Report No. 45704 Indonesia The World Bank in Indonesia 1999–2006 Country Assistance Evaluation November 24, 2008 Country Evaluation and Regional Relations Independent Evaluation Group Document of the World Bank Foreword During the eight years covered by t h i s Country Assistance Evaluation (1998-2006), the Bank's management has gone a l o n g w a y toward restoring the Bank's credibility and the effectiveness of its program i n Indonesia, which h a d been eroded by the W o r l d Bank's close association with President Soeharto's regime. A sharp backlash inpublic opinion h a d occurred w h e n corruption associated with t h e regime and the sharp economic d o w n t u r n nthe after- n1998. I following t h e Asian financial crisis l e d t o the President's resignation i m a t h of the crisis, the Bank actively supported the adjustment program l e d by the Intema- tional Monetary Fund. Subsequently, i t adopted a lowered profile, focusing o n poverty reduction through community development and the drive to reduce corruption. The Bank also patiently built up its contacts with nongovernmental and c i v i l society organizations operating i n Indonesia. Starting in2004, as the economy recovered and a more technocratic management resumed, t h e Bank was able to restore i t s professional relationships a n d again provide just-in-time advice requested o n a w i d e range of subjects. The Bank's dialogue and knowledge services were supplemented by an expanded lending program l e d by a series of development pol- icy loans. In this period, the donor community increasingly turned t o the Bank t o take leadership i n coordinating multidonor activities and the government itself invited the Bank to lead i ncoordinating t h e donor support for the Tsunami relief effort in 2005. The successful effort t o rebuild the Bank's role and effectiveness provides a valuable case study for similar situations in other countries. Perhaps inevitably, during what i s perceived by most observers as a transitional phase in Indonesia, the overall outcomes of the Bank program, while generally positive, have n o t materialized at the speed that the Bank h a d hoped for and projected inits strategy docu- ments. For example, the Bank was n o t able t o expand its support for national infrastructure n the 2004 Country Assistance Strategy, because of continuing institutional as outlined i weaknesses and corruption in procurement. Nevertheless, t h e Bank did expand i t s sup- n a very wide range of activities, including unforeseen ones. port i Inview of this, for greater effectiveness, the Bank m a y wish t o focus i t s efforts somewhat more narrowly i n the next CAS period, with emphasis o n support for t h e conditions needed t o increase investment i n general, but particularly for small and m e d i u m enter- prises t o expand and increase their absorption of labor. Improved governance, education, and local infrastructure are key aspects of this, w h i c h mesh with the core elements of the current Bank program. Contents PREFACE .................................................................................................................... I INDONESIA: SUMMARY OF BANK PROGRAM OUTCOME RATINGSl..lll.ll.ll..ll.l. 111 EVALUATION SUMMARY .......................................................................................... V MANAGEMENT ACTION RECORD .......................................................................... XI COUNTRY MANAGEMENT AND TEAM OBSERVATIONS ................................... Xlll CHAIRPERSON’S SUMMARY ................................................................................ XV 1. BACKGROUND ............................................................................................ 1 2. THE WORLD BANK PROGRAM 199S2006 ............................................... 7 A. The Bank Strategy.............................................................................................. 7 Respondingto the Crisis 3. ACHIEVING THE PROGRAM OBJECTIVES............................................. 21 Pillar One: Restoring Growth and Investment for Sustainable Development. 21 A. Managing the Aftermath of the Crisis ........................................................................ 21 B. Restoring Stability and 23 C. Financial and Private S .......................................................... 26 D. National Infrastructure: 28 E. Pillar One: Restoring St Assessment 31 Pillar Two: Improving Governance and Building Institutions ........................... 32 A. Tackling Corruption 32 B. Decentralization.......................................................................................................... 36 C. Pillar Two: Improving Governance and Building Institutions: Overall Assessment ....39 Pillar Three: Poverty Reduction and S A. Poverty Reduction and Human Deve 8. Community Driven Development........ C. Pillar Three: Poverty Reduction & Social Service Delivery Overall Assessment ....46 Pillar Four: Disaster and Natural Resource Management ................................ 47 A . Disaster Management ................................................................................................ 47 6. Natural Resource Management ................................................................................. 49 C. Pillar Four: Disaster and Natural Resource Management: Overall Assessment ....... 51 The Overall Program .............................................................................................. 52 4. LESSONS AND RECOMMENDATIONS.................................................... 55 APPENDIX................................................................................................................. 59 ANNEX A . STATISTICAL TABLES ......................................................................... 67 ANNEX B: LIST OF PERSONS AND ORGANIZATIONS MET ............................... 81 ANNEX C: GUIDE TO IEG’S COUNTRY ASSISTANCE EVALUATION METHODOLOGY ...................................................................................................... 87 ANNEX D .COMMENTS FROM THE GOVERNMENT............................................ 91 Annex D: Attachment 1: Response to the Government ..................................... 93 Boxes Box 1. Institutional Restructuring in Indonesia in the Post-Soeharto Period................3 Box 2. The Bank and Indonesian Agriculture in the CAE Period............................... 12 Box 3: INT Findings on the Sulawesi Development Project...................................... 15 Table 1. Economic and Social Indicators for East Asian Countries ............................. 4 Table 2. Indonesia Sector Lending for FYOI-06 Categorized Development ............. 14 Table 3. Investment Levels and Quality ..................................................................... 25 Table 4 . Financial Ratios in the East Asia Region ..................................................... 28 Table 5. Indonesia Governance Indicators ................................................................ 36 Table 6 . Poverty Trends............................................................................................. 42 Figures Figure 1. Indonesia growth rates 1996 to 2005 (annual percentage) .......................... 4 Figure 2. Indonesia IBRDllDA Lending 1995-2005.................................................... 13 Figure 3. Post-crisis recovery in GDP per capita ....................................................... 23 Figure 4 . Central Government Development Spending US$B................................... 31 Appendix Table Appendix Table 1. Restoring Stability and Growth., .......................................... 59 Appendix Table 2 . Financial and Private Sector Development: Outcome Indicators ............................................................................................ 60 Appendix Table 3 . National Infrastructure Outcomes......................................... 61 Appendix Table 4 . Human Development: Outcome Indicators............................. 62 Appendix Table 5 . Disaster Management: Outcome Indicators............................ 63 Appendix Table 6 . Natural Resource Management: Outcome Indicators...............64 Preface This Country Assistance Evaluation (CAE) provides a n independent assessment of W o r l d Bank assistance t o Indonesia during the period 1999-2006. The evaluation is based o n a review of t h e W o r l d Bank documents and o n interviews with government officials, Bank and I M F staff, and officials f r o m other donor agencies, representatives of nongovernmental organizations, and the private sector. A Bank mission visited Indonesia during the period M a y 14 t o June 2,2006. This CAE was written by Basil Kavalsky (Task Manager, IEGCR), Manuel Hinds, Jane C. Hwang, U m a Lele, D a v i d Pearce, Steve Radelet (Center for Global Development), and Jeffrey Telgarsky (Na- tional Opinion Research Council). Pradeep M i t r a (ECA) and Shahrokh Fardoust (DEC) were t h e peer reviewers. H.Joan Mongal and Cecilia B. Tan (IEGCR) provided administrative assistance. i Indonesia: Summary of Bank Program Outcome Ratings BANK STRATEGIC GOALS ACHIEVEMENT OF ASSOCIATED CAS BANK PROGRAM OUTCOME OUTCOMES OR RESULTS RATINGSb PILLARS 1. Restoring Growth and While stability and growth are notable Moderately Satisfactory Investment achievements, progress has been slow in relation to the core Bank objectives of supporting the investment climate and infrastructure needed to accelerate growth. a. Managing the aftermath of Progress in restoring confidence and restructuring Moderately Satisfactory the crisis the banking and corporate sectors was uneven; however, there was success in establishing a social safety net especially through the rice subsidy. b. Restoring stability and Stability restored after crisis, and growth resumed at a Satisfactory growth steady pace, but with sharply reduced investment levels and limited impact on employment. c. Financial and private Financial sector supervision and regulation now Moderately Unsatisfactory sector development acceptable, but state banks still sources of risk. Climate for private investment remains unsatisfactory, d. Infrastructure Some institutional and policy progress in areas Moderately Unsatisfactory targeted by the Bank, but major objectives not achieved due to reduced public investment and mixed signals on private participation. 2. Improving Governance With the major structural transformation, Bank Moderately Unsatisfactory and Building Institutions objectives targeted putting frameworks and institutions in place. There has been progress in these areas, but capacity-buildingand implementation are moving slowlv. a. Tackling corruption Situation worsened after the crisis and successive Moderately Unsatisfactory governments made little headway until 2004 when significant steps were taken. Program now headed in the right direction and the past two years taken alone would merit a moderately satisfactory rating. b. Decentralization Still early days given implementation in 2001. Moderately Unsatisfactory Continuity in improving trends on service delivery is encouraging, but in relation to Bank Objectives of helping clarify the framework and the approach to xpacity building, still too liffle progress. iii Summary of Bank Program Outcome Ratings BANK STRATEGIC GOALS1 ACHIEVEMENT OF ASSOCIATED CAS BANK PROGRAM OUTCOME OUTCOMES OR RESULTS RATINGSb 3. Poverty Reduction and After the reversal during the crisis, poverty Satisfactory Social Service Delivery. reduction has continued. Bank targeted support for achievement of MDGs (on track with some exceptions) and addressing poverty at the community level has been effective. a. Human development Despite crisis and impact of decentralization, Satisfactory human development outcomes show an improving trend, but the pace needs to be accelerated. b. Community development. The Kecamatan Development Program (KDP), a Moderately Satisfactory flagship community development program, has had considerable social impact. Achieving the objective of longer term economic benefits for the poor depends on effective service delivery in social and productive sectors. This will require institutional development at higher levels of government. 4. Disaster and Natural These areas have assumed importance in the Satisfactory Resource Management. Bank program since 2004. Outcomes are evalu- ated as satisfactory in relation to the success of Bank supported programs in these areas. a. Disaster management. Relief effort in Aceh and Nias has made good pro- Satisfactory gress after a slow start due to a competent institu- tion being put in place. b. Natural resource Some progress in water management and coastal Moderately Satisfactory management. reef protection. The Bank virtually opted out of the forestry sector before 2004 recognizing that deple- tion would continue at an unacceptable rate absent government commitment on governance aspects of illegal logging. OVERALL This is a transitional period and progress in Moderately Satisfactory areas targeted by the Bank’s objectives is generally in the right direction though the pace is slow and risks remain significant. The goals of Bank assistance m a y b e distinct f r o m the client country’s own development a. objectives. b. TheBank program outcome rating and sub-ratings assess the extent t o w h i c h the Bank program helped achieve the results targeted in the relevant strategy document@). This is of course distinct f r o m assessing the quality of Bank‘s or the client country’s performance. iv Eva1uation Summary Indonesia Country Assistance Eva1uation With the h a n c i a l crisis o f 1997 a n d the resignation o f President Soeharto in 1998, Indonesia entered a p e r i o d o f transition to a n e w d e c e n t r a h e d a n d democratic m o d e l o f development. During t h l s p e r i o d the B a n k has been able to restore m u c h o f the credbility i t lost through i t s association with the f o r m e r r e g r n e a n d has agam become a trusted advisor both to the government a n d the donor community. T h e B a n k has achieved t h i s through effective analytic work, development policy lending in support of macroeconomic adjustment a n d institutional reform, a n d investment l e n d m g in support of a w i d e range of programs in areas such as community development, disaster relief, infrastructure, health a n d education. Bank-supported programs have m a d e i m p o r t a n t contributions in supporting t h e restora- tion o f macroeconomic stability, a n d in h e l p i n g Indonesia to r e t u r n to the pre-crisis i n c o m e levels a n d to reduce p o v e r t y after the sharp increase experienced during the crisis. B a n k programs have been less effective in h e l p i n g to achleve the ambitious objectives set out in t h e strategy documents for establishmg the institutional basis for good governance a n d effective economic management a t both t h e national a n d l o c a l levels. D e s p i t e these achievements nearly half o f Indonesia’s p o p u l a t i o n s t i l l subsists on less t h a n US$2 a day a n d to continue to play a n effective r o l e in h e l p i n g t h s vulnerable group find employment a n d m o v e out o f poverty, t h e B a n k needs to l r e c t a greater p a r t o f i t s future p r o g r a m t o w a r d h e l p i n g put in place the conditions needed for small a n d m e d i u m enterprises to set up a n d grow. Ths wdl require increased focus on good gov- ernance, l o c a l infrastructure a n d education. T h e years f r o m 1999 t o 2006 marked a month at t h e end of the year, and the resulting price period o f transition for Indonesia-from inflation sharply reduced the incomes o f the urban three decades o f autocratic centralism to a middle and working classes. In the face o f mounting democratic and decentrahed development model. opposition President Soeharto resigned in May 1998. W o r l d Bank support to Indonesia’s development likewise underwent a transition-from a major T h e subsequent period has seen four different development partner during the period up until presidents and a succession o f ministers i nt h e 1997, t o being viewed as sharing responsibility for core economic ministries. The technocratic tradi- t h e long-term corruption and costly financial crisis tion o f prudent and s k i l l f u l economic management of 1997/8, and during the subsequent period quickly reasserted itself, and starting i n 2000 the gradually returning t o a relationship o f t r u s t and a economy began t o grow at around 5 percent per key advisory and financing role. year and by 2005 had regained t h e pre-crisis levels o f per capita income and poverty. Those i n power The arc o f Indonesia’s story i s well known. President became aware that the centralized development Soeharto’s regime had been spectacularly successful model was unlikely to be viable in a more democ- in achieving growth and poverty reduction, but at a ratic, less t g h t l y controlled environment. Hence, cost o f a highly centralized autoaatic government at the beginning o f 2001 Indonesia implemented a with high levels o f corruption. The Asian crisis in “big bang” decentralization i n which 2 million 1997 mggered the collapse o f the regime. The value employees o f the central government were of the rupiah fell by 80 percent in the space o f a transferred to the local governments i n t h e locali- ties in which they were stationed. V EVALUTATION SUMMARY Transition in the Role of the Bank By 2003 the n e w C A S looked forward t o a n expan- sion of Bank activities in Indonesia. T h e CAS put T h e World Bank h a d been a major p m e r in the de- priority on anticorruption efforts and improve- velopment of Indonesia since 1966, providing ments in the investment climate. T h e n ew agenda substantialpolicy advice, a n a l p c work, and levels o f was to b e supported by the resumption o f adjust- lending. Through m u c h of the 1980s and 1990s m e n t lending through single-tranche development Indonesia had one o f the largest portfolios i n the policy loans and o f lendmg for infrastructure. T h e Bank C A S especially emphasized support for Indonesia's W h e n crisis struck in 1997 the Bank participated local governments, m o s t of w h i c h lacked the capac- in the recovery package agreed with the IMF, i t y to plan and implement effective development financing three adjustment loans and technical programs. T h e Bank, i n concert with many other assistance for the financial sector. With g r o w i n g donors, was to support the capacity bddmg effort. public awareness o f the costs o f the crisis (the amount required to recapitalize the commercial T h e tsunami o f December 2004 added a n e w pri- banks was equivalent to 50 percent o f GDP), ority for Indonesia a n d the Bank. T h e donor popular opinion swung sharply against the Bank, community, concerned about t h e effective man- w h i c h was viewed as a principal architect o f t h e agement of the huge amount o f assistance that was strategy and supporter o f a corrupt regime. T h i s pouringin, turned to the B a n k to manage a l e d to calls for cancellation o f debt o w e d to the M u l t i - D o n o r Trust Fund (MDTF) for reconstruc- Bank. tion o f A c e h and Nias. A similar approach was later used f o r donor support for decentralization. Starting i n mid-1999, B a n k management and staff set about the task o f r e b d d i n g the Bank's credi- Then, in 2004, newly elected President Susilo bility in Indonesia. In the following three years, Bambang Y u d h y o n o brought into the key the Bank repositioned itself. I t adjusted to m u c h economic ministries a group o f technocrats who lower levels o f lending, focused on tackling were interested i n obtainingthe Bank's policy corruption, and constructed a n operational agenda analysis as a n input into their decision-making. around community development and specifically targeted the poorest rural communities. As a consequence o f all these developments the Bank has now built up i t s capacity i nJakarta, as well T h e B a n k also made efforts to reach o u t to part- as opening satellite offices in A c e h and Sulawesi ners in Indonesian civil society, especially nongov- provinces. T h e B a n k now has specialists in most of ernmental organizations, a n d the donors. T h e the key economic sectors stationed i n the Jakarta Bank's Department o f Institutional Integrity was office and a wide-ranging program o f analyttc work. called i n t o review a sample of ongoing projects. Lendmg remains substandally b e l o w the averages o f They uncovered a pattern o f collusion i n the 1990s but i s building up steadily (see Figure). procurement and padding o f cost estimates to allow for bribes to government officials. In light o f t h i s finding, B a n k management placed special The Evaluation Findings emphasis on managing the fiduciary risks o f the T h e CAE evaluates the Bank program in Indonesia ongoing p o r t f o l i o and designing n e w projects to against four objectives or pillars, three o f w h i c h are minimize opportunities for corrupt practices. derived from the F Y O l and W 0 4 C A S documents. These three pillars are: restoration o f growth and Indonesia IBRDADA Lending 1995.2005 investment, improving governance and buildingin- 3000 , I stitutions, and poverty reduction and social service delivery. T h e fourth p h , disaster and natural re- 2000 source management, became a m a j o r part o f the Bank program following the 2004 t s u n a m i . In each m3 - o f these areas the CAE sets out the objectives of 584 500 493 303 the Bank program as d e h e d by the CAS. T h e CAE then uses the actual outcomes, quantified if 1995 1996 1997 1996 1999 2000 2001 2002 2003 2004 2005 possible, as a basis f o r rating the extent to w h i c h fiso.1 p a r s the objectives were achieved. Source: World Bank Internal Document. vi SUMMARY EVALUATION tion or n e w private investments. Indonesia i s Indonesia growth rates 1996 to 2005 (annual accumulating a large infrastructure deficit. percentage) Sustainabhty of g r o w t h remains a concern. Indonesia's tropical forests, in particular, remain at risk o f depletion. Improvinggovemance and buildinginstitutions. T h e Bank's technical advice and a n a l p c studies provided a good basis for efforts in these areas, but Y I there was insufficientfollow-up. While recent devel- opments are i n the right direction, the slow progress Source: World Bank Internal Document. o v di n the areas targeted by the Bank's objectives leads to a rating o f moderately unsatisfactory. Restoration ofgrowth and investment. T h e CAE hnds the outcomes in t h i s area moderately satisfac- T h e n e w Corruption Eradication Commission is tory relative to the Bank's objectives. T h e Bank making inroads into the culture of corruption i n the support in t h i s area included adjustment lendmg in uvll service, bringing an increasing number o f n e w the aftermath o f the crisis. A f t e r a hiatus f r o m 2001- cases to hghq and securing s@cant convictions 2003, the Bank resumed i t s lendingin support of including some lugh prohle cases. T h e most broad policy change and institutional development i n troubling area i s that of legal and judicial cormp- 2004 with a series of Development Policy L o a n s and don, where efforts so far have been ineffective and investment loans for infrastructure. n place to address the there i s no clear strategy i problem. Indonesia's crisis was deeper a n d longer than other crisis countries, with the exception o f A key element in the overall governance is to build Argentina. T h i s reflected weak institutions as w e l l insututionaland managed capacity in local govem- as policies that did not adequately recogrme the ment. Achieving t h i s will take time-probably weakness o f those institutions. Targeted subsidies decades. Meanwhile, m o r e needs to be done to provided a n effective social safety net to cushion danfy the rules of the game with regard to account- part o f the impact o f the crisis on the poor. abilities and fiscal arrangements between the center and the districts. Central minismes continue to try to T h e restoration of growth since 2000 has been a retain or claw back control. Local governments lack very positive story, with prudent fiscal management capacity and support in canying out their uhdear w h i c h has brought public debt down t o manageable mandate. levels. Growth has bounced back f r o m the income decline and increased poverty associated with the Povem reduction and social service delivery. crisis, but has n o t yet accelerated to a point where it T h e C A E rates t h i s satisfactory. T h e B a n k can s g d i c a n t l y benefit employment and the half o f program i n the social sectors was modest relative the Indonesian population eaming less than US$2 a to i t s involvement before the crisis, a n d the focus day. T h a t wdl require a substanttal increase in o f the Bank's efforts was a series o f loans for efficient private investment. community driven development. T h e investment clunate has a long way to go Poverty rates have been brought back to pre-crisis before it can provide appropriate incentives for levels and a majority o f social indicators have both foreign a n d domestic investors, particularly n t h e right direction, albeit at a continued to m o v e i in the small and m e d i u m enterprise sector. Part o f slow pace. Despite leakages, the Indonesian the fiscal prudence was a sharp cut i n infrastruc- government has made effective use o f a d h o c ture investment. There was some h o p e that the programs targeted to the poor to provide a safety shortfall in infrastructure investment w o u l d b e net. filled by the private sector, but t h i s has not happened. There i s s t i l l ambivalence in Indonesia Community-driven development has been a n im- about private ownership i n infrastructure a n d the portant element o f the Bank's support for the environment has not been welcoming to privatiza- poverty reduction strategy. T h e Kecamatan Devel- vii SUMMARY EVALUTATION opment Program (KDP) i s the dominant program disaster and natural resource management, taken in h s area a n d seeks to empower communities t o together, i s rated moderately satisfactory. i d e n q the local investment needs they regard as the most urgent. KDP uses facilitators and compe- Overall Outcomes and Recommendations tition among villages for funds as a means o f ensuring quality and keeping costs down. T h e For the C A E period, the outcomes overall are m o d e l has been scaled up to a large proportionof rated moderately satisfactory. the country and is attuned to Indonesia’s n e w development model. There are caveats, however. Measured against the Bank‘s objectives, the Government’s success i n achieving macroeco- KDP was designed t o complement investment at n o m i c stability, the careful fiscal management, the central a n d provincial levels, so with the demonstrated by the recent reduction i n the petro- decentralization, there i s now a “missing middle” l e u m subsidy, increasing expenditures on social between central programs a n d the community services, a n d the progress made in the legislative investments, with inadequate public investment in a n d institutional framework i n m a n y areas, all district and provincial level infrastructure a n d represent i m p o r t a n t achievements. services, and little provision made for coordina- tion. As a consequence local investments in small- Y e t Indonesia’s aspirations are to achieve the growth, scale infrastructure, education, a n d health facilities poverty reduction, and social progress of its East may n o t b e coordinated with those driven from Asian comparators and the transition h a s n o t yet put the center a n d arrangements for operation and nplace the fundamentals required to move to the i maintenance o f these local investments are uncer- next level In particular, the investment climate will tain. X i s raises questions about the longer-term need committed leadershp in the near term. sustainability o f the investments KDP i s support- ing and i t s longer-term impact on the poor. Indonesia has undertaken a m a j o r structural trans- f o r m a t i o n a n d the B a n k has p r o v i d e d support for Disaster and natural resource management. t h i s restructuring, in a number o f areas. T h e Unlike other areas, the Bank did n o t target these i n institutionaldevelopment associated with t h i s the C A S though they have become important paas support i s rated modest. There has been a good o f the program. T h e objectives are therefore derived deal o f legslation over the past years, but regula- f r o m the actual Bank programs, includingthe Bank’s tions for these o f t e n take years to get on the books role i nmanaging a Multi-DonorTrust Fund for relief a n d even then, there seems to b e little follow- efforts i nA c e h and Nias. T h e reconstruction of through. A c e h is now moving forward effectively. Progress i s rated satisfactory. T o the u e & t o f the Indonesian T h e risks that Indonesia faces are s@cant. T h l s is government it recognized the importance o f having a large and complex country and the viabihty o f the committed leadership in disaster management and n e w decentralized model, with political and regional set up a n e w agency (the BRR) with &her standards pressures, cannot b e taken for granted. I t will and salary levels than the regular c i d service. This require that citizens become convinced that the model could well set the standard for the future m o d e l can deliver honest and effective government. reform o f Indonesia’s civil service. T h e logistical problem o f coordinating hundreds of aid agencies T h e B a n k has played a s@cant n Indonesia role i and b i k o n s i n aid i s enormous, but BRR has taken during the 1999-2006 period. In the vkous process effective leadership in addressing the challenges. areas, such as providing quality analysis and advice a n d building effective partnerships, the Bank’s With regard to natural resource management, sus- efforts have been exemplary. T h e Indonesia pro- tainability remains a concern. Some progress has gram managers have done a very g o o d job o f been made in better management o f water and ma- repositioning the Bank in a ddficult environment rine resources. However, there has been little n the Bank’s commitment and and earning t r u s t i progress i nreining i n the depletion of Indonesia’s objectivity. tropical forests, w h i c h are important n o t only to the national environment, but to the global environ- But i n the n relation t o the objectives defined i m e n t as well. On balance, progress in the area of E y O l and FY04 CAS documents, there i s s t i l l not viii SUMMARY EVALUATION enough to show from these efforts interms of focusing cross-sectoral efforts on the achievement specific outcomes. Inpart this is a consequence o f o f those outcomes. The overarching objective the transitional nature o f the period. Things may should be the need to reduce the remaining popu- lookverydifferent a few years hence. But it is hard lation inextreme poverty and reduce the large to avoid the conclusion that this lack of impact proportionof the population that remains springs pattly from not focusing on a more limited economically vulnerable. This in turn will requl-e set of strategic objectives. increased and more efficient investment in both physical and h uman capita. This could be the Enhanced strategic focus should not be a matter prism used for identifying the core outcomes that of the Bank opting out of particular sectors, but the Bank wishes to support. rather of defining more specific outcomes and Vinod Thomas Director-General Evaluations ix Management Action Record Major Monitorable IEG Recommendations Requiring a Management Response Response There is a need for greater Given that the Government’s own program for improving the investment climate is selectivity in the Indonesia very much centered around a broader agenda of governance reform, we believe that program with a strategic our current strategic focus is well aligned with the Governmenffs priorities. Therefore, focus on support for such a strategic focus would not entail shifting out of the FY04 CAS goals of strengthening investment and labor governance and the social agenda. absorption to reduce the Management wholeheartedly agrees with the CAE that supporting investment is large vulnerable population. essential and notes that the Bank program will continue to build on the following achievements in this area: o The Bank will continue to manage an influential survey of the investment climate, which frames a very active policy dialogue on investment issues; o The Bank will continue to play an important advisory role in the implementation of the recently adopted Investment Law, one of the Gol’s flagship pieces of legislation; o The Investment Climate Working Group, founded by the Bank with the US, Japan and the Gol, will continue to serve as a partner for the Government on these issues even with the abolition of the CGI; o The Bank will continue to follow up on the results of a major rural investment cli- mate study to encourage inclusion into the Gol’s policy package. Management agrees that labor absorption is a priority issue, and our programs reflect this belief. In what we consider a major achievement, the Go1 has chosen to scale up the Bank-financed Community Driven Development (CDD) projects into a nationwide program that is expected to play a major role in creating new employment opportunities and reducing vulnerability at the village level. The achievements of the CDD program, the largest of its kind in the world, have been widely recognized within Indonesia and globally in the development community, and its continuing growth in Indonesia is a mark of its success that does not appear to be fully recognized in the CAE. The Bank has also been working closely with the Government on large-scale unconditional and conditional cash transfer schemes that have already proven to have reduced vulnerability to major adjustments in fuel prices as a result of the reduction of Government fuel subsidies. Though the CAE raises important issues about the sustainabilityof these CDD programs, we believe that there is already a strong record of sustainability backed up by empirical studies. The adoption of a national poverty program on the basis of Bank-financed CDD operations is as good an indicator as any of the sustainability of this approach. On decentralization, the The Bank is playing a leading role in supporting decentralization through the Bank should focus its efforts establishment of the US$50 million multi-donor Decentralization Support Facility, the in helping to clarify the mobilization of a multi-donor support program for Eastern Indonesia headquartered in a relative roles and Makassar sub-oflice, and the rolling out of regional Public !Expenditure Reviews and regional responsibilities of the center Public Financial ManagementAssessmenf Tools Aceh, Papua, Sulawesi and elsewhere) and the regions, and helping implemented in conjunction with an extensive network of regional universities and reform Indonesia build institutions to networks. A trio of Bank-financed local government operations is currently under support the development of implementation to link capacity-buildingfor improved local governance and accountability capacity at the local level. with actual investments in local infrastructureand poverty reduction programs. Through the Decentralization Support Facility, these pilot programs are to be scaled up to support the development of capacity at the local level. xi ACTIONRECORD MANAGEMENT Major Monitorable IEG Recommendations Requiring a Management Response Response Indonesia is a disaster 'hot The Management team certainly recognizes this reality; disaster management was spot'. The Bank should as- incorporated as a key objective into the FY07 CAS progress report and the Bank is sist it in developing disaster engaged with all levels of the Go1 to develop its capacity to respond to future relief, mitigation and man- disasters. Support from the Bank has, for instance, prompted the Go1 to prepare disaster agement capacity. risk management legislation which is now before Parliament, while the Bank is considering mainstreaming disaster preparedness and management within the KDP and UPP models. 