Document of The World Bank ON A PROPOSED LOAN AND PROPOSED CREDIT IN THE AMOUNT OF SDR87.5 MILLION (US$111.3 MILLION EQUIVALENT) FOR A

Transcription

1 Public Disclosure Authorized Document of The World Bank Public Disclosure Authorized Public Disclosure Authorized PROJECT APPRAISAL DOCUMENT ON A PROPOSED LOAN IN THE AMOUNT OF US$208.9 MILLION AND PROPOSED CREDIT IN THE AMOUNT OF SDR87.5 MILLION (US$111.3 MILLION EQUIVALENT) TO THE REPUBLIC OF INDONESIA Report No: IND Public Disclosure Authorized Environment and Social Development Unit East Asia and Pacific Region FOR A SECOND KECAMATAN DEVELOPMENT PROJECT May 23, 2001

2 CURRENCY EQUIVALENTS (Exchange Rate Effective April 15, 2001) Currency Unit = Rupiah Rps.10,000 = USSI USS100 = Rps.1,000, FISCAL YEAR Government of Indonesia -- January l-december 31 APBN APBD Bappeda Bappenas BPM Bupati BPD BPKP Camat CAS CPAR DAU DPRD Desa Dusun FAD Kabupaten Kepala Desa KDP Kecamatan KPKN LKMD LSM MIS MoF MoHARA NGO PjOK PMD PMU SOE Susenas UDKP UPK VTP WSSLIC ABBREVIATIONS AND ACRONYMS National Development Budget Provincial and District Development Budgets Regional or District Development Planning board Department of Planning Directorate of Community Empowerment District Head Village Parliament (Badan Perwakilan Desa) National Financial and Development Audit Agency Subdistrict head Country Assistance Strategy Country Procurement Assessment Review General Block grant Provincial and District Parliament Village Hamlet Inter-village development forum District Village Head Kecamatan Development Project Subdistrict Provincial Office of National Treasury Village Administrative Forum (Lembaga Ketahanan Masyarakat Desa) NGO Management Information System Ministry of Finance Ministry of Home Affairs and Regional Autonomy Non-governmental organization Local project manager Department of Community Development (Pembangunan Masyerakat Desa) Project Management Unit Statement of Expense National Expenditure Survey Kecamatan Administrative Forum (replaced by FAD) Kecamatan Financial Management Unit Village Infrastructure Project Water Supply and Sanitation for Low Incomes Commnunities Project Vice President: Country Manager/Director: Sector Manager/Director: Task Team Leader!Task Manager: Jemal ud-din Kassum Mark Baird Zafer Ecevit Scott Guggenheim

3 INDONESIA SECOND KECAMATAN DEVELOPMENT PROJECT CONTENTS A. Project Development Objective Page 1. Project development objective 2 2. Key performance indicators 2 B. Strategic Context 1. Sector-related Country Assistance Strategy (CAS) goal supported by the project 2 2. Main sector issues and Government strategy 3 3. Sector issues to be addressed by the project and strategic choices 8 C. Project Description Summary l. Project components Key policy and institutional reforms supported by the project Benefits and target population Institutional and implementation arrangements 19 D. Project Rationale 1. Project alternatives considered and reasons for rejection Major related projects financed by the Bank and other development agencies Lessons learned and reflected in proposed project design Indications of borrower commitment and ownership Value added of Bank support in this project 25 E. Summary Project Analysis 1. Economic Financial Technical Institutional Environmental Social Safeguard Policies 39 F. Sustainability and Risks 1. Sustainability Critical risks 40

4 3. Possible controversial aspects 41 G. Main Loan Conditions 1. Effectiveness Conditioni Other 42 H. Readiness for Implementation Compliance with Bank Policies 44 Annexes Annex 1: Project Design Summary 45 Annex 2: Detailed Project Description 48 Annex 3: Estimated Project Costs 59 Annex 4: Financial Control measures 60 Annex 5: Financial Summary 64 Annex 6: Procurement and Disbursement Arrangements 65 Annex 7: Project Processing Sclhedule 92 Annex 8: Documents in the Project File 93 Annex 9: Statement of Loans and Credits 94 Annex 10: Country at a Glance 97 Annex 11: Anti-corruption strategy for KDP-2 99 Annex 12: Procurement, Disbursement, Contract and Audit formats 106 Annex 13: Environment Screening Criteria 114 Annex 14: Guidelines for Resettlement, Land and Asset Acquisition 118 Annex 15: Kecamatan Poverty Descriptions 121 MAP(S)

5 Date: May 11, 2001 Country Manager/Director: Mark Baird Project ID: P Lending Instrument: Specific Investment Loan (SIL) INDONESIA SECOND KECAMATAN DEVELOPMENT PROJECT Project Appraisal Document East Asia and Pacific Region EASES Team Leader: Scott E. Guggenheim Sector Manager/Director: Zafer Ecevit Sector(s): SY - Other Social Protection Theme(s): Poverty Targeted Intervention: N Program Financing Data [X] Loan [X] Credit [] Grant ] Guarantee [ ] Other: For Loans/Credits/Others: Amount (US$m): $320.2 Proposed Terms (IBRD): Variable Spread & Rate Single Currency Loan (VSCL) Proposed Terms (IDA): Standard Credit Financing Plan (US$m): Source Local Foreign Total BORROWER IBRD IDA Total: Borrower: GOVERNMENT OF INDONESIA Responsible agency: DEPARTMENT OF HOME AFFAIRS Address: JI. Pasar Minggu Raya, Pasar Minggu, Jakarta Selatan, Indonesia Contact Person: Eko Sri Harymoto Tel: Fax: ppkpmd@vision.net.id Estimated disbursements ( Bank FY/US$m): FY Annual Cumulative Project implementation period: January June 2006 Expected effectiveness date: 08/31/2001 Expected closing date: 12/31/2006 OCS PAD De., R. M. 2000

6 A. Project Development Objective 1. Project development objective: (see Annex I) Objectives of the proposed four year project are to (i) support participatory planning and development management in villages; (ii) support a broad construction program of social and economic infrastructure in poor villages; and (iii) strengthen local formal and informal institutions by making them more inclusive, accountable, and effective at meeting villagers' self-identified development needs. The project is a continuation of a longer-teni participatory program for poverty reduction that includes the two Village Infrastructure Projects and the first Kecamatan Development Project. 2. Key performance indicators: (see Annex 1) Performance benchmarks reflect the project's objectives of building economic and social infrastructure and improving local govemance. Indicators refer to: Economic outputs and impacts from community investments; Changes in community's abilities to plan and manage development programs; * Increasing involvement of civil society in development monitoring; and * Improving the interest and role of local government in responding to community needs B. Strategic Context 1. Sector-related Country Assistance Strategy (CAS) goal supported by the project: (see Annex 1) Document number: R [IDA R2001-3; IFC R2001-2] Date of latest CAS discussion: January 30, 2001 The new Indonesia CAS moves beyond crisis management to address the fundamental issue of poverty reduction. Supported by a recent Poverty Assessment, key themes in the CAS are the priority of better governance at all levels with a special focus on transparency and anti-corruption measures; improving the quality of public service deliveiy in the context of a national decentralization program; and making the planninig and management development programs more inclusive, especially in terms of giving voice to the poor. The program to improve community participation in development and build basic economic infrastructure is a cornerstone of the CAS strategy. Indonesia remains a fundamentally rural country (albeit with strong urban-rural linkages). Much of the long term impact of the crisis is being born by the rural poor, both directly because of income shocks but also indirectly, through the drying up of public investment in infrastructure development and maintenance that is essential for them to gain access to social services and markets. The maedium tenr growth strategy must be both more broad based and yet also sufficiently flexible to allow for variance in local needs than the centralized programs of the past. Improving the quality of rural growth by improving the perfonnance of local institutions is a second key CAS theme. Indonesia has a rich stock of social capital but it has often been marginalized in the past. Furthennore, New Order notions of family and community values often distorted their development into highly stylized notions of how groups should fit together: women were channeled into "keluarga sejahtera" family values that marginalized them from public roles; traditional resource management groups were stigmatized as barriers to growth, etc. Using local institutions to channel local demand, to introduce the checks and balances that atrophied under the New Order government, and to support the development of accountable and responsive local governmuents is a high priority for Indonesia

7 The proposed project supports these themes by turning them into practical steps for local reform. Indonesia's new decentralization laws provide a solid framework for launching the change. But institutional change at the local level needs more than a supportive policy framework. It requires an action program that lets communities experiment and consolidate. KDP-2 gives teeth to the reform agenda laid out in the CAS and Indonesia's decentralization program by turning broad principle into a program of action in which millions of rural Indonesians will participate and from which many of the poorest Indonesians will receive significant benefits. 2. Main sector issues and Government strategy: Country and Sector Background - At present, Indonesia is engaged in a difficult transition. The political and economic crisis highlighted several key features about development that had been masked by the New Order growth years. These included: (a) despite high rates of poverty reduction, vulnerability remained high and many poor were not sharing adequately in economic growth; (b) delivery of development services to villages was expensive, of poor quality, and excessively centralized; (c) gaps between local governments and villagers were large. The new government's recovery agenda focuses on democratization supported by a large scale decentralization program, and a 10 point economic reform program designed to promote growth and reduce poverty. The Bank's recently completed CAS supports this program. Within the overall 10 point program, improved local governance and the provision of primary economic infrastructure to villages are free-standing entries. The Coordinating Ministry for Economic Management is preparing a more detailed explanation of how this strategy will be carried out, but a draft presidential instruction has already been prepared and is a foundation of the proposed KDP-2. Indonesia's dramatic decentralization program will transform the country from one of the world's most centralized systems to one of the most decentralization. The two laws making up the decentralization framework imply that local government spending will more than double, rising to more than 40% of total government spending. Most of this transfer will be through a general grant (DAU), which is a minimum of 25% of government revenue and may rise still higher. Grant transfers are determined through a formula that guarantees that regions receive amounts equal to their previous recurrent and development budgets; nevertheless, development investment needs are actually greater in poorer areas and it is not clear what kind of equalization formnula will provide extra funds for the poorer regions. Most development expenditure planning remains sectoral. However, the Bank and the national government have increasingly started exploring more thematic and issue oriented approaches. For example, GOI recently formed a coordinating board to deal with the policy implications of poverty reduction programs. The Bank has also launched three provincial public expenditure reviews whose purposes are to identify local configurations of poverty and whether public investment is addressing it efficiently. At present, no such cross-cutting framework exists in the newly empowered districts. District investment programs remain resolutely sectoral. Nevertheless, there is a strong need to change the role of district planning frameworks to focus on solving problems such as poverty rather than implementing sectoral programs. KDP's initial strategy is to provide forums and encounters where district administrations and legislators can begin thinking about altnerative approaches to poverty and participation in a context where they are meeting poor villagers and making decisions in response to constituents. Over time, the program introduces financial mechanisms and operational studies to support district-level poverty reduction strategies and the longer-term sustainability of poverty programs through the assumption of district - 3 -

8 responsibilities. Poverty and growth in rural villages -- In the past, public infrastructure investment in Indonesia has concentrated on infrastructure in projects of national, provincial, and district importance. Projects at these levels usually have many beneficiaries and high rates of returns. However, access roads are not well-developed and, given the heavy rains and difficult conditions of rural villages, many villages are often cut off for several months of the year. Isolation contributes to high transportation costs and poverty, including associated problems of poor education and health care. Over the years the government has sponsored several programs to solve the problem of providing access, safe water, and basic health and education to poor villages. The Army Corps of Engineers has a special "enter the villages" road-building program. Until recently, INPRES grant programs included earmarked funds for infrastructure development. Crash building programs throughout the New Order years built schools and clinics across the country. Villages across the country, of course, also mobilize their own resources to improve communications. However, the scale of the challenge remains enornous estimates of village infrastructure investment needs assumed a per village cost of $33,000 simply to provide feeder road, water supply, and sanitation, with the poorer villages requiring substantially more investment. The current generation of World Bank community projects also began as attempts to fill the infrastructure gap. Reviews of Bank experience with community built roads (Yogya Uplands), water supply (WSSLIC), and various local irrigation schemes all pointed to the lower costs, higher quality, and greater ownership that comes from community participation. However, in all cases, the top-down transfer system was clumsy and slow. Furthermore, reviews of community programs on the ground showed recurrent problems of elite capture and political manipulation. Simply building infrastructure was not enough without a more conducive environment for planning and managing it. Bank/GOI sector work and operational replies to these problems started, more or less, in 1996, with the Local Institutions Study on the one side, and the Village Infrastructure and WSSLIC Projects on the other. VIP pioneered direct resource transfers to villages on Java for building rural infrastructure despite initial skepticism that the system could respond. The LLI study identified the growing gap between govemment agencies and community organizations, and it also pointed to the social processes that were creating these gaps. The key finding from that study was the potentially positive role that community institutions could play in local development despite the many ways in which they were being undermined by New Order development programs. The study documented the systematized mismatches between community priorities and development investment decisions. The Bank's Poverty Assessment (FY01) also stressed the close linkages between local governance reform, demand-responsive public services, and a revived strategy for poverty reduction. These findings harmonized well with academic work on social capital, and work being done in other countries on community-driven development. If conmuunity-based programs were such a rich field for development, why were they so neglected in Indonesia? Four main reasons stand out: * First, despite a general belief among community workers that Indonesian villages had great potential to become self-managing actors in development programs, there is also a risk in overly romanticizing community social structure and civic organizations. Most villages are not egalitarian, harmonious units, but conflictive and highly stratified entities with internal problems of exclusion, corruption, and - 4 -

9 conflict of their own. Projects that simply "gave" resources to villages with no planning structure for negotiating through these problems usually saw their funds slip through village fingers with little return for the investment. * Second, many of the most important community institutions deliberately placed distance between themselves and the development institutions established by the New Order state. Religious organizations, for example, withdrew from the country's political and administrative arenas; community institutions for managing conflict, natural resources, found themselves competing with parallel organizations set up by the government. Community projects thus became part of the New Order state's program to establish legitimacy for its own institutions. To the extent that villagers did not see these as legitimate, self-organizing gave way to "mobilization" and, usually, resistance. * Third, technical planning and delivery are not very compatible with village-led development because economies of scale and technical efficiency are much greater at higher organizational levels. These are also the area where Bank and government development programs typically exercise their greatest comparative advantage. * Finally, while NGOs and other groups had a long history of success at community development at very localized scales, such models were not designed to be carried out at the level implied by a large development program. This problem was highlighted by the fact that the only obvious delivery system available for trying out community work on a large scale - the government apparatus - was clearly unsuited for the kinds of bottom-up planning and participatory methods used by successful community workers. In short, because so many of the pre-conditions for successful community programs in Indonesia were inextricably linked to the reform of local governance, opportunities to promote bottom-up development during the New Order period were always limited and would sooner or later bump into the contradiction posed by the government's state building project. Nevertheless, that there were such efforts being made throughout the New Order period is critical to understanding the evolution of the community development program of which KDP is a part. Three variables are important: (a) the New Order government continually sought to push resources down to the local (district) level through mass building and transfer operations; (b) the government's norm of centralized control over local decision making was never as thorough as its own documents and most academic studies claimed it was; and (c) there has always been a strong populist constituency inside and outside of government for variant versions of a "people's economy". What has evolved into the Kecamatan Development program draws on this background to solve a problem faced by GOI reformers: how to design and sequence programs that can address the poverty-govemance nexus without waiting for a general reform of development policy and the civil administration. As chance would have it, events outstripped the program, and what began as a problem caused by excessive centralization has become one of productively dealing with the challenges of a national decentralization program hurtling by all the "buts" and "commas" of decentralization's many expert advisers. The Bank's strategy for community development has evolved in lockstep with GOI's own changing perspective on decentralization and local reform. However, the heart of this strategy has been the use of projects to create "facts on the ground" to show that properly designed community empowerment programs lead to higher returns, greater benefits for the poor, and more sustainable outcomes. World Bank contributions to this program have been less at the level of detailed sector work per se, than on setting the - 5 -

10 operational precedents for pushing the program to the next level. Thus, the 1995 Village Infrastructure Project provided the design machinery for communities to receive fumds directly and manage them in accountable ways. Once there was a system in place to transfer and manage money and projects, the first Kecamatan project could focus on broadening the range of stakeholders involved in decision-making, including a renewed regulatory and advisory role for the decentralized district governments and, for the first time, an institutionalized role for civil society monitors. KDP also opened up project menus so that for the first time villagers were engaged in fully participatory and transparent budgeting. KDP-I began in 1998 and will finish in early Of the 67,500 villages in Indonesia, more than 12,000 poor villages have participated in KDP so far, with a total beneficiary popuilation of almost 10 million people. During the project's first two years, seventy-five percent of the funds were used to build economic infrastructure such as roads (62%), bridges (10%), irrigation (8%), and clean water (7%). The remaining 25% was used for economic activities. Economic infrastructure built through KDP methods costs as much as 30% less than traditional approaches used in the same places. Poverty benefits from the village investments have been large. Seventy-seven percent of KDP's loan beneficiaries are perceived to be the poorer members of their communities, and 38% have been women. Nearly five million people received wages in KDP's first year. Ex post reviews show average rates of return of 30-40% to rural infrastructure built through KDP, virtually all of which is captured by villagers. The project has generated four million person-days of labor in its first year; and, because the project sets wages below the local agricultural minimum, nearly all of the wage amount is paid to the poor and vulnerable. A sample of the Year 1 sub-districts found that 60% of the participants in project meetings were poor, and 40% were women. The new project continues this program, with an increasingly explicit governance-poverty linkage. The heart of the project lies in the activities that increase communities' abilities to make assessments of their development needs and involve local governments and other stakeholders in solving them. However, while the program presumes that representative institutions are fundamental for successful service delivery to the poor, there still needs to be a responsive technical support structure to ensure the quality of whatever it is that communities build with their resources. The new project places more emphasis than previously on developing local technical capacities for design, management, and maintenance. The purpose of better local governance remains higher quality growth. Project Background The core elements of KDP are (i) a very fast system of direct cash transfers from the Special Account to kecamatans, where village representative hold collective bank accounts; (ii) a tiered system of technical and social facilitators recruited from the private sector, NGOs, and the villages themselves; (iii) open project menus; (iv) a process for technical review of subproject proposals that excludes any higher level review or modification; (v) support for village management of procurement, financial management, and project implementation; and (vi) full transparency through a program of disclosure and independent civil society monitoring. Key to the project's success is a 4-6 month long, facilitated planning process. Project planning begins in hamlets, a social unit below the village, and ends in the kecamatan, sub-districts that contain an average of villages and as many as 100,000 people. Any group that has existed for more than a year can make a proposal.village meetings decide on a maximum of two proposals for forwarding to the final round of subdistrict decision-making; of the two proposals, the second must come from women. In the sub-district meetings, representatives of all the villages allocate the KDP grant against the proposals

11 Throughou the process, a variety of means are used to work with and through traditional organizations rather than limiting discussion to the formal administrative groupings. Table B.2 below is a schematic presentation of the KDP process. Table B2. KDP Sequencing Phase SOCIALIZATION I DISSEMINATION OF INFORMATION Activity * Provincial and district workshops to publicize KDP among local government officials, press, universities and NGOs. * _ Kecamatan Facilitator training Kecamatan forum meetings(udkp 1) to publicize KOP and to evaluate project staff (just in old kecamatans) and select Year 2 villages (just in new kecamatans) * 1st village meetings (Musbangdes 1) to publicize KOP in the village and select Village Facilitators * Train Village Facilitators I* nformation boards placed in all villages SOCIALIZATION IN HAMLETS AND * Inventory of all village groups and locations of poorer villagers ACTIVITY Sub-village and group meetings, cross-visits SUGGESTIONS COLLECTED Updating information on village _ boards SUGGESTIONS COLLECTED * Further dissemination of project information * Special meetings with women's groups * Special meetings with women's groups to discuss women's proposal ideas SELECTION OF ACTIVITIES FOR E * * 2nd village meetings (Musbangdes 11) to discuss proposal ideas Village TA for proposal preparation selected VILLAGE PROPOSALS Formation of team to prepare village proposals T * Preparation of proposals, with designs and budgets * Updating information on village boards,._ * Corss village visits to learn about process FEASIBILITY I VERIFICATION Formation of verification teams STAGE * Field visits and inspections * Team meetings to compile results and recommendations * Feedback to villages and groups FUNDING BECISIONS 2nd Kecamatans Forum Meeting (UDKPII) to select village projects for funding (SELECTION OF PROPOSALS and to select UPK (Financial Management Units), DPRD joint teams formed. * The team from one village visit another village to learn about process TO BE FUNDED) Evaluation of project staff by UDKP 11 forum in old and new kecamatans. PREPARAI'IONS FOR PREPARATIONS FOR l 3rd village meetings (Musbangdes 111) to discuss results of UDKPII meeting, elect community Implementation Team, decide on village technical assistance ~~~and elect teams to control implementation in village. Updating information on village boards * Training for implementation teams, UPKs, Village TA * Administration and release of funds. Release of funds: from the state treasury in 3 stages (40%, 40% & 20%) O from collective village accounts as needed (not by pre-set %) * Mobilization of village laborers Procurement of materials and equipment: o less than Rp 15 million, information from 3 sources (not written) IM PLENIENTATION o Rp 15 million or more, 3 quotations (written) evaluated by village teams MPLEIENTA * Implementation of village activities, loans disbursed * Supervision, monitoring, reporting and monthly meetings of facilitators * Village meetings to account for funds (when about 50% of funds expended) F * Formation of maintenance teams * Training for village councils and maintenance teams POST IMPLEMENTATION * Repayment of loans and relending of repaid funds, on UDKP instructions STAGE * Maintenance of infrastructure * Evaluation of project and staff by villagers * Village meetings for hand-over of completed projects, to account for funds used -7-

12 The design for KDP-2 is supported by a strong analytical program on how to promote community development in this time of transition. Within the World Bank-GOI partnership alone, operational studies that are directly contributing to KDP-2 include: * An Institutional Development Facility grant to develop a model regulation on village and kecamatan government reform; * A follow-up to the Local Level Institutions Study that analyzes changes in social capital and local government capacity; * A grant from the Japan Social Development Fund to develop and document methods for using community institutions for participatory planning in highly marginalized groups (widows); Relevant technical studies being carried out by the ongoing KDP project which feed into the new project design include: * An evaluative review of the media used to convey information in KDP villages; * A quantitative survey of the effectiveness of KDP's participatory planning process; * Engineering cost-benefit studies of alternative technique for building village infrastructure; * A multi-province review of KDP's experience with revolving micro-credit. * 10 ethnographic case studies of poor people's participation in KDP; * A pilot program to provide legal advocacy services and education to KDP villages; o O&M assessment of Year 1 KDP Results from these studies will be available before the new project's detailed designs are finalized. Preliminary results suggest they will be most useful for fine-tuning designs and for making local adaptations. 3. Sector issues to be addressed by the project and strategic choices: The proposed project faced two overriding choices in its design. The first was whether to push the whole program through the decentralized district government budget and administrative structures from the outset, or whether to adopt a more gradualist approach that links the budget and administrative changes to broader changes in local governance. The second was what kind of fiscal structure should the project adopt in the context of decentralization. Much of this PAD explains these choices and their practical implications. KDP-2 works closely with district governments and much of the project lays the foundation for full integration of local governments. However, Indonesia is a society that is going through an epochal transition. Institutional relationships throughout this system are being completely re-defined. Much of the old model remains embedded in them still. District governments still face problems of accountability with their lower level memberships. Furthermore, procurement and financial management reforms are just starting in districts (where they are starting at all). Until those reforms are further along, hierarchical ties between the communities and the districts are unlikely to promote the end user choice and the competitive provision of good and services to villagers that are key contributions from this project to village development. In fiscal terms, KDP fits into the special grant structure from the central government allowed by the decentralization laws as part of the country's national anti-poverty plan. At present, about 25% of the project's funds will come from district contributions through the matching grant program, which is administratively simple and yet still provides a good measure of local government commitment. Over time, however, GOI is expected to explore alternative cost-charing mechanisms with the provinces and districts, which can include on-lending IDA and IBRD loan proceeds. Such mechanisms would continue to be grants to the poor villages, but they would let the central government share the responsibility for solving poverty - 8 -

13 with those districts which have an increased ability to pay. KDP includes substantial funding to support the development of such options. Table 3.1: Polic Issues in Community Develo ment Policy Issue Past Practice Current Policy KDP-1 KDP-2 Selection of form of village Standardized, To be determined Used standard Decentralized: villagers govemment established by through groups (UDKP, add non-voting council national law kabupaten specific LKMD) members by acclaim; procedures inter-village forum chosen by members Revenue base Uniform $2,000 Transfers from Provided kecamatan Grant includes central transfer for districts are to be level competitively replacement of village used only for allocated investment investment budget for administration administration costs budget villages as well as and investment projects competitively assigned kecamatan grant; study in comp. 3 Funding decisions for Proposals District Sub-district Sub-district community generated approved at projects district or higher Accountable administration Standard design Village Provided initial Training in budgetary within villages govemance training/experience administration and established by in project funds project management for district regulation management all village funds Budget transparency None Budgets approved Budgets posted in Annual budgets+project by district sub-district and budgets discussed in parliament villages sub-district and village meetings Accountability to district Reports to district Reports to district "Socialization" of Joint monitoring by govemment executive executive executive and legislature and villagers; legislature before annual "accountability and after project. reports" to legislature. Selection of village Requires Determined on a Used existing local Village leaders agrees leadership confirmation by district by district govemment on an election process district basis institutions for project management administrator supplemented by elected representatives Introducing grievance and Complete Revitalize judiciary, Introduced Continues KDP-I but adds dispute resolution domination by remove organizing independent NGOs, pilot programs to develop mechanisms executive restrictions on journalist monitoring on-demand legal aid NGOs to govemment village services for villagers programs. Improving gender equity Women defined by National policy on Promoted women's Supports equal numbers of household roles gender participation in men and women in the mainstreaming decision-making inter-village institutions, women decision-making forum facilitators to engage (FAD). Separate planning women's groups, streams for women to rules promoted provide autonomy. proposals from women -9-

14 Civil society access to Generally Unregulated Coordinated Private sector and NGOs villages (including NGO, prohibited by through local join meetings. private banks) regulation government Technical support by public Through supply By line agencies Introduced Expands competitive agencies and budget driven competitive supply supply, in some cases line agencies within context of district.plan. Public procurement in Allowed Unclear Introduced out-of- No restrictions allowed; districts district-only district shopping for village-managed. restrictions villages C. Project Description Summary 1. Project components (see Annex 2 for a detailed description and Annex 3 for a detailed cost breakdown): Indicative Bank- % of Component Sector Costs % of financing Bank- (US$M) Total (US$M) financing Kecamatan Grants Community Capacity Building Implementation Support Monitoring and Evaluation Studies Total Project Costs Front-end fee Total Financing Required The twin purposes of the proposed KDP-II are to support better governance in rural villages and to provide rural communities with public goods and the development infrastructure that will raise the incomes of the poor. It adheres to the same basic principles found to be workable and effective in the VIP and KDP projects, that is, transparency, participation, bottom-up decision-making, village financial management, and technical and social facilitation drawn from the private sector and NGOs. Component A: Kecamatan Grants Program $310.6 million 1$232.5 millioni) The four-year project will assist villages select activities to be funded from an annual sum of money that ranges between Rps. 750 million- 1.5 billion per kecamatan, depending on their population. The grant will be made available to all villages within a selected kecamatan All villages can participate from the outset if they are in kecamatans which have already gone through a minimum of 2 years of VIP or KDP. (for the others, there would be a "step-in" period that follows the KDP model of 50% of the villages participating each year of the first two years until there is a body of trained local facilitators and participants). Grants are channeled directly to a collective bank account held in the kecamatan, (though they are recorded on the district's budget records)

15 The large majority of project funds will be used to support a competitive selection process of proposals made by community and hamlet level organizations. Grant structure -- Each kecamatan grant normally has two windows: * 70% for infrastructure, economic activities, and social services allocated on a competitive basis to proposals from villages; and * 10% to be allocated for pre-existing, successful (verified on audit) savings-borrowing schemes being operated by women's groups. Planniing Cycle -- Planning in KDP-2 begins with a long-term participatory planning exercise that takes place in each village. Its purpose is to provide the "big picture" of village needs, including reviews of past investments as part of the exercise. Villagers and facilitators do not just identify new investment needs but also the current condition and usefulness of the infrastructure they already have. The methodology for this exercise includes invitations to district line agencies, NGOs, and private investors to join the collective planning discussions and present programs which villagers can access. As part of this exercise, the villagers establish broad priorities for the annual KDP grants. This initial exercise serves three purposes: (a) it lets the villagers carry out an overall needs assessment; (b) it provides information from the conmmunities to higher-level service suppliers about locally perceived demand; and (c) it allows villagers to distribute their priorities between proposals best met by the low-tech, labor-intensive methods of KDP and needs that can be supplied by other sources of skills and resources. Final guidelines for this long termn planning process are being developed through a 100 village pilot that will be finished by the end of June, Proposals for the kecamatan and village grants can be used for public infrastructure, economic activities (where eligible), social services, and training, except for the standard negative list of items ineligible for WB financing for policy reasons. Proposals cannot break Indonesia's rules or regulations. Where these exist, village proposals must follow district planning guidelines. Thus, for example, proposals for irrigation require endorsement by the water resource planning board, while proposals for school rehabilitation must be consistent with district education master plans. Project selection will be made in sub-district (kecamatan) level fora by village delegations from subprojects that have been screened in the villages. Any community-based organization can submit a proposal, although, as with KDP, the number of final proposals that can be reviewed in the kecamatan level forum will be limited to prevent overload. Communities will be encouraged to coordinate among themselves on activities that should be taken simultaneously (i.e. providing adequate water supply to new schools) and for larger programs that require joint village participation. A maximum of 7% of a proposal can be used to hire technical assistance, which must come from a list pre-qualified by the project's district engineering facilitator. Such technical assistance is supervised directly by the district and subdistrict engineers. Project procurement, financial management, and technical oversight are all done by the communities themselves, assisted by project trainers and facilitators. Communities have the option to hire contractors on an exceptional basis for difficult works although the large majority will carry out all works through village labor. Wages are set locally at rates lower than the agricultural minimum daily wage. The standard procedures and formats acceptable to the Bank that were developed for KDP- I Annex 4 explains this system in further detail, will be continued in KDP

