Indonesia - Urban Water Supply and Sanitation Project

Documentof The World Bank FOROFFICIALUSEONLY ReportNo: 38860-ID PROJECT APPRAISAL DOCUMENT ON A PROPOSEDLOAN INTHEAMOUNT OF US$23.56MILLION TO THE REPUBLIC OF INDONESIA FOR AN URBANWATER SUPPLY AND SANITATION PROJECT June 24,2009 UrbanDevelopment Sector Unit EastAsia 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 Bankauthorization.  CURRENCY EQUIVALENTS (Exchange Rate Effective November 17,2008) Currency Unit = Indonesian Rupiah(IDR) IDR 1 = US$0.0001063 US$l = IDR9,400 FISCAL YEAR January 1 - December31 ABBREVIATIONS AND ACRONYMS ADB Asian Development Bank APBD Anggaran PendapatandanBelanja Daerah(local budget andrevenue) APBN Anggaran Pereacanaan BelanjaNegara (central government budget) ASEM Asia-Europe Meeting Funds AusAID Australian Aid Agency BAPPENAS Badan Perencanaan Pembangunan Nasional (Agency for NationalDevelopment Planninghlinistry of Planning) Bawasda Badan Pengawasan Daerah (local audit) Botabek Bogor Tangerang Bekasi BP Best Practices BPKP BadanPengawasanKeuangandanPembangunan(state audit) CPS Country PartnershipStrategy (also referred to as Country Assistance Strategy (CAS)) CQS Consultant's Qualification Selection DA Designated(Special) Account DAK Dana Alokusi Khusus (SpecialAllocation Funds block grant from central - government to local governments for specialpurposes) DAU Dana Alokasi Umum (General Allocation Funds- block grant from central government to local governments for generalpurposes) DG Directorate General DGCK Directorate Generalof CiptaKarya (Directorate General of Human Settlements ofthe Ministry of Public Works) DPRD Dewan Perwakilan Rakyat Daerah(local parliament) DSCR Debt Service CoverageRatio EIRR Economic Internal Rate of Return EMP Environmental ManagementPlan ENPV Economic Net PresentValue FM Financial Management I FNPV Financial Net PresentValue FRAP Financial Recovery Action Plan FY Fiscal Year GDP Gross Domestic Product Go1 Government of Indonesia .. 11  FOROFFICIAL USE ONLY IBRD International Bankfor Reconstruction and Development ICB International Competitive Bidding IDR IndonesianRupiah IuFR Interimun-auditedFinancial Report IG Inspectorate General Keppres KeputusanPresiden (presidential decree) KPA Kuasa PenggunaAnggaran (authorized use of budget) KPPN Kantor PelayananPerbendaharaanNegara (government treasury office) L A M P LandAcquisition and Resettlement Action Plan MAK Mata Anggaran Kegiatan (budget of activity) MDG MillenniumDevelopment Goal MoE MinistryofEnvironment MoF MinistryofFinance MoH MinistryofHealth MoHA MinistryofHomeAffairs MoPW MinistryofPublic Works NCB National Competitive Bidding NRW NonRevenueWater O&M Operation andMaintenance PAMSIMAS ProyekAir Minum dun Sanitasi berbasis Masyarakut (Indonesianterm for WSSLIC) PCU Project Coordinating Unit PDAM PerusahaanDaerahAir Minum (local water utility) PEMDA PemerintahDaerah (local government) PIU Project ImplementationUnit PMM Project ManagementManual PP Peraturan Pemerintah(government regulation) PPIAF Public Private Infrastructure Advisory Facility RPJM Rencana PembangunanJangkaMenengah(MediumTerm Development Plan) SATKER SatuanKerja (working unit) SBD StandardBidding Document SIDA SwedishInternationalAid Agency SIL Specific Investment Loan SLA Subsidiary Loan Agreement SP2D Surat Perintah PencairanDana (SubsidiaryRemittanceOrder) SPM Surat PerintahMembayar (Payment Order) SPP Surat PermintaanPembayaran(Payment Request) TOR Terms of Reference UDP Urban Development Project UKL UpayaKelola Lingkungan(Environmental Management Plan) UPL UpayaPemantauanLingkungan (Environmental Monitoring Plan) USAID UnitedStates Aid Agency UWSSP UrbanWater Supplyand Sanitation Project WASAP Indonesia-Water and Sanitation Program (Dutch-funded Technical Assistance Program) This document has a restricted distribution and may be used by recipients only in the performance o f their official duties. Its contents may not be otherwise disclosed without World Bank authorization.  WBI World Bank Institute WSSLIC Water Supply and Sanitation for Low Income Communities WTP Water Treatment Plant Vice President: Mr.JamesW. Adams, EAPVP Country Director: Mr.JoachimvonAmsberg, EACIF Sector Director: Mr.JohnRoome, EASSD Sector Manager: Ms.SoniaHammam,EASIS Task Team Leader: Mr.SuhailJme'an, EASUR iv  INDONESIA UrbanWater Supply and SanitationProject CONTENTS Page I STRATEGICCONTEXTANDRATIONALE . .................................................................. 3 A. Country and Sector Issues ................................................................................................... 3 B. Rationalefor Bank involvement ......................................................................................... -6 C. Higher level objectives to which the project contributes .................................................... 6 I1 PROJECT DESCRIPTION . .................................................................................................. 7 A. Lendinginstrument ............................................................................................................. -7 B Projectdevelopment objective andkey indicators . .............................................................. 7 C. Project components ............................................................................................................. -7 D. Lessons learned andreflected inthe project design ............................................................ 9 E. Alternatives considered and reasons for rejection. ............................................................ 10 I11. IMPLEMENTATION ..................................................................................................... 10 A. Partnership arrangements .................................................................................................. 10 B Institutionalandimplementation arrangements . ............................................................... -10 C. Monitoring and evaluation o f outcomeshesults ............................................................... -11 D. Sustainability ..................................................................................................................... 12 E . Critical risks andpossible controversial aspects ............................................................... 12 I V. APPRAISAL SUMMARY .............................................................................................. 14 A. Economic andfinancial analyses. ...................................................................................... 14 B. Technical ........................................................................................................................... 17 C .Fiduciary ............................................................................................................................ 18 D. Social ................................................................................................................................. 19 E. Environment ...................................................................................................................... 20 F. Safeguard policies., . . ............................................................................................................ 21 G .LandAcquisition andResettlement Framework ............................................................... 21 H Policy ExceptionandReadiness . ........................................................................................ 21 I Readinesscriteria., . . . ............................................................................................................. 21 V  Annex 1: Country and Sector Background ........................................................................... 23 Annex 2: Major RelatedProjectsFinancedby the Bank and/or other Agencies ..................29 Annex 3: ResultsFramework and Monitoring ...................................................................... 30 Annex 4: Detailed Project Description .................................................................................. 39 Annex 5: Project Costs.......................................................................................................... 49 Annex 6: ImplementationArrangements ............................................................................. -50 Annex 7: Financial Management and DisbursementArrangements..................................... 53 Annex 8: ProcurementArrangements ................................................................................... 68 Annex 9: Anti-Corruption Action Plan................................................................................. 78 Annex 10: Economic and Financial Analysis ........................................................................ 84 Annex 11: SafeguardPolicy Issues ...................................................................................... -92 Annex 12: Project Preparationand Supervision .................................................................... 95 Annex 13: Documentsinthe Project File .............................................................................. 97 Annex 14: StatementofLoans and Credits .......................................................................... -98 Annex 15: Country at a Glance ........................................................................................... 101 Annex 16: Map IBRD33420 ............................................................................................... 102 vi  INDONESIA ID-URBANWATER SUPPLY AND SANITATION PROJECT APPRAISAL DOCUMENT EASTASIA AND PACIFIC EASUR Date: June 24, 2009 Team Leader: Suhail Jme'an (EASUR) Country Director: Joachim von Amsberg Sectors: General water, sanitation andflood (EACIF) protection sector (100%) Sector Manager: Sonia Hammam(EASIS) Themes: Other urbandevelopment (P) Project ID: PO90991 Environmental screening category: Partial Assessment Lending Instrument: Specific Investment Loan ProjectFinancingData [XI Loan [ 3 Credit [ ]Grant [ ] Guarantee [ ]Other: For Loans/Credits/Others: Total Bank financing (US$m.): 23.56 Proposedterms: US$ Variable SpreadLoan, 24.5 years with 9 years grace, commitment linked Development Total: 26.19 7.35 33.54 ResponsibleAgency: MinistryofPublic Works J1. Pattimura No. 20 Ke#ayoran Baru Jakarta Selatan, Indonesia Tel: 6221 72796155/58 Fax: 6221 72796155 -1-  Zumulativel 1.00 1 5.00 I 10.00 I 15.00 1 20.00 I 23.56 I I I I Project implementationperiod: Start September 1,2009 End: June 30,2014 Expected effectiveness date: September 30,2009 Expected closing date: December 31,201 4 Does the project depart from the CAS incontent or other significant respects? ReJ PAD I.A [ ]Yes [XINO Does the project requireany exceptions from Bank policies? Re$ PAD I K H [ ]Yes [XINO Have these been approved by Bank management? ]Yes [ IN0 I s approval for any policy exception sought from the Board? [ ]Yes [XINO Does the project include any critical risks rated "substantial" or "high"? ReJ PAD III.E [XIYes [ ] N o Does the project meet the Regional criteria for readiness for implementation? ReJ PAD I K I [XIYes [ ] N o Project development objective ReJ PAD II.B and TechnicalAnnex 3 The objective o fthe Project i s to improve and expand water supply services inthe Project areas by strengthening local water utilities to become operationally efficient and financially sustainable. Project description[one-sentence summary of each component] ReJ PAD II.Cand Technical Annex 4 The project comprises o f water supply system improvementsfor the participatingmunicipal water supply utilities (PDAMs). Which safeguard policies are triggered, ifany? Re$ PADI K F and TechnicalAnnex 11 Environmental Assessment and Involuntary Resettlement. Significant, non-standard conditions, if any, for: ReJ PADIKI Board presentation: None. Loan effectiveness: The Ministry o f Public Works and each participating P D A M shall have adopted the Project Management Manual, satisfactory to the Borrower and the Bank. Disbursement Condition: N o disbursement shall be made for each PDAMuntilsuch PDAM shall have entered into a satisfactory P D A MPerformance Agreement. -2-  I. STRATEGICCONTEXTANDRATIONALE A. Country and Sector Issues 1. Over the past few years, Indonesia achieved impressive economic growth and reduced poverty. The country has re-emergedas a middle-income country from the financial crisis of the last decade. Its investment rate has increased, and foreign direct investment flows have improved. Gross Domestic Product (GDP) growth was 6.3% in 2007 - thehighest inten years. National poverty head-countdecreasedto 16.5 % in2007, as comparedto 17.8% in2006. 2. Despite this impressive performance of the economy, the performance of the water and sanitation sector remains stagnantwith historically low investmentlevels of about 0.5% of GDP. Economic losses due to lack of access to water and sanitation are estimated at 2.4% of GDP in 2002. Furthermore, rapid urbanization poses another challenge to the water and sanitation sector. Currently, nearly half of the population lives in urban areas. With the current rate of growth estimated at 3.5%, the urban population will reach 167 million or 60% of the total population by 2025. It is no question that urbanization is a key determinant of the future of water and sanitation policy and investment. The delivery of safe, adequate and reliable water and sanitation services to the growing urbanpopulation, most of which is poor, must be given a higher priority, and the declining coverage trendneeds to be reversed. 3. Inthe water sector, Indonesia has fallen behindother countries in the region in service provision. In 1996, Indonesia outranked Thailand, Taiwan and Sri Lanka in the overall infrastructure index (Global Competitiveness Report), but lost its position by 2002. Only about 18% of an estimatedpopulation of 220 million has access to pipedwater. Inurbanareas, only 28% of the population has access to piped water. A majority of the population relies on wells and surface water, which in urban areas can cause environmental problems. The high urbanization rate, combined with slow investment, requires additional efforts to overcome the decline inthe connection rates of urbanwater supply. Given the current trends of urbanization, population growth andthe challenges facing the water and sanitation sector, urbancoverage will decline beyondruralrates. 4. Inthe sanitation sector, Indonesiahas one ofthe lowest ratesofurbansewerage coverage in Asia. A survey by the Ministry of Health (MoH) in 2000 indicated that human waste generated by over 96% o f all households is not appropriately treated. Current access to private sanitation is 62% for the country (53% rural, with a quarter connected to septic tanks; and 73% urban, with two thirds connected to septic tanks). The MillenniumDevelopment Goal (MDG) target is to reach 73% for the country by 2015. An estimated 70 million of people currently use and share public or other non-private forms of sanitation facilities. The risk of contamination of ground and surface water is high and has a negative effect on the health and well-being of the people. On-site sanitation systems have not been accompanied by investment in collection, treatment and disposal infrastructure. The costs of inadequate sanitation are substantial, and the health and environmental costs in cities are especially high. It is estimated that the cost of poor sanitation equates to US$56 per personper year, amounting to 2.6% of the GDP. -3-  5. The decentralization process that started in 2001 has brought greater autonomy and challenges to the water and sanitation sector, but few investments. Provision o f water and sanitation services are now functions o f local authorities, in line with modern practices that encourage moving services closer to consumers, and promises efficiency and accountability in service delivery, particularly incountries as large and diverse as Indonesia. Decentralizationhas transferred the responsibility o f water supply inurban areas to over 300 semi-autonomous water enterprises (PerusahaanDaerahAir Minum or PDAMs) under the ownership andjurisdiction o f local governments (Pemerintah Daerah or PEMDAs). However, the autonomy o f PDAMs remains questionable inmost cases. The objective o fthe policy o f bringing services closer to the people and away from the old system o f central planning and implementation i s sound, but it requires a different approach for the formation and implementation o f national strategies. The incentives for sub-national governments to address the sector issues in a comprehensive manner are not aligned with their new responsibilities. Central government resource transfers are currently based on the needs o f sub-national governments, irrespective o f their performance or compliance with national requirements and targets. Decentralization offers challenges and opportunities for innovative approaches to efficient service delivery with local accountability. 6. Prior to decentralization, the Ministry o f Finance (MoF) used to provide financing to PDAMs by means o f subsidiary loan agreements (SLA) bearing much o f the default risk and the burden of any unpaid loans. Today, some 220 PDAMs hold more than 400 outstanding loans with the MoF, with about 63% o f these in arrears or in default, i.e., $500 million o f debt has accrued to the MoF. Many PDAMs struggle to cover their operating costs and few can generate funds to cover debt payments or new capital expenditures. In2003, the MoF issued Decree No. 35, which was further elaborated and strengthened in 2006. The decree has the objective o f laying out the procedures for channeling loans and grants to PEMDAs. PEMDAs should settle past arrears or agree on an orderly debt rescheduling with the MoF, before applying for a new loan or grant. In case o f default, the MoF can collect overdue debt services by intercepting the transfer o f the general allocation funds (DAU) to the PEMDA in default. Modalities and a clear cut strategy in rescheduling arrears are under discussion, even though a clear action plan to shepherd this process in a concerted manner will require much work inthe coming years. With practically no access to affordable long term finance, PDAMs resort to expensive short term financing from commercial banks or suppliers, putting the utilities in a more difficult financial situation. 7. The Ministry of Home Affairs (MoHA) decree 23/2006 sets out the guidelines for setting PDAM tariffs with a focus on affordability, cost recovery and efficient use o f water. It also suggests simplification o f the tariff structure from the current multi-category, multi-block system. Local governments are responsible for setting water tariffs. Some PEMDAs are adopting the MoHA guidelines to varying degrees. Inrare cases, the PEMDA has delegated tariff setting to the PDAMs; in others, the Mayor can set tariffs without the approval o f the local parliament. However, in general, the process i s long and cumbersome and tariff increases are resisted or blocked. Tariff schedules aim to ensure that poor households are subsidized from better off and commercial customers. However, it i s not clear that such a policy i s addressing the poor. Lower tariffs are a disincentive for PDAMsto connect poorer households. Currently, 25% o f households pay for water, from piped and un-pipedsources. The average price o f water piped from plant varies from one area to the next, ranging from IDR340/m3 in Lombok to a high o f IDR4,367/m3 in Jakarta. The price variation i s similar for the cost o f household connections -4-  which ranges from IDR300,OOO per connectionto IDRl,000,000 inJakarta. The average level o f operation and mainstream cost recovery i s 80%. PEMDAs are usually reluctant to increase tariffs on social grounds. Such policy combined with interference in the management o f PDAMs, delays PDAM transformation into commercially viable enterprises. Where local governments do not allow tariffs to cover costs, and use public utilities to provide employment opportunities in the locality, utilities will continue to face financial and operational difficulties. Utilities then resort to cutting operation and maintenance expenditures, delaying needed repairs, thus increasing the deterioration o f the existing capital assets and hastening the need for more capital needs. 8. The Government Strategy for the sector comprises ofthe following: (i)TheNationalMediumTermDevelopmentPlan,issuedbytheMinistryofPlanning (BAPPENAS) in 2004, covers planning period 2005-2009. In the water sector, the plan aims to provide 40% o f population with access to piped water (66% urban and 30% rural) up from 28% in2003. (ii) NationalActionPlansonCleanWaterandSanitation, issuedbytheMinistryof The Public Works (MoPW) in 2004, addresses MDG target No. 7: "Ensuring Environmental Sustainability". Indonesia committed to halve the proportion o f people without sustainable access to safe drinkingwater andbasic sanitation by 2015. In the water sector, the plan includes investment plans to increase access to safe drinkingwater to 88% by 2015, up from 75%. (iii)Government RegulationNo. 16 o f 2005 supports the implementation o f Law 7/2004 on Water Resources to comply with the Ministry o f Health(MoH) andthe Ministryo f Environment (MoE) standards by January 2008. Inthe water sector, drinking water should meet health standards that set quantitative limits on levels o f bacteriological and chemical substances in drinking water. The M o H departments inthe provinces and cities are responsible for testing. (iv) Government RegulationNo. 120/PMK 05/2008, regarding `Resolution o f State Debts originating from Continuous o f Foreign Loans, Investment Fund Accounts and Regional Development Accounts o f Drinking Water Regional Company,' was implemented inAugust 2008. (v) Government Strategy for PDAMs. The Government o f Indonesia (GoI) aims to transform the PDAMs into efficient and financially viable service enterprises that are responsive to consumer demands. Given the varied conditions, capacity and needs o f PDAMs, the Go1 has adopted a phased approach for their development and reform. During the first phase, the Go1 will support 50 PDAMs that have improved their financial condition through the P D A M debt restructuring program. This program uses a simplified model developed by the Rescue Program which was funded by the Asia- Europe Meeting Fund(ASEM) and supported by the Bank. The essence of the rescue program i s for PDAMs to undertake a Financial Recovery Action Plan (FRAP). The FRAPconsists o f an analysis of all the existingproblems o f the PDAM, whether they are technical, financial, institutional, legal, commercial or managerial. Their causes are determined, so that appropriate actions can be implemented. The required actions are contained in the FRAP details, and supported by financial projections that show -5-  the results o f these combined actions on the P D A M operations. It i s estimated 30 PDAMs have gone through the program so far. While the FRAP includes technical solutions to increase revenues through improved efficiency measures, the program does not secure funding for the recommended technical investments for the much needed efficiency and expansion programs. B. Rationale for Bankinvolvement 9. The project fits within the agreed Country Partnership Strategy (CPS) for Indonesia 2009-2012, Report No. 44845-INDY which was discussed by the Executive Directors on September 11, 2008. This project addresses outcomes that are related to Pillars 1 and 2, `Improving the Climate for high Quality Investment and growth' and `Making Service Delivery Responsive to the Poor'. The CPS also highlights the importance o f investing in Indonesia's water institutions by improving services to the poor and addressing the deteriorating conditions o f PDAMs in order to facilitate delivery of water services and to help Indonesia achieve the MDGs. Inaddition, the project will strength oversight and regulatory role of local and national governments and thus contributes to improved governance and accountability in the water and sanitation sector. 10. The Bank has been supporting the water sector in Indonesia over many years. Inaddition to water supply improvement components in integrated urbandevelopment projects, and inrural areas, recent support has focused on institutional issues. FRAP (see Attachment 1 to Annex 10) was developed under the PDAM rescue program, and it i s now a national program used to resolve the financial problems o f interested PDAMs. Several analytical work prepared with government cooperation deepened the Bank's knowledge o f the sector. The Bank also engages directly with PDAMs and PEMDAs to strengthen water and utility governance through the Dutch-funded Technical Assistance Water and SanitationProgram (WASAP). 11. This project combines institutional, technical, financial and operational steps to be undertaken by the PDAMs and PEMDAs, while ensuring that they improve their financial situations. C. Higher level objectives to which the project contributes 12. The ultimate objective o f the project i s to improve the health and well-being of the population. Several studies and surveys have rated access to water and sanitation as the most important medical advance inthe past 150 years, and led to fewer outbreaks o f diseases such as cholera, diarrhea, and others. The size o f investment o f this project is small, compared to Indonesia's needs inthe water supply sector. Despite its small size and focus on expansion and improvements in specific areas, the project also aims to work with all levels o f government to remove institutional barriers to larger reform and impact. This includes removing barriers to on- lendingto local governments and PDAMs, a goal in the government's strategy to facilitate the flow o f international finance to the sector. The project also aims to remove barriers to internal generation o f funds through improved efficiencies and corporate management of PDAMs including improved knowledge and responsibility o f their PEMDA owners. The lessons learnt from this project can be applied inscaling up to other PDAMs throughout Indonesia. -6-  11. PROJECT DESCRIPTION A. Lendinginstrument 13. The project i s proposed as a Specific Investment Loan (SIL) for US$23.56 million from the International Bank for Reconstruction and Development (IBRD). The borrower has selected a Variable Spread Loan in US Dollars with 24.5 years repayment, including a 9-year grace period with annuity payments. The loan will be provided to the Republic o f Indonesia through its Ministry o f Finance. 14. The Bank Loan will be on-lent to PEMDAs in local currency (IDR), plus a foreign exchange risk premium (5.02%) as stipulated by law. For the purposes o f this project, the PEMDA will inturn enter into a Performance Agreement with its PDAM. Inthe case of Bogor the funds will be on lent to the PDAM, while for Kapuas and Muara Enim, the funds will be provide as equity contributions fkom their respective PEMDAs. B. Projectdevelopment objectiveand key indicators 15. The primary development objective o f the project is to improve and expand water supply services in the project areas by strengthening local water utilities to become operationally efficient and financially sustainable. The outcome o f the project would be: (i)technical improvements to and expansion o f production and distribution facilities, reduction of non- revenue water, improvements in water quality and greater operating efficiency; and (ii) commercial improvements inPDAMcorporate management. 16. The project objectives will be monitored through the following key indicators: (4 Improved access to water services 1. .. Increment incapacity of production system. 11. ... Increment innumber o f connections. 