Updated Project Information Document (PID) Report No: AB579 Project Name INDONESIA - Initiatives for Local Governance Reforn Project Region East Asia and Pacific Region Sector Power (20%); Irrigation and drainage (20%); General transportation sector (20%); Water supply (20%); Sub-national government administration (20%) Theme Decentralization (P); Participation and civic engagement (P); Public expenditure, financial management and procurement (P); Other accountability/anti-corruption (P); Rural services and infrastructure (P) Project P076174 Borrower(s) GOVERNMENT OF INDONESIA Implementing Agency(ies) MINISTRY OF HOME AFFAIRS, DIR.GENERAL OF REGIONAL AUTONOMY Address: JI. Medan Merdeka Utara 7, 2nd Floor, Jakarta Pusat Contact Person: Dr. I Made Suwandi, Director of Policy Facilitation and Evaluation of Regional Autnomy Tel: 6221-3453627 Fax: 3453627 Email: kaspada@telkom.net BAPPENAS Address: JI. Tarrian Suropati, Jakarta Contact Person: Mr. Max Pohan, Director for Regional Autonomy Development Tel: 62-21-31935289 Fax: 62-21-31935289 Email: pohan@bappenas.go.id Environment Category B (Partial Assessment) Date PID Prepared December 29, 2003 Auth Appr/Negs Date December 18, 2003 Bank Approval Date March 30, 2004 1. Country and Sector Background Since 2001, Indonesia has embarked on an ambitious decentralization process. This has resulted in resources, personnel and basis services being transferred from the central government in Jakarta to district governments. The "Big Bang" decentralization program resulted in: some 2 million out of 3.4 million central civil servants transferred to the provinces and districts (kabupatens);some 16,000 facilities transferred to the regions; and a number of central government departments in the provincesdisbanded.. Many districts have rationalized their service delivery agencies by consolidating several agencies into one and requiring extension agents to provide a range of technical services. Though these administrative changes have been put in place, the concomitant culture and systems required to make public services and public servants more demand driven and community responsive are still lacking. Technical agencies prepare their individual budgets and policy documents with little outside consultation and compete with each other for limited resources. Budgets are still decided at the Kabupaten-level. through lobbying the planning department, the District head's office, and local parliament, communities have limited voice in the process. Input from the Kecamatan or village remains minimal. Projects requiring construction or purchase of goods are promoted, as these provide means for civil servants to supplement their low wages through kick-backs from contractors. Civil servants' performance is measured by how well budgets are spent as opposed to development outcomes. The district budget, despite the rhetoric of 2 PID decentralization, remains an opaque document, with limited transparency and accountability of expenditure outcome. Civil society participation in budget formulation remains limited. Overall the environment for "good governance" at the local level is weak, and corruption similar to the national situation is endemic On-going analytical studies by donors, NGOs and the Bank on district governance indicate that: there is lirnited understanding of procedures and regulations relating to new decentralized mandates at the district level; most public funds are being allocated for routine rather than development expenditures; and citizen satisfaction of public service delivery remains at the same level (as when? Pre-decentralization?). However, the potential for misuse of public funds is increasing. Civil society and the local legislature, though legally mandated under decentralization laws, are not actively involved in the preparation of development priorities and plans or reviewing expenditure outcomes; and poverty issues and programs are receiving limited investment support from constrained district budgets. There are however a small, but growing number of districts who have initiated reform measures to address some of these problems. These districts are typically ones in which a reform-minded executive or legislature has invited civil society or university input in planning and budget allocation, and initiated reforms in procurement, auditing, and transparency. Some districts have even allocated resources to NGO groups to implement activities and to ensure better or improved delivery of services. There is a unique opportunity to build on these initiatives by providing incentives at the right level and establishing information fora which allow for negotiated decision-making between the executive, legislature, and civil society which should lead to better investment patterns. One way to achieve this is by investing in a process of civic participation in local governance, budget oversight and improved expenditure allocations which should lead to better targeted and quality investment The national government is working on developing guidelines and procedures for implementing the decentralization laws. Areas of focus include reforms in financial management, auditing, procurement, local revenue generation, and freedom of information. The national governmnent is also concerned about inter-governmental fiscal transfers - ensuring that there is some equalization between rich and poor districts and that basic services and development investment continues in a sustainable manner, i.e. roads get built and maintained, local governments deliver services and education standards are maintained. Poverty, another key cross-cutting area for the government is not earmarked in the current equalization