Indonesia - Second Eastern Indonesia Region Transport Project : restructuring

49370 DATA SHEET TEMPLATE FOR PROJECTPAPER Environmental category: B Borrower: Republic of Indonesia Responsible agency: Ministry of Public Works Revisedestimated disbursements (Bank FY/US$m) Does the restructured project require any exceptions to Bank policies? -Yes XNo Have these been approved by Bank management? -Yes -No I s approval for any policy exception sought from the Board? -Yes &No NIA Does the restructured project trigger any new safeguard policies? If so, click here to indicate which one(s) [selection box like the one in the new ISR] No IBRD/IDA Others ---  Republic of Indonesia Second EasternIndonesia Region Transport Project (EIRTP-2) Project Paper for Second Order Restructuring 1. Introductory Statement This project paper seeks the approval of the Regional Vice President to introduce the following changes in the Republic of Indonesia, Second Eastern Indonesia Region Transport Project (EIRTP-2), Loan No. 4744-IND, P074290, and accompanying amendments to the Project's legal documents. The proposed changes are (i) cancellation of several technical assistance (TA) components, (ii) Revision of the measurement methods of a few performance indicators (PI), (iii)reallocation of savings and unallocated funds, and (iv) the extension of the closing date by 21 additional months. The proposed changes are in line with and will contribute toward meeting the original project development objectives of the Project. 2. Backgroundand Reasons for Restructuring The project was approved on June 22, 2004, and became effective on October 21, 2004. The project development objectives (PDOs) are to (i) improve condition of the strategic road network in order to reduce transport costs and enhance regional accessibility, (ii)support decentralization of planning and management responsibilities for works on Provincial and Kabupaten roads to the respective provincial and Kabupaten governments, and (iii) increase the efficiency, quality and transparency of works procurement and implementation. The project has been performing moderately satisfactory (MS) to date with regard to the PDOs and implementationprogress (IP). A summary of past ISR ratings i s shown inAnnex 1. The MS rating for PDOs and IP are mainly due to the slow progress of the implementation of the civil works components. As of March 2009, 92 contracts representing nearly 1,600 km of road valued at IDR 1.839 billion (US$172 million equivalent) have been contracted, of which 45 contracts, representing about 590 km of roads, valued at about IDR 513 billion (US$35 million equivalent) are complete. This means the overall physical progress is about 37 % in projectedroad length, and 20 9% in monetary value. The disbursements are about US$105 million, which is about 53 9% of the Loan amount (US$199 million). Given delays in implementation of both national and sub-national roads, the Project will require an extension of the Loan closing date. Although the Project has significant delays in implementation, the bulk of the design and preparation of the bidding documents are now complete, and the Project is performing moderately satisfactory. The outcomes would be enhanced through the proposed restructuring associatedwith the extension of the closing date and the proposed changes. 3. Proposed Changes The proposed changes are as follows: (i) Cancellation of three TA components. Due to the changes in the technical environment and policies during the last five years the following TA components are proposed to be cancelled. (a) TA for training support, due to 2  the difficulties in the selection process and GOI's new policy to use its own funds, not foreign loan, for internal training, (b) TA for establishment of Road Board and Road Fund, as the Government has put a proposal to the parliament to revise the current legislation (Traffic and Road Transport Law) to allow for the establishment of a Road Fund and i s waiting for the outcome before committing to this component, (c) TA for Traffic and Road Asset Monitoring System, as the MPW decided that the proposed system i s premature in the current technical environment of Provincial and Kabupaten roads. (ii)Revision of the measurement methods of two performance indicators. The following two revisions are proposed for refinement of the PImeasurement. (a) 2c: "percentage of works packages reported by the RDSCs in environmental monitoring reports to Bapedalda" - the words "to Baledalda" will be deleted. This is because the Regional Design and Supervision Consultants (RDSC) does not report to Bapedalda (Environmental Agency in each sub-national government), and report to DGHon all contracts. (b) 3c: "Number of technical audits carried out by Inspectorate General" - the word "number" is to be replaced with the word "ratio", as the number of original contracts has fallen substantially, so the target i s proposed to be set at the same ratio (52 %) as the original target. (iii)Reallocationofsavingsandunallocatedfundsrelatedtothemodificationofthe project structure. This i s due to the facts that (a) The Government has updated strategic plan for maintenance of National roads, which necessitates increased allocation for National roads, and also the MPW needs to provide special support to infrastructure development for the new province of Sulawesi Barat which was established in October 2004, (b) the project will have some savings by the design adjustments and low tender prices of Goods category, and (c) several TA components need to be cancelled, and (d) reallocation of Unallocated component i s intended to complete the National roads component. The proposed reallocationof funds is shown inAnnex 2. (iv) The extension of the closing date bv 21 additional months to March 31, 2011. The Ministry of Public Works (MPW) has examined the status of all the works packages and analyzed the factors to influence the further implementation, including the grant mechanism for ongoing sub-national works. It is