Document of The World Bank FOR OFFICIAL USE ONLY Report No: 62151-ID PROJECT APPRAISAL DOCUMENT ON A PROPOSED LOAN IN THE AMOUNT OF US$531.19 MILLION TO THE REPUBLIC OF INDONESIA FOR THE FOURTH NATIONAL PROGRAM FOR COMMUNITY EMPOWERMENT IN RURAL AREAS June 14, 2011 Indonesia Sustainable Development Unit Sustainable Development Department East Asia and Pacific Region This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. CURRENCY EQUIVALENTS (Exchange Rate Effective June 7, 2011) Currency Unit = Indonesian Rupiah IDR 1,000 = US$0.12 US$1 = IDR 8,508 FISCAL YEAR January 1 – December 31 ABBREVIATIONS AND ACRONYMS AF Additional Financing AMDAL Environmental Impact Assessment APBD Local Government Budget APBN National Government Budget ASF Administrative Service Firms ASF-RMC Administrative Service Firms for Regional Management Consultants AusAID Australian Agency for International Development B3 Bahan Beracun dan Berbahaya (Hazardous Material Wastes) BAPPENAS Badan Perencanaan dan Pembangunan Nasional (National Development Planning Agency) Bawasda District level Auditor General Office BGAP Better Governance Action Plan BKAD Board for Inter-Village Coordination BKPG Bantuan Keuangan Pemakmue Gampong (Fin. Assistance for Village Prosperity Program) BP Bank Procedure BPKP Badan pengawas Keuangan dan Pembangunan (National Government Audit Agency) BP-UPK Community-Appointed Financial Management Oversight Body CDD Community Driven Development CHS Complaint Handling System CPS Country Partnership Strategy CSO Civil Society Organization DA Designated Account DG Director General EIRR Economic Internal Rate of Return ESW Economic and Sector Work F&C Fraud and Corruption FM Financial Management G20 Group of Twenty Finance Ministers and Central Bank Governors i GoI Government of Indonesia HH Households HR Human Resources IBRD International Bank for Reconstruction and Development ICB International Competitive Bidding IDA International Development Association IFR Interim Financial Report IGSES Implementation Guidelines for Social and Environmental Safeguards IT Information Technology J4P Justice for the Poor JMC Joint Management Committee JSDF Japan Social Development Fund KAT/IVPs Komunitas Adat Terpencil/ Isolated and Vulnerable communities KDP Kecamatan Development Project KPPN Kantor Pelayanan Perbendaharaan Negara (Treasury Office) M&E Monitoring and Evaluation MAD Inter-village Meeting MD Village Assemblies MDG Millennium Development Goal MDTF Multi Donor Trust Fund MENKO KESRA Coordinating Ministry for People's Welfare MHP Micro Hydro Power MIS Management Information System MOF Ministry of Finance MOHA Ministry of Home Affairs MPW Ministry of Public Works NCB National Competitive Bidding NGO Non Government Organization NMC National Management Consultant O&M Operations and Maintenance OP Operational Procedure ORAF Operational Risk Assessment Framework OSU World Bank Operational Services Unit PCN Project Concept Note PDO Project Development Objective PEKKA Perempuan Kepala Keluarga (Indonesia Women-Headed Household Program) PJOK Penanggung-Jawab Operasional Kegiatan (Local Project Manager at sub-district level) PMD Directorate General of Village Community Empowerment PMU Project Management Unit PNPM Program Nasional Pemberdayaan Masyarakat (National Program for Community Empowerment) PNPM Generasi Program Nasional Pemberdayaan Masyarakat (National Program for Community Empowerment) focusing on MDGs ii PNPM Green Program Nasional Pemberdayaan Masyarakat (National Program for Community Empowerment) focusing on environmental sustainability PNPM-MKP Program Nasional Pemberdayaan Masyarakat Mandiri Kelautan Perikanan (National Program for Community Empowerment of Self-Supporting Marine and Fisheries Communities) PNPM Peduli Program Nasional Pemberdayaan Masyarakat (National Program for Community Empowerment) targeting most marginalized groups PSF PNPM Support Facility POT Provincial Oversight Teams QCBS Quality and Cost Based Selection RESPEK Rencana Strategis Pembangunan Kampung (Strategic Plan for Village Development) RFP Request for Proposals RLF Revolving Loan Fund RMC Regional Management Consultant Rp Rupiah Satker Project Management Unit SIL Specific Investment Loan SOP Standard Operating Procedures SP2D Surat Perintah Pencairan Dana (Remittance Order) SPM Surat Perintah Membayar (Payment Order) SPP Surat Permintaan Pembayaran (Payment Request) SW Staff Weeks TA Technical Assistant Tim Pengendali National-level oversight body of PNPM TNP2K Tim Nasional Percepatan Penanggulangan Kemiskinan (National Team for the Acceleration of Poverty Reduction) TOR Terms of Reference TPK Tim Pengelola Kegiatan (Village Implementation Team) TPM Tim Penyelesaian Masalah (Problem Resolution Team) TSA Treasury Single Account TV Television UKL-UPL Environmental Management and Monitoring Efforts UPK Unit Pengelola Keuangan (Financial Management Unit) UPP Urban Poverty Project WB World Bank Regional Vice President: James W. Adams Country Director: Stefan G. Koeberle Sector Director: John A. Roome Sector Manager: Franz R. Drees-Gross Task Team Leader: Susanne Holste iii PROJECT APPRAISAL DOCUMENT (PAD) TABLE OF CONTENTS PAD DATA SHEET ..................................................................................................................................... v I. Strategic Context .................................................................................................................................. 1 A. Country Context ............................................................................................................................ 1 B. Sectoral and Institutional Context ................................................................................................. 1 C. Higher Level Objectives to which the Project Contributes ........................................................... 3 II. Project Development Objective ............................................................................................................ 4 A. PDO............................................................................................................................................... 4 1. Project Beneficiaries .............................................................................................................. 4 2. PDO Level Results Indicators ................................................................................................ 4 III. Project Description ............................................................................................................................... 4 A. Project components ....................................................................................................................... 4 B. Project Financing .......................................................................................................................... 5 1. Lending Instrument ................................................................................................................ 5 2. Project Cost and Financing .................................................................................................... 5 C. Lessons Learned and Reflected in the Project Design .................................................................. 6 IV. Implementation ..................................................................................................................................... 7 A. Institutional and Implementation Arrangements ........................................................................... 7 B. Results Monitoring and Evaluation............................................................................................... 8 C. Sustainability................................................................................................................................. 8 V. Key Risks and Mitigation Measures ..................................................................................................... 8 VI. Appraisal Summary .............................................................................................................................. 9 A. Economic and Financial Analysis ................................................................................................. 9 B. Technical ..................................................................................................................................... 10 C. Financial Management ................................................................................................................ 10 D. Procurement ................................................................................................................................ 11 E. Social (including safeguards) ...................................................................................................... 12 F. Environment (including safeguards) ........................................................................................... 13 TECHNICAL ANNEXES Annex 1: Results Framework and Monitoring ........................................................................................... 14 Annex 2: Detailed Project Description ...................................................................................................... 19 Annex 3: Implementation Arrangements ................................................................................................... 25 Annex 5: Implementation Support Plan ..................................................................................................... 50 Annex 6: Team Composition ...................................................................................................................... 54 iv PAD DATA SHEET Indonesia Fourth National Program for Community Empowerment in Rural Areas Project (PNPM-Rural IV) PROJECT APPRAISAL DOCUMENT EAP EASIS Date: June 14, 2011 Sector(s): Water supply (20%); Irrigation and drainage Country Director: Stefan G. Koeberle (20%); Roads and highways (20%); Primary education Sector Director: John A. Roome (20%); Sub-national government administration (20%) Sector Manager: Franz R. Drees-Gross Theme(s): Rural services and infrastructure (55%); Team Leader(s): Susanne Holste Participation and civic engagement (31%); Rural Project ID: P122810 markets (11%); Social analysis and monitoring (3%) Lending Instrument: SIL EA Category: B Partial Assessment Project Financing Data: [x] Loan [ ] Credit [ ] Grant [ ] Guarantee [ ] Other: Proposed terms: A variable spread Loan with a final maturity of twenty four and a half (24.5) years, including a grace period of nine (9) years. Source Total Amount (US$M) Total Project Cost: 1,283.6 1 Cofinancing: 26.05 Borrower: 726.37 Total Bank Financing: 531.19 IBRD 531.19 IDA New Recommitted Borrower: Republic of Indonesia Responsible Agency: Directorate General of Village Community Empowerment (PMD) Ministry of Home Affairs Contact Person: Mr. Ayip Muflich Telephone No.: 6221-79191684 Fax No.: 6221-79196118 Email: ppkpmd@yahoo.com Estimated Disbursements (Bank FY/US$ m) FY 2012 2013 2014 Annual 320.00 176.19 35.00 v Cumulative 320.00 496.19 531.19 Project Implementation Period: Start: June 14, 2011 End: February 28, 2014 Expected effectiveness date: August 1, 2011 Expected closing date: June 30, 2014 Does the project depart from the CAS in content or other significant ○ Yes  No respects? If yes, please explain: Does the project require any exceptions from Bank policies? ○ Yes  No Have these been approved/endorsed (as appropriate by Bank ○ Yes ○ No management? Is approval for any policy exception sought from the Board? ○ Yes ○ No If yes, please explain: Does the project meet the Regional criteria for readiness for  Yes ○ No implementation? If no, please explain: Project Development objective: For villagers in PNPM-Rural locations to benefit from improved socio-economic and local governance conditions. Project description [one-sentence summary of each component] Component 1: Kecamatan Grants: Supports the construction of the economic and social infrastructure needed and requested by the target communities. Component 2: Facilitation Support: Provides technical advisory services, training and other material support, through facilitators, to strengthen the capacity of district and sub-district government institutions and communities in development planning and investment. Component 3: Implementation Support and Technical Assistance: Provides technical advisory services, training and other material support for PNPM implementation at the national, provincial, district, and sub-district levels, including training of facilitators, monitoring and evaluation, and enhanced technical and financial audits. Component 4: Project Management Support: Provides technical advisory services and other material support to strengthen the executing agency, the Directorate General of Village Community Empowerment (PMD), and to support the management of the incremental activities generated by the project. vi Safeguard policies triggered? Environmental Assessment (OP/BP 4.01)  Yes ○ No Natural Habitats (OP/BP 4.04) ○ Yes  No Forests (OP/BP 4.36) ○ Yes  No Pest Management (OP 4.09) ○ Yes  No Physical Cultural Resources (OP/BP 4.11) ○ Yes  No Indigenous Peoples (OP/BP 4.10)  Yes ○ No Involuntary Resettlement (OP/BP 4.12) ○ Yes  No Safety of Dams (OP/BP 4.37) ○ Yes  No Projects on International Waterways (OP/BP 7.50) ○ Yes  No Projects in Disputed Areas (OP/BP 7.60) ○ Yes  No Conditions and Legal Covenants: Loan Description of Condition/Covenant Date Due Agreement Reference Schedule 2, The Borrower, through PMD, shall implement the Project in During Section I.B, accordance with updated Operations Manual and each implementation paragraph 1 Supplemental Manual, acceptable to the Borrower and the Bank. Schedule 2, The Borrower, through PMD, shall ensure that all annual audit By September Section I.B, reports referred to in Section II.B of this Schedule 2, including 30 in each year, paragraph 9(a) Kabupaten audit reports, shall be published on the PNPM beginning Website by no later than September 30 in each year of Project September 30, implementation for the prior year annual audit reports, 2011 commencing on September 30, 2011 for 2010 annual reports. Schedule 2, The Borrower shall ensure that, except as the Bank and the Not later than Section I.B, Borrower shall otherwise agree in writing, (a) BPKP shall carry 45 days after paragraph 10 out a continuous audit of the Project in partnership with Local the end of each Government inspectorates; and (b) on terms of reference agreed calendar among PMD, BPKP and the Bank, BPKP shall, after PMD has quarter compiled each interim financial report, review such interim financial report for each calendar quarter during Project implementation and shall provide to the Bank its clearance of such interim financial report and its report of each such review not later than forty-five (45) days after the end of each calendar quarter. Schedule 2, The Borrower, through PMD, shall ensure that: tracking of all By September Section I.B, active complaints cases is made available on the PNPM Website 30, 2011 paragraph by no later than September 30, 2011; and a service standard and a 11(b) and (c) mechanism for its implementation, acceptable to the Borrower and the Bank, is established by September 30, 2011. Schedule 2, The Borrower, through PMD, shall ensure that each Sub-Project During Section I.C is prepared, implemented and monitored in accordance with the implementation Implementation Guidelines for Social and Environmental Safeguards. vii Schedule 2, The Borrower shall ensure that the Project is carried out in During Section I.D accordance with the provisions of the Anti-Corruption Guidelines implementation and the Better Governance Action Plan, which reaffirms the Borrower‟s commitment to good governance in PNPM. Schedule 2, The Borrower shall prepare and furnish to the Bank, as part of the Not later than Section II.B, Project Report, interim unaudited financial reports for the Project 45 days after paragraph 2 covering the quarter, in form and substance satisfactory to the the end of each Bank. calendar quarter Schedule 2, The Borrower shall have its Financial Statements audited in Not later than Section II.B, accordance with the provisions of Section 5.09(b) of the General six months paragraph 3 Conditions. Each audit of the Financial Statements shall cover after the end of the period of one (1) fiscal year of the Borrower. The audited each fiscal Financial Statements for each such period shall be furnished to year. the Bank. Schedule 2, No withdrawal shall be made for payments made prior to the date Prior to Section IV.B of this Agreement, except that withdrawals up to an aggregate disbursement amount not to exceed one hundred million United States Dollars ($100,000,000) equivalent may be made for payments made prior to this date but on or after June 14, 2011, for Eligible Expenditures for Kecamatan Grants under Category 1. viii I. Strategic Context A. Country Context 1. Indonesia is the world‟s fourth most populous state, its largest Muslim-majority nation, a country rich in natural resources and one recently transformed from a centralized authoritarian state into a relatively stable, democratic and decentralized one. With its recently demonstrated economic resilience, it is also emerging as a significant player in the region and globally, now chairing the G20 working group on development. 2. Despite the most recent downturn, Indonesia‟s economy continued to strengthen throughout 2010, with growth ending the year above pre-crisis levels. Poverty rates fell from 17.4 percent of the population in 2004 to 13.3 percent in 2010. Economic growth is forecast at 6 percent in 2011 with scope to average 7 percent by mid-decade despite the weaker global outlook. The challenge, however, is to maintain this momentum into the medium term – as Indonesia‟s demographic shifts and the population ages – and to ensure that economic growth leads to improved living standards for all Indonesians. 3. It is striking that, despite the achievements of the past decade, 31 million Indonesians still live below the national poverty line of US$22 per month and half of all households live clustered around the poverty line, remaining vulnerable to falling below it. Of the total population living in poverty, 65 percent are in rural areas – where half of the population resides and where income and employment opportunities and delivery of basic services are seriously constrained, and are characterized by regional disparities. Non-income poverty – as reflected in health and education access and outcomes – remains a serious problem. 4. While recent history has shown a positive trend in economic and political achievements, this still remains an incomplete transition. The challenge for policy makers now is to both make the investment effort and tackle the policy and institutional impediments that limit the effectiveness of Indonesia‟s institutions in delivering services and accountability to the populace and also those that constrain the poorest from benefiting more fully from growth and poverty reduction efforts. B. Sectoral and Institutional Context 5. The National Program for Community Empowerment or Program Nasional Pemberdayaan Masyarakat (PNPM), which was launched in 2008, is the Government of Indonesia‟s (GoI) flagship poverty alleviation program. PNPM covers both rural and urban parts of Indonesia; each was built on a World Bank-financed community-driven development (CDD) project: the Kecamatan Development Project (KDP) series and the Urban Poverty Project (UPP) series. The rural area program or PNPM-Rural is now one of the world‟s largest community-based poverty reduction programs, implemented nationwide in over 60,000 villages. The program was launched by the President of Indonesia and has scaled up annually from 1,100 sub-districts (kecamatan) covered by the third KDP in 2006, to 4,371 sub-districts under PNPM-Rural in 2009. PNPM-Rural currently covers 4,791 sub-districts or about 76 percent of Indonesia‟s sub-districts1. PNPM uses a CDD approach, providing direct block grant financing to local communities at the sub-district level to finance an open menu of local development priorities – typically 1 PNPM includes five core programs which collectively cover every sub-district in the country. PNPM-Rural is the largest of the programs. The four other programs consist of two Bank financed projects: PNPM-Urban and Support for Poor and Disadvantaged Areas; and the respective Asian Development Bank and Japan International Cooperation Agency financed projects: PNPM Rural Infrastructure Support Program and PNPM Infrastructure for Socio-Economic Development. 1 small scale social/economic infrastructure, education and health activities, and micro-loans to women‟s savings groups – implemented with mechanisms to ensure broad-based participation and transparency. 