0 The Bank already has a major engagement with the Government on disaster relief and disaster management capacity, even beyond our own Multi-Donor Fund-financed projects. In response to the tsunami and earthquakes, the Bank has been involved in all aspects of the reconstruction, including the initial damage assessment, financing analysis, strategic planning, establishment of a multidonor financing mechanism, rapid deployment and capacity-building of ground staff, and rapid design and implementation of more than US$400 million in new reconstruction projects. The Bank played a leading role in the establishment of the Gol's widely-praised Special ReconstructionAgency (BRR) which the CAE cites as an effective mechanism for donor coordination in response to natural disasters. The development of these models has helped to ensure an even more rapid and effective response by the Government to the major earthquake in Yogyakarta. The country team's leadership of the rapid preparation of a joint Govemmentdonordamage and loss assessment for both the Aceh and Yogyakarta disasters in less than four weeks after the disaster is a model now being widely disseminated across the Bank. Many of the lessons learned on how to assist the Government on disaster response and management have been incorporated in the Bank's new rapid response guidelines. The Bank should assist Management agrees that progress in the forestry sector has been insufficient, and it Indonesia in developing and is committed t o improving results in this field. But as the CAE acknowledges, the great clarifying its strategies in two bulk of this inactivity occurred prior to 2004, when the Go1 lacked commitment in this area. key areas where policies are During that frustrating period, the Bank was forced to deliberately limit its engagement in the in some disarray at present: sector; it would have been negligent to allocate large resources for the forest sector in those forest management and circumstances. Since 2004 however, the current Administration has demonstrated a much infrastructure development. greater commitment to progress in the forestry sector, and the Bank has responded vigorously to this opportunity. From a relatively modest brief that targeted the demand side, we have expanded to a US$2 million Bank-executed technical assistance program today (plus a US$17 million forest protection project in Aceh). The Bank is actively assisting the Government in preparation for the 13th Conference of Parties meeting in Bali in December 2007 and is working closely with the Government and donors to support this interest and develop new initiatives, including a global carbon financing facility that could bring substantial benefits to Indonesia. The Bank is working closely with the Government of Indonesia t o support and implement its strategy on infrastructure development. This will remain an important component of the Development Policy Loan series and associated program lending. The Bank is working with the Government on a framework for an infrastructure investment guarantee fund and financing facility. The Bank is also closely engaged in partnership with the ADB on policy dialogue and support for the infrastructure agenda through the ADB's IRP loan. IFC is seeking to play an important advisory role for "model" infrastructure transactions. xii Country Management and Team Observations Indonesia Country Management and Team Observations on the Draft CAE Management appreciates the comprehensive review of the IEG team, and the opportunity t o comment on its findings. While the CAE raises a number of important issues and useful recommendations, we believe that its underlying analysis does not fully take into account the magnitude of Indonesia's transition over the past eight years in assessing its progress and, relatedly, the contribution of the Bank's program. It views Indonesia's economic crisis and recovery against the benchmarks of the other East Asian crisis countries, and does not recognize the full implications of the magnitude of the political and institutionaltransition that accompanied it - more analogous to the countries of Eastern Europe and the former Soviet Union (whose own economic recoveries took far longer relative to Indonesia's). Viewed in this light, Indonesia's institutional progress, supported by the Bank's programs and policy dialogue, seems anything but "modest" (as assessed in the CAE) incorporating a complete transformation of democratic political institutions, a powerful new set of accountability institutions, an unprecedented political and fiscal decentralization, the emergence of a strong civil society and independent media, an impressive record of macroeconomic stability, and a recovery in poverty reduction -all despite a succession of five presidents in less than 10 years and a string of devastating natural disasters and terrorist strikes. The remaining challenges are indeed substantial and success in many years has not fully met expectations, particularly in the areas of governance, the investment climate and infrastructuredevelopment as laid out in the CAE, but to underestimate the progress to date in Indonesia's transition reflects, in our view, an exceedingly narrow approach to development. Management believes that the current IEG report does not fully recognize the extent t o which the Bank's program was transformed in light of the recommendations made in an earlier IEG CAE in 1999. The 1999 CAE called for a shift from an overemphasis on rapid economic growth to a more broad-based development strategy, with much greater attention to governance and social development oriented towards rebuilding the Bank's credibility in post-Suharto Indonesia and recreating the basis for long-term engagement. These recommendations were strongly reflected in the FYOI and FY04 CASs under review as they had also become priorities of successive Indonesian governments. Management believes that the Bank program has made substantial progress in meeting those objectives with a measurable impact on Indonesia's transition, The current CAE seems to characterize this expanded purview as excessively broad, not recognizingthat it was essential for re-positioningthe Bank as a credible and reliable partner in Indonesia'sdevelopment in a rapidly changing political, social and economic environment. The CAE's central recommendation that the Bank should now focus on a more traditional growth agenda does not fully recognize how important the more broad-based development agenda remains to the credibility of the Banks engagement in Indonesia. In addition, Management would like to offer comments on the CAE on the follow specific topics: Decentralization: Indonesia's "Big Bang" decentralization process has certainly been challenging, but the CAE largely fails to recognize the scope of this essential government reform, or t o consider the broader context in which it has occurred. While the Bank is certainly aware of the myriad of remaining challenges associated with the process (including those which the CAE points out here), it bears note that reports and surveys commissioned by the Bank have consistently shown both increasing public satisfaction with the decentralization process and measurable improvements in many areas of public service delivery at the local level following decentralization. The Bank has provided a range of analytic, advisory and capacity-building services highly valued by the client that has contributed to these results. The Bank will continue to build on this foundation to address the significant remaining challenges. Private investment: Management also feels that the IEG overlooked the broader, nuanced approach taken by the Bank to private investment during this turbulent period. Building a competitive environment for private investment (which would mark a distinct change from the very uncompetitive environment which existed pre-crisis) requires a substantial investment of time and resources, and the Bank has pursued a major decade-long program towards this end. A number of important early victories were achieved, such as the Electricity Law, but the political turbulence of the early post- crisis period undercut some of these achievements. These temporary setbacks have gradually given way to an emerging framework for more efficient infrastructuredevelopment, and the Bank has been a leader in supporting this process. Some of the Bank's achievements have been the 2004 "Averting an Infrastructure Crisis," a definitive analysis which has guided xiii AND TEAMOBSERVATIONS COUNTRY MANAGEMENT Indonesia Country Management and Team Obsenrations on the Draft CAE much of the reform process; the provision of major technical assistance for the Risk Management Unit in the Ministry of Finance; a US$17 million project to prepare PPPs; and support for the Government's 2005 InfrastructureSummit. Finally, the Bank Group is taking a very proactive approach to supporting model PPP infrastructureprojects to generate a catalytic effect on further infrastructure investments. Infrastructure development: While Management shares IEG's conviction that infrastructure development is essential to Indonesia's development, we believe that the CAE misses the more complex and important questions associated with the Bank's approach in Indonesia. Infrastructurelending in Indonesia has faced substantial governance risks and major problems associated with the deterioration of project preparation and project implementation capacity in the aftermath of the financial crisis. Rather than continuing with business-as-usuallending, the Bank decided to tackle the issue directly. Through these efforts, we worked with the Go1 to introduce some important reforms to procurement and financial management processes, but the lending program fell and some relationshipswere strained. We are confident that in the long run this approach will prove itself successful, that its contribution to Indonesia's infrastructuredevelopment will be recognized as valuable in strengthening the overall institutionalenvironment and policy framework for increased infrastructure investment in future. We would have appreciated the IEG's evaluation and analysis of this strategy, and were disappointed that the IEG focused narrowly on specific infrastructuresectors in which it saw inadequate progress, and declined to consider these more important questions about tradeoffs and priorities. CDD and infrastructure: The CAE mischaracterizes the Banks work in urban and village infrastructure (where the Bank has spent US$1.5 billion) as 'social projects,' ignoring their enormous impact on infrastructuredevelopment. These projects will continue to be an important part of the Banks local infrastructureprogram going forward, as there is much empirical evidence regarding the enhanced rate of economic of return of CDD infrastructure projects and reduced corruption. xiv Chairperson’s Summary COMMITTEE ON DEVELOPMENT EFFECTIVENESS nIndonesia, 1999-2006: Country Assis- Informal Subcommittee Report: The W o r l d Bank i tance Evaluation; Indonesia Country Impact Review and Draft Management Response (Meeting of January 23,2008) 1 . On January 23,2008, t h e Informal Subcommittee of the Committee o n Development Ef- fectiveness (CODE) considered the I E G reports o n The World Bank in Indonesia, 1999-2006: Coun- ty Assistance Evaluation, and the Indonesia C o u n t y Impact Reviezo together with the draft Man- agement Response. 2. Country Assistance Evaluation(CAE). The C A E reviewedW o r l d Bank (hereinafter re- ferred t o as the Bank) support t o Indonesia between 1999 and 2006. IEG noted that during this period the Bank has been able to restore its credibility i nIndonesia, w h i c h was eroded during the Asian financial crisis. Bank support t o Indonesia was considered as going i nthe right direc- t i o n although progress was slow and risks remained sigruficant. Accordingly, the overall out- come of Bank assistance was rated moderately satisfactory. The CAE made several recommen- dations including: (i) focus Bank support o n more selective outcomes; (ii)support efforts t o restore growth and investment for sustainable development, focusing o n i m p r o v i n g manage- ment and privatization of state-owned banks, developing energy and transport sectors where there i s Government leadership, and addressing natural resource management issues; (iii) strengthen governance and buildinstitutions by supportingprocurement reform, ensuring that Bank fiduciary standards are met, and assisting the decentralization process by promoting clar- ity of roles and responsibilities of t h e center and the regions as w e l l as building local institu- tional capacity; (iv) continue supporting poverty reduction a n d social service delivery, espe- cially i n developing a longer-term approach t o social safety net, strengthening knowledge resources t o improve Indonesia’s competitiveness, and monitoring andbuildingthe evaluation capacity of the Kecematan Development Program (KDP) as it is integrated into the Government program; and (v) help develop Indonesia’s national disaster relief and reconstruction manage- ment capacity based on i t s experience in Aceh. 3. Bank Response. Bank management noted that the C A E is a useful input to the ongoing preparation of the n e w Country Partnership Strategy. While supporting the overall analysis of the development challenges, Management remarked o n the nuanced differences i nviews with I E G regarding the contribution of Bank support. Management highlighted the magnitude of t h e political and institutional transformation in Indonesia after the Asian financial crisis, cou- pled with frequent changes in the presidency, natural disasters, and terrorist strikes. In t h i s context, it believed that more recognitioncould have been gwen to the Bank‘s role i npromoting institutional change, establishing accountability institutions, supporting the decentralization ef- forts, strengthening the c i v i l society and independent media, a n d achieving macroeconomic xv CHAIRPERSON’S SUMMARY stability and addressing poverty reduction. Management recognized the remaining substantial challenges and t h e slow progress particularly i nthe area of governance. I t noted that the core of future Bank assistance will continue t o be o n strengthening institutions a n d building their capacity that will support the Government’s development agenda. Focus o n institutions and t h e i r capacities was considered critical for improving investment climate, and increasing public and private investments inareas like infrastructure and energy. At t h e local level, Management said that the Bank w o u l d selectively support those local government initiatives backed by strong leadership and high commitment, and with potential of becoming models for other local governments in Indonesia. 4. Country Impact Review (CIR). The CIR evaluated the effectiveness of IFC‘s strategic approach and operation inIndonesia between fiscal years 1990 t o 2006. T h e CIR described the shift inIFC operations before, during, and after the Asian financial crisis. IEG f o u n d that IFC‘s strategic priorities have been aligned with the country’s strategy for private sector develop- ment. A m o n g the areas supported, IEG noted that more w o r k i s needed i nsupporting a larger private sector role ininfrastructure, and i ndeepening financial markets. I E G also emphasized the need t o strengthen the environmental, safety, health and social (ESHS) compliance of pro- jects which have h a d lower satisfactory performance i nIndonesia than the overall IFC average. Some other recommendations were: ( i) strategically partner with the W o r l d Bank and other multilateral development banks t o introduce sector reforms and investments t o promote the role of private sector in infrastructure and t o develop a long-term local currency debt market; (ii)scale-up and d i v e r s e its agribusiness operations by w o r k i n g more closely with small and medium enterprises (SMEs), farmers and communities; and ( i ii) up support for SMEs in scale underserved regions through regional SME oriented commercial banks. 5. IFC Response. IFC management agreed with the thrust of the findings and recommen- dations which were being incorporated into its Operations. Inthe areas of infrastructure and t h e financial sector, Management elaborated o n its ongoing activities and w o r k with the Bank. Management commented o n its w o r k i nsupporting the linkages and supply chains inthe agri- culture sector and plans to expand value chain approaches in IDA countries inEast Asia. It as- sured that greater attention w o u l d be given t o SME development in remote areas, but also re- marked o n the need for the Government t o improve policies t o enable greater IFC involvement. To improve ESHS compliance rate, Management said supervision i s being increased, and with the decentralization of IFC operations, IFC w o u l d strengthen its client contacts and monitoring. 6. Commentsfrom the Government. A statement o n behalf of the Indonesian authorities was circulated for the meeting. The Government welcomed the C A E and CIR, w h i c h they con- sidered constructive. Regarding Bank support, the Government emphasized alignment with its development strategy and support for its governance reform. There was broad agreement with IEG’s assessment of the upturn of Bank relationship and credibility in Indonesia. Support was expressed for continued Bank efforts intackling governance and buildinginstitutions, strength- ening its w o r k with local institutions, closely coordinating with donor community, and increas- ing transparency and strengthening institutions t o reduce corruption. A s for the role of IFC, the Government also encouraged efforts t o increase t h e private sector role i ninfrastructure includ- ing the transportation sector. It noted the need t o improve the link between advisory services a n d investment operations. Scaling-upand diversification of support to agribusiness was sup- ported taking into consideration the importance of ensuring food security. xvi CHAIRPERSON’S SUMMARY 7. M a i n Conclusions a n d Next Steps. The Subcommittee members welcomed t h e oppor- tunity t o consider the CAE and the CIR together w h i c h provides a comprehensive review of the Bank a n d IFC activities. Overall, IEGs findings and recommendations were supported. Mem- bers commended the Bank‘s adaptation to the evolving country situation, although a member said more recognitioncould have been g w e n t o the extraordinarily difficult country context in w h i c h the Bank was operating i n, and the remarkable contributions of the Bank as a strong partner t o b o t h the Government and other donors. The importance of aligning Bank support with Government priorities was emphasized. M o s t of the comments o n Bank support t o Indo- ngovernance and anti-corruption, decentralization, and community- nesia related t o i t s role i driven development (CDD) as w e l l as o n disaster management issues. In addition, a f e w speakers remarked o n the need for t h e Bank t o mainstream gender in its w o r k and the impor- tance of coordinating with other donors. With regards t o IFC operations, issues of ESHS com- pliance and the l n i k between advisory services and investment were raised. A f e w members stressed that the Bank and IFC needed to address the constraints in infrastructure w h i c h was noted by the two W o r l d Bank Group institutions. CAE 8. General Comments. A member asked whether the CAE was evaluating the Bank’s con- tributions or the Government’s efforts, especially since some of the outcome indicators are so broad that focus seemed to be o n the Government. IEG noted that thefocus o f CAEs is on the out- come of Bank support, which is based on the resultsji-amezuorkand objectives outlined i n the countyas- sistance strategy. IEG also noted that the attribution of outcomesfor Bank support is always a challenge i n CAEs, and that there is an ongoing review o f the approach to and methodologyfor CAEs. This mem- ber also wondered about the appropriateness of using corruption perception measures and the Heritage Foundation indicators for measuring outcomes in the area of governance and anti- corruption. IEG agreed on the need for cure i n using perception indicators. It supported the Bank’s ef- forts to develop more actionable indicators for governance and anti-corruption. Another member asked for I E G s views regarding the 1999 Country Assistance Note (CAN) recommendations t o focus more o n broad-based development strategy with great attention to governance and social development, and the current C A E that recommends more focus o n traditional growth agenda. A speaker sought more detailed analysis of outcomes related t o donor coordination infuture CAEs. 9. Strengthening Governance a n d Addressing Corruption. Regarding the slow progress instrengthening governance, building institutions, a n d tackling corruption, one member was n o t so concerned given the complexity of t h e issues faced and the need for time and patience. Another member noted the recent progress especially incombating corruption. This member emphasized the importance of enforcing the laws and i m p r o v i n g poor people’s access t o legal institutions and processes. Bank management explained that i n supporting governance and anti- corruption eforts, especiallyjudicial and legal reforms, the Bank was identihng entry points zuhere there i s country leadershipand commitment, these are critical to implementation and sustainability of eforts. A member sought t o better understand f r o m IEG whether institutional buildingwas a cross- cutting issue for the public sector or more relevant at the local level inthe context of decentrali- zation. IEG responded that institutional capacity building and developmentis a cross-cutting issue that should be at the core of Bank support as mentioned by Bank management. 10. Support for Decentralization. Few members remarked o n the tensions between I E G and Management views o n t h e Bank‘s role in decentralization. Responding t o a member’s re- xvii CHAIRPERSON’S SUMMARY quest for more clarity o n IEG‘s comments regarding the Bank’s role insupporting decentraliza- tion, IEG noted that there is still significant uncertainty about the role and responsibilities related to de- centralization. Accordingly, there is a need to balance Bank interventions focused on national level and systemic issues and support to local governments. Within this context, IEG noted that the Bank has a role i n supporting decentralization. Another member echoed I E G i n cautioning the Bank against overcommitting and becoming an implementing agency i n supporting decentralization. A speaker commended the Bank’s role indecentralization and was supportive of Bank assistance t o local governments based o n their needs. Bank management commented that one key area o f sup- port requested by the Government is strengthening the transfer o f resourcesfi.om national to local gov- ernment level. It concurred that the Bank should not retail support to each local government and ex- plained its approach to support models o f local government, partnering with national institutions that may work more widely zuith local governments and disseminate experience. 11. Mainstreaming the KDP. The mainstreaming of KDP i n t o the national poverty reduc- t i o n program was welcomed. A few members remarked o n the resource intensive nature of CDDs, the need for close supervision, reliance o n external facilitators, and potential for under- mininglocal government institutions. Inthis context, a member asked h o w the Bank i s address- ing these issues, while another member asked about the Government’s ability to mobilize addi- tional resources and its institutional capacity necessary for mainstreaming KDP into its national program. Bank management believed that the sustainability o f KDP is no longer an issue with the Gov- ernment integrating i t into its core poverty reduction program. It noted that while the Bank and multi- donor financing remain significant, the Government’s own resources for the program zuere increasing and w i l l exceed external resources. The Government’s ownership of the program was attributed i n part to the rigorous monitoring and impact evaluation and the results being achieved at the community level. 12. Disaster and Natural Resource Management. Commending t h e Bank’s role inthe area of disaster management includingt h e establishment of the Post-Tsunami Rehabilitation and Reconstruction Agency for Aceh and Nias, f e w members asked about the feasibility of setting up a nationwide system for disaster management, given the level or resources and capacity re- quired. Linked to the increasingly pressing issue of climate change, a few speakers urged more concerted efforts i n the area of disaster and natural resource management, prioritizing envi- ronmental sustainability and issue of depletion of Indonesia’s tropical forests. Management re- ported that the Government i s currently evaluating the experience o f the Post Tsunami Rehabilitation and Reconstruction Agency for Aceh and Nias to drazu lessons on disaster and reconstruction manage- ment, and also on broader civil service and public sector reforms. It added that the Ministry of Finance has initiated civil service reforms to link performance with pay scale. CIR 13. T h e need to strengthen ESHS compliance was emphasized. A member stated that IFC ought t o better understand the reasons for weak compliance in this area a n d Management should outline the steps being taken to address them. IFC management believed that the main rea- son for the lower ESHS compliance7uas the Asianfinancial crisis, zuhen a large number o f companies ex- periencefinancial distress. While IFC helped to restructure many clients, afezu involved litigations. I n the process, IFC supervision was aDcted and there was impact on ESHS compliance. It was also noted that IFC is strengthening the overall oversight of ESHS with the revised policiesfbrenvironmf and so- cial development, better understanding o f ESHS issues in thefinancial sector, and more proactive super- vision including for Category B projects. The member insisted that according to IEG, the problem of compliance is n o t confined t o projects active at t h e time of the Asian crisis but includes the entire period also the most recent years, w h i c h I E G confirmed. xviii CHAIRPERSON’S SUMMARY 14. Link between Advisory Services and Investment Operations. A member sought more information o n the n e e d to l n i k advisory services and investment operations and actions being taken t o address t h e matter. IFC management responded that while advisory services and investment operations were not well-coordinated i n the past, the situation has changed recently. It elaborated on the role of the C o u n t y Manager i n delivering a coordinated and aligned package of advisoy services and in- vestment. Likewise, i n the area o f infiastructure and the private sector, IFC management emphasized the attention given i n coordinating with the Bank. 15. Crisis Management. A member asked whether IFChas systems i nplace i nanticipation of a crisis based o n lessons learned inIndonesia and other countries. IFC said that since the Asian and Russian crisis, i t has established a more formal portfolio management system zuhere the credit risk ratings of projects are assessed evey quarter. This provides early signals about a deteriorating situation. In addition, IFC said that ifthere are macroeconomic issues i n a county, its portfolio is subjected to ape- riodic stress-test to determine the potential impact of a crisis and to consider mitigating actions. Jiayi Zou, Chairperson xix I. Background 11 . F r o m 1967 t o 1998, the Soeharto regime was an extremely successful model of economic g r o w t h and poverty reduction. Inthe thirty years before the Asian crisis i n1997, Indonesian g r o w t h aver- aged 7.2 percent per annum and the share of those earning less than US$1 a day declined f r o m about 60 percent of the population i n 1965 t o about 15 percent in 1996. The model h a d a number of elements. First, the political system was highly centralized with decision making concentrated at the top. Second, a team of very able techno- crats supported by foreign advisers put in place a strong and suppor- tive environment for robust growth, with prudent macroeconomic policies a n d large investments i ninfrastructure, primary education and health. Third, there was a high rate of private investment i nagri- culture, labor-intensive manufactured exports, and i n some large im- port-substitutingindustrial undertakings supported by credit f r o m state and connected banks. Fourth, high levels of foreign borrowing supported the public investment i n infrastructure and social devel- opment. Corruption was n o t simply an adjunct of the more than three decades of t h e Soeharto regime. It was part of the structure -a w a y of maintaining the political and economic balance needed for the regime’s sustainability. A large part of the rents accrued t o the army for example, with some state enterprises and part of the illegal log- ging in the hands of high-rankingofficers. The cronies of t h e regime and Soeharto family members received various privileges i nthe f o r m of licenses, trade restrictions or monopolies. T h e private sector took the view that y o u paid, but you got w h a t y o u p a i d for. Corruption i n Indonesia was discussed i nthe international press and w e l l under- stood by multi-national firms. 