Documentof The WorldBank FOR OFFICIAL USE ONLY ReportNo: 27424-IND PROJECTAPPRAISAL DOCUMENT ONA PROPOSEDLOAN INTHEAMOUNT OFUS$14.50MILLION AND A PROPOSEDCREDIT INTHEAMOUNT OFSDR9.92MILLION(US$l5.00MILLIONEQUIVALENT) TO THE REPUBLICOF INDONESIA FORTHE INITIATIVESFORLOCAL GOVERNANCEREFORMPROJECT May 16,2005 Rural Development and Natural Resources Sector Unit East Asia and Pacific Region This documenthas a restricteddistributionandmay be usedby recipients only inthe performanceof their official duties. Its contentsmay not otherwise be disclosedwithout World Bank authorization. CURRENCY EQUIVALENTS (Exchange Rate Effective February 16,2005) Currency Unit = Rupiah IDR = US$.111 US$ = IDR9,OOO FISCAL YEAR January 1 -- December 31 ABBREVIATIONS AND ACRONYMS AAA Analytical and Advisory Activities ADB Asian Development Bank AKU Arah KebijakanUmum(General Policy Directive) AMDAL Analisis Mengenai Dampak Lingkungan (Environmental Impact Analysis) ANDAL Analisis Dampak Lingkungan (Environmental Assessment) APBD Anggaran Pendapatandan Belanja Daerah (Regional Government Budget) APBN Anggaran Pendapatandan BelanjaNegara (State Budget) APKASI Asosiasi Pemerintah Kabupaten Seluruh Indonesia (Association of Kabupaten Governments inIndonesia) APL Adaptable Program Loan ASEM Asia and Europe Management Fund AusAID Australia Agency for International Development BAPEDALKAB Badan PengendalianDampak LingkunganKabupaten (Office for Environmental Impact Control - atlocal level) BAPEDALDA Badan PengendalianDampak Lingkungan Daerah (Office for Regional Environmental Impact Control - atprovincial level) BAPPEDA Badan PerencanaanPembangunanDaerah (Regional Development Planning Board - atlocal andprovincial levels) BAPPENAS Badan PerencanaanPembangunanNasional (National Development Planning Agency) BAWASDA BadanPengawasDaerah (Regional Internal Auditor) BIGS Bandung Institute for Govemance Study BIGG Building Institutions for Good Governance BPD BadanPenvakilan Desa (Village Representative Council) BPKP Badan Pemeriksa Keuangan danPembangunan(National InternalAudit Agency) BPS Badan Pusat Statistik (Central Statistical Agency) BUILD Breakthrough UrbanInitiatives for Local Development Bupati Head o f Kabupaten Executive CARE Cooperative for Assistance and Relief Everywhere CAS Country Assistance Strategy CDD Community Driven Development CIDA Canadian International Development Agency CLGI Center for Local Governance Innovation CLGS Community and Local Government Support COREMAP Coral Reef Rehabilitationand Management Program CPAR Country Procurement Assessment Review FOR OFFICIAL USEONLY CPPR Country Procurement Portfolio Review cso Civil Society Organization CSSP Civil Society Strengthening Support Program DAK Dana Alokasi Khusus(Specific Purpose Grant) DAU Dana Alokasi Umum(General Allocation Grant) DFID UKDepartment for ForeignInternationalDevelopment DG Directorate General DGRA Directorate for Regional Autonomy (Ministry of Home Affairs) Dinas Technical Agencies at Regional Level DLN Dana Luar Negeri (Foreign Funds) DPRD Dewan Penvakilan Rakyat Daerah(Regional Legislative Council) EA Environmental Assessment EA Executing Agency EIRR Economic Internal Rate Return EMP Environmental Management Plan EOP EndofProject ERR Economic Rate of Return ESW Economic and Sector Work FITRA Local Budget Monitoring NGO F-Kab Fasilitator Kabupaten (District Facilitator) FM Financial Management FMR Financial Monitoring Report GAR General APBD Revenue GDS Govemance and Decentralization Survey GO1 Government o f Indonesia GR Government Regulation GTZ German Technical Assistance (Deutsche Gesellschaft ftir Technische Zusammenarbeit (GTZ) GmbH IBRD Intemational Bank for Reconstructionand Development ICR Implementation Completion Report I C W IndonesianCorruption Watch IDA Intemational Development Association I D T InpresDesa Tertinggal (Presidential Instructionon Least Developed Villages program) IFC Intemational Finance Corporation ILGR Initiatives for Local Governance Reform Project IP Indigenous People Ivp Isolated andvulnerable peoples JBIC Japan Bank for International Cooperation JICA Japan Intemational Cooperation Agency JPS Jaringan Pengaman Sosial (Social Safety Net) JSDF Japan Social Development Fund Kabupaten DistrictLocal Government KADIN Indonesia Chambers o f Commerce Kanwil Provincial office of the central government ministry Kaukus Tujuh Belas Group o f SeventeenNGOs KDP Kecamatan Development Project KEPPRES KeputusanPresiden (Presidential Decree) KKN Korupsi, Kolusi dan Nepotisme (Corruption, Collusion andNepotism) This document has a restricted distribution and may b e used by recipients only in the performance of their official duties. I t s contents may not be otherwise disclosed without W o r l d Bank authorization. KMK Keputusan Menteri Keuangan (Ministryof Finance Decree) KPPN Kantor Pelayanan PerbendaharaanNegara (Decentralized NationalTreasury Office) LAR LandAcquisition and Resettlement LARAP Land Acquisition and ResettlementAction Plan LCS Least-Cost Selection LED Local Economic Development LIL Leaming and InnovationLoan LLI Local Level Institution Study LPEM Lembaga PenyelidikanEkonomi dan Masyarakat (Economic and Society ResearchInstitute) LPJ Laporan Pertanggungjawaban (Bupati's Accountability Report) LPKPP Government Procurement Policy Development Institute M&E Monitoring and Evaluation MDG MillenniumDevelopment Goals MIS Management Information System MOF Ministry of Finance MOHA MinistryofHome Affairs M O U Memorandum o f Understanding MSF Multi-Stakeholder Forum M T R Mid-termReview Musrenbang Desa Musyawarah PerencanaanPembangunanDesa (Village Planning Meeting) MusrenbangKabupaten Musyawarah PerencanaanPembangunanKabupaten (District Planning Meeting) Musrenbang Kec Musyawarah PerencanaanPembangunan Kecamatan (Sub-district Planning Meeting) NCB National Competitive Bidding NGO Non-government Organization NIC National ImplementingCommittee NJOP Nilai Jual Objek Pajak (land price estimate usedfor landtax calculation) N M C National Management Consultants NPS National Project Secretariat NSC National Steering Committee O&M Operation and Maintenance PAP Project Affected People PCT Provincial Coordination Team Perda Peraturan Daerah(Local Regulation) PERFORM Performance Oriented RegionalManagement PHP Provincial Health Project PHRD Program on HumanResources and Development PIU Project ImplementationUnit P M U Project Management Unit POM Project Operational Manual PP Peraturan Pemerintah (Government Regulation) PPA Participatory Poverty Analysis PRSAP Poverty Reduction Strategy and Action Plan PRSP Poverty Reduction Strategy Paper PSR Project Summary Report PWG Poverty Working Group QBS Quality-based Selection QCBS Quality and Cost Based Selection Renstra Rencana Strategis (Strategic Plan) RKL Rencana PengelolaanLingkungan (Environmental Impact Management Plan) RMC Regional Management Consultant RPERs Regional Public Expenditures Review Sekda Sekretaris Daerah (Regional Secretary) SIL Sector Investment Loan S K Surat Keputusan (Decision LettedDecree) SMERU Social Monitoring and Economic Research Unit SOP Standard Operating Procedures SUSENAS Survei Sosial Ekonomi Nasional (National Social Economic Survey) TA Technical Assistance T M P TimMonitoringPengamanan (Safeguard Monitoring Team) TOR Term o f Reference UKL Upaya Kelola Lingkungan (Simple Environmental Impact Management) UNDP UnitedNations Development Program UNICEF The UnitedNations Children Fund U P L Upaya Pemantauan Lingkungan (Simple Environmental Monitoring) UPP Urban Poverty Project USAID United States Agency for International Development VIP Village Infrastructure Project WB World Bank WDR World Development Report WISMP Water Resources and Irrigation Sector Management Program Vice President: Jemal-ud-din Kassum, EAPVP Country ManagedDirector: Andrew D. Steer, EACIF Sector ManagedDirector: Mark D. Wilson, EASRD Task Team Leader/Task Manager: Erman A. Rahman, EASRD INDONESIA INITIATIVESFORLOCAL GOVERNANCEREFORMPROJECT CONTENTS A. Project Development Objective Page 1. Project development objective 3 2. Key performance indicators 3 B. Strategic Context 1. Sector-related Country Assistance Strategy (CAS) goal supported by the project 3 2. Main sector issues and Government strategy 4 3. Sector issues to be addressed by the project and strategic choices 7 C. Project Description Summary 1. Project components 7 2. Key policy and institutional reforms supported by the project 9 3. Benefits and target population 10 4. Institutional and implementation arrangements 11 D.Project Rationale 1. Project alternatives considered and reasons for rejection 14 2. Major related projects financed by the Bank andor other development agencies 15 3. Lessons learned and reflected inthe project design 16 4. Indications o fborrower commitment and ownership 19 5. Value added o f Bank support inthis project 19 E. Summary Project Analysis 1. Economic 20 2. Financial 21 3. Technical 21 4. Institutional 22 5. Environmental 26 6. Social 28 7. Safeguard Policies 31 F. Sustainability andRisks 1. Sustainability 32 2. Critical risks 33 3. Possible controversial aspects 34 G. Main LoanConditions 1. Effectiveness Condition 34 2. Other 34 H. Readiness for Implementation 36 I.CompliancewithBankPolicies 36 Annexes Annex 1: Project Design Summary 37 Annex 2: Detailed Project Description . 41 Annex 3: Estimated Project Costs 72 Annex 4: Cost Benefit Analysis Summary 73 Annex 5: Financial Summary 85 Annex 6: (A) Procurement Arrangements 86 (B) Financial Management and Disbursement Arrangements 96 Annex 7: Project Processing Schedule 104 Annex 8: Documents inthe Project File 106 Annex 9: Statement o f Loans and Credits 109 Annex 10: Country at a Glance 111 Annex 11: Safeguard Framework 113 Annex 12: Anti-Corruption Plan 133 MAP(S) IBRD#32878 INDONESIA Initiatives for LocalGovernance ReformProject ProjectAppraisalDocument East Asia and Pacific Region EASRD 30RROWER 0.18 I 0.00 I 0.18 [BRD 13.01 1.49 14.50 [DA 13.53 1.47 15.00 JK:BRITISHDEPARTMENT FORINTERNATIONAL 10.80 1.20 12.00 DEVELOPMENT (DFID) LOCAL GOVTS. (PROV., DISTRICT, CITY) OF BORROWING 4.62 0.00 4.62 ZOUNTRY Borrower: GOVERNMENT OF INDONESIA Responsible agency: MINISTRY OF HOME AFFAIRS, DIR.GENERALOF REGIONAL AUTONOMY Address: J1. Medan Merdeka UtaraNo. 7, 7th Floor, Jakarta Pusat 10110 Contact Person: Dr. IMade Suwandi, Director of Local GovernmentFunctions Tel: +62-21-3453627 Fax: +62-21-3453627 Email: kapasda@telkom.net Other Agency(ies): BAPPENAS Address: J1. Taman Suropati2, Jakarta 10310 ContactPerson: Mr.Deddy Koespramoedyo, Director for Regional Autonomy Development Tel: +62-21-31935289 Fax: +62-21-31935289 Email: deddyk@bappenas.go.id 1 Estimated Disbursements Bank FY/US$mk ( I Project implementation period: Four years Expected effectiveness date: 10/01/2005 Expected closing date: 09/30/2009 - 2 - A. Project Development Objective 1. Project development objective: (see Annex 1) The development objective o f the proposed Initiatives for Local Governance Reform Project (ILGR) is to pilot support to district (kabupaten) governments in improving transparency, accountability and public participatory practices and in undertaking reforms in financial management and procurement. Primarily the project would assist advances in good governance at the district level through establishment o f a set o f minimumreforms inthe key cross-cutting governance areas of public participation, transparency, financial management and procurement as well as in preparing a participatory Poverty Reduction Strategy and Action Plan (PRSAP) through provision o f general facilitation, technical assistance and capacity building. The project would also provide incremental poverty targeted investment funds to kabupatens that complete a predefined set o f the minimum reforms to finance priority rural infrastructure identified in the PRSAP that brings the cross-cutting reform elements together, including more pro-poor budget allocations, to demonstrate and test reform implementation at the district level. Lastly, the project would give visible recognition o f the kabupatens' reform initiatives and disseminate good governance practices emerging from the districts so that the lessons learned can help to influence reforms in other kabupatens not participating directly inILGR. 2. Key performance indicators: (see Annex 1) The key performance indicators are: (a) Extent to which recommendations from consultations/public hearings are incorporated into district plans andregulations (peudas); (b) Greater public availability o f information; (c) Twelve district budgets show increases inpoverty targeted expenditures by the end-of-project (EOP); (d) Economic Internal Rate o f Return for project-funded infrastructure (>15%); (e) Greater than 12 participating district governments practicing accepted standards o f procurement as verified by audits and studies by EOP; (0 Greater than 12 participating district governments practicing sound financial management as verified by audits and studies by EOP; and (8) Percentage increase in stakeholder satisfaction with government service delivery. B. Strategic Context 1. Sector-related Country Assistance Strategy (CAS) goal supported by the project: (see Annex 1) Document number: 27108-IND Date of latest CAS discussion: November 25,2003 The main objective o f the Country Assistance Strategy i s to assist the Government o f Indonesia with poverty reduction over the medium and long term, through: (a) improving the investment climate by maintaining macroeconomic stability, building a stronger financial sector, fostering a competitive private sector, building Indonesia's infrastructure, and creating income opportunities for poor households and farmers; (b) malung service delivery responsive to the needs o f the poor by helping Indonesia accelerate education and health outcomes, reducing environmental degradation, and improving access to clean water and sanitation, and helping Indonesia revamp the management and accquntability systems for service delivery (such as making providers more directly accountable to their clients, especially the poor); and - 3 - (c) improving governance by making development planningmore responsive to constituents, improving transparency and public financial management, effective implementation o f decentralization, strengthening the accountability o f local govemments under a more coherent decentralization framework, and enhancing the public establishment o f a credible, impartial and accessible justice sector. The project supports all three goals identified in the CAS through its focus on improved local governance and service delivery at the district level, as well as investment inrural infrastructure. One o f the key CAS business platforms i s the Local Sewices Platform (LSP), which is intended to support enhancement o f governance accountability at the district level. Indonesia decentralization has put district-level govemments in charge of service delivery and given them authority to influence and regulate their local investment climate. The project, which focuses on basic, cross-cutting governance reforms, is the first in a series of operations identified in the new CAS period to support the implementation- o f the LSP. It is meant to strengthen the foundation for good governance on which other, more sectoral focused project interventions will be able to build. 2. Main sector issues and Government strategy: Decentralization and Local Governance The decentralization Laws 22 and 25/1999 (on local government and fiscal balance) which became effective in January 2001 have led to a fundamental shift in Indonesia's govemance and service delivery. By October 2004, the country had 440 kabupatens (districts) and kotas (urban centers) responsible for providing basic services to their citizens. In the past, financial and human resources were allocated and appointed by Jakarta. With decentralization, all government functions - apart from national economic and monetary affairs, defense, legal and judicial systems, intemational relations, trade and monetary affairs - have been devolved to the kabupatenskotas. The Law 25/99 mandates that central government shares revenues with local and provincial governments. At least 25 percent o f total national revenues are channeled to the local level through the general allocation grant (DAU). The Law also mandates the allocation o f special specific purpose grants (DAK) and a further sharing of portions of national tax and natural resources revenues with local governments in production areas. Currently the local share in government spending has nearly doubled from 17 to 31 percent and i s likely to grow to over 40 percent. For the majority o f kabupatens, the DAU constitutes 70 percent o f their revenues, and total central transfers including shared taxes account for 85 percent o f revenues. The "Big Bang" decentralization program o f 2001 led to some 2 million out o f 3.4 million central civil servants being transferred to the provinces and kabupatens, a number o f central government departments in the provinces being disbanded (Kanwils), and some 16,000 facilities transferred to the regions. Many kabupatens have rationalized their service delivery agencies (Dinas) by consolidating several agencies into one and requiring extension agents to provide a range o f technical services. Though these administrative changes have been put in place, the concomitant changes in culture and systems required to make public services and public servants more demand driven and community responsive are still lacking. Dinas agencies prepare their individual budgets and Renstras (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 (Bappeda), the Bupati's office (Sekda) and local parliament (DPRD). Communities have limited voice in the process and input from the kecamatan or village remains minimal. - 4 - Projects requiring construction or purchase o f goods are favored, as these provide means for civil servants to supplement their low wages through kick-backs from contractors. The kabupaten budget, despite the rhetoric o f decentralization, remains an opaque document, with limited transparency, and accountability o f expenditure outcome. Overall the environment for "good governance" at the local level i s weak and corruption similar to the national situation i s endemic. InSeptember 2004, the decentralization laws were revised with the passage ofLaws 32 and 3312004. The key significant changes introduced by the laws include the direct election o f regional heads, review o f district budgets by the province on behalf o f the central government, a greater role for the province in monitoring o f district performance, and new requirements on local borrowing. The national government is working on developing guidelines and procedures for implementing the decentralization laws. Areas o f focus include: reforms in financial management, auditing, procurement, local revenue generation, and freedom o f information. The national government i s also concerned about inter-governmental fiscal transfers--ensuring that there i s 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 health and education standards are maintained. Rural Poverty The economic crisis o f the late 1990s revealed the vulnerability o f millions o f Indonesians to poverty. A World Bank analysis showed that around half o f all Indonesians face a 50-50 chance o f experiencing an episode o f poverty every three years (World Bank, 2001: Constructing a New Strategy for Poverty Reduction). Prior to the crisis, the poverty headcount index was 15.7 percent, but rose to a peak o f 27 percent in early 1999. Since then poverty levels in Indonesia have fallen as rice prices declined and real wages increased, and in 2002 the rural poverty headcount ratio was 23.1 percent, three times higher than the urban rate. Java accounts for 61 percent o f the poor, and the rest are scattered through eastern Indonesia as well as other areas (South East Sulawesi, East Java, East Kalimantan, and Central Java). Poverty i s concentrated in rural areas, where 78 percent of the poor reside and 65 percent o f poor households are considered agricultural, as about half o f their income comes from agriculture. Access to markets and services remains a major determinant o f rural poverty. Inthe past, government poverty programs focused on providing subsidies and handouts from the center to households targeted in poor areas through programs such as the Inpres Desu Tertinggul (IDT) which provided block grants to poor villages, and the Social Safety Net (JPS) program and programs to compensate reduction o f fuel subsidy. In addition, government approaches to poverty alleviation programs have generally been centralized sectoral allocation o f funds. In early 2005 Indonesia finalized its five-year national poverty reduction strategy (PRSP) which is an integrated part o f the country's five-year development plan (RPJM). The PRSP was subjected to consultation broadly with civil society and across the country. The consensus was to view poverty as multi-dimensional-that poverty i s not only about lack o f income but also lack o f access to basic rights that should be respected, protected and fulfilled, as stated in the RPJM. These rights include access to food, health services, education, employment, housing, water, land, environment and natural resources, security and participation in the process o f public policy making. The PRSP rightly links poverty reduction to governance-that "better governance will create more opportunities for people to participate in decision makmg and empower the poor as well as allow the private sector and others to play a strategic role in - 5 - poverty reduction." The PRSP will become the reference for local governments to develop their own poverty reduction strategies. The key sector issues, thus, are how to ensure that the national governance reform agenda i s incorporated at the district-level, and that key priorities and investments identified in poverty reduction strategies are included indistrict-level budgets and have local ownership and support. National Frameworkfor Local Government Capacity Building The Government has developed an overall national framework for capacity building to support decentralization (October 2001). Key elements o f this strategy include: 0 Understanding and disseminating the regulatory framework for decentralization, tasks and functions for the regions, so that all stakeholders inthe region participate in decentralized local governance. 0 Developing the roles and functions o f the DPRD and village councils (BPD), developing a code o f conduct and interactionbetween the councils and civil society. 0 Buildinga new system of fiscal transfers including accountability and transparency in the Kabupaten budget (APBD) and an open inclusive process for its formulation and implementation. 0 Establishing a human resource management system with clear personnel management and ensuring institutions are capable for their tasks and functions. Developing patterns o f interaction with other regions to allow transfer and exchange o f good practices. 0 Developing a new mechanism to promote regional economic development, employment and poverty alleviation. Donor supportfor Indonesia's Decentralization Program The donor consultative group for Indonesia has highlighted a number o f issues that the Government needs to address: Develop a cohesive management framework for decentralization which includes appropriate mechanisms for coordination between agencies, internal reform for the Ministry o f Home Affairs, and strengthening o f monitoring and evaluation functions. Define minimumstandards for basic service provision involving stakeholders inthe process. Utilize the full range o f fiscal decentralization instruments such as the DAK, and improve procurement, accounting and auditing systems. Fully enforce the regulations on public participation as stipulated inLaw 2811999. Improve implementationo f supervisory functions. Provide additional funds to the regions for capacity buildingpurposes. Support civil service reform. Involve regional and local governments inpro-poor policy formulation. The UNDP-World Bank-ADB supported Partnership for Governance Reform in Indonesia provides a mechanism for donors to coordinate efforts in multi-donor supported governance reform activities in Indonesia. In January 2005, the World Bank, DFID, UNDP, ADB and the Government o f Netherlands have established a multi-donor trust fund to support decentralization (Decentralization Support Facility, DSF). This facility will help donors harmonize their local government programs and help support an overall government vision for implementing decentralization. - 6 - 3. Sector issues to be addressed by the project and strategic choices: Indonesia's ongoing decentralization process has resulted in financial resources, personnel and responsibilities for delivery o f basic services being devolved to district governments. Nonetheless, comprehension o f procedures and regulations relating to new decentralized mandates at the kabupaten level i s limited, and most district-level funds are being allocated for routine rather than development expenditures. Moreover, the potential for misuse o f public funds i s high. Civil society and the local legislature, though legally mandated under decentralization laws, are not actively involved in the preparation o f development priorities and plans or reviewing expenditure outcomes. Poverty issues and programs are receiving limited investment support from constrained kabupaten budgets. There are, however, a small but growing number o f kabupatens who have initiated reform measures to address some o f these highlighted problems. There is an opportunity to build o n these initiatives by providing incentives at the right level and establishing information forums 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 i s by investing in a process of civic participation in local governance, budget oversight and improved expenditure allocations leading to better targeted andquality investment. Using a cross-sectoral approach, the ILGR will address systemic capacity issues that affect kabupaten governments, including weaknesses in public policy, exclusionary budget planning and management practices; poor standards o f service delivery and accountability to end users; weak financial management, procurement and intemal controls; limited local resource mobilization capacity, and barriers to improving the local investment climate. Poverty reduction i s cross-sectoral by nature and sectoral interventions required to address poverty will depend on the geographical location and the nature of rural poverty in the kabupaten. The project takes a cross-sectoral approach towards addressing the issues identified above through a system that builds local ownership for the reform agenda through improved transparency, accountability, civic participation, and local level poverty analysis, and will leverage better use o f the kabupaten budget through complementary investment support for poverty programs. A series o f district level poverty reduction strategies, currently being piloted in the ILGR kabupatens, use participatory poverty assessment (PPAs) techniques to encourage broad local partnerships and ownership o f the local poverty agenda, and prepares cross-sectoral district-level poverty strategies which also supports the national PRSP process. C. Project Description Summary 1. Project components (see Annex 2 for a detailed description and Annex 3 for a detailed cost breakdown): The project has the following components: e Component A: Local Governance Reform 0 Component B: Poverty Targeted Investments 0 Component C: Implementation Support and Monitoring Component A: Local Governance Reform will continue supporting kabupatens, which have participated in the project preparation (batch 1, approximately 15 kabupatens) and meet minimumentry requirements, to undertake more advance reforms to meet minimum pre-investment and investment requirements stipulated in the Local Govemance Reform Framework (see Attachment 1 to Annex 2). Simultaneously, starting in Year 2 o f project implementation, about 25 additional kabupatens will be selected to participate in ILGR and be assisted over a period o f between 18-24 months, in meeting minimum pre-investment requirements. Sub-components include: - 7 - Al. Reform of the Kabupaten Planning and Budgeting Process, which focuses on the enhancement o f participationand instrengthening links with local pro-poor priorities; A2. Reform of the Kabupaten Budget Implementation and Financial Management and Reporting, which will improve local procurement and financial management practices; and A3. Strengthening Accountability Mechanism, which will help increase information disclosure and cross-district networking. Component B: Poverty Targeted Investment will provide incremental financing in approximately 15 (batch 1) kabupatens for supporting pro-poor development expenditures which are identified and prioritized through an enhanced planning process linked to the development o f the district PRSAP. Investment funds for the batch 2 kabupatens will come from the subsequent project-ILGR2, the design o f which will be informed by the experiences and lessons coming out o f this project. Component C: Implementation Support will fund specialized technical, facilitation and monitoring support for the activities in Components A and B at the district, regional and national levels. Sub-components include: C1. General Facilitation and Specialized Technical Assistance, which provides for facilitation and technical assistance to the districts; C2. Capacity Building and Institutional Training, which provides for training to district staff and other local stakeholders to institute govemance reforms; and C3, Monitoring, Evaluation, and Studies/Surveys, which will support the overall monitoring and evaluation framework for the project, and finances studies on local govemance. Table 1. ProjectCostsby Components-TotalIncludingContigencies ndicative Bank- % of Component costs Yo of financing Bank- (US$M) Total (US$M) financing A. Local Govemance Reform 1.Reform o fthe KabupatenPlanning and Budgeting 0.50 1.1 0.00 0.0 Process 2. Reformof KabupatenBudgetImplementation and 0.50 1.1 0.00 0.0 Financial Management Reporting 3. Strengthening Accountability Mechanisms 0.50 1.1 0.00 0.0 B.Poverty Targeted Investments 31.18 67.3 28.06 95.1 C. Implementation Support 1, General Facilitationand Specialized Technical Assistance 8.88 19.2 1.37 4.6 2. Capacity Buildingand Institutional Training 3.56 7.7 0.00 0.0 3. MonitoringIEvaluation & StudiesISurvey 1.11 2.4 0.00 0.0 Total Project Costs 46.23 99.8 29.43 99.8 ~~ ~ Front-end fee 0.07 0.2 0.07 0.2 TotalFinancing.Reauired 46.30 100.0 29.50 100.0 - 8 - Table 2. Project Costs by Components-Base Costs (Bank andDFIDFinancing) lndicative Bank- % of DFlD % Component costs Total % Of financing Bank- Financing of DFlD (US$M) (US$M) financing (US$M) financing A. Local Governance Reform 1.33 2.9 0.00 0.0 0.00 0.0 1. Reform of the Kabupaten Planning 0.44 1.o 0.00 0.0 0.00 0.0 and Budgeting Process 2. Reform of Kabupaten Budget 0.44 1.o 0.00 0.0 0.00 0.0 Implementation and Financial Management and Reporting 3. Strengthening Accountability 0.44 1.o 0.00 0.0 0.00 0.0 Mechanisms B. Poverty Targeted Investment 31.18 67.3 28.06 95.1 0.00 0.0 C. Implementation Support 11-90 25.7 0.59 2.0 11.16 93.0 1. General Facilitation and Specialized 7.45 16.1 0.59 2.0 6.71 55.9 Technical Assistance 2. Capacity Building and Institutional 3.32 7.2 0.00 0.0 3.32 27.7 Training 3. Monitoring, Evaluation and 1.13 2.4 0.00 0.0 1.13 9.4 Studies/Survey Total Project Costs 44-41 95.9 28.65 97.1 11.16 93.0 Price Contigencies 1.82 3.9 0.78 2.6 0.84 7.0 Front-endfee 0.07 0.2 0.07 0.2 0.00 0.0 Total Financing Required 46-30 100.0 29.50 100.0 12.00 100.0 2. Key policy and institutionalreforms supportedby the project: Decentralization and strengthening o f local govemment capacity to deliver basic services to citizens is a major thrust o f Indonesia's development strategy. However much remains to be completed in terms o f issuance o f clear guidelines and standards from the central government in areas such as financial management, audit requirements, accounting standards, and minimum standards for basic services. To support the agenda, the World Bank, through a Dutch Trust Fund for Decentralization, has funded a program o f technical assistance, training and analytical work, working closely with other donors through the donor decentralization working group. The ILGR provides an opportunity to continue to support the overall decentralization policy and institutional reform agenda both at the national level (through support for policy reforms) and at the local level (through direct implementation o f activities in selected districts). Policy and institutional reforms are proposed inthe following four key areas. (i) Enhancing accountability and transparency in the local planning and legislative process. The project will assist local government executives and legislatures to develop, through broad public consultation, local laws and regulations that will allow greater freedom and access to public information (including planning and budget documents, general audit reports, procurement information and requirements for licensing) and broader public participation in policy planning, budgeting, program execution and monitoring. Once the local legislation i s passed, the local government is mandated to finance these measures through budgetary allocation thus ensuring sustainability and commitment towards the reform process. - 9 - (ii)Strengthening local governmentjhancial management and accountingstandardspractices. The project will support reform in several financial management areas including: (a) overall institutional and legal framework through the issuance o f enabling local regulations relating to financial management, budget preparation and execution, overall budget classification and construction. These changes would allow for budget classification by function in accordance with intemational best practices and better align local financial management regulations with the latest central regulations. (b) Specific administrative reforms in public expenditure management that enhance accountability o f district government staff and introduction o f financial controls to improve fiduciary safeguards and efficient handling o f public funds. (iii)Supporting a sub-national procurement reform agenda. The latest Country Procurement Assessment Review (CPAR) in Indonesia, conducted in 2000-2001, identified that from all accounts, the public procurement system does not function well. It is not market driven, has been prone to misuse and abuse, and reduces value for money for public funds. Based on the CPAR agenda the following areas have been identified as essential for sub-national reforms and thus a key focus of project interventions, which hrther strengthened by the recent issuance of Keppres 80/2003 that provides the overall framework for national-level procurement reforms. The project will support the implementation o f the Keppres at district level, particularly in establishing a procurement focal point, streamlining existing regulations to promote economy, efficiency, transparency and open competition, improving information systems, improving control, auditing and feedback system, and training and capacity building o f local staff involved inprocurement. (iv) Supporting the national poverty reduction agenda. Being the first to pilot district PRSAP, the methodology (PPAs), which has been developed during the project preparation, will be scaled up through the national Poverty Reduction Committee (Komite Penanggulangan Kemiskinan, KPK). In ILGR districts the poverty reduction strategies will be incorporated in the district five-year and annual development strategies. This would ensure that over time an increasing percentage o f the kabupaten budget is allocated to poverty related expenditures. 3, Benefitsand target population: The nine target ILGR provinces o f West Sumatra, Banten, West Java, Central Java, Yogyakarta, East Java, Gorontalo, North Sulawesi and South Sulawesi, have a combined population o f 111 millionpeople or 54 percent o f Indonesia's population. There are currently 130 kabupatens in these provinces o f which 40 would be eligible to participate in the project. The number o f poor households living in these districts i s estimated to be 22 million (based on Susenas) and approximately 2 million o f them live inthe first batch o f 15 ILGR districts. These districts, which are geographically clustered for more efficient technical assistance and information sharing/cross leaming, are Solok, Tanah Datar (West Sumatra), Lebak (Banten), Bandung, Majalengka (West Java), Kebumen, Magelang (Central Java), Bantu1 (DI Yogyakarta), Ngawi, Lamongan (East Java), Bolaang Mongondow (North Sulawesi), Boalemo (Gorontalo), Gowa, Takalar, and Bulukumba (South Sulawesi). The project would have a direct impact on poor households and indirectly have a positive impact on all citizens in the districts through increased budget allocation for pro-poor service delivery and reduction in corruption and the overall cost o f doing business leading to improvements inthe investment climate. - 1 0 - The benefits o f the project can be categorized under three main areas: (9 Enhancement of governance and improvement of the local investment climate. Measures supported by the project should improve governance through greater transparency, more public control, reduced corruption and more efficient use o f public resources. Local contractors/businesses would benefit from a more competitive, less corrupt procurement process and permitting process. Hence, the project will lead to overall improvements in the local investment climate. (ii)Povertyreduction. Theprojectdesign,throughitsup-frontinvestmentinlocalcapacitybuilding in poverty analysis and strategies, and follow-up investment financing for poverty linked rural infrastructure, attempts to mainstream poverty reduction in overall district's policies and budgetary allocation. (iii)Capacity building to help implement decentralization. The project's mainbeneficiaries of capacity building and institutional strengthening are local government officials and DPRD members, as well as local civil society (NGOs, community based organizations, local universities, journalists) involved in the project activities. The project will also improve the capacity o f national and provincial government officials in supervising, monitoring and coordinating ILGR-related reforms inthe districts. 