Indonesia - Third National Program for Community Empowerment in Rural Areas Project

Document o f The World Bank FOR OFFICIAL USE ONLY Report No: 53046-ID PROJECT APPRAISAL DOCUMENT ON A PROPOSED LOAN N I THE AMOUNT OF US$785.0 M L L I O N TO THE REPUBLIC OF INDONESIA FOR THE THIRD NATIONAL PROGRAM FOR COMMUNITY EMPOWERMENT IN RURAL AREAS March 4, 2010 Indonesia Sustainable Development Department East Asia and Pacific Region 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 otherwise be disclosed without World Bank authorization.  CURRENCY EQUIVALENTS (Exchange Rate Effective as o f March 1,20 10) Currency Unit Indonesian Rupiah IDR 1,000 US$0.10799 US$l IDR 9,260 FISCAL YEAR January 1 - December31 ABBREVIATIONS AND ACRONYMS AF Additional Financing cv Curriculum Vitae APBD Local Government Budget DA Designated Account APBN National Government DIPA Government Budget Budget Authorization Document AusAID Australian Agency for ERR Economic Internal Rate o f InternationalDevelopment Return BAPPENAS National Development ESW Economic and Sector Work Planning Agency BKPG Financial Assistance for FM Financial Management Village Prosperity 'Program BPD Badan PenvakilanDesa, GO1 Government o f Indonesia Village Representative Council BPK Supreme Audit Board GTZ German Agency for Technical Cooperation BPKP State Internal Audit HCU Handling of Complaints Unit Commission BP Bank Procedure HH Household BRI Bank Rakyat Indonesia IBRD InternationalBank for Reconstruction and Development Bupati Head o f District ICB International Competitive Bidding Camat Head o f Sub-district IDA InternationalDevelopment Association CCT Conditional Cash Transfer IDR Indonesia Rupiah CDD Community-driven IFAD InternationalFund for development Agricultural Development CIDA Canadian International IFC International Finance Development Agency Cooperation CFAA Country Financial IFR Interim Financial Report Accountability Assessment CPS Country Partnership ILGR Initiatives for Local Strategy Government Reform .. 11  FOR OFFICIAL USE ONLY IPSAS International Public Sector O&M Operations and Maintenance Accounting Standards ISDS Integrated Safeguards osu Operations Services Unit Datasheet JICA Japan International PAD Project Appraisal Document Cooperation Agency JMC Joint Management PCN Project Concept Note Committee Kabupaten District PID Project Information Document KDP Kecamatan Development PDO Project Development Objective Project Kecamatan Sub-district PEKKA Indonesia Women-Headed Household Program KPK National Anti-Corruption PFM Public Financial Management Committee KPPN Ministry o f Finance's PJOK Local Project Manager at Sub- Treasury Office district level LCS Least Cost Selection PMD Directorate General o f Village Community Empowerment, within M O H A LG Local Government PMU Project Management Unit M&E Monitoring and Evaluation PNPM National Program for Community Empowerment MAD Inter-village Consultations PNPM-MKF' National Program for Community Empowerment o f Self-Supporting Marine and Fisheries Communities MD Village Assemblies PPK District Project Manager MDG Millennium Development PRIME Poverty Reduction and Goals Women's Leadership Project Menko Kesra Coordinating Ministry for PSF PNPM Support Facility People's Welfare MIS Management Information RESPEK KDP scale-up, with locally System funded block grants in Papua & West Papua Provinces MOF Ministry o f Finance RFP Request for Proposal NGO Non-Governmental RLF Revolving Loan Funds Organization MOHA Ministry o f Home Affairs RMC Regional Management Consultant MPW Ministry o f Public Works QCBS Quality and Cost-Based Selection NCEP National Program for SAD1 Smallholder Agribusiness Community Empowerment Development Initiative NMC National Management Satker Project Management Unit Consultant OP Operational Policy SPADA Support for Poor and Disadvantaged Areas SP2D Remittance Order SPM Payment Order This document has a restricted distribution and may be used by recipients only in the performance o f their official duties. I t s contents may not be otherwise disclosed without W o r l d Bank authorization. SPP Payment Request TA Technical Assistance Tim Pengendali National-leveloversight body o f PNPM TOR Terms o f Reference TPK Community Project ImplementationTeam UPK Sub-district FinancialManagement Unit UPP Urban Poverty Project USD United States Dollar VSL Variable-Spread Loan WSSLIC Water Supply and Sanitation for Low Income Communities Project Vice President: James W. Adams, EAPVP Country Director: Joachim von Amsberg, EACIF Sector Director: John Roome, EASSD Sector Manager: Sonia Hammam, EASIS Task Team Leader: John Victor Bottini, EASIS iv  INDONESIA INDONESIA: Third National Program for Community Empowerment in Rural Areas TABLE OF CONTENTS . I STRATEGIC CONTEXT AND RATIONALE ............................................................. 1 A. Country and Sector Issues................................................................................................... 1 B. Rationale for Bank Involvement ......................................................................................... 3 C. Higher Level Objectives to which the Project Contributes ................................................ 4 I1 . PROJECT DESCRIPTION ............................................................................................. 4 A . Lending instrument ............................................................................................................. 4 . . Program Objective and Phases............................................................................................ B. 4 C. Project development objective and key indicators .............................................................. 5 D. Project components ............................................................................................................. 6 E. Lessons learned and reflected in the project design............................................................ 8 F. Alternatives considered and reasons for rejection .............................................................. 9 I11 . IMPLEMENTATION .................................................................................................... 10 A . Partnership arrangements .................................................................................................. 10 B. Institutional and implementation arrangements.. .............................................................. 10 C . Monitoring and evaluation o f outcomeshesults ................................................................ 11 . . . D. Sustainability ..................................................................................................................... 12 E. Critical risks and possible controversial aspects............................................................... 13 F. Loadcredit conditions and covenants ............................................................................... 14 IV . APPRAISAL SUMMARY ............................................................................................. 16 A. Economic and Financial Analyses .................................................................................... 16 B. Technical ........................................................................................................................... 16 C . Fiduciary ........................................................................................................................... 17 D. Social................................................................................................................................. 19 E. Environment ...................................................................................................................... 21 F. Safeguard policies ............................................................................................................. 22 G. Policy Exceptions and Readiness ...................................................................................... 23 V Annex 1: Country and Sector o r Program Background ......................................................... 24 Annex 2: M a j o r Related Projects Financed by the B a n k and/or other Agencies ................. 3 1 Annex 3: Results Framework and Monitoring ........................................................................ 33 Annex 4: Detailed Project Description...................................................................................... 38 Annex 5: Project Costs ............................................................................................................... 42 Annex 6: Implementation Arrangements ................................................................................. 43 Annex 7: Financial Management and Disbursement Arrangements ..................................... 45 Annex 8: Procurement Arrangements ...................................................................................... 57 Annex 9: Economic and Financial Analysis ............................................................................. 62 Annex 10: Safeguard Policy Issues ............................................................................................ 64 Annex 11: Project Processing .................................................................................................... 75 Annex 12: Documents in the Project F i l e ................................................................................. 76 Annex 13: Statement o f Loans and Credits .............................................................................. 79 Annex 14: Country at a Glance ................................................................................................. 82 Annex 15: Better Governance Action Plan.............................................................................. 85 Annex 16: Gender Action Plan .................................................................................................. 92 Annex 17: Strategy f o r PNPM Revolving L o a n Funds ........................................................... 93 Annex 18: PNPM-Rural- Progress o n Commitments ............................................................ 97 Annex 19: M a p IBRD 37556 .................................................................................................... 100 vi  INDONESIA THIRD NATIONAL PROGRAM FOR COMMUNITY EMPOWERMENT IN RURAL ' AREAS PROJECT APPRAISAL DOCUMENT EAST ASIA AND PACIFIC EASIS Date: March 4,2010 Team Leader: John Victor Bottini Country Director: Joachim von Amsberg Sectors: Sub-national government administration Sector Director: John Roome (25%); Water supply (20%); Irrigation and Sector Manager: Sonia Hammam drainage (20%); Roads and highways (20%); Primary education (1 5%) Themes: Decentralization (P);Rural policies and institutions (P);Participation and civic engagement (P);Social safety nets (P);Rural services and infrastructure (S) Project ID: 115052 Environmental screening category: B - Partial Assessment Lending Instrument: Specific Investment Loan Project Financing Data [XI Loan [ ] Credit [ ] Grant [ 3 Guarantee [ ]Other: For Loans/Credits/Others: Total Bank financing (US$m.): 785.0 Proposed terms: L I B O R based IBRD Variable Spread Loan (VSL) in US$ currency, with total maturity of 24.5 years including 9 years grace period. Front end fee o f 0.25% to be paid up front out o f GOI's own resources. Finnnrinv Plan CIJSS millinn) Source Local Foreign Total BORROWERRECIPIENT 524.4 27.6 552.0 International Bank for Reconstruction and 744.0 41.0 785.0 Development International Development Association (IDA) 0.0 0.0 0.0 Total: 1,268.4 68.6 1,337.0 vii Does the project require any exceptions from Bank policies? [ ]Yes [XINO Have these been approved by Bank management? [ ]Yes [XINO I s approval for any policy exception sought from the Board? [ ]Yes [XINO Does the project include any critical risks rated "substantial" or "high"? [ ]Yes [XINO Does the project meet the Regional criteria for readiness for implementation? [XIYes [ ] N o Project development objective: For villagers in PNPM-Rural locations to benefit from improved socio-economic and local governance conditions. Project description [one-sentence summary o each component] f Component 1: Kecamatan Grants: Supporting the construction o f economic and social infrastructure that i s desired and needed by the communities, including provision o f revolving funds for women's groups, preparation for and response to crises, and support for pilot programs. Component 2: Facilitation Support: Developing community capacities for planning and project management through support for sub-district level social and technical facilitators who assist with program socialization, planning, social mapping, village planning, technical assistance, and oversight o f chosen projects. Component 3: Implementation Support and Technical Assistance: Providing implementation support and technical assistance to the national and provincial governments. The bulk o f this component covers the oversight and coordination costs o f the program. PNPM also provides training, quantitative and qualitative monitoring, and it commissions a m i x o f internal and outsourced evaluations. Component 4: Project Management Support: PNPM's special programs, which include pilot projects and government add-ons as well as crisis response activities (natural disasters, conflict, and financial), place several additional demands on normal government budgeting, particularly as the program i s operating nationwide. Most o f these operational costs w i l l be covered by the Government through the national and local budgets; a minimal amount i s financed through the loan. Which safeguard policies are triggered, if any? Environmental Assessment (OP/BP 4.0 1) Natural Habitats (OP/BP 4.04) Involuntary Resettlement (OP/BP 4.12) Indigenous Peoples (OP/BP 4.10) Significant, non-standard conditions, if any: Board presentation: None. Loan effectiveness: The Borrower, through the PMD, shall have adopted the Project Manual, in form and substance satisfactory to the Borrower and the Bank. In addition to covenants typical for this type o f operation and used in past PNPM projects, the Legal Agreement will contain the following covenants: (i) The Borrower shall apply the Project Manual and its related operating instructions in carrying out the Project and making and carrying out Kecamatan Grants, including any Special and Pilot Program or any activities with respect to any natural disaster, emergency or catastrophic event, with respect to which the Borrower may, in addition, adopt and thereafter apply in implementation o f such activities a Supplemental Manual acceptable to the Bank and the Borrower. (ii) The Borrower shall ensure that Facilitators are contracted, trained and mobilized by no later than April 30 in each year o f Project implementation and shall ensure, on an annual basis, that adequate ... Vlll  budget i s made available for training o f Facilitators and Oversight Consultants based on a training plan agreed between the Bank and the Borrower. The Borrower shall ensure that the Facilitators responsible for Sub-projects shall remain in place until such Sub-projects are completed. With respect to sub-project sub-projects financed from sources other than the Loan, including sub- projects for which facilitators are financed by the Project but the sub-projects are themselves financed from such other sources, the Borrower shall undertake such sub-projects in accordance with the Project Manual; and retain responsibility for the design, construction, fiduciary controls and implementation o f such sub-projects. The P M D Secretariat shall: (a) make available to the public through i t s website or in i t s office, at all times, until completion o f the Project, free o f charge, the l i s t o f Project Kecamatans and block grant allocations and the Project Manual; and (b) through the relevant camat and bupati, in each Project Kecamatan and Project Kabupaten, shall make publicly available by December 3 1 in each year o f Project implementation, commencing on December 3 1, 2010, the results o f Project implementation and accounts for funds used during such year. The Borrower, through the P M D Secretariat will coordinate and ensure that Provincial and Kabupaten Satkers shall arrange for the public disclosure of complaints and cases related to the Project, if any, and their handling and resolution, including through media sources and on the P N P M website. By no later than the date which i s two months after the Effective Date, the P M D Secretariat will issue instructions to Provincial and Kabupaten Satkers, agreed between the P M D Secretariat and the Bank, which specify the criteria for which types o f complaints and cases shall be disclosed in accordance with this paragraph. The Borrower, through the P M D Secretariat, shall, by no later than three months after the Effective Date, issue instructions or issue an updated Project Manual, acceptable to the Borrower PMD Secretariat and the Bank, to all Local Governments at the Kabupaten, Kecamatan and Province levels defining and to relevant stakeholders defining time periods within which categories o f complaintdcases must be resolved, to whom they should be escalated if not resolved within such time periods and what the consequences w i l l be if such cases are not resolved or escalated in accordance with such instructions. The Borrower shall ensure that, except as the Bank and the Borrower shall otherwise agree, auditing activities under the Project, including those referred to in Section 1I.B o f this Schedule, are carried out in accordance with: (a) BPKP's audit manual, dated November 30, 2007, as such manual may be amended from time to time with the prior agreement o f the Bank and subject to its continued acceptability to the Bank; and (b) in accordance with terms o f reference agreed with the Bank. (viii) The Borrower shall establish and maintain until completion o f the Project, Project implementation arrangements agreed between the Borrower and the Bank. The Borrower shall ensure that decision letters for Satkers are issued in a timely manner early in each fiscal year o f Project implementation. ix I. STRATEGIC CONTEXT AND RATIONALE A. Country and Sector Issues 1. Decreasing poverty but large "near-poor" segment. Indonesia has shown solid progress in economic growth and poverty reduction since the Asian crisis 12 years ago and has demonstrated sustained resilience and robustness during the recent global economic downturn. Poverty rates have fallen from 17.4 percent of the population in 2004 to 14.2 percent in 2009. Despite these gains, 32.5 million Indonesians currently live below the poverty line and 40 percent o f households live just above the national poverty line o f US$21 per month and remain vulnerable to falling into poverty. Poverty i s particularly high in rural areas, where about half o f the population and more than two-thirds o f poor people reside. Non-income poverty remains a serious problem in terms o f indicators related to health, access to safe water and sanitation, and education outcomes. Inequality i s increasing as evidenced by a Gini coefficient o f 3 1.7 percent in 1999, which has risen to about 35 percent in 2009. 2. A national program on povetty reduction: PNPM. In August 2006, the Government o f Indonesia (GOI) launched its flagship community-based poverty alleviation program, the National Program for Community Empowerment or Program Nusionul Pemberduyuun Musyurukat (NCEP/PNPM). PNPM i s GOI's operational umbrella for all poverty programs which use a community empowerment approach. The objective o f PNPM i s to ensure that the poor benefit from improved socioeconomic and governance conditions. The program aims to consolidate community-based programs o f various ministries and institutionalize Indonesia's experience in bottom-up planning and decision-making into a single community-based poverty reduction program, in both rural and urban areas. PNPM i s one of the largest poverty reduction programs in the `world, with a documented record o f community engagement, participation, and service delivery. Today PNPM has nationwide coverage in all rural villages and urban wards in Indonesia. The program's participatory and transparent framework has helped improve local governance by directly involving communities in decision-making and has been successful in increasing the poor's (including women and. vulnerable community members) access to tertiary socio-economic infrastructure and other basic services. 3. The rural and urban windows o f PNPM. PNPM has a rural and urban arm and builds primarily upon the successful experience with the Bank-funded Kecamatan Development Program (KDP 1, KDP2, KDP3, KDP3b and the Community Recovery through KDP in Aceh and Nias) and the Urban Poverty Program (UPPI, UPP2, UPP2 Additional Financing, and UPP3), which began in 1999. Since the first KDP/ UPP projects in 1999, each successive project has built on the lessons learned from previous projects. Although PNPM i s designed as a consolidated poverty reduction program, GO1 maintains separate rural and urban windows for implementation. The implementing agency for the rural arm o f PNPM i s the Ministry o f Home Affairs (MOW), while the implementing agency for the urban arm o f PNPM i s the Ministry o f Public Works (MPW). This i s due to the scale and scope o f the PNPM, the oversight o f different ministries, and the operational differences tailored to the rural and urban contexts. However, the convergence o f systems continues at the village level and additional opportunities for common implementation strategies were identified during project preparation - such as operational procedures regarding procurement; monitoring and evaluation; complaints handling; anti-corruption; and the training o f the programs' community facilitators. Standardization of many fiduciary aspects concerning supervision o f the two programs was also incorporated into the respective designs o f PNPM- Rural and PNPM-Urban. These include a common financial management and auditing framework; shared sanctions protocols; a consistent financing framework; and harmonization o f the procurement rules for community-driven development (CDD) projects. 1 4. The rural poverty reduction program. In 2009, a massive scale-up of the entire PNPM program occurred resulting in PNPM-Rural covering 68 percent or 4,371 of the sub-districts (kecamatan) in Indonesia (4,37 1), comprising approximately 59,166 villages. A key component of PNPM-Rural's poverty reduction and local governance effort i s the disbursements of block grants to Indonesia's rural administrative sub-districts. Through a gender-inclusive participatory approach, community representatives residing within the sub-districts determine the specific tertiary socio-economic infrastructure projects the block grants will fund. Annually disbursed sub-district block grants will range in size from Rp. 900 million to Rp. 3.0 billion (approximately US$90,000 to US$300,000) per sub-district depending on individual sub-district population, remoteness, and indicative level o f poverty. 5. Continued Bank support to a successful GO1 program. The Bank has provided critical financial and technical support to UPP/ KDP/ PNPM. Since the first KDP project that was operational from 1998- 2002, several successor projects have been approved by the Board and are under implementation (see Table 1). In 2008, the Bank approved the first PNPM-Rural project and subsequent Additional Financing in 2009. The majority of funds have supported small-scale infrastructure construction and maintenance. The program has reached 4,371 or 68 percent of the sub-districts in Indonesia. With the proposed project, total IBRD/IDA financing for these operations would increase to approximately US$2.3 billion (Table 1). Table 1: KDPPNPM-Rural Program-Approved & Proposed World Bank Financing I No. ofsub- 1 IBRDLDA I I Balance* I 6. Disbursement schedule. The Bank has approved a combination of loans and credits for PNPM-Rural and Rural I1 AF in the amount o f $53 1.2 million, out of which $86.8 million remains undisbursed. The remaining funding i s included in the GO1 FY 2010 budget and will begin disbursing in February 2010. A l l funds from PNPM-Rural I1 AF are expected to disburse by June 30,201 1 (Table 2). Table 2: Disbursement Profile: PNPM-Rural and I1AF* FY09 IFYlO I I FYll I Total Disbursement Estimate as in Project Paper (US% mil) Annual I 2101 I 271.1 I 50.0 I 53 1.2 I Cumulative I 210.1 I 481.2 I 531.2 1 I Annual 150.0 330.6 50.6 53 1.2 Cumulative 150.0 444.4 531.2 *Source Project Portal, February 1,2010. 2 7. PNPM Support Facility. Coinciding with the creation o f the PNPM umbrella, GO1 established the PNPM Support Facility (PSF) to harmonize and coordinate development partner efforts, including the planning and targeting of financial assistance, as well as the monitoring and evaluation o f project's operations and impact. The PSF receives overall policy guidance and oversight from the Joint Management Committee (JMC), which comprises GO1 non-executing agencies (National Development Planning Agency - BAPPENAS, the Ministry o f Finance - MOF, and the Coordinating Ministry for People's Welfare - Menko Kesra) and development partners contributing more than US$1 million to support PNPM projects. The JMC Chairman i s the Deputy for Poverty, Labor and Small & Medium Enterprises, BAPPENAS. The Bank serves as co-chair o f the JMC and administers the PSF Trust Fund into which grant funding i s channeled. The governments o f Australia, Denmark, the Netherlands and the United Kingdom have made significant financial contributions to the PSF, and have representatives serving as voting members o f the JMC. To date, development partners have pledged in excess o f US$235 million to the PSF Trust Fund. GO1 and the Bank are also engaged in discussions with other prospective development partners, such as the European Commission, to negotiate additional contributions to support PNPM. B. Rationale for Bank Involvement 8. Building on a successful partnership. There are multiple reasons for continued Bank involvement in PNPM, including its (a) successful track record working with GO1 to manage and execute the KDP projects and ongoing PNPM-Rural operations; (b) readiness and ability to provide necessary technical expertise in required areas; (c) early intervention in the form o f additional financing for innovations and assistance in program development; (d) strong mechanisms in place to facilitate project supervision, results monitoring and evaluation, quality control, and targeting; and (e) capacity to assist GO1 in synergizing the participation o f development partners supporting PNPM. In addition, through the PSF, the Bank is uniquely placed to support GO1 to develop and institutionalize the PNPM framework and the development o f its long-term poverty reduction strategy. Bank involvement also promotes better capture o f synergies between PNPM community investments with other sector projects and in increasing the active involvement o f sectoral departments and local technical agencies in service delivery. Another reason i s that the Bank can also leverage its institutional experience and knowledge o f global best practice of large-scale, national CDD programs in Brazil, India, Mexico, and the Philippines, to name a few. 9. Achievements. The rationale for the Bank's continued involvement in and support o f PNPM-Rural i s based on the achievements made through the KDP and PNPM-Rural series o f projects, including: Poverty reduction: A rigorous 2008 impact evaluation o f KDP2 (PNPM-Rural's direct predecessor) showed that real per capita consumption gains were 11 percent higher among poor households in KDP areas compared with control areas. Also, the proportion o f households moving out o f poverty in poor sub-districts was 9.2 percent higher in KDP2 areas compared with control areas. Vulnerable households near the poverty line were less at risk o f falling into poverty as a result o f KDP participation. An impact evaluation of KDP1 shows that the program had a significant impact on rural household expenditure; The longer a sub-district received KDP funding, the greater the estimated impact on rural household expenditure. Employment: KDP reduced unemployment by 1.5 percent in comparison with control areas. Some 72 million workdays have been created as of December 2007 from KDP/PNPM-Rural. Physical village infrastructure: As o f September 2009, over 53,000 kilometers o f roads have been built or upgraded; 11,600 clean water supply units built; 13,300 irrigation systems built, 6,000 village health posts supported; and 9,700 schools have been built or rehabilitated, along 3  with other types o f economically productive infrastructure since KDPl began in 1998. Subprojects funded through KDP have resulted in expanded business opportunities and employment. Economic rates o f return on sample infrastructure are high, ranging from 39 to 68 percent. Quality, cost-effective infrastructure: Independent evaluations of the technical quality for infrastructure built classified over 90 percent o f the infrastructure as "good" to "very good". Also, an independent evaluation found that village infrastructure built by villagers through KDPPNPM costs significantly less-on average 56 percent less-than equivalent works built through government contracts. Participation rates: Community participation i s high. Participation o f women in PNPM-Rural meetings averaged 48 percent in 2008. Nearly 60 percent o f those who attend KDP/PNPM- Rural planning meetings are from the poorer segments o f the community. A recent impact evaluation and gender review did find, however, that PNPM could do more to promote participation o f women and vulnerable groups. Health and education benefits: PNPM-Rural and its health and education pilot program, PNPM-Generasi have led to school facility improvements and reduced school costs for poor families. In addition an interim impact evaluation shows that PNPM-Generasi has dramatically improved healthcare access and use, including a strong rise in the number o f mother and children using healthcare services; lowered malnutrition rates in areas indicative o f chronic malnutrition; and increased working hours o f and out-reach services provided by midwives. C. Higher Level Objectives to which the Project Contributes 10. Governance and access to services. The project i s consistent with the FY2009-12 Country Partnership Strategy (CPS) for Indonesia, Investing in Indonesia s Institutions for Inclusive and Sustainable Development, which emphasizes engagement with government counterparts, including at the sub-national level, and other stakeholders to address critical governance and institutional challenges. The project's CDD approach aims to improve existing government programs, strengthen institutions and improve the links between different levels o f government. In addition to its cross-cuttingengagements to strengthen central and sub-national government institutions and systems, the CPS identifies five thematic areas, which form the core o f the Bank's engagement: (a) Private Sector Development; (b) Infrastructure; (c) Community Development and Social Protection; (d) Education; and (e) Environmental Sustainability and Disaster Mitigation. The proposed project supports both the approach suggested in the CPS as well as its thematic areas o f engagement. PNPM serves as the Bank's operational centerpiece for community development. 11. PROJECT DESCRIPTION A. Lending instrument 11. IBRD investment loan. The lending instrument for this project will be a Specific Investment Loan (SIL) with an implementationplan period of two-and- a-half years. B. Program Objective and Phases 12. I n support for PNPM. This project supports GOI's nationwide program for poverty empowerment, PNPM, which i s the operational umbrella for all poverty programs using a community empowerment 4 approach. While Bank financing has been instrumental to the program in the last 11 years, the national and local governments financed over 36 percent o f KDPBNPM-Rural. At this time the Government envisages that the overall urban and rural program will cost a minimum o f $1.7 billion per year until 2015 which will primarily be funded by national and local government budgets and community contributions, complemented by support from development partners. The World Bank support to the PNPM program proposed this year i s substantially more than last year. The increase i s not so much related to the scale-up o f the PNPM program itself (which occurred last year) but to the larger gross government financing needs Indonesia faces this year (because of the maturity profile o f its existing debt). Indonesia has typically managed i t s public finances extremely prudently. Part o f its prudent fiscal management has been a conservative approach to its financing strategy, which this year, as part o f its overall effort to manage any impacts from the global financial crisis, calls for scaled up use o f official financing sources, including this loan for PNPM-Rural 1 1 1. 13. PNPM Roadmap. GO1 has indicated in a roadmap for the future o f PNPM that it plans to continue PNPM at least until 2015, in two phases. The first phase, to scale-up PNPM to full national coverage has been achieved. The second phase entails shifting PNPM into a more sustaining mode, whereby local governments will take on greater responsibility for financing and sectoral agencies will participate more actively. The plan i s that over time, other CDD poverty reduction initiatives will be folded into PNPM in order to make programming at the community level more streamlined, coordinated, and responsive to beneficiaries' needs. The plan to continue PNPM until 2015 includes support from the World Bank and other deveiopment partners through additional financinghepeater loans and contributions to the PNPM Support Facility (PSF) - a mechanism established by GO1 and development partners to provide support to PNPM through new modalities and institutional arrangements. At this time, GO1 envisages that PNPM will cost a minimum o f US$1.7 billion per year and will continue to be funded by national and local government budgets and community contributions, with supplemental financing provided by development partner agencies. The long term-financing arrangements o f PNPM still need to be further developed by GOI. Annex 1 contains a more in-depth overview o f the roadmap, including progress on the key issues being discussed with GOI. 14. PNPM-Rural's architecture remains. During PNPM-Rural's 2007-2009 scale-up, the program's core architecture did not deviate .in any significant way from KDP. KDP already was a very large project and its core operating systems were designed for scale-up and had demonstrated their ability to incorporate an increased geographic scope. The main differences between the operations o f the first PNPM-Rural and the project agreed during project preparation are: (a) The number o f sub-districts rises from 4,371 in 2009 to 4,791 in 2010 (a result o f GO1 diving further the number o f sub-districts in the country); (b) Increased oversight, coordination, and facilitator management devolved to provincial level project managers; (c) Allowance o f up to three decision points, up from one in KDPPNPM-Rural, on subproject allocations and disbursements allowed within the fiscal year; and (d) Significantly increased training in and supervision of project implementation, particularly in financial management. This i s necessary given the proposed increase in block grant funding and geographic coverage. C. Project development objective and key indicators 15. Overarching objective. The project development objective (PDO) i s for villagers in PNPM-Rural locations to benefit from improved socio-economic and local governance conditions. 5 16. K P I s . Key performance indicators for the PDO include: (a) Improved household (HH) expenditure rates and improved access to economic and social services in a minimum of 4,100 sub-districts in 2010 (impacts taken from representative sample). (b) Economic Internal Rate of Returns (ERRS) greater than 30 percent for major rural infrastructure works in PNPM kecamatan. (c) Through the MDGKommunity Conditional Cash Transfers pilot, improved health indicators in minimum of 200 sub-districts in 6 provinces: 0 Immunization coverage for 12-23 month olds increases by at least 10 percentage points from 38 percent in 2005 to 48 percent in 2010; 0 Prenatal care visits increase by at least 10 percentage points from 56 percent in 2005 to 66 percent in 20 10; and 0 Deliveries assisted by trained professionals increase by at least 10 percentage points from 40 percent in 2005 to 50 percent in 2010 (impacts taken from representative sample). (d) Greater than 80 percent satisfaction levels from beneficiaries regarding improved services and local level governance in a representative subset of sub-districts. 