1 1.3 With t h e onset of the Asian financial crisis i nJuly 1997, there was initially confidence that Indonesia, with its strong record of g r o w t h and sound fiscal management, w o u l d be able to weather the storm. The more or less simultaneous occurrence of a number of adverse events -widespread forest fires, drought i nJava, an illness of the aging President, and the Asian financial crisis-exposed the underlying institutional weaknesses and brought a temporary end t o t k t y years of steady economic progress. When the rupiah first came under pressure with foreign banks refusing t o renew short-term loans a n d Indonesian companies unable to meet their obligations t o the domestic commercial banks, the Indonesian authorities turned t o the 1 CHAPTER BACKGROUND International Monetary Fund (IMF). The I M F proposed a program of fiscal tightening combined with the closure of selected banks. The argument for closure was that this step was needed so that t h e markets w o u l d perceive the determination of the authorities t o deal with weaknesses i nthe banking system. Instead i t was taken as a s i g n of the overall weakness of t h e financial sector and l e d t o withdrawals f r o m a l l banks. The central bank (Bank of Indonesia) stepped in with increased credit, but t h e situation rapidly went downhill. 1.4 With President Soeharto suffering a stroke o n December 19, 1997 the rupiah went into meltdown as investors a n d depositors tried to get their money out of the country. Between September 1997 and January 1998 the Indonesia rupiah depreciated f r o m about 2400 t o the dollar t o over 10,000 to the dollar (at one p o i n t exceeding 15,000 t o the dollar). What started as a financial crisis rapidly became an economic and political crisis. Incomes of the w o r k i n g population declined with r a p i d inflation and underlying resentment of a n authoritarian regime linked t o widespread corruption l e d t o demands for President Soeharto’s resignation, which took place in M a y 1998. 1.5 The subsequent eight years are generally viewed in Indonesia as a period of transition. There have been four different Presidents with r a p i d turnover of the core economic ministers. Indonesia has moved towards a different model of economic and social develop- ment, associated with democratic political institutions. There has been a substantial overhaul of Indonesia’s political and administrative structure in the post-Soeharto period (see Box 1). Perhaps the key element of t h i s restructuring i s the ’big bang’ decentralization approved in 1999 and effective on January lst, 2001. The decentrali- zation established the kabupaten (county) or kota (municipality) as the core unit for sub-national decision-making. I n2004,34 percent of public expenchtures were controlled by local governments as com- pared t o o n l y 14 percent in 1998. Arguably the main reason for the speed with w h i c h decentralization was carried o u t was the urgent political imperative as a result of the secession of East Timor in 1999 and the real threat of secession by other provinces (e.g. Aceh). Thus, the economic and social development dimensions of decentralization were n o t w e l l prepared and remain w o r k in progress. 2 CHAPTER1 BACKGROUND Box 1. Institutional Restructuring in Indonesia in the Post-Soeharto Period. In the space o f eight years, Indonesia has achieved major progress in m o v i n g towards a n e w democratic decentralized political and administrative structure, with the associated institutional framework. There have been two well- contested elections for the Presidency. Direct elections for governors and may- ors have also been introduced, and direct elections for kabupaten (district) councils are being phased in. The legislative branch of Government has been restructured with extensive checks and balances granted t o national and local legislatures and a n e w upper legislative house has been established with stronger regional representation. The legal framework has been put in place for a set of oversight institutions, including the Supreme Audit Agency, Judi- cial Commission, Police Commission, Ombudsman’s office, and the Anti- corruption Commission. All these are functioning, though with varying de- grees of effectiveness, as might be expected gwen their relative newness. The Indonesian decentralization shifted control over more than a third of the budget f r o m the central government to over 400 local governments Over 2 mil- l i o n civil servants stationed at the local level changed affiliation f r o m the cen- tral t o local governments. The institutional transition is by n o means complete and there are still sigruficant risks that there will be inadequate follow through in some areas, but the fact that there is open public debate a n d media surveil- lance, and a m u c h expanded role of civil society, provides some confidence that this institutional restructuring will be sustained. 1.6 The tradition of sound macro-economic management has re-asserted itself over the period. I nthe period since 1998 g r o w t h has resumed albeit at a lower rate than the pre-crisis average (see Figure 1). The portion of the population living o n incomes of less than U S $ l a day, w h i c h rose t o 24 percent at the peak of the crisis, has reverted t o the 16 percent it was before. The ratio of debt t o GDP w h i c h rose rapidly i n the immediate post-crisis period due to the cost of re- capitalizing the commercial banking system has n o w come d o w n sub- stantially. Although Indonesia’s progress since 1998 has been slower than in other East Asian crisis countries, none of the others went through the same process of political and administrative restructuring (see Table 1). A s of mid-2006, Indonesia s t i l l has 45 percent of i t s population earning less than US$2 a day, and formal sector unem- ployment at 10 percent of t h e labor force. 3 1 CHAPTER BACKGROUND Figure 1. Indonesia Growth Rates 1996 to 2005 (annual percentage) Table 1. Economic and Social Indicators for East Asian Countries Economic and lndo Vietnam Philip China Malay- Thailand Indicators for East Asian nesia pines sia Countries GDP per capita (constant 914.9 539.0 1123.9 1444. 4434.3 2440.4 2000 US$) (2005) 8 Poverty headcount ratio at 45.2F 34.2 47.58 46.7A 9.30 25.9 $2 a day (PPP) (% of population (2002) Rural population ('YO of 51.9 73.6 37.3 59.6 32.7 67.7 total population) (2005) Electric power 440.1 433.1 574.5 1378. 3060.5 1751.84 consumption (kWh per 5 capita) (2003) Unemployment, total (Yo of 9.9 2.1 9.84 4.0~ 3.5 1.5 total labor force) (2004) School enrollment, 64.1 73.5 85.9 72.5 75.85 73.2 secondary (% gross) (2004) School enrollment, tertiary 16.7 10.2 28.8 19.1 32.4E 43.0~ (% gross) (2004) Note: A:2001, 8:2000, C: 2002, D: 1997, E: 2003, Ff: 2005 Source: World Bank Internal Documents. 1.7 Investment overall has remained w e l l b e l o w p r e c r i s i s levels throughout the period. There are a n u m b e r o f reasons for the sluggish rates of investment. The internal political situation remained unsettled f o r m u c h of the post-crisis p e r i o d and ethnic Chinese capital that h a d left in the w a k e o f the crisis w a s s l o w to r e t u r n w i t h o u t greater assurance o f economic and political stability The r a m p a n t 4 1 CHAPTER BACKGROUND corruption meant that b o t h foreign and Indonesian private investors s t i l l needed to make large pay-offs in order t o obtain licenses. The trade u n i o n movement, w h i c h h a d become far more powerful after the crisis, was able t o secure legislation o n employment practices that added substantially t o costs for potential investors. Fiscal constraints and an initial reluctance to undertake new foreign borrowing f r o m of- ficial sources l e d t o a sharp slow-down i npublic investment in na- tional infrastructure programs. In addition the legislature and t h e court system have put obstacles in the w a y of foreign investment in electricity and telecommunications. Public investment in infrastruc- ture averaged US$8 b i l l i o n a year inthe mid-90s a n d only US$2 b i l l i o n a year in 2003-05, whereas by some estimates Indonesia needs US$90 b i l l i o n of infrastructure investment in the next decade. 1.8 The Indonesian economy has suffered f r o m an extraordinary number of exogenous shocks i nthe past f e w years. The independence of East Timor, terrorist attacks i n Bali and Jakarta; the destruction in Aceh and Nias in the wake of Tsunami; the earthquake in Jogjakarta; c i v i l strife in Aceh and West Papua; have a l l served t o increase the difficulty of forging a consensus in Indonesia about the w a y forward. 1. Business Week reported in 1997 that ”it i s well-nigh impossible” for for- eign firms “to get a deal done without a Soeharto clan member as ally, agent, NOTES or partner.” 5 2.The World Bank Program 1999-2006 A. The Bank Strategy RESPONDING TO THE CRISIS 2.1 Throughout the Soeharto period the Bank h a d a close relation- ship with the technocrats i n Indonesia’s core economic ministries. The Bank’s advice a n d inputs were sought o n most of the key eco- nomic policy decisions during the period. The large program of investment lending and technical assistance was regarded as one of the best performing portfolios in the Bank. Overall there was a great deal of satisfaction with the Bank’s association with one of the acknowledged success stories of sustained g r o w t h and poverty reduc- tion. 2.2 With the onset of the crisis, the I M F announced multi-donor pledges of up t o US$38 billion for Indonesia (much of which never materiahzed). The Bank provided the F u n d with the agenda of struc- tural measures to be included in the Letters of Intent. I nFYs 98 and 99, the Bank provided three adjustment loans in support of the pro- gram - two Policy Reform Support Loans (PRSL I ,US$1billion; PRSL 11, US$500 million) and the Social Safety N e t Adjustment Loan (SSNAL, US$600 million). With the changes in the political situation n Indonesia following the resignation of Soeharto, and the increasing i demands for the establishment of a democratically elected govem- ment, the public perception in Indonesia of the Bank‘s role began t o shift. The Bank was seen as a contributor t o the crisis with i t s empha- sis o n an open economy and i t s support for a regime that was associ- ated with so m u c h corruption, and there were calls for the Bank t o write off outstanding loan balances. 1 2.3 By 1999 it h a d become clear that the Bank h a d t o re-think its approach. Even those technocrats w h o h a d maintained close relations with the Bank during the crisis f o u n d it difficult t o b e publicly associ- ated with the institution. For the incoming Country Director, the first order of business was to restore the Bank’s credibility. This meant: n o t being seen t o ’push‘ lending, or t o tolerate, and implicitly abet, corruption; and broadening the Bank’s base of contacts beyond the inner circle of technocrats, to encompass civil society, NGOs, politi- cians and local government officials. 2.4 Inits M a y 1999 evaluation of the Bank’s program in Indonesia f r o m 1990-1998, IEG identified three major structural issues that the 7 2 CHAPTER THEWORLDBANKPROGRAM 1999-2006 Bank h a d in its v i e w n o t p a i d sufficient attention to during t h e 90s. These were corruption, the weakness of t h e financial sector a n d the continuing vulnerability of the more than half of t h e population with incomes of less than US$2 a day (World Bank 1999a). 2 The core ele- ment in the Bank’s new approach was t o make tOhe drive against cor- r u p t i o n a key part of the Bank‘s program in Indonesia. The Bank formed a partnership with the government, NGOs, U n i t e d Nations Development Program (UNDP), and the Asian Development Bank (ADB) t o help set the anti-corruption agenda and tackle issues of legal and judicial reform and carried out major analytic w o r k to support anti- corruption efforts. It also began t o investigate i t s o w n projects to identify corruption and take corrective action. Second, the Bank provided support t o t h e IMF, which was taking the lead in the finan- cial sector reform program. Third, the Bank increased its focus o n poverty and vulnerability through the Kecamatan Development Program (KDP) and the Urban Poverty Program (UPP), w h i c h also built in approaches t o minimizingcorruption through public over- sight. STRATEGY THEBANK’S 2.5 F r o m 1999 t o 2003 t h e Bank pursued a policy of maintaining a lower profile in Indonesia and rebuilding its reputation. The Bank CAS of January 2001 posited a base case reflecting a ’muddle- through‘ situation, ’with some slippage i n structural reforms but with continued macroeconomic stability that w o u l d help sustain poverty reduction’ - an extremely accurate reading of the following three years. The CAS goes o n to say that ”This i s n o t a desirable scenario, providing a fragde foundation for external support t o Indonesia, and even harbors risks t o the Bank’s portfolio as fiduciary standards m a y slip in a decentralized system. At the same time, the Bank i s one of Indonesia’s long-term development partners and cannot disassociate itself f r o m this fledgling democracy.” (World Bank 2001,ii) The CAS identified four ’key elements’ of t h e Bank’s involvement over the three years (2001-2003): A shrinking portfolio with emphasis o n quality improve- ment and strengthening fiduciary controls. 0 A focus o n just-in-time advisory services with fewer l o n g reports. A core lending program of US$400 m i l l i o n a year - less than a third of pre-crisis levels (around US$1.3 b i l l i o n a year during FY90-97). 8 CHAPTER 2 THEWORLDBANKPROGRAM 1999-2006 0 A focus o n projects supporting social services a n d basic in- frastructure for the poor, w o r k m g with local governments a n d communities. 2.6 The CAS identified three extremely broad themes for Bank in - volvement i n Indonesia: (1)Sustaining economic recovery and pro- moting broad-based growth; (2) Buildingnational institutions for accountable government; and (3) Delivering better public services t o t h e poor. What gave the lending program some focus was its small size, with community-based projects constituting a large share of proposed lending. 2.7 The FYOl CAS also discussed a high case in w h i c h annual Bank lending w o u l d go up t o US$1 b i l l i o n and could include adjustment lending if needed. Movement to the high case required: prudent monetary, fiscal and debt management; accelerated bank and corpo- rate restructuring and privatization; agreement o n a policy framework for rice; progress o n agreed actions t o reform procurement and financial management systems; and initial steps o n preparation of a broad- based poverty reduction strategy. 2.8 The second phase of t h e Bank’s rebuilding efforts i nIndonesia was ushered inby a n e w Country Assistance Strategy published i n October 2003. Once again the strategy was organized around very broad, overlapping rubrics: (1)Improving t h e climate for high quality investment; (2) M a k i n g service delivery responsive t o the needs of the poor; and (3) the core issue of governance. These broad categories re- quired large numbers of sub-categories e.g. the first category-the in- vestment climate - was elaborated via 5 sub-categories and 14 bullet points. In addition the CAS identified four delivery levels w h i c h it called ’business platforms’: Community Driven Development; Local services (i.e. district and provincial levels); Public Utilities; and the National level. T h e CAS claimed that Indonesia h a d m e t the high case triggers of the FYOl CAS - a debatable proposition given the evi- dence presented for this in Table 2 of the CAS which includes caveats o n almost every aspect of Government policy performance - and pro- posed a base case of US$450 t o US$850 m i l l i o n a year. 2.9 T h e large range inbase case lending rested o n the progress in buildingup the ’local services platform’ that was identified as the key nthe absorptive nt h e Bank’s activities, and more specifically i gap i capacity of the Kabupatens which h a d been officially designated as the local administrative units, but i nmost cases lacked t h e capacity t o design and implement development programs. Some 40 percent of total lending was envisaged for local governments. 9 CHAPTER 2 THEWORLDBANKPROGRAM 1999.2006 2.10 Both foreign and domestic investment in Indonesia h a d languished since t h e crisis. T h e CAS placed high priority o n improv- ing the investment climate through Bank policy-based lending, n e w infrastructure loans, and increased support f r o m IFC. 2.11 The Bank's governance and anti-corruption efforts remained central t o t h e program. The CAS proposed good governance as the instrument for selectivity in what was recogruzed t o be a very broad program. It was recognized that there was little scope in the political environment at t h e time of the CAS for addressing governance and anti-corruption measures directly through stand-alone projects. In- stead i t was proposed t o use the entire lending and AAA program t o foster transparency and accountability. 2.12 An unforeseen role emerged for t h e Bank in Indonesia subse- quently. The devastation in Aceh and Nias, caused by the Tsunami i n December 2004, l e d t o an unprecedented outpouring of support f r o m the international community. The donors t u r n e d t o the Bank t o manage a Multilateral Trust F u n d (MTF), including some grant resources provided by the Bank itself. This i s n o w the second largest trust fund managed by the Bank world-wide. The Bank used t h e mechanism of KDP w h i c h was already o n the ground in some areas of Aceh as an instrument for channeling part of this assistance to the vil- lage level. THEEVALUATION FRAMEWORK 2.13 The breadth of t h e themes and the w i d e range o f the Bank program mean that n o economic sector i s l e f t unmentioned in the FY04 CAS. Environmental issues are the only topic that does n o t s i t comfortably with t h e three themes. I norder t o provide coverage the CAS has an annex explaining the areas under each of the three themes w h i c h relate to environmental issues. The complexity of the frame- w o r k with its multiple overlays, poses a v e r y difficult challenge for evaluation. In order t o build up a framework for evaluation, the pro- grams supported by the Bank have been divided among the three broad pillars w h i c h carried over through t h e two CAS documents, with specific sub-components that f o r m t h e basis for a composite judgment o n the progress u n d e r each pillar. A fourth pillar -disaster and natural resource management -has been added. Pillar 1: Restoring Growth and Investment. (i) Managing the aftermath of the crisis. ( i i) Restoring growth. ( iii)The Financial and Private Sectors. (iv) Infrastructure. 10 CHAPTER 2 THEWORLDBANKPROGRAM 1999-2006 Pillar 2: Improving Governance and Building Institutions. (i) Tackling Corruption. (ii)Decentralization. Pillar 3: Poverty Reduction and Social Service Delivey. (i) H uman Development. (ii) Community Development. Pillar 4: Disaster and Natural Resource Management. (i) Disaster Management (ii) Natural Resource Management 2.14 Inaddition t o the topics above, two other areas were exam- ined, but have n o t been included in the CAE document. The f i r s t of these i s agriculture, where the program was v e r y thin during the period. T h i s was explained as a consequence of the difficulty of iden- tdying a suitable counterpart for either analytic w o r k or lending activities. Going forward it will b e important t o re-engage i nagricul- nthe reduction of r u r a l and urban poverty ture given its critical role i by creating employment, maintaining food price stability and meeting the MDGs o n malnutrition. (see Box 2) The second area i s urban wa- ter and sanitation where the Bank attempted t o develop a program, but was unable t o d o so due t o the prevailing weakness of the policy framework and the fragmented nature of the agencies (PDAMs). The time and effort spent o n trying t o develop a program i nurban water and sanitation could have been better deployed i nother parts of the program. THE BANKPROGRAM 2.15 Someone who h a d slept through the period f r o m 1996 to 2006 w o u l d wake up t o find a Bank that i s very similarly positioned t o where i t was at the beginning of the period. The Bank n o w has an even larger office in Jakarta with international staff representation i n every major sector. It has re-emerged as the lead economic adviser t o the core ministries i n the central government. Lending at near US$1 b i l l i o n a year is s t i l l short of pre-crisis levels, but has recovered sub- stantially f r o m its low point of US$133 m i l l i o n i n2001. Both the Bank and the Indonesian Government deserve a great deal of credit for t h e i r success in restoring a relationship that seemed in the aftermath of t h e crisis likely to result i n the Bank having a very l i m i t e d presence and program. Instead, effective Bank leaders and key counterparts were able to restore t h e Bank t o the influential role i t h a d played in 11 2 CHAPTER THEWORLD 1999.2006 BANKPROGRAM t h e p r e c e d i n g three decades in an e n t i r e l y n e w set of p o l i t i c a l a n d in- s t i t u t i o n a l realities. 2.16 This r e t u r n of t h e Bank to i t s earlier p r o m i n e n c e is d u e not only to t h e efforts of Bank managers, but p e r h a p s m o r e than anything else to t h e p o l i t i c a l context inJakarta. With t h e u n s e t t l e d e n v i r o n m e n t af- t e r t h e crisis and t h e deliberate decision to k e e p a low profile, t h e Bank scaled b a c k i t s program. T h e n with t h e presidencies of Abdur- rahman Wahid (also known as Gus Dur) and M e g a w a t i Sukamoputri, t h e r e w a s s t r o n g p o l i t i c a l representation of elements o p p o s e d to a l a r g e Bank presence and program and l i t t l e clear sense of w h e r e t h e c o u n t r y or t h e e c o n o m y w e r e headed. It w a s only with t h e Susilo Bambang Yudhyono presidency s t a r t i n g in October 2004 and t h e re- emergence of technocrats in k e y p o s i t i o n s of economic m a n a g e m e n t that t h e m o v e toward greater engagement became a reality, with increased l e n d i n g and analytic work and a m o r e v i s i b l e presence of t h e Bank in Indonesia. Box 2. The Bank and Indonesian Agriculture in the CAE Period. Agricultural development played little role inthe Bank program during the C A E period. Was this an example of strategic f m s or a missed opportunity? From 1967-96, agricultural growth and diversification were important con- tributors to Indonesia’s pro-poor growth performance. I nthe post-crisis pe- riod, growth rates in paddy and other agricultural production (particularly p a l m oil, tobacco, livestock and horticulture) have exceeded the pre-crisis trends. Per hectare paddy yields reached a n e w high i n200506. For tree crops, however, much of the increase has come f r o m n e w cultivation o n defor- ested land. Continued growth inthe future is likely to involve further diversi- fication of agriculture into high-value crops, processing and marketing. This in turn calls for the development of a strong regulatory framework, well- functioning financial and commodity markets, improved infrashcture, and an appropriate investment climate for the small and medium-scale private sec- tor. These imply an important public sector role in regulation, environmental management, trade policy, and improved agricultural research and extension. The concern is that the public sector has made slow progress in developing this institutional infrastructure to support continued progress in agriculture. The Bank had been a major presence inIndonesian agriculture before the cri- sis. In the post-crisis period it initially undertook a program combining ana- lytic w o r k with an active policy dialogue, focused o n the issue of rice pricing and marketing policy, financial sector reform and the need for government in- vestment in research and extension. With lack of progress in the dialogue, in the past few years the Bank’s work o n agriculture has been opportunistic and piecemeal. Bank staff felt that they did n o t have an interested interlocutor for the agriculture policy dialogue within the GOI. Inthe circumstances the Bank probably made the right choice given the - number of other claims o n its resources. But going forward it will be increas- ingly important to integrate agricultural development into the agenda for pro- poor growth. It is a key t o reducing the vulnerable population, two-thirds of whom are largely dependent o n agriculture for their livelihood. 12 CHAPTER 2 THEWORLDBANK 1999-2006 PROGRAM BANKLENDING 2.17 T h e reduction i nBank lending after 1999 h a d the effect of a steady reduction i nBank exposure a n d a negative n e t transfer t o In- donesia until 2003 (see Figure 2). There was continuing debate i nthe country team i nt h e wake of t h e decision n o t t o continue with adjust- ment lending as t o whether t l u s was the right thing t o d o during a critical period w h e n n e w policies needed t o be put in place. B y 2003 it was becoming apparent that the approach of focusing o n a l i m i t e d set of interventions related mainly t o KDP and anti-corruption h a d suc- ceeded in laying the groundwork for an expanded a n d more balanced Bank program, with lending carrying more strategic weight than i n the previous three years. This was embodied in the FY04 CAS. Figure 2. Indonesia IBRDllDA Lending 1995-2005 I Indonesia IBRDllDA Lending 1995-2005 I 1995 1996 1997 1998 1999 2020 2001 2002 2W3 2wl 2W5 Fiscal Years Source: World Bank Internal Document. AND PROJECT LOANCOMPOSITION QUALITY 2.18 The composition of Bank lending has been very different since the crisis. Inthe Soeharto era the Bank's focus was very m u c h o n the g r o w t h agenda, with major investment lending for infrastructure and agriculture. During the crisis years the Bank focused o n adjustment and since then investment loans in the 'traditional' sectors have been less than half of n e w lending. The amount of lending for the first pillar during the CAE period was less than 20 percent of its level in the 1990s. B y contrast the Bank has substantially increased t h e share, and maintained t h e absolute amounts, of i t s lending for poverty reduction and social service delivery, though there have been sharp shifts within the category (see Table 2). Most notably there has been a decline i nlending for Education. It should also b e noted that m u c h of the lending for Social Development comprises KDP, 70 percent of w h i c h i s directed at village-level infrastructure programs. Similarly 13 2 CHAPTER THEWORLDBANKPROGRAM 1999.2006 the Urban Poverty Program has a large component of small-scale infrastructure. Table 2. Indonesia Sector Lending for FYOI-06 Categorized Development (US$M) FY91-97 W98-99 WOO-06 Pillar One: Restoring Growth and Investment for Sustainable Development Energy and Mining 2142 0 221 Environment 211 0 0 Economic Policy' 125 500 350 Financial Sector 457 20 0 Global InfonnationlCommunicationsTechnology 700 35 0 Private Sector Development 75 32 17 Rural Sector 993 344 239 Social Protection 0 600 48 Transport 1268 234 400 Urban Development (excluded projects: UPP 2 and UPP 3) 1108 105 62 Total Lending for Pillar One 7079 1869 1338 (80%) (46%) (38%) Pillar Two: Improving Governance and Building Institutions Economic Policy' 125 500 350 Public Sector Governance 58 725 60 Total Lendina for Pillar Two 183 1225 410 (2%) (30%) (12%) Pillar Three: Poverty Reduction and Social Service Delivery Education 1079 263 154 health Nutrition and PopLlation 359 87 462 Social Protection 0 600 48 Social Development 0 0 834 Water Supply and Sanitation180 180 0 0 Urban Development (only LPP 2 and UPP 3 Pro,'ects) 0 0 239 Total Lend nq for Pillar Three 1618 951 1737 (18%) (24%) (50%) 'Adjustment & Development Policy Lending have been equally divided between Pillar 1 & 2. Source: World Bank Internal Document. 2.19 For m u c h of the pre-crisis period, the Indonesia portfolio was considered one of the best performing i nthe Bank with IEG rating 83 percent of projects exiting between FY79 and FY97 as Satisfactory. T h e projects w h i c h have closed after 1999 have a weaker record of implementation compared t o the past with only 66 percent of projects exiting between FY99 a n d FY06 rated Satisfactory. Only 34 percent h a d substantial institutional development impact and only 46 percent were regarded as sustainable. A number of factors appear t o be driv- ing t h i s modest record: first, decentralization meant that central min- istries h a d less authority t o deliver o n obligations; second, there were problems of counterpart funding in many cases; third, the environ- ment of pervasive corruption has l e d the Bank to declare mispro- curement i na number of cases (see Box 3). 14 CHAPTER 2 THEWORLDBANKPROGRAM 1999-2006 CORRUPTION IN BANKSUPPORTED PROJECTS 2.20 O n e of the more unsettling events for Bank staff in the turbu- lent months of the crisis was the leak t o the press of a n internal memorandum w h i c h stated that 20 t o 30 percent of project expendi- tures in Indonesia were lost through corruption, and "there i s n o reason t o believe that this i s any different for Bank projects." Regard- less of the veracity of this claim, inthe post-crisis period the senior managers w o r k i n g o n Indonesia felt that t h e Bank could n o t be credi- b l e inhelping the Government address corruption unless it could demonstrate that it was committed t o ensuring that its own projects were free of corruption. 2.21 In2001, the Bank's Department of Institutional Integrity (INT) conducted a fiduciary review of a Bank project i nIndonesia. The review revealed a widespread pattern of collusion in procurement and inflation of cost estimates that allowed for fraudulent and corrupt practices (see Box 3). The findings of I N T proved a wake-up call t o t h e Bank and l e d t o greater focus o n designing projects so as t o limit t h e opportunities for corruption. The strategy adopted was first to identify risk factors associated with projects and then to develop anti- corruption plans for a l l projects w h i c h either counter the risks through t h e design or monitor high risk projects m u c h more closely. An example of design changes was the Bali education project where parents were brought in at b o t h the design phase and o n the monitor- ing of funds spent o n the schools. ~ Box 3: INT Findings on the Sulawesi Development Project INT is the unit responsible for investigating allegations of fraud and c o m p - tion o n Bank-financed projects. In 2000 and 2001, there were numerous complaints f r o m Indonesia, which l e d to INT conducting its f i r s t fiduciary review of a n Indonesian project - the Second Sulawesi Urban Development Project - a t the request o f the W o r l d Bank Office inJakarta (WBOJ). The fi- duciary review found sigmficant and pervasive weaknesses in four m a i n ar- eas of record-keeping, procurement, implementation, and financial man- agement. The review f o u n d a sigmficant amount of missing documentation, manipulation o f the procurement process, contract performance n o t in ac- cordance with the technical specifications, and project disbursements made in the absence of adequate and appropriate supporting documentation. Twenty-six cases were referred for investigation as a result of the fiduciary review, most of which have n o w been substantiated and closed. SERVICES KNOWLEDGE 2.22 While the Bank's budget for analytic w o r k in Indonesia i s simi- lar to that for other Bank borrowers of its size (e.g. Russia, Brazil), the Bank has greatly leveraged its own efforts through donor Trust Funds for analytic w o r k which are managed by the Bank. For the past three 15 2 CHAPTER THEWORLDBANKPROGRAM 1999-2006 years (2004 t o 2006), for example, t h e UK (DFID) has p a i d for three specialist staff in the Bank’s Jakarta office, w o r k i n g o n poverty issues. The Dutch government has also been a major source of t r u s t funds for Bank analytic work. A s a consequence of this, total expenditure by t h e Bank o n analytic w o r k in Indonesia i s very close to that of India w h i c h i s t h e highest in the Bank. 2.23 The Bank has used analytic w o r k as a mechanism t o enable i t to play a wide ranging role as policy adviser t o the Government a n d the donor community. It has produced a solid stream of analytic out- puts in response t o requests f r o m Government officials for analysis of policy issues - an example i s the w o r k done o n assessing the implica- tions for the poor of the reduction of the fuel subsidy - and for com- parative data and descriptive materials o n h o w problems are being addressed in other countries. 