grant. The key sector issues thus are how to ensure that the national reform agenda in governance is replicated or incorporated at the district-level, and that key priorities such as poverty alleviation strategies and investments have local ownership and support. The recently approved Indonesia Country Assistance Strategy (CAS) has been responsive to the decentralization efforts through developing a new approach to the delivery of development assistance tailored to each level of government. The CAS proposes a strategy to ensure transparent use of funds, accountability of service providers to clients and the necessary capacity for their effective use. Delivery of the CAS is through four business platforms. These are the: * Community Driven Development (CDD) Platform: Scaling up Indonesia' s successful CDD projects, such as the Kecamatan Development Program which direct resources to small-scale investments identified by empowered communities to improve their livelihoods; * The Public Utility Platform which applies sound governance and financial sustainability procedures to the public utilities; * the National Lending Platform which addresses national level problems such as infrastructure and 3 PID the power sector; and * the Local Services Platform: supports the creation and enhancement of accountability at the District Level. Taking into account the new role district-level governments now play - in charge of service delivery and with authority to regulate their local investment climate - the local services platform will be built on four principles: 1) define selection criteria based on clear standards of governance reform; 2) maximize complementarities across activities to promote a critical mass of reforms; 3) integrate capacity-building into project designs; 4) encourage cross-district networks and demonstration effects through stepped-up monitoring and dissemination. The proposed Initiatives for Local Governance Reformn Project (ILGR), will support this local services platform, as he first of series of operations identified in the new CAS period. It seeks to improve local governance and service delivery at the Kabupaten level, and boost investment in needed rural infrastructure. The ILGRP project-wide reforms will build local support and ownership for the governance reform agenda through improved transparency, accountability, civic participation, and local level poverty analysis. The project will leverage better use of the Kabupaten budget through complementary investment support for poverty programs. ILGRP also supports a series of district level poverty reduction strategies, which are currently being piloted in proposed ILGRP Kabupatens. These strategies are being developed using participatory poverty assessment (PPAs) techniques to encourage broad local partnerships and ownership of the local poverty agenda. 2. Objectives The development objective of the proposed Initiatives for Local Governance Reform Project is to support governance reform in 40 district (Kabupaten) governments selected on a competitive basis. The project would support a series of graduated reforms in public disclosure and civic participation in local budget planning, and execution, development of enhanced local poverty alleviation strategies, improvements in financial management and procurement and improvements in local revenue generation. Investment support would also be provided to finance priority rural infrastructure identified through participatory local government poverty alleviation strategies. Through improved governance and capacity building interventions, the project will support the overarching goal of poverty reduction in Indonesia. 3. Rationale for Bank's Involvement There are five major areas where the Bank adds value through this project: The cross sectoral approach builds on strong sectoral and CDD expertise: The Bank program in Indonesia has for the past few years worked in a decentralized environment through a number of sectoral programs (basic education, provincial health project, water and sanitation for low income comnmunities.) that have helped develop relationships, capacity and some reform (albeit sectoral) at the local level Mobilizing substantial grant and investment funds: The Bank is able to mobilize substantial grant and investment funds to help finance Kabupaten capacity building and development budgets. Building on our analytical work: The Bank has invested in substantial Economic and Sector Work through our work on local institutions (LLI study), decentralization (Regional Public Expenditure s, GDS surveys, on-going work on "local government platforms"), monitoring impact of user fees (SMERU, ASEM), and poverty (Poverty Reduction in Indonesia: Constructing a New Strategy.) Complementing activities in the urban sector: The Urban governance APL being proposed provides an excellent counterpart experiment for the city governments not covered by ILGRP and provides an 4 PID important area for cross-fertilization and exchange of experience. Building on our global knowledge base: The project builds on the lessons leamed from our global knowledge base on decentralization, good governance, CDD, and anti-corruption. Information on on-going operations in Uganda, Ethiopia, Mexico, Brazil, India provide valuable inputs and opportunities for cross-country knowledge exchange. 