~ co 56338 '" E "' "' '" "' "' « '" ~ '" E U ~ co '" E ~ "' '" > c: THE WORLD BANK OFFICE JAKARTA Jakarta Stock Exchange Building Tower II/12th FI. JI. Jend. Sudirman Kav. 52-53 Jakarta 12910 Tel: (6221) 5299-3000 Fax: (6221) 5299-3111 Website: www.worldbank.or.id THE WORLD BANK 1818 H Street N.w. Washington, D.C. 20433, US.A. Tel: (202) 458-1876 Fax: (202) 522-1557/1560 Email: feedback@worldbank.org Website: www.worldbank.org Printed in 2006. This volume is a product of staff oft he World Bank.The findings, interpretations, and conclusions expressed herein do not necessarily refiect the views of the Board of Executive Directors of the World Bank or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. The boundaries, colors, denominations, and other information shown on any map in this work do not imply any judgment on the part of the World Bank concerning the legal status of any territory or the endorsement of acceptance of such boundaries. Rural Investment Climate Assessment Website: www.worldbank.org/id/rica Acknowledgements The Rural Investment Climate Assessment Case Studies were prepared by a team led by Stefan Nachuk, and consisting of Novi Anggraini, Novia Cici Anggraini, Jennifer Donohoe, Janes Imanuel Ginting, Julie Hackett, Gregorius Kelik Agus Endarso, Kyle Lemargie, Agni Paramita, Peter Rooney, and NunikYunarti. The Rural Investment Climate Assessment Case Study team extends its deep thanks to the people of the Ave ., localities where the case study research was undertaken: Serang, Malang, Manggarai, and Tegal districts, and Wiradesa, sub-district, Pekalongan. Without their thoughtful ideas and generosity, these studies would not have been possible. The Rural Investment Climate Case Studies are part of a project led by Neil McCulloch, the Indonesian Rural Investment Climate Assessment or RICA. The RICA project is one output of World Bank's Indonesia Poverty Team (lNDOPOV) led by Jehan Arulpragasam. Overall guidance was provided by William Wallace, Lead Economist for Indonesia, Rahul Raturi, Rural Development Sector Managerfor East Asia, Shobha Shetty, Senior Economist Rural Development and Andrew Steer, World Bank Country Director for Indonesia. Project management support was provided Roksana Khan and Juliana Wilson. Logistical,ed',tor"lal, and production support was provided by Maulina Cahyaningrum, Juliana Wilson, Lina Marliani, Indra Irnawan, Niltha Mathias, and Deviana Djalil. Financial support from the World Bank-Netherlands Trust Fund for Institutional Development and Capacity Building as well as from the DFID Poverty Reduction Partnership Trust Fund is gratefully acknowledged. ~.'.. il I ! The Rural Investment Climate Assessment (RICA) project was funded by the World Bank-Netherlands Trust Fund for Institutional Development and Capacity Building as well as the DFID Poverty Reduction Partnership Trust Fund. The project is designed to provide a better understanding of the rural investment climate and its linkages to rural poverty reduction. The initial phase of the RICA project has four components: the Rural Investment Climate Survey, National Conference on the Rural Investment Climate, and five case studies that complement the quantitative survey with qualitative research. The case studies were designed to increase understanding of the policy and institutional setting and how it infiuences the failure or success in implementation and outcomes. The RICA Case Studies were chosen around five themes where knowledge gaps exist or where good examples of innovation have been found. The knowledge gained from these case studies will be incorporated into the RICA Report. For more information on the RICA project, please refer to www.worldbank.org/id/rica. '._ 1 I ~ : . ) --, 1-. .': KAB. KAB. PESISIR KAB. KAB. KEBUMEN ·~-~r 1 KAB. MALANG ..I KAB. MANGGARAI Case Study 5: . Roads in Manggarai District, East Nusa Tenggara: Infrastructure Decline and Impacts on Business and Communities Abstract Poor road conditions in Manggarai Dist(lct are having a negative impact on local businesses by increasing transport costs, reducing access to raw materials and inhibiting the ability of local businesses to participate in higher value-added activities. There are three main reasons why road conditions in Manggarai are bad. First, the budget for roads is very small. The DAU funding formula poses particular problems for maintaining the road network in large but sparsely populated districts, such as Manggarai. The local budget allocation process does not prioritize roads, focusing instead on the large civil service budget. Further, districts do not control the principal road-user taxes and are therefore not able to raise funds commensurate with the costs imposed by users on the road network. Second, within the road budget, there are competing needs between new road building and upgrading and the maintenance of existing roads. While routine maintenance is cheaper and more cost-effective in the long-term, upgraded asphalt roads have a stronger short-term impact on voters. As a result, the budget process tends to bias expenditure away from maintenance. Finally, the alliance between contractors, politicians, and government offcials responsible for road construction and maintenance reinforces the bias toward larger capital-intensive roads projects despite eVidence that smaller labor-based projects might be more appropriate in several locations. Leakage of project funds also increases costs and reduces the quality of roads constructed. This paper outlines these processes and puts forward a series of recommendations for reform to restructure the incentives faced by local stakeholders to be more consistent with the delivery of a higher condition road network that meets the needs of the Manggarai population. This case was written by Jennifer Donohoe. Research was based on fieldwork undertaken in Manggarai district in August and September 2005; team members included Janeslmanuel Ginting, and Novia Cici Anggraini. Analytical and managerial support by Neil McCulloch World Bank (Indonesia), and Stefan Nachuk, World Bank (Indonesia). Editorial support WQS provided by Juliana Wilson, consultant (U.s.A). See Bibliography for works referenced. This case is copyrighted by the World Bank and may not be reproduced or reused without its permission. Hoads ill Manggarai District;. East Nusa Tenggara: Inframuclure Decline and impacts on Business and Communities 15 Introduction Good quality roads are an essential requirement for economic development. Numerous studies show the close connection between the condition of Infrastructure, growth, and poverty reduction, But road Infrastructure In many parts of Indonesia Is In poor condition, creating a slgnlftcant obstade to development In these areas, This study explores the Impact of poor roads on non-farm businesses In one poor remote region, Manggaral District on Flores In Nusa Tenggara Timor, and seeks to understand why the district roads there are so bad, In particular, It examines whether low expenditure on road maintenance Is due to a lack of funds, the nature of the budgeting and planning process, or the Incentives faced by the various bureaucratic and political actors In the district. Manggarai District Manggaralls located In Nusa Tenggara Tlmur province on Flores Island between the districts of Manggaral Barat to the west and