4. Institutionaland implementationarrangements: National Level InstitutionalArrangement The project will be implementedby national, provincial and local governments with support from consultant and facilitators. NationalManagementConsultant(NMC) I ..................................................... Kabupaten Facilitator(F-Kab) ..................................................... M: governmental = consuitant -= organization unit accountability line ............ = coordination line -11 - National Steering Committee (NSC), chaired by the Deputy Chairman for Regional Development and Autonomy o f the National Development Planning Agency (Bappenas). N S C supports and promotes legal and regulatory aspects o f implementation, issues the Local Governance Reform Framework and approves the participating list o f districts. National Implementing Committee (NIC), chaired by the Director General for Regional Autonomy (DGRA), Ministry of Home Affairs (MOHA). NIC approves and issues the project operational manuals, evaluates the program performance, and coordinates with other related programs. National Project Secretariat (NPS), chaired by the Director for Local Government Functions, DGRA, MOHA. NPS coordinates overall project management, including reviewing district performance and monitoring, procurement and preparation o f annual budgets for all components and verifying sub-project eligibility. Bappenas will manage the implementation o f evaluation and studies under Component (2-3. e Provincial Coordination Team (PCT), chaired by the Provincial Planning Board (Bappeda). PCT facilitates information sharing between districts and coordinates the scaling up o f reforms to other kabupatenskotas, monitoring and evaluation o f the project, as well as facilitating the selection o f the second batch o f kabupatens. Project Management Unit (PMU), chaired by the kabupaten's Regional Secretary will manage the overall implementation at local level. National Management Consultants (NMC) will be hired to help NPS preparing training modules technical backstopping, andprogram monitoring. Regional Management Consultants (RMC) will be based in three regional offices covering participating kabupatens innine provinces. When the facilitation in the batch 2 kabupatens starts, the RMC's coverage will expand. The regional consultants would include experts in poverty assessment, procurement, financial management, participation, safeguards, and engineering. These regional consultants would provide capacity building assistance to local governments and DPRD members as well as to the multi-stakeholder working groups. e Kabupaten Facilitators (F-Kab) will support project implementation at district level. Each kabupaten will have one lead facilitator and one technical facilitator (engineer). The lead facilitator will focus in facilitating the reform process, including bringing together different stakeholders to participate inthe process, while the technical one is responsible to help identifying, assessing the feasibility and monitoring sub-project(s) implementation. DistrictLevel InstitutionalSetting Participating local governments, through a Bupati Decree, will establish a Project Management Unit (PMU) that will manage the overall implementation at the local level, including coordination with multi-stakeholders working groups. - 1 2 - --r- (Transparency 8 Participation) I II Working Group I 4 I Poverty Working Group ~ I-. Finance I Division/ I I Agency I I ~ r- I I I I 1 I 1 Coordinator Assistant on Economic & on Governance, Legal Development, Bappeda Bureau, Pub,ic Relation, Information Bureau m d : governmental multi-stakeholders Unit (Technical = organization unit = working group -= accountability line ----= coordination line Notes: *ILGRsub-projectswill be implementedby relatedtechnicalagency(ies)or dinas basedonthe resultsofthe PRSAP. Sincethe sub-projects may differ from one year to the next, thetechnical agenciesinvolvedinthe projectmay differ as well. Each unit of the P M U have the following roles and responsibilities: 0 Chairperson: provides overall project coordination; 0 Finance Division/Agency: manages the.disbursement o f the funds; Coordinator for governance reform: coordinates governance reform activities and development o f PRSAP; Coordinator for sub-project planning and implementation: organizes public consultation on the PRSAP and annual budget and planning process, as well as monitoring sub-project implementation 0 Project Implementation Unit -PIU (technical agencies): prepares detailed design o f and draft budget documents for the sub-project(s); procures contractors (private or community) who will implement the sub-projects; supervises sub-project implementation; verifies sub-project completion o f contract milestones and processes payment requests; prepares quarterly reports. Infinancial management (FM) and procurement reforms, which are more technical and within the primary domain o f the local government, the government will establish two teams: 0 FA4Reform Team, a multi-sectoral committee of government officials, is responsible to prepare an action plan and the necessary regulations, to lead and to coordinate FM reforms, to prepare quarterly reports, and to organize public consultations o n the reforms. 0 Procurement Focal Point will lead procurement reforms at the district level, including preparation o f action plan and necessary regulations, leading and coordinating procurement reforms, preparing quarterly reports, implementing capacity building, organizing public consultations on and networking activities inprocurement reforms. Bupati Decree(s) will be issued to establish these entities that clearly states the functions and target outputs o f each. - 13- To promote governance reforms with broader-based support ILGR creates space for local stakeholders to participate in reform-related activities. The project facilitates the establishment o f multi-stakeholder working groups whose membership include government officials, DPRD members and local NGOs that are selected democratically through public meetings (multi-stakeholders forum). There will be at least two working groups working intwo o f the areas requiredinthe Local Govemance ReformFramework: 0 "Basic Democratizatiodgovemance"-promotion o f improved public access to information and decision-making process. The working group will prepare and draft local regulation, on transparency and participation, including holding public consultations, and will monitor the implementation. 0 Poverty-formulation o f the district-level PRSAP. The poverty working group will formulate the participatory PRSAP, hold public consultations and monitor the implementation o f the PRSAP. D. Project Rationale 1. Project alternatives considered and reasons for rejection: The project focuses on govemance reforms linked to poverty alleviation. The project builds on lessons learned from on-going CDD initiatives, and the results from analytical work on decentralization. It also aims to pilot mechanisms to reward reform-minded governments that are willing to develop local, participatory poverty alleviation initiatives based on citizen choice. There are a number o f other Bank projects and on-going analytical work and pilot activities on decentralization which attempt to address issues not covered by ILGR but equally important for the governance agenda such as: judicial reform, anti-corruption strategies, civil service reform, inter-fiscal government allocations; community empowerment, poverty monitoring and analysis. ILGR will reinforce these efforts but will not try to address all aspects o f govemance, or replicate activities carried out by others. The following project alternatives were reviewed and rejected: (i) Investment lending versus adjustment lending: The alternative o f adjustment lending was rejected in favor of investment lending because implementation of key governance reforms at the local level needs to be accompanied by significant facilitation and capacity building. Moreover, providing incremental investment funds to participating kabupatens which complete an initial set o f prescribed reforms will allow demonstration and testing o f reform implementation at the district level, which can then be expanded to a larger number o f kabupatens. (ii) S I L vs LIL or APL: The altemative o f a Learning and Innovation Loan (LIL)was rejected because the maximum size o f a LIL would limit the geographic coverage needed for a representative pilot operatation in a large and diverse country such as Indonesia. Governance reform is a long-term program, and an Adaptable Program Loan (APL) would have been one alternative. This alternative was rejected, however, as it would commit the country program in a potentially experimental Governance operation, where much still needs to be piloted and tested. A SIL was preferred because it provides enough flexibility in design to allow for an appropriately sized pilot operation and a follow-up loan for program expansion to other kabupatens, once the basic model has been tested. (iii)Geographical Coverage: ForILGRto succeed,astrategicchoicewasmadetobeselectiveinthe initial phase and limit the total numbers o f kabupatens by focusing o n existing "good performers". Initial kabupaten selection was based on three sets o f criteria: poverty criteria, project strategy related criteria (workmg in geographical clusters), and "proof o f willingness" to participate and - 1 4 - pursue a reform agenda. Ultimately selection would be based on the kabupaten's commitment to pursue an overall reform program that meets basic reform criteria (Local Governance Reform Framework) established by the project as a means o f "verification". Thus, the coverage of the project is limited to areas where reform initiatives are underway, so as to maximize the current reform efforts. If there is a follow-on operation to ILGR, these would be areas for expansion, provided there are on-going governance initiatives and local governments are willing to engage inthe program. (iv) Sectoral reform project versus cross sectoral reform: The project could have looked at governance reform from a sectoral lens, but the Country Team endorsed a cross-sectoral operation that looks at cross-cutting or "platform" governance reforms at the kabupaten level inareas such as participation, transparency, disclosure, procurement, and financial management. The Indonesia program has a series o f decentralized sectoral programs (health, roads, agriculture) which will respond to the kabupaten sectoral investment needs and build in sector-specific reform requirements. To ensure complementarity, these sectoral investments over the next CAS period are intended to be clustered in kabupatens that meet the ILGR minimum entry requirements. ILGR investment financing will focus on priority rural infrastructure identified through participatory poverty assessments. If successful, ILGR would provide a vehicle for central government to scale-up and expand governance reform in all kabupatens beyond the initial set o f reformers, improve utilization o f scarce public resources, maintain minimum national standards for basic social services, and help attain the Millennium Development Goals. Based on this reasoning, strategic choices were made not to include sectoral interventions such as health and education reforms, as these are better dealt with through sector-wide approaches or by projects that cut across kabupaten boundaries at provincial or national levels (such as the Bank's Provincial Health Project) . 2. Major related projects financed by the Bank and/or other development agencies (completed, ongoing and planned). Latest Supervision Sector Issue Project (PSRI Ratings (Bank-fhancec Drojects only) Implementation Development Bank-financed Progress (IP) Objective (DO) Participatory methodologies, Indonesia -Kecamatan S H S competitive allocation, NGO/civil Development Project. society monitoring. Linkingservice providers to Indonesia-Decentralized S S beneficiaries through committees. Agriculture and Forestry Extension Project. CDD-Governance Mexico-Rural Development in S S Marginal Areas Project. C D D Brazil- State o f Bahia Rural S S Poverty Reduction Project. Sub-national lending C D D lending India-District Poverty Initiatives S S linked to adjustment lending on Project. governance. Other development agencies Local service delivery DELIVERIand DINAMIS (DfID) - 1 5 - Capacity Buildingfor Local PERFORM, BIGG, LGSP Governments (USAID), Sustainable Capacity Building Development (ADB) Good governance inCities BUILD,BRIDGE,LOGIC (UNDP) Regional Development Policy Project, JICA projects and Human Resource Development in Local Government The World Bank's World Development Report 2003, "Making Services Workfor the Poor", helps provide a theoretical framework to look at accountability in Indonesia from the perspective of the relationship between citizens, politicians and policy makers, and implementing agencieshervice providers and helps to identify areas where failures occur inthe accountability framework. "Combating Corruption in Indonesia", and "Village Justice In Indonesia: Case Studies on Access to Justice " 2003 provides detailed analysis and diagnostic information on how corruption takes place in local governments and in development projects and the types o f remedial actions taken by citizens and reform-minded local governments to combat corruption. "Local Governments and Local Economic Development and Investment Climate in Indonesia" 2003 provides diagnostic data on constraints relating to user fees and taxes facing local businesses working inkabupatens andkotas. "Education in Indonesia: Managing Transition to Decentralization" 2003 provides a clear sector strategy on how to finance and improve local educational standards, services and capacity in a decentralized setting. "Decentralizing Indonesia: The World Bank Regional Expenditure Review Overview Report" 2003 provides detailed diagnosis o f the outcomes and impact o f decentralization in 3 regions (North Sumatra, West Java and Nusa Tenggara Barat). Initial results from the RPER indicate that though the decentralization process has gone relatively smoothly, regulatory uncertainty, budgetary pressures, unequal distribution o f resources, and imperfect governance remain an obstacle. Community Driven Development initiatives, such as Indonesia's successful Kecamatan Development Program (KDP) and Urban Poverty Project (UPP), are good at delivering resources directly to communities to plan and reinforce transparency and accountability at the village-level, but communities have limited leverage or influence on how higher levels o f government plan, implement development investments and deliver public services. Local government administrators also use the opaqueness o f the public budget planning and allocation system for private benefit through over inflated contracts, kick-backs o n inputs and limited accountability on outcomes. Identifying the right incentive framework to change this type o f behavior within local government systems is a challenge. The World Bank has financed several projects which work at the sub-nationaUdistrict level and focus on reform and capacity building.A new generation o f sub-national projects are nowjust getting o f f the ground inIndia, but these are basedonbudget-support for State governments willing to implement key governance reforms, However few projects combine the higher level sub-national governance reform with - 16- community-driven initiatives. A few key lessons from local government reform projects in Uganda, Ethiopia, Mexico and Brazil indicate that successful projects need a combination o f the following: 0 Intergovernmental rules o f the game need to be clear and well understood by local governments. 0 Local governments should have capacity to finance basic services. 0 Strengthening civil society's role in bodies such as local councils can provide a strong base for participation. 0 Mobilizing support from stronger local governments to assist weaker ones can reduce technical assistance costs and develop sustainable partnerships. 0 Developing standard sub-project documents and technical designs can help to reduce costs. 0 Supporting dissemination o f best practice between local governments and communities, rewarding innovation, and developing a core group o f local governments willing to take a stand against corruption, can help to expand adoption o f reforms. 0 Demand driven projects can be a key tool for institutionalizingthe decentralization process and linking reforms to different levels o f administration (national- sub-district -village). In Indonesia there are a number of other donors active in the field o f decentralization and governance. These include GTZ, USAID, DfID, UNICEF, ADB, JICA, AUSAID, CIDA, Ford Foundation and Asia Foundation and the Partnership for Governance Reform. For example, the GTZ support for decentralization measures has several areas o f assistance including support for participatory regional development planning; transparent regional budgeting and financial management; development o f local stakeholder fonuns and democratic village administration; and improving strategies towards poverty alleviation oriented service delivery. A number o f donor projects such as PERFORM, BIGG (USAID) and BUILD (UNDP) have experience with developing and running kabupaten and kota stakeholder forums using local facilitators. NGO groups, such as FITRA, have developed a menu o f modules and training materials on citizen participation in budget monitoring. The Bandung Institute o f Governance Study (BIGS) and Indonesian Corruption Watch (ICW) are experimenting with citizen score-cards for service delivery. The lessons learned from these experiences will be directly used by ILGR in: (a) developing training materials for local government and civil society capacity building; (b) developing operational manuals and guidelines for kabupaten stakeholder forums; (c) using examples o f existing practices for stakeholder inclusion and conflict resolution; and (d) supporting on-going forums where they exist and mainstreaming their efforts into the kabupaten budgetary oversight system. The recently established Center for Local Government Innovation (CLGI) i s also assisting in developing capacity o f these stakeholder forums and provides a mechanism for disseminating innovations through kabupaten local government and legislative networks. ILGR proposes to develop partnerships with other donor-financed capacity building interventions and will support existingkabupaten civic forums to reform planning, budgeting processes and access to investment funds. During project preparation a "Study on Kabupaten Reform Dynamics in Indonesia" was commissioned. The study, which was carried out in three ILGR districts, resulted in findings that help fine-tune project design. These findings include: District leadership matters. Support from the Bupati as the top executive is essential. However change agents among the mid-level bureaucrats are also important. These are the people that can push or stall the reforms. Hence sufficient time should be allocated to assess and map them. - 17- Outsiders can help drive reforms. The role o f external agents i s crucial, especially in places where civil society i s weak or fragmented and good governance practices are new. Providing on-the-ground facilitation, including bridging between the government and civil society, becomes a crucial support at a time o f "transition". Competition promotes innovation among regions. Key politicians and civil servants want and need recognition for successful reform initiatives. Recognizing and promoting "enlightened" leadership through dissemination at different levels will serve as an incentive to boost further reforms as well as providing opportunities for cross learning. Nascent reforms require support to have real impacts. External agents should be aware about the on-going reform initiatives and "latch on" to them. Piggy backing on their initiatives will create a high level o f ownership and at the same time providing facilitation, technical support and local level capacity buildingwill deepen the initiatives' impacts. Overall, the following key elements have informed the project design: (9 Effective channels for citizen-civil servant communication. Even though decentralization places the decision-maker closer to the beneficiaries, it does not automatically translate into an enhancement o f communication between government and society. Projects or programs promoting broad-based reform require a set o f reformers based not just within Government, but also from an increasingly active civil society. Local networks o fjournalists, NGOs and activists will play a large role in pushing reforms from outside the system. Just as important as kabupaten-level demand for reform, is harnessing community demand for reform. The project addresses this issue by providing mechanisms for greater civil society participation in decision-making, demystifying the budget process and simplifyingbureaucratic procedures. (ii)Legalframework. Pastdecentralizationprojectshaveencounteredproblemsresultingfromthe vague demarcation o f powers and responsibilities o f the local governments. The project aims to strengthen the legal framework o f decentralization through the issuance o f revised guidelines that would assist local governments implement national laws and support legally mandated consultation processes concerning the use o f public funds, preparation o f local regulations and provision o f governmental services. (iii)Technicalassistance. Theprovisionoftechnicalassistancetolocalgovernmentsisanimportant element for the success o f the reforms. Experience from past projects have shown how technical assistance can fail when they are designed externally and do not have the buy-in o f local governments. Technical assistance in this project will be demand-driven, based on the identification o f needs by local authorities and tailored to local conditions. Technical assistance will also, as much as possible, tap into locally available resources in local universities, NGOs and the private sector. (iv> Promotion of transparency in decision-making. The administrative monopoly on decision-making, the culture o f patronage, and the existence o f elite networks from the previous centralized system may serve to frustrate and undermine the decentralization process. The project addresses this issue through the promotion o f transparent processes such as the formation o f the kabupaten multi-stakeholder forum as a broad-based citizen's group that engages with the local government in the reform process. The selection o f project sites will be based on the existence of pro-reform executive leadership and where there is already community demand for changing the system. - 1 8 - (v) Dissemination of `good practices'. Local governments often have very little idea o f what strategies have succeeded and tend to repeat the failures o f others. The project will facilitate the exchange o f experiences between different kabupatens and between NGOs working in different areas to hasten learning and reward innovation. (vi) Supportfor local-level dynamics of decentralization. The devolution o fpower from the center to local governments i s often an uneven and messy affair. Inrecognition o f this process the project has adopted a flexible approach that supports the dynamics o f decentralization through the development o f local reform action plans that build-upon minimumentry criteria. 4. Indications of borrower commitment and ownership: Strong borrower support for this project is evident and can be seen inthe following: Memorandum o f Understanding signed by Bupatis and DPRDs regarding their interest in participating in the program, and allocation o f counterpart budget by pilot kabupatens participating inthe preparation phase (US$4,000-17,000 per kabupaten). Official request from BAPPENAS for the project and inclusion inthe lending program. Establishment o f a GO1 preparation team and National Steering Committee (by ministerial decree) at the center and active participation in field visits, meetings, drafting o f term o f reference, and overall project preparation. Support from the Government to convene meetings with other donors working on govemance. Successful implementation o f a PHRD grant for project preparation and use o f DFID grant funds to pilot initial facilitation on govemance reform and participatory PRSAP formulation. Support from the National Poverty Alleviation Committee and their commitment to use the project manual on local level poverty analysis for all kabupatens participating in the PRSP exercise. 5. Value added of Bank support in this project: There are four major areas where the Bank adds value through this project: 0) The cross sectoral approach builds on strong sectoral and CDD expertise: The Bank program inIndonesia has for the past few years worked in a decentralized environment through a number o f sectoral programs (basic education, provincial health, agriculture extension, water in low income communities) that have helped develop relationships, capacity and some sectoral reforms at the local level. The Bank has also supported civic participation and improved local level govemance at the village and kecamatan-level through KDP and UPP. ILGR builds on these two approaches through a focus on cross-sectoral reforms targeted at the kabupaten-level. (ii)Mobilizingsubstantialgrantandinvestmentfunds: TheBankisabletomobilizesubstantial grant and investment funds to help finance kabupaten capacity building and development budgets. The donors are providing resources for technical assistance and capacity building, but few o f them are providing the investment funds required by kabupatens to finance basic services and reform use o f existing public expenditures. (iii)Buildingonour analyticalwork: TheBankhasinvestedinsubstantialEconomicandSector Work through our work on local institutions (LLI study), decentralization (RPERs, GDS surveys, on-going work on "local government platforms"), monitoring impact o f user fees (SMERU, ASEM), and poverty (Poverty Report). More analytical work i s required and through this operation the Bank can link proposed ESW directly to an on-going investment operation. -19- (iv) Building on our global knowledge base: The project builds on the lessons learned 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. E. Summary Project Analysis (Detailed assessments are inthe project file, see Annex 8) 1, Economic (see Annex 4): 0 Costbenefit NPV=US$ million; ERR = O/o (see Annex 4) 0 Costeffectiveness 0 Other(specify) The project focuses on improving local govemance and accountability, building capacity at the local level and financing community initiated sub-projects aimed at reducing poverty, particularly rural infrastructure, A conventional economic analysis o f ILGR will fail to capture the various expectedpotential benefits from the project. It renders its importance, however, to better identify the nature o f these benefits and where possible, their scope, in view o f designing the appropriate tools and indicators for ex-post monitoring and evaluation system. It i s nevertheless important to note that ILGR effectively generates two different sets of economic benefits. First, from Components A and C, there are the expected benefits from improved govemance and accountability in the kabupatens. Second, from Component B, there are the expected benefits from the investment sub-projects. With respect to quantifiable economic benefits, which will mainly accrue as a result o f sub-projects implementation, the programmatic nature o f the project loan does not allow a detailed cost-benefit calculation ex-ante. However, experience from similar projects in Indonesia and other regions indicates that demand driven projects, involving community participation, are highly cost-effective and economically viable, Because communities are actively involved in the prioritization, implementation, operations and maintenance, it can be assumed that the projects they select will be o f highpriority and socially productive, In the case o f ILGR, kabupatens that recently completed their participatory poverty analysis and their poverty reduction strategies formulated their priorities for the use o f investment financing. Based on extensive experience from other projects in Indonesia (KDP, UPP, VIP, WISMP), small scale kecamatan and kabupaten level infrastructure projects have been shown to be economically viable. For example, the I C R for the Java irrigation loan indicates that rehabilitation o f small scale irrigation systems generate EIRRs from around 16 to 30%. During the MTR, the project management unit will run a detailed economic analysis o f implemented sub-projects under ILGR in order to estimate benefits generated and identify problems (ifany) that need to be addressed. Non-quantifiable benefits include: (a) improved governance, enhanced public participation and accountability o f local governments to their constituencies as a result o f the endorsement and implementation o f a comprehensive package o f reform measures (see Annex 2), and (b) enhanced project effectiveness through the mobilization of greater resources under the same budget to finance pro-poor projects. These lessons could serve to provide policy recommendations for necessary corrective measures aimed at maximizing the benefits o f decentralization for more efficient service delivery at the local level, The project's monitoring and evaluation system described in Annex 2 will ensure the necessary tools and indicators to measure outputs and outcomes generated by these reforms and their induced benefits are in place. - 20 - 2. Financial (see Annex 4 and Annex 5): NPV=US$ million; FRR = % (see Annex 4) ILGR's funding will not have a significant fiscal impact at the macroeconomic level. They represent 0.017 percent o f the national expenditure (2004), and only a small component o f the national development expenditures (0.093 percent). At the local level, ILGR covers 40 o f the 440 local governments in the country with an estimated population o f 34 million (BPS 2002) representing 16 percent o f Indonesia's overall population. Depending on the location and population size o f kabupatens, ILGR's fund represent between 1.1 and 5.1 percent of the local budget and around 5 to 18 percent o f district-level development expenditures. The project would finance local public infrastructure sub-projects. It will therefore not aim to fully recover the capital cost from beneficiaries. Kabupatens should be able to meet their financial commitments towards the project in terms o f additional O&M without detrimental impact on finances, in case active steps are taken to improve their revenue generation effort. Many o f these kabupatens have been accumulating budget surpluses over the past few years. In the short-term, kabupatens ability to finance incremental O&M will largely depend on the stability o f the expected stream o f revenues generated by fiscal transfers from higher level governments. Fiscal Impact: The positive fiscal impact o f the project will result from various sources: 0 An increase in national and kabupaten fiscal resources being allocated to support poverty targeted development sub-projects. 0 Procurement reforms will improve competitiveness of the biddingprocess and render the procurement cycle more transparent resulting in reduction in prices offered for public contracts, and additional savings inthe local governments' budget. 0 Improvement in the financial management systems o f participating kabupatens will generate direct benefits to the budget. More efficient use o f public funds will generate greater savings and prospects for a more efficient allocation o f resources among the local level dinases. 0 An increase in economic activities expected from sub-projects will yield tax revenues generated by additional income. These additional revenues would widen the pool o f resources available for kabupatens to finance other development programs and Operations and Maintenance. 3. Technical: Meeting the Reform Requirement. The single biggest challenge will be for kabupatens to meet the program requirements in transparency, procurement and financial management reforms, in addition to preparing a participatory PRSAP. This i s a result o f stark differences in regional capacities and generally poorer oversight arrangements. In addition the national architecture for financial management reforms is still evolving, and remains highly uncertain. Implementing regulations for the new State Finance Law (No. 17/2003 passed in March 2003), particularly those related to regional government are yet to be issued. Some other key regulatory and organizational changes that are planned at the national level will change the financial management landscape dramatically when fully implemented. This has presented some challenges, as the dividinglines o f authority between the Center andregions are not always very clear andregions often look up to the Center to prescribe what they should be doing to progress reforms. The current set o f program requirements therefore represent a combination o f existing "kabupaten good practice", and basic reform measures that are in compliance with the national reform agenda. During preparation, several kabupaten diagnostic and base-line assessments were carried out on "existing practice" in drafting Perdas -21 - and information disclosure, procurement practices and financial management and audit practices. The current set o f revised requirements is buildingon these assessments and making gradual improvements in these three core governance requirements. Inthis way a core group o f kabupatens (at least 40) will be able to meet the basic entry and first phase requirements. The project will dedicate substantial technical and training support to ensure kabupatens fulfill these requirements. Technical quality of the infrastructure. A significant portion (9-14 percent) o f kabupaten development budgets are allocated to small scale infrastructure ranging from US$ lO,OOO-200,000. The kabupaten public works dinas use technical standards and guidelines issued by the Ministry o f Public Works to ensure technical quality o f civil works. In addition kabupaten projects meeting a standard threshold size are supervised using third party consultants. The project design includes a number o f mechanisms to ensure quality, These include the use o f standard design and specifications o f typical kabupaten infrastructure, financial and other criteria (roads, bridges, markets, irrigation rehabilitation- based on guidelines used in other Bank financed projects), technical review and monitoring support by technical facilitator based in kabupaten clusters and annual review by kabupaten technical review teams. Operations and Maintenance (O&M). Sustainability o f sub-projects will be an essential element of the project design. With the reclassification o f local government budget starting in 2003, some o f the O&M expenditures previously placed under development expenditure, now are more explicitly classified as O&M. This has led to an increased level o f O&M expenditure in most kabupatens. For example in Bandung the O&M expenditure has increased from 1.6 percent o f the recurrent budget in 2002 to 18.6 percent in2003. Though kabupatens have sufficient resources, including surplus funds, the funds presently allocated for O&M o f kabupaten infrastructure are minimal. Monitoring of process, outputs, impacts of governance reform and sub-projects. The project places a premium on effective and results-oriented monitoring and evaluation (M&E). The project's M&E system i s designed to: (a) track the progress o f project activities, including inputs and outputs, and take corrective measures as necessary; and (b) assess the longer-term outcomes and impact o f project interventions. The M&E system will provide a continuous leaming and feedback system to improve the project's approach. The project's M&E system includes intemal monitoring, extemal monitoring and independent evaluation. For a fuller description o f the M&E system, see Annex 2. 4. Institutional: The key institutional issue will be the relationship between the local governments (districts) and central government with the provincial government inbetween. The project will attempt to work directly with the districts while the operational role o f the center i s defined in terms o f standard setting, developing overall guidelines and regulations for the national reform agenda, supporting implementation o f the national reform agenda at the local level, developing guidelines for issues that cut across districts and provincial boundaries, and other related policy guidelines. The provincial government will be particularly helpful in inter-district coordination within its jurisdiction. 