111.Improvements in customer satisfaction in quality, service hours, and reliability o f water services. (b) Moreover the project will also track the following indicators for each P D A M as proxy to improvements incommercial and financial operations 1. OperatingRatio. ii.DebtServiceCoverageRatio(forBogoronly). C. Projectcomponents 17. The project will be implemented over a 5-year period o f 2009-2014. The estimated total project cost i s IDR315.2 billion or US$33.54 million, which includes physical and price contingencies, as well as taxes. The Bank Loan would finance US$23.56 million of the capital investments (goods and works) based on 85% financing o f civil work and equipment in Bogor and 100% of certain identified civil works and equipment packages in Kapusa and Muara Enim. The respective PEMDAs and PDAMs will provide the remaining financing for civil works and equipment through their own budgets. The MoPW will finance 100% o f the cost o f construction supervision consultants and support for the Project Coordinating Unit (PCU) and Project Implementation Units (PIUs) through its budget. PDAMsREMDAs will also finance land -7-  acquisition costs as well as activities complementary to the project. The listing o f packages funded by the Bank Loan and non-Bank funded i s given inAnnex 5 and also inthe Procurement PlaninAnnex 8. 18. The project comprises o f water supply system improvements (US$ 31.18 million) for the participating PDAMs that are diversely located on the islands o f Java (Kota Bogor), Kalimantan (Kabupaten Kapuas), and Sumatra (Kabupaten Muara Enim). 19. These PDAMs were self-selected after about 20 PDAMs expressed interests inthe project. Many of the 20 PDAMs dropped out later on, while these three PDAMs showed the necessary commitments and prepared the documents required to remain inthe project. All, except Bogor, satisfy the MoF requirements, and have no arrears. Bogor and the MoF have agreed to resolve Bogor's arrears in order for Bogor to participate in the project. To ensure that the institutional aspects o f this component are implemented, the performance agreement between each PEMDA and PDAMwill include inaddition to the financial on-lending terms, assurancesthat both parties undertake their obligations responsibly, including financial indicators, cost recovery tariffs, management efficiencies, and PEMDA contributions. Performance agreements and indicators are selected from monitoring indicators in the Government's restructuring program and the guidelines o fthe Ministry o f Home Affairs. 20. The planned works will result in increased production and sales o f water, thus increasing revenue. The effective cost per unitvolume o f water sold will decrease due to improved delivery efficiency afforded by the reduction inwater loss from the distribution system. The following is a summary o f investments. Detailed description i s inAnnex 4. (a) Part 1. Bogor (West Java): Investments in Bogor comprise o f constructing: (i)a new water treatment plant adjacent to the existing Dekeng WTP; (ii) additional units o f two rapid sand filters with new filter back washing facilities for the existing Dekeng WTP; (iii)newwaterreservoir; (iv)newwaterdistributionpipelinesincludingnewhousehold a connections; and (v) and implementing a non-revenue water (NRW) reduction program. The Bank Loan will finance 85% o f all works and goods contracts for the above investments. The estimated cost for the investment in Bogor (including contingencies) i s IDR 102.9 billion (US$10.95 million). (b) Part 2. Kapuas (Central Kalimantan): Investments inKapuas funded 100% by the Bank Loan comprise o f constructing: (i)new water reservoir; and (ii) water distribution a new pipelines. Other complementary non-Bank funded investments (funded by local government budget) include implementing a non-revenue water reduction program and installing household water connections. The estimated cost for the investment in Kapuas (including contingencies) i s IDR 53,102 million (US$ 5.65 million). (c) Part 3. Muara Enim (South Sumatra): Investments inMuara Enim funded 100% by the Bank Loan comprise of: (i)constructing river intakes and raw water transmission pipelines for three different existing WTPs; (ii)constructing new water treatment facilities; and (iii) improving the water distribution network inMuara Enim and Tanjung Enim. Other complementary non-Bank fundedinvestments (funded by local government budget) include: (i) constructing three new water reservoirs; (ii) implementing a non- revenue water reduction program and installing household water connections to meet the -8-  growing demand for water in both urban areas of Muara Enim and Tanjung Enim, and (iii)constructing an office building.The estimated cost for the investmentinMuara Enim (including contingencies) i s IDR 137 billion(US$ 14.58 million). 21. The Go1using their own procedures will engage consultants, who will be fully fundedby counterpart funds (APBN, APBD, and PEMDA), to enhance project performance and augment institutional andmanagement capacity. The consultant services cover: (i) Technical support for project implementation and supervision at the central and P D A M levels, which aims to ensure that project implementation i s in line with and satisfies requirements o fthe World Bank andthe GoI; (ii) Constructionsupervisionactivities; (iii) Preparation o f detailed engineering designs for the various packages; and (iv) Capacity building activities to provide specialized consultant services and training to PEMDAs and PDAMs. 22. There i s also a separate and parallel activity for sanitation technical assistance to be funded by other donors. It aims to initiate sanitation technical assistance program, focusing on mapping o f sanitation, public information, capacity building, small pilot projects and feasibility studiesto expand sanitation systems inthe project areas. This program builds on the experience gained from similar pilots under WASAP. The cost o f this component is not included in the project, as it will rely on existing and forthcoming donor assistance. It is likely that an estimated grant o fUS$3.5 millionwill be allocated for this activity by AusAid. D. Lessons learnedand reflectedinthe projectdesign 23. Like many countries, Indonesia has recognized that central planning for local services, such as water and wastewater, i s inefficient and not responsive to customer demand. Experience has shown that public investments not accompanied by utility reforms are not sustainable inthe long-run, and can lead to the accumulation o f debt and worsening o f the financial situation o f utilities. On the other hand, demanding local governments and utility reforms which are not accompanied by investment support that lead to service improvements is also not sustainable either, and it will lead to disappointment on some customers and to the rejection o f further reform. A careful approach combining reform with investments can lead to success. A close partnershipamong the central and local governments, water utilities andthe local community is essential to achieve progress. 24. Bank studies inIndonesia and elsewhere have shown that tariffs below cost recovery that are originally conceived to assist the poor do not serve their intended purpose. First, they serve as a disincentive for utilities to extend their services to poorer areas as they see such an extension as a losing proposition. Second, the poor often end up paying more intime, money, and quality for the water services when they do not have water connections and buy water from vendors. Third, low tariffs that do not cover costs, often exact a heavy toll on the water supply system through the lack o f funds for routine operations and maintenance, let alone replacement or capital expenditures. In attempts to improve the situation, water utilities often resort to increasing tariffs for other customers, particularly industry. While this tactic may be acceptable and could work up to a limit, experience has shown that with unjustifiable tariff increases, -9-  industries tend to look for other sources for water and avoid water utilities particularly those with deteriorating service. Thus, water utilities lose their best paying customers and their sources o f revenues. 25. The project design incorporates the above lessons by supporting PDAMS that have demonstrated willingness to engage in reform and that have also demonstrated better financial management. The project calls for a stronger partnership between central and local government towards achieving the reform goal by transforming PDAMs into efficient and finally viable serving citizens. Finally, the project i s closely linked to the governance and decentralization agenda through the strengthening linkage between local governments and water utilities as well as through the necessary and requiredoversight by central government. E. Alternativesconsideredandreasonsfor rejection 26. Investments in water system improvements and expansions without undertaking reform steps were rejected as they can lead to unsustainable operations and further the financial distress o f utilities. Direct on-lending to PEMDAs or PDAMs (with a sovereign guarantee) were considered with the advantage o f reaching PDAMs more directly and assisting them in project preparation. Indonesian legislation and practice, however, do not allow such an approach at this time. Similarly, the options o f on-lending through commercial banks were also considered, but it was felt that the focus o f the preparation activities would shift away from the water sector to the financial sector, with different stakeholders. Moreover, the risk premium charged to PDAMs would be higher making financial sustainability beyond the reach o fthe PDAMs. 111. IMPLEMENTATION A. Partnershiparrangements 27. The preparation o f this project benefited from discussions, studies and experience of other partners, including Dutch trust funded WASAP, USAID, AusAID, Japanese aid agencies and others. These partnerships will continue duringthe project for the exchange o f information and knowledge. In particular, the project will benefit from collaboration with WASAP and AusAID, as well as financing o fthe sanitation activities targeting the participating cities. B. Institutionalandimplementationarrangements 28. The institutionaland implementation arrangements proposed for the project aimto reflect the new decentralized nature o f the Go1 and will mirror the responsibilities o f the various layers o f governments and stakeholders. This arrangement i s expected to increase efficiency, avoid duplication and increased costs, and improve local knowledge andresponsibility for local project implementation, while retainingpolicy makingand monitoring at higher government levels. 29. Project Coordination: the MoPW, which has a long track record in the formulation and execution o f water and sanitation programs, will be the executing agency for the project. It has been the lead agency for integrated urban infrastructure projects, where water supply i s a large component, and it has knowledge o f Bank procedures and the Go1 requirements. A Project Coordinating Unit (PCU) will be established in the MoPW to coordinate the input o f the local Project Implementation Units (PIUs). The PCU will have access to specialized advice to ensure quality control in procurement and financial management, to integrate project activities for -10-  reporting and monitoring activities, and will participate in project training activities. The PCU will report to other agencies, particularly BAPPENAS and the MoF intheir role of monitoring foreign loans. The PCU, through the MoPW, will draw on expertise at the MoF in the review and monitoring o f the financial conditions o f PDAMs. The PCU will also communicate with other national government stakeholders as necessary. The PCU will be the main contact point for liaison with the Bank regarding project progress and implementation. The MoPW's role will focus on monitoring and facilitating implementation, while detailed project implementation will be at the local level. 30. Project Implementation: The water supply component in each PDAM will be implemented at the local level in line with the decentralization principles. Each o f the participating PDAMs will form a PIU within its planning division, consisting o f current staff who will be responsible for the project implementation. The PIUs will include the directors o f the technical and financial departments supported by their existing staff for the purposes of procurement and financial management and overall project implementation in accordance with Indonesian law and practice, and would therefore liaise with the relevant local and central governments agencies in terms o f planning, implementation and monitoring. PIUs will be responsible for the daily implementation o f the project including the procurement process, disbursement applications, the financial management system, the monitoring and evaluation o f the performance indicators, and coordination with local and central government officials. Staff will receive extensive training in Bank fiduciary responsibilities in procurement, disbursement and financial management to augment their current skills. A draft Project Management Manual (PMM) has been prepared detailing the roles, responsibilities and procedures for project implementation. C. Monitoring and evaluation of outcomedresults 31. The first lines of responsibility to monitor project performance are with the PIUs, PDAMs and their respective PEMDA management. PIUs will be responsible for routine monitoring o f progress of investments. They will prepare periodic reports comparing physical progress o f the project investments against the annual plans for review by P D A M and PEMDA management, along with reports on financial expenditures (financial management reports). Semi-annual reports will be submitted to the PCU, which will review them for aggregation, consistency and evaluation o f project progress against annual plans. The PCU will collate and summarize the reports for submission to the Bank. Semi-annual reports will form the basis for review and supervision by the Bank. Inaddition, the end-of year report will be submitted to the external auditor to be taken into account in the preparation o f the annual project and entity audits. Annual reviews will take place to evaluate progress o f the previous year, assess reasons for delays and agree on corrective actions as necessary. Annual reviews and evaluations will take place with the participation o f PDAM and PEMDA management, the MoPW and the Bank by February o f each calendar year. A mid-term review will take place in the third year o f the project to assess progress towards achieving objectives. 32. Monitoring indicators are selected from Decree No. 47/99 from the MoHA, which sets guidelines to assess PDAM performance. These monitoring indicators will be part o f semi- annual and other reviews by the MoPW andthe Bank.The monitoring indicators are part o f each Performance Agreement. Arrangements for results monitoring are inAnnex 3, -11-  33. Baseline data are available for some o f the above indicators. For those indicators that do not have baseline data, the PDAMs will carry out field surveys shortly after project implementation starts to establish the required information. PIUs will be responsible for compiling project data during implementation. PEMDAs and the MoPW (through the PCU) will verify and spot check the data and ensure quality. Local departments o f the M o H and the MoE within each district will be responsible for the monitoring quality indicators as per Regulation 16/2005, (for e.g. bacteriological and chemical substances indrinkingwater). D. Sustainability 34. A key feature of this project is to establish a flexible framework where PDAMs with various degrees o ftechnical, managerial andfinancial strength -with the support o fthe local and central governments - can become sustainable entities capable of improving and expanding service delivery. This would require cooperation among communities, the PDAM, and the local governments on a set o f principles that have to be adhered to. The actions that had previously undermined service delivery whether they were improper investments, technical standards, lack o f accountability, wastage, low tariffs, or underminingP D A M finances and corporate autonomy are addressed between the PEMDA and P D A M in the Performance Agreement and progress reports. Customer orientation and responsiveness along with staff training will be a key to improving P D A M performance. The project aims to improve the financial position o f the participating PDAMs by implementing a set o f reforms and targeted actions to make these PDAMs efficient and financially sustainable. These actions are in line with the FR4P recommended by the government, and include among others: (i)maintaining the principle of financial and administrative autonomy from the PEMDAs; (ii)adhering to cost recovery principles by controlling costs and increasing revenues; (iii) reducing the rate o f NRW to an acceptable level; (iv) expanding coverage; and (v) managing staffing costs. E. Critical risks and possiblecontroversialaspects Risks RiskMitigation Measures RiskRating with Mitigation To project developmentobjectik i P D A Mbusiness plans were prepared basedon waiting lists o f customers Highconnectionfees andtariffs willing to connect. Several surveys M leadto lack o f interest to connect indicatethat the poor are willing and in many cases already pay higher tariffs thanfor pipedwater. Highlevel ofattentionto corruptionin Indonesia and the Bank. Procurement, Corrupt practices delay project financial management, and anti- S and diminish objectives corruption action plansare inplace and agreed to by negotiations. Bank intensive supervision from the field. Lack o f commitment to reform PDAMs selected have shown interest in M bythe PDAMs andPEMDAs. reform. Subsidiary and Performance -12-  PEMDAs avoid tariff increases 01 Agreements will itemize responsibilities staff salary controls o f PEMDAs and PDAMs to achieve benchmarks. The Bank will regularly review achievements Discussions with PEMDAs and PDAMs indicate awarenessof problems and solutions. Intensive training and capacity buildingprograms areprovidedthrough PDAMs sanction illegal the WASAP-ByWater Supply Services connections, billing, or other and Capacity Buildingon subjects o f S corrupt practices NRW, SOP, corporatization, financial and asset management. Surveys o f staff andcustomers are includedinthe project to monitor progress and solicit change based on experience. To componentresults Thorough financial projections include Insufficient counterpart funds local funding. The MoF also requires budgetcommitments from local M governments. Disbursement o f a majority of Bank funds through direct payment to contractors or reimbursements. Delays inimplementation by contractors due to slow payment Allow PDAMsto implement their procedures that prevent PDAMs components and initiate procurement M to implement the project ina and disbursement actions, while timely manner maintaining oversight and review, including spot checks, internal and external audit, and reporting and monitoring withPEMDAs andthe central government. The Bankintroducedparticipating Lack o fknowledge o f Bank PDAMs to Bank's procedures during procurement, financial preparation. Procurement and financial management and disbursement management consultants at the PCUto M xocedures ensure quality control. Training at the project launch, and thereafter. -13-  RiskMitigationMeasures RiskRating with Mitigation Lack o f available water sources Improve plant and equipment efficiency due to increased demand and before considering expansion. N expansion Feasibility studies investigated water availability. Public information andparticipation. Resistance by staff and Provide opportunity to legalize consumers to dealing with illegal connection without penalty within a M connections month. Stafftraining. Community and staff surveys Sanitation technical assistancenot tied to Lack o f financing for the core project. Bank will assist the MoPW sanitation technical assistance andPEMDAs to develop proposals M duringproject implementation. Donors have expressed interest infunding sanitation TA. Cooperation with WASAP and other TA not sufficient to stimulate donors, including follow up activities on investments insanitation pilot projects requiring50% government S h d i n g Overall Risk Rating M ~~~ RiskRating H(HighRisk), S (SL stantial Risk), M(Modest Risk), N(Negligible or Low Risk) - IV. APPRAISAL SUMMARY A. Economic andfinancialanalyses ProjectEconomicCost-BenefitAnalysis 35. The impact o f the project on the economy is estimated based on the incremental economic costs and benefits o f the project. External additional benefits such as those o f improved health and environment are not included. Incremental costs with the project include investment and operational costs excluding inflation and taxes. Quantifiable benefits that accrue with the project include the estimated value of: (i)increased consumption due to improved services and accessibility by existing and new customers; (ii)saved water due to improved efficiencies; (iii)amount o f water consumed with the new connections valued at the difference between the price charged and cost o f water without connections; and (iv) time saved from collecting water at the minimumincome prevailing inthe area. -14-  Project Area Bogor Kapuas Muara Enim ENPV (Billion IDR) 752.5 42.0 147.6 EIRRf%) 48 19 32 ProjectFinancialCost-BenefitAnalysis 36. The financial costs and benefits are projected for 20 years. Incremental power and chemical costs are based on increases inproduction. Power and chemical costs are projected to increase 5% and 3% respectively in real terms. Salary costs will only increase with inflation (projected at 7% annually). Other costs vary with the increase inthe asset base. The benefits are based on additional water sales over the 20 year period and the connection fees collected during the project period. The results o f net present value and financial rate o f return of the proposed investments are summarized below: Project Area Bogor Kapuas Muara Enim FNPV (Billion IDR) 229.3 54.8 61.3 FIRR(%) 22 19 26 Affordability Analysis 37. Based on assumptions o f average tariffs applicable for 2006, and average and quintile incomes ineach o f the project areas, the average P D A M tariff i s affordable to households based on the projected consumptions. On average, however, the monthly bill will reach around 3% o f monthly income. Households inthe lowest quintiles will pay tariffs that are lower than average and consume less water. FinancialAndysis ofPDAMs 38. Impact of project activities on PDAMJinancial situation. Project investments aim at (i) increasing coverage which would improve revenues; and (ii)efficiency improvements to decrease costs. Salary costs and overall administrative expenditures are within the PEMDA and P D A M control. They represent a highproportion o f operational expenses and are increasing at a higher rate than inflation and productivity. In order to reach positive project rates o f return, Bogor needs a 10% increase in tariffs, while the others need a 20% increase. The table below shows the projected impact o f the project on the PDAMs' operating efficiency (measured as the Operating Ratio (OR)) and their debt sustainability (measured as Debt Service Coverage Ratio (DSCR)), where applicable. 1 ProjectArea I2009 12010 12011 I2012 12013 12014 Operating Ratio 0.97 0.89 0.89 0.89 -0.86 0.82 DSCR 10.6 5.2 4.8 4.5 4.7 5.9 OperatingRatio 0.98 1.09 0.82 0.95 0.86 0.90 DSCR na na na na na na -15-  IProiect Area I2009 I2010 I2011 I2012 I2013 I2014 I MuaraEnim: I Operating Ratio 1.67 1.48 1.43 0.89 0.89 0.67 DSCR Not na na na na na applicable (na) 39. Operating Ratio. The profit making enterprise, Bogor i s expected to sustain its current performance and maintain an operating ratio (operating expenditures including depreciation, interest and taxes) below 1. Kapuas and Muara Enim, which smaller and financially weaker, are likely to cover their operating costs by the end o f the third year o f the project. According to the projections, this is possible provided salary and administrative costs do not increase beyond inflation. To ensure PDAMs reach and maintain this ratio, tariffs should be regularly adjusted. 40. Debt Service Coverage Ratio. In the case of Bogor the funds will be on lent to the PDAM. So in order to ensure that the Bogor PDAM can sustain the project's capital expenditures, the debt service coverage ratio should be monitored through the following. For Kapuas and Muara Enim PDAMs, the funds will be passed on as equity contributions and the DSCR will not be tracked. (i) the Bank/MoF shall be notified o f and provide no objection to additional long term debt (beyond one year) to becontracted bythe participating PDAMs; (ii) to ensure that debt for investments is not financed with short-term borrowing, current liabilities targetrate should not exceed 35% o ftotal liabilities; and (iii) financial statements o f the participating PDAMs shall be audited annually. The audit shall be conducted by an audit firm acceptable to the Bank. The Bank shall review the audit reports with the participating PDAMs, PEMDAs, the MoPW and the MoF each year to agree on next steps. 41. Finally, training in financial and corporate management o f water utilities shall be provided to PDAM general director, the director o f financial department, and to the senior management and financial staff o f PDAMs and PEMDAs FiscalImplications 42. Law no. 55 sets the limits on PEMDA's borrowing. The loan will be on-lent from the MoF to PEMDA and will be considered as part o f PEMDA debt. The debt service coverage ratio cannot be less than 2.5 o f PEMDA revenues less obligations, and total debt cannot exceed 75% o f PEMDA revenues less debt obligations. For the participating PEMDAs these limits will be maintained throughout the loan period, and it i s expected that with rising incomes and the leveling off o f the debt service, these ratios will remain well below the legal upper limits. Based on current PEMDA budget projected with inflation, below are the lowest DSCRs and highest loan limits during the project period including the years where the interest payments peak and reflect the due principal payments. Based on the information provided, all PEMDAs can take the proposed loan. -16-  Bogor Kapuas Muara Enim DSCR 7.8 33.0 36.1 Debt outstanding as % 48 20 26 o f debt allowed Sensitivityand RiskAnalysis 43. Sensitivity analysis was undertakenon the most likely risk factors (i) increases; (ii) tariff salary costs; and (iii)investments costs. The financial rate o f return o f the project i s highly sensitive to changes intariff increases. Assuming tariff increases are 5% less than assumptions, only Bogor can maintain a financial rate o f return above the 12% discount rate. Bogor can maintain acceptable financial ratios (Operating ratio and DSCR), if investments increase costs are 10% higher than estimated. However, Bogor would approach the lower limit o f both ratios, ifsalary costs increase bythe historicallevels of 35%. BothKapuas andMuaraEnimwill delay reaching appropriate financial ratios if investment costs or salary costs approach the aforementioned rates. Expansiono f coverage is a key factor to improved financial and economic performance and should be pursued wherever existing capacities allow. 