6. In 1998, the GoI launched KDP; a decade later it was so convinced by its success that it rebranded the program as the National Rural Community Empowerment Program and committed to its national roll- out. Today the central government finances more than half of the program cost from its own resources and local governments support the project with a minimum of 20 percent of the block grant costs. The strengths of the program are: (a) cost effectiveness – village tertiary infrastructure is being built at significantly lower cost (a third to half as expensive as under conventional contracting) and returns have also been very high, with EIRRs of 53 percent on average; (b) welfare effects – evaluations have shown that welfare rates have improved about 5% faster in project locations compared to locations not covered by the program; and the vulnerable are less likely to slip into poverty; and (c) inclusiveness - the planning and management processes reach out to all groups in the village and women play a particularly important part in PNPM Rural. Women also have special access to funding through a window that allows up to 25 percent of all block grant funds to be used as capital for women's savings and loans groups. What sets the program apart is that it has increased the population's trust in government which has consistently delivered on its promise of resource transfer. Villagers are able to engage in multi-year prioritization and management of resources, albeit on a competitive basis. Interestingly, PNPM has also spurred the use of social media and there is active use of Twitter and Facebook to exchange information amongst groups. With the proposed project, total IBRD/IDA financing for these operations would increase to a cumulative total of approximately US$2.8 billion (Table 1). Table 1: KDP/PNPM-Rural Program - Approved & Proposed World Bank Financing No. of sub- IBRD/IDA Project Phase Period districts (US$ mil) Closing Date KDP 1 1998-2002 986 225.0 31 Dec 2002 KDP Supplemental 2000-2002 986 48.2 31 Dec 2002 KDP 2 2000-2006 1,316 335.5 31 Dec 2007 KDP 3A 2003-2009 760 91.0 31 Dec 2009 KDP 3B + AF 2005-2009 1,800 283.0 31 Dec 2009 PNPM-Rural 2008 2,600 231.2 30 Jun 2011 PNPM-Rural II AF 2009 4,258 300.0 31 Dec 2011 PNPM-Rural III 2010-2012 4,791 785.0 31 Dec 2012 PNPM-Rural IV 2011-2013 4,978 531.2 30 Jun 2014 TOTAL 2,830.1 7. Coinciding with the creation of PNPM, GoI established the PNPM Support Facility (PSF) to harmonize and coordinate development partner efforts, including the planning and targeting of financial assistance, as well as the monitoring and evaluation of PNPM operations and impact. PSF receives overall policy guidance and oversight from the Joint Management Committee (JMC), which comprises GoI non- executing agencies (National Development Planning Agency - BAPPENAS, the Ministry of Finance, and the Coordinating Ministry for People‟s Welfare – Menko Kesra) and donor partners. The JMC Chairman is the Deputy for Poverty, Labor and Small & Medium Enterprises in BAPPENAS. The Bank‟s Country Director serves as co-chair of the JMC and the Bank administers the PSF Trust Fund into which grant funding is channeled. Donors are Australia, Denmark, the European Union, the Netherlands, the United Kingdom and the United States. To date, development partners have pledged in excess of US$188 million for the PSF Trust Fund. GoI and the Bank are also engaged in discussions with other prospective development partners, such as Canada and the Millennium Challenge Corporation. 2 8. Embedded within Indonesia's Medium Term Expenditure Plan, GoI's poverty alleviation strategy comprises three clusters: (a) Cluster 1 focuses on social protection through targeted poverty and social protection programs at the household level; (b) Cluster 2, of which PNPM forms the base, promotes community level development and empowerment; and (c) Cluster 3 stimulates micro-level growth through programs that target micro-finance and support to small and medium enterprises. 9. PNPM-Rural, under Cluster 2, is seen as the operational umbrella to the large number of poverty programs using a CDD approach. Its design and objectives are emblematic of the new relationship between the state and villages that was fostered by the 1998 political transition and subsequent decentralization reforms. PNPM-Rural‟s design is consistent with the prevailing „new‟ paradigm of local knowledge and autonomy: responsive local-level institutions that have altered the approach to rural development in Indonesia and, in sharp contrast to the New Order period of top-down planning and control, are geared towards allowing villagers to exercise their rights over matters of public interest and to be at the forefront of the local development process. The program‟s participatory and transparent framework has helped improve local governance by directly involving communities in decision-making and has been successful in increasing the poor‟s (including women‟s) access to tertiary socio-economic infrastructure and other basic services. About 60 percent of funded village proposals arise from women‟s special meetings and a majority of the beneficiaries are below or at the poverty line. 10. A Vice Presidential instruction has confirmed that PNPM will continue at full coverage until the end of 2014. Consultations are underway to better articulate key policy questions for the future, including those of integration of community-based programs within Cluster 2 and also to strengthen the formal and informal arrangements between PNPM and sector service delivery at the local level. This policy dialogue will continue with Government and will be enriched under the proposed fourth phase of PNPM by special programs/pilots (e.g., PNPM Generasi, which focuses on health and education, and Green PNPM, which focuses on natural resource management and village-level renewable energy) and associated analytical work. Other strategic policy questions which the Bank task team will continue to engage on include: (a) adjustment of the core PNPM model to different kinds of poverty across Indonesia‟s diverse regions (e.g., targeting the poorest sub-districts or trying to reach the poorest in richer areas); (b) bringing the social capital created through PNPM to bear to strengthen the downward accountability of local government; and (c) utility/scope of PNPM as an instrument to address the needs of the most marginalized and vulnerable peoples. 11. The most pressing issues in the preparation of PNPM-Rural IV were those of overall implementation and management quality to ensure that arrangements are robust enough to manage a program of this scale and complexity. In addition to providing needed financing, the KDP and PNPM- Rural operations have provided critical implementation support and technical assistance instrumental in the national scale up of the program, allowing it to reach millions of additional Indonesians. PNPM- Rural III began actively addressing the systems and managerial stresses caused by the rapid scale-up of the program. PNPM-Rural IV, in addition to providing financial support, will build on the achievements and lessons learned under PNPM-Rural III to strengthen the management and implementation systems. C. Higher Level Objectives to which the Project Contributes 12. The project, which covers about 76 percent of Indonesia‟s sub-districts, directly supports GoI‟s efforts to accelerate poverty alleviation and extend employment opportunities for the poor. The project is consistent with the FY2009-12 Country Partnership Strategy (CPS) for Indonesia, Investing in Indonesia’s Institutions for Inclusive and Sustainable Development, which emphasizes engagement with government counterparts (including at the sub-national level) and other stakeholders to address critical governance and institutional challenges. In addition to its cross-cutting engagements to strengthen central and sub-national government institutions and systems, the CPS identifies five thematic areas, which form 3 the core of the Bank‟s engagement: (a) Private Sector Development; (b) Infrastructure; (c) Community Development and Social Protection; (d) Education; and (e) Environmental Sustainability and Disaster Mitigation. The project‟s CDD approach aims to improve existing government programs, strengthen institutions and improve the links between different levels of government. The proposed project provides continued support to PNPM, the Government‟s flagship poverty alleviation program, to whose development the Bank has made a significant contribution. II. Project Development Objective A. PDO 13. As under the ongoing PNPM-Rural III operation, the PDO would remain for villagers in PNPM- Rural locations to benefit from improved socio-economic and local governance conditions. 1. Project Beneficiaries 14. PNPM-Rural benefits an estimated 40 million villagers in PNPM-Rural project areas by increasing employment opportunities and access to more and better quality basic services. About half of the beneficiaries are women. 2. PDO Level Results Indicators 15. Key performance indicators for the PDO include: (a) Improved household HH expenditure rates and improved access to economic and social services in a minimum of 4,978 sub-districts in 2011 (impacts taken from representative sample). (b) Economic Internal Rate of Returns (EIRRs) greater than 30 percent for main rural infrastructure categories. (c) Greater than 80 percent satisfaction levels from beneficiaries regarding improved services and local level governance (impacts taken from representative sample). III. Project Description A. Project components 16. The project will have four components with a total investment of US$1.3 billion. The four components will be the same as the ongoing PNPM-Rural III project. Each component is described below. For further details see Annex 2. 17. Component 1: Kecamatan Grants (US$1,097.58 million). The objective of this component, which accounts for the bulk of the project, is to support the construction of the economic and social infrastructure needed and requested by the target communities, and includes for Component 1(a): (i) planning for community development, including the preparation of sub-project proposals; (ii) training and capacity building for communities, including in development planning and investment; (iii) investing in social and economic infrastructure identified through community development planning; (iv) investing in activities identified through community development planning using revolving loan funds (RLFs) for women‟s savings and loan groups; and (v) preparing for and responding to disaster, emergency or 4 catastrophic events, as needed, through subprojects. Component 1(b) consists of providing kecamatan grants to pilot and special programs. 18. Two pilots (PNPM Generasi and Green PNPM), which are co-financed by PSF grants under PNPM-Rural III, are likely to receive continued grant support in parallel with the loan-financed PNPM Rural IV operation. 19. Two special programs (Aceh: PNPM-BKPG and Papua and West Papua: PNPM-Respek), for which community block grants are provided from the respective provinces‟ allocations, and which are part of PNPM Rural III, will continue under PNPM Rural IV. 20. Component 2: Facilitation Support (US$110.75 million). This component will provide technical advisory services, training and other material support, through facilitators, to strengthen the capacity of district and sub-district government institutions and communities in development planning and investment. 21. Component 3: Implementation Support and Technical Assistance (US$36.77 million). This component will provide technical advisory services, training and other material support for PNPM implementation at the national, provincial, district, and sub-district levels, including training of facilitators, monitoring and evaluation, and enhanced technical and financial audits. 22. Component 4: Project Management Support (US$38.51 million). This component will provide technical advisory services and other material support to strengthen the executing agency, the Directorate General of Village Community Empowerment (PMD), and to support the management of the incremental activities generated by the project. 23. Crisis response. PNPM‟s platform with its established structures (e.g., disbursement channels through UPKs) and operating systems (e.g., facilitators on the ground with “local” knowledge) and nationwide presence can support quick and effective response to emergency situations. In response to three natural disasters that struck Indonesia towards the end of 2010, GoI requested emergency assistance to use the PNPM platform and aligned CDD mechanisms as a key pillar of its recovery strategy. The Bank and other PSF members established a PSF Disaster Management Support Fund to channel financial resources and utilize the program‟s systems, including its facilitators, to help disaster affected communities recover and restore livelihoods. B. Project Financing 1. Lending Instrument 24. As with previous KDP/PNPM-Rural projects, the present project will be financed by a Specific Investment Loan (SIL), which allows GoI to determine program financing needs and the amount of foreign borrowing on an annual basis. The Borrower has selected an IBRD Loan in US$ with a Variable Spread, final maturity of 24.5 years including a grace period of 9 years and annuity principal repayment, at a rate equal to LIBOR for the Loan Currency plus the Variable Spread. 2. Project Cost and Financing 25. The total project financing requirements are estimated to be US$1.3 billion. Table 2 shows the project cost and financing. 5 Table 2: Project Costs, US$ millions Component IBRD* APBN APBD Community Donor** Total 1. Kecamatan Grants 400.00 461.44 178.04 35.34 22.76 1097.58 2. Facilitation Support 99.11 10.66 -- -- 0.98 110.75 3. Implementation Support 30.98 3.57 -- -- 2.22 36.77 and Technical Assistance 4. Project Management 1.10 19.65 17.67 -- 0.09 38.51 Support Total 531.19 495.32 195.71 35.34 26.05 1,283.61 *Withdraws up to an aggregate amount not to exceed US$100 million equivalent may be made prior t the date of the loan agreement, but on or after June 14, 2011 for eligible expenditures for kecamatan grants. **Donor resources have been received under existing trust fund arrangements. C. Lessons Learned and Reflected in the Project Design 26. PNPM-Rural scaled up very rapidly from 2,600 sub-districts in 2008, to 4,371 in 2009 and over 4,790 in 2010. In 2010 the program was active in 57,000 villages and was financing more than 75,000 subprojects. While the program design was able to support such an expansion, the management and governance arrangements became strained. The following lessons and action areas were identified: (a) The institutional and managerial capacities of the executing agency need to grow with the program. PNPM accounts for about 80 percent of MoHA‟s budget but there are no designated staff who work exclusively on the program. Reporting lines between PMD, the National Management Consultant firm (NMC) and Regional Management Consultant firms (RMCs) had become unclear, resulting in confusion for facilitators and duplication of assignments. As part of project preparation, the standard operating procedures (SOPs) on the roles and responsibilities of PMD, NMC and RMCs have been revised and disseminated. Recruitment is under way for dedicated technical assistance to support key functions, such as MIS, HR, and FM. A functional review will be carried out that will further clarify staffing and training needs. (b) The program needs a robust and integrated Management Information System (MIS). Timely and reliable data is essential for program managers to monitor implementation and make informed decisions. The MIS has become fragmented and suffers from inefficiencies and inaccuracies in data gathering, transmission and reporting. A comprehensive systems analysis will be carried out for a complete redesign of the MIS platform. The new system will integrate internal controls and management data requirements and will be adapted to the decentralized requirements of data entry and retrieval. The full development and launch of the new system may occur beyond the project period. There will also be new staff recruitment and training. (c) Governance enhancements. PNPM has built-in systems to promote downward accountability and enhance citizens‟ ability to engage as well as to report on grievances and fraud. The Complaints Handling System (CHS) will be further strengthened to ensure better capture and follow through, including the escalation of cases which could not or were not resolved at the local levels. Annual audits will be carried out jointly by the National Government Audit Agency (BPKP) and district government audit boards (Bawasda) in at approximately 20 percent of sub-districts to help reduce corruption and increase transparency. Results and recommendations of the audits will be posted on the project website and socialized in the communities, sub-districts, and districts. PMD with support from NMC will aim to carry out financial management reviews in all PNPM-Rural sub-districts. 6 (d) Qualified facilitators are the backbone of PNPM. Strong facilitation is one of the important reasons for PNPM‟s success: facilitators who are familiar with the social dynamics of the villages are typically recruited from the districts or sub-districts in which they work and, are provided with training and mentoring.. Pre-service and refresher training for facilitators will be improved, and facilitators in remote areas, such as Papua will be provided additional benefits to make such postings more attractive. (e) Implementation assistance from the Bank. Just as the government‟s team was being overstretched by the increased scale and complexity of the program, so was the Bank‟s. The team was increasingly taxed to ensure timely follow up of issues that required management decision and to provide adequate field-level supervision. Bank‟s implementation support has been strengthened to meet the requirements of a scaled-up PNPM. A “portfolio approach” is being adopted to supervision and monitoring, and the various programs and pilots are supervised in an integrated fashion. IV. Implementation A. Institutional and Implementation Arrangements 27. PNPM-Rural IV institutional arrangements build on successful elements of the existing structure for the implementation of PNPM-Rural III. PNPM-Rural implementation management occurs across five levels of government: national, provincial, district, sub-district, and village (though sub-districts are not technically a formal level of government, but are administrative divisions of districts). Each of these levels has: (a) government policy and coordinating bodies with larger mandates, into which PNPM fits; (b) administrative bodies (satkers or project management units at the national, provincial and district levels) providing program oversight and coordination; and (c) bodies or teams for implementation and oversight. 28. At the national level, PNPM has a coordinating body chaired by Menko Kesra. It includes Bappenas, the Ministry of Finance, and the main line agencies that execute the component programs as well as related sector ministries. PMD is responsible for program execution. The NMC firm oversees implementation of technical assistance. 29. At the provincial level, PMUs within the local government manage the administrative arrangements and budget for facilitators at the district and sub-district levels who are responsible for technical implementation of the project. RMCs hire Provincial Oversight Teams (POTs) to provide technical support to district and sub-district facilitators. PNPM-Rural IV will employ eight RMCs (compared to six under PNPM Rural III) to manage technical support facilitators working on PNPM-Rural and its pilot and government add-on projects. 30. At the district level, PMUs provide administrative support and oversight to the program and help to manage block grant disbursements. Each district has a team of at least three senior facilitators: an engineer, a social organizer, and a financial specialist with one or more assistants. The district facilitators provide technical oversight to sub-district facilitators. The PMUs control the funds, based on established procedures. They facilitate disbursement and oversee the use of these funds, both from the national budget as well as from local government budget. They do not handle any cash though. 31. At the sub-district level, the program employs a minimum of two facilitators, who directly support communities with project implementation. The facilitators work closely with sub-district officials, 7 including the sub-district head and the other local government official appointed as the operational head of PNPM-Rural (PjOK). 32. At the village level, communities prepare and prioritize projects through village assemblies (MDs). Village cadres or facilitators, one man and one woman, assist with the planning process and support the village implementation teams who manage sub-project implementation. B. Results Monitoring and Evaluation 33. PNPM-Rural has a comprehensive monitoring and evaluation (M&E) framework to provide stakeholders with empirical data regarding the results and impact of the program, and is complemented by a portion of the PSF trust fund dedicated for special studies and evaluation. Monitoring activities are designed to ensure the government has a current understanding of project progress and efficiency, and improve the quality of implementation and planning. The current framework includes both project- collected data as well as community and external-stakeholder based systems. 34. Monitoring activities include: community participatory monitoring; government supervision and monitoring; consultants' internal monitoring; independent external monitoring by provincial NGOs; complaints handling and grievance redress mechanisms; financial supervision and audits, both internal and external; and, World Bank supervision missions. 35. The program also provides fertile ground for evaluation work on the core government objectives of poverty, employment, services, community empowerment and quality of governance, as well as opportunities for experimenting with various intervention strategies. Studies typically employ a mixed methods approach utilizing quantitative and qualitative components. Evaluation activities include: impact evaluations for PNPM-Rural and its pilots, including the Revolving Loan Fund Pilot, PNPM-Generasi and Green PNPM; and, thematic evaluations and studies including: technical quality and costs of services; economic analyses; sustainability; micro-finance reviews; environment; conflict prevention; gender; social accountability and local governance. C. Sustainability 36. The sustainability of PNPM-Rural/KDP has already been broadly demonstrated: (a) strong community participation, local ownership, and investments in demand-driven subprojects; (b) institutionalization of the process through local government participation, (e.g., their provision of 20 percent of the block grant investment funds and an additional 6 percent for administration and oversight), enabling rapid scale-up; and (c) high quality and more economical village-level investments using a community-driven approach. PNPM programs have built upon the successes and have expanded the geographic scope of previous operations. The scale-up has taken place in the context of institutional change, major economic crises, and during the implementation of one of the world's largest decentralization programs. The success of these programs in spite of socio-political challenges, highlights their potential for long-term sustainability and their flexibility to adapt to a changing environment. V. Key Risks and Mitigation Measures 37. The proposed project builds on the ongoing program but with a strengthened management and governance framework. Key potential risks are summarized in the Operational Risk Assessment Framework (see Annex IV). The overall risks are rated Medium-I (low likelihood-high impact). The key identified risks include: (a) institutional and managerial capacity of PMD; (b) formal and informal fiduciary and governance controls; and (c) availability of qualified facilitators. 