2.24 There appears to be widespread appreciation of the Bank’s ana- lytic w o r k in the Government, donor community and civil society. The anti-comption report of 2003, w h i c h provides a very frank and com- prehensive assessment of corruption issues, i s regarded as a milestone in Indonesia. The mission was t o l d that the Auditor General’s office h a d 400 copies made and distributed t o all staff. It continues t o be used as a training handbook for the department. Similar flagship studies have been produced i nmost areas of Bank activity inthe past eight years. The set of policy notes produced for the n e w Government in 2004 drew high praise as being especially w e l l adapted to the needs of i t s audience. 2.25 Bank reports are available in a network of 16 libraries t o w h i c h the Bank regularly sends its publications. A sigruficant gap in the dis- semination effort i s t h e tendency t o translate into Bahasa only t h e executive summary of most Bank documents due t o budget constraints. Web-sites are also m a i n l y in English, with the notable exception of KDP. 2.26 The Bank has also been able t o exploit its knowledge of other countries, which i s m u c h valued in Indonesia. The mission was t o l d of numerous examples where the Bank h a d been able t o provide just in time advice o n h o w a problem was being addressed by other coun- tries. A recent case was the program of unconditional cash transfers w h i c h Indonesia put in place for compensating the poor for the in- crease in energy costs. The Bank was subsequently able t o put the al- ternative of conditional cash transfers o n the table by bringing t o Ja- karta Mexican officials w h o h a d been involved in the Progressa program there. At the t i m e of writing the adoption of this approach i s under consideration by the GOI. 16 CHAPTER 2 THEWORLD 1999.2006 BANKPROGRAM 2.27 While the bulk of Bank analytic w o r k in Indonesia i s demand- driven, the interests of particular donors have o n occasion l e d t o a skewing of the content of studies t o reflect donor interests rather than Government priorities. On the whole however, the Bank has used its knowledge services effectively t o take its policy dialogue a n d impact n Indonesia, w e l l beyond the scope of t h e lending program. i PARTNERSHIPS 2.28 An important part of the Bank’s activities i nIndonesia post- crisis consists of its expanded partnerships with other donors and c i v i l society in Indonesia. Given the pressures o n the Bank after 1998, the Bank needed t o convince c i v i l society in general a n d the NGOs in particular that it could w o r k effectively with them towards common goals and especially towards reducing corruption. A Senior Adviser was recruited with the mandate of w o r k i n g with the NGO commu- nity and others o n t h e anti-corruption effort. 2.29 A key part of the effort was t o bring together the Government and the NGO community. The Bank has brought NGOs i n t o i t s dia- logue at every opportunity including most prominently the FYOl and FY04 CAS preparation. The Bank has also worked closely with NGOs in KDP and t h e post-Tsunami relief effort. There i s s t i l l strong anti- Bank sentiment i n Indonesia emanating f r o m some NGOs. It has however, become less about the specifics of the Bank’s role i n Indone- sia and more about the Bank, the I M F and the WTO as institutions in the forefront of globalization. 2.30 Parliamentarians represent another important target group for Bank partnership efforts in Indonesia. Each parliamentarian has two staff members; a n expert and an administrator. The Bank h a d five sessions for the experts in 2005, for example, at which Task Team Leaders (TTLs) came t o speak about their work. A number of Government officials expressed the view that this i s a group for w h o m increased outreach by t h e Bank could be especially valuable, b o t h for the country itself through their improved understanding of economic issues, and for the Bank through a clearer sense of h o w best to frame i t s objectives and design its methods. 2.31 The Bank has also attempted t o foster m u c h greater partner- ship with the large number of bilateral and multilateral donors i n Jakarta. During t h e first f e w years after the crisis the Bank maintained a lower profile, encouraging other donors to take the lead, as with the Partnership for Governance Reform, but over time the Bank’s range of interests and i t s managerial capacity have l e d t o its taking a leader- ship role o n many issues. 2.32 An important feature of the Bank’s capacity to coordinate i s its role as cochairman with the Government of the Consultative Group 17 2 CHAPTER THEWORLDBANKPROGRAM 1999-2006 for Indonesia (CGI). There i s a great deal of questioning both in the donor community and the Government as t o whether the CGI contin- ues t o play a u s e f u l role. These are n o longer important as pledging sessions since the volume of a i d f r o m each donor i s established w e l l inadvance. In addition the a i d composition is dominated by the three largest sources of assistance - the Bank, the ADB and the Government of Japan (each about 30 percent of assistance). I nthe circumstances t h e CGI has evolved i ntwo directions: first, a public relations exer- cise; and second, an opportunity for air t i m e for the views of some o f the smaller donors. 2.33 Since 2003 the Bank’s increasingly close relationship with the core m i n i s t r i e s and its build up of capacity in the office in Jakarta have resulted i nthe Bank becoming the ’go to’ institution for donor initiatives. The major multilateral t r u s t funds for the post-tsunami reconstruction and for decentralization support are clear evidence o f this. A n e w trust fund for the education sector, also to be adminis- tered by the Bank, i s under consideration by donors. These Multilat- eral Trust Funds are a valuable innovation. They provide for closer oversight than budget support funds, while substantially reducing the transaction costs for the Government. They seem t o b e w o r k i n g w e l l in Indonesia and could w e l l be an instrument with potential for use in other countries. However, donors have expressed some concern about the Bank’s objectivity and interest in monitoring and evaluating these t r u s t funds. As a consequence a number of donors have launched separate evaluations. It w o u l d be more efficient i f each trust fund specified arrangements up front for independent monitoring and evaluation. Both a cause and an effect of these multilateral trust funds has been the build-up of Bank staff and donor-supported consultants i n the Bank office inJakarta. More than in any other country depart- ment, other than perhaps China, t h e Bank has moved the key special- i s t staff to the country office. Inp a r t t h i s reflects the fact that time differences and costs of travel make the trade-off more cost-effective than for most other Country Units, but it also reflects t h e frequent requests f r o m the Government a n d the donors for the Bank t o provide a d hoc assistance and take o n special coordinating roles. As a conse- quence there i s a senior staff member in most areas where the Bank i s active and even some where i t is n o t very active (e.g. urban water and sanitation). The Bank needs t o take care n o t t o recreate the pre-crisis situation where the focus o n the relationship with the core ministries distanced the Bank f r o m Indonesian c i v i l society. Another danger of such a large office (around 200 staff) with senior level representation in most sectors i s that i t can very easily generate supply d r i v e n activi- ties. I nthe words of one donor ”The Bank is i n t o absolutely every- thing”. 18 CHAPTER 2 THEWORLDBANKPROGRAM 1999.2006 1.At a public meeting in 2001 the Bank's Regional Vice-president was asked "Why should w e repay this criminal debt"? 2. Indonesia: Country Assistance Note, IEG, March 1999. NOTES 19 3.Achieving the Program Objectives Pillar One: Restoring Growth and Investment for Sustainable Development THE AFTERMATH A. MANAGING OF THE CRISIS 3.1 Bank Objectives: The 2001 C A S characterizes the Bank’s ob- jectives i n the aftermath of the crisis as follows: first, economic recov- ery, essentially providing support for the Government’s Extended Arrangement with the IMF, including direct efforts t o support some of t h e structural components such as bank and corporate restructur- ing; second, ensuring that social safety nets were i nplace t o protect the poor; a n d third, supporting governance reform a n d anti- corruption efforts. 3.2 The Bank Program: The Bank pledged USN.3 billion in sup- p o r t of the IMF-led stabilization package. Inthe event the Bank’s lending fell w e l l short of that figure. InFY99 the Bank provided US$2.1 b i l l i o n of adjustment lending consisting of two Structural Adjustment Loans (SALs) and a US$600 m i l l i o n Social Safety N e t Ad- justment Loan (SSNAL). I E G evaluated the outcomes o n the SALs as moderately unsatisfactory, and f o u n d the Bank’s performance o n the second SAL t o be unsatisfactory. “The Bank lacked a strategy for dealing with the crisis and timely support f r o m senior Bank manage- ment was inadequate”.I 3.3 The Bank put particular emphasis o n the value i t was adding t o t h e program through supporting the design of a social safety n e t which could protect the poor during this difficult period with a num- ber of key measures reflected in conditionality in the adjustment loans and particularly the SSNAL. With regard to governance and anti- corruption, the Bank played a n important role in the setting up of the Partnership for Governance Reform, though i t was n o t as effective as h a d been hoped in leading a national dialogue and consensus o n an anti-corruption program, given the reluctance of t h e Government t o engage with c i v i l society. 3.4 The Bank worked closely with the I M F o n the Banking and Corporate restructuring programs. A p a r t f r o m the Adjustment loans, the Bank provided substantial technical assistance through a Banking Reform Assistance Project (BRAP). This project, also rated unsatisfac- 21 CHAPTER3 ACHIEVING OBJECTIVES THEPROGRAM tory by IEG, financed a number of external experts a n d advisers in a situation where the problem was n o t a lack of knowledge of what was needed or h o w t o go about it, but one of corruption, bureaucratic chaos and rampant politicization. The Bank also supported the IMF’s abortive efforts t o set up a system of bankruptcy courts t o speed corporate restructuring. 3.5 Outcome: The outcomes in the areas targeted by the Bank’s objectives during the post-crisis management i n 1999 and 2000 are rated moderately satisfactory. Although Indonesia’s i n i t i a l fall in GDP was the deepest among t h e seven countries that suffered major crises during the 1994-2001 period (see Figure 3) the steps taken t o put in place a social safety n e t provided an effective cushion for the poorest groups, as did the fact that the r u r a l sector was m u c h less affected by the crisis with agriculture benefiting f r o m high prices. A targeted rice subsidy was provided t o 10 m i l l i o n people. Despite leakages the program appears to have played a useful role in protecting the poor. Also effective were programs designed t o encourage schoolchildren f r o m poor families to continue with t h e i r schooling. Progress o n the governance and anti-corruption front i s discussed in more detail later. The establishment of the Partnership for Governance Reform with representation f r o m the Government, NGOs, c i v i l society and donors, was a helpful initial step, though it i s difficult to argue that i t produced a genuine national dialogue o n the issues. 3.6 It i s a matter of some controversy whether better management of the financial sector by the Indonesian authorities as the crisis un- folded might have resulted in less of an initial decline in GDP, or whether the underlying weaknesses of key institutions was such that whatever policies were adopted, t h e results w o u l d have been broadly the same. T h e cost of recapitalizing the banking sector in Indonesia was the equivalent of 50 percent of GDP. 3.7 The first IMF program proposed the closure of 26 banks. The argument for closure was that this step was needed so that the markets w o u l d perceive t h e determination of the authorities t o deal with weaknesses in the banking system. Instead it was taken as a s i g n of the overall weakness of t h e financial sector and since there was n o deposit insurance in place, t h i s l e d t o withdrawals f r o m a l l banks. The Bank of Indonesia (BI) stepped in with increased credit, but the situation rapidly went downhill. With President Soeharto suffering a stroke o n December 19,1997 the value of the r u p i a h f e l l sharply as i n- vestors and depositors tried t o get their money o u t o f the country. The second I M F program proposed a package of US$38 b i l l i o n of support, and this played a role in quieting the markets and stabilizing t h e situation along with the fiscal tightening. 22 CHAPTER3 THEPROGRAM ACHIEVING OBJECTIVES 3.8 Inthe initial response t o the crisis the Government took measures t o strengthen banking regulation i nthe Bank of Indonesia. This process was rated unsatisfactory by IEG i n2003.2 The IEG review identified major continuing weaknesses inbankingregulation. A n e w agency h a d been established t o deal with the debt of the failed banks - the Indonesian Bank Restructuring Agency (IBRA), but the I E G review reported that at that time there was suspicion of corrup- tion. IBRA h a d seven chairmen during i t s short M e span (it was closed i n2004) and there were strong grounds for believing that, in some cases, the debt of the banks h a d been sold back t o the former owners at a substantial discount. IBRA's average recovery o n its debt nother crisis coun- of 26 percent is n o t o u t of line with experience i tries, however. 3.9 Progress in restructuring the corporate sector was mixed. A n e w instrument was created in the Jakarta Initiative, a voluntary program whereby credit was extended to banks t o enable them t o provide debt relief t o corporate borrowers. A r o u n d a third of the non-performing loans resulting f r o m the financial crisis were resolved through t h i s mechanism. Realistically this was a reasonable achieve- ment, but there h a d been an expectation of more take-up than this. Part of the shortfall m a y have been because of the absence of a credi- ble threat of bankruptcy i nIndonesia. Figure 3. Post-Crisis Recovery in GDP per Capita - . - 3 - 2 - 1 0 1 2 B 4 I B 7 (I s 1 0 Y-mr (year 0 = y e a r of pm.~Ilsls peak In QDP per capita) B. RESTORING AND GROWTH STABILITY 3.10 Bank Objectives: The F Y O l CAS frames two broad objectives in this area; first, t o maintain macroeconomic stability and fiscal sus- tainability; and second, to promote pro-poor policies and public ex- penditures. A number of specific measures are cited i nrelation t o the second,- particularly the liberalization of rice marketing and trade to lower rice prices and the elimination of t h e f u e l subsidy w h i c h in 2001 cost more than the entire development budget of the Government. 23 CHAPTER 3 ACHIEVING THE PROGRAM OBJECTIVES The 2004 CAS subsumes pro-poor g r o w t h among a number of other categories, related more specifically t o SME development, access t o finance, land rights and r u r a l development. 3.11 The Bank Program: Initially after the crisis, the Bank scaled back its involvement in t h e macro area i nparallel with its decision t o focus the lending program o n KDP and t h e advisory w o r k o n corrup- t i o n issues, with the I M F taking t h e leading role on macroeconomic issues. The Bank carried o u t useful analytic w o r k o n debt issues during this period as w e l l as i t s regular reporting t o the CGI. With Indonesia’s exit f r o m the I M F program, the Bank has again become a key analyst and interlocutor for the Government o n macroeconomic policy, with studies o n public expenditure and trade policy, support through the GFMRAP (Government Financial Management and Revenue Administration Project) o n public financial management and tax and customs administration, and Development Policy Lending t o provide a framework for continuing structural reform. The Bank also provided a n important input i n t o the decision-making o n the f u e l subsidy through its analytic w o r k o n the potential impact o n the poor of reducing the subsidy. 3.12 Outcome: The progress in achieving macroeconomic stability and restoring growth i nthe period after 2000 is rated satisfactory (see Appendix Table 1for quantified outcome indicators). G r o w t h accel- erated each year between 2001 and 2005, and in 2004 income per capita returned to its pre-crisis level. Inflation was reduced t o less than 7 percent i n2003 and 2004 (although it increased again at the e n d of 2005 following the fuel price increase and increases in rice prices due t o the rice i m p o r t ban). 3.13 A major achievement was the reduction in public debt, w h i c h n 1999 t o 47 percent i fell f r o m 97 percent of GDP at i t s peak i n2005. This reduction exceeded almost a l l projections. The faU was due to prudent debt management, the decline in interest rates, a n d t h e in- crease i nGDP in dollar terms. Budget management has been a strong part of t h e overall performance. Revenues are n o w a larger share of GDP than before the crisis. 3.14 The important area of concern i s that m u c h of the adjustment took place through a sharp reduction in both public and private in- vestment. Gross capital formation fell by 50 percent in real terms between 1997 and 1999, and by 2005 s t i l l remained 30 percent below its 1997 level. This decline directly reduced growth during the period, weakened infrastructure spending and depleted the capital stock, making i t more difficult to achieve high growth rates over t h e me- dium term. With hindsight a somewhat larger deficit with less compression of investment in infrastructure and more stimulus t o growth might have been sustainable, but given the overall instability 24 CHAPTER3 THE PROGRAM ACHIEVING OBJECTIVES the tendency t o err o n the side of conservatism i s understandable. Indonesia’s investment rate and Incremental Capital-Output Ratio (ICOR) f r o m 2000-2005 were consistent with global averages though investment i s lower than and the ICOR around the mid-point of Asian comparators. (see Table 3) Table 3. Investment Levels and Quality Investment GDP Annual GDP Growth Incremental (Yo) (%) Capital-Output Ratio ’1 2000-2005 China 36 9.2 3.9 India 23 5.8 4.0 Korea 30 5.5 5.5 Malaysia 24 5.2 4.6 Thailand 25 5.2 4.8 Indonesia 1990-96 31 7.9 3.9 Indonesia 2000-05 20 4.7 4.4 I1The incremental capital-output ratio is defined as the average investmenffGDPratio divided by the average annual GDP growth rate. Source: World Bank Internal Document. 3.15 Another area of concern i s that employment has n o t increased in h e with the recovery in economic growth. Although the data o n employment i s of questionable quality, it suggests only sluggish growthi njob creation. To increase the pace of both employment generation and poverty reduction, Indonesia needs g r o w t h of around 6-7 percent. Although population growth i s around 1.5 percent per annum, the labor force i s g r o w i n g more rapidly due t o past popula- t i o n growth and longer life expectancy. An acceleration of g r o w t h i s likely t o require b o t h higher levels and better quality of investment. A recent I M F report indicates that “Over t h e mediumterm, produc- tivity gains f r o m improvements in infrastructure and increased investment could generate g r o w t h rates in the range of 6 and 7 per- cent as increased domestic demand i s reinforced by improved competitiveness and export growth” (IMF 2006,lO). Although b o t h the Fund and the Bank project g r o w t h reaching 6.5 percent in 2007 and 2008, Indonesia does n o t appear, as yet, to have the fiscal, governance and physical and social infrastructure fundamentals in place to sustain that l e v e l of g r o w t h over the m e d i u m and longer- term. 3.16 W i t h regard t o the fiscal aspects of pro-poor growth, t h e domi- nant feature i s government intervention in two key product markets - rice and fuel. The crises during the late 1990s l e d to major changes in agricultural policy in Indonesia. Most important was the reduction in barriers to agricultural trade, including reduction or elimination of tariffs a n d the elimination of the i m p o r t monopoly of BULOG (the state trading agency) o n major food items such as rice, wheat, a n d soybeans. Indonesia’s overall trade regime has been relatively open 25 CHAPTER3 THEPROGRAM ACHIEVING OBJECTIVES with l o w tariffs, yet in the case of rice a complete b a n o n rice imports was re-established leading t o a 30 percent increase in rice prices i n April 2006 over the April 2005 level. The data suggests that t h i s has l e d to a sigmficant upturn i npoverty during 2006. 3.17 An example of a b o l d policy r e f o r m was the recent reduction of the domestic f u e l subsidy which reflects the Government’s reim- bursement to the state o i l company (PERTAMINA) of the difference between controlled domestic prices a n d w o r l d prices. Just before the crisis the subsidy was negligible (0.3 percent of GDP). But the sharp depreciation of the rupiah, coupled with a rise i nw o r l d o i l prices l e d t o large increases in the subsidy, w h i c h peaked at 5.9 percent of GDP in 2000. InOctober 2005 the Government raised domestic prices by a weighted average 114 percent, and sigruficantly reduced (although did n o t completely eliminate) the subsidy. The reduction in the sub- sidy created space t o increase development expenditure w i t h o u t add- ing t o the deficit. To reduce the potential for political unrest the re- duction of the subsidy, was coupled with funds for schools, scholarships, health services, and village infrastructure and a one year cash transfer program that provided transfers t o 17 m i l l i o n people. C. FINANCIAL SECTOR AND PRIVATE DEVELOPMENT 3.18 Bank Objectives: T h e FY01 C A S discusses the need t o acceler- ate bank and corporate restructuring through ”restoring the profit- ability of the banks, improving supervision, and m o v i n g firmly for- w a r d with the restructuring and divestiture of the state banks.” A second obective i s t o enable competitive private sector development. This i s to be achieved through a n extremely w i d e range of activities cutting across almost every area of Bank involvement - the CAS lists 1 1sub-objectives including promotion of FDI, privatization of state- owned enterprises, development of the SME sector, etc. The FY04 CAS repackages this in terms of improving the investment climate, with t w o areas which relate specifically t o the topic of t h i s section namely: a) strengthening and diversifying the financial sector, and b) creating a supportive environment for competitive private invest- n the earlier CAS, ment. T h i s last p o i n t i s m u c h more focused than i with an emphasis o n streamlining approval of new businesses a n d customs clearances, improved corporate governance, introducing competition in three sectors dominated by Government agencies (telecoms, o i l and gas, and power), and improvements i nthe invest- ment climate i nselected kabupatens. 3.19 The Bank Program: M u c h of the Bank’s involvement i n Financial and Private Sector Development was undertaken i nthe aftermath of the crisis as described earlier. To complement t h e I M F efforts, the Bank provided support through the BRAP t o promote bank restructuring. The restructuring program h a d t w o elements; 26 CHAPTER3 THEPROGRAM ACHIEVING OBJECTIVES first the private banks were t o be restructured through a n e w tempo- r a r y agency, the Indonesian Bank Restructuring Agency (IBRA); and second the state-owned banks were t o be restructured separately and privatized. The Bank supported IBRA with technical assistance, and the Bank and the I M F divided responsibilities for the state-owned banks, with the I M F leading the efforts o n Bank Mandiri, a new, large public sector bank, created out f r o m four smaller ones, and the Bank p r o v i d i n g the lead o n restructuring Bank Negara Indonesia. 3.20 A s the urgency of post-crisis restructuring receded, the Bank’s interest i nthe longer-term development of these sectors appears t o have waned. The FY04 CAS states that “The IFC‘s n e w (US$20 mil- lion) Program for Eastern Indonesia SME Assistance (PENSA) will be t h e Bank Group’s main vehicle (for) capacity building for SMEs. I t will b e supported by business climate programs through the Bank’s decentralized governance programs ”(World Bank 2003a, 19). Coor- dination between the Bank and IFC t o derive synerges for private sector development will be examined in the upcoming evaluation of IFCs role in Indonesia. There was some coverage of investment climate issues in the Development Policy Loans and analysis through t h e Costs of D o i n g Business surveys, as w e l l as in AAA reports o n investment and non-banking financial institutions. I naddition, the Bank has developed and managed a bi-annual survey of the Invest- ment Climate w h i c h has been an important driver of reform in this area. T h i s i s w e l l publicized and s e e m t o have contributed t o recog- n i t i o n at the political level of the importance of tackling the related issues. Inrecent months these seem t o have gained some traction, with the President attaching priority t o streamlining investment approvals. 3.21 Outcome: Overall outcomes for the financial and private sectors are rated moderately unsatisfactory (see Appendix Table 2 for quantified outcome indicators). T h i s consists of a moderately satisfac- tory rating for the financial sector and a moderately unsatisfactory rating for E D . The perspective of 2006 leads t o a somewhat different conclusion f r o m the I E G evaluation of 2003 referred to earlier. B y now, much of the banking system has been restructured, recapitalized and privatized t o well-established banks. Regulation and supervision have been improved and the Bank of Indonesia made fully independ- ent. T h e restructured system has worked satisfactorily in prudential terms. However, there are s t i l l sigruficant issues with respect t o fi- nancial sector development: (i) while safer, the banking system i s intermediating a l o w amount of resources relative to the country’s GDP when compared to Indonesia’s peers in East Asia and t o its o w n past (deposits are 40 percent of GDP and credit to the private sector 26 percent) (see Table 4); ( ii) interest rate margins (at 6.4 percent i the n 2006) are much higher than those prevailing in other East Asian coun- 27 CHAPTER 3 ACHIEVING THEPROGRAMOBJECTIVES tries; (iii) there appears to be a lack of investment credit; and (iv) the prudential performance of the two largest state-owned banks remains poor w h e n compared t o international standards and the rest of the banking system. T h i s m a y n o t pose an immediate systemic risk but i t results in substantial misallocation of resources. Table 4. Financial Ratios in the East Asia Region Korea Indonesia Malaysia Philippines Thailand Interest margins 2.6 6.4 3.0 3.5 2.0 Return on assets 0.9 3.5 1.6 0.9 1.2 Capital adequacy 12.1 19.4 13.8 16.9 11.9 Deposits % GDP 67.5 39.4 119.8 47.1 99.1 Credit to private sector YOGDP 92.3 26.0 116.7 26.0 93.1 Source: World Bank InternalDocument 3.22 Indonesia’s private sector was severely impacted by t h e finan- cial crisis. While there has been some improvement over the period under review, foreign direct investment and private investment re- m a i n w e l l below t h e i r pre-crisis levels. Indonesian managers cite two primary reasons for this: political instability a n d policy uncertainty; and corruption i n general and i nparticular int h e legal system, w h i c h makes contracts very difficult t o enforce through the courts. I naddi- t i o n there i s a l o n g l i s t of other concerns: the 2003 labor legislation w h i c h requires some of the highest rates of severance payment as a share of salary in the world; bureaucratic procedures w h i c h lead t o l o n g delays; lack o f long-term credit for investment; infrastructure bottlenecks; high crime incidence; and lagging secondary and tertiary education of the labor force. No substantial progress has been made t o resolve these long-term problems. Indonesia ranks very l o w in two of the most inclusive of the indicators of investment climate - the Wall-Street-Journal-Heritage-Foundation Index of Economic Freedom a n d the G r o w t h Competitiveness Index of the W o r l d Economic Forum-and has declined substantially i nrankings relative to other countries. INFRASTRUCTURE: D. NATIONAL ANDTRANSPORT ENERGY 3.23 T h e Bank’s objectives i nthe energy and transport sector were: first, t o help preserve existing infrastructure assets, and second, t o help improve the investment climate for infrastructure financing. The FYOl CAS discussion of infrastructure centers o n three objectives: (1) Provide assistance for essential investments for maintenance and rehabilitation; (2) Improve the policy and legal framework of key sectors to facilitate competitive private sector investment; and (3) Mo- bilize co-financing for infrastructure needs. However, as bottlenecks continued t o emerge during the period, the FY04 CAS adds direct 28 CHAPTER3 THEPROGRAM ACHIEVING OBJECTIVES support for public investment to: (4) Provide power for growth; and (5) B u i l d national transportation and communications mfrastructure. 3.24 The Bank Program: Despite the lack of forward progress in infrastructure policies and investments, the Bank‘s role was si@- cant in keeping the focus of successive Governments o n the need for a coherent infrastructure strategy. An important part of the Bank’s contribution was its analytical and advisory services, w h i c h provided the basis for the policy dialogue, identified needed investments and outlined various possible reform measures for the sector.3 T h e Bank helped the Government organize an infrastructure summit for poten- tial donors inJanuary 2005, with its report o n “Averting an Infrastruc- ture Crisis” providing the framework for the summit. 3.25 The lending portfolio during t h i s period was limited.4 No n e w lending occurred from FY99 t o FY02 within the energy and transport sectors. When lendingresumed in FY02, it was centered o n four pro- jects; two projects in the roads sector: the Eastern Indonesia Regional Transport (EIRT) Projects 1and 2 b o t h in the amounts of US$200 mil- lion, and two projects in the energy sector: the Java/Bali Power and the Domestic Gas Market project for US$141 m i l l i o n and US US$SO million, respectively. The projects targeted the poorest, least devel- oped areas of Indonesia, supporting the maintenance and rehabilita- t i o n of national r o a d links. INT investigations substantiated allega- tions of collusion and corruption which l e d to the Bank declaring misprocurement o n contracts totaling nearly US% million. The Java/Bali power project was designed, inter alia, t o support the unbundling of PLN, t h e Indonesian central power company. All four projects currently have moderately satisfactory t o satisfactory super- vision ratings o n achievement of t h e i r development objectives; how- ever, i na l l cases there have been delays and procurement issues. 