16 KDP-2 ACTIVITY CYCLE Program Preparations IProvincial and_ I I District Selection and Training of workshops Kecamatan Faciiitators Marintenance of Works Constructed & Rep3id Loan Funds. RevolvsiRelent Inter-village M beeting (FAD 1) Village meeting to hand over 1 Village Meeling finished works and account (Mtusbangdes 1) for all funds eenandsd Facilitator Supervislon of Implementation. Training cross village visits, reporting I =1~~~~~~~~~~~~ >7 It lvillage Village Meetings to account for funds used to date 12X min) romee Higs Special mreting wlth Releaso of Funds & woman's groups to decide on Implementation of Activities women's proposal 1l frl VI 2" Village M:tinm g l (Musbangdes 11) Preparation for implementation to decide village proposals (recruitment or village labores. 9 procufement, e:: procureme, _Preparation ec of Village and women's wiout design and budgetsi 1 r oroposats 3j Village Meeting (Musbangdes li) to, J dsiscuss results of FAD 11 and form FeasibittyNerlfication Visits village teams to oversoe iriplementation (with feedback to illagoos) 2- Intcervillago Meoting (FAD 11) to rank village projects F FK. and kader teknis hetp prepare the designs and l \I budgets for prioritized activities 3'~ Inter village Meeting tfao till to select viige projects for furding after de %gns and budgets are prepared Mlatching 2rants -- KDP-1 was a very popular program and many districts nominated more poor kecamatans to join than the project could fund. At the time, districts controlled very few of their own resources and realistically could not provided incremental funding. KDP-2 will take place in a much more decentralized environment. District interest in joining KDP-2 provides a useful opportunity to pilot more generally ways for districts to participate in centrally funded development programs. KDP-2 will offer 100% funding for the technical assistance to all kecamatans (above and beyond the standard annual allocation) which are in districts where (a) districts agree to follow all KDP rules and manuals; and (b) where they will provide the grant amount from their DAU allocation, incremental to the project grant. GOI will also authorize a partial subsidy on the grant amount for the poorer kabupatens. The subsidy will be the

17 same as the overall poverty equalization formula being used for distributing the national budget among the different regions, but project cost tables assume an average subsidy of 37.5%]. A maximum of 200 kecamatans per year can be added through this option. Districts will have to have committed in writing to the program by September 30 of the preceding year. Pilot Rrograms -- KDP is designed to provide benefits to poor commnunities by working with village institutions. But even within poor communities, there are often highly vulnerable groups who do not participate easily in village and subdistrict discussions. KDP-2 includes several pilot programs to work with local leadership and organizations on intra-village targeting of the most vulnerable groups using the basic KDP grant mechanism but involving more specialized kinds of facilitation and technical support. Each pilot will involve 3040 villages and no more than four to five provinces. Year 2 pilot programs to work with widows and female-headed households are being designed collaboratively with the National Commission on Violence Against women; and for poor coastal fishermen with the Ministry of Marine and Coastal Resources. To keep administration simple, all funds in these pilots will continue to flow through PMD, KDP-s implementing agency within the Ministry of Home Affairs. Carrying out of poverty reduction pilot projects in villages, through the provision of Grants to LKMDs. Increasing villagers' awareness of available dispute resolution mechanisms through: (i) the provision of information to villagers on dispute resolution mechanisms including the preparation and publication of a booklet on villagers' rights relating to activities under the Project; (ii) the establishment and maintenance of a data base and a filing system for disputes and their resolution; and (iii) the provision of relevant information on these matters to Project staff and Project consultants. Component B: Community Capacity Development ($65.5 million) - Although the heart of the project lies in the block grants, the longer term impact of the project will be sustained by developing within communities the ability to plan, manage, and maintain their own projects. A recurrent problem with community development strategies in Indonesia, however, is that they tend to focus on one-time generic training programs rather than developing any sustained strategy for developing capacities and transferring skills. Furthermore, until recently there has been little interest in linking up the levels of government. That is, district development programs focus on district capacities; community development on community capacities, and the two meet only rarely; much of this is attributable to the fact that vertical linkages were essentially ways to pass instructions and resources down the system, not ways to link bottom-up participation into government planning. Decentralization provides a good opportunity to change this pattern. KDP-2's strategy builds upon three principles: (i) developing village capacities requires a sustained input of training and practical experience in basic technical, facilitation and administrative skills; (ii) practical exercises that bring villagers into direct contact with district governments for specific purposes will forge many of the most important relationships needed for this level of Indonesia's local government reform program; and (iii) well managed horizontal exchanges between villages and sub-districts promote joint problem solving and lower local conflict. Component C: Imiplementation SUPDort ($40A million) -- To achieve these goals, the project will hire and train approximately 30,000 villagers and 2,000 facilitators who will work at the sub-district level. They will be the training infrastructure of the project. The detailed training program is summarized in Annex 2 of this PAD. It consists of: (i) basic skills in development planning and management (procurement, financial management, participatory design, technical skills) - 13-

18 (ii) (iii) (iv) cross-village programs in cooperative planning, ex post quality review, and conflict resolution; village linkages to the government and private sector at the district level through monitoring, long-term development planning, and community participation in district contracting; district level participatory poverty assessments and dialogue on sustainability. This component also includes approximately $0.4 million for small stipends to project participants (community leaders, facilitators, NGOs, parliamentarians, women's groups) to meet other community leaders from elsewhere in Indonesia trying to solve similar problems in community development. The center will be run by an experienced, independent NGO funded through component D. Component D: monitoring and evaluation: studies ($2.9 million) -- This component supports Bappenas and PMD's efforts to track impacts from the KDP-2 program and to seed pilot programs in a number of areas that have to do with local govemance and poverty. Under KDP-1, surveys established a statistically valid baseline for monitoring project impacts. KDP-2 will include mid-term and terminal surveys to trace both the effects of the project's institutional reforms and also hypotheses about local govemance and poverty reduction. This component also includes a study through the national statistical bureau to profile poverty more accurately in KDP kecamatans through statistical methodologies. Other operational studies envisaged under this component include second year work on community-based safety nets, revenue generation studies, and pilot prograrns on post-conflict recovery, technical support for the poor fishing communities and widows pilot programs described in Component A, above, and district-level procurement reforms needed to facilitate community participation in district procurement. These studies and pilots will begin in Years 2 and 3 of the project

19 Proiect Implementation Framework: The Cast of Characters Role of Provincial govermnent -- Provincial governments will form coordination committees that are responsible for overall project supervision. During the final stages of project preparation, working groups in each province will propose adaptations to local circumstances such as the involvement of traditional institutions, use of local languages and graphics, etc. However, the basic KDP operating principles, such as direct transfers to village accounts in order to support bottom-up planning, will be standard across provinces. Role of Local District Government -- District level governments play an important role in KDP-2 but they will not have a direct role in decision-making, which happens in the sub-districts and villages. Districts nominate kecamatans for the project (based on poverty criteria) and each forms a district level problem solving team. All KDP-2 funds enter the district accounts (KDP funds range from 3-8% of district budgets) and participating kecamatans routinely report on progress and outcomes from the program. The project's approach to district development is to strengthen capacity and accountability by increasing the number of direct encounters between district organizations and the communities. Thus, for example, the long-term village planning exercise includes presentations in villages by district sectoral managers about the kinds of programs they have that villagers could access. Similarly, the project includes a broad range of joint monitoring exercises which involves district administration and parliament making on-site visits together with community leaders. Lack of access to adequate information plagues community development in Indonesia. All too often, schoolbooks can spend months in a warehouse because nobody in the villages knows that they have arrived. Much of the work of KDP-2' s empowerment facilitators consists of finding and disseminating information. Information shared will include information about available government programs, including those that are undertaken at a larger scale, dissemination of standards, technical problem solving, and support for contract enforcement. Agencies will be available for consultation and coordination assistance, for example, by providing heavy equipment. Project proposals in the social sectors must be consistent with district education and health plans where these exist. Project financial information is registered in district budgets and financial record keeping. DPRDs (district parliaments) also play an important role in the project. They will also form joint project implementation monitoring teams together with members of the participating kecamatan councils whose job is to make site inspections. At the beginning and end of each project cycle, kecamatans will prepare an "accountability speech" for the DPRD that summarizes project accomplishments and faults. Role of Civil Society Civil society institutions play several different roles in the project. As envisioned under Laws 22&25, communities can now elect their own representative councils (BPD). Under KDP2, communities will run their own procurement, bank accounts, implementation committees, reporting and monitoring, maintenance groups, and grievance committees. Project procedures include streamlined formats and procedures to allow full local understanding and control over decision-making and financial management. Civil society organizations are also expected to play a central role in helping the communities link up with government and private social services and also to reduce elite capture of project benefits

20 Provincial-based independent monitoring by independent advocacy NGOs and the media will be continued and expanded. The project will maintain an aggressive transparency, advocacy and disclosure program through the mass media (i.e. publication of annual implementation summaries, release of all audits), an official transparency policy, and support for community-based advocacy on disclosure. NGOs are also expected to provide many of the "empowerment facilitators" described in the section on technical assistance. The pilot program on legal advocacy programs for the poor, which pairs KDP project villages with national and district advocacy NGOs and university based law faculties in two provinces, will be evaluated during the first annual workshop for possible scale-up in Year 2. Role of Technical Assistance The project will use three kinds of consultants. The first is an in-house structure to provide participating communities with facilitation, technical review, and management support. These consultants will be recruited on individual multi-year contracts at the national and provincial level and paid through a bank-managed payroll rather than through firms. The project will provide each kabupaten and kecamatan with two consultants -- a technical consultant skilled in appropriate engineering, and an empowerment consultanto support community facilitation. The project includes a significant training activity to promote the development of these skills within villages. The project will draw on the existing VIP and KDP field staff since the total package of proposed activities is too complex for an entirely new team to assimilate in a short time and because they have leamed a lot in their prior work with the program. Very little intemational assistance will be used. The second kind of consultant will be villagers nominated by the communities and trained by the project. These are like KDP's village facilitators, but they will have a broader set of roles. Eventually they will replace some of the project facilitators and be paid for in part from village and kecamatan budgets. Because the longer-term goal of this activity is to develop the capacity of villages to promote village interests, the project will include a longer-term capacity development program for them. Finally, the project will use a variety of specialized consultancies to develop local capacities through training in project management, legal aid, dispute resolution, and grassroots advocacy on behalf of villages. Initially these consultants will be managed through project contracts, but over time their services will be contracted and paid for directly by the communities

21 The major design differences between KDP 1 &2 are summarized in Table 1.1: Table 1.1: Differences between KDP 1 &2 Topic KDP I (Ln. 4330) KDP 2 Comment/Explanation Facilitation I per sub-district 2 per sub-district (1 KDP-2 includes more social, I technical) villages per sub-district; need to maintain/rehab existing facilities; greater emphasis on skills transfer. Menus Infrastructure and Economic activities Economic meant as Economic open to all limited to those transitional support during kecamatans kecamatans meeting crisis, weak microcredit repayment standards and policy environment promoting links to banks Grants All competed for at Kecamatan competitions Former standard grant kecamatan level supplemented by flat eliminated by village allocation decentralization. Village grant needed to rehabilitate infrastructure now ceded to village. Training Basic Extensive, with special Increasing handover of tasks focus on village from TA to village facilitators and local management govemment Village Planning For developing KDP Begins with long-term Will support links to other project proposals village planning vision, of government agencies and which some get presented private investors/suppliers to KDP, others to districts. Technical Standard P.W. technical Retains appraised Villager-specific technical manuals, manuals but adds and social manuals, villager activities for villager technical supervision and technical management audit. Also strengthens management training. Funding All grants from center Fixed allocation for each All KDP rules apply province. Provinces and regardless of funding districts can, however, sources. TA provided spread this over a larger through project to all number of kecamatans through matching grant kecamatans (including district matching grant participants) Selection/targeting Participation assigned Requires written annual Will need a mechanism to from master list endorsements from determine when bad proposed by districts, Bupatis, Bappedas, and performers are dropped with Bappenas DPRDs (Yr. 2) balancing among regions and provinces Kecamatan UDKP forum made up of UDKP replaced by UDKP abolished under laws institutions village LKMDs decides intervillage forum elected 22 and 25. New procedures by each village and ratified allow for popular selection of,by official letter intervillage forum

22 Role of Districts Briefings Joint monitoring, GOI will soon develop accountability speeches to appropriate equalizing legislature, public formula for subsidizing budgeting, incremental poorer districts. contribution in cash for approx. 25% of funds 2. Key policy and institutional reforms supported by the project: The community grants component has the following institutional objectives: (a) making local governance organizations more inclusive and accountable; (b) increasing the standard of public sector service delivery by promoting private sector supply to villages; (c) supporting the decentralization program by freeing district agencies to focus on district projects. (d) support more efficient poverty reduction investments by introducing mechanisms for the poor to express demand. The major policy reforms needed to do item 1 that will be sought under the project are already present in the new decentralization laws (#s22 and 25) and the proposed Presidential Instruction (Kepres) on poverty alleviation. KDP-2 thus focuses on institutional improvement and practical actions. The two strategies for improving public sector service delivery pursued under this project are (i) giving budgets directly to villagers increasingly lets them pursue alternative suppliers; (ii) the project's extensive training program in village procurement and financial management gives them the skills to become critical customers rather than passive recipients. It is believed that few additional policy reforms are needed for this (Oust lots of practice) but in practice some clarification of these new rules may be needed for MoF and audit. The project's strategy for improving links to the higher levels of government again builds from the consumer side rather than by introducing new administrative mechanisms. As the two LLI sector studies have shown, the gap between district government and communities in most areas is very large. KDP's approach for overcoming this gap rests on five activities: (i) getting villagers more information about what govemment does and how they can benefit from it; (ii) increasing the frequency of contacts with government through mechanisms such as parliamentary briefings on project costs and benefits by villagers, the parliament-kecamatan joint project implementation committees; (iii) letting villagers buy services from alternative suppliers, thus bringing competition to government; (iv) establishing district and provincial project coordination committees which resolve village-level implementation problems; and (v) establishing civil society watchdog committees and extending NGO/university based legal advocacy services to the communities

23 3. Benefits and target population: The initial target population for this project are the approximately 1,000 kecamatans (of 3,500 in the country) participating in Year 3 of KDP- 1. About 60% of these are off Java. These kecamatans were selected from a master poverty register developed using PODES and Susenas criteria. KDP's first year selected the bottommost group from each province. In Year 2 of KDP-1, provinces and districts nominated about half of the participating kecamatans, again selecting from the master list but ranking them by local perceptions of their poverty. It is expected that some 500 of these kecamatans will be replaced when the final Year 1 list is prepared for KDP-2. This is because they will have completed the 3-year KDP cycle, because of poor performance under KDP- I or else because revised survey data shows that they are no longer among the poorest. eligible replacements will be selected from a new master database that ranks kecamatans according to poverty data gathered in the 2000 household expenditure survey. Thus, virtually all kecamatans participating in KDP-2 will rank among the country's poorest (See Annex 15). Benefits from the project include the infrastructure that is built as well as improved village planning and management project. Benefits for the poor from KDP infrastructure are large. Using conservative assumptions, direct returns to the transport infrastructure average 30-50%. Nearly all of the benefits of cheaper transport are captured by farmers. Indirect benefits are also large: improved access is positively associated with better education and better health care. KDP-2 will provide approximately 89 million man-days of paid labor, which, because they self-target, will go to poor villagers. A conservative estimate of the total benefiting population of KDP-2 is approximately million people, though not all these people benefit equally.. Year 1 implementation will assess the logistical and financial feasibility of expanding coverage. As with the current KDP, once the main guidelines and staff development programs are working well, the numbers of participating kecamatans can fluctuate significantly without any major perturbance in project management. This is because very little coordination is needed between any group of kecamatans, because the basic principles of the project are very simple, and because project implementation is highly decentralized. Opportunities to expand coverage will arise if Indonesia's domestic budget picture improves or if district governments accelerate their participation in the matching grant program.project budgets assume that 200 kecamatans per year will be added through the matching grant program. 4. Institutional and implementation arrangements: Project Implementation will be through the Ministry of Home Affairs and Regional Autonomy, Department of Community Development (BPM). At each administrative level of the project, BPM will work with the local government to formn a coordinating working group (Tim Kordinasi Pengelolaan Program) whose functions are to provide information to villagers about planned development programs, to provide technical support as requested and/or required by project technical criteria, and to solve administrative bottlenecks and problems. Each level of government is supported by technical and social consultants who provide the project's field management. Consultants are contracted and paid directly by BPM, supported by a competitively selected contract management firm. Recruitment, management, and final consulting staff evaluations are the responsibility of the technical consultants, but issues of policy, administration,and long-term planning are handled by BPM and the decentralized project coordination teams. Within the sub-district and villages, communities will carry out planning through locally elected

24 administrative councils. Each sub-district and village council forns a small team for project implementation each year to help with project record keeping. Government will be supported by consultants drawn from private sector and NGO backgrounds for technical implementation Funding flows will continue to use the KDP procedures of direct, unearmarked standard grants sent through the provincial treasuries to collective bank accounts held by villagers. The advantage of this system is that it is, easy to document, and thus far, free from leakage. The project will carry out independent financial, technical, and social audits. The project operates on Indonesia's annual January-December fiscal year. The Golden Arches -- In some senses, KDP is best seen from the perspective of a franchise organization rather than as a national project or development program. If KDP II is successful, during the course of its implementation, the implications of this franchise model can be pursued as the national decentralization itself becomes clearer. Participating districts would "buy" the rule book and staff training/management procedures for their extra kecamatans, with the project funding the full costs of the technical assistance, but a decreasing share of the kecamatan grants. Each province or district could introduce a broad range of local adaptations as long as the basic principles of direct funding and participatory decision-making and management remain intact. D. Project Rationale 1. Project alternatives considered and reasons for rejection: The main reason to continue with the current approach is that KDP-2 is the natural continuation of the program started by the VIPs and KDP-1. All three are achieving the Bank's development objectives of poverty reduction despite Indonesia's turbulent working environment. By their nature, institutional reform projects such as this require long periods to come to fruition, and this was envisaged from the program's outset

25 2. Major related projects financed by the Bank and/or other development agencies (completed, ongoing and planned). Latest Supervision Sector Issue Project (PSR) Ratings (Bank-financed projects only) Implementation Development Bank-financed Progress (IP) Objective (DO) Participatory methodologies, Kecamatan Development S HS competitive allocations, NGO/civil Project (Ln.4330-IND) society monitoring Direct financial flows to villages Village Infrastructure Project HS HS outside of norrnal fiscal transfer system (Ln.4110), completed Special training programs to reorient Village Infrastructure Project HS HS engineers for community programs (Ln.3880-IND), completed Quality, sustainability, and economic VIP-2 HS retums to community infrastructure Community-managed procurement VIP-2, KDP S Feasibility of flexible programmatic KDP S rather than pre-defined annual allocations Single-sector technical support WSSLIC 2 S HS Monitoring options WSSLIC 2, WASPOLA S HS Commnunity credit management Urban Poverty Project S S Governance reforms to community Community Empowerment S S institutions Project Impacts of decentralization on local economic environments Other development agencies OECF (local contracting) FAO (horizontal leaming) ASEM/EASRD study on regional deregulation P3DT OECF Integrated Pest Management lpid0 Ratings: HS (Highly Satisfactory), S (Satisfactory), U (Unsatisfactory), HU (Highly Unsatisfactory) 3. Lessons learned and reflected in the project design: The Indonesia program, like Indonesia itself, as a whole is moving away from top-down, centrally run development programs. The three key features of the new approach are (a) a renewed focus on project

26 quality rather than just quantity; (b) a wholesale portfolio shift into demand-responsive project design; and (c) using and developing local capacities wherever possible. Particularly relevant lessons learned from past operations in the sector include: (a) (b) (c) (d) (e) (f) (g) (h) Project designs must be kept simple and flexible to cope with Indonesia's enonmous variability; High levels of participation lower projects costs and improve quality; Contractor management is very poor in Indonesia and few courses of redress exist or are used; Lack of community access to relevant information about development programs is a major barrier and lies at the root of many quality and corruption problems; Community projects require skilled facilitation in both their social and their technical dimensions. Such skills are scarce. Proper capacity development is a large investment, as shown most clearly by the innovative IPM programs. Planning periods must be long enough to allow for inclusive discussions; Big improvements can be gained in the quality of village infrastructure by supervising site designs and the quality of construction materials. There are high returns to increasing women's participation because of the improved effectiveness and sustainability of project benefits. Project planning designs must be adapted to women's needs and capacities (rather than the other way around). Most communities can meet WB objectives in procurement, financial management, and project quality provided that project formats and procedures are designed appropriately; KDP- 1 met or surpassed all its perfonnance indicators except for repayments to the revolving funds. A broad range of independent reports confirm its success at getting funds to poor villages in a relatively intact form, and the general usefulness of the process and investments funded by the project. Despite the national economic crisis that surrounded the project's startup years, community contributions in cash and kind have averaged 17%, which is significant given the average size of project investments and the po\ erty of the participating villages; furthermore, variance around this figure is very high and in some cases community contributions match or exceed the total amounts received from the project

27 Table 3.1: Year 1 performance of KDP based on Schedule 6 indicators I. Inputs Loan Agreement Actual Number of project kecamatans Number of villages with subprojects Grants and subloans disbursed (Rp billion) ff. Outputs Number of subproject agreements ,800 Percentage of work agreed that was 80% 83% completed Percentage of kecamatans visited by >20% 100% project supervision staff (nat.l and provincial) III Impacts No. direct beneficiaries 1 million 1.5 million Subloans repaid >80% Data incomplete but 50-60% % infrastructure with O&M committees formed # kecamatan accounting units operative >50% 100% Audits 5% 29% Independent monitoring 4 public locations with information # trips by journalists to sites 10 >200 KDP has also fallen short of expectations in several areas, and KDP-2 introduces major changes in how each of these will be handled (or dropped). Particular problems areas include: * ithe quality of facilitator development and management remains problematic; Programs to link complex village proposals or proposals not funded by the project itself with district and NGO service suppliers have not gone very far; Problem reporting throughout the system is sporadic; Repayment to the revolving fund in most locations was low (although it increased significantly in many Year 2 kecamatans and in some places is very high); Intervention by local officials distorts choice and often invites corruption; Leakages and abuse of power remain threats (see Annex 11) Technical support by engineering firms should have been better than it was; Inter-village cooperation on projects happens, but it is rare. Both the VIP and KDP projects have been relatively successful at avoiding most (but not all) of the common problems identified by OED as responsible for limiting the effectiveness of social funds. Despite the turbulent political and economic environment of Indonesia, KDP has disbursed at 125% of estimates at a time when the portfolio average has hovered at 40%. Furthermore, KDP went through a very fast startup, and both VIPII and KDP were scaled up by more than 50% after their first year of operation. As a result, Year 3 of KDP was supplemented by a $48 million Credit, which is also expected to be fully disbursed one year ahead of schedule

28 The VIP and KDP experiences provide many useful lessons about how decentralized project designs whose first audience is made up of subnational stakeholders should differ from standard project designs whose audiences are central agencies and the Bank. These include: (a) (b) (c) (d) (e) (f) (g) Monitoring should focus on flexible approaches that combine tabulated data with qualitative and participatory monitoring in which site visits and autonomy are key. Their findings should be conveyed through very brief written summaries, routine multi-stakeholder workshops, minuted agreements and follow-up actions. These need to be budgeted; Getting officials from all levels into the field is the key to changing hearts and minds - policy dialogue is useful and sector work also provides guidelines on better ways to do things, but making these projects not only sustainable but also interesting to local governments requires a large number of "events" and opportunities to visit sites themselves. Funds for this should be channeled through private contracts; Linkages to district governments, though important, also carry with them many risks, and the process of strengthening them must be staged carefully-- Initially communities need more distance from government line agencies than most projects allow them. Later, once the rules are established and familiar, bridges can be built and more equal partnerships developed. Otherwise government often takes over and "guides"; Technical designs must be kept simple and recurrent costs low This kind of project stands or falls on the quality of its kecamatan and village facilitators -- There are large returns to top-quality field staff management and development. KDP-2 provides more job security, career development options, and incentive programs for high performing facilitators. Special audit socialization procedures are needed - Local audit agencies do not automatically grasp revisions to national audit procedures. Without special training and uniform TOR for auditors, villagers will be penalized even for following project rules exactly; Fully targeted selection breaks down in subnational projects. It is nearly always better to use formal methods to get into the right playing field, but then use self-targeting at several levels to agree on who participates. 4. Indications of borrower commitment and ownership: Borrower commitment to the program is very high as evidenced by the following indicators (a) (b) (c) (d) (e) Adoption of KDP mechanisms across a broad range of donor and nationally funded sectoral initiatives; During implementation of KDP-l, the government added $25 million to its contribution so that KDP mechanisms could channel fuel subsidy transfers to off Java villages. The government also complemented KDP-I shortfalls with a $48 million Supplementary Credit at a time of drastically reduced foreign borrowing; Project supervision missions involve high participation by all participating agencies, and field findings about KDP are discussed in inter-agency meetings. The project secretariat has written requests from district administrators around the country to add 417 more kecamatans, and in at least five provinces local governments are already twining KDP with their own funds; Evidence of community ownership can be seen in the very high levels of local contribution, despite the project's lack of any mandatory contribution. Average total contributions for Year 2 of KDP came to 17% despite the relatively large size of individual projects. There are several cases where community contributions matched those of the project

29 (f) GOI's strong anti-corruption follow-up actions on KDP (See Annex 11). 5. Value added of Bank support in this project: The project fits closely with core CAS objectives of supporting more participation in development, better poverty reduction programs, and more effective governance. KDP- I gave a strong start to commnunity-driven development for rural Indonesia by introducing new ways to work with local institutions. KDP was large enough to show that participatory principles can work on a large scale in Indonesia, and that results from community owned projects can meet all Bank and Govenmment standards for quality, accountability, and financial management. KDP also introduced innovative ways to involve civil society. Nevertheless, from the beginning KDP was meant as the first stop on a longer-term program to reform local govemance and improve development effectiveness. Bank involvement contributed the following elements that would not have been otherwise available: (a) comparativ experience with community programs; (b) expertise to allow direct procurement of goods and technical assistance by villages; (c) procedures, guidelines, and training for sound financial management by villages; (d) direct payment mechanisms for independent NGOs and joumalists to monitor project performance; (e) intensive field supervision. The Bank's added value also comes from its involvement in financial management and procurement. Bank vigilance through prior review and project supervision provides needed support for the government reformers trying to implementhis project in an institutional environment riddled with risk and leakage. Reformers inside the govenmment repeatedly singled out the Bank's role as one of their few institutional allies with enough weight to make reforms stick as a key contribution, without which progress would be very slow. E. Summary Project Analysis (Detailed assessments are in the project file, see Annex 8) 1. Economic (see Annex 4):.: Cost benefit NPV=USS million; ERR = % (see Annex 4) * Cost effectiveness O Other (specify) Since the KDP-2 project builds many of the same items and uses essentially the same methodology as VIP/KDP, the same evaluation methods will be used. VIP's Project Completion Report assessed intemal rates of return for primary infrastructure at 35-40%, a level confirmed by sample surveys for KDP-1. Off Java levels will vary but on balance be lower than this; nevertheless, they can be expected to be no lower than 20% even in conditions of low density and low economic potential. Important but not counted benefits from KDP infrastructure include significant health and education benefits. A quantitative assessment of off-java internal rates of return based on completed KDP infrastructure will be available by the end of Year