Ngada to the east. The district Is large, covering 4,188 km2 of mostly mountainous farmland and forest but has a population of just 481 ,679, The district capital, Ruteng, Is located In the central eastern mountains ofManggaral, approximately 6 hours drive from Manggaral's largest port of Reok to the north and four hours from Labuanbajo, the capital of Manggaral Barat, where the majority of sea traffic to Java departs, Manggaral has 12 sub-districts, The poverty rate for the district Is 48%, with some sub-districts having a poverty headcount as high as 59%, Over 40% of the population has not completed primary school, The total labor force of Manggaralls 326,916 and the open unemployment rate Is 2.4%,1 In 2002, the provincial minimum wage was set at Rp, 330,000 per month (approx, USD 1, l/day) but the average real wage was only Rp, 127,600 per month (approx, USD O,S/day), Almost ninety percent of the population Is Involved In primary production, and 53% of GDP came from agriculture In 2003, Including fruits and vegetables, rice, cassava and maize, Micro and small enterprises' make up a large proportion of the off-farm sector.' There are only a few medium- scale enterprises In the district and the local government had no available records of large enterprises,' Most micro Industries are household-based weaving enterprises or kiosks, Weaving has been carried out for generations In I Flgu", on Ih. workforce are glv,n a, 'populal/on abov.lh. age 0110 y.ars In employment' 2 Micro I",iumy I, a,fin.d a, an .nlerprlse wllh asse" all." Ihan Rp, 5 mil, Micro enl"prls" are usually II'ted wllh the D.partm.ntoITroa. and Industry but are nol required to have a permll (SIUP), Thoselhal do register u.ually do so wh.n applying far creall a, the SIUP I, on. precondl· tlan lrom mostl.nd,rs, Small.nterprlse, are Ihose Ihal have a,,," .etween Rp, Smil and Rp, 600 mil and hold a bu./n", licens. (SIUP), SOU"" 'Manggaral Dalam Angka: BPS Manggaral, 1999-2003, T,I'phan.lnt"vl,w with Ihe sub·H.ad olth. D.partm,ntoITrad. ana Inaustry Mang· goral, 15 S.pfember 200S 3 Th./areslligures (2003) show that ,mall.nterprlses In Manggarallnclud. ch,ml,al manufacturing (3,596 ollolal sMEs), m.tal, machln., and .Iectronlc (4,396), agricultural product proc.sl/ng (25,796), and 'other Indu'trl.,· (66,596). Over4096 010/1 ,mallindustrl" are locared In oraraund Ih. District ,apllal olRuteng 0' Ih.,./···n" ace." fa mark.ts, Oth" centers or. k.camatan Borong, which I, the main ,ub·dlstrlctlor agrlcul· turol production, and kecamatan R.o~ wher.lh, Olstrlctl major port Is 10,0l 30 kmlhour state roads in Manggarai as of 2003.7 Of · Moderate: 15-30 kmlhour this, 1,520 km, or 79%, are classified as · Bad; 5-15 krnlhour district roads, 14% as provincial and 7% as · Very bad: < 5 km/hour national roads, Overall, road conditions in b. Topography and surface condition Manggarai are very poor, The government · Good: passable at any time currently (2003) classifies 56% of all roads ., · Moderate: passable at any time, but using slower speed at particular as being in a bad or very bad condition, times - e.g. during rain. The proportion of bad or very bad roads in · Bad: impassable at particular times - e.g. during the rainy season - or Manggarai was slightly lower than the only passable using a four-whee/-drive vehicfe provincial average in 2003 but much · Very Bad: impassable at all times except using a four-whee/-drive vehicle higher than the national average of 48%, As can be seen in Table 1, roads under district government authority in Manggarai are in the worst condition, About 1030.74 km, or 68%, of the district's road is in "bad" or "very bad" condition, District roads that !'ink sub-districts to the district capital and to provinc'lal and national roads are a priority for businesses, These roads are the main conduit for agricultural produce on the one hand, and agricultural inputs on the other, Poor condition village roads on the other hand make it difficult to get agricultural goods out of the villages and reduce villagers' access to public services, Table 1 - Road Condition in Manggarai by Government Authority and Compared to NTT Province and National Averages - 2003 (%) , , ~--- .----- , Roads under National Government Authority 51 27 22 Roads under Provincial Government Authority 35 60 5 Roads under District Government Authority 10 22 68 Manggarai Total 17 28 56 % NTT Average (2003) 18 21 61 National Average 19 33 48 Sources: Manggarai Dafam Angka, 2003; NIT Do/am Angka 2003, National Data - World Bank 2004. Road surface is also a determining factor of road condition, In Manggarai a third of district roads are soil, and are generally impassible for regular road transport for the two months of the wet season (which months?) as their 7 Manggarai Dafom Angka, 2003. Othe~ government documents, such 05 NIT Do/am Angko, state that Manggarai has 2,202.60 km of road. Roads:n !,~al19g~ri; D:s{r;~. ~a;, N~';a T~'1gga~a: Inff~struc:t"re Dec!:ne ~na in;paC!S on Su;i~ess and C::mr<;ur-ilies dirt roads turn to impassible mud. Only 2% of roads under The District government have been covered with the stronger "Hotrnix" type of hot asphalt mix. The other 65% is regular asphalt, aggregate or Telford road surface. Asphalt provides a smoother, stronger surface; however, it requires regular (annual) maintenance or it will quickly degrade and is quite expensive to build. Aggregate provides a strong surface and a cheaper option that asphalt, however, without suitable drainage it has a tendency to erode particularly under the very high rates of rainfall in Manggarai. Telford is a type of cobbled road that can be a strong and cheap alternative, and if built correctly will withstand heavy rainfall. Table 2 - Manggarai: Length of Road by Road Surface - 2003 (km) An Inexpensive, High-Quality Method of Road Construction Villagers, if organized, afe capable of building and maintaining Telford roads, but do not hove the skills or equipment to build or maintain asphalt roads. The Telford road-building method has been successfully implemented in Manggarai through donor-funded projects, and more recently through the sub-district Development Program and the Church. The first program for building Telford roads in Manggarai was funded by the SWiss government Intercorporation and resulted in 222 kilometers of road in remote and poor areas of the district. The roads are best buHt with strong community participation and therefore require intensive facilitation. One of the drawbacks to building Telford roads is that they take time to construct-a normal pace is about one kilometer per month. The benefit is that the roads are much cheaper to build than asphalred roads, especiafly when the community provides labor and local materials at a discounted rate to complete the project. These roads tend to be better maintained, as communities directly benefit from them, and take ownership over their care. Since the Swiss roads project finished in 1996, one church-based social organization, DelSos, has been able to convince government to provide it with funding to build Telford roads during the past three years on a very small scale, and has been successful in terms ofcost and creating community ownership. Many of the proposed sub·district projects for the sub-district Development Program have included stretches of Telford road to link communities to markets and public services. Trends in Road Conditions Chart 1: Overall Road Condition - Manggarai 70 There was an increase of 15% in the ., ..