4.1 Executingagencies: The Ministry o f Home Affairs, Directorate General o f Regional Autonomy, is currently involved in executing a number o f donor-financed projects aimed at strengthening the decentralization process and developing district capacity. The Ministry has also worked closely with the Bank in the execution of the - 22 - US$6.9 million Dutch Trust Fund for Decentralization. Locating the project secretariat in MOHA is appropriate as it will: (a) build on the on-going analytical work supported through the Dutch Trust Fund; and (b) ensure that the agency responsible for issuing national guidelines related to clarifying decentralization laws and procedures i s centrally involved inimplementing the project. MOHA will also be one o f key government counterparts o f the newly established multi-donor Decentralization Support Facility (DSF). The DSF should facilitate the exchange and dissemination o f good practices from the project, reduce undesirable duplication or overlap o f donor support, provide cross-linkages o f donor support beneficial to the project, and reduce donor coordination transaction costs for MOHA. 4.2 Project management: National. The current institutional arrangements, which include relevant agencies inthe National Steering Committee (NSC) chaired by Bappenas, will ensure that coordination with other Ministries such as Ministryof Finance andthe National Audit Agency (BPKP), takes place at regular intervals. MOHA will head the National Program Secretariat which basically will manage the operations o f the project. Hence establishing a strong, fully staffed and functioning secretariat to play this role, will be a key aspect for the project's success. The secretariat will have to provide adequate information, technical support and timely back-stopping to the districts and they will be assisted by a team o f national management consultants. Provincial. The province will have a coordination team o f related, cross-sector agencies, chaired by the Province Development Planning Agency (Bappedu). The team will facilitate information sharing among ILGR and non-ILGR districts, as well as promote relevant reforms, which the project has supported, to non ILGRdistricts. Inaddition, the team will helpmonitoring and evaluation o f district performance, resolving cross-districts issues that fall under its jurisdiction and facilitating selection o f batch 2 kabuparens. Districts. Capacity o f the district as well as its civil society, which i s included in local decision-making process and as independent program monitors, vary considerably both on and off Java, making inter-district assistance crucial. The project, through its decentralized technical support teams and facilitators will provide substantial training to regional staff, civil society groups and DPRD members, in the first year o f project implementation. The results would be disseminated through cross-visits by district teams, regional and national issues-based workshops and training events. The regional technical assistance team will also be located by cluster, and would allocate their time between districts, based on existing district capacity and needs. Duringpreparation, 15 pilot districts have already undergone training inareas ranging from perda drafting to poverty assessment. Other donors such as USAID and GTZ are already working in some ILGR districts and providing training in participatory planning and budgeting. The project will buildon existing capacity and ensure the second batch o f districts complete a training needs assessment prior to receiving further training. The district reform action plan also provides a mechanism to tailor training and capacity building inputsbasedontheir current base-line of reform. Training modules for this willbe centrally developed. Recruiting suitably qualified kabupaten facilitators and regional technical support teams will be essential in ensuring a successful program. Duringpreparation, recruitment o f facilitators was carried out nationally, and most facilitators placed inkabupatens were from the province or region. Duringthis time it was clear that facilitators recruited from within the kabupaten were less effective than those from outside. A detailed training manual and program has been piloted for facilitator training and will be modified during implementation for the second batch o f facilitators. During preparation the project has trained some 25 kabupatens and regional facilitators, who will continue through implementation and some may graduate to -23 - the regional technical support teams. Giventhe large number o f donor-funded govemance projects, there i s currently substantial national expertise available to assist kabupatens in the core governance areas that are the focus o f the project. 4.3 Procurement issues: The procurement assessment identified local govemments as having limited capacity and weak procurement systems. Two main actions will be requiredto minimize procurement risk: (i) Local governments will participate in implementing the procurement reform program under this project, to reach a minimum standard o f procurement as mandated by Keppres 80/2003. The reform program will help establish a satisfactory and sustainable procurement system at the kabupaten. Activities financed under the reform program are described inAnnex 2. (ii) increase kabupaten capacity inproject implementationthrough: 0 Quality assurance and evaluation o f the procurement reform component under the project will be provided by the Secretariat o f LPKPP at the Directorate of System and Procedures at BAPPENAS. 0 A draft Project Operational Manual has been developed during project preparation and will be finalized prior to Effectiveness. The manual includes all applicable procurement, procedures, and monitoring and reporting requirements. 0 A procurement training program for all project actors has been developed and agreed with the Bank. 0 As part o f strengthening the capacity o f the Executing andImplementingAgencies, there will be two sets o f technical assistance teams, who will be hired under the project. At the national level, there will be a National Management Consultant (NMC) to assist the Executing Agency in coordinating this project. At the regional level, there will be Regional Management Consultants (RMC) to provide management supports to the PMU and PIUs at Kabupaten level. 0 An Evaluation Committee, comprising o f qualified members acceptable to the Bank, will be formed at National Project Secretariat, to assess the performance o f the consultants. The assessment report will be sent to and agreed with the Bank on annual basis. This report will provide the basis for continuation o f consultants' services. 0 N C B will follow the Open Competitive Bidding procedures as described in Keppres 80/2003, subject to clarification. The selection o f consultants will completely follow the Bank Consultant Guidelines. With the effectiveness o f Keppres 8012003, i t i s expected that the following actions will be strengthened under the project: (i)transparency in the procurement process, including mandatory announcement o f award o f contracts inthe public domain; (ii)sanctions and enforcement against collusive practices, both to consultantshidders and to the government officials; (iii) sanctions and enforcement against poor performances o f consultantshidders. In addition, the implementing agencies have an option to follow the "Pemilihan Langsung" procedures as described in Keppres 80/2003 to satisfy the Bank's shopping procedures which will be included in the Project Operational Manuals. - 24 - 0 Procurement processing is the responsibility o f the procuring unit. Therefore, in the case o f investment projects, the procurement will be the responsibility o f each PIU at the Dinas level, However, to maintain quality assurance and consistency on procurement, all correspondence with the Bank related to procurement (including requests for prior review) will be conducted through the EA at the central level, in which case both the procuring unit and the EA must have agreement on the proposed procurement action or query. The overall procurement risk for the local governments i s high. The prior review thresholds will be based on this capacity assessment. Overall project procurement includes hiringtechnical assistance through large consultancy contracts at the central level and small to large contracts o f works and goods at the local govemment level. MOHA has already prepared the draft procurement plan for project implementation. Given the size, nature o f procurement and the experience o f executing and implementing agencies in dealing with similar types of projects, the overall risk is high.Annex 6(A) describes project procurement aspects in further detail. 4.4 Financial management issues: A financial management assessment of this project was carried out between September-November 2003 and has involved an assessment of financial management capacity o f the key implementing agencies and an evaluation o f the adequacy of financial management arrangements proposed for the project, including accounting systems for project expenditures and underlying internal controls. Recent Bank experience inother projects inthe concerned Ministries, the shortage o f financial management skills in the Indonesian civil service generally, and a consideration o f the Country Financial Accountability Assessment report (issued April 2001) and development thereafter suggest that financial management capacity at these central agencies is likely to be generally low. A significant part o f the project expenditure will be executed and accounted for at the district governments. Indistricts, there is an even greater shortage o f accounting skills, and financial management systems are generally weaker than at the center. An analysis o f project specific risks indicates that substantial risks may arise from several other features. The lead implementing agency (DGRA, MOHA) has prior experience in managing Bank projects. However, risks arise from the geographical spread o f PIUs and use o f multiple agencies and community organizations. The geographical spread o f project activities to about 40 kabupatens and inherently weak andvariable financial management capacity inthe regions imposes substantial risks on financial accounting and reporting. Validation of payments i s traditionally a weak area, and vulnerable to malfeasance and fraud. Based on these factors financial management risks inherent in the project entity and risks specific to project design have been rated as high. Although the risks are rated as high, the project will be working with regions that have shown an interest and commitment in moving in the right direction, and the risks are worth taking. Further, several measures have been designed to mitigate these risks. These include deployment o f trained financial management consultants in districts to assist in the preparation o f project financial statements and more intensive payment validation procedures, including community disclosure and oversight mechanisms where applicable. A series of these measures and other operating authorities and procedures for each project activity will be clearly documented in the Project Operational Manual, Full details o f these measures are given in Annex 6(B). With the completion o f the action plan, the project will have acceptable financial management arrangements when the project becomes effective. - 25 - Funds for the project are expected to be channeled through a Special Account opened for the purpose. Disbursements into these accounts will be made through Special Account procedures by central treasury offices. Fund flows to local Dinas offices (spending units) will follow the local government system. FMR-based disbursements will be introduced, under which replenishments will be made based on quarterly Financial Monitoring Reports. Annual financial audits will be conducted by BPKP, Government auditors, based on Terms o f Reference that will seek specific feedback on internal controls in sub projects. Harmonized financial management arrangements will be agreed with other donors (DFID). 5. Environmental: Environmental Category: B (Partial Assessment) 5.1 Summarize the steps undertaken for environmental assessment and EMP preparation (including consultation and disclosure) and the significant issues and their treatment emerging from this analysis. Under ILGR, sub-project investment will be identified during project implementation, after the participating kabupaten has completed a minimumset of prescribed reforms duringthe pre-investment phase. Therefore, no environmental assessment was conducted ex ante. Instead, in line with the programmatic nature o f the investments under the project, a Safeguards Framework, including an Environment Framework, was developed during preparation and adopted as part o f the Project Operational Manual, along with more specific guidance for implementation o f the framework. Also, a screening process employed as part o f the Environment Framework will ensure that the sub-projects will not be located in sensitive areas. As is the norm inthe Bank`s Indonesia portfolio, the project will rely heavily on government guidelines as the basis o f the project's environmental screening requirements. Four scenarios are possible under Indonesia regulations: (i) N o EA, (ii) EA, (iii) and (iv) Standard Operating Procedures (SOP). Full EMP, However, under ILGR, the sub-project screening procedure o f the Environment Framework will exclude financing any projects that would have potential impacts significant enough to require ANDAL (full EA) under Indonesian regulations, or located in sensitive areas. No large-scale impacts are envisaged, also because investments will be o f relatively modest-scale. The minimuminvestment ineach Kabupaten inany one year will be between US$O.5-1.0 million, and the total investment in any Kabupaten will be between US$1.5-3 million over 3 years. A negative list will preclude fimding o f projects that would involve pesticides, asbestos or other hazardous materials, commercial logging. Moderate impacts are possible, primarily those associated with new roads, construction o f buildings,and small-scale infrastructure. The following measures will be used for sub-project related consultation with and disclosure to key stakeholders, including local government, local parliament, community members and specific interest groups such as women and indigenous people, and civic organizations (environmental NGOs etc.): (0 All project investmentsand reform initiatives will be defined by a process o f civic participation inthe Kabupaten, andthe safeguardissues willbe key part ofthe discussion anddecisions. (ii)PotentialProjectAffectedPeoplewouldbepartofthegroupthatproposestheproject. When they are not, there will be a special consultation process to obtain their views. The overall citizen participation processes should include an explanation o f the rationale and consequences o f the Bank's safeguard policies, so these are understood. Investment proposals submitted will thus be pre-screened and meet safeguards requirements. (iii)Before beingfinalizedeachreportandplanrequiredunderthe SafeguardFrameworkisto be disseminated widely, especially among the affected people, for public comments and the comments received should be taken into account as appropriate in the final report andor plan. The final report andor plan should be disclosed in a public place in a form and language accessible to affected groups and local NGOs. - 26 - (iv) As part of project information dissemination, the project will work closely with local press, radio and strategic civil society networks. 5.2 What are the main features of the EMP and are they adequate? ILGR is a demand driven project, executed by local level government. An overall Safeguards Framework has been prepared and discussed with participating local governments. The Safeguards Framework, includes environmental screening procedures, guidelines for preparation, review and implementation o f subproject management plans or application o f standard operating procedures to prevent adverse impacts, a policy framework for land acquisition and resettlement, a framework for addressing the needs and requirements o f indigenous peoples, and guidelines for consultation and disclosure. Institutional arrangements for safeguards have been defined to suit the range o f capabilities that may be encountered, from kabupatens with functioning environmental management agencies (BAPEDALDA) or environmental committees, to kabupatens in which there is little or no capacity to address environmental issues. Facilitators will be trained in safeguards procedures, to enable them to assist in the development and implementation o f the project safeguards screening and review. The project design incorporates several levels of interventionto ensure compliance to applicable safeguards policies: . The project operational manual has a section on safeguards and includes standardized formats relating to land acquisition, environmental screening and participation o f vulnerable and disadvantaged groups. . The complaints handling unit at the central level will also monitor and follow up on any complaints received by potential project affected people, so that remedial action can be taken quickly. The management consultant teams will include safeguard specialists in the regional cluster who will . conduct training for kabupaten safeguards teams and facilitators. The consultants will also review all infrastructure proposals to ensure compliance with both Indonesian law and Bank requirements. The kabupaten safeguards team will undergo a specialized training to ensure comprehension o f the safeguards procedures. The Bank supervision team will include dedicated safeguards specialists who will participate on bi-annual project supervisions. 5.3 For Category A and B projects, timeline and status o f EA: Date o f receipt o f final draft: February 24, 2004 5.4 H o w have stakeholders been consulted at the stage o f (a) environmental screening and (b) draft EA report on the environmental impacts and proposed environment management plan? Describe mechanisms of consultation that were usedand which groups were consulted? The project social and environmental safeguards framework was sent by the national steering committee to all batch 1 kabupatens (15 pilot kabupatens) during preparation. The framework was presented by the project facilitators to the multi-stakeholder forums comprised o f NGOs, village representatives and local government staff, Since project investments under component B will be identified during the budget planning and allocation process (during project implementation), the discussion focused on the general framework screening procedures and establishment o f the Kabupaten safeguards committee. - 27 - 5.5 What mechanisms have been established to monitor and evaluate the impact o f the project on the environment? Do the indicators reflect the objectives and results of the EMP? The project monitoring team will conduct quarterly and annual reviews o f all sub-projects implemented under component B. This will be carried out by the consultant engineers assisted by the safeguards specialist. The reports will be available for review prior to Bank supervision missions. 6. Social: 6.1 Summarize key social issues relevant to the project objectives, and specify the project's social development outcomes. Social development issues most pertinent to ILGRproject goals are threefold: (i) Poverty Reduction - Recent research points to the fact that national-level poverty reduction efforts frequently overlook root causes o f poverty and fail to accurately target the most disadvantaged groups at the local level. By taking a district-based approach that aims to substantiate participatory poverty analyses, the ILGRproject aims to develop locally appropriate poverty reduction strategies that will be more sustainable, albeit smaller in scope, than those developed by the central govemment. (ii) Civic Participation - Improvinggovemance necessarily means a higher degree o f involvement o f the citizenry in the affairs o f govemment. In countries like Indonesia where there are no long-standing traditions o f civic participation, the challenge for ILGR i s to provide practical means for ordinary people to understand government business and then participate in those aspects most relevant to them. The ILGR will endeavor to enhance participation in critical aspects o f government business that are most correlated to poverty reduction efforts, namely the development planning, budgeting, budget tracking and delivery o f key public services. (iii)Gender Mainstreaming - Projects such as ILGR must make a consistent effort to improve the status o f women in Indonesia. To this end, ILGR will proactively mainstream gender concems as an integral part o f good govemance programs. More specifically, the project will help to create a multi stakeholder forum in participating kabupatens, where the interests o f marginal groups, such as the poor and women, would be given particular attention, particularly in relation to budget decision o f the local government and poverty reduction efforts. However, as this arena alone will not be sufficient to consistently increasing mainstreaming gender concems, a project-associated JSDF grant for assisting civil society initiatives, will put specific effort on fostering women participation on the participatory budgeting and public service delivery evaluation. Through the JSDF grant, the women's groups in ILGR kabupatens will receive assistance to develop their own advocacy focus and strategy on the budget development process and on public service delivery. Within the strategy development, they also will create milestones to measure their success. This measurement will also be used by the project to evaluate the project's ability to consistently mainstream gender. - 28 - 6.2 Participatory Approach: H o w are key stakeholders participating inthe project? 6.2.1 Planning and Design The key mechanism for involving a range o f public stakeholders i s a multi-stakeholder forum to be constituted at the kabupaten level. In order to represent the broadest possible range o f stakeholders, the forums are intended to include members from: ----- Civil Society organizations including local NGOs Academics Customary ethnic and/or religious leaders The private sector (including professional associations) People's organizations, especially those with a constituency amongst the poor (e.g. farmers or workers associations) The intent i s not to establish these forums in accordance with any prescriptive formula, but rather to build upon existing pro-reform momentum, often utilizing pre-existing loose coalitions o f civil society activists. Emphasis is placed on having the forums broadly representative o f the socio-economic realities at the local level, At the same time, efforts needto be made to ensure both a reasonable geographic (so as to ensure all areas of the kabupaten are represented) and gender balance amongst forum members. 6.2.2 Preparation Phase Inpractice, duringthe project preparation phase in 15pilot kabupatens, the majority of stakeholder forums, following up on a large-scale public meeting, have been divided for practical purposes 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 o f the working groups vary from district to district). On average, each working group has 7-15 active members, mostly representatives from civil society, local government officials, and local parliament members. The PPA working group is responsible for carrying out community assessments to produce a "Poverty Reduction Strategy and Action Plan" (PRSAP) for reference during the annual district-based development planning mechanism (Musrenbang) 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 o f a perda (local regulation) that ensures a higher degree o f participation and transparency in the annual planning, budgeting and public service delivery activities o f local government. 6.2.3 Future Implementation Moving beyond the development o f the 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 o f the PRSAP, either inthe context of a stakeholder forum or specific issue-based working groups. Significant variation in terms o f the nature o f civic engagement can be expected from participating kabupatens. However, a degree o f consistency will be attained by focusing public participation efforts on certain key benchmarks that are likely to include: - 29 - Public consultation and the endorsement o f the stakeholder forum (or a designated working group) with respect to the use o f 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 o f the implementationof the perda on transparency and participation; 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 o f the financial management and procurement reform package. 6.3 How does the project involve consultations or collaboration with NGOs or other civil society organizations? Civil society organizations, including NGOs, have been instrumental inthe design o f the civic participation mechanisms that are being put into place as part o f the ILGR initiative. They will continue to play a critical role both within the stakeholder forums and their corresponding working groups, as well as with envisioned implementation phase mechanisms such as the Transparency Commission. Along with independent media, Civil Society groups will provide the most important means o f monitoring progress towards ILGR good govemance goals. At the same time, it is important to ensure that NGOs not become overly dominant within the designated civic participation mechanisms. Given that a large number o f NGOs do not have a genuine grassroots constituency amongst the poor, ILGR must exercise caution in order to avoid the perception that stakeholder forums are not being established as an altemate form o f local government. 6.4 What institutional arrangements have been provided to ensure the project achieves its social development outcomes? The ILGR team includes several members well grounded in methods o f civic engagement as well as specialists long involved with Indonesian civil society. They have been involved in all aspects o f ILGR design and will continue to play a role throughout the project's intended implementation phase. Field-level facilitators and regional coordinators also have extensive experience in liaising between local governments and the public. Finally, the recently approved JSDF i s intended to foster innovative civil society-based means of enhancing participatory budgeting, budget tracking and public service delivery (using a "Civic Report Card" model) and will add value to institutional arrangements already inplace. 6.5 H o w will the project monitor performance interms o f social development outcomes? The overall M&E framework (see Annex 2) for the project includes a series o f independent assessments and qualitative and quantitative studies o n govemance that will measure: (a) poverty and improved govemance outcomes; (b) steps taken to enhance civil society participation in kabupaten budget planning and execution activities; and (c) overall steps taken to improve inclusion o f disadvantaged groups (poor households, women and vulnerable groups) inproject activities. - 30 - 7. Safeguard Policies: 7.2 Describe provisions made by the project to ensure compliance with applicable safeguard policies. 0 4.01-EnvironmentalAssessment An Environment Framework has been developed as part o f the Safeguards Framework and is included in Project Operational Manual along with more specific guidance for its implementation. OP 4.04 -- Natural Habitats The project's negative list will ensure that no subprojects which adversely affect critical natural habitats will be eligible for project financing. OP 4.09 -- Pest Management The project will not procure any pesticides nor will an increased use o f pesticides result from the project. No further action i s requiredunder the policy. OPN 11.03 -- Cultural Property The negative list indicates that no subproject would be financed which degrade or damage physical cultural property. Construction contracts include provisions for chance finds and the procedure to follow in such events. OD 4.20 -- Indigenous Peoples (IP) A Indigenous Peoples Framework has been developed as part o fthe Safeguards Framework and is included inthe Project Operational Manualalong with more specific guidance for its implementation. OP 4.12 -- Involuntary Resettlement A LandAcquisition and Resettlement Framework has been developed as part of the Safeguards Framework and i s included in the Project Operational Manual along with more specific guidance for its implementation. OP 4.36 -- Forestry The project will not finance activities that would involve significant conversion or degradation o f critical forest areas or related critical natural habitats as defined under the policy. No action i s required under this policy. - 31 - OP 4.37 -- Safety of Dams The project will not finance construction or rehabilitation o f any large dams as defined under this policy. No action is required under this policy. OP 7.50 -- International Waterways There are no known project components involving international waterways as defined under the policy. No action i s required under this policy. OP 7.60 -- Disputed Areas The project is not located in any known disputed areas as defined under the policy. No action i s required under this policy. F. Sustainability and Risks 1. Sustainability: Sustainability o f operations i s crucial at both the district and national levels. (i) At the district level maintaininggovernance reforms will require: Supportfrom the district executive and legislative groups. For Bupati and DPRD, one o f the key incentives to buy into the reform agenda will be national recognition for their efforts and assurance that these efforts will eventually increase private sector investment and donor support. The project will promote the efforts o f the Bupati and DPRD through various opportunities, including cross-exchange and discussions with other districts and national and international actors. This "expos&" will create a leverage to increasingly direct additional Bank and other donor projects to this group o f reform-minded districts. Budget to demonstrate and eventually institutionalize reforms, particularly for pro-poor allocation beyond the project. When the district has implemented the Local Govemance Reform Framework, the project provides investment funds that go into the district budget to finance its own poverty strategies (financing is limited to rural infrastructure in the first batch o f districts). Once the central government sees that local governments can be fiscally responsible and are making efforts to allocate resources for poverty alleviation purposes, additional funds could be provided through the DAK mechanism. Hence this project allows the central government to test and pilot initiatives and reward better performing kabupatens with additional poverty targeted financing. Civil society demand. The project provides space for multi-stakeholder participation to develop reform action plans and to monitor the implementation o f the plans. This participation will create not just ownership but also raise awareness and empower civil society, which will enable them to demand for more reforms. At the same time the project will help develop a media strategy to publicize the reform action plans and the annual outcomes to ensure widespread support and monitoring. (ii) At the national levelthere would be the following: (a) Enabling laws and regulations. In these relatively early years o f decentralization, many laws and regulations, including guidelines and standards, are still laclung. Without these regulations, the reforms that have started will not be able to evolve further to create the desired impacts. The central government has been aware o f the issues. At present financial management reforms are beginning to gain momentum at the center. Many key aspects are expected to be legislated and implemented over the next few years. Regional - 32 - financial management reforms will need to be deepened and continued well beyond the project period inresponse to those changes. The project enables such response through an empowered FM Reform Committee which will be constituted in each participating region to develop detailed implementation plans and technically supervise implementation o f reforms. In procurement reforms, the project-in line with the central government guidelines in Keppres 80/2003-facilitates the establishment o f a focal point to gear up district reforms. Although there i s not yet a law which specifically mandates information disclosure and broad-based participation, there are other laws and regulations that support some kind o f information disclosure and public participation (see Annex 8 for the regulatory framework). The project i s able to facilitate the creation o f Regional Law(s) on Transparency and Participation inthe participating districts. (b) Adequate supervision and responses. The National Project Secretariat, assisted by the National Management Consultants and Regional Management Consultants, will have regular supervision and monitoring to respond to district's needs and to enable problem solving related to the project. In addition, a clear reward-and-sanction mechanism is developed to create a healthy competition among districts and build up the project's credibility. From the Bank side funding for supervision during implementation i s adequate and sustained from a dedicated cross-sectoral team. 2. Critical Risks (reflecting the failure of critical assumptions found in the fourth column of Annex 1): Risk Risk Rating I Risk Mitigation Measure From Outputs to Objective Laws No. 3212004 and 3312004 are M The laws were recently enacted and the Bank, revised and backtrack decentralization through its policy advice, will work with process (including fiscal relation) MOHAand MOFto strengthen decentralization process. Lack o f political accountability and there M Upcoming direct Bupati election andnewly i s no incentive for change. elected DPRD members are expectedto improve local political accountability. Improvement o f local accountability is also inherent inthe project design. From Components to Outputs M See risk mitigation measure on the lack o f political accountability above. The project's entry requirements include commitment from the executive and legislative and some concrete actions that demonstrate reform mindedness o f the local leaders. Communities and civil society groups are M Civil society and community are involved in not enthusiastic to participate in local project implementation from the very beginning. planning and decision making. Issuance o f the perda to guarantee their access to information and decision making process i s expected to increase the level o f participation. Local government's policies and plans S The project will enhance planning and budgeting which are developed inparticipatory process andwill require kabupaten to implemeni manner are not reflected inthe budget PRSAP through their budget. allocation. - 33- Delay in district level budgeting process, H The project will attempt to reduce the delay by procurement or disbursement. The Law decentralizing sub-project verification process to No. 3212004 mandates province to review regional consultants and kabupaten facilitators. district-level budget prior to its enactment. The Kabupaten-level staff will be trained in project procurement and FM. The procurement and mobilization o f S Procurement plan was a requirement for project project staff are not efficient and delayed. negotiations. Capacity buildingactivities are not M The activities will be a part o f R M C contract provided intimely manner that will be recruited as soon as the project i s effective. Overall Risk Rating S I Risk Rating H (High Risk), S (Substantial Ri :), M (Modest Risk), (Negligibleor Low Risk) - 3. PossibleControversial Aspects: Corruption i s a major risk associated with all Bank-financed projects in Indonesia. Though ILGR i s a project that supports "good governance", given the overall climate o f corruption in Indonesia, the possibility o f corruption occurring in the project is more than likely, and the overall reputational risk to the Bank's program in Indonesia is high. The project design proposes to mitigate and reduce the overall risk o f corruption through the program design and heavy emphasis on disclosure and external monitoring (see Annex 12); and through its emphasis on "de-selecting" kabupatens who fail to meet clearly defined governance requirements. There are no other controversial aspects relatedto the project. G. Main Loan Conditions 1. EffectivenessCondition (a) the Loan Agreement has been executed and delivered and all conditions precedent to its effectiveness or to the right o f the Borrower to make withdrawals thereunder, except only the effectiveness o f the Development Credit Agreement (DCA), have been fulfilled; (b) the DFID Grant Agreement has been executed and delivered and all conditions precedent to the effectiveness o f the DFID Grant Agreement or to the right o f the Borrower to make withdrawals thereunder, except only the effectiveness o f the DCA, have been fulfilled; (c) the Project Operational Manual, acceptable to the Association, has been adopted in accordance with the provisions o f paragraph 4 o f Schedule 4 to the DCA; (d) at least eight (8) Kabupatens have met the eligibility criteria referred to inparagraph 5 o f Schedule 4 to the D C A and set forth in Annex A to said Schedule, each in a manner acceptable to the Association; and (e) the National Management Consultants (the contract for which services is included inthe Procurement Plan) have been selected inaccordance with the provisions o f paragraph 9 to Schedule 4 to the DCA. 2. Other [classify according to covenant types used in the Legal Agreements.] ProjectManagementand Implementation 0 The Borrower shall: (a) maintain until completion o f the project: (i) National Steering Committee the and the National Implementing Committee, each with functions and responsibilities acceptable to the Association, and (ii) the Project Secretariat with functions andresponsibilities, and headed by a Project - 34 - Manager with qualifications and experience, in each case acceptable to the Association; and (b) provide said Project Secretariat at all times with such facilities, staffing and funding as shall be necessary to accomplish its functions, responsibilities and objectives. The Borrower, through MOHA, shall ensure that each Participating Kabupaten and Additional Participating Kabupaten shall (a) establish and thereafter maintain until completion o f the project, with functions and responsibilities acceptable to the Association, a PMU, and (b) provide each said P M U at all times with adequate funds and other resources, and with qualified and experienced personnel in adequate numbers, acceptable to the Association and inall cases as shall be necessary to accomplish its functions, responsibilities and objectives. KabupatenEligibility Without limitation upon the provisions and requirements o f the Project Operational Manual, the Borrower shall: Ensure that only those Kabupatens that have met the eligibility criteria set forth in Annex A to Schedule 4 to the D C A and in the Project Operational Manual may participate in the project as Participating Kabupatens and Additional Participating Kabupaten; Make available Phase 1 Grants only to those Participating Kabupatens that have met the eligibility criteria set forth inthe Local Govemance Reform Framework and inPart 1 o f Annex B to Schedule 4 to the DCA; Make available Phase 2 Grants only to those Participating Kabupatens that have met the eligibility criteria set forth inthe Local Govemance Reform Framework and inPart 2 o f Annex B to Schedule 4 to the DCA; and Make available Phase 3 Grants only to those Participating Kabupatens that have met the eligibility criteria set forth in the Local Govemance Reform Framework and in Part 3 o f Annex B to Schedule 4 to the DCA. Audit The Borrower shall ensure that auditing activities under the project, including the audits referred to in Section 4.01 o f the DCA, are carried out in accordance with: (a) BPKP's audit manual dated April 13, 1999, as such manual may be amended from time to time with the prior agreement of the Association, and (b) inaccordance with terms o freference agreed with the Association; and By October 31, 2005, inform each Participating Kabupaten that all auditing activities with respect to Sub-projects are to be carried out exclusively by independent auditors appointed by the Project Secretariat in accordance with Section 4.01 (b) o f the D C A and in accordance with the operational manual. MonitoringandEvaluation The Borrower shall engage, inaccordance with the provisions o f Schedule 3 to the DCA, by not later July 31, 2006, consultants, each with terms o f reference acceptable to the Association for the purpose o f carrying out: (a) independent monitoring o f the project, including the Local Govemance Reform Framework, and (b) independent evaluation o f the project, including the Local Govemance Reform Framework. -35 - H. Readiness for Implementation E1.a) Theengineering designdocumentsfor thefirstyear's activities arecompleteandready forthe start of project implementation. H 1.b)Notapplicable. 