8 Table 3. Key Risks and Mitigation Measures Risk Mitigation Measures The current PMD team may  SOPs on roles and responsibilities of PMD, NMC and RMCs have lack the capacity to manage revised and disseminated and are being implemented. the expanded program  Functional review to refine job descriptions, evaluate the number of effectively positions needed, and ensure positions are adequately staffed.  Technical assistance to strengthen management. ToRs have been agreed and positions will be advertised by the end of June 2011. Fiduciary and monitoring  Annual joint BPKP and district inspectors will carry out reviews in systems have come under strain 20% of sub-districts and results will be posted on the web and because of rapid expansion to announced in districts. Audits for FY 2010 funds have been national scale completed and results will be available by end June.  Internal reviews will be performed in sub-districts. Nearly 3/4 of all districts inspected recently.  The CHS has been redesigned with web-based case tracking; the SMS gateway for filing complaints is active; escalation policy is in place for resolution of cases of alleged fraud and corruption.  A quarterly report will be prepared on the monitoring of controls, that will be reviewed by the Bank.  BPKP to review the interim financial report for each calendar quarter during project implementation and provide to the Bank its report no more than 45 days after the end of each calendar quarter. Delivery quality could be  Periodic joint reviews by the government and the task team to affected by program size: monitor implementation and make recommendations for weakening of key design improvements. features, training, M&E  PNPM salary scales adjusted to attract and retain good facilitators; recruitment of women will be promoted; extra efforts put in place for facilitators for remote areas, including recruiting and training reserve facilitators who will apprentice in remote areas as "assistants."  21 days of pre-service training to new facilitators and a one-week refresher training course twice a year for all existing facilitators.  The MIS will be audited, redesigned and re-launched and will integrate agreed upon key performance indicators and internal controls. NSP Afghanistan will provide support. A first mission took place in May 2011, and a second one is planned for July 2011. VI. Appraisal Summary A. Economic and Financial Analysis 38. The project will maintain the same technical standards and basic design as under the earlier KDP and PNPM-Rural projects. An economic analysis of 41 KDP subprojects (roads, bridges, water supply and irrigation) carried out during the first KDP found a weighted average economic internal rate of return (EIRR) of 60 percent. A 2010 impact evaluation confirmed that village infrastructure built through CDD costs significantly less - on average 56 percent less - than equivalent works built through the Ministry of Public Works or local government contracts. A cost-comparison based on the above-mentioned sample using local government and private engineers to re-cost CDD-built infrastructure showed significant savings due to the elimination of some of the following costs: middlemen and outside contractors' 9 overhead costs; double and/or triple handling of materials; frequent on-site design modifications; and extra charges for supervising projects in remote areas. 39. Poverty Impacts. An impact evaluation for the 2007-2009 period demonstrated significant poverty impacts from the program. Household consumption in PNPM-Rural sub-districts increased by 5-7 percent more than for households in control areas. For (a) poor households and (b) households in poor and remote sub-districts, the impact was greater, at 7-9 percent and 15-19 percent, respectively. In addition, PNPM households were 2-4 percent more likely to escape poverty over the period than households in control areas. These results are consistent with findings from the previous impact evaluation of KDP2. B. Technical 40. PNPM-Rural IV, as its predecessors, will finance simple, tertiary village infrastructure, activities related to social and health services, revolving funds for viable women's savings and loans groups, and crisis response activities. In 2010, as in previous years, about 81 percent of block grants were used for access infrastructure, water and sanitation, irrigation and drainage, and school renovations. Technical designs have been improved over the years and pictorial guidance books help field engineers and villagers to ensure appropriate construction. 41. In 2011, more than 5,000 field engineers will be contracted and mobilized, and will be supervised by about 390 senior engineers assigned to each participating district. All new facilitators will be given pre-service training, with separate sessions on civil engineering, safeguards, and other matters, e.g., recommended building practices appropriate for village structures in earthquake prone areas. 42. Experienced PNPM community facilitators receive "refresher training" each year and meet at least once every month to share experiences and discuss solutions to problems faced. During each annual project cycle, these facilitators train village technical cadres, village implementation teams, Operations and Maintenance (O&M) teams, and teams established to carry out feasibility reviews of all proposals coming from village assemblies. Supervisory engineers at the district level check all designs and budget, and certify works constructed, paying special attention to those that are more difficult or larger. When warranted, special arrangements are made for technical assistance and oversight, as in the case of micro- hydro power investments. C. Financial Management 43. A financial management assessment was carried out and took into account lessons learned from the current project. PNPM-Rural IV will further augment the FM controls designed under earlier PNPM projects, while following broadly the same control framework, which has served the project well in its many years of implementation. The major FM risks for the project are: (a) the current PMD team may lack the capacity to manage the expanded program effectively to manage PNPM successfully; (b) uneven quality in facilitator support to communities in maintaining adequate FM arrangements; and (c) controls at various levels may not be implemented fully to prevent misuse of project funds. These risks are being mitigated through existing and strengthened controls as described below. 44. Intensive training arrangements have been put in place to ensure that field consultants and facilitators are adequately trained to enable community groups to maintain adequate books of account. Payments at all levels are made using Government‟s single treasury account. Reviews of consultants payments have been conducted and indicate that the system is working well and there are no significant delays in receipt of funds by intended recipients. PMU is supported by additional consultants who carry out independent review of consultant invoices. Additional people may be hired, if necessary to strengthen 10 controls over these payments. Random third party confirmations are being introduced as a part of the review procedure to strengthen controls over consultants' and facilitators' fees and reimbursables. The National Satker, with support from the NMC, will regularly review the functioning of payment controls. A quarterly report will be prepared by the National Satker on the monitoring of controls that will be reviewed by the Bank. The project auditors, BPKP, will carry out a continuous audit of the project, in partnership with local government inspectorates, increasing audit coverage to around 20 percent. BPKP shall review the Interim Financial Report (IFR) for each calendar quarter during project implementation and shall provide its report of each such review to the Bank not later than forty-five (45) days after the end of each calendar quarter. D. Procurement 45. This project will utilize the same procurement and implementation modality for the existing PNPM- Rural III program, with improvements to address some of the challenges faced so far. The main improvements from a procurement perspective are: (a) updated scope of work, selection process, and contract forms for the RMCs from consulting to non-consulting services; (b) updated community driven procurement instructions in the Operations Manual to reflect lessons learned; and (c) increased spot checks by ex-post review in addition to the reviews to be carried by BPKP. 46. Procurement under the project will include: (a) selection of one consultant firm, the NMC, to support the overall management of the program; and (b) procurement of eight RMC firms as Administrative Service Firms (ASF-RMC) to support the recruitment of provincial coordinators and specialists, pay their salaries, provide support (e.g., manage training and workshops), and to cover the operational cost for the RMCs. One of the ASF-RMC will be dedicated to supporting PNPM Generasi and PNPM-RESPEK. Regional Procurement Consultants under the previous projects were selected under the Guidelines for Selection of Consultants which usually takes considerable time. However, there are no real intellectual services provided by these firms as they were mainly providing teams of staff and administrative support, operational expenses, training, etc. PMD and the Bank team agreed that procuring the required services as non-consulting services under the Bank‟s Guidelines for procurement of Goods, Works, and Non-Consulting Services will be more suitable to the project; as the required services of these firms and the qualifications of the teams are straightforward and pre-determined by the implementing agency. This will ensure a faster and more straightforward procurement process. Procurement will also include: (c) recruitment of around 13,400 facilitators; (d) CDD procurement by the communities to implement the project; and (e) packages for printing (e.g., training materials, event publications) and recruiting event organizers. PMD has sufficient capacity to manage the procurement under the project. 47. Facilitators under (c) above will be hired by the Provincial Satkers, based on continuation of contracts for existing and performing facilitators ( i.e single sourcing) or competitive selection process carried out in batches at the provincial level, with final decisions by the National Satker. Procurement under community grants will be carried out by communities following the procedures as described in the Operations Manual for the existing PNPM-Rural project agreed by the Bank, with minor revisions and improvements, as needed, from time to time. Based on lessons learned in PNPM-Rural, special attention is needed to ensure proper training of the facilitators in administrative and technical matters, especially FM and procurement, prior to their deployment to the field. Improvement of the Operations Manual or training materials will also include simple, relevant and illustrative case studies to enhance understanding at the community level. 48. Ex-post procurement reviews will rely on BPKP audits for community grants and individual facilitator contracts. Based upon the procurement assessment, the overall residual project risk for procurement is moderate. 11 E. Social (including safeguards) The program will continue to support broad-based social development. Several social issues are discussed elsewhere in this document. This section will concentrate on: (a) demand-side governance; (b) gender; and (c) indigenous peoples. 49. Demand-side governance. The program will continue to strengthen the capacity of poor villagers, including women, to demand better services, and support institutional arrangements that help them channel their demands to local governments and hold them accountable. This will be accomplished by: improving the internal governance of communities and sub-districts by promoting broad-based participation and increased transparency, downward accountability, and strengthened governance institutions such as the village and sub-district inter-village bodies; strengthening government linkages through reforms to the bottom-up planning and budgeting process to ensure citizen participation by including district-level oversight of the subprojects; and, stimulating community demand for better district-level service delivery (e.g., through PNPM Generasi). 50. Gender. PNPM‟s nationwide reach and CDD approach makes it a useful instrument for government to remove some of the barriers to gender equality and in so doing improve the effectiveness of poverty reduction. Like its predecessors, PNPM-Rural IV will continue to: (a) respond to women‟s basic needs, by funding, for example, water supply, health and education facilities, which help to remove practical barriers of time and capacity that constrain women‟s involvement in development; (b) increase the potential for women‟s economic activity by investing in local infrastructure such as roads and bridges which help to remove some of the obstacles to women‟s access to markets and resources; (c) work with GoI to make the revolving loan fund mechanism, which helps women engage in income-generating activities and expand their businesses, more sustainable; and (d) ensure women are active participants in planning and decision-making, through the emphasis on broad-based participation that helps to break down some of the barriers to women‟s participation, to ensure that their voice is heard so that decisions are more responsive to their concerns. 51. In addition to the gender initiatives carried out in the loan funded KDP/PNPM-Rural projects, the program is informed by and benefits from Japan Social Development Fund (JSDF) financed activities and activities, evaluations and studies supported by the PSF, including the recently launched GoI PNPM Peduli project, which aims to fill gaps in government poverty reduction programs to reach the most marginalized, including women, by capitalizing on the comparative advantage of local CSOs. A very important JSDF-funded initiative, PEKKA, empowers widows and poor women and equips them with better knowledge of their rights, helps them to be recognized as heads of households, and supports micro- finance initiatives. 52. Indigenous peoples. PNPM-Rural demonstrates best-practice principles for indigenous people‟s involvement in program implementation, including: the recruitment and tailored training for facilitators from the same ethnic groups; local language translation (as needed); independent reviews by socio- cultural specialists; and modifications to the planning process to reflect the aim of free prior and informed consultation leading to broad community support. In addition to being beneficiaries of the program, indigenous people, like in other communities, are part of the decision making process included in the organizational structure. For example, they are part or account for the whole of TPKs and UPKs. The program will continue to provide training, inclusion of indigenous people‟s issues, and improvement in the quality and skill sets of facilitators. 12 53. Papua presents a special challenge to the Bank‟s Operational Policy (OP) 4.10 on Indigenous Peoples to provide culturally compatible development benefits, given the porous governance environment that prevails in many areas of the island. Inputs from a broad range of Papuan stakeholders introduced many modifications to the global design in order to reflect Papua's unique physical and cultural conditions. These include adjustments to the geographical units, logistical support for facilitators so they can reach isolated communities, extra training by dedicated engineers, and the formation of a Papuan government-NGO advisory group. 54. PNPM-RESPEK, the local government add-on to PNPM-Rural, provides each village in Papua and West Papua with a block grant of Rp. 100 million (approx. US$11,000). Linked to the program is a US$1.8 million PSF-financed trust fund that will support a third "Barefoot Engineers" training program for young Papuan technical facilitators. 55. In summary, PNPM-Rural complies with Bank policies on indigenous people. Project Implementation Guidelines for Social and Environmental Safeguards (IGSES), which are a supplement to the Operations Manual, support the involvement of indigenous peoples and address their needs. F. Environment (including safeguards) 56. The project is rated Category B based on the types of its environmental impacts and it triggers the Bank‟s Operational Policy (OP) 4.01 on Environmental Assessment. The Operations Manual, including the IGSES, has been reviewed by environmental specialists, and meets Bank standards. The IGSES provide a uniform understanding and clear direction for the implementation of safeguards policies for PNPM-Rural at all levels (including consultants, facilitators, government and the communities) in order to minimize negative impacts on the community and the environment, and to ensure compliance with applicable laws, regulations and policies. 57. No large scale, significant or irreversible environmental impacts are anticipated under the project. PNPM-Rural investments are very small, and under the Indonesian Environmental Assessment rules, they fall below the minimum size required for a formal environmental assessment. Experience under KDP highlighted two kinds of environmental risks: first, communities living in or near protected habitats will use natural resources from these areas, regardless of formal regulations, unless suitable awareness campaigns are conducted, messages are clearly understood by the communities, and sanctions are imposed; and environmental risk in poor placement of water supply sources, which can lead to contaminated water supplies. A few cases occurred in the past due to systemic failures in engineering oversight, reporting, and follow-up. 58. Proposed mitigation and prevention methods are proper training and monitoring by the supervising field engineers to carefully screen sub-projects against these risks. Projects with large potential environmental risks are on the negative list and will not to be funded. Project preparation confirmed that these improvements are being reflected in the training and monitoring plans. 59. Field engineers who assist communities in the planning, design and implementation of subprojects are required to consider environmental impacts during the project screening process. In analyzing environmental effects, the planner must be able to identify a range of impacts that might arise from the proposed activity. 60. The project Implementation Guidelines for Social and Environmental Safeguards (IGSES), which is a supplement to the Operations Manual, include the Environmental and Social Codes of Practices for covering all environmental issues; including land acquisition in village subprojects, specifically for two cases: (a) voluntary donations; and (b) donations with compensation. 13 Annex 1: Results Framework and Monitoring INDONESIA: Fourth National Program for Community Empowerment in Rural Areas Project Cumulative Target Values Description Responsibility Core PDO Level Unit of Data (indicator Baseline Frequency for Data Results Indicators Measure 2011 2012 2013 Source/Methodology definition Collection etc.) Project Development Objective (PDO): Villagers in PNPM-Rural locations to benefit from improved socio-economic and local governance conditions. Baseline Indicator One: impact 2% Percent Improved HH 2% survey Change in per increase 2% increase 2% National change in expenditure rates increase completed in capita above above increase Coordination real per and improved above 2007. Impact household control control above Team, capita access to economic control survey expenditure group per group per control 2007 baseline surveys Bappenas, and consumption and social services group per completed in in project project group per and 2010 impact World Bank. attributable in a minimum of project 2010. No comparison cycle cycle project surveys. Surveys are to the project 4,800 sub-districts cycle impact study with change (based on (based on cycle (based commissioned (in in 2011 (impacts (based on has been in control previous previous on previous to independent comparison taken from previous planned in group. evaluation evaluation) evaluation)2 survey firm. with control representative evaluation) the future. of KDP2) group). sample). (see footnote below) EIRRs were Economic Indicator Two: last Internal Rate EIRR EIRRs >30 % for Economic calculated in External of Return between 39 Economic analyses main rural Internal Rate >30% 2004. consultant including % - 68 % study in 2011-2012. infrastructure of Return Exercise will team. both direct for KDP2 categories. be repeated and indirect in 2011 effects. Indicator Three: Monthly Beneficiaries Monthly field reports >80% satisfaction field reports, stating they Previous from consultants, levels from surveys and are satisfied satisfaction government and beneficiaries % of field reports Consultants, with the levels > >80% >80% >80% NGOs, field surveys, regarding Beneficiaries at end of Government. impact of the 80% for supervision mission improved services each project project in KDP2. reports, technical and local level cycle, bi- improving evaluations. governance annual local services 2 The impact evaluation was intended to cover the PNPM engagement from 2007-2012 and not only the one cycle of block grants which will be financed by PNPM-Rural IV. However results for this indicator are available only for 2007-2010 due to the loss of the control group which occurred when the program went to national scale in 2009/2010. While no additional analysis will be generated for the period 2011-2013, the previous results are considered representative of expected project impact (see Annex 3, sections on Monitoring and Evaluation). 