· _---------- share of roads with "bad/very bad" 60 50 condition relative to total between 1999 40 . - - - - - - - - - - .... - .... ---- ..----.-- - - - - - - . - - - - - and 2003 from 48% to 57%. Moderate 30 condition roads increased slightly in the 20 first part of the period also refiecting 10 ., the 10% decrease in the proportion of 1999 2000 2001 2002 2003 roads in good condition. For district roads, the trend is stronger, with almost a 16% increase in bad and very bad condition roads between 1999 and 2003 and a huge drop to only 10% of roads in good condition. Impact of Poor Road Conditions upon Enterprises Since many factors affect the investment climate in Manggarai, it is difficult to establish a clear link between declining road conditions and poor economic performance. Nonetheless, it is possible to document the links between poor quality infrastructure and impacts upon communities and enterprises. We explore two of these links in more detail- increased travel time and increased costs. Increases in travel time ... In comparison to many other areas in Indonesia, road conditions and associated travel times are much worse between Manggarai and its main business destinations. It takes approximately one week for a loaded truck to travel from Ruteng to Surabaya, a similar distance as Jakarta to Surabaya, but the latter trip only takes two days. Road conditions are so bad that in some cases farmers and intermediary traders take extremely roundabout routes to sell their produce. For example, the 40 km road between Pota, Elar Sub-district, and the sub-district capital, Lengko Elar, is of such poor condition that farmers and traders must travel on foot or by horse for eight hours each way. If they or intermediary traders wish to transport goods between these two areas they have to travel over 100 km from Pota to Lengko Elar by taking the provincial road east, then south to Ruteng and west again to get to the sub-district capital. The Pota-Ruteng leg of the trip takes 10 hours and the Ruteng-Elar stretch takes another 4 hours. Normally the trip is carried out over two days as people choose to stay overnight in Ruteng rather than traveling overnight to Lengko Elar. If the road between Pota and Elar were upgraded to Telford or aggregate, it would take only three hours to travel directly to Lengko Elar. 8 8 Interview with DelSos representative I Pc",ds:r. M;nggJ.rai O;wi:1. In~r~SI;uc!"re ~a5: ~':.Jsa Ter,g~wa: D\'cl:ne and imoac!s on Busir-.;s and C'J<;"r:.ul';[!es Increased costs for transport companies ... Table 3: Travel times for comparable distances in Java and Manggarai ~--~~~--~~~--~~~~~--------------------------~ ---------~- ~~_~~~-""'i"'''~~~'~ ",",~=,_~.'iii. (,,_c,~l:%}:, _t-"~ "' ____'<"'~' ,''c\.' \, " __......!.."",,~ __~c;.::i _,~~ ~. __ ~_~~,.;...t' ;.-~r,'·'"':,';\,~\~fi,~\1,,~,~1"S'~,(:,'\',,\Jc ~_ ,....~.,...."'~~"..l"'_,_" ,.',\""!",,i:l:,,"J..,;;,""1l~ 1;i'\'O,4~).c~i~J,'$"'£.' <.-........ _.. _'§.'f!iiffff!!1 Jakarta-BandungDistance: 128 Ruteng-Labuanbajo Distance: 140 The road from Ruteng to Labuan Bajo km Time: 1.5 hours Km/hour: .85 km Time: 3.5-4 hours Km/hour: 35-40 is mostly classified as National Road Ruteng to Palembor Distance: Ruteng to Lempanpaji Distance: 104 Vehicles are only able to travel at an 40 km Time: 1 hour Km/hour: km Time: 8 hours Km/hour: 13 average of 40 km/hour on the best 40 Ruteng - Borik Distance: 130 km road in Manggarai and an average of Time: 6 hours Km/hour: 21 13 km/hour on one of the worst For transport companies, poor road conditions dramatically increase their costs for fuel and vehicle maintenance. Local transportation companies reportthatthe average life of a vehicle in Manggarai is only 5 years,' whereas the same vehicle in Java would last for 10 years without the need for significant repairs. One large transport business owner stated that his trucks consume around one liter per kilometer on the roads in Manggarai, but only one liter for every four kilometers when traveling in Java. Increasing fuel prices mean that this difference has a strong impact on transport companies' profit margins. Transportcompanies'profits are further reduced in Manggarai duetothe effect road conditions have on maximum safe load limits. In Java, because road conditions are on average better, trucks can take about 17 tons of goods in one load. Poor road conditions in Manggarai limit the maximum safe load of vehicles to around 12 tons and therefore the amount of profit a company can make from each trip. Poor road conditions also raise costs for public transport operators. The government sets rates for public transport; however, transport operators and drivers often raise these fees illegally because they would otherwise make no profit Firms are able to do this in rural Manggarai because transport users have no alternatives W For goods transportation t~e fee is set by the transport operator and varies depending on distance, the type of goods being transported and the time it takes to transport Due to low local demand and ability to pay for most users, many routes remain unprofitable. Some farmers are so desperate to save money thatthey will carry their produce on their back in a passenger transport vehicle rather than pay the additional cost of transporting their goods separately. II The effect of increased travel time, and increased maintenance costs is a decrease in profits to the transport industry and increase travel time and cost for farmers, intermediary traders and businesses. Increased cost of 9 Interviews with transportation companies, Ruteng and Ci~QI, August 31 and September 0 f, 2005 10 Information from field trip interviews, Cibal and Sambi Rampas, 01-02 September, 2005 11 Interview with De/50S representative, Gorgonius 0 Bajang, 30 August 2005 transport and time in turn, negatively impact upon farmers, intermediary traders, and businesses. Other impacts of poor infrastructure on SMEs ... Poor infrastructure not only increases time and cost. It also has secondary effect on the sorts of activities businesses can conduct. For example, the unreliability of the road infrastructure affects the timeliness of delivery, precluding higher value activities, such as production for supermarket value chains. Similarly, poor road conditions and the high cost of transport mean local businesses are unable to fulfill their need for raw materials in a t'lmely manner. Long travel times mean that produce is more likely to be damaged enroute, and as a result, farmers sometimes harvest too early to ensure freshness. This reduces the quality of the produce they are able to supply again limiting their ability to participate in higher value activities. Moreover, as the literature shows (Janvry et ai, 1991), high transaction costs can result in some markets failing entirely. Beyond a certain cost, it is simple not worth suppliers reaching into more remote or difficult to reach areas. For example, both farmers and the non-farm sector suffer as producers of agricultural inputs are unable or unwilling to transport production inputs such as fertilizers to rural areas, and productivity suffers as a result. Even where suppliers do exist, rnarkets are often very small. This tends to limit the