17. See Annex 3 Results Framework and Monitoring, for results indicators and further details. D. Project components 18. The project will cover approximately 420 additional sub-districts, which were recently created by the administrative division of sub-districts and their subsequent incorporation by GO1 into the program. It will also continue to support those 4,371 sub-districts already which are participating. The project will utilize the institutions established and processes and mechanisms developed under the first PNPM-Rural project and i t s predecessor KDP projects, building upon experience gained and lessons learned. The four components will be similar to the ongoing project. Table 3 below illustrates project costs by component and by IBRD and government and community contributions. 19. Component 1: Kecamatan Grants (US$1,186.82 million). The main activity in PNPM-Rural 111, similar to PNPM-Rural and Rural I1 AF, will be the construction of economic and social infrastructure that i s needed and requested by the target communities and includes (a) planning for community development (e.g., preparation of subproject proposals) and (b) training and capacity building (e.g., development planning and investment). The selection of activities i s open except for items specifically excluded through the project's negative list, or for land purchases of any kind. These activities are funded through grants disbursed by the government to the sub-districts (kecamatan) and villages. 20. Financial services. While project will also continue to support revolving funds managed by women's groups efforts will be focused on promoting more sustainable access to financial services to the poor, while at the same time maintaining and improving community ownership. Up to 25 percent of the block grants can be used to support women's saving and loans groups through revolving funds. Under PNPM- Rural approximately between 16 to 18 percent rather than the eligible 25 percent of block grant funding was in the form of revolving funds. The average repayment i s about 94 percent. If any sub-district falls below 80 percent the window closes and revolved funds are not allowed. Discussions with GO1 on a multi-year pilot for access to financial services to the poor, especially targeting women beneficiaries, are 6 currently underway. Presenting details on the best approaches to ensure the financial sector can play a more active role in expanding the poor's access to sustainable financial services will be part o f the pilot's work. Annex I 7 Strategy for PNPM Revolving Loan Funds elaborates further. 21. Crisis response and other initiatives. There are also a number of special initiatives that can be funded using the block grant disbursement mechanism provided certain procedural changes are made to the standard PNPM-Rural Project Manual and complemented by additional facilitation and technical assistance. They include inter alia: (a) Responding to crises, including natural disasters, financial, and special needs in border areas, where an accelerated planning and disbursement cycle i s allowed; and (b) Supporting community investments that are environmentally friendly, including investments in renewable energy, in particular micro-hydro power. 22. Pilots. In addition to the core sub-district planning and block grant scheme, PNPM-Rural has operational pilots funded through loans and grants from several bilateral development partners (Australia, Canada, Denmark, The Netherlands, and United Kingdom). The pilots build upon the main PNPM platform and principles o f community participatory engagement. Two o f the major pilots are: (a) PNPM Generasi or the incentivized block grant scheme for the achievement o f MDGs related to health and education; and (b) Green PNPM to support natural resource management and renewable energy initiatives. 23. Component 2: Facilitation Support (US$78.47 million). This component promotes the development o f community capacities for planning and project management through support for sub- district technical and social facilitators and kabupaten (district) facilitators. I t also includes activities to strengthen inter village organizations and forums and local government coordination and oversight. 24. Component 3: Implementation Support and Technical Assistance (US$41.75 million). This component provides implementation support, training and technical assistance at the national and provincial levels to manage the program and strengthen the capacity o f local governments. A portion o f the national level support will include assistance to aid in the strategy development for PNPM going forward. The component also covers the costs of PNPM-Rural's monitoring and evaluation program. In addition, it includes an enhanced audit program that expands sampling, provides capacity development support for district government auditors, and sampling and provides capacity development support for district government auditors. This component also funds most project training other the community-level training. 25. Component 4: Project Management Support (US$29.96 million). PNPM's special programs, which include pilot projects and government add-ons as well as crisis response activities (natural disasters, conflict, and financial), place several additional demands on normal government budgeting, particularly as the program i s operating nationwide. Most of these operational costs will be covered by the Government through their national (APBN) and local budgets (APBD); a minimal amount i s financed through the loan. 26. Local Government Add-ons. The local governments of Aceh, Papua and West Papua are capitalizing on the CDD approach and have linked their own development programs to PNPM-Rural. 7  Aceh; PNPM-BUG. In 2009, the Government o f Aceh, as part o f its village prosperity program (BKPG), allocated over US$lOO million (approximately one-eighth o f its provincial budget for the year) in block grants for 6,411 villages in 23 districts and 276 sub-districts. Planning and implementationo f the funds are linked to PNPM-Rural's (and PNPM-Urban's for 41 1 of the villages) mechanisms and facilitators. PNPM-BKPG will continue in 2010, but with increased block grant funds from both PNPM as well as from the local provincial government for BKPG. P a p a and West Papua: PNPM-RESPEK. In 2007, the local governments of Papua and West Papua launched a village development strategy (RESPEK) and allocated about US$40 million for block grant investment funds for every village and linked planning and implementation o f these funds to PNPM-Rural, utilizing over 1,000 facilitators to support about 420 sub-districts and more than 4,000 villages. PNPM-RESPEK continued fully funded in 2009, and i s expected to continue in tandem with PNPM-Rural through 20 10 as well. 27. There are often smaller pilots and add-ons by local governments as well. Component IBRD APBN APBD Community Total % 1. Kecamatan Grants 684.00 159.22 295.75 47.82 1186.82 88.8 3 .Facilitation Support 76.00 2.47 78.47 5.9 4. Implementation Support 23 .OO 7.14 11.61 41.75 3.1 and Technical Assistance 5. Project Management 2.00 10.54 17.42 29.96 2.2 support Total I 785.00 I 179.37 I 324.81 1 ,47.82 I 1337.00 1. 100 E. Lessons learned and reflected in the project design 28. The design o f the first PNPM-Rural project incorporated multiple lessons learned from previous CDD operations around the world and in Indonesia - such as KDP. Moreover, its platform allows for a systematic "learning by doing approach". Both have been instrumental in contributing to the project's effective implementation, GOI's buy-in, and visible impact,to date. While there will be no significant changes in this project's design, implementation refinements will be included in the new project, to , address the following: (a) Revolving Funds. While the revolving funds have had a positive impact in the ongoing project I and earlier KDP projects, the current design i s not sustainable and might over time have adverse effects on the availability o f financial services for the poor. The new project will begin a gradual phasing out of revolving funds. This phasing out will be combined with the design and progressive build-up of more sustainable, independent access to financial services to the poor. (b) Audits. Research has shown that high levels o f participation and community oversight are not sufficient in monitoring the financial management o f the project, and that expanded audits help reduce fraud and corruption. The project will: (a) expand and improve the intake o f quality data; (b) strengthen the systems for responding to corruption, including through escalation mechanisms for issues that cannot or are not addressed appropriately at local levels; and (iii) - improve transparency. For funds used in 2010 (and beyond) audits are expected to cover at 8  least 20 percent o f all sub-districts. The villagers o f every sub-district will be informed in advance o f the higher probability o f being audited, and every village audited will hear directly the results o f the audit immediately after the village i s inspected. Audits will be carried out jointly by the State Internal Audit Commission (BPKP), and local district level inspectors (Bawusdu). Financial Management. Facilitation and oversight by project consultants i s essential to project success. Well trained facilitators and oversight consultants will be mobilized early and tasked with local supervision. Besides employing consultants dedicated to ensuring technical quality, additional consultants will continue to be placed in each province to oversee the complaints handling systems and placed in each district for enhancing the supervision o f financial management practices and to assist in the handling o f revolving funds. The management o f facilitators will continue to be delegated to provinces and management o f block grants funds to district governments, but supervision and financial oversight of both will be increased. Disbursements. Delays in the issuance o f annual budgets have negatively affected KDPPNPM implementation and results. GO1 has agreed to pre-finance all block grants, an agreed portion o f which will then be reimbursed. This should eliminate most serious delays. F. Alternatives considered and reasons for rejection 29. In order to simplify the budgeting process, starting in 2010, for the sub-district community block grants, GO1 will allocate hnds in the national budget (DIPA) for reimbursement from the Bank once the eligible expenditures have been incurred. In the proposed DIPA for 2010, GO1 has allocated a total o f US$S06 million for community block grants, and the Bank loan i s expected to reimburse US$629 million. Expenditures for other categories (totaling US$156 million and mostly for the provision o f technical assistance), will be budgeted for payment from the project's designated account as in the past. I n the past ail project funds were treated this way. This caused serious delays since a project had to be declared effective before funds were allocated into the government's budget (at the national, provincial, and district levels) for the project. This proved to be a very involved and lengthy process, especially when budget revisions were made. 30. Considering the evolving nature o f the PNPM, different lending options were considered for the proposed project. One alternative proposed was to combine the KDP and UPP projects into one consolidated Specific Investment Loan with two jumbo components, each having its own implementation systems. This option was rejected because the two branches have different executing agencies. Until GO1 confirms an overall management structure with coordinating authority, simpler designs will work better than a consolidated approach that would have to address the challenges o f different executing agencies. 3 1. PNPM i s a central government program with highly decentralized execution. District governments can engage and will contribute funds, but all core systems remain in the hands o f the central government, supervised by the central government. An alternative option would have been to decentralize project management and operations to sub-national governmental units such as provinces. However, Indonesia's decentralization vests almost no authority for provinces to supervise districts. Having 394 projects in effect would be unmanageable and quickly spin out o f control, even `if these districts could accept responsibility for loan funds. 9 111. IMPLEMENTATION A. Partnership arrangements 32. Development Partner support to PNPM-Rural. In addition to administering the PSF Trust Fund and co-chairing the JMC comprising GO1 non-executing agencies and development partners contributing more than US$1 million to the PSF Trust Fund for PNPM, PNPM-Rural has benefited from generous support from bilateral development partners. Assistance has been especially helpful for piloting innovations that then get taken up by the larger program and for providing special assistance in difficult environments, such as Aceh, Nias, and Papua, as well as for conducting monitoring and evaluation activities. Active development partnerships connected to PNPM-Rural are included in Table 4. Table 4: Development Partnerships for PNPM-Rural Development Program 0 bjective Contribution Partner (US$ million) Australia PNPM Support Facility To support to PNPM 9.3 Small Holders To improve smallholder technology 6.9 Agricultural and marketing in eastern islands Development Initiative (SADI) Support for RESPEK To support "barefoot engineers" 2.1 (Papua) program Canada Green PNPM for To improve environmental 14.6 Sulawesi awareness and management in upland areas Denmark PNPM Support Facility To support to PNPM 15.5 Japan Sustaining Women To expand leadership training,for 1.o Leaders women PEKKA To support women-headed , 3.0 households PRIME To support women's leadership 1.7 training centers Women Migrant To develop new financial products 1.5 Workers and microfinance options for migrants from PNPM communities Netherlands PNPM Support Facility To support to PNPM 37.3 United Kingdom PNPM Support Facility To support to PNPM 5.6 SPADA for Aceh and To support community-based 10.0 Nias reintegration programs. TOTAL 108.5 B. Institutional and implementation arrangements 33. Policy coordination. Tim Pengendali i s the national oversight body of PNPM. Tim Pengendali i s chaired by Menko Kesra and includes Bappenas, Finance, and the main line agencies that execute the component programs. In practice, Menko Kesra i s responsible for overall policy guidance, Bappenas manages technical issues, including overall budget preparation and planning, Finance provides the budget, and the line agencies execute delivery to the villages. 10 34. Project oversight. Overall project oversight of PNPM-Rural I11 will remain the responsibility o f the Ministry o f Home Affairs (MOHA), while the day-to-day coordination i s to be undertaken by a Project Management Unit (PMU), assisted by administrative units (Satkers). At the provincial level, PNPM-Rural I11 coordination and management will mirror the national level arrangement, with the governor in charge. Similarly, at the district level, the district heads (bupatis) will oversee poverty alleviation programs, including PNPM, and delegate this responsibility to sub-district heads (camats). Village heads play this role at the local level, in villages. At the lower administrative levels, coordination and decisions on sub- projects and funding of PNPM-Rural are carried out at inter-village consultations (MADS) and village assemblies (MDs). 35. Implementation support. For PNPM-Rural 1 1 as for KDP and PNPM, consultants and facilitators 1, will be employed to assist with coordination and implementation. The consultants and facilitators are employees o f and managed by the National Management Consultant (NMC) team, which are f i r m s contracted by GO1 to oversee technical assistance provided to the project. These consultants and facilitators are charged with and responsible for the technical quality o f the sub-projects selected for funding through the inter-village consultation and village assemblies. They report to the relevant Satkers at the respective levels o f government (provincial, district, and sub-district). Each province participating in PNPM-Rural I11 will have a small Provincial Oversight Team, and in each district a team o f at least three district facilitators (one engineer, one social organizer, one financial specialist and one or more assistants). Each participating sub-district will have a minimum o f two facilitators (one social organizer and one field engineer plus a field assistant) directly working with sub-district officials and the villages and the project teams in each. See Annex 6 Project Implementation Arrangement for more details. C. Monitoring and evaluation of outcomes/results 36. Comprehensive M&E framework. PNPM-Rural has a comprehensive monitoring and evaluation (M&E) framework consisting of: (a), Monitoring Activities: Community participatory monitoring Government supervision and monitoring Consultants' internal monitoring Management information systems (MIS) Independent external monitoring by provincial NGOs Complaints handling and grievance redress mechanisms Financial supervisions and audits, both internal and external World Bank supervision missions (b) Evaluation Activities: Impact evaluations for both PNPM-Rural and its pilot, PNPM-Generasi program. Thematic evaluations and studies including: technical quality and costs o f services; economic analyses; sustainability; micro-finance reviews; environment; conflict prevention; gender; and local governance. These evaluations employ both quantitative and qualitative methodologies. 37. Common guidelines for all PNF'M projects. GO1 has also formed two sub-working groups for M&E, one focused on finalizing target indicators for all PNPM, and another working group on MIS and reporting. PNPM M&E Operational Guidelines, which will apply to a l l programs under the PNPM umbrella are in place and will be further improved by MOHA in the areas of: (a) community and NGO 11 monitoring; (b) complaints handling; (c) financial audits; (d) impact evaluations; and (e) thematic evaluations and studies. 38. Learning by doing. As under previous projects, PNPM-Rural 111 will continue to support GO1 in adopting and implementing strategic directions for the program and in addressing specific challenges to its effectiveness through a learning-by-doing approach. The project will support the piloting o f design changes as part of implementation in some communities, which will be evaluated at mid-year review meetings hosted by Tim Pengandali (the Inter-ministerial Oversight Committee o f the PNPM). At these semi-annual meetings, senior government officials and key stakeholders will agree on which pilots will be undertaken, the geographic areas for conducting them, and appropriate monitoring and evaluation metrics and methods. In addition, results from existing pilots will be reviewed and decisions will be made on whether to scale-up the pilots, make adjustments and continue testing, or discontinue. D. Sustainability 39. PNPM is the foundation of the Government's poverty alleviation efforts at the community level, The sustainability o f PNPM-RuralKDP has already been broadly demonstrated: strong community participation ensures local ownership and investments in demand-driven subprojects; local government participation provides additional support and ensures institutionalization o f the process, enabling increased ability to scale-up; and village-level investments have been proven to be o f high quality and more economical using a community-driven approach v i s - h i s traditional contracting. PNPM programs have already been scaled-up through successive operations that have built upon the successes and have expanded the geographic scope of previous operations. The scale-up o f the programs has taken place in the context o f institutional collapse, major economic crises, and during the implementation o f one o f the world's largest decentralization programs. The success of these programs in spite o f the socio-political challenges faced highlights their potential for long-term sustainability and their flexibility to adapt to a changing environment. 40. Sector linkages. With PNPM-Rural and its pilots, sectoral agencies at the local government level are becoming increasingly more involved in coordinating the implementation o f complementary projects. For example, the Ministry of Marine Affairs and Fisheries, in an effort to reduce poverty occurring in 32 percent o f the 16.4 million fishermen and coastal communities, launched in 2009 the National Program o f Self-supporting Marine and Fisheries Community Empowerment (PNPM-MKP). The program provides assistance for the development o f marine fisheries and small scale businesses. 41. Local government ownership. In order to ensure ownership and sustainability, in addition to the reorganization o f the management o f poverty alleviation efforts, local governments are required to provide a minimum of 20 percent of the block grant investment funds and an additional 6 percent for administration and oversight. For PNPM-Rural, provincial governments also manage all facilitators, including recruitment, training, contracting, salary payments and performance evaluations, with supervision from the central government's P M U and its NMC in Jakarta. 42. PNPM i s a platform. In stages, over the last eleven years, efforts have been undertaken to better guarantee sustainability. What was begun under KDP and was taken up in 2006 with the launch o f PNPM and expanded nationally in 2009 by the Government, has also been replicated by local governments in many locations (Papua and Aceh, to name but two). Larger amounts o f the government's own funds are going into CDD activities linked to PNPM. All this i s evidence CDD in Indonesia i s successful and sustainable. 12 E. Critical risks and possible controversial aspects 43. Fiduciary stress. The ability to transfer resources directly to communities across the country in a diligent and transparent fashion i s one o f the main strengths o f the PNPM program. Over the eleven years o f development and gradual scale up o f the program, fiduciary systems have been developed that: (a) install downward and upward accountability for the use o f resources; (b) provide voice to beneficiaries to easily file complaints in case o f (perceived) fraud; (c) provide decision makers with data on the number and status o f fraud cases; and (d) ensure that issues identified through supervision, audits, or complaint handling are diligently addressed. These systems are robust and well tested. Nevertheless, there are two risks that require attention: (a) the strains that are put on the system due to the national scale up o f the program; and (b) complacency. With regard to the former, the doubling o f the number o f kecamatans over the last two years creates an understandable challenge to ensure that the systems that have proven their effectiveness in the previous phases o f the program remain robust when operating at a larger scale. This requires careful managerial attention on the system as a whole, and on the areas that pose the greatest fiduciary risks in particular; deployment and training o f staff with the appropriate skill mix; and ongoing "learning by doing" to continuously upgrade the existing systems and strengthen their implementation. GO1 and the Bank are taking a number o f specific steps to address both risks. Among others, these include: The deployment o f additional specialized staff in areas that have a weaker track record with regard to the robustness o f the fiduciary systems. The tasking o f the District level Auditor General Office (Bawasda) with the systematic auditing o f PNPM funds in partnership with the National Auditor Office so that at least 20 percent o f kecamatans are audited. The application o f revised criteria that trigger the escalation o f fraud issues in those cases where appropriate action i s lacking and the consequences and sanctions when fraud issues are not adequately addressed. `The publication in the local press and on the project website o f the main fraud cases and their follow up. The semi-annual review by the Tim Pengandali o f the status and degree o f resolution o f fraud cases. 44. A more comprehensive list o f the risks and mitigation measures follows. Risk Mitigation Measures Risk Rating with Mitigation Sustainabilitv: (a) lack of clarity (a) Intensive consultations between the Bank and M from GO1 on the overall design GO1 on the Roadmap for PNPM, including the and long-term financing plan for levels and sources o f medium- and long-term PNPM could undermine the financing. sustainability o f the program; and (b) Though Revolving Loan (bl) Continue to limit access to RLF to pre-exising M Funds (RLF) in PNPM-Rural have women's savings and loan groups, allowing no more been shown overall to be than 25% of the kecamatan block grant to be allocated beneficial and are performing for RLFs and only in areas where repayment rates are well, they are not sustainable and > 80%. 13  Risk Mitigation Measures I RiskRating I with Mitigation in some cases might crowd out (b2) Launch pilot in 2010 to improve RLF local credit markets and actually performanceand preserving the-capital now in UPKs, reduce access for the poor. phasing out o f RLFs as part of PNPM and establishing a model(s) for sustainable access to micro-finance Pro-Door targeting: targeting (a) Ensure that for any new/additional funding that M strategy does not provide becomes available, priority be given to allocaiing these sufficient funds to the poorest finds to the poorest areas. communities. (b) Discussions with GO1 on block grant finding for 201 1 include sizeable increase for the poorest areas. Fiduciaw inadequate enforcement (a) Develop further a risk-based control framework. M o f fiduciary controls may enable (b) Revise project field staff performance evaluation corrupt activities undermine trust manual, stressing fiduciary responsibility. and prevent the program from (c) Improve and expand the intake o f quality data e.g., meeting its development increase audit sampling size and undertake joint audits objectives. with state and district officials. (d) Strengthen systems for responding to corruption, including through escalation mechanisms for issues that cannot be (or are not) addressed appropriately at local levels. (e) Improve transparency of use of funds e.g., promote dissemination of audit findings and follow up on audit findings and the handling o f corruption problems. ( f ) Increase financial management and complaint handling training for facilitators. (8) Increased awareness and engagement of senior GO1 officials. Proiect management: limited (a) The P M U will further outsource some project M capacity of the executing agency management functions. to manage the scaled- (b) The Bank has appraised actions taken to improve uphationwide project and all its project management and supervision. pilots. OVERALL R I S K LEVEL M Risk Rating: H (High Risk), S (Substar 1 Risk), M (Moderate Risk), L (Low Risk) F. L o a d c r e d i t conditions and covenants 45. Effectiveness condition: The Borrower, through the PMD, shall have adopted the Project Manual, in form and substance satisfactory to the Borrower and the Bank. 46. Covenants Applicable to Project implementation: In addition to covenants typical for this type o f operation and used in past PNPM projects, the Legal Agreement w i l l contain the following covenants: (a) The Borrower shall apply the Project Manual and i t s related operating instructions in carrying out the Project and making and carrying out Kecamatan Grants, including any Special and Pilot Program or any activities with respect to any natural disaster, emergency or catastrophic event, with respect to which the Borrower may, in addition, adopt and thereafter apply in implementation o f such activities a Supplemental Manual acceptable to the Bank and the Borrower. 14 (b) The Borrower shall ensure that Facilitators are contracted, trained and mobilized by no later than April 30 in each year o f Project implementation and shall ensure, on an annual basis, that adequate budget i s made available for training o f Facilitators and Oversight Consultants based on a training plan agreed between the Bank and the Borrower. The Borrower shall ensure that the Facilitators responsible for Sub-projects shall remain in place until such Sub-projects are completed. (c) With respect to sub-project sub-projects financed from sources other than the Loan, including sub-projects for which facilitators are financed by the Project but the sub-projects are themselves financed from such other sources, the Borrower shall undertake such sub-projects in accordance with the Project Manual; and retain responsibility for the design, construction, ' fiduciary controls and implementation o f such sub-projects. (d) The P M D Secretariat shall: (a) make available to the public through its website or in i t s office, at all times, until completion o f the Project, free o f charge, the list o f Project Kecamatans and block grant allocations and the Project Manual; and (b) through the relevant camat and bupati, in each Project Kecamatan and Project Kabupaten, shall make publicly available by December 31 in each year o f Project implementation, commencing on December 31, 2010, the results o f Project implementation and accounts for funds used during such year. (e) The Borrower, through the P M D Secretariat will coordinate and ensure that Provincial and Kabupaten Satkers shall arrange for the public disclosure o f complaints and cases related to the Project, if any, and their handling and resolution, including through media sources and on the PNPM website. By no later than the date which i s two months after the Effective Date, the P M D Secretariat w i l l issue instructions to Provincial and Kabupaten Satkers, agreed between the P M D Secretariat and the Bank, which specify the criteria for which types o f complaints and cases shall be disclosed in accordance with this paragraph. (f) The Borrower, through the P M D Secretariat, shall, by no later than three months after the Effective Date, issue instructions or issue an updated Project Manual, acceptable to the Borrower P M D Secretariat and the Bank, to all Local Governments at the Kabupaten, Kecamatan and Province levels defining and to relevant stakeholders defining time periods within which categories o f complaints/cases must be resolved, to whom they should be escalated if not resolved within such time periods and what the consequences w i l l be if such cases are not resolved or escalated in accordance with such instructions. (8) The Borrower shall ensure that, except as the Bank and the Borrower shall otherwise agree, auditing activities under the Project, including those referred to in Section 1I.B o f this Schedule, are carried out in accordance with: (a) BPKP's audit manual, dated November 30,2007, as such manual may be amended from time to time with the prior agreement o f the Bank and subject to its continued acceptability to the Bank; and (b) in accordance with terms o f reference agreed with the Bank. (h) The Borrower shall establish and maintain until completion o f the Project, Project implementation arrangements agreed between the Borrower and the Bank. The Borrower shall ensure that decision letters for Satkers are issued in a timely manner early in each fiscal year o f Project implementation. 15 IV. APPRAISAL SUMMARY A. Economic and Financial Analyses 47. Economic Internal Rate o f Return ( E m ) . The project will maintain the same technical standards and design as under the earlier KDP and PNPM-Rural projects. An economic analysis of 41 KDP subprojects (roads, bridges, water supply and irrigation) carried out during the first KDP found a weighted average ERR of 60 percent. Village infrastructure built through CDD cost significantly less - on average 56 percent less - than equivalent works built through MPW or local government contracts. A cost-comparison based on the abovementioned sample using local government and private engineers to re-cost CDD-built infrastructure showed significant savings due to the elimination of some of the following costs: middlemen and outside contractors' overhead costs; double and/or triple handling o f materials; frequent on-site design modifications; and extra charges for supervising projects in remote areas. 48. Poverty Impacts. A poverty impact simulation carried out during PNPM project preparation and updated in 2009 found that besides those receiving direct employment through subproject implementation, additional families will benefit indirectly from the economic activity generated by the program. Such additional benefits beyond direct employment include: (a) an increase in the wages of unskilled workers rises even those who have no contact with the program, by reducing competition from desperate workers who drive all wages down; (b) supplemental income benefits workers primarily when they need it the most; when there are few other jobs because it i s the off-season for agriculture, or there i s drought, flood or other natural or economic catastrophe in a region of the country; and (c) injecting purchasingpower into villages increases economic activities in local areas by about 16.5 percent, Le., for every Rp. 100 million spent, village income will actually increase by Rp. 116.5 million. B. Technical 49. PNPM-Rural will finance simple, village tertiary infrastructure, infrastructure related to social and health services, revolving funds for viable women's savings and loans groups, and crisis response activities. In past years, approximately 70 - 80 percent of block grants funds have gone to public village level infrastructure, mostly comprising investments in access (roads and bridges), but significant amounts for water and sanitation, irrigation and drainage, and more recently for school renovations and village health facilities as well 50. In 2010 more than 5,000 field engineers will be contracted and mobilized. These field engineers are supervised by more senior engineers assigned to each district participating in the project - accounting for almost 400 senior engineers in all. A l l new facilitators are given pre-service training, with separate sessions dealing with civil engineering, safeguards and related matters, such as in recommended earthquake building practices appropriate for village structures. PNPM community facilitators receive "refresher training" throughout the year. These facilitators are then tasked with training community groups and subproject implementation teams. During each annual project cycle, these facilitators train village technical cadres, village implementation teams, Operation and Maintenance (O&M) teams, and teams established to carry out feasibility reviews of all proposals coming from the village assemblies. Supervisory engineers at the district level check all designs and budget and certifj) works constructed, paying special attention to those that are more difficult or larger. When warranted, special arrangements are made for technical assistance and oversight, as in the case o f micro-hydro power investments funded by PNPM-Rural and its Green PNPM pilot. The Government of the Netherlands i s providing funding to the German Agency for Technical Cooperation (GTZ) and providing a team of experts with four offices throughout Indonesia to ensure the quality of micro-hydro power investments by villagers. 