14 Cumulative Target Values Description Responsibility Core PDO Level Unit of Data (indicator Baseline Frequency for Data Results Indicators Measure 2011 2012 2013 Source/Methodology definition Collection etc.) (impacts taken technical and local from representative evaluations. level sample). governance. Beneficiaries Monthly field reports, Monthly field reports surveys and from consultants, field reports Project government and Beneficiaries at end of Consultants, beneficiaries, 49 49 49 49 NGOs, field surveys, ( in millions) each project Government. supervision mission cycle, bi- reports, technical annual evaluations. technical evaluations. Of which female Beneficiaries 24 24 24 24 As above As above As above (beneficiaries) ( in millions) INTERMEDIATE RESULTS Intermediate Result (Component One): Villagers participate in a process to plan, select and manage basic social and economic infrastructure provided through block grants. Min. 50% In 2008, 48 participation rate Monthly and % for of women and % of women annual women and poorest community and poor project cycle Project monthly 56 % for >50% >50% >50% MOHA members in community reporting reporting. MIS poorest planning and members. through community decision-making facilitators. members meetings >85% of agreed Monthly and In 2006, 95 Monthly and annual work plans % of work annual % 85% 85% 85% project cycle MOHA completed each plans project cycle completed. reporting year. reporting. 15 Cumulative Target Values Description Responsibility Core PDO Level Unit of Data (indicator Baseline Frequency for Data Results Indicators Measure 2011 2012 2013 Source/Methodology definition Collection etc.) PNPM- Rural 2008 Technical >70% of annual reviews, Technical reviews, infrastructure % of report field reports, field reports, World MOHA, World works are infrastructure showed 65 >70% >70% >70% World Bank Bank supervision Bank evaluated as of works % supervision missions high quality evaluated missions as high quality O&M Technical arrangements are reviews, Technical reviews, in place and/ or % of O&M field reports, field reports, World MOHA, World functioning for >85 % >85% >85% >85% arrangements World Bank Bank supervision Bank >85% of supervision missions infrastructure missions works. By 2011, 4,500 sub-districts with completed subprojects (#/type Monthly and 4,100 sub- Monthly and annual of infrastructure Infrastructure annual districts in 4,800 4,800 4,800 project cycle MOHA works, economic, works project cycle 2010 reporting education, health, reporting. revolving loans and environmental management, etc.) Through the Three wave MDG/Community Average Taken from impact Conditional Cash standardized Generasi > 0.03 evaluation, Transfers pilot, Impact evaluation Survey firm, effects for (2007) standard monthly improvements in surveys, Project MIS PMD education and baseline deviation project priority health and health targets survey progress education reports indicators. Intermediate Result (Component Two): Consultants at the national, provincial and district levels are providing assistance to communities and local governments to implement PNPM . By 2011, >90% of NMC % of local local government monthly and Field reports, PNPM government > 70% > 90% > 90% > 90% MOHA councils provide annual Governance Study councils funds and/or reports, 16 Cumulative Target Values Description Responsibility Core PDO Level Unit of Data (indicator Baseline Frequency for Data Results Indicators Measure 2011 2012 2013 Source/Methodology definition Collection etc.) oversee PNPM. PNPM Governance Study in 2008 & 2010. By 2012, 90% of planned facilitators % of positions are filled Monthly reports and positions > 85% >85% >90 % >90 % HR database MOHA (sub- HR database filled district/district levels). By 2011, 90% of % of facilitators receive facilitators the agreed upon Monthly reports and receiving N/A >85% >85 % >85 % HR database MOHA number of pre and HR database adequate in service training training days Intermediate Result (Component Three): Project stakeholders use results of M&E activities and studies to improve project performance. By 2011, 90 % of % of Monthly reports and planned consultant positions > 90% > 90% > 90% > 90% HR database MOHA HR database positions are filled filled Audit sample size Annual increases to min. BPKP audit Annual BPKP audit BPKP, of 20% of all sub- % of sub- 13.5 % in 20% 20% 20% reports and reports and World MOHA, World districts and audit districts 2010 World Bank Bank audits Bank results are made audits public. >70% of sampled Monthly villages receive reports, Regular reporting, socialization % of sampled >70% >70% >70% >70% budget and procurement and MOHA material packages villages procurement budget documents for PNPM in 2011 documents onward. Intermediate Result (Component Four): Project management teams established in a timely manner and functioning. Number of project Project management units >350 in Monthly HR database and WB management >400 >400 >400 MOHA established by 2009 reports supervision. units. March every year. 17 Cumulative Target Values Description Responsibility Core PDO Level Unit of Data (indicator Baseline Frequency for Data Results Indicators Measure 2011 2012 2013 Source/Methodology definition Collection etc.) All oversight consultants and % of Monthly HR database and WB facilitators paid on >80% >80% >80% >80% MOHA facilitators reports supervision. time, in full every month Kecamatan Grants % of Block >75% in Monthly HR database and WB disbursed and >80% >80% >80% MOHA Grants 2009 reports supervision. accounted for. 18 Annex 2: Detailed Project Description 1. PNPM-Rural's project development objective is for villagers in PNPM-Rural locations to benefit from improved socio-economic and local governance conditions. PNPM-Rural IV will support approximately three-fourths of the total sub-districts in the country, reaching a total of about 4,978 sub- districts. Other areas of the country will be covered by PNPM-Urban and three other core projects under the PNPM umbrella. 2. Activities that will be supported through the four components of PNPM-Rural IV include:  Continued capacity building in community-level governance, participatory planning and management of socio-economic infrastructure.  Building or repairing basic productive infrastructure, such as small roads, bridges, irrigation, and clean water supply systems.  Building or repairing social infrastructure such as school buildings and clinics.  Training women's savings and loan groups for revolving funds management and capital for village-level revolving funds. .  Developing district and sub-district management and technical capacities.  Utilizing the PNPM platform to implement pilot programs, including PNPM Generasi which focuses on improving health and education outcomes and the Green PNPM which supports community investments in natural resource management and renewable energy activities.  Responding to crisis situations, including natural disasters, conflict, and financial crisis. Table 2.1 summarizes the project cost and financing plan for PNPM Rural IV. Table 2.1: Project Costs, US$ millions Counterpart Funds Component IBRD APBN* APBD Community Donor*** Total ** 1. Kecamatan Grants 400.00 461.44 178.04 35.34 22.76 1097.58 2. Facilitation Support 99.11 10.66 -- -- 0.98 110.75 3. Implementation Support 30.98 3.57 -- -- 2.22 36.77 and Technical Assistance 4. Project Management 1.10 19.65 17.67 -- 0.09 38.51 Support Total 531.19 495.32 195.71 35.34 26.05 1,283.61 * National; ** Local; *** Donor resources have been received under existing trust fund arrangements. 3. Component 1: Kecamatan Grants (US$1097.58 million). This component, will support the construction of the economic and social infrastructure in target communities, and includes for Component 1(a): (i) planning for community development, including the preparation of sub-project proposals; (ii) training and capacity building for communities, including in development planning and investment; (iii) investing in social and economic infrastructure identified through community development planning; (iv) investing in activities identified through community development planning using revolving loan funds (RLFs) for women‟s savings and loan groups; and (v) preparing for and responding to disaster, emergency or catastrophic events, as needed, through subprojects. Component 1(b) consists of providing kecamatan grants to pilot and special programs, which include: 19 (a) PNPM Generasi is an incentivized block grant pilot under PNPM-Rural that aims to support GoI priorities and the Millennium Development Goals: to reduce poverty, maternal mortality, and child mortality, and to ensure universal coverage of basic education. In 2007 the pilot began operating in five provinces and 164 subdistricts. An impact evaluation completed in 2010 showed that PNPM-Rural‟s CDD approach can be modified effectively to empower communities to demand and access basic health and education services. Recognizing this success, GoI, with support from the PSF, has committed to expanding PNPM Generasi‟s incentivized kecamatan grants and facilitation support to new locations with low baseline levels of health and education. The PSF has committed US$105 million to expand PNPM Generasi coverage over the 2010-2014 period.3 Thus far US$38.3 million has been allocated to expand the project into 138 new sub-districts. GoI is currently in discussions with the Millenium Challenge Corporation regarding the possibility of obtaining additional funding for this purpose. Additional PSF resources to expand PNPM Generasi will be processed as Additional Financing to PNPM-Rural IV. (b) Green PNPM is the environmental pilot for PNPM-Rural which funds block grants and related technical assistance to promote community investments in natural resource management and renewable energy. Since 2007, the pilot, through recipient- and Bank- executed trust funds totaling US$34 million, has financed three annual rounds of block grants (2008, 2009, and 2010) for community-selected „green‟ activities (e.g., reforestation/agro- forestry, conservation, watershed management, micro-hydro and bio-gas power schemes, environmental awareness raising and education), GoI-contracted technical assistance, grants to local/international environmental NGOs, and environmental impact evaluations and studies. In 2010, the GoI requested that an additional US$18 million be allocated from the PSF to continue funding Green PNPM activities through 2012. This proposed additional financing, which has been endorsed by the PSF donors, would be used to expand Green PNPM's coverage to additional environmentally sensitive locations, and fund two more years (2011 and 2012) of block grant disbursements. Additional resources to expand Green PNPM will be processed as Additional Financing to PNPM-Rural IV. (c) Aceh: PNPM-BKPG. In 2009, the Government of Aceh, as part of its village prosperity program (BKPG), allocated over US$100 million (approximately one-eighth of its provincial budget for the year) in block grants for 6,411 villages in 23 districts and 276 sub-districts. Planning and implementation of the funds are linked to PNPM-Rural's and PNPM-Urban's operating systems and utilize PNPM facilitators. (d) Papua and West Papua: PNPM-RESPEK (Strategic Village Development Plan). In 2007 Papua‟s and West Papua‟s first directly elected governors introduced an ambitious new CDD program, channeling community grants of Rp. 100 million to each of the 4,478 villages in the two provinces to fund development activities in the areas of (a) nutrition and food security, (b) education, (c) primary health care, (d) village infrastructure, and (e) economic livelihoods. 4. The Kecamatan Grants provide block grants directly to each participating sub-district, which on average consists of about 30 villages. Each village prepares proposals for discussion at an inter-village meeting (MAD) at the sub-district level. Villages can submit up to three proposals, of which two come from women‟s groups inclusive of an RLF proposal. Proposals may be for a wide range of activities, e.g., building small roads to water systems, and up to 25 percent by value may be towards providing capital to 3 Subject to availability of donor commitments and extension of the PSF for two or more years. 20 women‟s groups for small businesses through the revolving loan funds. A critical element of the component is that all villagers are given the opportunity to participate in the proposal preparation process, and that decisions are democratically made. 5. Proposals from villagers will be verified by project facilitators for technical feasibility and presented at an inter-village meeting, where village representatives decide collectively on the proposals that will be financed. Block grants to sub-districts range from approximately Rp. 750 million to approximately Rp. 3.0 billion (approximately US$49,000 to US$324,000) based on the sub-district's population, poverty level, and project cycles and are usually not big enough to fund proposals from all villages, so choosing the proposals involves a process of competition, bargaining, and compromise. The cost of the average sub-project is about $20,000. 6. Project funds will be transferred directly to the collective village accounts at the sub-district level, and will be released for implementation of the approved subprojects or to women‟s savings and loan groups. Funds for income-generating ventures must be repaid at market interest rates, into a sub-district- level revolving fund, to be made available to future borrowers. 7. Component funds may be used for any activity, except for activities specifically excluded under a negative list or for land purchases of any kind. Activities that are eligible for funding through the grants include those that:  Can be undertaken by the village, with locally available technical assistance;  Are technically and financially feasible;  Are determined to be a public need;  Benefit the community, especially the poor. 8. Financial Services. The project will continue to support revolving loan funds (RLFs) for women's savings and loan groups that provide microcredit for low income borrowers, most of whom have few or no alternative sources of credit, according to a study carried out in 2008. A multi-year pilot, funded through the PSF, for access to financial services for the poor, especially women, is currently underway. According to recent assessment of a sample of 150 UPKs managing microcredit in Central Java and Yogyakarta, PNPM-Rural has achieved significant outreach, and management and financial performance is good.. Overall, the assessment found that PNPM Rural is a very good program for the purposes of delivering credit directly to the women of low income families, through community governed structures. Non-performing loans were found to be somewhat higher than the benchmark for microcredit activities in Southeast Asia, but overall much better than the average for "people's banks" (Bank Perkreditan Rakyat or BPRs) in Indonesia. Repayment rates on average are well above 90 percent, and there is potential for UPKs to transform their microcredit activities into sustainable, pro-poor microfinance vehicles. ,. However, challenges remain, including the governance aspects of the instrument and the assessment also recognized that there are problems with RLFs, particularly after loan disbursement and once funds start revolving. Findings from the the pilot will be the basis for developing capacity building interventions and strengthening the institutional platform for women‟s savings and loan groups 9. Crisis response, access to renewable energy, and access to basic services. A number of special initiatives will be funded using the block grant disbursement mechanism, including: (a) Preparing for and responding to disasters, emergencies or catastrophic events. (b) Supporting community investments that are environmentally friendly, including investments in renewable energy. The Green PNPM pilot will continue to support beneficiaries‟ access to energy 21 services derived from renewable sources (e.g., micro-hydro power (MHP), bio-gas, solar). By the pilot‟s scheduled completion in December 2012, it is expected that a total of 250-300 MHP schemes will be financed, which will provide electricity to about 39,000 rural households. (c) PNPM Generasi will continue to empower communities to demand and access basic health and education services, through incentivized kecamatan grants in at least 90 new sub-districts with low health and education coverage. Figure 2.1 Block Grant Cycle – PNPM Rural 22 10. Table 2.2 indicates the Kecamatan Block Grant allocation on and off Java-Bali, by poverty category. Table 2.2 Kecamatan Block Grant Allocation PNPM-RURAL IV BLOCK TOTAL POVERTY AREA GRANT POPULATION CATEGORY* ALLOCATION Rp. million** < 40,000 Less poor 1,000 Near poor 1,500 Poor 3,000 40,000 – 60,000 Less poor 1,250 JAVA-BALI Near poor 2,000 Poor 3,000 > 60,000 Less poor 1,500 Near poor 2,500 Poor 3,000 < 7,500 Less poor 750 Near poor 1,000 Poor 1,750 7,500 – 15,000 Less poor 1,000 Near poor 1,250 Poor 3,000 OFF JAVA-BALI 15,000 – 25,000 Less poor 1,250 Near poor 2,000 Poor 3,000 > 25,000 Less poor 1,500 Near poor 2,250 Poor 3,000 *Areas categorized as less-poor may still have deficiencies in rural infrastructure and access to services. ** The less poor and near poor sub-districts that have received block grants for more than three cycles under PNPM-Rural will receive Rp. 450 million and Rp. 650 million, respectively. 11. The program has been proven to reduce the risk of vulnerable villagers falling into poverty. Empowerment and local level institutional development, good governance, the provision or rehabilitation of tertiary infrastructure, and a level of social protection to help prevent the vulnerable falling into poverty supported the government's decision to expand the program nationally in 2009. Given evidence that impacts are greater in poor and remote sub-districts, the government provides significantly higher amounts of block grant funds in poor sub-districts than in less poor locations. 12. Sub-project rules for procurement, financial management, technical oversight, and reporting are provided in the Operations Manual. The manual will be re-issued annually incorporating lessons from the annual performance review. 13. Component 2: Facilitation Support (US$ 110.75 million). This component will provide technical advisory services, training and other material support, through facilitators, to strengthen the capacity of district and sub-district government institutions and communities in development planning and 23 investment. It will finance the sub-district level social and technical facilitators who assist with program community awareness campaigns, planning, social mapping, village planning, technical assistance, and oversight of chosen projects. The sub-district level facilitators will work closely with village level facilitators and community project teams to develop their capacities in planning and project management. The component will also finance three district facilitators in each district. 14. Component 3: Implementation Support and Technical Assistance (US$36.77 million). This component will provide technical advisory services, training and other material support for PNPM implementation at the national, provincial, district, and sub-district levels, including training of facilitators, monitoring and evaluation and enhanced technical and financial audits. The bulk of this component will cover the costs of experienced consultants and specialists at the national and provincial levels who will provide technical advice, field oversight, and coordination to the program, and strengthen government management, especially at the local level. It will also provide both quantitative and qualitative monitoring, and strengthen internal systems through better technology, additional training, and improved oversight. This component includes an enhanced audit program that will expand sampling, provide capacity development support for district government auditors, and funds to address problems identified through audit reviews. 15. Component 4: Project Management Support (US$38.51 million). This component will provide technical advisory services and other material support to strengthen the PMD and support the management of incremental activities generated by the project, including pilot projects and government add-ons as well as crisis response activities (e.g., natural disasters, conflict, and financial crisis). Most of these operational costs will be covered by the government through the national (APBN) and local budgets (APBD); the remainder will be financed through the loan. 24 Annex 3: Implementation Arrangements A. Institutional and implementation arrangements 1. PNPM-Rural IV institutional arrangements build on successful elements of the existing structure for the implementation of PNPM-Rural III. PNPM-Rural implementation management occurs across five levels of government: national, provincial, district, sub-district, and village (though sub-districts are not technically a formal level of government but are administrative divisions of districts). Each of these levels has (a) government policy and coordinating bodies with larger mandates and into which PNPM fits; (b) administrative bodies (satkers or project management units at the national, provincial and district levels) providing program oversight and coordination; and (c) bodies or teams for implementation and oversight. 2. At the national level, PNPM has a coordinating body chaired by Menko Kesra and includes Bappenas, Ministry of Finance, and the main line agencies that execute the component programs, as well as related sectoral ministries. PMD, within the Minsitry of Home Affairs (MoHA), is responsible for program execution. A National Management Consulting (NMC) firm, hired by PMD, oversees the implementation of techincial assistance. 3. At the provincial level, PMUs within the local government manage the administrative arrangements and budget for facilitators at the district and sub-district levels who are responsible for technical implementation of the project. Seven Regional Management Consultants (RMCs), based in Jakarta, will be responsible for the quality of implementation in clusters of provinces. The RMCs will create oversight teams consisting of a coordinator and supporting specialists in each province. These Provincial Oversight Teams will provide technical support to district and sub-district facilitators. 4. At the district level, satkers provide administrative support and oversight to the program and help to manage block grant disbursements. They facilitate disbursements and oversee the use of these funds, both from the national budget as well as from local government budget, but do not handle any cash. Each district has a team of at least three senior facilitators: an engineer, a social organizer, and a financial specialist with one or more assistants. They also undertake joint audits of the program with the local auditors. The district facilitators provide technical oversight to sub-district facilitators. 