2. The procurement documents for the first year's activities are complete and ready for the start of project implementation. IXI 3. The Project Implementation Planhas been appraised and found to be realistic and of satisfactory quality. 94. Thefollowing itemsarelackingandarediscussedunderloanconditions(SectionG): The Draft Operational Manual has been appraised and found to be realistic and o f satisfactory quality 1. Compliance with Bank Policies 1. This project complies with all applicable Bank policies. 0 2. ThefollowingexceptionstoBankpolicies arerecommendedforapproval. Theprojectcomplies with all other applicable Bank policies. Erman A. Rahman Mark D. Wilson Andrew D. Steer Team Leader Sector ManagerlDirector Country ManagerlDirector - 36 - Annex 1: Project Design Summary INDONESIA: Initiatives for Local Governance Reform Project Key Performance lata Collection Strategy Hierarchy of Objectives Indicators CriticalAssumDtions Sector-related CAS Goal: Sector Indicators: ectorl country reports: from Goal to Bank Mission) Making service delivery Increasedrole o f local roject monitoring, 'olitical accountability responsive to the needs of the governments and stakeholder ssessments, studies on volving, local capacity is poor groups in planning and smbating corruption Jeak monitoring service delivery and funds utilization Development planning Local governments open their Fovernanceand ,oca1 level governments face responsive to constituents budgeting, planning and lecentralization Survey, legacy o f over centralization financial management roject Evaluation Report ndlittle capacity practices to greater public scrutiny Project Development Outcome IImpact roject reports: from Objective to Goal) Objective: Indicators: Pilot district governments Extent to which Independent NGO budget $0 back-tracking on Laws improve transparency, recommendations from and expenditure tracking i212004 and 3312004 relating accountability and consultationslpublic hearings (JSDF funded) o decentralization and fiscal participatory practices and are incoporated into district Stakeholder feedback and elations undertake reforms in financial plans and regulations (perdas) evaluations management and procuremenl Annual review of poverty 'olitical accountability strategies and budget wolves over time planning Greater public availability o f GDS ncentives for change develop information, in particular Qualitative governance studj iufficiently financial and procurement Procurement survey information Financial management study Twelve district budgets show Susenas data increases in poverty targeted Annual review o f poverty expenditure by end-of-project strategies and budget POP) planning EIRRfor project-funded conomic feasibility study infrastructure (>I 5%) >12 district governments Procurement survey practicing accepted standards Audit reports o f procurement as verified by audits and studies by EOP >12 district governments Financial management practicing sound financial evaluation management as verified by Audit reports audits and studies by EOP % increase in stakeholder GDS satisfaction with government Qualitative governance stud. - 37- servicedelivery IndependentNGO budget and expendituretracking (JSDF funded) htput from each Output Indicators: 'roject reports: from Outputs to Objective) :omponent: L. Local Governance teform i1. District development 40 districts meet entry hpervisionandmonitoring ;oca1 govemment planning iolicies andbudgetsare requirements eports, project progress ieeds andparticipatory irepared through a eports Joverty analysesare iarticipatory process and 12 districts issue local :omplementary and reflected eflect local priorities for regulations on mechanisms 'roject documentation(e.g. n actualbudget allocations loverty reduction for public consultation and egulations, strategies, action access to informationby )lam, frameworks) Zommunitiesandcivil society mid-termand functioning youps take advantage of satisfactorily, and 20 other vlinutes of meetings ipportunitiesto participate in districts prepare draft local .oca1planningand regulationsby EOP lecision-making Povertyreductionstrategies Core group ofreformersand and actionplans are issued leaderswithin the districtsare and implementedin 12 committedto pushingthe districts by mid-termand in reformagendaforward and 20 other districtsby EOP support capacity development Local legislative assembly (DPRD Kabupaten) and executive(Bupati) agree on the reformagenda and suppor it 12, Improvementsare made I Action plansin FMreform 'inancia1 management n procurementand financial are preparedand implemented :valuation nanagementprocesses in 12 districts by mid-term and in20 otherdistrictsby Procurementsurvey EOP Action plans inprocurement reformare preparedand implementedin 12 districts by mid-termand in 20 other districts by EOP 3. Poverty Targeted hvestment 'riority investmentin A minimumof 24 MIS, regular monitoring There are no delays in districl Cabupaten-level pro-poor sub-projectssupportedby :eports by TA teams, budget allocations, nfrastructureimplemented mid-termand 72 sub-projects infrastructurequality disbursementsor procuremen inder enhancedgovernance supportedby EOP, all :ethnicalreview, audits :onditions following proper technical, financial andprocurement procedures -38- C. Implementation Su Technical, monitoring s 40 project districtsreceive Iapacitydevelopment plans 'heprocurementand supervisory support for capacity development .ndtraining records iobilization of project staff implementation assistance inthe core ccur efficiently and without governance reform areas lupervisionandmonitoring ignificant delays (transparency and eports, project progress participation, procurement eports :apacity development and financial mgmt) by EOP iitiatives are providedin a VIIS .melymanner 10 staff at the center supportingproject monitoring :omplaints handling database and implementation, 45 regional staff supporting 'echnical studies and project implementationand valuationsreports monitoring, 55 staff supportingkabupaten ndependentNGO budgetand governments ixpendituretracking (JSDF unded) ProjectMandE system in place and providing accurate timely data on progress and outcomes Complaintsreceivediresolved satisfactorily Project Components I Inputs: (budget for each 'roject reports: from Components to Sub-components: component) htputs) A. LocalGovernance US$1.33 million )reject progressreports Zounterpart funds are Reform did-Term Review ivailable 1. Reformof the Kabul US$0.44million Planningand Budgetini process 2. Reformof Kabupate: US$0.44million Budget formulation, exe and Financial Managen reportingpractices 3. Strengthening US$0.44million Accountability Mechani B. Poverty targeted US31.18million )reject progressreports 4PBD availableon time and investment iisbursed C. Implementation Su US$l1.90million )reject progress reports Procurementprocess :ompleted on time 1. Technicalassistance US$7.45million Facilitation -39- l, Capacitybuildingand US$3.32 million raining 3. Monitoring,Evaluation U S 1 . 1 3 million mdStudies - 40- Annex 2: Detailed Project Description INDONESIA: Initiatives for Local Governance Reform Project The project seeks to pilot support to kabupaten governance and link them to poverty reduction activities. Primarily the project assists advances in good governance at the district level through establishment o f a prescriptive set o f minimum reforms in the key cross-cutting governance areas o f public participation, transparency, financial management and procurement as well as in preparing a participatory Poverty Reduction Strategy and Action Plan (PRSAP). Next, by providing incremental poverty targeted investment funds to kabupatens that complete an initial set o f the prescribed reforms, the project brings the cross-cutting reform elements together, including more pro-poor budget allocations, to demonstrate and test reform implementation at the district level. Lastly, the project also gives visible recognition o f the kabupatens' reform initiatives and disseminates good governance practices emerging from the districts so that the lessons learned can help to influence reforms in other kabupatens not participating directly in ILGR. More specifically, the project proposes to support the following, in selected kabupatens which meet the ILGR minimum requirements (see Attachment 1 to this Annex for a detailed description o f the requirements): 1. A set of prescribed minimum reforms in kabupaten policies and procedures on access to information and access to decision making to improve transparency o f and participation in the local government's budget planning, allocation and implementation process, with a view to enhancing the responsiveness o f local government; 2. A set ofprescribed minimum reforms in kabupaten policies and procedures on procurement and $financial management, with a view to reduce corruption and increase overall efficiency in fiscal management and leadto overall improvements inthe kabupaten investment climate; 3 . Development of a kabupaten-level PRSAP and itsformal integration into an enhanced approach to the existing kabupaten budget (APBD) planning, allocation, implementation and monitoring process, with a view to enable citizens' "voice" to be better heard both by the executive and the legislative parts o f the kabupaten government, and thus allow local government's to make "allocative choices" that are more responsive to citizen needs and lead to increasing pro-poor expenditures. These requirements are staged into three phases: entry, pre-investment, and investment (year 1 and year 2-year 3 has no new reform requirements). Participation in each phase entails undertaking a separate and progressively difficult set o f reforms, and the performance o f each kabupaten will be evaluated at the end of each phase to confirm its eligibility for the subsequent phase. Once a kabupaten meets the prescribed set o f minimum requirements o f the entry phase, the project will provide facilitation and technical assistance in the pre-investment phase to support the kabupaten to "graduate" to the investment phase. Inthis last phase the project will provide investment funds to finance key rural infrastructure sub-projects which are identifiedthrough the PRSAP. See Figure 1. -41 - t I - 42 - transparency, financial management and procurement. Under Component C, the participating kabupatens will receive general facilitation, specialized technical assistance and capacity buildingto equip and assist them to undertake the reforms. The participating kabupatens will be divided into two groups. The first, comprising approximately 15 kabupatens which participated during project preparation will enter the program at project effectiveness. The second, comprising approximately 25 kabupatens still to be identified will enter the program later in the second year o f implementation. Pre-Investment Phase. At project effectiveness, the first batch ofparticipatingkabupatens will commence the pre-investment phase, followed by the second batch o f participating kabupatens in the second year o f implementation after having met the minimum entry requirements. The pre-investment phase will last for 18-24 months in which each participating kabupatens will conduct a poverty assessment and prepare a PRSAP, as well as initiate prescribed reforms in participation, transparency, financial management and procurement. The participating kabupatens will start receiving capacity building and technical assistance from the project at this phase. However, as kabupatens inthe first batch have commenced work on some of the requirements o f the pre-investment phase (e.g., PRSAP, participation, transparency) during project preparation, they will need approximately 3-6 months before commencing the investment phase. Investment Phase. The participating kabupatens which fail to meet the prescribed requirements in the pre-investment phase will not be eligible to access the ILGR investment. Those which complete the prescribed requirements "graduate" to the investment phase and are then obliged to undertake additional reforms, The project will continue providing capacity building and technical assistance for the additional prescribed reform agenda and ensure that the reforms undertaken in the pre-investment phase are institutionalized and well grounded. During the investment phase, only the first batch participating kabupaten is eligible to receive funding for sub-project investments in rural infrastructure for three years under Component B, providing they meet the reform requirements. This project does not provide investment funds for batch 2 kabupatens. These funds will come from the subsequent project-ILGR2. By Component: Project Component A US$1.33 million - Component A: Local GovernanceReform A-1 Reformof the KabupatenPlanning andBudgetingProcess (Approximate Project Costs are UB0.44 million) A-1-1 Strengthening strategic links with pro-poor localpriorities Under this sub-component, the project supports development o f a kabupaten-level PRSAP and its formalized integration into the APBD process with a view to move toward a more "pro-poor" budgetary allocation. The output o f this sub-component i s two-fold: (i) piloting a participatory process in preparing kabupaten-level pro-poor policy; and (ii)identifying activities that will be financed through project investment. The PRSAP will be developed by a multi-stakeholder poverty working group (PWG) which is established through a public meeting (multi-stakeholders forum, MSF) and, when necessary, legalized by a Bupati Decree. At the request o f the National Poverty Reduction Committee, this working group, serves as a technical team for the Kabupaten's Poverty Alleviation Committee (Komite Penanggulangan Kemiskinan - 43 - or KF'K). The working group, which conducts the Participatory Poverty Assessment (PPA), i s comprised of: 0 Local government officials from the Development Planning Board (Bappeda) and technical agencies such as community empowerment, family planning and social welfare, statistics office, agriculture; 0 Non-government individuals, typically from non-government organizations, civil society organizations, community-based organizations (religious-based, women, farmer/fishermen association) and private sector; and 0 Local parliament (DPRD) members. The majority o f working group members should be from non-government and women should be well represented. Development o f the PRSAP comprises the following tasks: 0 Preliminary analysis of the local poverty situation. The analysis aims to analyze the poverty situation from several aspects, such as: socio-economic situation o f the kabupaten, existing policy, budget and programs, distribution o f the poor and their access to basic services (education, health, basic infrastructures, market), as well as structural (access to information and decision-making process) and external factors (beyond the authority o f the kabupaten). This quantitative and, to some extent, qualitative data is used to develop preliminary hypotheses and to select sites for field assessments. The preliminary analysis i s used as the basis for an initial consultation with a wider group o f stakeholders through a public consultation process. 0 Field assessment. The field assessment i s intended to verify the preliminary hypotheses and to provide a better understanding o f the voice o f the poor. Participatory poverty assessment tools, such as problem tree analysis, seasonal analysis, welfare classification, Venn diagrams, are used for this purpose. The poverty working group conducts the assessment in at least 3 locations that represent poverty typologies inthe kabupaten, spending 4-5 days in each site. 0 Formulation of the strategy. Based on the verified hypotheses, the working group develops poverty problem statements and strategy alternatives to cope with the problem. The strategy (for each problem) is selected against four attributes, Le. authority, capability, budget, and institutional capacity. The strategy formulation process will involve public consultation, both through individuavlimited meetings and general public consultation. 0 Formulation of action plan. The strategy i s expanded in a detailed action plan that includes an implementation framework, timeframe, and institutional arrangements. At this point a series o f issues-based discussions are conducted to involve non working-group members, such as technical agencies (public work, forestry, etc.) and non-governmental interest groups. 0 Institutionalization of the PRSAP. To ensure that the strategy and action plan will be referred to in the future (3-5 years) development of the kabupaten, it is necessary to institutionalize the PRSAP in the form o f Bupati's decree/local regulation. The PRSAP is then implemented through a participatory planning mechanism supported by Component A-1-2. Under this sub-component, the participating kabupaten governments finance local stakeholder participation, including government stafi who are involved in poverty assessments and working groups. General facilitation, specialized technical assistance and capacity building support is provided to the Kabupaten poverty reduction working group from Kabupaten Facilitators and regional and national Poverty Specialists under Component C. - 44 - A-1-2 Enhancingparticipation in decisionmakingprocess Ingeneral, the project supports enhancement of wider public participation indecision-making processes as one o f the project objectives and also as a means to reach the broader objective o f improved local governance and accountability. Under this sub-component a multi-stakeholder basic democratization (transparency and participation) working group is established, and support is provided to the working group to develop local legislation (perda) ensuring public access to the decision making process will be practiced and sustained beyond the life o f the project. Furthermore, once the PRSAP has been formulated, the project will support enhancement o f the decision making process (including usage o f ILGR funds). The perda on participation will cover at least three areas: (i)public involvement in formulation o f kabupaten policies and legislation process, including regional strategic plan, spatial plan, taxes and user charges; (ii)public involvement in annual planning, budgeting, and budget execution (including procurement); and (iii) public complaint mechanism, both in the implementation o f public investments and public services. The project will also support the implementation o f the perda, particularly on the annual planning and budgeting process as described below. The issuance o f the perda and initial implementation o f the action plan are the requirements that must be fulfilled in the first year o f investment while full implementation i s the second year's requirement. The project's main intervention in the APBD planning and budgeting process i s to open up dinas level programming process, inter-dinas planning discussion (Musrenbang Kabupaten) and in final budgeting processes, so that civil society, local community, sectoral associations/organizations representatives as well as the Poverty Working Group (PWG) can be engaged and give their input to the draft budget from an early stage. The perdas on transparency and participation would enhance this process. There are 4 important steps requiredto effectively influence the substance o f the APBD (See Table 1): 0 First, the PRSAP should be an integral part o f the kabupaten Renstra (strategic plan), and thus becomes a guideline for the dinas Renstra (dinas strategic plan based on the kabupaten Renstra). The legalization o f PRSAP (see Sub-component A-1-1 above) is expected to establish this link. 0 Second, the Dinases proposals for PRSAP-related investment should be planned in the following steps: (i)PRSAP coordination workshops, led by Bappeda and involving Poverty Working Groups, to determine basic preliminary allocation o f fund; (ii)the results o f the workshops will be disseminated to wider stakeholders and Musrenbang Kecamatan meetings; and (iii) concurrently each related Dinas will develop the detailed proposal with participatory process involving civil society interest groups and related community representatives for the kabupaten poverty reduction strategic investment. The result will be consulted with a wider audience. 0 Third, Bappeda compiles sub-project lists for Musrenbang Kabupaten workshops based on Dinas and Musrenbang Kecamatan proposals, as well as DPRD and Bupati inputs. Related stakeholders such as community representatives, interest groups (civil society, water-users, peasant associations, etc.), DPRD members, and Poverty Working Group will attend these meetings. At this stage the proposals already include further feasibility studies and detailed cost calculations and Bappeda has reviewed the estimate o f overall budget availability in detail. Since a preliminary estimation o f budget and process o f prioritizing the proposals has been done earlier, the Rakorbang will focus inrefining the priority and cross-dinas consistency o f strategic investment. The output of - 45 - these series of Rakorbang workshops is a clearly definedbudget proposaland priority that will be agreedby the executive and DPRD inthe form of a MoU. 0 Fourth, the draft budget, before it is approvedby the DPRD, will be consulted with the community and civil society representatives. Table 1. Kabupaten Planning and Budgeting Process Dinases'proposalsare alignedto PRSAP upfront PRSAP is formulatedthrougha participatory processes PRSAP has specifictime-bound action plans Local governments are required to provide substantialamount of block grant to support village budget Dinases preparedraft list of projectand discuss it with PovertyWorkingGroup (PWG) to align with PRSAP PWG and dinases participateto discuss andverify proposalsthey have agreed before (above) Participationof PWG (andother multi-stakeholders forum or MSFworking groups)and community representatives Divisionof roles and responsibilitiesof each stakeholdergroup in MusrenbangKabupaten (includingDPRD) ILGR investmentceiling has been confirmed prior to MusrenbangKabupafen Publicconsultationduring budgetformulation in MusrenbangKabupafenare "inserted" duringthe processand no public consultation in the process("black box") Jun-Nov Feasibility Study Feasibility study (technicaland economic Clear threshold on feasibilitystudy requirements aspects) for several"complicated"projects Dec-Feb BudgetApproval Budgetcommittee(legislativeand executive) Publicconsultationon the draft budget finalizes the budget March-Dec BudgetExecution Each dinaslagencyexecutethe budget MSF monitorsthe projectsimplementation Bawasda and/orBPKPaudits the Annual reviewand evaluationof implementation of implementation PRSAP Issues: lack of technicalmonitoringand Under this sub-component, the local governments willfinance local stakeholder participation, including government stas who are involved in the development of the perdu on participation as well as those participating in implementation of the Musrenbang Kabupaten. - 46 - General facilitation, specialized technical assistance and capacity building support is provided to the Kabupaten basic democratization working group from Kabupaten Facilitators and regional and national governance specialists, including training, workshops and consultation meetings under Component C. A-2 Reformof Kabupatenbudgetimplementationand FinancialManagement (Approximatecosts are US0.44 million) To complement the "basic" good govemance principles o f transparency and participation, the project will support implementation o f more "technical" reforms in Kabupaten procurement and financial management practices with a view to ensuring efficiency, fairness, and transparency inmanagement o f public funds and reduction in corruption. It i s envisaged that improved financial management and procurement systems and practices will help bring all public funds into the public accountability framework and at the same time bringflexibility inbudgeting for legitimate variations. Inaddition it is hoped that these improved practices will reduce the chances for corruption, and create an enabling environment for improved govemance in other areas. Under this sub-component, participating kabupatens will be required to institute a series o f graduated reforms in financial management and procurement over a period o f 3-4 years, with agreed benchmarks for monitoring progress. These will be institutionalized through the issuance o f Bupati decrees and kabupaten-levelperdus, and supported by capacity building o f kabupaten staff, and provision o f equipment and software. National and Regional Procurement and Financial Management Specialists will assist local government in meeting pre-determined requirements for the various program phases though technical backstopping and capacity building programs that include training, and cross-kabupaten workshops. The key beneficiaries o f the activities under this sub-component are the office inthe kabupaten appointed as the focal point for the procurement reforms, the FM Reform Committees, as well as other government officials of Regional Secretary (Sekdu) Office, Internal Audit Agency (Buwusdu), Finance DivisiodOffice, and DPRD members. A-2-1 Procurement At entry, participating kabupatens are requiredto assign an appropriate office inthe kabupaten government as focal point to take on the functions o f leading and coordinating the procurement reforms. In most kabupatens, the focal point will likely be within the Sekdu office (particularly Assistant for Economics and Development). The procurement reform focal point will lead and coordinate procurement reform and develop a local procurement policy which i s in line with national procurement reforms stipulated by newly issued Presidential Decree (Keppves) 8012003. The procurement reform focal point will work with other key parts o f the kabupaten government to streamline regulations (or remove them when necessary) to promote economy, efficiency and open competition. Transparency, related to procurement policies, procedures and practices, will also be ensured. A workable mechanism to handle complaints and apply sanctions will be established in addition to an annual survey o f bidders and civil society about kabupaten procurement practices (see Sub-component (2-2). Another important aspect o f the reform is that the focal point functions will formally become a permanent part o f kabupaten government function through issuance of a revision o f the existing perda on kabupaten organizational structure and functions to include the new functions o f the procurement focal point, within Year 1 o f ILGR investment. - 47 - A-2-2 Financial Management At entry, each participating kabupaten will be requiredto establish a FinancialManagement (FM) Reform Committee, to lead and coordinate the prescribed financial management reforms. The kabupaten -through the FM Reform Committee- will implement phased reforms o f financial management, including the following seven areas o f reforms: (a) Provide an appropriate enabling legal framework for financial management reforms; (b) Strengthen procedures for authorization o fbudget expenditure; (c) Improve financial controls over management o f public funds; (d) Strengthen monitoring and accountability o f all public funds generated or received; (e) Enhance accountability o f Work UnitHeads for compliance with regulations; (f) Strengthen effectiveness o f internal audit function; (g) Implement greater transparency inlocal financial management. See Attachment 1for details in each area. Under this sub-component, the participating local governments will finance the establishment and operations of the Procurement Reform Focal Point and the FA4 Reform Committee, as well as the incremental costs of development of and consultation on the required SK Bupatis and perdas, and their public disclosure. The participating local governments also finance local stakeholder participation, including government stafl who are involved in the training and workshops. The Sekda ofice and Regional Finance Ofice will be the key counterparts. General facilitation, specialized technical assistance and capacity building support is provided to the kabupaten Procurement Reform Focal Point and the FM Reform Committee from Kabupaten Facilitators and regional and national procurement and financial management specialists, including preparation o f guidebooks, kabupaten training, roadshows, workshops and consultation meetings under Component C. A-3 StrengtheningAccountabilityMechanisms (Approximate costs US$0.44 million) A-3-1 Information Disclosureflransparency The Kabupaten Working Group on Transparency and Participation will prepare a local regulation (perda) on people's access to public information (transparency) and monitor the implementation o f concrete initiatives in information disclosure taken by local government. Specifically, the working group members -local government officials, DPRD members and nongovernment representatives- and the facilitators will be trained by national and regional consultants on what should be in the draft regulation, how to prepare a "white paper", how to conduct the public consultation process on the draft perda, and orientation for the DPRD who have to approve the perda. The implementation framework o f capacity building activities and transparency perda and detailed action plan formulation i s similar io participation perda formulation process (see Sub-component A-1-2 above). On concrete initiatives, requirements for disclosing public information -by actively disseminating the availability o f public documents and summaries o f budget and Bupati accountability speech (LPJ) inmass media- are part o f the project's entry criteria. Inthe pre-investment phase, when the transparency perda is being drafted, it i s required to announce the procedures, costs, and time needed to obtain licenses and other public services in the mass media and at the designated locations. In addition, all draft local regulations - 48 - (transparency, participation, budget preparation and execution principles, PRSAP) required by the project will also actively disseminated at this phase. The transparency initiatives will be continued in the investment phase untilthe perda is fully implemented inYear 2. The government, particularly Public InformatiodPublic Relation Office and Bappeda, and DPRD will receive technical assistance from the project to disclose information, such as inpreparingpress releases and summaries o f medium term plans (regional development plan, strategic plan, spatial plan), budget and annual planning document, and LPJ; licensing and public service requirements; as well as technical aspects o f preparing other information dissemination means (such as website, newsletter). As in other areas, the project will also support inter-kabupaten exchange and peer-learning through intra- and inter-region workshop and cross visits. A-3-2 Networking and Inter-kabupaten Exchange The project would support a series o f regional exchanges and workshops for kabupatens to share experiences and directly leam from each other. The administrative costs o f the workshops and management of the exchanges would be covered through the regional consultant contracts (Component C) but all funds for kabupaten staff travel would be covered by the APBD. Under this sub-component, the participating local governments will finance the establishment and operations of the Kabupaten Working Group on Transparency and Participation, as well as the incremental costs of development and consultation on the required transparency perdas, its public disclosure, and the cost of public disclosure of other documents named under the perdu. The participating local governments alsofinance local stakeholder participation, including government staff; who are involved in the training and workshops. The Public Information/Public Relation Ofice, Legal Bureau, and Bappeda are the key counterparts. General facilitation, specialized technical assistance and capacity building support is provided to the Kabupaten Working Group on Transparency and Participation from Kabupaten Facilitators and regional and national specialists, as well as capacity building including training, workshops and consultation meetings under Component C. Project Component B US$31.18 million - Component B-Poverty Targeted Investments The ILGR investment component, which will only be used for batch 1 kabupaten "graduates" (batch 2 kabupaten graduates will get investmen funds from the subsequent project - ILGR2), uses three over-arching principles as the basis for investment financing linked to improvements in govemance: (a) The PRSAP provides the overall policy framework for kabupatens to reduce poverty which should be financed by the APBD. The ILGR investment funds provide only partial financing o f the strategy. (b) The ILGR investment decision-making process is fully integrated into the regular kabupaten planning and budgeting system, with enhancement intransparency and participation. (c) The ILGR investment funds are on-granted to the kabupatens and are included inthe APBD budget document to ensure budget transparency. - 49 - Once batch 1 kabupatens, which are facilitated in the project preparation, successfully meets the pre-investment requirements, the project provides investment funds to finance priority