16 5 1. From late 2007 through early 2009, an intensive independent assessment o f KDPPNPM-Rural infrastructure was carried out in all provinces in eastern Indonesia. The study covered more than 350 villages and 750 subprojects made up o f 18 types o f infrastructure subprojects, which villagers had chosen to invest in. The study focused on subproject designs and budgets, costs, technical quality o f the works, O&M, functionality o f the works, and applicable social and environmental safeguards. The findings support the results o f earlier evaluations and studies and are being fed into improvements in project materials, manuals and training and helping to improve supervision. Under this project additional training will be provided, to facilitators and communities, in: safeguards and environmental screening appropriate for village infrastructure; O&M planning and budgeting; procurement and its supervision; and recommended earthquake building practices. More training will also be provided for village technical cadres and field assistants. I n order to make this happen, field engineers and their supervising engineers at the district level, will also receive more frequent and intensified training. Performance evaluations of facilitators will pay special attention to the role o f facilitators in ensuring safeguard mitigation measures are included in infrastructure proposals and construction supervision and post-construction O&M plans. 52. Studies and surveys show high functionality and sustainability o f infrastructure subprojects built through KDP/PNPM. Training for community O&M provided for under the current project and will be continued under the proposed project; however, planning for O&M needs to be strengthened. Forging more and better links to local government sectors i s a priority for PNPM going forward, which i s expected to contribute to the O&M o f projects financed subprojects. In all districts multi-sectoral coordination teams have established and meet at least monthly to review PNPM progress and problems and to access district programs in light o f community needs. C. Fiduciary 5 3 . Financial Management. The project has several identified financial management (FM) risks: (a) the use o f sub-district community block grants, with respect to how effectively beneficiaries, community groups, and the Sub-district Financial Management Units (UPK) use, manage and account for funds;(b) the uneven capacity o f the field consultants to assist the community groups and UPKs in the financial management aspects o f the project and in providing necessary supervisory oversight; and (c) the weak financial management capacity o f the PMU and the newly established local government management units. This third risk i s largely associated with the scale-up of PNPM to nationwide coverage in 2009. 54. PNPM has'a successful record o f mitigating these risks through internal controls and an established oversight system. Over the past year, PNPM has also taken several steps to strengthen i t s financial controls, which including: (a) the countersigning by facilitators o f key documentation, and improved mechanisms for transparency and complaints handling; (b) external audit of the project using a more risk- based approach (Le., focus on high areas identified in internal and external reporting and site visits) and with an expanded audit scope; (c) increased the audit sample size, and the use o f local district level inspectors (Bawasda) in future PNPM audit assignments; (d) training o f project staff, consultants and facilitators to support the implementation of the project's fiduciary controls; and (e) separate accounting and reporting o f the revolving funds for women's savings and loans groups. 55. The last PNPM-Rural audit reports were submitted in a timely manner by the external auditors (by June 30,2009) with unqualified (clean) opinions, including the KDP 2 and 3 audit reports. The PMU will continue to prepare general purpose financial statements in accordance with International Public Sector Accounting Standards (IPSASs). The audit o f these statements will be carried out by appointed government auditors (BPKP) acceptable to the Bank. The annual audit report will be furnished to the Bank no later than six months after the end o f the government's fiscal year. The auditors will take into account specific audit methodologies that are needed to audit widely dispersed community-based 17 activities, as established under other on-going PNPM around the country. The TOR for the audits has been approved and i s acceptable to the Bank. 56. Disbursement Arrangement. GO1 and the World Bank agreed that Component 1 Kecamatan Grants o f the project will employ two different disbursement methods based on whether the block grants support standard project subprojects or support pilot and special programs. For the former, disbursements will be "Reimbursement". For the latter, expenditures will be financed through the special account. Payments for eligible block grants disbursed to UPKs will be paid from GO1 sources and reimbursed by the Bank to MOF's treasury account. For Kecamatan Grants for pilot and special programs and other project S components, a Designated Account (DA) denominated in U dollars will be opened by DG Treasury (MOF) in Bank Indonesia (central bank) or a commercial bank acceptable to the Bank. The ceiling o f the advance to DA will be variable, and the advance(s) will be made on the basis o f the six month projected expenditures. The reporting o f use`of the DA funds and expenditures for block grants would be based on the quarterly IFR (Interim Financial Report). Applications for reimbursement o f block grants, other than those for pilot and special programs, and the advance to the DA will be submitted together with the reporting on use o f DA funds which will consist o f (a) the IFR with a list o f payments for contracts under the Bank's prior-review, covering both block grants and others; (b) projected expenditures for consultants and technical assistance for six months; and (c) the DA reconciliation statement. 57. DG Treasury will authorize the relevant Treasury Offices (KPPNs) located near the implementation units to authorize payments o f eligible project expenditures by issuance o f SP2D (remittance order) charging GO1 account or the DA as appropriate. For this purpose, DG Treasury shall issue a circular letter to the relevant KPPN Offices providing guidelines and criteria for eligible project expenditures in accordance with the loan agreements. When expenditures are due for payment, local government project management units will prepare SPPs (payment request) to the payment officer within the PMU in Jakarta. After document verification, the payment officer will issue the SPM (payment order) together with the supporting documentation for submission to the relevant KPPN. The KPPN will check the budget eligibility and issue the SP2D to the KPPN's operational bank which will transfer the funds directly to the payee's account and arrange for debit for the loan portion to the DA. 58. Procurement. Subject to good performance, the PMU will extend the existing high-valued management service contracts (NMC and RMCs) which are currently scheduled to finish towards the end of 2010. The contract for a poorly performing firm will not be extended and its replacement will be treated as a non-consulting service firm, and procured accordingly. This approach has been agreed due to the nature o f services required. Planning i s crucial in order to ensure smooth transition and to avoid implementation problems. This i s helped by the fact that procurement o f a non-consulting service company requires less time than selection o f a consultant firm. 59. Other procurement activities include procurement o f printing services and consulting services, including hiring o f NGOs for building community monitoring capacity and selection o f individual consultants (including advisors at the national level, and facilitators at district and sub-district levels). The hiring of all facilitators and their respective contract administration will be done by the Provincial Satkers, while procurement under community grants will be carried out by communities following the procedures as described in the Project Manual for the existing PNPM-Rural and Rural I1 AF project agreed by the Bank, with minor revisions and improvements, as needed, from time to time. Based on lessons learned in PNPM-Rural, special attention i s needed to ensure proper training o f the facilitators in administrative and technical matters, especially FM and procurement, prior to their deployment to the field. Improvement o f the Project Manual or training materials should also include simple, relevant and illustrative case studies to enhance understanding at the community level. 18 60. Procurement ex-post review will rely on BPKP's audit, which will carry out audits for the community grants and individual facilitator contracts. Further details about procurement arrangements are attached in Annex 8. Based upon the procurement team's assessment, the overall project risk for procurement i s moderate. D. Social 61. The project, as its predecessors, will continue to support broad-based social development. Several social issues are discussed elsewhere in this report, this section will concentrate on: (a) demand-side governance; (b) gender; and (c) poverty targeting. 62. Demand-side governance. The project will build on i t s predecessors' success and strive to continue to achieve gains through: (a) Improving the internal governance o f communities and sub-districts by promoting broad-based participation, constituent`accountability, and strengthened governance institutions such as the village and sub-district councils and community user groups. (b) Improving government linkages through reforms to the bottom-up planning and budgeting process, by involving district parliaments in project oversight; and by requiring district government budget contributions (which for 2010 are set at a minimum o f 20 percent o f block grant amounts and 6 percent for administration and supervision). (c) Stimulating community demand for better service delivery by district governments (e.g., through PNPM-Generasi). 63. This large agenda i s not and has not been solely assigned to PNPM-Rural and its predecessor, KDP. Paralleling the community development work are a series o f local govemment programs such as the Initiatives for Local Government Reform (ILGR) 'and Support for Poor and Disadvantaged Areas (two SPADA projects) which are both part of PNPM, and Urban Sector Decentralization Reform Project (USDRP). These programs are intended to work at the district level "downwards" by reforming local government management and service delivery systems. 64. This overall strategy o f linking the district level to communities, however, has not gotten off to a smooth start for the following reasons: (a) A l l district reform projects have been hindered as a result of budgetary and procurement issues, but they are now active, though three o f the four were or are being restructured; and (b) Weak coordination and differing approaches among national ministries.has made an integrated strategy more difficult to execute. 65. Nevertheless, progress has been made, aided by the overall consolidation o f Indonesia's democracy and decentralization programs. O f particular benefit has been the onset o f direct elections for district heads. Indonesia's district elections have become very competitive, with an average incumbent turnover rate of about 43 percent with campaigns run on platforms o f less corruption and greater service delivery. 66. For PNPM, the government working group overseeing project preparation plans to consolidate and extend the core governance agenda for communities. The main elements o f this program will include: 19  (a) Revising the village and sub-district regulations to provide an overarching institutional framework, based on accountable representation; (b) Revising the planning and budgeting cycle so that village demands and proposals can enter district planning and budgeting deliberations; (c) Promoting district level poverty reduction action plans; (d) Monitoring improvements to service delivery to PNPM communities over time; and (e) Finalizing and rolling out a national "Access to Justice" strategy that will help communities access Indonesia's legal machinery. 67. Gender. Inclusion o f women i s and has been a priority since the beginning o f KDP. A 2007 gender review found KDP to be among the top performers on gender. The gender strategy i s aligned to the empowerment focus o f PNPM which focuses on economic empowerment through job creation and income generation and political empowerment through decision-making by communities and social empowerment that looks at locally driven changes to gender relationships. 68. The project's gender action plan draws on the national government policy framework for gender equality and women's empowerment. I t also integrates lessons from project evaluations and best practices from Indonesian NGOs and civil society organizations. PNPM-Rural 111 will continue to incorporate lessons learned and best practices on gender and its many affirmative actions enshrined in the Project Specific actions being undertaken or that will commence with the new project include: Adding at least two gender activists exp,erienced in poverty programs to the advisory board that supports the inter-ministerial poverty reduction committee; Adding to PNPM's oversight consultant team a qualified gender specialist; Training in microfinance and in financial management will target women; Strengthening the recruitment practices and working conditions consultant contracts financed from the Bank loan to ensure gender embedded into the process; Supporting special programs under the PNPM umbrella will be directed towards women's interest groups, such as widows, women migrant workers, etc; Mobilizing grant funds to support women's leadership training programs; and Tracking, through surveys, changes in gender relationships, and particularly women's access to local leadership positions and decision-making, 69. Poverty targeting. The project employs a sophisticated method o f general poverty targeting. I t began with the development o f a master poverty list using the national expenditure survey and an infrastructure gap assessment survey assembled by Bappenas. Provinces then selected eligible districts from this list, and the districts then proposed eligible sub-districts. The final lists were then re-verified by Bappenas. While there are some problems with both the quality of survey data and some local manipulation of eligibility criteria, by and large this method appears to have been effective at identifying poor locations. As o f 2009, all rural sub-districts participate in PNPM, with sub-district community block grants being allocated based on population, location, and level o f poverty. W h i l e poorer and remote sub- districts receive more investment funds, there i s concern that this additional funding i s insufficient. As such, GOI, as part of project preparation i s discussing appropriate budgets for pro-poor initiatives for 201 1 and beyond. Within project sub-districts secondary poverty targeting i s carried out by villagers as part o f the planning and decision-making process. When one examines poverty targeting within sub- districts and villages, poverty targeting i s less successful, though improvements have been made in the last few years, since the start of PNPM. Poor households are now surveyed and inventoried to ensure participation and benefits are better targeted. Though because PNPM's decision-making process i s based on a public review o f proposals, wealthier and therefore more educated groups are more able to succeed in the competition. Other variables that can act against the poor within sub-districts and villages include 20  distance, language differences, and deep-seated hierarchies that make the poor unwilling to speak up in public meetings. Better facilitation can break through some o f these barriers, but the ability o f local elites to control the PNPM process remains a major challenge to the program. . 70. Three sets o f actions have helped improve poverty targeting: (a) including the 17,000 poorest villages (as proposed by Parliament) through the sub-district eligibility lists; (b) improving tools for village level participatory poverty assessments, have including a refined methodology for long-term village strategic planning, the instruments developed for the MDG achievement programs, and a full set o f facilitator training materials; and (c) providing direct support to specialized, grassroots NGOs that work with marginalized communities through the PSF. E. Environment 7 1. No significant environmental safeguard issues are anticipated. PNPM-Rural 111's investments are very small, and under the Indonesia Environmental Assessment rules, they all fall below the minimum size required for a formal environmental assessment. The project's negative list consists primarily o f activities excluded by Bank environmental policies, and these have been respected in the implementation o f subprojects. Furthermore, additional information gained from supervision and the lessons learned through KDP/PNPM have been used to improve training. 72. The works built by villagers with assistance from KDPPNPM-Rural are very small and have mostly negligible negative impacts on the environment. Almost half o f the very small projects had a minor impact that could be have been reduced further with more thorough screening, better.designs, and more intensive and focused construction supervision. Mitigation o f these minor negative environmental impacts requires improvements in facilitator training, in the tools provided in the Project Manual (e.g., environmental checklist) and in improvements in the design and construction o f the subprojects. Supervision i s also recommended to be intensified. An illustrated field manual of good and bad practice , in environmental management o f small village infrastructure, which i s expected to help facilitators and villagers to minimize adverse environmental impacts, was also released in 2009. The manuals,are being reprinted in 20 10 for sub-district engineers. The basic environmental impact potential o f investments supported through the project i s low, so the general strategy followed under KDP and PNPM-Rural remains relevant 73. PNPM-Rural's Project Manual has been reviewed by a range o f environmental and environmental engineering specialists, and they meet Bank standards. However, experience under KDP showed two kinds o f environmental risk that can affect community projects. First, communities living in or near protected habitats will use natural resources from these areas regardless of formal regulations unless suitable sanctions are imposed. A second environmental risk i s poor placement o f water supply sources, which can lead to contaminated water supplies. The number o f cases where this has occurred i s not large, but occur when there are systemic failures in the sub-project's engineering oversight, reporting, and follow-up. 74. I n both types o f environmental malfeasance, the proposed mitigation and prevention methods are proper training and monitoring by the supervising field engineers. Project preparation confirmed that improvements are being reflected in training and monitoring plans. 75. For the environmentally sensitive (forest, coastal, marine) and socially sensitive areas, such as in Papua, in some areas o f Kalimantan, and in some o f the islands near Sumatra, salient features relevant to safeguards analysis and mitigation are financed by the project. Supported by nearly US$60 million in grants from PSF (with funds from Denmark, the Dutch, AusAid and Canada), the project will continue to pilot new approaches for community based environment'work initially in some of the fragile areas of 21 Sumatra and Sulawesi. These "green" programs cover watershed management, renewable energy, and environmental education and small village investments in reforestation, for example. Detailed design documents are in the project files. They include the direct involvement of experienced green NGOs in promoting environmental awareness and community based natural resource management, 76. Though exempt from formal studies, planners of PNPM-Rural infrastructure projects are required to consider environmental impacts. In analyzing environmentaleffects, the planner must be able to identify a range of impacts that might arise from the proposed activity. Environmental effects are defined as those changes, both positive and negative, that arise directly as a result of the development activities. Analyses of potential impacts during PNPM-Ruralprojects examine effects during construction and operations. F. Safeguard policies Table 5: Safeguard Polices Safeguard Policies Triggered by the Project Yes No EnvironmentalAssessment (OP/BP 4.0 1) [XI [ I Natural Habitats (OP/BP 4.04) [XI [I Pest Management (OP 4.09) [I [XI Physical Cultural Resources (OP/BP 4.1 1) [I [XI Involuntary Resettlement (OP/BP 4.12) [XI [I Indigenous Peoples (OP/BP 4.10) [XI [ I Forests (OP/BP 4.36) [ I [XI Safety of Dams (OPBP 4.37) [ I [XI Projects in DisputedAreas (OPBP 7.60) [I [XI Projects on InternationalWaterways (OP/BP 7.50) [I [XI 77. PNPM-Rural has a project land acquisition and resettlement policy embedded in its operational manuals that has been accepted by the Bank. Application of the policy framework, measured through ' field reviews of KDP, reports generally good results from implementation of the policy. A review of about 350 representative sites found no cases of involuntary displacement. PNPM-Rural does not involve state powers of eminent domain at any stage, and land transactions can only take place on a willing- buyer/willing-seller basis. Land acquisition assessments are part of the proposal review process and must be approved by the district level oversight engineer. Land and resettlement are also recorded in the village records and reviewed during field supervision. 78. No significant adverse impacts from land acquisition or involuntary resettlement resulting from a KDP subproject have ever been reported. However, there are occasional cases where engineers do not follow the safeguard review rules or villagers have felt pressured to contribute land without receiving "fair" compensation in return. PNPM's training and oversight manuals have been revised to address the first problem. For the second, review of several such cases during supervision missions found no loss of income, living standards or livelihood. 79. Papua presents a special challenge to the OP's directive to provide culturally compatible development benefits, particularly given the porous governance environment that prevails in many areas of the island. Inputs from a broad range o f Papuan stakeholders introduced many modifications to the global design in order to reflect Papua's unique physical and cultural conditions. These include adjustments to the geographical units, logistical support for facilitators so they can reach deeply isolated communities, extra training by dedicated engineers, and the formation of a Papuan government-NGO advisory group. As a result, in 2006 the Governors of Papua and West Papua decided to scale-up KDP with additional provincial funds under the new name of "RESPEK". 22 80. RESPEK will provide each o f the 4,478 villages o f Papua and West Papua with a block grant o f Rp. 100 million (approx. US$11,000). Funding will be provided through the government's regional autonomy budget, but PNPM-Rural will continue to operate as well, covering the costs of training and managing the facilitators as well as providing block grants at the sub-district level in 2010. A linked US$l.O million grant from AusAID will finance another "barefoot engineers" training program for young Papuan technical facilitators, which will later be added on a permanent basis to the government allocations for RESPEK. PNPM co-financing from International Fund for Agricultural Development (IFAD) also includes livelihoods improvement programs developed especially for Papua and West Papua. 81. In summary, PNPM fully complies with Bank policies on indigenous people. Policies and practices are embedded in the Project Manual and the PNPM-Rural planning and implementation process ensures the involvement o f indigenous peoples and that their needs are able to be addressed. 82. Regarding social safeguards, the current Project Manual provides guidelines and procedures associated with workers' safety, indigenous communities, and, relocation. Additional training will ensure all communities are aware o f their rights and adhere to a l l applicable social safeguards. G. Policy Exceptions and Readiness 83. N o policy exceptions are requested, and the project i s deemed ready for approval. This assessment i s based on following: (a) The audit arrangements and terms of reference are agreed; (b) The Project Manual has been agreed on; (c) The draft circular letter regarding the disbursement mechanism has been prepared; and (d) The agreed Environmental Guidelines, the Land Acquisition and Resettlement Policy Framework, the Isolated Vulnerable Peoples' Framework and the Better Governance Action Plan, all o f which have been embedded in the Project Manual and tested over the previous ten years, have been adopted by the Government. 23  Annex 1: Country and Sector o r Program Background INDONESIA: Third National Program for Community Empowerment in Rural Areas 1. PNPM-Rural rests firmly on the foundation of the Bank funded Kecamatan Development Program (KDP). K D P was built on more than a decade o f experience with community-based infrastructure delivery as part o f GOI's overall strategy for consolidating i t s remarkable track record in poverty reduction. At the time, government was investing approximately US$2 billion per year in district level infrastructure. Reviews suggested that community provision o f infrastructure would be an efficient way to close the gap between isolated villages and the district networks. A generation o f community development projects such as the World Bank-financed Village Infrastructure Projects, Water Supply and Sanitation for L o w Income Communities, and other community-driven programs provided block grants and technical assistance to poor communities. 2. KDP was launched in 1998, at the onset o f the financial crisis, and it has expanded steadily. I t drew heavily on the lessons learned from the previous community development projects, but it operated on a much larger scale. T o date, K D P and P N P M projects have disbursed approximately US$2.6 billion o f loan, grant, and national government funds. Table 1.1 describes the financial composition o f these projects. Table 1.1: KDPE'NMP-Rural Financing (US% millions) I Project Phase I Externalsources Government I I Grants I Total (IBRD+IDA) Contribution K D P1 225.0 50.0 2.1 277.1 K D P Supplemental 48.2 6.5 0.0 54.7 KDP2 335.5 101.3 43.9 480.7 KDP3A 91.0 5.0 101.0 201.9 KDP3B + AF 283 .O 88.3 20.0 262.2 PNPM-Rural 23 1.2 232.7 0.0 463.9 PNPM-Rural I1AF 300.0 403.1 0.0 703.1 Total 1,513.9 886.9 167.0 2,567.8 3. Decentralization and Governance. In 2001, Indonesia embarked on a radical and rapid decentralization process, transferring much o f the responsibility for the delivery o f public services to the local level and almost doubling administrative districts' (kubuputen) budgets in government spending. An intergovernmental fiscal framework, using block grants, replaced a system o f largely earmarked grants. L a w 22/1999 on Regional Government and L a w 25/1999 on Fiscal Balance between the central government and regions gave broad autonomy to the districts in all but a few sectors which remain explicitly assigned to the provincial and central level (e.g. defense, security, justice, foreign affairs, fiscal affairs, and religion). The goal o f this effort was to make local government institutions more responsive to their constituents and to improve local governance practices regarding, in part, transparency and accountability. Despite early problems, there have been significant gains from the decentralization process. Local governments are becoming more responsive to the needs o f local communities and open public debates have begun to flourish. However, the capacity o f district governments to provide equitable' and accessible services varies considerably across regions. 4. GO1 has produced a strategic framework for PNPM, which focuses on five key areas: (a) Stabilizing prices for basic commodities used by the poor; (b) Promoting pro-poor growth, with a special focus on small and medium enterprises; 24  (c) Increasing access o f the poor to basic services such as health, education, water and sanitation; (d) Developing safety nets, primarily through the conditional cash transfer system(househo1d and community-based); and (e) Consolidating and expanding the community development programs. Figure 1.1: GOI's Framework for Poverty Reduction I N Labor-related Programs Employment Creation Policies Infrastructure onomic Growt Source: Bappenas, July 2007 5 . GO1 has strategically embraced PNPM as a comprehensive operational framework under which all CDD projects will be placed. Through this approach, GO1 aims to streamline and coordinate the implementation o f more than 60 CDD programs currently active in Indonesia, managed by over 18 government agencies. GO1 envisions that this operational consolidation o f efforts will lead to a reduction in the duplication o f assistance, an increase in the efficiency o f public spending, and a standardizaition in the methodology used to monitor program outputs, outcomes and impact. 6. Within this overall framework, GO1 has identified a number of critical areas in i t s community development programs that PNPM's more strategic approach can help redress. These include: Consolidating the many project-specific versions o f community development distributed among different ministries; Aligning basic principles for community coverage across all GO1 community development programs; Ensuring targeting concentrates investment funds on the poorest communities, now that PNPM has achieved national coverage; Using rigorous evaluations to assess best practices for operational procedures and mechanisms such as financing, disbursement, planning, technical quality, fiduciary oversight, etc; 25  (e) Clarifying and strengthening the roles for local government in demand-driven programming; .and (f) Providing a strategic way to develop community governance and managerial capacities. 7 . At present PNPM includes five programs, three of which receive World Bank support: PNPM- Rural (formerly the Kecamatan Development Project - KDP); PNPM-Urban (formerly the Urban Poverty Project- UPP); Support for Poor and Disadvantaged Areas (SPADA). Two other programs, PNPM Rural Infrastructure Support Program I1 (PPIP/RIS-PNPM 11) and PNPM-Infrastructure for Socio-Economic Development (RISE), are funded by the Asian Development Bank and JICA, respectively (Table 1.2). These programs form the core o f PNPM, and the intention i s that eventually they will be merged into a common operational policy. Linked to these projects are an increasing number of sectoral programs that provide specialized inputs to improve the delivery of poverty services. Over time, local governments will be expected to integrate education, health, and agricultural service provision into PNPM. Name of Project Implementing Agency Sub-districts (kecamatan) Covered 1. PNPM-Rural Ministry of Home Affairs 4,791 2. PNPM-Urban Ministry of Public Works 885 3. Support for Poor and Ministry of Less Developed 186 Disadvantaged Areas (SPADA) Areas 4. Regional Infrastructure for Social Ministry of Public Works 23 7 and Economic DevelopmentProject (RISE) 5. Rural Infrastructure Support Ministry of Public works 215 Program (PPDPAUS-PNPM IT) Total Sub-districts in Indonesia 6,3 14 8. PNPM differs from many other conditional cash transfer and social safety net programs because it creates large quantities of economically productive assets. By providing funding to construct and/or rehabilitate roads, irrigation and drainage works, and water supply and sanitation works, PNPM supports a sustainable approach to increasing employment and income. The resulting increased purchasing power also helps to stimulate village economies. 9. The project is also an effective mechanism to address various crises. In addition to support for post-disaster reconstructionin Aceh-Nias (2004 tsunami) and central Java (2006 earthquake), the program will aid in the response to the earthquakes that occurred in western Java and western Sumatra in September and October 2009. In response to the recent financial crisis, GO1 i s looking towards PNPM to provide a mechanism to rapidly disburse critical resources in case of a pronounced slowdown in economic growth. PNPM will remain a key program for the new Government administration at least until 2015 as it attempts to maintain the pace of poverty reduction and address equity and inclusiveness during the recent economic downturn and frequent natural disasters. Other areas where KDP responded rapidly to unexpected disasters and conflicts include Yogyakarta and Papua (earthquake), Maluku (conflict), and Bali (bombing attack). 10. KDP was the first World Bank funded project to introduce an anti-corruption action plan as part of a strategic approach to reducing corruption risks. The plan combined social controls through transparency, legal literacy training, and cooperation with civil society organizations such as NGOs, legal aid organizations, and the media, with enhanced oversight by government regulators, an agreed program 26 for applying sanctions, and an operational research program to identify what measures can most effectively track and effect corruption. 1 1. Identified corruption complaints against KDPPNPM from all sources--government and independent auditors, NGOs, journalists, villagers and KDP/PNPM staff and consultants--are recorded in a master database that forms one quantitative basis for measuring KDP/PNPM performance. The total number o f complaints received to date i s about 6,800 of which approximately 60 percent involve allegations o f misuse o f funds. Eighty five percent o f all complaints have been resolved and over 47 percent o f the misused funds have been recovered. Keeping in mind that the mechanisms for measuring corruption rates are highly imprecise, the general picture i s one o f efficient delivery o f development funds to villages and continuing efforts to promote better governance in line with the project's objective. 12. K D P F N P M - R u r a l benefits and impacts are well-documented. Since KDP began in 1998 projects have met or exceeded almost all output targets. Table 1.3 summarizes the results as o f September 2009. Subproject Type Totals to Date 145,5 14 individual scholarships distributed 18,728 school grants to provide equipment and materials Source: PNPM 2008 Annual Report, Ministry o f Home Affairs 13. PNPM program coordination. GO1 has appointed the Coordinating Ministry for Social Welfare (Menko Kesra) to chair a ministerial-level working group on the development and oversight of the PNPM. It includes the Ministers for National Development and Planning (Bappenas), Finance, Home Affairs, Public Works, and Social Development. Menko Kesra also chairs the national-level oversight body o f PNPM, Tim Pengendali, which i s a Deputy-level Steering Committee that includes representatives from seven ministries and i s similar in composition to the ministerial working group. Representatives from international development agencies contributing to Indonesia's poverty reduction efforts also participate in its meetings. 14. Bappenas i s responsible for the technical preparation o f the program and has formed seven working groups to produce the overall technical guidelines, budget, timeframe, and implementing regulations, 27 which must be approved by the Tim Pengendali and subsequently carried out by the MPW or MOHA. The working groups also discuss relevant technical issues and lessons learned from evaluations of community development programs in Indonesia to identify means to strengthen poverty reduction initiatives. Such issues include: (a) Improvements to spatial and intra-village poverty targeting; (b) Reviews of poor communities' capacity and willingness to pay for upkeep versus need for government maintenance; (c) Improvements in the representation and performance of village and sub-district governance structures; (d) Strengthening of audits by increasing samples and developing the capacity of local audit agencies; and (e) Simplification o f procurement procedures to avoid multiple amendments. 