3.26 Outcomes are rated moderately unsatisfactory (see Appendix Table 3 for quantified outcome indicators). A s explained earlier, development expenditures o n infrastructure bore the brunt of the fiscal tightening following t h e crisis and have been insufficient to m e e t increasing demand. Infrastructure accounted for approximately 48 percent of the central government’s development spending in 1994/95 and only 21 percent in 2004. T h e budget for transport, which i s accounted for mainly by the highway sector, recovered fairly rapidly after the crisis, but development spending o n energy remained at very l o w levels throughout the period. Inthe course of the period, bottlenecks began t o emerge in b o t h transport and energy supply. Road construction did n o t keep pace with the continuing r a p i d expansion in t h e number of automobiles and t h i s resulted i n high levels of traffic congestion. The electricity supply became less predictable in a number of localities and approximately 70 m i l l i o n 29 CHAPTER3 THEPROGRAM ACHIEVING OBJECTIVES people (largely poor and rural) are still w i t h o u t electricity connec- tions. 3.27 Although recent shifts i n government priorities have indicated further attention t o infrastructure, the financial needs are beyond the current budget capacity of the government. For example, energy investment needs are estimated at approximately USN.5 - 5.6 b i l l i o n a year as compared with the current US$2 b i l l i o n (see Figure 4). The Bank projects that Indonesia will need t o increase infrastructure spending by an additional 2 percentage points of GDP (US$5 billion) annually inorder t o reach its 6 percent medium-term g r o w t h target (World Bank 2004,ll). 3.28 The awareness that public funds were unlikely t o meet infra- structure financing needs l e d t o attempts t o attract financing f r o m the private sector through changes in the legal and regulatory environ- ment for oil and gas, and power. The 2001 o i l and gas l a w provided a framework for the sector: three major segments of the o i l and gas industry were unbundled (production, transmission and distribu- tion), open access t o network services was allowed, thereby encourag- ing a competitive gas market. The government has issued regulations for upstream oil exploration, downstream competition and market pricing. An oil and gas regulatory b o d y was established i n2004; however, regulatory implementation remains weak. For power, an electricity law, passed in 2002, encouraged a more competitive envi- ronment by unbundlingP L N s monopoly. However this l a w was deemed unconstitutional by the Supreme Court and was annulled i n 2004. Currently, the sector has reverted t o an o l d l a w and a n e w l a w isi n the process of being drafted. The financial health of PLN has yet t o improve. Despite increases i ntariffs t o pre-crisis levels, t h e finan- cial constraints of P L N have l i m i t e d i t s ability t o invest i norder t o meet rising energy needs a n d left it unable t o respond t o increasing demands of connectivity. As a result, blackouts are being experienced outside of Java. 3.29 T h e evidence suggests that the Government remains ambiva- l e n t about private participation. There are sigruficant vested interests inmaintaining Government control of the various d r a s t r u c t u r e sectors and this was reflected i n actions by Parliament and the Supreme Court w h i c h have made for unease among potential private investors. As a consequence, the Infrastructure Summit organized in January 2005, m e t with a l u k e w a r m response f r o m investors. This did, however, provide an impetus for organizational measures by GO1 to attract investments, including a committee tasked to increase public and private investment i n Infrastructure, a Risk Management Unit in t h e Ministry of Finance t o ensure appropriate risk sharing, as w e l l as a n e w unit t o ensure investments meet stringent international best practice guidelines. T h e absence of a clear Government policy I 30 CHAPTER3 THEPROGRAM ACHIEVING OBJECTIVES statement that c a n provide guidance for drafting the n e w electricity law, as well as restoring the confidence of potential private investors, remains an important obstacle t o progress. Figure 4. Central Government Development Spending (US$B) 14 0 12 0 10 0 80 60 40 20 00 1994l95 2002 2004 ITotal hfrastructure Q a h e r STABILITY ANDGROWTH E. PILLAR ONE: RESTORING FOR SUSTAINABLE DEVELOPMENT: OVERALL ASSESSMENT 3.30 Outcome: The overall ratingfor the achievements on thefirst pillar relative to the Bank's objectives is moderately satisfactory. 7'he relmant question i n assessing the first pillar outcomes is whether the conditions have been put i n place i n the areas targeted by the Bank, which would provide the basis for this growth i n the years ahead. On the positive side are the achievement of macroeconomic stability and the improvements i n financial regulation, private banking and recently i n reducing bureaucratic hurdles for setting up new businesses. But the failure to deal with the institutional issues of the investment climate such as unreliable courts, rigid labor l a m and rampant corruption, and the shortfalls i n investment i n infvastructure could put a brake on acceleration o f growth i n the medium term. 3.31 I n s t i t u t i o n a l Development for the first pillar i n the areas targeted by the Bank is rated modest. The most significant achievement has been i n relation to the institutional setting o f the financial system. This improved substantially during the period i n two key respects:first, the increased inde- pendence of Bank Indonesia and, second, the upgrade i n regulation and supewision. Another important step here is the prospective reorganization o f the Finance Ministry. By contrast however, the progress i n improving the institutional framework for private sector development was negligible. W i t h regard to infvastructure there have been substantial legal reforms i n the oil and gas regulatoyframezuork. However this progress has not been matched i n the electricity sector. Other major institutional uncertainties for infva- structure planning relate to decentralization, where the problem o f coordinat- ing the approaches o f the central, provincial and local levels of government has yet to be resolved and the absence o f an effective regional layer of admini- stration is a serious impediment. 3.32 Risks: Overall the downside risks for pillar one are rated moder- ate. On macroeconomic stability the risks seem low. The concerns lie more 31 CHAPTER3 ACHIEVING OBJECTIVES THEPROGRAM with whether the conditions are i n place to generate more rapid growth on a sustainable basis. 7'hejinancial system is clearly safir and more resilient today than i n the years before the crisis. The residual risk relates to the state banks. Improved regulation and supervision suggest that even with the weak fiducia y and managerial situation o f these banks the overall risk is moderate. For infrastructure the risks are high. There is no sign as yet o f the consensus needed for private infrastructure investment. On the positive side there has been increased openness to external borrowing for public infiastmcture and some movement on foreign private investment i n oil and gas. 3.33 2%~ Bank's contribution was sigruficant. It played an effective role though policy analysis and development policy lending i n helping the Government cement some o f the key legislative and policy measures. Hozo- ever, the Bank did not assign the priority to private sector development which it merited as the potential engine for the accelerated grozoth Indonesia needs. Strong analytic work on the macro was not complemented until recently by the work needed on the business environment.5 Pillar Two: Improving Governance and Building Institutions CORRUPTION A. TACKLING 3.34 The Bank's Objectives: T h e FYOl CAS puts high priority o n improvements in governance, with t h e focus at the national level o n legal and judicial reforms, c i v i l service reforms, i m p r o v i n g public financial management and public procurement. "A k e y priority i s reducing opportunities for corruption, by strengthening accountabil- ity and transparency in the public sector through better procurement, financial management, and audit." The FY04 CAS reiterates the importance of what i t describes as "the core issue of governance". It states that "the goal of the program i s t o help Indonesia address what might be described as a n increasing 'accountability gap,' i.e. the perception that the tremendous gains in transparency and democratic competition since the fall (of Soeharto) have n o t been matched by genuine government accountability for demonstrable results in restor- ing i n t e g r i t y t o the public sector and reducing corruption". To t h i s e n d it defines some 'targeted' results. These included: a) Reduced leakage in expenditure flows t o end-users; b) Sigruficant improve- m e n t in corruption perception measures and improved public satis- faction with the judiciary; and c) Doubling of cases investigated based o n audits. 3.35 The Bank's Program. In the aftermath of the crisis, t h e Bank decided that the drive against corruption needed to be a cornerstone n Indonesia. A Senior of t h e effort to rebuild t h e Bank's credibility i Governance Adviser was located in the Jakarta Office and this posi- t i o n was maintained through the period. 32 CHAPTER3 THEPROGRAM ACHIEVING OBJECTIVES 3.36 O n e of the Bank's first interventions i nthis area was its support for the Partnership for Governance Reform, launched in 2001 and already referred t o i n the context of managing the crisis. This emerged out of the interest of the donor community in supporting better governance. A governing board was established with mainly Indonesian government and civil society participation. Board membership included S.B.Yudhyono w h o subsequently became President of Indonesia. The Partnership supported some useful policy w o r k and helped t o keep the issue of legal and judicial reform o n the front burner. But i t did n o t create an effective partnership between t h e Government and NGOs i n tackling corruption. 3.37 In addition t o the Partnership, the Bank prepared a report o n "Combating Corruption i n Indonesia" i n2003. This has been one of the most important analytic outputs of the Bank i nthe post-crisis period and i s cited by government officials and donors alike as a key contribution to the internal debate and policy action. The Report covers the full range of topics relevant t o corruption except for t h e role of the military, which was deemed too sensitive t o include. T h e Report remains the basic document o n corruption i nIndonesia. 3.38 Bank lending for tackling corruption has taken two forms. First, the Bank's development policy loans have contained condition- ality o n a w i d e variety of issues relating t o the legal and institutional framework and the investment climate. Second, the Bank i s provid- ing support for a major reorganization of t h e Ministry of Finance through a technical assistance project. 3.39 Inthe area of legal and judicial reform; the Bank supported the IMF's initiative to introduce a special commercial court system as part of the effort t o deal with potential bankruptcies after the crisis. This failed t o take off, and the justices in the commercial courts have been subject t o the same pressures as the rest of the court system. There have been a few positive steps taken i nthe legal and judicial reform program, for example the adoption of a good bankruptcy l a w and t h e increasing use of written decisions i ncomplex cases. There seems t o be little public demand f r o m the Indonesian side for further move- ment o n t h i s front. The Bank deserves some credit for stepping back f r o m an area where the time was n o t ripe and shifting its focus t o other, more tractable corruption-related issues. 3.40 Procurement reform has been a major area of Bank involvement in Indonesia. Starting with the 2000 Country Procurement Assess- ment, the Bank made the issuance of revised regulations and the establishment of a National Procurement Office (NPO) core features of i t s dialogue with the Government and conditioned movement to higher lending cases o n progress i n these areas. The revised procurement regulations that were issued in 2004 represent a sigrufi- 33 CHAPTER3 ACHIEVING OBJECTIVES THEPROGRAM cant step forward and close some loopholes o n collusion. The estab- lishment of the National Procurement Office was part of the condi- tionality for the Development Policy Loans. By M a y 2007, however, this h a d n o t been finalized. Proposals for the legislative and organi- zation basis for the NPO h a d been discussed by the Steering Commit- tee, but there was s t i l l n o agreement o n t h e precise scope and cover- age of the new body. 3.41 Outcomes. The outcomes o n tackling corruption in the areas supported by the Bank are rated moderately unsatisfactory. There has been progress in putting institutions a n d regulations i nplace. With the support of Bank Development Policy Loans t h e Indonesian Par- liament has enacted a substantial legislative framework for dealing with corruption including Acts dealing with Money Laundering, Freedom of Information, Whistleblower Protection, etc. The audit function in Government has been strengthened and a n e w Corruption Eradication Commission has been established. But the legislation is n o t yet being implemented effectively and the institutions, w h i l e they represent a promising beginning are s t i l l v e r y limited in their cover- age. I nmost k e y areas-legal and judicial reform, campaign finance reform, policies o n forestry concessions, c i v i l service reform, pro- curement, and clarity of operating rules for decentralized government units-Indonesia's anti-corruption program i s only at the starting gate. 3.42 Legal and Judicial Reform: Most public surveys of corruption in Indonesia identify the judiciary and the police force as the institutions where corruption i s most pervasive. In2000 a National L a w Commis- sion was set up t o design a l a w reform plan but went nowhere. The Supreme Court was then asked t o take responsibility for judicial reform. Since little was done, in late 2004 President Yudhyono took o n the issue by appointing a Judicial Commission with the authority t o appoint judges. The subsequent period has seen a steady battle between the 49 Supreme Court justices and the Commission. While t h e principle of judicial independence i s important, the apparent abuse of this independence, reported in the press, i n one high profile case after another, raises serious questions of the capacity o f the judi- ciary t o 'heal itself'. This i s n o t yet resolved a n d is complicated by the ambivalence of some of the ministers inthe coalition and vested in- terests in the Parliament a n d elsewhere. Inthe meantime the evi- dence in Table 5 below, suggests that the objective of i m p r o v i n g public satisfaction with t h e judiciary i s n o t being achieved. 3.43 Investigations: An important development at the national level has been the establishment of a Corruption Eradication Commission (KPK). T h e inspiration for this was H o n g Kong's Anti-Corruption Commission. The l a w setting up KPK was passed i n 2002, but it has become operational only gradually over the past three years. KPK has sweeping responsibilities for carrying o u t its o w n investigations 34 CHAPTER3 THEPROGRAM ACHIEVING OBJECTIVES and i s authorized i ncertain situations to take over investigations or prosecutions conducted by the Police or the Attorney General’s Office. T h e number of complaints filed with KPK rose f r o m 2,243 i n 2004 to 7,307 i n2005. This has n o t as yet resulted i na commensurate increase i nthe number of cases investigated and brought t o trial n o r inthe number of convictions achieved, mainly because of limits o n investigative capacity. The trend i s positive however, and i nconcert with the Police, the Attorney General’s office, and the State Audit Agency, there has been a substantial increase i nhigh profile corrup- t i o n cases including a former Minister for Religious Affairs and h i s former Secretary General, a Governor of Aceh province, and a former chief of the Investment Coordinating Board. 3.44 Civil Semice Reform: There have also been sigruficant steps taken in addressing corruption i nthe c i v i l service. The discovery of a scam involving duty drawbacks p a i d out o n goods w h i c h were never exported l e d t o the dismissal i n2005 of the Director of Customs and the Director of Taxation. A full-scale reorganization of the M i n i s t r y of Finance i s in progress, and the Government i s looking more broadly at the issue of civil service reform, beginning with the compensation system. The current system involves a very low base salary and multiple benefits and a d hoc payments which make the salary struc- t u r e opaque and c a n result i n substantial variations for those d o i n g similar work. The object of t h e reform w o u l d b e t o increase the base salary and minimize or eliminate other payments. While t h i s will n o t eliminate corruption i n the c i v i l service it should make it possible for c i v i l servants t o meet their basic needs without resorting to seeking other sources of income. 3.45 Procurement Reform: Progress here i s central to the objective of reducing leakages o n public expenditures. Indonesia was a pioneer in making information o n procurement o n W o r l d Bank projects publicly available i n 2002. N e w regulations o n procurement were under preparation for much of the period, but were only issued in 2004. These have t h e potential for more effective monitoring of collusion in the bidding process. The regulations also apply t o local govemments but they will need considerable training i nimplementing them. In addition, the proposed National Procurement Office, w h i c h will over- nthe see t h e general policy a n d training needs of the country i procurement area, has n o t yet been set up. 3.46 Public Perceptions: The public perception index i nIndonesia needs t o be interpreted with care. While the data i nTable 5 below show that i nevery area other than voice and accountability the index i s w e l l below the 1996 level, perceptions are particularly difficult t o assess when there has been a major shift t o a situation where the me- dia are free t o report o n corruption. Even taken f r o m a 1998 base however, the outcomes are still mixed, with a decline in”regu1atory 35 CHAPTER 3 ACHIEVING THEPROGRAM OBJECTIVES quality’. The most encouraging statistic i s the upturn inthe ’control n the most recent survey, w h i c h suggests that of corruption’ variable i the Government measures are beginningt o have a n impact o n perceptions in that area. Table 5. Indonesia Governance Indicators (Higher scores represent more favorable perceptions) 1996 1998 2000 2002 2003 2004 2005 Voice and Accountability 14.9 10.6 30.4 32.4 35.7 36.2 40.6 Political Stability/ No Violence 23.1 7.5 2.8 9.4 4.2 7.1 9.0 Government Effectiveness 61.9 30.1 39.2 34.0 34.0 39.7 37.3 Regulatory Quality 57.4 44.3 31.5 23.6 23.6 36.9 36.6 Rule of Law 41.1 13.5 12.0 18.3 21.6 23.1 20.3 Control of CorruDtion 34.1 9.3 10.8 6.9 13.2 15.2 21.2 Source: World Bank Internal Document. 3.47 Despite the positive steps being taken or being considered, corruption remains pervasive and damaging t o economic g r o w t h and the situation i s improving at a very slow pace. As the examples of corruption i nBank supported projects demonstrated, corruption has become systematized in some areas. For example, i t is widely reported that most n e w public sector jobs require up-front payments t o senior officials and local representatives. The problems with the judiciary and police have continued throughout t h e period. The power of the military makes it difficult for the government t o deal with their sources of rents. Campaign financing i s rife with illegal payments and legislation i s subject t o payments by lobbyists. B. DECENTRALIZATION 3.48 T h e Bank’s Objectives: The F Y O l CAS frames its overarching goal of poverty reduction in the context of the decentralization process that was just beginning, recognizing that more effective gov- ernance and service delivery h a d t o be achieved at both the national and local levels. Specific initiatives in the CAS relating t o decentrali- zation included: focusing o n fiscal decentralization t o support poorer regions and encourage poverty reduction; helping to define sectoral roles and responsibilities across levels of government; building local institutions and capacity, and supporting reform-oriented provinces and/or districts with service delivery improvements from w h i c h the poor benefit most. T h e FY04 CAS continues these themes. 3.49 T h e Bank’s Program: In support of these objectives the Bank has carried out a range of analytic activities with respect t o decentrali- zation. This has included a major report (Decentralizing Indonesia, 2003) assessing t h e first two years o f Indonesia’s decentralization 36 CHAPTER3 THEPROGRAM ACHIEVING OBJECTIVES experience, the preparation of a public expenditure analysis for West Papua, and t h e development of a database of socio-economic and fiscal data allowing analysis at the national, provincial, and local levels. Other analytic w o r k includes assessments of t h e fiscal transfer system, local tax mobilization, and local borrowing a n d service deliv- ery surveys. 3.50 Policy and Institutional Dmelopmenf. The major focus of the Bank's initialw o r k o n decentralization was t o provide support for the development of the system of intergovernmental finance. The Minis- try of Finance (MoF) counterparts reported that the assistance of the Bank was extremely valuable and important i nhelping t h e M o F develop the fiscal arrangements for decentralization and t o develop the capacity t o review, assess, a n d revise the fiscal arrangements t o better achieve decentralization objectives. 3.51 The Bank also provided a series of advisory services t o the GO1 supporting the revisions t o the decentralization laws i n2004. Evalua- t i o n reports and feedback f r o m the M o F and Ministry of H o m e Affairs (MoHA) indicate that this w o r k is valued, including reviews of issues such as local autonomy, minimumservice standards, local financial management, and local government borrowing. However, many of the recommendations await follow-up. 3.52 Other Bank activities, related t o capacity and institution build- ing, show a mixed record. Some activities, such as the development of a system of regional performance measurement and monitoring, a regional financial reporting system, a n d accounting standards received negative or mixed grades f r o m reviewers in terms of t h e i r effectiveness. Other activities, such as planningimprovements t o MoHA's c i v i l service training institute (IPDN) and developing a system to increase MoHA's capacity t o review local laws, were effec- tive. 3.53 Loans geared toward linking local governments and poverty alleviation have built u p o n the experience of KDP/UPP (the Urban Poverty Program i s the urban equivalent of t h e KDP); the most recent project, UPP3 includes a component whereby Poverty Alleviation Action Grants (of US$250,000 t o US$750,000) are provided i n support of the development of local government poverty reduction strategies. The Initiatives for Local Government Reform Project (ILGRP) com- bines capacity-building for 14 local governments i nthe first phase, in the areas of poverty alleviation through a participatory strategy, with funding for investments. The ILGRP suffers f r o m delays, added t o the t w o years it took between project preparation and loan effective- ness, which undercut the momentum that h a d been built up with the participating local governments. Neither project can claim at t h i s stage to have made a sigruficant contribution towards the longer t e r m 37 CHAPTER 3 ACHIEVING OBJECTIVES THE PROGRAM n the objective of mainstreaming poverty reduction strategies i programming of local governments. 3.54 Decentralization S u p o r t Facility (DSF). The Bank’s leading role in decentralization combined with donor interest i n supporting it, l e d t o a high level of t r u s t fund resources f l o w i n g through the Bank. DSF was established in 2005 with D F I D support a n d t o date has h a d accumulated pledges of US$52m f r o m 5 donors. DSF i s focused o n three themes (fiscal issues, capacity building a n d regulatory devel- opment, and service delivery) using a n approach that attempts t o build capacity directly through combining DSF staff with their coun- terparts int h e Government. 3.55 Outcome: Given t h e concerns expressed by the Bank and other donors i n 1999-2000 about the potential for a massive failure o n the p a r t of local governments t o be able to meet t h e i r n e w extensive responsibilities, there i s some cause for satisfaction with the decen- tralization program. The fiscal system, one of the Bank’s m a i n objec- tives, meets one k e y standard for a decentralized system-revenues are shared with or transferred to the local level by formula in a predictable, relatively stable, manner - a n d the M o F has developed capacity t o analyze revenue-sharing and transfer alternatives and assess their impact. There was some concern at the outset of the decentralization process that service delivery at the local level, another Bank objective, w o u l d be adversely affected. Infact, many indicators for education and health have continued to improve and the most recent Bank-sponsored survey shows that about 70 percent of the population i s of the view that health and education services have improved since the introduction of decentralization. A small proportion of local governments (about 10 percent) are experimenting with n e w approaches to priority-setting, service delivery, and accountabihty, often by increasing transparency in decision-malung and i m p r o v i n g governance structures. 3.56 Despite these accomplishments, the outcomes o n balance, measured against the Bank’s objectives, are judged moderately unsatis- factory. The fiscal system is less than optimal because of decisions to ensure that n o localities’ revenues declined (“hold harmless”) and t o cover the local government wage bill. The result is less equalization and disincentives for greater efficiency. With authority for local governments granted under decentralization, n e w local taxes have proliferated. Many of these are nuisance taxes with little economic rationality in t h e i r design or application, but w h i c h also impose addi- tional transaction costs because of their arbitrary nature and w i d e variation across localities. Also of concern are restraints placed o n trade by some municipalities. 38 CHAPTER3 THE PROGRAM ACHIEVING OBJECTIVES 3.57 Progress o n defining roles and responsibilities across levels of government, a prerequisite t o building local institutions and capacity and supporting service delivery improvements, has lagged. Steps t o clarify expenditure assignment have moved slowly. Finally in mid- 2006 implementing regulations for the l a w are being put forward; the quality and specificity of assignments varies widely across sectors and there i s s t i l l confusion between obligatory a n d non-obligatory func- tions of local government. As yet there are n o monitoring or report- ing systems that provide information o n local government perform- ance. Central government influence over local staffing, through the fiscal system and administratively for senior c i v i l servants, remains high. Central ministries have taken advantage of t h i s situation t o continue t o act in areas that are assigned t o local governments. c. PILLAR TWO: IMPROVING GOVERNANCE AND BUILDING INSTITUTIONS: OVERALL ASSESSMENT 3.58 Outcomes for pillar tzuo are rated moderately unsatisfactory. I n neither of the fwo areas evaluated, has the progress been commensurate with the expected outcomes defined by the Bank, nor with the potential achieve- ments. These are dificult areas - they cut across sectors and Government ministries and fhere has not been clear championing and accountabilityfor movement. I n s t i t u t i o n a l Development has been modest. It has been sig- n$cant i n the anti-corruption effort where the legalfvamezuork and the k q institutions are now i n place and the challenge is implementation. It has been less efictive i n decentralization however, wherefive years down the road some o f the basic operating principles have still to be clarified. Risks are high i n this area. There has been inconsistent political and bureaucratic leadership and this has opened the door fo a reassertion of vested interests i n this area. There needs to be a long-term commitment to better governance. The Bank has made a sigruficant contribution in both the areas discussed above, and devoted a great deal of managerial attention to these topics. These are long-haul topics and the Bank needs to remain engaged. The Bank needs to be especially carefil not fo spread itselftoo thinly i n these areas, particu- larly on decentralization. The Bank’s comparative advantage lies i n helping fhe Government define the rules of the game and this should be its core objec- tive goingfonuard. Pillar Three: Poverty Reduction and Social Service Delivery AND HUMAN A. POVERTY REDUCTION DEVELOPMENT 3.59 T h e Bank’s Objectives: The Bank’s strategic poverty reduc- tion and human development goals during t h e review period were essentially threefold: first, t o help reduce the large number of Indone- sians remaining vulnerable t o poverty; second, t o accelerate attainment of the country’s M i l l e n n i u m Development Goals (MDGs); and third, drawing o n the decentralization and community empowerment 39 CHAPTER3 ACHIEVING OBJECTIVES THEPROGRAM processes initiated during 1998-2001 in response to the crisis, t o address t h e structural governance, efficiency and quality issues that h a d emerged in education and health. T h i s implied the definition of a n e w service delivery paradigm under w h i c h providers w o u l d be made accountable directly t o clients, community organizations w o u l d articulate citizens’ needs and facilitate t h e i r involvement in public resource allocation and expenditure decisions, and communities w o u l d themselves monitor results, thereby enhancing transparency, reducing corruption, and improving governance. 3.60 The CAS documents therefore shift the Bank’s focus f r o m gen- eral support for increased access t o basic education t o more focused assistance for improved quality and more efficient a n d transparent management of basic education services i nthe new decentralized environment. This i s t o b e achieved by restructuring projects already in the portfolio and by undertaking a major sector review. Likewise, in health, support i s t o be targeted towards helping build district-level capacity, particularly in weak performance areas such as maternal and child health and nutrition, with projects aimed at m a k i n g service planning and delivery more participatory and accountable. Thus, CAS indicators for measuring the impact of Bank support include n o t only quantitative access and coverage ratios linked t o Indonesia’s MDGs, but also qualitative benchmarks such as improvements in test scores (education) and nutritional status (health). 3.61 The Bank Program contributed to these goals m a i n l y through its dialogue and analytic w o r k - where the Bank continued to be a n important voice o n poverty and human development issues - and, to a lesser extent, lending. In 1999, for example, i t provided substantial support for various measures to cushion the impact of the crisis o n the poor and, in 2005 it advised the government o n the likely impact o n the poor of the reduction in the fuel subsidy. It has also been in t h e forefront of discussion o n conditional cash transfer programs, of- fering detailed analysis and international experience and perspective. 