infrastructure needs defined and prioritized in their PRSAP. However, the main objective o f the fund is not only financing sub-projects, but providing a means for leveraging govemance improvements. H o w the money is allocated, managed, used and monitored is a process through which local government will increase transparency, responsiveness, effectiveness, and accountability to local citizens. Typesof sub-projects and selection criteria Each local government (executive and legislative), civil society, private sector and community representatives will determine, in a participatory manner, the subprojects that will be financed by ILGR. Financing is open to construction, rehabilitation and upgrading o f public infrastructure and non revenue generating investments that are identified as local priorities in the kabupaten-level poverty reduction strategy and action plan (PRSAP) and are eligiblebased on Table 2. In addition, the investment will not finance: (i)military or paramilitary purpose; (ii) works for civil government administration or religious purposes; (iii)activities relate to the manufacture or use of environmentally hazardous goods (including asbestos, pesticides and herbicides), arms or drugs; (iv) government salaries; (v) production, processing, handling, storage or sale o f tobacco or products containing tobacco; (vi) activities within a nature reserve or any other area designated by the Government agency responsible for the management andor protection o f such area; (vii) activities relate to mining and excavation of live coral; (viii) activities relate to alterations to river courses; (ix) activities relate to reclamation larger than 50 hectares; (x) new irrigation larger than 50 hectares; (xi) construction o f water retaining or storage structures o f a capacity greater than 10,000 cubic meters activities that can not be financed by ILGR investment based on the safeguard framework; or provision o f micro-credits. Size of investmentsfunds and sub-projects The size o f the investment funds will be determined by the population size o f the kabupaten, taking into account the difference inpopulation densities on and off-Java (see Table 3). The size o f each subproject should be larger than that financed by the World Bank's Kecamatan Development Project- (village-level sub-projects), but smaller than sectoral (central-government) projects. The project will finance sub-projects ranging from Rp300 million upwards in size (that includes counterpart funds). ILGR Kabupatens have an annual budget (APBD) ranging from Rpll3-932 billion, with an average budget o f Rp285 billion for FY2003. ILGR finances approximately 10 percent o f the development budget. It is expected that the subprojects in one kabupaten will not be concentrated in one sector. - 50 - Table 2. ListofEligibleKabupatenSub-projects underILGR Water SUDD~V(includes civil work and comolementarveauioment) --- Wells - Chemical water treatment systems Water catchmentsiharvesting structures - Stand alone motor pumps and electric - Ponds pumps Community water supply systems (incl. motor pumps and electric --- Community water storage facilities pumps) Spring improvement (incl. simple water treatment system) --- Community filtration systems. Public taps M C K (Public bath room) Community drainage system Energy (includes civil works and complementary equipment) - Electricity distribution systems - - Stand alone generators Solar system generators Transportation (includes civil works only) - Roads (earth, laterite surfaced, gravel surfaced, paved) ------ - Improvement or rehabilitation o f Culverts nationaliprovincial roads and bridges Bridges Vented causeways Rakzt landing facilities Inland waterways improvements Bus/public transport waiting areas Irrigation and Flood Protection (includes civil works and complementary equipment) -- Earth dams and reservoirs - Stand alone motor pumps or electric ----- Spillways Canals and distribution systems Diversion structures Pumping station structures Drainage structures Flood protection structuresifacilities Natural Resources Management (includes civil works only) - Communal meeting areas --- Administration buildings Communal agricultural centers Police or army buildings Communaltraining centers Buildings for religious activities Communal libraries ----Building for commercial financial activities -51 - Table 3. Maximum Investment Size 750,000-1,500,000 6.5 billion > 1,500,000 9 billion Off-Java <250,000 4.5 billion 250,000-500,000 5.5 billion >500,000 6.5 billion Sub-project decision making process and implementation The Program Management Unit (PMU), with assistance o f Kabupaten Facilitators, will identify sub-projects that will be proposed for financing by ILGR investment funds. The selection o f sub-projects will be based on the type o f sub-projects, relevance with PRSAP, an appraisal o f the cost-effectiveness o f the sub-project following the method prescribed in the Project Operational Manual, compliance with the project safeguards framework, and the total cost o f the sub-projects for the budget ceiling. Kabupaten Facilitators will submit the kabupaten proposal to the Regional Management Consultant (RMC) who will verify it based on the criteria above. The verified proposal will be then sent to the National Project Secretariat (NPS) which will be compiled by the National Management Consultant (NMC). If the kabupaten meets the relevant minimum governance reform requirements, the NPS will then prepare the nationalbudget (APBN) and inform the results to P M U to prepare the kabupaten budget (APBD). Once the budget i s approved, relatedDinas(es) will thenprocure private contractor(s) to physically implement the sub-project(s) in the field following project procurement guidelines. Project Component C US$ 11.90 million - Component C: Implementation Support C-1 General Facilitationand Specialized Technical Assistance (EstimatedProject Costs:US$7.45 million) To support the implementation o f ILGR at each level o f organization -national, regional, kabupaten consultants will be hired by the National Project Secretariat. At the national level, a team o f National Management Consultants (NMC) will assist the project manager and secretariat in managing and monitoring the project implementation. The N M C will train the other consultants, including the Regional Management Consultants (RMC) and kabupaten facilitators (F-Kabs). Through frequent site visits, the N M C will evaluate whether the main goals o f the project are being met and that physical, economic and social targets are being achieved. The N M C will be responsible for overseeing the work o f the other ILGR consultants and reporting o n progress at regular intervals. In addition, the N M C will assist the project manager prepare an annual report that includes the lesson learned, project achievements and impact. The N M C will also provide on-the-job training to counterparts in the Project Secretariat. The N M C will consist o f the following (see Project Operational Manual for detailed TORS): ---- team leader procurement specialist legal/policy specialist poverty specialist - 52- -- safeguard specialist financial management specialist - - monitoring and evaluation specialist M I S data base specialist - -- communications/media specialist complaints handling staff plus support staff The R M C will be based in three regional offices. Both NMC and R M C will backstop the Kabupaten working groups and facilitators in areas such as poverty assessment, financial management, procurement, participation, environmental and social safeguards and review quality o f infrastructure financed through the investment funds. The regional coordinators will also help facilitate cross-kabupaten exchanges, dissemination o f best practice and coordinate regional training events. R M C in each cluster will include the following staff complement: --- regional coordinator engineer governanceilegal drafting specialist - - FMspecialists procurement specialists - --- M I S specialist safeguards specialist poverty specialist plus support staff Each participating kabupaten will receive facilitation assistance from two Facilitators. The lead kabupaten facilitator will have a governance background and will be responsible for general facilitation of the working groups and supporting the P M U in coordinating the working groups and reform committees. The second facilitator will be an engineer who will work closely with the Poverty Working Group and facilitate the sub-project decision-making process and monitoring o f the sub-project implementation. The engineer will be recruited once the PRSAP i s completed, prior to the investment phase. An assistant will help both Kabupaten Facilitators inadministrative and data entry. Intotal the project will hire 80 facilitators and 40 assistants. Under this sub-component the project willfinance the cost of consultants and facilitators salaries and allowances, administrative costs, operational costs,publications and dissemination materials. C-2 CapacityBuildingandInstitutionalTraining (EstimatedProjectCosts: US$3.32 million) The project would provide a combination o fpre-set training and capacity building modules provided by the regional and national management consultants to the Kabupaten working groups and staff responsible for procurement and financial management reforms. The support would be in the form o f technical back-stopping and a series o f kabupaten and regional workshops and specific field based exercises such as the Participatory Poverty Assessments. The RMC would periodically identify the training and technical assistance needs and look for opportunities to coordinate and share training sessions across kabupaten clusters, The following Table summarizes the type o f modules to be provided by the NMC/RMC (and additional expertise ifrequired) under the four areas. - 53 - Table 4. Summary of Capacity Building and Institutional Training Developing the PRSAP Quantitative Analysis 0 Community Assessment 0 Strategy Formulation 0 Integrating Strategy inthe Regular Planning Process Transparency/Participation 0 Legal Drafting 0 Transparency, participation, accountability -implementing the perda, budgeting 0 Safeguards Procurement Reform 0 Socialization of KEPRES 80 0 Training for procurement focal pointilJP3D Training of Key Dinas personnel in new procurement methods and planning 0 Training of BAWASDA and procurement watch groups Training on procurement monitoring Financial Management 0 Training of DPRD inbasic regional financial management Reform 0 Training for BAWASDA staff on financial and performance audit 0 Training of finance accounting staff in double entry book-keeping 0 Training o f finance department staff on budget execution, cash management, control systems 0 Training of work units on budget execution and accounting Inaddition to the project prescribed training each kabupaten could request some specific training inareas to be identified by the Kabupaten working groups. Some o f the unallocated resources from the project would be directed towards this type o f training. This request would also be packaged in the formats and sent to the national project secretariat though the RMC. Inthe first year o f project implementation a more detailed capacity building needs assessment survey would be carried out in the participating Kabupatens to identify complementary training required by local government beyond the current menu provided by the project. C-3 Monitoring, Evaluation, and StudiedSurveys (Estimated Project Costs USU.13 million, excludes costs for Internal Monitoring that is covered under Sub-component C-1) Internal Monitoring Internal project monitoring will be implemented using a Management Information System (MIS). Basic information will be collected and entered at the kabupaten level, and stored in a master database. The database will be available to all at national and district levels. The MIS will serve two main functions: 0 to monitor progress in project implementation, and generate a series o f monthly, quarterly and annual reports to support project implementation; and 0 to identify problems in a timely manner and provide the necessary information to develop appropriate solutions to ensure the project remains on track. The internalproject monitoring and evaluation, uses several types o f interventions: - 54 - Consultant Monitoring The N M C will be responsible for internal project monitoring, essentially process monitoring o f both inputs and outputs. The central team will receive monthly reports from the Kabupaten facilitators and the RMC. The N M C will inturnassist the Project Secretariat prepare regular reports for the World Bank and DfID. The N M C will assist MOHA prepare a report for the national steering committee, which highlights the following progress indicators: 0 The progress o f reform measures implemented ineach o f the core governance areas; 0 Proposed reforms for the coming period; 0 Kabupaten priorities for service delivery and development projects implementedduring the past year financed by ILGR through the poverty strategies; Major problems encountered (including complaints) and recommendations for improvements; 0 Planned investment activities for the following year; 0 A summary o ffiscal performance for each kabupaten; and 0 Case studies o f Kabupaten"best practice" or governance innovations. For investment planning and the sub-project execution process, the Facilitators will monitor local government compliance with operational rules specified inthe operations manual on: 0 Involvement o f Kabupaten stakeholders inthe budget (APBD) planning process and the steps required for public disclosure and participation; 0 Compatibility o f investment proposals with those outlined inthe PRSAP; and 0 Documentationo f Kabupaten stakeholder reviews and comments on the APBD proposal including ILGR investment funds prior to submission to the DPRD finance committee. The main monitoring tool for kabupaten sub-projects i s the project secretariat MIS which will host the database for kabupaten sub-projects and information regarding financial flows, costs, characteristics, and the expectednumber o fbeneficiaries. Government Monitoring and Reporting From the government's side, each kabupaten is required to submit their reports to the National Project Secretariat. Monthly reports, using standardized formats (see project manual) will be prepared by PMU and will be sent to the NPS to report upon progress on or related to the core reform requirements against Kabupaten-level action plans. In parallel, the Kabupaten facilitator will be responsible for validating implementation o f the action plan. Stakeholder Feedback The project will develop special activity feedback forms that will be distributed by the F-Kabs so that at every stage o f the process (entry, pre-investment phase, and investment phase), stakeholders will be given a chance to provide feedback on how the process is proceeding. Government officials, NGOs and other civil society actors will comment on their satisfaction with the quality o f the outputs and the decision-making process. These feedback forms will assist the project in systematically identifying strengths and weaknesses inthe activities in order to take corrective action if necessary. The feedback forms will also be used on a longitudinal basis to assess whether there is improvement as the project cycle progresses and from one year's cycle to the next. - 55 - Complaints Handling One major objective o f the M&E is the identification and resolution of problems encountered during implementation, so that they can be resolved at the earliest possible stage. The project will maintain a separate communication channel to facilitate the reporting o f grievances and complaints. The project will publish project contact information and PO Boxes where citizens can send inquiries and complaints. The complaints handling unit will ensure that problems are collated at the regional and central levels, and the project secretariat through the N M C team deals with the grievances quickly and ina timely manner. Table 5. Summary of InternalMonitoring Activities ILGR consultants progress 0 Monthly reports Monitoringby Monitor and regularly report Government officials at Quarterly reports and Government progress, and troubleshooting the national, and problems solved officials kabupatenlevel Stakeholder Provide feedback at every stage Govt officials, NGOs, Periodic feedback at every feedback o f the processin order to civil society actors stage identify strengths and weaknesses in activities Complaints To document and resolve field NMC/RMC staff for 0 Resolvedcases handling process problems handling complaints Databaseof complaints The cost for intemal monitoring i s included under Sub-component C-1. ExternalMonitoringand EvaluationActivities This sub-component activity will focus on external independent project monitoring and evaluation that will be managed by Bappenas, using several types o f interventions: JSDFfinanced monitoring by NGOs The Bank has also received a Japan Social Development Fund (JSDF) grant o f US$2.0 million to provide parallel financing to an intemational NGO to support civil society institutional strengthening in analyzing and disseminating local government budget information as well as in monitoring the quality o f service delivery and budget execution through civic report card in the ILGR districts. The results o f this activity will be used as one o fthe monitoring tools of the project. Annual Review of Poverty Strategies and Budget Planning The project will commission an extemal review of the district poverty strategies, action plans and budgets to assess their technical quality and feasibility. This annual review will examine how data and poverty information has been integrated into strategies and plans, as well as the soundness o f the plans and budgets. This review will provide valuable informationto improve the next planning and budgeting cycle. - 56 - Evaluation of Economic Feasibility and Cost Effectiveness of ILGR Infrastructure Investments The socio-economic impact o f sub-projects, generated by improved planning, implementation and maintenance at the level o f local government' administration, will be evaluated using standardcost-benefit analysis tools specifically designed to fit the type o f proposed sub-project (water, and sanitation, rural roads, irrigation projects). The study will analyze the Economic Internal Rate o f Retum (EIRR) for ILGR infrastructure investments and also compare these costs with similar non- ILGR infrastructure projects in order to assess cost-effectiveness. These studies will be carried out at mid-term and at the end o f the project period by an extemal consultant. Evaluation of Procurement Reforms The project secretariat will commission an annual survey o f contractors and cost o f kabupaten project goods and services to monitor the impact o f reforms in the procurement process. The results from the survey will be made publicly available and provide a quantitative measure o f govemance reform impact. Regional Financial Accountability Assessment This study, to be conductedby external consultants andthe Ministryo f Finance, will evaluate the impact of financial management reforms. Evaluationof the Impacts of Overall Governance Reforms Governance and Decentralization Survey (GDS) - During preparation, the project commissioned a baseline perception survey o f govemance- the GDS-implemented by Gadjah Mada University in the 16 pilot ILGRKabupatens. The GDS tracks local public service delivery and govemance trends inthe wake o f Indonesia's wide-sweeping 2001 decentralization reforms. The results from the baseline, show that overall the ILGR kabupatens have higher performance than the average Indonesian Kabupaten in areas such as participation, accountability, transparency and poverty-targeted programs. This baseline survey will be repeated in 2005 and 2007 (future dates are still tentative), with modifications in the questionnaire to include more household interviews from the initial sampling o f kabupatens and to include comparison districts (allowing for comparisons between ILGR and non-ILGR districts). The GDS results will be used for the mid-term and final project evaluation, and i s a key longer-term outcome measure for the project. Overall the project will focus on improving the "govemance trajectory" for the ILGR Kabupatens, as opposed to absolute percentages in govemance reform. The project will finance the costs o f the survey through the project secretariat. Qualitative Study of Governance Reforms The project will also commission bi-annually an extemal - consultancy firm or NGO to conduct a qualitative study o f govemance reforms. This qualitative work will complement the quantitative GDS exercise. The qualitative study will use focus group discussions and key informant interviews to understandbetter the evolving, complex dynamics o f govemance change, especially interms o f attitudes, changes inperception, practices, and spill-over effects of improved local govemance reforms. Beneficiaries o f ILGR TA such as government officials, NGOs, civil society representatives and other stakeholders will be interviewed. This study will give the project a fuller, richer description o f the incremental, qualitative changes taking place that otherwise would not be captured in all its dimensions through a survey questionnaire. Mid-term ProjectEvaluation InYear 2 the project will commission a review o f the project performance - and design. Some important areas to look at are: (i) the Local Govemance Reform Framework-how realistic the framework is and how big i s its impacts, (ii) the project phasing, and (iii) impact of the the - 57 - project's investment funds. The results will help improve the current design and particularly the subsequent design o f the project-ILGR2. Final Project Evaluation - The final evaluation will assess whether the project meets its development objectives. Specifically the evaluation will look at the overall impact o f the project on govemance practices related to the project intervention, including the budgeting process and poverty-targeted allocation. The evaluation will provide lessons learned for similar projects inthe future. Semi-annual supervision missions along with the project financial audits will also be conducted. Table 6. Summary of External Monitoring and Evaluation Activities expenditure tracking, expenditure process. reporting on kabupaten budget citizen report cards To assess citizen's satisfaction with expenditures, citizen report cards public service provisions (JSDF providing feedback on satisfaction with financed) service deliverv Annual review o f To evaluate the technical quality External evaluators Report assessing the quality and poverty strategies and and feasibility o f the poverty feasibility o f the poverty strategies and budget planning strategies and budget formulation budget formulation Economic feasibility and To evaluate the rate o f return and External consultant Study evaluating the benefits and costs cost effectiveness cost effectiveness o f ILGR team derived from ILGR financed infrastructure investments infrastructure projects Regional Financial To evaluate the impact o f financial External consultants Study evaluating changes in financial Accountability management reforms and M O F management practices. Assessment Procurement To evaluate the impact o f ILGR's External team Survey report on kabupaten procuremen evaluationisurvey reforms on prices o f good, services practices Governance impact study To evaluate changes in governance University Gadjah Updated GDS for ILGR's kabupatens -GDSsurvey and service delivery inILGR Madah and reports on findings (baseline, districts mid-term and final) Qualitative govemance To evaluate the impact o fthe External consultant Bi-annual qualitative studies to impact study program on governance indicators firm or NGO complement the GDS and provide in qualitative terms descriptive informationregarding governance changes To evaluate the project External consultant Mid-term evaluation on project impacts evaluaton performance and provide inputsto on governance practices inall areas o f the current as well as ILGRZ ILGRintervention desim Final project evaluation To evaluate the project overall External consultant Final evaluation on project impacts on performance governance practices. World Bank -DfID To supervise ILGR's progress and World Bank, DfID Aide Memoire (twice a year) cross-sectoral implementation o f activities Bappenas, MOHA, supervision missions N M C , M O F Financial Audits To audit ILGR finances BPKP Audit findings and reports - 58 - Attachment 1to Annex 2 ILGRLocal GovernanceReformFramework A. GeneralRequirements y (RequirementstoE Verify fiscal capacity Review to and certify eligibility :onfirm o fkabupatens inletter satisfactory in to World Bank form and Submit a Letter o fAgreement addressed Letter o fAgreement Compile letters from substance. to the National Steering Committee kabupatens and submit signedby Bupati and chairperson o f copies to World Bank. DPRD expressing interestto participate in the program, and a commitment to: (a) implement specific govemancereforms (participation, transparency, procurement, financial management) to be undertaken insubsequent phases as Governance Reform Framework; (b) commit to establish the Transparency and Participation, and Poverty Working Groups through public meeting;" (c) undertakeparticipatory poverty analysis and to institutionalize the poverty reduction strategy and action plan (PRSAP) into the Kabupatenplanning and budgetingprocess; and (d) adopt the Operational Manual, including the participatory planning and budgeting process, safeguards framework", and appraisal procedures for sub-projects. Issue a Bupati Decree (SK Bupati) "I Copy o fBupati's Submit letter"" to Review letter to comprising instructions to: (a) establish Decree World Bank as confirm ikabupaten-level project management unit certifying that the SK satisfactory in to coordinate project activities; (b) Bupati for each o f the form and implement the ILGRgovemance eligible kabupatens are substance. framework as agreed, in form, substance available at the Project and timing; (c) follow the procedures in Secretariat, and are the Operational Manual, including the satisfactory inform participatory planning andbudgeting and substance. process, safeguards framework and appraisal procedures for sub-projects; and (d) amend the Bawasda's annual general audit program to include verification that the procurement and FM reform measures stipulated inthe regulations have actually been implemented Pre-Invesi Have no loan arrears, either repay or reschedule certify eligibility o f Kabupatens in letter to -59 - B. Transparencyand ParticipationRequirements try (Requirementsto f eticipatein ILGR)' Announcement in mass media of the Proofof Submit letter"' to Review letter to Verify summaries of budget and Bupati's announcement in World Bank as confirm announcement accountability speech (LPJ) in mass mass media. :ertifying that the satisfactory in inmediaand media. proof of the form and quality of mnouncement for substance. summary of :ach of the eligible budget and kabupatensare Bupati's ivailable at the Project accountability Secretariat, and are speech satisfactory in form available. and substance. Announcement inmass media of the Proofof Submit letter"" to Verify availability of the following documents announcementin World Bank as announcement (locations, requirements, time, and the mass media. certifying that the inmedia. costs to get it): budget, Bupati's proof of the Verify accountability speech, regional strategic announcementfor availability of plan (Propeda,Renstra), annual plan each of the eligible documents. (Repetada,AKU and Strategies and kabupatens are Priorities), local regulations and spatial available at the Project plan are available at the designated Secretariat,and are location(s). satisfactory inform and substance. Check, on a sample basis, availability of documents in designated locations. Pre-Investme Phase Establish Transparency and Participation, Documentation Review andPoverty Working Groups through verifying documentationand public meetingwithin 3 months of entry.' establishment of verify that working working groups groups are established with appropriate composition of membership. Announcement inmass media of the Proof of Submit letter to World Check procedures,costs, and time needed to get announcementin Bank as condition o f announcement licenses and other services, such as ID mass media eligibility for and public cards, birth certificate, business license investment certifying posting, and and buildingpermits at least once a year, that the proof of the verify as well as being permanently posted at announcement for procedures, designatedlocations. eacho f the eligible costs and time This activity will be continued in kabupatensare to obtain InvestmentPhase. available at the Project licenses and Secretariat, and are other services satisfactory inform and substance. Check, on a sample basis, availability o f oosted information in designated locations Announcement inmass mediaof the Proofof Submit letter to 3heck procedures,costs, and time neededto get announcementin World Bank as innouncement licenses and other services, suchas ID mass media :ondition of mdpublic cards, birth certificate, business license zligibility for iosting, and andbuildingpermits at leastonce ayear, investmentcertifying Jerify as well as being permanently postedat that the proof of the irocedures, designatedlocations. announcement for :osts andtime This activity will be continued in each of the eligible .oobtain Investment Phase. kabupatensare icenses and availableat the ither services Project Secretariat, and are satisfactory inform and substance. Check, on a sample basis, availability of postedinformation indesignated locations Submissionof draft local regulation Copy of draft Review content of Reviewdraft Check (perda) on public access to information perda. draft perdas, ?erdato confirm zommunity (transparency) to DPRD, which contains Proofof summary of public satisfactory in involvement assurance andmechanisms ofpublic submission of commentsand form and and the access to: draft perdato changes made to the substance. process of Informationrelatedto discussionon DPRD. drafts as results of formulating public policies inDPRD; Minutes ofpublic inputsfrom the the draft Planningdocuments(Propeda, meetings and public. perda. Renstra, Repetada,and spatialplans); attendance list of Submit copies of Draft and final documents of all at least 3 public perdas alongwith perdas,budget (APBD) andbudget meetings to letter to World Bank realizationreports; discuss the draft. as condition of Audit reports and their follow-ups, eligibility for Bupati's accountability reports (LPJ), investment certifying information on procurement policies, that the draft perda proceduresandpractices, on for each of the complaintresolution mechanismand eligible kabupatens results (follow-up). are availableat the Project Secretariat, and are satisfactory inform and substance. Submissionof draft local regulation Copy of draft Review content of (perda) onpublic access to decision- perda. perda, summary of makingprocess (participation) to DPRD, * Proofof public comments that contains assurance of: submissionof and changes madeto Public participation indrafting and draft perda to the drafts as results finalization discussionof any perdain DPRD. of inputs from the DPRD, planning documentsand * Minutesof public. budgetingprocesses (including meetings and Submit letter to Propeda, spatialplans, Repetada and attendance list of World Bank as APBD); at least3 public condition of Establishmentof monitoring and meetings to eligibility for evaluation mechanismofpublic discuss the draft. investment certifying satisfaction on service delivery; that the draft perda Establishmentof complaintresolution for eachof the mechanism(incl. for procurement). eligible kabupatens are available at the Project Secretariat, and are satisfactory inform and substance. -61 - Finalize PRSAPandpreparedraft local Copy of PRSAP Submit letter to Reviewdraft 4nnual regulation(perda) onimplementing the and draft perda. World Bank as perdasto confirm .eview of PRSAP. Documentation conditionof satisfactory in ioverty of PRSAP eligibility for form and strategiesand process investment certifying substance. mdget (including results that PRSAP and ?laming of community- draft perda for each level assessment, eligible kabupatens minutes and are available inthe attendance lists Project Secretariat, ofpublic andare satisfactory meetings) inform and substance Implementenhancedpublic participation Documentation Submit letter to Reviewprocess Annual inannualplanning andbudgetingthat on the process World Bank as and output of review of covers: (including budget conditionof participatory poverty Set budget ceiling as an input for estimates, eligibility for planning and strategies and dinas and kecamatanplanning minutes of investmentcertifying budgeting budget discussions meetings and that the planningand process. planningthat Allocate block grant to attendance lists) budgeting process verifying that villageikecamatanlevel. The on current year for each eligible the enhanced information of the allocationand planning and kabupatensis being public guidelines are disclosedto public. budgeting implemented with participation Public meetings on dinas process. enhancedpublic processi s programming(at leastfor 5 poverty Budget allocation participation andthat followed, and priorities sectors) and guidelines of documentationof the that the Public meetingson inter-dinas villageikecamata process are available APBD programming nblock grant inthe Project appropriately Public consultationon final draft of Documentation Secretariat,andare reflects the APBD on changes satisfactory in form content of the This activity will be continued in reflectedin final and substance. discussions. InvestmentPhase. APBD documents reflecting the inputsfrom the public. Investment Pha Issuelocal regulation(per&) on access Copies of issued Review on the Randomreview to public information (transparency) perdas. changesmadeto the of final perdason Issue local regulation(perda) on access draft perdas. a sample basisto to decision-makingprocess Submitcopies of confirm (participation) perdas alongwith satisfactory in Issue local regulation(perda) on letter to World Bank form and implementationof the PRSAP. certifying that the substance, final perdas for each of the eligible kabupatensare availableat the Project Secretariat, andare satisfactory in form and substance. - 62 - Implementationof perdaon access to Proofof Submit letter to Review to Verify that public information (transparency) by announcement in World Bank as confirm 3erda is announcingthe summary of planning mass media. conditionof satisfactory in mplemented documents (Propeda, Renstra,AKU, continuedeligibility form and 1s reported. StrategiesandPriorities) and list of all for investment substance. perdasbeingissuedin the last 1year in certifying for each mass media. participating This activity will be continued in kabupatenthat the InvestmentPhaseYear 2. perda on access to public information andaccess to decisionmakingare beingimplemented satisfactorily. Implementationof perda on access to List of perdas decision-makingprocess(participation) issuedinYear 1 by at leastdiscussing 50% of the perdas (incl. those being issuedinYear 1 of investment discussedin through intensive public consultations public consultations) Documentation ofpublic consultation process (incl. minutes of meetings and Continuedimplementationof perdason Same as above Same as above Same as above Same as access to public information above (transparency) and access to decision making (participation). -63- C.FinancialManagementRequirements Ent,: Requirementsto Participate in ZLGR)' Issue aBupati's Decree (SK Bupati)" copy of ISubmit copies of SK Review SK establishing aFinancial Management Bupati's Decree Bupati,alongwith Bupati, Reforms Committee, with membersfrom key establishingthe letter"" to World Bank membershipand stakeholder departments, and tasked with Committee,and as certifyingthat the SK TOR to confirm preparingthe detailedreformimplementation copy of its Bupati for each ofthe satisfactory in plan and guiding the implementationof Terms of eligible kabupatensare form and reforms. Reference. available at the Project substance Secretariat,and are satisfactory in form and substance. Pre-Investmi f Phase FinancialManagementReform Committee to Phasedaction Reviewactionplan to teview to preparedetailedphasedimplementationplans plan with time confirm satisfactory in :onfirm for the reformmeasures. These plans will be targets for form and substance. ;atisfactory in completedandpresentedto the Bupati and implementation Submit letter to World Formand Project Secretariat within 3 months after the is submitted to Bank as condition of substance. Committee hasbeenestablished. Bupati and eligibility for Project investment certifying Secretariat. that the actionplan for eachof the eligible kabupatensare available at the Project Secretariat, andare satisfactory inform and substance. Providean appropriate enablinglegal IssuedPerda and Review form and Review perda framework for financial management SKBupati with content of perda and SK and SK Bupati reforms, by issuing the required Bupati. to confirm A local regulation (perda) on the coverage Submit copies of perdas satisfactory in Principlesof RegionalFinance inline and SK Bupati along form and with GR 10512000and Kepmendagri with a letter to World substance. 