15. Key challenges. GO1 recognizes that translating these principles into operational programming will require a sustained, high-level drive. Three challenges are particularly prominent and have been the subject of a great deal of internal discussion: The consolidation o programs challenges organizational autonomy - GOI's commitment to f consolidating its CDD operations i s long overdue. However, potential resistance to this effort from different agencies, and even development partners, should not ' be underestimated. Recent high-level dialogue within the government made an important advance by clarifying that PNPM consolidation involves two separate, distinct activities. One stream of policy work will evaluate the existing portfolio, particularly loan funded projects, to identify best practices and discontinue inefficient or ineffective management systems. A second stream will provide a way for technical agencies to work with communities through standardized procedures on sub-district and village consultation, planning, transparency and record keeping, procurement, etc., but it will not interfere with the formation and operation o f village-level technical groups such as water user associations, school boards, and health committees, etc ... Impact depends on sustained budget allocations - Reaping the benefits of PNPM depends on full funding at an average of Rp. 3.0 billion per sub-district, with even more investment funding going to those sub-districts indicative of higher rates of poverty. Employment and poverty reduction benefits from PNPM are sensitive to, and will be noticeably affected by, reductions in funding. The Indonesian Cabinet has already approved in principle full funding for PNPM. However, the Indonesian Parliament has still not approved sufficient funds to allow for larger investment block grants for poor areas, and the Tim Pengendali continues to provide significant funds for "near poor" areas thus reducing the actual amount of block grant funding available for those sub- districts truly classified as impoverished. Implementing the scaled-up national program effectively requires a permanent governance pamework - PerPres 13/2009, a Presidential, Regulation in-lieu-of-law, was promulgated vesting oversight in a multi-sectoral team headed by Menko Kesra and linking PNPM management with the coordination of all poverty alleviation efforts. Recently a high-level post in the Vice President's office for Poverty was created and the incumbent becoming more involved in PNPM oversight. A new PerPres i s being drafted to formalize oversight from the Vice President's office while leaving day-to-day coordination with Tim Pengendali. 16. Government Policy on the PNPM. The Presidential Regulation, PerPres 13/2009, issued for the period from 2008 through 2015 defines PNPM as a national policy framework that covers all village- 28 level empowerment and poverty alleviation programs and assigns them to be managed by one national coordinating structure, the same structure used to coordinate all poverty alleviation efforts. The regulation makes all planning, budgeting, implementation, management and funding mechanisms subject to a single set o f operational guidelines aimed at synchronizing and harmonizing the implementation o f the programs carried out under the PNPM umbrella. 17. The Government has indicated in a roadmap for the future o f PNPM that it plans to continue PNPM at least until 2015, in two phases. The first phase, which spanned from 2007 through 2009 and has already been achieved, scales-up PNPM to full national coverage, reaching each o f Indonesia's 79,000 villages and urban wards. The second phase, which this project will directly support, began in 2010 and entails shifting PNPM into a more sustaining mode, whereby local governments will take on greater responsibility for financing and sectoral agencies will participate more actively. The plan i s that over time, other CDD poverty reduction initiatives will be folded into PNPM in order to make programming at the community level more streamlined, coordinated, and responsive to beneficiaries' needs. The plan to continue PNPM until 2015 includes support from the World Bank and other development partners through additional financinglrepeater loans and contributions to the PNPM Support Facility (PSF) - a mechanism established by GO1 and development partners to provide support to PNPM through new modalities and institutional arrangements. At this time, GO1 envisages that PNPM will cost a minimum o f US$1.7 billion per year and will continue to be funded by national and local government budgets and community contributions, with supplemental financing provided by international development agencies. The long term-financing arrangements of PNPM s t i l l need to be further developed by GOI. 18. Some o f the key issues in the roadmap, which the Bank has been engaging with GO1 on since preparation o f the PNPM-Rural project, include: Linking PNPM participatory planning and development efforts to district programming and budgeting procedures - specifically to the "musYenbung"/annuaI development planning process. Improving village governance and the role and responsibilities o f local institutions, in particular through the increased involved o f elected village councils (BPDs) in rural areas. Increasing block grant funding for PNPM community investments (either through routine annual inter-governmental transfers or through a special program as now), and providing more for poor, remote sub-districts. Strengthening the national management o f PNPM, including putting in place a new regulation in-lieu-of-law or implementing regulations for the Presidential Directive 13/2009, which i s already in place. This Presidential Directive establishes a national poverty alleviation coordination team which i s directly linked to PNPM management and oversight. Issuing new regulations providing flexibility and higher limits for community procurement. 19. With the national expansion of PNPM and in preparation for the PNPM-Rural 111 and PNPM-Urban I1 projects, additional areas have been added to the roadmap and are being discussed with GOI, and include inter alia: (a) The role and responsibility o f local government, which deals largely with the issues around the mandate for local governments to co-finance the national program and whether the national program i s eventually taken over by local governments. 29  The role and responsibilities of sector agencies in relation to PNPM and community service delivery. Improving benefits for poorer households in less poor areas. PNPM-Rural has been proven to have significant impact in poor areas and less or no impact in areas that are not poor, even though they can have large numbers of poor people. The Bank and GO1 are considering ways to provide benefits to these poor households. Improving the quality of education services and community participation in basic education. PNPM-Generasi aims to demonstrate how communities and local sector agencies can work together to improve basic services in health and education. The interim results show dramatic improvements in the delivery of health services and indicators, though little positive impact on education. A priority going forward i s to understand better ways to improve the quality of education services and community participation in basic education. Improving synergies among GOI's poverty reduction efforts, which are made up of three clusters: Cluster 1- individual social welfare programs; Cluster 2-community-based programs such as PNPM; and Cluster 3-small and medium enterprise development programs. The Bank and GO1 have agreed to explore, through more research and discussion, the linkages among the clusters to optimize development efforts and poverty reduction impact. 20. The roadmap is evolving and discussions o f the future of poverty alleviation efforts demand more research and study. Some o f this i s urgent and needed for planning for 201 1. In addition to the topics already mentioned, a number of other issues need examination, such as the optimal length of time for a poor area to remain in PNPM. GO1 and i t s partners, including the World Bank, are planning to accelerate and deepen ongoing analytical work which includes (a) a systematic "learning by doing" approach to continuously improve the design features o f the program; (b) an ongoing evaluatiop to assess the impact; and (c) a consultative and analytical process to clarify the future strategic direction of the program. 30 Annex 2: Major Related Projects Financed by the Bank and/or other Agencies INDONESIA: Third National Program for Community Empowerment in Rural Areas 1. PNPM i s part o f the Government o f Indonesia's (GOI) larger efforts to better coordinate its poverty alleviation programs. GO1 strategy contains three clusters: Cluster 1 includes individual social welfare programs, Cluster 2 comprises community-based programs such as PNPM, while Cluster 3 will contain programs for supporting small and medium enterprise development. At present PNPM includes five programs, three of which receive World Bank support: PNPM-Rural (formerly the Kecamatan Development Project - KDP); PNPM-Urban (formerly the Urban Poverty Project- UPP); Support for Poor and Disadvantaged Areas (SPADA). Two other programs, PNPM Rural Infrastructure Support Program I1 (PPIP/RIS-PNPM 11) and PNPM-Infrastructure for Socio-Economic Development (RISE), are funded by the Asian Development Bank and the Japan International Cooperation Agency (JICA), respectively. 2. Best practices and lessons learned from the KDP and PNPM-Rural and UPP seriesPNPM-Urban will continue to be used in common by both projects such as training materials, technical manuals, fiduciary procedures and monitoring and evaluation (M&E) systems. Examples o f shared inputs include: (a) Improved and integrated program website;. (b) Facilitator training activities; (c) Leadership development activities; (d) Guidance in community participatory planning; and (e) Strengthen anti-corruption and fiduciary procedures. 3. Other related projects financed by the Bank and or other agencies include: (BOS) - GOI's own funds Poverty Reduction 31 Project Title Financing Sector Issue Comment US$ mil National Program for Community 53 1.2 Community PNPM core program, Empowerment - Rural Empowerment, Good cluster I1 of GOI's Poverty governance and Poverty Alleviation Reduction in rural area KDP Nias 25.8 Community based post On-going, KDP platform disaster reconstruction based recovery project Early Childhood Education and 67.5 Human development Potential collaboration Development Project with PNPM-Rural/ Generasi BERMUTU-Better Education Improving quality of Support to GOI's cluster I through Reformed Management and public service providers 1 & 1 of poverty reduction Universal Teacher Upgrading BOS-KITA Project access to basic education Support to GOI's cluster I for all o f poverty reduction Basic Education Capacity 40.4 Working with technical Support to GOI's cluster 1 agencies to implement o f poverty reduction community projects Health Professional Education 77.8 Improving quality o f Quality Project public service providers 2nd Eastern Indonesia Region 199 Infrastructure development Matching well with tertiary Transport to support economic infrastructures built growth through PNPM Infrastructure development Matching well with tertiary to support economic infrastructures built growth through PNPM Community-based Settlement 85 Community based Community based Reconstruction and Rehabilitation reconstruction reconstructionbuild on Project for N A D and NIAS KDP approach Livelihood Recovery DI Yogyakarta [ 10.8 Community based Community based and Central Java reconstruction reconstructionbuild on UPP approach Support for Poor and Disadvantaged 173 District government can provide link between Areas Project (SPADA) planning linkages community and district planning SPADA in Aceh and Nias 25.6 District government can provide link between planning linkages community and district planning Third WSSLIC (PAMSIMAS) 137.5 O&M for water supply, Collaboration with PNPM- methodologies to reach the Rural at village level very poor Public Expenditures Supp. Facility 2,000 Anticipating the Impact o f GO1 i s looking towards (DPL-DDO) the Global Economic PNPM-Rural and other Crisis national poverty programs to provide possible channels to disburse quickly critical spending to the poor if needed. Sixth Development Policy Loan 750.0 Budget Support Triggers on PNPM budgets (DPL6) 32  Annex 3: Results Framework and Monitoring INDONESIA: Third National Program for Community Empowerment in Rural Areas PROJECT DEVELOPMENT OUTCOME INDICATORS USE OF OUTCOME OBJECTIVE INFORMATION Villagers in PNPM-Rural Improved HH expenditure rates and improved Determine if PNPM i s having its locations to benefit from access to economic and social services in a desired effects on socio- improved socio-economic and minimum o f 4,100 sub-districts in 2010 economic welfare. local governance conditions. (impacts taken from representative sample). EIRRs >30 % for major rural infrastructure types. Through the MDG/Community Conditional Determine if the PNPM-Rural Cash Transfers pilot, improved health indicators CCT pilot i s having an impact in minimum o f 200 sub-districts in 6 provinces: on specific health immunization coverage for 12-23 month conditionalities. olds increases by at least 10% points from 3 8% in 2005 to 48% in 20 10; Prenatal care visits increase by at least 10% points from 56% in 2005 to 66% in 2010; Deliveries assisted by trained professionals increase by at least 10% points from 40% in 2005 to 50% in 2010. >80% satisfaction levels from beneficiaries regarding improved services and local level governance (impacts taken from representative sample). Intermediate Results Results Indicators for Each Component Use of Results Monitoring One per Component Component One: Kecamatan Component One: Component One: Grants Villagers participate in a process Min. 45% participation rate o f women and Assess if planning and inclusion to plan, select and manage basic poorest community members in planning and procedures and policies need social and economic decision-making meetings adjustment to encourage greater infrastructure provided through participation. block grants. >85% o f agreed work plans completed each year. Assess if sub-district sites are #/type o f infrastructure works, economic, and benefiting from KDP financing education and health subprojects/ activities and assistance. completed in 4,100 sub-districts by 20 1 1. >70% o f infrastructure works are evaluated as o f high quality. Determine if program needs to increase i t s inspection and O&M arrangements are in place and/ or supervision o f technical works hnctioning for >85% o f infrastructure works. and O & M arrangements. 33  Intermediate Results Results Indicators for Each Component Use of Results Monitoring One per Component Component Two: Facilitation Component Two : Component Two: Support Consultants at the national, By 20 11, >90% of local government councils Review if training and capacity provincial and district levels are provide funds and/or oversee PNPM. building plansneed adjustment providing assistance to and if learning interventions communities and local >70% o f planned consultant positions are filled meet the needs o f the councils to governments to implement and consultants are trained by the time the perform their duties. PNPM. project begins its 2010 socialization and planning cycle. Determine if technical assistance i s in place. Component Three: Component Three: Component Three: Implementation Support and Technical Assistance Project stakeholders use results By 20 1 1, audit sample size increases to min. of By announcing audits and their of M&E activities and studies to 20% o f all PNPM-Rural sub-districts and audit findings to the public, the improve project performance. results are made public. program expects to reduce corruption. >70% o f sampled villages receive socialization Assess whether or not the material packages for PNPM in 20 10. program i s can continue to be implemented at a national level. Component Four: Component Four: Com ponent Four: Project Management Support Project management teams Number o f units established by March every Monthly management reports, established in a timely manner year. HR records and supervision. and functioning. Facilitators managed and paid monthly. Kecamatan Grants disbursed and accounted for. 34 B E B E c 31 0 E s vl 0 2 s r- g m 03 .cr" A A Is d -g r- A g m A s vl 0 2 g g r- m 03 4 A A s s 0 0 L- m A A  Q Q Q z z z 0 H E E a rn l- g m W A A v) l m - og W A A a s l- v) g '? m W 2 A A QI g 0 0 c.l h .5 A 0 rn s 0 m 00 A A  Annex 4: Detailed Project Description INDONESIA: Third National Program for Community Empowerment in Rural Areas 1, PNPM-Rural's project development objective is for villagers in PNPM-Rural locations to benefit from improved socio-economic and local governance conditions. PNPM-Rural also supports the development of responsive institutional structures that enable bottom-up planning and provide for development oversight at the local level. Decision-making i s left to the communities themselves, and all important decisions are made in community-wide meetings. Monitoring o f activities i s undertaken by many actors, including district legislatures, NGOs, and independent teams selected by the communities themselves. 2. The project's core architecture will remain largely unchanged. PNPM-Rural and Rural I1 AF and i t s predecessor, KDP, have scaled-up geographically every year. Their core operating systems were designed for future expansion and through eleven years of experience, they have already demonstrated their ability to adjust to an increased scope. 3. 1 PNPM-Rural 1 1 will support approximately three-fourths of the total sub-districts in the country, reaching a total o f 4,791. Other areas o f the country will be covered by PNPM-Urban and three other core projects under the PNPM umbrella. 4. Activities that will be supported through PNPM-Rural 111 include: (a) Building or repairing basic productive infrastructure, such as small roads, bridges, irrigation, and clean water supply systems. (b) Building or repairing social infrastructure such as school buildings and clinics. (c) Training for revolving funds management and village-level revolving funds by women's groups. (d) Assistance for the development of district and sub-district management and technical capacities. (e) Carrying out a number o f carefully designed pilot programs to provide special assistance to disadvantaged or marginalized groups. These pilots include the PNPM-Generasi pilot and Green PNPM natural resource management and renewable energy pilot. 5, The following table illustrates the projected budget composition for PNPM-Rural111. 6. Component 1: Kecamatan Grants. The main activity in PNPM-Rural 1 1 similar to PNPM-Rural 1, and Rural I1 AF, will be the construction of economic and social infrastructure that i s needed and requested by the target communities and includes (a) planning for community development (e.g., preparation of subproject proposals) and (b) training and capacity building (e.g., development planning 38 and investment). The selection o f activities i s open except for items specifically excluded through the project's negative list, or for land purchases o f any kind. These activities are funded through grants disbursed by the government to the sub-districts (keacamatan) and villages. Criteria for activities that are eligible for funding through the grants include: (a) Can be undertaken by the village, with locally available technical assistance; (b) Technically and financially feasible; (c) Determined to be a public need; and (d) Gives benefits to the community, especially the poor in the village. 7. Financial Services. While the project will also continue to support revolving funds managed by women's groups, efforts will be focused on promoting more sustainable access to financial services to the poor, while at the same time maintaining and improving community ownership. Discussions with GO1 on a multi-year pilot for access to financial services to the poor, especially targeting women beneficiaries, are currently underway. Presenting details on the best approaches to ensure the financial sector can play a more active role in expanding the poor's access to sustainable financial services w i l l be part o f the pilot's work. 8. Crisis response and other initiatives. There are also a number o f special initiatives that can be funded using the block grant disbursement mechanism provided certain procedural changes are made to the standard PNPM-Rural Project Manual and if complemented with additional facilitation and technical assistance. They include inter alia: (a) Preparing for and responding to disaster, emergency or catastrophic events, as needed, through subprojects andor using the project implementation arrangements.; and (b) Supporting community investments that are environmentally friendly, including investments in renewable energy, in particular micro-hydro power. 9. Sub-districts are normally made up o f 20 to 40 villages. They receive an allocation from the project which for 2010 w i l l range from Rp. 900 million to Rp. 3.0 billion (approximately US$90,000 to US$300,000) based on the sub-district's population and poverty level (see table 4.2). Some sub-districts may receive significantly more block grant funding due to PNPM pilots being active in their region, their need for additional funding to respond to recent naturavfinancial crises, or from complementary government programs, such as the Assistance for Village Prosperity Program ( B U G ) in Aceh. Twenty percent o f the financing for PNPM-Rural block grants come from district governments, allocating funding from their own budgetary resources. 10. Before the proposals for activities to be funded through the block grants are discussed at the Sub- . district Decision-Making Forum, they undergo a verification process by a team o f selected citizens with advice from the sub-district level consultants. The teams verify each proposal on the basis o f their technical feasibility, financial feasibility, and other criteria. The verification team does not however determine rankings or relative priority o f individual proposals. If any proposal i s found not to be feasible, the verification team discusses the identified weaknesses with the communities so that the proposal could be modified. However, while facilitators and the verification team can recommend the rejection o f a proposal, the communities s t i l l make the decision themselves as to whether or not an activity i s funded through the block grant. 39  11. Subproject rules for procurement, financial management, technical oversight, and reporting to government and to the Bank are provided through the Project Manual. The manual i s re-issued annually as part o f each year's overall performance review and programming, for the coming stage. Table 4.2: Sub-district Block Grant Allocation ,2010 Criteria I I 1 I I 1 PNPM-RURAL111 POVERTY BLOCK GRANT AREA ' TOTALPOPULATION CATEGORY* ALLOCATION IDR million < 40,000 Non-poor 1,000 Near poor 1,500 1 Poor 3.000 40,000 - 60,000 Non-poor 1,250 JAVA-BAL1 Near poor 2,000 Poor 3,000 > 60,000 Non-poor 1,500 Near poor 2,500 Poor 3,000 < 7.500 Non-Door 750 Near poor 1,000 Poor 1.750 7,500 - 15,000 Non-poor 1,000 1 Near poor 1,250 Poor 3,000 OFFJAVA-BAL1 15,000 - 25,000 Non-poor ~~ 1,250 Near poor 2,000 Poor 3,000 > 25,000 Non-poor 1,500 Near poor 2,250 Poor 3,000 12. Component 2: Facilitation Support. PNPM-Rural 111 will continue to develop the participating communities' capacities for planning and project management which were supported previously under KDPPNPM-Rural project. This component supports the sub-district level social and technical facilitators who assist with program socialization, planning, social mapping, village planning, technical assistance, and oversight o f chosen projects. These sub-district level facilitators work closely with village level facilitators and community project teams to develop their capacities in planning and project management. This component also supports district level facilitators - accounting for a minimum o f three facilitators in each district. 13, Component 3: Implementation Support and Technical Assistance. This component provides implementation support and technical assistance to the national and provincial governments. The bulk o f this component covers the costs o f experienced consultants and specialists at each o f these levels who provide technical advice, field oversight, and local-level coordination to the program, and strengthen the local government councils. P N P M also provides both quantitative and qualitative monitoring, and it commissions a mix o f internal and outsourced evaluations. This component will fund several studies and evaluations to support the Government in examining the impact o f PNPM-Rural on: poverty and socio- economic welfare; access t o services; cost effectiveness and service quality; sustainability; and governance and empowerment issues (social capital, accountability, inclusiveness, access to information, 40 conflict prevention and dispute resolution, and corruption). It will also support the strategy development for PNPM going forward. The internal system will be strengthened through better technology, additional training, and improved oversight. PNPM reserves approximately two to three percent o f its budget for monitoring and evaluation. Improving the government's ability to monitor and evaluate the PNPM program i s a key objective o f the multi-development agency PNPM Support Facility (PSF). This component o f PNPM also includes an enhanced audit program that expands sampling, provides capacity development support for district government auditors, and funds to address problems identified through audit reviews. 14. Component 4: Project Management Support. PNPM's special programs, which include pilot projects and government add-ons as well as crisis response activities (natural disasters, conflict, and financial), place several additional demands on normal government budgeting, particularly as the program i s operating nationwide. Most o f these operational costs will be covered by the Government through its own national and local budgets; a minimal amount i s financed through the loan for these activities. 15. PNPM-Rural Pilots. In addition to the core sub-district planning and block grant scheme, PNPM- Rural includes three major operational pilots funded through loans and grants from several bilateral development partners (The Netherlands, United Kingdom, Australia, Canada, and Denmark). A l l o f the pilots build upon the main PNPM platform and principles o f community participatory engagement. These include: (a) PNPM-Generasi or the incentivized block grant scheme for the achievement o f MDGs related to health and education; and (b) Green PNPM to support natural resource management and renewable energy initiatives. 16. In addition to these there i s a very small pilot (being implemented in thirty sub-districts) called Creative Communities aimed at linking culture to empowerment and poverty reduction. 17. Local Government Add-ons. The local governments o f Aceh, Papua and West Papua are capitalizing on the CDD approach and have linked their own development programs to PNPM-Rural. Aceh; PNPM-BUG. In 2009, the Government o f Aceh, as part o f its village prosperity program (BKPG), allocated about US$lOO million (approximately one-eight o f its provincial budget for the year) in block grants for 6,411 villages in 23 districts and 276 sub-districts. Planning and implementation o f the funds are linked to PNPM-Rural's mechanisms and faci Iitators. Papua and West Papua: PNPM-RESPEK. In 2007, the local governments o f Papua and West Papua launched a village development strategy (RESPEK) and allocated about US$40 million for block grant investment funds for every village and linked planning and implementation o f these funds to PNPM-Rural, utilizing over 1,000 facilitators to support about 420 sub-districts and more than 4,000 villages. 41  Annex 5: Project Costs INDONESIA: Third National Program for Community Empowerment in Rural Areas Table A5.1: Financial Summary Project Cost By Component and/or Activity Local Foreign Total US$ million US$ million US$ million 1. Kecamatan Grants 1,127.53 59.34 1,186.87 2. Facilitation Support 74.77 3.94 78.70 3. Implementation Support & Technical Assistance 39.55 2.08 . 41 -63 4. Project Management Support 26.55 3 -24 29.79 Total Baseline Cost 1,268.40 68.60 1,337.00 Physical Contingencies Price Contingencies Total Project Costs Interest during construction Front-end Fee Total Financing Required 1,268.40 68.60 1,337.00 Table A5.2: Total Project Financing Sources Total Sources US$ million Financing Arrangements (US$ million) IBRD 785.00 Government Central (GOI) 179.37 District 324.81 Beneficiaries 47.82 Total Project Costs 1,337.00 42  Annex 6: Implementation Arrangements INDONESIA: Third National Program for Community Empowerment in Rural Areas 1. Government officials at each administrative level will play an active role in coordinating the implementation o f PNPM-Rural 111. Additionally, government efforts at each level will be complemented by an array Consultants and Facilitators contracted to provide technical assistance related to a specific sectoral focus (e.g. health, education, infrastructure etc.) or managementloperationaloversight duty (e.g. procurement, financial management, community mobilizatiodsocialization). 2. Tim Pengendali is the national oversight body of PNPM. Tim Pengendal'i i s chaired by Menko Kesra and includes Bappenas, Finance, and the main line agencies that execute the component programs. In practice, Menko Kesra i s responsible for overall policy guidance, Bappenas manages technical issues, including overall budget preparation and planning, Finance provides the budget, and the line agencies execute delivery to the villages. 3. Overall project oversight o f PNPM-Rural I11 will remain the responsibility o f the Ministry o f Home Affairs (MOHA), while the day-to-day coordination are to be undertaken by a Project Management Unit (PMU), assisted by administrative units (Satkers). At the provincial level PNPM-Rural I11 coordination and management mirror the national level arrangement, with the governor in charge. Similarly, at the district level, the district heads (bupatis) will oversee poverty alleviation programs, including PNPM, and delegate this responsibility to sub-district heads (camats) in sub-districts. Village heads play this role at the local level, in villages. At the lower administrative levels, coordination and decisions on sub-projects and funding o f PNPM-Rural are carried out at inter-village consultations ( M D s ) and village assemblies (MDs). 4. For PNPM-Rural 1 1 as for KDP and PNPM, the government hires consultants and facilitators to 1, assist with coordination and implementation. These consultants and facilitators are charged with and responsible for the technical quality of the sub-projects selected for funding through the inter-village consultation and village assemblies. The consultants and facilitators report to the relevant Sutkers at the respective levels o f government. The consultants and facilitators are employees of and managed by the National Management Consultant (NMC) team, which i s a firm (or firms) contracted by GO1 to oversee technical assistance provided to the project. In each province participating in PNPM-Rural 1 1 will have a 1 small Provincial Consultant team, and in each district a team o f at least three district facilitators (one engineer, one social organizer, one financial specialist and one or more assistants). Each participating sub-district will have a minimum o f two facilitators (one social organizer and one field engineer plus a field assistant) directly working with sub-district officials and the villages and the project teams in each. Similar to the national level, these teams at the provincial, district, and sub-district level are employees o f and managed by consultancy firms contractedto the government. 5 . The Directorate General for Community and Village Empowerment (PMD), housed within MOHA, serves as the Implementing Agency for KDPPNPM, including PNPM Rural 111. Each fiscal year, the PMD establishes at least one Satker to provide the necessary support to the project (presently there are two Satkers based in Jakarta for PNPM.) These units work with and are assisted by a Project Secretariat, Project Advisors, the National Management Consultant team o f specialists, and additional contractors responsible for special tasks such as training. At the provincial level a Satker i s also established and assisted by a team o f provincial consultants. This arrangement i s mirrored at the district level. In each province and district there i s a key government counterpart, the PJOK, with whom project consultants work with on a daily basis. 43  Project Implementation and Organization Chart Menko Kesra PNPMOversight Body Directorate General o f Village National Management PNPM Inter-Ministerial Project Management Unit -\L- J/ Provincial Oversight Team Prowncial Satker T T \1 \1 Kabupaten Facilitators (3) Kabupaten Satker m Kabupatenl District Kecamatan Inter-village Kecamatan Facilitators (2-3) Consultations J, I Local Project Manager (PJOK) 1 Kecamatan/ I I Sub-district Community Project 3 ImplementationTeam t (TPK) I V V Community Beneficiaries Village 44  Annex 7: Financial Management and Disbursement Arrangements INDONESIA: Third National Program for Community Empowerment in Rural Areas 1. GO1 has submitted a request for project financing to continue national PNPM, which covers both rural and urban areas o f Indonesia. PNPM was largely established through the scaling up two World Bank-financed community driven development projects, the Urban Poverty Project (UPP) and the Kecamatan Development Project (KDP). The government has requested financing o f $785 million to support the rural program for through 2012. While the coverage i s s t i l l national, the number o f sub- districts the project covers has increased by approximately ten percent. There are no structural changes to the core design o f the existing project. 2. This annex documents an updated assessment and validation o f the existing PNPM-Rural project and proposed PNPM-Rural 111. The purpose o f this assessment and validation i s to determine whether the financial management system o f the implementing agency, PMD, MOHA, has the capacity to produce timely, relevant and reliable financial information to cover the continuation and scale-up o f the national programs under PNPM-Rural 111; and if the financial management arrangement for the project ' expenditures and underlying internal controls are adequate to meet fiduciary objectives, satisfy the Bank's 1 OP/BP 10.02 with regards to the existing and proposed PNPM-Rural 1 1 and allow the Bank to monitor compliance with agreed implementation procedures and appraise progress towards i t s objectives. 3. The project has several significant risks. First, there i s a risk posed by the use o f community block grants, particularly with respect to how effectively beneficiaries and community project financial management groups (UPK at sub-district level and TPK at village level) use and account for the funds. The second risk i s the uneven capacity o f the field consultant to assist the community groups on the financial management aspects. The third risk i s the weak financial management capacity o f the P M U and local government project management units, which i s largely related to the additional coverage o f the project. 4. Balanced against the potential risks is PNPM's successful record o f mitigating these risks through internal controls and an oversight system. Over the past year, PNPM-Rural has also taken several steps to strengthen its financial controls. The external audit o f the project i s being conducted using a more risk-based approach and with an expanded audit scope. In addition, the project auditor has agreed to increase the audit sample size and, following a successful trial in five provinces, to involve Bawasda on future PNPM-Rural audit assignments. A plan for the strengthening o f Bawasda i s being developed. Since 2009 additional FM consultants have been recruited at the central as well as local levels for each participating district. Project Description 5. Referring to Annex 4: Project Description. Country Issues 6. Based on the Country Financial Accountability Assessment (CFAA) and other assessments/ reports, there are major deficiencies in the Public Financial Management (PFM) area that are acknowledged by the government. These are: (a) Inefficient budget formulation process; 45  (b) Unreliable accounting and reporting systems; (c) Lack of capacity in audit institutions, especially among local government auditors; and (d) Lack of sanctions in the civil service. 