number of competitors, giving rise to complaints of collUSion and oligopolistic practices. Farmers and businesses in Manggarai complain that large businesses in urban areas are able to create an oligopoly to control prices ofthe goods that they produce and consume. Their weak bargaining pOSition is exacerbated by lengthy travel times. For example, when farmers take their goods directly to market, they are often forced to leave in the middle of the night in order to arrive in the nearest major town in time to sell their produce and return home. Buyers in town often wait until the buses are about to return to the villages and offering much lower than regular prices to the farmers, who are forced to sell or bear the additional cost of staying overnight in the city. Hoads in Manggarai D!St'iCt, East Nu,a Tenggari:!: 13 infrJstn.Jctl:re Declineand Impacts on Business and Con,mun!tie5 1 What happens when roads are improved? The main road through Sambi Rambas sub-district is the national road running from Ruteng to Bejawa. Villages within this sub-district must first meet the main road via the district road system. In Satarnawang village, the Swiss Intercorporation project funded the construction of a Telford road of 10 km in 1998-1999. The road, built with local community involvement, had a strong impact on socio-economic development in the village. it used to take about six hours to travel to Ruteng during the dry season and ten hours during the wet season. Because the road was made of soil, often vehicles would become stuck during the wet season and have to wait overnight for repairs or towage. There were only two vehicles regularly servicing passengers to and from the area--Nwooden busesN a truck fitted with chairs and covered with an awning. The - bus was unable to enter the village, so produce was carried on foot or taken by horse 35 km to the nearest bus stop in Bealaing. The nearest health facility at the time consisted of a public health centre (Puskesmas) in the next village, Lengkoajang. Because of the distance, most people chose to receive treatment from a traditional health practitioner (dukun), reSUlting in lower quality care. There was no senior high school, so students had to travel to the sub-district capital for higher education. Due to the cost of transport, and the time away from agricultural activities, many children would drop out before high school. Since the Telford road was built, and subsequently asphalted by the government in 1999, it now takes 3 hours to travel from Satarnawang to Ruteng and there is year-round access. Farmers and intermediary traders are able to make the round trip in one day. Now, more than 30 buses cover the route, and 2S of these are owned by local businesspeople. As the new road became a hub for trade, locals began moving their houses and businesses closer to it, or opened new businesses, in order to take advantage of the increased market. Farmers are now less reliant on intermediary traders as they are able to sell their crops directly to traders in Ruteng and return home in one day. This both improves profits for farmers, and reduces the cost of raw materials for businesses in the district capital. The increase in farmers'profits means they are now able to buy more household goods and modern agricultural inputs, which in turn supports growth in the off-farm sector. The secondary impacts included improved education and health facilities. Now local people are able to go to Ruteng for serious illnesses and a new Puskesmas opened in the area partly due to its improved accessibility. A Senior High School was built in 1996 just as the road project was completed; the "road was one of the reasons why this location was chosen. Due to increased services, and the presence of new teachers and students from neighboring villages, Satarnawang also experienced an increase in demand for other services such as boarding houses, and land prices in the area increased. Why are Road Conditions so Bad? Insufficient Funding for Roads? The road budget for the district, including for maintenance, comes from the District Budget (APBD). 12 The DAU (Dana Alokasi Umum - General Allocation Grant) is the most important source of sub-national revenues in Indonesia. The 2004 DAU transferto Manggarai was Rp. 173.15 billion and accounted for 86% oflotal revenues. National roads are funded directly by central government through a Special Allocation Fund or OAK. Authority for provincial roads lies with the provincial government, and maintenance of these roads is funded by the APBD1 12 APBD2 (District budget), a general pool offunds that combines the DAU (Dana A/okasi Umum - the general-purpose equalization transfer from central governmentJ national and provincial OAK (Dana A/okasi Khusus - Special AllocQtion Funds), Qnd District own revenues. f\o)d, i;-. 1,~flaWUCWle I)&:i~e ~"d ';1~f1::lg"ra: D!str:(t, E5S!i'\us~ Ten'29"rJ: Impacts en i3"s:neS5 and COiTIm:.;ni~ies I or the provincial budget. In 2004, Manggarai received Rp. 3.48 billion in DAK specifically for roads under national and provincial govemment authority. Local authorities are satisfied that funding for national road maintenance is suffiCient, however, they claim that funding for provincial roads is not yet adequate for the district's needs. Table 4 : Outlines 8udget Sources For Manggarai And Allocations For Development And Routine Expenditure, Roads. -, All figures in billions of Rupiah The district govemment considers lack of DAU to be the biggest limitation to its ability to maintain roads. It asserts that the DAU should be more heavily weighted on poverty level and land size, and if it were that Manggarai would be better equipped to deal with its development needs. It is fair to say that DAU calculation does not have a strong equalizing effect between rich and poor districts. The largest part of the calculation, 62% is based on the size of the civil service in a given district. Only 4% is allocated based on poverty depth, and 4% on total land size. Having said this, however, post-decentralization transfers are on average higher than those prior to decentralization were, and road conditions have declined during this period. In addition, increases in the DAU would not necessarily be used to fund road development. Given that on average 6% of the budget has been allocated to roads in the past 5 years," this would mean for every additional Rp. 1bil (USD 100,000) allocated through the Q,AU, the maximum increase we could expect to the road budget would be only Rp. 55.3 mil (USD 5,530) would be allocated to roads. A focus on (expensive) upgrading to asphalt rather than (inexpensive) maintenance A further reason why district roads are so bad is that expenditure is heavily biased towards the construction of new roads and the upgrading (asphalting) of existing roads, rather than routine and period maintenance. In 2004,62% (Rp 3.9billion) of the road budget was allocated to upgrading roads to asphalt while only 23% (Rp 1.4 billion) was spent on periodic and routine maintenance. The total maintenance bill covered only 33km of routine maintenance. The final 15% (or Rp 0.9 8illion) was spent on new road construction. 13 Road budget as percentage ofAPBD 1999-2005 Roads ir. M~nggarai Dimicr, E3sr Nu,~ Tengg3ra: 15 1 Infrastructure Decline and imp ilus:n~ss and CommunitieS II!l3l11!1i1!li1l1111i11ii1Il1111iIllllIDBIIiIIII· · ·!llilliillli!ilIlIllllllm.IlBIl!IIIf,liWRnl!i!!!Ill'i!!ilIllIIIIaalll'ilI'IIi'I'i'lIliI'ImiMI\1Mi!I!!ll@I!!I!