5. At the sub-district level, the program will employ a minimum of two facilitators (one social organizer and one field engineer plus at least one field assistant). Sub-district facilitators will play a lead role in the inter-village meetings (MADs) where communities are informed about the program, the annual planning process, and the approval and implementation processes. The facilitators will work closely with sub-district officials, including the sub-district head and the other local government official appointed as the operational head of PNPM-Rural (PjOK). 6. At the village level, communities will prepare and prioritize projects through village assemblies (MDs). The MDs also select village cadres or facilitators, a man and a woman, who will assist with the planning process and support the village implementation teams (TPKs). The cadres and TPKs are also responsible for ensuring that poor villagers benefit directly from the sub-projects, in part through the use of their labor. TPKs also ensure accountability and transparency by reporting sub-project implementation status, including the use of funds, to villagers. Village MDs also establish teams to help with proposal writing, operations and maintenance, community monitoring, and elect representatives to the inter-village meetings held at the sub-district level. 25 Figure 3.1: Project Implementation and Organization Chart Menko Kesra Ministry of Home Affairs PNPM Oversight Body Directorate General of Village National Management PNPM Inter-Ministerial Community Empowerment / Consultants Coordination Team National Satker Central Provincial Oversight Team Provincial Satker Governor Inter-sectoral Coord. Team Province Kabupaten Facilitators (3) Kabupaten Satker Bupati/Mayor Inter-sectoral Coord. Team Kabupaten/ District Kecamatan Inter-village Kecamatan Facilitators (2-3) Camat/Kecamatan Head Consultations Local Project Manager (PJOK) Sub-district Financial Management Unit (UPK) Kecamatan/ Sub-district Village Assembly Meetings Village Cadres Kepala Desa/Village Head (MD) Community Project Elected Village Representative Implementation Team Council (BPD) (TPK) Community Beneficiaries Village B. Financial Management 7. PNPM is a community empowerment program, but its implementation over a large number of locations led to significant financing of technical assistance. The Bank is providing financial support to communities and technical assistance to the GoI in implementing PNPM-Rural. From a financial management perspective the project can be viewed as supporting two main areas: 26 (a) Direct project financial support to local communities in 32 provinces, 393 districts, 4,978 sub-districts and over 60,000 villages under PNPM-Rural IV. These communities receive block grants which amount to a total of around US$1 billion. (b) Total project financial support for technical assistance, which reached US$100 million under PNPM-Rural III and will increase to US$142 million under PNPM-Rural IV. The technical assistance will finance the salaries and services of not less than 9 services firms (1 NMC and 8 RMCs with respectively 50 and 300 staff) and 13,400 facilitators (1,400 at district and 12,000 at the sub-district level). 8. Two sets of control processes are in place. The financial support to local communities follows the principles of CDD, including participatory governance, local empowerment and social accountability. The technical assistance follows traditional principles of investment lending including financial accountability, control over activities and monitoring of controls. The high volume of transactions for both parts of the project puts the controls over payments as the highest area of vulnerability with a risk to be managed at all levels. 9. A financial management assessment was carried out and took into account lessons learned from the current project. The major FM risks for the project are: (a) PMD lacks the institutional and managerial capacity to manage PNPM successfully; (b) uneven quality in facilitator support to communities in maintaining adequate FM arrangements; and (c) controls at various levels of the project are insufficient to prevent misuse of project funds. The FM risk for the project is considered “substantial” because of the sheer scale of the project - spread over 60,000 villages and 5000 sub-districts across the country with limited capacity at the community level to manage and account for funds. 10. The National Satker (project management unit within PMD) consists of 63 staff including eight staff who work on financial management. The NMC provides 11 FM consultants to support the National Satker for the national level monitoring, and the RMCs employ at least three consultants in each province who provide technical assistance and monitoring support. The project employs approximately 1,400 management facilitators at the district level and 12,000 community facilitators at the sub-district level who provide downstream technical assistance and monitoring support. Intensive training arrangements have been put in place to ensure that the field consultants and facilitators are adequately trained to enable community groups to maintain adequate books of accounts. Payments at all levels are made using government's single treasury account and reviews of consultants' and facilitators' payments have been received by the intended recipients without significant delay. The National Satker is supported by additional consultants who carry out independent reviews of consultants' and facilitators' invoices. Random third party confirmations are being introduced as a part of the review procedure to strengthen controls over consultants' and facilitators' fees and reimbursables. The consultants who carry out reviews of consultants and facilitators invoices will select a sample for which they would contact the original vendors to ensure that the invoices for the reimbursables are genuine. The National Satker with support from the NMC is expected to regularly review the functioning of payment controls. A quarterly report will be prepared by the National Satker on the monitoring of controls that will be reviewed by the Bank. The project auditors, BPKP, will carry out a continuous audit of the project in partnership with local government inspectorates thus increasing the audit coverage to around 20 percent. BPKP shall review the IFR for each calendar quarter during Project implementation and shall provide to the Bank its report of each such review not later than 45 days after the end of each calendar quarter. A detailed FM assessment has been prepared and is available in project files. 11. The project will follow the financial management arrangements under the ongoing PNPM-Rural III project; however, some of the key controls are being strengthened. The key features of the FM arrangements (including strengthened controls) include: 27 (a) Flow of funds to communities. Commitment Officers in District Satkers assemble requests from the various UPKs at the sub-district level for which they are responsible. After documentation review, the Commitment Officer forwards the requests to the Payment and Verification Officer. After document verification, the Payment and Verification Officer issues a payment order (SPM) to the Treasury Office (KPPN). The Treasury then issues remittance orders (SP2D) to the operational bank or Bank Indonesia branch office, which arranges for remittance of funds from the Designated Account (DA) to the respective UPK accounts. The District Satker monitors to ensure that the funds are remitted to the UPKs in a timely manner. The project has an active complaints handling system, and any delays in receipt of payments at the community level can be reported. (b) Flow of funds to district and community facilitators. The PjOK at the sub-district level reviews and certifies sub-district facilitators‟ reports prior to submission to the Provincial Satker. Similarly, the District Satker reviews and certifies district facilitators‟ reports before submitting the invoices to the Provincial Satker. The Commitment Officer in the Provincial Satker, receives and reviews the invoices from facilitators which they then forward to the Payment and Verification Officer. After document verification, the payment officer issues an SPM to the Treasury Office. The Treasury Office checks the budget availability and issues the SP2D to the Treasury Office‟s operational bank, which transfers the funds directly to the facilitators‟ account. (c) Flow of funds to Consultants/Training Providers/Suppliers. Consultants/Training providers/suppliers submit invoices to the commitment officer in the National Satker. There are five individual consultants who help the National Satker review and verify the invoices. After review of the supporting documents, invoices are forwarded for payment to the Verification Officer in the National Satker. After document verification, the Payment Officer issues an SPM to the relevant Treasury Office. The Treasury Office checks the budget availability and issues an SP2D to the Treasury Office‟s operational bank which transfers the funds directly to the beneficiaries‟ account. The government‟s Treasury Single Account (TSA) system is used for all payments at all levels. (d) Accounting and reporting. TPKs keep accounts for each sub-project and prepare a progress report, which includes a report on funds received and utilized on sub-project activities. TPKs keep all supporting documents and provide one copy to the UPK for requesting funds. UPKs are required to prepare simple accounting and financial reports for sub-district grants. UPKs keep supporting documents for all transactions from the block grants. The sub-district facilitators assist UPKs in administering the block grants and certify the monthly report submitted to the district. UPKs also prepare a separate report (balance sheet and income statement) for revolving fund activities. The district facilitator prepares a consolidated report for each district and submits to the Provincial Satker and the Provincial Oversight Consultant. Provincial consultants submit the report to the National Satker and the NMC through the project management system for consolidation. The National Satker submits quarterly IFRs to the Bank. (e) Flow of Documents. The original documents are retained as follows: (a) National level - all supporting documents related to transactions which take place at the central level, including the NMC and RMC payments - iIn addition, the National Satker receives a copy of the SP2D from all Provincial and District Satkers; (b) Provincial level - all supporting documents related to district and sub-district facilitator payments and incremental operating costs of 28 Provincial Satkers; (c) District level - all supporting documents related to block grant payments and incremental operating costs of District Satkers; and (d) Community level - all supporting documents related to the block grants (sub-project expenditures), including revolving fund activities. (f) Internal controls/Kecamatan Grants. Community based controls include: the facilitator‟s review and certification of the community report; at least three signatures are required to withdraw funds from the community account; cross village audit; establishment of community oversight; and display of project reports, including disclosure of the financial report in a public area. The complaints handling system is being strengthened and is becoming web based for continuous monitoring of complaints received. Audit coverage is being increased through the involvement of local government auditors. In addition, monitoring coverage by district and provincial FM consultants is being increased. Regular borrowers‟ confirmations are being introduced to manage the high risks of revolving funds. (g) Facilitation support, technical assistance and project management. There are 1,400 district facilitators with on average 3-4 facilitators per district and there are 12.000 sub-district facilitators with on average 2-3 facilitators and assistants per sub-district. Facilitators receive payments from the Treasury Office directly into their accounts. Reviews of facilitators‟ payments indicate that there were no significant delays in receipt of funds. The review is being strengthened to include independent third party confirmations. Audit coverage includes consultant contracts and reimbursables. Consultant contracts have been streamlined to reduce the ambiguity around reimbursable expenditures. The National Satker, with assistance from the NMC, is expected to monitor the payment controls. A quarterly report will be prepared by the National Satker on the monitoring of controls. BPKP will carry out a continuous audit of the project in partnership with local government inspectorates. BPKP shall review the IFR for each calendar quarter during project implementation and will provide to the Bank its report of each such review not later than 45 days after the end of each calendar quarter. (h) Audit. The external auditors‟ opinion on financial statements will include an opinion on the internal control framework, and a report on performance indicators. The audit manual has been upgraded to be risk-based and focused on internal controls. An MOU between DG PMD, Inspectorate General (IG) MOHA and BPKP has enabled the involvement of local government auditors in the auditing of local level project accounts. BPKP has trained the local government auditors in all provinces. The annual audit will cover around 20 percent of the sub-districts. C. Disbursements 12. The project funds will be disbursed against eligible expenditures as shown in Table 3.1 Table 3.1: Expense Categories Percentage of Amount of the Loan Expenditures to be Category Allocated financed (expressed in US$) (inclusive of Taxes) (1) Kecamatan Grants 400,000,000 80% of Kecamatan Grant amount disbursed 29 (2) Consultants services, goods, training and 99,110,000 100% workshops, and incremental operating costs for facilitation support under Part II of the Project (3) Consultants services, goods, training and 30,980,000 100% workshops, and incremental operating costs for implementation support and technical assistance under Part III of the Project (4) Consultants services, goods, training and 1,100,000 100% workshops, and incremental operating costs for Project management support under Part IV of the Project TOTAL AMOUNT 531,190,000 * Withdrawals up to an aggregate amount not to exceed US$100 million may be made for payments made prior to the date of the loan agreement, but on or after June 14, 2011, for eligible expenditures for kecamatan grants. 13. The applicable disbursement method is “Reimbursement” for the block grants, and “Advance”, “Reimbursement” or “Direct Payment” for other expenditures. Payments for block grants will be made from GoI sources and reimbursed by the Bank to the MoF treasury account. For other components, a Designated Account (DA) denominated in US dollars will be opened by DG Treasury (MoF) in Bank Indonesia (central bank) or a commercial bank acceptable to the Bank. The DA will be solely used to finance eligible expenditures other than for block grants. The ceiling of the advance to DA will be variable, and the advance(s) will be made on the basis of the six month projected expenditures. Reporting on the use of DA funds and expenditures for block grants will be based on quarterly IFRs. Applications for reimbursement of block grants shall be submitted together with: (a) statement of expenditures; and (b) either copies of records evidencing eligible expenditures and amounts actually paid, or the certification for reimbursement of kecamatan grants issued by MoHA. Applications for the replenishment of the DA advance shall be submitted along with the quarterly IFRs, supported by: (a) a list of payments for contracts under the Bank‟s prior-review together with records evidencing such expenditures; (b) a statement of expenditures; (c) IFRs for other expenditures and cash forecast for the next two quarters; and (d) the DA reconciliation statement and a copy of the related bank statement. Applications for direct payments will be supported by records evidencing eligible expenditures. All documentation for expenditures submitted for disbursement will be retained by the Implementing Agency and be made available to the auditors for the annual audit, and to the Bank and its representatives if requested. 14. The DG Treasury will authorize its relevant Treasury Offices located near the implementation units to authorize payments of eligible project expenditures by issuance of remittance order (SP2D), charging the GOI account or the DA, as appropriate. For this purpose, the DG Treasury shall issue a circular letter to the relevant Treasury Offices, providing guidelines and criteria for eligible project expenditures in accordance with the loan agreements. When expenditures are due for payment, project implementing units will prepare a payment request (SPP) to the Payment Officer within the project implementing unit. After document verification, the Payment Officer will issue the payment order (SPM) together with the supporting documentation for submission to the relevant Treasury Office. The Treasury Office will check the budget eligibility and issue the remittance order to the Treasury Office‟s operational bank, which will transfer funds directly to the payee‟s account and arrange for debit for the loan portion to the DA. Although the DA will be in the name of DG Treasury MoF, the National Satker will be responsible for reconciling the DA and preparing separate applications for the withdrawal of reimbursements and advances of DA, duly approved by DG Treasury, before their submission to the Bank. Copies of DA bank statements will be provided to the National Satker by DG Treasury, MoF. 30 D. Procurement 15. This project, as a continuation of the existing PNPM-Rural III project, will utilize the same procurement and implementation modality for the existing program, with improvements to address some of the challenges faced so far. The main improvements will be to: (a) change the scope of work, selection process and contract forms for the management firms at the regional level from consulting to non- consulting services; (b) update the manual for community driven procurement to reflect lessons learnt; and (c) carry out more spot checks for ex-post review, in addition to the reviews to be carried out by BPKP. 16. Procurement under the project will include: (a) selection of a consultant firm (NMC) to support the overall management of the program; (b) recruitment of individual consultants to work in seven RMC teams; (c) procurement of eight Regional Management Consultant firms as Administrative Service Firms (ASF-RMC) to support the recruitment of provincial coordinators and specialists, pay their salaries, provide support (e.g., manage training and workshops), and cover the operational cost for the RMCs. One of the ASF-RMC will be dedicated to supporting PNPM Generasi and PNPM-RESPEK. Procurement will also include: (a) recruitment of around 13,400 facilitators; (b) CDD procurement by the communities; and (c) packages for printing and recruiting event organizers. The implementing agency is familiar with the implementation of this project and has managed the required procurement tasks well . 17. Procurement for the proposed project will be carried out in accordance with the World Bank's "Guidelines: Procurement under IBRD Loans and IDA Credits" dated January 2011; "Guidelines: Selection and Employment of Consultants by World Bank Borrowers" dated January 2011; and the provisions stipulated in the Legal Agreement. For each contract to be financed by the Loan, the different procurement methods or consultant selection methods, estimated costs, prior review requirements, and time frame are agreed between the Borrower and the Bank in the Procurement Plan. The Procurement Plan will be updated at least annually or as required to reflect the actual project implementation needs and improvements in institutional capacity. As of January 2011, a new presidential decree governing public procurement is in effect. This new decree (Perpres 54/2010) does not have clear articles on the applicability of Bank Guidelines in case of loans/grants. This has been addressed in the legal agreement and during negotiations. 18. The main risks that are identified are: (a) delays in selection of NMC and ASF-RMCs; (b) scope and quality of ex-post reviews; (c) findings from ex-post reviews not reflected in improving the CDD procedures; and (d) clarity of the applicability of the Bank Guidelines on procurement. Based on mitigation measures completed and to be carried out during implementation (see below), the residual procurement risk is rated as moderate. 19. A number of mitigation measures were completed during preparation:  Agreement with GoI on the applicability of Bank Guidelines with the full effectiveness of Perpres 54/2010, based on precedents set by the loans and grants negotiated between the Bank and GoI in 2011.  Procurement Plan prepared by MoHA and procurement process for the NMC and the seven ASF-RMCs launched.  Agreement on revisions to the scope of the BPKP post review exercise and reporting formats. 20. The following measures will be carried out during project implementation:  Contracts for the ASF-RMCs awarded by August 2011. 31  NMC contract to be awarded by December 2011.  Follow up on performance of NMC and ASF-RMCs.  Follow up on BPKP post review.  Continuous improvements to the manual.  More guidance and refresher courses to facilitators.  Spot checks for post review conducted by the Bank. 21. Procurement of Goods and Non Consulting Services. There will be procurement of eight administrative firms to provide services of payment of salaries, support operational costs for the RMCs individual consultants, and to manage training and workshops. These will be selected using non- consulting services contracts and carried using ICB or NCB methods based on the value of the contracts. The estimated values of these contracts range from US$3.6 million to US$5 million. The bidding documents for these packages are already under preparation and first draft has been submitted to the Bank‟s for review. The Individual consultants will be selected on a competitive basis by the National Satker and will be placed in seven regional management consultants‟ teams to support management and implementation of the project. In addition, there will be nine packages for event organizers and printing services. The procurement methods that will be allowed under the project will include International Competitive Bidding (ICB), National Competitive Bidding (NCB), and Direct Contracting. Please see Table 3.2. 