30 Summary of VIP Cost and Benefits (from ICR): A Year 2000 survey of 479 sample VIP villages (drawn from all 3 years of the 1995/6-1997/8 program) shows the following yearly benefit range: VIP infrastructure built /98, yeal y rupiah benefit range re ported (% of villages) 1/ Rp. Million From increased usage (%) From cost savings (%) Total benefits (%) , Totals I/columns may not total 100% due to rounding. 100%=479 villages About 4% of the villages reported no benefits, and projects there would not have been justified. Projects in as many as 15% of the villages would not achieve cost recovery based on the above benefit spread and a 10 year economic life for the infrastructure built by the project. On the other hand, approximately 40% of the villages achieved cost recovery within a single year, with yearly benefits of Rps. 120 million and above. Some poor subproject returns may be due to the fact that benefits not revealed in cash are not expressed in rupiah (i.e. health from better water supply and sanitation). Road projects (75% of total projects) stood up well, with 12% deficient and 53% in good condition five years after the project. Bridges are in better condition than roads, while water supply deteriorates more quickly (21% deficient after 5 years). These infrastructure types are likely to last 10 years in reasonable condition. (The exception is sanitation, which shows 50% deterioration after 5 years). Even assuming that projects off Java last only 7-8 years (because of tougher conditions), the project as a whole is justified with a 10% return if the project's useful life averages only 5 years. The average numbers for just roads and bridges in the project result in a cost recovery of only one or two years, with an economic rate of return of 50%. Cost effectiveness: Projects built through KDP and VIP methods cost 15-30% less than traditional methods of line agency construction, even after discounting community contributions. A WB-ADB-UNICEF review of multi-versus single sector water-supply projects also found the multi-sectoral approach to be most cost-effective. 2. Financial (see Annex 4 and Annex 5): NPV=US$ million; FRR = % (see Annex 4) Economic activities normally provide full cost-recovery within the first 18 months. Infrastructure such as roads provide cost-recovery within three years on Java and four years off-java. Fiscal Impact: Village infrastructures built through KDP methods cost significantly less -- on average about one-third but in many cases more than half less -- than equivalent works built through Ministry of Public Works contracts. Because the project provides grants to kecamatans, no costs are recovered by the project. Fiscal impact from the project is small. Communities are responsible for maintaining works built by the project and thus pose no incremental burden on the government budget. At the national level, a Bank/IDA blend at intemational interest rates and with 5 and 10 year grace periods postpones the fiscal costs of the project and avoids raising more expensive (and unavailable) local revenues

31 3. Technical: [X] Summarize issues below (e.g., appropriate technology, costing) []To be defined (indicate how issues will be identified) [ ] None There are no major or new technical issues to be resolved for the infrastructural activities since VIP and KDP have already developed and used technical manuals for the kinds of infrastructure chosen by Indonesian villages. In the past, the main technical difficulty has been getting engineers more used to the poor quality practices of local contractors to follow the manual's technical standards. The solution to this has been intensive technical training and supervision. KDP-2 doubles the ratio of technical specialists available to villagers; increasing their presence allows for a much more hands-on supervision and training program than was possible in KDP-1. As noted below, there are issues that arise with the role of technical services in the program and how they can fit with the demand-responsive approach of KDP-2. A technical manual for the expanded infrastructure menu was appraised. Maintenance is included in the design of the VIP/KDP programs. Part of sign-off (and performance indicators) is that all infrastructure have some version of an O&M committee, with a source of revenue and work program. The general O&M caliber is acceptable but it can be improved. Data on maintenance comes from three sources. KDP's 2nd Annual report includes the following: Activity Yr. 1 Loan Actual Yr. 1 Yr. 2 Loan Actual Yr. 2 Agreement Agreement (halfway) % infrastructure >50% 90% >50% 60% subprojects with O&M committees A survey of facilitators in Year 2 found that 88% of the infrastructure projects are being maintained by the communities (defined as ongoing collection of user fees and with posted maintenance schedules), and 67% of O&M committees were still active. However, KDP is only a year and a half old. More revealing is the 5 year VIP-I ex post evaluation done on Java and Sumatra. Table 3 summarizes results from a 5 year post-completion engineering review of VIP: Table 3: VIP 5 Year Ex Post Quality Evaluation Type # Vill. S %S SD %SD S+SD %total Roads Bridges Water S Sanitation Jetties S=satisfactory; SD=somewhat deficient and N=1,635 villages In short, serviceability of all infrastructure five years after handover was still high, with the exception of latrines (MCK). Chi-square analysis of distributions between quality and maintenance showed high correlations, with the strongest relationships showing for roads, followed in order by water supply, sanitation, and bridges. However, no causality can be inferred from the data - does better quality lead to better maintenance or does better maintenance lead to better quality? The report author assumes both are

32 probable. OED's draft report on VIP I also found that "the improvements to rural roads...seem to have been sustained.., almost three-quarters of the village chiefs interviewed claimed that roads are better maintained now than they were five years ago....sustainability is rated as likely." Surveys of maintenance on Java and Sumatra found that two-thirds of the villages on Java had maintained their infrastructure, but slightly less than one third on Sumatra. They also show that five years after finishing, more than half of the Javanese villages had named maintenance organizations while only one in eight Sumatran ones do. This shows that other organizational forms besides O&M committees can maintain infrastructure. KDP surveys also identified some recurrent O&M problems. First, facilitators are usually too busy with current activities to support O&M from prior years. Second, many of the O&M committees are not accountable to communities. They were appointed by village heads or LKMDs. Third, sometimes user fee management is not transparent. Finally, there are many cases where dinas's offer to fit the village infrastructure into their routine maintenance plans, at which point the villages stop maintenance but the kabupaten activities do not materialize. KDP surveys also found very large regional disparities. Project O&M group averages were pulled down significantly by NTT (60%) and Inian Jaya (30%), places probably in need of a different O&M strategy altogether. For the new option of education, technical concems revolve around how and whether to allow communities to recruit and manage contract teachers in ways that ensure the quality of education. Issues are (i) coordination with district plans (where these exist); (ii) sustainability; and (iii) quality. TOR for this activity have already been developed and reviewed by HRD, which will manage preparation of this type of investment choice. These options will not be entered into the project manual until HRD has cleared them. Several sectors will be concemed about overlap with community-chosen programs and plans conceived and executed at higher levels. Two mechanisms deal with this. For areas where there is an obvious need for higher level aggregation (i.e. assigning health care workers and teachers, water resource sharing), project rules require coordination with the district plans and, in the case, of water and schools, approval by the district board before they can be funded. But for projects planned for villages, the main mechanism is transparency: to the extent that sectoral programs break precedent and tell villagers and kecamatan leadership what's been budgeted for the near future, overlaps will be avoided by villagers using their own funds on other priority investments

33 4. Institutional: [XX] Summarize issues below (e.g., project management, M&E capacity, administrative regulations) []To be defined (indicate how issues will be identified) [] None The main institutional issues revolve around the evolution of Indonesia's decentralization program. The project implementation period will witness the issuance of a large number of decrees by district governments that define responsibilities, establish revenue bases, transfer management control, and introduce an accelerated hands-on learning process for local government. KDP will be somewhat shielded from much of this turbulence because it does not rely on the formal government apparatus, with the important exception noted elsewhere that rules to establish new kinds of kecamatan and village administration will be issued by districts. KDP's basic management design consists of a small national team within BPM supported by a management consultant. Local governments appoint an agency or a multi-sectoral team to coordinate KDP activities. The person or head of the team is an official charged with community empowerment and development. This team coordinates the work of the implementation consultants and ensures that administrative requirements are met properly. Each level of implementation consultant reports directly to the higher level consultant, except for the national team, which reports to the national project manager. At the national level, the main government capacity issues refer to contract processing, invoicing, and audit, as follows. The project will involve approximately 45 contracts for firms and NGOs, and a payroll of more than 2,500 technical and empowerment facilitators. The government will hire a competitively selected procurement/contract management agent to assist with procurement, invoicing, and payroll management. BPKP, the national audit board, has done a credible job auditing KDP. It will be continued. However, both the VIP and KDP projects have faced problems with other auditors in Jakarta and the regions who do not use the project's loan documents as the basis for their auditing work. Negotiations agreed that BPM will instruct local govenrments to use the agreed BPKPK audit manual for all KDP auditing. Monitoring and Evaluation - Monitoring and evaluation are highly problematic in Indonesia. The experience of VIP and KDP points to a number of recurrent problems: Reporting bad news is not rewarded by authorities; Written reports are not an effective form of communication; * Typical monitoring assumes a Jakarta or Washington audience; * Quantitative monitoring is plagued by bad survey management and little interpretation; Indonesia's huge distances imply very high monitoring costs

34 After much bad experience with independent monitoring, both projects concentrated on producing a high-quality in-house monitoring system that was built around a computerized Management Information System. KDP added two innovations that tumed out to be very useful: independent monitoring by at least one advocacy NGO in each province, and a blind contract with the Indonesian Association of Independent Journalists to send reporters into the villages and publish their stories in local newspapers. The NGOs join monthly meetings in the districts and provinces where their main findings are also presented orally. NGO coverage will increase in KDP-2. BPM will also publish annually the project's complaints database in national and provincial newspapers both to inform the public of actions taken and to increase people's faith that the problems they report get taken seriously and resolved. A summary of the proposed monitoring for KDP-2 is given in Table 4.1 Table 4.1: Summary of KDP-2 Monitoring and Evaluation No. Activity Objective Implementing Output AencY 1 Management Information Project management of BPM consultants Monthly reports, System all field, budget, and databases planning 2 Monitoring by Government Report on field progress, Home Affairs at Reports on Officials trouble-shooting all levels, special problems identified teams, audits and solved 3 Community monitoring Within village trouble Community Minutes from shooting members meetings, letters 4 Ethnographic case studies Document lessons M&E staff 6-8 case studies learned and best per year practices 5 Complaints resolution process Document and resolve Monitoring Complaints field problems Complaints Unit database 6 Financial Supervision and Review record-keeping National financial Quality reviews. Training and identify training supervision and Needs assessments needs _ training unit External Monitoring 7 NGO province based To provide independent, provincial Monthly reports monitoring critical information NGOs 8 Journalists To provide independent, 18 provincial Articles published information in public journalists in local domain newspapers 9 Impact Evaluation To provide statistical Private survey firm Report on baseline measures of institutional survey of 4,500 change and poverty HH and impacts community leaders 10 Financial Audits To audit KDP finances BPKP Audit findings (distributed l publically) 11 Technical infrastructure study To assess O&M External Report consultant team (5 people)

35 Sanctions - The national government was reluctant to apply sanctions even when there were well-proven examples of kecamatans not following project rules or documented cases of corruption. The most common problems are intervention by local government in project choices, and collusion between local government and in some cases project staff in project procurement. This tendency will be even more pronounced with the increased local power of district governments. In KDP- 1, over time the government became more willing to use administrative and legal sanctions in these case (with results that range from funds being returned to recalcitrant kecamatans being dropped from the project), but a more effective sanctioning system must be developed for KDP-2 to prevent localized KKN infections from spreading. Overall, however, the general trend is positive. At the district level, the key project institutional issues are about how best to extend and deepen the socialization program for DPRDs; improve the fit between the KDP-2 community model and district budgeting; clarify the administrative status of subdistricts and village governments; and continue the training program for kecamatan staff. 4.1 Executing agencies: BPM has recently been reorganized. Appraisal must assess whether the new organization retains appropriate skills and high-level access for problem solving. 4.2 Project management: The current management structure is acceptable but it needs to be re-organized in order to deal with KDP-2. It's two key problems are weak coordination between the monitoring/training wings and the operational divisions which manage fieldwork; and lack of rigor in client responsiveness. Measures to address these problems are: (i) decentralziing the regional management responsibilities to province-based command centers; (ii) performance benchmarking and semi-annual workplanning; (iii) a BPM policy statement integrating the technical lines of command; and (iv) unifying training and operations. 4.3 Procurement issues: A procurement assessment has been produced for the project and is on file. It is surmnarized in Annex 6. KDP-2 has been assigned a "medium" risk. because the project has so few large contracts to procure (about 5). Project specific procurement risk is relatively low, although country procurement risk remains high. 4.4 Financial management issues: A financial management risk assessment has been prepared for this project and is available on file. Its findings are similar to those of the procurement assessment: country risk is high, but internal financial management is acceptable. Because such a large proportion of the project takes place in villages, Annex 4 provides a more detailed presentation of KDP's financial management and reporting system. 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. a. [X] Summarize issues below (distinguish between major issues and less important ones) [ ] To be defined (indicate how issues will be identified) [ ] None Major: The only major issue is the high likelihood that communities living in protected or environmentally vulnerable areas will want to build connecting roads. Other: A environmental data sheet has been filed separately. Environmental issues refer primarily to impacts caused by small scale infrastructure construction. The project will use an environmental screening

36 procedure that sifts out forbidden projects (i.e. community roads into protected areas). Mitigable impacts will be addressed through standard operating procedures that are built into project manuals and training programs. This approach has been used for both the Village Infrastructure and first Kecamatan Development Project. Environmental Screening and mitigation criteria for KDP-2 are given in Annex 13. b. Environmental category: [ ] A [XX] B [ ] C c. Justification/Rationale for category rating: B - Impacts from any one subproject are small and can be covered either through the project negative list, or else through standard civil engineering operating procedures. The prior project has had several field reviews by WB environmental specialists; furthermore, some of its independent monitors come from environmental activist NGOs. Both confirm that adverse environmental impacts are limited and small. d. Status of Category A assessment: EA start-up date: Date of first EA draft: Current status: e. Proposed Actions: The main actions proposed are to conduct a special environmental review of VIP and KDP to see what environmental problems have arisen in practice, to update the project manuals and review training modules, and to add "roads in protected areas" to the project's negative list. An experienced environmental consultant will produce an environmental checklisto be used for project training and monitoring. The project's annual report will summarize environmental issues and actions taken. f Status of any other environmental studies: None g. Local groups and NGOs consulted: Consultation and openness have been a key part of K1DP, and KDP II will extend this. Project preparation included a workshop with independent NGOs to discuss mechanisms for meaningful civil society dialogue in each province. The main lines of the consultation strategy for KDP II are as follows: (i) regional workshops for civil society groups and local government will be managed by independent NGOs selected in consultation with the provincial NGO fora. These began on April 5-7th with a workshop for 21 NGOs and will continue throughout the year; (ii) a consultation program for all provincial and district parliaments, which also began in April and will be completed before effectiveness; (iii) an information package that includes the project's transparency/disclosure policy, basic project documents, a collation of independent monitoring and reporting studies, the proposed budget, and an online database that has all core KDP documents; (iv) on-site workshops to discuss evaluations and recommendations made by commnunities at the end of their Year 2 cycle under KDP- I (approx. 10% of the kecamatans). (v) A national workshop whose purpose is to consult national NGOs and central agencies will take place after the regional consultations are finished so they can address national issues that were raised by the regions. This is currently scheduled for November, h. Resettlement [] Summarize issues below (e.g., resettlement planning, compensation) []To be defined (indicate how issues will be identified) [ ] None No significant resettlement is anticipated (none has been experienced in the VIP and KDP projects). Village subprojects that would involve displacing or seriously affecting more than five families require a full resettlement plan, a criteria that has been strikingly successful in encouraging a more

37 vigorous than usual search for alternative designs. Projects that affect less than 5 families will require payment of cash compensation or the provision of alternative productive land as part of the subproject approval. Affected families will also have to agree with the proposed compensation arrangements, as discussed and recorded in open village meetings. Indigenous people's concerns are met primarily through the design of the project itself since the whole point of demand-driven investment funds like KDP is to allow local decision making over how development resources get used. KDP- 1 experience showed that there are four particularly important concerns in how KDP approaches indigenous communities: (i) developing dissemination materials collaboratively with local communities (issues of language, graphics, etc); (ii) identifying appropriate, inclusive decision-making mechanisms in environments where indigenous groups are politically and culturally marginalized; (iii) finding a balance so that groups (i.e. women) excluded from traditional institutions can also join project processes; and (iv) marginalized indigenous groups are especially vulnerable to problems of elite domination and corruption. KDP-1 included several adaptations to address such concerns (i.e. using NGOs with established field presences to manage the program, recruitment and training of facilitators from these communities, special logistical support, police investigations of leakage, etc.) The project will work closely with local groups to make sure that the new project builds on the best of these experiences. Indigenous people's development program for Irian A somewhat more specialized approach is needed for Irian Jaya. In Irian, the core problem lies in the structural exclusion of indigenous communities from "mainstream" activities. These include government and business, but other normalizing institutions such as higher education have disproportionately low Irianese participation. KDP- 1 experience in Irian shows that while there are no adverse outcomes attributable to the project, benefits to Irianese communities are also less than they are elsewhere. Participation and awareness are low, intervention is high, and the quality of finished product is often not very good. KDP- I made some adjustments to Irian's unique circumstances. All of the project staff are now themselves Irianese, although for higher levels (i.e. engineering) it was not possible to recruit staff with engineering credentials similar to those in other provinces. Because of the province's very large distances and lack of super-village organization, decision-making was pushed from the kecamatan to the villages. Traveland communicatons allowances for facilitators have been increased, and in one especially hard to reach subdistrict implementation was delegated to a church-based NGO which had an established field presence in the villages. Extra supervision has cracked down hard on intervention and corruption, with strong support from the provincial and central government. Travel and staffing allowances have also been adjusted to accommodate the vast distances and difficult terrain. A specific proposal made by the Irianese staff and progressive government officials has been to focus more on capacity development. Discussions with NGOs, church leadership, and local government in Irian have identified the following program. Each subdistrict will use a civil society-local government

38 awards committee to identify the three best high school students (at least one woman) in the sub-district. They will receive a one-year fellowship to the provincial university, which will give them an intensive program in technical design and community facilitation that is designed and managed together with the KDP field staff. While they are there, a skilled, non-lrianese engineer will be placed in each kecamatan, as per KDP standards, to begin work on community infrastructure. In the project's second year, the students will receive on-site mentoring by the kecamatan engineer. At the end of the program they will get an equivalency certificate and become the project engineers for Year 3 and onwards. Preparation of this program is advanced. Negotiations ratified the special program for Irian. GOI requested that the program principles developed under OD4:20 be expanded to include other indigenous groups currently not participating in KDP (i.e. Mentawai), and the final loan documents reflect this agreement. Their application will be determined on a case-by-case basis. i. Borrower permission to release EA: [] Yes [] No [XI N/A j. Other remarks: 5.2 What are the main features of the EMP and are they adequate? 5.3 For Category A and B projects, timeline and status of EA: Date of receipt of final draft: 5.4 How have stakeholders been consulted at the stage of (a) environmental screening and (b) draft EA report on the environmental impacts and proposed environment management plan? Describe mechanisms of consultation that were used and which groups were consulted? N.A. 5.5 What mechanisms have been established to monitor and evaluate the impact of the project on the environment? Do the indicators reflect the objectives and results of the EMP? Impacts are small and not amenable to remote monitoring. Environmental indicators are built into the supervising engineer's monitoring and reporting requirements. 6. Social: 6.1 Summarize key social issues relevant to the project objectives, and specify the project's social development outcomes. Both KDPs draw heavily on two Bank funded sector studies of local institutions as well as an increasingly rich body of literature about local govemance and social change in the post-soeharto era. KDP has also undertaken a range of social studies, including am ongoing comprehensive assessment of information flows and project media in project villages. By way of summary, the main social findings from these studies are that: The center of community organizing lies at the subvillage level; Strong organizing capacity is tied to multiple bases of leadership; accountability; institutional forms of conflict mediation; the cohesiveness of traditional institutions; multiple sources of external support; sources of new ideas; * Low capacity does not mean that there aren't effective groups or innovative ideas; it usually means that there are fewer of them and they operate at lower organizational levels

39 Poor and women are not isolated from community organizing but they do not have the same access to decision-making as the better off and men; this also applies to community run initiatives; * Information bottlenecks constrain both the administrative and technical quality of conmmunity initiatives Written documents give too much power to the officials who decide who has access to them; The relationship between poverty and social capital is manifested not just at the level of households, but also in communities. Poverty gets maintained by the difficult and almost nonexistent access that communities have to higher-level decision making; * Restrictions on organizing by civil society and organizational competition from groups created through development projects has in many places weakened traditional organizing without providing a satisfactory replacement. Positive lessons from the social assessmenthat are reflected in the project design include: There have been far-reaching changes in local governance in Indonesia since the fall of Soeharto and the drawn-out transition that has followed. An important new development has been the re-assertion of traditional leadership and governance in many villages; * High performing and dedicated community organizers can play a crucial role in project success. They are involved not only in providing technical assistance, but also regular facilitation of discussions for problem solving and consensus building; e Proactive government officials at the sub-district level perform vital functions of conflict mediation, coordination, facilitation, and problem solving with community leaders and village-based extension workers; - Using oral media to convey information increases the transparency and accessibility of project discussions more than written handouts, instructions, and most graphical material; - Written invitations to village meetings are forbidden; - Successful, inclusive village planning requires more time than traditional projects provide; the payoff for the extended planning process is more ownership and an increased likelihood that decisions reflect opinions outside those of the village elite; Using women facilitators and providing special planning and decision-making channels for women' s groups can produce dramatic increases in women's involvement in final decision-making. Pesantren PPK -- Ouantitative evaluation -- The project carried out a quantitative review of KDP's impact on awareness and participation in 7 provinces using matched pairs of kecamatans and a 4,500 HH survey. Results from the first survey round found that (a) it was methodologically possible to establish KDP-non-KDP kecamatans which could provide a control for impact measurement; and (b) even before the kecamatan decision meetings, KDP's socialization program made a statistically significant impact on participation in the program, trust in local leadership, and on women's involvement in planning. Gender -- KDP- 1 included a number of measures to promote gender equity: affirmative action recruitment programs for field staff, equal numbers of male and female village facilitators (a total of some 14,500 village women were hired and trained to be facilitators). All project field staff receive a module of gender training and Year 3 of the project incorporates a variety of new methods to increase women's participation in decision-making

40 Results have been positive for participating women in two ways: much greater involvement of women in village and kecamatan planning and decision meetings, and a number of subproject selections that directly benefited women, especially poor women. There is also a much greater acceptance of gender concerns among the government staff and consultants than there was in the beginning of the project, and several local groups have developed gender sensitive programs of their own. Nevertheless, there is plenty of room for improvement. Women's participation in the apex decision meetings drops significantly, and as a result proposals from women's groups often receive lower priority. Limiting the number of proposals to two per village which get decided in village-wide meetings as was done in KDP, acted against women's groups, which usually have a smaller membership than men's groups do. Women faced communication problems: poor women are more likely to lack fluency in Bahasa Indonesia than poor men are, and the project did not have a good overall strategy for producing socialization materials in local languages. Women facilitators and engineers also faced on-the-job pressures that their male counterparts didn't, and the project did not produce a good support program for an already difficult working environment. The new project builds on the lessons from KDP by focusing on three particular areas: identifying formats and media that reach poor rural women; developing a separate planning channel for women's proposals (the "musbangdes-perempuan") rather than pooling them in the final decision meeting; and improving the open menu and project selection principles so that women's proposals do not get screened out by project design rules. The new facilitator training program includes more in-depth attention to gender, drawing heavily on successful experiences identified by the facilitators from the first KDP program, and monthly group evaluation programs include a review (and modification) of field efforts as they happen. Women facilitators face a special constraint caused by access to transportation; this must be solved locally, but in KDP-2, field teams have both the mandate and the budget to work out appropriate solutions to this problem. Finally, the project includes a 10% line for sub-village level revolving funds that can only go through pre-existing women's groups. The intemational arena has a growing number of good tools for mainstreaming gender and poverty sensitive approaches; until recently, there have not been many well trained people or NGOs who could adapt them to the needs of large projects and rural social organizations. The new project will draw both on this literature and on the lessons coming from the JSDF-supported pilot for community based rehabilitation of widows to improve its gender performance. KDP-2's action plan for integrating women into the project follows:

41 Table 1. Action Plan for Integrating Gender in KDP Stage and Activity PLANNING and PROPOSAL SELECTION Socialization and Dissemination of Information Provincial and District Workshops Staff selection and deployment Facilitator training Provincial manual preparation First FAD (inter-village) meeting First village meetings Village facilitator training Socialization in hamlets and collection of suggestionsfor activities Dusun socialization Selection of activities and preparation ofproposals Musbangdes 11 Proposal writing Verification and design Verification Design IMPLEMENTATION Physical Activities Recommendation to ensure gender mainstreaming and equality * Discuss women, poverty, and participation * Explain gender goals of project and poverty reduction strategy * Determine number of male and female facilitators to be recruited per province to promote gender balance * Advertisements for all new project staff should state that "women strongly encouraged to apply" * Ensure all kabupaten teams are mixed male and female * Include gender-related issues (meeting techniques, timing, facilitation, etc) * Identify local specific and acceptable ways to 1) disseminate information to women, ii) ensure women can participate in all aspects of the program. * Six people from each village - minimum of three women * Explain gender aspects * Select facilitators - one male and one female (overall 3 of the 7 people receiving honorariums in the village should be women) * Importance of ensuring women's participation (sp. attention to transport issues) * Identify local women's groups, networks, and meeting places * Use identified methods to ensure all women know about and have the opportunity to suggest activities. * Identify sustainable simpan-pinjam groups at least one year old * Ensure 40% of participants are women * Second proposal to come from women * Ensure that women are involved in preparation of proposals for the activities they suggested * Involve women on team * Involve women in design if they have proposed the project, or will be beneficiaries of it. * Include women in visits to other villages to discuss proposals * Include women in implementation and monitoring teams * Open opportunities for women to work on projects for equal wages as men

42 Capacity Building REPORTING, MONITORING, and EVALUATION Reporting Monitoring Evaluation PROJECT MANAGEMENT Consultants * Include gender in training for all levels * Ensure gender balance among participants * Include the participation of women, and gender equality in dialogue, and discussions * Use cross village trips by women, and visits by role models to promote women' s participation in areas where this proves difficult. * Include indicators regarding women's participation in reports * Ensure gender balance in monitoring teams * Monitor women's participation * Participatory studies to review project impact on improving gender equality * Gender balanced teams * Include in TORs * Staff responsible for gender * Create working group on gender to discuss workplace issues, combining dual roles, and encourage women staff to support each other. Monitor gender balance in team, wage discrepancies, promotions etc. 6.2 Participatory Approach: How are key stakeholders participating in the project? a. Primary beneficiaries and other affected groups: [X] Name and describe groups (how involved, and what they have influenced or may influence.) Not applicable (describe why participatory approach not applicable with these groups) The major purpose of the project is to promote local-level participation, and participation is the core of project implementation. Aside from the obvious examples described elsewhere in this PCD, other mechanisms to support participation in the project include: (a) (b) (c) initial village scoping exercises to identify all traditional and customary social groups and build them into the village facilitators socialization schedule; banning written invitations to village meetings so that all invitations get announced in public meeting places; pilot programs to work with primary stakeholders often excluded from development projects, such as poor widows (4 provinces); and adat leaders and groups. Primary stakeholders have an increasing number of channels to affect the design of KDP-II above and beyond what can be modified within their own kecamatans and villages. For example, > Village facilitators (elected by the villagers) increasingly join the annual regional and national planning workshops; > Annual evaluation meetings include an evaluation of the project staff by villagers, which includes their recommendations for improvement; > Briefing teams for district parliaments (who must approve KDP) include representatives elected by village councils; Selected villagers and local leaders are invited on World Bank-GOI project supervision cross-visits;

43 6.3 How does the project involve consultations or collaboration with NGOs or other civil society organizations? [XI Name and describe groups (how involved, and what they have influenced.) [ Not applicable (describe why participatory approach not applicable with these groups) Other key stakeholders and the ideas they've suggested include: (a) NGOs - ideas on transparency, extended training for local government, simplified procedures for NGO involvement, feedback on information sharing; (b) 4th estate - feedback on independent monitoring, program in investigative joumalism training for community/poverty programs. 6.4 What institutional arrangements have been provided to ensure the project achieves its social development outcomes? 6.5 How will the project monitor perfonmance in terms of social development outcomes? 7. Safeguard Policies: 7.1 Do any of the following safeguard policies apply to the project? Policy Environmental Assessment (OP 4.01, BP 4.01, GP 4.01) Natural habitats (OP 4.04, BP 4.04, GP 4.04) Forestry (OP 4.36, GP 4.36) Pest Management (OP 4.09) Cultural Property (OPN 11.03) Indigenous Peoples (OD 4.20) Involuntary Resettlement (OD 4.30) Safety of Dams (OP 4.37, BP 4.37) Projects in International Waters (OP 7.50, BP 7.50, GP 7.50) Projects in Disputed Areas (OP 7.60, BP 7.60, GP 7.60) Applicability 0 Yes 0 No * Yes 0 No 0 Yes * No 0 No 0 Yes * No Yes 0 No * Yes 0 No 0 Yes 0 No 0 Yes 0 No 0 Yes * No 7.2 Describe provisions made by the project to ensure compliance with applicable safeguard policies

44 F. Sustainability and Risks 1. Sustainability: The project supports Indonesia's large decentralization program and is thus part of a transitional strategy that will change as responsibilities and opportunities become clearer. The project's sustainability is expected to come from three sources. Fiscal sustainability derives from the increasing share of the project budget that is assumed by local government. These will be incremental amounts and include a share of the village grant, not just district overhead costs. Furthermore, under the new decentralization laws, communities have much more ability to retain taxes and fees than before. By Year 3 of the project, villagers will have taken on all normal O&M functions. The matching grant program described in the text is also intended to normalize the eventual shift of KDP into the regular system of budget transfers. GOI will explore arrangements for expanding the matching grant prograrn or alternative onlending terms during early project implementation. Technical sustainability is expected to come from communities greater sense of ownership, the O&M plans required for each subproject proposal, and the broad-based transfer of project planning and management skills to villages. KDP-2 also has a strong program to train villagers in infrastructure maintenance. Social sustainability derives from the restoration of community ownership over commnunity institutions and development decision-making. This is not just about "general" principles of ownership: under the New Order, communities were actively prohibited from maintaining much village infrastructure. KDP-2s program lifts those bans and provides structured ways for villagers to take responsibility again for maintaining what they've built. Over the longer term, sustainability of the project will come from incorporation of the project's principles into community development and funding approaches, and the disappearance of individual project interventions (i.e. no KDP IV and V). 2. Critical Risks (reflecting the failure of critical assumptions found in the fourth column of Annex 1): Risk Risk Rating Risk Mitigation Measure From Outputs to Objective Macroeconomic volatility KDP can shift into more labor intensive activities Relations with IMF program deteriorate KDP largely shielded because it is a poverty program Macropolitical risk of civil conflict Flee From Components to Outputs Input cost prices rise significantly Poor quality facilitation limits project success at including the poor and vulnerable Elite domination of decision-making destroys project's institutional objectives Leakage raises costs, lowers quality, destroys confidence, and skews choices Poor maintenance reduces benefits Village councils do not prove capable of managing grants or TA effectively Overall Risk Rating Risk Rating - H (High Risk), S (Substantial Risk), M (Modest Risk), N(Negligible or Low Risk) M