3.62 Formal studies o n poverty, education, and health, policy briefs o n these and related issues prepared for the n e w l y elected govern- ment i n2004, and informal studies and policy advice and techrucal assistance have a l l facilitated the overall policy dialogue and helped promote consensus among the large number of donors involved. A large education sector study in 2004 outlined a broad policy r e f o r m agenda - governance a n d management finance and public spending, education quality, and teacher management -that exploited the experience in decentralization gained since 1998-99 t o h e l p address the fundamental quality challenge. Similarly, a major health sector study in 2001 addressed the politically sensitive issue o f revised roles and responsibilities between t h e center, provinces, a n d districts. Besides recommending a quantitative methodology for determining 40 CHAPTER3 THEPROGRAM ACHIEVING OBJECTIVES objectively w h i c h responsibilities should be assigned t o w h i c h level of government, the study also advocated a series of medium-term goals, such as transformation of district health bureaus into district health boards, creation of province-level health councils, and establishment of National Health and National Health Insurance Councils. 3.63 Finally, the Bank‘s poverty team recently completed a report, based o n a conference h e l d in Jakarta in April 2005, entitled “Making Services W o r k for the Poor,” w h i c h assesses five years’ experience with decentralization. I t addresses service delivery issues f r o m a n inter-sectoral perspective, taking i n t o account lessons learned f r o m various community-level development programs i n Indonesia and drawing u p o n relevant national and international best practice. W e its major messages - increasing t h e accountability of govern- ment agencies and service providers, strengthening the role of clients in service delivery, and clarlfying inter-governmental relations -are important, the report makes little effort t o integrate the analysis con- tained inthe earlier education and health sector studies. 3.64 Lending for education and health, o n t h e other hand, has been modest by historical standards in Indonesia- totaling US$615 m i l l i o n f r o m FY99-05, w h i c h was slightly less than for the KDP. Moreover, there was n o lending at a l l for education for five years (FY00-04) -a continuing legacy of major problems and the unsatisfactory outcome of a m u c h earlier (FY95) Book & Reading ProjecF. At the same time, the outcome or progress of almost a l l completed or ongoing projects has been satisfactory. Three junior secondary (East Java & East Nusa Tenggara, Central Indonesia, and Sumatra) and two basic education projects (Sumatra and Eastern Indonesia) piloted innovative reforms such as block grant funding, scholarship programs for poor students, contract teachers, and community-led school construction and reha- bilitation that later became national policy under decentralization in 2001. Similarly five health loans - three for provincial level health projects one for water supply and sanitation in l o w income communi- ties, and one for t h e health workforce and services - have supported implementation of the health reform agenda. About 20 percent of KDrs commitments went for education and health. The integration of this into the overall Bank support for these sectors has n o t been well handled by the Bank, a n d given the Government’s intention t o mainstream and extend KDP nationwide i n2007, a stronger focus on h o w this support relates t o local government education and health service delivery institutions i s needed. 3.65 Outcomes measured against the Bank’s objectives are rated satisfactory (see Appendix Table 4 for quantified outcome indicators). Given the small size of the Bank’s program relative t o the scale o f Indonesia’s poverty and social challenges, t h e Bank‘s contribution t o these outcomes was modest. With regard to poverty reduction, after 41 CHAPTER3 ACHIEVING OBJECTIVES THEPROGRAM a few very difficult post-crisis years, the d o w n w a r d trend in the poverty rate has resumed and by 2005 the percentage of those living o n less than US$1 per day (16 percent) was slightly lower than in 1996 (17.6 percent), thanks largely t o the resumption of economic g r o w t h (see Table 6). However, nearly half of Indonesians still l i v e o n less than US$2 per day and remain vulnerable t o poverty. Moreover, re- cent g r o w t h rates are n o t generating sufficient jobs and planned labor market reforms that w o u l d facilitate employment creation have yet t o materialize. Table 6. Poverty Trends 1996 1999 2002 2003 2004 2005 Million Poor 34.2 48.0 38.4 37.3 36.1 35.1 % Poor 17.6 23.4 18.2 17.4 16.7 16.0 Poverty line 1999: Rp. 92,409 per capita monthly (urban) & Rp. 74,272 per capita monthly (rural) 2004: Rp. 143,455 per capita monthly (urban) & Rp. 108,725per capita monthly (rural). Sources: Central Bureau of Statistics, Ministry of Health & World Development Indicators. 3.66 T h e primary, mainly quantitative indicators for h u m a n devel- opment have continued to improve gradually, despite fears about the disruptive effects of decentralization. Three factors explain these outcomes. First, the crisis, mainly a financial and urban phenomenon, h a d only limited, indirect impact o n the r u r a l poor; second, the government took timely steps t o mitigate potential damage t o the social fabric through various targeted transfer programs; and third, b o t h education and health were being partly decentralized already in 1998-99, which probably m u t e d the impact of the ‘big bang’ in 2001. Despite these outcomes and the country’s impressive record over three decades, the human development challenges facing Indonesia - the world’s fourth most populous country -remain daunting. 3.67 Indonesia’s progress towards achieving i t s M i l l e n n i u m Devel- opment Goals (MDGs) for poverty reduction, education and health are by and large o n track, although improvements in two health and two health-related environmental indicators that have lagged for years -child malnutrition, maternal mortality, and access t o safe water and sanitation - remain slow. Inaddition, two measures of gender equality continue either unchanged (women in non- agricultural wage employment) or have deteriorated (female mem- bers of parliament). 3.68 The impact of decentralization in terms of h u m a n development i s n o t yet clear. On one hand, the advent of elected national and local leaders and lawmakers and the pro-activity of c i v i l society institutions have helped improve public accountability, transparency and the political climate for carrying o u t t h e overall human development reform agenda. Public spending o n b o t h education and health has 42 CHAPTER3 THEPROGRAM ACHIEVING OBJECTIVES g r o w n rapidly since 2000. On the other hand, planning, managerial, and implementation capacities at district and subdistrict levels remain a constraint; and linkages between community-level activities a n d local government service delivery institutions need substantial strengthening. Further, the size a n d structure of t h e central ministries have changed little since decentralization and do n o t yet reflect t h e i r new regulatory and strategic roles. 3.69 While continued growth will lead t o further gradual declines in poverty, it will need t o accelerate f r o m the current 4.5-5 percent per a n n u m if t h e bulk of the population s t i l l living o n less than US$2 per day and vulnerable to poverty i s t o be reduced decisively i nthe next decade. A sustainable increase i n g r o w t h will in turn require higher investment in human resources n o t only i n early childhood and basic education but also i nthe quality and coverage of secondary and terti- ary education - the latter for Indonesia t o improve its competitiveness in the global economy. Indonesia’s a d hoc programs, such as subsi- dized rice distribution and unconditional cash transfers t o the poor, have proved an effective social safety net, but looking ahead, the time m a y soon be coming for the development of a more coherent a n d sustainable social protection and security system. Meanwhile, the resilience of the public health and education systems t o the disruptive effects of both the crisis and decentralization i s a matter for some satisfaction. B. COMMUNITY DEVELOPMENT DRIVEN 3.70 T h e Bank’s Objectives: The F Y O l CAS indicates that the Bank “will continue to help empower communities so that poor everywhere have a n opportunity”. This was defined as ”approaches i nwhich project selection and implementation are inthe hands of communities”. The FY04 CAS has a more specific commitment to ”sustainable income creating opportunities for poorer households” includingproviding 30,000 villages or towns with improved access to roads, bridges, irriga- tion and other infrastructure through participatory planningand financing. 3.71 The Bank Program: Indonesia has h a d a l o n g tradition of community based development starting in the 1970s. The Kecamatan Development Program, t h e biggest community development program funded by the Bank i n the developing world, i s based o n experience with previous Bank funded community based r u r a l infrastructure projects. Through four successive projects starting in mid-1998 the Bank will have committed US$1.4 b i l l i o n t o community based projects nthe r u r a l sector. (This includes a recent supplemental loan of i US$130 million, which the Bank made because the Government did n o t make adequate provision for the expansion of the program i nits 43 CHAPTER3 THE PROGRAM ACHIEVING OBJECTIVES budget.) Other small scale efforts in community participation abound including those funded by t h e UNDP, DFID, USAID and Bank funded programs in water management, fisheries, agricultural research and extension, and urban development. KDP n o w covers about 48 percent of a l l villages in the country - some 34,200 in a l l - with the focus o n the poorest villages. 3.72 KDP supports participatory planning at the village and kecamatan (subdistrict) levels, by making available block grant fi- nancing of US$50,000 t o U S $150,000 i neach kecamatan depending u p o n population size. Each kecamatan usually covers two t o four vil- lages. K D P devotes considerable organizational and management at- tention t o the participatory process, by mformation, training, use of facilitators and detailed manuals and formation of representative committees t o give the community a voice in decision making o n local development programs. T h e facilitators provide communities with training and information regarding their roles and responsibilities. In addition, the communities are supported by consultants in the prepa- ration and implementation of grant proposals. The consultants are also responsible for quality assurance. K D P has some 40,000 facilita- tors and consultants. 3.73 The project proposals are selected by a committee representa- tive o f the community and then submitted t o the next administrative level, the kabupaten (district), for review and approval. T h e grants are channeled through the MOHA. Seventy nine districts or 40 percent of the total 192 participating KDP districts provide matching funds. Seventy percent of block grants have gone for infrastructure activities such as tertiary roads, bridges, irrigation schemes, and clean water supply; 20 t o 23 percent t o loans for economic activities and 7 t o 10 percent for education and health activities including school con- struction and renovation, educational scholarships, health unit construction and renovations. Within this total 10% o f funds are allo- cated for women’s activities. 3.74 T h e outcome of the overall community development effort t o date is rated as moderately satisfactoy. K D P has increased the access of Indonesia’s poor t o infrastructure, through participatory approaches. The question i s whether K D P can lead t o ’sustainable income creating opportunities for poorer households’ w i t h o u t more effective imple- mentation of other aspects of the CAS strategy? The effective integra- t i o n of K D P i n t o sectoral service delivery programs i s weak b o t h inside the Bank and within the Government. 3.75 K D P has h a d a positive impact o n poverty in the short run through increased employment of t h e poor in the construction of the infrastructure. KDP has been effective in expanding coverage of 44 CHAPTER3 THEPROGRAM ACHIEVING OBJECTIVES physical infrastructure in poor communities and KDP funded studies show economic rates of r e t u r n of 30 t o 40 percent. These rates of re- turn suggest that there will b e an impact o n poverty in the longer term based o n the production multiplier effects of the development of infrastructure. T h e important caveats here are first, that KDP has n o t yet developed a n effective maintenance model and if the infrastruc- ture i s n o t maintained, as i s frequently the case with community development programs, a large part of the future benefits m a y n o t materialize. Second, m u c h of the infrastructure i s small scale and does n o t connect service delivery at higher levels of administration in any sector. This i s n o t a failure of the KDP model, but rather of the associated Bank program whch has n o t engaged key sectors at the central and regional level t o support effective integration of service delivery at different levels of Government. 3.76 With regard t o community empowerment, the participatory approach w h i c h i s the core of KDP was designed t o improve local level transparency and governance. Anecdotal evidence suggests that transparency i s high and that community decision-making is partici- patory a n d representative, but it is difficult t o measure the precise achievement of this objective. Systematic evidence o n attendance of community members in meetings i s perhaps the most widely avail- able but there i s l i m i t e d evidence o n improved local knowledge of issues as a result of the KDP, and the development of social capital, in the f o r m of increased t r u s t and social networks. 3.77 The best test of effective empowerment i s the impact i t is having o n the implementation of programs. By channeling funds directly t o the local l e v e l and bypassing the intermediate layers of Government, KDP avoids the rake-offs w h i c h often occur. With deci- sion-making by the community and transparency o n the costs of contracts, there i s the potential for substantially reducing corruption and lowering the costs of infrastructure. Evidence o n the comparative quality of infrastructure within and outside KDP areas suggests that the quality of KDP infrastructure i s as good i f n o t better than that of the infrastructure constructed by the government. KDP studies suggest that the cost of construction i s at least 30 percent lower, t o some extent, because communities contribute t h e i r labor amounting t o about 15 percent of the total costs and supervise construction, whereas government constructs infrastructure o n forced account or through contractors. 7 3.78 Perhaps the most fundamental questions about KDP relate, however, n o t so much t o the program, but t o h o w it fits within the overall Bank and Government strategy in Indonesia. A core objective of the Bank in Indonesia, discussed above is the strengthening of the capacity of decentralized local governments. There i s an anomaly between the KDP approach of bypassing local governments and 45 CHAPTER3 THEPROGRAM ACHIEVING OBJECTIVES going directly t o t h e community and this objective. As explained earlier, f r o m 1999 t o 2003 the Bank decided t o focus o n KDP, so as t o identify its core mission as poverty alleviation and t o try t o avoid the taint of corruption associated with programs channeled through the central government. Since 2003 t h e Bank has attempted t o use par- ticipatory approaches i nprograms t o support decentralized local governments. These attempts have encountered serious difficulties i n using the existing administrative structures. A core p a r t of the KDP approach is t h e use offacilitators who, depending o n their location, earn two t o three times as much as the equivalent government offi- cials, n o t taking into account the security and fringe benefits of a gov- e r n m e n t job. A recent Government-sponsored program covering 500 villages in the most promising districts attempted t o adopt the KDP approach using public officials. Only 3 percent of officials were reported t o b e following the rules o n participation and information disclosure. Other donor supported programs h a d similar results. While the evidence suggests therefore that any mainstreaming of KDP should use i t s approach of external supervision through the use of p a i d facilitators, this remains a contentious issue in some parts of the Indonesian Government. 3.79 The relationship of KDP t o the sectoral ministries i s also problematic. It i s managed by the M i n i s t r y of H o m e Affairs. Sectoral ministries and departments have h a d very limited, if any involvement inKDP although discussions are currently underway t o p i l o t demand driven education programs and farmer extension. Inter-ministerial coordination tends t o be weak at best and there needs t o b e more explicit focus o n h o w best t o derive synergies across sectors t o improve the quality and supply of service delivery. 3.80 K D r s widespread impact and popularity among the recipients of block grants makes political leaders want to embrace the KDP approach. Local government officials also acknowledge that KDFs participatory methods m a y w e l l be the most effective among commu- nity based programs. As a consequence, the Government of Indone- sia has recently announced that its n e w national poverty reduction program will draw o n the experience of KDP. Inspite of the stated intention of the Government t o follow the KDP approach, there are s t i l l questions of the extent to w h i c h officials at the national and local level have bought into the three key elements of the model; the use of external facilitators, representative community groups and competi- tion among villages so that the best proposals are funded. C. PILLAR POVERTY THREE: &SOCIAL REDUCTION DELIVERY: SERVICE OVERALL ASSESSMENT 3.81 Outcomes are rated satisfactory. As in other areas, change is generally in the right direction, but at a slow pace. The continued broad 46 CHAPTER3 THEPROGRAM ACHIEVING OBJECTIVES commitment to access to education and health has resulfed i n growing expenditures i n these areas that has compensatedfor the underlying struc- tural weaknesses. Institutional development has been modest. The key here is for the various levels of semice delivery - the central ministries, district and local governments and the community - to work together effec- tively. These are not as yet well integrated. I n practice the programs and responsibilities at each level are unclear and the risks are moderate that with each level working at cross purposes, this will i n due course begzn to impact coverage and quality. The Bank has played a sigruficant role overall i n this area, though this combines a relatively modest contribution by the traditional sector programs in health and education, with a substantial contribution to community development through the KDP and other participatoy programs, not examined i n detail. The Bank needs to ty to increase the coherence o f its own support for social programs i n Indonesia. The push towards expanding activity at the local and community levels needs to be supplemented by increased efirts i n the area zvhere the Bank’s comparative advantage is greatest, i.e. assisting the central ministries to adapt to the demands o f their new business environment by increasing their focus on strategy, standards setting and monitoring and devolving implementation responsibility to local governments. Pillar Four: Disaster and Natural Resource Management A. DISASTER MANAGEMENT 3.82 The Bank’s Objectives: The Bank‘s role i n supporting disaster management was n o t foreseen i n either CAS document, despite Indo- nesia’s being one of t h e recognized ’hot spots’ i n terms of vulnerabil- ity t o natural disasters. W i t h i n days of the Tsunami at t h e e n d of 2004, the Bank was asked by President Yudhyono to play a role i n supporting the relief effort t o help ensure that resources provided by t h e Government and donors reached the victims and that the transi- t i o n f r o m relief t o recovery was effected quickly and with long-term, sustainable solutions. Inaddition t o its access t o technical and admin- istrative expertise, the Bank h a d a n important asset in that a number of villages i n Aceh province were already organized under t h e KDP, which provided a structure for helping to manage the disaster response. 3.83 T h e Bank Program: The Bank was quickly able to mobilize staff to lead the assessment o f damage and loss that was presented to t h e donor community less than four weeks after t h e disaster. The as- sessment gave the GO1and international donors a common frame- w o r k u p o n which initial reconstruction needs and financing could be discussed. The Bank ( w i t h financing f r o m the Multi-Donor Fund (MDF), (see below) was able to quickly refocus suitable existing pro- jects (such as KDP and UPP) t o get reconstruction activities under w a y whde the BRR, the ministerial-level Rehabilitation a n d Recon- 47 CHAPTER 3 ACHIEVING OBJECTIVES THE PROGRAM struction Agency, was being set up and funds w o r k e d t h e i r w a y through the government budget system. Both KDP and UPP offered existing methodologies and networks for community-driven devel- opment (CDD) that could be used t o involve and organize communi- ties in their own rebuilding. The R A L A S (Reconstruction o f Aceh Land Administration System) project i s addressing the need for formal titles inthe long-term, but the CDD approach has allowed communities t o quickly adjudicate land claims so that the BRR c a n proceed with reconstruction i nadvance of formal title issuance. 3.84 The Bank, i nresponse t o a GO1request, developed the concept for the Multi-Donor F u n d (MDF) as a means of pooling and coordi- nating official reconstruction funds. Established in April 2005, the MDF has received pledges totaling US$525 m i l l i o n f r o m 15 donors (including two, U S A I D and ADB, w h o are also implementing their o w n reconstruction projects). The Bank i s the Trustee of the MDF and its staff serves as the M D F Secretariat. A s of mid-2006, the MDF h a d allocated US$296 m i l l i o n t o projects, focusing initially o n support for activities that could have immediate impact and o n technical support t o the BRR. Future funding is to be allocated consistent with BRR’s strategy, focusing o n sectoral gaps. The Bank has also been an active supporter and partner for BRR, p r o v i d i n g substantial technical assis- tance b o t h with its own resources and through MDF. 3.85 The Bank played a key role i nmeeting t h e goals of the recon- struction and recovery effort - assessing needs and financing requirements, planningfor recovery t o maximize the effectiveness of reconstruction resources, and implementing recovery activities in a coordinated and sustainable manner. The nature of the disaster required exceptional responses in terms of quickly designing and cre- ating implementation structure. The Bank has n o w developed a sub- stantial body of knowledge about disaster reconstruction, f r o m Aceh and other reconstruction efforts, but this knowledge has n o t been gathered and synthesized. There i s n o formal structure within t h e Bank t o capture disaster response experience and deploy resources systematically or t o re-use quickly these institutional models and arrangements w h e n another disaster strikes. 3.86 Outcomes: The international response t o the Tsunami has been unprecedented. Pledges of assistance total almost US$9 billion, of which US$2.5-3.5 b i l l i o n each will come f r o m the GO1 and NGOs, with the balance f r o m official donors. Outcomes t o date are rated sat- isfactory (see Appendix Table 5 for quantified outcome indicators). The volume of reconstruction activities a n d the number of organiza- tions involved (over 500 international and local NGOs plus official donors and UN agencies) pose a difficult coordination challenge. Ini- tial delays were caused by pledges of a i d that took t i m e t o authorize and deliver, commitments t o undertake programs for w h i c h the 48 CHAPTER3 THEPROGRAM ACHIEVING OBJECTIVES implementers h a d l i t t l e experience (particularly housing construction by emergency relief organizations), and donor a n d government organizational, financial and legal requirements that took t i m e t o navigate. Reconstruction and recovery are n o w occurring i n sigrufi- cant increments. Tlus said, a good deal of construction remains behind schedule, particularly with respect t o housing where the complexity of matching the different standards of different donors has proved especially daunting. Another outstanding challenge i s h o w t o address commitments i nexcess of need i nsome sectors (such as health and education) and deficits i nothers (such as irrigation flood control and environment). These problems have been difficult t o resolve because NGOs and other assistance providers are unwilling t o reprogram their activities. Efforts are n o w being made t o ensure that unprogrammed funds are targeted t o these gaps. 3.87 A major accomplishment that has and is continuing t o shape and steer t h e reconstruction efforts was the creation in April 2005 of the BRR t o lead the recovery effort. Injust over a year BRR has built a staff, developed procedures, and staked o u t a recognized leadership position inthe reconstruction effort. It has used i t s ability t o offer market salaries t o attract a high quality staff, but has also insisted o n commitment f r o m its staff t o high standards of performance and governance. BRR has taken responsibility for leading the reconstruc- t i o n program. InFebruary 2006 BRR adopted a strategy for programming remaining reconstruction funding that i s aimed at fill- ing sectoral gaps (for example, i ntransport and housing), t o guide its approvals of proposed reconstruction projects. But BRR i s time limited, so it is unclear h o w its experience and lessons learned will be retained by the GOI. BJXR i s pursuing a r e g o n a h a t i o n strategy that is intended t o raise capacity i nthe regions inw h i c h i t i s w o r k i n g in order t o institutionalize some of i t s methods and approaches, but this aspect of its mission i s n o t yet well-developed. B. NATURAL MANAGEMENT RESOURCE 3.88 Bank Objectives: A s a mega biodiversity country, Indonesia's natural resource management has b o t h national and global public goods dimensions i n the areas of water, forestry, coral reefs and fish- eries. The FYOl CAS has as an objective "Sustainable natural resource management and environmental protection". It proposes a Bank focus o n the governance dimensions "since the principal constraint t o sound policies are weak institutional capacity and pervasive corrup- tion". The sectoral focus was t o be o n forestry and water resource management. The FY04 CAS does n o t identify natural resource management as a separate objective, but includes an annex designed t o show the way inw h i c h environmental concerns will b e handled i n the context of each of the three CAS pillars. 49 CHAPTER 3 ACHIEVING THEPROGRAM OBJECTIVES 3.89 The Bank’s program o n natural resource management has been modest during the CAE period. The Bank’s lending t o the water sector, using multiple instruments, including the f i r s t ever water resources adjustment loan, irrigation projects, trust funds and effec- tive donor coordination, helped t o establish a national framework for policy, regulatory and institutional reforms and community involve- ment in management of water resources. In the views of donors w h o co-financed the water resources adjustment loan, this operation made a major contribution t o more effective management o f the sector, even though the policy triggers for the third tranche were n o t m e t and i t was cancelled. The operation was rated fully satisfactory by IEG. There have been similar achievements i nthe management of coral reefs through an adaptive lending approach. This said, important challenges lie ahead in ensuring the necessary policy, financial a n d institutional sustainability of these programs. 3.90 The forestry sector in Indonesia has presented a dilemma for the Bank. Large rents are associated with illegal clearing of forests, sale of logs, and use of the land for oil palm or other plantation crops. M u c h of these rents accrue t o powerful vested interests and the mili- tary. T h i s i s contributing t o the steady depletion of Indonesia’s forests. The Bank has recognized that t h i s is essentially a governance problem and that w i t h o u t Govemment commitment it made little sense t o expend resources in the sector. With public statements of the n e w President and Minister of Forestry in 2004 indicating their determination t o tackle the forest depletion issue, the Bank decided t o expand i t s program of technical assistance and provided a US$17 n support of forest protection i m i l l i o n loan i n Aceh. 3.91 One area of intervention where a more pro-active role for t h e Bank might have been useful relates t o the post-crisis debt of forest enterprises. A large volume of this debt was sold by IBRA and m u c h of it ended up in the hands of t h e state banks, where it i s essentially classified as non-performing loans. N o t only d o these represent a major r i s k for these institutions, but there i s also in the words of one observer ”good reason t o believe that the sale of forestry debt by IBRA and the subsequent handling of this debt by Bank Mandiri (a state bank) and other institutions have, in some cases, involved corrupt a n d illegal practices”.g T l u s falls clearly i n t o the purview and broader objectives of the Bank. 3.92 Outcomes are rated moderately satisfactory despite the lack of progress i nthe forestry sector (see Appendix Table 6 for quantified outcome indicators). This takes i n t o account the Bank’s modest objec- tives. Indonesia achieved major reforms of the Irrigation and Water Management Sector after the financial crisis, including n e w legislation w h i c h established a national framework for irrigation management a n d accorded Water Users’ Associations ( W A S )shared responsibil- 50 CHAPTER3 THE PROGRAM ACHIEVING OBJECTIVES ity for irrigation operations and management (O&M) jointly with local governments. Inthe area of coral reef management, GO1estab- lished a national framework t o address expansion of a co-management program jointly with fishing communities, while clardying responsibilities of the Ministry for Marine Affairs and Fish- eries (MMAF), provincial a n d local governments and fishing commu- nities to reduce destructive and illegal fishing in coral reef areas. Successful implementation of p i l o t programs in the operations and maintenance (0and M) of water resource and coral reef co- management has paved the w a y for implementing these n e w institu- tional arrangements o n a nation-wide basis. 3.93 B y contrast, reforms in the forest sector have been painfully slow. Indonesia’s success i nincreased production of tree crops i s in large part as a result of r a p i d conversion of pristine o l d g r o w t h tropi- cal forests t o agriculture. While the rate at which forest concessions are being awarded has slowed in the post crisis period, enforcement of sustainable forest management practices remains a challenge under decentralization. Corruption associated with forest concessions and illegal logging, has become more dispersed with decentralization, making it difficult t o contain. The expansion of the l o g processing capacity made possible by the profits in land conversion and willing- ness of the state banks t o l e n d t o t h e forest sector have resulted in r a p i d g r o w t h of plywood, pulp and paper production. Since 2004 there is m u c h more commitment o n the part of the Government t o tackle these issues, evidenced by a series of administrative directives, but i t i s s t i l l too early t o judge t o what extent this will contribute t o effective outcomes in this very challenging area. AND NATURAL C. PILLARFOUR:DISASTER MANAGEMENT: RESOURCE OVERALL ASSESSMENT 3.94 The outcomes for this pillar need to be assessed i n terms o f the objec- tives zuhich are implicit i n the programs that the Bank supported i n these areas. By that criterion the outcomes are judged satisfactory. I n Aceh the Bank’s prima ry concern has been to ensure the success of those programs for zuhich it has direct responsibility. The Bank’s role as coordinator o f the MTF however, also implies a broader concern with the overall pace and effective- ness of the reconstruction effort. While the Aceh relief effort compares favorably with other-post Tsunami programs, there i s still lagging progress on the housing front, which detracts from what would otherwise be regarded as a highly satisfacto ry program. W i t h regard to natural resources the Bank’s objectives have been appropriately modest i n theforestry area and there have been solid achievements in dealing with water and marine resources. I t zuill be important for the next C o u n t y Assistance Strategy to frame clear objectivesfor the Bank i n these areas. Institutional Develop- ment in this urea is rated sigruficant in all aspects other than forestry. The establishment with Bank support o f the BRR is a signal achievement that 51 CHAPTER3 THEPROGRAM ACHIEVING OBJECTIVES provides a model for management i n the disaster area and possibly more broadly as well. Risks i n this area are also sigruficant, given the substantial rents i n this area and the potential for corruption. Finally the Bank’s contri- bution to the outcomes i s rated substantial. Much o f the institutional development i n this area is consequent to the Bank’s efirts. The Overall Program 3.95 On balance the CAE views the outcomes in the programs supported by the Bank as moderately satisfactory. The rating reflects the achievement of macro-economic stability, the restoration of growth and poverty reduction, and the maintenance of the quality and coverage of social programs during this difficult transition period. 