44. Two variables within the control o f PDAMsPEMDAs are important in determining the sustainability and viability o f the project. Cost recovery tariffs ensure robust revenues; cost ' efficiency measures ensure the fairness o f tariffs and their sustainability. Together these variables influence the sustainability and viability o f the project. PDAMs and PEMDAs must control salary costs, review the financial health o f the PDAM, and increase tariffs following annual reviews o f the financial situation. Financial projections are based on the assumption that salary costs and administrative expenditures will increase only inline with inflation. Increases in salary expenditures on historical basis will wipe out any improvements inthe financial situation o f the enterprises. The financial covenants below aimed to ensure the move o f enterprises to commercially based operations and less reliance on PEMDAs. B. Technical 45. The project will finance civil works and equipment for improved water supply facilities. The technical design will be based on the standard practices o f PDAMsto implement rehabilitation and expansion works. Duringthe preparation o fthe project, consultants assisting PDAMs paid particular attention to the following: (i) availability o f sufficient water sources and finding alternatives; (ii) avoiding excess capacity 'design and allowing for modular additions as demand increases so as to avoid highcapital and operating costs; (iii) estimating reasonable demandconsumption to avoid overdesign, higher costs, and lower thanexpected revenues; and (iv) efficiency o f operations o f equipment, such as generators andpipes. -17-  46. During implementation, engineering consultants will assist the PIUs in the design and final supervision o f construction. The PCU will have access to technical advisory services on as needed basis to verify issues that cannot be resolved by the PIUs. This will ensure that the quality of engineering design, supervision andphysical construction is maintained. C. Fiduciary Financialmanagementissues 47. Countw Issues: Assessments of financial management (FM) systems in Indonesia highlight the risks inthe control environment despitethe commitment of the political leadership for improvement. Responsibilities are unclear, legislative and regulatory instruments need further clarity and consistency. The MoF (White Paper, May 2002) recommended the establishment o f the Financial Management Reform Committee to lead the preparation of the government regulations on its treasury and accounting system. Decentralization has further highlighted the need for better financial management inthe public sector to include reform inthe local governments and public sector utilities. Many of the details of the decentralization process are still to be defined (See details inAnnex 7). 48. Project Issues: A financial management assessment was undertaken of individual PDAMs and the Ministry of Public Works, where the PIUs and a PCU will be established to implementthe project. PDAMs were found to have good financial staff capable of undertaking financial managementof the project, but where knowledge of Bank requirementsandprocedures are non-existent. Onthe other hand, the MoPW has beeninvolvedand is knowledgeable inBank operations, but lacks staff with appropriate accounting and financial management skills. The highlights of the actions to mitigate the high financial risk assessment are as follows: (i) intensive training for PDAMs and the MoPW staff on Bank requirements; (ii) agreement on the Project Management Manual, disbursement procedures, flow of funds, and formats of financial management reports prior to negotiations; and (iii) hiring of financial management consultant at the MoPW to be responsiblefor (a) financial managementof the consultant services and training component being implemented by the MoPW, (b) review of PDAM project accounts and financial management reports; (c) quality control of accounting and disbursement of all project transactions, and (d) compilation of overall project financial management reports. In addition, the internal audit functions of the implementing agencies (PDAMs and PEMDAs) will be strengthenedthrough training on Bank requirements, and agreement were reached on the audit terms of reference for audit of project accounts. The details of the assessment and action plan are describedinAnnex 7. The FMrisk assessment i s rated "Substantial." 49. Procurement issues: Procurement of goods and works funded by the Bank loan for this Project will be carried out in accordancewith the World Bank'sGuidelines: Procurement under IBRD and IDA Credits, May 2004, as revised October 2006 (the Procurement Guidelines) and the provisions stipulated in the Legal Agreement. A procurement capacity assessment of the PIUs and the PCU was conducted during project appraisal. The overall project procurement risk assessment is rated "Substantial." To minimize the risk, a qualified procurement Consultant will be hired(within the project management consultancy) at the PCUto ensure quality control andto provide advice. To improve understandingo f Bank procedures, procurement requirementswere discussed during preparation as a form of increasing knowledge. The procurement planwas also developed in a collaborative manner and requirements for updates discussed. Training will -18-  continue to be provided, with a formal training session for project participants from PDAMs, PEMDAs and the MoPW, as soon as the project becomes effective. The main risks are: (i) the main procurement activities will be in the participating PDAMs, and there is limited experience among P D A M staff in conducting competitive bidding and selection o f consultants inaccordance with the Bank Guidelines; (ii) P D A M staff are unfamiliar with the newly issued KeputusanPresiden (Presidential Decrees or Keppres) 80/2003 and there are uncertainties on how to implement this regulation; (iii) the general procurement environment i s weak and collusive practices have been found inpast projects; (iv) decentralization laws and the rising power o f districts will place added pressure on project staff to favor local firms and individuals, which is not allowed under Bank procedures; and (v) engagement o f consultants for project management and implementation supervision bythe Go1andoutside ofthe Bankprocurement procedures. 50. The proposed actions to mitigatethe risks include: appointment o f a procurement specialist at each PIU. The PCU will benefit from specialized advice from a consultant who will undertake the procurement o f the MoPW related component, and will provide quality control and review of PIU procurement document prior to their submission for World Bank review; establishment o f a Procurement Plan (PP) for the project for the first year o f implementation with subsequent annual updates; use o f standard bidding and evaluation documents to minimize risk o f mistakes and unacceptable changes; provision of procurement training during project preparation, project launch, and annual procurement training workshops; inclusion o f clarification on NCB procedure in the legal documents and P M M respectively; establishment o f an anti-corruption action planfor the Project; and terms of reference and team composition and timing o f the PCU Management consultancy and construction supervision consultants, procured using the GoI's own resources, were agreed with the Bank duringnegotiations. D. Social 51. The project is expected to generate a positive impact from the provision o f wider access to water services through better access to efficient, equitable and sustainable water services. Several studies have confirmed the importance o f providing piped clean water to the poor, and indicated their willingness to pay for the service, rather than receive intermittent poor quality water. Some studies suggest that the poor pay up to 7 times more for water provided through vendors compared to the cost o f dependable piped water. This is in addition to the cost o f time -19-  and quality. Women and children usually bear the responsibility o f fetching water and having quality piped water in the house i s especially beneficial to women, who are responsible for cooking and cleaning. Attempts to assist the poor through subsidies or lower tariffs often backfire mainly because PDAMs are reluctant to extend coverage to poor areas and receive lower revenue thanwhat is requiredto cover costs and what can be charged inother areas. 52. It is confirmed that no indigenous people will be affected inthe project sites of all three participating cities. E. Environment 53. The project is classified as Category B interm o f the environmental assessment screening category o f the Bank as it involves routine investments inwater supply that are likely to improve the environment. The project design emphasizes the rehabilitationand upgrading o fthe existing water supply infrastructure, therefore it would not entail any major significant, complex or irreversible impacts. No works would be undertaken that could affect protected or vulnerable ecosystems. 54. In order to comply with the Indonesian and Bank environmental review procedures, environmental reviews for each o f the P D A M water sub-projects were prepared. An Environmental Management Plan (EMP or UKL and UPL) to mitigate the identified risks i s the output o f the reviews. The proposed investments are expected to have minor and routine environmental impact, and will bring about positive health and environmental benefits to the proposed areas through'the supply o f clean water. Construction o f water supply pipelines i s likely to have negative impacts on noise and air quality inthe short-term during the construction period. Details o f mitigation measures, their location, time frame and the responsible agencies for their implementation and supervision are provided inthe EMP. 55. PIU staff will ensure that the details o f the EMP will be provided in the requests for proposal and bidding documents to interested consultants and contractors in order to include these plans intheir work program. The supervisory engineers will include the supervision o f the EMP in their work programs. PIU staff will be trained on environmental regulations and their application, environmental management in urban services improvements, urban vegetation management, mitigation measures and their implementation, public consultation, monitoring, and progress reporting. The engineer/environmental specialist from the supervision consultant team will ensure that construction i s done in an environmentally sound manner. Muara Enim does not require an EMP, since investments there fall within the Go1requirements as acceptable to the Bank. EMPs for Bogor, and Kapuas have been prepared, provided to the Bank, and disclosed inthe Public Information Center. -20-  F. Safeguardpolicies SafeguardPoliciesTriggeredby the Project Yes No ~~ ~ Environmental Assessment (OP/BP/GP 4.01) [XI [I Natural Habitats (OP/BP 4.04) [I [XI PestManagement(OP 4.09) [I [XI Cultural Property (OPN 11.03, beingrevised as OP 4.11) [I Involuntary Resettlement (OP/BP 4.12) Indigenous Peoples (OD 4.20, beingrevised as OP 4.10) Forests(OP/BP 4.36) Safety of Dams (OP/BP 4.37) Projects inDisputedAreas (OP/BP/GP 7.60) Projects on International Waterways (OP/BP/GP 7.50) [XI G. LandAcquisitionandResettlementFramework 56. Land acquisition occurs in a number of activities in 2 (two) participating cities: Kapuas and Muara Enim. For Kota Bogor, the lands for all activities are already available. Given the nature and the scale of the project, land acquisition will be in a small-scale with minor socio- economic risks. 57. InKapuas and Muara Enim, limitedland acquisition is requiredfor the construction of reservoirs and water treatment plants. For transmission pipe provision, some trees and crops acquisitiodcompensation will be required, without land acquisition. To ensure that the affected people are fairly compensated, a Land Acquisition and Resettlement Action Plan (LAMP) has beenpreparedby each participating local government for each activity that may require land and other asset acquisition from the community. Due to the relative small scale of the impact, abbreviatedL A W s are acceptable. Landi s acquired through direct negotiation and transaction betweenthe PEMDARDAM and the landowners. All L A W s from Kapuas and Muara Enim have beenprovided to the Bank and disclosed inthe Public InformationCenter. Bogor does not require a L A M P . H. PolicyExceptionandReadiness 58. No exceptionsare sought to any Bankpolicies for this project. I.Readinesscriteria Conditionsfor Negotiation 59. The following conditions/issueswere completedbefore/during negotiations: (i) The MoF to confirm inwriting the choice ofthe type of loan. (ii) The MoF and PEMDAs to confirm funds to be on-lent to Bogor PDAM and on- granted(as equity contribution) to Kapuas and MuaraEnimPDAMs. (iii) Form of Subsidiary Loan Agreements (between the MoF and each PEMDA) and Performance Agreements (between each PEMDA and its PDAM) satisfactory to the Bankandthe Borrower to be submitted. -21-  The MoPW to establish the PCU, to be measured by assignment of the head of the PCU, satisfactoryto the Bank andthe Borrower. Each PEMDA to establish the PIU, to be measured by assignment of the head of the PIU, satisfactoryto the Bank and the Borrower. The MoPW to submit the draft Project Management Manual, satisfactory to the Bank andthe Borrower. The MoPW to finalize terms of reference for PCU advisory consultancy and to provide evidence of the start of the selection process satisfactory to the Bank and the Borrower. The MoPW to finalize arrangements for internal and external audits including Terms of Referencefor auditor satisfactoryto the Bank and the Borrower. The MoPW with PEMDAsPDAMs to finalize draft model terms of reference for procurement staff at the PIUs and to provide evidence o f the start of the selection process satisfactory to the Bank andthe Borrower. EffectivenessConditions 60. The Project ManagementManual, satisfactoryto the Bank andthe Borrower, shallhave beenadoptedby the MoPW andthe participating PDAMs. DisbursementCondition 61. No disbursement shall be made for each PDAM until such PDAM has entered into satisfactory PDAM PerformanceAgreement. -22-  Annex 1: CountryandSector Background INDONESIA: ID-UrbanWater Supply andSanitation 1. Over the past few years, Indonesia has succeeded in achieving impressive economic growth and reducing poverty rates. The macro economy continues to be strong and Indonesia has now re-emerged as a middle-income country (MIC). The investment rate has increased and foreign direct investment flows have improved. GDP growth was 6.3% in 2007 the highest in - ten years, and thereafter revised downward to 6.0% in 2007. National poverty head-count decreased to 16.5% in 2007 as compared to 17.8% in 2006; more than 14 million people have been lifted out o f poverty since 1999. 2. Despite this impressive performance o f the economy, the performance o f the water and sanitation sector has remained stagnant at a historically low investment level o f about 0.5% o f GDP. According to recent studies, and based on data from the Central Statistics Board, the annual social and economic costs o f healthproblems related to water and sanitation are estimated at US$4.7 billion or IDR 10,000 per household per month. The overall estimates o f economic losses due to lack o f access to water and sanitation are estimated at 2.4% of GDP in2002. Urban activity is at the heart o f economic growth in Indonesia, and urbanization is a leading determinant o f the future structure of water and sanitation policy and investment. Inaddition to the environmental and healthbenefits of access to clean water, the sector contributes to improved labor productivity, a better investment climate and ultimately improved economic growth. The delivery o f safe and adequate water and sanitation services to the growing urban population, most of which is poor, must be given a higher priority, and the declining coverage trend must be reversed. 3. The decentralization process that started in 2001 has brought greater autonomy and challenges to the water and sanitation sector, but practically few investments and little progress inclarifying the flow offunds have takenplace. Water andsanitation are now functions oflocal authorities, in line with modern practices that encourage subsidiarity - i.e. move services closer to consumers - and promises efficiency and accountability in service delivery, particularly in countries as large and diverse as Indonesia. Central government resource transfers to local governments are based on the needs o f sub-national governments, and do not provide incentives to promote investments to achieve national objectives such as the Millennium Development Goals. 4. Despite the lack o f progress, the fbture i s promising. Indonesia's positive economic performance presents a golden opportunity to increase efforts to improve basic services for citizens. The recent decentralization offers challenges and opportunities for innovative approaches to efficient service delivery with local accountability. Improvements in delivering water services will contribute to improving the business and natural environments and would enable the country to take advantage of its strategic position in a competitive and dynamic region. 5. Sectoral policies are showing signs o f improvements. The Ministry o f Finance (MoF) recently implemented three new regulations that offer water utilities to re-examine their financial health and provide options to graduate into stronger water institutions. The regulation P M K -23-  No.120PMK 05/2008, regarding `Resolution of State Debts Originating from Continuation o f Foreign Loans, Investment Fund Accounts and Regional Development Accounts o f Drinking Water Regional Company', provides options to partially write-off PDAMs existing debt with certain conditionality. Likewise, the DGfiscal balance DAUintercept decree P M K 129/2008 and the regulationo fthe Minister o fFinance PMK 168/07/2008 concerningRegionalGrantspromote further conductive environment for fiscal decentralization. Sector Realities 6. Water: Indonesia has fallen behind other countries in the region in the supply o f water services. In 1996, Indonesia outranked Thailand, Taiwan and Sri Lanka in the overall infrastructure index (Global Competitiveness Report), but lost its position by 2002. The inadequacy of service delivery inthe sector inrecent years has had significant impact on human development outcomes. The most potent indicator o f the problems in the sector is the high incidence o f water-borne disease, disproportionately affecting the poorer sections o f society. N o other countries with a similar per capita GDP inthe region exhibit such little progress inrelation to water and sanitation service delivery. 7. Only 17% o f an estimated population o f 220 million has access to piped water. Inurban areas, where nearly half o f the population lives, access to piped water i s critical, only 28% o f the urban population has access, and that percentage is declining. Only 8 percent o f the rural population has access to piped water. A majority o f the population rely on wells and surface water, which in urban water are causing environmental problems such as the lowering of the water table and increasing costs o f extraction. Combined with weak sanitation, the quality o f well water in the urban areas is dangerous. The high urbanization rate, combined with slow investment, requires additional efforts to overcome the decline in the connection rates o f urban water supply. At the current rate o f growth estimated at 3.5%, urbanpopulation will reach 167 million by 2025 and will represent 60% o f the total population. According to the preliminary analysis o f 2007 National Social Economic Survey data, during the period 1994-2006 of the households that have access to safe water, 52% have individual privately owned sources of drinkingwater (pump or well), and 25% have ajointly owned source (communal tap). Access to water and sanitation infrastructure services in Indonesia i s currently highly regressive. Giventhe current trends of urbanization, population growth and the challenges facing the water and sanitation sector, urbancoverage rate will decline beyond rural coverage rate. 8. Sanitation: Even more critical is the state o f sanitation: Indonesia has one o f the lowest rates o f urban sewerage coverage inAsia. A survey by the Ministry o f Health in2000 indicated that human waste generated by over 96% o f all households i s not treated. Current access to private sanitation i s 62% for the country (53% rural with a quarter connected to septic tanks; and 73% urban o f which 2/3rd connected to septic tanks). However, these figures mask a large problem of the adequacy and conditions o f these systems as well as the condition o f treatment thereafter. The MDGtarget i s to reach 73% coverage for the country by 2015. Urbansanitation is the least well addressed o f major policy issues in Indonesia. Less than 10 cities have some form o f network sewerage reaching about 1.3% o f the urbanpopulation. An estimated 70 million people currently use and share public and or other non-private forms o f sanitation facilities. The risk o fcontamination o fground and surface water is highand has a negative effect onthe health and well-being of the people. On-site sanitation systems have not been accompanied by investments, incollection, treatment anddisposal infrastructure. In2002, the government spenta -24-  small fraction (0.1%) as much on sanitation as it did on water supply. The cost of inadequate sanitation is substantial and the health and environment costs in cities are especially high. It is estimated that the cost of poor sanitation equates to US$ 56 per person per year amounting to 2.6% ofthe GDP. 9. Sub-national government's share of infrastructure development budget increased from 35% to 55% between 2000 and 2004, with loca1,governments' share up to 35%. Most of spending in the sector is on operations and maintenance (O&M) which i s about 8 times capital spending. This reflects lack of resources, and potentially deterioration in the capital stock requiring emergency capital repairs rather than expansion. Additionally, with their new responsibilities, PEMDAs have found it difficult to effectively manage their investment expenditures. PEMDA budgets are not always spent, leading to lack of investments, and deteriorating services while cash is accumulated in banks. Improving PEMDA capacity is neededto affect improvements inthe operational and financial conditions of PDAMs and of the water sector ingeneral. 10. Government Strategy: Until2001, Indonesia, despite its diversity and size, was governed andmanagedthrough ahighly centralizedpolitical, administrative andfiscal system.This system resulted in discontinuity between user demand and decision-making on local public services, undermining accountability. The decentralization policy o f 2001 and the accompanying Fiscal Balance Law, which provides for the financing of decentralizedtasks, aimed to eliminate these shortcomings and to bring about a fundamental change ingovernance. Included inthe functions transferred to local government i s the delivery of urban water services. The National Development Goals for Water and Sanitation are addressed inthree main documents: 11. The National Medium Term Development Plan (RPJM) issued by BAPPENAS in 2004 covers planning period of 2005-2009. In the water sector, the plan aims to provide 40% of population with access to pipedwater (66% urbanand 30% rural). The RPJMdoes not deal with targets for provision of water from alternative sources or with quality of water. Inthe sanitation sector, the planindicates that Indonesia should be "open defecation free" by end of 2009 -which means effectively that all households inthe country should have access to private or communal sanitation facilities. The planfocuses on increasing the capacity utilization of sewage and sludge treatment plants to 60% and to halve by end of 2009 the volume of untreated domestic wastewater. The plan indicates that large and metro cities should start development of piped sewerage systems by 2009. 12. The National Action Plan on Clean Water and Sanitation, issued by the Ministry of Public Works (MoPW) in 2004, addresses MDG target No. 7: "Ensuring Environmental Sustainability." Indonesia committed to halve the proportion of people without sustainable access to safe drinking water and basic sanitation by 2015. Inthe water sector, investmentplans aim to increase access to safe drinking water to 88% by 2015, up from 75%. The plan aims to reduce dependency on unprotected water sources such as rivers, lakes and wells. In the sanitation sector, the plan is to increase access to improved sanitation to 75% by 2015 (80% urbanand 70% rural), up from approximately 63% in2002. Utilities in large metropolitan areas are expected to provide off-site sanitation to about 7% of the population an eight fold increase from service levelin2000. -25-  13. Government Regulation 16 o f 2005 supports the implementation o f Law 7/2004 on Water Resources to comply withthe Ministryo f Health (MoH) andthe Ministry o f Environment (MoE) standards by January 2008. Inthe water sector, drinkingwater should meet health standards that set quantitative limits on levels o f bacteriological and chemical substances in drinking water. The M o H departments in the provinces and cities are responsible for testing. In the sanitation sector, wastewater from households and larger institutions must be treated individually or in a centralized treatment plant. The residual waste must meet verifiable standards (e.g. pH level from 6-9; BOD not to exceed 100mg/l, etc.) UrbanWater Supply 14. Institutional Framework: In urban areas, water supply is the responsibility o f over 300 semi-autonomous water enterprises (Perusahaan daerah air minum or PDAMs) under the ownership and jurisdiction o f local governments. People living in the service areas o f the PDAMs receive water through 5.25 million connections to piped systems. While PDAMs constitute the key institutions in the provision o f water services, they are just one part o f a spectrum o f urban water provision. In addition to the 35% o f the urban population formally served by PDAMs, it i s estimated that an additional 15% obtain P D A M water through on-selling by intermediaries. The remaining 50% ofthe populationrelies on self-provision at the household level. The low coverage and quality o f the water services provided by PDAMs inurban areas is generally agreed to be the key issue to be addressedifthe water sector inIndonesiai s to become functioning andhealthy and able to contribute to improved productivity and humandevelopment outcomes. 15. The current plight o f PDAMs can be attributed as muchto the lack o f institutional clarity andeffective structuringthat characterized their emergence inthe late eighties as to the financial difficulties they have faced since 1997. Autonomy from local governments has been limited, so PDAMs could not be held accountable for their low operating efficiency evidenced by high staffing ratios and highnon-revenue water (NRW). Their revenues were also limited because o f inadequate commercial policies and practices. Prior to the economic crisis that swept the region in 1997, most PDAMs were already struggling with their operations and had accumulated massive debt. The financial crisis exacerbated their weak institutional and financial position sending most o f them into virtual bankruptcy. 16. Local governments now have the main responsibility for the supply o f water and sanitation services intheir areas o f responsibility. PEMDAs are owners o f PDAMs, and control much o f 'their activities, determine tariffs, withdraw dividends and contribute to investments. PEMDApolicies affect PDAMperformance. PEMDAs canplay a leading role inimproving the well being o f their citizens and the overall natural, business and health environment o f the area under their authority. PEMDAs can use their newly acquired authorities, financial capacity and responsibilities for delivery clean water to their citizens. The scope for improving the current weak corporate governance arrangements between the PEMDAs and the PDAMs is large and present an opportunity for greater improvements inthe sector. 