7. Recent PFM reforms in Indonesia have been part of a broader reform agenda o f macroeconomic stability set out in the Government White Paper of 2003. The Government's target i s to have a sound PFM system in place by 2012. The Indonesia PFM reform agenda i s led by the Government, with technical support being provided by many development partners, including the World Bank. Major progress in laying the foundations for PFM reform has been achieved to date, including a new State Finance Law, Audit Law. The government continues to prioritize several PFM areas for improvement, including budget and treasury management, monitoring and evaluation of public expenditures, public procurement system and government accounting and public functions. However, inefficient budget formulation remains an issue and impacts government programs, including the delay of project implementationfor PNPM-Rural. Strengths and Weaknesses 8. The existing project has strengths and weakness in several areas. The project design has strengths that derive from using a CDD mechanism to work with communities, which are as follows: (a) Community Groups receive the funds directly in their bank account from MOF's Treasury Office (KPPN), based on joint approval by community representatives and certification by a registered government officer. (b) The community has strong ownership, which creates incentives for community control over funds. (c) An external monitoring and evaluation unit i s established through the PMU. (d) An internal financial management team provides hands-on training and oversight to provincial groups. (e) Adoption of proven CDD management tools and systems has been used successfully under the existing program, such as the flow of funds mechanism, independent reporting and monitoring. 9. Based on supervision missions and review of audit reports fiom the existing projects, we note the following weaknesses in a number o f locations: (a) The capacity o f community groups to manage and implement block grants i s weak. (b) The capacity of local governments to supervise and monitor project implementation i s not strong. (c) The capacity of facilitators to provide financial management assistance i s uneven and weak. (d) Implementationof internal controls in the PMU and community groups i s often inadequate. (e) Use o f web-based complaints tracking and reporting i s not being maximized i.e.the website cannot provide up-to-date information on the progress o f case resolution on a individual case by case basis. (f) With devolution of responsibility for dealing with complaints and cases from central to provincial governments, clarification i s needed as to the process, roles and responsibilities in the complaints escalation process. (g) Audit reports are not accessible by the public, as a result public scrutiny i s not optimized. 10. The project's weaknesses create a number of risks for project implementation. The following measures have been taken to mitigate these risks: 46  (a) At least one senior Financial Management Consultant (FMC) has been recruited in each province. I n addition at least one FMC has been recruited in each district to supervise fiduciary controls, book-keeping, financial accounts, revolving funds and to train sub-district consultants and UPKs. (b) At least one dedicated Complaints Handling Specialist has been or i s in the process o f being recruited in each province, working closely with the provincial FMC and following up on audit findings, including reporting on actions taken and results achieved. (c) Starting in 2009, after nationwide socialization and training, revolving funds (small loans to community groups) are accounted for separately from other investment funds. (d) Provincial and District Financial Management Specialists have increased their minimal levels o f field supervision to 25 percent and 100 percent respectively and have received additional dedicated F M training. In addition, in-service training and joint problem solving i s being undertaken at the regular Provincial level meetings. (e) The project i s in the process o f designing an improved UPK mapping and categorizing system, in which UPKs will be assessed and scored quarterly, with a specific action plan to address weaknesses. ( f ) Consultant TORSinclude supervision o f community financial books. 1 1. I n addition, in order to further mitigate the risks, the project will: Substantially strengthening training programs to improve F M supervision by local government, and field facilitators (FKab and FK). Continued strengthening o f financial management teams and financial controls at the central and local levels including increased oversight by consultants, Improving recruitment by provincial governments to fill empty consultant positions. Formal criteria to assess consultant F M oversight as a mandatory part o f their quarterly performance evaluations. Increasing transparency and accountability through mandating updated village information boards as a pre-requisite for local consultants to sign-off for the withdrawal o f funds from UPK bank accounts. This would carry both rewards and sanctions, including sanctions for a breach o f code o f ethics if not complied with. An independent study into the effectiveness of the UPK Supervisory Board - Badan Pengawas UPK (BP-UPK), with a view to identifying opportunities to strengthen the structure and capacity o f these boards. Discussions are currently being held with development partners to seek funding for this. Ongoing discussion to formalize local government auditors (Bawasda) involvement in external audits, including training these local government auditors and include them in the audit assignments. Bawasda involvement will help expand the project audit coverage; and The existing text message and web-based complaints handling system needs to be improved to provide more up to date information including providing access to audit findings online for public review. Risk Assessment Summary 12. A detailed analysis o f financial management risks arising from the country situation, the existing project entities, additional project features and related internal controls has been completed during this additional assessment. This analysis i s summarized below. These risks have been rated on a scale o f High, Substantial, Moderate to Low. The overall F M risk i s assessed as substantial before mitigation and moderate after mitigation, provided that all mitigating measures are effectively implemented and the project i s effectively supervised. 47  Condition Summary Comments Issues Risks Negotiatiodof And Risk Mitigation Effectiveness Y/N? A. Inherent Risks Government recognizes existing S N Financial Reporting weaknesses in PFM, but making progress has been challenging. The Bank assists - f Status o entity Complexity CDD mechanisms are in place, inc. I community planning, execution, accountability mechanisms 2. F M capacity o f S Project financing may stretch the capacity M N governments, project o f the agencies to supervise and monitor consultants and closely the sub-project activities. community group However, the risks may remain in the community level. The project will provide technical assistance to P M U LOCAL GOVERNMENT MANAGEMENT UNITS and community groups and improve recruitment performance to minimize empty positions in the field. Overall Project Risk S Budget preparation i s well defined, but S N Delay in issuing there are frequent delays in execution. budget documents Other decrees on budget execution should be issued right after budget documents are issued. Financing block grants through reimbursements should improve disbursements performance in 20 10. GO1 will pre-finance the block grant component without waiting for loan signing. 48  Summary Comments And Risk Mitigation 2. Accounting S Government accounting standards are M N Reliability of followed. However, there will be separate accounting system reporting procedures for project purposes. The risk i s substantial due to inadequate capacity, especially on community level. The project provides technical assistance to UPK. 3. Internal Control S Weak payment verification. Internal M N Inadequate payment Project Manual but the level o f veriJication compliance i s uneven. Field consultants will be better trained and local auditors will review and verify the UPK reports. 4. Flow o f Funds M Community receives the block grant M N Communities do not directly in their account in a commercial receive the grants in bank. a timely manner 5.Financial Reporting S PMU will prepare a separate financial M N Reliability and monitoring report in which it will be timeliness ofjhancial assisted by financial consultant. At the reports community level, UPK will prepare simple financial reports, assisted by faci 1itators. 6. External Audit Audits are now risk-based and focused on M N Integriv o auditor f systemic issues. Audit manual has been and poor follow-up revised and training provided to BPKP. on auditJindings The Bank has requested BPKP to further increase number o f audit samples in 2010. The project will train local auditors (Bawasda) and will involve them in audit assignments. Overall Control Risk M Overall Risk S M Risks: [High / Substantial Moderate / Low] Institutional Arrangements 13. A central project management unit (PMU) will be continued through the Ministry o f Home Affairs, Department o f Community Development (PMD), which manages all PNPM-Rural activities. At each administrative level o f the project (National, Provincial, District and Sub-District), PMD will work with the local government to form a coordination working group whose functions are to provide information to villagers about planned development programs, to provide technical support as requested and/or required by project technical criteria, and to solve administrative bottlenecks and problems. 14. Within kecamatan and villages, communities will carry out planning through locally elected administrative councils. Every sub-district and village council forms a small team for project 49 implementation each year to perform project record-keeping. A project financial management unit (UPK) i s established at the kecamatan level; while a community project implementationteam (TPK) i s set up in each village. The kecamatan block grant includes funds to finance overhead costs, such as small honoraria for the UPK and TPK members. The project will use a variety of specialized consultants to develop local capacities through training in project management, legal aid, dispute resolution, and grassroots advocacy on behalf o f villages. Initially, these consultants will be managed through project contracts, but over time it i s envisioned that their services will be contracted and paid for directly by the communities. Facilitators will also assist the community groups to prepare the financial reports on sub-grant implementation. The facilitator should control and monitor any risk of overlap between different projects operating in the same village. Accounting and Reporting 15. Similar to the existing program, all financial transactions will be recorded in the government accounting system and included in government accountability reports. The PMU will prepare a separate set o f project financial reports that are suitable for project monitoring purposes. The specific accounting procedures are set out in the Project Manual. The PMU and Local Project Unit (PJOK) at the kecamatan level will maintain separate accounting records for all payment requests (SPM) and payment orders (SP2D), on a cash basis. UPKs are also required to prepare simple accounting and financial reports for the block grants they received. In order to minimize the accounting risk, facilitators will continue to assist the UPKs in administering the block grants. Each UPK will prepare a separate balance sheet and income statement for revolving funds. 16. The PMU will be responsible for preparing aggregate Interim Financial Reports (IFR) and submit these to the Bank on a quarterly basis in formats to be agreed with the Bank. These reports will cover all consultant contracts and block grant payments to the UPKs. A Special Purpose Financial Statement for this project will be prepared annually for audit. Staffing 17. The PMU has adequate experience from the previous and existing program, it also has recently recruited additional financial management (FM) staff, specifically one specialist in each district, The project will continue to provide technical assistance to local government management units and community groups (i.e., UPKs and TPKs) during the course o f project implementation. Internal Control 18. The majority o f the project activities will be conducted by communities in the villages (desa) where the communities themselves will monitor and verify project progress. In addition, field consultants (facilitators) will countersign UPK and TPK reports. UPK will not be able to withdraw funds without a countersignature from the facilitator. In order to obtain the approval o f the facilitator, the village implementationteam (TPK) has to produce an acceptable funds utilization plan or utilization report and bank account balance (for the second and remaining payment). The reports should be published and made available to the public. The frequency o f withdrawals will depend in part on physical proximity to the bank from the village, but in principle the amount of cash kept in the village should be as small as possible. 19. The TPKs submit their project report to the UPKs. These reports will be aggregated at the kecamatan level and made public at the kecamatan forum and public arena. Internal controls at the village level are as set out in the Project Manual, including for subprojects implementation reports, FK signatures, and public information. These control mechanisms are expected to create community controls over project 50 implementation. Overall, internal controls satisfy minimum standard requirements. Although there may be some questions about the effectiveness o f government internal controls, the likely impacts o f any weaknesses are limited as the government i s only responsible for very narrowly defined administrative activities. This i s because all o f the sub-grants are directly transferred from the treasury office (KPPN) directly to community group accounts. 20. Routine internal control at the local and national levels w i l l involve verification and reconciliation. There w i l l be three reconciliations. The first reconciliation will be carried out by the sub-district project manager (PJOK) and Treasury Office. This reconciliation w i l l be based on payment orders (SP2D) issued by the Treasury Office. The second reconciliation w i l l be carried out at the U P K level, which will reconcile the U P K books and its bank statement. The third reconciliation for the Technical Assistance and Training components will take place at the P M U level and w i l l reconcile all SP2D and SA statements. The facilitators will assist the PJOKs and UPKs to conduct reconciliations at the local level, while the central management consultant w i l l assist the P M U with SA reconciliation at the central level. Complaints Handling 2 1, The project continues to improve complaints handling, with both text messaging (SMS) and a web- based reporting system in place. Further improvements to the website w i l l increase transparency into progress in following up complaints and cases and follow up to audit findings. With devolution of responsibility for dealing with complaints and cases,from central to provincial governments, clarification i s needed as to the process, roles and responsibilities in the complaints escalation process. Audit Arrangements 22. The last PNPM-Rural audit reports have been submitted in a timely manner by the external auditors (by 30 June 2009) with unqualified (clean) opinions, including K D P 2 and 3 audit reports. The P M U i s responsible for preparing general purpose financial statements in accordance with IPSASs. The audit o f these statements w i l l be carried out by government auditors (BPKP) acceptable to the Bank. The annual audit report w i l l be furnished to the Bank no later than six months after the end o f the government's fiscal year. The auditor w i l l take into account specific audit methodologies that are needed to audit widely dispersed community-based activities, as has been established under other on-going PNPM programs around the country. 23. The audit assignment will be in accordance with the agreed Terms o f Reference (TOR). Under the PNPM, it i s expected that the external audit w i l l go beyond merely providing and opinion on the accounts to include opinions on internal control framework and compliance with the Project Manual. The BPKP audit manual for C D D has been upgraded to be more risk-based and focused on internal controls. In addition the auditors have and w i l l continue to assess and report on the achievement o f the performance indicators that relate to the areas o f governance and financial management. 24. The audits have also included an assessment o f the reliability o f project financial statements, and the verification o f accounting information at community level on the sample basis. The annual audited financial statement has included a review and reconciliation o f Special Account transactions and quarterly interim financial reports. The P M U needs to make more effort to make the audit reports more accessible to the public, particularly through maximizing use o f the project website. 25. The audit sampling coverage has been determined based on kecamatan number. A pilot project involving local government auditors has been completed in 5 provinces. Based on the success o f this BPKP plans to train local government auditors in all provinces through this program. I t has been proposed that Bawasda auditors w i l l be included and serve as partner in the auditing o f the UPKs. These 51 discussions are in progress, with the National Secretariat for Poverty Reduction (The Coordinating Ministry for Social Affairs - MenKo Kesra) taking the lead. I t i s intended that the participation o f local government auditors in the audit process will help expand project audit coverage from 13.5 percent in 20 10 to 20 percent in 201 1. 26, Another key expected outcome will be improved local governance resulting from increased capacity o f local government auditors. Since the majority o f project activities will be conducted by communities in the villages, the communities themselves will also play a role in monitoring and verifying project progress. The process o f Audit Exit meetings at the kecamatan level has been introduced and will be expanded further in 2010. The role o f internal auditor o f the executing agency i s limited; the internal auditor (IG) will be involved in organizing and coordinating Bawasda assignments. Disbursement Arrangements 27. GO1 and the World Bank agreed that Component 1 Kecamatan Grants of the project will employ two different disbursement methods based on whether the block grants support standard.project subprojects or support pilot and special programs. For the former, the disbursement will be "Reimbursement". For the latter, expenditures will be financed through the special account. Payments for eligible block grants disbursed to UPKs will be paid from GO1 sources and reimbursed by the Bank to MOF's treasury account. For Kecamatan Grants for pilot and special programs and other project components, a S Designated Account (DA) denominated in U dollars will be opened by DG Treasury (MOF) in Bank Indonesia (central bank) or a commercial bank acceptable to the Bank. The ceiling of the advance to DA will be variable, and the advance(s) will be made on the basis o f the six month projected expenditures. The reporting o f use o f the DA funds and expenditures for block grants would be based on the quarterly IFR (Interim Financial Report). Applications for reimbursement o f block grants, other than those for pilot and special programs, and the advance to the DA will be submitted together with the reporting on use o f DA funds which will consist of: (a) the IFR with a l i s t o f payments for contracts under the Bank's prior- review, covering both block grants and others; (b) projected expenditures for consultants and technical assistance for six months; and (c) the DA reconciliation statement. 28. DG Treasury will authorize its relevant Treasury Offices (KPPNs) located near the implementation units to authorize payments o f eligible project expenditures by issuance of SP2D (remittance order) charging GO1 account or the DA a appropriate. For this purpose, DG Treasury shall issue a circular s letter to the relevant KPPN Offices providing guidelines and criteria for eligible project expenditures in accordance with the loan agreements. When expenditures are due for payment, the local government management units will prepare SPP (payment request) to the payment officer within the Sutker. After documents verification, the payment officer will issue SPM (payment order) together with the supporting documentation for submission to the relevant KPPN. The KPPN will check the budget eligibility and issue the SP2D to the KPPN's operational bank which will transfer the funds directly to the payee's account and arrange for debit for the loan portion to the DA. The flow o f funds and reporting mechanism are as shown in diagram 1. The project will provide retroactive financing in an amount o f up to $157 million for eligible expenditures incurred prior to the date o f the loan agreement but after February 10, 2010. Retroactive financing allows funds that are used for the project, in line with the project manual, to be reimbursed by the project after it i s declared effective, up to a max. 20 percent o f the loan amount. 29. Although the DA will be in the name o f DG Treasury MOF, the PMU at PMD level will be responsible for reconciling the DA and preparing separate applications for the withdrawal of reimbursements and advances o f DAYduly approved by DG Treasury, before their submission to the Bank. Copies o f DA bank statements will be provided to the PMU by DG Treasury, MOF. 52 30. Under PNPM-Rural, the National DIPA budget documents are as follows: (a) Budget DIPA at district level to be executed by the district Sutker (work unit responsible for project execution), covering Block Grants, Planning and Training Grants; (b) Budget DIPA at the provincial level be executed by the provincial Sutker, covering district consultants' and facilitators' salaries and allowances; and (c) Budget DIPA at central level to be executed by Central Sutker, covering NMC, provincial consultants and other consultant services at central level. In addition, each local government (LG) w i l l also provide fund contributions to the block grant from their APBD (local budget). The Provincial Sutker w i l l execute payments, administer and report on project activities in the respective province and districts. These provincial reports are submitted to the P M U and used as the basis for preparing the consolidated IFR for the project. The submission o f IFRs under PNPM-Rural has been satisfactory. The same P M U at the PMD, M O H A w i l l be responsible for consolidating and preparing the IFRs for this project. Flow of Funds to Community Groups 3 1. After a UPK i s formed and opens a bank account, it signs a standard form grant agreement with the PJOK, which i s then certified by the district consultant and facilitator, and approved by the district project manager (PPK). 32. Facilitators are required to fill out standard form payment request to be signed o f f by the sub-district's PJOK, certified by the district consultant and submitted to the district PPK. The PPK assembles request from the various UPKs for which he is responsible and then issues a payment order (SPM) to the Treasury Office (KPPN), attaching a l i s t o f payee UPKs. The K P P N then issues remittance orders (SP2D) to the operational bank or Bank Indonesia branch office, which arranges for a remittance o f funds from the DA to the respective U P K accounts. The district Sutker conducts monitoring to ensure that the funds are remitted to the UPKs in a timely fashion. 33. The release o f funds to the UPKs will be carried out in three tranches (40%, 40%, 20%). The first payment i s made upon signing o f the block grant agreement, and the subsequent payments made based upon satisfactory progress reports, as certified by the facilitator. 34. The block grants comprise two sources o f financing: (a) funds from D I P A budget o f central government to be made available from GO1own source, o f which a portion o f them will be reimbursed by the Bank; and (b) funds from the local government contribution will be 20 percent o f the block grant. The standard mechanism for releasing block grants i s stipulated in the Project Manual, sub-grant agreements, and the DG Treasury's circular providing guidelines for payments. Payment o f Facilitator and Individual Consultant Salaries 3 5 , The management o f facilitators and district consultants w i l l be handled by the provincial Sutkers, following the standards set by the PMU. Their performance i s monitored and evaluated by the provincial consultant who then reports to the national Sutker. At the beginning o f each month, the provincial Sutker calculates the salaries, allowances and fixed operational costs to be paid to each facilitator and district consultant, and issues payment orders (SPM) attaching a l i s t o f the payees for submission to the K P P N office. The KPPN will then issue remittance orders (SP2D) to i t s operational bank or Bank Indonesia branch office, which arranges for remittance o f the funds from the DA to the respective consultants' accounts. The provincial Sutker w i l l conduct monitoring to ensure that the funds are remitted to the consultants' accounts on a timely basis. 36. The allocation o f loan proceeds, and the percentage o f expenditures financed are shown in the table below. 53  Table 7.1: Allocation of Loan Proceeds Diagram 1 Flow of Fund & Reporting Mechanism -I_-_- " - -1 1 " 1 - -_ World Bank Reimbursement/Advance IFR 3) SPZD PMU/PIUs 3) SPZD (KPPN) 2) SPM + reports d payment process - .. x _ - fund transfers Project Manual 37. The PMU has issued a Project Manual for the existing project which includes financial management and administration procedures. The manual has been agreed with the Bank. Based on a review conducted by the Bank, the manual was revised to take into account further improvements in project procedures and implementation. 54 Supervision Plan 38. Risk-based supervision of project financial management i s being conducted at least twice a year. This involves a review o f the project financial management system, including sub-grant expenditures, accounting, and reporting and internal control framework. These reviews take into account projects' management report, supervision mission and audit reports. Stronger F M monitoring systems should also benefits overall project supervision. Financial management supervision will be conducted by financial management specialists and Bank consultants. A Bank financial management team will be set up to work with the financial management specialist on supervising project implementation. Action Plan Status per Dec 15,2009 F M Consultant and Complaint Position Need Actual Shortage % Handling Specialist in each Province FMC 45 42 3 9% CHS 45 40 5 11% F M Consultant (FasKeu) in each Position Need Actual Shortage % Kabupaten FasKeu 373 360 13 3% Separate report for revolving funds PMU has issued the Project Manual. Socialization and from investment funds training are completed, implementation i s on-going. FMC and FasKeu agreement on Agreed: FMC min. 25% and FasKeu 100 percent. minimum level of field supervision. F M Trainings for F M Consultant Monthly provincial level coordination meetings will and FasKeu provide an opportunity for ongoing training and problem solving. Improve on how UPKs are mapped This has been addressed through Part X o f the Project and categorized. Manual and supported by a letter from the PMU dated 3 1 August 2009. Include supervision o f financial TOR includes supervision o f community books. books in revised consultant TORS Formal criteria for consultant Criteria are currently being developed by PMD which i s performance evaluations expected to be circulated and socialized to project management by 3 1 March 20 10. Internal study on effectiveness o f Not yet done. Under discussions with development UPK Supervisory Board - Badan partners for Independent study. Pengawas UPK (BPUPK). 55 10 Training for UPK and BP-UPK Once a year with DOK Training fund. 11 Up dated Village Information N o formal rules. The project needs to include in the Boards. Facilitator who signs a Project Manual. withdrawal application without ensuring information on village boards i s updated will be sanctioned 12 BPKP will work together with local Pilot successfully completed in 5 provinces and auditors (Bawasda) discussions are underway to implement in all provinces in 2010. Sample size for 2010 i s 13.5% and will increase to 20% in 201 1 when more local auditors are involved. 13 Web-based complaints information System in place and will continue to improve the- system availability o f information to users. 56  Annex 8: Procurement Arrangements INDONESIA: Third National Program for Community Empowerment in Rural Areas A. General 1. Procurement for the proposed project would be carried out in accordance with the World Bank's "Guidelines: Procurement under IBRD Loans and IDA Credits" dated May 2004 (Rev October 2006); and "Guidelines: Selection and Employment o f Consultants by World Bank Borrowers'' dated May 2004 (Rev October 2006), and the provisions stipulated in the Legal Agreement. The variohs items under different expenditure categories are described in general below. For each contract to be financed by the Loan, the different procurement methods or consultant selection methods, the need for pre-qualification, estimated costs, prior review requirements, and time frame are agreed between the Borrower and the Bank in the Procurement Plan. The Procurement Plan will be updated at least annually or as required to reflect the actual project implementation needs and improvements in institutional capacity. 2. This project repeats the going-on National Program for Community Empowerment in Rural Areas (NCEP Rural or PNPM Rural) and will be implemented in 32 provinces and 394 districts in Indonesia from 2010 to 2012. The Bank has previously financed PNPM-Rural and Rural I1 AF to cover similar operations. The existing Project Management Unit (PMU) will remain the executing agency for this Project. 3. Selection of Consultants: To meet the project's development objectives, management consultants (NMC and RMCs) need to be maintained to supervise activities financed by the kecamatan grants, which are estimated to be completed by the end o f 201 1. For this purpose the PMU will extend the existing contracts for National Management Consultant (NMC), Regional Management Consultants (RMC), and Training Development Consultant (TDC), which are financed by PNPM-Rural and Rural I1 AF. Such extensions were anticipated during preparation o f PNPM-Rural and Rural I1AF, and have been taken into account in the selection o f the above consultants. There is also the need for the PMU to anticipate implementation delays, which are quite common in CDD type projects, and possibility of additional financing for kecamatan grants 2012, either o f which may result in the need to further extend the consultant contracts beyond 201 1. In such event, each request will be reviewed and treated on a case-by- case basis to ensure that the required level o f services i s maintained, while ensuring that the Bank's fiduciary requirements are met. The selection method will include Quality and Cost Based Selection (QCBS) whenever possible, Quality Based Selection (QBS), Consultants' Qualification Selection (CQS), Least Cost Selection (LCS), Single Source Selection (SSS) both for firms and individuals, and Individual Contracts (IC). 4. The extensions o f consultant contracts will consist o f the following (all contract amounts are in IDR and stated in US$ equivalent): (a) The NMC contract will be extended from the beginning o f 20 1 1 to the end o f 20 11, thereby increasing the contract amount from US$4.8 million to US$6.7 million. Services o f the N M C are required to assist the PMU in the overall management o f the project as well as delivering the training o f trainers. (b) Contracts for the RMCs will be extended from the end o f 20 10 to the end of 20 11, thereby increasing the contract amounts from about US$3 -0 to US$4.4 million for each contract (US$21.8 million in total), to US$5.7 to US$7.6 million each (US$37.8 million in total, out o f which US$12.2 million will be financed from PNPM-Rural 111). Services o f the RMCs are required to monitor, provide support and quality assurance to the implementation o f community 57  grants, payroll administration services, including delivering training to facilitators. In the case that the contract o f a poorly performing RMC shall not be extended, i t s replacement will be treated as a non-consulting service contract, and procured following Bank's Procurement Guidelines (refer to the paragraphs below). In such events, the P M U needs to also do proper planning and execute the procurement process in a timely manner in order to ensure necessary overlap and smooth transition thereby avoiding potential implementation problems. Based on terms in the existing contracts, confirmation and processing of a contract extension should be made by June o f 20 10 or six months prior to expiration of the RMC's contracts, whichever i s earlier. (c) TDC contracts will be extended from the beginning of 201 1 to the end o f 201 1, thereby increasingthe contract amount from US$0.9 million to US$1.3 million, 5. There will be community-based monitoring which will be divided into six contracts due to the wide geographical locations and specific culture and conditions (US$139,000 each, US$835,000 in total). These contracts are planned to be awarded to NGOs following simple CQS procedures. Based on estimated cost for each package, short-lists of each contract may be comprised of only local NGOs. In addition to hiring the NGOs, the PMU will hire a number of individual experts competitively, based on a comparison of the CVs of at least three qualified individuals. 6. The kabupaten and kecamatan facilitators (a total of US$145.6 million out o f which US$76 million will be financed by PNPM-Rural 1 1 will be hired and individually contracted directly by the 32 1) Provincial Satkers. Each individual contract will be less than US$20,000. All the positions will be advertised, clearly spelling out the minimum qualifications and requirements. Then through an agreed selection mechanism, the most qualified candidate among those who apply will be selected as Facilitators. Details o f the procurement process will be provided in the Project Manual and standard operating procedures, acceptable to the Bank and the Borrower. 7. A simplified version of Bank's standard RFP and contract documents in local language acceptable to the Bank will be used for selection of the NGO. Standard contracts, acceptable to the Bank, will be used in the case of individual consultants and facilitators. 8. Procurement of Goods, Works and Non Consulting Services: There will be procurement of non- consulting services for bulk printing of socialization and training materials (less than US$200,000 each, US$4.0 million in total) and for event organizers to provide support for training, workshops, and seminar activities (less than US$500,000 each, US$6.8 million in total). As referred to above, should there be a need to replace an RMC, such replacement will also be treated as a non-consulting service contract (estimated at US$l.8 to US$2.4 million equivalent each) and procured accordingly. Learning from past experience in the selection of NMC and RMCs, it i s anticipated that the scopes o f the above contracts would not attract international competition. In addition, the scope of each contract i s relatively simple and straight-forward. Therefore procurement o f these non-consulting services will follow NCB procedures using standard bidding documents agreed by the Bank and the Borrower. The use of NCB procedures should not preclude the possibilities that an international firm might choose to participate in n the tender process, though unlikely based on previous experience. I addition, to ensure uninterrupted services, once the decision i s made the PMU should proceed with the procurement process at least by June of 2010 or six months prior to expiration o f the RMC's contracts, whichever i s earlier. The selection method will include International Competitive Bidding (ICB), National Competitive Bidding (NCB), Shopping, Direct contracting, and community procurement. 