4. Description 1. Project components (see Annex 2 for a detailed description and Annex 3 for a detailed cost breakdown): The proposed project will support advances in good govemance initiatives at the district level through: (i) provision of specialized packages of technical assistance, general facilitation and capacity building to help broaden and deepen the reforms already underway in the relatively more progressive districts in the 9 ILGR provinces, or facilitate implementation of minimal reforms in other reform minded districts participating in this project; (ii) the project rewards good govemance at the district level by providing incremental investment funds to districts that complete a set of prescribed reforms in areas of public participation, transparency, financial management and procurement, as well as giving visible recognition of these reform initiatives; and (iii) the project will disseminate the best good govemance practices emerging from the districts so that the lessons learned can help to influence reforms in other districts not participating directly in ILGR. The proposed project would provide support over a four year period (2004-2007), for the following three components; * Component A - Local Govemance Reform * Component B - Pro-Poor Investment Funds * Component C - Implementation Support and Monitoring The total proposed IBRD/IDA Loan/Credit of US$63.46 million will principally finance investment funds for rural infrastructure identified through a participatory poverty assessment and strategy; and provide partial capacity building support (training and technical support) to enhance local government accountability. The associated capacity building, networking, monitoring, impact studies, technical assistance and facilitation activities would be co-financed through a DflD Trust Fund of $20 million. The Bank will also apply for a Japan Social Development Fund (JSDF) grant of $2 million to provide parallel financing to a national NGO to support independent monitoring and civic score-card activities in the ILGR Kabupatens. The local government would provide co-financing for the investment funds based on the cost-sharing formula in the Ministry of Finance Decree Number 35/2002, which specifies cost-sharing percentages based on the fiscal capacity of the local govemment and the nature of the project (see annex 4) . Though the overall amount of money provided by the project is limited, over time additional Bank projects would increasingly be directed to this group of Kabupaten reformers. Component A: Local Governance Reform will support training and cross-learning, capacity building, equipment, and incremental operating costs for such items as legislative drafting, and information dissemination to enable 40 qualifying kabupatens to undertake key governance reforms over a 18-24 month period prior to entry into the investment phase of the program, as well as 24 qualifying kabupatens to undertake more advanced reforms during the investment phase. Activities under this component include: (a) reform of the kabupaten planning and budget allocation process through development of participatory kabupaten poverty reduction strategies and action plans (PRSAPs); (b) enhancing participation in decision making process through support to existing and/or newly established multi-stakeholder forums; and (c) 5 PID strengthening accountability mechanisms through passage of enabling local legislation and regulations; support to the kabupaten working group on information disclosure and public participation to promote improved transparency and participation in kabupaten polices (renstra, perda process, permits and user fees) and budget planning and allocation (APBD); administrative reforms in budget execution that enhance financial controls in cash, revenues and expenditure management; and increased accountability for public expenditure through streamlined financial accounting and reporting, accountability (audit and Bupati's accountability speech-LPJ) and the local legal instruments (perdas, SKs). Activities to be financed include: training, equipment, independent monitoring, and an e-govenmuent pilot. Component B: Pro-Poor Investment will "reward" progress on good governance by providing finance for poverty focused development expenditures identified and prioritized through an enhanced kabupaten planning process. The pilot Kabupaten PRSP process has identified improvements in rural infrastructure as a key priority for poor households. ILGR financing for poor-poor infrastructure would (a) support a key need identified in the PRSP process; (b) allow the Kabupaten opportunity to free up their constrained budget (?APBD) for health and education expenditures; and (c) provide an inroad into procurement reform in a key technical agency involved in the bulk of Kabupaten procurement. The component provides support for poverty-focused rural infrastructure ranging in size from 5-10 billion rupiah per year over 2-3 years, depending on the fiscal capacity, population and location of the kabupaten. These grants will finance kecamatan and kabupaten-level infrastructure ranging from Rp 300 million upwards. The sub-projects are to be implemented by kabupaten dinas agencies through an enhanced public participation and consultation process. Activities to be financed include infrastructure sub-projects as detailed in a positive list in the project operational manual. ( for further details see annex 2b) Component C: Implementation Support and Monitoring will fund specialized technical, facilitation and/or monitoring support for the activities in Components A and B, at three geographic levels: * general facilitation support at the kabupaten level to assist stakeholder groups with the governance reform; * specialized technical assistance clustered at the regional level in procurement, financial management, transparency, public participation and participatory poverty analysis to assist kabupatens with implementing the reforms under components A, as well as in engineering design to assist kabupatens with implementation of infrastructure under component B; and * specialized technical support clustered at the central level for policy formulation, legal drafting, specialized areas of financial management, and public information. This component will also provide technical support at the central level for monitoring and overall reporting of governance outcomes under the project. Activities to be financed include technical assistance, facilitation, operational support, and monitoring and evaluation studies and surveys. Given the essential role which conumunications will play in the ILGR - not only to inform kabupaten governments and the general kabupaten population about ILGR and the reforms it entails, but also to ensure buy-in, ownership, and sustainability of reforms - a communications strategy will be developed to guide efforts through the project cycle. 