3.96 Indonesia has h a d t o put in place in a very short time the insti- tutions and processes needed t o support the n e w democratic decen- tralized structure. The Bank has supported its efforts t o enact the legislative frameworks and policies implicit in this structure. The supporting regulations and f o l l o w up actions needed t o make the frameworks and institutions effective agents of development are, however, s t i l l lagging. In addition institutional development is the area in w h i c h the Bank‘s lending portfolio has performed most poorly. As a consequence the Institutional Development in the areas assisted by the Bank i s rated as modest. 3.97 Risks are regarded as significant. Indonesia i s s t i l l a very young democracy and neither i t s government, nor its bureaucracy are yet fully accustomed t o dealing with an independent legislature. Moreover, instead of interacting with a single authoritarian source of policy as u n d e r the o l d regime, they must n o w grapple with multiple decision points at b o t h the center and local government levels. The rule of l a w i s frequently subverted by rampant corruption and the role of the military and police. Private investment has n o t yet recov- ered f r o m the crisis and small and m e d i u m enterprise i s n o t yet play- ing the role it will need to, if employment and poverty reduction are t o expand at t h e pace needed for political and social stability. Continuing ambivalence towards FDI limits the role i t needs t o play, especially in promoting expansion of infrastructure. The decentrali- zation i s a l o n g t e r m process and i t will take time for the various actors t o settle i n t o t h e i r n e w roles. It remains unclear whether i t will make a positive contribution t o development outcomes in t h e m e d i u m term. 3.98 Nevertheless, Indonesia has a strong technocratic tradition in economic management. Senior ministers and officials have proven their mettle in this difficult period of transition. Their skilful steering 52 CHAPTER3 THEPROGRAM ACHIEVING OBJECTIVES of the economy combined with a continued strong outlook for pri- m a r y commodity prices has the potential t o lead to a virtuous circle of increased investment, stability, employment and poverty reduction. The key going forward will be an acceleration of the rather glacial trend toward improvement in t h e investment climate. T h i s needs t o be at the top of the priority list of b o t h the Government and the Bank. 3.99 T h e Bank has played a significant role in supporting Indone- sia during this period of transition. The CAS documents of FYOl and FY04 defined strategies which were highly relevant t o Indonesia’s needs. The FYOl CAS was produced before the results-based CAS was introduced and Bank objectives were defined in rather general terms, in contrast with the limited Bank program at that p o i n t in time. The FY04 CAS was ambitious and innovative and deserves credit on that score. Inpractice the attempt t o define a very comprehensive program and use governance as a criterion for selection, was a mixed success. Governance i s so broad a criterion that there i s little evidence that anything was excluded f r o m the program o n t h i s basis. Instead the Bank moved i nvery agile fashion t o respond t o the changing environment and the evolving needs of the Government and interests of the donors. The Bank consistently provided high quality advice and support. It did n o t shy away f r o m difficult ’long-haul’ areas such as anti-corruption and decentralization. The Aceh relief effort and KDP are examples of where the Bank was especially effective, with well-defined goals and focused support. 1.Project Performance Assessment Audit. Report No. 27177, November 4, 2003. NOTES 2. Ibid. 3 .Major studies include: Oil and Gas Sector Study (June 2000); Electricity for All (Dec. 2005; Averting the Infrastructure Crisis (June 2004). 4. This refers to lending for energy and transport projects at the national and provincial levels. The Bank provided substantial support for community - level infrastructure through the KDP 70 percent of the $1 billion of block grants from K D P went to tertiary roads, bridges, irrigation schemes and clean water. 5. IFC h a d a substantial program of activities during the period. This i s be- ing evaluated separately. 6. A Bank investigation of the FY97 Book & Reading project revealed wide- spread collusion in bidding, leading to a declaration of misprocurement and cancellation of part of the loan. 7. In a highly quoted study, Benjamin Olken (2005) shows through a random- ized sample of 600 village projects in Indonesia that community participation and the threat of audits have quite different impacts on the level and types of corruption in KDP infrastructure construction. Threat of increased audits re- duces costs o f construction by 8 percent. By contrast increasing grass-roots participation in the monitoring process reduced theft o f villagers’ wages, but 53 CHAPTER 3 ACHIEVING OBJECTIVES THE PROGRAM this was almost entirely offset by corresponding increased material costs. The study finds that: "Overall, traditional top-down monitoring can play a n important role in reducing corruption, even in a highly corrupt environ- ment." 8. Unpublished letter, quoted with permission of the author. 54 4. Lessons And Recommendations 4.1 This i s a transitional phase for Indonesia. It has m o v e d f r o m a highly centralized model of development t o one w h i c h potentially gives substantial authority t o locally elected representatives. A host of new institutions, policies, laws and regulations have been put i n place. These remain works i nprogress for t h e most part. T h i s i s understandable given the scale of the change and the environment of nwhich it i s being put in political instability and natural disasters i place. 4.2 The Bank has managed the ’process’ aspects of its support for Indonesia with exceptional skill. It has built back a relationship and reputation which was severely damaged by the crisis. Both t h e Government and the donor community turn t o the Bank for the diffi- cult tasks of development coordination. The dialogue with NGOs and c i v i l society is a constructive one, in w h i c h b o t h sides recognize that the other is acting i n good faith. T h e Bank has shown willingness t o w o r k at the local level with small decentralized local governments and communities. That there i s n o t more t o show for these process interventions i n terms of outcomes and results in the areas targeted by the Bank’s objectives, m a y be partly a matter of time. B u t this may also partly reflect a lack of strategc focus o n the part of the Bank. 4.3 In order to move t o the level and quality of g r o w t h needed t o employ a growing labor force and make a sigruficant dent o n the 50 percent of the population with incomes below US$2 a day, Indonesia needs b o t h t o attract increased FDI with t h e associated knowledge transfer, and t o promote the growth of small and m e d i u m enterprises in manufacturing, agri-business, horticulture and commercial services. The Bank needs to use the expansion of eficient public and private investment as a prism for a more focused approach to the Bank’s involvement in Indonesia. This will require closer analysis and operational follow- up in areas such as SME and agricultural development. In the social sectors, the focus should be o n elements providing for productivity growth i nthe labor force. There i s a major role for expanded public investment in infrastructure and public goods. While a broad-based approach t o governance and anti-corruption are indispensable ele- ments of improving the investment climate, it i s n o t realistic for the Bank t o b e engaged in support of all aspects of decentralization. The Bank needs t o re-think the composition of its staffing i nJakarta t o align with a more strategic approach. 55 4 CHAPTER LESSONS AND RECOMMENDATIONS 4.4 A number of specific recommendations of t h e C A E are sum- marized below 0 The Bank program: The Bank needs t o focus its program o n selected outcomes. The CAE proposes the promotion of increased and more efficient investment (both private and public) as the stratepc direction towards w h i c h the Bank’s interventions should be channeled. 0 Restoring growth and investmentfor sustainable development: (a) State Banks are the remaining residual risk i nthe finan- cial system and constitute a n important potential source of inefficiency and corruption. The Bank needs t o help the Government develop a strategy for b o t h better manage- ment and eventual privatization of these banks. (b) The Bank needs t o help the Government put i nplace a set of service standards for lowering the cost of d o i n g business t o that of its South-East Asian competitors and systematic monitoring and reporting o n the achievement of these ser- vice standards. (c) For energy and transport the key i s for the Government to develop clear strategies indicating its sectoral objectives, investment priorities and the support- ing policy and institutional framework. The Bank should offer its support, but only if there i s Government leader- ship. (d) Natural resource management The issue of for- est management i s a difficult one for the Indonesian Gov- ernment given the powerful vested interests. The Bank should consider a somewhat more pro-active approach go- ing forward, with the role of the state banks in supporting forest enterprises as a potential entry point. Improving Governance and Building Institutions: (a) Tackling corruption: Procurement reform i s an obvious focus which merits t h e development of a detailed strategic approach. The Bank needs t o continue w o r k i n g closely with the donor community t o allow for adequate depth of speciali- zation o n specific problems o f governance and anti- corruption. The Bank should of course continue t o ensure that i t s o w n projects meet i t s fiduciary standards. (b) Decentralization: This i s a n area where the Bank i s i n danger of becoming over-committed. It i s far f r o m obvi- ous that the Bank’s comparative advantage lies i nsetting up regional offices and w o r k i n g with i n d i v i d u a l kabupat- ens and kotas. The Bank’s resources m a y be better directed at helping sector ministries put in place the struc- tures, incentives and especially the monitoring needed for administering programs through decentralized local governments and helping Indonesia build institutions to 56 4 CHAPTER LESSONS AND RECOMMENDATIONS support the development of managerial and technical capacity at the local level. Poverty reduction and social semice delivey: (a) T h e Bank needs to assist t h e Indonesian authorities t o review the possibility of a move away f r o m a d hoc social transfer programs and develop a longer-term approach t o the social safety net which can build as income increases over time. (b) The Bank needs t o re-focus i t s w o r k o n t h e social sectors towards the development of the knowledge resources which Indonesia needs for competitiveness in the global marketplace i.e. o n secondary, tertiary a n d tech- nical education. (c) The Bank i s phasing out its lendingfor KDP n o w that this i s being mainstreamed by the Indone- sian government. I t should not however, phase o u t i t s involvement i n or concern with KDP. There should be continued support for monitoring and evaluation capacity building. In addition, the Bank should be advocating and supporting needed coordination between KDP commu- nity-level activities and those of local government service delivery institutions (agriculture, education, health, etc.) Disaster Management: T h e Government needs t o take the positive experience with rehabilitation in Aceh and use t h i s as the basis for developing a national disaster relief and reconstruction management capacity. The Bank should increasingly s h i f t its focus f r o m individual relief efforts t o supporting the development of this capacity. 4.5 The Indonesia program i s a n outstanding example of effective relationship management. The Bank i s t h e coordinator for the t w o most important donor initiatives -Tsunami relief and decentraliza- t i o n support - and t h e principal external advisor t o the core m i n i s - tries. The Bank has leveraged its capacity through trust funds and i s producing large numbers of excellent analytic outputs and shorter just in time notes as w e l l as exploring lending options in almost every key sector. To achieve the above agenda, the Bank needs t o cluster its wide-ranging program of policy dialogue, analytic w o r k and lending around a set of core programs t o increase its strategic focus o n well- defined outcomes. 57 Appendix Table 1: Restoring Stability and Growth: Outcome Indicators Appendix Table 2: Financial and Private Sector Development Outcome Indicators Appendix Table 3: National Infrastructure: Outcome Indicators Appendix Table 4: Human Development: Outcome Indicators Appendix Table 5: Disaster Management: Outcome Indicators Appendix Table 6: Natural Resource Management: Outcome Indicators 59 Appendix Table 1. Restoring Stability and Growth: Outcome Indicators Objectivdlndicator Pre- Baseline Outcome 2005 Comments Crisis 1998 1996 1. Re-establish economic growth, and the foundation for future growth GDP growth (%) 7.6% -13.1% 5.6% Recovery took longer than other postcrisis countries; concerns that growth still below potential. Investment 29.6% 25.4% 22.0% Macroeconomic adjustment came on the back (Share of GDP) of a substantial reduction in investment, weakening potential for future growth. Was this the best path? Was it the only choice? FDI 2.7% -0.3% 1.8% (2004) Public Investment 7.0% 6.6% 4.5% 2. Reestablish macroeconomic stability, and reduce vulnerability to future crises Inflation (5) 8.0% 58.4% 10.4% 6.5% in 2003 and 2004; rose in 2005 because of fuel price increase. Exchange rate volatility Coefficient of variation (st. devlmean) from Still some volatility, but not substantially worse 2000-05 = 9.1Yo than other postcrisis countries Current account balance -3.4% 4.3% 0.9% Risk of emerging deficit as net oil exports fall, if (share of GDP) non-oil exports do not continue recent growth. Short-term external 1.66 0.85 0.67 Less vulnerable, but still high, and higher than debtheserves (2004) most postcrisis countries. 3. Reduce the budget deficit Budget balance 1.4% -2.4% -0.6% Debates about whether the stance was too (share of GDP) tight, especially in early postcrisis years. Revenues 15.8% 13.9% 18.2% of which: non-oil 12.2% 10.9% 13.1% Rose to 14.7% in 2004 Expenditures Fuel Subsidy 0.3% 2.7% 3.5% Rose to 5.9% in 2000 Development Exp. 5.9% 5.0% 1.4% 3.9% in 2003 and 3.1% in 2004 Interest Davments 1.8% 3.1% 2.1% Rose to 6% in 2001 4. Reduce public-sector debt Public debt (share of 24.0% 97% 47.0% Over-achieved, albeit at the cost of tight deficits GDP) (1999) and low public investment. Lower debt levels should create space for increased investment. Source: Internal Document. 61 Appendix Table 2. Financial and Private Sector Development: Outcome Indicators Year Pre-crisis 1996 Baseline 1998 Outcome 2005* Comments 1. Stabilize, restructure and recapitalize the banking system Capital Adequacy 11.8% -15.7% 19.8 All indicators are at Ratio 16.4 437.2 19.5 least at pre-crisis Return on Equity levels and have more credibility as regulation and supervision improved 2. Improve banking regulation and supervision Lax regulation, Same as in 1996. Independent and Bl's Poor risk Reforms started, supervision complies information and aiming at complying with all 22 Basle evaluation, weak with Basle principles principles. supervision 3. Settle debts of the private sector Firms with forex JiTF restructured Rp. Some help to private denominated debts 29.7 billion sector in continuing of imports were its operations. deeply indebted 4. Privatize State-ormed banks 39.0% of total 39.3% of total 38.0% of total assets NPLs of these banks assets assets remain very high NPLs of large State- Mandiri 26% owned banks BNI 16.6% Year Pre-crisis 1996 Baseline 1998 Outcome 2005* Comments 5. Increase financial intermediation Deposits % of GDP 48.4% 41.8% 39.4% Intermediation Credit to private sector 55.4% 21 .O% 26.0 substantially lower %of GDP than that of Indonesia's competitors 6. Improve investment climate Rank in Index of #33 #38 #I 22 Indonesia lags economic freedom of behind many the Wall Street Journal countries in the main and the Heritage indicators of Foundation investment climate. Private investment % 22.6% 18.9% 16.9% of GDP Private investment FDI % GDP 2.7% -0.3% 1.8% and FDI recovering FDI % in $ millions 6,194 -24 1 5,163 but still lower than before 1998 7. Unemployment and labor flexibility Unemployment rate 8.5% 5.5% 10.3% 2003 Labor Law introduced the most generous severance payments in Asia as well as other rigid provisions. Government recently announced its intention to reform it. Source: Internal Bank Document 62 Appendix Table 3. National Infrastructure: Outcome Indicators % of Paved Roads 47.3 60.5 roads has not been suffi'cient. There has been an 80% increase Motor Vehicles 158.2 of motor vehicles over the same 87.8 period. (per 1000 people) % Roads in GoodFair Condition: National Roads 97% 81% Provincial 89% 50 KabuaptenKota 37% 53% (2000) (2006) Electricity Consumption 325.4 499.9 54% increase, however tariff (kwh per capita) levels remain similar to precrisis levels and PLN is unable to service the increase in electricity consumDtion: in certain recions blackouk occur Central Government 6.6 US$B 1.4 US$B Infrastructure Development (1996/1997) (2004) Expenditures lmprove investment Climate for Growing lnfrasbucture FinancingNeeds Reform Reculatorv Electricitv Law New Electricitv Law in 2002 No reaulatorv bodv established I . I Frameworkto create a 1511985. to create a mire more competitive competitive sector was environment annulled. Reverted back to Law 1511985 while in the process of dmfting a new Electricity law. Regulatory Body established but weak regulations. 2001 Oil and Gas Law Issued: downstream competition, market pricing and upstream production Objectivellndicator Baseline 1998 Outcome 2005 Comment Address Inefficient -Fuel Subsidies Reduced Subsidies - Power Tariff Increase (not enough to attract investors) Reform PLN Restructuring under implementabn but facing constraints due to growing electricity demands Infrastructure Summit GO1 created National (Jan. 2005) Committee on Policy for Accelerating Infrastructure Provision (KKPP1)-attempt to increase public private partnership; and Risk Management Unit (RMU) to balance risk sharing between public and private sector. 63 Appendix Table 4. Human Development: Outcome Indicators 1999 2004 Comments Education Elementary school net enrollment ratio (%) 92.7 93.0 MDG: Unchanged, below East Asian regional average (95) Improving, but quality at issue Junior high school net enrollment ratio (%) 59.2 65.2 Senior high school net enrollment ratio (YO) 38.5 43.0 Improving, but quality at issue Population > 10 yr completed primary & 47.0 49.9 junior secondary (%) Population > Idyr completed high school ,7.6 20.7 & college (%) Adult literacy (%) 88.4 90.5 Health Life expectancy at birth (yrs) 65.5 68.6 Fertility (average births per woman of 2,6 2.3 reproductive age) Infant mortality (per 1,000 live births) 36.0 28.0 MDG: Improving, and now better than E. Asian average (37), achievable Maternal mortality (deaths per 100,000 307.0 230.0 MDG: Improved from high Live births) (>300) to moderate (100.299) on global s c a b b u t still four times E. Asian average (55) Children 12-23 months immunized against 75.0 72.0 MDG: Achievable, but measIes deteriorating and off track Poverty Population below poverty line (%) 23.4 16.7 MDG: On track, in line with E. Asia average Malnutrition(% children under 5) 30.3 25.6 MDG: Off track and 2 %times E. Asia average (IO) 64 Appendix Table 5. Disaster Management: Outcome Indicators Objectivellndicator Baseline Outcome Comment (Dec. 2004) (Dec. 2005) Assessing Needs and Securing Financing Rapid assessment of Completed "Damage and Loss" assessment damage to mobilize January 2005 presented to CGI Meeting of reconstruction January 19-20, 2005, less than 4 resources weeks after tsunami Needs for long-term us$5.8 billion $US8.9 billion Pledge sources: GOllPublic Sector- recovery I Total funds (needs) (pledged) US$2.75 billion; Donors - $US3.6 pledged billion; Private - US$P.Sbillion. US$4.4 billion allocated by end Planning for Recovery Reconstruction Adopted May May have caused delays by creating Master Plan 2005 uncertainty until adopted Organization to Viewed as the "gatekeeper" for provide leadership for BRR Created project approval; implemented coordinating April 2005 "sector gap" strategy for reconstruction unprogrammed financing in assistance and February 2006 monitoring I adjusting strategy Implementing Recovery Activities Housing 123,500 units lost 16,200 Requires adjudication of land claims builff13,200 prior to BRR approval under Schools 2,087 damaged or construction destroyed 335 rebuilt Major health facilities 122 damaged or destroyed 37 rebuilff51 Coastal fishing boats 4,717 lost under construction Fish ponds (hectares) 20,000 destroyed 3,122 replaced or being built Farmers 60,000 displaced 13,000 ha of land restored 5,000 back in use 40,000 Source: Aceh and Nias One Year after the Tsunami, BRR and International Partners, December 2005. 65 Appendix Table 6. Natural Resource Management: Outcome Indicators Pre-Crisis 1996 Outcome 2005 Natural Resource Management, Global and National Public Goods Forestry Logs 1.30% -2.50% Sawn Timber 3.90% -5.50% Plywood 2.70% 20.60% Fisheries Production Growth Rates 3.10% 8.10% Irrigation and Water Management Policy and Organizational Framework Centralized water resource Irrigation Management policy and management institutionalframework installed Maintenance and Operations Underfunding of O& M Water Users Associations share responsibility for O&M Source: Central Bureau of Statistics, Ministry of Agriculture, Ministry of Forestry. 66 Annex A. Statistical Tables Annex Table 1 Indonesia at a Glance Annex Table 2 Indonesia - Economic and Social Indicators, 1990-2005 Annex Table 3 External Assistance t o Indonesia, 1999-2005 Annex Table 4 Indonesia-Analytical and Advisory Work, 1999-2006 Annex Table 5 Indonesia-List of IBRD/ IDA Approved Projects FY99-06 Annex Table 6 Indonesia-World Bank IBRD/ IDA Commitments by Sector Board FY99-06 Annex Table 7 Indonesia-Project Ratings by Sector Board Exit FY99-06 Annex Table 8 Portfolio Status Indicators: Indonesia and Comparisons FY99-06 Annex Table 9 Cost of Bank Programs for Indonesia and Comparison Countries, U S thousands, FY99-06 Annex Table 10 Indonesia: Bank's Senior Management, 1999-2006 Annex Table 11 Indonesia M i l l e n n i u m Development Goals 67 ANNEXA TABLES STATISTICAL ANNEXTABLE1: INDONESIA AT A GLANCE 8/13/06 East Lower- POVERTY and SOCIAL Asia & middle- 2005 Population. mid-year (mllions) GNI per caplta (Atlas method, US$) Indonesia 220.6 1,280 Pacific 1,885 1,627 Income 2,475 1,918 Development diamond. Life expedancy I GNI (Atlas method, US$ hllions) 282.3 3,067 4,747 Average annual growth, 199945 Population (%J 1.3 09 1.0 Labor force (%J 1.9 13 1.4 primary Most recent estlmate (latestyear available, 1999-05) capita Poverty (% ofpopulabon below nabonal povertyline) 27 Urban population I%of total mulabon) 48 41 50 Ltfe e w a n c y at birth (yearsJ 67 70 70 Infant mortality (per l,oOo/iw, births) 30 29 33 Child malnutntion (% ofchildren under5) 28 15 12 Access to an improvedwater source (% of populabon) 77 79 82 Literacy (% ofpopulabon age 15+J 90 91 89 Gross pnmary enrollment (% of school-age populabm) Male Female 117 118 116 115 116 114 114 115 113 -Indonesia ~ Lower-m'ddleincomegmup I KEY ECONOMIC RATlOS and LONG-TERMTRENDS 1985 1995 2004 2005 Economic ratios' GDP (US$ hlltons) 87 3 202.1 254 3 287.2 Gross capital formatiordGDP 28 0 31.9 23 1 23.4 Trade Exports of goods and WMW/GDP 22 2 26.3 31 3 37.7 Gross domesbc sawngsiGDP 29 7 30.6 25 8 32.5 Gross national sawngs/GDP 24 6 28.1 22 8 29.8 T Current accwnt balancelGDP -2.2 -3.2 12 0.9 Interest paymentsiGDP 2.3 2.4 16 Total debVGW 42.0 61.5 55 3 Total debt servicelexwrts 20.8 29.9 221 Present value of deWGDP 53 6 Present value of debtlexwrts 147 0 Indebtedness (average annual gmwih) GDP 1985-95 77 199505 22 2004 5.1 2005 56 2o0509 6.3 - lndonesia GDP per captta 59 06 3.6 42 5.2 ~ Lower-mddleincorna gmup Exports of aoods and seMCes 93 25 8.5 14 5 10.0 STRUCTURE of the ECONOMY (% of GDPJ IgE5 1995 1 Growth of capital and GDP (OX) 1 40 T I Agriculture 23.2 17.1 15.6 14.0 Industry Manufacturing Services Househdd final consumption expenditure General gov't final consumption expenditure 35.8 16.0 40.9 59.1 11.2 41.8 24.1 41.1 61.6 7.8 44.3 28.7 41.4 64.6 8.3 40.7 45.3 63.9 7.5 20 0 -20 41 -GCF *GDP I 1985-95 1995-05 *Oo4 'Oo5 Growth of exports and imports ( O X ) (average annual growih) Agriculture 3.4 2.5 4.1 2.8 IndUstN 9.7 2.1 3.9 5.0 25 ManufacturinQ 11.2 3.0 6.2 Services 7.9 2.1 7.0 6.7 Household final consumption expenditure 6.5 3.2 4.3 2.7 General gov't final consumption expenditure 4.6 3.2 1.9 4.1 -50 Gross capital formation 11.0 -3.1 30.6 10.5 -Exports *Imports imports of goods and services 8.5 0.1 24.9 15.1 - ANNEXA TABLES STATISTICAL Indonesia PRICES and GOVERNMENT FINANCE 1986 1996 2004 2006 Domestic prices I Inflation (%) I 25 I% change1 20 Consumer prices 4.7 9.4 6.2 10 5 is Implicit GDP deflatoi 4.3 9.7 6.3 13.7 I O Gavernment finance 5 (% of GDP, indudes current QmntsJ 0 Current revenue 19.8 15.6 17.6 17.9 00 09 02 03 04 05 Current budget balance -2.3 7.8 7.4 50 -GDP deflator -CPl Overall surplusldeticit -1.0 1.9 -1.0 -1 0 TRADE 1986 1996 2004 2006 1 (US$ millions1 Total exports (fob) Fuel Estate crop 18,527 .. _. 45,418 10,465 2,916 71,585 15.803 2.845 88,845 20,195 1,141 Export and import levels (US$ mill.) i100000 T 80,000 I Manufactures .. 18,312 22.063 27,011 60.000 Total imports (cifl 10.259 40.629 45,425 62,195 40.000 Food .. 3.022 3,786 3.863 Fuel and energy .. 3.007 11.797 14.521 20,ow Capital goods .. 16,290 12,175 16.538 Export price index (2000=100j .. 24 101 102 Import price index (2000=100J .. 26 109 113 Terms of trade (2000=100J .. 95 93 90 BALANCE of PAYMENTS 1985 1996 2004 2006 Cumnt a c c o u n t balance t o GDP (%) (US$ millionsj Exports of goods and serums 19,371 52.923 89,783 108,239 Imports of goods and services 17,840 54,461 79.116 93,521 ST Resource balance 1,531 -1,538 10,667 14,718 Net income -3,542 -5,874 -8,704 -13,058 Net current transfers 88 981 1,139 1,031 Current account balance -1,923 -6.431 3,103 2,691 Finanung items (net) 2,433 8.004 -3,079 11,320 Changes in net reserves -510 -1.573 -24 -14,011 1 99 00 01 02 03 04 05 Memo: Reserves including gold (US$ millionsj 5.880 14,787 36.194 47,088 Conversion rate (DEC, local/US$J 1,1106 2,2486 8,938.9 9,504 0 EXTERNAL DEBT and RESOURCE FLOWS 1986 1996 2004 2006 i Composition of 2004 debt (US$ mill.) (US$ m11lionsJ Total debt outstanding and disbursed IBRD 36,715 3.590 124.398 12,503 140,649 8,943 8.132 I 8943 IDA 844 756 996 1,001 Total debt service 5,823 16,416 20,464 IBRD 384 1,875 1.938 1,871 IDA 12 26 35 36 Composition of net resource flows Ofikial grants 137 250 290 Official creditors 980 1.129 -2,687 Private creditors 154 2.303 -947 Foreign direct investment (net inflows) 310 4.346 1,023 Portfolio esuity (net inflows) 0 1,493 2,129 World Bank program Commitments 1,068 1,312 773 IA-IBRD E - Bilateral Disbursements 777 1,045 659 652 1 B - IDA D - Other multilataral F - Pnvate Principal repayments 133 975 1.390 1,417 IC-IMF G - Shon-tern Net flows 644 69 -731 -765 Interest payments 262 926 584 489 Net transfers 382 -857 -1,314 -1.254 Note. This table was produced from the Development Economics LDB database 8/13/06 ANNEXA TABLES STATISTICAL Annex Table 3: Indonesia-ExternalAssistance, Total Net ODA Disbursement, 1999.2005, USM I 1999 2000 2001 2002 2003 2004 2005P m i Australia I 72.28 72.02 59.21 71.12 86.5 106.11 467.24 Austria I 7.43 8.52 4.77 0.52 0.37 0.55 22.16 Belgium 1.06 0.98 1.17 1.4 1.4 -6.91 -0.9 Canada 26.31 26.45 18.78 11.55 21.63 9.25 113.97 Czech Republic 0.02 0.04 0.1 0.16 Denmark 1.88 1.4 3.65 I.a9 2.74 3.02 14.58 Finland 1.7 0.65 0.41 0.42 0.66 0.11 3.95 France 21.19 21.7 26.1 44.81 57.04 -28.24 142.6 Germany -19.47 6.38 29.92 78.39 -91.1 -8.59 4.47 Greece 0.03 0.01 0.01 0.05 Ireland 0.07 0.14 0.03 0.07 0.03 0.34 Italy 1.1 1.27 0.94 2.33 3.34 -16.42 -7.44 Japan 1605.84 970.1 860.07 538.3 1141.78 -318.54 4797.55 Korea 9.33 3.79 23 14.67 30.17 16.97 97.93 Latvia 0.18 0.18 Luxembourg 0.24 0.08 0.19 0.03 0.54 Netherlands 71.93 143.96 119.65 127.27 76.89 -0.52 175.99 715.17 New Zealand 3.92 2.88 2.99 4.47 4.84 6.53 25.63 Noway 8.59 5.8 4.62 6.05 6.57 7.37 39 Poland 0.02 0.01 0.14 0.17 Portugal 0.04 0.08 0.12 Slovak Republic 0 0 Spain 13.84 66.12 41.35 7.85 9.68 10.89 149.73 Sweden 2.97 4.07 3.74 1.58 5.94 9.12 27.42 Switzerland 5.61 3.49 3.27 6.34 3.92 2.6 25.23 Turkey 0.01 2.72 2.73 United Kingdom 40.66 33.86 23.44 31.72 7.38 8.45 145.51 United States 207.26 174.19 141.01 225.75 210.88 68.87 1027.96 Other Bilateral Donors 0.01 0.05 0.01 0.01 0.08 Totai Bilateral Donors 2083.77 1547.79 1368.19 1776.74 7580.88 -126.35 176.17 7807.19 Arab Agencies 5.56 1.99 -1.24 6.63 12.94 Arab Countries 0.6 0.5 1.95 0.67 -2.68 1.I6 2.2 AsDF 0.16 17.94 10.78 7.88 36.73 37.69 47.76 158.94 DAC Counbies,Total 2074.44 1543.98 1345.16 1162 1550.66 -146.29 175.99 7705.94 DAC EU Members,Total 144.63 289.05 255.21 298.42 74.54 -28.48 175.99 1209.36 EC 28.73 37.68 28.37 23.94 27.97 42.59 - 189.28 G7,Total 1882.89 1233.95 1100.26 932.85 1350.95 -285.22 - 6215.68 GEF 2.77 3.68 4.01 3.56 2.9 1.68 2.27 20.87 IDA -12.36 33.16 12.29 59.78 63.77 94.75 - 251.39 IFAD -3.83 -6.81 6.67 -2.78 -1.09 -2.23 4.56 -14.63 MONTREAL PROTOCOL 1.04 0.31 0.9 0.46 1.39 1.45 0.46 6.01 1999 2000 2001 2002 2003 2004 2005P rota/ Non-DAC Bilateral Donors,Total 9.93 4.31 24.98 15.41 27.54 21.1 0.18 103.45 0.15 -0.01 -0.1 -0.21 -0.23 -0.17 -0.31 -0.88 0.03 3.39 3.79 7.44 3.72 0.05 18.42 4.13 3.15 3.82 4.1 1 5.89 7.84 28.94 4.07 2.5 6.78 6.15 4.48 5.3 29.28 0.87 1.14 6.09 5.76 5.92 19.78 7.73 6.73 5.13 5.09 5.59 5.53 6.36 42.16 6.65 6.63 6.41 7.1 1 6.78 6.88 40.46 WFP 0.05 0.01 0.24 0.38 0.02 0.62 1.32 Multilateral, Total 40.19 109.5 100.74 130.66 162.6 208.61 51.98 804.28 ALL Donors,Total 2124.56 1657.79 1470.88 1308.07 1740.8 83.42 228.15 8613.67 71 ANNEXA TABLES STATISTICAL Annex Table 4: Indonesia-Analytical and Advisory Work, 1999.2006 Document Title Date Report No. Document Type Indonesia - Country Assistance Strategy Progress Report (English) 09/05/2006 36856 CAS Progress Report Indonesia - Country assistance strategy : progress report (English) 0211611999 18963 CAS Progress Report - Indonesia Country assistance strategy progress report (English) 09/16/2002 24608 CAS Progress Report CAS Public Information Indonesia - Country assistance strategy public information notice (CPIN) (English) 12/03/2003 PIN99 Note CAS Public Information Indonesia - Country assistance strategy public information notice (CPIN) (English) 03/19/1999 PIN8 Note CAS Public Information - Indonesia Country assistance strategy public information notice (CPIN) (English) 10/09/2002 PIN83 Note CAS Public Information Indonesia - Country assistance strategy public information notice (CPIN) (English) 02/27/2001 PIN54 Note Indonesia - Country assistance strategy : chairman's Chairman's Concluding 11/26/2003 27422 concluding remarks (English) Remarks Indonesia - Country assistance strategy progress report : Chairman's concluding Chairman's Concluding 09/03/2002 24953 remarks (English) Remarks chairman's Concluding Twelfth Meeting of the Consultative Group on Indonesia (English) 01/21/2003 31808 Remarks Country Assistance Indonesia - Country assistance strategy (English) 10/29/2003 27108 Strategy Document Country Assistance Indonesia - Country assistance strategy (English) 02/08/2001 21580 Strategy Document Country Financial Indonesia - Country financial accountability assessment (English) 04/27/2001 21824 Accountability Assessment Indonesia - Country procurement assessment report : reforming the public Country Procurement 03/27/2001 21823 procurement system (English) Assessment (CPA R) Decentralizing Indonesia : A regional public expenditure review overview report 06/01/2003 26191 Economic Report (English) Indonesia - Combating corruption in Indonesia - 11/ I 212003 27246 Economic Report enhancing accountabilityfor development (English) Indonesia - Investingfor growth and recovery 06/09/2006 35423 Economic Report (English) - Indonesia Selected fiscal issues in a new era 02/14/2003 25437 Economic Report (English) Indonesia : Maintaining stability, deepening reforms 01/01/2003 25330 Economic Report (English) Indonesia : new directions (English) 01/01/2005 31335 Economic Report - Indonesia Country assistance note (English) 03/29/1999 19100 IEG Study Indonesia - Education in Indonesia : managing the 08/01/2004 29506 Sector Report transition to decentralization Main report (English) Indonesia - Informationand communication technologies for rural development : issues and options Main report and annexes (English) 10/01/2005 33503 Sector Report - Indonesia - Water Use Rights Study Second Stage 02/01/2005 33129 Sector Report Main report (English) Indonesia development policy report : beyond macroeconomic stability (English) 12/04/2003 27374 Sector Report Source: World Bank Internal Document. 