58 9. Kecamatan Grants: The Kecamatan Grants (less than US$40,000 per contract, US$629 million in total) will be mostly for infrastructure works and will be disbursed to communities in villages scattered in all provinces. The procurement under the grants will follow community participation approach, using the forms and simplified procedures as defined in the existing Project Manual acceptable to the Bank, which will be revised from time to time by incorporating lessons learned. B. Prior Review 10. The thresholds for prior review as well as revised procurement method will be determined in the procurement plan, taking into account inputs from the Bank's supervision missions, and agreed to by the Bank. Assessment o f the agency's capacity to implement procurement 11. Procurement activities will be carried out by the Ministry o f Home Affairs through the Directorate General of Village Community Development (PMD). MOHA has committed to keep the existing staff, organization and structure, and systems at the central level being used for the PNPM-Rural and Rural I1 1 AF operation to run PNPM-Rural 1 1and manage its procurement. The staff has extensive experience in Bank procurement. Procurement in PNPM-Rural and Rural I1 AF i s generally on-track with no significant issues that suggest the need for specific changes in procurement arrangements. 12. The PMU will keep the existing staff and field facilitators experienced with the PNPM procurement throughout the project's implementation. In its recent ex-post review mission on the execution o f community grants, BPKP identifies that the wide geographical spread o f implementation activities and the ongoing capacity issue for implementationat the community level (especially in remote areas) continues to increase risks o f procurement delays, backdated contracts, and mismanagement o f contract implementation. For this purpose, the PMU will ensure improvements in this area through timely in- service and refresher training for the field facilitators, for which the duration and curriculudmaterials are acceptable to the Bank, supplemented with actual case studies, in addition to the regular coordination meetings. Procurement guidance in the existing Project Manual will be reviewed and simplified, to the extent possible, in order to enhance its practicality and suitability for the communities at the village level, while ensuring that the fiduciary requirements are met. The project should also make available include more relevant and actual examples and case studies to allow better understanding by community groups. Cases of fraud and corruption will be used to instill clearly the dos and don'ts. In addition, generic design specifications for common works (which are frequently accepted to be funded by the grants) may also be provided to facilitators and communities, such as for village roads, public sanitation facilities, etc. to provide an initial or additional technical reference. 13. The provincial Sutkers will be responsible for the hiring and contracting o f a large number o f individual facilitators. Considering that they are occupied with the existing jobs, there i s a serious issue on how they would effectively do the contract management. For this purpose, as part o f their TORS, the RMCs will keep their existing pro-active roles in assisting these provincial Satkers with contract administration and HR issues. The existing PNPM Project Standard Operation Procedures (SOP) has included this feature. The SOP also elaborates several improvements related to HR issues (for example: salaries, leave, individual's replacement, etc) which will be applicable to the provincially contracted individuals. Supervision will be carried out by the PMU and NMC from Jakarta. 14. Since the Project consists o f simple and straight-forward procurement, based on the above assessment and subject to carrying out improvements and mitigation measures, the residual project risk for procurement i s determined to be moderate. 59 C. Procurement Plan 15. The Borrower, during project preparation, developed a Procurement Plan for project implementation which provides the basis for the procurement methods. This plan has been agreed between the Borrower and the Project Team and i s available at the PMU. I t i s also be available in the Project's database and in the Bank's external website. The Procurement Plan will be updated in agreement with the Project Team annually or as required to reflect the actual project implementation needs and improvements in institutional capacity. Frequency of Procurement Supervision 16. In addition to the prior reviews to be carried out by the Bank, the capacity assessment of the Implementing Agency has recommended annual supervision missions to visit the field to carry out post review of procurement actions. As part of the Project's covenants, BPKP will carry out procurement ex- post review, in addition to financial management audit, for the community grants and individual facilitators' contracts. For this purpose, the existing TOR for regular BPKP audit has been amended to include recent BPKP's experiences in conducting the Bank's ex post review for CDD projects. There are ongoing concerns on the adequacy o f BPKP's budget to execute such an exercise given the scope of the new project. Some options, such as BPKP's partnering with local inspectors, will be examined. A budget assessment should also be carried out and the Bank shall be updated on this issue prior to effectiveness of the new project. Details of the Procurement Arrangements Involving International Competition 17. Goods and Works and non consulting services. N/A 18. Consulting Services. (a) L i s t of Consulting Assignments with short-list of international firms: N/A (b) Consultancy services estimated to cost above US$200,000 per contract and all Single Source Selection of consultants (firms) will be subject to prior review by the Bank. (c) Short lists composed entirely of national consultants: Short lists of consultants for services estimated to cost less than US$400,000 equivalent per contract may be composed entirely of national consultants in accordance with the provisions of paragraph 2.7 of the Consultant Guidelines. 60  I Extension of Consultant Contracts under P N P M - R u r a l I I ~ Estimated Contract Original Amendment Original Extended Ref. Contract (amount in Contract Contract NO. Description o f Assignment Price bracket i s Completion Period (US$mil) from PNPMIAI) 1 National Management Consultant 4,8 1.9 Mar 20 11 Dec 201 1 2 Regional Management Consultant 1 3.4 1,8 Sept 20 10 Dec 201 1 (0.6) 2.2 3 Regional Management Consultant 2 3.6 Oct2010 Dec 201 1 I 1 (0.07) 1.7 4 Regional Management Consultant 3- 3.3 Sept 20 10 Dec 201 1 (0.6) I I ~ 2.1 5 Regional Management Consultant 4 4.2 Oct 2010 Dec 201 1 (0.6) 2.4 6 Regional Management Consultant 5 473 Sept 20 10 Dec 201 1 (0.8) 2.0 7 Regional Management Consultant 6 3.0 Sept 20 10 Dec 201 1 1 I (0.7) 8 Training Development Consultant 0.9 0.3 May 201 1 Dec 201 1 61  Annex 9: Economic and Financial Analysis INDONESIA: Third National Program for Community Empowerment in Rural Areas 1. PNPM-Rural works on the basis of an open menu with communities, selecting their activities based upon their self-identified priorities. Thus subprojects are not pre-identified at the national level. Eleven years of experience with KDP and PNPM-Rural, however, shows that there i s still high demand for rural infrastructure projects such as village roads, bridges, and water and sanitation. In the past, such economically productive small-scale infrastructure has composed 60 to 77 percent o f the block grant portfolio, followed by education and health at approximately 12 percent, and women's economic loan activities ranging from 11 to 16 percent. 2. Economic Internal Rate of Return (EIRR). The project will maintain the same technical standards and design, and will provide a useful basis for assessing likely returns to PNPM for small-scale rural infrastructure. An economic analysis o f 4 1 KDP subprojects (roads, bridges, water supply and irrigation) carried out during the first KDP found a weighted average E R R of 60 percent. 3. Past studies have shown a positive correlation between ERR and the length of a communities' participation in the project. For example, a 2005 study confirmed the ERR for sub-districts entering KDP in i t s first year were 60.4 percent; 53.8 for those entering in the second year, and 12.9 for third year entrants. The longer a sub-district received funding through KDP, the higher the rates of return. An independent economic analysis undertaken in 2004, based on a sample of 113 subprojects across four provinces, estimated an EIRR of 5 1.4 percent. According to a 2007 World Bank study these results are consistent with other CDD programs around the world. Type o f Infrastructure No. Projects Average EIRR Water Supply 41 38.62% Roads/ Bridges 55 5 1.84% Irrigation 17 67.64% Total Projects 113 51.36% 4. Cost-Effectiveness. Village infrastructure built through CDD cost significantly less - on average 55.8 percent less - than equivalent works built through MPW or local government contracts. A cost- comparison based on the abovementioned sample used local government and private engineers to re-cost CDD-built infrastructure showed significant savings due to the elimination of some of the following costs: middlemen and outside contractors' overhead costs; double and triple handling of materials; frequent on-site design modifications; and extra charges for supervising projects in remote areas. Type of Infrastructure No. CDD Cost Cost, Local Average Cost Projects Only* Government/ Difference (IDR) Contractor Price (%I * Does not include voluntary community contributions generally valued at 17% o f total project cost. 62 5 . Fiscal assessment. Because the project provides grants to kecamatan, no costs are recovered by the project. The fiscal impact from the project i s small. Communities are responsible for maintaining works built by the project and thus usually poses no incremental burden on the government budget. At the national level, the Bank provides loans at very competitive international interest rates, with 10 years grace period and 20-24 years o f principal plus interest repayments. This postpones the fiscal costs o f the project and avoids raising more expensive (and unavailable) local revenues. 6. Poverty Impacts. Given the strong similarities in the implementation between PNPM-Rural and KDP, impact evaluations on poverty for KDP provide a good indicator of expected impacts for PNPM- Rural. A rigorous evaluation demonstrated that real per capita consumption gains were 11 percentage points higher among poor households in project areas compared with control areas. Also, the proportion of households moving out o f poverty in poor sub-districts was 9.2 percent higher in project areas compared with control areas. Vulnerable households near the poverty line were less at risk o f falling into poverty as a result of participation in the project. 7. A poverty impact simulation that was carried out during PNPM project preparation and updated in 2009 found the following: (a) A larger number of families than those receiving direct employment will benefit indirectly from the economic activity generated by the program. (b) There will be benefits in addition to direct employment and income: 0 The additional income will benefit workers primarily when they need it the most; when there are few other jobs because it i s the off-season for agriculture, or there i s drought, flood or other natural or economic catastrophe in a region of the country. It will raise the wages o f unskilled workers significantly, even if they have no contact with the program, by reducing the competition during the off-season from desperate workers who drive all wages down. By developing roads, and water and sanitation works, PNPM will permanently increase employment and income. The annual rate of return for the infrastructure investment i s estimated to be 50 percent or more. Injecting purchasing power into villages will increase economic activities in local areas by about 16.5 percent. That is, for every Rp. 100 million spent, village income will actually increase by Rp. 116.5 million. (c) PNPM can be sustained as a permanent social protection program: PNPM i s self-targeting. Only the poor or near-poor tend to take PNPM jobs that involve difficult manual work for low, but sustainable wages. PNPM-Rural generates permanent income and jobs, as well as additional government revenue, and i s therefore self-financing. With a rate o f return o f 50-70 percent the program quickly pays for itself. 63  Annex 10: Safeguard Policy Issues INDONESIA: Third National Program for Community Empowerment in Rural Areas Review of Experience to Date and Procedures for PNPM 1. PNPM-Rural i s concerned about preserving the environment, ensuring that any negative environmental impacts from PNPM-Rural activities can be avoided or at least mitigated. Though any construction activity will have some impact on the environment, the significance i s largely proportionalto the scale o f construction. Nevertheless, as part o f preparation for PNPM-Rural, a review o f environmental management experience was carried out and updated recently, the results have been incorporated into the design o f the proposed repeater project. 2. This Annex: (a) Describes procedures and requirements for environmental impact analysis in Indonesia; (b) Summarizes the general approach to environmental management that i s taken on the PNPM- Rural projects; (c) summarizes the results of a review o f investments and impacts implemented during KDP / PNPM-Rural, and (d) Describes the proposals for incorporating the results o f the review into the design and procedures for PNPM-Rural 111. Environmental Impact Analysis in Indonesia 3, PNPM follows official Indonesian government policy in regards to environmental impacts. Government Regulation 27 o f 1999 established the required methodologies for environmental impact analyses. This regulation was superseded by Minister o f Environment Decree 11 o f 2006, which was intended to clarify and simplify regulations. This regulation also contributes to an improved level of project planning. Planned development activities are divided into two classes: (a) activities with large potential impact that require comprehensive environmental impact analysis; and (b) activities with relatively minor potential impacts, for which an explicit impact analysis i s not required. According to the Minister for the Environment, Decree 11 o f 2006 regarding Activities Obligated to be Supported by Impact Analysis, the types and sizes o f activities undertaken by PNPM are exempt from comprehensive impact analyses due to the small scale o f investments' and construction activities supported. 4. Even though exempt from formal studies, planners o f PNPM-Rural infrastructure are required to consider negative environmental impacts. The planners are graduate-level civil engineer who works with the local communities assisted by a village technical facilitator. In analyzing environmental impacts, the planners must be capable o f imagining all sorts o f impacts that might arise as a result of the activities. Environmental impacts are defined as those changes that arise directly as a result o f development activities, both positive and negative. 5. A typical example o f the environmental impacts i s that which building a rural road can cause as seen in the table below, according to types o f impact: ' PNPM-Rural subproject costs cannot exceed more than approximately $39,000 (minus community contributions). Most cost significantly less. 64  Table 10.1: Example of Environmental Impacts Category 1: Serious but local problems Category 2: Serious negative impact on environmenUsocia1 Water flow concentration Landslides Sale of land to outsiders Loss o f productive land due to landslides Deforestation Increased sediment load due to road erosion Category 3: Negative impacts o slight f Category 4: Unclear impacts, positive or probability or less important impact negative Air pollution from vehicles Establishment o f small industries that Flooding due to improper siting o f bridge potentially to pollute the environment Increase in airborne dust Increased intensity in farming or livestock Increase in criminal activity in the village Residents seek employment outside the village Noise pollution Moving houses to roadside Outsiders move into the village Category 5: Clearly positive impact Category 6: Negative impact, but clearly acceptable to the local community reduction in erosion from agricultural land due to application o f improved technologies Traffic accidents Availability o f construction materials in village Loss o f land required for road widening Increase in communication, including access to health and education facilities 6 . From the above table it can be seen that categories 1, 2, and 4 require special consideration from project planners. Category 1 includes problems o f short-term impact even though the effects might be widespread. To address these potential issues, standardized design, and operational procedures included in the Project Manual and reinforced through training and supplemental readings and handbooks are applied during implementation across the project. Standard design and operational procedures are also in place to address deforestation and increased sediment load in Category 2. I Approach to Controlling Environmental Impacts in PNPM-Rural I I 7. The principle behind controlling environmental impacts in PNPM-Rural i s to limit possible negative impacts and to develop the positive impacts o f any infrastructure construction activity. As part o f the planning process, a form indicating potential environmental problems i s completed. Potential problems are then monitored during and after implementation by the village and technical facilitator. The assessment i s quite complete; it includes serious problems (however unlikely they are to occur) as well as relatively minor problems that are likely to occur. 8. The determination o f negative impacts requires experienced facilitators, coupled with the use o f input from existing PNPM-Rural manuals. Negative environmental impacts for roads and bridges, for example, arise especially from the disturbances of unstable soils that are sensitive to landslides or from changes in the flow o f water. Excavation and embankment construction can result in landslides or erosion. Landslides: (a) disrupt traffic (not an environmental problem, per se); (b) endanger agricultural land or housing; (c) increase erosion/sedimentation; and (d) diverting the flow o f rain water. 9. Erosion o f road sides can have large, negative impacts if the soil i s transported to productive land or if it i s carried in suspension to a reservoir where it would reduce its storage capacity. At the same time, 65 both landslides and serious erosion will result in unsightly scars near the road. Changes in water courses can destroy productive lands or irrigation canals, as well as disturb the road itself, 10. There are four steps in the process of reducing environmental damage: (a) Identifying potential hazardddangers; (b) Selecting an alignment that minimizes environmental disturbances; (c) Utilizing civil works and vegetative treatments to limit negative impacts; and (d) Undertakingmaintenance and repairs in a timely fashion. 11. The first two are the most efficient, and they are the responsibility o f the surveyor and designer. A good survey can truly reduce or eliminate many environmental problems. This i s emphasized in pre- service training for the facilitators. 12. Roads are often located in critical lands that are sensitive to erosion and landslides, where soil types and climate combine to multiply risks. The designer must consider a variety of treatments to build infrastructure that will not harm the environment while still bringing sustainable benefits. To analyze the environmental effects one needs to consider and record information on: (a) Treatments necessary to overcome environmental problems, including: Changing the alignment to reduce steep grades Building civil works to stabilize side slopes a Using vegetative treatments to stabilize side slopes or prevent erosion a Using special treatments to overcome the problem of ground water, such as drains (b) Negative environmental effects that might s t i l l exist after construction: a Side slopes that are unstable and endanger housing or agricultural land. a Excavation that results in the stockpiling o f unstable soil. a Side slopes that are left bare, without any vegetative cover. a Sedimentation of rivers as a result o f construction. e Changes in the course of a stream, which could cause flooding, erosion, or sedimentation. a Changes in water flow that damage productive land. a An increase in erosion and sediment as the result of uncontrolled discharge from ditches or culverts. a The cutting down of the forest. a Socioeconomic problems that arise as the result of constructing a bridge or road. a These problems include the sacrificing of productive lands or other land holdings. If other problems arise, it i s necessary to record any information that need to be considered about the type and extent of the problem. 13. For water supply projects or sanitation projects, there i s always the possibility o f increasing contamination, for example a water source contaminated by surface water entering from outside, or ground water contaminated by a poorly designed or constructed waste control system. One also must consider the formation of an operations and maintenance committee for all infrastructure projects, These matters are discussed in the technical training for facilitators and in the certification for works carried out by the senior engineer at the district level. 66 Environment Impact Control Strategy 14. The method used to ensure that proper attention i s paid to environmental problems i s a combination o f standard checklists and a special checklist for the environment contained in the Project Manual and developed by field engineers or as needed. 15. For each type o f subproject, a technical standard i s included in Operations Manual, which includes consideration o f environmental effects. For example, the magnitude o f the grade of a road and the steepness o f the cross-slope perpendicular to the road are limited. Drainage for the road must be installed, together with culverts to discharge water safely. Leeching fields from latrines have to be located at least ten meters from any water sourcehpply, and located downstream as groundwater flows. Water sources/supplies cannot be located near any potential source o f contamination. 16. The completion of the environmental format i s an obligatory part o f the subproject planning process. Each type o f project i s checked for the various treatments that must be carried out to avoid or rectify environmental problems. At any point during construction, the same form i s brought out to the field and reviewed, at a time when it i s still feasible to easily remedy deficiencies. At the end o f construction, the form i s reviewed again. The district civil engineering consultant will be responsible for reviewing all 1 infrastructure designs on PNPM-Rural 1 1 subprojects in the district. H e or she will reject any design not accompanied by a completed environmental form and may also request clarification for any feature where a problem i s anticipated. One other element o f handling environmental problems i s the use o f technical inspection forms, which exist for many types o f subprojects. Among the items inspected are those dealing with aspects o f environmental impact, such as for roads where the forms include slope protection, drainage ditches, and shoulders. These forms are filled out regularly and incidentally by anyone who inspects the infrastructure. Review of Experience in KDPPNPM-Rural 17. During 2008 a total o f 23,662 small scale infrastructure subprojects were financed and implemented. The subprojects have been placed into 16 infrastructure types and the investment costs tabulated. The summary data i s shown in the table below. Summary points from this table include: (a) 6 o f the 16 types o f subject could raise potential concern from an environmental point o f view, namely: roads, irrigation, bridges, water supply, jetties and sanitation. (b) The average scale o f construction was 'relatively small. For example, the average road investment financed development o f only 1.2 kilometers o f road (new road construction and road improvement) at a cost o f about 126.8 million rupiah (US$13,352) per kilometer. Most o f the irrigation development involved rehabilitation o f small schemes although there was some new construction as well. To provide some perspective, the average investment o f around 147.6 million rupiah (US$l5,538) would finance 1 km irrigation development, low-technology irrigation command. The other forms o f development were similar: bridges include small scale steel girder bridges with wooden decks, concrete bridges, wooden bridges, and suspension bridges; water supplies come from a variety o f sources, but mostly come from springs and dug shallow wells. Most distribution systems are gravity fed, but some utilize electrical or diesel pumps. 67  1 Table 10.2: Infrastructure in PNPM-Rural, 2008 Projects No'of 1 Total Budget (IDR) 1 Average Cost (IDR) 1 I (us%) Avg. Cost I 1 Source: PNPM-Rural Annual Report 2008 18. Field oversight reviews have not identified significant or recurrent environmental impacts. Site visits by oversight engineers and the national project management database record environmental concerns, and these were reviewed during the appraisal of the KDP and PNPM-Rural project series. Bank supervision missions also include environmental impact specialists as well as engineers with environmental training. 19. Nevertheless, some environmental issues were reported to the HCU (Handling o f Complaints Unit). Some typical examples are set out in the following table along with comments, where appropriate, on possible control strategies that could be used to avoid similar problems in the future. Table 10.3: Sampl Cases o f Environment: I Impact in KDP Location Activity Environmental Impact /Comment Kecamatan Irrigation project Aek Caused downstream areas Incorporate standard Sosopan, South Bustak to suffer drought from lack guideline requiring design Tapanuli, North o f water flow engineer to check effects of Sumatra incremental water demand on downstream users, Lancap Jae, Use o f heavy equipment Disturbed wildlife in the Largely unavoidable and only Kecamatan in constructing a new surrounding forest o f short term effect. N o Arse road special safeguards Irecommended Riau province, Construction o f a road Became a link in the IPotentially significant, but a Southeast leading to protected transportation o f illegal road could be-designed to Sulawesi forests logging prevent any illegal logging province truck from being able to pass. Tana Toraja, Culverts in general built In relatively flat areas the Failure to follow good design South without urotective uncontrolled discharge urinciules. Need to find out 68  Sulawesi ;tructures including damaged field or why communities or their wing walls, drop orchards. engineering advisers were not ;tructures, and lined applying standard design I n mountainous areas led lischarge channels. safeguards and to supervise to landslides on the side for the required certification. slopes o f the road. Cilacap, Construction o f a Reduction in flow area Failure to follow good design Central Java bridge with a caused the stream to principles. Need to find out reduction in the overflow, causing why communities or their wetted perimeter of damage to productive rice engineering advisers were not the channel fields. applying standard design safeguards to supervise for the required certification. 20. In general, the number o f complaints formally recorded in the system i s small. This may be due to one or a combination o f factors: (a) a lack o f importance/awareness associated with environmental issues; (b) an inability to identify environmental problems; and (c) a reluctance to report problems upwards. I Proposed Responses for PNPM-RuralI I 2 1. The review illustrates: A small number o f environmental issues were encountered, but environmental impact potential o f investments supported through the project i s low, so the general strategy followed under KDP and PNPM-Rural project series remains relevant; Most o f the issues had their origin in apparent failures to follow best civil engineering practices and it i s likely that these can be addressed through continued training and supervision o f civil engineering staff providing technical advice and oversight; and The small number o f environmental complaints made to the PNPM HCU may be a reflection of the very low adverse impact of investments supported under the project, but it also could be a reflection o f lack o f interesvawareness in environmental issues on the part o f beneficiaries or a reluctance to report problems upwards. 22. These three items have been addressed in the design o f PNPM-Rural. I t has been made clear that the national government, the development partners, and the NMC place high importance on attention to the environment. It is the responsibility o f the sub-district facilitators to explain the basis for this to the villages and to monitor subproject implementation. Causing environmental damage i s enough to cancel an activity. Facilitators that are insufficiently engaged with project's environmental impacts will be replaced. Attention to the environment i s equally important at the district level, where the district consultants and especially the district civil engineering consultant must enforce environmental standards and implementation. In addition, the following items are on the project's negative l i s t (reflected in the project's legal documents): (a) Pesticide or herbicides: No subprojects using or producing these materials will be financed. (b) Tobacco or tobacco products: production, processing, handling, storage or sale o f tobacco or products containing tobacco will not be financed by the project. (c) Asbestos: No asbestos-containingmaterials will be financed. Special mitigation measures to address any issues with existing asbestos in any proposed subproject (e.g. renovation o f school 69  buildings that may have used asbestos) will be applied. Linkage: no asbestos allowed in the subprojects although purchased as owdparties contributions. Hazardous materials and wastes: no subproject will be financed that uses, produces, stores or transports hazardous materials (toxic, corrosive or explosive) or generates "B3" (hazardous/Bahan Beracun dan Berbahaya) wastes. Coral: N o mining or excavation o f live coral or coral reef. Development o f protected areas. The Decree o f the Minister o f the State for the Environment o f the Republic o f Indonesia Number KEP-1l/MENLW2006, entitled Concerning the Types o f Businesses Activities Required to Complete an Environmental Impact Assessment, prescribes that any business or activity that i s located in a protected area or that may change the purpose and/or designation o f a protected area shall be required to prepare an AMDAL (Analysis on Environmental Impact). This includes: forest protection area; river edges; marine/freshwater conservation areas; nature tourism park; peat areas; areas surrounding lakes and reservoirs; coastal mangrove areas; water catchment areas; national parks; coastal edges; forest parks; cultural reserves; areas surrounding springs; scientific research areas; nature conservation areas; and areas susceptible to natural hazards. Development o f protected areas: no new settlement or expansion of settlements will be supported in protected areas under the project. Where settlements already exist, and if it i s the policy o f the local government to allow the settlement to remain, proposals for funding under 1 PNPM-Rural 1 1 may be used by the existing residents using project's standard procedures and in compliance with any local regulations on land management which are defined by the protected area management plan. Protected areas: no r.oad construction or rehabilitation o f any kind will be allowed inside delimited or proposed protected areas. International waters: Subprojects that involve water resources developments on rivers which flow into or out of other countries will not be financed. River protection: N o subprojects are allowed to alter any river courses. Reclamation: N o land reclamation larger than 50 ha. will be financed Irrigation: The project will not finance new irrigation larger than 50 ha. Water reservoir: no construction o f water retaining or storage structures of capacity greater than 10,000 cubic meters. 23. Reluctance to report problems i s widespread in most subprojects. Problems will be reported faithfully only if several conditions are met: (a) There are no negative or unfair consequences inflicted on those reporting problems. (b) There are positive results from reporting problems Le., help i s given. (c) There are negative consequences from not reporting problems. 24. The design o f PNPM-Rural I11 attempts to address all three o f these conditions. Reporting o f problems i s a major point in the performance evaluation system. Problems that are reported are discussed and handled at monthly meetings, and doing this i s a major point in the performance evaluation o f kabupaten consultants. The first item i s connected with the attitude o f senior consultants, government officials, and development partner representatives when confronted with reported problems. They should perceive these reports as evidence that the system i s working and as opportunities to improve performance in the field. 25. Success in the field depends upon the discipline o f subproject actors meeting these three conditions, which i s a task for senior management. A review o f the effectiveness o f these measures will be carried out annually. As part o f project implementation, GO1 will continually improve the technical safeguards- 70 related guidelines in the project manuals and record findings and follow-up in the Aide Memoires, documentation and reporting o f safeguards-related instruments implemented by the project, and include safeguards-related materials in the training for consultants and facilitators. Guidelines for Resettlement, Land and Asset Acquisition 26. During the construction o f village infrastructure it i s nearly inevitable that some land, crops, trees, houses, or other assets might need to be acquired to allow for the most effective, efficient, and beneficial use o f resources. For example, existing village paths are often 'upgraded to become all-weather roads with slightly wider running surfaces, plus shoulders and drainage ditches. The so-called right-of-way therefore needs to be increased one or two meters, and this can only happen if the land bordering the road is acquired. Similarly, it i s not always possible or desirable to locate water supplies, latrines, bridges, markets, or jetties on communally held land. 27. PNPM-Rural 111 has a simple policy framework and set o f operational procedures to guide cases of land acquisition in village subprojects. Implementation o f these guidelines i s built into the Project Manual oversight and facilitator terms of reference, and the project provides both internal and independent monitoring o f their implementation. Minimizing acquisition 28. PNPM-Rural 111 follows the same acquisition procedures as the KDP series. Policy guidelines and procedures meet the standards o f World Bank policies on land acquisition and resettlement. PNPM- Rural's I11 guidelines and reporting formats are incorporated into the Project Manual and are tracked through the MIS. A l l proposals must be reviewed and their location, alignment, or specifications changed as necessary. Proposals to widen road right-Qf-waysmust also be reviewed carehlly. 