·~IlIIt·§i K~~ll!m_I!I\li.iii'mi!lliIl·· to road building and maintena,nce of Rp. 19.06 billion, it would take a period of 23 years to upgrade all Telford and soil roads to asphalt. During this time, however, all roads would continue to require routine and periodic maintenance, which becomes increaSingly expensive ifnot carried out on a routine basis. By contrast, Ifthe same budget were used to upgrade all soil roads to Telford or aggregate, it would cost just 74.5 billion and take only four years in terms of the budget currently available . ., Source: APBD Manggarai, 2000-2004 lfln billions of Rupiah Failure to invest more in maintenance also has a major financial cost. Technical specifications dictate that routine . maintenance should be carried out each year for the first five years of a new or upgraded road, costing between Rp. 25 and 75 million per kilometer depending on the type of road. If routine maintenance is carried out each year, the road will only require periodic maintenance in the fifth year and then can be maintained for another five years before requiring an upgrade. If the road is not maintained regularly, however, it will only last two years in a good condition before falling into the poor or very poor category. It will then require periodic maintenance which if again not maintained will require an upgrade within another 2 years. Thus, the overall cost of failing to maintain roads is high. Taking a one kilometer stretch of road as an example, the following three scenarios present the long-term costs to the government in maintaining this road: Roads in oVianggarai DistriCt. East Nusa Tenggara: Infrastructure Decline and ImpactS on Business and Communities I 17 Table 7: Calculation of Maintenance Costs and the Cost of Faili 2 Routine 45 495 450 Routine 15 165 Maintenance Maintenance 3 Routine 45. 540 Periodic 225 675 Routine 15 180 Maintenance maintenance Maintenance 4 Routine 45 585 675 Routine 15 195 ~': Maintenance Maintenance 5 Periodic 225 810 Upgrade 315 990 Periodic 75 270 maintenance maintenance 6 Routine 45 855 990 Routine 15 285 Maintenance Maintenance 7 Routine 45 900 Periodic 225 1,215 Routine 15 300 Maintenance maintenance Maintenance 8 Routine 45 945 1,215 Routine 15 315 Maintenance Maintenance 9 Routine 45 990 Upgrade 315 1,530 Routine 15 330 Maintenance Maintenance ,. 35m width asphalt Hotmix, ""Millions of Rupiah. Source: based on Kimpraswi! Manggarai costing for new roads and maintenance by surface, and maintenance requirements over time In scenario one, an asphalt road is constructed and maintained regularly, while in scenario two it is not maintained regularly. In scenario three, aTelford road is constructed and maintained regularly. The cost differences are striking; upgrading and maintaining a Telford road costs only Rp 435 million over a ten-year period compared to Rp 1,530 million for the construction of 1km of asphalt road, which is then not maintained regularly. As the Manggarai government is responsible for approximately 517 kilometers of asphalt road, failure to carry out essential routine maintenance could cost it almost Rp. 12 billion," or 63% of the current road budget, each year in the long term Most Spending on the Civil Service Due to the nature of budgeting at the local level, roads must compete for funding with all other development spending, and with routine spending, the majority of which is allocated to civil service salaries. In 2005, the district government allocated just 7% of the total budget, or Rp. 19.06 billion to roads. This is compared to the national allocation of 10%, which in itself is considered low by international standards (World Bank, 2004). In the same year, Rp. 160.05 billion was allocated for routine spending, with Rp. 125.83 billion or 62% of this allocated to paying civil servants' salaries. 16 The difference in cost between scenarios one and two 18 I P.oad5:11 Mangg'l'2.i District, Eas:. ~i1J5, T~rogg~ra: I :nfrJ,lrUC1\:re Cec;;r,e a;~d lmp~::r5 O~ Bus;n5S ana (omI1'Lin::ies Chart 3 - Manggarai Routine and Development Budget Manggarai Budget by Activity- 1999 to 2005 350.00 , - - - - - - - - - - - - - - - - - - - - - - - , 300.00 -.~- _ 250,00 0- ~ _TotaIAPBD g f'I"I 200.00 _Routine Spending a eMI Servants Salaries (Part of Routine) C DOevelopment Spending ~ 150.00 · Roads Budget (Part of Development Spending 15 ~ 100.00 50.00 0.00 llLL l 1999 2000 2001 2002 2003 · 2004 2005 Source: Manggarai Do/am Angka, 1999-2005 (Nominal Expenditures) As is the case with many districts in Indonesia, Manggarai has a large bureaucracy with 36 government agencies. Many departments have overlapping authority, such as Bappeda and the various Litbang (Research and Development units in each technical department), which are both responsible for researching development needs. The department ofTrade and Industry has overlapping duties with the department of Cooperatives, Small and Medium Business as they are both focused on supporting the same sector of the economy. Some local government departments have little to do-- the BKPMD, the Regional Investment Board, handles a very small amount of investment each year, a duty that could be integrated into another department's authority. For more detail regarding government departments and options for consolidation, see Annex 2. Since decentralization, a few districts have been able to reduce administrative spending by amalgamating departments where appropriate and eliminating others that had no logical function in the district. One is Jembrana District, in which the government reduced its seventeen departments to ten through consolidation. Whilst civil service consolidation can help local governments to rationalize spending, it is not an easy reform, as it tends to receive strong opposition from senior civil servants. Raising local revenues to fund local roads The district government is limited on how it can raise additional revenues to finance local expenditures. Although decentralization saw the majority of responsibility for roads transferred to the district level, authority to collect Roads in Mar·g9crai Ois,rlcr, East Nusa Ten';mar.:l; I Infrastructure Decline and 'mp~c(s on Business and Communities revenues from road-users still lies with the central and provincial governments. Central government collects taxes on vehicle imports and luxury sales tax on spare parts, while the provinces collect taxes on vehicle acquisition, motor vehicle ownership transfer fees and the annual motor vehicle tax as well as taxes on vehicle operation such as the fuel tax. The district government collects fees at two district border posts, and at the Reok port; however, these fees are small and are only charged to companies transporting goods in and out of the district rather than within the district.There is a weighbridge atthe Reok port; however,according to local government sources the weighbridge is broken. This means that officials in charge of-collecting fees must estimate the load weight, a process that ., is open to corruption. Fees collected are channeled into the APBD as part of the total regional revenues and therefore are not earmarked for road maintenance. As a result, businesspeople consider the fees a nuisance, as