72 I I 1 - V I - M T1 s s U I u v) v) 0 0 v) .. v) m v) N W 0 E ANNEXA TABLES STATISTICAL Annex Table 6: Indonesia-World Bank IBRDllDA Commitments by Sector Boards FY99-06 Sector f999 2000 200f 2002 2003 2004 2005 2006 Total % Education 160 - 4 3 80 68 314 5.1% Energy and Mining 141 80 221 3.6% Economic Policy 1,000 300 400 1,700 27.5% Health, Nutrition and Population 45 115 103 106 138 506 8.2% Public Sector Governance 500 60 560 9.1% Private Sector Development 32 17 49 0.8% Rural Sector 300 18 70 122 30 539 8.7% Social Development 320 250 264 834 13.5% Social Protection 600 48 648 10.5% Transpot i 200 200 400 6.5% Urban Development 105 17 100 184 406 6.6% Total 2,741 133 493 303 584 322 917 685 6,178 100.0% SOUfCe: World Bank Internal Document. - 74 ANNEXA TABLES STATISTICAL Annex Table 7: Indonesia-Project Ratings by Sector Board Exit FY99-06 1 -m 1864 4 318 800 33 250 539 500 150 566 566 150 w 17E7 14 617 166 56 643 823 818 857 828 619 851 Ban*n* 122892 175 882 767 61 463 919 199 782 818 851 713 R MoS D s br-1 ctdnr 52 I 00 00 0 00 00 00 00 00 00 00 Ph 1m - 255 I 1000 1000 100 1000 1000 1WO 1040 1WO 1WO 1000 IndaaV 612 3 834 667 0 00 00 00 887 899 831 661 w mi 8 615 mo 21 125 3 8 250 615 748 815 500 B s n M 52916 114 $31 622 68 342 867 895 735 Lyll a09 575 RUM SOm China 41400 25 966 960 88 880 988 960 880 058 9S6 960 P h l l m 6507 9 1000 889 45 333 940 150 889 1WO 1000 889 V*bar 281 3 I000 1000 66 661 1000 1000 1000 IMP 1WO 1WO IhheaS 6199 13 646 500 31 250 315 200 333 355 437 411 w 51490 8 940 801 76 644 910 696 137 900 928 804 ~snilnh 15~06 504 820 144 51 478 753 si 897 no 773 664 soar1FTobSDn Chma 2234 I 1 0 0 0 1 0 0 0 1 0 0 1 0 0 0 1000 1WO 1wo IO00 M . h W6 2 1 0 0 0 1 0 0 0 0 00 IWO IWO 500 998 998 500 Philwnes 99 1 1040 1000 0 00 1000 1WO 1WO two Thalind 2535 1 1000 1000 100 IWO 1000 1000 I000 lW0 lW0 IO00 IMaSr m a 1 1000 1WO 0 00 00 00 1000 1000 w 11244 12 1000 721 45 1 4 860 550 661 999 999 900 Banimh 66869 131 889 615 52 492 836 116 832 BB4 861 837 m m Chloe 43555 21 939 952 94 952 1000 lW0 852 939 lW0 1000 Phil-er 1676 2 1000 1000 80 500 1000 1000 1000 1WO 1WO 1000 Thibd 139 1 1000 1000 100 IO00 1000 1000 1000 IWO IWO 1000 VWblSm 3819 4 1 0 0 0 1 0 0 0 1 250 1000 1000 1000 1MO 831 150 I M M Bw7 7 934 851 49 511 923 833 1000 IWO 934 857 w 62090 43 948 953 81 161 972 925 977 €57 981 953 L n W I75182 201 906 883 62 638 907 827 929 931 903 858 LtbsnDevekymlt Chl". 3863 4 990 750 99 150 1000 1000 150 150 1WO IO00 Phihppmar 624 1 IO00 1000 100 1000 1000 1000 1000 1MO 1WO 1000 $928 8 591 861 24 222 264 375 n8 15% SI 667 w 11679 17 753 106 53 353 580 8 3 785 170 156 765 B a n M 59618 114 832 743 44 312 159 660 772 816 815 146 WswSWand SsniPWn Chins 10037 6 911 675 72 625 917 675 815 917 917 675 Ph,lppm€s si8 2 881 500 ea 500 1WO 1WO 1000 IWO 861 500 v m m m 503 1 1000 1000 100 1000 1000 1000 1000 two 1WO 1000 IndOoeQa I422 2 1000 1000 31 500 313 500 1000 1MO 1WO 1000 w 13819 11 936 882 69 641 889 882 941 940 936 882 L n W 53738 99 153 136 44 439 649 837 168 612 729 117 Ordl Chnl 14MJl 94 926 904 65 809 915 945 894 919 953 928 Mlbp 8481 7 1000 1000 45 333 1000 1000 571 914 999 857 POilpPngl 1 M I 26 633 692 42 423 609 667 846 881 738 131 Thsiland 26210 I9 616 885 13 737 1040 1000 947 980 616 895 VYhW I6859 16 1000 1000 53 825 1000 1000 1000 1WO 984 938 IhhW 74649 61 655 646 31 312 532 463 725 833 647 709 w 8anM 327721 1452054 306 2053 830 800 169 159 66 54 E46 496 669 607 142 732 816 782 909 b19 851 766 629 734 75 * lobrl E v a I u M $1 1sTob1N e I C m h l~ l ~ t l m l l d whhh eutmne wasmMmnu~ pgesk w brri m! m ~ b n e o t o l m l ~ t o d k whsh OYI-YROmlishpd o " ToBI Evaluated(No) 81 TOW N u n b a O l e v a l u s ! d p q n k * h a h oubane viu mkdminw t h l nurtwolH1IYlted PIJCSb vhlsh C 4 w - mlmW STATlSTlCAl Annex Table 8: Portfolio Status Indicators: Indonesia and Comparisons FY99-06 I China I 744 I Net Commit Amount 118,311.4 II # Project At Risk 26 I % At Risk 3.5 11 Comm At Risk 3,281.1 ~ I % Commit at Risk 2.8 Ii Indonesia 349 30,744.0 68 19.5 5,725.1 [ 18.6 Malaysia 12 1,929.5 0 0.0 0.0 1 0.0 I Philippines I 171 I 12,023.3 I 29 I 17.0 1 2,479.6 I 20.6 1 Thailand 55 6,094.6 4 7.3 295.0 4.8 Vietnam 217 22,264.9 15 6.9 1,095.5 4.9 1 SOUfCf?: World Bank InternalDocument 76 ANNEXA TABLES STATISTICAL Annex Table 9: Cost of Bank Programs for Indonesia and Comparison Countries, US$ Thousands FY99-06 I 1 Total 1 1 Supervision Lending 1 AAA 1 Other I Bank $13,348,416 $1,270,424 $1,017,575 $1,316,731 $9,744,123 China $178,964 $63,130 $48,157 $39,568 $28,110 Indonesia $106,317 $37,139 $23,440 $30,157 $15,581 I Maiavsia I $6,270 1 $1,568 1 $1,492 1 $2,730 1 $480 I Philippines $54,877 1 $16,942 $14,645 $14,440 1 $8,850 Thailand $31,415 ~ $7,004 $5,245 $12,644 ~ $6,522 Vietnam 1 $68,007 1 $17,686 I $22,849 I $15,148 j $12,324 Cost Structure by Percentage Total Supervision Lending AAA Other Bank 100 10 8 10 73 I China 1 100 I 35 I 27 1 22 1 16 I Indonesia 100 35 22 28 I 15 Malaysia 100 25 24 44 I 8 I Philippines 1 100 1 31 1 27 1 26 i 16 I Thailand 100 22 17 40 ~ 21 Vietnam 100 26 34 22 ~ 18 SOUfCe: World Bank Internal Document 77 ANNEXA TABLES STATISTICAL Annex Table I O : Indonesia: Bank’s Senior Management, 1999-2006 Year Vice President Country Director Economist 1999 Jean-Michel Severino Mark Baird Vikrarn Nehru 2000 Jernal Kassum Mark Baird Vikram Nehru 2001 Jernal Kassum Mark Baird Vikrarn Nehru 2002 Jernal Kassum Andrew Steer Bert Hofman 2003 Jernal Kassum Andrew Steer Bert Hofman 2004 Jernal Kassum Andrew Steer Bill Wallace 2005 Jernal Kassum Andrew Steer Bill Wallace 2006 Jernal Kassum Andrew Steer Bill Wallace Source: World Bank Internal Document 6. 78 ANNEXA TABLES STATISTICAL Annex Table 11: Indonesia Millennium Development Goals 79 ANNEXA TABLES STATISTICAL le 11: I . .c e d ) 80 Annex B: List of Persons and Organizations Met GOVERNMENT OF INDONESIA Dr. Anggito Abimanyu Acting Head, Agency for Economic Analysis & InternationalCooperation, Ministry of Finance Mr. Arum Atmawikarta Director, Health & Community Nutrition, Ministry of Health Dr. Nasirah Bahaudin Head, Personnel Education & Training, Ministry of Health Dr. Satryo Soemantri Brodjonegoro Director General of Higher Education, Ministry of National Education His Excellency Mr. BlEGiono Coordinating Minister, Ministry of Economic Affairs Sapta Putra Ginting Deputy Director of Spatial Planning for Small Islands and Maritime Boundary, Ministry of Marine Affairs and Fisheries Mr. Erwidodo Head, TREDA, Ministry of Trade Dr. Haryono Secretary, Indonesian Agency for Agricultural Research & Development, (IAARD),Ministry of Agriculture Widdi Hardjono Head of Cooperation & Public Relation Division, Indonesian Agency for Agricultural Research and Development, Ministry of Agriculture Mr. Jannes Hutagalung Special Staff to the Coordinating Minister of Economic Affairs Mr. Saut Hutagalung Head, Bureau of Planning & Foreign Cooperation, Ministry of Finance Dr. Djunaedi Hadisumarto Adviser to the State Minister of National Development Planning, Ministry of National Development Planning Mr. David Hawes Lead Advisor, Coordinating Ministry of Economic Affairs Dr. Mohamad lkhsan Advisor, Coordinating Ministry for Economic Affairs Mrs. Sri Mulyani lndrawati Minister of Finance, Ministry of Finance Mr. Junino Jahja Deputy of Internal Affairs & Public Complaint, Corruption Eradication Commission Mr. Fasli Jalal Director General, Quality Improvement of Teachers & Education Personnel, Ministry of National Education Ir. Ida Kusuma W. Planning Division, Ministry of Marine Affairs and Fisheries Ir. Syahrial Loetan, MCP State Ministry for National Development Planning Agency (Bappenas) Dr. Ir. Endah Murtiningtyas, MSc Directorate of Food and Agriculture, State Ministry for National Development Planning Agency Dr. Anwar Nasution Chairman, The Supreme Audit Board of the Republic of Indonesia Prof. Dr. Widjojo Nitisastro Economic Adviser to the President of the Republic of Indonesia lr. Hendrianto Notosoegondo Director General of Regional Infrastructure, (Bina Marga) Ministry of Public works Dr. Progo Nurdjaman Secretary General Dr. T. Marwan Nusri MPH Head of Bureau of Planning and Budgeting, Ministry of Health Prof. Dr. Widi Pratikto Director General of Coastal & Small Islands, Ministry of Finance Dr. Man Elka Pangestu Minister of Trade Mr. Mardjono Reksodiputro Secretary, National Law Commission Mr. Roestam Sjarief Secretary, General Ministry of Public Works Mr. Maurin Sitorus Director, Ministry of Finance 81 ANNEX B LISTOF PERSONS AND ORGANIZATIONS MET Mr. Sugeng Sasomo Sec. Dir. Gen., Ministry of Home Affairs Dr. Setiawan Soeparan Head of Health Manpower Center, BPSDM, MOH Mr. Ace Suryadi Dir. Gen of Non Formal Education &Youth, Ministry of National Education Dr. Ahmad Suryana Director General, Indonesian Agency of Agricultural Research & Development, Ministry of Agriculture Mr. Made Suwandi Director for Facilitation of Regional Autonomy, Policy & Reporting, Ministry of Home Affairs Ir. Agoes Widjanarko MURP, Director General of Cipta Karya Ministry of Public Works Ir. Umiyatun Hayati Triastuti Director, State Ministry for National Development Planning Ir. Tatag Wiranto Deputy Minister for Economic and Private Business Development, The State Ministry for the Development of Disadvantaged Regions NGOslPRlVATESECTOR Sarwoto Atmosutarno Head of Division, PT. TELKOM Syarifudin Baharsyah Professor Ekonomi Agribisnis, lnstitus Pertanian Bogor Mr. Benedicto S. Bayaua Secretary General, Asia Pacific Rural and Agricultural Credit Association (APRACA) Dr. Muhammad Chatib Basri - Director, Lembaga Penyelidikan Ekonomi & Masyakarat Fakultas Ekonomi Univsitas, Indonesia Mr. Taco Bottema Director, CAPSA Ms. Binny Buchori Executive Director, International NGO Forum on Indonesian Development (INFID) Mr. Richard Carey Deputy Director, Dev. Co-operation Directorate OECD Mr. James Castle Castle Asia Dr. William L. Collier Senior Associate, PT. INTERSYS Kelola Majo Mr. Andrew Collins Deputy Rep., Australian Indonesia Partnershipfor Reconstruction& Dev Fiona Cornwell Manager, Dept. of Agriculture, Fisheries & Forestry, Australian Government Siti Ch. Fadrijah Deputy Governor, Bank of Indonesia Dra. Siti Chalimah Fajriah MM Deputy Governor, Bank of Indonesia Mr. Eugene K. Galbraith President Commissioner, Bank Central Asia Mr. Edwin Gerungan President Commisioner, Bank Mandiri Mr. Erry Riyana Hardjapamekas Deputy Chairman, Corruption Eradication Commission (KPK) Mr. Bambang Harymurti Chief Editor, Temp Int’l Media Mr. Dennis Heffernan Senior Partner, Van Zorge Heffernan &Associates Richard J. Hough Director of Programming, USAID Indonesia Richard J. Hughes Int’l. Relations Advisor, U. S. Department of Agriculture Foreign Agricultural Service (FAS) Sir Richard Jolly Honorary Professorial Fellow & Research Assoc. Institute of Development Studies at the University of Sussex Mr. Teunis Kamper Deputy Head of Mission, Ambassade van het Koninkrijk der Nederlanden Dr. David Kaimowitz Director General, Center for International Forestry Research (CIFOR) Roseley Khalid Director, Department of Agriculture Malaysia Dinur Krismasari Program Officer, Japan Int’l. CooperationAgency Mr. Jaco Mebius First Secretary, Water Resources Royal Netherlands Embassy, Indonesia 82 ANNEXB LISTOF PERSONS AND ORGANIZATIONS MET Trigeany Linggoatmodjo Program Specialist, USAID Indonesia Shantanu Mitra Head, Department for Int'l. Dev. DFlD Indonesia Ir. Yaya Mulyana Direktur PMOlNCU COREMAP Coral Ref. Rehabilitation & Management Program Mr. Jerry Ng Bank Danamon Dr. Durga P. Paudyal Director General, Centre on Integrated Rural Development for Asia and the Pacific (CIRDDAP) Mr. Heru Prasetyo Badan Pelaksana Rehabilitasi & Rekonstruksi (BRR) NAD-Nias Mr. Binny B. Buchori Perkumpulan PraKarsa Prof. Ir. Widi Agoes Pratikto Direktur Jenderal ,Department Kelautan Dan Perikanan Ms. Shanti Poesposoetjipto Member of Executive Boards Partnership for Governance Reform in Indonesia Liberty Marpaung & Sam Yohn Ex-Project Manager, BEP Dr. Mia Horn af Rantzien Ambassador Permanent Representative of Sweden to WTO Pijush K. Saha Liaison Officer, Asia-Pacific Association of Agricultural, Research Institutions (APAARI) Dr. Bungaran Saragih Professor Ekonomi Agribisnis lnstitus Pertanian Bogor Mr. Sugianto Project Manager, Capital Market Supervisory Agency, BAPEPAM Mr. Laksamana Sukardi Dr. Bambang Bintoro SlEGjito Team Leader, Private Provision of Infrastructure Technical Assistance (PPITA) Ms. Allison Sudradjat Miinister-Counsellor & Sr. Representative, Australian Government, AusAlD Prof. Peter Timmer Center for Global Development Prof. Sediono M. P. Tjondronegoro Chairperson Comite Sopcial Science Indonesian Academy of Sciences Theresa G. Tuano Director, Office of Water & Environment, USAID Indonesia Lr. H.M. ltoc Tochija Walikota, KOTA ClMAHl Drs. Freddy Herman Tulung Department of Information & Communication (INFOCOM) Mr. Sofyan Wanandi Director, GEMALA, PT David Williamson General Manager, Dept. of Agriculture, Fisheries & Forestry, Australian Gov. Dr. Bambang Widianto Deputi Bidang Kemiskinan, ketenagakerjaan dan Usaha Kecil Menengah, BAPPENAS Kurniawan Zulkarnain Team Leader, Konsultan Manajemen Pusat (KMP) DONOR AGENCIES Dr. Robin Bourgeois Sr. Agricultural Economist, CAPSA. Economic & Social Commission for Asia and the Pacific, United Nations Taco Botema Director, CAPSA. Economic & Social Commission for Asia and the Pacific. United Nations Ambassador Jean Breteche Head of Delegation, Brunei Darussalam and East Timor European Commission He Changchui Assistant Director-General and Regional Representative for Asia and the Pacific, Food and Agriculture Organizations of the United Nations Mr. Bruce Davis Director General, AUSAID Neela Gangadharan Chief, Agricultural Policy Support Service (TCAS) Food &Agriculture Organization of the UN N.M. HLA Chief, RAPX, Food and Agriculture, UN 83 ANNEXB LISTOF PERSONS AND ORGANIZATIONS MET Mr. Kato Keiichi Resident Representative, Japan International Mr. Koki Hirota Chief Representative, JBlC Erna M. Lokollo Programme Lead of Research & Development Sr. Agricultural Economist, Economic & Social Commission ,Asia & the Pacific Purushottam K. Mudbhary Sr. Policy Officer, Food and Agricultural Organizations of the United Nations Mr. Thomas L. Price Sr. Programme Officer, Food and Agriculture , Organization of UN Salil Shetty Director, Millennium Campaign, UM Derek Staples Sr. Fishery Officer, Food and Agriculture Organization of the UN Ms. Gwee-Yeap Son Acting, Resident Representative, UNDP Mr. Erna Witoelar MDG Ambassador, UNDP WORLDBANKAND IMF Mr. llham Abla Operations Officer, EASRD Mr. Surendra Agarwal Ex-Project Advisor Ms. Preeti Ahuja Country Program Coordinator Ms. Vivi Alatas Senior Economist, EASPR Mr. Guy Alaerts Lead Water Resources Specialist, EASRD Mr. Mark Baird Former Country Director Mr. Keith Clifford Bell Sr. Land Policy Specialist, EASRD Mr. John Clark Donor Coordination, Decentralizationand the Tsunami Relief Effort Mr. Dan Citrin IMF Former mission Leader Mr. Aniruddha Dasgupta Former Head of InfrastructureTeam Mr. Herwidayatmo Executive Director for Indonesia Mr. Oscar de Bruyn Kops Country Program Coordinator Ms. Sally Burmingham Jakarta Office Mr. Mike Edwards Financial Sector Mr. Mohammed Farhandi Energy Mr. Scott Guggenheim Lead Social Development Specialist, EASRD Mr. Hongjoo J. Hahm Lead InfrastructureSpecialoist, Jakarata Office Mr. Bert Hofrnan Former Macro-Economist Mr. Migara Jayawardena Jakarta Office Ms. Kundhavi Kadiresan Mgr, Portfolio & Operations Mr. Kai Kaiser Sr. Economist, PRMPS Mr. Jemal Kassurn Former Vice President, East Asia Mr. Homi Kharas Sector Director for PREM and FPSl Ms. Jessica Poppele Former Country Program Coordinator Mr. Eka Zamen Putra Energy Specialist, Jakarta Office Mr. Sarwar Lateef Former Deputy, Jakarta Office Mr. Josef Lloyd Leitrnan Manager, Multi-Donor Fund for Aceh and Nias Mr. Sandy Lieberman Social Sectors Mr. Terry Mathews Sr. Institutional Integrity Officer Mr. Stephen Mink Lead Economist 84 ANNEXB LISTOF PERSONS AND ORGANIZATIONS MET Mr. H. Rachmat Natadjumena Project Manager, Library Dev. Project Mr. David Nellor IMF former mission Leader Mr. Vikram Nehru Former Macro-economist,Jakarta Office Mr. Thomas Oentoro IFC Mr. Pawan Patil Senior Economist, EASRD Mr. Michael Richards Institutional Integrity Officer Mr. Rahul Raturi Sector Manager, EASRD Ms. Louise Scura Lead Natural Resources Economist Mr. Stephen 8. Schwartz Senior Resident Representative, IMF Ms. Shobha Shefly Sr. Economist, EASRD Mr. P.N. Srinivas Lead Economist EASFP Mr. Andrew Steer Country Director for Indonesia Mr. Jerry Strudwick Sr. Education Specialist Mr. Tony Toft Ex-Legal in Jakarta Office Mr. Dennis de Tray Former Country Director Mr. William (Bill) Wallace Lead Economist, PREM Mr. Tom Walton Environment Mr. Roland White Sr. Institutional Development Specialist 85 Annex C: Guide to IEG’s Country Assistance Evaluation Methodology 1. This methodological note describes the key elements o f IEGs country assistance evaluation (CAE) methodology.’ CAEs rate the outcomes of Bank assistance programs, not the Clients’ overall development progress 2. A Bank assistance program needs t o be assessed o n h o w w e l l it m e t its particular objectives, w h i c h are typically a sub-set of the Client‘s development objectives. I f a Bank assistance program is large in relation t o t h e Client’s total development effort, t h e program outcome will be similar to t h e Client’s overall development progress. However, most Bank assistance programs provide only a fraction of the total resources devoted to a Client’s de- velopment by donors, stakeholders, and the government itself. InCAEs, IEG rates o n l y the outcome of the Bank’s program, n o t the Client‘s overall development outcome, al- though the latter i s clearly relevant for judging the program’s outcome. 3. The experience gained i nCAEs confirms that Bank program outcomes sometimes diverge sigruficantly f r o m the Client’s overall development progress. CAEs have identi- fied Bank assistance programs which had: 0 satisfactory outcomes matched by good Client development; 0 unsatisfactory outcomes inClients which achieved good overall development re- sults, notwithstanding the weak Bank program; and, 0 satisfactory outcomes in Clients w h i c h did n o t achieve satisfactory overall results during the period of program implementation. Assessments of assistance program outcome and Bank performance are not the same 4. By the same token, an unsatisfactory Bank assistance program outcome does n o t always m e a n that Bank performance was also unsatisfactory, and vice-versa. This becomes clearer once w e consider that the Bank’s contribution t o the outcome of its assistance pro- gram is only part of t h e story. The assistance program’s outcome is determined by t h e joint impact of four agents: (a) the Client; (b) the Bank; (c) partners and other stakeholders; a n d (d) exogenous forces (e.g., events of nature, international economic shocks, etc.). Under the right circumstances, a negative contribution f r o m any one agent might overwhelm t h e positive contributions f r o m the other three, and lead t o an unsatisfactory outcome. 5. IEG measures Bank performance primarily o n the basis of contributory actions the Bank directly controlled. Judgments regarding Bank performance typically consider the relevance and implementation of the strategy, the design and supervision of the Bank’s lendinginterventions, the scope, quality and follow-up of diagnostic w o r k and other AAA 87 ANNEXC ASSISTANCE GUIDETO IEG’S COUNTRY METHODOLOGY EVALUATION activities, the consistency of t h e Bank’s lending with i t s non-lending w o r k and with i t s safeguard policies, and the Bank‘s partnership activities. Rating Assistance Program Outcome 6. In rating the outcome (expected development impact) of a n assistance program, IEG gauges the extent t o w h i c h major strategic objectives were relevant and achieved, w i t h o u t any shortcomings. In other words, did the Bank d o t h e right thing, a n d did it d o it right. Programs typically express their goals i n terms of higher-order objectives, such as poverty reduction. The country assistance strategy (CAS) m a y also establish intermediate goals, such as improved targeting of social services or promotion of integrated r u r a l devel- opment, and specify h o w they are expected t o contribute toward achieving the higher- order objective. IEGs task i s t h e n t o validate whether the intermediate objectives were the right ones and whether they produced satisfactory net benefits, and whether the results chain specified i nt h e CAS was valid. Where causal linkages were n o t fully specified in the CAS, it i s t h e evaluator’s task t o reconstruct t h i s causal chain f r o m the available evidence, and assess relevance, efficacy, and outcome with reference t o the intermediate a n d higher- order objectives. 7. For each of the m a i n objectives, the CAE evaluates the relevance of t h e objective, the relevance of the Bank’s strategy towards meeting t h e objective, including the balance between lending and non-lending instruments, the efficacy with w h i c h the strategy was implemented and t h e results achieved. This i s done i n t w o steps. The first i s a top-down review of whether the Bank’s program achieved a particular Bank objective or planned outcome and h a d a substantive impact o n the country’s development. The second step i s a bottom-up review of the Bank’s products and services (lending, analytical and advisory services, and aid coordination) used t o achieve the objective. Together these t w o steps test the consistency of findings f r o m the products and services and t h e development impact dimensions. Subsequently, a n assessment i s made of the relative contribution t o the re- sults achieved by the Bank, other donors, the Government and exogenous factors. 8. Evaluators also assess the degree of Client ownership of international development priorities, such as t h e M i l l e n n i u m Development Goals, and Bank corporate advocacy pri- orities, such as safeguards. Ideally, any differences o n dealing with these issues w o u l d b e identified and resolved by the CAS, enabling the evaluator t o focus o n whether the trade- offs adopted were appropriate. However, i n other instances, the strategy m a y be f o u n d t o have glossed over certain conflicts, or avoided addressing key Client development con- straints. I neither case, the consequences could include a diminution of program relevance, a loss of Client ownership, and/or unwelcome side-effects, such as safeguard violations, a l l of whch must be taken into account i njudging program outcome. 88 ANNEXC GUIDE EVALUATION TO IEG’S COUNTRY ASSISTANCE METHODOLOGY Ratings Scale 9. IEG u t i l i z e s s i x rating categories for outcome, rangingfrom highly satisfactory to highly unsatisfactory: Highly Satisfactory: The assistance program achieved a t least acceptable progress toward a l l major relevant objectives, had best practice development impact o n one o r more of them. N o major shortcomings were identified. Satisfacto y : The assistance program achieved acceptable progress toward a l l major relevant objectives. N o best practice achievements or major shortcomings were identified. Moderately Satisfactory: The assistance program achieved acceptable progress toward most of its major relevant objectives. N o major shortcomings were identified. Moderately Unsatisfacto y: The assistance program did n o t make acceptable pro- gress toward most o f its major relevant objectives, o r made acceptable progress o n a l l of them, but either (a) did n o t take into adequate account a k e y development constraint or (b) produced a major shortcoming, such as a safeguard violation. Unsatisfacto y : The assistance program did n o t make acceptable pro- gress toward most of its major relevant objectives, and either (a) did n o t take i n t o adequate account a key de- velopment constraint o r (b) produced a major short- coming, such as a safeguard violation. Highly Unsatisfactory: The assistance program did n o t make acceptable pro- gress toward any of its major relevant objectives and did n o t take into adequate account a k e y development constraint, while also producing at least one major shortcoming, such as a safeguard violation. 10. T h e institutional development impact (IDI)c a n b e r a t e d as: high, substantial, mod- est, or negligible. ID1measures t h e extent to w h i c h t h e program b o l s t e r e d t h e Client’s abil- ity to m a k e m o r e efficient, equitable and sustainable u s e of i t s huma n , financial, and natu- ral resources. Examples of areas i n c l u d e d injudging t h e institutional d e v e l o p m e n t i m p a c t of t h e program are: t h e soundness of economic management; t h e structure of t h e p u b l i c sector, and, in particular, t h e c i v i l service; t h e institutional soundness of t h e f i n a n c i a l sector; t h e soundness of legal, regulatory, and j u d i c i a l systems; t h e extent of monitoring and e v a l u a t i o n systems; t h e effectiveness of aid coordination; t h e degree of f i n a n c i a l accountability; t h e extent of budding NGO capacity; and, t h e l e v e l of social and e n v i r o n m e n t a l capital. 89 ANNEX C EVALUATION GUIDETO IEG’S COUNTRY ASSISTANCE METHODOLOGY 11. Sustainability can be rated as highly likely, likely, unlikely, highly unlikely, or, i f avail- able information i s insufficient, non-evaluable. Sustainability measures the resilience to r i s k o f the development benefits o f the country assistance p r o g r a m over time, taking into ac- count eight factors: technical resilience; financial resilience (including policies o n cost recovery); economic resilience; social support (including conditions subject to safeguard policies); environmental resilience; ownership by governments and other k e y stakeholders; institutional support (including a supportive legal/regulatory framework, and or- ganizational and management effectiveness); and, resilience to exogenous effects, such as international economic shocks or changes in the political and security environments. assistance program refers to products and services generated in support of the economic 1 In this note, development of a Client country over a specified period of time, and client refers to the country that receives the benefits of that program. 90 Annex D - Comments from the Government Re: Comments on Draft d I E C Report on the World Bnnk in Iodoonwh 1999-2006 91 ANNEXD COMMENTS FROM THE GOVERNMENT Thank you. Sincerely y a m , cc. 1. Director General o f h b t Managemunt, Ministry of Finance 2. Smr&ary C h n d , Ministry oflFiance 3. Ssmtary to the State Minister fir Development Planning 92 Annex D: Attachment 1: Response to the Government The World Bank 1818HStreetNW. (202)47blM10 IKTCRNATION41BANK FOR RECM(SfRUCTION AND DEVELOP!ENY Washington, D.C. 20033 Cebla Addross: I M B A M IKTrRNATMNAL DEVELOPMENTASSOCIATION US A C&e Address: NDEVAS June I,2007 Mr. Ir. Lukita Dinarsyah Tuwo, MA Deputy Minister for Development Funding National Development Planning Agency (Bappenas) Deer Mr. Tuwo: E& Indanesb: Country Assistance Evaluation Thank you for your comments on the draft o f the World 33ank’s Country Assistance Evaluation (CAE). In line with established practice, we plan to attach these comments to the document when i t i s submittedto the Committee of Development Effectiveness (CODE) o f the Worid 3 a n k ’ s Board of Executive Directors. As regards your first point, to the effect that the National Procurement Office has not y a been set up, we have corrected the draft CAE document to reflect &is information. On your second point that KDP i s not the only poverty alleviation project and that other projects such a s the Urban Poverty Projects and SPADA were not evaluated, this i s correct. Unfortunately given the sale o f the Indonesia program and the limited time available to the Bank team, we had to be selective and i t was decided to focus on KDP as the largest, though not the only program o f this kind. We note your concern about the cost o f facilitators and consultants for these projects and have revised the draft to reflect this concern. On the point that a greater share o f these poverty alleviation projects should be h d e d on IDA terms, this issue was not reviewed in the CAE and is perhaps more appropriately raised with Bank management. Your third point, that Indonesianeeds an expanded Bank presence in the forestry and cnvkonment sector, including expanded financing, relates to the program going fonvard. The CAE document notes some o f the difficulties that have been associated with expanded support for forestry and environment activities in the past. RCA 248423 WI W145 D1 FAX (202) 477-6391 -- ” 93 ANNEXD: ATTACHMENT 1 RESPONSE TO THE GOVERNMENT Mr. Ir. Lukita Dinarsyah Tuwo -2- June 1,2007 . Once again, thank you for these he@!% comments. We hope that the final version o f the CAE document will prove useful to you and your coileagues in discussing with the Bank how i t can continue to play an effective role in Indonesia and how to fine-tune the program to be even more responsive to the country's needs. Thank you and best regards. Senior Manager ' Country Evaluation and Regional Relations Independent Evaluation Group 94 Bibliography (Core Documents Only) IMF. 2006. Staff Report fw the 2006 Article IV Consultations. Washington, D.C.: IMF. < http:/ /www.imf.org/external/pubs/ft/scr/2006/cr06319.pdf > Olken, Benjamin A. 2005. Monitoring Corruption: Evidencefrom a Field Experiment i n Indonesia. Harvard University and NBER. < http://www.aeaweb.org/annual-mtgpapers/2007/ 0105-0800-1703.pdf > World Bank. 1997.Indonesia: Banking Reform Assistance. Project Appraisal Document. Report No. 17165. Washington, D.C. World Bank 1998. Indonesia: Policy Reform Support Loan I. Project Information Document. Report No. PID6344. Washington, D.C. World Bank. 1999a. Indonesia: Country Assistance Note. Report No. 19100. Washington, D.C. World Bank. 1999b. Indonesia: Country Assistance Strategy Progress Report. Report No. 18963. Washington, D.C. World Bank. 1999c. Indonesia: Policy Reform Support Loan 11. Project Information Document. Report No. PID7360. Washington, D.C. World Bank. 2000. Oil and Gas Sector Study. Report No. 20512. Washington, D.C. World Bank. 2001. Indonesia: Country Assistance Strategy. 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