expected that 15 National road contract packages (9 ongoing, 5 rebid and 1 not yet tendered) and 49 Provincial and Kabupaten road contract packages (27 ongoing, 16 in tender process or to be rebid, and 6 not yet tendered) will not be completed by the original closing date (June 30, 2009). The estimated works completion i s expected in December 2010 *(the revised implementation schedule i s shown in Annex 3). This i s considered as the optimal time for completion of all the packages of Notional, Provincial and Kabupaten road works, and optimal use of Loan funds without exceeding the total Loan amount. The proposed extension of the closing date i s based on this estimate and the proposed action plan (shown in Annex 4) to complete the project by the revisedclosing date. 3  4. Analysis The proposed changes are not expected to have any major effect on the original economic, financial, technical, institutional or social aspects of the project as appraised. The proposed changes do not raise environmental category of the project nor trigger new safeguard policies. The proposed changes do not involve any exceptions to Bank policies. 5. ExpectedOutcomes The proposed changes will not affect the achievement of the intended PDOs, outcome targets, or outcome indicators. 6. Benefitsand Risks With the proposed restructuring of the Project, there is no major risks that could jeopardize the achievement of the original PDOs and outcome targets including political, policy-related, social/stakeholder related, macro-economic, financial, institutional or capacity related risks. Fraud and corruption are serious risks in the context of infrastructure development in Indonesia. Both EJRTP 1 and EIRTP 2 have been subject to investigations by the Bank's Integrity Vice Presidency (INT). INT has ,substantiated a number of allegations which have resulted in the application of appropriate remedies, and some entities may be subject to Bank sanctions for engaging in collusive and corrupt practices. EJRTP 2 includes a substantial anticorruption plan, the elements of which aim to detect and mitigate such risks. 4  Annex 1:Summary of ISR Ratings Item Project Development Objectives Implementation Progress Financial Management Project Management Counterpart Funding Procurement 1 Monitoring & Evaluation Overall Safeguard Compliance Note: S=Satisfactory;MS=Moderately Satisfactory;MU=Moderately Unsatisfactory;U=Unsatisfactory 5  Annex 2: ProposedReallocation of Funds Allocation (US$) Aide-memoire Proposed No Category Original November 2006 reallocation* 1 Civil Works (a) NationalRoad 23,260,000 43,653,832 77,334,000 (b) Provincial Road 53,470,000 53,203,506 40,000,000 (c) Kabupaten Roads 52,440,000 54,072,662 41,000,000 2 Goods 6,000,000 6,000,000 4,446,000 3 Incremental Operating Cost 1,600,000 1,600,000 750,000 4 Consultant Services & Training 34,470,000 34,470,000 34,470,000 5 Front EndFee 2,000,000 1,000,000" 1,000,000 6 Unallocated 26,760,000 5,000,000 TOTAL 200,000,000 199,000,000 199,000,000 *The Loan amount has become US$199,000,000 after the Bank cancelled US$l,OOO,OOO of the Front-end Fee. 6  Annex 3: Revised Implementation Schedule (please see the attached bar-chart) 7  Annex 4: Action Plans to Complete the Project by the Revised Closing Date 1. Actions for ContinuousFinancingfor Sub-nationalRoadsComponent a. The critical issue for continuing the implementation of Provincial and Kabupaten roads is the difficulty to extend the Sub-national Grant Agreement to maintain financing of Provincial and Kabupaten road packages. The original Grant mechanism was based on the MOF decree No. 35/KMK.07/2003 on Loans to Regions, and has continuedunder transition arrangements contained in the revised decree No. 52/PMK.010/2006. However, these arrangements are no longer valid under the new decrees No. 168 and 169 of 2008. A new Grant mechanism would need to be developed under decrees No. 168 and 169 of 2008, however, this process i s likely to take considerable time, and potentially runs beyondthe current Loan Closing Date. b. In order to speed up the process, it is proposed to continue to use a mechanism based on transfers from the Central Government, since the Road Law no. 38/2004, Article 30.I d allows the Central Government to assist sub-national governments. The MPW has already set aside a budget of Rp.251.84 billion in 2009 for the purpose of financing the Loan share of sub-national road works under EIRTP-2. C. The above action plan needs a mechanism to involve transfer of rights to work on certain sections of sub-national road components to the Central Government in line with the Loan portion, which will be returned to the sub-national governments at the completion of the works. The sub-national governments will continue to contribute their own share in line with the original Grant Agreements. The DGHwill be responsible for the usage of the Loan share funds. d. A statement of obligations including allocation of funds, accepting the Loan Agreement covenants including the Project Management Manual and maintaining the works on the targeted roads will be contained in a Declaration by each sub- national government. 2. Actions for Managing Implementation of the Remaining Works To ensure good control of the remaining works implementation including both ongoing and new contracts, the following actions will be taken: - Ongoing contracts will maintain their validity, and will not be split. However, they will have two sources of funds, namely the national portion (Loan share) and the Region's contribution (equivalent to the counterpart funds), - The contracts will be managed by a single unit, the "Work Unit" (Satker Daerah) who will be authorized by a decree from the Central Government for the Loan share, and from the sub-national governments for their contribution. - Supervision of the whole works will continue to be carried out by the Regional Design and Supervision consultant (RDSC) engagedby the Central Government. 8  am mr Lul  I I I II I a mWN c 0  I I1 I I I1 1  0 I I I I I I II I  0....In