17. The objective o f the decentralization policy for the water sector to bring the services closer to the people is sound. Decentralization, however, makes the formation and implementation o f national strategies more difficult and requires consultation and innovation to devise incentives to achieve objectives. The national government now issues decrees and guidelines to local governments and PDAMs on the water sector, but the latter are sometimes -26-  slow or reluctant to adopt them. A new approach combining incentives with resource transfers dedicated to achieving national objectives inthe water sector is needed. 18. Sector Financing. Prior to decentralization, the MoF usedto provide financing to PDAMs by means of subsidiary loan agreements bearing much o f the default risk and the burden o f any unpaid loans. Today, some 220 PDAMs hold more than 400 outstanding loans with the MoF, with about 63% o fthese inarrears or indefault, i.e. $500 milliono fdebt has accrued to the MoF. Inthe present environment, few PDAMshave enoughresource generation capacity to meet their operational costs and debt service obligations. 19. In2003, the MoF issued Decree No. 35, which was further elaborated and strengthened in 2006 (Decree No. 53). The decree has the objective o f laying out the procedures for channeling loans and grants to PEMDAs. Local governments have to settle past arrears or agree on an orderly debt rescheduling with the MoF, before applying for a new loan or grant. In case o f default, MoF can collect overdue debt services by intercepting the transfer o f the general allocation funds (DAU) to PEMDAs indefault. Inpractice Decree No. 53 and the accompanying regulations are not providing PDAMs with the necessary relief or incentives to come forward at the necessary pace to resolve the problems inthe sector. Other decrees prevent "good" PDAMs from rescheduling their debts, and are therefore required to pay all arrears before discussion o f new loans. PDAMs without arrears can borrow with less attention to their current financial situation. The intercept clause - common in many countries - i s not used for fear o f political backlash. PDAMs often receive bad advice not to repay their arrears in hopes o f being "forgiven". The Government's strategy to achieve the MDG No. 7 requires substantial investment financing, 60% o f which is plannedto be from international financial institutions, and up to 11% from private lenders. Private sector financing is a priority and the government has been making substantial efforts to attract the private sector to infrastructure investments. 20. Tariff Policy. Decree No. 23/2006, issued by the Ministry o f Home Affairs, sets the guidelines for setting PDAMtariffs with an eye on affordability, cost recovery and efficient use o f water. It also suggests simplification o f the tariff structure from the current multi-category, multi-block system. Some PEMDAs are adopting the M o H A guidelines to varying degrees. In rare cases, those PEMDAs delegated tariff setting to the PDAMs. Inothers, the local parliament delegated tariff responsibility to the mayor. However, these are rare cases, and the majority o f PDAMs face considerable interferences that hinder their efficient operations. Where PEMDA interference in the management o f PDAMs continues, delays in PDAM transformation into commercially viable enterprises persist. Where local governments do not allow tariffs to cover costs, utilities will continue to face financial and operational difficulties, as they resort to cutting on operation and maintenance expenditures, delay needed repairs thus increasing the deterioration of the existing capital assets andhastening the need for more capital needs. Overall the tariff structure remains complex with many categories and multiple block tariffs. Only few PDAMs who have improved their information systems can analyze the impact o f tariff changes on customers and operations. 21. A misguided concept is that lower tariffs are designed to assist the poor. Evidence suggest that PDAMs are reluctant to expandtheir services to the poor because they know it i s a losing propositions as they are doomed to receive lower revenues for investment. The poor end up without proper connections, and the subsidy and benefits accrue to those who can afford higher tariffs. The poor continue to obtain their water from more difficult and lower quality sources. They end up paying more for clean and drinking water. Some studies suggest that poor -27-  households may pay up to 7 times more than more affluent households for their clean water. Finally, cross subsidizing from industries to households i s a method used by many utilities in many countries, and this can work up to a point. With deteriorating services and increased tariffs, industries often resort to obtaining water from their own sources and disconnecting from water utilities, thus deprivingthe latter from their best customers and sources o f revenues. Thus improving water services is needed to maintain current customers as well. Finally, charging tariffs that do not cover costs, increase the financial difficulties o f water utilities as they resort to cutting on operation and maintenance expenditures, delay needed repairs thus increasing the deterioration o f the existing capital assets and hastening the need for more capital needs. PDAM operations and management should be separated from the daily political concerns o f local governments who should retainthe vision and oversight functions o fthe local utilities. 22. Financing. The lack o f access to sustainable financing from internal cash generation or from long-term sources is forcing PDAMs to resort to short-term expensive solutions from commercial banks or suppliers. However, few PDAMs can afford such sources for their growing investment needs. The central government also has a large role to play to facilitate improvements inthe sector. The role o f the central government should be as a policy maker and a facilitator. The lack o f progress on the settlement o f debts and arrears o f PEMDAs and PDAMscurrently present a real obstacle to the development of the sector, as the MoF does not allow borrowing incase there are arrears. Inreality, sub-national debt accounts for only 0.3% o f the consolidated government debt, o f which the PDAMs account for 0.2%. The central government should retain the position o f hard budget constraint and avoid bailing out non- performing PDAMs and PEMDAs. However the central government can facilitate sector development by developing realistic expectations and targets for the resolution o f the arrears problems by using the existing or a modified system of conditional cash transfer (DAK) to provide incentives to improve sector performance by (i)using the intercept procedure o f fiscal transfers to recoup part o f the arrears inagreement with PEMDAs; (ii) rewarding PEMDAswith transfers; and (iii) targeting DAK or other transfers to the water and sanitation sector. Only a partnership among the central and local governments, the PDAMs and the community can deliver on the development o fthe water sector. -28-  Annex 2: Major RelatedProjectsFinancedby the Bankand/or other Agencies INDONESIA: ID-Urban Water Supply and Sanitation Sector Issue Project LatestSupervision(PSR) Ratings (Bank-financed rojects only) Implementation Development Progress (IP) Objective(DO) Bank-financed Participatory, poverty alleviation, Water Supply and Sanitationfor Low community-driven Income.CommunitiesIand 11. S S PAMSIMAS. Sector reforms, demand-responsive, crisis PDAMRescue Program(ASEM- S S relieve fundedTA). Sector reforms, policy formulation. Water Sector Adjustment Loan U S Utility benchmarking PDAM Benchmarking(PPIAF-funded TA) Participatory, poverty alleviation, integration BaliUrbanInfrastructureProject S S ofplanningof urbaninfrastructure KalimantanUDP S S development Semarang-SurakartaUDP S S SecondSulawesiUDP HU HU SecondEastJava UDP S S SurabayaUDP HU HU Other DevelopmentAgencies USAID Water Efficiency Team I,11, 111; Sector reforms, operation andmanagement Local GovernanceWater Services improvement EnvironmentalServices Program. ADB Supportfor Local Government Governance, financingreforms, private FinancingSystem; sector participation RegulatoryFrameworkfor Private and PublicWater Supply and Wastewater Enterprises. ADB Metro BotabekUDP Participatory, poverty alleviation, integration SumateraUrban Sector Development ofplanningof urbaninfrastructure Project development JBIC (formerly OECF) Ujungpandang(formerly Makassar) Sector development Water Supply Project -29-  Annex 3: ResultsFrameworkandMonitoring INDONESIA: ID-UrbanWater Supply and Sanitation ProjectOutcome Use of ProjectOutcome Indicators Information Improve and expand water supply Increment incapacity o f Assess coverage rates against services inthe Project areas by production system planned investmentsto monitor strengthening local water utilities project progress. to become operationally efficient Increment innumber o f and financially sustainable. connections Coverage against service area Improvements incustomer Coverage against NAP (National satisfaction Action Plan) and MDG , (a) Quality (b) Service Hours Assess outreach to the poor (c) Reliability Assess user satisfaction with Operating ratio <1 water access and improvements to take corrective action, where DebtService Coverage Ratio needed. (DSCR) >1.3 (for Bogor only) Assess progress against agreements, review for needed action from PEMDAs.PDAMs IntermediateOutcome Use of Intermediate Indicators OutcomeMonitoring Additional volume o f water Assess whether program i s on produced target and effective inreaching service reliability. Identify reasons for deviatiodshortfall and take corrective action. IReduction innon-revenue water No. ofbulk metersreplaced, Assess N R W reduction plan. repaired on installed No. of individual metersreplaced or repaired Improvements inPDAM No. of employees per connection Assess adherence to performance corporate management agreement. Water tariffs collection period Tariff increasesto maintain target operating ratio -30-  Arrangementsfor ResultsMonitoring 1. Institutional Issues. The monitoring indicators are selected from indicators included in the decree from the MoHA which aim to regulate and monitor P D A M operations. These indicators are based on analytical work and technical support between the Bank and the Go1 as part o f the PDAM rescue program. PDAMs will be responsible for the collection of the data based on their own information. A full description o f the Monitoring and Evaluation system for the project, with procedures, will be included inthe Project Management Manual. 2. Data Collection, Analysis and Monitoring. Baseline data are available for the above indicators and are (or will be) collected by PDAMs intheir normal line o f duty. Where baseline data are not available the PDAMs will carry out necessary field surveys to collect the data soon after project implementation commences. Other information will be monitored for progress. Information on project specific data will be compiled in the project progress reports (procurement and financial management monitoring). Data will be aggregated at the PCU for further analysis, comparison and to draw lessons. Project targets interms o f number o f planned connections, timing, unit and total costs o f other investments will be monitored against plans. NRW baseline data is weak and unreliable due to lack o f necessary measuring equipment. Bulk meters at the production site will be installed inthe earliest stages o f the project while individual meters will be installed, replaced or repaired soon thereafter to allow for better measurement. The training program will include the design o f measures to reduce physical and administrative NRW to feed into the design of the investment program with PDAM participation, with the objective o f reducing measuredNRW by 5% at the end o f the project. 3. Inadditionto the routine data monitoring andevaluation, annual indepthmonitoring and evaluation based on the annual report will take place during project supervision. A further in depth review o f the project will take place during the mid-term review. Finally, to assess user satisfaction with the services and the social impact o f the project, at least two surveys o f user satisfaction will be undertaken during the project, which will also feed into decision on any corrections of project implementation. Surveys o f P D A M staff will assess their views o f progress and solicit input for improvements. Bank supervision from the field will ensure quick action i s taken to continue progress o f the project. The Bank will be able to respond quickly, discuss with all stakeholders, provide feedback on activities and initiate corrective action when needed. 4. Capacity. The PDAMs have the required capacity to collect the data, monitor and analyze progress. Staff o f the PIUs and PCUs will have direct access to the necessary data. Engineers and consultants will be inplace to monitor physical progress against plans. The PCU will be responsible for aggregating the project data and make project analysis. A consultant is hired for this purpose. The indicators are available from P D A M data, and would be monitored by PEMDAs and the PCU. The training program envisaged by the project to be delivered through WASAP-B program i s designed to increase capacities at all levels, but particularly to PDAMs on specific technical, institutional and financial matters, and to PEMDAs on corporate management issues and relation between them and PDAMs. The training provided through this -31-  program is based on diagnostics and analysis of the utility's performance and operational efficiency. -32-  m I 3 c? 3 3 V A c? 3 - V A c? 3 V 3 A   v, I 3 3 V I 0 IC1 3 3 V a a a e e e a e  d 3    Annex 4: DetailedProjectDescription INDONESIA: ID-UrbanWater Supplyand Sanitation 1. The project comprises of capital investment. It includes investments inPDAM operations including construction and rehabilitation of water sources and water treatment plant, as well as expansion and rehabilitation of distribution networks and house connections. In addition to service expansion, the component aims to reduce water losses and improve sales through a program of detection and reduction. This component also includes expansionof coverage, a key source of improved and sustainable revenue generation for the PDAMs. Besides the capital investment, the GO1will engage consultants who will be fully funded by the counterpart funds, and part of it will directly target improvements in operational and managerial skills of PDAM and PEMDA officials through training. The main part of the training component for PEMDAs and PDAMs will be covered under the WASAP-B program implementedby the World Bank and WBI. Capacity building programs are targeted based on PDAM diagnostic analysis. A complete program will be developed by end of 2009. Additionally, a parallel component to initiate work on sanitation strategies inthe participating PDAMs is included inthe project. WSP will explore possibilities of program expansionby following the current adopted methodology and approach on environmental sanitation inthese sites. 2. The project will be implemented over a 5-year period 2009-2014. The estimated total project cost is IDR 315.2 billion or US$ 33.54 million, which includes physical and price contingencies as well as taxes. The Bank would finance US$23.56 million based on (a) 85% financing of civil work and equipment for Kota Bogor, and Bogor PDAM will provide the remaining financing for civil works and equipment; (b) 100% financing of civil works and equipment of a clean water reservoir and distribution networks for Kabupatens Kapuas, and Kapuas PEMDA and PDAM will provide 100% financing of civil works and equipment for construction of 100 l/s WTP, household connections, NRW water network replacement and DED; and (c) 100% financing of civil works and equipment for water intakes and WTPs, and distribution systems of Kapupaten Muara Enim, and Muara Enim PEMDA and PDAM will provide the 100% financing for civil works and equipment of three clean water reservoirs, household connections and NRW water network replacement. PDAMsBEMDAs will also finance landacquisition costs as well as activities complimentary to the project. 3. The existing water supply systems o f KotaBogor, KabupatensKapuas and Muara Enimare describedbelow: (a) Kota Bogor - PDAM Tirta Pakuan Kota Bogor supplies safe and clean water toward water supply Zones 1,2,3,4 and 6 in the urban areas. The current service coverage i s of about 47% of the total urbanpopulations. The water supply services are provided with different pressure heads and are of 24 hours continuous services. There are five urban water supply systems (WSSs) of total design capacity of 1,710 L/s inBogor City, namely (a) Kota Batu Water Supply System of 70 L/s which has suppliedpotable water to Zone 6 of the urban area since 1918, (b) Tangkil Water Supply System of 170 L/s which has supplied potable water to Zones 1 and 4 of the urban area since 1974, (c) Bantar Kambing Water Supply System o f 170 L/s which has supplied potable water to Zones 2 and 3 of the urbanarea since 1969, (d) Cipaku Water Supply System of 300 L/s which has suppliedpotable water to Zone 3 of the urbanarea since 1988, and (e) Dekeng Water -39-  Supply Systemof 1,000 L/s which has suppliedpotablewater to Zone4 of the urbanarea since 1997. 70L/S 170L/s 170L/S uotaB a u Tangkll Bats 300L/S l,OOOL/S w# W S Kambing Clpdd Dekeng (1918) (1974) wss wss wss d I E E 0E 0 E 0 0 cn Q I In I hl 3 0 z 1 + + Zone6 Zone 1 Zone 2 Zone3 Zone4 Figure 1ExistingWater SupplySystemsofKotaBogor (b) KabupatenKapuas - PDAM Kapuas supplies water toward about 50% of the total urban populationsof Kota Kapuas. However, the water supply services sometimes fail to meet the stipulated drinking water supply standards and also are not able to meet 24 hours continuous services.Portablewater is also deliveredto consumers by five existingtrucks inparticularduring the dry season which usually takes place from April to September. The existing water supply services also suffer from seawater intrusion during the dry ' -40-  season (The P D A M is constructing a new intake and raw water transmi'sison line o f about 30 kmupstream of the existing WTPs). The remaining 50% o f the urban population who do not have access to the piped water supply services provided by the PDAM, obtain unsafe water from rivers and wells. It was reported that suffering from diarrhea and water related diseases o f the unserved populations by the P D A Mwas very common There i s one existing water supply system (WSS) which consists o f six packaged WTPs (see below) and two service reservoirs o f 200 m3 and 500 m3 that supply clean water to the urbanpopulations o f Kapuas. (a) 20 L/s WTP has commissioned since 1982 (b) 30 L/s WTP has commissioned since 1992 (c) 10 L/s WTP has commissioned since 1995 (d) 25 L/s WTP has commissioned since 1996. (e) 40 L/s WTP has commissioned since 1998 (f) 25 L/s WTP has commissioned since 2004. -41-  WSS 20LjS 1 O L D+ 25LB +4OL/s + 30L/S ++ 2 5 L F Kota Kapuas Figure2 ExistingWater Supply Systemof Kapuas. - (c) Kabupaten Muara Enim - PDAM Muara Enim supplies water toward about 50% of the total urbanpopulationsof Tanjung Enim and Muara Enim. However, the water supply services sometimes fail to meet the stipulated drinking water supply standards and also are notableto meet24 hourscontinuous services. The remaining 50% of the urbanpopulations, who do not have access to the pipedwater supply servicesprovidedby the PDAM, obtainunsafe water from River Enimandwells. During the dry season which usually starts from May to September, the unserved populationsbesides facing water shortage, they have to drink unsafe water. It was also reported that the number of diarrhea and other water related sickness during the dry season hadincreasedby at least 5% with compareto the wet seasoninthe past. There are two existing water supply systems (WSSs) which supply clean water to the urban populations of Tanjung Enim, namely, Karang Asam WSS and Talang Gabus wss. -42-  40L/S 40L/S KarangAm Tdang Gabus WSS wss 40LB WTPS 2OLB 20L/s + WTPS 500m' Reservolr KoSaTanjung Enim Figure3 ExistingWater Supply Systems o fTanjungEnim The two existingwater supply systems (WSSs) which supply cleanwater to the urban populationsofMuaraEnim, namely, TalangJawa WSS and PelitasariWSS. -43-  60LjS SOW TdangJava Pclitasari 20Lh 20LjS 20Lh + + 360m' Reservoir Kota Muara Enirn Figure 4 - Existing Water Supply Systems o fMuaraEnim 4. The project comprises of water supply system improvements (US$ 31.18 million) for the participating PDAMs that are diversely located on the islands of Java (Kota Bogor), Kalimantan (Kabupaten Kapuas), and Sumatra (Kabupaten Muara Enim). 5. These PDAMs are self-selected after about 20 PDAMs expressed interest in the project. Many of the 20 PDAMs dropped out later on, while these three PDAMs showed the necessary commitments and prepared the documents required to remain inthe project. All, except Bogor, satisfy the requirements o f the MoF, and have no arrears. Bogor and the MoF have agreed to resolve Bogor's arrears in order for Bogor to participate in the project. To ensure that the institutional aspects o f this component are implemented, the performance agreement between each PEMDA and P D A M will include in addition to the financial on-lending terms, assurances that both parties undertake their obligations responsibly, including financial indicators, cost recovery tariffs, management efficiencies, and PEMDA contributions. Performance agreements and indicators are selected from monitoring indicators in the Government's restructuring program and the guidelines of the Ministryo f Home Affairs. -44-  6. The planned works will result in increased production and sales, thus increasing revenue. The effective cost per unit volume sold will decrease due to improved delivery efficiency afforded by the reduction in water loss from the distribution system. The PDAM-specific investments and outcomes are estimated as follows: Part 1. Bogor(West Java): Investments inBogor comprise: constructing o f a newwater treatment plant with capacity 400 l/s adjacent to the existing Dekeng WTP, constructing . two additional units o f rapid sand filters with new filter back washing facilities o f the existing Dekeng WTP which will be upgraded from 1,000 l/s to 1,200 l/s in capacity, constructing a 2,000 m3 water reservoir, constructing 100 km o f water distribution pipelines with 40,000 new household connections serving about 200,000 additional people in Kota Bogor, and implementing a NRW reduction program by installation o f new water meters and replacement o f 8 km o f old pipelines. NRW is expected to be reduced by 5% as a result o f project investments (from 38 to 33%). The Bank Loan will finance 85% o f all works and goods for the above investments. (b) Part 2. Kapuas (Central Kalimantan): Investment in Kapuas, capital o f Kabupaten Kapuas will comprise constructing o f new water reservoirs, increasing distribution system, and rehabilitating pipelines to reduce water losses and improve service levels to meet the growing demand for water in Kapuas. The Bank Loant will finance: (i) the construction o f a 1,500 m3 water reservoir; and (ii) construction o f about 25 km o f the water distribution pipelines. Local Funds by GoI/PEMDAs/PDAMs will finance: (i) 8,000 new household connections serving about 40,000 additional people in Palinkau, Kapuas Timor, Selat Huh and Desa Pulotelo, Kapuas; and (ii) the implementation o f a NRW program by installation o f new water meters and replacement o f old pipelines. NRW is expected to be reduced by 5% as a result o f project investments (from 35 to 30%). (c) Part 3. Muara Enim (South Sumatra): Investments in Muara Enim cover activities to increase the supply of treated water and improve the efficiency o f water distribution. The Bank Loan will finance 100%of some investments, which are outlined below, while the remaining complementary investments will be funded at 100% by the GoIPEMDAsPDAMs. UrbanArea ofMuara Enim: (i)Forthe PelitaSari WTP. The Bank Loan will finance: (i) upgrading of the existing river intake from 90 Vs to 100 l/s including construction o f 1 km o f 355 mmdiameter raw water transmission pipeline, (ii) constructiono fnew 10011s the primary sedimentation tank of the existing Pelita Sari WTP, and (iii)the construction of 50 l/s new WTP. Local funds by GoI/PEMDAs/PDAMs will finance constructiono f a new water reservoir. (ii) Talanrr JawaWTP. For The Bank Loan will finance: (i) upgrading o f the existing river intake from 60 Vs to 75 l/s including,construction o f 0.90 km o f 250 mm diameter raw water transmission pipeline, (ii) construction o f new 75 l/s the primary sedimentation tank of the existing Talang Jawa WTP, and (iii)the -45-  provision o f 70 l/s booster pumping station. Local funds by GoI/PEMDAsPDAMs will finance constructiono f a new water reservoir. (iii)For the Water Distribution Network in Muara Enim Urban Area. The Bank Loan will finance: (i) construction o f about 120 km o f water distribution the pipelines o f diameters varying from 110 - 355 mm. Local funds by GoVPEMDAsPDAMs will finance: (i) new household water connections 8,400 serving about 42,000 additional people inurbanareas o f Muara Enim; and (ii) the implementation o f a non-revenue water reduction program by installation o f new water meters and replacement o f 62 km o f old pipelines. NRW is expected to be reduced by 5% as a result o f project investments (from 40 to 35%). UrbanArea o fTaniunaEnim: (iv)For KarangAsam WTP. The Bank Loan will finance: (i) construction o f a the new river intake o f 100 l/s including construction o f 0.60 kmo f 355 mm diameter raw water transmission pipeline, (ii)the construction o f new 150 l/s primary sedimentation tank o f the existing Tanjung Asam WTP, and (iii) construction the o f a new 100 l/s new WTP. Local funds by GoWEMDAsPDAMs will finance constructiono f a new water reservoir. (v) For the Water Distribution Network in Taniuna Enim UrbanArea. The Bank Loan will finance the construction o f about 80 km o f water distribution pipelines o f diameters varying from 110- 355 mm. Local funds by GoI/PEMDAs/PDAMs will finance: (i) (no. to be conjrmed during negotiations) new household 5,600 connections serving about 28,000 (no. to be conjkmed during negotiations) additional people in urbanareas o f Tanjung Enim; and (ii) implementation o f the a non-revenue water reduction program by installation o f new water meters and replacement o f 58 km o f old pipelines.NRW i s expected to be reduced by 5% as a result o fproject investments (from 40 to 35%). 7. The Go1will engage consultants, who will be fully funded by counterpart funds, to enhance project performance to augment institutional and management capacity. The success o f the project and its long-term viability depend not only on the technical merits, but also on the institutional and management skills o f the executing agencies. The consultant services are divided into three parts: (1) technical support for project implementation, which aims to ensure that project implementation i s in line with and satisfies World Bank and Go1 requirements; (2) project enhancement support which aims to ensure that the project achieves its objectives efficiently by providing specialized consultant services and training to PEMDAs and PDAMs; and (iii) the project will initiate technical assistance in sanitation (costs not included) to be financed through grant funding from additional donors. These anticipated activities are separate from the project, but aims to initiate information dissemination, mapping, pilot projects and feasibility studies for sanitation investments inthe project area. 8. Project Implementation Support, would include consulting services and equipment for the PCUPIUs for: -46-  (i) Technical support for project implementation and supervision at the central and PDAM levels, which aims to ensure that project implementation is in line with and satisfies requirementso f the World Bank andthe GoI; (ii) Constructionsupervisionactivities; (iii) Preparation o f detailed engineering designs for the various packages; and (iv) Capacity building activities to provide specialized consultant services and training to PEMDAs and PDAMs. The above will be contracted as a management advisory firm so that activities could be coordinated. Inaddition, this sub-component will finance costs for the conduct o fproject audits. 