45 It is hard to imagine an environment much riskier than KDPs first three years: a coup, a drought, 7 separatist movements, and the hiving off of the 21st century's first new country. Throughout all of this, KDP energetically continued field activities and in fact scaled up by nearly 50% over appraisal. Given Indonesia's turbulent environment, a full risk assessment should also identify macropolitical conditions under which the project might be stopped. Scenarios under which this could occur include: (a) (b) (c) Debt default/imf withdrawal; Extended political violence; Breakdown of decentralization. These issues were be raised with government during preparation and their general strategy will be discussed at appraisal. Preliminary thinking is: (a) (b) Debt default - short of a general break in all multilateral lending, KDP-2 should be shielded since it is a project that works at local levels and is not linked to any of the major policy issues surrounding the fund program; Extended political violence -. KDP's Year 2 was suspended in Maluku for this reason (with great difficulty), and in both Irian Jaya and Aceh, project timetables cannot be kept because of localized problems with conflict. However, although KDP managed to escape more or less unscathed in most places, finding good mechanisms to suspend and restart quickly was not possible - solutions had to be jerry-rigged at each outbreak. Primary risks were that money would be diverted to combatants or to other unauthorized uses, but also that project staff would not leave their posts despite danger because they were afraid of losing their jobs. General guidelines for a mechanism to address violence issues have been agreed as part of the KD2 package. These are (i) a letter from MoF to the provincial treasuries that halts all fund disbursements; (ii) a letter from BPM to facilitators ordering them to stop processing project documents; (iii) contract provisions that allow facilitators to temporarily withdraw from conflict areas without suffering any financial penalties; and (iv) joint agreement with the WB about when activities can re-start after they've been stopped because of conflict. (c) Decentralization breakdown - Potential issues are a big increase in local corruption and intervention, and a long period of confusion about central-district responsibilities that leads to institutional paralysis for this and other projects. A linked risk is that control agencies will be less effective than they are at present. The project's initial strategy will be to deal with these problems on a case-by-case basis, with clear provisions for dropping subdistricts that break the rules. KDP's financial management risk analysis gives the project an overall risk assessment of " medium"(annex 5). However, it also stresses that while KDP's intemal systems are good and meet all World Bank standards, the overall country risk corruption risk environment in Indonesia is very high. Strong Bank supervision remains key to successful implementation. 3. Possible Controversial Aspects: No especially controversial aspects exist in KDP once the problems of corruption, violence, and govemance breakdown described elsewhere in this PAD are taken into account,. All of these issues plagued one or another part of KDP- 1 and are certain to recur. However, such problems were localized and are seen to be localized by the Indonesian public

46 Controversy of a different kind is likely to rise over the plan to put field facilitators on payroll rather than hire them thlrough companies. Indonesian consulting firms are well organized through a powerful trade organization that zealously protects the development consulting industry. KDP's activist anti-corruption work is also likely to evoke some manipulative controversies during implementation. G. Main Loan Conditions 1. Effectiveness Condition Issuance of the Project Manual acceptable to the Bank comprising implementation arrangements, land acquisition and resettlement, environmental impact mitigation, maintenance provisions, subproject selection criteria, financial management procedures and project monitoring indicators. This Project Manual will be the sole technical document used in this project. 2. Other [classify accordiing to covenanit types used in the Legal Agreements.] Disbursement Conditions For category 2 (Training and Facilitation supports): BPM has employed at least 30 national consultants, 200 provincial and district consultants, and 1,000 kecamatan facilitators; appointed two management firms; and selected a bank to provide payroll services to support project implementation During Implementations I. Borrower will maintaini the BPM Secretariat until the completion of the Project 2. Borrower will ensure that auditing activities under the Project are carried out in accordance with BPKP's audit manual and in accordance with tenns of reference agreed with the Association. 3. Borrower will select Project Kecamatans that are among the Borrower's 35% poorest Kecamatans based on the SUSENAS data. 4. Borrower will ensure thiat the relevant Bupatis and Camats (a) provide public informnation aimed at disclosing to villagers and their representatives, all administrative, financial, environmental, social, procedural and teclhical aspects pertaining to the selection, design, preparation and implementation of Sub-projects; and (b) make such information, including the Project Manual, available free of charge for consultation at the Kecamatan office. 5. Borrower will ensure that (a) necessary funding to fully finance the proposed Sub-project has been obtained, including a Gran-t or a Sub-loan and any voluntary contributions to be made by villagers; (b) appropriate engineering and environmental standards and practices that would minimize any acquisition of land and avoid involuntary resettlement of Affected Persons have been considered in the design of the Sub-project in accordance with the Project Manual; (c) the Land Acquisition and Resettlement Guidelines lhave been complied with, and, if applicable, appropriate compensation arrangements h-ave been completed and are satisfactory to the Affected Persons as set forth under the Land Acquisition and Resettlement Guidelines and paragraph 15 of this Schedule; (d) a Sub-project Agreement has been entered into and an implementation plan for the Sub-project has been prepared in accordance with the provisions of the Project Manual; and (e) a maintenance programn for the works to be carried out under the Sub-project has been prepared in accordance with terms acceptable to the Association. 6. Borrower will (a) ensure that, until completion of the Project, the Project Manual is made available to

47 the Kecamatan Facilitators and the Kabupaten engineers and applied in the carrying out of Sub-projects; and (b) periodically update the Project Manual, if needed, in agreement with the Association. 7. Borrower will ensure (a) each infrastructure under Sub-project is reviewed by the Kabupaten engineer upon completion and that a certificate of Sub-project completion is issued by the Kabupaten engineer upon a finding of satisfactory Sub-project completion in accordance with the Project Manual and approved designs; and (b) if there is a finding of unsatisfactory completion of a Sub-project, except for cases of force majeure under Grants, the UPK shall recover the amounts disbursed under the respective Grant in accordance with community procedures acceptable to the Association. 8. Borrower will (a) avoid, and, if not possible, minimize cultural, social and economic adverse effects on Isolated Vulnerable People caused or likely to be caused by the Project; and (b) through a process of informed participation, involve concemed Isolated Vulnerable People in the design and implementation of Sub-projects to ensure that the benefits received by the Isolated Vulnerable People are in harmony with their economic, social and cultural preferences, and protect their customary user rights. 9. Borrower will ensurle that (a) a revolving fund is established and maintained by the UPK in the Project Kecamatans in accordance withi procedures agreed with the Association and set forth in the Project Manual; (b) payments on the pr-incipal of and interest on Sub-loans are deposited into the respective Kecamatan account established for such revolving funds; (c) the UPK has been provided with technical assistance and traininlg in bookkeeping and financial management; (d) the verification team for proposed Sub-pro jects includes at least one member from a commercial bank; and (e) where the Project Kecamatan has provided Sub-loans under the Borrower's Kecamatan Development Project (i) the annual average repayment on principal under Sub-loans calculated over the twelve preceding months is equal to or more than 80% of the total amount of repayment due during such twelve-month period, or (ii) the repayment has improved during the same twelve-month period by at least 25% in the aggregate. 10. Borrower will (a) carry out the studies in accordance with terms of reference acceptable to the Association; (b) not later than January 1 in each year, commencing January 1, 2002, furnish to the Association for comments the recommendations of the studies carried out in the preceding year; (c)not later than July 31 in each year, commi-encing July 31, 2002, prepare action plans for the implementation of the recommendations of the studies carried out in the preceding year, taking into account the comments of the Association on such recommendations; and (d)promptly thereafter, carry out each of such action plans. 11. BPM will contract at least one NGO per province to monitor project implementation. 12. Complete summary infonnation on complaints received and their resolution will be published each year in a national and local newspaper. 13. Annual reviews by no later than November 30 of each year will determine the following year's coverage. 14. BPM will inform annrually to the KDP Kabupatens and Provinces that the audit of the subprojects is to be carried out exclusively by the auditors appointed by BPM. 15. Participating districts will designate kecamatan PjOKs in the selected kabupatens by November 30 of each year. District coordination teams would be named by December Annual implemenitation reports will be provided to the Association by no later than March 31st of each year, beginning in March 2003, to be reviewed by June 30 of each year. 17. Reports on the implementation of Part A of the Project covering the preceding calendar quarter, not

48 later than April 30..lIul 31, October 31 and Januar,v 31 in each year, starting January 31, 2002, and until the completion of the Project. H. Readiness for Implementation l C 1. a) The engineering design documelnts for the first year's activities are complete and ready for the start of project implementation. 1. b) Not applicable The procuremiienit documenits for the first year's activities are complete and ready for the start of project implementation The Project Implementation Plan lhas been appraised and found to be realistic and of satisfactory quality. C 4. The following items are lacking and are discussed under loan conditions (Section G): 1. Compliance with Bank Policies Z 1. This project complies with all applicable Bank policies. E 2. The following exceptions to Bank policies are recommended for approval. The project complies with all other applicable Bank policies. Scott E. Guggenheim Zafer Ecevit Mark Baird Team Leader Sector Manager/Director Country Manager/Director

49 Annex 1: Project Design Summary INDONESIA: SECOND KECAMATAN DEVELOPMENT PROJECT Key Performance Hierarchy of Objectives Indicators Monitoring & Evaluation Critial Assumptions Sector-related CAS Goal: Sector Indicators: Sector/ country reports: (from Goal to Bank Mission) Reducing Poverty % of poor CAS and CEM No gaps between macro and project objectives Improving local governance Satisfaction with leadership Surveys A believable survey rises methodology exists Project Development Outcome I Impact Project reports: (from Objective to Goal) Objective: Indicators: Component A: Kecamatan Min. # participating villages BPM PMU records The project's development Development Grants KPKN records objectives are fully in line with CAS and GOI objectives. Providing broad-based resource access to villages Year 1: 7,500 Risks: Year 2: 10,000 Country risk includes Year 3: 10,000 macroeconomic management, Reducing poverty in rural institutional problems with areas HH expenditure to rise by 1% Mid term and concluding decentralization, and for each year of KDP panel survey localized problems of political involvement competition and civil violence Providing low cost, quality infrastructure 20% less than current costs Technical audits Project and Bad local economic policy from line agencies with agency records environments aren't replaced Improved maintenance similar or better quality. by worse ones. 10,OOOkms. feeder roads built 2,000 units clean water 2,000 village markets Project risks: 1,000 school rehabs. Poor maintenance 70% of infrastructure built by Technical surveys KDP to be ranked as satisfactory Component B: Community Capacity Development Ability of villages to carry 50% of all villages to have Tabular count of plans out long term planning finished plans by Year 3 District government intervention; Central government does not provide transfers or local government counterpart funds; New community and kecamatan councils do not prove to be capable or honest Villages able to meet audit Completed courses in 80% of MIS records Assumes problems get standards in FMS&D villages audits reported Corruption is reduced 70% resolution rate of all MIS records. cases in corruption database NGO reports

50 Decision meetings made more Annual 10% increase in Panel survey inclusive active participation rates with MIS at least proportional growth by women and poor Legislature to monitor and 15% annual increase in MIS review KDP implementation number of UDKP-DPRD joint monitoring teams. Component C: Implementation Support Facilitators deployed in 90% of kecamatans have TA Payroll records local violence does not kecamatans present before UDKPI prevent mobilization Field problems are resolved 75% of technical problems are Monthly reports to national Problems are reported' fixed team database maintained 75% of corruption cases Complaints database log reported are resolved Technical training courses 50% of villages participate National log are completed Governance training 75% of DPRD programs are Provincial records programs are completed completed Component D: Monitoring and Studies Assessing village revenue Report listing options

51 I Key Performance Hierarchy of Objectives Indicators Monitoring & Evaluation Critical Assumptions Output from each Output Indicators: Project reports: (from Outputs to Objective) Component: Component A: Grants # desas with project proposals Project records Politicization of local Improved planning (.80%) institutions Annual surveys Takeover by technical agencies, consultants, contractors Public infrastructure #subproject implementation Project records Poor engineering supervision; agreements (>80%) Technical audits Unwillingness to use O&M groups formed (.70%) sanctions for bad performers Roads, canals, bridges, etc. built or rehabilitated Project Components / Inputs: (budget for each Project reports: (from Components to Sub-components: component) Outputs) Community Grants million PIP IDA eligibility Capacity Development 69.1 million MoF contribution Implementation Support 42.7 million Villager contribution Monitoring/Studies

52 Annex 2: Detailed Project Description INDONESIA: SECOND KECAMATAN DEVELOPMENT PROJECT Prepared by the Government of Indonesia (to be a public circular) KDP-2 is a combination and improvement on the Kecamatan Development Project and the Village Infrastructure Projects. The two projects have proven that communities are capable of building something of decent quality and relatively low cost. At the same time the projects empowered communities to be able to develop themselves. In KDP-2, an increase in the capability of communities and institutions is a major goal, so that at the end of the project they are able to plan, implement, control, and maintain develop activities in their own village, using processes that are transparent and participative. Institutions are also improved, including the district legislature, the new village legislatures, and local NGOs. Consultants will be trained to improve their ability to coach and to transfer their knowledge. Aspects of good govemance are given more attention, in part by emphasizing the role of the governnent as an information giver and facilitator of services to the communities. Decision making is left to the communities themselves, transparently and responsibly. All important decisions are made in community wide meetings. Monitoring of activities is undertaken by many actors, including the legislatures and NGOs, as well as independent teams selected by communities themselves. Special dialogues will be conducted among all stakeholders in KDP-2. The main activity in KDP-2 will be the construction of infrastructure that is desired and needed by the communities, as well as activities to increase community and institutional capacity and savings and lending activities by women's groups. The selection of activities is quite free, as long as they meet criteria similar to those used in VIP or KDP. All assistance is given as a grant to the village by the government Criteria for activities include: * Can be undertaken by the village with technical assistance * Technically and financially feasible * A public need * Gives benefits to the community, especially the poor in the village * Savings and loan is only for women's groups, managed by women transparently How is the process of selecting activities? Independently from KDP-2, the community will put together a list of the Community's Vision of the Future, or how they envision the village in about ten years (see the box below). After that, each village will select activities to be proposed through village meetings; the general population may propose up to two activities; the second must come from the women's meetings. Each proposed activity is put into written form, to be discussed at a forum of all villages in the kecamatan. Before the proposals are discussed at the Forum, they undergo a verification process done by a team of selected citizens with advice from the consultant. The team is selected by the Subdistrict Manager and the Empowerment Facilitator, and their technical expertise is verified by the Management and Technical Facilitator. Verification is undertaken of each proposal on the basis of technical feasibility, financial feasibility, and criteria. The team does not determine rankings or priorities. If there were any proposals found to be unfeasible, these would be discussed with the communities at the time of the visit, so

53 that the proposal could be modified or at least the community could understand the reason for rejection by the facilitators. However, while facilitators can recommend rejection, the communities must still make the decision themselves. All proposals are discussed by the Forum of Villages, just like the UDKP meetings in KDP. The format of the proposals is very simple - they do not have to made pretty or complicated - and they do not include cost estimates. The Forum will determine the priority for designing. The Forum will also at the same time select a kecamatan-wide independent team that will monitor all aspects of KDP in the kecamatan. The kecamatans receive an allocation from the project, which is anticipated to be between 1 billion to 1.5 billion rupiah per year, depending on their population. Table 1: KDP-2 grant amount allocation criteria Java Off Java Size of Grant >50,000 >25, billion rupiah 25,000-50,000 15,000-25, billion rupiah <25,000 <15,000 ineligible Women's savings and loan activities are limited to 10 million rupiah per village (if there are many villages, then there must be competition or each village will receive somewhat less so that the maximum is 10% of the total allocation). The standard allocation is not competed for but it will also be limited to 15 million rupiah or 15% of the total grant to the kecamatan. All other proposals are competed for. Activities are planned by the village with the assistance of the Management and Technical Facilitator. A technical cadre is selected by the community, and he or she will be trained by the coach. The designs will be based on the results of technical surveys and measurement in the field together with the communities. From year to year, the portion undertaken by the village increases. Designs will be discussed and approved by the village and coach, and then inspected by the Management and Technical Consultant at the district level. After the designs are ready, the villages will assemble one more time to determine which proposals are funded (at Forum III). A grant agreement is prepared for those activities that will be funded. It will have attachments, including the design, budget, map, a commitment for community contributions, and other requirements. It is signed by the kecamatan manager for KDP, the person-in-charge from the village, the village chief, and a representative of the Forum. The camat will legalize the determination in a decree, which allocates permanently the funding for each activity. Each village selects a management team, in a community meeting. One person is picked as the person-in-charge. Others might include a daily head of implementation, secretary, and treasurer. They are assisted by two empowerment cadre (one male and one female) and one technical cadre, who were selected back at the first Forum. Implementation rules are similar to those in VIP and KDP, such as in bookkeeping, reporting of expenditures, reporting, determination of suppliers, receipt of materials, quality control, and completion documentation. The rules apply to all the activities, including the standard allocation. Villages may not use subcontractors, except in unusual circumstances. Funding is facilitated by the kecamatan project manager. Funds are transferred directly to the account of the village management team in a local government back. The amount of funds is fixed by the

54 Camat's decree. The funds are sent in three tranches, depending on the size of the activities, such as in tranches of 30, 50, and 20%. The transfer of the second and third tranches depends on the accounted-for use of 90% of the previous tranche. To implement KDP-2 activities, the villages are assisted by two kinds of consultants at the kecamatan level, the Management and Technical Facilitator and the Community Empowerment Facilitator. Each has his or her own job description, although they work together. Most of the consultants will have had experience in either VIP or KDP. They in turn are supervised by the senior Management and Technical Consultant and Community Empowerment Consultant at the district level, and they in turn by the province and national levels. Facilitators are assisted by three assistants at the kecamatan level, one for construction, administration, and human resource development. This project requires lots of training of the community, the management team, village institution, officials, coaches, members of the legislature, and NGOs. All the training will be done participatively and practically. There will be formal sessions at the district, kecamatan, and village as well as on-the-job training. The main function of the consultants is to transfer knowledge. Supervision is undertaken by the management team and supervisors that they select. Besides that there are others that do supervision. The Interaction Management activity is still performed, including the formation of a monitoring committee by the local legislature and village empowerment meetings. At the national secretariat there is a unit formed especially to handle complaints. Supervision is also undertaken by consultants. Peer reviews are undertaken as in VIP, wherein the administration and physical results in one village are reviewed by villagers from other villages from another kecamatan. Inter village monthly meetings will be conducted to share information about progress and problems. Monitoring and evaluation are conducted routinely by the villages, consultants, and local government. Routinely also, independent NGOs will monitor, as in KDP. Monitoring will examine the processes, progress, and benefits. Facilitators are evaluated by the village, local government and senior consultants. Districts and kecamatans will be evaluated in regards to their support for the project (using benchmarking). Villages are evaluated about their accomplishments and willingness to follow the rules. For all evaluations, there must be sanctions for the violators. To reflect good governance, the government will fill the role of information giver: * Size of kecamatan allocation * Rules and technical standards * Strategic information, such as long term development plans * Information about other programs, for synchronization and to avoid overlappping, maximizing the benefits from the two programs. The government will also ensure the integrity of the whole KDP process through visits and meetings, including verification and supervision

55 VILAGE CASH FLOW Grant Ag_eernent Iitial Withdrawal ReRequest l~~~~~~~~~~~~~~~~~~~~~~cmlto Proceipts 4 from f fuzlds < Appr oved Repoit an ank X cscount Staterm It Field nlotes Sbge 2: 0 Sltge 3: 2i asury ran- Funis; go into afl2er I & A\htler 3 Vilage account Eperutr Sty h -51-

56 How Well Do the Processes in KDP-Il Support Good Govemance, Capacity Building, and Poverty Alleviation By Chronological Order of Activities By Total Score By Good Governance By Capacity Building By Poverty Alleviation No ActivitylProcess in Activity/Process in Activity/Process in KDP Activity/Process in Activity/Process in KOP-II GG CB B/PA Total KDP-I1 Score 11 Score KDP-lI Score KDP-11 Score 1 Viiage Future Vision Village Future Vision 11 Village Future Vision 4 Village Future Vision 4 Transparency 4 roposal & AC5jvity -oposa v-iy - proposal & Actvity 7rMpoSe Acnvity 2 Selection Selection 11 Selection 4 Selecton 4 Detailed Designs 4 Village I eamr 3 Selection Transparency 11 Consultant Procurenent 4 Training 4 Coaching 4 Consultam P rcuring Materiais - 4 Procurement Training 11 Transparency 4 Coaching 4 Tools 4 5 Transparency Coaching 11 Training 4 Learn from Experience 4 Field Construction 4 ommuniy Frocunng u a%n r _s_ 6 Contributions Tools 10 Financial Control 4 Maintenance 4 Quality Control 4 7 Verificaton Supervision 10 Monitorng by Legislature 4 Transparency 3 Supervision 4 _ommunity 8Detailed Designs Learn from Experience 10 Complaint Handling 4 Contrbutions 3 Inspection 4 9 Channeling Funds Pre Audit 10 Pre Audit 4 Verificabon 3 Leam from Experience 4 10 Trainng Maintenance 10 Village Team Selection 3 Financial Control 3 Maintenance 4 _ s~~~ommunity 11 Coaching Contributions 9 Community Contrbutons 3 Village Administation 3 Village Future Vision 3 Procunng Materials - Trroposal b ACtiVity 12 Financial Control Verification 9 Verficaton 3 Tools 3 Selection 3 managing 5avmngs & at omumyti 13 Village Administration Financial Control 9 Coaching 3 Loan 3 Contributions 3 Procuring Matenais & -_omnrionng D_y 14 Tools Legislature 9 Village Administration 3 Field Construction 3 Verification 3 managing savings rocunng Matenais & 15 Loan Field Construction 8 Tools 3 Quality Control 3 Training 3 managing navings & 16 Field Construcbon Quality Control 8 Supervision 3 Supervision 3 Loan 3 _monitonng Dy 17 Quality Control Inspection 8 Monitoring 3 Legislature 3 Monitoring 3 18 Supervision Monitoring 8 Channeling Funds 2 Pre Audit 3 Pre Audit 3 19 Inspection Complaint Handling 8 Inspection 2 Consultant Procurement 2 Financial Control 2 _ t,~~~~~~~onsunvant numtn, cqy 20 Reporting Procurement 7 Reporting 2 Detailed Designs 2 Legislature 2 21 Monitorng Detailed Designs 7 Leam from Experience 2 Channeling Funds 2 Complaint Handling 2 msonlionngdy _ vilage earm 22 Legislature Village Administration 7 Maintenanoe 2 Inspection 2 Selection 1 _managing iavmng=s _o&ns-rant 23 Complaint Handling Loan 7 Detailed Designs I Reporting 2 Procurement I Learn rrom _,79 - T5lIa at Managing iavings is 24 Experience Selection 5 Loan 1 Monitoring 2 Village Administration 1 25 Pre Audit Reporting 5 Field Construction 1 Complaint Handling 2 Reporting 1 26 laintenance Channeling Funds 4 Quality Control 1 Village Team Selection 1 Channeling Funds 0 sg= oo 2oeaunance Explanation: Ca = crv c y n.x,=gn BIPA= a... hw/p.-ety 5eAliis,a Pnrl5-52 -

57 Capacity Building Activities on KDP-11 Type of Training Type of Participant Number of Par Timing Duration Level Type of Training Cost Construction Skills Foremen Every village On-the-job Maintenance Village Team Training Technical Cadre Incidental OJT Village OJT Village Leaders 3 days Subdistrict Class/Practice Head of groups Village Person-in-Charge Inibal training Daily supervisor Every Village Beginning 2 days Subdistrict Penyuluhan OJT Treasurer Incidental OJT Village OJT Village Facilitator Training Intitial Training Formal Training Secretary _. Village facilitators 40, days District Class/Practice 7,200,000 Technical cadre 20, days District Class/Practice Village facilitators 40,000 Monthly 1 days Subdistrict Class/Study Tour Technical cadre 20,000 Monthly 1 days Subdistrict Class/Study Tour OJT VF and TC 60,000 Incidental Village OJT Training for BPO and village officials Initial training Members of BPD 3 wakil Beginning 2 days Subdistrict Extension 1,800,000 Village Chief Village officials 1 orang 2 orang Kecamatan-Level Consultants Orientation Workshop New Nontechnical 500 Beginning 12 days Regional Class/Practce 100,000 Experienced Nontech days Class 165,000 New Technical days Class/Practice 145,000 Experenced Technical days Class 165,000 Evaluation Workshop 2000 September 5 days Class 120,000 Training of Assistants Intial Training Admin Asst 1000 Beginning 5 days District Class/Practice 50,000 Construction Asst 1000 Beginning 3 days Distnct Class/Practice 30,000 Empowerment Asst 1000 Beginning 5 days District Class/Practice 50,000 Formal Training Asst Admin & Con 2000 Monthly/OJT SubdistNillage Class/OJT 120,000 Training of Senior Consultants Asst Empowerment 1000 Monthly/OJT Class/OJT 540,000 Initial Training (Parallel) Technical 150 Beginning 6 days Regional Class 24,750 Nontechnical ,

58 Orentations for Project Staff TKPP Comm.Development 150 Beginning 3 days Province Class 90,000 Planning 150 Public Works 150 Programming 150 Training of Project Managers Kecamatan Managers Kecamatan managers 1000 Middle 5 days Province Class 80,000 Camats Camats 1000 Middle 3 days Province Class 50,000 Techniques of Good Govemance Distnct Officials 6 per District Middel 4 days 9 Dist I unit Discussion 60, 750 Training for DPRD (legislatures) Case Studies 3 members per distic! 450 Middle 3 days per region (10) Discussion 36,000 Case Studies Training for NGOs in Monitonng 3 per NGO 150 Beginning 5 days National 3 Class 30,000 (mgr, empowr., tech) Dialogues National Kabupaten (districts) 42 persons per meeting 1684 times 3 days West, Central Discussion 73,080 (prop, kab. kec, village [indep comm, management committeej consult, NGO, reporters, universities, legislatures) East, National 20 persons per district 150 kab twice yeariy 2 days Distrct Discussion Problem Solving Forums 6 tables x 6 Invited participants, persons 3 times 3 days Nationas Discussion 43,740 based on creat vity recommendations Training of Trainers Technical 20 ASAP 6 days National Class 5,800 Nontechnical 20 2 waves Onentation to uong Term Visions of Villages District 3 Pra-Beginning 1 days Distrct 3,375 Subdistnct 3 1 days Subdistrct 15,000 Village 3 1 days Village ,

59 MbSrfh7&ifelre hshas4we B0 enprwcfackifesa mdcapacihy5uiia Village Level Capacity Building Activities Consultants Govt and NGOs Networking 0 AQ~~2 MaJorKDP-2Atltvites Xi,g R z E Process Supported Outcome 0 2~ o - CO < ~~0 Ec* _ 1: A t: _EI181 Village Long-term Vision i $ $ N $ N i Determination of village needs Village owns of list of needs in line with a vision of the future Proposing and Selecing Selection of actvibes most Activites N i $ N $ $ $ N $ Determination of funded activibes appropriate for KDP Selection of Village Team i $ Management by village Village team able to manage project in accordance with principles Consultant procurement fair Procuring Consultants N Coaching by consultant and economical All information known by all Transparency i $ i $ N $ $ i i N N N IGood governance stakeholders Contribubons by N Communities contribute a Community I N i N $ N N I_Determination of funded activities significant portion All activites feasible and in Venfication $ _ i $ _ $ $ Control of activity selection accordance with crtera All activities accompanied Detailed Planning N i i $ $ N _Making of detailed designs by complete designs Channeling Funds i $ $ Payment of funds to villages Training N $ $ $ $ $ i N $ $ N N N_ i Improved community capability Coaching N i S N N i I i IN _ I I mproved community capability Financial Control i $ i N i I L Administrative supervision Funds channeled efficiently to villages without leakage All stakeholders able to perform their tasks Communities receive continuous coaching Communities can account for all expenses