they do not get any direct benefit from them.17 Revenuescollected by the provinces are shared with the district; however, there is no differentiation between road- user charges and other revenues, so ultimately these funds are absorbed into the overall budget.This is particularly a problem in terms of road maintenance, as road-users are not held directly responsible for maintenance due to the damage their vehicles cause to roads and local governments cannot be held accountable for maintenance based on a known source of revenue. Links between the costs imposed by road-users in terms of damage to the roads, and the funds available for road maintenance would be beneficial in two ways. Road-users would have a direct incentive to minimize the use of more damaging forms of transport, and the funds available for road maintenance would be directly related to the damage caused to roads, thereby ensuring adequate funds are available for the preservation of the network. How Funds are Spent-The Road Budget Allocation Process Why does there appear to be a bias in favor of building new asphalt roads and upgrading roads to asphalt rather maintaining existing roads and building cheaper roads? One reason is the nature of the budget allocation process. Allocation of the development budget is based on two separate processes. The first is a participatory bottom-up process of discussion from the village to the district level called the Musrenbang. The second is a series of technical studies carried out by each government department, based on their area of authority. For roads, Kimpraswil, Bappeda and the Regional Secretariat carry out this feasibility study. According to Bappeda, it is in the Musrenbang that the problem of excessive emphasis on network expansion rather than maintenance is most pronounced. The majority of village and sub-district road proposals are for a new or upgraded road and not simply for maintenance of existing roads. Although the Musrenbang is supposed to be a participatory process, in reality only the most outspoken people participate and most see the results as a 17 FGO Roads:o ~"1angg3f~i Cistlict, Eas, NUSd Tenggara: infrastn;Cp~le Cedir;e ;'I,.ct impn::s on Bus:n5S and Con~m .... n::ie5 "wish list"from village and sub-district heads. During the Musrenbang process the findings ofthe feasibility study, which is carried out concurrently, are not utilized to decide on development priorities and most Musrenbang participants lack the technical skills to make decisions based on economic or social benefit to the community. Proposals are therefore made by local elites, without information that would help participants to understand the tradeoffs between building new roads and maintaining existing roads. New road building is usually given priority in both the sub-district and district level Musrenbang. Village and sub-district proposals tend to be dropped because they are not in line with district priorities such as main arterial roads. Limited budget means that the government will tend to focus on big impact projects . ., District Musrenbang The Musrenbang Process Some sub -district proposals chosen, additional district proposals Th is fa ru m be gi ns at the vi II age level, wh ere Y'II Jag erepresentatives, added facilitated by the sub-district government, make a list of projects Results to Bappeda for Budget they would like to be implemented in the village in the coming discussion year. These lists are then presented at the sub-district level Musrenbang, which consists of three representatives from each village, the sub-district head, sub-district level community leaders and sometimes the DPRD representative for the sub- Proposals from all sub -districts district. Bappeda facilitates the sub-district Musrenbang process submitted to the District and can give advice on appropriate prioritization. At the district level, Bappeda also facilitates the Musrenbang Sub -District Musrenbang with participants from other government departments, non- Some village proposals selected, and government organizations and key community figures. The list additional sub -district proposals added of priorities is again prioritized based on economic and social needs. At this stage, almost all original village level proposals are eliminated and many sub-district level proposals are removed. I Proposals from all villages submitted to District level proposals are added and Bappeda uses the results in its discussion of the RAPBD (Draft District Budget) along with sub-district I inputs from each department. " I Village Musrenbang I ;:(oads Ir. I\"~rlgg;:;ra; DiStrict. ~ast Nus;; Terlgg;:;ra: irlirastruaure Deciir,e a,-,d lmp;:;o; on Business arlO Cor.-,m;,in::ias 121 The Feasibility Study The last comprehensive study of strategic roads took place in Manggarai over 10 years ago.18 No current data is available at the local level to show which roads are of economic significance, why they are of significance, or the condition of economically significant roads. The local government claims to have knowledge of the road system from anecdotal evidence. Decisions on road development and maintenance are made without reference to actual demand. The second process, which runs parallel to the Musrenbang process, is the annual Feasibility Study, which is regulated by a national directive from PU (write out), SK #77. Bappeda with Kimpraswil and the Regional Secretariat carries out this study, which focuses on costing pre-selected roads for upgrade, maintenance or new construction. The study team consists of three technical experts who examine the physical condition of the roads and analyze local econornic and development needs. They then prioritize roads in the assessment based on the estimated budget. This prioritization takes into account the economic' benefit of improving or building a new road, the size of the population and poverty level and regional development issues such as opening up isolated areas with economic potential. Technical issues such as the amount of traffic that will use the road and the difficulty of building based on topography are also considered. Funding for the feasibility study only covers a partial study of the district; however, and as a result, the team has to prioritize which areas will be studied prior to going to the field. Its prioritization is based on instructions from the Regent and existing knowledge ofthe district. The priorities for road building and maintenance are based broadly on economic hubs, such as centers of coffee or vanilla production, roads that link sub-districttowns to the district capital and isolated areas that should be opened up. This year the study team received Rp. 25 million from the central government Department of Public Works with which they were able to study 28 lengths of road. The Draft Budget Once the feasibility study and Musrenbang process are complete, the government decides which ofthe proposed projects will be jncluded in the draft budget. Bappeda and Kimpraswil staff claimed that the feasibility study is weighted higher in terms of importance to the draft budget than Musrenbang proposals. The stated reason for this is that the Musrenbang proposals tend to focus on building new roads rather than carrying out routine maintenance and repairs. Critics argue that the decision is based predominantly on the Regent's preferences