9. Project Enhancement Support. These activities are designed in order to facilitate and ensure that the project achieves its wider development objectives through consultant services and training to enhance P D A M and PEMDA managerial and technical skills. Additionally, surveys will be conducted to gauge the attitude o f stakeholders, beneficiaries, staff and managers of PDAMs to ensure that lessons learned are incorporatedinto investments and project progress as needed. Public information and participation will be conducted to inform the population about the project and to engage them to participate and provide their views on current and desired services. Customer surveys will determine strengths and weaknesses o f current services and to design new approaches for better services. Similarly, P D A M staff surveys will solicit views o f staff for improvements. The results o f the surveys will be used by PDAM and PEMDA management to improve performance and services. The surveys will also be designed to solicit views from staff andusersto reduce NRW. 10. Assessment of the nature and structure of NRW A water loss mitigation program will be conducted in all participating PDAMs. Water losses reported by PDAMs are not sufficiently reliable, and it is important to verify the problem more accurately. Many water meters are old or broken and do not correctly measure water flows. The reduction program will aim to determine the proportion o f illegal connections, physical leakage and administrative errors due to inaccurate meters, meter readings, and erroneous billing. The assessment will ascertain the most effective means o f loss reduction and will lead to investments in physical loss reduction programs (leak detection equipment, metering, replacement o f deficient pipes); and administrative investments (bill payment systems). The assessment will identify steps to avoid illegal connections through a mix o f incentives and penalties for P D A M staff and consumers. These consultant services and training to the PDAMs and PEMDAs will be provided in an ongoing WASAP-B `Water Supply Services and Capacity Building' program implemented by the World Bank and WBI, focused on the participating PDAMs, the costs o f which are not included herein. 11. Sanitation Technical Assistance; This is a separate and parallel activity to be funded by other donors and will provide support to the project by initiating sanitation technical assistance program inthe project areas focusing on mapping o f sanitation hotspots, public information and capacity building campaigns targeting the poor, and studies to devise appropriate methodologies for addressing severe sanitation issues that would be appropriate for the areas under the project. -47-  12. The Bank will conduct workshops in Jakarta for all participating PDAMs, other officials and staff involved inthe project on Bankprocurement andfinancial management guidelines and procedures withinthe context of the project. -48-  Annex 5: ProjectCosts INDONESIA: ID-UrbanWater Supply and Sanitation - Bas' canpnents - IDR (nillicn) J S (nillkn) US$(million) Partl. ForKotaBoaor 1.NwWTP 47,xJr 5.05 0.35 50,823 2. N wReservoir 5,45: 0.58 0.04 3. BadtwashR q d ePlart at DekergWTP 6,62 0.71 0.05 7,093 4. Filter Unitsat DekergWTP -I 8,05! 0.86 0.06 8,619 0.92 0.76 5. Extendngthe Mer DstnbttionNebwrk 20,Pr 215 0.15 21,640 1.93 6. lmprrerting NRWProgram 8,34: 8,927I 0.79I SUM& =207 102942I 1695 I 9.06 I Part2. ForKabuwten 1.N w Reservoir 7,024 0.75 0.05 2.Water DstitutmNetwork 2a. Sebt HUIU-1 17,649 1.90 0.13 2b. SlatHUIU-2 2,848 0.30 0.02 2.PuloTeb-1 a.kbT&-2 6,244 0.66 0.05 2,484 0.26 0.m 3. NwWTP 6,Ow) 0.65 0.05 4. NwHouseCcnneclicns - 4,800 0.51 0.04 5. Imprenting NRWProgram 2,025 0.22 0.02 6. DED 252 0.03 0.M) SUM& @,6Z 128 a n Part3. ForKabupatenM w aEnlm 1.PdBsariWTP 11,746 1.25 0.09 12.P~IB an Reservcir 2,880 0.31 0.a? 13. KarmgAsmwrP 17,481 1.86 0.13 ~4.KxmgAsgnReselvcir 3,310 0.35 0.02 ~ 5CcnstuJtiond officeBuMing . 4,365 0.46 0.a 6.Tdarg JamWTP 8,134 0.87 0.06 7.Tdarg jam Reservoir 5260 0.56 0.04 8.Water DistitutmNetwok @baa Erim-1) 16,799 1.79 0.13 9.Water DstitutmNetwok @baa Erim-2) 16,799 1.79 0.13 10.. Water Distribltim N&ok (Tmjmg Edm) 19,993 213 0.15 - 1 11. NewHwseComedions 19,504 207 ;: 0.15 12 InplementirgNRWFngm 1,798 0.19 0.01 Subto$ 128p69 13.62 ass ConsultantServicesandTralnhg 1.Supp~rtfathe PCUa d RUs 9,923 2. Constxiion Supervisionfor Bogor 3,525 - 3. CarstxiionSupervisionfor &pas 3,080 4. ConstxiionSupervisionfor W a a h iSmU 4.180 0.44 M d bas4 20,7w TOTAL COSl - 294,613 31.34I 219 NU=: 1,Exchangerde(hcbmsianRupNhper US) 9,400 -49-  Annex 6: ImplementationArrangements INDONESIA: ID-UrbanWater Supply and Sanitation 1. Following decentralization, which assigned the provision o f water and sanitation services to local governments, the old methods o f doing business in the water sector, that were based on central government directions had to be changed. New partnerships within the government framework had to be designed based on the new realities. In a decentralized environment, the role o f central government changes to be a policy maker setting visions and targets for the sector, while monitoring its performance and designing an incentive structure for improvements by other stakeholders. Partnership between the MoPW, the MoH, the MoHA, and the MoF i s necessary to resolve many o f the current issues o f PEMDAs and P D A M including debt arrears, improvement inoperational efficiencies and designing incentives for improved performance. At the same time standards and targets set by central government need to be adhered to and monitored. Local governments have a new role as owners o f the PDAMs and are responsible for ensuring their appropriate management and viability while ensuring that central government policy i s being implemented and goals achieved. PDAMs are responsible to their owners and customers. The project aims to forge a partnership arrangement amongst these stakeholders to ensure sustainability o fthe sector. 2. The institutional and implementation arrangements proposed for the project aim to reflect the new decentralized nature o fthe Go1andwill mirror the responsibilities of the various layers o f governments and stakeholders. The arrangement is expected to increase efficiency, avoid duplication and increased costs, and improve local knowledge and responsibility for local project implementation, while retaining policy makingand monitoring at the central level. ProjectCoordination 3. The MoPW has a long track record in the formulation and execution o f water and sanitation programs. It i s the lead agency for integrated urban infrastructure projects, where water supply was a large component. The MoPW has good knowledge o f Bank procedures and Go1 requirements. It participated in developing the project along with other central and local agencies. A Project Coordinating Unit (PCU) will be established at the MoPW to coordinate the input o f the local Project Implementation Units (PIUs) and inform stakeholders inthe national government and to liaise with the Bank on project progress and alert them to needed action. The PCU will have access to specialized advice and will participate inproject training activities. The PCU will include a procurement consultant who will be responsible for reviewing the procurement documents prepared by PIUs before they are forwarded for the Bank to review. The consultant will be responsible for the quality control of the documents and ensuring Bank standard documents are being used. The consultant will provide advice to PIUs upon request, and will consolidate their submissions of the updated procurement plans for the progress report. The PCU will also have a financial management consultancy team who will be responsible for the review of financial management reports, disbursements applications and other financial documents prior to their final submission to the Bank. The consultant will ensure Bank procedures are adhered to. The consultant will also consolidate the submissions o f the PIUs into the progress report o f the project for review by government stakeholders and the Bank. The PCU will have access to technical advisory services to prepareterms o f reference for specialized assignments and training. -50-  ProjectImplementation 4. The P D A M components will be implemented at the local level in line with the decentralization principles. Each o f the participating PDAMs will establish a project implementation unit within its planning division consisting o f current staff who will be responsible for the project implementation. These PIUs will be responsible for conducting the procurement process, preparing payment requests and disbursement applications, managing the financial management system, the monitoring and evaluation o f the performance indicators, and daily implementation o fthe project. The PIUs will submit their quarterly reports to the PCUwho will share them in a summarized form with the Bank in a format agreeable to the Bank and included inthe PMM. The PIUs will also include technical expertdengineers from PDAMs who will be responsible for monitoring o f contracts and the implementation o f the investments. Monitoring will ensure that technical and environmental standards are adhered to. The engineers, procurement and financial management staff will work together to ensure the project i s implementedaccording to agreed procedures, ina timely manner andwith quality standards. Supervisionplan 5. Intensive supervision by the Bank, especially inthe first year o fproject implementation i s recommended, and more time is planned to be committed to the project to ensure smooth implementation in the subsequent years. The Bank's supervision will be coordinated with the PCU's own supervision. The supervision plan including its strategy (skill mix. etc) will be covered inthe PMM. -51-  I i / I1 I II I I I I I I I I I I . . _ _ . . - e - l I I I I I I ----_I-- I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I , I I  Annex 7: FinancialManagementand DisbursementArrangements INDONESIA: ID-Urban Water Supply and Sanitation A. ExecutiveSummary and Conclusion 1. The UrbanWater Supply and Sanitation Project (UWSSP) will be financed as a Specific Investment Loan, with a total project size USD 33.54 million, o f which USD 23.56 will be funded from this loan. Three PDAMs (Bogor, Kapuas, and Muara Enim, under the coordination o f Directorate General (DG) Cipta Karya, the MoPW), will be the implementing agencies for this project, with an estimated 91% o f the project expenditure to be executed through the PDAMs. The project will be implementedover a period o f 5 years. 2. The purpose o f the financial management assessment is to determine whether the financial management systems o f the respected PDAMs and the MoPW have the capacity to produce timely, relevant and reliable financial information on project activities, and if the accounting systems for project expenditures and underlying internal controls are adequate to meet fiduciary objectives and allow the Bank to monitor compliance with agreed implementation procedures and to appraise progress towards its objectives. 3. The financial management assessment for the UrbanWater Supply and SanitationProject (UWSSP) was carried out in accordance with guidelines issued by the Financial Management Sector Board inNovember 3, 2005l. The Bank Team reviewed the operations o f the following units within DG Cipta Karya, the MoPW, as the coordinating agency, including its finance unit and Inspectorate General. The MoPW will be responsible for the implementation o f the Consultant Services and Training Component. FMS also assessed the financial management capacities o f P D A M Bogor (in West Java) and Kapuas (in Central Kalimantan) and the respective finance units o fboth local governments. 4. DG Cipta Karya, the MoPW with its prior experience in managing Bank financed projects was noted to have a limited number o f staff with sufficient capacity to coordinate the project implementation and be financially accountable for it. However, it was observed during the assessment that such capacity is inplace at PDAMs level and 91% o f the cost o f the project will be spent at PDAM level. Furthermore, there is also additional risk due to the weak overall country environmental control. Taking all these factors into consideration, the overall Financial Management risk o fthe project i s rated as "Substantial". 5. A financial management action planhas been developed and has been discussed withthe MoPW to help mitigate the identified financial management risks. This action plan includes strengtheninginternal controls through regular internal audit o f project activities, strengthening payment validation procedures to reduce risks o f fraud, segregating financial functions from the rest o f project management maintaining checks and balances, documenting project and financial management procedures in a manual to guide project staff and training o f project staff in financial management procedures. '"Financial Management Practices in WorldBank- FinancedInvestment Operation",November 2005. -53-  6. The Bank's assessmentconcluded that upon implementation o fthe actions stated inthe proposed "Financial Management Action Plan" below, the project would satisfy the Bank's financial management requirements as stipulated inOPBP 10.02. B. Summaryof CountryIssues 7. Recently concluded PEFA2assessment indicates that in recent years Indonesia has made significant changes in the way its public finances are managed and in increasing transparency and independent oversight. In almost all areas of public financial management, a sound regulatory framework i s in place. Advances have been made in budget preparation, and in instituting a State budget that combines the previously separated recurrent and development budgets. 8. However, internal controls inthe execution o f the budget by spending agencies have not scored well overall. Internal audits exist in all ministries but generally lack capacity to use modern systems and carry out risk-based auditing. There is no government-wide Government Financial Management Information System (GFMIS) that provides information on budget management at all levels of national government. While the external audit function i s under- resourced and lacks capacity, it has nonetheless made significant progress inrecent years. 9. The Bank and several other development partners are engaged with the Go1inproviding assistance in several o f these areas o f weaknesses. The Government Financial Management and Revenue Administration Project (GFMRAP) i s the Bank's primary channel for assisting the Go1 on these issues. The Bank is also working with internal auditors o f four line ministriesincluding the MoPW to strengthen their ~apacity.~The Bank is also engaged with the external auditor to strengthen its capacity in several areasS4 10. Implementation experience with the MoPW suggests that even though most o f these country issues apply, the MoPW is a relatively better performingministry interms o f compliance with the finance andtreasury laws. 11. This situationimpacts the financial management arrangements for thisprojectto the extent that this project relies on Government financial management and project implementation systems. PEFA (PublicExpendituresFinancialAccountability) 2008. The Bank has engaged with Ministries of Public Works, Finance, Health and Education in strengthening the respectiveInspectorateGeneralinthe internal audit ofthe Bank`s financed projects. There are two ongoing Trust FundedTA supportingBPK, i.e. onthe strengtheningforensic audit capacity andon the strengtheningaccountability for and audit of disaster relatedaid. - -54-  Issues Risk RiskMitigatingMeasures Incorporated Residual Condition of Rating into Project Design Risk Negotiations or Effectiveness (Y/N?) Inherent Risk Countrv level S N Public Government recognizes existingweaknesses Financial inpublic financial managementandhas Management several programs to improve PFM, including through the Bankfinanced project (GFMRAP). However, making substantial progress on the country issues has been challenging and is likely to remain so. Overall S S Country Risk EntityLevel S M MOPW- To anticipate poor reliability o f entity's Y, TOR by negotiation DGCK financial management capacity, the project and selected after Implementing coordinating unit will be supported by effectiveness (refer to Entity/ financial management consultant. Action Plan to Mitigate Organization Risk- Project Status of entity organization & Staffing PDAMs M - Muara Enim, Inall FY2007 PDAMs audit reports, the M Bogor, and auditors provided unqualified opinion. Kapuas - All PDAMs implementing accounting systembasedon Decree ofMinistryof Regional Autonomy no 8 FY 2000 since FY2001. - Finance and accounting staff o fPDAMs notedto have accounting background and sufficient capacity to produce reliable financial statement Overall Entity S M Risk Proiect Level S Y, Final draft on- 1. Project The project aims to reflect the new M lendingagreement (the Complexity decentralized nature o f the Go1and will mirror the responsibilities o f the various layers MoF and local govt) o fgovernments and stakeholders. There will and agreement between be on-lending arrangement from central each local govt with its government to Bogor, Kapuas and Muara PDAMby negotiation Enimlocal governments andspecific arrangement for each localgovernment to its PDAM. All arrangementexpected to be final before negotiation. Overall Proiect I S M Risk -55-  ControlRisk Budgeting S There is riskthat there will be delay in M Y, acceptable draft Riskofproject inclusion ofproject activities inthe local PMMby negotiation activities not governmentbudget. and full adoptionbefore beingincluded effectiveness(refer to inthe local Following are action planto mitigate: Action Planto Mitigate government a) Annual budget and work plan will be Risk-PMM) budgets requiredfor submissionto the Bank. b) DG Cipta Karya, MPW will coordinate with Bangda, the MoHA to monitor budgeting processwithin the local governments of participating PDAMs. c) PMMwill detail budgetingprocessto ensure all proposedactivities sufficiently and timely budgeted. Accounting M Use of PDAM chart of account and M Reliability of government chart of Account to be used for accounting accounting; simplified loan categories for system Bankreporting. Internal H Despitethe fact that PDAM'staffhave M Y, acceptable draft Control accountingbackgroundand sufficient capacity PMMbynegotiation Inadequate to producereliable financial statement, the and full adoptionbefore vayment project will still facedthe riskthat payments effectiveness (refer to verification will be made without properly verifyingthat Action Planto Mitigate work paid for is completedand is eligible for Risk-PMM) funding. PMMwill detailthe following: a) Sufficient segregationofduties among paymentauthorization and"commitment maker". b) Stronger payment validation procedures at all levels. c) Criteria for eligible project expenditures in accordance with the Financing Agreement to be followed by the relevant KPPN. Funds Flow S )There willbededicatedbank account atthe M Y, acceptable draft centralbankto channel credit disbursements. PMMbynegotiation b) The mechanismfor fundflows to the and full adoptionbefore PDAM was describedinthe flow of f h d effectiveness (refer to below andwill be agreedand reflected in Action Planto Mitigate PMM. Risk-PMM) Financial S Formats for special purpose financial M Y, acceptabledraft Reporting statements for annual reporting and quarterly PMMby negotiation interim un-audited financial report (IFR) will andfull adoptionbefore be agreedand includedinthe PMM. effectiveness (refer to Action Plan to Mitigate Special purpose financial statements will Risk-PMM) include aggregation of expenditures at PDAMs level. In addition, expenditures at PDAMs will also be included intheir financial statement with disclosures of foreign funded parts. Mechanism on how to comrde PDAMs' IFR -56-  and produce project's IFR will be agreed and reflected inbothPAD andPMM. The on-lending agreement (from central to local governments) will cover requirement o f PDAMto DreDareIFRon auarterlv basis. 6. Internal Arrangement for both Inspector General o f the M Y, letter to IGby Audit MoPW and Bawasda to conduct internal negotiations (refer to audits. Action Planto Mitigate Risk-Internal audit) Letter to be issued authorizing Inspectorate General (IG) o f the MoPW to undertake internal audits at the central level with TOR agreedby the Bank. Letter o f PDAM's director to be issued Y, finalize arrangement authorizing its internal audit unit (if any) or draft letter by Bawasda (under BPKP - Deputy for negotiation and Letter Supervising government Agencies in o f PDAM's director Economic Sector supervision) o f the confirming the respective local government (where PDAM arrangement by participants are located) to undertake internal effectiveness. audits o f the project with TOR agreed by the Bank, Auditing There will be two types o f audit: M Y, by negotiations 1. DGCK Letter appointment of BPKP (refer to Action Planto Riskofpoor (Deputy State Accountant) to conduct audit Mitigate Risk- audit quality o f agaegate Special Purpose Financial Auditing) andpoor Statements o f the project with TOR oversight o f acceptable to the Bank. projects. 2. PDAM Director Letter on appointment of BPKP to conduct audit of PDAM Financial Statements with TOR acceptable to the Bank. 3. Project Audit reports and audited financial statements will be made available to the public. Overall M Control Risk Overall Risk S M D. ImplementingArrangements 12. DG Cipta Karya, Ministry of Public Works (DGCK, MPW) is the lead agency for integrated urban infrastructure projects, including water supply and sanitation. DGCK, MPW will be the coordinator for this project. MPW has extensive experience in implementing Bank- financed projects. The most recent Bank project implemented by DGCK includes The Third Urban Poverty Project (UPP IIIIIBRD 4779-IND and IDA 4063-IND): this received a unqualified audit opinion for fiscal 2007, with follow up action findings related to requirementto -57-  improve the control system in the area o f project planning, monitoring and management, performance o f consultants in providing assistance to the community, procurement at the community level, payment verification, etc. 13. A Project Coordinating Unit(PCU) will be established inDGCipta Karya, the MoPW to coordinate the input o f the local Project Implementation Units (PIUs) and communicate with other national government stakeholders and with the Bank regardingproject progress, and alert them to needed action. The PCU will have access to specialized advice and will participate in project training activities. 14. The project in each local government will be implemented at the local level in line with decentralization principles. In PDAMs, the Director o f PDAM will be the ultimate responsible person on the implementation o fthe project. P D A Mwill be treated as the Pemegang Komitmenu Commitment maker. Each o f the participating PDAMs will form a project implementation unit (PIU) within its planning division consisting o f current staff to take care o f the daily project implementation in PDAMs. The PIUs will include the directors o f the technical and financial department supported by their existing staff for the purposes o f procurement and financial management and overall project design and implementation in accordance with Indonesian law andpractice, andwould therefore liaise with the relevant local andcentral governments agencies interms ofplanning,implementationandmonitoring standards. 15. PIUs will be responsible for the daily implementation o f the project including the procurement process, disbursement applications, the financial management system, the monitoring and evaluation o f the performance indicators, and coordination with local and central government officials. Staff will receive extensive training in Bank fiduciary responsibilities in procurement, disbursement and financial management to augment their current skills. The PIUs will submit their quarterly reports to the PCU who will share them in a summarized form with the Bank. 16. Under the previous arrangement, loans to PDAMwere managed through Subsidiary Loan Agreement (SLA) directly from central government. Recently, the Government o f Indonesia issued Government Regulation / PP no. 54 FY 2005 regarding local government loan. Based on the regulations, funds for project implementation in PDAMs will be channeled through local government under on lending terms. The funds will be included inthe local government's budget (APBD). 17. Based on the Decree o f Ministry o f Regional Autonomy no. 8, August 2000 on the Implementation o f Accounting System Manual for PDAMs, all PDAMs are obliged to implement the accounting system in FY 2001. In addition to that, the P D A M entity financial statement i s also subject for audit. We have reviewed the financial statement o f the participating PDAMs and found that FY 2005 audited financial statements with unqualified audit opinion are available for all o fthem. 18. P D A M is owned by local government; therefore it i s subject to audit by Bawasda, the local government internal audit unit (IG). Bawasda mostly conducts operational audits on all units withinthe respected local government, included under donor-financed agencies, such as the -58-  project. In this project, Bawasda will be trained and supervised by BPKP to conduct internal audit o f the project. E. Strengths & Weaknesses 19. StrenPths a) Based on the assessment, FMS noted that implementation o f Accounting System Manual for PDAMs has been uniform inall PDAMs. b) The finance and accounting staff of PDAMs visited are noted to have accounting backgrounds and sufficient capacity to produce reliable financial statements. 20. Weaknesses a) Although prior experience o f the MoPW in implementing Bank-funded projects has given it familiarity with Bank financial management and disbursement procedures and requirements, and the Audit reports in the earlier project were received on time, the previous project was already closed while the audit qualification raised inthe reports has just beensatisfactorily resolveddue to the preparation o fthe project. b) The involvement of local government to a certain degree provides an additional layer to the project implementation, while at the same time bringingownership and commitment to the local government to its P D A M intention to promote its performance. Close coordination between both PDAMs and its respective local government is essential inthis project. c) Bawasda o f the respective participated local governments has either limited or no experience inconducting internal audits for World Bank financed projects. d) The MoPW has its own internal audit unit (IG). We have found that the IG's activities are limited to cover only 30% o f all MoPW budget implementation. Currently IG has 70 auditors with economics, management and technical backgrounds, but none o f them are accountants. All o f them have received internal audit training and certification from BPKP. Currently the Bank is working closely with AusAID inthe preparationo fproposal to strengthen IGcapacity. F. ActionPlanto Mitigate Risks 21. For the project preparation, specifically for the purpose o f financial management assessment, FMS introduced to P D A M candidates the financial management requirements for World Bank financed projects in the project workshop. FMS prepared financial management questionnaires, distributedit to them and received responses to the questionnaires. Based on the questionnaire and discussion with project preparation and task team, PDAM Bogor (in West Java) and Kapuas (in Central Kalimantan) were selected for visit based on the consideration o f the geographic location o f PIU and their responses on the questionnaires. FMS visited PDAM Bogor, West Java and Kapuas, Central Kalimantan as part o f a pre-appraisal mission o f the -59-  UrbanWater Supply Project. Duringthetisit FMS also visited finance units of both Bogor and Kapuas local government. 