5. Financing Source (Total ( US$m)) BORROWERIRECIPIENT ($17.76) IBRD ($10.00) IDA ($53.15) UK: BRITISH DEPARTMENT FOR INTERNATIONAL DEVELOPMENT (DFID) ($20.00) 6 PID Total Project Cost: $100.91 6. Implementation In the interest of "Mainstreaming Governance Reforms" and "Strengthening the Decentralization Process " the project will work with existing national and local government institutional structures, to strengthen their roles and functions as defined by Law 22/1999. The institutional structures used by ILGRP include the following levels of government: * National level steering committee, chaired by Bappenas to coordinate implementation of national policies relevant to local governments. Bappenas is the national planning agency responsible for inter-ministerial coordination on development planning and policies. National-level project Secretariat under the Ministry of Home Affairs, Directorate for Regional Autonomy (MoHa RA)- the National Implementing Agency and the key Agency responsible for implementing Indonesia's decentralization policies. Sekretariat Daerah at the Kabupaten level, the secretariat to the kabupaten executive (Bupati) responsible for all administrative and budgetary issues in the Kabupaten including review of draft legislation to be passed by the local parliament. Their role in the project will be to coordinate and oversee and institutionalize all reform activities related to transparency, procurement, financial management. * A Financial Management Reform Committee in each participating region, whose members will comprise representatives from the Finance Division and the Sekretariat Daerah to serve as champions for change. This Committee will be tasked with developing a detailed implementation plans for the target reforms and provide technical oversight and guidance for successful implementation. * Bappeda, the kabupaten economic planning agency responsible for coordinating between technical agencies and preparing the overall budget. In the project Bappeda will be responsible for all reforms related to Kabupaten planning and budget allocation and procedures related to the participatory budget planning process ( see Annex 2b for more details). Project Location During project preparation, an initial list of 22 districts were identified as potential "candidates" in the following 9 provinces :Gorontalo, North Sulawesi, South Sulawesi, Central, East and West Java, Yogjakarta, Banten, and West Sumatra. During project implementation the program would expand outwards from these initial 22 pilot kabupatens, and all 1 18 districts in the nine provinces would be eligible to apply for entry in the program. The project would select 40 Kabupatens based on their meeting project "entry criteria" on a first-come-first served basis. The project would provide facilitation, technical and training support to 40 Kabupatens in the nine provinces during the first year pre-investment phase; and support 26 out of the 40 Kabupatens during the investment phase of the project (years 2-4). Entry Criteria All districts interested in participating in the program must meet a set of minimum entry requirements to enter the program and then for subsequent investment support. Entry-level Requirements: 1 . Be located in one of the nine provinces covered by ILGRP 2. Publicly disclose in a timely and accessible manner basic documents such as the budget document, five year and annual development strategy, Bupati's Accountability Speech, budget realization 7 PID report 3. Submit a letter of agreement signed by the Bupati and chairperson of DPRD to participate in the program, that shows agreement to implement: (a) specific govemance reforms (participation, transparency, procurement, financial management) to be undertaken in subsequent phases; and (b) participatory poverty analysis and to institutionalize the poverty reduction strategy and action plan (PRSAP). 7. Sustainability 8. Lessons learned from past operations in the country/sector 9. Environment Aspects (including any public consultation) Issues : There will be no large scale impacts, primarily because investments will not be of large enough scale, nor will they be located in sensitive areas. The minimum infrastructure investment in each Kabupaten in any one year will be US$500,000, and the total investment in any Kabupaten will not exceed US$1.5 million annually (or $4.5 million over 3 years). Moreover, the project screening procedure will eliminate any projects that would have potential impacts significant enough to require ANDAL (full EA) under Indonesian regulations. Moderate impacts are possible, primarily those associated with new roads, construction of buildings, and small-scale infrastructure. A negative list will preclude funding of projects that would involve pesticides, asbestos or other hazardous materials, commercial logging, etc. Key