2912002 covering the reform areas to be Bank as condition of implemented inYear 1 and 2 of eligibility for Investment below; and investment certifying aBupati's decree (SK) on the policies, that the perdaand SK systems andproceduresfor the Bupati for each of the preparationandexecution of the APBD, eligible kabupatensare inaccordance with existingcentral availableat the Project regulations. The SK to also include Secretariat, and are reformagendaproposed inthis project satisfactoryin form and for implementationduring the investment substance. period, as stated below. - 64 - Investment Phc ? (Year 1) Implementation o f reform actions proposed Verification o f Submit letter to World 'ost review will be completed ineach investment year in compliance with Bank as condition of luring accordance with the SK on FMreforms and the action plan continued eligibility for upervision. the implementation plan prepared by the FM inundertaking investment certifying Reforms Committee. the prescribed for each participating 1) Strengthen procedures for authorization o f reform kabupatenthat the budget expenditure, including requirements i s phased action plan for Authorize local government officials to done by financial management make mid-year revisions inthe budget Bawasda as part reform is being allocation or budget target line items o f their annual implemented within certain pre-determined financial general audit satisfactorily and in limits, similar to the authorities given to program. accordance with SK central govemment officials. Bupati on reforms. To prevent potential misuse o f Progress and "contingency budget" (Belanja Tidak exceptions will Tersangka), specify clear criteria for reported to FM expenditures that shall be funded from reform these funds, and the procedures committee and governing the authorization and Bupati. The commitment o f such expenditure. Committee 2) Improve financial controls over verifies and management o f public funds, by reports quarterly Segregate the functions o f the finance to National department (which shall be responsible Project for the issuance o f payment instructions Secretariat status (SPM) and the regional treasury (kas o f action plan Daerah). implementation. Kas Daerah shall not receive, disburse or hold cash, but only process banking transactions. Instruct Bagian Keuangan (Finance Dept) to undertake periodic comprehensive reconciliation o f cash accounts covering accounting records, bank statements, official and temporary proof o f collections, and actual cash collection. To improve checks and balances, do not locate Kas Daerah at the same premises as regional development banks (BPD). 3) Strengthen monitoring and accountability o f all public funds generated or received. by ensuring All regional govemment bank accounts can be opened only with authority from the Bupati Heads o f all Work Units shall submit quarterly reports to Finance Dept & Bupati declaring the name, location, and balances o f all bank accounts in the name of the Work Unitor officials thereof. - 65 - Investment Ph e (Year 2) Implementation o f reform actions proposed Verification o f Submit letter to World ?ostreview v'erify will be completed in each investment year in compliance with Bank certifying for each luring ivailability accordance with the SK on FM reforms and the action plan participating kabupaten iupervision. If the implementation plan prepared by the FM inundertaking that the phased action locuments Reforms Committee. the prescribed plan for financial reform management reform i s 4) Enhance accountabilitv o f Work Unit requirements i s being implemented Heads for compliance with regulations. done by satisfactorily and in Require Work Unit Heads to issue annually a Bawasda as part accordance with SK Statement o f Responsibility to Bupati, with o f their annual Bupati on reforms. copy to Bawasda, affirming compliance general audit with applicable rules and regulations, and program . that all revenue collected and donations received are deposited to the authorized Kas Progress and Daerah account. exceptions will reported to FM 5) Strengthen procedures and systems for reform revenue collections. committee and and Bupati. The Require all taxilevy payments and other Committee local collections to be deposited directly verifies and by taxpayers to the bank accounts o f the reports quarterly local govemment, except for small to National payments like parking fees and Project admission fees to museums, recreation Secretariat status centers etc. o f action plan Adopt use of serially numbered implementation. accountable receipt forms for all revenues. 6) Strengthen effectiveness o f intemal audit function, b y requiring that copies o f all Bawasda general audit reports are provided to DPRD within 30 days o f being issued. 7) Implement greater transparency inlocal financial management, b y requiring completion and publication inlocal newspapers or websites o f summary quarterly financial reportsibudget realization reports within 2 months o f quarter-end. - 66 - D.ProcurementReformRequirements Entry (Requirements to Issue an SK Bupati" on establishmentof Copy of Bupati's Submit copiesof SK Review SK awork unit as focal point inprocurement Decreeestablishing Bupati along with Bupati, reform, with the following tasks: the unit, andcopy of letter"' to World membership and Coordination with LPKPP its Terms of Bank as certifying TOR to confirm Lead and coordinateprocurement Reference. that the SK Bupati satisfactory in reform inkabupaten for each of the form and Implement trainings on procurement eligible kabupatens substance to other work unit are available at the Oversee, monitor and report Project Secretariat, procurement practices andare satisfactory Issue Procurement Bulletin in inform and quarterly basis to publish substance. informationand opportunity in procurement includingpractices Pre-Znve: nent Take initial step to operationalize Copy of annual Postreview procurement focal point by providing budget plan. during supplementalbudget for expanded supervision. functions ---.-.. . Issue an SK Bupati" on the systems and Copy of issuedSK Review SK Bupati to Procurement proceduresfor implementationof the Bupati; submit copy confirm satisfactory survey that Keppres 8012003, with specialattention of standard bidding inform and verifying: to the following: documentsadopted. substance. Submit procurement a) Adoption of standardbidding letter to World Bank processis documents for kabupatenprocured as condition of transparent contracts, regardlessof source of eligibility for adequate funding. investment certifying complaint b)Establishment of clear androbust that the SK for each handling mechanismfor recordingand handlingof of the eligible system in procurement complaints. kabupatensare place c) Enforcementandpublic disclosure of availableat the adequate sanctionsrelating to procurement Project Secretariat, disclosure deficiencies. and are satisfactory inplace inform and substance. - 67 - Implementprovisions of Keppres a ) ~ o p y o f Ex post review on 8012003 related to the following: II documents for three sample basis to major contracts, confirm a) Removalof pre-qualification system includingrecordson implementation for small contracts (Uk Only for secondbatch of kabupatens. IX Focal Point to provide to Local Project Management Unit. DirKeuangan Daerah (with capacity building form Secretariat of LPKPP). Civil society, NGOs, and Secretariatof LPKPP. 1111Assuming that the national procurement certification system is not yet in place. Ifthe national procurement certification system is in place, this verification will be those who have beencertified under the system. XlllAssuming that national certification system is in place. - 70 - Attachment 2 to Annex 2-List of the Kabupatenin 9 Provincesof ILGR Kabupatens participating InILGRpreparation -71 - Annex 3: Estimated Project Costs INDONESIA: Initiatives for Local Governance Reform Project B. Poverty Targeted Investments C. Implementation Support and Monitoring Total Baseline Cost Price Contigencies Front-end Fee Government Local Counterpart Fund 3.11 i 0.00 3.11 Local Government Reform Cost 1.33 0.00 1.33 incremental Operating Costs 0.16 i 0.00 0.16 Incremental Operating Costs Other -- Honoraria 0.59 0.00 0.59 Total Baseline Cost 40.49 3.92 44.41 Unallocated 0.16 1.82 Front-end Fee I 0.07 0.07 Total Financing Required 42.15 4.16 46.30 -72 - Annex 4: Cost Benefit Analysis Summary INDONESIA: Initiatives for Local Governance Reform Project Summary of Benefits and Costs: See main text below. Main Assumptions: See main text below. Sensitivity analysis/ Switching values of critical items: See main text below. Economic Justification & Analysis Although the majority o f ILGR's resources focus on physical investments aimed at poverty alleviation in rural areas, the main development objective o f the project is to enhance the efficiency and effectiveness o f the planning and resource allocation process o f participating kabupatens, leading to more appropriate, and better quality infrastructure and service delivery in the context o f an improved governance and accountability framework at the local level. This is consistent with the Bank's Country Assistance Strategy (CAS), which supports decentralization and the investment climate by focusing on capacity enhancement and strengthening of accountability at local and central governments' levels. This Annex aims at justifying the design features and implementation arrangements o f ILGR from an economic point o f view. It will explain why there i s a need for an ILGR type o f interventions inthe targeted kabupatens; present the approach to the economic analysis given the demand driven nature o f the investment sub-projects and how the project's design will promote economic efficiency inthe use o f funds; it will also discuss the main conclusions drawn from the fiscal analysis for 16 ILGR kabupatens before highlighting finally major risks of the project (the analysis was conducted when 16 kabupatens were facilitated. In June 2004, facilitation in one kabupaten, Bantaeng -South Sulawesi, was discontinued that change the total numbers o f Batch 1ILGR Kabupatens to 15 kabupatens). I.Theneedfortheintervention ILGR targeted kabupatens are characterized by a relatively high level of poverty. Despite progress in governance related reforms, they still manifest weaknesses in institutions and lack o f accountability. Compared to the national average, income poverty indicators deteriorated substantially despite the moderate improvement in lowering the number o f the poor over time. The average poverty head count index in ILGR kabupatens stood at 19.7% in 2002, higher than the 18.2% national level poverty rate. In 1999, i t registered 22.5%, significantly lower than the national poverty rate o f 23.4%. In 2002, Amongst the 15 Kabupatens, the number o f kabupatens whose poverty level stands above the national level increased to 7 compared to 6 in 1999. Six kabupatens experienced worsened poverty levels compared to 1999. See table 1 and chart 1 below. - 73 - Table 1. Poverty Head Count Index 1999 (Yo) 2002*(%) National Poverty Rate 23.4 18.2 Average ILGR Kabupaten 22.5 19.7 Source: National Poverty Rate: BPS Estimate (2003), Kabupaten s Poverty Rate: DAU Data Base, MOF (2002-2003) Chart 1. ILGR Kabupatens Poverty Rate, 1999-2002 40% 35% 30% 25% 20% 15% 10% 0% Source: National Poverty Rate: BPSEstimate (2002), Kabupaten 's Poverty Rate: MOF (2002-03) The majority of ILGR Kabupatens still experience considerable levels of deprivation despite improvements in income. Non-income indicators of poverty reveal higher levels o f needs in ILGR kabupatens compared to the national average. 7 out of 15 o f ILGR'kabupatens have a higher proportion o f population without access to sanitation and to safe water compared to the national average (see chart 2a and 2b below). Chart 2a. Proportion of Household Without Access Chart2b. Proportionof HouseholdWthoutAccessto Safe to Proper Sanitation M e r Rop. Householdwithout access to Proper Sanitation Prop Householdwithoutaccessto SafeWater -National Average -National Average Source: SUSENAS 2002 - 74 - lowI.. ilia1 % 22 217 I 8 16 I 4 12 10 ILER MoniLGR 11. Methodology for the Economic Analysis ILGR is not a traditional investment project. It is rather a multisectoral intervention, which tests an innovative approach for participatory, demand driven investment planning, budgeting, execution and maintenance o f projects at the district level in the newly decentralized context o f Indonesia. As such, an economic intemal rate o f retum (EIRR) for ILGR cannot be calculated prior to project implementation, because the economic costs and benefits o f the individual sub-projects financed by ILGR cannot be evaluated ex ante. The investments sub-project will be decided during the implementation o f ILGR on a purely demand driven basis at the local level, following a participatory poverty assessment in which strategic poverty reduction priorities are set and types o f investment sub-projects are identified by local stakeholders. The project's implementation will seek to ensure however that economic efficiency in the use o f funds is duly regarded through the methodology agreed upon with the participating kabupatens for the selection and evaluation o f ILGR financed sub-projects. Sub-projects are identified, designed and appraised during the course o f ILGR implementation. To ensure that only economically and socially viable sub-projects are approved for funding, and that the investments are implemented cost-effectively and sustained, the approach to choosing sub-projects to be included in the Project Operational Manual as part o f the project design, will involve the following: 1. Identification o f eligibility and appraisal criteria to guide selection o f sub-projects for funding; 2. Use o f unit cost- standards and measures to guide sub-project appraisal; 3. Agreement on project performance indicators and a management information system to measure andmonitor the performance and impact ofthe project; and 4. Provision o f technical assistance and training to enhance capacity in project management and implementation. 1. Eligibility and Appraisal Criteria To enhance chances o f achieving ILGR's objectives and benefits, some principles will need to be agreed to determine which sub-projects would be eligible for funding. Eligibility principles would include: 0 Sub-project inline with the priorities o f the Poverty Reduction Strategy and Action Plan (PRSAP); 0 Sub-project i s socially andor economically justifiable; 0 The sponsoring entity is capable o f effectively managing the implementation o f the sub-project; and 0 Beneficiary communities are involved in decision making related to andor management o f various aspects o f the sub-project such as planning, implementation and supervision. Similarly appraisal criteria must be articulated and agreed upon for assessing the viability o f eligible sub-projects and their selection for funding under ILGR. The method o f appraisal will vary depending o n the nature and size o f the sub-project and will be specified inILGR's Operations Manual. Typically, it will be based on cost effectiveness or least cost analysis for most projects, and selection will be agreedon a case by case basis. A qualitative description o f demonstrable positive economic effect will be a precondition for any funding approval. The ILGR team in conjunction with several sectoral technical staff will develop appraisal criteria o f sub-projects consistent with sectoral technical standards. The eligibility and appraisal criteria must be laid out in ILGR Operational Manual that will guide local staff and stakeholders in selecting and appraising sub-projects for funding. - 76 - 2. Cost Effectiveness Measures to Enhance Sub-project Selection and Implementation A database o f unit costs shall be used for each kabupaten . The data will be compiled from unit costs of items typically found in the bill o f quantities; this database will be updated regularly, typically once every six months. The unit cost database for each area will be used as a reference against which to judge and rank the sub-projects being proposed for financing, on the basis o f their cost effectiveness. In addition, the database will play an important role in cost control both as a reference during the selection o f contractors, especially for direct contracting, and during contract execution. 3. Project Performance Indicators and M I S In order to measure and monitor the performance and impact o f the sub-projects throughout and after implementation, specific tools will be developed as part o f the Monitoring and Evaluation framework (see Annex 2). 4. Capacity Enhancement for Project Management and Implementation ILGR funding includes support for technical assistance and training to strengthen project management at the local level, including sub-project selection, appraisal and supervision. Accordingly, appropriate training will be provided for the project management teams and to kabupaten staff before selection o f sub-projects and during implementation. The training will concentrate on economic infrastructure sub-projects (roads, water supply, irrigation schemes) and could include technically complex projects where the choice o f appropriate technologies i s critical for the sustainability of the facility built. It would also selectively strengthen the capacity o f sub-project beneficiaries with a view to enhance their capacities to oversee sub-project implementation and to operate and maintain the investments created by ILGR. 111. ExpectedBenefits and Costs A conventional economic analysis of ILGRwill fail to capture the various expected potentialbenefits from the project. It renders its important however to better identify the nature o f these benefits, and where possible their scope, in view o f designing the appropriate tools and indicators for ex-post monitoring and evaluation system. It is nevertheless important to note that ILGR effectively generates two different sets o f economic benefits. First, from Components A and C, there are the expected benefits from improved governance and accountability in the kabupatens. Second, from Component B, there are the expected benefits from the investment sub-projects. With respect to quantifiable economic benefits, which will mainly accrue as a result o f sub-projects implementation, the programmatic nature o f the project does not allow a detailed cost-benefit calculation ex-ante. However, experience from similar projects in Indonesia and other regions indicates that demand driven projects, involving community participation are highly cost-effective and economically viable. Because communities are actively involved in the prioritization, implementation, operations and maintenance, it can be assumed that the projects they select will be o f highpriority and socially productive. Inthe case of ILGR, kabupatens that recently completed their PRSAP formulated priorities for the use of investment financing. Duringthe mid-term review (MTR), the project management unit will runa detailed economic analysis of implemented sub-projects under ILGRinorder to estimate benefits generated and identify problems (if any) that needto be addressed. -77 - Non-quantifiable benefits are also expected to be substantial as a result o f the govemance and institutional reforms introduced by the project. They are however more difficult to measure ex-ante. The project's monitoring and evaluation system described in Annex-2 will make sure to devise the necessary tools and indicators to measure outputs and outcomes generated by these reforms and their induced benefits, the most important o f which are the following: Improved governance, enhanced public participation and accountability of local governments to their constituencies as a result o f the endorsement and implementation o f a comprehensive package o f reform measures (see Annex 2) in the areas o f poverty reduction, participation, transparency, procurement and financial management. For example, the absence o f an enabling legal framework and o f modem financial management policies and weaknesses in financial management practices in the areas such as budget formulation, execution, revenue collections and accountability for public expenditure at the kabupaten level undermine both the reporting on the general government sector and the capacities o f local governments to absorb the functions which were assigned to them after decentralization. Although more substantial progress in reforms would be feasible only after the new central government regulatory changes are fully rolled out, the FM reforms proposed under this project will nevertheless bring these regions on to the path towards more effective public financial management by introducing necessary basic and initial steps in support o f that. Based on the review of other FM reform projects in other countries following decentralization (Philippines, Venezuela, Ecuador, Guatemala, Thailand), fiscal savings, efficiency and effectiveness gains would be generated thus improvingthe accountability o f local government to the public. Similarly, review o f procurement reform projects undertaken in other developing countries (Philippines, Bangladesh) shows that benefits interms o f increased competition and lower prices, decreased contracting costs, and timeliness o f contract execution would greatly enhance the quality o f service delivery and people's satisfaction with it. Institutional impact on decentralized, demand driven and participatory planning and delivery of public services as a result o f opening up the planning process. Benefits are derived from participation o f local communities in enhancing project effectiveness through the mobilization o f greater resources under the same budget to finance pro-poor projects, and in improving economic efficiency as underutilized labor and indigenous knowledge are employed. Local people will be able to make rational choices by selecting the types o f services best fit to their local preferences allowing for variations across kabupatens inthe type and quality o f service delivery. This will improve the allocative efficiency o f investments on the one hand and increase the sense o f immediate responsibility and ownership by the community beneficiaries and positive externalities and spillover effects generated as innovative ideas are shared with other communities. Lessons learnt about the implementation of GOI's decentralization strategy, especially with respect to the transfer o f powers and functions to local governments in the area o f public service delivery, as a result of ILGR's approach and arrangements to project preparation and implementation. The latter will allow for the provision o f valuable feedback to government policy makers and the development community on the benefits and risks o f decentralization and its working arrangements. These lessons could serve to provide policy recommendations for necessary corrective measures aimed at maximizing the benefits o f decentralization for more efficient service delivery at the local level. - 78 - IV. FiscalAnalysis The fiscal analysis examined the detailed fiscal situation o f the kabupatens participating inthe first phase o f ILGR, and analyzed the fiscal impact o f the project. Several findings served to guide design features of ILGR. ILGR kabupatens fiscal profile 1. ILGR kabupatens accumulated sizeable surpluses and recorded a relatively strong overall fiscal position in 2001 and 2002 in line with the generic pattem exhibited across other local governments. The size o f these surpluses is considerable both inabsolute and relative terms. They varied between US$3 and 4 million, reaching 9.61% and 9.73% o f the kabupaten's overall budget in2001 and 2002 respectively. When compared to the size o f their total development expenditures, the surplus accounted for 48.1% in2001 and 33.5% in 2002. Reported surpluses were primarily unplanned, and to a large extent caused by intemal organizational and administrative constraints encountered throughout the public expenditure and revenue management cycle and process. Overestimation o f revenues on the one hand and savings in planned development spending resulting from limited absorptive capacity and conservative spending stance explain part o f these surpluses. The amount o f ILGR funds to be channeled to the kabupatens i s relatively small compared to the surpluses. The latter would absorb any incremental O&M resulting from ILGR investment sub-projects. 2. Despite high growth rates of total revenues (25% on average, compared to 15.5% for local governments during 2001-2002), ILGR kabupatens have a lower revenue availability per capita (Rp. 432,310 compared to Rp. 445,069 nationally in2002). They rely more heavily on higher level governments transfers (especially the Dana Alokasi Umum- DAU) for more than 90% o f their revenues, and have very limited own resource revenues (5 to 8% o f total revenues on average). While transfers provide a growing sources o f revenues without the costs associated with administering a local tax, they provide little incentives to the kabupatens to increase local resource mobilization. In the short-term, predictability, regularity and timeliness o f receipt o f transfers are thus important factors affecting budget planning and execution. In the medium to long-term however, improving revenue generation efforts remains the key for consolidating the fiscal performance and for improving andmaintaining service delivery overtime. 3. Unlike urban local governments, levies rather than taxes constitute the major source of own revenues. Most o f the nine local taxes allowed by law, are more buoyant inurban areas than inrural areas (tax on motor vehicles, transfer o f ownership, fuel tax, hotel & restaurant, entertainment, billboardadvertisement, street lighting, and parking tax). In addition, Kabupatens prefer to issue levies because o f the less stringent conditions to abide by and the highcost related to administrating taxes. Yet in most kabupatens new levies have not contributed much to local own revenues and there i s a need to review the kabupatens approach to own revenue generation. 4. Weak revenue generation is largely explained by the level and quality of institutional arrangements for revenue management, more specifically: i)Feeble tax administration and collection that stands far below potential, ii)lack o f skills for revenue planning and forecasting often underestimate iv) absence o f integrated financial management information system, and v) uncoordinated role assignment for revenue management at the local level. The project will provide necessary technical assistance in this regard. - 79 - 5. Kabupatensspend most of their revenues on recurrent expenditures (on average, around 71.82% o f total expenditure in 2002 revenues) especially on wages and salaries. The latter absorbed most o f the routine budget with a share of 79.2% in 2002. This leaves little funds for capital expenditure. They also spend very little o n Operations and Maintenance (0 & M) expenses with an average share amounting to 1.29% and 1.58% of total routine expenditure in 2001 and 2002 respectively. These shares are considerably lower than the national and the kota averages which stood at 2.2 % and 2.9% respectively. While there is a large degree of mis-recording O&M spending, the latter remains very low and is not set to increase over time through policy induced measures, which poses the danger o f infrastructure and services deterioration at a time where the needs are increasing. 6. Despite the growth in development spending (around 45% in the last two years) ILGR kabupaten spend less on average than other districts (29.43% in 2002, compared to 31.69% at the national level). This spending is concentrated in four main sectors: transport including roads and bridges construction and rehabilitation (25 to 28%), Government apparatus (13%); education (10%); and regional Development and Settlement sector (10%) including capital investment in local owned enterprises. Agriculture accounted for 6% and included livestock and seed development projects, and some agricultural extensions projects. By concentrating on roads and infrastructure, ILGR will maximize its impact inimproving the effectiveness o f budgetary resource allocation as the local ministry for public works consumes the largest share o f the development budget. 7. ILGR kabupatens maintain a low level of indebtedness (debt stock to general revenues) and debt-servicing ratio, mainly due to the prohibition to borrow imposed by central government. Nevertheless, the performance o f the kabupatens in repaying debt obligations varied across regions, with at least one kabupaten defaulting on its dues and its debt categorized as bad loans. Chart 4. SectoralDistributionof Development Expenditure(2002) S e c t o r a l D i s t r i b u t i o n o f D e v e l o p m e n t E x p e n d i t u r e s Ag,,c waterairrigation Other 10% 6% 4% Trade ®ional Business deevelopment Gover nmenl Apparalu 5% transport 29% 10% I Regional Development and Settlement 10% Under the existing reporting arrangements, the assessment o f creditworthiness remains very difficult and does not generate the right incentives for further transparency with regard to debt and financing - 80 - transactions. Through the financial management reform, ILGR will allow a better enforcement o f the regulatory reporting and disclosure requirements and monitoring the indebtedness levels o f these kabupatens . Note: * GAR= General APBD Revenue = Total Revenue (DAKt emergency fund other loans+other earmarked revenues) should not exceed 75% as - per Article 6 PP 107/2000. Fiscal impact ILGRfunds are small enough so as not to have a significant fiscal impact at the macroeconomic level, They represent 0.017% o f the national expenditure (2004), and i s only a small component o f the national Development expenditures 0.093% . At the local level, ILGR covers 15 o f the 440 local governments (no. o f local governments as o f October 2004) in the country with an estimated population o f 212 million (BPS 2002) representing 8.9% o f Indonesia's overall population. Depending on the location and population size o f the kabupatens, ILGR funds will represent between 1.1 and 5.1 % o f the local budget in 2002 and around 5 to 18 % o f development expenditures. Beside the potential ILGR funds, financing from other donors, local government revenue, and Central Government transfers constitute the overall pool o f funds available for financing development expenditures at the kabupaten level. Inaddition ILGR sub-projects are financed inthe form o f grant from central government to local government, no expense for cost recovery i s expected Kabupatens should be able to meet their financial commitments towards the project in terms of additional O&M without causing deterioration in their finances. Because trend projections could not be made due to the lack o f time series data, and to the changes in the budget and financial statement presentation o f kabupatens, assumptions were developed based on existing data under two scenarios: with and without ILGR. The objective was to determine the extent to which the kabupatens could absorb ILGR funds while ensuring that sufficient funds are set aside each year for operations and maintenance o f the investments. The accumulation o f surplus, the stable and steady stream o f transfers, as well as the gradual improvement intheir revenue generation effort as a result o f the TA component o f the project should allow the kabupatens to sustain their commitments, while maintaining a positive fiscal stance. -81 - ILGR kabupatens fiscal profileat a glance ILGRkabupatens enjoy a surplus of surpluses Mainly resulting from over-reliance on transfers i ILGRP Kabupaten's SurpluslRGDP Share of Transfer in Total Revenue (2002) 4% 3% 2% 1% 0% - SurplusiRGDP 2001 SurplusiRGDP 2002 mTransfers/totrev------Average iLGRP aL.smm-SurplusiRGOP Kab Average 2002 -SurpluslRGOP National Average 2002 -National Average __ With a growing but still meager revenue base Largely absorbed by routine expenditures re:0,' -Average I ' i?"2001 11112002 8 I 2001 111 2002 Average 2001 2002 With little left for capital expenditures. And a low level of fiscal capacity I I I 12 l6 81- 4 I - r I2001 2002 0 High Medium Low .I -Average2001 Average 2002 - 82 - The positive fiscal impact o f the project will result from various sources: The program will result in an increase in national and kabupaten fiscal resources being allocated to support poverty targeted development sub-projects inthe initial group o f kabupatens. Over the life o f the project, local governments will have to commit an estimated Rp42 billion by way o f counterpart finds, while central government will be required to provide an estimated Rp1.6 billion towards the financing o f the project. In taking a programmatic approach, it is proposed that the project's demands on national level counterpart funds should largely be absorbed within the annual budget envelope. On the part o f participating kabupatens, the analysis o f fiscal revenues and expenditures shows that kabupatens should be able to meet their commitment to the programs for counterpart funds and additional O&M, assuming a steady flow o f central and provincial transfers. A positive fiscal impact will result from the procurement reforms. Improving the competitiveness of the bidding process and rendering the procurement cycle more transparent and participative will result in a reduction inprices offered for public contracts, and would translate into additional savings in the budget o f local government as experienced in the Bali Urban Infrastructure Improvement project. Improvement in the financial management systems o f participating kabupatens will generate direct benefits to the budget. As kabupatens will design and implement major enhancements to their financial and treasury management systems including the receipt and payment system for recording transactions, financial planning to support the cash execution o f the budget. e Economic activities expected from the financed projects will yield tax revenues generated by additional income. These additional revenues would widen the pool o f resources available for kabupatens to finance other development programs and 0 & M. Overall, the fiscal impact o f ILGR on both central and local government finances appears to be small while the potential benefits are expected to be greater. These benefits should increase markedly as more kabupatens join inimplementing the program. V. Risks The main risk associated with ILGR implementation is the weaknesses in structures and institutional capacities could undermine the ability of local governments to formulate, plan and implement the required ILGR reforms and the poverty reduction strategy and action plan (PRSAP). To mitigate this risk,much of the pre-investment period will be spent inpreparing detailed implementation plans for reforms and capacity buildingwork o fkey regional institutions who will be involved inimplementing these reforms. The national project secretariat established at the central government level will play a major role in supervising and monitoring the implementation o f the sub-projects in each kabupatens, and provide the necessary technical support and capacity building.Moreover, the necessity o f meeting the transparency and participation core govemance benchmarks as a key prerequisite for investment financing eligibility, as well as the close involvement o f civil society inthe multistakeholders forum and decision makingprocess for the use o f ILGR finds will limit these risks. Other mechanisms have been embedded inthe project's design in order to ensure that projects financed by ILGRare economically viable: - 83 - Inaddition to the participatory nature of the process for investment sub-project selection and decision making, eligibility for financing is still verified by the procedures and standards agreed upon with local governments and presented inthe Operations Manual. While inprinciple all kabupatens are eligible to participate inILGR activities, only those that klfillthe governance reform requirements and implement local governance reform framework in the area of transparency, participation, financial management and procurement will benefit from the investment funds. The expected positive impact of these reforms on the allocative efficiency of funds and the public expenditure management system at the kabupaten level will improve the expected returns on investments. Close and continuous monitoring o f implementation of ongoing projects, supported by the requisite training and capacity buildingwill contribute to enhancing the quality and impact o f the projects. ILGR has built-in incentives that would reward those kabupatens that perform well. Additional resources in the coming years are conditional on a good track record in implementing reforms and pushingforwardthe agenda on better social services delivery. All together, the above-mentioned measures andapproachwould minimize the risks o fILGR selecting and financing sub-projects which are not economically viable and are not sustainable. -84 - Annex 5: Financial Summary INDONESIA: Initiatives for Local Governance Reform Project Year 1 Year 4 Total Total Proiect Costs 7.33 8.84 46.23 Front-en; Fee 0.07 0.07 Total Project Financing 7.40 14*54I 15.52 8.84 46.30 Financing IBRD 2.65 4.62 4.63 2.60 14.50 IDA 2.65 4.88 4.87 2.60 15.00 Government Central 0.03 0.05 0.05 0.04 0.18 Local 0.67 1.51 1.64 0.80 4.62 DFlD 1.41 3.49 4.33 2.77 12.00 Total Project Financing 7.40 14.54 15.52 8.84 46.30 *: Year 1 started inJuly 2005 Year 4 ended inJune 2009 - 85 - Annex 6(A): Procurement Arrangements INDONESIA: Initiatives for Local Governance Reform Project Procurement Background and Framework for Procurement Reform The 2003 Country Assistance Strategy (CAS) for Indonesia identified governance and institutional constraints as the most serious impediments preventing Indonesia from achieving its full economic potential and accelerating the pace o f poverty reduction. Opaque public procurement practices, poor financial management, high levels o f corruption, and decline in the quality o f civil services have led to very low expectations o f public services, and contributed to the high cost o f doing business which, in tum, has deterred private sector development. Procurement reform is one o f the priority areas for governance improvement. The latest Country Procurement Assessment Review (CPAR) for Indonesia was conducted in 2000-2001, with full participation and endorsement from the Government of Indonesia (GOI). The CPAR identified that by all accounts, the public procurement system in Indonesia does not function well. It is not market driven, has been prone to misuse, and reduces value for money o f public funds. The above deficiencies mean that despite improvements inprocurement regulations over the years, there is a continuing high risk o f non-economic influence on public procurement and inefficient use o f public resources, These deficiencies, unless tackled urgently, decisively and in a coordinated manner could become even more serious with the devolution o f government functions to sub national levels under the decentralization program currently undenvay.The Country Portfolio Performance Review (CPPR) i s conducted annually on the Indonesia Portfolio, to monitor the performance o f on going projects. This Review includes one on procurement. The latest CPPR identified procurement delays and capacity o f staff carrying out procurement as sources o f corruption and inefficiency at all levels o f project implementation. General Framework A public procurement system can be said to be well functioning if it achieves the objectives of transparency, competition, economy, efficiency, faimess and accountability. The following key elements can be used indetermining to what extent a particular system meets these objectives. 