60 Village Administration i _ $ N N $ $ _ Administrabive supervision Procuring Tools and Materials $ i $ $ N N N Administrative supervision Managing Savings & Loan i i $ $ N $ N N N N Technical supervision Constructon in the Field i i $ N i $ N $ Technical supervision Quality Control i $ $ N i $ N N $ N N Technical supervision Supervisioin $ $ N $ i i N N $ $ N N Technical supervision Inspections $ $ $ N $ N I N $ Technical supervision Reporting $ N N N i $ i N i $ Upward flow of informabon Monitoring $ IN N i $ N i i $ N i I i $ Collection of field informabon Monitoring by Legislature I N S $ Supervision by third parties Communites have all requiredocumentation Suppliers etermined and matenals received according to rules Community groups able to perform tasks Construction of infrastructure according to plan and needs Construction of infrastructure that lasts and is beneficial Guarantee that administrabon and works according to plan Construcfion of infrastructure that lasts and is beneficial Higher levels also know progress and problems Stakeholders know impact from actvites Legislature knows actvibes and monitors progress Complaints Handling $ N $ $ $ N $ I $1 N i i I Problem solving All complaints paid attenbon to and case solved Exchange and analysis of More and more efficient Learning from Experience $1 $ 1 $ i l information and effecive over time Pre-Audit (Peer Review) $ N I i $ $ I NJ $ NJ Supervision by third parties MaintenanCe ;$11 $ $ $N N $ N N NNi Improved community capacity Notes. i KDP-2 Activity is a main topic in the given Capacity Building activity $ KDP-2 Activity is a suppporting topic in the given Capacity Building activity N - KDP-2 Activity is a supplementary topic in the given Capacity Building activity Villages able to pass all audits Infrastructure delivers benefits for a long time

61 Matrix of Capacity Bulding Activities on KDP-2 Level Object GG Co BIPA E Goa Matadal Paridcpant Instructor Village Project XX X Construction skills Quality control; maintenance; Community Dist Tech consultant construction techniques Village Prqect & X XXX Training mgt. and Financial control; work Management team Subdistrict consultants Institution administration organization; communications Village Project & XX Orientation and skills Project rules; faclitation; technical Village facilitator Subdistrict and district Instituton training and managerial; communicaton and technical cadre consultants Village Socio- XXXX XXXX Skills and knowledge As needed, including study tours Community NGO, consultants, Economic training as KDP-funded universities, and I xxx activity govemment agences Village Socio- XXXX XXXX Support for educational Scholarships; teachers, Community Help from Educaton Economic facilities rehabilitating facilites, supplies Village Instituton XXXX XX X Training for BPD and Project rules; monitoring BPD member, NGOs, govemment independent teams techniques; handling cases independent teams agencies, consultants Consultant Project X XX Training for exper. and Project rules; technical training; Subdistrict Senior consultants inexperienced facilitaton training; facilitatoring; consultants consultants role of consultants Consultant Project XX Orientation and training Project rules; technical, Technical, admin, Subdistrict and district for assistants to administrative, and empowerment and empowerment consultants consultants skills; faciltatoring assistants Consultant Project XX X Management training for facilitatoring; creative thinking District consultants National consultants and senior consultants NGOs Consultant Instiuton XXXX XXX Training of native sons Basic education; facilitabon Selected University; special to be local consultants techniques; civil engineering; secondary school consultant team in remote areas project management grads

62 MatrIx of Capay Buildi Activitm on KDP-2 Levl ~ Ob Go CS WPA Ga tl PaudDpant Indtructor Officials Project XXX XXX O-O entaion and Protect rules; monitoring Subdistrict staff Subdistrdc, district training of project staff techniques; visit techniques; consultants; gov t administration agencies Officials Institution XXX XXX Management traiiing Project rules; facihiation Camat, project NMC;senior consultants, for officials techniques; creabve thinking; managers university, NGOs faclitatoring Officials Insttufion XXXX XXX X Techniques of 'Good Counseling; information sharing; District staff NMC; NGOs; university Governance role of govermnent officials, trarsparency Officials Institubon XXXX XX X Training for members of Prject nrues; monitoring Members of legislature NGOs; nabional agencies baislaturehuesco tech p lnthandrig_ NGOs Project XXX X Monitoring training for Project rules; monitoring and Contracted NGOs NMC; government I I NGOs evaluabon agencies; universities Network Instituion XXXX XX Dialogues at regional Discussions of all aspects of KDP All stakeholders NGOs and district levels Network Project X XXX XX Forums for creatve Forum for learning from NGOs and consultants NMC problem sohng rence Network Project & XXX Training of Trainers How to train and plan training, All levels NGOs & NMC Instituton aeneral Network Socio- XXXX XXX Orientation and How to probe and process Communites offidals, NMC, senior consultants Economic traning in helping informaion on needs; how to consultants, esp. Vhilages deterrnine make use of such informatbon; village facilitator and their Vision of the how to coilc informabon about PPM Future fundng outside the project Notes: GG = Good Governance The more stars, the more the activity supports this goal. CB = Capaty Building B/PA = Benefil/Poverty Alliation By Component: Project Component I - US$ million Project Component 2 - US$65.50 million Project Component 3 - USS million Project Component 4 - US$2.90 million

63 Annex 3: Estimated Project Costs INDONESIA: SECOND KECAMATAN DEVELOPMENT PROJECT Project Comvonent Local Foreign Total... USD Million. A. Kecamatan Grants B. Community Capacity Building C. Implementation Support D. Monitoring & Evaluation and Studies E. Front end fee l Total Project Costs Financing Plan Local Foreign Total... USD Million. BORROWER IBRD IDA Total Financing Notes: A. 700 Kecamatans for 3 years; An additional 200 Kecematans for 3 years starting in year 2; Assuming Rph I billion/kecamatanlyear; Most expeditures would be for locally made goods and services, but some are tradable and these are reflected in the estimate of "foreign" costs such as cement, steel, fuel. B. Reflects the total cost of the Kecamatan Facilitators & training needs C. Includes technical assistance, publication costs, administrative support,and GOI Implementation support 1/ Including price and physical contingencies

64 Annex 4: Cost Effectiveness Analysis Summary INDONESIA: SECOND KECAMATAN DEVELOPMENT PROJECT Summary of benefits and costs: Because of KDP's open menus, detailed cost-benefit calculations cannot be made ex-ante. Experience from the main investment types in KDP 1 and the VIP projects displayed IRRs ranging from 22%-90% with a mean of 35-40%. Indirect benefits are not counted. Calculations for KDP-2 assume an average IRR of 25%. The possibility of localized failures is included through the conservative benefit returns presented in this annex. Main Assumptions: (i) kecamatan and village facilitators provide a valuable service (information sharing, more people involved in public decision-making, higher ownership/maintenance to justify their cost); (ii) release of the grants will occur on time -- essential because of the seasonality of the rural calendar; (iii) open menus do not distort choice or contaminate other public investment programs; (iv) equipment needed for infrastructure construction is available in local markets; (v) internal markets remain relatively undistorted. It is not easy to quantify KDP's aggregate impacts because its most important objectives focus on the systemic rules and incentives that guide local governance in Indonesia as much as any one investment, and these require longer tenn benefit estimates. KDP's open menus also make it impossible to know with precision which investment proposals will actually receive funding. Therefore, the cost-benefit analysis proceeds from a SWOT (Strength, Weakness, Opportunity, Threats) framework. The concluding section on benefits summarizes some of the specific economic return data based on experience under KDP-1. Institutional Aspects (SWOT) Strengths of the project design are (i) the open menus; (ii) the high degree of transparency; (iii) use of traditional institutions to organize decision-making; and (iv) the contracting of privately recruited and managed facilitators to share infonnation and encourage free choice. Moving from sectoral to cross-sectoral menus allows for a better fit between end users perceived needs and project delivery. Indonesia's existing bottom-up planning system already suffers badly from the fact that community investment decisions are primarily driven by the central budgets of different technical agencies, regardless of need. Decentralizing funds to communities and allowing them to match their resources over a broad range of expressed and negotiated priorities allows them to build more useful infrastructure. KDP's decision-making process forces communities to ration their resources. It also leads to better maintenance and thus a longer economic life for the investment. KDP's flexible design allows the project's total size to match resources and capacities. It is thus well on its way to becoming a permanent system for community development financing across Indonesia, and this future has been endorsed by Bappenas. KDP's improved design remedies the chief weakness under KDP-1: the lack of sufficient technical quality control and transfer to the villages. Weaknesses - of moving the financial transfer and TA management structure away from control of the district goverrunent are possible loss of sustainability as Indonesia's decentralization program progresses, and less ownershiip by local government since KDP's village grants cannot be put to other uses. Districts pressed for resources under decentralization may also decide to reduce investment and services to KDP villages by way of compensation, thus reducing program sustainability still further. Giving more

65 control to local decision making also increases the likelihood of "not in my backyard" decision making, despite the national benefits that could accrue from unpopular decisions. The new project's design also runs a greater risk of local govenmment capture than the original KDP did because of the greater scope for DPRD and local govenmment involvement than- was allowed under KDP-1. Strengths - of tightening up the TA management and increasing the participation of technical specialists are that the infrastructure being built by the project will last longer and thus produce higher rates of return; and that there is much more time and incentive to accelerate the technical transfer to village cadres under the new system than there was under the old. Program continuity is also an important strength of the new project since villagers can increasingly intemalize and normalize expectations about revenue flows to make decisions over. Introducing the matching grant component provides a channel for expanding coverage and normalizing KDP approaches in an uncomplicated way. Weaknesses -- of the system are twofold: the small size of the infrastructures built and their lack of linkage to district planning; and the susceptibility of the project to elite capture. The new project also faces a riskier overall environment, particularly given the still unclear mandate, resources, and responsibilities of the newly empowered district govermnents. Decentralization across Indonesia has also led to drops in women's participation which a more centralized project structure could address more effectively. Strengths Outweigh Weaknesses - Social and economic benefits from the project (infrastructure for the poor, improving the match between investments and priorities, better maintenance, skills transfer) are considered to outweigh the risks of low sustainability and lack of integration into district management plans. Furthermore, the project's low costs and high counterpart contributions by villagers outweigh possible benefits of scale and better technology that could be gained by vesting decision-making in more specialized technical branches of govemmenit. Opportunities - KDP provides two excellent opportunities for improving village development programs. Govemment policy now promotes the KDP design as a foundation of its national poverty reduction strategy but because of the crisis it lacks the resources to implement it in more than a small number of locations without extemal assistance. Second, KDP-2's unique system of direct payment to facilitators potentially offers a very large cost saving to abroad range of community development programns in Indonesia. With costs for facilitators averaging 20-25% across a broad range of community project types (urban poverty, basic education), reducing TA management costs by approximately 50% will amount to a large saving for the govemment (or else it will stimulate contractors to start providing a service for which development projects will be willing to pay). Thlreats - The three major threats facing KDP-2 have already been discussed elsewhere in this PAD: (a) elite capture of benefits; (b) opposition by private contractors; (c) capture and distortion by district govemments. Techlnical "threats" integral to the project design itself hinge almost entirely around the caliber, training, and management of the facilitators. Indonesia retains a strong tendency of "guided" hiring. The project's TA apparatus will quickly be neutralized and ruined by collusive hiring and management unless the TA can remain autonomous. Summary of benefits and costs Because KDP- I is only finishing its second year of operation, detailed cost-benefit calculations are not yet possible. Gross costs show that approximately 20% of the project goes for technical assistance, which includes a large number of villagers within the participating villages (i.e. their wages flow into the communities)

66 Individual villages and project proponents choose their own subprojects from a completely open menu. Nevertlheless, some 50% of villages choices have been for all-weather roads and bridges, and in these cases the technologies and methods are the same as those for VIP.. For the basic infrastructure congruent with the infrastructure meniu choices under VIP I and 2. rates of return ranged (conservatively) between 20-40%. Gains come from lowered transportation costs, higher fanngate prices, and the growth in local businesses previously not viable. Sample calculations for KDP confiim these estimates but with high variance at the high end, with several bridges and road links exceeding IRRs of 80%. Cost savings for transporting goods in the sample dropped by 75%. Time spent traveling was cut by between 66%-80%, and average increase in traffic on the roads or bridges was above 60%. Even these are conservative estimates because methods do not count benefits suclh as lowered infant and maternal mortality, better school attendance, and lower consumer prices. Case studies did not confirm the hypothesis that people who previously earned a living by carrying goods to market would not find new jobs; in all cases studied this social cost did not materialize, even despite Indonesia's olngoinig economic crisis. Economic activities There are many possibilities for the rural poor that require seed capital larger than what is available from infonnal sources; however, Indonesia's micro-credit and rural banking system do not yet provide an accessible network of credit opportunities. KDP kept menus completely open, requiring only that economic activities charge local commercial (BRI) rates of interest. Over time KDP's revolving funds moved from the kecamatan to the village level, where social controls and relationships functioned more effectively as incentives for repayment and continued revolution. KDP's interest rates provide a filter on subproject proposals; however, tlhe project's group proposal process, which does not require collateral, eliminates the regressive screen that blocks poor people from access to formnal credit elsewhere. Economic activities in KDP-2 continue th-is system but with some technical refinements to improve longer-tenn connections to the private banking system. Like KDP-1, there is no objective of developing a micro-credit institution. The purpose of economlic activities is stretch resources for community development througlh cost sharing and the use of revolving funds with community sanctioned repayment. The incentive for repayment is that the resources will stay at the community level. This implies a real open menu where communities could use resources from the revolving fund for a wide variety of public/private goods witlh financial returns which justify repayment. Revolving funds of this sort have an important financing role. without taking anything away from "real" micro-credit institutions. No government program slhould be competing with privately run credit, and KDP's allocations to kecamatans and villages are given as grants. (thouglh not to individuals). Benefits from KDPs economic activities are high, but so are the risks. Benefits are that anecdotal and some survey evidence shows that KDP credit provides first-time credit access for poor people, and that it gets invested productivelv; furthermiiore, KDP's economic discussions are key methods for bringing in groups such as women who nonnally don't participate in community decision-making. Ongoing monitoring is measuring poor people's participation in the economic programs. Costs are hiighly variable rates of repayment, and the risk of non-sanctioned defaults contaminating more rigorous microcredit and banking operations. On the first, repayment has improved

67 between Year 1 and Year 2, suggesting that design and dissemination mechanisms require improvement. On the second, no evidence of such contamination exists although it will be investigated further before KDP-2 becomes effective. (KDP- I also suffered from measurement mistakes - repayment rates were measured against a calendar year rather than the agreed repayment schedule.) KDP-2 improves the economic option in the following ways: (a) all proposals must be verified by a consultant hired from a local bank; (b) communities that are eligible for the economic option must show year-to-yearepayment improvements of 20% or more (or already be at >80%); (c) funds revolve at the village rather than kecamatan level, to increase social pressure for repayment; (d) communities adopting the economic option must use a portion of their TA budget to contract a consultant who will train the village in basic bookkeeping. Overall benefits from the modified approach are that (i) poverty benefits are likely to increase; and (ii) closer links and more access to the private banking system will develop through the review and payback system. TOR for in-house and independent project monitoring will reflect the need for close supervision of any negative spillovers and this will be a topic addressed in each annual programming workshop. Thus, the benefit of including economic activities in KDP-2 is deemed to outweigh the costs of dropping the open menus. Distortions caused by economic activities requiring a higher ERR than those needed for infrastructure projects which do not require an economic justification will also produce a benefit by weeding out marginal subproject proposals

68 Annex 5: Financial Summary INDONESIA: SECOND KECAMATAN DEVELOPMENT PROJECT Total Financing Required IMPLEMENTATION PERIOD Year 1 Year 2 Year 3 Year 4 _ Total I Proiect Costs 1 r = = X_X_= Kecamatan Grants & Pilots Community Capacity Bldg Implementation Support Monitoring & Evaluation and Studies Front end fee Total Project Costs Financing Arrangeme I s =1 IMPLEMENTATION PERIOD Year 1 Year 2 Year 3 Year 4 Total 0IBRD/IDA_ Government Central _ _ 23.3 District _ Beneficiaries _ ,Total Project Costs

69 Procurement Annex 6: Procurement and Disbursement Arrangements INDONESIA: SECOND KECAMATAN DEVELOPMENT PROJECT l. Procurement Overview 1. Procurement of works and goods will follow the "Guidelines: Procurement under IBRD Loans and IDA Credits", January 1995 edition, revised January and August 1996, September 1997 and January Standard Bidding Documents (including Standard Prequalification and Bid Evaluation Documents), which may be updated from time to time, will be used for all Association financed procurement. 2. Selection of Consultants will follow the "Guidelines: Selection and Employment of Consultants by World Bank Borrowers", January 1997 edition, revised September 1997 and January 1999, and "Standard Request for Proposals for Selection of Consultants", July 1997 edition, revised April 1998 and July The procurement of consultants will use the World Bank Standard Request for Proposal, Selection of Consultants dated July 1997, revised April 1998 and July 1999, and the associated Standard Forms of Contract. 3. KDP-2 is a follow-on project to KDP-1 (Ln IND) and the basic design is the same. Over eighty percent of the Association's financing is for grants under beneficiary sub-projects procured by the villages in accordance with agreed procedures. Under these procedures procurement is managed by villagers using forms and procedures that were appraised by the Association and have been supervised in the field by senior Bank procurement and financial management specialists. For the grants, the key to minimizing leakage and collusion lies in the extent to which social controls can function. These controls are explained in detail under Annex 12. The agreed procedures are contained in the Project Manual which are the same as for KDP- 1. These procedures have been found to be satisfactory. 4. Other than grants the only other procurement actions under the project are for consulting services. For these procurement actions, KDP-2's procurement strategy greatly simplifies the overall demands placed on PMD's procurement system. Whereas KDP-1 had 19 large consulting services management contracts to procure for a total of nearly $45 million, KDP-2 will have only four competitively selected contracts for consulting firms with an estimated value greater than USD 200,000. The estimated values for these contracts are much lower than the values for contracts under KDP- 1. (Details are provided below in a procurement table) 5. These four contracts include: services to manage invoicing for Kecamatan Facilitators and to manage the payroll of the National Management Consultants; services to manage the payroll of the District/Provincial consultants; services to manage start-up recruitment and training; and, services to design, prepare, and manage printing of training materials. For the printing portion the firm will procure printing materials acting as a procurement agent and using ICB procedures. 6. The main rationale for this strategy of hiring individual consultants at all levels is that no firms are needed to provide individual consultants since the pool already exists; thus, the service being contracted is to invoice and pay field staff. A separate note summarizing the detailed functioning of this proposed management system is available in project files

70 7. The national, provincial, district, kecamatan and desa facilitators will be hired as individuals, by PMD. (GOI has previous experience with such a system). The facilitators will be hired and managed directly because of their previous experience with VIP and/or KDP. They will be recruited as individuals competitively selected through advertisements placed in national and provincial newspapers and screened by a provincial level selection comrnmittee coordinated by the national management consultant on behalf of PMD. 8. Other contracts for firms include very small contracts to provincial NGOs for approximately $25,000 each (final numbers will depend on whether 25 or 30 provinces participate); and, four very small contracts to NGOs to carry out studies to assist widows. 9. There are seven contracts based on sole-source selection procedures. The justification for which is given below: (a) The district profile contract is a small contract for the national statistical bureau (BPS) since this firm is uniquely qualified; (b) The "joumalist" contract with an estimated value of USD 300,000 for Indonesia's only Association of Independent Journalists (i.e. unique qualifications); and (c) Five very small contracts for approx. $40,000 each go to provincial-level law universities or legal NGOs, which have unique qualifications in term of legal experience and the ability to support junior lawyers who will be working in villages. Second Kecamatan Development Project List of Contracts for Consulting Services Contract US$ Selection No.of Prior Duration Comment ( type Contracts review (mos) Comp. A: Grants Per kecamatan 232,900,000 Community 3,000 1/02-6/06 All contracts are allocation Proc. less than $35,000 (most less than $3,000) Community fishing 800,000 Community 40 1/02-1/04 All contracts are pilot Proc. less than $25,000 (most less than $2,000) Comp. B: Community Capacity Dev. Kecamatan and 28,100,000 IC 2000 TOR 12/01-6/06 Approx. village facilitators $300/month Comp. C: Implementation Support Special program 600,000 Others 100 Yes 1/02-12/03 95 scholarships for Irian (scholarships) + 5 IC Trainers

71 National 2,700,000 IC 50 Yes 11/01-6/06 Incl. 4 SY management international Approx. $ 1,000/month Province/District 8,900,00 IC 350 TOR 12/01-6/06 Approx. management $700/month consultants Recruitment and 500,000 QCBS 1 Yes 8/01-6/02 training preparation team Printing/materials 2,500,000 QCBS 1 Yes 1/02-1/04 Design to follow IEC study. Unspecified quantities contract. Administration of 800,000 QCBS 1 Yes 1/02-6/06 Management province and firm district field consultants Administration of 800,000 QCBS 1 Yes 11/01-6/06 national consultants Widows 200,000 CQ 4 Yes 1/03-6/04 Local NGOs Comp. D: M&E/Studies Legal advocacy 200,000 SS 5 Yes 1/02-1/04 Regional law schools or qualified NGOs M&E 400,000 IC 10 Yes 1/02-6/06 Technical studies Impact monitoring 700,000 IC 10 Yes 1/02-6/06 Annual survey NGO monitors 1,100,000 CQ Yes 1/02-2/06 Provincial NGOs AJI (journalists) 300,000 SS 1 Yes 1/02-6/05 Independent journalist association District profiles 200,000 SS 1 Yes 6/02-2/03 BPS A Procurement Capacity Assessment Report (PCAR) was conducted for the project and is available on project file. This covered legal issues, project cycle management, organization and functions, support and control systems, record keeping, staffing, the general procurement environment, and overall risk assessment in accordance with the instructions issued by OCSPR. The assessment has rated the proposed project's procurement risk as "medium" for the following reasons: (i) this is a second phase project; performance under the first phase has been generally satisfactory; (ii) the project does not involve any large packages or complicated tendering. Nevertheless, Indonesia's general

72 procurement environment is weak and collusive practices have been found in several contracts. Actions taken to mitigate procurement risk in KDP-2 are given below: * The draft procurement plan will be finalized by negotiations and an updated procurement plan will be required for each new fiscal year before disbursements can be initiated. * Procurement supervision will be conducted every six months and the procurement plan will be monitored on an on-going basis. * To enhance procurement capacity of the villages, procurementraining will be conducted as part of the capacity building for project management in all participating villages. * All contracts for consulting assignments for firms will be prior reviewed. * All contracts for individual consultants will be prior reviewed, except for Kecamatan Facilitators (FKs) and District/Province Consultants (KMK/KMP). For whom only the TORs will be prior reviewed. * Use of consulting firms to coordinate invoicing, and payroll management. These firms will not handle payments directly but will prepare all evaluations and paperwork for PMD signature and release of funds. * A Project Operations Manual has been developed during preparation. This manual contains a section on procurement which covers procurement procedures, procurement methods, and reporting requirements. The manual will be finalized after appraisal and the project Loan/Credit Agreement will specify that all changes to the manual must be approved by the Association. II. Procurement Methods Procurement methods are summarized in Tables A and Al, and the thresholds in Table B. (a) Consulting Services: Consultants contract for firms at or above US$ 100,000 will be selected based on Quality and Cost-Based Selection (QCBS). Below US$ 100,000 selection will be based on Consultants' Qualifications (CQ), and, for the field consultants, selection procedures of individual consultants will apply. The existing field consultants, as explained above, will be given preference since they have been trained and are now uniquely qualified. Field consultants will be recruited by advertising in pi-ovincial newspapers and selected by a province level recruitment conmmittee. Terms of reference for all x ear I positions have been appraised by the Bank and are available in project files. * All contracts at or above US$ 200,000 must be advertised in a national newspaper and in Development Business. Consultants selected under QCBS will provide technical assistance to PMD for project management. * Consultants selected under CQ will be for very small assignments (less than US$ 100,000) such as, provincial NGO monitoring and small studies conducted by NGOs. * Seven contracts will be awarded using the sole-source selection method for which the justification has been provided above. * Individual consultants will be selected per Section V of the Consultants Guidelines

73 (b) Beneficiary Sub-Projects: (US$233.7 mijlion): (i)kecamatan Grants (US$232.9 million); (ii) Pilot community development and local governance reform projects (US$800,000): The above components will finance beneficiary subprojects which are demand driven in nature, making it difficult to determine ex-ante what is to be procured. Grant funds from the project can be used for services, consultants, goods, training, scholarships, and works, as these are needed to prepare and implement subprojects. Proposals for all subprojects are approved by the oversight consultant and two members of the village and sub-district council. All proposals are attached to an Implementation Agreement signed by the members of the subproject proponent and the facilitator (see PAD Annex 12). Both the proposal and the implementation agreement are approved by the project manager (PjOK) before funds are released; however, whilst they can be approved or rejected, they cannot be changed. Most works (an estimated 95-98%) undertaken in this project will use community participation to mobilize and pay labor. A very small number of works may need to be procured through small works. These will be contracted on the basis of lump-sum, fixed-price contracts awarded on the basis of quotations obtained locally from at least three local contractors (can include NGOs) in response to a written invitation. The invitation includes basic specifications, start and completion dates, an agreement format acceptable to the World Bank, and relevant drawings. Bids are opened in public meetings and read aloud. The award is made to the contractor who offers the lowest price quotation for the work. No restrictions on participation in bidding are allowed. This method is described in the Project Manual. Annex 12 of the PAD includes the main forms required by the Project Manual, which have been agreed with the Bank. Differences between kecamatan grants and pilot projects - KDP's standard design calls for kecamatan grants which are disbursed against proposals reviewed by the inter-village forum. However, for very isolated and very poor groups, kecamatans are too far for effective participation. The pilot programs for widows and fishermen differ from the normal grant, therefore, by moving decision-making downwards to individual villages, without going through kecamatans. All relevant formats are modified accordingly, but otherwise the procurement and disbursement procedures are the same as for the main grants. II. Prior Review Thresholds (Table B) * The thresholds for the Association's review are summarized in Table B. - Contracts for civil works at or above US$ 50,000 equivalent will be subject to prior review. * All contracts for goods at or above US$ 50,000 equivalent will be subject to prior review. Contracts for consulting firms regardless of value will be subject to prior review. Contracts with individuals will be subject to prior review, except for the contracts for provincial and district consultants, and kecamatan facilitators. For these contracts the terms of reference and qualification requirements will require prior review. IV. Procurement Plan The Procurement Plan for the project, providing a timeline for each step of the procurement process has been agreed with the Bank. The Procurement Plan is available on file and will be finalized as part of the Project Implementation Plan, PIP, for FY01 and FY02. During the life of the project, annual Implementation and Procurement Plans, acceptable to the Association, will be required starting November 30, 2001, and thereafter each November 30 until project completion, as a condition for commencing implementation in each year of the project

74 Procurement methods (Table A) Table A: Project Costs by Procurement Arrangements (US$ million equivalent) Method Expenditure Category ICB Procurement Other2 N.B.F. Total NCB Cost 1. Works (0.00) (0.00) (0.00) (0.00) (0.00) 2. Goods (0.00) (0.00) (0.00) (0.00) (0.00) 3. Services (0.00) (0.00) (48.0) (0.00) (48.0) 4. a. Government administration, training, and field monitoring (0.00) (0.00) (0.00) (0.00) (0.00) b. Training and additional operating expense (0.00) (0.00) (37.4) (0.00) (37.4) 5. Beneficiary Subprojects (community procurement) (0.00) (0.00) (232.7) (0.00) (232.7) Total (0.00) (0.00) (318.1) (0.00) (318.1) Figures in parenthesis arc the amounts to be finance(d by the Bank Loan,'Credit. All costs include contingencies. Includes consulting services, training costs, additional operating expense, and procurement under community participation

75 Table Al: Consultant Selection Arrangements (optional) (US$ million equivalent) Consultant Selection Method Services Expenditure QCBS QBS SFB LCS CQ Other N.B.F. Total Category Cost' A. Firms (4.60) (0.00) (0.00) (0) (1.30) (0.70) (0.00) (6.80) B. Individuals (0.00) (0.00) (0.00) (0.00) (0.00) (41.40) (0.00) (41.40) Total (4.60) (0.00) (0.00) (0) (1.30) (42.10) (0.00) (48.0) 1\ Including contingencies Note: QCBS = Quality- and Cost-Based Selection QBS Quality-based Selection SFB = Selection under a Fixed Budget LCS = Least-Cost Selection CQ = Selection Based on Consultants' Qualifications Other = Sole-source selection, Selection of individual consultants (per Section V of Consultants Guidelines). N.B.F. = Not Bank-financed Figures in parenthesis are the amounts to be financed by the Bank Loan/Credit. Overall Procurement Risk Assessment Average Frequency of procurement supervision missions proposed: One every 6 months (includes special procurement supervision for post-review/audits)

76 Prior review thresholds (Table B) Contract Value Contracts Threshold Procurement Subject to Expenditure Category (US$ thousands) Method Prior Review (US$ millions) 1. Works 2. Goods O 3. Services 100 QCBS 4.6 Below 100 CQ 1.3 IC 3.8 SS: SS 0.2 District Profiles SS 0.3 Joumalists SS 0.2 Law schools (5) 4. Beneficiary Subprojects CP 5. Miscellaneous Total value of contracts subject to prior review:

77 Disbursement Allocation of loanicredit proceeds (Table C) Table C: Allocation of Credit/Loan Proceeds Expenditures category IDA IBRD Financing SDR (Million) USD Percentage (Million) 1. Kecamatan Grants and Subloans % of Grant or Sub-loan amount disbursed 2. Facilitation support & Training % 3. Consultant's services for: (a) Implementation Supports % (b) M&E Studies % Front-end Fee (IBRD) 2.1 TOTAL PROJECT FINANCING The project will satisfy the Bank's minimum financial management requirement as stipulated in OP/BP after completion of the agreed action plan (Attachment 6.3). The system includes checks and balances in funds withdrawals, accounting and reporting of expenditures as well as periodic inspections in the field. The systems are supplemented by communities' social controls and transparency. Village's capacities to manage these systems vary, but for the most part the gaps can be minimized by hands-on training and technical assistance. A more detailed financial control measures adopted in the project is shown in Attachment 6.4. Special Account: GOI will establish a Special Account (SA) at Bank Indonesia (BI) denominated in US dollars, with an authorized ceiling $32million. The SA will be under the name of the Directorate General of Budget (DGB), Ministry of Finance. The procedures to withdraw funds from the SA will follow government procedures used for other projects acceptable to the Bank. The DGB shall forward the bank statements of the SA received from BI to the KDP project manager which will be used as the basis for SA replenishment request. 90-day Advance Account: KDP project manager will establish a 90-day advance payroll account in a competitively selected commercial bank to manage the payroll system for fields consultants. A deposit for an estimated of 3-months salaries will be made to the payroll account. The

78 bank will automatically releases funds to the consultants accounts each month in accordance with a set of criteria agreed up-front. The bank will provide bank statements and summary of payments made each month which will be used as the basis for replenishing the payroll account from Special Account at Bl. Any unutilized funds in the payroll account will be refunded to the Special Account. The criteria for selecting the bank for the above purpose, agreed at negotiations, would include the capability of such bank to provide payments services to consultants at the kabupaten level at the lowest cost. The term of references for the banking services and the consultants payroll system are provided as Attachments 6.5 and 6.6 respectively. Use of statements of expenses (SOEs): Disbursements will be made against Statements of Expenditure (SOEs) for all Kecamatan grants and subloans, training and facilitators supports. The documentation for relevant expenditures will be retained by the KDP project manager, MOF treasury offices, Province and District consultants, sub-district and Village units. All documentation will be made available to the Bank and auditors upon request. Audit Arrangement There is no outstanding audit on the previous project KDP-I. KDP project manager will prepare and produce consolidated project accounts. The auditor will also audit the attainment of objectives according to the agreed perfornance indicators. The annual audit reports shall be furnished to the Bank no later than six months after the end of the government fiscal year. Immediately after issuance, all the audit reports will be made available to the general public Prior to negotiations, BPM has issued a letter requesting auditor to audit the project in accordance with (i) Terms of Reference for the audit of special purpose financial statement as in Attachment 6.6, and (ii) the audit manual for the community projects (Pedoman Pelaksanaan Audit dan Pelaporan for Program Pengembangan Kecamatan, issued by BPKP in April 13, 1999). BPM ensures that these will be the sole guidelines for project auditing. BPM has agreed to inform annually the KDP's Kabupatens and Provinces that the audit of the subprojects is to be carried out exclusively by the auditors appointed by BPM

79 INDONESIA: SECOND KECAMATAN DEVELOPMENT PROJECT NOTE ON INDIVIDUAL CONSULTANT HIRING Attachment Nearly 90% of KDP2's consultant service procurement consist of hiring individuals rather than firms. The total amount of individual consultants is approximately $40 million in a project whose total procurement costs are $48.2 million. The purpose of this note is to summarize the rationale for this procurement strategy and the mechanisms that will be used by the project to provide effective checks and balances on service delivery quality. A more detailed summary of the proposal is provided in Attachments Rationale for the Stratesv 2. As explained in the PAD, the second Kecamatan Development Project is the fourth in a line of community development projects that began with the two Village Infrastructure Projects and the first KDP. Both because of their innovative designs and because of Indonesia's institutional flux, these projects have all been limited to three year time horizons so that the Bank and government can periodically pull back and assess progress before moving on to the next phase. 3. Both VIP and KDP involved a significant investment in training field staff in participatory planning methodologies and in village financial management. KDP-2 uses all of the same basic methodologies and formats as KDP-1, and from the beginning the new project has been seen as a continuation of the earlier project. 4. Between 15-20% of the staff were changed each year following performance evaluations; the remaining staff were moved to the next stage of the long-term training program. Assuming that another 15-20%/o are changed at the end of the current KDP cycle, the new project will be drawing on a pool of approximately 2,000 experienced, trained field consultants. All of these staff were competitively recruited through national advertising. For the new project, they will be given preference because of their experience and training, but they nevertheless must apply to the advertisement and be selected by the staff evaluation team. All new recruits will also be recruited through national advertising and selection. Company Services 5. Because the project draws on the existing pool of facilitators, the main task of consulting firms - to provide skilled services - is not needed for this project. Almost none of the current project consultants are full time core staff of their firms. All of their contracts will have ended before the start of KDP-2 and they will have returned to the open labor market. 6. Consultant service management in Indonesia is very poor generally, and the first KDP was no exception. Supervision files record widespread falsification of qualifications and substitutions of staff, so much so that by the second year of KDP, BPM and the Bank required additional confirmation interviews by the project's technical teams before new candidates could be accepted. Finns refused to accept any responsibility for poor staff performance, including cases of criminal action by their employees, even after the Bank revised standard contracts to include liability clauses. Government and independent surveys

80 commissioned by the Bank found widespread billing violations, such as deductions from direct costs, over-billing, and delays in payment to field staff of up to six months after payment to the firms had been released. As the CPAR notes, Indonesia presently lacks an independent judiciary, which meant that the project has had few remedies other than contract termination. This option was used in the three worst cases. But the overall value of the companies - at an overhead cost of nearly twice the billing rate - was very small and often was actually negative. Background and Procedure of the Direct Payment Proposal 7. The background to the present proposal is the Inpres Desa Tertinggal (IDT) project, a anti-poverty program managed by the same branch of Bappenas that was responsible for the VIP projects and the first year of KDP. Under IDT, the government directly hired and paid approximately 2,600 village facilitators. Payment was through the post office. For all of its other flaws, the IDT direct payment system worked smoothly. However, Bappenas found that the administrative requirements of the system placed a heavy strain on their internal management capacities, and the system was not adopted for other donor finded projects once the IDT program drew to a close. 8. Both Bappenas and MoF strongly support the proposed revival of the direct payment system for KDP-2. The proposal was discussed with BRI, a national bank that has branches in all districts where KDP-2 would operate. BRI did not foresee any administrative difficulties with the proposal. They already have similar arrangements for managing salary transfers to teachers and military personnel across the country. 9. Two kinds of firms would manage the system: * Competitively recruited management companies would provide administrative support to BPMs payroll unit. Their draft terms of reference are attached. To improve accountability and maintain independent controls, two separate firms would manage (a) national team consultants (approx. 50 persons); (b) province and district consultants (approx. 350 persons). * Competitively selected bank services to manage payroll of the kecamatan facilitators (approx persons). The BPM project manager will open up a 90-days advance account in the designated bank, which is replenished from the BI Special Account. The bank is authorized to provide monthly payments to facilitators through their district banks upon receipt of the "summary of facilitators time sheet/performance" from the district consultant. The bank shall provide monthly statements of money received from the BI Special Account and money released to the individual facilitator accounts. 10. This system is much simpler than the current arrangement. Contracts are individual contracts signed between the consultant and BPM, the project's executing agency. Consultants report to the technical consultant immediately above them, just as in the current KDP subdistrict consultants report to the district consultant, district consultant to the provincial consultant, and provincial consultants to the national management team in Jakarta. 11. The National Management Team lists all the facilitator names, locations, and payment details. This forms the master payroll list. Each facilitator has a normal, private account, preferably at the same bank as the paymaster but not necessarily so since electronic interbank transfers work well in Indonesia (not restricting local accounts to branches of a national bank also allows for competitive selection of the -76 -

81 paymaster). The facilitator's bank account number and transfer information is recorded in the national bank. 12. Payments to the consultants are automatically sent to their bank account each month. Transfers stop if: * Project Manager orders suspension; * Project Manager stops an individual payment; * The Project ceases to be active in the area concerned. 13. Consultant monitoring is through a standard monthly timesheet that is signed by both of the district consultants and a subdistrict facilitator elected from among all the facilitators in that district This same model would be used for the district consultants, who would also elect one of their members to sign off monthly payments at the provincial level. Both districts and provinces already have mandatory monthly meetings for all technical staff, so no additional travel is involved in payroll certification.. Regular ex-post audits and supervision by the National Management consultant also review the timesheets. Each district consultant summarizes the individual timesheets into a "staff attendance and performance report" which can be checked against payments. Copies go to the local project manager (PjOK). 14. Operational costs for the consultants are paid through a separate account. These cashbooks are public documents and are presented to the sub-district council for review at the start and finish of each KDP cycle. They are also audited

82 INDONESIA: SECOND KECAMATAN DEVELOPMENT PROJECT TERMS OF REFERENCE CONSULTANT CONTRACT ADMINISTRATION SERVICES Attachment 6.2 Back2round 1. The background to the present proposal is the Inpres Desa Tertinggal (IDT) project, a anti-poverty program managed by the same branch of Bappenas that was responsible for the VIP projects and the first year of KDP. Under IDT, the government directly hired and paid approximately 2,600 village facilitators. Payment was through the post office. For all of its other flaws, the IDT direct payment system worked smoothly. However, Bappenas found that the administrative requirements of the system placed a heavy strain on their internal management capacities, and the system was not adopted for other donor funded projects once the IDT program drew to a close. 2. Contracts for field consultants are individual contracts signed between the consultant and BPM, the project's executing agency. Consultants report to the technical consultant immediately above them, just as in the current KDP subdistrict consultants report to the district consultant, district consultant to the provincial consultant, and provincial consultants to the national management team in Jakarta. 3. Competitively recruited management companies would provide administrative support to BPMs payroll unit.. To improve accountability and maintain independent controls, two separate firms would manage: (a) national team consultants (approx. 50 persons); (b) province and district consultants (approx. 350 persons) Contract Administration Responsibilities 4. The administrative firm will assist the KDP-2 Project Manager in preparing the standard contracts for the individual consultants and for storing the signed contracts in Jakarta. 5. The selected administrative firm will field a team of persons to support the payment of consultants in the field. The firm will act as payroll agent to the individual consultants. The firm will prepare the payments list to the selected bank at the national level, including the name of the consultant, their account numbers, and the amount to be transferred into each account. This will be delivered both in written and electronic form in a format negotiated with the bank, to facilitate on-line transfers. 6. The selected administrative firm will compile data for each individual consultant. For each consultant the record will indicate their two bank account numbers, their placement, their monthly salary and standard allowances, and their typical monthly operational expense. 7. The individual consultants at the district and province levels will each open two bank accounts. One account will be a personal account into which will be transferred the consultant's personal entitlements, including salary, transport, and housing. A second account will be opened for operational costs for the consultants, including office expenses, per diem, reporting, communication, computer rental, office rental, and the like

83 8. Each month the administration firm will receive information about the amount of funds to be transferred to the consultants. This information will be sent from the consultants immediate supervisor, so that there will be one instruction from each district and province and from the national management consultants. Consultants will be paid the standard amounts unless the administrative firm is informed of changes in advance. Consultants may not be paid, for example, if * Project Manager orders suspension; * Project Manager stops an individual payment; * The Project ceases to be active in the area concemed The operational payments may be altered to reflect special transfers to fund particular project requirements in the field. In such cases the admninistator will be informed, and the instructions to the bank will reflect the modified amounts. 9. The consultants will account for any expenses from the operational account as well as attendance information in the form of time sheets. This information will be prepared by the individual consultants and certified by their superiors before being forwarded to the administrator. The administrator will crosscheck this data to ensure that the consultants had received the funds in accordance with instructions to the bank, and to see that there is adequate back-up for operational expenses. 10. The administrative firm will prepare written instructions for the consultants about the adequacy of proof for the different kinds of expenses, to simplify auditing. This will include deciding which items must be sent to the national administrator and which may be stored on site subject to on-site audit. 11. The firm handling the administration of the NMC will procure or rent facilities and equipment for the NMC, as their procurement is not included in their normal operating expenses, unlike the consultants in the field. The administrator will undertake this procurement, following standard procurement guidelines and the requirements as identified by the NMC and Project Manager. Reportina Requirements 12. The firm will report to the Project Manager for KDP-2. Each monthly report will include information about the amounts transferred, summnarized by district. It will highlight any deviations from standard payments. It will also describe any problems in the payment system and give recommendations to overcome the problems. Loeistical Requirements 13. The firm must maintain office space convenient to the national secretariat at Ditjen BPM in Jakarta, adequate for the number of staff and for storage of documents. 14. The number of staff and computers must be adequate to the task of processing information on the approximately 2500 contracts to be managed under these TOR. 15. The firm must have on-line capabilities, so that reports and information may be sent electronically from the field wherever possible

84 Attachment 6.3 INDONESIA: SECOND KECANIATAN DEVELOPMENT PROJECT Action Plan on Financial Mlanagement Issues/ Problems Remedial Action Responsible Due Date Unit 1. Organization *project organization structure agreed *BPM * Done struc ture and acceptable to the Bank *Establishment project organization * Done structure 3. Project staffing.proposed staff for the project *BPM * Done management unit *Appointment of Project Nlanagers and *BPU * Done their team 4. Project *training plan for project stakeholders *BPM * Done management capacity 5. Project *PMM completed and acceptable to the *BPM * Done Management Bank. Nlarual I (PMM) *PMM formally issued *BPM * Before Effectiveness -Re-evaluation on applying PMvlR-based * A year after disbursement effectiveness 6. Buidget & *budget document issued and or *BPM * Nov 30, Funding for the first revised 2001 year implementation 7. Circular letter *SE issued and circulated *BPM/ DG.. Nov 30, (SE) by DG Budget Budget 2001 S. Audit *dratt TOR audit *BPM * Done Arrangement *Auditor assignment agreed * Done

85 Attachment 6.4 INDONESIA: SECOND KECAMATAN DEVELOPMENT PROJECT FINANCIAL CONTROL MEASURES The Financial Process KDP begins with a fixed total amount that is assigned to a sub-district. This amount is standard and is widely publicized so that all stakeholders know how much total money is available. Within the sub-district or village, the money supports individual proposals that come from village assemblies. The allocation of funds to a particular village is based on completed designs and budgets drawn up together by the village and the field engineer and approved by the local government's project manager. Once determined, this amount of funds is never changed, although how it is spent and the physical works undertaken can easily be amended by the three parties. Upon ratification of the plans by the project manager and responsible party from the village, the village implementation team requests an initial withdrawal from the local branch of the treasury at the district level. They use a standard administrative format that simply withdraws a standard percentage of the allocated funds. It is signed by the village representatives and by the project manager. The size of the withdrawal is a standard percentage of the budgeted total. The treasury office requires a few simple things to accompany the first withdrawal: proof that the project manager and village representative are indeed the authorized parties, a copy of the grant agreement with the village, and signature samples. The funds are transferred directly into the account of the village implementation team in a local branch of a government or commercial bank. Even though the funds are in their own bank account, the village team cannot withdraw funds without countersigning by the consultant. Both the consultant and the responsible person from the village would have previously submitted their signature samples to the bank, along with proof that they were the authorized persons. In order to obtain the approval of the field engineer, the village implementation team has to produce an acceptable Funds Utilization Plan - a detailed list of anticipated expenditures for the immediate future. The frequency of withdrawals depends in part on physical proximity to the bank from the village, but in principle the amount of cash kept in the village is as small as practical. On Java, access to the banks is nearly always easy, although remote branches of banks often required some advance notice to be sure to have sufficient funds on hand for a large withdrawal. Off-Java, special contracts with cormmercial state banks are signed to provide regular cash deliveries to outlying locations. Every expenditure made by the village has to be accounted for in an Expense Report. An adequate receipt is one that has the signature of the person receiving the funds, a clear description of what the expenditure was for, a clear amount and date. All receipts of materials and services in the Expense Report require the attachment of delivery orders, wherein a designated person notes the items and quantity received, countersigned by the person delivering them. Withdrawals from the bank continue to be made until the first tranche's funds are nearly exhausted. At this point the village requests additional funds from the treasury, using the same form countersigned by the project manager. This shows both the funds requested and cumulative status. In addition to this request, the project manager requires two other items prior to submitting the request to the treasury. The first was the summary of expenses found in the Expense Report, and the second was a status report signed by the local bank saying how much funds remained deposited from the previous tranche

86 The full expense report includes a summary of expenses and receipts, including the amount of cash on hand in the village. This sheet is backed up with the proof of every expenditure and their associated delivery notes, all of which are glued to blank sheets of paper and bound. One expense revort book is prepared for each withdrawal from the treasury, but these books stay in the village. They can be examined by the consultant, the project manager or his designate, any inspectors, and any person in the village who had an interest. Payment of incentive wages to villages is accomplished through the use of two standard payment forms. These are used for any payment to a villager, whether working for at a daily rate or working on a piece rate based on accomplishment. The form for pay based on attendance lists the workers in a particular group (usually around 20 workers, men and women), their attendance, their accrued wages this period, and their signature (or thumb print if they were illiterate) confirning that they had received the given amount of money. Most payment is on a weekly or bi-weekly basis. Payment based on accomplishment also shows the list of workers, the basis for calculating the volume accomplished, the division of payments to each individual (decided amongst themselves), and their individual signatures. All of these payments and rates are posted on publicly displayed signboards. The Cash Book A key to financial control is the requirement that the implementation team maintain an accurate cash book in a standard format, updated daily. The key features of the cash book are that: * The information is maintained in a ledger so that corrections and additions are apparent; * It contains a detailed list of all financial transactions, both receipts and expenses; * Expenses are described at the same level of detail as the official receipts, with each expenditure entered into a column corresponding to the sub component of the project it corresponded to (including the village team's administrative expenses) * All expenses are coded with a simple expense category and listed with the number written on the proof of expense * Two kinds of incoming funds are recorded: from the treasury into the bank, and from the bank into the village treasurer's hands. Balances were calculated using the latter. * Erasures, white-out, and obliterating marks are forbidden, so that corrections are visible. Books are closed near the end of each month and books are then signed by four persons: the village treasurer, the responsible party, the field engineer, the village chief in his capacity as controller, and two villagers as witnesses. * A running balance is maintained, with the proviso that the balance cannot be negative. In this way, the books always show the actual status of expenses and cash, without hidden expenses and loans to complicate the understanding of an inspector. Village-level meetings are held during implementation to review procurement and expenditures, and all information is posted on public signboards (avg. 10 per village). An accountability meeting is held at project completion for the village implementation team and the facilitators to account for funds and to hand over the project to the village, represented by the council and the village head

87 Inspecting Several government inspection agencies make formal inspections of a given VIP or KDP village. The district and provincial inspection offices typically made inspections during implementation to a small sample of villages in their area. They are usually more concemed with administrative inspections, but they also review the physical works to some extent. The National Development Auditing Agency BPKP performs a larger scale inspection several months after the end of the fiscal year, again on a sample of villages. In the field, representatives of their regional branch offices inspect both the administrative and physical aspects, as well as the visible benefits. Their reports are sent both to the project manager in Jakarta as well as to the World Bank. More frequent inspections are made by other project consultants. Senior engineers are assigned to each district, and more than half their time (by contract and TOR) is spent in visiting villages to check on the physical works and on the work of the field engineers. This includes checking the administration. In cases where the works or administration are below standard, recommendations and instructions are left with the implementation team and field engineer. An independent inspector visits villages at random without any accompanying consultants, and this serves as a crosscheck of all the above. Conclusions Although lacking in sophistication, the financial control system in the community projects for the most part is effective in limiting leakages and in detecting leakages that occurred. The system includes checks and balances in funds withdrawals, detailed bookkeeping and records of expenses, and periodic inspections in the field. The formal systems are coupled with the communities' social controls and fueled by transparency. Village's capacities to manage these systems vary, but for the most part the differences can be remedied through hands-on training and follow-up. This is not to say that malfeasance never occurs, but it is usually relatively easy to detect, often reported when it does occur, and in enough cases actors have been subjected to administrative sanctions when it was detected to prevent any widespread contagion effects. Weaknesses in the system appear to revolve largely around implementation extemalities rather than aspects of the system itself. For example, while the community projects' financial management systems can usually detect leakages, there is a much less well developed system for imposing sanctions on people who steal. Similarly, local government auditors have been accused of falsifying reports or to ask villagers for money to not report supposed financial abuses

88 INDONESIA: SECOND KECAMATAN DEVELOPMENT PROJECT TERMS OF REFERENCE BANKING SERVICES FOR FACILITATORS PAYROLL Attachment 6.5 Back2round 1. The background to the present proposal is the Inpres Desa Tertinggal (IDT) project, a anti-poverty program managed by the same branch of Bappenas that was responsible for the VIP projects and the first year of KDP. Under IDT, the government directly hired and paid approximately 2,600 village facilitators. Payment was through the post office. For all of its other flaws, the IDT direct payment system worked smoothly. However, Bappenas found that the administrative requirements of the system placed a heavy strain on their internal management capacities, and the system was not adopted for other donor funded projects once the IDT program drew to a close. 2. Contracts for field facilitators at Kecamatan level are individual contracts signed between the consultant and BPM, the project's executing agency. Consultants report to the technical consultant immediately above them, just as in the current KDP sub-district facilitators report to the district consultant, district consultant to the provincial consultant, and provincial consultants to the national management team in Jakarta. 3. Competitively selected payroll agent (banks) would manage payroll for the kecamatan facilitators (approx persons). Banking Services 4. The selected bank in Jakarta will open up a Master payroll account into which The KDP project manager will deposit an advance for the estimated three months salary of the facilitators. The bank will provide monthly payments to the facilitators through their designated district banks. 5. The selected bank will designate a bank in each KDP's district (district bank) who will be authorized to transfer funds to the facilitator account upon receipt of a monthly "Summary of facilitators timesheet/performance" from the district consultant. These funds transfers are to be debited directly to the Master Account/Jakarta 6. Payments to the facilitators are automatically made each month unless the KDP Project Manager orders suspension in writing to the selected bank (due to suspension of individual payment; or the project ceases to be active in the area concerned) 7. The individual facilitators will each open two accounts at a district bank, preferably at the same bank as the paymaster but not necessarily so since electronic interbank transfers work well in Indonesia: First, a personal account into which will be transferred the consultant's personal entitlements, including salary, transport, housing and other fixed allowances

89 Second, a joint account (under the names of two facilitators, PJOK and UPK) for operational costs for the kecamatan socialization costs, including the salaries of assistants, village facilitators, office expenses, per diem, reporting, communication, computer rental, office rental, and the like. 8. Payment will be made by on-line electronic transfer wherever possible. There will be no amount deducted by the selected bank or its branches from the individual amounts transferred to the facilitators 9. The bank has no reporting requirements other than monthly Bank statements (in hard copies and electronic files) of money received from the BI Special Account account, money released to the facilitators accounts, and the account balance. 10. KDP Project Manager arranges replenishmento the Master Account an amount of the estimated next three months salary and operational cost requirements less the balance available. 11. Any interest accrued will be credited to the account and transactions fee will be debited to the account 12. The bank, upon request by KDP Project manager, shall made available the documentation evidencing the payments made from the payroll account for audit 13. Details of the payment system can be seen in Attachment

90 INDONESIA: SECOND KECAMATAN DEVELOPMENT PROJECT PAYIMrT T, SYSTEM FOR FACILITATORS Attachment 6.6 Kecamatan Level Consultants The Community Empowerment Coach and the Management and Technical Coach are facilitators in KDP at the kecamatan (subdistrict) level. Assuming the number of kecamatans is 1000, there will be 2000 facilitators (1) Selection Process. The need for consultants is advertised in local newspapers. Format I - Standard advertisement Based on applications received, the consultants will be selected by the National Secretariat and National Management Consultants, with the assistance of the local government coordination teams and existing senior consultants in the field, and then recommended to the National Project Manager. The former KDP facilitators and VIP field engineers will be given priority. (2) Appointment of the Kecamatan Facilitators. Their Letter of Appointment Format 2 - Appointment Letters is prepared by the Project Manager, for a three year assignment. The performance of the consultants will be reviewed periodically and the consultant can be discharged for cause if his or her performance is inadequate. (3) Selection and Appointment Schedule * Posting advertisement in newspapers 1 August 2001 * Receipt of applications I - 15 August 2001 * Selection and interviews August 2001 * Recommendations to Project Manager 1 September 2001 * Appointrnent letter by Project Manager I October 2001 * Ready to work 1 November 2001 (4) Supervision of Kecamatan Facilitators. The district level consultants undertake the supervision of the kecamatan facilitators. The district level consultants include a Technical and Management Consultant and a Community Empowerment Consultant at the district level. They undertake supervision of the performance of the kecamatan facilitators and approve their reports. At least once a month the kecamatan facilitators will attend a meeting with the district consultant. At the end of each month, the kecamatan facilitators will submit a monthly report, countersigned by the kecamatan level manager and inspected by the district consultants. This report will form the basis for them to prepare a "Summary of Kecamatan Facilitator Performance" Format 4 - Summary of Kecamatan Facilitator Performance that is used as the basis for payment. System for Payment of Consultant Salaries (1) The kecamatan facilitators will open two accounts in a selected district level bank, one individual for payment of salary (with housing and transport and other lumpsum allowances) and one joint account for operational costs, including the payments for subdistrict assistants and village cadre. (2) Each end of month, the district consultants will send the Summary of Kecamatan Facilitator

91 Performance to the district bank as the basis for paying their salaries. (3) The district bank will crosscheck this summary with the list of names provided by the national level bank, if matches it pays to the accounts of the facilitators. Contract Agreement between KDP and the bank The KDP Project Manager Project Manager is at the Ditjen BPM, Jakarta will contract a bank to pay the salaries and operational expenses of the consultants, with the basic agreement being as follows: (1) KDP Project Manager. * Opening a Master Account for paying salaries at the national level bank * Submitting the names of the consultants and their placement * Submit a payment request (SPP) to the KPKN (Treasury) for the first two month's requirements * Submit an SPP to the KPKN to fill the Master Account for consultant salaries * Ask the provincial consultants to collect the specimen signatures of other senior consultants that will be submitting Summaries of Performnance to the administrative firm. (2) National Bank/Jakarta * Select the district banks e Tell the district banks the names and entitlements of the facilitators and their placement * Inform the district bank of the payroll regulation * Submit to the Project Manager the monthly bank statements and summary of payments made (details per district) Format 5 - Summary of Payments to Consultants (3) Kabupaten Bank e Receives the Summary of Kecamatan Facilitator Performance for the district consultant. - Crosscheck this summary with the list of names provided by the national level bank, if matches it credit the accounts of the facilitators - Inform the national bank to debit the Master Account e Follow the payroll regulation (4) Schedule of Payments and its Reports * District Consultant Summary of Facilitator Performance Day 1-3 * District Bank Credit Facilitators Account Day 5-7 * Nat. Bank Debit the Master Account Day 5-7 * Nat. Bank Submit a summary of payments per district Day 8-10 * Project Mgr Submit an SPP to replenish the Master Account Day

92 Payroll System for Facilitators OVERVIEW KPKN Payment1 (treasury) \ requetreplenishment KDP Project Mgr * Bank (Jakarta) * Update facilitators Contract Agreement * Master account data maintenance * Processes payment 4 * Payroll summary auth. Monthly statements reports time sheet reports T Facilitators Names Debit central District Consultant District Bank Performance review Summary of facilitators * Reconciliation with of subdistrict Performance payment list (names) facilitators * Credit facilitator account Monthly works report Facilitators Collect money -88 -

93 INDONESIA: SECOND KECAMATAN DEVELOPMENT PROJECT TERMS OF REFERENCE for the Audit of Special Purpose Project Financial Statements Attachment 6.7 Objectives The overall objectives of the audit are: (i) to enable the auditor to express a professional opinion on the project financial statements, the operation of the overall financial management system including internal controls, and compliance with financing agreements; (ii) to provide project management with timely information on financial aspects of the project to enable follow-up action; and (iii) ) to assess on the achievements of project objectives as measured by performance indicators. The audit should cover the entire project, i.e. covering all sources and application of funds by all implementing agencies. The auditor should visit the various implementation units and other agencies as considered necessary for the audit. Scope The audit will be carried out in accordance with International Standards of Auditing and with the Audit Manual for World Bank Financed projects (July 1998). It will include such tests and controls as the auditor considers necessary under the circumstances. Specific areas of coverage of the audit will include the following: (1) an assessment of whether the project financial statements have been prepared in accordance with consistently applied Generally Accepted Accounting Principles (GAAP) and give a true and fair view of the operations of the project during the year and the financial position of the project at the close of the fiscal year. Any material deviations from GAAP, and the impact of such departures on the project financial statements as presented would be stated (2) an assessment of the adequacy of the project financial management systems. The financial management system would include methods and records established to identify, assemble, analyze, classify, record and report on transactions and to maintain accountability for the related assets and liabilities including internal controls. This would include aspects such as adequacy and effectiveness of accounting, financial and operational controls, and any needs for revision; level of compliance with established policies, plans and procedures; reliability of accounting systems, data and financial reports; methods of remedying weak controls or creating them where there are none; verification of assets and liabilities; and integrity, controls, security and effectiveness of the operation of the computerized system (if any), and (3) an assessment of compliance with provisions of financing agreements, especially those relating to accounting and financial matters. This would interalia include verification that: (a) all external funds have been used in accordance with the conditions of the relevant financing agreements, with due attention to economy and efficiency, and only for the purposes for which the financing was provided. (b) counterpart funds have been provided and used in accordance with the relevant financing agreements, with due attention to economy and efficiency, and only for the purposes of which they were