22. DG Cipta Karya, the MoPW with its prior experience in managing Bank financed projects was noted to have a limited number of staff with sufficient capacity to coordinate the project implementation and be financially accountable for it. However, it was observed during the assessment that such capacity i s inplace at PDAMs level and 91% of the cost o f the project will be spent at PDAM level. Furthermore, there is also additional risk due to the weak overall country environmental control. Taking all these factors into consideration, the overall Financial Management risk ofthe project i s rated as "Substantial". 23. As part o f the project preparation, DG Cipta Karya, the MoPW is expected to adopt the action planbecause, with strict adherence to the action plan, the financial management risk o fthe project can be reduced accordingly. Action Plan Expected Output Due Rate A. ProjectOrganizationand Staffing Team o f FMconsultant at PCU to be selectedto ITOR ofFMconsultant agreedby Completed support coordination on project implementation the Bankand request forproposal during (RFP) has been sent to short negotiations listed f m s I I B. On-lending arrangement The project aims to reflect the new decentralized - Draft on lendingagreement Completed nature o fthe Go1and will mirror the (the MoF and local during responsibilities o f the various layers o f governments) negotiations governments and stakeholders. There will be on- - Draft agreement between lending arrangement from central government to local government and each Bogor, Kapuas andMuaraEnimlocal PDAM governments and specific arrangement for each local government to its PDAM. C. ProjectManagementManual (PMM) P M Mto include procedures to be followed by all Draft PMMacceptable to the Completed implementing unit o fthe project. Bank during This should include, inter alia, negotiations (a) all financial management and disbursement procedures for this project, (b) annual budgets and work plans, (c) stronger payment validation procedures, (d) segregation o f duties among payment authorization and"commitment maker" functions, (e) financial reporting formats, (0 supervision, (g) internal and external audit arrangements, (h) supervision mechanism, (i) community oversight arrangements and (i) anti corruption plan. Training for all project staff who will require the PMMtraining The first necessary skills to carry out respective duties as program after described inthe PMM loan effectiveness E.InternalAudit -60-  Arrangement with IG andBawasdato conduct - DGCipta Karya letter to IG Completed internal audit and internal control reviews of informingthe internal audit during participatingPDAMs basedon TOR acceptableto arrangement ofthe project. negotiations the Bank.Copiesofthese audit reportsto be - PDAMletter to respected provided to the Bank. Bawasda informingthe internal audit for the project Copiesofthese audit reports to be providedto the - Copiesof internal audit reports Bank. to be sent to the Bank andthe externalauditor. F.Annualaudit Arrangementof 1. DGCipta Karya letter to Completed 1. The project annualaudit. BPKP (Deputy State during 2. All PDAMs entity annualaudit Accountant) covering negotiations inaccordancewithspecific TOR acceptableto confirmingthe audit the Bank. arrangements (on special purposefinancial statement of the project) with audit TOR attached. 2. Letter of PDAMto BPKP (Deputy State Accountant) confirming the audit arrangements andagreed TOR. G. FinancialManagementArrangements 24. Accounting policies and procedures o f this project will substantially follow Government financial management procedures, with strengthened procedures where appropriate. These Government procedures include, for instance, Government budgeting procedures, accounting standard (PP no. 24, 2005) and Government accounting systems (PerMenKeu no. 59/PMK.o6/2005), which have been issued following the issuance o f the Finance and Treasury Laws. Below are summarized procedures from budgeting to reporting procedures. All project activities and expenditures will be included inthe respective KPA budget and, administrative and accountability procedures for approving expenditures and disbursing funds to beneficiaries will follow Government procedures. Details o f these procedures will be included in the Project Management Manual. Budgeting 25. The budget for Bank-financed projects will be integrated into the budget of the respective government implementing agency viz., DG Cipta Karya, the MoPW and respective local government recipient o f on lending agreement. Under this arrangement, for auditing purposes, the accountability for project budget performance will be combined with that o f the corresponding budget allocation o fthe implementing agency. -61-  Activities and Expenditure programming a. Supplier/Consultant/Contractor Contracts 26. Most o f the project expenditures will be payments to suppliers, consultants and contractors. Procured process will follow procurement procedures specified and agreed in the loan agreement. The payment on contract will be transferred directly to the respective vendor or consultant or contractor. 27. To effect payments, the Satker will prepare SPP and send to Finance Unit o f the MoPW for verification o f eligibility, compliance with the approved budget, compliance with the contracts, and acceptability o f supporting documentation which will then issues SPM' The . finance unit will submit the SPM to the government treasury office (KPPN), which in turn will issue payment remittance order (SP2D) to the central bank/ commercial bank acceptable to the Bank. Payment will be transferred directly to the account of the respective vendor or consultant or contractor, andKPPNwill debit the Bank's portion o fthe project designated account. b. Self-Managedactivities 28. Small part o f the project will finance training. This type o f expenditures will be made based on the assigned budget. PCU will be able to request an advance payment o f a maximum o f a month's projected cash needs from KPPN. This advance i s maintained on an imprest fund. The advance should be accounted for to KPPN within a month. An SPP6should be prepared by PCU for eligibility and documentation completeness review by the finance units within MPW, which will consecutively issue the SPM. SPM shouldbe submittedto KPPN for issuance o f SP2D. 29. Although the payment process will follow government procedures, the following additional payment validation measures (applicable for both self managed activities and contract payments) will be prescribed to mitigate fiduciary risks, including stronger accounting evidence, audit trails and procedures to validate contracts andoutputs: Verification o f completeness o f the documentation supporting all SPP (including ticket and boarding pass for travel, attendance list for meeting & trainings, signed time sheets, andthirdparty invoices andwarrant cards); Assurance that all activities are supported by reports andphotographs; Confirmation made to the thirdparties performing services to the project; Random confirmation made to participant o fthe workshop/training; Random confirmation made to the beneficiaries, Le. scholarship recipient; Visits to location (ifnecessary); Other types o f review (ifnecessary). Bankpayment transfer instruction to KPPN(Government Treasury Office) issuedbythe Finance Section atthe Ministry. `PaymentRequest -62-  Accounting and Record-Keeuinx 30. The MoPW finance bureaus and province sub-units follow the government accounting standard (Government Regulation no. 24, 2005) and government accounting system (MoF Regulation no. 59/PMK.06/2005). Government accounting software is used to record all transactions. Manual back-up (general cashbook and its supporting books) i s still maintained in both finance bureaus/sub-units and KPPN. The system i s closed monthly and budget realization reports are submitted to the MoF on a quarterly basis. KPPN also maintains a budget realization records card specifically for the project. This card is supported by advance and contract monitoring cards; one card for each contract. 31. At PDAMlevel, based on Decree of Ministryo f Regional Autonomy no. 8, August 2000 on the Implementation o f Accounting System Manual for PDAMs, all PDAMs are obliged to implement the accounting system since FY 2001, Reuortinq 32. Currently, the government is implementingGFS classification as the government chart o f account (MoF regulation no. 13/PMK.06/2005). The Ministry o f Finance Chart o f Account does not include codes for funding sources (e.g. donors). As a consequence, the government accounting software could not differentiate project expenditures from government expenditures. Therefore, to enable differentiation o f project expenditures for the purpose o f budgeting and facilitating report preparation according to component and expenditure categories, the following will needto be includedas a part o fthe PMM: (i) harmonization between project component and expenditure categories as described in the loan agreement, with the Government o f Indonesia chart o f accounts (Mata Anggaran Keluaran- MAK and Tolok Ukur); (ii) the MoPW Finance Unit should differentiate all project payment vouchers and payment remittance orders; and (iii) reconcile project records with a project designated account (DA). 33. The MoPW Finance Unit should work closely with CPMUto coordinate all implementingunits inpreparing the interim un-audited financial report (IFR), which is important to ensure that loan funds are available whenexpenditures are due for payment. 34. The IFR will include (i)sources and uses o f funds by project activity and by disbursement category; (ii) Designated Account activity statements (iii) Loan disbursement and expenditure status; (iv) detailed expenditures for contracts subject to prior review, if any; (v) summary aggregate expenditures for others/contracts not subject to prior review. Inaddition, to facilitate a check on consistency o f financial information with other project information, in consultation with other members o f the task team, the project will be requested to provide to the Bank a quarterly report on outputs realized for eachproject activity and a procurement progress management report. 35. All reports receivedfrom implementingunits will be compiled inan agreed format, on a quarterly basis, within 45 days o f the end o f the reporting period. The quarterly reports will be accumulated annually for annual financial audit purposes. -63-  36. Monitoring of the project budget will be through IFR, progress and procurement reports andproject supervision. Thismechanismalso enablesearly identification ofproblems, especially those related to weak accountability, and due to the shortcomings of budget execution such as under-spendingof budget allocation. H. FundsFlow andDisbursementArrangement 37. Following is the flow if funds for the main project for expenditures (at PDAMs level about 91% of the project cost). Application for I by IFR ' Withdrawal supported SpecialAccount. V (SA) Statement PublicWorks DG Central Bank , Draft Withdrawal Treasury Application supported by I ConsolidatedFinancial SE. DGTreasury MonitoringReports: Financial, Procurement &Physical Progress. * Operational PDAMIFR: MoFTreasury Bank Finance, Procurement, Office (WPN) PaymentRemittance' 4 Order (SPZD) I Local Govt. (District/City/) PDAM Sub-projectIFR *Finance I PIU 'Procurement I *Physical Progress Contractors 4 IIIIIIIII I---, =fund 38. The applicable disbursement methods include: 1) Advance, and 2) Reimbursement. In order to facilitate disbursements, a DA denominatedinUS dollarswill be opened by DG Treasury in the Central Bank (BI) or a commercial bank acceptableto the Bank under the name of the MoF. DG Treasury will authorize its KPPNs located nearby the implementationunits to authorize payments of eligible project expenditures by issuance of SP2D chargingthe DA. For this purpose, DGTreasury shall issue a circular letter to the relevant KPPN Offices providingguidelines and criteria for eligible project expenditures in accordancewith the LoanAgreement 39. The DA will be solely usedto finance eligibleprojectexpenditures. Althoughmanagementofthe DA will be under the responsibilityof DG Treasury under the MoF, the DG Cipta Karya finance unit under the MoPW will be the one responsible to reconcile the DA and to prepare the application for withdrawal for advances and reporting the use of the DAYduly approved by DG Treasury before their submissionsto the Bank. Copies ofthe DA's bank statement will beprovidedto the MPW finance unit by DGTreasury MoF. -64-  40. The ceiling of the advance to DA will at $2.5 million. Applicationsfor reporting of use of the DA funds would be supported by: (i)list payments for contracts under Bank's prior-review and records evidencing such expenditures, or (ii)statement of expenditures (SOEs) for all other expenses and DA reconciliationstatement. Reportingof use of DA funds and application for an advance to DA may be submittedina single applicationonmonthlybasis. 41. When the CPMU is capable of producingthe quarterly IFR on time, reportingthe use of funds will bebasedonthe IFR, whichwillthenalso includeprojectedcashflows for the project. Expenditures in PDAMlevel 42. Based on Government Regulation no. 54 FY 2005 regarding local government loans, funds for project implementation in PDAMs will be channeled through local government under on-lending terms. The fund will be included inthe local government's budget (APBD). 43. P D A M will submit SPP with complete documentation for validation against DASK, including a contract, invoice for the approval process. The local government finance unit will then issue a SPM to KPPN for SP2D issuance to the Central Bank to credit the payee's (third party or contractor) accounts at its respective bank and debit the Designated Account for the Bank's portion. Therefore, no physical funds will be received by Kas Daerah. 44. The project accounting will take place in both the PDAM for the APBD used and the finance unit o fthe respective local government for receipt o f central government budget (APBN) funds anduse ofAPBD funds. 45. All documentation for expenditures submitted for disbursement will be retained at the implementing unit and shall be made available to the auditors for the annual audit and to the Bank andits representatives ifrequested. Amount of Loan YOofexpenditures Loan CategoryDescription Allocated (US%) to be financed (1) Goods andWorks under Part 1ofthe Project 9,060,000 85 (2) Goods andWorksunder Part 2 ofthe Project 4,150,000 100 (3) Goods andWorks under Part 3 ofthe Project 10,350,000 100 TOTAL 23,560,000 I. Internalcontrol:ProjectManagementManual(PMM) 46. The P M M will document financial management system and procedures to be followed by all the implementing unitsto ensure that the project has sound financial management practices. 47. The P M Mwill include organization structure, job descriptions, budgeting, procurement - with addition of WB procedures if there are differences, record management for finance units, asset management, flow o f funds, payment verification - with additional verification processes for Bank finance expenditures, accounting (including use o f government chart o f account for the project), reporting (IFR format, IFR preparation and time line), annual (internal and external) audit arrangements, supervision plan, governancehti corruption and disclosure requirements -65-  (including acceptable mechanisms for Civil Society Organization (CSO) oversight on procurement, sanction & remedy procedures, audit report publication and complaint handling mechanism); monitoring and evaluation mechanism (including training plan and supervision plan) for project implementationandIGreview o fPMMcompliance. J. Internalcontrol: InternalAudit 48. Internal controls and accountability for project implementation in P D A M will be undertaken by internal audit arrangements by the respective Bawasda under BPKP (Deputy for Supervising Government Agencies in Economic Sector) supervision. An action plan has to be prepared to ensure that: i)Bawasda receipt sufficient training from BPKP; ii)project activities and expenditures in all participated PDAMs are covered by the respective Bawasda's work plan and iii)DGCipta Karya letter to BPKP and Bawasda informingthe internal audit arrangement o f the project. 49. Internal audit arrangements with IG o f the MoPW should be in place to cover project internal control at the central level. Project implementationat the central level will be audited. A letter from DG Cipta Karya will be issued by negotiation confirming the IG's responsibility in conducting internal audit o f the project. Internal audit will be conducted based on terms o f reference for internal audit to be agreed with the Bank. All reports on audit findings will be submitted to external project auditors as well as the Bank for information. Verification by the IG should include substantive checks on the reliability of accounting evidence. K. Audit Arrangements Project annual audit 50. The project's annual special purpose project financial statements will be audited annually. The annual audit reports and audited financial statements shall be furnished to the Bank not later than six months after the end of the government fiscal year (June 30 o f the following year). The audit will be conducted inaccordance with the Terms o f Reference for audit acceptable to the Bank and agreed at negotiations. TYPE AUDIT REPORT OF EXECLTINC DUEDATE AGENCY Proiect Financial Statement (a single audit DGCK, MoPW Six months after the end of the opinion comprising project account and I I . I Government fiscal year DA/SOE account) 51. Knowing the peer review result, the scattered project implementation and the capacities available, it is proposed to accept BPKP (under Deputy State Accountant) as the external auditor for this project. PDAMAudit 52. The proposed project audit in each PDAM will be part o f the PDAM annual financial statement audit. Specific audits o f the project expenditure in each PDAM will be part o f the -66-  project audit. PDAM shall prepare the financial statement based on the records (including the project transaction reflected inthe IFR) for audit by the Auditors. 53. PDAM annual financial statement shall be prepared by PDAM based on the PDAM records, including the project transaction and should include: a) P D A M Balance Sheet; b) Statement o fIncome (including reference to the expenditures fundedbythe Bank); c) Statement o f Changes in Shareholders' Equity; d) Statement o f Cash Flows; e) Notes to the Financial Statements; and f) The fourth quarter ofthe project IFR. 54. The annual audit reports shall be furnished to the Bank not later than six months after the end of the PDAM fiscal year (June 30 of the following year). The audit will be conducted by BPKP or private auditor acceptable by the Bank in accordance with the agreed Terms o f Reference for audit. The auditor will also audit due process and due diligence andthe attainment o f the objectives according to the agreed performance indicators. Type of Audit Report ExecutingAgency DueDate PDAMEntityFinancial Statement II I PDAMMuaraEnim, IISix monthsafter the endofthe Bogor, andKapuas. I PDAMfiscal year 55. Insupport ofthe transparency effort, the Bankwould like to have anagreement withDG Cipta Karya, the MoPW on the mechanism for public access to the annual audit report o f the project. The agreement will be reflected in the disclosure requirement as part o f PMM. The mechanism should be agreed by negotiation. After the auditor issues the annual audit report as part o fthe reform agenda, the audit report will be made accessible to the public. L. Supervisionplan 56. Intensive supervision, especially in the first year o f project implementation i s recommended, and more time i s planned to be committed to the project to ensure smooth implementation in the subsequent years. The Bank's supervision will be coordinated with the PCU's own supervision. The supervision plan including its strategy (skill mix. etc) will be covered in the PMM. The supervision will take into account the findings o f both internal and external audit reports. -67-  Annex 8: ProcurementArrangements INDONESIA: UrbanWater $upply andSanitationProject A. General 1. Procurement for the proposed project would be carried out inaccordance with the World Bank's Guidelines: "Procurement under IBRD Loans and IDA Credits" dated May 2004 and revised inOctober 2006 and the provisions stipulated inthe Loan Agreement. The various items under different expenditure categories are described below: 2. For each contract to be financed by the IBRD Loan, the different procurement or consultant selection methods, estimated costs, prior review requirements, and time frame have been agreed between the Government o f Indonesia (GoI) and the Bank inthe Procurement Plan. The Procurement Plan shall be updated at least annually or as required to reflect the actual project implementation needs and improvements ininstitutional capacity. 3. For all procurement to be carried out through International Competitive Bidding (ICB), the Bank's Standard Bidding Documents shall be used. For National Competitive Bidding (NCB) and Shopping, standard documents, acceptable to the Bank shall be used. The N C B standard documents shall incorporate the Bank's NCB conditions. For selection o f consulting firms, the Bank's Standard Request for Proposals shall be used. For NCB, the Borrower shall follow the procedures outlined in Keppres 80/2003, as supplemented with additional conditions which have been agreed with the Go1and included as anAttachment to this Annex, 4. Procurementof Works. Works procured under this project would include construction or rehabilitation works in water distribution systems o f three water companies (PDAMs) in (i) Kota Bogor, (ii)Kabupaten Kapuas, and (iii) Kabupaten Muara Enim. Each o f these three PDAMs shall have a Project Implementation Unit (PIU) for the implementation o f their respective components. Each contract estimated to cost US$3.O million equivalent or above, procurement will be carried out through ICB. For contracts estimated to cost less than US$3.0 million equivalent, procurement may be carried out through NCB, while those estimated to cost less than US$50,000 equivalent, procurement may be carried out through Shopping. 5. Procurementof Goods. Goods procured under this project would include procurement o f water meters for water companies (PDAMs). These contracts will not include installation o f equipment which will be separately contracted by PDAMs. For contracts estimated to cost US$200,000 equivalent or more, procurement shall be carried out through ICB. However, none are planned as present. For contracts estimated to cost less than US$200,000 equivalent, procurement may be carried out through NCB, while those estimated to cost less thanUS$50,000 equivalent, procurement may be carried out through Shopping. 6. Consultant Selection. All consultant contracts, including the PCU Management Consulting and each construction supervision consultants, are funded by counterpart funds and would be procured using the GoI's procedures with terms o f reference and team composition agreed with the Bank. -68-  B. Assessment of the Capacity of ImplementingAgency's to implementprocurement 7. Most findings and recommendation below are based on an assessment o f the participating PDAMs, which was undertaken by the Bank in December 2006. The Bank identified the following key issues and risks concerning procurement for implementation: a. Corruption and Collusive Practices: This has been a nationwide issue, which has normally involved both bidders/consultants and government officials. The general procurement environment i s weak. Based on this initial assessment, the corruption mapping areas and the proposed actions to mitigate this risks are included inAnnex 9; b. Low capacity of the procuring units: some o f the MoPW's staff are familiar with Bank's procurement procedures, however there i s no guarantee that they will be assigned as procurement staff for this project since the decree establishing the team i s yet to be issued. On the other hand , PDAM's staff are not familiar with Bank's procurement procedures and since their experience i s limited to the reginla level the do not have the capacity to carry out and supervise large procurement contracts. There i s also an issue with regard to how the respective procuring units can effectively enforce the agreed procurement procedures as per the loan agreement , especially those that differ from Keppres 80/2003 (for example, NCB procedures that are acceptable to the Bank); c. Independency o f procurement decisions: although the DGCK, PDAM, and the members o f the biddindevaluation committee are authorized to make their own independents decisions in accordance with Keppres 80/2003, sometimes they can be influenced by other parties, such as: higher level officials (for example, their superiors) or by external parties(for example, bidders or consultants). This can cause significant delays in the procurement processing, and can result in contracts being given to low-quality consultants/contractors and to the delivery o f low-quality services/works. d. Procurement delays: low capacity in knowledge o f Bank Procurement Guidelines and procedures, late initiation o f the procurement process and long evaluation process (especially in hiring consultants) normally contribute to significant delays in contracts award. e. Consultant services: Consultants for project management and implementation supervision will be engaged by the Go1andoutside o fthe Bank's procurementprocedure. f. The procurement complaint handling mechanism will follow the one stated in the Keppres 80/2003, which will be detailed inthe PMM. It is agreed that there will be a unit within each implementing agency which will be assigned to record the complaints and the follow up actions, including referral to the respective procuring units. The procuring units will be responsible for ensuring that the complaint are handled and resolved in a timely manner. All procurement complaints will be addressed to the procuring units, and ifnotresolved, then the complaint may be sendto the direct supervisors ofthe procuring units. For complaints related to fraud and corruption, the complaint handling units will have to refer the cases to the respective authorities in accordance with the national law andregulations. -69-  8. Table 8.1 below presents a list o f measures agreed between the Go1 and the Bank to mitigate the above mentionedrisks. Table 8.1: Agreed Corrective Measures Actions Decree to establishthe project's organizational structure and staffmg, including procurement officer (Completed) Decree to appoint PCU and PDAMs procurement Negotiation MoPW, PEMDAsPDAMs officer (Completed) At least one procurementworkshop conducted Agreed at Negotiation MoPW prior to the project launch, attendedby all implementing agencies (Completed) Draft PMMdevelopedto streamline all agreed Negotiation MoPW procurementproceduresandreporting underthis project (Completed) ProcurementPlan for the first 18 months of Negotiation MoPW, PDAMs implementation available (Completed) SBD, andRFP for procurementactivities during Negotiation MoPW the first year available (Completed) TOR anddetailedprocedures for including Draft completed at MoPW independentmembers ofcivil society as observers Negotiation for procurementprocess (Completed) Agreement on TOR, team composition and timing Negotiation MOPW, PDAMs ofthe PCUmanagement consultantsandeach construction supervisionconsultant. (Completed) PCUManagementConsultant and procurement September 30,2009 MoPW specialistsat the PIUs appointed 9. Considering the extremely weak capacity o f the PIUs, the time required strengthening their capacity with the above mentioned measures (Paragraph B), and above all, the decentralized nature o f the project, the overall procurement risk i s concluded as "substantial". The thresholds for procurement method and prior review, as well as modalities for post review and supervision frequency are based on this capacity assessment. -70-  C. ProcurementPlan 10. Each P D A M submitted procurement plans for implementation o f their respective components. These individual procurement plans have been consolidated into one Procurement Plan for the project. This Procurement Planprovides a list o f contracts to be implemented inthe initial 18 months period o f the project and the related processing schedule for each contract. This Plan was discussed and an updated version agreed between the Go1 and the Bank. It is available in the project's file. The Procurement Plan will be updated at least annually or as required to reflect the actual project implementation needs and improvements in institutional capacity. The updated Procurement Plan will be reviewed by the PCU Management Consultant before submission to the Bank. The Procurement Plan, including its updates shall also be available inthe Bank's external website. D. FrequencyofProcurementSupervision 11. Inadditionto the Bank's prior review, postreview ofprocurement actions will be conducted by the Bank on annual basis. The findings of the post reviews will be considered to improve the procurement processing ofthe project -71-  - - - - _. - - - e e e 2 2 3 e 2 0 24 Q 0 0 0 0 0 2 Qm Q m Q Q m 0m 0 0 0 2 2 3 I I I 3I e El 2 3 0 0 0 0 Q 0 0 $ QB Q Q Q - 2 0 - 0 d - d 0 -d 0 3 3 3 3 2 2 0 3 3 0 0 0 Q 0 m Q m Q m Q m Q 4 m 0 0 0 0 41 3 I I I eI 3 2 2 3 Q 0 0 0 0 0 B Q d Q Q Q 0 d 0 B -8 3 3 x 3 3 Q 0 0 m 4 0 41 2I Q 0 0 m Q - 0 -2 W r: 00 0 2 - - c.4 3 00 m 3 00 VI rzm W Wm Wi c\1 3 ' a ; 4 c 8 '5 - p: m m 2 U z  I 3 3 3 3 c! 0 0 2 Q 2 E: I E: I 0 Q 0 Q - 3 0 0 3 3 x 0 3 3 0 e 0 3 2 E: I E: I 0 Q Q 0 3 3 0 - 0 m m 0 Q 8 Q 0 2 2 8I h s 0 0 Q 0 3 - E: m 9 W 3 2 - VI 0 N 2 d m 3 - I 3 m .