1. A clear, comprehensive and transparent legal framework as characterized by: the presence o f legal rules that are easily identifiable, that in themselves promote all the objectives stated above and that govern all aspects o f the procurement process. At a minimum such rules should provide for: wide advertising o f bidding opportunities, maintenance o f records related to the procurement process, pre-disclosure o f all criteria for contract award, contract awards based o n objective criteria to the lowest evaluated bidder, public bid opening, access to a bidder complaints review mechanism, and disclosure o f the results o f the procurement process. 2. Clarity on functional responsibilities and accountabilities for the procurement function as characterized by a definition o f (a) those who have responsibilities for implementing procurement including preparation o f bid documents and the decision o n contract award, (b) who in the buying entities bears primary accountability for proper application o f the procurement rules, and (c) means of enforcing these responsibilities and accountabilities including the application o f appropriate sanctions. - 86 - 3. Related to (2) above, i s the need for an institutional framework that differentiates between those who carry out the procurement function and those who have oversight responsibilities. Inthis regard, it i s considered "good practice" to have an agency which has responsibility for overall procurement policy formulation and the authority to exercise oversight regarding proper application o f the procurement rules and regulations. Attributes that make such an agency successful include: lack o f involvement in internal operational procurement matters inthe buying entities, functional independence and authority to enable it to oversee procurement in the entire public sector and an adequate budget and staff to enable it to carry out its responsibilities effectively. 4. Robust mechanisms for enforcement are essential. Clarity o f rules and institutional arrangements may be o f little value if there does not exist the means to enforce the rules and if the rules are not in fact enforced. The means o f enforcement include the right to audits by the government o f the procurement process and a bidder complaints review mechanism inwhich bidders have confidence. The Decentralization and Regional Autonomy Laws require districtlmunicipality governments (referred to as "local governments") to be accountable for generating revenue for their own operational activities, and also for the expenditures that they make (including procurement). At the end o f a fiscal year local governments have to demonstrate that public funds have been used and goods and services procured in an efficient and transparent manner. This requires adequate support systems. Considering current capacity and resources in most local governments, reforms in a number o f areas (including procurement) at the local government level are necessary to ensure more accountable use o f public funds. The development objective for Procurement Reform at the Sub National Level under this project i s to increase efficiency, transparency, and accountability in the procurement o f goods, works and .services, which is carried out by the participating local governments. The project would support public procurement reform within the national context and framework' through streamlining appropriate procurement rules and procedures; building up procurement management capacity; and establishing a series o f mechanisms to improve transparency and reduce corruption. This reform is crucial to strengthen the country's aid utilization capacity and aid effectiveness, and to gain donor group's confidence to justify development assistance to the sub-national level inIndonesia. Procurement Reform at the Sub-National Level The areas o f procurement reform at the sub national level has been developed consistent with the background and framework and as a follow up o f the CPAR recommendations and current assessment by the Bank and GO1o f selected local governments. The reform program covers activities to meet the standard quality o f procurement systems in particular local government that are required under the new Keppres 80/2003, with adequate institutional capacity and control mechanism to ensure sustainability. ' The procurement reformprogramat the sub-nationallevelshouldbe within the currentnationallegal framework, andbe consistent with the reform that hasbeeninitiatedat the nationallevel,as part of the longterm country'simprovementofthe publicprocurementregime. - 87 - The objectives o f the procurement reform at the sub national level are the following: 1. Ensure the professionalism o f the procurement function and reduce the public perception of corruption inprocurement, with effective complaint-handling and sanctions; 2. Reduce procurement delays and improve timeliness o f award o f contracts; 3. Ensure that all procurement activities are audited by Bawasda, and results o f the audit are included inBawasda's regular audit report; and 4. Analyze and report on trends o fprices and quality o f delivered serviceslgoodslworks. The requirements for reform at each o f the project phase are included in the Procurement Reform Requirements under the overall local government govemance framework for the project. Specifically, these include: 1. Expanding the role of existing unit within the local government structure to lead and coordinate the procurement reform. As the procurement regulatory and oversight function is currently not found, each participating local government will appoint an existingunit This Unit will have no procurement functions except for its own needs. It may provide technical advice on generic procurement issues referred to it, but shall not get involved or provide opinion on any specific procurement evaluation or contract award, thus preserving its pristine role as a policy, technical assistance, training and oversight unit.,within the local government system, whose role will be expanded including to lead and coordinate the procurement reform efforts. In the long term, this unit will become the anchor (focal point) for procurement regulatory and oversight function. Local governments will follow national laws and are not expected to produce their own procurement rules and regulations, except for clarification o f certain procurement practices. 2. Issuing an SK Bupati on the systems and procedures for implementation of the Keppres 80l2003. This decree will include the following: (a) adoption o f standard bidding documents for kabupaten procured contracts, regardless o f source o f funding; (b) establishment o f clear and robust mechanism for recording and handling o f procurement complaints; and (c) enforcement and public disclosure o f sanctions relating to procurement deficiencies. 3. Implementing provisions of Keppres 80/2003 in the local government procurement practices. This area o f reform will include the implementationo f the new initiatives introduced by the Keppres 8012003, particularly on the following detailed areas: (a) removal o f pre-qualification system for small contracts (these Ozone-depleting substances, tobacco or tobacco products: N o subprojects using or producing materials will be financed. ii)Pesticides.Theprojectwillnotfinancetheprocurementorapplicationofpesticides. iii)Asbestos. No asbestos-containing materials willbe financed. Special mitigation measures to address any issues with existing asbestos in any proposed sub-project (e.g. renovation o f buildings that may have used asbestos) will be applied. iv) Hazardous materials and wastes. No sub-project will be financed that uses, produces, stores or transports hazardous materials (toxic, corrosive or explosive) or material that classified as "B3" (hazardous wastes) inIndonesian law. v) Development in protected areas. N o subproject will be financed that would be located in a protected area or might change the purpose andor designation o f a protected area. Protected areas are identified in The Decree or the Minister o f the State for the Environment o f the Republic o f Indonesia Number KEP-17/MENLH/2001, entitled Concerning the Types of Businesses Activities Required to Complete an Environmental Impact Assessment. The list includes notably: forest protection area; marinelfreshwater conservation areas; nature tourism park; areas surrounding lakes and reservoirs; coastal mangrove areas; national parks; coastal edges; forest parks; cultural reserves; areas surrounding springs; scientific research areas; and nature conservation areas. vi) Natural Habitat. World Bank O.P. 4.04's prohibition on conversion o f critical natural habitat also applies and would take precedence over KEP-l7/MENLW2001 in case o f conflicting results. No sub-project will be financed that would involve conversion of critical natural habitat. - - vii) Cultural Property. N o sub-project will be financed that would degrade or damage cultural property, including not only physical artifacts and structures but also sites considered sacred or otherwise having spiritual importance. A clause will be included inthe construction contract form to give guidance on what to do inthe case o f chance finds. C. Conducting the assessmentorproducing UKLLTPL The assessment should cover these three method as describe in KABAPEDAL decree number 8 and 9/2000 and their annexes: 0 data analysis of the construction activities (plus the method o f measuring possible impact and its threshold, the environment o f the location o f construction and the perception o f the community and project affected people (see the community consultation table inthe KABAPEDALdecree number 8/2000); - 116- 0 impact analysis; 0 mitigation' and environmental management evaluation: the basis, alternative scenario, the trade off o f all possible options; and the report should cover: 0 the purpose and the description o f the sub-project; 0 the method (see above); 0 the main environmental issues with their condition, possible condition and threshold,' condition for creating adverse impact; and 0 the recommendations which include: the management - monitoring plan, specific recommended action and the schedule inrelation with the construction. D. Review and Clearanceof UKL/UPL The review will be based on KABAPEDAL decree no 8 and 9/2000 and their annexes. The review will be done by the Safeguard Monitoring Team. The first case ineach kabupaten will also be reviewed by National Management Consultant (NMC) that works for the executingiimplementing agency and the World Bank. The World Bank will also do random post review. E. Implementation of Environmental Management and Monitoring Plan This will be done by the supervision consultant o f the sub-project, the executing agency o f the sub-project or the Didapedalkab. What will be managed and monitored i s based on the UKL/UPL document. 4. LandAcquisition and Resettlement Principles This framework for land acquisition and resettlement is triggered in cases where a sub-project to be financed under the project will be located on land that does not belong to the government or has been occupied under private use for more than a year. The fundamental principle on which this land acquisition framework is based is that all necessary measures will be undertaken to improve, or at least restore, incomes and living standards o f all persons adversely affected as a result o f land acquisition under the project. More specifically, this framework incorporates the major guiding principles espoused in World Bank OD 4.30, as follows: i) Acquisitionoflandandotherassetsshouldbeavoidedwhenfeasibleandotherwiseminimized; ii)Ifanypersonsaretobeadverselyaffected,mitigatio; measures must provide them with sufficient opportunities to improve, or at least restore, incomes and living standards; iii)Lostassetsshouldbereplacedinkind,orcompensatedatreplacementcost; iv) Compensation should be paid infull, net o f taxes, fees or any other deductions for any purpose; v) If any persons are required to relocate, transfer costs and subsistence allowances will be paid in addition to compensation at replacement cost for lost structures and other assets; vi) Absence o f legal title to land or other affected assets will not be a barrier to compensation or other suitable forms o f assistance; -117- vii) Adversely affected persons will be provided information relating to impacts and entitlements, will be consulted as to their preferences regarding implementation arrangements, and will be informed regarding methods and procedures for pursuinggrievances. In the event of conflict or inconsistency between Indonesia law and the principles and procedures as established in this land acquisition framework, the Government o f Indonesia, including the participating kabupaten governments, will waive Indonesian law to the extent necessary for effective implementation of this framework. Avoidance and Minimization of AdverseImpacts To be eligible for financing under the project, sub-project investment proposals are required to avoid land acquisition entirely, or minimize the impact o f land acquisition and resettlement. The related impacts include not only loss o f land, shelter and cost o f moving to another location, but also loss o f assets, access to assets and source of income or other means o f livelihood. All sub-project investment proposals must explore viable alternatives to eliminate or minimize these impacts. All infrastructure subprojects that involve new physical works or changes in the siting of existing infrastructure may require land acquisition. Subproject screening measures will ensure that no major land acquisition or resettlement-related impacts occur. Specifically, screening will exclude the following: 0 Subprojects resettle more than 100persons intotal or affecting more than 200 people; 0 Subprojects for which sources o f necessary compensation have not been established. For any subprojects requiring acquisition o f land or other assets, mitigation measures will be provided in consistency with this framework. Voluntary land contribution Insome cases an individual owner or user may agree to provide land (andor attached assets) for provision o f public goods without compensation in cash or in kind. Such a voluntary contribution i s an act o f informed consent; voluntary contributions are made with prior knowledge that other options are available, and are obtained without coercion or duress. For the purposes o f this framework, only minor contributions (no more than 10% o f any holding o f productive land, or buildingsor other fixed assets worth no more than Rpl million) will be sought andor accepted; voluntary contributions will not be sought or accepted where they would significantly harm incomes or living standards o f individual owners or users. The facilitator and the safeguard monitoring team have to make sure that there is no pressure to the PAP (project-affected people") to contribute their land. The agreement should be documented in a legal document signed by the person voluntarily contributing the land. Eligibilityfor Compensation and/or ResettlementAssistance All PAP are eligible for compensation andor resettlement assistance under this framework. PAP include: (i) personwhohasalandcertificate; (ii) whodonothavealandcertificatebuthaveproofof any those traditional ownership; (iii)those who occupy land which clearly a green belt area or i s legally owned by a government institution (proof by legal certificate); and (iv) those who are renters. -118 - EntitlementsRelating to Specific Categoriesof Impact Land acquisition or resettlement under the -project must not make the living conditions o f PAP worse off?. The PAP have the right to get real replacement cost compensation such as cash compensation equal to the real market price of land and assets (such as building, trees and other productive assets) or land to land compensation in similar place" in the neighboring area. In addition, the other related cost such as moving cost, land transfer, rearrangement o f land certificate and taxes should be borne by the government. Those PAP in categories: (i) and (ii) are entitled to full replacement cost for lost and other assets. above For those in category (iii), ifthey occupy the landless than 10years, are only entitled to compensation for their building, plants and business assets. The renter is only entitled to compensation for all productive asset above the land valued according to the term in the renter contract. The compensation for renters, sharecroppers or agricultural laborers that have to move their activities to other places are at least equal to: (i)three-month rent, (ii) value o f the harvest for that season o f those particular land and crops (or give the the opportunity for them to harvest that first) or (iii)a total income o f the labor inthat season, respectively. Planning and ReportingRequirements As kabupaten investment sub-projects to be financed by the ILGR are relatively small in scale and simple in nature, the number of persons to be adversely affected by land acquisition is likely to be very small. Accordingly, planning and reporting requirements are kept as simple as possible. Cases where no involuntary land acquisitionor resettlementis required: For all investments for which no involuntary land acquisition is necessary, the relevant dinas will provide to the following information: 0 EITHERa statement, signedby the head o fthe involvedDinas andcountersigned by the Safeguard monitoring team and Kabupaten Facilitator, that the subproject will be located entirely on public land which i s not under private use; 0 OR a report prepared by the involved Dinas and verified by the Safeguards Team and the Kabupaten Facilitator indicating the subproject will be located entirely or inpart on land which has been voluntarily contributed and contains the following information: a. an estimate o f the amount o f land and other assets to be utilized, and field measurement results indicating that no more than 10% o f total land holdings and/or other assets o f value greater than Rp 1million are needed from any household; b. a description of methods used to inform potentially affected individuals regarding the proposed investment, and their rights and options regarding land or other assets required, and confirmation that individuals have been informed that they have the option o f refusing land contribution including their rational andbenefit for contributing their land; c. signed Statements o f Voluntary Contribution from each individual voluntarily contributing land (and any attached assets), indicating their informed consent (see sample forms for voluntary contribution in Section 8); and d. a report o f the public meeting at which the voluntary land acquisition arrangements (including sitingmaps) have been disclosed to, and validated by residents inthe sub-project area. Caseswhere involuntary landacquisitionor resettlementis required: In cases where land or other assets will be acquired involuntarily, a Land Acquisition and Resettlement Action Plan ( L A W ) must be prepared, including the following elements: - 119 - description of the subproject necessitating land acquisition; a census of project affected people providing basic data identifying impacts and persons to be affected by them, and valuation o f affected assets; arrangements for in-kindreplacement o f land, or for compensation at replacement cost, including signed statements by all affected landowners confirming that these arrangements are satisfactory; incases where some o fthe project affectedpeople lose more than 10%o ftheir productive assets or require physical relocation, the plan also covers a socioeconomic survey and income restoration measures; arrangements to ensure adequate performance by contractors relating to compensation for temporary impacts; a schedule o f assets (other than land), which will require to be replaced as part o f the construction contract, and signed statements by the affected owners confirming that these arrangements are satisfactory; an implementation schedule clarifying institutional responsibilities and indicating that replacement land will have been provided before implementation o f the subproject begins; a siting map and field measurements validated by villagers, showing land to be acquired and replacement land to be provided, sufficiently detailed to allow verification; and arrangements for disclosure o f information, consultations, monitoring o f implementation and procedures for pursuing grievances. The LARAP report i s to be prepared as part o f feasibility studies, and should include the alignment o f land needed, the number o f PAP, general information o f the PAP income and employment and the existing land valuation from the following three sources: e sample inthe market: the latest land transaction inthe area from the kecamatanikelurahan record; e proposal by kabupaten govemment; and NJOP (land tax form). The LARAP will be reviewed as part o f the technical assessment process prior to approval o f dinas plans. Following approval, provision o f in-kindasset replacement, other than that to be included inthe subproject implementation contract, will be completed before the contract for subproject implementation is signed. Consultations and Information Disclosure As stated above, obtaining land or other assets through voluntary contribution and negotiated agreement requires that individuals potentially involved are informed about their rights and options. Prior to such negotiations, and prior to any land acquisition proceedings, the relevant dinas must provide information about key provisions o f this Framework. Potentially affected individuals must be informed that they are not obligated to voluntarily contribute land or get less from real replacement cost compensation for subproject purposes, that involuntary acquisition o f land without appropriate compensation is not permitted, and that lodging of a valid objection by an affected landowner will be sufficient cause for subproject approval to be delayed or withheld. Additional information to be disclosed will include: entitlement to replacement inkind or compensation at replacement cost; methods to be used in establishing compensation rates; and procedures and their right for pursuing grievances, including contact information. Information should be presented in a language and medium accessible to those potentially involved or affected. - 120 - Grievance Procedures If PAP are not satisfied with proposed entitlements or implementation arrangements, or are dissatisfied with actual implementation, they can seek satisfaction through the Safeguards Monitoring Team or its designated officials. If this does not result in resolution o f issues, project-affected persons can also make grievance verbally or in written form to the Regional Management Consultant. If this does not result in resolution o f issues, project-affected persons can make grievance in written form to the National Management Consultant and ultimately to the National Project Secretariat. At each level, specified authorities should record receipt o f grievances and reply to the project-affected person or persons within ten days after receiving the grievances. Project-affected persons will be exempted from any administrative or legal charges associated with pursuing grievances. OrganizationalRoles and Financial Responsibilities To achieve the objectives o f this framework, the Bupati o f the participating Kabupaten governments will establish the following roles and responsibilities: 0 The safeguard monitoring team (TMP) which is established together with the stakeholders forum in Kabupaten. It i s coordinated by the Assistant 1 in Kabupaten secretary office with the members from representatives o f Bappeda, DidBapedalkab, related Dinas (sectoral agency), community council association, legal aids NGOs, environmentalinatural resources NGOs, land related NGOs and I V P related NGOs. The budget for this team activities i s from Assistant 1 APBD budget that i s dedicated for this project. The roles o f this team are to assist the study, to monitor the implementation o f LARAP, UIUiUPLrecommendation, SOP and the compliance o f this safeguard framework. 0 The screening for LAR will be done by the related Dinas and the TMP. The result together with the list of sub project proposal will be sent to and reviewed by the NMC cc. to the World Bank. 0 The socio economic study and the LARAP will be prepared by the related Dinas or the consultant o f the Dinas with help from Bappeda. The TOR and the draft o f these reports have to be reviewed by the TMP and NMC. The first TOR and draft reports from each kabupaten are subject to be reviewed by the World Bank. The Bank could also review the other based on the seriousness o f the possible impact. 0 The implementation o f LAR will be done by the LAR implementing team (in the Indonesian law: The Presidential decree no 55 LAR~. this team is called "9 committee" which after decentralization could be more or less than 9) coordinated by Assistant 1 and the related Dinases. The members o f the team are the related community head, land office representative in Kabupaten, staff from Kabupaten secretary office, etc. The budget for this LAR implementation i s from the secretariat office budget. Sources of Fundingfor Land Acquisition-Related Activities As the borrower, the Government of Indonesia carries official responsibility for meeting the terms o f this Framework, including financial obligations associated with land acquisition and resettlement. Inpractice, project funds (from the IBRD Loan, IDA Credit and DfID grant) cannot be used for this purpose, and the participating Kabupaten governments will be required to use other APBD resources (fiscal transfers from the central government or their own revenue). Therefore, where a subproject i s proposed that would require land acquisition and/or resettlement, and where no sufficient source o f necessary compensation funds can be identified, the proposal will be disqualified for financing under the project. -121 - Monitoring and Oversight The identification of the possible negative impact and monitoring o f the implementation o f land acquisition plan will be done with the supervision o f the safeguard monitoring team. The national management consultant as part of the national implementing agency and Safeguard Monitoring Team that is created within the stakeholders forum, will assist and monitor the fulfillment o f safeguard requirement and processes. The World Bank will monitor on a sample basis the implementation o f this framework and any resulting resettlement instruments as part o fperiodic supervision missions. 5. Isolated and vulnerable Peoples Framework Development Plan Principles As a prerequisite to World Bank support, the ILGR must meet the requirements o f Operational Directive 4.20 (Indigenous Peoples, or in Indonesian context we call it isolated and vulnerable peoples = IVP). This policy directive requires that special planning measures be established to protect the interests o f ethnic minorities with distinctive characteristics that may make them vulnerable to disadvantages in the development process. The primary objectives o f OD 4.20 are: a) to ensure that such groups are afforded meaningful opportunities to participate in planning that affects them; b) to ensure that opportunities to provide such groups with culturally appropriate benefits are considered; and c) to ensure that any project impacts that adversely affect them are avoided or otherwise minimized and mitigated. Indonesia has hundreds ethnic groups, which originated inIndonesia, and which are culturally distinct, have different languages and, since Indonesia i s still predominantly agricultural, have close attachment to natural resources in their areas. One ethnic group could nationally be a majority or proportionally high, but in a particular island or kabupaten that group could be a minority and vulnerable. Inthe Indonesiancontext OD 4.20 applies to those minority ethnic groups that are vulnerable and isolated in particular area due to (i) their dependence to their natural habitat and sensitivity to the change o f it natural habitat and also (ii) their distinct socio-cultural behavior and system. Under the ILGR, all economically vulnerable and disadvantaged groups will get special attention in the kabupaten forum decision makingprocess and inkabupaten poverty reduction strategy, but not all o f these groups could categorized as isolated and vulnerable people as defined by OD 4.20. In the first batch of participating kabupatens already identified, only the Kajang Luar community meets the definition of I V P under the policy. The Kajang Luar community has been involved during project preparation in the participatory poverty assessment process and in the formulation o f poverty strategy and development strategy for the kabupaten. - 122- This framework plan document describes actions taken, or to be taken, by the participating kabupaten governments to ensure that project arrangements meet the requirements o f OD 4.20. Because ILGR would empower communities within a kabupaten to determine their own development priorities and have more influence over the kabupaten's budget allocation to these priorities, ILGR has two distinctive features important to the design o f this framework plan: 0 First, in ILGR, the processes o f kabupaten-level prioritization o f needs and selection o f activities occur only during project implementation. So prior assessment o f the appropriateness and impacts o f particular activities to be funded under the project is impossible. 0 Second, this framework plan focuses on one objective: ensuring appropriate opportunities for local participation at the kabupaten level. With appropriate participation (which includes the interest o f the minority and vulnerable groups), project activities responding to needs identified by kabupaten residents themselves can be considered to be "culturally appropriate" by definition. Similarly, with appropriate participation there i s no basis for considering a kabupaten to be "adversely affected" (or affected without sufficient mitigation action or trade-off) as a direct consequence o f a development activity the kabupaten itself has initiated. Therefore the crucial point on protecting the interest o f I V P is to make sure that the spirit to include the interest o f IVP and avoid adverse impact to I V P i s embedded in the participatory procedure in the project design and implementation. Key Elements of the Framework Plan The key elements o f this framework plan, then, are: a) to ensure through project design and monitoring arrangements that isolated and vulnerable peoples are afforded opportunities to participate inprioritization o f their needs; b) to ensure that their expressed needs are subsequently represented at the kabupaten level budget planning and Dinas sub project formulation; and c) to ensure that selection o f activities for funding i s reasonably responsive to isolated and vulnerable peoples priorities, also sensitive to their vulnerability. Kabupaten-Level Participation Arrangements To ensure that isolated and vulnerable peoples are able to participate adequately at the kabupaten level in identifying and prioritizing needs, the following general arrangements apply: 0 There will be a non governmental organization in the poverty working group that has serious concem and works with the isolated and vulnerable people. 0 The Safeguard Monitoring Team in kabupaten where isolated and vulnerable people would be related or affected should have an NGO that is concemed to the I V P group. The isolated and vulnerable people group will have an opportunity to discuss independently (or together with concemed NGOs) and to have an independent view o f the proposed sub-project. The involved dinas representing the kabupaten government and the facilitator have to facilitate this independent process. Kabupaten-Level Decision-Making Arrangements 0 The sub component o f the project will be considered to have a potential impact if (i) covers the it whole kecamatan in the kabupaten that have I V P and those project have a potential benefit or adverse impact to the IVP or (ii) it will be inthe specific kecamatan that has IVP. - 123- The isolated and vulnerable people will obtain relatively equal benefit from the sub-project as compared to other beneficiaries. The project should taken into account their distinct characteristic, law and values inthe investment design. 0 The project will not finance sub-projects that would lead to adverse effects on isolated and vulnerable people. Ifthe investment proposal is targeted the IVP as its main beneficiaries, the IVP has the right to refuse the investment. Consultations and I nformation Disclosure Consultation and information disclosure inthis project i s mainly done within: (a) the participatory Poverty Reduction Strategy and Action Plan (PRSAP) formulation where all sub-project financed should be based on; and (b) the participatory budgeting o f the dinas when dinases are preparing their proposal for the sub project. In the PRSAP working group and the IVP community will have an exclusive, independent focus group discussion, with help from the IVP's NGO assistant to capture the I V P specific interest on the strategy. The result o f this discussion will be part o f PRSAP. The minutes o f this discussion and the result o f the PRSAP will be discussed openly inthe Kabupaten forum and reported to the N M C and the World Bank. In the Dinas participatory budgeting proposal when the IVP issue is triggered again, the specific focus group discussion will be conducted. If the main purpose o f the sub-project proposal i s to benefiting the IVP, the IVP have the right to refuse the proposal. Also if the proposal is not specifically related to I V P but created adverse impact, the IVP has the right to refuse the proposal. In all other cases the T M P will monitor weather the I V P interest has been accommodated inthe PRSAP or sub-project proposal according to the principal o f this framework. All documents on PRSAP, sub-project proposal and T M P recommendation i s open to the public and specifically informed to the I V P relatedassistant NGOs and will be reviewed by the N M C and the World Bank. Grievance Procedures IfIVP, its NGOassistant or interest supported group are not satisfiedwith the PRSAP and or the proposed subproject proposal or its implementation, they can seek satisfaction through the Safeguards Monitoring Team or its designated officials. Ifthis does not result in resolution o f issues, they can also make grievance verbally or in written form to the Regional Management Consultant. Ifthis does not result inresolution o f issues, they can make grievance in written form to the National Management Consultant and ultimately to the National Project Secretariat. At each level, specified authorities should record receipt o f grievances and reply to the IVP and its interest supported group within ten days after receiving the grievances. They will be exempted from any administrative or legal charges associated with pursuing grievances. OrganizationalRoles and Financial Responsibilities The PRSAP facilitator, Bappeda (local planning agency) officer, T M P members will be trained to facilitate I V P and they are responsible to make sure that the I V P interest and right (according to this framework) is accommodated in the PRSAP and in related sub-project. The budget for T M P i s under Assistant 1 APBD budget and all I V P consultation activities are under Bappeda APBD budget. The R M C safeguard specialist will supervise the consultation activities. - 124 - Monitoring and Oversight: 0 Inkabupatenlevelwill be done by the TMP andBappeda 0 Inregionallevelwillbedonebythe safeguardspecialist from RMC 0 Innational levelwill be doneby the sociavsafeguardspecialist fromNMC All of them will get additional training relatedto triggering process, IVP consultation and IVP sensitivity issues. The crucial point for monitoring i s in the PRSAP process and on the Dinas IVP related proposal development. 