22. Selection of Consultants. There will be a selection of one firm under the project which is the NMC; at an estimated cost of US$5.3 million. The firm will mobilize a large team to provide technical and management support for individual consultants and facilitators placed at the regional, provincial, district and sub-district level. It will also provide support to the PNPM coordination team and MoHA on all technical and managerial aspects of the program including program development, human resources development, program monitoring and good governance. The functions of the NMC have been expanded from previous years and are critical for the project. The assignment will be for an initial two years period with possible extension on a yearly basis subject to program needs and good performance of the selected firm. The selection method will be Quality and Cost Based Selection (QCBS). The RFP for this assignment already went through the first round of review by the Bank and the short listing process was launched in May 2011 with the award of contract expected in October-November 2011. Please see Table 3.3. 23. Regional Procurement Consultants under the previous projects were selected under the Guidelines for Selection of Consultants which usually takes considerable time. However, there are no real intellectual services provided by these firms as they were mainly providing teams of staff and administrative support, operational expenses, training etc. PMD and the Bank team agreed that procuring the required services as non-consulting services under the Bank's Guidelines for procurement of Goods, Works, and Non- Consulting Services will be more suitable to the project; as the required services of these firms and qualifications of the teams are straightforward and pre-determined by the implementing agency. Furthermore, PMD preferred the option of selecting the individual consultants under the RMC teams as individuals as they believe this will provide them with better control of quality and performances of these individuals. 24. The district and sub-district facilitators (a total of 13,400 facilitators at an estimated amount of US$100 million) will be hired and individually contracted by the 32 Provincial Satkers. Each individual contract will be less than US$17,500. Positions will be public announced and posted on the project website, clearly spelling out the minimum qualifications and requirements. Then through an agreed selection mechanism, the most qualified candidate among those who apply will be selected as facilitators. Facilitators from the ongoing program may be selected on sole source basis depending on performance. 32 Details of the procurement process will be provided in the Operations Manual and SOPs, acceptable to the Bank and the Borrower. Management of the contracts and payments will be done at the provincial level supported by districts and the AMS-RMCs. Provincial Satkers are staffed by provincial civil servants and responsible to the Governor. The budget for facilitators is channelled from the National level through the Provincial Satkers, who agree with PMD (in coordination with the Bank) on the use of the budget and rules and procedures for implementation of project funds. The National Satker supervises the use of the funds provided to the Provincial Satkers. 25. Kecamatan Grants. The Kecamatan Grants (the average value of subprojects will be less than US$20,000, with US$400 million in total) will be mostly for (a) investing in social and economic infrastructure identified through community development planning; (b) investing in activities using revolving loan funds (RLFs) for women‟s savings and loan groups, and (c) preparing for and responding to disaster, emergency or catastrophic events, as needed, through subprojects. Grants will be disbursed to communities in villages scattered in all provinces. Procurement under the kecamatan grants will follow a community participation approach, using the forms and simplified procedures as defined in the existing Operations Manual acceptable to the Bank, which will be revised from time to time by incorporating lessons learned. 26. Ex-post review. BPKP will carry out ex-post reviews for this project. In addition, the Bank will carry out some spot check post reviews to compare results and as a measure of quality control. BPKP post review will include a review of the recruitment process for facilitators, and will ensure consistency of the reporting format among the different reviewing teams, as results and details of reviewed grants and communities vary within the report. 27. In its recent ex-post review report on the execution of kecamatan grants, BPKP identified that the wide geographical spread of implementation activities and the ongoing capacity issue for implementation at the community level (especially in remote areas) continues to increase risks of procurement delays, and deviations from agreed procedures as well as some cases of mismanagement of contract implementation. For this purpose, the National Satker will ensure improvements in this area through timely in-service and refresher training for the field facilitators. Procurement guidance in the existing Operations Manual will be reviewed and simplified, to the extent possible, in order to enhance its practicality and suitability for the communities at the village level, while ensuring that the fiduciary requirements are met. The project should also make available more relevant and actual examples and case studies to allow better understanding by community groups. Cases of deviations should be used to show clearly the dos and dont‟s. In addition, generic design specifications for common works (which are frequently accepted to be funded by the grants) may also be provided to facilitators and communities, such as for village roads, public sanitation facilities, etc. to provide an initial or additional technical reference. 28. Since the Project consists of repetitive and straight-forward procurement, based on the above assessment and subject to carrying out improvements and mitigation measures, the residual project risk for procurement is determined to be moderate. 29. Procurement Plan. The Borrower, during project preparation, developed a Procurement Plan for the project, which provides the basis for the procurement methods. The Procurement Plan will be updated in agreement with the Bank annually, or as required to reflect project implementation needs and improvements in institutional capacity. The thresholds for prior review as well as the revised procurement method will be determined in the procurement plan, taking into account inputs from the Bank's supervision missions, and agreed to by the Bank. 30. Details of the Procurement Arrangements Involving International Competition: 33 (a) Goods and Works and non consulting services: four packages for non-consulting services will follow the ICB method. (b) Consulting Services: there will be one package for consultant firms under the project. 31. Tables 3.2 and 3.3 summarize procurement arrangements and schedules for non-consulting services and consulting services respectively. Table 3.2: Procurement Arrangement and Schedule for Non-Consulting services Contract Procurement Pre-qualif Domestic Bank Expected Ref. Description of Price Method (Yes-No) Preference Prior Bid Opening No. Assignment (US$ (Yes/No) Review Date mil) 1 AMS-RMC 1 4,9 NCB No No May 11 July 11 2 AMS-RMC 2 5 ICB No No May 11 July 11 3 AMS-RMC 3 5 ICB No No May 11 July 11 4 AMS-RMC 4 4.1 NCB No No May 11 July 11 5 AMS-RMC 5 5 ICB No No May 11 July 11 6 AMS-RMC 6 4.8 NCB No No May 11 July 11 7 AMS-RMC 7 4.6 NCB No No May 11 July 11 AMS-Generasi NCB No No June 11 July 11 8 3.6 & RESPEK Printing NCB No No NA Nov 11 9 0.65 package Event NCB No No NA Oct 11 0.28 to 10 organizers 0.92 ( 8 packages) Kecamatan CDD No NA NA NA 11 400 Grants Table 3.3: Procurement Arrangements and Schedule for Consulting services Ref. Description of Contract Selection Bank Expected No. Assignment Price(US$ Method Prior proposal mil) Review submission date QCBS 1 NMC 5.3 May 11 August 11 Kecamatan CS/SSS* 2 /Kabupaten 100 NA NA Facilitators *Competitive selection and single source selection of individual consultants E. Better Governance Action Plan 32. The government has declared a strong stance against corruption in PNPM which is reflected in the measures under this Action Plan. PNPM‟s governance and integrity framework builds on over a decade of field experience and specific research trials under KDP and PNPM. The guiding principle 34 underlying the anti-corruption program is that procedures must encourage oversight and action by multiple stakeholders, not just GoI or the Bank. Its key features are: (a) Local control of funds. The PNPM projects are designed to increase local control over funds. Funds are transferred directly from the government treasury office into community accounts. Beneficiaries know the amounts of the block grants and are involved in or informed about decisions on the use of these funds. All accounts have multiple signatures. Public village accountability meetings are held to account for subproject results and the funds utilized. Key information, including on funding levels, is made publicly available, either posted on village information boards, on the project websites and in some cases in the local press. The GoI is keenly aware of the risks that PNPM might be used for political activities or political parties and is determined to mitigate against this risk. The Loan Agreement (in the Annex 1 to Schedule 2, Paragraph 2), and subsequently the Project Operations Manual, specify the prohibition for the funds to finance activities related to political practices or parties. This prohibition will be publicly stated to ensure community awareness and compliance. (b) Competition. Since the demand for funds outstrips by far the availability of resources, decisions need to be made on which projects will receive funding. To ensure transparency, this decision is made through a competitive process at the sub-district level, which is conducted by the community assembly. Government officials need to sign off on the result of the competition, but do not have a vote nor discretionary authority. (c) Internal controls. The primary means of internal control is through the project‟s management and monitoring systems. Routine supervision is performed by a Provincial Coordinator, Provincial Administrator, Financial Management Specialist, Complaint Handling Specialist, Management Information System Specialist and Training Specialist. There are also three facilitators in every district (empowerment, engineering and finance) who are responsible for supervising program activities in every sub-district. Every specialist and facilitator is required to complete at least twelve days of field supervision per month. Locations visited are prioritized, at all levels, based on risk, including technical difficulties of sub-projects, areas with known complaints, weak community facilitators, and remote areas where capacity, including among local government partners, tends to be weak. The NMC now has positions for eleven national-level auditors to perform regular financial, fiduciary, and technical internal audits and seven specialists to investigate complaints, as well as sixty-plus consultants to undertake various supervision activities. Joint missions with the World Bank are now carried out on a quarterly basis. Information received from supervision reports, mass media, monitoring reports, NGOs and the public is recorded into the program‟s Management and Information System (MIS). Backing this system up is a complaints-handling unit, which is part of the overall monitoring program. (d) Audits. BPKP performs annual audits and reviews the program‟s financial management controls. Audit procedures have become more complex because of the substantial contribution of funds from local governments, which are audited by the Bawasda. The sample of audited sub-districts will be approximately 20 percent and audit results are shared at the district level and posted on the project‟s website. PMD/NMC will compile an aggregate list of findings and recommendations which will be posted on the website and monitored quarterly. 35 (e) Village-level social controls. PNPM projects rely on broad-based participation that helps promote greater accountability. all stages of the project there are checks, balances, and mechanisms whereby villagers can hold the project accountable. For example, villages carry out cross village “audits,” one village inspecting another village‟s subprojects and records. Women groups have proven to be particularly effective in reviewing the use of funds and materials procured by the village implementation teams. (f) Press and NGOs. PNPM implementation is actively monitored by NGO watchdogs and the media (national and local newspapers, community radios, social media and several local TV stations). PNPM engages with media, providing project fact sheets, carrying out media field visits, holding radio and TV talk shows, and publicizing reported cases of fraud and corruption and actions taken to resolve these cases. Specialized NGOs also provide training to media journalists interested in covering PNPM and support the publication of monthly articles on corruption cases. (g) Code of Ethics. All consultants employed by the PNPM projects have to abide by the Code of Ethics for consultants, which is included in the Operations Manual and stated in each individual‟s contract. In line with the SOPs for the handling of breaches of the Code of Ethics, any serious violation results in termination of employment. PMD and the NMC maintain a database which currently has about 450 consultants/ facilitators who violated the code of ethics and are banned from being employed because of violations, such as consistent tardiness, and complacency in carrying out due diligence as necessitated in the Operations Manual. (h) Complaints handling. PNPM has redesigned its complaints handling mechanisms, which are detailed in the Operations Manual. The objective is to resolve complaints as fully as possible, at the location where they are reported to have happened. Beneficiaries, or anybody who has an interest in the program, can easily file complaints either through the facilitators, or by sending SMS messages. Complaints are reported on a website and investigated. The result of the investigation is also made publicly available. The purpose of these publications is to increase beneficiaries‟ awareness about their role in holding the program accountable, to convey the importance of the fight against corruption in PNPM, and to provide a feedback loop to the authors of complaints. The data from the redesigned complaints handling system will also be used more actively by PNPM management to target audits and supervision and to identify areas for improvement in program operations. This will be further enhanced through the adoption of a service standard and mechanism that provides for automatic suspension of problematic locations after 30 days if no action is taken by PNPM management. (i) Sanctions. Sanctions for corrupt behavior are built into the project cycle and, crucially, are widely socialized. PNPM facilitators, consultants, UPK managers or TPKs run the risk of being dismissed or criminally charged if exposed with corrupt behavior. Government officials may also be dismissed or, more commonly, rotated to less desirable posts, hierarchically or geographically. In case of unresolved corruption cases, disbursements to an offending village, sub-district or district - depending on the spread and level of abuse - can be suspended until appropriate action is taken. This has proven to be an effective deterring mechanism as well as a good way to push for resolution of corruption cases at the village level. In the case of insufficient action, a sub-district may be declared a "problem area" (currently there are 12 sub-districts with this status). Sanctions will also apply against proven financing of political activities or parties or illicit charges for the purpose of financing them. These sub-districts still have facilitators to help solve problems and facilitate planning, although disbursement of funds is suspended until the issues are addressed as needed. The 36 Bank loan cannot reimburse the expenditure from the block grants unless appropriate action has taken place to address the abuse. One of the biggest challenges is how to apply sanctions consistently and ensure that they are credible enough to act as a disincentive towards corruption. 33. While the key features of the control framework are place, and remain overall effective in mitigating corruption risks, most of the corruption cases can be traced back to weak compliance and due diligence with PNPM policies and existing controls. High-level discussions with GoI counterparts have led to an agreement on a reform program to reverse this trend and further strengthen the program‟s governance and integrity framework. A number of critical objectives have been agreed with the implementing agency in order to improve governance and enhance the control systems. In order to measure progress towards these objectives, a number of critical benchmarks have been identified and some have been completed as part of preparation for PNPM-Rural IV while others will be fulfilled during implementation. 34. This BGAP is organized around these five critical governance and integrity objectives: (a) enhancing institutional capacity and renewing management; (b) strengthening the Management Information System; (c) strengthening the Complaints Handling System; (d) enforcing existing fiduciary controls; (e) improving the quality and deployment of human resources, particularly facilitators. (a) Enhancing institutional capacity and renewing management of PMD. PMD‟s capacity had not kept up with demands of the program for strong and effective management. Reporting lines between PMD, NMC, and RMCs had become confused sending conflicting messages to project staff and consultants. As a first step new SOPs were issued to clarify reporting lines roles and responsibilities of key players, particularly for facilitator management. A performance evaluation of the consultant firm at the national level has also been conducted, leading to the replacement of its leadership. A functional review has been planned as part of a managerial renewal process. The overarching objective will be to ensure that the implementing agency has the institutional and managerial capacity to manage PNPM successfully, in line with the following principles: (a) staff fully dedicated to PNPM; (b) staffed with qualified civil servants and technical assistance; (c) staff selected through competitive processes; and, (d) staff movement in line with government HR regulations. (b) Strengthening the Management Information System (MIS). The program needs a well functioning and integrated MIS that can be used as a tool in the management and decision making process. A preliminary assessment of gaps in MIS systems has already been conducted, and an audit of the whole MIS system planned to support the redesign of the system and provide reliable and comprehensive data to inform decision-making and reporting has been agreed. Key principles that will drive the redesign of the MIS are (a) prioritization of data to focus on those that are critical to inform decision making at various levels; (b) built-in checks and balances to ensure accuracy of data; (c) integration of different databases that currently exist; and, (d) generation of simple and automated reports to inform management decisions. (c) Strengthening the Complaints Handling System (CHS). New SOPs on complaints handling, with a three-month deadline for resolution of fraud and corruption allegations at each level, improved protocols for escalation of cases and a new policy for stagnant and deadlocked cases have already been issued. These SOPs are being actively implemented through a series of instruction letters issued by the implementing agency to mobilize all actors. To support these new policies, an audit of the whole CHS has been conducted and a new blue print produced based on the successful PNPM-Urban model. Web-based software applications 37 have been developed and a trial run completed. All Financial Management and Complaints Handling Specialists have already received trainings in complaints handling and financial controls, to be followed by refresher sessions. Going forward, there will be an expansion of partnerships with legal aid offices for the protection of whistle blowers and provision of legal assistance to community members through a partnership with the Bank‟s Justice for the Poor program. (d) Enforcing existing fiduciary controls. Formal controls have been strengthened under PNPM- Rural through: the deployment of human resources in the central and provincial financial management oversight units; new SOPs on internal audits which made them mandatory in all sub-districts; new instructions on increased supervision of village procurement; development of an improved risk-based audit manual and ToRs; training of local government auditors and expansion of the audit sample size to 20 percent of all sub-districts starting in 2011; and budget provisions to improve fiduciary training. Continuous efforts are nonetheless required to ensure successful implementation of new SOPs and system improvements, and reverse recent years of underinvestment in human resources. While engagement with civil society, which plays a vital role - as watchdog - in exposing corruption cases has been stepped up under PNPM-Rural III, progress has been more uneven as regards village-level social controls. Revisiting these systems, as an „intensive practice space‟ for improved local governance, will be fundamental for moving forward. In particular, capacity improvements and increased oversight are needed for community self-monitoring groups. (e) Improving the quality and deployment of human resources, particularly facilitators. The role that facilitators play in ensuring application of program procedures, transparency, and limiting corruption in PNPM is crucial. As key players in the oversight system, facilitators train and monitor community sub-district financial management units and village implementation teams (UPKs and TPKs, respectively). The implementing agency has taken critical steps to reverse years of underinvestment in facilitators, including: (a) budget provisions to create 20 percent reserves; (b) restoration of the competitiveness of salary scales; (c) new guidelines on recruitment and instruction on performance evaluation; (d) budget provision for twenty-one days of pre-service training and semi-annual week long refresher trainings; and, (e) 95 percent positions filled in accessible areas. 