$ .$ cZ c c Z I 3 33 mE >> '! : a< .t ;9$2 CFr: 4 cr 3 E $ 3 E 3 - E 3  f f Q 0 0 m . m Q 0 0 2 2 I I 2 Q 0 0 B QB dz 2 2 3  Attachment 1to Annex 8 Detailsof the ProcurementarrangementsInvolvingInternationalCompetition 1. Goods, Works,andNonConsultingServices Table below lists the contract packagesto beprocured following ICB: Est. Cost Procurement p-Q Preference Domestic Review by ExpectedBid Contract (Description) (US$ Method (Prior) Bank OpeningDate million) (Yesmo) New Water Treatment 5.05 ICB No Yes December2009 Plant of 400 LISat Dekeng(Bogor) For each PIU, the first two NCBs and first shopping contracts for goods and works, will be prior reviewed by the Bank. In addition, all ICB contracts and direct contracting are also subject to prior review by the Bank. -75-  Attachment2 to Annex 8 ClarificationsRelatingto NationalCompetitiveBiddingProcedures 1. General The procedures to be followed for NCB shall be those set forth in Presidential Decree No. 80/2003 of the Republic of Indonesia with the clarifications and modifications described inthe following paragraphs required for compliance with the provisions of the "Guidelines for Procurement under IBRD Loans andIDA Credits" dated May 2004 and revised inOctober 2006 (the Guidelines). 2. Registration (a) Bidding shall not be restricted to pre-registered firms and shall not be a condition for participation inthe biddingprocess. (b) Where registration is required prior to award of contract, bidders (i)shall be allowed a reasonable time to complete the registration process, and (ii)shall not be denied registration for reasons unrelated to their capability and resources to successfully perform the contract, which shall be verified through post-qualification. 3. Pre-aualification shall be(a) Pre-qualification shall not usedfor simple goods and works. Normally, post-qualification used. Pre-qualification shall be required only for large or complex works with the prior `no objection' ofthe Bank. When pre-qualificationshall be required: (b) eligible bidders (both national and foreign) shall not be deniedpre-qualification, and (b) invitations to pre-qualify for bidding shall be advertised in at least one (1) widely circulatednational daily newspaper a minimumof thirty (30) days prior to the deadline for the submission of pre-qualification applications. 4. Joint Ventures A bidder declared the lowest evaluated responsive bidder shall not be required to form a joint venture or to sub-contract part of work or part of the supply of goods as a condition of award of the contract. 5. Preferences (a) N o preference of any kind shall be given to nationalbidders. (b) Regulations issued by a sectoral ministry, provincial regulations and local regulations, which restrict national competitive bidding procedures to a class of contractors or a class of suppliers shall not be applicable to procurement proceduresunderthe Loan. 6. Advertising -76-  (a) Invitations to bid shall be advertised in at least one (1) widely circulated national daily newspaper allowing a minimum of thirty (30) days for the preparation and submission of bids and allowing potentialbiddersto purchase bidding documents up to twenty-four (24) hours prior the deadline for the submissionof bids. (b) Biddocuments shall be madeavailable, by mailor inperson, to all who are willing to pay the requiredfee. (c) Bidders domiciled outside the area/district/province of the unit responsible for procurementshall be allowedto participateregardless of the estimated value ofthe contract. (d) Foreignbidders shall not be precludedfrom bidding. Ifa registrationprocess is required, a foreign firm declared the lowest evaluatedbidder shall be given areasonable opportunity for registering. 7. Bid Security Bid security, at the bidder's option, shall be in the form of a letter of credit or bank guarantee from a reputablebank. 8. BidOpeningand BidEvaluation (a) Bids shallbe opened inpublic, immediatelyafter the deadlinefor submissionof bids, and ifbidsareinvitedintwo (2) envelopes, bothenvelopes(technicalandprice) shallbeopenedatthe same time. (b) Evaluationof bids shall be made in strict adherenceto the criteria declared inthe bidding documents and contractsshall be awarded to the lowestevaluatedbidder. (c) Bidders shall not be eliminated from detailed evaluation on the basis of minor, non- substantialdeviations. (d) No bidder shall be rejected merely on the basis of a comparison with the owner's estimateand budgetceiling without the Bank's prior concurrence. 9. Rejectionof Bids (a) All bids shall not be rejected and new bids solicited without the Bank's prior concurrence. (b) When the number of responsivebids is less thanthree (3), re-bidding shall not be carried out without the Bank's prior concurrence. -77-  Annex 9: Anti-CorruptionActionPlan INDONESIA: ID-UrbanWater SupplyandSanitation Introduction 1. The objective o f UWSSP's Anti-Corruption Action Plan is to identify corruption risks and mitigation measures beyond the standard control systems employed by the Bank. While more detailed program specific control systems are outlined in Annex 8: Procurement Arrangements and Annex 7: Financial Management & Disbursement Arrangements, this Action Plan (i)maps potential risks o f corruption; and (ii) presents program activities to address these risks inthe form o f anAction Plan. 2. Corruption Mapping. The corruption matrix included in this Action Plan identifies potential risks o f corruption and specifies appropriate mitigation measures agreed to by the Executing Agency o f the Government o f Indonesia. 3. Action Plan. Specific mitigation actions are presented in the Corruption Mapping Matrix. The following provides a summary: a. EnhancedDisclosureProvisions and Transparency. The Project (PCUPZUs) assisted by technical assitant Consultant will prepare a website regarding this project at least inthe existing MoPW website. The website will disseminate information on existing PDAMs services, general plan under the project, and PDAMs services after the project. Progress o f the project in the form o f figures, narative, pictures, reports etc. will be presented on the website. Brochures on certain project information will be disseminated to relvant stakeholders, summary project information will be published through mass media and several press releases will be issued by MoPW, PCU, Local Governments, PDAMs, and PIUS. b. CivilSociety Oversight.The UWSSP's Enhancement Support component will serve as a catalyst to bring the PDAMs closer to their PEMDAs, communities and interest groups for mutual understanding, day-to-day communication and cooperation. Town meetings, communication to DPRDs, and invitation to stakeholders including universities and NGOs to oversee the project, at least through the project website will increase their participation and encourage them to state their views on current and desired P D A M services and practices. By providing complete project information on the website, the project will be able to invite much broader civil societies to participate in overseeing the project, at least virtually, from various angles. c. MitigatingCollusion, Fraud & Nepotism. Opportunity for collusion and fraud exist in any project. Transparent and well-advertised procurement under the program with appropriate oversight will reduce this form o f corruption. Additional auditing and procurement procedures are proposed, such as oversight by consultant services and capacity buildingtraining procurement specialists mappedto each PDAM. At the central level, there will be a committee to be formed to regularly evaluate the performance o f the -78-  consultants, who are hired under the Project, and make the results circulated to the relevant technical parties. d. ComplaintsHandlingMechanism. As part of the reform activities, complaint handling mechanism will be established integrated with transparency mechanism at each participating P D A M and PEMDA as well as PCU. Complaint handling procedures as currently defined in the Keppres 80/2003 will be strictly followed by also assigning authorized officials to be responsible for maintaining the database and the follow up actions. While there is designed to encourage local complaint resolution through formal channel, as well as the pressure from public, in some cases local elites might misuse power and program activities. For these cases, an alternative system has been established through a feedback mechanism at the national level. This mechanism handles complaints brought to their attention. These complaints will be acted upon in a professional and timely fashion, andwithout risk o freprisalto `whistleblowers' inthe public. e. Sanctions 8s Remedies. Clear sanctions and remedies are an important final step inthe effort to fight corruption. This Project has a low tolerance for corruption. Any official (government, non-government, etc.) can be sanctioned if sufficient evidence i s available. Inall procurement contracts, evidence of corruption, collusion or nepotism will result in termination o f the relevant contract, possibly with additional penalties imposed (such as fines, blacklisting, etc.) and in accordance with Bank and Government regulations. In addition, some requirements on the contract would provide the PCUPIUs strong power to terminate supervision consulants when not perform in assuring accuracy, quality and quantity ofthe goods/works inaccordance to the technicalrequirements. CorruptionMappingMatrix 4. Limitingthe occurrence ofcorruptioninthis Project starts withidentifyingpotential risk areas -this i s called corruptionmapping. This corruption incentive mapping and identification o f opportunities for corruptionwill be repeated at least every six months as the project progresses and lessons are learned. Capacity o f the PIU Non independentjudgment o f and the bidding/evaluation process. society is included as part ofthe TenderEvaluation Substantial (Local The decisions tendto bias committee Committee GovernmentPEMDA) towards bidders/consultants as - Capacity building for all actors "instructed" by the higher level involved inprocurement under officials or other parties. the WorldBank's Guidelines as well as certification o f staff in accordance with Keppres -8012003 Development o f Project Management Manual to -79-  streamline all procedures and sanctiodcomplaint handling mechanism Bidevaluation Substantial -Delay inevaluationprocess - The Procurement Plan will be that would benefit exclusive binding inthe Legal agreement, bidders and will set as the basis for any - Proposals are rejected due to procurement actions. reasons unrelated to the capacity - The Bank would declare o f biddersin carrying out o fthe misprocurement for any -contractsinformation unjustifiedextension of bid False about the proposals information provided by the - Post qualification system bidders Award o f Contract Modest - The committee may call the - No negotiation for competitive prospective winner and negotiate the contract amount - Collusion -selectionbidding Mandatory disclosure o f andnepotism in contract awards awardine"the contract Procurement Substantial Riskofkickback, andbudget Mandatory review by the Bank Planning, including markup o f Procurement Planning, and the one for the sub disclosure o fProcurement Plan projects inpublic domain, including disclosingthe monitored unit rates as part ofthe PDAM reformprogram Overall Substantial Riskofkickback, collusive - Enhanced disclosure, Procurement practices to "award" the contract complaint handling, and to "preferred" bidders, and sanctions as defined inKeppres lower quality o f 80/2003, and developed inthe productslservices PEMDA structure as part o fthe reform component as well as those stated on the contracts. In the case for central level, MoPW already developed its own mechanism for complaint handling as well as sanction system. - Enhanced control system (internal and external) including involvement o f civil society in the procurement decision actions - Development o fProject -Manuals Tighten Banksupervision DELIVERY OF GOODS, WORKS ANDSERVICES Delivery o f goods, Substantial Cormption may happen by - Technical specifications and such as water (PDAM level) lowering the quality and/or pictures o fgoods should be meters, pipelines, quantity o f delivered water delivered disseminated to leak detection meters, pipelines and leak appropriate stakeholders. :quipment and jetection equipment with the Brochures for customers, -80-  equipments for same contract prices prospective customers and water treatment PDAM staff. Publish it onthe plant and spring website for broader sources stakeholders. Brochures and website should provide addressto report or complaint when knowingactual goods delivered is lower quality and/or quantity thanwhat - TOR should be. andcontract ofthe supervision consulant should state legally boldthe responsibility o fthe supervision consultant to assure the quality and quantity appropriateness according to the technical design. Whenthe supervision consultant fail to do so, the appropriate/ responsible individual o fthe supervision consultant (which named on the contract) should be terminated directly. Determining Modest Collusion and corruption may - Report andrecommendation of priority o f the (Local Government & may happen when determining the NRWassessment and service areato be PDAM levels) priorities o fthe service areas reduction plan should be made improved or included inthe construction and available to public, at least on expanded rehabilitation works the website. Summary ofthe report should be explained to mass media, at least through a - Maps press release. o f the existing service area, the new service area and rehabilited service area should be disseminated to appropriate stakeholders, at least through Progressand quality Substantial Corruption may happen by - General the website. design ofthe o fthe construction (PDAM level) manipulating progress and constructionand rehabilitation and rehabilitation quality achievements ofthe works should be uploaded on works (including construction and rehabilitation the website with considering works related to works by the contractor the size o fthe files. water treatment - Each contract summary plant and spring including contract price and sources) the name ofthe contractor of the constructionand rehabilitation works should be - Periodically per uploaded on the website. eachproject location, the supervision consultant upload its supervision reports, including pictures, technical achievment data and financial data showing progressesofthe -81-  contractorsinthe construction - For andrehabilitation works. eachsupervisonconsultant report publishedon the website, the PIUshould provide its comments over the report, and also uploadedon - TOR the website. and contract ofthe supervisionconsulant should state legally boldthe responsibility ofthe supervisionconsultantto assurethe accuracy ofthe progress and quality ofworks supervised. Whenthe supervisionconsultantfail to do so, the appropriate/ responsibleindividual ofthe supervisionconsultant(which namedon the contract) should Effectivenessofthe Low Corruption, collusion and - Data be terminated directly. and statisticsof existing constructionand (Local Government nepotismcould be minimised by connections andthose after the rehabilitation works level) assuring that the works are project shouldbe published, at as well as service highly effective least on the website. expansionand - The statisticsofthe existing spring sources NRW (before project) and NRW after the construction andrehabilitation works (after project) shouldbe published publicly, at least throughthe - Public website. complaint handling mechanismshouldbe developedintegratedlywith project relatedinformation dissemination,at least through website and mails. Appropriate information on complaint and its follow up would be publishedat least - Having throughthe website. project information publishedonthe website and other media, the PCU should invite stakeholders as well as interest groups suchas universities, NGOs and relevant DPRDsto visit the - Monitoringand website. evaluation reportsproducedunder the technicalassitant should be uploadedon the website. -82-  FINANCIAL MANAGEMENT I The final list of Substantial - Risk o fun-sufficient capacity I- The criteria andperformance PCU and PIU staff o f PCU andPIU staff. indicators o f Project Manager, with their (i) Treasurer, planning staff, experiences in procurement staff, fmancial handling donor staff and money. Staff o f PCU financing project and PIU agreedby the Bank and(ii) o f history have beenincorporated inthe project management P M M and will be usedas the andor treasury basis o fthe annual training taken performance review o f the - relevant staff Requirement o fPOM as guidelines for project implementation. - Requirement o fGovernment Project Management, Treasury andPOMtraining for PCU andPIUstaff. - Annual Training agreedbythe Bank on PCU andPIU staff. Audit Report Substantial Riskofunavailability of The implementing agency will Publication information on the progress and (and the World Bank can) make result o f project implementation publicly available promptly (including misuse, collusive and after receipt o f final audit nepotism practice ifany). reports prepared inaccordance with the loadcredit agreement, and all formal responseo f the government -83-  Annex 10: EconomicandFinancialAnalysis INDONESIA: ID-UrbanWater Supply andSanitation EconomicandJinancia1analysis 1. A 2006 poll conducted by the British Medical Journal ratedaccessto water and sanitation as the most important medical advance in the past 150 years, which led to fewer outbreaks o f diseases such as cholera, diarrhea, roundworm, schistosomiasis among others. Accessible clean water is vital to the survival o f children in their first years. Piped water saves women and children time from fetching water and caring for the sick. In urban areas, problems o f lack o f access to water and sanitation are magnified and economic costs multiply given higher densities. InIndonesia, excessive reliance o fthe urbanpopulation on individual well water is lowering the water table, making it more difficult and costly to access clean well water. The proximity o f wells to home-based sewage disposal facilities increases the risks to the environment andhealth situation. Health and environmental benefits and the ensuing savings o f medical costs along with the overall improvementsto economic productivity are the largest benefits of water supply and sanitation projects, yet they are the most difficult to quantifl. 2. Economic analysis was conducted to assess the impact o f the project based on the incremental economic costs and benefits. Incremental costs with the project include investment and operational costs excluding inflation and taxes. Quantifiable benefits that accrue with the project include the estimated value of: (i) increased consumption due to improved services and accessibility by new customers; (ii) value o f the amount o f water consumed with the new the connections valued at the difference between the price charged and cost o f water without connections; (iii)saved water; and (iv) time saved from collecting water at the minimum income prevailing inthe area. 3. Incremental and non-incremental water consumption. An important economic benefit o f piped water supply projects is the switch from reliance on unplanned and difficult to monitor household wells to reliance on renewable water sources such as springs and rivers. Part o f the consumption o f piped water will be replacing current consumption from vendors and wells. Water, particularly from wells i s undervalued, where in principle households and industries extract it for free or for very little costs. By agreeing to pay for the piped water instead, households realize the economic value o f water. Project Area Bogor Kapuas Muara Enim ENPV (Billion IDR) 752.5 42.0 147.6 EIRR(%) 48 19 32 Financial analysis ProjectFinancialCost-BenefitAnalysis. 4. The financial costs and benefits are projected for 20 years. Incremental power and chemical costs are based on increases in production. Salary costs, power and chemical costs are also increases with inflation. Other costs vary with the increase inthe asset base. The benefits -84-  are based on additional water sales over the 20 year period and the connection fees collected during the project period. The results of net present value and financial rate of return of the proposedinvestmentsare summarizedbelow. Project Area Bogor Kapuas Muara Enim FNPV (IDR) 142,754 33,807 272,896 FIRR(%) 22 19 26 Financial Analysis of participatingPDAMs. 5. The financial analysis of participating PDAMs is conducted to ensure that these enterprises and the project are sustainable in the long term and remain financially liquid and capable of producing the associated benefits. The PDAMs participating in the project can be classified into 2 groups: Group 1: 1 Large PDAM, Bogor, is located on the island of Java, and has more than 30,000 connections. This PDAMhas recordedprofit makingwith good financial indicators according to their audited financial statements. It is capable of covering its operational costs, including interest and depreciation. Group 2: 2 smaller PDAMs, Kapuas and Muara Enim, are located in Kalimantan and Sumatra respectively. These PDAMs are about the same size with average 12,500 connections in 2005. In 2006, Kapuas split into 3 parts and connections decreased to 9000. According to the audit report, both Muara Enim and Kapuas have been making losses since 2001,but Muara Enimhad made positive income in 2007. Kapuas did not cover their operating costs even before depreciation. At the same time, both PDAMs have almost no debt and rely on the PEMDAs for annual financial support to cover their operational losses. PEMDAs also contribute the capital expenditure ofthese two PDAMs. 6. PDAMs share some common features in their financial situation. All improved their revenues substantially over the two years, largely due to expansion through increased connections and water sales as well as increase in weighted average tariffs (14-25%). For Kapuas, operational costs (production and administration) increasedinlarger proportion (around 20%) surpassing increases in revenues. Only in Bogor, operational cost increases matched revenue increases. The main reason for Kapuas is cost increases is salaries, which in all cases, except for Muara Enim accounted for over 40% of the costs. Indeed, Muara Enim production salaries are very low at 15% of production. Despite being the largest item, salary costs increased more than the average cost increase. In Kapuas, salary costs increased more than doubled. In Muara Enim, the increase is from extremely low base as compared to others, and may be justified as a means to improve employee performance and avoid corruption. In Kapuas, it is clear that the increase in salary costs i s the major contributor for deteriorating financial situation andincreasedlosses. 7. Ingeneral, PDAMs manage their accounts receivablewell, and report low non-payments of bills. Kapuas can improve their collection to bring it down from about 60 to 30 days. Bogor appears to rely more heavily on debt (both short and long term) to finance its investments and operations (over 50% of total assets). Bogor is shifting inthat direction due to the accumulation of arrears to the Ministry of Finance. On the other hand, the smaller loss making PDAMs have -85-  practically no debt and their PEMDAs finance investments and operations. At the same time, both smaller PDAMs have a high current ratio indicating need for better management of current assets, particularly inventories, to improve their cashflow. 8. Impact ofproject activities on PDAMfinanciaZ situation. Project investments aim at (i) increasing coverage which would improve revenues; and (ii)efficiency improvements to decrease costs. Inaddition to the physical improvements conditions for managementefficiencies are included in the project design to ensure improved financial sustainability of the participating PDAMs. This is particularly true for the control of salary costs and overall administrative expenditures which is withinthe PEMDA and PDAM control. 9. Provided salary and administrative costs are controlled and necessary tariff increases implemented, all PDAMs will be able to meet the financial conditions of operating efficiency (Operating Ratio below 1) and debt sustainability (DSCR of 1.3 or above) within the project period without additional PEMDA support. Projectedfinancial implications Project Area 2009 20010 2011 2012 2013 2014 Bogor Operating Ratio 0.97 0.89 0.89 0.89 0.86 0.82 DSCR 10.6 5.2 4.8 4.5 4.7 . 