stakeholders involved are local govemment, local parliament, community members and specific interest groups such as women and indigenous people, and civic organizations (environmental NGOs etc.) All project investments and reform initiatives will be defined by a process of civic participation in the Kabupaten, and the safeguard issues will be key part of the discussion and decisions. The project facilitator will be trained in safeguard principles and procedures, including the use of a check-list. There will be a simple, user friendly safeguards section developed and incorporated in the overall project manual. Potential Project Affected People would be part of the group that proposes the project. When they are not, there will be a special consultation process to obtain their views. The overall citizen participation processes should understand the rationale and consequences of the Bank's safeguard policies, so there is support. Investment proposals submitted will thus be pre-screened and meet safeguards requirements. As part of project information dissemination, the project will work closely with local press, radio and strategic civil society networks. The project safeguard framework will be part of the overall dissemination package. Role of Multi-Stakeholder Forum During project preparation the key mechanism for involving a range of public stakeholders was a "multi-stakeholder forum" constituted at the kabupaten level. In order to represent the broadest possible range of stakeholders, the forums include members from Civil Society organizations including local NGOs, academics, customary ethnic and/or religious leaders, private sector (including professional associations), People's organizations, especially those with a constituency amongst the poor (e.g. farmers or workers associations). Frequently referred to as Multi-stakeholder Forums, the intent is not to establish the Forums in accordance with any prescriptive formula, but rather to build upon the existing reform momentum, often utilizing pre-existing loose coalitions of civil society activists. Emphasis is placed on having the Forums broadly representative of the socio-economic realities at the local level. At the same time, efforts need to be made 8 PID to ensure both a reasonable geographic (so as to ensure all areas of the kabupaten are represented) and gender balance amongst Forum members. In practice, during the project preparation phase in 22 pilot kabupatens, the majority of stakeholder Forums, following up on a large-scale public meeting, have been divided into two distinct "working groups" - one tasked with undertaking the Participatory Poverty Analysis (PPA) and the other forming a Transparency, Participation and Accountability (TPA) working group (although the names of the working groups vary from district to district). On average, each working group has 10-15 active members, with the PPA members supplemented by local government representatives, while the TPA generally consists of a higher proportion of NGO-based members. The PPA working group is responsible for carrying out community consultations at the sub-district (kecamatan) level that produces a "Poverty Reduction Strategy and Action Plan" for consideration during the annual district-based development planning mechanism (Repeta) and eventual endorsement by the local Planning Department and ratification by the district parliament. At the same time, the TPA working group assists with the drafting and socialization of a Perda (local regulation) that ensures a higher degree of participation and transparency in the annual planning, budgeting and public service delivery activities of local government. Future Implementation Moving beyond the development of the Poverty Reduction Strategy and Action Plan (PRSAP) and the local regulation on Transparency and Participation, the working groups may be reassembled into a Stakeholder Forum to reinforce public participation in annual development planning and budgeting practices or they may help oversee implementation of the PRSAP, either in the context of a stakeholder Forum or specific issue-based working groups. Significant variation in terms of the nature of civic engagement can be expected from participating kabupatens. However, a degree of consistency will be attained by focusing public participation efforts on certain key benchmarks that are likely to include: * Public consultation and the endorsement of the stakeholder Forum (or a designated working group) with respect to the use of ILGR investment funds. It is anticipated that ILGR funds will target mainly pro-poor rural infrastructure; * A "Transparency Commission" comprised primarily of civil society leaders to provide independent monitoring of the implementation of the Perda on Transparency, Participation and Accountability; * Public consultation mechanisms (envisioned in some kabupatens as distinct and ongoing Working Groups) on specific issues deemed crucial to district-level poverty reduction; and, * Enhanced access to information and the possible involvement of independent non-government participants in tendering committees as part of the financial management and procurement reform package. 10. List of factual technical documents: 9 PID 11. Contact Point: Task Manager Asmeen Khan The World Bank 1818 H Street, NW Washington D.C. 20433 Telephone: 202-458-5377 Fax: 202-477-2733 12. For information on other project related documents contact: The InfoShop The World Bank 1818 H Street, NW Washington, D.C. 20433 Telephone: (202) 458-5454 Fax: (202) 522-1500 Web: http:H/ www.worldbank.org/infoshop Note: This is information on an evolving project. Certain components may not be necessarily included in the final project.