35. In addition to PNPM-Rural's work with the Bank‟s fiduciary and governance teams, four additional activities promote anti-corruption work in the project: (a) A comprehensive Governance Review of the program will be conducted to further strengthen PNPM‟s governance and integrity framework. The central/local government levels and community level are all important and due for review. The Review will build on, and expand the scope of, ongoing commitments:  A first phase will consist of an in-depth and systemic analysis of the existing program, addressing both the central/local government levels, and including management arrangements and incentives. The results will inform the ongoing implementation of the PNPM-Rural portfolio and preparation of PNPM-Rural V.  A second phase will focus on the community level, where the bulk of funds are disbursed to community organizations, and consist of an applied exercise to review the utility and robustness of governance systems, transparency and downward accountability mechanisms at the community level, with a proposal to bring FM and governance 38 specialists/practitioners from community development programs in other regions to Indonesia to review practices, procedures and experience, share lessons, etc. (b) Through the establishment of the Bank-managed PNPM Support Facility in Jakarta, it is feasible to adopt an implementation support strategy that involves constant rather than periodic oversight. Field supervision and monitoring intensified in 2010, and implementation support missions, which cover between two and four provinces, will be fielded at least once a month in 32 provinces to review aspects of the programs and to provide implementation support. Specific attention will go to: (i) improving fiduciary controls and oversight; (ii) undertaking technical reviews of project implementation; and (iii) preparing ex-post community procurement reviews; and, (iv) monitoring follow up of fraud and corruption complaints by responsible parties. (c) PNPM‟s Multi-donor Trust Fund (PSF) includes a window dedicated to strengthening government agencies‟ ability to monitor and oversee PNPM and a window to involve civil society and NGOs. PSF has moved towards a “portfolio approach” to supervision and monitoring whereby the various programs and pilots under the PNPM umbrella are supervised in an integrated fashion. The benefit of this portfolio approach is that challenges with core systems such as the MIS, complaints handling system, performance management of staff, or relations between the management consultants and Satkers, can be addressed in a comprehensive fashion rather than on a project-by-project basis. 36. The analytical work conducted through the PNPM Support Facility on governance and anti- corruption includes several PNPM-based activities, such as longitudinal reviews of what makes for effective corruption reduction; randomized evaluations (in partnership with the national anti-corruption board) on petty corruption in government programs. While results from such programs benefit the Bank's overall governance reform strategy, they also benefit PNPM implementation. F. Environmental and Social (including safeguards) 37. There are two safeguards policies trigged under the project: OP 4.01: Environmental Assessment; and OP 4.10: Indigenous Peoples. Environmental and social safeguards are built into Project operations through the IGSES. During PNPM-Rural IV preparation, GoI undertook a review and consolidation of its environmental and social safeguards approaches and documentation and combined them into a consolidated set of guidelines and associated checklists and forms that replace the frameworks used in earlier PNPM projects. Two formal changes were made to reflect this streamlined approach. OP 4.04 on Natural Habitats is not triggered as the program will not be undertaken in prohibited, critical natural habitats, nor will it result in significant conversion of natural habitats. OP 4.12: Involuntary Resettlement is not triggered because it was determined that due to the community driven nature of PNPM, any land provided will only be on a voluntary basis, and will be documented in accordance with the IGSES. The Project does not involve or permit involuntary taking of land and involuntary restrictions of access to legally designated parks and protected areas. Environment 38. Experience from the ongoing PNPM-Rural projects as well as their predecessor, the Kecamatan Development Projects (KDP), indicate that any adverse environment impacts are typically site specific, small in scale and can be managed locally by adopting screening criteria, good engineering designs and construction practices. This is also the case for PNPM-Rural IV which follows the same design and the same project components as PNPM-Rural III. Nonetheless, with the substantial scope of operations under PNPM-Rural IV, and an implementation area that spans environmentally and socially sensitive areas, 39 ensuring sufficient attention to the relevance and the application of Safeguards guidelines, and their adequate monitoring and oversight, is a priority. 39. With village grants capped at US$35,000 and a mean of $20,000, PNPM-Rural infrastructure is very small, hence the associated potential environmental impacts are of a concomitant scale. No PNPM- Rural subproject reaches the minimum threshold needed to trigger Indonesia‟s environmental assessment procedures. The 2006 review of 321 randomly chosen villages found no cases of significant adverse environmental impacts. Minor impacts included poor site management, poor placement of water facilities, and failure to conduct PNPM‟s environmental awareness programs for villagers. 40. Field oversight reviews have not identified significant or recurrent environmental impacts. Site visits by oversight engineers and the national project management database record environmental concerns, and these were reviewed during the appraisal of the KDP and PNPM-Rural project series. Bank supervision missions also include environmental safeguard specialists as well as civil engineers with environmental training. Typical examples of negative environmental impacts are set out in the Table 3.4 along with control strategies that could be used to avoid similar problems in the future. Table 3.4: Sample Cases of Environmental Impact in KDP/PNPM Rural Location Activity Environmental Impact Control Strategy Sub-district Irrigation project Aek Caused downstream areas Incorporate standard Sosopan, South Bustak. to suffer drought from lack guideline requiring design Tapanuli, North of water flow. engineer to check effects of Sumatra. incremental water demand on downstream users. Lancap Jae, Sub- Use of heavy equipment Disturbed wildlife in the Largely unavoidable and only district Arse. in constructing a new surrounding forest. of short term effect. No road. special safeguards recommended Cilacap, Central Construction of a bridge Reduction in flow area Failure to follow good design Java. with a reduction in the caused a stream to principles. Need to find out wetted perimeter of the overflow, causing damage why communities or their channel. to productive rice fields. engineering advisers were not applying standard design safeguards to supervise for the required certification. 41. The principle behind managing environmental impacts in PNPM-Rural is to limit potential negative impacts and to develop the positive impacts of any infrastructure construction activity. As part of the planning process, a form indicating potential environmental issues is provided in the IGSES, which is a supplement to the Operations Manual. Potential impacts are then monitored during and after implementation by the village and technical facilitators. 42. The following items are on the project's negative list and are reflected in the project's legal documents: (a) Activities related to the military or army; activities related to political practices or parties. (b) Building/rehabilitation of government offices or religious facilities. (c) Purchase of chainsaws, weapons, explosive materials, asbestos, or other environmentally destructive materials (such as pesticides, herbicides, prohibited drugs, etc.) (d) Purchase of any fishing boat with capacity above 10 tons and any related equipment. 40 (e) Government officers' salary. (f) Activities using child labor below working age per regulations of the Borrower. (g) Activities related to the production, storage or sale of goods with tobacco content. (h) Activities in locations which are stated as a natural preserve per the regulations of the Borrower, except in any case in which there is a written permit from the official responsible for management of any such locations. (i) Activities for mining or collecting or usage of reefs. (j) Activities related to management of water resources from any river that flows from or to a country other than the territory of the Borrower. (k) Activities related to relocating river lines. (l) Activities related to reclamation of land of more than 50 hectares. (m) Building any new irrigation network with an area of more than 50 hectares. (n) Activities to build a dam or water tank with large capacity of more than 10,000 cubic meters. Indigenous Peoples 43. Indonesian communities covered by the World Bank‟s policy on indigenous people can generally be classified in two categories: (a) Masyarakat Adat /Adat communities/Customary law communities. These are based on lineage or locality and are bound by customary law. Characteristics of these communities include: (i) self identification as a distinct indigenous cultural group, (ii) collective attachment to ancestral territories and to the natural resources in the territories; and (iii) customary cultural, economic, social, or political institutions. (b) Komunitas Adat Terpencil (KAT)/Isolated and Vulnerable communities (IVPs). This is a government-designated category of customary law communities that live in isolated areas. The characteristics attributed to these communities include: (i) collective attachment to ancestral territories and to the natural resources in the territories; (ii) customary cultural, economic, social, or political institutions; and (iii) an indigenous language. They are also identified by government as: (i) having a subsistence economy; (ii) using simple tools and technology; (iii) having a high dependence on the environment and local natural resources; and (iv) having restricted access to social, economic, and political services. 44. These two categories are included as part of the PNPM-Rural's guidelines to ensure full participation of indigenous communities, including principles of free prior and informed consultation with a broad community support schemes during subprojects preparation. 45. Review of Experience. KDP / PNPM did not anticipate any significant adverse impacts on indigenous or culturally distinct populations and none have been found during project supervision. Test cases specifically supervised for this purpose have included the Baduy, on Java, who as a rule reject outside development projects, and indigenous communities on the island of Nias, near West Sumatra. In both cases KDP / PNPM practice proved highly adaptive. In Baduy the project did not enter until it was approached by traditional leaders and the terms of encounter negotiated and recorded by both sides. In Nias, KDP / PNPM initially experienced several implementation problems because of its isolation and the deeply hierarchical village structures, but again no adverse impacts could be identified. Ongoing post- tsunami reconstruction is closely supervised by the Bank through the closely linked KRRP (KDP Recovery and Rehabilitation Project) funded by the MDTF for Aceh and Nias and, again, no adverse impacts have been identified on any of the indigenous communities. General supervision in the eastern islands also did not turn up any systemic adverse impacts on ethnic minorities. Specific measures in the 41 project design that appear to promote culturally appropriate activities include the villager's customary authorities own election of their representatives to the project, use of sub-village planning units, and even flexibility in facilitator's operational funds that allows them to support traditional customary activities. 46. Project design itself has also proven to be somewhat more flexible than anticipated when it first started. Thus, in provinces such as Aceh or West Sumatra, where kin-based descent units also carry out important administrative functions, the project produced special guidelines that used these traditional units rather than the standard sub-district and village structures. In parallel with the increased use of culturally apposite forms of social organization has come an entirely new generation of problems associated with the people excluded by traditional social structures, such as, for example, women, immigrants or villagers of low status groups. These problems do not have easy solutions. For the moment the primary means for addressing them is through better training and facilitation, with some trials (e.g., in Aceh) to work with traditional leaders on making their group's workings more inclusive. Land Acquisition 47. PNPM-Rural has a simple policy framework and a set of operational procedures to guide cases of land acquisition in village sub-projects. PNPM Rural's guidelines and reporting formats are part of the IGSES supplement to the Operations Manual. Implementation of these guidelines is built into the Operations Manual oversight and facilitator terms of reference, and the project provides both internal and independent monitoring of their implementation. Policy guidelines and procedures meet the standards of World Bank policies on voluntary land donations. 48. As it will not be possible in many cases to eliminate the need for acquisition, the guidelines allow for acquiring assets through the following two methods: (a) Voluntary Donations. In accordance with local custom, community members have the right to donate their land or other assets or to move their homes temporarily or permanently without seeking or being given compensation (with proper recording). (b) Donations with Compensation. Persons who donate their land or other assets have the right to seek and receive compensation (partial or full market price of the property). G. Project Monitoring and Evaluation 49. The objective of the PNPM-Rural M&E system is to provide stakeholders with timely and empirical information to monitor and improve the program, and assess results, specifically with respect to the PDO level indicators discussed in Annex 1. M&E activities are funded under Component 4 of the loan (primarily for MIS and other monitoring activities) as well as via a separate trust fund (M&E Special Studies) under the PSF. 50. Monitoring. Monitoring activities are designed to ensure that the government has a current understanding of project progress and efficiency, and an ability to track progress and improve the quality of implementation. The data collected focus on input and outputs to assess whether locations are receiving required inputs, progress toward completion of socialization activities, proposal development and sub-project construction, and accounting for disbursement. The monitoring system is also designed to directly collect data on PDO-level indicator 3 (satisfaction of beneficiaries with service delivery and local governance) as well as project component intermediate results listed in Annex 1 through a number of complementary measures including: (a) the project MIS system; (b) community participatory and independent external NGO monitoring; (c) financial supervision and audits; and (d) Government, 42 Consultant and World Bank field supervision reporting. A Complaints Handling and Grievance Redress mechanism is also in place to document and track response to any issues arising in the field. 51. The government currently has in place an MIS system which collects a comprehensive set of data on every village/sub-project in the program. However, the scale up of PNPM over the past few years, including the addition of pilots (including disaster relief, PNPM-Generasi, PNPM-Green) has generated some problems with timely receipt of information and data management. As part of an agreed action plan to address these issues, the government has started a renewal of the system building on lessons from similar programs in other countries, including the National Solidarity Program in Afghanistan which is providing support to PMD. Furthermore, the GoI committed to ensuring that all MIS positions at the NMC will be filled, has created additional data entry positions at the district level to ease the burden on district and sub-district level facilitators, and is hiring programmers at NMC to better integrate the currently disparate pilot program systems with the main system for PNPM-Rural IV with the objective to move toward a fully integrated web-based system. The government has also committed to improving the quality and effectiveness of the final user-level reporting mechanisms to ensure that MIS system data is used to identify problems more quickly and improve project implementation via a PSF-funded recipient executed grant with Bappenas. The full development and launch of the new system may occur beyond the project period. There will also be new staff recruitments and training. 52. Evaluation. The overall evaluation framework includes: (a) impact evaluation activities designed to directly measure project impact for PDO level results indicators as well as other areas of interest to the government; and (b) studies planned to address issues critical to the government‟s learning agenda in greater depth. Designs utilize mixed methods approaches, including both qualitative and quantitative components when feasible. In the past, the bulk of the analytical work was carried out by international experts, with support from the World Bank. The program is shifting its approach to increasingly work with and through national research institutes and, by doing so, foster capacity in these organizations, as part of an effort across development partners to strengthen the knowledge sector in Indonesia. 53. Impact Evaluation. During preparation for PNPM-Rural I, the task team and government agreed on a rigorous impact evaluation plan designed to evaluate the PDO-level indicator 1 (increase in per capita household expenditure) as well as other key areas of interest to the government (poverty, access to services, employment and governance). A key feature of the design was the use of a well-identified control group to use as a counterfactual comparator with PNPM locations. Given that the scale-up of PNPM to every rural sub-district in Indonesia was to be completed by 2010, the period available for evaluation was limited to 2007-2009. The results of this evaluation showed that PNPM households saw their consumption increase by 5-7 percent more than the control households; poor PNPM households and PNPM households located in poor and remote sub-districts saw larger gains of 6-8 percent and 15-19 percent, respectively. Because all control areas are now receiving the project, there will not, however, be an opportunity to continue to rigorously evaluate PDO-level Indicator 1 for PNPM-Rural IV. Given the fact that the results are consistent with an evaluation of predecessor project KDP2, and that the project design and implementation have not changed, the results obtained for the evaluation of PNPM over 2007- 2009 are considered representative of the impact for the overall PNPM engagement from 2007-2012/13. It is planned to complete an updated economic analysis study in the coming year (2011/12) with results available in 2012 to report on PDO-level Indicator 2, Economic Internal Rate of Return. 54. Thematic Studies. Several areas of interest on the government‟s learning agenda are being explored via in depth thematic studies, including, inter alia: (a) Local Level Institutions: a mapping of the power, political and incentive-based relationships between institutions at the district and village levels including communities, village government, district government, district service provision and community development 43 programs. The study is designed to determine how PNPM can be improved to increase social accountability with poverty reduction programs at the local level. (b) Incidence of Benefit: will explore how infrastructure benefits are distributed among households at the village level across socio-economic characteristics, including gender, poverty, and relationship with village government. (c) Infrastructure Census: will develop a database of all available infrastructure for every village in Indonesia (including main road, bridges, water supply, schools and health clinics) in order to estimate the remaining infrastructure deficit, financing gap of addressing the deficit and to track the progress of reducing the deficit over time. The objective is to increase the capacity of the government to utilize a more systematic and evidence based approach to determining needs and priorities for PNPM moving forward (including targeting, maintenance and block grant size), assessing the impact of community-based programs on poverty reduction and determining local government block grant allocation. (d) Community Management of Development Portfolio: The government is currently developing a strategy to integrate all community based poverty reduction programs into a single platform. The study will determine what mechanisms communities are using to manage the proliferation of these programs as an input to the overall integration strategy. 