1. Key Stepsinthe SafeguardsFramework D. Construction Implementingaction plan 4 & monitoring IVP developmentproposal incorporatedin the sub project * The first simple impact (UKL-UPL, land acquisitron) will be review by the Bank and the later will only be revlew by the National Monitoring ConsultantlNational implemenbngagency and Safeguard Monitoring Team - 125 - 2. Safeguard OrganizationalSetting I lmulementinaaaencvlNMCI Multi Stakeholders Forum creating the Coordinate by Assistant 1 of Sekda, members: Bappeda, Bapedalkab, NGO related to environment, legal aids, IP and project affected people representatives - 126- 3. SafeguardInvestmentSteps Steps EnvironmentalAssesment Landacquisition & Institutions involvedOUTPUT Budget: (EA) Resettlement(LAR) January Stakeholdersforum creating safeguard monitorino team (TMP) The forum, ass 1 andsafeguard monitoringteam Sectoral agencies,with help by Bappeda,while preparing the proposals they also screeningthesafeguard: Bappeda: supervise Dinas to Screen Environment is NOneedanymeasurement ll. NeedSOP Sectoral agency (Dinas): responsible iii. NeedUKUUPL +the 1s' for screening, preparing TOR and UKUUPLin kabupaten review by the Bank,the rest by TMP iv. Need AMDAL +changethe Safeguard monitoringteam (TMP): supervise &review safeguard proposal screening, TOR and the study Output: EA, safeguard screen result, social economicstudylLARAP February- March PreDarina J L ClPL any proposa, Conducbna soaal ecOnomlc study Dinas/Consultant with ass stance from Sectoralagencies witn AMDA, stdl oe prepared~ b t for LARAP. TORof the study is Bappeda prepareU ~ ~ - ~ p L / ~ w p the partlapatory preparedkondictng notfinanced tnough LGR and preparedfor the subsequentyear sbbject to reviewedby TMS, study (seec censds) implementing agency 8the World Bappeda aSSISt D~~~~on the st,,@ bLdgeting investment (year 2 of investment) Bank(for LAMP & P'simple TMP review UKL-LPJLARAPlsosec LAMP) censbs Output: Drafl UKL-UPULARAP ( s o w census) April -May 9 -oca1 government sdbmitDngme ouoget declsionand proposal for World Bank and lmplementlng oudgeting process Partcipatory $xmina safequard bv executm aaencies and The World Bank LGR, ncl.d,ng safeguard table 9 agencysafeguard screening, U K ~ - Budget decision . (Rakorbang) G v ng feeaback to ~ x agovernment i LJPbLARAP Oufpuf:feedbaa for tne stddy & LARAP, final UKL-UPL & LARAP June -December Dec Finaloocumentfor local budget January March - Waitlng grant olsbursement from centralgovernment Other than above process later there i s a need for safeguard midterm review and post project review, Notes (see table 8 above): 0 January is a preparation period o f ILGR for the new Kabupaten. The stakeholders forum has been introduce, the working groups are working and the forum also establishing the safeguard monitoring team (TMP -tim monitoringpengamanan lingkungan dan hak masyarakat atas tanah) as a preparation -127 - for ltabupaten investment and participatory budget process. TMP is constitute o f assistant 1 from Sekda (Secretary of Kabupaten) office as coordinator, Bappeda office, related Dinas (sectoral agency) and NGOs (environment, legal aids, and NGOs that assisting vulnerable groups). The TMP will get appropriate training to understand this framework well. 0 In February the Dinases start preparing their investment proposal, with help by Bappeda, as part o f participatory budgeting process. The project proposed is based on the PRSAP. Bappeda and the Dinas, with help by the TMP start the safeguard screening-(see the categories on the table above) and prepared the TOR for the required related studies. The project that will create a serious impact environmentally (need full EIAIAMDAL) or land acquisition (need full LARAP) could continued be prepared, though not for next year investment, but for the subsequent year investment. Since it need a full year o fpreparation. This type o fproject is normally not a kabupaten financed type o fproject, more likely become a proposal for National project inthe Kabupaten. In April and May, while continuing with the participatory budgeting Dinas (or the consultant who works for Dinas or Bappeda) is preparing the required safeguard study such as UKL/UPL or LARAP (including social economic census). The sub-project proposal should include the sub-project alignment. Inthe end ofMay, after the decision onthe investment proposal has beenmore definite and the draft of the studies have been ready, the list o f investment proposal and the related safeguard requirement studies send to the executing agency (Ministry o f Home Affairs) and the World Bank for review. The first simple LARAP and UKLhJPL in each Kabupaten will be reviewed in detail by the World Bank for the next The World Bank will only review the list and doing a random check. Every L A M P i s subject to The World Bank review. The rest will be review mainly by TMP. Any proposal that need AMDAL or more than 100 reallocated should be change with the other proposal. Any investment proposal that need safeguard preparation (such as LAR) that the time and cost exceed the availability of the single budget cycle system should be proposed for the next cycle year, while the implementation that will be done i s the LAR. 0 In June till December local government will implementing the LARAP and recommendation from UKL/UPL that has to be done before construction if any. Inimplementing the LARAP the Dinas will establish a land acquisition implementing team constitute o f local land office, Sekda, implementing agency, the related sub district head and village head. The Dinas also need to appoint a project supervision team that also supervises the environmental management in the sub-project. All recommendation from UKL/UPL should be part o f TOR for construction implementation The World Bank, executing agency and the T M P will review the result. TMP will also facilitating any complain during this process. 0 The local government could continue the preparation till March if necessary, since the budget allocation from central government for the next year budget i s not disbursed yet till March. 0 March the construction started. T M P will monitor the implementation. - 128- PAP Occupation and pcxicconditon Impact on: Compensation offerhequested by ~ education Noteson Land Building Other asset Government PAP NJOPltax vulnerability Um2). . estimatinn --. -. -.. , abdul Fishery on the river above Low: Shouldnear 1,5 m 4 m2 1simple ship X for land A.... M Rplm2 Wife+ street vendor (2km 7000ihh from river and deep or dock; 2 Y for building B..... from home) Entong +Ir'grade ($km local market 9m* trees manggo Z for semi C..... from home) permanent structure W for trees D...... Revi Women headhousehold ........ ~ with small kid- school helper I I I I I I I I Recommendation for action: Negosiation result: Agreed by: 1. Cash compensation basedon negotiation Land Building Other Bupati: PAP (see attachment): 2. Buildingcommunaldock xx YY asset: z #of IVP affected Their specific characteristic that relevant Possible Impact or bias benefit Action plan (from focus discussion) to the sub project 150 hh, 745 pop 1 There are not used to irrigatedfarming 1 Unequalfarming productrvity Special extension services facilitation Monitoring plan: Measurement Operation procedure and environment management: __~ and threshold: .................. ~ Environmentalissue: Ground water Monitoring plan: Measurement Operation procedure and environment management: and threshold: ............................. I I I I - 129- Compensation agreement form The project affected people named below agreed that the compensationof land is: .. Another land in ..... (see map...) that they have seen and agreed with the condition as stated in the attached map and detail explanation ( including facilities: a. electricity, b. clean water, c. asphalt road.......) Cash compensation: o For land ........ o For building ....... o -.............. For other asset: Trees a,.. ..............,; b.............. The affected people: Name: 1 Detail plot in the map I Total compensation (transferthrough bankaccount) 1Signature: Abdul 1 See plot x2 map... ................. I Acc No. BCA................. I I 1 I This agreement is true and sign without any pressurefrom anybody and with total understanding of the PAP: Signature of the safeguard monitoring team: Signature of the facilitator: The right ofFull ... PAP to getlhave replacement value for compensation 9 Independent opinion differ from the government and other people in the community Compensation before the construction started Clear and thorough explanation of the safeguardlland acquisition framework of this program This is not a receipt of payment. The receiptshould be sign after the payment or compensation finish and the fund transfer to the bank. ______ Voluntaw contribution form I understand that in this project I have the right for full replacement compensation but I decided without any pressure from anybody to donate my land for the purpose of ....................... developmentfor public interest. ... I agree to donate because I will get a benefit in terms of: 9 ,,, , , , .. . . .. .. ...................... .., I, I, the land I donated is less than 10% of the total area of my plot, the land the land is cut less than 1,5 m deep, there is no valuable structure or other asset in the area that I donated, There is nobody renting my land land with relatively equal productivity o Signature of the renter My statement is true and expressed without any pressure and with total understanding of the project and project safeguard framework Signature: I mfirm that this agreement is true and have been signed without any pressure from anybody and with total understanding of the project and the safeguard project framework from the affected people: Signature of the safeguard monitoring team Signature of the facilitator - 130- Format of the minutes for public discussion for land aquisition and contribution: ~~ Overview of the public discussion: The structure of the meeting: ......................................................................................................................I......... Information given and when they have been distributed: 1, .. ,,* , * ,, 2* 3, .. ,,* * , , . ... . I I III , , * The result: (including arrangement and rasional for land contribution from the community) Signature: Dinas and facilitator Verified by the PAP: Clause for environmental management that should be in the contractor contract: Conditionalfor environmental protection: 1 The second party should fully understood and follow the recommendation of the EIA as describe in the document 1 In implementing the construction the second party should always pay attention to the environmental impact as mentioned in the document ........... Sanction: If ............. and deviation from the recommendation of the environmental management plan as describe in ...........the first party could give sanction to the second party in term of: . . . . . . . . . . . Guarantee: The second party has to guarantee that the construction implemented has already following the environment management plan and recommendation on the document .... The second party has to guarantee that the process during the pre construction and construction there should be no environmental impact as describe in the document....... If there is any impact, the second party should take necessary measurement agreed by the first party without any additional cost of construction. EndNotes ''Stakeholders constitute of strategic parties that could influence and be affected by a related decision IVP = Isolated and vulnerable people; in Indonesia context is: An indigenous community that is vulnerable and isolated due to their distinct culture compare to the mainstream culture in the area. See Glossary. - 131 - 'Mitigation measureinthis environmentalframework is to protectenvironmentbasedonprocedures that regulatedby the Indonesianlaws, regulations andthis framework. `Mitigation measurein this land acquisitionframework is to make sure that impactwill be minimal and the affectedpeople livelihoodwill be restored to the level beforethe landacquisition. `Seesample forms for voluntary contribution inSection 8. Any personwho, on account ofthe execution ofthe project, or any of its components would, as aresultoftaking of land, havetheir: (i)right,title orinterestinanyhouse,land(includingresidential,agriculturalandgrazingland)or anyotherfixedormovableassetacquiredor possessed,infull or in part, permanently or temporarily; (ii)business,occupation,work,placeofresidenceorhabitatadverselyaffected; (iii)standardoflivingadverselyaffected;or (iv) accessto productiveassets adverselyaffectedtemporarily or permanently. 'Worse off inthis framework meansthe affectedpeople's livelihood is reduced due to landacquisition, burdenfrom financial consequencesof moving and the constructionof the sub project. Livelihood comprises land tenure, related constructionand other assets, business, employment opportunities, accessto healthandeducationfacilities. '*PlacewhichIndonesian have similar landvalue, infrastructure,accessto school-healthfacilities and employmentopportunity. LAR in the law usedto be regulatedby the PresidentialDecreenumber 55 which is more general, less focused inPAP participationand has no requirement for full replacement cost (only direct compensation cost) compare to The World Bank requirement. AAer decentralization the responsibilityfor LAR processesin under local govemment.The draft new law for LAR is in line with the World Bank requirement,producedwith the cooperationwith The World Bank andADB. - 132 - Additional Annex 12: Anti-Corruption Plan INDONESIA: Initiatives for Local Governance Reform Project Overview The project encompasses some o f the most important elements o f an anti-corruption strategy as major integral parts o f its design. It acknowledges the inherent weaknesses o f working at the kabupaten level and aims to tackle them in a systematic manner, actively promoting greater transparency and accountability. However, this positive approach inthe design does not mean that there is room for complacency inrelation to corruption. Due diligence must be given to ensure that the rules o f the project are followed and its aims properly met. This will require a strict regime o f monitoring, supervision and, where necessary, the use o f sanctions. Success o f the ILGR depends on continued support from many actors (inter alia): MOHA, Bappenas and the national level government; province government; Bupatis, Bappeda and district level government; DPRD, civil society and, ultimately, citizens living in the participating communities. Consultants, contractors, facilitators and auditors will also play important roles in the project. This diverse set o f actors needs to work together to ensure that the project achieves its goals in an effective, efficient and cormption-free way. Involvement o f so many actors in the process can initself act as a major disincentive to corruption: everyone knows that someone else is watching. The challenge will be to ensure that each actor remains properly informed on a regular basis o f plans and progress. For this reason, it i s possible that the project's increased levels transparency and proactive dissemination o f information may eventually prove to be the most important o f the anti-corruption elements. It is recognized that strong local mechanisms will not be inplace at the outset. Indeed, a primary purpose of this project i s to develop and install improved systems (especially in relation to kabupaten governance, financial management and procurement) in a gradual, participative manner. Improvements can be expected to occur during and as a result of project implementation. This means that corruption risks may be greater at the beginning, and more support and supervision would therefore be necessary during the earlier phases. For this reason, the investment funds o f the project are held back until an appropriate level o f reform has been achieved. As the new systems become established the increased levels o f transparency and accountability will significantly reduce corruption risks. Monitoring by empowered communities and civil society groups will further reduce risks and the burden o f supervision. The investment stage will begin after 36 months o f start-up (including Project Preparation). However, the improvements inmanagement and governance may take up to more than 4 yegs to become fully consolidated, This period will be a crucial learning stage where the local governments need to test and strengthen their new capacities. The investment funds are designed to encourage the reforms and provide an ideal opportunity for 'learning by doing'. Since the systems will still be new, it i s essential that the effort i s carefully overseen in order to avoid mismanagement and corruption. A similar tactic o f combining facilitation, capacity building, investment grants and appropriate levels o f supervision has been used to good effect by the K D P project to empower villages and kecamatans (subdistricts) over recent years. Since the project aims to reach across sectors, and impact on kabupaten governance as a whole, it will be essential that cases o f corruption be treated seriously. Investigation o f complaints must be done in a timely and professional manner, and sanctions applied wherever cases are proven. The following sections o f this annex review the elements o f the project that relate directly to the prevention of corruption, identification - 133 - andinvestigation o f cases, and proposed remedies, including sanctions. The anti-corruption elements of this project are inseparable from the project Procurement, Financial Management, Disbursement and Disclosure strategies. In the ILGR, the Anti-Corruption Plan i s not a 'stand-alone' feature, but rather a set o f mainstreamed, integral facets pervading the project design, further details on most o f the elements o f this plancanbe found inthe relevant sections of this PAD. Corruption mapping Procurement o f facilitation and TA contracts will be centralized. The normal procurement and financial management procedures acceptable to the Bank will be enhanced by measures for improved disclosure (see also below). The main dangers o f corruption inthis project are at the kabupaten level where there will be three key areas o f concern: Numerous trainings, workshops and other small-scale activities. The many payments can be difficult to monitor and control, and can be subject to serious financial leakages or even completely bogus requests for reimbursement. Deliberate abuse o f funds, especially during the early phase o f the project, may severely discredit the entire effort. Tight controls need to be applied over such items as allowances and expenses. Difficulties are compounded because o f the limited financial management capacity (in fact, it is not uncommon for funds to be 'stolen' from one budget line in order to cover up for a more innocent management error in another!), hence it is essential that the project team provides hands-on bookkeeping and basic management support. Disclosure o f budgets will help reduce risks. Technical assistance related to the financial management andprocurement reforms will also be a mitigating factor. Procurement of infrastructure-related contracts. This will be a major area o f concern at the beginning o f the implementation phase and thereafter. There must be stringent adherence to procurement rules and increased disclosure in the procurement process. The Dinas agencies will be managing contracts but not constructing the infrastructures. Involvement o f end-userdcivil society in the procurement process, as members o f bidding committees and process monitoring teams, will act as a deterrent to abuse. Bids must be open to contractors from outside o f the kabupaten and sufficient efforts must be made to ensure that bid information i s widely disseminated. Transparency i s a key: the likelihood o f monopoly-control and collusion i s greatly reduced. Simplification and standardization o f forms and procedures will also reduce corruption risks. Supervision and quality control. In the past, quality control in infrastructure projects has tended to be very poor. Often there has been collusion between supervisors and contractors resulting inthe certification and payment o f infrastructures that are substandard, even o f dangerously bad quality. The end result is roads, schools and other constructions cost more than they should and are soon ina grave state o f disrepair. This project must ensure that trained, motivated supervisors are actively monitoring quality as infrastructures are constructed. Spot checks must be made by national project staff and technical audits performed on a reasonably large sample o f cases. Civil society groups (NGOs) will be involved in ensuring that standards and specifications are being met. This will include the involvement o f NGOs in routinely checking specifications in each subproject location. Attention will be given to the control and payment systems where simplification, standardization and civil society oversight will all reduce risks. The project will ensure that timing o f contractor payments is carefully tracked, as payment delays are often a sign o f rentseeking. -134 - Enhanced disclosure provisions Recently the World Bank and GO1(Bappenas) have agreed upon a set of enhanced disclosure provisions that will be piloted under new Bank-assisted projects. Participating kabupatens inILGR will agree to adopt the enhanced disclosure provisions, at least in respect to Bank-supported activities. These provisions include: 0 Audit reports will be made publicly available by both the Borrower andthe Bank. 0 The mid-term report will be made publicly available by the Borrower. 0 The procurement process, where the Borrower has agreed that additional information concerning parts o f the procurement process in the project will be made publicly available. The legal agreements for this project will include specific undertakings to effectuate these arrangements. These undertakings would eliminate the need for GO1 approval to be obtained prior to the public release o f such information. Salient information from monthly and quarterly reports, will also be made available to the public and disseminated to the press. For other documents, which are currently not disclosed without Borrower consent, the Bank will continue to consult GO1prior to disclosure. These provisions are a good starting point. All ILGR locations are expected to go beyond this by not only making basic information routinely available, but by making it available ina form that i s usehl and easily understood. The information needs o f different groups need to be considered. The needs differ between government staff; civil society; companies and communities. The project will acknowledge these differences and endeavor to regularly supply each stakeholder group with sufficient and clear information to meet their needs. Civil society oversight Training for people from civil society groups is a key part o f this project. This training will help prepare the groups to play a more active and effective role in the decision-making and monitoring process. Their involvement in key parts o f the project (helping to oversee aspects such as procurement, financial management, progress and quality control) can provide a vital, objective element to the project. Clearly it is essential for the involvement to be bono$de, and not captured by the "pseudo-NGOs" which proliferate in some areas. Such NGOs include those that have a blatantly, unswerving anti-government stance, and also those that are actually created for and by civil servants. The key will be to engage in dialogue first and foremost with genuine civil society groups that have good motivation and capacity. Failure to do so may lead to serious cases o f fraud and corruption later on since pseudo-NGOs can attempt to legitimize corrupt practices. Partners from civil society will participate in many aspects o f the project, from budget planning to monitoring. The project will include civil society in kabupaten procurement committees and monitoring teams to ensure there is no collusion between contractors and dinas staff involved in implementing the projects, The project will then empower local universities, NGOs and journalists networks to monitor progress and local government performance through contracts for independent monitoring, citizen score-cards and assessments o f citizen satisfaction with kabupaten services. These efforts will help ensure demand for greater accountability and transparency o f local government representatives. - 135 - As members o f the multi-stakeholder forums, civil society groups will have an ideal platform to voice their concerns, particularly in relation to slow, shoddy and corrupt practices. Project information dissemination will include links to the local press, radio and strategic civil society networks, ensuring that people are kept up-to-date between and outside o f the forums. It is plannedthat, beyondthe measures imbedded inthe project, local civil society groups will also be asked to participate in monitoring activities to be financed separately through an approved Japan Social Development Fundgrant. Complaintshandling,monitoringand supervisionmechanisms The project will have mechanisms to investigate and follow up on complaints from communities (including individuals, families and community-based groups); civil society (NGOs, religious, education and other organizations); consultants and companies; and also civil servants. Complaints might be very open and vocal, encouraged through supervision or monitoring visits, or submitted anonymously. The ILGR complaints system will differ somewhat from that used by KDP inthat it must be more easily accessible to local government, contractors and other groups, whereas the focus o f the K D P system has tended to be response to inputs from communities. This may result in a shifting o f the typologies o f complaints towards more technical, procurement and financial management issues. Of course, like that inKDP, the complaints handling system inILGR must also be capable o f dealing with cases reported by communities, such as elite capture o f benefits and other abuses o f power. It is essential that independent channels be provided for complaints related to corruption, since project staff and consultants may be implicated in corruption cases. This project will replicate systems tested under KDP, whereby citizens have several channels for their comments and complaints. It i s also essential to discriminate between cases that are due to innocent error or inexperience, and cases that are due to deliberate, illegal acts. To ensure that innocent people are not persecuted, the complaints handling system must include a professional system o f investigation. BPKP will be the main auditors for the project and Bawasda will act as an independent auditor in relation to kabupaten level procurement. The local government will be required to make a commitment towards investigation and prosecution o f cases involving KKN. Information concerning cases will be made public through meetings and the project's information dissemination system - particular attention will be given to cases that have been successfully prosecuted, since news o f these will act as a disincentive to future abuse. Cases of corruption can be reported, but they can also be found as a result o f supervision and monitoring. The main methods by which corruption cases are likely to be found are as follows: Internal monitoring of the project is mainly designed and implemented though management and facilitation contracts allotted from the national level. The key will be to ensure that reports o f corruption, in whatever form, are shared with the appropriate levels o f the project in a clear and timely fashion. For example, if a consultant suspects that there i s a case o f collusion at the kabupaten level, then a report should be sent immediately to appropriate people at the province and national levels for further investigation. External monitoring will also be undertaken (e.g. see notes on civil society oversight above) and cases reported from these activities must also be properly investigated andtracked. -136 - Quality control reports and audits, from internal consultants and from external agencies will be another possible starting point for investigations into corruption. The role o f Regional TA inthe regular monitoring o f quality issues will be crucial to ensuring that standards are met and maintained. Annual technical and financial audits will be a means o f checking whether the TA reports have been accurate, and whether additional measures need to be applied. Progress and payment records can also give clues as to where corruption is taking place. Unduly high payments and late payments should be investigated. Score cards which measure citizen satisfaction o f the project will also be used. The results o f these need to be very carefully analyzed, since public perceptions o f problems can sometimes be misleading. However, the cards can provide an indication o f whether corruption remains a problem in a given area. Appropriate investigations must be launched wherever indications are strong that corruption i s a problem. Government and Bank supervision may also catch infringements that have not been reported through the normal channels (this i s often itself a sign o f collusive practices concerning project facilitators or staff). As with incoming complaints, cases caught during monitoring and supervision, will be tracked in such a way that it will be possible to easily tell which cases remain unresolved. Clearly a robust system o f information management is required to filter incoming information. This system needs to be able to refer cases to the appropriate people (or authorities) and track progress o f each individual case. Again, a system similar to that beingusedinKDPwill be applied. Policies to mitigate chances of collusion The prominent role o f multi-stakeholder forums inthe project will greatly reduce the risk o f collusion. It is vital that the forums are truly representative o f a broad section o f society. The forums must also be properly encouraged and supported, so that all members can play an active role. The emphasis on transparency inthe ILGR will also discourage collusion. For this reason the project needs to disseminate all salient information direct to civil society and private sector groups, as well as to the press. Linking project payments to proven progress (e.g. with proper certification o f quality) will also reduce the scope for corrupt and collusive practices. External monitoring (see above) will further reduce risks o f corruption and collusion. The wide range o f policy reforms related to govemance, financial management and procurement should all lead to a more responsive and responsible local government. The project helps the kabupatens to work through these reforms and implement them. Sanctions and remedies There are many strict laws on theft and corruption inIndonesia, but severe penalties for signiJicant abuses are seldom applied, especially in cases concerning civil servants and people with political influence. Sanctions needto be applied otherwise the social stigma from the publicity surrounding a case will be the only disincentive to corruption. This stigma is unlikely to be an effective deterrent o n its own. Infact, if it - 137- becomes public knowledge that prosecuted cases receive little or no punishment then there will be a severely perverse negative effect. It will be essential that cases o f corruption be treated seriously. Suspicion of corrupt practices would be enough to trigger the suspending o f payments (or reimbursements) to specific contractors, subprojects, or even entire districts depending on the severity of the apparent case. Where corruption allegations are proven, expended funds would have to be returned and appropriate action taken. Ifappropriate action is not taken then pressure must be applied at the next level. For example, a worker is engaged i s stealing - if the contractor who employs the worker does not take appropriate action then the contractor will be held responsible and held liable. Where contractors are proven guilty o f corrupt practices and the local dinas does not take action, then the kabupaten may be heldcomplicit andjointly responsible. The project will encourage a system o f blacklisting for companies that engage in collusion or have produced unacceptably poor quality results. Due care will be taken to ensure that this system does not result inthreats and rentseeking. The project will require government civil servants working on the project to : (i)sigdagreetocodeofethicsrelatedtoKKNfreeprojectmanagement; and (ii)require the Kabupatens to take administrative action against staffinvolvedinKKNincluding prosecution/ or demotion. Since the project aims to reach across sectors, and impact on kabupaten governance as a whole, it is essential that sanctions be applied strictly and fairly. A 'one-strike' policy needs to be applied to contractors, facilitators and consultants: any case of complicity in corruption would lead to dismissal and possible prosecution. An entire kabupaten would be removed from the project list if it fails to deal with corruption issues properly - even ifthe specific cases are not directly linked to the project - since ILGR cannot function ina setting where corruption i s allowed to thrive. Therefore, the kabupaten governments need to ensure that other development activities (irrespective o f funding source and sector), also adopt strict governance rules. - 138- Attachment to Annex 12. EnhancedDisclosureof Information The implementing agency and the World Bank will each make publicly available, promptly after completion of a mid-term review of a project carried out in accordance with this agreement, the mid-term review report and the aide memoire prepared for this purpose. The implementing agency and the World Bank will each make publicly available promptly after receipt all final audit report (financial or otherwise, and including qualified audit reports) prepared inaccordance with this agreement, and all formal responses ofthe government. The implementing agency will (and the World Bank can): 0 make publicly available promptly after finalization all annual procurement plans and schedules, including all updates thereof; 0 make available to any member o f the public promptly upon request all bidding documents and requests for proposals issued in accordance with the procurement provisions of this agreement, subject to payment of a reasonable fee to cover the cost of printing and delivery. In the case of request for proposals, the relevant documents will only be made available after notification o f award to successful fm. Each such document will continue to be available until a year after completion of the contract entered into for the goods, works or services in question; 0 make available to any member of the public promptly upon request all short lists o f consultants and, in cases o f pre-qualifications, lists o f pre-qualified contractors and suppliers; 0 disclose to all bidders and parties submitting proposals for specific contracts, promptly after the notification o f award to the successful bidder/consultant, the summary o f evaluation o f all bids and proposals for such proposed contract. Information in these summaries will be limited to a list of bidders/consultants, all bid prices and financial proposals as read out at public openings for bids and financial proposals, bids and proposals declared non responsive (together with reason for such an assessment), the name of winning bidderkonsultant and the contract price. Such summaries will be made available to the public, promptly upon request; 0 allow representatives o f the end-users of the goods or works being procured to attend the public bid openings; 0 make publicly available and publish widely contract award information for all contracts for goods and works above US$lOO,OOO equivalent and all contracts for consultants above US$50,000 equivalent, promptly after such award; and 0 make available, promptly upon request by any person or company, a list of all contracts awarded inthe three months preceding the date ofsuch request inrespect ofaproject, including the name of the contractor/consultant, the contract amount, the number o f bidderdmakers o f proposals, the procurement method followed and the purpose o f the contract. - 139- MAP SECTION