or on where important members of the government live. The Regent has several opportunities to infiuence budget allocation including indicating where the feasibility study should be carried out, participating in the Musrenbang process, and approval of the draft district budget. Due to the cost of the direct election process, the Regent enters his post indebted to many interest groups 18 Interview with Bappeda and individuals in terms of their financial support for his election rumored to be around Rp. 3-4 billion. Several respondents mentioned that the Regent would now be bound to ensure projects are implemented in areas that will directly benefit his supporters. Some critics also mentioned that previous Regents have tended to direct funds toward projects in their place of birth or residence. The Budget Agreement Once the government completes the draft budget it is then submitted to the DPRD for its approval. DPRD budget committee members decide on the budget, taking into account Musrenbang results in their respective constituent sub-d"lstricts. They do not utilize the results of the feasibility study, however, and therefore have to rely on their own judgment when it comes to development proposals. Soth government and non-government critics alike claim that DPRD members change the budget based on their own personal and political interests and that the roads system suffers as a result. At least one quarter of all current DPRD members are contractors, and as a result, it would be in their interest to divert funds from routine maintenance activities to building new roads. Though DPRD members are not allowed to take on any government contracts during their tenure, several respondents also believed that they were able to do so by placing their businesses under different management during their time in office. DPRD members, like the Supati, are often bound politically and finanCially to businesspeople that supported their election, and as a result feel obliged to ensure certain projects are carried out. Some also believe that DPRD members are infiuenced by bribes from the Regent and other members of the executive. Conversely, the DPRD asserts that it is a representative body and therefore has the right to ensure regional development represents public interests. This could result, quite naturally, in DPRD members focusing on proViding roughly equal benefits to most parts of the district to satisfy their constituents, while not focusing strongly on strategic significance and/or economic viability. As a result, the DPRD prIOritizes build'lng new roads to expand th~ road network, drawing money away from routine maintenance, and therefore participating in a process that results in poor maintenance of all roads. Collusion Leads to Poor Road Conditions Finally, many respondents contended that collusion in the tender process and subsequent poor quality road building results in poor road conditions. The key players in Manggarai have strong incentives to engage in collusion at present. Kimpraswil runs the tender process, and has a great deal of power in terms of determining project allocation, and monitoring project implementation. Many observers expressed the view that contractors are able to infiuence Kimpraswil staff in order to obtain projects. Several DPRD members are also contractors, and although they cannot legally participate in government projects, they may still be able to infiuence the process. 'l i i I I , I Many respondents argued thatthe Regent has a direct hand in the decision about which contractors win certain ! projects. It was alleged that contractors were the main supporters of the Regent's election campaign, which cost Rp 3-4 billion, and that he therefore has an interest in deciding which contractors are chosen for government projects, and in ensuring that there are sufficient construction projects for all his supporters. DISTRIG PARLIAMENT Influences Tender Process Support for Election Campaign BUPATI Influence Tender Process CONTRAGORS AND KIMPRASWIL BUSINESSPEOPLE Awards Contract . In fact, direct elections in the district may have increased incentives for key players to engage in collusion. Now, both DPRD members and the Regent must raise money and political support on a regular basis for their election campaigns. Therefore, collusion in road building begin well before the planning and budgeting process begins, with contractors supporting particular candidates for government office. In addition, there may be collusion in the tender process since there are strong incentives for local contractors to collaborate with each other and those procuring government roads projects to maximize their profits. Respondents heavily criticized the tender process because it tends to focus on obtaining the cheapest offer for the project, rather than considering the contractor's ability to provide a good road for a reasonable price. Previously the government kept a list of contractors, which categorized them based on their ability to carry out certain types of projects. Contractors were only allowed to bid for a project if they had the appropriate technical capacity. With Keppres 80/2003, however, the tender process is now open to all proposals. While in principle this has increased transparency, the open tender process, combined with collusion, may have actually resulted in unqualified contractors winning government projects. 24 I iI::;~~,:n :.'3ngCia~a; ~:';5aL~!"gi;W:3: I Di,,!;ic:, ta:;, infr~~e,,:~ ... r;: ;)':(1:111;0 211-:1 :IT'P3:!5 or. Su""e,s and CCo:',rr:ur7;,'e3 Some contractors are also accused of skimping on materials during construction to increase their profits. A 1cm reduction in the asphalt layer of a 6m wide road is equal to Rp. 34 million per kilometer." As a result, the road will only be able to sustain 70% of its traffic load in its service life (10 years). Poor quality construction, lack of regular maintenance, and overloaded vehicles can often result in roads degrading in as little as five years. Kimpraswil is also charged with monitoring all government-funded roads projects, and it hires consultants to carry outthis task. However, it usually carries out monitoring only when the road is almost complete, or complete, and therefore can no' longer affect the outcome of the project. It is rumored that monitoring consultants and members of the government can be infiuenced by contractors so that they will ignore any abnormalities in the -, project. 20 Conclusions Roads in Mangarrai are in relatively poor shape and evidence indicates that the road network has been degrading in recent years. This is having a negative impact on local firms and communities and the local investment climate. The immediate causes for these problems include lack of funding, inappropriate priorities resulting in a lack of maintenance and expensive upgrading techniques. However, the underlying problem is that the incentives for most stakeholders in Manggarai are to act in ways which result in a poor-condition, badly maintained road network. , The district Regent and members of parliament must raise money for their election campaigns, and public works projects are a traditional source offunding, both in terms of extra payments from contractors to secure bids, and the goodwill and presumed financial and political support that these contractors will provide in future election campaigns. Large, materials-intensive trunk roads are most likely to generate extra benefits to all parties, and not surprisingly, more likely to get built. Labor-intensive roads and/or maintenance of existing roads generates fewer benefits. In addition, building expensive roads in scattered locations has the added advantage of responding to community"demands, as expressed through the Musrenbang process by spreading the benefits of road construction to many localities. Kimpraswil staff responsible for procurement and monitoring of road construction, face similar incentive problems. While its staff should be neutral and simply implement the results of the planning and budgeting process, they may be given strong incentives, in the form of payments from contractors, to ensure that they do not monitor construction quality too closely. 