55. Pilots. In order to continue to improve implementation effectiveness and project design, a number of ongoing pilots are planned or currently under implementation which are supported by impact evaluations: (a) PNPM Generasi: recently, a 3-year evaluation of PNPM-Generasi was completed and plans for subsequent evaluation of the new project design for Generasi going forward are being developed. (b) Revolving Loan Fund: the new Revolving Loan Fund pilot is being implemented in Central Java and Yogyakarta with plans to expand to two additional off-Java provinces in late 2011. A randomized evaluation for both the on- and off-Java locations is in preparation. H. PNPM Support Facility (PSF) 56. The PSF was established in 2007 through a multi-donor trust fund to support the management and technical implementation of PNPM (which includes PNPM Rural) with the following specific objectives : (a) ensure better coordination among development partners and across grants supporting PNPM; (b) develop capacity at all levels to plan, manage, and improve poverty reduction programs; (c) reduce poverty through government and civil society partnerships; and (d) support high quality monitoring and evaluations efforts. 57. A Joint Management Committee (JMC) chaired by Bappenas and co-chaired by the Bank governs the PSF. In addition to Bappenas and the World Bank, Australia, Denmark, the European Commission, the Netherlands, the United Kingdom, and the United States are members of the JMC. Menko Kesra and the MoF are also members of the JMC. The Vice President's Poverty Commission (TNP2K) actively coordinates with the PSF. The Asian Development Bank, the Islamic Development Bank, Japan and 44 Canada, which contribute significant resources to PNPM Mandiri and other community empowerment programs, maintain coordination with the PSF, but are not members of the JMC. 58. The PSF is a key vehicle for GoI and other stakeholders coming together to discuss strategic directions. Four strategic issues emerge as priority items: (a) integration of various community-driven development programs within Cluster 2 of the government‟s poverty alleviation framework; (b) adjustment of the core PNPM model to different kinds of poverty across Indonesia's diverse regions; (c) bringing the social capital created through PNPM to bear to strengthen the downward accountability of local government; and (d) strengthening the "handshake" between PNPM and sector service delivery. 59. PSF commitments more than doubled in 2010 reaching US$90 million, and are set to more than double again with expected commitments reaching over US$185 million in 2011. Commitments are channeled through four windows: (a) Block grants to communities, using the established mechanisms of the PNPM core projects. Examples include support to PNPM's Generasi incentivized block grant pilot program to support health and education outcomes, and support to disaster recovery efforts. (b) Coordination and supervisory support, which entails managing the PSF program and its projects, reporting, knowledge management, and staffing. (c) On-granting to Indonesian civil society, intended to harness the resources and capabilities at the grassroots level to reach the marginalized who are not currently being reached by PNPM; and (d) Specialized technical assistance, which consists of expertise related to M&E and special studies. 45 Annex 4: Operational Risk Assessment Framework (ORAF) Project Development Objective(s) The project development objective for PNPM-Rural IV is for villagers in PNPM-Rural locations to benefit from improved socio- economic and local governance conditions. PDO Level Results 1. Improved HH expenditure rates and improved access to economic and social services in a Indicators: minimum of 4,978 sub-districts in 2011. 2. >80% satisfaction levels from beneficiaries regarding improved services and local level governance. 3. EIRRs >30% for main rural infrastructure categories. Risk Category Risk Rating Risk Description Proposed Mitigation Measures At the local level, some villagers may Strong facilitation; strengthening of be marginalized by village elites inter village decision-making forums; Stakeholder and/or local governments exert too requirements for female representation L much influence on the allocation of in key positions; and oversight block grants. practices. PMD has insufficient capacity to Joint reviews by task team and key manage a national program across senior government officials will various agencies and levels of monitor follow through of benchmark government; poor quality of NMC commitments and increased Bank and RMC performance, including supervision on governance, and adequate qualified staff on fiduciary aspects. Implementing Agency Risks H procurement, FM, and IT/MIS. (including FM & PR Risks) IFRs will be post-reviewed by auditors The fiduciary and monitoring systems and issues solved prior to the have come under strain because of processing of the next Withdrawal rapid expansion of the program to Application. national scale. They may be compromised by lack of adequate PMD will undergo a functional review 46 Risk Category Risk Rating Risk Description Proposed Mitigation Measures oversight from regional/national to redefine job descriptions, revise teams, delayed response to „red flags‟ number of positions needed, and and poor functionality of IT/reporting ensure positions are adequately staffed systems. in line with the GoI policies with regard to rotation of staff. Additional TA provided in FM and procurement. SOP has been issued clarifying roles and responsibilities of PMD, NMC, and RMCs. Mandatory good quality pre-service and refresher training for facilitators provided. Joint audits by BPKP and district auditors in 20% of sub-districts, with reports and recommendations posted on project‟s website and tracked. Improved web-based complaints handling database with case tracking. Introduction of service standards for automatic action after 30 days for fraud or corruption in kecamatan grants or by consultants, leading to temporary suspension of disbursements and termination of the facilitator contract and debarment of the individual by the client. Improved MIS/IT system to provide 47 Risk Category Risk Rating Risk Description Proposed Mitigation Measures better management tools and improved management control systems. Incorporation of the Better Governance Action Plan in the project‟s operations manual and disclosure on website. The Revolving Loan Fund (RLF) A dedicated pilot is now focusing on encounters problems of fraud and assessing and improving RLF design Design corruption after the first cycle. and operations and will make M-L recommendations to transform RLF operations into more financially and institutionally sustainable forms. Lack of due attention to, or oversight IGSES has been introduced as annex of, the Bank‟s Safeguards policies to project‟s operations manual and the (particularly after the scale-up) on the Bank task team will monitor its Social & cumulative impacts of small-scale implementation Environmental L subprojects. Training for facilitators and project Insufficient technical guidance under staff includes safeguards PNPM Green. Lack of cohesiveness among Regular exchange of information and Program & Donor L interventions financed by donors. coordination of activities amongst donors. Project scale could lead to a Joint reviews by task team and key weakening of key design features, senior government officials on such as strong facilitation, formal and implementation quality and informal fiduciary controls, and social recommendations for improvements. Delivery Quality M-I accountability mechanisms. Delays in recruiting, training, and Appropriate HR policies; monitoring retaining qualified facilitators. of training programs. 48 Risk Category Risk Rating Risk Description Proposed Mitigation Measures Monitoring and evaluation agenda Task team will revitalize evaluation could be neglected. work and will support PMD to rebuild MIS. Risk Rating: at Risk Rating during Preparation Implementation Comments This project builds on a strong program that has achieved positive and large scale development results on the ground. While the prevailing risks highlighted above are of significant concern, the mitigation measures that are being put in place will counteract recent weaknesses. Financing will be channeled to existing participating Medium-I Medium-I sub-districts, which have a proven track record in community based resource and project management. The task team will work closely with senior government officials, project agencies, and consultants to ensure that the proposed mitigation measures are effectively implemented. Legend: L: Low; Medium - L :Medium-Likelihood (high likelihood, low impact); Medium - I : Medium-Impact (low likelihood, high impact); H: High. 49 Annex 5: Implementation Support Plan 1. The strategy for implementation support has been developed based on the nature of the project and the ORAF risk profile (Annex IV). It will aim to provide field based, incremental, flexible implementation support to the client through a „portfolio approach‟ to supervision and monitoring whereby the various projects and pilots under the PNPM Rural umbrella are supervised in an integrated fashion. The main thrust of the incremental supervision and monitoring efforts will be to ensure that the agreed benchmarks for an improved management and governance framework are implemented. The team will have regular review meetings with PMD to monitor progress and on a quarterly basis will meet jointly with PMD and Bappenas to review implementation. 2. Capacity: The Bank has dedicated field staff in key geographic locations (e.g., Papua) and a permanent mobile team, who are constantly both responding to information (e.g., disbursement data) and pro-actively addressing risk areas (e.g., staff quality/training). Significant TA is being provided by the Bank through the ongoing projects to address weaknesses in systems that have been catalyzed by the program‟s scale up, particularly on the fiduciary side. The Bank will also assist the implementing agency in: (a) developing a program of formal certification for PNPM facilitators, which would serve as both a quality assurance mechanism and a performance motivator; (b) reinvigorating the program‟s focus on key principles, including community empowerment and downward accountability (e.g., through communication materials and in training modules); and (c) reinforcing third party/community-based monitoring practices, including peer-peer oversight modalities. The Bank and other donor partners have previously supported the implementing agency with dedicated training on procurement, etc. Under this project, additional training support will be offered, with a concomitant commitment by the implementing agency to retain trained staff. 3. Governance: The Bank will assist GoI in conducting a comprehensive Governance Review of the program to build on and expand ongoing commitments to strengthen the program‟s governance and integrity framework. The central/local government levels and community level are all important and due for review. A comprehensive review of these inter-related levels will be conducted through two components: (a). Governance Review - Management and Systems to provide a more in-depth and systemic analysis of the existing program, addressing both the central/local government levels, and including management arrangements and incentives; and, (b) Governance Review - Community level will consist of an applied exercise to review the utility and robustness of governance systems, transparency and downward accountability mechanisms at the community level, with a proposal to bring FM and governance specialists/practitioners from CDD programs in other regions to Indonesia to review practices, procedures and experience, share lessons, etc. The Bank will pay particular attention to supporting the implementation of the findings of the Governance Review. 4. Fraud and corruption: In addition to the Governance Review, which will analyze the robustness of formal and informal fiduciary controls at all levels, the Bank will assist the implementing agency in establishing a task force for information systems review and improvements to audit, and overhaul the existing MIS platform. Specific support will be provided for the testing and roll out of a new web-based complaints-handling system and for the implementation of new protocols for the escalation of complaints, particularly for stagnant and deadlocked cases. The Bank will also assist the implementing agency in conducting a review of internal audit implementation, and in reviewing the external audit manual following the testing of the new risk-based framework. 5. Delivery Quality: The Bank will work closely with PMD to ensure that the key design features of the program, such as strong facilitation, formal and informal fiduciary controls, and social accountability mechanisms are in place. Bank supervision will focus on monitoring that agreed requirements and quality standards for pre/in service training for facilitators and government staff are being met. Adapting the 50 modus operandi of PNPM to match different socio–economic and geographic conditions will be an important aspect of integrating the various PNPM programs and is important for increasing the effectiveness of PNPM as part of GoI‟s broader social protection arsenal. The PNPM Support Facility Trust Fund will continue to finance Bank-executed impact evaluations and special studies to assess the program‟s impacts and provide insights on appropriate block grant size, duration of participation in the program, facilitation/socialization and other project design features for different contexts, including not only poverty and population, but other criteria such as infrastructure deficit and capacity of local governments and communities. 6. Role of other partners: Many of the donors which are active in Indonesia are members of or are affiliated with the PNPM Support Facility and the implementation support shall consist of joint supervision missions. Implementation Support Plan 7. Project implementation will be supported by a task team based in the Jakarta office and in key locations across Indonesia, which will ensure that the Bank can undertake regular field supervision nation-wide and in ongoing policy dialogue on the future of the program and more broadly in GoI poverty reduction efforts. As part a “portfolio approach” to implementation support, joint missions with donor partners of the PSF will be conducted at least once a year; formal supervision missions with GoI will be organized semi-annually; the Bank field team will also conduct routine supervision missions every month. Locations to be visited will be prioritized based on risks, and each of the thirty-two provinces covered by the program will be visited at least twice a year. The Bank is developing a web-based „issue management‟ tool to incorporate implementation issues/risks and related corrective measures identified in Back to Office Reports and Aide Memoires into a single platform, to support pro-active monitoring and follow up on action plans. Detailed inputs from the team are given below: (a) Technical: Appropriate technical specialists will review and guide the Technical Assistance component of the project, and participate in missions,and review the quality of infrastructure works financed in a sample of locations. (b) Fiduciary: Financial Management specialists will conduct regular financial assessments in a (risk based) sample of project locations to gauge compliance with key elements of formal and informal fiduciary controls, including: budgeting and counterpart funding; disbursement status; internal controls including internal audits; accounting and financial reporting; FM facilitation; and management of the RLF. Formal supervision of financial management will be undertaken annually. In addition to the procurement prior review to be carried out by the Task Team, continuous support missions will visit the field on an going basis to carry out spot check post review of procurement actions. The procurement team will provide training at central level, and suggest improvements to the operation manual. (c) Gender: A gender specialist will participate in formal and routine supervision missions to assess whether women are active participants in planning and decision-making, and whether sub-projects funded respond to women‟s needs and increase the potential for women‟s economic activity. They will propose strategies and modifications to project design for effective gender mainstreaming. (d) Safeguards: A safeguards specialist will participate in formal supervision missions to assess the status of safeguard implementation and reporting. 51 (e) Operations: Day to day operations of the project will be supported from the Jakarta office. Table 5.1: Implementation support focus Time Focus Skills Needed Resource Estimate (Staff Weeks) First twelve Implementation of Institutional capacity building 6 months benchmarks to improve Governance 6 governance and MIS 3 management framework Training 3 HR 3 Environmental monitoring Environmental Specialist 4 Social monitoring Social Specialist 4 Financial management Financial Specialist 4 Gender Gender Specialist 3 Community Infrastructure Engineering 3 Procurement training and Procurement Specialist 3 support at central level Procurement expost Procurement Specialist 6 review spot check Communications Communications Specialist 3 M&E M&E Specialist 8 Safeguards Safeguards Specialist 4 (environment and indigenous people) Implementation Support ACS 4 Team Leadership TTL 20 12-48 months Implementation of Institutional capacity building 12 benchmarks to improve Governance 12 governance and MIS 3 management framework Training 3 HR 3 Environmental monitoring Environmental Specialist 8 Social monitoring Social Specialist 8 Gender Specialist Gender 6 Engineering Community Infrastructure 6 Financial management Financial Specialist 8 Procurement training and Procurement Specialist 2 support at central level Procurement expost Procurement Specialist 6 review spot check Communications Communications Specialist 6 M&E M&E Specialist 16 Safeguards Safeguards Specialist 8 (environment and indigenous people) Implementation Support ACS 8 Team Leadership TTL 40 52 Table 5.2: Skill Mix Required Skills Needed Number of Staff Weeks Number of Trips Comments Institutional capacity 10 4 international Governance 18 4 international MIS 6 2 international Training 6 2 international HR 6 2 international Environmental Specialist 12 6 local Social Specialist 12 6 local Gender 9 6 local Community 9 6 local Infrastructure Financial Specialist 12 6 local Procurement Specialist 9 10-12 local Communications 9 6 local Specialist M&E Specialist 24 6 local ACS 12 6 local TTL 60 10 local Technical specialists 20 5 International and local 53 Annex 6: Team Composition World Bank staff and consultants who worked on the project: Team Composition Name Title Unit Susanne Holste Lead Social Development Specialist / Task Team Leader EASID Kevin Tomlinson Operations Officer EASID Sentot Satria Social Development Specialist EASID Natasha Hayward Sr. Social Development Specialist EASER Jan Weetjens Social Development Sector Coordinator EASID Renaud Rodier Social Development Specialist EASID Alex Setiadji Fiduciary/Governance Consultant EASID Sri Kuntari Social Development Specialist EASID John Victor Bottini Social Development Consultant EASID Franciscus Prahastanto Operations Assistant EASID Nia Yuniarti Program Assistant EASID Melinda Good Sr. Counsel LEGES Juan Martinez Sr. Social Development Specialist EASIS Virza Sasmitawidjaja Safeguards Consultant EASIS Dayu Indira Dharmapatni Sr. Social Development Specialist EASIS Catrini Pratihari Safeguards Consultant EASID Dennie Mamonto Safeguards Consultant EASID Amien Sunaryadi Sr. Operations Officer EACIF Rajat Narula Sr. Financial Management Specialist EAPFM Unggul Suprayitno Sr. Financial Management Specialist EAPFM Imad Saleh Lead Procurement Specialist EAPPR Yoko Doi Financial Management Specialist EASFP Dewayani Diah Savitri Gender Consultant EASID Zulfi Novriandi Procurement Consultant EASID 54 95° 100° 105° 110° 115° 120° 125° This map was produced by the I N DO N E SI A Map Design Unit of The World Bank. The boundaries, colors, FOURTH NATIONAL PROGRAM denominations and any other information shown on this map do not imply, on the part of The FOR COMMUNITY EMPOWERMENT 15° World Bank Group, any judgment on the legal status of any territory, or any endorsement or IN RURAL AREAS INDONESIA acceptance of such boundaries. CITIES AND TOWNS VIETNAM PROVINCE CAPITALS MYANMAR NATIONAL CAPITAL 135° 140° PHILIPPINES PROVINCE BOUNDARIES 10° INTERNATIONAL BOUNDARIES 10° THAILAND Sulu Sea 0 200 400 Kilometers Banda Aceh L A Y 0 100 200 300 400 Miles 5° A S BRUNEI 5° 1 Medan M Natuna I Celebes Talaud Is. Besar Tarakan Pematangsiantar Sea P A C I F I C O C E A N A A 24 Halmahera Simeulue 19 Morotai Island 2 Manado SINGAPORE 23 Nias Tanjungpinang Pekanbaru 25 Ternate Waigeo 0° 3 Pontianak 26 Gorontalo 0° Lingga 20K A L I M A N T A N Samarinda Manokwari Me Padang 30 Biak Balikpapan Palu Peleng Sorong 4 nt Siberut 5 Jambi Bangka 21 aw Obi Misool 32 Yapen SUMATERA Pangkalpinang Palangkaraya SULAWESI Sula Is. Jayapura ai 9 Mamuju Ceram 6 Palembang Belitung 22 27 Fakfak Is 28 Kendari Buru Amahai . 7 Bandjarmasin 29 33 Bengkulu Parepare Ambon PAPUA Bandar 8 NEW GUINEA Muna Kai Timika 5° Java Sea Makassar Lampung 11 Baubau Is. Enggano JAKARTA 31 PAPUA Banda Sea Aru Serang 12Bandung Semarang Is. Madura 10 JAWA13 Wetar Surabaya Babar Tanimbar 16 Sumbawa Alor Moa Yogyakarta 15 Bali Lombok Flores Is. Raba 14 Merauke Denpasar Mataram Ende 17 Waingapu 18 Sumba TIMOR-LESTE Arafura Sea PROVINCES: 10° Timor 10° 1 NANGGROE ACEH DARUSSALAM 12 JAWA BARAT 23 KALIMANTAN TIMUR Kupang 2 SUMATERA UTARA 13 JAWA TENGAH 24 SULAWESI UTARA 3 RIAU 14 D.I. YOGYAKARTA 25 GORONTALO 4 SUMATERA BARAT 15 JAWA TIMUR 26 SULAWESI TENGAH I N D I A N O C E A N 5 JAMBI 16 BALI 27 SULAWESI BARAT 6 BENGKULU 17 NUSA TENGGARA BARAT 28 SULAWESI SELATAN 7 SUMATERA SELATAN 18 NUSA TENGGARA TIMUR 29 SULAWESI TENGGARA 15° LAMPUNG 8 19 RIAU KEPULAUAN 30 MALUKU UTARA 15° IBRD 38629 9 BANGKA-BELITUNG 20 KALIMANTAN BARAT 31 MALUKU AUSTRALIA MAY 2011 10 BANTEN 21 KALIMANTAN TENGAH 32 PAPUA BARAT 11 D.K.I. JAKARTA 95° 100° 22 KALIMANTAN SELATAN 105° 33 PAPUA 115° 120° 125° 130° 135° 140°