94 provided; (c) expenditures charged to the project are eligible expenditures and have been correctly classified in accordance with the relevant financing agreement; (d) agreement; goods and services financed have been procured in accordance with the relevant financing (e) all necessary supporting docunents, records, and account have been kept in respect of all project activities (f) clear linkages exist between the accounting records including accounts books and the Project Financial Statements; (g) where Special Account has been used, it has been maintained in accordance with the provisions of the relevant financing agreement. (h) statement of expenditures (SOE) used as the basis for the submnission of withdrawal applications accurately reflect expenditures and activities on the project (i) project expenditures as reported by the project implementation agencies are reconciled with the amounts withdrawn from the Special Account and the amounts deposited to the special account are reconciled with the amounts disbursed from the IBRD Loan. (4) an assessment on the achievements of the planned results of the projects as measured by the performance indicators as stipulated in the relevant financing agreement. Project Financial Statements Project Accounts, are prepared by the project executing agency, and should include (i) Annual Project Expenditures and Financing; and (ii) Cumulative Project Expenditures and Financing. Sources of funds would show IBRD, other donors, and GOI counterpart funds separately. Project expenditures would be summarized by main project components, disbursement categories and by project location (province or kabupaten) both consolidated for the current fiscal year and accumulated to date. The auditor must assess a reconciliation report between the project expenditures made from the special account and the withdrawals from the special account. Reconciliation should also be made with the amounts paid from the pre-financing account and direct payments. Financial Statement of Special Account, is prepared by DG Budget, MOF and includes: (i) deposits and replenishments received from the Bank; (ii) withdrawals from the special account; and (iii) the remaining balances at the end of the fiscal year The auditor should provide an opinion as to the degree of compliance with the Bank's procedures and the exactitude of the balance of the Special Account at year-end. The audit should examine the eligibility and integrity of financial transactions during the period under review and fund balances at the end of the period, the operation and use of the special account in accordance with the financing agreement, and the adequacy of intemal financial controls. The auditor should assess a reconciliation report between the amounts deposited to the special

95 account and disbursed by the World Bank to the special account. Statement of Expenditures. The auditor is also required to audit all SOEs (paid from the special account and/or other accounts) used as the basis for the submission of withdrawal applications. The auditor should apply such tests and control as the auditor consider necessary under the circumstances. These expenditures should be carefully compared for project eligibility with the relevant financing agreements, and with reference to the Project Appraisal Document for guidance when considered necessary. Ineligible expenditures identified as having been included in withdrawal applications and reimbursed by the World Bank should be noted separately by the auditor. The total withdrawals under the SOE procedure should be part of the overall reconciliation of Bank disbursements described above. Audit Report The audit report shall contain the auditor's opinion on the fairness of the project financial statements. The report should refer to the auditor's TOR. The auditor should submit the report to the project executing agency who should then promptly forward one copy of the audited accounts and report to the Bank. It should be received by the Bank no later than six months after the end of the project's fiscal year. The audit opinion on the Special Account should include a separate paragraph commenting on the accuracy and propriety of expenditures withdrawn under the SOE procedures and the extent to which the Bank can rely on SOEs as a basis for loan disbursement Management Letter In addition to the audit reports, the auditor will prepare a "management letter," in which the auditor will: (a) give comments and observations on the accounting records, systems, and controls that were examined during the course of the audit; and identify specific deficiencies and areas of weakness in systems and controls and make recommendation for their improvement; (b) give comments on economy, efficiency, and effectiveness in the use of resources; (c) report on the achievement of the planned results of the project (d) report on the degree of compliance of each of the financial covenants on the financing agreement and give comments, if any, on internal and external matters affecting such compliance; (e) communicate matters that have come to attention during the audit which might have a significant impact on the implementation of the project, and (f) any other matters that the auditors considers pertinent. General The auditor should be given access to all legal documents, correspondence, and any other information associated with the project and deemed necessary by the auditor. Confirmation should also be obtained of amounts disbursed and outstanding at the Bank. The auditor should be familiar with the Bank's Audit Manualfor World Bank Financed Projects which provide guidance to auditor,.conducting audits of World Bank financed projects

96 Annex 7: Project Processing Schedule INDONESIA: SECOND KECAMATAN DEVELOPMENT PROJECT Project Schedule Planned - -- Actual Time taken to prepare the project (months) 5 First Bank mission (identification) 12/15/ /15/2000 Appraisal mission departure 05/15/ /04/2001 Negotiations 05/25/ /18/2001 Planned Date of Effectiveness 08/31/ /31/2001 Prepared by: Department of Home Affairs, Bappenas Preparation assistance: PHRD Bank staff who worked on the project included: Name I Speciality Yogana Prasta Disbursements Unggul Suprayitno Financial Management Naseer Rana Procurement Gillian Brown Institutions/Gender Pawan Patil Economist Asmeen Khan Rural Development Karin Nordlander Lawyer Anthony Toft Lawyer Enurlaela Hasanah Consultant (proj. historian) Victor Bottini Consultant (institutions) Soeroso Soesastromo Consultant (engineering) Susanto Simanjuntak Consultant (anti-corruption) Richard Gnaegy Consultant (engineer, MIS) Arie Purwanti Consultant (document management) Gloria Davis peer review (anthropologist) Lant Pritchett peer review (economist) Julie van Domelen peer review (institutions)

97 Annex 8: Documents in the Project File* INDONESIA: SECOND KECAMATAN DEVELOPMENT PROJECT A. Project Implementation Plan Procurement Plan Financial Management and Disbursement Review Project Implementation Plan TOR and draft RFPs for Year I Technical Assistance Year I Kecamatan List (pre-evaluation) B. Bank Staff Assessments C. Other KDP Supervision mission reports Local Institutions Study Collected newspaper reports on KDP 1 (Indonesian) Monthly NGO reports on KDP 1 (Indonesian) Minutes from Preparation Workshops with Civil Society (Indonesian) KDP corruption study/database (Indonesian and English) Topical case studies (Indonesian) LD quantitative review of participation *Including electronic files

98 Annex 9: Statement of Loans and Credits INDONESIA: SECOND KECAMATAN DEVELOPMENT PROJECT Apr-2001 Difference between expected and actual Original Amount in US$ Millions disbursements Project ID FY Purpose IBRD IDA GEF Cancel. Undisb. Orig Frm Rev'd P ID-PROVINCIAL HEALTH I e P ID-WSSLIC II P DECENTAGRIFOR EXT P IND-URBAN POVERTY PROJECT , P IND-MUNCIPAL INNOVATIONS PROJECT P ID-SULAWESI BASIC EDUC P ID-FIFTH HEALTH PROJECT P WATSAL P CORPORATE RESTRUCTRG P ID-SUMATRA BASIC EDUC P ID-EARLY CHILD DEVELOPMENT P BENGKULU REGIONAL DEVELOPMENT P IIDP P ID-XECAMATAN DEV FUND P CORAL REEF MGMT REHA P ID-SAFE MOTHERHOOD P SUMATRA REG. ROADS P ID-W. JAVA BASIC EDUC P BANKING REFORM ASST P CORAL REEF MGM REHAB P IND-SULAWESI UDP II P RLWY EFFICIENCY P IND-BALI URBAN INFRASTRUCTURE PROJECT P ID-QUALITY OF UNDERGRADUAT EDUC (QUE) P SOLAR HOMES SYSTEMS P ID-CENTRAL INDONESIA SEC. EDU P BEPEKAAUDIT MODER P P ID-IODINE DEF. CONTROL P ID-SUMATRASEC EDUC P ID-E.JAVA SEC.EDUC P IND-EAST JAVA UDP II P IND'L TECHNOLOGY DEV P P KERINCI SEBLAT ICDP ID-SECONDARY SCHOOLTEACHER DEVT P ID-HIGHER EDUC SUP.(DUE) P NUSATENGGARA DEV P POW. TRANS& DIST II P STRATEGIC URB. RDS I P SULAWESIAGRIAREA P KERINCI SEBLAT ICDP P P ID-HEALTH IV:IMPR HEALT IND-KALIMANTAN UDP P IND-TAP P ID-BOOK & READING DEV P AG. RESEARCH II P LAND ADMINISTRATION P ID-PHRD II P TELECOM SECTOR MODER P IND-SEMARANG SURAKARTA UDP P SUMATERA & KALIMAN P P HIGHWAY SECTOR II P JAVA IRR IMP & W R M P DAM SAFETY P BIODIVERSITY COLLECT

99 Original Amount in US$ Millions Difference between expected and actual disbursements Project ID FY Purpose IBRD IDA GEF Cancel. Undisb. Orig Frm Rev'd P ID-THIRD COMM HEALTH & Total:

100 INDONESIA STATEMENT OF IFC's Held and Disbursed Portfolio Apr-2001 In Millions US Dollars Committed IFC Disbursed IFC FY Approval Company Loan Equity Quasi Partic Loan Equity Quasi Partic 1997 PT Bank NISP PT Berlian PT Bunas Finance PT Dharmala PT Grahawita PT Hotel Santika PT Indaci PT Indo-Rama /91/93/95/99 PTKIAKeramik /94/96 PT KIA Serpih PT Kalimantan PT Makro /00 PT Megaplast PTNusantara PT PAMA PT Pramindo Ikat PT RIMBA PT Samudera PT Sayap PT Viscose /95 PT Wings Prudential Asia SEAVI Indonesia Semen Andalas /87 Ciluluk Village KDLC Bali LYON-MLF-Ibis Manulife POF PTABSFinance PT AdeS Alfindo PT Agro Muko PTAlumindo PT Argo Pantes PT Astra /91/94 PT Astra Graphia PT Astra Otopart PT BBL Dharmala /96 PT Bakrie Pipe Total Portfolio: Approvals Pending Commitment FY Approval Company Loan Equity Quasi Partic 2000 NISP Equity PT Petrosea Total Pending Commitment:

101 Annex 10: Country at a Glance INDONESIA: SECOND KECAMATAN DEVELOPMENT PROJECT East POVERTY and SOCIAL Asia & L ow - Indonesia Pacific Income Development diamond' its9 Population, nid-vear (millions) , Life expectancy GNP per capita AMlas method. US$) GNP fatlas method. US$ billions) 120, Average annual growth, Population (%M Labor force (% GNP F-. Gross per, primary Most recent estimate hlatedt year avallable, ) capita enrollment Povetv (% of population below national poverty line) 20 Urban popuietion ( of tot8 lopulation) 3S Life expectancy at b(rth (Ye8rs) 65 e9 60 Infant mortalitv (per 1,000 live births) Child mainutritlon (1 of children under 5) Access to safe water Access to imoroved water source fyt of oopulation) tiliteracv (1 ofdopuleloin age 15+) Gross orimary enrollmert I% of school-age oopulation) ndonesia Male 115 t Low-income group Female 110 t21 86 KEY ECONOMIC RATIOS and LONG-TERM TRENDS Economic ratios' GDP (US$ billions) , Gross domestic investment/gdp Exports of qoods and services/gop Trade Gross domestic savinqs/gdp Gross nationat savinqs/gop Current account baltncetgop Domestic Interest oayments/gdp 1, Investment Total debt/gdp S Savings S I t Totat debt service/exports Present valve of debt/gop Present value of debt/exports Indebtedness S S (average annua/ growth) GDP * ndonesie GNP Der capita Low-income group ExDorts of qoods and services , = STRUCTURE of the ECONOMY Growth of investment and GDP(%h (% of GDP) 40 Aariculture Industry Manufacturinq Services Z S Private consumption General government consumdtion GD1 -OGDP Imports of qoods and services Growth of exports and Imports 1%) (average annual growth) Agriculture Industry Manufacturinq Services Private consumption sa General government consumption Gross domestic investment Imports of qoods and services Exports -'Imports Gross national product Note: 1999 data are preliminary estimates. * The diamonds show four kev indicators in the country (in bold) compared with its income-qroup average. If data are missino. the diamond will be incomplete

102 PRICES and GOVERNMENT FINANCE Domestic prices Inflation (%) (% change) 100 Consumer prices Implicit GDP deflator so Indonesia Govermment flnance 25 (% of GDP, includes current grants) Current revenue Current budget balance GDP deflator ^ CPI Overall surplus/deficit TRADE Export and import levels (USS mill.) (US$ millions) Total exports (fob).. 23,833 48,354 55,546 60,0o0 Fuel.. 9,340 7,424 10,256 Rubber es 952 1,420 1,229 40,000 Manufactures.. 7,669 23,322 26,281 Total imports (cif).. 19,624 33,778 35,945 L Food ,284 1,787 20,000 Fuel and energy.. 3,146 3,122 3,958 Capital goods.. 5,904 6,388 3,366 o Export price index (1995=100) Import pnce index (1995=100) 87. Exports * Imports Terms of trade (1995=100) 95 BALANCE of PAYMENTS (US$ millions) U Current account balance to_gdp (%) Exports of goods and services.. 25,460 52,722 59,317 6 ImPorts of goods and services.. 19,675 41,060 41,972 Resource balance ,662 17,345 4 Net income -2,920-8,066-10,958 2 Net current transfers. -4,464 1, Current account balance. -1,599 4,609 6, Financing items (net). 1,847-3,140-2,836 Changes in net reserves ,469-3,452 A Memo: Reserves including gold (USS millions).. 26,169 31,221 Conversion rate (DEC, local/uss) , , ,405.0 EXTERNAL DEBT and RESOURCE FLOWS (USS millions) Composition of 1999 debt (USS mill.) Total debt outstanding and disbursed 18,624 59, , ,435 A. 11,578 IBRD 739 8,542 10,692 11,578 G: :682 IDA c: 9,090 Total debt service 3,065 9,833 18,967 23,225 IBRD 95 1,134 1,456 1,584 0: 9,083 IDA Composition of net resource flows Official grants V Official creditors 555 2,935 2,696 E. : 32,054 Private creditors ,653 0 Foreign direct investment F-84,007 '4- Portfolio eouity World Bank program Commitments B15 2, ,693 A- IRD E - Bilateral Disbursements 229 1,258 1,212 1,506 B - IDA D - Other multilateral F - Private Prncipal repayments C - IMF G - Short-term Net flows Interest payments Net transfers Development Economics and EASPR

103 Additional Annex 11 Anti-Corruption Strategy INDONESIA: SECOND KECAMATAN DEVELOPMENT PROJECT As noted in the Indonesian CAS and CPPR, all projects in Indonesia operate in a high-risk environment when it comes to issues of leakage and corruption. Project preparation will include a full financial management assessment and disbursement action program that will be agreed at negotiations. Nevertheless, highly dispersed community projects such as KDP operate in somewhat different institutional environments than standard projects do which must be addressed by their anti-corruption strategies. The administrative controls and formal procedural changes needed for controlling corruption in large infrastructure projects, whose problems usually revolve around large procurement packages are often less effective for this kind of project., A well-implemented strategy that makes greater use of social controls and transparency can ensure levels of confidence demonstrably higher than traditional project designs that operate in these very same villages. This note summarizes the general anti-corruption strategy for KDP-2, and corruption experiences under the first three years of KDP. Identifying Corruption in Indonesian Community Proiects - Traditional community development projects have a relatively limited number of well-known points of leakage. A non-exhaustive list would include: a) Transfers - Financial transfers to communities usually come earmarked or in kind. The Local Level Institutions (ESW) study found that less than 50% of the nominal Rps. 20 million cash grant per village got there at all, and less than 15% of that amount actually came as a cash grant. IDT (Inpres desa tertinggal), a $200 million nationwide poverty program, also suffered badly from delivery of goods in kind (usually of an inferior kind). b) Poor contractor management - Contractor management for communities is normally handled by district technical offices, not by villages. Contract awards are often "directed" to favored companies, regardless of qualifications or experience. Anecdotal interviews by WB staff have found endemic problems of substitution of inferior rnaterials, unfinished works, and off the top payments for contract awards. There are no sanctions for inferior work. c) Poor pricing practices - Because contractor markets are not competitive, both over billing and overdesign are endemic. d) False taxes and charges - Government charging for "services" is so common that officials will even issue receipts for blatantly illegal practices, such as a standard 5% charge on all funds going through a village head. Virtually every financial transaction in a development project has a charge on it to get the proper form signed and the funds released. e) Standard financial control systems often work against rather than in favor of sound financial management - villagers everywhere report recurrent charges being levied by auditors and inspectors to not find fault with financial reporting, often on forrnats that either have never been given to villagers or else contradicthe ones already in use. The corruption problems with technical assistance for conmmunity projects are also well known and, while they are not very different from Indonesian development projects in general, stand out in the case of community programs because communities often have few altemative suppliers and nobody from whom

104 they can seek redress: (i) TA companies substitute staff and rig staff qualifications - in KDP-1, students from one company called the WB to complain about how they and all other candidates (more than 100) were given instructions on how to falsify their c.v's to meet the project's TOR. Another (fired) company claimed that it was forced to swallow a merger with the second-ranked company, including a Rps. 300 million cash payment and the absorption of 20 entirely unqualified staff. (ii) Cuts in salaries and travel allowances - often QCBS "winners" can beat the competition because apparently competitive overhead costs are "subsidized" by later cuts from staff salaries and travel allowances. While development orthodoxy might consider this the market clearing rate for field staff, in actual practice what usually happens is that the field staff take a second job somewhere else or don't go to their posts at all. (iii) Price fixing between TA staff and local government (including village heads) is also common, aided by a general lack of public information about prices. How did this situation develop? Addressing the corruption problem in Indonesian community projects can only begin if the structural causes as well as the distressingly obvious symptoms are well-understood. Although Indonesia was not a corruption free-paradise in the past (and novels on the late Dutch colonial period such as Max Havelaar point to just who planted the seeds of today's corruption), by all accounts the corruption" problem" became a corruption pandemic in the late 1980s and 1990s. Three changes in Indonesian state-social relationships were key: (a) Government's self-identification as the messenger of development. Much has already been written about the New Order government's wholehearted promotion of development programs. The machinery to carry these out was the highly centralized system of planning and delivery of broad-based development programs meant to cover huge areas at a time. Large scale planning did not need local inputs. Complementing the task of providing physical infrastructure was a strong belief in the need for government "guidance" to help villagers overcome their unproductive traditional practices so they can reap the fruits of modem technology; (b) Concentrating power in the executive and eliminating or suppressing virtually all other checks and balances. Most forms of checks and balances and also of supra-village dispute resolution mechanisms withered away during the New Order - this is not just the suppression of unions, parties, legislatures and the like, but also the inhibition of basic contract enforcing institutions such as small-claims courts and district level civil advocacy groups, which elsewhere provide some institutional controls on corruption in community programs. (c) Deliberately undermining local institutional controls over government and governing elites Pieter J. Evers "Resourceful Villagers, Powerless Communities: Rural Village Government in Indonesia" January 20, The village consolidation law of 1982 was the first of a series of measures to move village institutions away from village control and instead make them the downwards link of the central authority. Shortly afterwards, many districts across the country began passing regulations that banned village maintenance of public infrastructure, assign authority over social institutions (land, marriage) to state agencies, banned popular culture, and eliminated public gatherings. Development projects contribute to this loss of social capital by inventing entirely new, single-function project implementation groups (farmner

105 groups, family planning groups, etc) which had resources and administrative access that more rooted and controllable community groups lack. For many years, rural Indonesia's physical needs were so great that the flaws in the development model could be sidelined because of the sustained benefits that this system could provide. (Ex post vision obviously gives a different perspective). By the mid 1990s, disenchantment with the model was widespread, and in villages, "development" was becoming a word as much feared as it was welcomed. This is all well known by now; the relevant issue for community development programs is whether it's possible find a way out of these problems and into a healthier development environment. KDP- 1 and corruption KDP's anti-corruption strategy has three main themes: (i) eliminate complexity; (ii) shine bright flashlights on every financial transaction; (iii) respond quickly to complaints. Eliminate complexitv - In many traditional community-oriented projects, money disappears due to the welter of transfer levels, intermediaries, and processing requirements involved in turning World Bank project funds into bridges, roads, and water supply system in distant villages. KDP simplifies every aspect of this system. Because money goes straight from the national level to the village accounts, there are almost none of the delays or leakages norrnal to designs that step funds down through inter-governmental transfers. The project's handover of budgets to the villagers also supports simplified management: when agencies start listing the many forns and procedural requirements needed to get started, the villagers almost always take their business elsewhere. KDP has also simplified all of the steps involved in financial management and disbursement so that many kinds of stakeholders can easily understand and use them. There are no "hidden" charges allowed other than those listed on the forms, and MoF ratification included notes to auditors that no other financial reporting or license documents were to be used other than those negotiated with the project. All of the basic formats attached to the appraisal report are the same as those used in the field. Shine a bright light -- Transparency lies at the core of KDP's anti-corruption work, and it takes place in three main arenas. First, there are a broad range of materials and procedures to ensure that all financial information is both public and publically displayed within the villages. For example, local shopping price quotations for materials must be read out loud in public meetings to be valid; signboards posted around the villages state material and labor unit costs; and all bookkeeping is managed by an elected "implementation committee." Unlike standard practice, there isn't a single format in KDP that would allow a lone official to withdraw or transfer funds: all require at least three signatures, including gone from an elected villager and a second from the project facilitator. Second, as noted in the PCD text, KDP involves a broad range of entirely independent groups whose job is to inspect KDP sites for signs of irregularity. These groups have full access to KDP documents. The provincial NGOs also have monthly meetings with the consultant and government managementeams to list the problems they encounter and review proposed corrective actions. Third, the government management group has also taken many steps to ensure national level transparency. KDP is the first World Bank project in Indonesia to send its audit summaries to civil society oversight groups. Contract provisions and follow-up letters for the NGO monitors provide them with full discretion to share all findings, and the independent journalist contracts specify that there is no prior review. For Year 3 of KDP, BPM is publishing an expanded version of the problems database summarized below in

106 commonly read provincial newspapers so that independent organizations can check for themselves whether problems have been reported and fixed. Box 1: When villages know, they complain Villagers in Pulau Laut Timor, South Kalimantan were surprised when their subdistrict leader ("camat") ordered the elected kecamatan financial unit (UPK) to release Rps. 1.5 million from each KDP account for kecamatan administration (2% of the total). They had been told in the general meeting and the UPK training that only the community fora could decide how that money was spent. Nevertheless, they followed orders, but they also reported to the forum where the money had gone.. The UPK and community leaders next reported the problem to the district technical consultant. In his monthly meeting with the District Coordination Team, the consultant and the "Tim Kordinasi" agreed that the first answer would be to visit the site jointly so they could investigate what had happened. So confident had the camat been that he'd issued entirely false receipts to the villagers - which the UPK then showed to the joint team. The joint team wrote a report to the Bupati, who ordered the district's Inspektorat to investigate. The Inspektorat again interviewed all members of the UPK, who held their ground and showed them even more that funds had been diverted. The Inspektorat reported his findings back to the Bupati. Soon after, the camat was fired by the bupati, and the Rps. 8.0 million were retumed to the UPK. Respond to complaints - The last major element in the strategy is to follow-up on reported cases of corruption - and to be seen to be following up on corruption by the villagers and other stakeholders. KDP has several channels for villagers to complain, including a well-used national "complaints box" whose address is printed on all village graphical materials. Table 1 summarizes the reporting and follow-up from the project's first year and a half. This is a national level database, updated weekly, which is routinely shared with civil society watchdog groups, including the press. At the provincial level, reports by field staff, villagers, and the monitors are logged in, reported to local government and the national team, and then pursued every two weeks until resolved. In several districts and provinces, increasingly active project coordination teams also pursue corruption problems. In some extreme cases they have removed abusive village heads and camats (e.g. North Sumatra, South Kalimantan) and succeeded in getting missing funds restored. More common than restoring funds is fixing bad quality infrastructure, and project files document several cases where corrective action plans were proposed and implemented. Approximately 5% of the TA staff have also been replaced because of corruption or letting corruption happen without reporting it. Table 1: KDP's national corruption complaints report status (as of 9/00) Type of Total Total Solved Further Total Solved Further Complaints received investigation Year 2 investigated KDP processes and procedures KDP funds tnappropriate II intervention by government and consultants Totals Total (%) for each

107 KDP- 1 also enforced a vigorous financial management improvement campaign for the national level contracts. This included: * letters from BPM and the companies to all field staff informing them of their salaries and entitlements (probably the single most appreciated KDP innovation); * spot on-site inventory reviews of equipment and paycheck stubs; * retroactive payment corrections as conditions for contract extensions (esp. for travel); semi-annual meetings with all companies to review their performance; spot ex post reviews of staff qualifications. * replacement of recurrent offending companies. Box 2: A Case of Corruption Complaints Being Handled Successfully in South Sumatra In September, 1999, the kecamatan facilitator for Tulung Selapan discovered that the village head appeared to have stolen KDP funds. He reported the case to his supervisor and to the district coordination team. Following consultation with the national consultants, district officials and the consultant held a public meeting, which confirmed that the Village Head had taken approximately US$1,000 for his personal use. He returned half the funds right away, and promised to pay the balance as soon as he could. The outcome of the meeting was recorded in the national complaints monitoring database, which tracked the case for several weeks and then proposed another public village "audit." The meeting was attended by the Village Head, the village elders, and the LKMD. This meeting concluded by relieving the village head of his duties, but the local leaders, consultants, and national team continued to press for return of the money. Finally, in December, the LKMD and some village elders demanded that he return the money or else they would take the case to the policy. The remaining amount was returned in January Overall performance - There are three major sources of evidence which suggest that there is less corruption in KDP than most other community projects. First, KDP produces an average of 25% more output for the same input (ongoing studies will provide a more quantified report of this early finding). Technical reviews also conclude that output quality is the same or better. Second, interviews with field staff and companies by Bank missions and reporters suggest a strong downwards trend in diversions. (A particularly good indicator for WB missions is to compare "billed" transportation costs and the receipts for the amount of funds received by kecamatan facilitators). Finally a growing number newspaper reports and village self-reporting point to spillover effects: villagers reject demands for kickbacks and in several cases have run people asking for bribes out of town. So much for the good news. The bad news is that there is still corruption in KDP. Local level collusion, often with district and village governments, remains the single biggest source of problems, and there remains a disturbingly high correlation between contracting and corruption in KDP subprojects. Of special difficulty has been the endemic tendency to avoid sharing information, or limiting its access only to officials and elites. Another recurrent problem has been the harassment and the physical intimidation of staff who report corruption. Fear of reprisals inhibits facilitator's willingness to report corruption, although reports from the facilitators still remain the best source of information about diversions and leakage. Overall, the reporting of problems and their disposition needs to be improved and better protection provided for the whistleblowers who are threatened. Three of the project's consulting firms (of 19) were not extended in the project's second year because of

108 concerns over delays or cuts in payments to field staff, and a fourth has been put on a short extension to see if it complies with agreements to return back pay and allowances. Not surprisingly, the poorest and most isolated provinces have suffered most from corruption. A very informal group discussion with government counterparts suggested that aggregate corruption in KDP amounts to 10% (project audits estimated that only 5% o funds could not be accounted for) but all such numbers must be treated as working assumptions, at best. By and large official complaint channels have proved to be of little use and complaints to authorities have not provided an effective corruption sanction. In all but one case, if money was returned it was because the community groups and adat leadership acted. Police investigations also failed to pursue charges successfully, with one exception (when a Darwin award-winning village chief who had pocketed village funds tied himself up in plaited banana fiber rope, pretended to have been robbed, and called the police himself, who, sensing something extraordinarily amiss when the banana rope virtually dissolved at their touch, arrested him and made him return the funds). When pursuit of official corruption happens, sanctions are nearly always the outcome of villager and consultant appeals to higher-level officials, like bupatis, or the outcome of WB supervision follow-up, and are not due to a functioning, accessible system of legal redress. KDP-2's anti-corruption strategy KDP-2 extends the basic principles of the strategy outlined above, but it also adds some additional elements. The most important new decision facing KDP-2's anti-corruption strategy will be how to deal with decentralization. Decentralization in principle offers new opportunities to promote government accountability. In practice, at least during the transition to a decentralized administration, the opportunities for rent-seeking are more likely to rise than to fall. Nevertheless, just as center-district relationships are being entirely re-worked, executive-legislative relationships are also a site of struggle. KDP's anti-corruption strategy will chart a course through this broken landscape in the following ways: (a) (b) (c) (d) (e) (f) (g) Technical assistance procurement will remain centralized (a pilot program under VIP-2 to decentralize contracting to the provinces failed), although all field staff will be from their province; Increasingly deep involvement of DPRDs, including routine provision of audit reports and the joint implementation monitoring teams described in the PCD text; Carrying out spot audits from the center by the national management consultant company; Using prior year performance as the basis for increasing each district's KDP-2 allocations; Preparation, by appraisal, of an on-site auditing manual that will be issued by MoF and distributed to all KDP participants with an MoF cover letter saying that no other auditing formats are allowed; Distribution and public posting in each district of a unit cost price table based on real expenditures; More sharing of information with civil society watchdog groups. In the past, government commitmento pursuing corruption problems was at times lackadaisical in part because of the conflict of interest created by the unified civil service. That is, the district level civil servants involved in unauthorized diversions were often outposted members of the same central agencies. Sanctions by past or future colleagues were minimal, and usually taken only in response to strong Bank (and a times, community) pressure. Decentralization changes this configuration somewhat. All of KDP's local implementing agencies are now part of local government, not Jakarta line agencies and ministries. At least in theory, the built-in conflict between regulation and implementation is eliminated. Part of KDP2's anti-corruption strategy, therefore, consists of encouraging the Jakarta group to exert their regulatory role more forcefully. Evidence