19 Assuming current price of Rp.200,OOO per ton. Figures from Gadjah Modo University Research Institute,200S 20 Various anonymous sources Roads in ,\I\al1ggarai District. East Nusa Tenggara: Infrastructure Decline and Impacts on Businessand Communities Local contractors also face Incentives to build materials and cost-Intensive roads. These tend to have larger budgets thereby generating greater Income. They also have the potential to provide additional Income In the form of savings through skimping construction materials. These contractors also face pressure to offer payments to secure future business. Even communities face dysfunctional Incentives, since most communities want new, high-quality roads. They both Insert these requests Into the Musrenbang process, and also lobby their DPRD representatives Informally. These demands for high quality roads, though Impossible to meet throughout the district, offer another Incentive for political representatives to prioritize construction of them In at least a few places. What steps might the central, provincial and local government take to change these Incentives and provide for better district roads) More Funds for Roads with More Accountability Transfer authority for existing central and provincial government, road-user charges to district governments and allow district governments to charge fees to road-users for the service they receive. By thinking of road maintenance as a commercial service, rather than a public good, local governments can create a new revenue stream for construction and maintenance directly related to the costs users Impose on the network. Current district road-user charges for vehicles entering and leaving the district should be abolished as they contravene the free movement of goods. However, welghbrldges should be renovated and modernized to ensure that charges are related to the costs Imposed by load weight and monitoring should be Introduced to ensure that such charges are non-negotiable. Trials could also be carried out as io the feasibility of taxing public transport providers, In return for Improving and maintaining roads with the revenues raised. Free up funds by consolidating local departments with similar roles to achieve significant budget savings and Increase effiCiency. The district government could undertake a study to Identify departments with overlapping responsibilities and recommend consolidation, and by using the experience of other districts that have carried out bureaucratic reform of this kind. In addition, the central government could support measures to rationalize local bureaucracies by providing Incentives such as cash grants for development for local governments that reduce spending on their administration. The central government could theoretically divert funds that would be saved as part of the DAU calculation for the local civil service to finance these grants. Improve the Way that Funds are Allocated and Monitored More spending on routine and periodic maintenance Is key to ensuring good road conditions In the long· term. 80th Bappeda and Klmpraswll can playa part In quantifying and socializing the relative cost-effectiveness of road maintenance, compared to the cost of building new roads and/or upgrading existing ones, and In ensuring that local citizens and leaders are aware afthe tradeoffs between these two approaches. f1o~d~ In Mdn~gMitl District, Ensl Nus~ l(!l"Igg~ra: Introwucrulr. De-dine ilnd Impiim on ft~Jsln'm ~nd Communltle5 Implement a block grant system to villa gas or sub-districts for maintenance and construction of smaller feeder roads. This type of system has been effectively used In the national Urban Poverty Project and the Sub- district Development ~rogram (KDP) to enable local people to Improve basic Infrastructure. Experience has shown that community-managed Infrastructure projects can, with appropriate facilitation, be both slgnlicantly cheaper and better-maintained than top-down projects Implemented by government. Coordinate the parallel Musrenbang and technical planning exercises to ensure that both are taken Into account when budget allocations are made for roads. This would require completing a comprehensive feasibility and needs study, and sharing the results of this study with those who are participating In community planning processes. Key would be to Inject technical expertise Into the debates on prioritization at each level while leaving communities to choose between feasible options based on their own development priorities. Use more cost effective road construction and maintenance methods to reduce spending on the construction of new village and sub-district level roads, and focus on the maintenance and cost-effective upgrading of existing roads. Undertake a comprehensive study of road usage, and calculate the costs and future benefits of maintaining and/or upgrading existing sections. Specifically, a future strategy could Include less spending on upgrading of roads with asphalt and more focus on local feeder roads that could be constructed using local labor particularly In remote localities that have limited road usage. One way of boosting this approach would be to reserve a special and substantial allocation for community labor-based road construction. Tackle Collusion This Is the most Intractable of problems, but It must be addressed. One way of doing this would be to require and enforce public disclosure of campaign contributions. Similarly Increasing the transparency of the tendering process would make It more difficult for sub-standard bids to be accepted. The Introduction of Independent third party monitoring of the condition of road construction with associated penalties would complement the Introduction of service contracts by providing an Incentive to contractors not to build sub-standard roads. Reduce Incentives for collusion by tying future roads payments to construction quality. Create Incentives for Klmpraswll to reduce collusion In procurement, Implementation and monitoring of roads projects by the greater use of outcome and service based contracts. Such contracts link disbursements to the delivery of a stream of Infrastructure services over a longer period of time, rather than the mere construction of a road. In this way contractors are given an Incentive to build roads that last since their payments depend on the road condition over a longer period of time. In addition It creates an Incentive to undertake maintenance to ensure future service quality. Ro~ds In Ml'In9g~r