5.9 Kapuas Operating Ratio 0.98 1.09 0.82 0.95 0.86 0.90 Muara Enim Operating Ratio 1.67 1.48 1.43 0.89 0.89 0.67 DSCR FiscalImplications 10. The fiscal impact analysis assesses capacity of the local governments to afford the potential subsidies needed for the project to reach its objective. Following decentralization, water supply services became the responsibilities of local governments in Indonesia. This principle has been adhered to, particularly inurbanareas and inthe case of PDAMs. PEMDAs are now responsible for delivery of urban water supply services to their constituents, and while PDAMs are legally separate commercial entities, they remain owned by the PEMDAs, who continue to have a major role in their management, not the least in the approval of tariffs. For the participating 3 PEMDAs, the local governmenthas beena supporter ofwater supply services. Inall cases, dividends paid by PDAMs to PEMDAs are returnedto the PDAM with additional considerable PEMDA funding for capital and sometimes operational expenditures. The law sets the limits on PEMDA borrowing (since the loan will be on-lent from the MoF to PEMDA and will be considered as part of PEMDA debt). The debt service coverage ratio cannot exceed 2.5 of PEMDA revenues less obligations, and total debt cannot exceed 75% of PEMDA revenues less debt obligations as set by the law. For the 3 participating PEMDAs these limits will be maintained throughout the loan period, and it i s expected that with rising incomes and the leveling off of the debt service, these ratios will remain well below the legal upper limits allowing PEMDAs to borrow for other purposes as may be allowed by the Ministry of Finance within the law. Based on available budget data, the table below shows the maximum ratios -86-  reached during the project period including when debt obligations, interest and principal paymentspeak. Projectedfiscal implications Bogor Kapuas Muara Enim DSCR 7.8 33.0 36.1 Debt outstandingas %of 48 20 26 debt allowed *The DSCR as definedinthe law =JPAD+DAU+DBH-DBHDR)-BW Principal + Interest + other charges PAD = LGownrevenues DAU= Generalallocation fund DBH= Sharedfund DBHDR= Sharedfund for forestation B W = Other obligations, including salaries 11. Total new borrowing allowed is defined as: (0.75*MoPW.APBD ofprevious year)- Debt outstanding, where MoPW.APBD = (APBD) -(DAK +DD+DPL+PLYD) MoPW.APBD = Revenueavailable for financing APBD = Total Local Government Revenue DAK= SpecialAllocationFund DD=EmergencyFund DPL = Receiptsfrom old borrowing PLYD =Extraordinary Revenue -87-  Assumptions: 12. P D A M Revenues: Increases in consumption are based on planned increase in connections, provided water is available. Consumption rate per connection i s based on historical evidence provided by PDAMs. Connection fees will increase based on tariff increases. The planned number o f connections and willingness to pay connection fees and tariffs are largely based on the PDAMs experiences, waiting lists and surveys they have conducted over the years. All PDAMs have prepared a 5-year business planthat was discussed with PEMDAs, in which they develop their investment plansandpriorities. 13. P D A M Costs: Salary and administrative costs are based on historical costs and are assumed to increase only at the rate o f inflation. This is a major assumption given the history o f the PDAMs and is necessary to reach an operating ratio less than 1 which i s 0. Chemical and electric costs are based on historic unit costs and inflation (more chemicals may be needed to reach quality standards). Other operational costs increase from historic costs and inproportion to the planned increase inwater production. 14. A physical contingency of 7% is added to the constant 2007 costs. Inflation rates are based on World Bank projections. Counterpart funding is assumed to be passed on as a grant from the PEMDA, while strong P D A M (Bogor) will pay the interest and debt payments on the loan. Other two PDAMs (Kapuas and Muara Enim) will get on-grant money from their respective PEMDA which receive sub-loan from the MoF (Central Government). 15. Provided these assumptions/conditions are satisfied by the P D A M throughout the implementation o f the project, the PDAMs, with support from the PEMDAs will be able to achieve the financial indicators and to continue their operations in a commercially sustainable fashion. -88-  2004-2005 Historical FinancialRatios I/ First line 2005&a, Tdline 2004data. Operating Ratio: Total Operating Costs (including depreciation, interest andtaxes) Total Revenue Working Ratio: Total Operating Costs (excluding depreciation, interest andtaxes) Total Revenue DSCR Net Income + Depreciation+ Interest pavments + chanpe inworking capital Principal + Interest payments Indicators Bopor Kapuas Muara Enim Current Ratio 0.7 78 3.93 0.85 39 5.7 Current Liabilities/ 0.29 0.0 15 0.61 Total Liabilities 0.24 047 LTermLiabilities/ II0.5 II0.0 II 0.31 0.13 Total Liabilities 0.56 0.0 0.57 Other Liabilities/ 0.21 0.98 0.26 Total Liabilities 0.20 0.95 0.12 Total Liabilities/ 0.58 0.18 0.02 Total Assets 0.62 0.13 0.07 Equity/ 0.42 0.82 0.98 Total Assets 0.38 0.87 0.93 -89-  Attachment 1 to Annex 10 P D A MFinancialRecovery Action Plan(FRAP) Background 1. The financial recovery action plan is prepared by a water utility (PDAM), which desires to improve its performance to enable it to expand its services to consumers. The FRAP consists o f an analysis o f all the existing problems o f the PDAM, whether they are technical, financial, commercial or managerial. Their causes are determined so that appropriate actions can be implemented. The required actions are contained in the FRAP details, and supported by financial projections that show the results o f these combined actions on the P D A M operations. The FRAP may recommend management, commercial and/or technical improvements requiring only minor investments. However, it may also involve major investments, depending on the technical problems that need to be addressed. If the P D A M has delinquent loans with the Ministry o f Finance, a proposed loan rescheduling scheme is included. 2. The FRAP is developed by the PDAM, and is then discussed and agreed upon with its mayor and DPRD. The FRAP becomes a commitment between these three parties with implementation falling to the P D A M and supervision resting with the Mayor and DPRD. The PDAM's accountability i s thereby improved as the latter's regulatory and oversight responsibility i s strengthened. The P D A M rescue program shows that by streamlining operations and receiving a boost from loan rescheduling with the MoF, a P D A M can be brought back to operate profitably. 3. The FRAP was piloted in 17 PDAMs, under the PDAM Rescue Program between 2000- 2002. It was funded by a grant from ASEM Trust fund to finance technical assistance to those PDAMs willing to be reformed. During that time, PDAMs were almost on the verge o f bankruptcy as the financial crisis that hit Indonesia in 1997 exacerbated weak management, poor financial discipline, and deteriorated network system. PDAMs could not borrow to properly maintain their network systems much less expand them, because they could not repay their outstanding obligations. 4. The program was intended to help PDAMs survive the crisis, not only in the short run, but also in a more sustainable manner that would enable them to be self sufficient in the long run. The program was expected to improve the operational and financial efficiency of the P D A M consistent with the overall direction o f water sector reform. Since there was no financial assistance involved, additional cash had to be earned by the PDAM out o f improved management and tariff increases, provided by local government inthe form o f additional equity, or obtained by the deferment of loan repayment, or a combination o f all three. The FRAP is a commitment from the following stakeholders A. The PDAMcommits to: a. raise tariffs to required levels b. addnewconnections depending on available capacity c. shorten the collection period to improve its cashposition d. reduce non-revenue water rate andturnthese into revenues e. improve the staffing ratio by suspending the hiring o f new employees and not filling upvacatedpositions -90-  f. reschedule delinquent loan accounts based on financial capability after considering positive effects from the above g. implement the required investment based on an agreed program to deal with the technical problems existing inthe PDAM. B. The PEMDA and DPRD commit to a. suspend collection o f dividends fkom the P D A M until its required service coverage has been attained. b. support the implementationofthe requiredtariffincrease c. allow the P D A Mto reschedule its delinquent loans; and d. monitor the PDAMperformance based onthe FRAP andtake action, ifrequired. C. The MoF commits to a. reschedule the PDAM's delinquent loan accounts based on the PDAM's financial capability after considering the results o fthe FRAP actions before loan rescheduling. 5. Inthe FRAP, targets are made for reductionofnon-revenue water, additional connections that can be generated, a shorter collection period, a lower staffing ratio, tariff increases, and debt service that is affordable in relation to the rescheduling o f delinquent loans. It also includes investments that need to be made to improve the system and the PDAM's equity inthe project. Based on these targets, the expected results are increased population served, a net profit after tax, an operating ratio o f at most 70% that affords the P D A M to earn a decent profit, and a debt service ratio higher than 1.3 to ensure repayment o f debts as they fall due, and an average tariff that enables the P D A Mto fully recover its O&M costs and depreciation. 6. It should be noted here that the covenants inthe Loan Agreement with respect to the PDAM's operating ratios and DSCRs are not intendedto monitor compliance with FRAP commitments. -91-  Annex 11:SafeguardPolicyIssues INDONESIA: ID-UrbanWater Supply andSanitation ENVIRONMENT A. Background 1. The UWSSP is designed primarily to improve and expand water supply services in the project areas by strengthening local water utilities to become operationally efficient and financially sustainable. The project will finance water supply system improvements for three PDAMs inKotaBogor, Kabupatens Kapuas, and Muara Enim. 2. The project i s expected to result in environmental benefits from the supply o f safe drinking water. The project is classified as Category B project: as potential adverse impacts from the subprojects are site-specific; and in most cases mitigation measures can be designed more readily. In terms o f environmental safeguard policy compliance, the project triggers Operational Policy (OP) 4.01 Environmental Assessment. The justification for the application - o f this policy i s summarized below, and has been reviewed by the Bank's Safeguards team. Muara Enimdoes not require an EMP, since investments are relatively small civil works and fall within the Go1 environmental screening requirements as acceptable to the Bank. All required EMPs (Bogor and Kapuas) have been receivedand disclosed inthe Public Information Center. B. InstitutionalContext 3. With the Regional Autonomy Law (32/2004), local governments now play a crucial role in water supply services; they own the PDAMs and control much of their activities. With the current capacity, local governments' environmental entities need to be strengthened. 4. Each participating local government, in close collaboration with the technical section in PDAMs, will be responsible for supervising the implementation o f environmental management and monitoringprocedures. The biannual project progress reports will include a summary o f any environmental issues encountered and proposed measures for their mitigation (in accordance with the approved EMP in each PDAM). As part of the final project evaluation, a summary o f the monitoring and environmental measures, as well as impact will be included in the project ImplementationCompletion Report. 5. Inorder to enhancethe projectperformance andsustainability, the TA component will include measuresto enhance and strengthen the P D A Mand PEMDAenvironmental departments byincludingtraining for environmentalissues. C. EnvironmentalAspects 6. Activities funded under the project are expected in general to have positive environmental effects. The main environmental issues envisaged during project implementation are water extraction and increasing water demand, conflict with irrigation, reduced groundwater and surface water level, and increased amount of waste water. Mitigation measures are prepared under the EMP. Three PDAMs are involved under this component: Bogor city, Kapuas Regency (Kalimantan) and Muara Enim Regency (South Sumatra). All o f these PDAMs - except Kab Muara Enim - have provided EMP or UKL-UPL in Indonesian terms. Best construction -92-  practices will be applied to all sites including small civil works that not require EMP. Table 1 gives details on project activities that require UKL-UPL. Table 1:Proposed activities require UKL-UPL (EMP) City Proposed Activities Size Bogor 0 Construction of new water treatment plant 400lh adjacentto the existing DekengWTP 0 Construction ofwater reservoir 0 Distributionpipelinesto households Kapuas 0 Water Treatment Plant 150 l/s 0 Construction of water reservoir 0 Distributionpipelinesto households 7. Below i s the summary o f the potential environmental impacts as well as mitigation measures proposed for the three main subprojects proposed under this component (Water Treatment Plant, Spring Intake and Constructiono f Water Distribution Pipelines) Table 2: Potential environmental impacts for the proposed activities Subprojects PotentialAdverse Environmental Impacts Mitigation Measures Springintake 1. Disturbance to topsoil created by 1. Storage of stripped topsoil away firom earthmoving works and heavy vehicle drainage paths, and no earthmoving traffic at constructionphase. works during rains 2. Reduced water flow downstream due to 2. Identification of water users ahead of water abstraction, potential for conflict sub-projectdesign between upstream and downstream users 3. Consultation with groups of water users related with this reduction of flow during sub project design 3. Limitedloss of flora and fauna Water Treatment 1. Disturbance to topsoil created by 1. Prior to disposal, used reagent to be Plants earthmoving works and heavy vehicle stored safely on site in fenced and traffic at constructionphase. covered structures away from third 2. Potential impacts associated with reagent parties potential intrusion and away firom management anddisposal drainagepaths 3. Potential impacts associated with treatment 2. No discharge of any reagent in a water sludgemanagementand disposal body 4. Noise, dust and vibration at construction 3. Raw water treatment sludge to be phase, noise and vibration at operation recycled, disposed off in the landfill or I 5. phase driedandspreadat the vicinity ofthe site Loss of flora and fauna ifnoalternativeexists distribution pipelines rightof way by dig and fill activities for the practices inorder to restorethe locations pipelines trench. into its original or better condition. 2. Noise, dust, mud and vibration at 2. Limit activities during day time, regular constructionphase. watering of exposed soil, clean the facilities ofmud. -93-  D. Land Acquisition and Resettlement 8. Land acquisition occurs ina number o f activities in 2 (two) participating cities: Kapuas andMuara Enim.For Kota Bogor, the landsfor all activities are already available. Activities will not acquire land permanently, but only temporarily during construction. For all activities, land acquisitions are in a small-scale with no or very minor socioeconomic risks. All required LARAPshave beenreceivedand disclosed inthe Public Information Center. 9. Land Acquisition and Resettlement Action Plan (LARAP). Where sites are already defined, the Bank requires LARAP documents to be prepared prior to appraisal. The required LARAPs apply for the acquisition o f land and other assets, such as trees and crops. In this project, some of the activities only need to acquire trees and crops for the transmission pipes and not the land. Abbreviated LARAP that applies to these small scale land (and assets) acquisitions are prepared by the respective PDAMandare approved by the Bank. 10. The scope and level o f detail o f the LARAP vary depending on the scale o f impacts, but generally the structure is: i)project description; ii)identification o f Projected Affected People, inventory o f assets lost, and valuation o f assets; iii)compensation for both physical and non- physical assets; iv) consultation with PAPS about compensation and mitigation measures; v) institutional responsibility for implementation and procedures for grievance redress; vi) arrangements for monitoring; vii) schedule and funding. The abbreviated LARAP as applied to all the activities in this project do not need a survey on socio-economic, a condition requiredin the comprehensive L A M P . However, detail information on the name o f the affected people and lost assets are required. The table below shows the landrequirement for each activity ineach city andthe status of LAMP. City and Activities Land requirement LARAPstatus Kab. Kapuas DevelopingWTP 2x50 936m2acquired, belongto one landowner. Approved Vsec. Kab. Muara Enim Expandingtransmission For land, only temporaryaffectedduringthe Approved anddistributionnetworks constructionand9'rubbertrees are to be acquired. 11. A new regulation on landacquisition for public purposes, Perpres No. 36 o f 2005 and its revision No. 65/2006 has shown good progress in terms o f compensation, inwhich market price i s to be used as a basis for compensation amount and requires an independent institution to value the assets. It is expected that this will ease the process of negotiation on compensation andwill not delay project implementation. -94-  Annex 12: ProjectPreparationand Supervision INDONESIA: ID-UrbanWater Supply andSanitation P1anned Actual PCNreview February 8,2005 February 8,2005 InitialPID to PIC February 23,2005 February23,2005 Initial ISDS to PIC February 19,2005 February 19,2005 Appraisal January/February 2007 March20,2007 and December 2008 Negotiations April 2009 May 28,2009 BoardRVP approval May 2009 July 28,2009 Planneddate of effectiveness September30,2009 Planneddate ofmid-termreview December 2012 Plannedclosing date December 31,20 14 Bankstaffandconsultantswho worked onthe project included: Name Title Unit Suhail Jme'an TTL (from May 2008), Sr. Financial EASUR Analyst Jan Drozdz TTL (upto May 2007), Sr. Water and EASIS Sanitation Specialist Risyana Sukarma Sanitary Engineer EASIS Maha Armaly Sr. UrbanFinance Specialist (TTL from ECSSD May 2007 to May 2008) MingyuanFan Sr, MunicipalEngineer EASCN Amreeta Regmi WASAP Coordinator EASIS IrmaMagdalena Setiono Water and Sanitation Specialist EASIS Widi Astuti Water Engineer, Consultant EASIS ArlanRahman Technical Specialist EASIS Melinda Good Sr. Counsel LEGEA PaulusBagus Tjahjanto ProcurementSpecialist EAPCO Imad Saleh ProcurementSpecialist EAPCO NoviraKusdarti Asra Financial ManagementSpecialist EAPCO Viviante Rambe Environmental Specialist EASES SteveBurgess Sr. Corruption Specialist EAPCO Amien Sunaryadi Sr. Operations Officer osu Andrew Sembel Environmental Specialist EASIS Virza Sasmitawidjaja Sr. Environmental Policy andSafeguards EASIS EddieHum Environmental Engineer, Consultant NininK.Dewi Social OperationsOfficer EASES Yogana Prasta Sr. OperationsOfficer LOAEA Toyoko Kodama Operation Officer, Consultant EASUR DesyAdiati Team Assistant EASIS Isabel Mutambe Program Assistant EASUR LuisTavares Peer Reviewer AFTUl Ventura Bengoechea Peer Reviewer AFTU2 -95-  Bankfunds expendedto dateonprojectpreparation: Bankresources: $544,386 EstimatedApproval and Supervision costs: 1. Remaining coststo approval: $ 25,000 2. Estimatedannual supervision cost: $ 120,000 -96-  Annex 13: DocumentsintheProjectFile INDONESIA: ID-UrbanWater Supply and Sanitation 3. Water Supply Feasibility Studies for each PDAM 4. PHRD-financed Feasibility Study for DBL Sumedang 5. PPIAF-financed Review Feasibility Study and Final Report for DBL Sumedang 6. Prequalification Documentsfor DBL Swnedang 7. Audited Financial Statementsfor each PDAM(2004,2005,2006) 8. Environmental ManagementPlans, LARAPs andLARPF for eachparticipating PDAMREMDA 9. Draft Project ImplementationPlan(PIP) 10. ProcurementPlanfor eachPDAM 11. Draft Project ManagementManual (PMM) 12. Review of Institutional Framework for On-lending 13. Aide Memoire -Appraisal Mission 14. World Bank "Indonesia -Enabling Water Utilities to serve the Urban Poor" (2006) -97-  Annex 14: Statement of Loansand Credits INDONESIA: ID-Urban Water Supply and Sanitation Difference between expected and actual OriginalAmount inUS$Millions disbursements ProjectID FY Purpose IBRD IDA SF GEF Cancel. Undisb. Orig. Frm.Rev'd PO79906 2007 ID-STRATEGIC ROADS INFRA 208.00 0.00 0.00 0.00 0.00 208.00 0.00 0.00 PO89479 2006 ID-Early ChildhoodEducationandDev 0.00 67.50 0.00 0.00 0.00 68.74 0.00 0.00 PO85375 2006 ID-WSSLIC I11 0.00 137.50 0.00 0.00 0.00 138.32 0.15 0.00 PO77175 2006 ID-DomesticGas MarketDevelopment 80.00 0.00 0.00 0.00 0.00 79.80 4.80 0.00 Proj. PO78070 2005 Support for Poor and DisadvantagedAreas 69.00 35.00 0.00 0.00 0.00 101.51 4.69 0.00 PO76174 2005 ID-Initiatives for Local Govern.Reform 14.50 15.00 0.00 0.00 0.00 37.50 12.33 0.00 PO84583 2005 ID-UPP3 67.30 71.40 0.00 0.00 0.00 93.91 -32.34 0.00 PO85133 2005 Govt Fin1Mgt & RevenueAdmin Project 55.00 5.00 0.00 0.00 0.00 55.04 9.64 0.00 PO71296 2005 ID-USDRP 45.00 0.00 0.00 0.00 0.00 44.78 1.15 0.00 PO92019 2005 KecamatanDevelopmentProject3B 80.00 80.00 0.00 0.00 0.00 120.18 48.48 0.00 PO85374 2005 ID-HIGHEREDUCATION 50.00 30.00 0.00 0.00 0.00 75.63 8.15 0.00 PO71316 2004 ID CoralReefRehab andMgmtProgI1 - 33.20 23.00 0.00 0.00 0.17 51.19 9.20 0.00 PO71318 2004 ID CoralReefRehabandManagementI1 - 0.00 0.00 0.00 7.50 0.00 7.02 1.52 0.00 PO84860 2004 ID-PCF-IndocementCement 0.00 0.00 0.00 0.00 0.00 10.73 0.00 0.00 PO64728 2004 ID-LANDMANAGEMENT&POLICY 32.80 32.80 0.00 0.00 0.16 54.34 10.98 0.00 DEVT PROJECT PO74290 2004 ID-E. INDREGTRANSPT 2 200.00 0.00 0.00 0.00 1.oo 169.16 70.16 0.00 PO79156 2003 IDThirdKecamatanDevelopmentProject 204.30 45.50 0.00 0.00 0.00 13.46 -9.17 0.00 PO76271 2003 ID-PPITA 17.10 0.00 0.00 0.00 0.00 6.56 6.36 -0.64 PO59931 2003 ID-WaterResources & 1rr.SectorMgt Prog 45.00 25.00 0.00 0.00 0.00 64.33 45.75 2.63 PO63913 2003 ID-Java-BaliPwr Sector & Strength 141.00 0.00 0.00 0.00 0.00 127.55 102.89 -0.08 PO73772 2003 ID-Health Workforce & Services (PHP 3) 31.10 74.50 0.00 0.00 0.00 85.20 50.59 0.00 PO73970 2002 ID-GLOBAL DEV LEARNING(LIL) 2.66 0.00 0.00 0.00 0.00 1.30 1.30 0.00 PO72852 2002 ID-UPP2 29.50 70.50 0.00 0.00 0.00 28.18 2.73 0.00 PO73025 2001 ID-SECONDKECAMATAN 208.90 111.30 0.00 0.00 0.00 16.82 2.18 0.00 DEVELOPMENT PROJECT PO49539 2001 ID-PROVINCIAL HEALTH I1 63.20 40.00 0.00 0.00 0.00 66.10 59.82 0.00 PO59477 2000 ID-WSSLIC 11 0.00 77.40 0.00 0.00 0.00 26.08 19.69 0.00 PO49545 2000 ID-PROVINCIAL HEALTH I 0.00 38.00 0.00 0.00 3.17 8.79 9.53 2.67 PO36049 1999 ID-EARLY CHILD DEVELOPMENT 21.50 0.00 0.00 0.00 10.65 0.31 10.97 10.97 Total: 1,699.06 979.40 0.00 7.50 15.15 1,760.53 451.55 15.55 -98-  INDONESIA STATEMENT OF IFC's Heldand DisbursedPortfolio InMillions ofUSDollars Committed Disbursed IFC IFC FY Approval Company Loan Equity Quasi Partic. Loan Equity Quasi Partic. 2006 Bank Danamon 155.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 2004 BonaVistaSchool 1.00 0.00 0.00 0.00 1.oo 0.00 0.00 0.00 2006 BuanaBank 5.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 2006 Centralpertiwi 45.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 2004 MedanNP School 1.75 0.00 0.00 0.00 0.00 0.00 0.00 0.00 2002 P.T. Gawi 11.05 0.00 0.00 3.49 4.90 0.00 0.00 3.49 1989 PT Agro Muko 0.00 2.20 0.00 0.00 0.00 2.20 0.00 0.00 1997 PT Alumindo 2.73 0.00 0.00 0.00 2.73 0.00 0.00 0.00 1989 PT Astra 0.00 0.20 0.00 6.00 0.00 0.20 0.00 0.00 1994 PT Astra 0.00 0.19 0.00 0.00 0.00 0.19 0.00 0.00 2003 PT Astra 0.00 0.12 0.00 0.00 0.00 0.12 0.00 0.00 PT Astra Otopart 0.00 0.70 0.00 0.00 0.00 0.70 0.00 0.00 2005 PT Astra Otopart 24.00 0.00 0.00 0.00 24.00 0.00 0.00 0.00 2000 PT BankNISP 0.00 2.85 2.86 0.00 0.00 2.85 2.83 0.00 2002 PT BankNISP 0.00 2.04 0.00 0.00 0.00 2.04 0.00 0.00 2004 PT BankNISP 35.00 0.00 0.00 0.00 35.00 0.00 0.00 0.00 1997 PT Berlian 0.00 3.35 0.00 0.00 0.00 0.00 0.00 0.00 1993 PT BinaDanatama 0.05 0.00 0.00 0.00 0.05 0.00 0.00 0.00 1996 PT Bina Danatama 0.00 0.00 2.58 4.81 0.00 0.00 2.58 4.81 2004 PT Ecogreen 30.00 0.00 0.00 0.00 30.00 0.00 0.00 0.00 2005 PT Ecogreen 25.00 0.00 0.00 0.00 20.00 0.00 0.00 0.00 PT Grahawita 0.00 0.00 3.75 0.00 0.00 0.00 3.75 0.00 1991 PT Indo-Rama 0.00 3.82 0.00 0.00 0.00 3.82 0.00 0.00 1995 PT Indo-Rama 0.00 1.57 0.00 0.00 0.00 1.57 0.00 0.00 1999 PT Indo-Rama 0.00 0.81 0.00 0.00 0.00 0.81 0.00 0.00 2001 PT Indo-Rama 20.00 0.00 0.00 0.00 0.33 0.00 0.00 0.00 2004 PT Indo-Rama 48.00 0.00 0.00 0.00 41.00 0.00 0.00 0.00 1992 PT KIA Keramik 0.23 0.00 0.00 2.00 0.23 0.00 0.00 2.00 1996 PT KIA Keramik 1.65 0.00 0.00 53.49 1.65 0.00 0.00 53.49 1995 PT KIA Serpih 4.50 0.00 0.00 49.50 4.50 0.00 0.00 49.50 1997 PT Kalimantan 9.38 0.00 0.00 0.00 9.38 0.00 0.00 0.00 PT Karunia(KAS) 16.45 0.00 0.00 3.56 16.45 0.00 0.00 3.56 2006 PT Karunia(KAS) 20.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 PT Makro 0.00 2.34 0.00 0.00 0.00 2.34 0.00 0.00 2000 PT Makro 0.00 1.21 0.00 0.00 0.00 0.71 0.00 0.00 2006 PT Makro 0.00 0.66 0.00 0.00 0.00 0.66 0.00 0.00 1998 PT Megaplast 0.00 2.50 0.00 0.00 0.00 2.50 0.00 0.00 1993 PTNusantara 0.00 0.00 10.16 7.90 0.00 0.00 10.16 7.90 2004 PT Prakars (PAS) 15.36 0.00 0.00 3.20 15.36 0.00 0.00 3.20 1997 PT Sayap 0.83 0.00 0.00 0.00 0.83 0.00 0.00 0.00 -99-  2001 PT Sigma 0.00 1.03 0.00 0.00 0.00 1.03 0.00 0.00 2006 PTTAS 7.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 1995 PT Viscose 7.81 0.00 0.00 0.00 7.81 0.00 0.00 0.00 2004 PT Viscose 8.31 0.00 0.00 0.00 8.3 1 0.00 0.00 0.00 1997 PT Wings 0.72 0.00 0.00 0.00 0.72 0.00 0.00 0.00 2001 Sunson 11.62 0.00 0.00 7.35 11.62 0.00 0.00 7.35 2005 WOM 0.00 15.82 0.00 0.00 0.00 15.74 0.00 0.00 2006 WOM 20.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 2004 Wilmar 33.33 0.00 0.00 0.00 33.33 0.00 0.00 0.00 Totalportfolio: 560.77 41.41 19.35 135.30 269.20 37.48 19.32 135.30 Approvals PendingCommitment FY Approval Company Loan Equity Quasi Partic. 2005 BankNISPSELF 0.03 0.00 0.00 0.00 2006 BankNISPSwap 0.00 0.00 0.00 0.00 2006 Orix Indonesia 0.08 0.00 0.00 0.00 Totalpendingcommitment: 0.11 0.00 0.00 0.00 -100-  Annex 15: Country at a Glance INDONESIA: ID-UrbanWater Supply andSanitation b t POVERTYandSOCIAL Asia (L Indonesia Pacific 224 1.885 2,475 1,470 1,627 1.918 Life 317 3,067 4.747 T 1A 0.9 1.o 1.5 1.3 I.4 18 49 42 49 67 70 70 30 29 33 29 15 12 A c w s to improved water source 77 79 82 91 91 89 117 115 114 -1ndOnesra 118 116 115 ~ Lowmiowleinarmegrwp 116 114 113 - 1996 2005 227.4 287.0 30.7 24.6 24.6 25.8 33.6 30.9 Tnde 30.1 28.9 29.4 28.2 24.1 25.0 4.9 -3.4 0.1 2.6 m& 3.4 2.9 2.6 capital 53.6 56.7 48.2 2:: formation 37.3 36.6 15.6 16.8 198636 1996-06 2005 2006 2006-10 GDP bveregewnudgrowth) 7.9 2.7 5 7 5.5 66 -1ndoneSa GDPper capta 6.1 1.3 4.2 4.0 5.3 Lowr-fwddleincunmgroup ErportsdgcodsarKlsarvices 9.1 3.8 16.4 9 2 6 9 STRUCTUREoftbe ECONOMY 1986 1996 2005 Aqncullure (ssof GD9 242 167 13.1 12.9 x) 1, Idustn, 337 435 46.8 47.0 10 Manufamnnq 167 256 27.7 28.0 8 SeMceS 420 399 40.2 40.1 0 Hauseholdfinal eonsunptonexpenditwe 44 624 63.0 620- ._ -10 Generalqov?final expencllture 110 7 6 8.1 8.6 IrrportsOfooodsandserviCes 205 264 29.3 26.I -GCF -GDP 198636 1996-06 2005 2o05 I Growtt,ofexportsandimporls(%) 3.3 2.5 2.7 9.9 2.4 4.7 11.2 3.5 4.6 8.1 3.2 7.9 Hwsahddfinal cmsuybon.expendike 7.7 3.1 4.3 Ganeralgov'tfinal cQlsuFnpbonexpendturn 4.3 4.9 6.6 (;msscapitalformation 10.6 -13 8.4 1.4 ImpxisofgoodsandSarvices 10.3 1.8 17.1 7.6 Note 2006 dataarepreliminaryestimates Gmcpdataareto 2005 *Thediamondsdwrv four keyindicatwsinthe cantry(inbdd)ccmperedwthitsinmmegroupaverage.fdataare mssing,hed i a dvan heonpletad -101-   MAPSECTION   8002 TSUGUA 11 10 9 8 7 6 5 4 3 2 1 PROVINCES: 10 15 Banda D.K.I. BANTEN BANGKA-BELITUNG LAMPUNG SUMA BENGKULU JAMBI SUMA RIAU SUMA NANGGROE 95 0 0 5