29. As it will not be possible in many cases to eliminate the need for acquisition, the guidelines allow for acquiring assets through the following two methods: (a) n Voluntary Donations: I accordance with local custom, community members have the right to donate their land or other assets or to move their homes temporarily or permanently without seeking or being given compensation(with proper recordings). (b) Donations with Compensation. Persons who donate their land or other assets have the right to seek and receive compensation (partial or full market price o f the property). 30. Voluntary contribution of land and other assets i s quite common in Indonesian villages, assuming that no individual loses too significant a portion o f their land. Losing a meter or two o f land on the side o f the road i s quite attractive to farmers, who will then have an all-weather road directly abutting their fields. Voluntary contribution for other purposes besides PNPM i s not unusual. Paying compensation for land i s also beyond the financial capacity o f the village. Providing appropriate compensation 3 1, Guidelines have been established to manage compensation for persons in the second category (Donations with Compensation) so that all these persons improve or at least hold steady their quality o f life, income, and production capacity compared to pre-project conditions. 71 32. Principle o f Compensation. The village must guarantee that one o f the following methods was used in timely fashion to compensate the persons who were affected by the project (but project funds absolutely cannot be used for compensation): (a) Land was replaced with other land o f equal productivity, or with other productive assets o f equal value; (b) Materials and labor were given to replace permanent structures that were removed; (c) Plants destroyed or missing or damaged were compensated in accordance with their value; or (d) Other acceptable compensation was given. 33. Principle o f Consultation. The village must ensure that all the people affected by the project are consulted at a public meeting in the village. During this meeting, their right to compensation must be explained, as well as such alternatives as found in the guidelines. Formal minutes o f the meeting are made and must include the main points o f discussion as well as any decisions reached, including: (a) For voluntary contributions, the name o f the development partner and details o f the donation; and (b) For compensated assets, the names o f the persons receiving compensation, and details o f the type and amount o f compensation, such as seen in the table below: Affected Compensa Additional Assets tion Promised Agreements 1, Agricultural land (mZ) 2. Other lands Area affected (mZ) Houses or buildings (units/mz) 3. Plants affected by the project 34. In addition, the minutes will contain the signatures o f the affected persons and the village chief. There will be notes about complaints made by the affected persons. And there will be a map showing the location o f the affected assets. 35. The sub-district facilitator will deliver a copy of the above notes to all those people who are affected by the project, to determine directly their wishes in regards to compensation, their perception o f whatever agreements had been reached, and their complaints (if any). Project approval 36. As the process o f determining compensation i s the responsibility o f the village, wherein the facilitator has no decision-makingpower, the sub-district facilitator i s bound to do the following: (a) H e or she must delay final approval until all persons affected by the project are satisfied with the compensation they are to receive, even if this causes a stalemate, the changing of design, and interminable negotiations. Outsiders must not intervene to impose a solution. (b) H e or she must delay implementation until compensation i s realized. Whenever a project has reached the implementation stage, the senior consultants, government officials, and development partner should assume that compensation has been successfully delivered. 72 37. I principle, if more than 200 persons are affected and require compensation, a compensation plan n must be produced and then agreed to by the Secretariat o f the National Coordination Team prior to project approval. This i s highly unlikely to occur in PNPM-Rural 111. Right to voice complaints and take legal action 38. A l l complaints should be handled and solved at the village level. If the problem cannot be solved in the village, complaints and legal action against these guidelines, the implementation o f agreements found in the minutes, or other grievances can be filed by the person affected or his or her representative to the sub-district. If still not solved, it can be further submitted for a decision by the Bupati. Complaints also can be sent to the HCU o f PNPM-Rural I11 at the regional or national level, where they will be analyzed and an investigation organized. Verification 39. At any time, all records regarding compensation, including minutes o f the meeting and proof o f compensation received must be available for inspection by the sub-district facilitator, district management consultants, auditors, and persons assigned to monitor aspects o f the project by the project Secretariat or NMC. The Village Minutes and evidence o f compensation having been made shall be provided to the sub-district empowerment facilitator assisting the village, to supervising engineers, auditors and socio- economic monitors when they undertake reviews under the project. Experience with independent oversight 40. Aside from the national oversight team and the implementation consultants, PNPM-Rural has been and will be again in 2010 well-monitored by more than 30 independent NGOs and the local and national media. TOR for the NGOs specify that problems associated with land acquisition should be checked on site and any problem reported. NGO and media reporting i s not censored or confined to government transmission routes, so this form o f monitoring provides a useful check on safeguard performance independent o f the project implementation structure. There have not been any reports of involuntary displacement, and only a very small number o f cases of land compensation disputes have been reported. 41. Supervision by the World Bank has also never reported any case o f families being involuntarily displaced by PNPM-Rural, but there have been cases o f facilitators not following the rules and cases o f the rules being followed, but families nevertheless dissatisfied with their outcome. However, Bank missions have never found cases of people visibly losing significant productive resources or experiencing drops in income, livelihood, or living standards because o f a PNPM-Rural project. In general, the Bank's field reviews suggest that lack o f government involvement in PNPM-Rural, whether by national or local agencies, seems to limit land acquisition to a bare minimum, and where it does happen, direct negotiations by villagers with the community councils produce outcomes that meet the Bank's policy objectives o f safeguarding against adverse impacts. Conclusion 42. While no process o f land acquisition will ever be fully free o f problems, PNPM's small size and the need for a local-level consensus does appear to provide an effective control system that minimize the scope and impact o f land acquisition. Project impacts will continue to be monitored closely. 73 Indigenous Peoples and Special Program for Papua and Nias 43. Overview. Indonesian communities covered by the World Bank's policy on indigenous people can generally be classified as falling in to one of three categories. First, there are small pockets of highly isolated, vulnerable groups such as the Mentawai or other small island populations. Such groups can easily be adversely affected by development projects because of unfamiliarity with modem market mechanisms, cultural and administrative prejudices against them, or inability to retain control over productive and natural resources. 44. A second category refers to the much larger ethnic populations which meet most of the World Bank's typological requirements (own language, sense of identity, traditional attachments) but exhibit varying degrees of vulnerability. Populations such as the so-called Dayak of Kalimantan or the tribal groups of Nusa Tenggara Timor fit here. 45. The third group refers to heterogeneous communities, where a segment of the population i s culturally or economically marginalized. Several of the fishing populations of the eastern islands, for example, have unique identities and also occupy subordinate positions within local social structures. 46. Review of Experience. As a project that begins from starting principles o f grassroots participation and flexible project designs determined through local planning, KDP / PNPM did not anticipate any significant adverse impacts on indigenous or culturally distinct populations and none have been found during project supervision. Test cases specifically supervised for this purpose have included the Baduy, on Java, who as a rule reject outside development projects, and indigenous communities on the island o f Nias, near West Sumatra. In both cases KDP / PNPM practice proved highly adaptive. In Baduy the project did not enter until it was approached by traditional leaders and the terms of encounter negotiated and recorded by both sides. In Nias, KDP / PNPM initially experienced several implementationproblems because of i t s isolation and the deeply hierarchical village structures, but again no adverse impacts could be identified. Ongoing post-tsunami reconstruction i s closely supervised by the Bank through the closely linked KRRP (KDP Recovery and Rehabilitation Project) funded by the MDTF for Aceh and N i a s and, again, no adverse impacts have been identified on any o f the indigenous communities. General supervision in the eastern islands also failed to tum up any systemic adverse impacts on ethnic minorities. Specific measures in the project design that appear to promote culturally appropriate activities include the villager's own election o f their representatives to the project, use o f sub-village planning units, and even flexibility in facilitator's operational funds that allows them to support traditional rituals. 47. The project design itself has also proven to be somewhat more flexible than anticipated when it first started. Thus, in provinces such as Aceh or West Sumatra, where kin-based descent units also carry out important administrative functions, the project produced special guidelines that used these traditional units rather than the standard kecamatan and desa structures. (Both provinces benefited in this respect from the 2004 decentralization laws). Needless to say, in parallel with the increased use o f culturally apposite forms of social organization has come an entirely new generation o f problems associated with the people excluded by traditional social structures, such as, for example, women, immigrants or villagers of low status groups. These problems do not have easy solutions. For the moment the primary means for addressing them i s through better training and facilitation, with some trials (Le. in Aceh) to work with traditional leaders on making their group's workings more inclusive. 74  Annex 11: Project Processing INDONESIA: Third National Program for Community Empowerment in Rural Areas Planned Actual PCN review 11/18/2009 12/18/2009 * Initial PID to PIC 11/30/2009 Initial ISDS to PIC 02/24/20 10 Appraisal 02/26/20 10 02/23/20 10 Negotiations 02/26/20 10 BoardIRVP approval 03/30/2010 Planned date of effectiveness 0813 1/2010 Planned date of mid-term review Planned closing date 1213 1/20 12 Key institutions responsible for preparation o f the project: Coordinating Ministry for People's Welfare, Bappenas, Ministry o f Home Affairs and Ministry o f Finance. Bank staff and consultants who worked on the project include: Name Title Unit John Victor Bottini TTL, Senior Social Development EASIS Jan Weetjens Social Sector Coordinator EASIS Sentot Satria Deputy TTL, Social Development Spec. EASIS Yogana Prasta Operations Adviser EACIF Unggul Suprayitno Senior Financial Management EAPFM Imad Saleh Lead Procurement Specialist EAPPR Bisma Husen Senior Procurement Specialist EAPPR Melinda Good Senior Counsel LEGES Ben Fisher Consultant OPCS Indira Dharmapatni Senior Operations Officer EASIS Festina Lavida Operations Officer EASIS Franciscus Prahastanto Operations Analyst EACIF Sadwanto Purnomo Community Development Spec. EASIS Andrew Daniel Sembel Environmental Specialist EASIS Peter Wrathall Financial Management Consultant EASIS Virza S. Sasmitawidjaja Social Development, Safeguards EASIS Alex Setiadji Social Development, Governance EASIS Threesia Marina Siregar Social Development, Fiduciary EASIS Ai Ando Ragatz Social Development, Microfinance EASIS Kevin Tomlinson Operations Officer EAPVP 75  Annex 12: Documents in the Project File INDONESIA: Third National Program for Community Empowerment in Rural Areas 1. Project specific documents (a) Project Manual (b) Project Implementation Plan (c) Budget (d) Training Plan (e) TOR for all positions (0 AuditTOR (8) Technical Design Manuals and field Guides (h) Better Governance Action Plan 2. Background or linked studies include: Published Studies 2005 - 2009 No Title Brief Description 2005 1 Economic Impact Analysis o f An independent study to conduct a post-construction economic impact KDP Infrastructure Projects analysis on 113 KDP rural infrastucture projects to determinate the (Jan 2005) overall economic benefits that have accrued to the villages. 2 An Analysis o f Efforts to A study to examine in greater depth ten KDP replication schemes and Replicate KDP (April 2005) to assess the extent to which they adopt certain principles and programmatic features o f the project. 3 Evaluation o f Infrastructure A study to evaluate the quality o f infrastructure built on a sample o f Quality o f KDP (September villages that had completed building infrastructure in the first year o f 2005) the KDP Phase 1 .1 2006 1 Local Conflict and Community A study to examine questions relating to the nexus between Development in Indonesia: development projects and different forms o f local conflict by Assessing the Impact o f the examining how the KDP interacts with social tensions and local KDP (February 2006) conflict, and how it affects the nature and extent local conflict management. 2 Gender in Community Driven A review to look at how gender and women's issues had been Development Project: addressed CDD projects to understand about what worked, and why in Implications for PNPM order to help influence the PNPM design. Strategy (September 2006) 3 2006 Village Survey in Aceh: A survey to provide an accurate overview o f the condition o f An Assessment o f Village Acehnese villages 2 years after the tsunami and one year after the Infrastructure and Social signing o f the H e l s i n k i Peace Agreement. Conditions (September 2006, report published in April 2007) 2007 1 Working Paper on the Findings A review to look at how gender has been addressed, and at what has o f Joint Donor and and has not worked in these and other community driven development Government Mission projects. (March 2007) 76 No Title Brief Description KDP Qualitative Impact An evaluation to determine whether KDP had an impact on Evaluation (April 2007) governance practices and community empowerment. Independent Evaluations of A series o f independent evaluations to examine the effectiveness of Government Community ongoing government poverty reduction programs, focusing on the Development Operations community level. 13 large community development programs (October 2007) implemented by ten different ministries were evaluated in 2007. Indonesia - National Program Environmental assessment o f PNPM-Rural. for Community Empowerment in Rural Areas : Environmental assessment - safeguard policy issues (April 2008) 2 PNPM-Rural baseline report This report outlines initial results for a selected group o f indicators (June 2008) from data collected in 2007, including household welfare, education - and health care services, and employment opportunities. 3 Impact Evaluation of KDP2 The evaluation examines the impacts of KDP2 project on households. (June 2008) Conditional cash transfers in The paper examines the design o f the two CCT programs, provides Indonesia : PNPM-Generasi survey details, and presents the survey results. and PKH baseline survey report (June 2008) Qualitative baseline study for The study explores the qualitative data on why some Indonesians do PNPM-Generasiand PKH : the not use basic maternal and child health services and why some availability and use of the Indonesians do not send their children to primary or junior high maternal and child health schools, which will serve as a baseline for future PNPM-Generasi services and basic education (Program Nasional Pemberdayaan Masyarakat Generasi Sehat dan services in the provinces of Cerdas) and PKH (Program Keluarga Harapan) evaluations. West Java and East Nusa Tenggara (July 2008) Promoting female migrant The study assesses financial instruments available to female migrants workers' access to finance workers and operational recommendations for enhancing the through PNPM availability of relevant services through PNPM, which promote access (November 2008) to finance in communities. Microcredit strategy The report outlines an operationally grounded strategy for a national formulation mission for PNPM microcredit program that would be complementaryto PNPM. (November 2008) Indonesia - Second National Environmental assessment o f PNPM-Rural I1 AF. Program for Community Empowerment in Rural Areas Project : environmental assessment - additional finding (December 2008) Progress report 2008 PNPM The report identifies PSF activities from 2007 to 2008. Support Facility (March 2009) 2 Final Report Farm.Reduction An AusAID hnded study on agribusiness development risk in Eastern Assessment for Nusa Tenggara Indonesia, particularly in NTT and NTB. Islands Eastern Indonesia - (SADI, February 2009) 77  Title Brief Description Social protection system The paper examines the social protection framework of female migrant framework for female migrant workers in the informal sector. workers (FMW) in the informal sector (October 2009) Picture Book The Good & The A study to evaluate the quality of house construction built on a sample Bad Infrastructure : House o f villages. Construction (November 2009) 2008 Annual Report o f PNPM-Rural (December 2009) 78  Annex 13: Statement of Loans and Credits INDONESIA: Third National Program for Community Empowerment in Rural Areas Difference between expected and Original Amount in US$ Millions actual disbursements Project ID FV Purpose IBRD IDA SF GEF Cancel. Undisb. Orig. Frm. Rev'd P113341 2010 ID-Health Professional Education Quality 77.82 0.00 0.00 0.00 0.00 77.82 0.00 0.00 PO90991 2010 ID-URBAN WATER SUPPLY 23.56 0.00 0.00 0.00 0.00 23.56 0.00 0.00 P115199 2009 Public Expend. Supp. Facility (DPL-DDO) 2,000.00 0.00 0.00 0.00 0.00 1,995.00 0.00 0.00 PO92218 2009 ID- lndo Infrastructure Finance Facility 100.00 0.00 0.00 0.00 0.00 100.00 0.00 0.00 PO96532 2009 ID: Dam Operational Improvement 50.00 0.00 0.00 0.00 0.00 50.00 0.00 0.00 (DOISP) P100740 2009 PINTAR 110.00 0.00 0.00 0.00 0.00 109.73 0.00 0.00 PO96921 2008 ID - National UPP (PNPM UPP) 167.68 125.00 0.00 0.00 0.00 115.01 -31.51 13.49 PO97104 2008 ID-BERMUTU 24.50 61.50 0.00 0.00 0.00 64.40 13.06 0.00 P105002 2008 National Program for Community 341.19 190.00 0.00 0.00 0.00 79.11 -231.91 -88.74 Empower PO79906 2007 ID-Strategic Roads Infrastructure 414.46 0.00 0.00 0.00 174.98 150.76 89.90 24.30 PO83742 2007 ID-Farmer Empower. Agric.Tech.&lnfo 32.80 60.00 0.00 0.00 0.00 56.34 14.05 0.00 PO89479 2006 ID-Early Childhood Education and Dev 0.00 67.50 0.00 0.00 0.00 50.99 4.05 0.00 PO85375 2006 ID-WSSLIC Ill (PAMSIMAS) 0.00 137.50 0.00 0.00 0.00 93 10 I 19.01 0.00 PO77175 2006 ID-Domestic Gas Market Development 80.00 0.00 0.00 0.00 0.00 32.31 22.31 0.00 Proj. PO71296 2005 ID-USDRP 45.00 0.00 0.00 0.00 0.00 30.94 23.64 0.00 PO76174 2005 ID-Initiatives for Local Govern. Reform 14.50 15.00 0.00 0.00 0.00 14.17 13.93 0.00 PO78070 2005 ID-Support for Poor and Disadvant Areas 138.00 35.00 0.00 0.00 0.00 31.29 24.17 0.00 PO84583 2005 ID-UPP3 67.30 71.40 0.00 0.00 0.00 17.53 -23.76 0.00 PO85133 2005 Govt Fin1 Mgt & Revenue Admin Project 55.00 5.00 0.00 0.00 0.00 48.90 47.93 -1.45 PO85374 2005 ID-HIGHER EDUCATION 50.00 30.00 0.00 0.00 0.00 51.71 42.21 0.61 PO74290 2004 ID-Eastern Indonesia Region Transp. 2 200.00 0.00 0.00 0.00 1.00 56.34 57.34 0.00 PO71316 2004 ID - Coral Reef Rehab and Mgmt Prog II 33.20 23.00 0.00 0.00 0.17 21.47 20.72 0.00 PO59931 2003 ID-Water Resources & IrrSector Mgt Prog 45.00 25.00 0.00 0.00 0.00 22.88 20.40 -1.17 PO63913 2 ID-Java-Bali Pwr Sector & Strength 273.72 0.00 0.00 0.00 0.00 22.44 22.44 -8.56 003 PO72852 2 ID-UPP2 56.52 206.00 0.00 0.00 0.00 3.95 -146.62 -11.12 002 PO59477 2 ID-WSSLIC II 0.00 77.40 0.00 0.00 3.95 3.47 -0.39 . 0.00 000 Total: 4,400.25 1,129.30 0.00 0.00 180.10 3,323.22 0.97 - 72.64 79  INDONESlA STATEMENT OF IFC's Held and Disbursed Portfolio In Millions of US Dollars 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 BonaVista School 1.00 0.00 0.00 0.00 1.00 0.00 0.00 0.00 2006 Buana Bank 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 Medan NP 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 PTAgro Muko 0.00 2.20 0.00 0.00 0.00 2.20 0.00 0.00 1997 PTAlumindo 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 0.00 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 PTAstra Otopart 24.00 0.00 0.00 0.00 24.00 0.00 0.00 0.00 2000 PT Bank NlSP 0.00 2.85 2.86 0.00 0.00 2.85 2.83 0.00 2002 PT Bank NISP 0.00 2.04 0.00 0.00 0.00 2.04 0.00 0.00 2004 PT Bank NlSP 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 Bina Danatama 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-Rarna 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 (KA5) 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 80 1993 PT Nusantara 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 2001 PT Sigma 0.00 1.03 0.00 0.00 0.00 1.03 0.00 0.00 2006 PT TAS 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 8.31 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 Total portfolio: 560.77 41.41 19.35 135.30 269.20 37.48 19.32 135.30 Approvals Pending Commitment FY Approval Company Loan Equity Quasi Partic. ~~ ~~ 2005 Bank NlSP SELF 0.03 0.00 0.00 0.00 2006 Bank NlSP Swap 0.00 0.00 0.00 0.00 2006 Orix Indonesia 0.08 0.00 0.00 0.00 Total pending 0.11 0.00 0.00 0.00 commitment: 81  Annex 14: Country at a Glance INDONESIA: Third National Program for Community Empowerment in Rural Areas v I /Indonesia a t a d a n c e 8Rrn East LoWer K e y Development lndlcators Asia a middle Age dlstrlbutlon, 2007 Indonesia Pacific income 72008) Ma k Female Population,mid-year (millions) 228.2 I90 3,435 Surfacearea(thousandsq. km) 1905 16,299 35.5n Population g r w (%) 12 0.8 10 Urban population (% of total population) 50 43 42 GNi (Atlas method, US$ billions) 427.7 4.n3 6.543 GNI per capita (Atlas method. US$) 1.870 2,182 1.905 GNI per capila (PPP. international $) 3,570 4,969 4.585 8 4 1 0 1 4 8 GDP growth (%) 6.1 11.4 n.2 percenl of lola1 populnlion GDP per capita grwrVl (%) 4.8 n.5 9.1 (moot recent estimate, 2003-2008) Poverty headcountratio at $1.25 a day (PPP, %) poverty headcountratio at $2.00 a day (PPP, %) n 39 I U n d e r 4 mortalltyrate(perl,000) I Life expectancy at birth (years) 71 72 69 im Infant mwlality (per 1,ooO live births) 25 22 38 SJ Child malnutrition (% d children under5) 24 0 25 m m Adult literacy, male (% of ages 15 and older) 95 96 88 m 5 Adult literacy, female (%of ages 1 and older) 89 90 77 9) a Gross primaty enrollment,male (% of age group) 18 111 10 P Gross primary enrollment.female (% of age group) 10 m 09 B 10 0 I I Access to an improved water source (% of population) 80 87 68 Access to improved sanitation facilities (%of population) 52 6 55 s Im lss5 BXI an Net Aid F l o w 1980 1990 2000 2008 a (US%millions) Net ODA and official aid 941 1.78 1.654 796 GrowthofGDP and GDPper Oaplta (%) Top 3 donors (in 2007): Australia 48 TI 72 335 1 ' 5 1 United States 18 31 I74 1TI 10 United Kingdom la 22 34 70 3 0 Aid (%of GNi) 13 1.6 1.1 0.2 5 Aid per capita (US$) 6 n 8 4 .10 .I3 Long-Term Economle T r e n d s Ccnsumer p r i m (mnual %change) 9.5 75 37 9.8 GDP implicit deflator (annual % ChMge) 31.0 77 20.4 8.3 Excnange rate (annud average, l a per USS) 827.0 1,8428 8,4218 9,630.9 Terms of traae inaex (Zoo0 = W) 31 W 56 1980-90 1990-2000 2000-08 (average annualgrowth %) Poputatlm. m,a-year (mihons) 148.3 l782 2063 228.2 1.8 1.5 1.3 78.00 114.426 165021 514,389 6.1 4.2 5.2 (W of GDP) Agnc-iture 24.0 194 156 14.4 36 20 33 1 lnausy 41.7 39 1 459 48.1 73 52 42 Manufaclunng 0.0 20 7 27 7 27.9 0 8 87 49 Servces 34.3 415 41 2 36.1 65 40 81 ticusehold final consumption expendilbre 51.4 589 607 62.6 52 66 48 Genera gov'l f4nalcm6LmpUm expendolure n.5 88 65 8.4 46 01 78 Gross capital formaoon 24.1 307 22 2 27.8 77 -0 6 60 Exports d goods an0 service3 34.2 25 3 410 29.8 27 59 87 Imports of gooas ana services 20.2 23 7 305 28.6 12 57 DO Gross sav ngs Note Figures in itaiics are for years other than those speufled 2008 data we prdimIn2y indicatesdata are not available a Aid data are for 2M)7 ment Economics, Development Data Group (DECDG) 82  Indonesia alance of Payments and Trade 2000 2008 Governance indicators,2000 and 2007 JS$ millions) otal merchandiseexports (fob) 62,l24 l39,605 otai merchandiseimports (cif) 44,593 128,907 Voice and accountability et trade in goods and sewicas 29.862 0.168 Political stability urrent account balance 16,615 300 Regulatoryquality as a % of GDP 0.1 0.1 Rule of law ilorkers' remittances and compensation of employees (receipts) 1190 6.V4 Ccntmlof cormpiion eserves, including gold 27,257 53.854 0 25 53 75 rm entral Government Finance K of GDPI urrent revenue (including grants) 8.7 8.4 Tax revenue 111 2.8 urrent expenditure 15.6 0.3 Technology and Infrastructure 2000 2007 iverali surplusldeficit -18 -0.1 Paved roads ( % o f total) 57.1 554 ighest marginal tax rate (%) Fixed line and mobile phone Individual 35 35 subscribers (per 0 0 people) 5 44 Cwpwate 30 30 High technology expwts ( O h of manufacturedexports) 8.2 0 8 xternal Debt and Resource Flows Envlronment JS$ millions) otai debt outstanding and disbursed 144.286 140.783 Aariculhkal land (%of land area) ' 25 26 otai debt service 16;622 M M 7 Forest area (%of iand area) 540 48 8 ebt relief (HIPC, MDRI) - - Nationally protected areas (%of land area) 12 2 otal debt (% d GDP) 87.4 32 6 Freshwater resources per capita (cu. meters) U,398 38 a7 otal debt service ( O h of expa-ts) 11.2 w. 0 Freshwatervht9drawal (billion cubic meters) 82 8 weign direct investment (net inflows) 4,550 6,928 C 0 2 emissions per capita (mt) 14 19 wtfolioequity (netinfiows) -1021 3,559 GDP per unit of energy use I (2005 PPP 8 per kg of dl equivalent) 37 4.2 :omposttionof total externaldebt,2007 Energy usepercapita(kg of u l equivalent) 734 803 World Bank Group poftfollo 2000 2007 (US$ millrons) IBRD Total debt outstanding and disbursed 11.715 6.821 (hsbursements 1,051 767 Principal repayments 761 1369 Interest payments 950 435 US$ mllllonr I IDA Total debt outstanding and disbursed 714 1,550 Chsbursements 59 28 rivate Sector Development 2000 2008 Total debt servica 31 38 imerequired tostart a business (days) - 76 IFC (fiscal year) est to start a business (%of GNI per capita) . - 77.9 Total disbursed and cutstanding palfolio 880 657 ime required to register property (days) - 39 of which IFC own writ 480 527 Chsbursementsfor IFC own account 20 225 anked as a major constraintto business 2000 2007 Palfolio sales, prepayments and (%of managers surveyed who agreed) repayments for IFC own account 43 38 Economic and regulatay policy uncertainty 48.2 Corruption 425 MlGA 56 50 tock market capitalization ( O h of GDP) 8.3 49.0 0 0 ank capital to asset ratio (%) 6.0 0.0 3te: Figures in italics are for years other than those specified. 2008 data are preliminary 8/25,09 indicates data are not available. -indicates observation is not applicable. wvdopment Economics, Devdopment Data Group (DECDG). 83 Millennium Development Goals Indonesii With selected targets to achieve behwen 1990 and 2015 (sstirnate dosest to dah shown, +A 2 y w r s ) Indonesla G o a l t halve the rates for extreme poverty and malnutrltlon mso ms6 2000 2007 Pwertv headcount ratio at1125 a day (PPP. % d ~opulatmn) P w e & headcount ratio at national poverty line ( % d population) R.5 27 1 16.7 S h a r e d l n m e or consumption tothe pmrest qunitile (%) 7.1 Prevalenced malnutrition ( 1 6children under 5) 310 27.4 24 8 24.4 Goal 2: ensure that children are able to OomPlmte prlmary schoollnm Pnmary schod enrdlment (net. %) 96 83 95 Primary campletion rate (% d relevant age group) 84 88 95 99 Seuxldary s c h d enrdlment (gross. %) 47 48 55 66 r w t h literacy rate (% d people ages 5 2 4 ) 88 97 Qoal 3: ellmlnate gender dlsparlty I n education and empower women Ratio d girls to boys in primary and secondary education (%) 93 88 98 Women employed in the nonagricultural sector (% d nonagricultural employment) 28 28 32 29 Proportion of seal5 held by m e n in national parliament (%) P El 8 11 Goal 4: reduce under-6 mortallty by lwO-thlrds Under-5 mortality rate (per 1ooO) 81 ea 48 31 Infant mortality rate (per IWO live births) 80 48 38 25 Measles immunlzallon (proporlion d o n e y e a r d d s immunized. %) 58 03 72 80 G o a l 6 : reduce maternal mortalltv by three-fourths Maternal mortality ratio (modeled estimate per Wo O live births) . o 420 Births Mended by skilled h d t h staff (% d tdal) 32 37 64 72 Contr-ptive prevalence (% d women ages -48) 50 55 61 Goal 6 : halt and boain to reverse the spread of HlVlAlDS and other major diseases Prevalence d HIV (K d population ages S 4 8 ) 01 0.2 Incidence d tubercUlD5lb (per Wo O people) . o 343 304 270 228 Tuberculosis cases detected under DOTS (%) 1 20 ea 00.1 7 : halve t h e proportion of peoplm without sustainable aocess to basic needs Ac-5 to en Improved water source (% d populstlon) 72 74 77 80 Access to Improved sanitation facilities (% d population) 51 51 52 52 Forest area (% of tdal land area) 043 50.2 540 48.8 Nationally prdected area5 (%of tdal land area) nz C 0 2 emissions (metric tons per capita) 08 12 14 19 GDP per unit d energy use ( m e t a n t 2005 P P P S per kg d d l equivalent) 30 4.1 37 4.2 Goal I : develop a alobal partnershlp for development Telephone rnalnlines (per W people) 00 17 3.2 7.0 0 Mobile phone subscribers (per a people) 00 0.1 18 38.3 Internet users (per W people) 00 0.0 0.0 5.8 Personal computers (per W people) 01 0.5 10 2.0 Eduoatlonindloators (%) I Measles Immunlxatlon(%of 1-yenrolds) ICTlndlcatorS (per 100 people) - 1 V d e Figurer in italics are for years Other than those specified indicates data are n d avallable &2MB Jevelcpment Econwnlcs. Development Data Group (DECDG) 84  Annex 15: Better Governance Action Plan. INDONESIA: Third National Program for Community Empowerment in Rural Areas 1. Projects in Indonesia operate in an overall high-risk environment when it comes to issues o f leakage, fraud and corruption. Proper fiduciary controls are essential to improve accountability for funds and reduce risks and incidences o f unaccounted funds, fraud and corruption. This i s especially true for the PNPM-Rural and its sister project PNPM-Urban which together cover approximately 90 percent o f the 6,3 14 sub-districts or about 70,000 villages in Indonesia. GOI's national-level oversight body, Tim Pengendali, has repeatedly placed anti-corruption as a top priority for this national community poverty alleviation program. As a result, the amount o f leakage (unaccounted funds) i s relatively low; moreover, individual amounts o f misuse reported are small. 2. Identifying Corruption in Indonesian Community Projects. Traditional community development projects have had a relatively limited number o f well-known points o f leakage. A non-exhaustive list would include: Transfers. Financial transfers to communities usually come earmarked or in-kind. The Local Level Institutions study found that less than 50 percent o f the nominal Rp. 20 million cash grant per village provided by central government actually found i t s way to communities, and that less than 15 percent o f what did arrive actually came as a cash grant. Field reports continue to report that significant percentages o f village transfers disappear en route or get provided in kind. Poor contractor management. Contractor management for communities i s normally handled by district technical offices, not by villages. Contract awards are often "directed" to favored companies, regardless o f qualifications or experience. Anecdotal interviews by World Bank staff have found endemic problems o f substitution o f inferior materials, unfinished works, and o f f the top payments for contract awards. Few sanctions are available for remedying inferior work. Poor pricing practices. Because contractor markets are not competitive, both over billing and over design are endemic. False taxes and charges. Government charging for "services" i s s t i l l common. Officials will even issue receipts for illegal practices, such as a "standard" 5 percent charge on all funds going through a village head. (Semi-legal practices by local governments such as "special" tariffs and mandatory purchasing agreements also occur.) Poor qudity or dishonest technical support. The corruption problems with technical assistance for community projects are also well known and, while they do not vary greatly from Indonesian development projects in general, they stand out in the case o f community programs because communities often have few alternative suppliers and a lack o f sources from which they can seek redress. Improper billing practices by consultant firms. Often Quality and Cost-Based Selection (QCBS) "winners" can beat the competition because apparently competitive overhead costs are "subsidized" by later cuts from staff salaries and travel allowances. Price faing between technical assistance (TA) staff and local government (including village heads) i s also common, aided by a general lack o f public information about prices. 85 Overview: Corruption patterns and trends in PNPM 3. The PNPM-Rural I11 Better Governance Action Plan builds on field experiences over the past eleven years o f KDP and PNPM implementation. The patterns and trends in PNPM-Rural problem and corruption cases are taken into account for improving governance in PNPM-Rural 111, and lessons learned are taken into in account in the Project Manual which includes guidelines on complaints handling. 4. PNPM's master database records information pertaining to fraud, corruption, and misuse o f funds from all sources (complaints, audits, NGOs, journalists, and World Bank supervision). O f the total 6,800 complaints received since KDPPNPM started, approximately 60 percent involve the misuse o f funds. Eighty five percent o f all complaints have been resolved and over 47 percent o f the misused funds have been recovered. Keeping in mind that the mechanisms for measuring corruption rates are highly imprecise, the general picture i s one o f efficient delivery o f development funds to villages and continuing efforts to promote better governance in line with the project's objective. 5. Certain trends and patterns can be seen in PNPM's data. First, the overall tendency i s for the number of cases to go down over time but for the amounts being stolen to increase. Also most cases of misuse o f funds involve revolving funds, funds which have been lent, repaid and relent; and not with kecamatan block grants. This i s primarily due to the increasing sophistication o f fraud and weaknesses in control by sub-district project financial management units (UPKs) and facilitators. In each o f the three largest cases, the perpetrator formed fictitious groups to receive PNPM-Rural funds by preparing all necessary documents and altering the financial and administrative records, including the illegal modification of computerized reporting templates. Second, as discussed below, whereas in earlier years more o f the cases involved government officials, in recent years officials account for only some 11 percent o f the total cases reported. By contrast, consultants and members o f the UPK, who have the most direct access to funds, account for some 33 percent. Finally, on the positive side, the amount o f money being recovered continues to rise. 6. The project's anti-corruption strategy has four main themes: (a) reducing opportunity through tailored designs; (b) strengthening formal systems; (c) strengthening social controls; and (d) improving redress. The guiding principle underlying the anti-corruption program i s that procedures must encourage oversight and action by multiple stakeholders, not just the World Bank or the government. 7. The key features o f the anti-corruption efforts and fiduciary control mechanisms are the result of ten years o f "learning by doing" and build on the results of specific research trials that were conducted as part o f the program. The key features are: (a) f Local control o funds. The PNPM projects are designed to increase local control over funds. Funds are transferred directly from the government treasury office into community accounts. Beneficiaries know the amounts o f the block grants and are involved in or informed about decisions on the use o f these funds. All accounts have multiple signatures. Public village accountability meetings are held to account for sub-project results and the funds utilized. Key information, including on funding levels, i s made publicly available, either posted on village information boards, on the project websites and in some cases in the local press. (b) Competition. Since the demand for funds outstrips by far the availability o f resources, decisions need to be made on which projects will receive funding. To ensure transparency, this decision i s made through a competitive process at the kecamatan level, which i s conducted by the community assembly. Government officials need to sign off on the result o f the competition, but do not have a vote or discretionary authority (Le. they sign-off on the soundness o f the process, but cannot alter its outcome). 86  Social controls. PNPM projects rely on broad-based participation that helps promote greater accountability. For example, villages carry out cross village "audits," one village inspecting another village's subprojects and records. Women groups have proven to be particularly effective in reviewing the use o f funds and materials procured by the village implementation teams. Code o Ethics. All consultants employed by the PNPM projects have to abide by the Code o f f Ethics for consultants, which i s included in the Project Manual and stated in each individual's contract. In line with the Standard Operating Procedures for the handling o f breaches o f the Code o f Ethics, any serious violation results in termination o f employment. Complaint handling. Beneficiaries, or anybody who has an interest in the program, can easily file complaints either through the facilitators, or by sending SMS messages. A l l complaints are systematically reported on a website and investigated. The result o f the investigation i s also made publicly available. Press and NGOs. PNPM Rural contracts regional NGOs to monitor the project, focusing on levels o f participation and transparency. With support from the PNPM Support Facility and the Department o f Communications and Information, the PNPM engages with media, providing project fact sheets, carrying out media field visits, holding radio and TV talk shows, and publicizing reported cases o f fraud and corruption and actions taken to resolve these cases. Audits. Systematic annual audits are conducted o f a sample o f 15 to 20 percent o f kecamatans. Following the findings o f a number o f trials that have been conducted as part o f the projects, the audit results are communicated to community members. Sanctions. In case o f abuse o f funds, disbursements to an offending village, sub-district or district are suspended until appropriate action i s taken. This has proven to be an effective deterring mechanism as well as a good way to push for resolution o f corruption cases at the village level. In the case o f lack o f action, a kecamatan may be declared "problem area" (currently there are 29 kecamatans with this status). These kecamatans still have facilitators to help solve problems and facilitate planning, although disbursement o f funds i s suspended until the issues are addressed as needed. Funds misused are not reimbursed from the project. Use o formal judicial system. In 2009, 129 cases o f misuse o f PNPM funds were sent to law f enforcement agencies. While only 22 cases have so far obtained a court decision (most are now being investigated by police and prepared for trial), the general trend o f court decisions i s increasingly favorable to village complaints. In 2009 nine cases that received a court ruling resulted in prison sentences, with fines and the return o f all misused funds. 8. To develop better capacity for handling complaints, corruption prevention and detection and resolving problems, workshops and special training events will be held in 2010 for all complaint handling specialists, who will train district facilitators. 1 Issues for PNPM-Rural 1 1 9. While the core design for PNPM-Rural 111 i s the same as the ongoing project and i s not significantly different from that o f KDP, the project's risk mapping requires updating. Risks faced by KDP such as government intervention in village decision-making have diminished, whereas risks posed by more 87 complex transfers (i.e. local government contributions) have increased. The overall risk assessment has been updated during project preparation. On a provisional basis, the main new corruption risks that PNPM-Rural I11will face are caused by: (a) The larger coverage achieved under the ongoing project; (b) Increases in block grant amount for some sub-districts that change the risWincentiveratio; (c) Contributions from local governments, with their own weak budgeting and control systems and late or irregular disbursements; (d) In some areas, pilot programs to reduce technical assistance (TA) ratios by increasing local government oversight; and (e) 1 Multiple programs (PNPM-Rural 1 1and pilots) in same locations. 10. The Project Manual has become more complex over the years and less accessible to villagers, A special version of the manual for village facilitators i s ready for printing. The current manual has been reviewed during project preparation and final revisions will be agreed to prior to facilitator training. Clearer divisions of tasks and responsibilities among F M staff and facilitators are expected before negotiation. Additional training in F M i s also planned for 2010, with funding from this project. Ongoing TA to the Indonesian audit board (BPKP) has produced an improved audit manual which was reviewed and approved during project preparation. 11. PNPM uses two types of formal control mechanisms to address identified risks associated with corruption and misuse of funds: internal controls and external audits. Each will be strengthened under PNPM: (a) Internal controls: The primary means of internal control i s through the project's management and monitoring systems. Backing this system up i s a complaints handling unit, which i s part of the overall monitoring pragram. The unit maintains a master database for recording all corruption allegations and for tracking their disposition. In 2009, PNPM maintained a central financial management unit; however, the central unit staff was reduced in favor of adding one monitoring and evaluation specialist and one financial management specialist to each provincial team. Since 2009, each district participating in PNPM has had a facilitator for overseeing financial management and revolving funds. An early warning system to help facilitators prevent and detect irregularities has been developed and i s being implemented. (b) Audits: PNPM traditionally has been monitored by BPKP. Parallel audits of PNPM by international audit firms showed no discrepancy in their findings, which suggests that BPKP audits meet international standards. 12. Both systems will be strengthened considerably under PNPM-Rural 111. Diagnostics carried out during project preparation recommended the following improvements: (a) Strengthening internal controls: Proposals for strengthening internal controls are discussed in the Critical Risk Section in the main text of the document as well as in Annex 7: Financial Management and Disbursement Arrangements, particularly the importance of updating the MIS system to accommodate the expanded project scope. Other recommendations agreed during project preparation and reflected in the related terms of reference for consultant assignments include: 0 Switching into a web-based MIS, planned for implementation in March 2010; 0 Monitoring response times to complaints; 88  0 Increased supervision o f and improvements in enforcing village procurement procedures; and 0 Strengthening the central and provincial financial management oversight units. (b) Strengthening government audit systems: The Bank's Operational Services Unit (OSU) in Jakarta and the PSF conducted an in-depth review o f PNPM's audit procedures as part o f preparation for PNPM-Rural 1 1 PNPM-Rural's audit procedures for 2010 will be more 1. complicated than previously because o f the substantial contribution o f funds from local governments, which are audited by the district government audit board ("Bawasda / Inspektorat Daerah"). PNPM-Rural I11 will update the existing PNPM audit manual to stress the risk-based control framework, particularly public understanding o f fiduciary objectives. Agreements for strengthening GO1 audits for these new funds include: 0 Strengthening Bawasda training, compliance mechanisms, and quality control; Carrying out joint audits, with BPKP involving Bawasda, based on a single TOR and resulting in a joint report (avoiding multiple audits and duplication); Promoting easy public access to audit reports, including through the press; 0 Announcing audit findings and reporting back to villagers in those locations which are audited; Making the BPKP audit more risk-based through an improved audit manual and audit TOR for CDD, which have been finalized during project preparation; and 0 Increasing budgets for fiduciary training. 13. In summary, GO1 and the Bank are committed to: Expanding and improving the intake o f quality data, including through pre-service training and supervision on the handling o f complaints; technical assistance to the national and local audit agencies; and intensive monitoringo f the anti-corruptionmeasures o f PNPM, including through the deployment o f additional resources (financial and human) on a risk-based approach. Strengthening financial management controls and mechanisms by the KPK (National Anti- Corruption Committee) as appropriate, including through escalation mechanisms for issues that cannot or are not addressed appropriately at local levels. Improving the transparency o f the use o f funds, including raising public awareness o f complaints and actions to resolve them, and o f audits. 14. It i s recommended that the BPK certify a national financial report. I 15. PNPM-Rural I I will also expand its work with the legal system. The Bank's community development program i s complemented by a GOI-UNDP-World Bank partnership called "Justice for the Poor", which is preparing a national access to justice strategy. At GOI's request, the Justice for the Poor program will partner with PNPM, where it will provide capacity assessments o f local law enforcement mechanisms and training for local court officers; legal education and legal aid; and training in legal literacy and social mobilization for communities. The Justice for Poor has released `Panduan Mediator Desa' (Guidance for Village Mediators) which helps community in mediation for informal dispute resolution. 16. The following changes will be supported directly through PNPM-Rural 1 1 1: 89  (a) PNPM planning funds can be used for transportation to testify at court cases or to give witness (case reviews show that communities require financial assistance to travel to district offices to give evidence; having groups o f villagers appear during case hearings i s critical for pushing trials through to final adjudication.) (b) PNPM training and socialization supplies (posters) will include materials on villager rights and how to pursue cases through the court system. 17. PNPM uses two types o f social controls: controls over financial flows by villagers themselves and controls through civil society. Both have been useful learning experiences. (a) Village-level social controls. Traditionally social controls are associated with greater access to information and higher levels o f participation. However, detailed quantitative and qualitative studies of PNPM suggest that a third element i s equally important. Communities require an organizational means to act on financial malpractice. PNPM-Rural will reinforce existing mechanisms by: 0 Continuing to simplify reporting formats; 0 Budgeting an enhanced information disclosure package and monitoring its dissemination; 0 Financing villagers' participatory cross-audits; 0 Improving monitoring of procurement procedures, which require that all supplier bids be opened in public meetings; 0 Extending the mandate of the women's groups that monitor materials delivered to communities; and 0 Expanding the pilot programs o f paralegal training and assistance. Reviews have shown that a recurring problem for villages i s not lack o f knowledge about corruption but lack o f mechanisms for filing complaints and fear o f reprisals for doing so. PNPM-Rural has developed a media campaign that includes television and radio programs informing villagers o f their rights and how to f i l e complaints. The "Justice for the Poor" program will be tracking whether reprisals and other forms of intimidation affect reporting. (b) Civil Society oversight. The PNPM program i s monitored by community, independent NGOs and independent journalists. From Dec. 2008 - Nov. 2009, in one year, about 900 news stories on PNPM were published covering the budget allocations, poverty reduction, and corruption cases. These articles appeared in 25 local and national media. During 2008-2009 there were about 225 complaints reported by communities and NGOs. 18, PNPM-Rural I11 will scale up the community based participatory monitoring program. A TOR i s now under discussion and review. The plan i s to contract six regional NGOs to provide training and administration to provincial NGOs to train village teams to carry out community participatory monitoring. Additional training will also be provided to regional government officials and to NGOs on how to handle and resolve corruption cases once complaints have been received. 19. Overall Performance. There are four major sources o f evidence which suggest that there i s less corruption in PNPM than most other projects. First and most importantly, PNPM gets more benefit for the funds spent than other village level development programs do. PNPM's infrastructure i s found to be on average 55 percent less expensive than comparable government-executed infrastructure. Technical reviews also conclude that output quality i s the same or, in most cases, better than built through other means (e.g., contractors). A 2004 independent infrastructure evaluation found that out o f the 108 90 infrastructure projects reviewed, 94 percent o f the projects were found to be o f very good or good technical quality. Audit findings by BPKP (national audit agency) for 2008 showed non-compliance of only Rp 2.35 billion (less than US$247,400 or 0.098 percent o f total disbursement in 2008). In short, PNPM's anti-corruption action strategy i s delivering high quality services to Indonesia's government and citizenry at low cost, with little leakage. 20. In addition to PNPM-Rural's collaboration with the OSU group, three additional activities promote anti-corruption work in the project: Because PNPM i s managed through the resident mission, it i s feasible to adopt a supervision strategy that involves constant rather than periodic oversight. Supervision missions visit field sites almost every month. The Bank plays an active role in helping the government pursue corruption cases. PNPM's Multi-donor Trust Fund to support includes a window dedicated to strengthening government agencies' ability to monitor and oversee PNPM and a window to involve civil society and NGOs more. The Bank's ESW program on governance and anti-corruption includes several PNPM-based activities, such as longitudinal reviews o f what makes for effective corruption reduction; randomized evaluations (in partnership with the national anti-corruption board) on petty corruption in government programs, and work with parliament on Indonesia's proposed Right to Information Act. While results from such programs benefit the Bank`s overall governance reform strategy, they also benefit PNPM implementation. 91  Annex 16: Gender Action Plan INDONESIA: Third National Program for Community Empowerment in Rural Areas 1 1. Since the beginning o f the series of CDD projects that preceded PNPM-Rural 1 1 and starting with the first Kecamatan Development Project (KDP) in 1998, a key .principle of the work has been broad;based participation. Inclusiveness-involving women, vulnerable people and the poor-and limiting elite capture, have always been goals of KDPPNPM-Rural. KDP and now PNPM-Rural include affirmative action policies to ensure women have access to basic services and participate in deliberations and decision-making processes, and enjoy the benefits of community-developmentefforts. 2. Some specific actions that will be taken and/or continued in PNPM-Rural I11 include: (a) Funding decisions in each kecamatan are made at an inter-village forum. The voting members of the forum are elected village representatives, six from each village; a minimum of three representatives must be women. The current participation rate of women in decision-making meetings i s 48 percent. (b) Continuing to ensure that women remain an integral part of the planning process. This i s includes a women's-only meeting to deliberate on development priorities and determine two of the three proposals any village i s permitted to submit in any one year for consideration for funding from the block grant funds provided by the project. (c) Maintaining another gender based feature of the project, which i s the option to choose capital for revolving funds for women's savings and loan groups as one of the three proposals villages are allowed to submit for consideration. Through the KDPPNPM-Rural project series, over 100,000 women's groups (with an average of ten women per group) have received funds and repayment rates average above 94 percent. (d) Ensuring that in each of the 61,000 rural villages at least one of the two mandatory village facilitators i s a woman, and providing a minimum of five full days of training, including on gender specific aspects of the project. Providing additional funding through community training grants to villages with women's motlitoring groups tasked with overseeing community procurement i s also continued in PNPM-Rural 111. (e) Documenting and publicizing, through the PSF, the roles and contributions of women in the project and its pilots, both PNPM Rural I11and other community based projects. 3. PNPM Gender Strategy. As noted in the main text of this project appraisal document, PNPM-Rural i s the largest o f the five core PNPM programs. The project will play a key role in the development and implementation of a gender strategy. The PSF i s finalizing two studies, one on facilitation and one on inclusiveness and the involvement o f vulnerable villagers. Both point to the role of women and possibilities for increasing women's participation, in particular in leadership and decision-making roles. Early in 2010, the World Bank, with the government, will carry out a special supervision mission on gender aspects of PNPM. The findings from these studies and supervision missions will be used as input to review progress to date and to draft a strategy to improve the mainstreaming o f gender issues in village planning and development. The PSF i s planning to host a workshop in the first half of 2010 to discuss these findings and to reach consensus on a plan for moving the gender agenda forward, including drafting a new PNPM Gender Strategy for consideration. The strategy i s expected to lead to a concept note for submission to the PSF Joint Management Committee for funding for support. 92  Annex 17: Strategy for PNPM Revolving Loan Funds INDONESIA: Third National Program for Community Empowerment in Rural Areas Background o f PNPM's Revolving Loan Funds 1. Since i t s inception, PNPM and its predecessor projects (JSDP and UPP), have provided financing for community-managed revolving loan funds (RLFs). The provision o f loans to microenterprises, many o f them women-led, to support income generation and job creation i s one o f the key poverty alleviation activities financed by PNPM. 2. The PNPM's provision o f RLFs was never seen as a microfinance program with a focus on building sustainable microfinance institutions, rather it i s seen as a community development/poverty alleviation program. The focus has been on facilitating access to credit for the poor to overcome market failure as access to credit from commercial banks, including banks which specialize in microfinance provision such as Bank Rakyat Indonesia (BRI), i s s t i l l very low, particularly in rural villages. 3. Over the past 10 years, the RLFs operating under PNPM, and its predecessor projects, have grown to become a significant national, community-based revolving fund operation reaching poor people who typically have no or limited access to other sources o f credit. I October 2009, it was estimated that there n are at least 2,535 UPK-managed revolving funds operating under PNPM-Rural alone, with total capital o f approximately US$180 million. These funds are providing loans to 190,000 groups *(the majority o f them women-only savings and loan groups) with an estimated outreach o f at least 1.3 million individual borrowers. Strengths and weaknesses o f PNPM IUFs 4. Strengths: As a community developmentlpoverty alleviation program, PNPM RLFs have developed key strengths that are in line with the original rationale for the PNPM: PNPM RLFs have high levels of outreach to the productive poor who are creditworthy yet have very limited access to finance. The loans from RLFs have had positive impacts on household income, business development, . job creation and children's education. PNPM RLFs and UPK staff have succeeded in most cases in gaining the trust o f the community and a high degree o f community ownership. The surplus of RLF, typically 15-20 percent o f the total profit, i s invested in the social needs o f the community (e.g., scholarship for the poor children, vocational training for the poor households, etc). 5. Weaknesses: Though PNPM RLFs have been successful and achieved a lot from the perspective o f a community developmentlpoverty alleviation program, the RLF operation has a number o f deficiencies from a sustainable microfinance perspective, namely: (a) Loan repayment performance i s mixed and in some cases very poor. This undermines prospects for sustainability and can also damage the credit culture in an area. * The number o f groups does not include those that received funds in 2009. The number i s likely to be. significantly larger since there are now approximately 4,370 UPK with more funds going to RLF groups. 93  Communities and UPK staff still lack training and skills in good practice microfinance that would enable them to develop a sustainable operation with a broader range o f loan products to meet people's needs. The project needs to provide more training for UPK staff and savings and loan groups. Accounting and financial reporting, though improved, are still not "microfinance good practice," e.g., there are no loan loss provisioning or write-off policies. There i s now some evidence o f crowding out o f banks with the RLFs regarded as providing "cheaper, easier to access" credit than commercial banks. However, there are also good practice examples where UPK staff are actively helping clients in need o f larger loans to get loans from banks. Such good practice needs to be shared and replicated. There i s no clear direction on the future form o f RLF operation beyond PNPM- and how to ensure sustainability o f the operations for the long-term. Future direction of PNPM RLFs -Pilot and Gradual Phase Out 6. During the next phase of PNPM, it has been proposed that a pilot project be developed that will test out an exit strategy for the Government's direct support o f RLFs through PNPM. by supporting the transition o f the RLFs from being a government-backed scheme to becoming operationally and financially independent, with UPKs as microfinance institutions able to access sustainable sources o f finance from either deposits or commercial sources. This i s in line with international good practice which encourages governments not to have a direct role in credit provision to the poor, but rather develop a conducive environment for the development o f an inclusive financial system that serves everyone. 7. Specifically, a comprehensive program should be developed and build on PNPM with an objective to: (a) Support the capacity-building, restructuring and institutionalization o f the PNPM RLF scheme. (b) Strengthen linkages between the PNPM RLFs and the commercial microfinance sector so as to help ensure growth and sustainability in the provision o f financial services to the poor. Action Plan 8. Over the next three years, it i s proposed that a pilot project be implemented in several provinces (both on and off Java) to test out the effectiveness o f the abovementioned strategy (Phase 1). The pilot will initially cover PNPM Rural, but it i s expected it will expand and cover both RLFs, both the Rural and the Urban projects. With locally demonstrated best practices and taking into account lessons learned, the pilot project will be developed into a larger program to be replicated nationwide (Phase 2). 9. During Phase 1, it i s expected that the following activities will be carried out: (a) Restructure and improve performance o f current PNPM RLF operations through provision o f technical assistance and additional training. (b) Determine the legal structure o f the RLF based on a menu o f institutional options that takes into account the institutional capacity o f the RLF and local context and support RLFs in their transformation to a new legal entity, where appropriate. (c) Link best performers into the commercial microfinance sector which help expand client outreach and sustainability o f the microfinance operations. (d) Ensure appropriate monitoring and supervision system(s) are in place. 94  10. By the end o f the program in 2015, PNPM should succeed in building the basis for sustainable access t o j n a n c i a l services for low income households in the communities it serves without direct support from the Government. For good performing RLFs, it will strengthen the management capability and institutional sustainability o f the RLF, test out different microfinance institutional models that are appropriate to the local context, and link these institutions into the commercial microfinance sector to ensure the future growth o f access to financial services for low-income people and communities. For RLFs which are performing below minimum standards and fail to improve after technical assistance, it w i l l help to put in place a policy and take action to liquidate the loan funds and protect the assets for the benefit o f the community. 11. In short over the next six years, in two phases, by the end o f 2015, when PNPM i s expected to end or to morph into an on-budget routine national inter-governmental transfer program or many local government programs for community poverty alleviation or a combination o f these approaches, revolving n funds and microfinance w i l l not be a part o f the program. I phase one, 2010 to 2012, a pilot w i l l be carried out, as described above. Based on the results o f this pilot, a transition program will be expanded nationally from 2013 to 2015, allowing RLFs or microfinance in PNPM to be stopped with access to credit and financial services provided by non-government, independent banks and MFIs. ~utcornes~ 12. The expected outcomes o f the project are: PNPM's good performing RLFs are financially and operationally independent o f government, professionally managed and able to provide sustainable access to credit and other financial services through linkages with the commercial financial sector. Poor performing RLFs adopt a clear policy and action to liquidate and protect the loan funds assets for the benefit o f the community. An adequate monitoring and supervision system(s) i s in place to provide fiduciary oversight o f the microfinance operations that i s part o f the appropriate mainstream supervisory framework. Client level social and economic improvements e.g. increases in business sales, household income, employment, assets, spending on education and health, financial literacy, increased self- esteem. 13. The suggested measurable Outputs o f PNPM RLF follow: (a) No. o f RLFs that have received high quality microfinance technical assistance and training. (b) Improvements in the financial management, portfolio quality and sustainability o f the RLFs, as measured by no. o f RLFs assessed as good or satisfactory as per key performance indicators. (c) No. o f RLFs that have institutionalized in a form that i s appropriate to the local context. (d) No. o f RLFs with linkages with commercial banks and access to more sustainable sources o f financing. (e) Increasing no. o f loans to poor clients for productive use (as measured by no. o f loans, average outstanding loan size, and percent o f borrowers from households that are low-income). (f) Improvements in the types and quality o f products and services offered to low-income clients that are responsive to clients' needs. The outcomes are anticipated over the life of the program beginning in 20 10. 95 (g) No. o f RLFs that stop receiving block grant allocation and achieve financial self-sustainability (for good performing RLFs) or are liquidated (for poor performing RLFs), such that the Government and the World Bank exit from financing RLFs through PNPM. 96  Annex 18: PNPM-Rural - Progress on Commitments INDONESIA: Third National Program for Community Empowerment in Rural Areas 1. The project team was asked during the project concept review for PNPM-Rural I11 to review the progress on decisions and commitments made with GO1 under PNPM-Rural and Rural I1 AF. All o f the areas deemed to lack sufficient progress were discussed with GO1 during project preparation and are . addressed in the new project. Action Progress Increase in the number o f trainings conducted Facilitators, UPKs and communities are trained in these both for facilitators, UPKs, and communities areas every year. Additional trainings will be provided in the areas o f environmental & social later in 2010, funded from the new project. A special safeguards, O&M, F M and community pilot to improve revolving funds and to move to procurement. More training will also be sustainable access to micro-finance services will be provided to women's savings and loan groups. carried out starting in 20 10. This pilot will improve training for womenls savings and loan groups and UPKs. Deliver detailed training plan for 2010. A comprehensive, budgeted training plan, including additional training for consultants and facilitators as well as for communities, acceptable to the Bank, i s a condition for negotiations. Training of local auditors (Bawasdas). A proposal for training o f local inspectors has been prepared. The training o f local inspectors has been agreed to in principle by all involved. Funding i s being sought from the PSF. Fiduciary Increase the number o f F M consultants in all The number o f F M staff was increased but more still the provincial project offices. might be needed. These will be provided when contracts are amended, if needed. The previous procurement advisor finished her contract and a firm has already been contracted to provide procurement advisory services. Not yet done. over community collective (UPK) accounts. Increase to 20% the number o f sub-districts In 2009 the sample size for audits o f PNPM-Rural was audited and increase awareness of audits 16% of all kecamatan. In 2010 the sample size will results. again be 16%. For funds from the new loan and the I audits carried out in early 20 11, the sample size will be > 20%; and the audits will be carried out jointly by BPKP and local inspectors, after they are trained. Villagers will be told o f the possibility o f being audited and audits results will be reported back to villagers right after inspections. Update o f SOP for consolidated planning for In progress. To be issued drafted, reviewed and issued the use of all planning and community training prior to the reimbursement o f these block grants from grants (DOK), from PNPM-Rural as well as all the new loan. ilots. 97  ~~ Action Progress , Improve web-based MIS, use of SMS for filing Some progress but more i s needed. Use o f S M S for complaints, and publishing o f complaints and complaints i s common practice in PNPM-Rural but audits findings. practice will be standardized with what i s done in Generasi. Complaints are still not printed when received. More will be done under the new project in 20 10. Update and disseminate the Project Manual. Few changes have been made in the Project Manual used in 2009 and 2010. The revisions will first be issued as a memo/matrix, as has been done in the past. Additional copies o f the manual will be printed as needed for new areas. Print and disseminate the "good and bad" These books will be printed for every field engineer booklets on village infrastructure and on and every kecamatan in 2010, using funds from the earthquake building practices new project. These booklets will be used in technical training sessions. This i s done every year. But for 2010 it has yet to be all provinces and districts and authorize the done. Without these Satkers and the UPKs authorized 4,791 sub-district UPKs to receive project to receive project funds, nothing will happen. No funds. funds can disburse and be used. Strengthen supervision plan, especially for Supervision i s carried out routinely. Plans are often not financial management. available and special, more intensive supervision o f FM i s still needed, with better reporting o f findings and follow up. One FM facilitator has now been placed in each and every district and additional consultants in each province; an increase in supervision i s possible in 2010. Increase community participatory monitoring This i s carried out routinely in a limited manner. PMD and funding for more cross-village visits. i s proposing to hire six NGOs to promote additional community participatory monitoring. Cross-village visits will require more funds, which can be provided through increased grants or through these NGOs. More support i s planned for 2010 through the new project. Strengthen resolution mechanisms, especially Facilitators are still often removed from problem sub- for problem sub-districts. districts. Discussions have started to revise this practice and to leave facilitators in place, tasking them with helping to resolve problems. Funds will be frozen as usual. One consultant dedicated to complaints handling has been placed in each province. More will be contracted if needed. Complaints involving misuse of funds will continue to result in the repayment o f those funds by the government. Update TORSand performance evaluation This i s underway. The TOR for facilitators will be methods o f facilitators. revised to emphasize responsibilities for helping with the production o f the RPJMDes (multi-year village plans); monitoring the use o f village information boards; supervising adherence to safeguard policies and oversight of community procurement. 98  Action Progress Hire minimum o f 2 gender specialist in the Tim A Gender advisor has been hired for the N M C o f the Pengendali, Central PMU, and/or PSF. Central P M U in P M D and a Gender Specialist has also been hired by the PSF. Conduct a survey o f recruit practices and Normally the number o f female facilitators and results with a "Gender Lens". consultants i s tracked. A more in-depth survey o f practices resulting in recommendations for possible improvements will be carried out prior to additional recruitment for 20 1 1. 99  95