109 that there is some willingness to move this way is already appearing within the current KDP: Strong BPM support for the idea of legal advocacy; * Director-leveletters to government of NTT and Irian citing problems of illicit government intervention; Strong involvement in DPRD alliance-building; * Good, critical audits by BPKP. KDP's experience does not always confirm fears that decentralization will increase corruption. Some of KDP's strongest support has come from district and subdistrict administrators who are pleasantly surprised to find out how much cheaper KDP infrastructure can cost than infrastructure provided through traditional agencies and contractors. District and province governments in North Sumatra, South Sulawesi, West Java, and Central among others, have extended KDP methods beyond the project and well ahead of the national government, and in all three provinces, individual district governments have taken sharp action to reduce leakage and improve quality. KDP-2 will encourage these positive tendencies in government (without expecting miracles). Of special importance is whether project staff can find reformers within government, particularly in executive positions, at all levels.: However, Indonesia has not benefited from a national anti-corruption or civil service reform program and the old problems remain strong and in some cases, have even worsened. The core of the anti-corruption campaign for KDP-2 will remain rooted in the effort to promote local-level transparency and in direct implementation of projects by socially rooted groups. Box 3: Sedang diproses: Corruption in Irian Jaya A 1999 Bank mission to Jayawijaya, one of the most remote districts in Irian Jaya, found that nearly 50% of the KDP funds had gone missing, making this the project's single worst corruption scandal. Initial accusations pointed to the project's technical consultant and a group of local government officials. It was agreed that the district would refer the case to the police, and would restore the missing funds to the villages. The supervising company would replace the technical staff with a high quality team to ensure that the replacement infrastructure met all standards, and they would turn their engineer over to the police. However, the samne group of suspect officials for months blocked the referral to the police. Upon threat of project suspension for all of Irian, the case finally was referred and a six month long investigation ensured. The consulting firm did not provide the replacement team and continued its poor supervision. They were let go and will be placed on a World Bank procurement blacklist. The suspect engineer fled to Sulawesi. The police report placed charges against this engineer and other unnamed suspects and recommended a full-scale prosecution. The police investigation soon ground to a halt, however, because the police lacked investigative resources. BPM suspended the project in the five kecamatans, and Year 3 participation across the district was put on hold. Suspension concentrated everybody's minds wonderfully. The police investigation resumed and the primary suspects were brought back to Jayapura. Meanwhile, the provincial government provided Rps. 145 million in goods and kind to finish the village projects that had been stopped. Final results from the investigation are not yet available. In the interim, the provincial government is starting a village-by-village explanation of the problem and its proposed resolution

110 Additional Annex 12 Procurement, Disbursement, Contract and Audit Formats INDONESIA: SECOND KECAMATAN DEVELOPMENT PROJECT Sample LKMD/BPD Contract Agreement Attachment 1 AGREEMENT Between LKMD/BPD and PIMPRO for the Kecamatan Development Assistance Grant Table of Contents General Conditions of Agreement I Samnple Form of Agreement 2 General Specifications 3 (developed per nature of works in Project Manual) General Conditions of Implementation Agreement 3.1. Duties of the Kecamatan Facilitator (acting for BPM pimpro) a) Verify subproject proposal and assist with preparation. b) Supervise implementation of works. c) Arrange payment documentation for work performed. d) Accept completed works Duties of the LKMD/BPD a) Implement the works in accordance with the specifications and Technical Guidelines for Works in the Project Manual provided by the Kecamatan Facilitator. b) Provide materials, equipment and personnel; unskilled personnel will have to be village labor as per the Manual, in accordance with the agreement and Technical Guidelines. c) Provide local management (team leader, foreman, administration) and pay at appropriate cost based on the agreement The works shall not be contracted without approval from the Kecamatan Technical Facilitator/Pimpro The LKMD/BPD must obey existing rules and regulations, and respect local customs Force Majeure is an event outside the control of the LKMD/BPD which obstructs or damages the work. Such an event must be reported to the Kecamatan Facilitator within 7 days. The Kecamatan Facilitator may

111 agree to costs resulting therefrom, and prepare an agreement addendum if needed Differences of opinion that may occur between the LKMD/BPD and the Kecamatan Facilitator should be brought for discussion with the Engineer/management consultant immediately at the kecamantan. Settlement of such difference shall be decided by the Engineer/management consultant and be based on factual evidence and the Agreement. If they entail costs justified in the opinion of the Engineer/management consultant due to changes of original specifications, then an Agreement addendum has to be prepared Non-compliance by the LKMD/BPD The LKMD/BPD shall be judged negligent if it does not comply with clauses 3.2. or 3.4. or does not obey the warnings of the Kecamatan Facilitator. The Kecamatan Facilitator shall give written notice to the LKMD/BPD of any non-compliance and send copy to the Engineer/management consultant and to the UDKP Sanctions a) In relation to negligence of the LKMD/BPD under clause 3.7., payments to the LKMD/BPD shall be postponed until the cause of negligence is corrected and accepted by the Kecamatan Facilitator in accordance with the Agreement. b) If within 15 days of receiving a warning under clause 3.7. the LKMD/BPD leader takes no corrective action, then the Kecamatan Facilitator may propose to the Pimpro to appoint an alternative leader or to appoint a third party to carry out the works Payment for the works shall be based on the amount of works certified by the Kecamatan Facilitator in accordance with the Agreement or addendum if any, Reporting by the LKMD/BPD a) Weekly personnel records. b) Weekly equipment record. c) Weekly progress of works. d) Monthly cumulative progress. Attachment I - Agreement Form LKMD/BPD: Address: SPABP No.: Date:

112 Attachment 2 for NO. SAMPLE KDP-2 IMPLEMENTATION AGREEMENT WORK/SUPPLIES IN KABUPATEN IN KECAMATAN VILLAGE No.: / /99/200 1 Date: Location: A. We, the undersigned: 1. NAME: TITLE: Kecamatan Facilitator /Pimpro ADDRESS: JI. hereinafter referred to as the FIRST PARTY. Authorized to act on behalf of the Government Dati 1 1 Kabupaten as Employer, by assignment letter dated: No.: 2. NAME: (LKMD/BPD) TITLE: (ketua satu LKMD/BPD) ADDRESS: J1. hereinafter referred to as the SECOND PARTY. 13. Both parties agree: a. Type of Works: b. Location: c. Description: d. Value of Agreement: Rp. (in words) e. Execution period: calendar days from the date of signing the agreement, without warranty period. f. Payment: Initial advance of Rp.20%. Payments proportional to physical progress as stated in bills certified by the Kecamatan Facilitator and the final hand-over. h. Condition for Execution: As stated in the attached General Conditions of Agreement i. Miscellaneous: 5 copies of agreement, 1 copy with Rp. 2,000 duty stamp for KPKN. SECOND PARTY FIRST PARTY Acknowledged by Head of LKMD/BPD for Pimpro Camat ( _ ) ( _ ) ( _ )

113 Kecamatan Development Project Documentation for Procurement of Small Civil Works/Supplies (for contract values between Rp. 20 million and Rp. 250 million) Attachment 3 Table of contents Invitation to Bid and Instructions to Bidders...,.,.,.1 General Conditions of Contract.2 Sample Form of Contract/Work Order... 3 Sample Form of Quotation General Specifications...,,... 5 (to be developed per nature of works in forthcoming Works Project Manual) 1. Invitation to Bid 1.1 Works: 1.2 Kabupaten/Kecamatan/Village: SPABP Inpres Date, No. Date No. 1.3 Appointment Procedure Activity Location Date Hour Remark Collect Bid Document LKMD/BPD Free of Charge Explain Documents idem Site Visit Submit Bid idem Duty Stamps Rp Evaluate/Negotiate idem Appoint contractor idem Duty Stamps Sign Contract idem Rp Instruction to Bidders

114 2.0 The contractor will be selected after review of 3 quotations from different sources for local shopping and I quotation for direct contracting, contract values cannot exceed Rp. 20 million for direct contracting and Rp. 250,000,000 for national shopping. Bids will be opened in public meetings. 2.1 Quotation Form attached. 2.3 Contract Form attached. 2.4 Attachment to the Quotation Form: Schedule of Activities and Prices 2.4 Contract Period: (3-6) months from the date of signing of Contract. 2.5 Type of Contract: Unit Price or Lump Sum, without escalation. 2.6 Payment for Achievement (output): Semi-Monthly: After certification for works completed in 2 week period; the last payment, after issuing a Certificate of Hand-over. General Conditions of Implementation Agreement 3.1. Duties of the LKMD/BPD Head (contract/owner)/kecamatan Facilitator (acting for BPM) a) Supervise implementation of works. b) Arrange payment documents for work performed. d) Accept completed works Duties of the Supplier a) Implement the works in accordance with the specifications and technical guidelines in the Project Manual provided by the Kecamatan Facilitator. b) Provide materials, equipment and personnel; unskilled personnel will have to be village labor as per the Manual, in accordance with the agreement and Technical Guidelines The works shall not be contracted without approval from the Kecamatan Facilitator The Supplier must obey existing rules and regulations, and respect local customs Force Majeure is an event outside the control of the LKMD/BPD which obstructs or damages the work. Such an event must be reported to the Kecamatan Facilitator within 7 days. The Kecamatan Facilitator may agree to costs resulting therefrom, and prepare an agreement addendum if needed Differences of opinion that may occur between the Supplier and the LKMD/BPD should be brought for discussion with the Kecamatan Facilitator inmmediately. Settlement of such differences shall be decided by the Engineer/management consultant and be based on factual evidence and the Agreement. If they entail costs justified in the opinion of the Kecamatan Facilitator due to changes of original specifications, then a contract addendum has to be prepared Non-compliance by the Supplier The Supplier shall be judged negligent if it does not comply with clauses 3.2. or 3.4. or does not obey the

115 warnings of the Contract Owner or Kecamatan Facilitator. The LKMD/BPD or Engineer shall give written notice to the Supplier of any non-compliance Sanctions a) In relation to negligence of the Supplier under clause 3.7., payments to the Supplier shall be postponed until the cause of negligence is corrected and accepted by the LKMD/BPD/Kecamatan Facilitator in accordance with the Contract. b) If within 7 days of receiving a warning under clause 3.7. the Supplier takes no corrective action, the LKMD/BPD/Kecamatan Facilitator may terminate the contract and appoint a third party to carny it out Payment for the works shall be based on the amount of works certified by the LKMD/BPD/Kecamatan Facilitator in accordance with the contract or addendum if any, Reporting by the Supplier a) Weekly personnel records. b) Weekly equipment record. c) Weekly progress of works. d) Monthly cumulative progress. Attachment I - Attachment 2 - Agreement Forn Bid Form Attachment 1 LKMD/BPD: Address: SPABP No.: Implementation Agreement No.: Date: Date:

116 Attachment 4 SAMPLE KDP-2 CONTRACT AGREEMENT for WORK/SUPPLIES IN KABUPATEN IN KECAMATAN VILLAGE No.: / /99 1 Date: Location: A. We, the undersigned: 1. NAME: TITLE: Project Manager of the WorksLKMD/BPD ADDRESS: JI. hereinafter referred to as the FIRST PARTY. Authorized to act on behalf of the Government Dati 1 Kabupaten as Employer, by assignment letter dated: No.: 2. NAME: (Supplier) TITLE: (Director) ADDRESS: JI. hereinafter referred to as the SECOND PARTY. B. Both parties agree to enter into Contract as the result of tendering:: a. Type of Works: b. Location: c. Description: d. Value of Agreement: Rp. (in words) e. Execution period: calendar days from the date of signing the agreement, without warranty period. f. Payment: Up to 10% advance to be netted out of payments of the first 2 months. Payments every 2 weeks proportional to physical progress as stated in bills certified by the Kecamatan Facilitator and the final hand-over. h. Condition for Execution: As stated in the attached General Conditions of Agreement i. Miscellaneous: 5 copies of agreement, I copy with Rp. 2,000 duty stamp for KPKN. Copy of contract shall be sent to Pimpro. SECOND PARTY FIRST PARTY Acknowledged by Supplier LKMD/BPD Pimpro ( _ ) ( _ ) (. 1 )

117 Attachment 5 To: The Project Manager (Pimpro) of the Second Kecamatan Development Project QUOTATION I. Having examined the Quotation Documents, comprising the Invitation to Bid, the Instruction to Bidders, the General Conditions and Technical Guidelines in the Project Manual, related to the following works: Description of : Works : I/We the undersigned offer to implementhe whole of the said works in conformity with the aforesaid documents for the sum of: Rp (in words) As detailed in the Attachmento the Quotation showing schedule of Activities and Prices (form to be developed in Manual) 2. I/We undertake to commence the works on the date of signing the Contract and to complete and to hand-over the works comprised in the contract within the period stated in the bid document. 3. This Quotation is valid for one month from its date. Date: Supplier Name: Address: Supplier Signature

118 Additional Annex 13 Environment Screening Criteria INDONESIA: SECOND KECAMATAN DEVELOPMENT PROJECT Environmental Screening 1. As a highly decentralized investment project, KDP-2 will support thousands of small subproject investrnents in poor villages. Many are in fragile locations potentially susceptible to damage to their physical and biotic environments. 2. KDP- 1's experience demonstrated few adverse environmental impacts. This is because of the small size of KDP infrastructure. Roads, for example, are overwhelmingly farm to market roads and do not join up with networks to open forest frontiers. Environmental impacts come mostly from poor site management, such as deep cuts on steep mountainsides. However, while KDP- 1 caused few environmental impacts, it did not do very much to improve local environmental awareness or to improve the environmental problems found in the villages where it operated. (i). (ii) (iii) Indonesia's environmental review procedure is acceptable to the Bank and will form the framework for KDP-2's approach to environmental management. Because KDP-2 subprojects will be small, no major adverse impacts are anticipated; however, the project will institute screening, review, and "red-flag" procedures to help ensure that problems are flagged and corrected: Prior to final approval in the UDKP forum, subprojects will be screened and approved by Kabupaten Engineers who have been trained in environmental mnitigation. The screening will ensure that environmental requirements are met during the project preparation and implementation. Subproject screening: (a) Environmental assessments are required for large KEP-39/MENLH/8/1996 Concerning the Types of Businesses or Activities Required to Complete an Environmental Impact Assessment. subprojects in the following areas: marine/freshwater conservation areas, peat areas, water catchment areas are as surrounding lakes and reservoirs, areas surrounding springs, scientific areas, areas susceptible to natural hazards, coastal mangrove areas, coastal edges, forest protected areas, and cultural reserves. No infrastructure projects will be allowed in national parks, forest parks, river edges, or nature tourism parks, which will be screened out of project sites at the outset of kecamatan selection. (b) The scale of most KDP-2 subprojects ordinarily should not be so large that they require a UKL-UPL KEPMEN PU-48 1/KPTS/1996 Concerning Decisions on the Types ofactivities in the Field of Public Works that are required to Prepare UKL-UPL.. If UKL-UPLs are needed (i.e., a subproject exceeds the limit for SOP in the table), then a consultant should prepare them and the World Bank will review the documents

119 (iv) Since the scale of most subprojects is expected to be small, no major adverse impacts are expected. Standard operating procedures should be sufficient to manage environmental concerns, and simple visual inspection by field supervisors and kabupaten engineers will be sufficient for monitoring implementation. The following table describes the scale of subprojects that require Standard Operating Procedures. All subprojects (i.e. nearly all KDP-2 subprojects) below the scale will not need any special environmental studies or review. Sectors and Projects Units SOP Irrigation: new construction ha 500 Irrigation: rehabilitation & Upgrading ha 500 Irrigation: New Paddy-field (pencetakan) ha 200 Tidal swamp area development ha 500 Non-tidal swamp area development ha 500 River normalization km 5 Flood control km 5 Rural roads km 5 Bridges m 60 Drainage km 5 (v) (vi) Special screening will be applied on the following cases: - Fishery: standards from the kabupaten Fishery Service Agency (Dinas Perikanan) will be applied to all fishery subproject proposals. - Asbestos, pesticides and other agrochemicals: No subprojects under this category will be financed (according to the negative list). - Development on protected areas: no new settlement or expansion of settlement will be supported in protected areas or areas proposed for protection by the government. Where settlements already exist, and if it is the policy of the kabupaten governmento allow the settlement to remain, proposals for finding under KDP-2 may be used by the existing residents using standard KDP-2 procedures and in compliance with any local regulations on land management, which are defined by the protected area management plan. No road construction or rehabilitation of any kind will be allowed inside delimited or proposed protected areas. Subprojectypes not mentioned on the above list and table do not require SOP. It is highly unlikely that any KDP investment project would pass above these limits. However, good practice should always be applied. Project engineers will screen all but minor subproject proposals involving land and water use changes (i.e. reclamation, irrigation); economic projects with environmental impacts will also be screened by kecamatan facilitators and the kabupaten engineers to be sure that alignments, effluent, etc meet best practice standards. Training programs for KDP-2 will also strengthen environrental awareness, and the technical and social facilitators will introduce environmental managementhemes into the village meetings organized for planning KDP decisions. 3. Design specifications for water supply, MCK, rural roads and bridges will be applied to KDP-2 in the form of Standard Operating Procedures that have been included in the KDP-2 project manual. Provincial consultants will aggregate and review environmental reports and flag them in their monthly reports to BPM. The final manual will include a matrix of likely environmental impacts and steps with which to address them

120 Environmental TOR for proiect TA Kabupaten Engineers should monitor the implementation of the works (described on the following paragraphs) and report their findings to the UDKP and kecamatan facilitator, with copies to the provincial consultant. Rural roads: The major direct environmental impact associated with rural roads is erosion. Construction in the rainy season, or improper construction methods which leave soils exposed unnecessarily, can cause significant erosion. Erosion also causes serious sedimentation and siltation problems in nearby surface waters. In addition, improper drainage can ruin roads and has adverse impacts on adjacent lands. The following points should be taken into consideration when preparing rural roads projects: I Description of the proposed project: location of roads, type of roads and expected volume of use, and construction activities. 2. Field Reconnaissance: to identify any natural and cultural features that may be affected by road conistruction. 3. Prediction of potential impacts based on the field reconnaissance. 4. NIanagement of impacts: a) Avoidance: if any construction may affect any of the features mentioned above, then alternative alignments or sites may avoid the problem at low cost. b) Good practice should be applied in road alignment and constmiction such as ensuring proper drainage, to mitigate impacts. As noted above, road construction or rehabilitation cannot be supported with KDP filnds in protected areas or areas proposed for protection by the government. District engineers will monitor compliance. Irrigation and drainage: Irrigation and drainage projects manage water supplies for the purpose of agricultural production. The most significant direct negative environmental impacts of groundwater extraction for irrigation arise from overtapping groundwater supplies (withdrawing water in excess of the rate of recharge). This can result in the lowering of the local water table and failure of local wells. If surface waters are diverted, downstream users may be adversely affected. These following points should be considered in preparing irrigation and drainage project: I. Description of the proposed project: general design and extent of irrigation and drainage works, size catchment area, operation and maintenance of irrigation works. 2. Field reconnaissance: land use (including current crops and cropping pattems), present water supply and water uses (including current distribution of water resources if irrigation systems already exist in area). 3. Identification of the impacts based on the field reconnaissance. Potential impacts to be assessed include: (a) Project location: impact on historic and cultural sites, effects on water resources outside and inside command area;

121 (b) Project design: drainage problems, crossing for people and animnals; (c) Construction works: soil erosion; and (d) Project operation: pollution by agrochemicals. 4. Measures to mitigate impacts include: use of alternative water sources, re-sizing system, design modifications, and good operating procedures

122 Additional Annex 14 Guidelines for Resettlement, Land and Asset Acquisition INDONESIA: SECOND KECAMATAN DEVELOPMENT PROJECT Objectives 3. Land acquisition will be kept to a minimum and no person will be involuntarily displaced under subprojects financed under the Project. Subproject proposals that would require demolishing houses or acquiring productive land should be carefully reviewed to their impacts through alternative alignments. Proposals that require more than minor expansion along rights of way should be reviewed carefully. 4. Land or other assets may be acquired through: a) Voluntary contributions. In accordance with traditional practices, villagers may elect to voluntarily contribute land or assets and/or relocate temporarily or permanently from their land without compensation; b) Contributions against compensation. A contributor considered "affected" will be eligible for compensation from the village. 2. These guidelines provide principles and instructions to compensate affected persons under l(b) above, to ensure that all such persons negatively affected, regardless of their land tenure status, will be assisted to improve, or at least to restore, their living standards, income earning or production capacity to pre-project levels. However, if acquired assets are less than 20%, the Kecamatan Facilitator may dispense with the procedural requirements delineated in para. 5 below. Compensation Principles 3. The LKMD/BPD shall ensure that any of the following means of compensation are provided in a timely way to affected persons (the village grant cannot be used to pay compensation): a) replacement land with an equally productive plot or other equivalent productive assets; b) materials and assistance to replace fully solid structures that will be demolished; c) replacement of damaged or lost crops, at market value; d) other acceptable in-kind compensation. Consultation Process 4. The LKMD/BPD will ensure that all occupants of land and owners of assets located in a proposed subproject area, are consulted. There will be a village meeting to inform villagers about their rights to compensation and options available in accordance with these Guidelines, The Minutes of the village meeting shall reflect the discussions held, agreements reached, and include the following:

123 a) for any voluntary contributions, name of contributor and details about the contribution; b) for land/asset acquisition against compensation, names of affected persons and details about the nature and level of compensation. Summary Arnount Compensation Agreement reached (1) agric. land (m2) (2) plots: area affected (m2) houses/structures to be demolished (units/m2) (3) trees or crops affected (4) signatures of villagers, kepala desa (5) record of any complaints raised by affected persons (6) map attached (show ing affected areas and replacement areas) 5. The kecamatan facilitator shall provide a copy of the Minutes to affected persons and confirm in discussions with each of them their requests and preferences for compensation, agreements reached, and any eventual complaint. Copies will be recorded in the UPK project documentation and be available for supervision. Subproject Approval 6. In the event that a subproject involves acquisition against compensation, the Kecamatan Facilitator shall: (a) not approve the subproject unless a satisfactory compensation has been agreed betveen the affected person and the LKMD/BPD, as mentioned above; (b) not allow works to start until the compensation has been completed satisfactorily to the affected persons; (c) in the highly unlikely event that more than 200 persons were affected and required compensation in a village, a compensation plan has to be prepared, and approved by the IDT Secretariat, before the subproject can be approved. Complaints and Grievances 7. All complaints should first be negotiated to reach an agreement at the village level. If this falls, complaints and grievances about these Guidelines, implementation of the agreements recorded in the Village Minutes or any

124 alleged irregularity in carrying out the project can also be addressed by the affected persons or their representative at the kecamatan level. If this also fails, the complaint may be submitted to the Bupati for a decision. Verification 8. The Village Minutes and evidence of compensation having been made shall be provided to the kecamatan empowerment facilitator assisting the village, to supervising engineers, auditors and socio-economic monitors when they undertake reviews under the project

125 Additional Annex 15 Kecamatan Descriptions INDONESIA: SECOND KECAMATAN DEVELOPMENT PROJECT This note summarizes a few of the key characteristics of the KDP and non-kdp areas. It reviews several of the more notable differences of KDP and non-kdp areas. Many of the major differences between KDP and non-kdp areas are determined by the geographic allocations of KDP areas. Perhaps the most important of these is the allocation among provinces and rural/urban areas. Location and Composition As KDP is principally a rural program, one of the largest differences between KDP and non-kdp kecamatan is the portion of the population living in rural areas. Table 1 displays that about 85% of the population in KDP areas live in rural areas, compared with 60% overall. Table Allocation of Population Among Rural and Urban Areas Non-KDP KDP-Yr.1 KDP Yr.2 Total Urban 44.7% 14.3% 16.4% 39.9% Rural 55.3% 85.7% 83.6% 60.1% Source: 1999 Susenas tabulations A few small provinces have an especially high densely of KDP investments. Over 64% of NTT's population, for example, lives in kecamatan that are included in the KDP. Aceh, SE Sulawesi and Maluku all have 40% or more of their populations living in KDP kecamatan. By contrast, the larger, and typically wealthier provinces of Java have only 12%-20% of their populations living in KDP kecamatan. Province % Population in Province % Population KDP Kec. in KDP Kec. Aceh 40.0 NTT 64.2 N. Sumatra 13.0 C. Kalimantan 22.3 W. Sumatra 19.1 S. Kalimantan 24.2 Riau 18.4 N. Sulawesi 28.2 S. Sumatra 20.5 C. Sulawesi 35.9 Lampung 34.2 S. Sulawesi 14.7 W. Java 13.7 SE. Sulawesi 45.5 C. Java 19.6 Maluku 43.3 Yogya 18.2 Irian Jaya 24.5 E. Java

126 But there are more differences than just the provincial and urban/rural dichotomy. PODES data from 1999 indicate that the mean distance from the desa centers to kabupaten capitals differs by 30 to 40% between the kecamatan groups. Excluding a small number of outliers, Desa in non-kdp kecamatan are, on average, 5 lkms from their kabupaten capital, while desa in KDP year I kecamatan are 66 kms and those in year 2 kecamatan are 70 kms away (these exclude about 5% of the desa that are more than 500kms away.) As for governance characteristics, village heads in KDP kecamatan have more experience but less education than village heads in non-kdp kecamatan. Village heads outside of KDP areas have about 4.5 years of experience; those in KDP year-1 kecamatan have 4.8 years, and those KDP year-2 kecamatan have 5.2 years. Not surprisingly, these newer village heads have more education. The average village head in non-kdp kecamatan has 10.3 years of schooling, while those in KDP kecamatan have 9.5 years. And desa in KDP kecamatan have much smaller populations than those in non-kdp kecamatan. The average desa population in non-kdp kecamatan is 3,200, while in the KDP kecamatan it is about 1,900. Much of this difference is due to the generally rural composition of the desa in KDP kecamatan, but even among rural desa, those in non-kdp kecamatan are still much larger, with average populations of 2,400 compared with 1,700. Poverty and Income Because poverty has been highly volatile in Indonesia in recent years, poverty comparisons between those living in KDP and non-kdp kecamatan, should consider the time pattern of poverty in the respective areas. Figure 1 displays the proportions of KDP and non-kdp kecamatan populations that lived below the poverty line Poverty lines in'96 and '99 are based on Sutanto and Irawan (2000). Those in '93 are based on BPS (1994) inflated by the 1996 increases in poverty associated with the redefinition from 1996 to 1999 methods. Those in intermediate years are interpolated using nominal expenditures and urban price indices. Over the past eight years, in 1999 the poverty rates were approximately 22% for non-kdp kecamatan, vs. 30% for the KDP kecamatan. While overall poverty rates varied significantly over the period, there were only slight movements in the relative poverty rates between KDP and non-kdp areas. More compelling, however, has been a convergence in poverty rates between those living in KDP Year 1 kecamatan and KDP Year 2 kecamatan. Poverty rates in the latter group started out two or three percentage points lower than the former, but by '98/'99, the rates were essentially the same

127 Figure 1. Approximate Poverty Rates: KDP vs. Non-KDP Areas, 199 o Non-KDP Kecamatan Prop. poor a Yr.1 KDP Kecamatan Prop. poor o Yr.2 KDP Kecamatan Prop. poor yr Because KDP is principally a rural program, and poverty incidence is generally higher in rural areas, some of the success of the KDP program in reaching the poor comes from this rural focus. However, it is useful to evaluate how the KDP is allocated among urban and rural areas, to see how effectively it reaches the poor in these respective areas. While the principal measure of how well the KDP reaches poor areas is found in the comparison of poverty rates among rural areas, there is an interesting phenomenon in the urban poverty rates in KDP kecamatan. While urban poverty rates are generally low relative to rural rates, the urban desa in KDP kecamatan selected in year 1 were notably poorer than their corresponding rural desa. Since BPS methods for comparing poverty between rural and urban areas have been criticized for being overly subjective, this does not necessarily mean that the urban Yr. I KDP residents are poorer than their rural counterparts in the same kecamatan. It does suggest, however, that the KDP urban areas are substantially poorer than the non-kdp urban areas. In both 1998 and 1999 the urban desa in Yr. I KDP kecamatan had roughly double the poverty rates of urban desa in non-kdp kecamatan

128 Figure 2. Urban and Rural Poverty Rates by KDP Kecamatan Group, Urban Poverty Rates, By KDP Status Rural Poverty Rates, By KDP Status J ' / Norn-KDP U KDP Yr KDP Yr Year Year By contrast, the rural poverty differences, while still significant, are much smaller. Urban desa in Yr.2 KDP kecamatan also had much higher poverty rates, though they were not as high as those in Year 1. By contrast, in 1999 rural desa in KDP kecamatan had 30% poverty rates, compared with 24% rates in rural desa in non-kdp kecamatan. The pattem of nominal incomes over the same time period is displayed in Figure 3. This shows relatively small differences in nominal incomes between KDP and non-kdp areas in rural areas, though relatively large differences in urban areas. The differences between Year land Year 2 KDP kecamatan are trivial. Figure 3. Nominal Expenditures by KDP Group Urban Nominal Expenditures, By KDP Status Rural Nominal Expenditures, By KDP Status 200, nn I. -- +Non-KDP KDP Yr. 1 KDP Yr.2 150, , , ,000 50,000 -= 50, Year Year But comparisons of nominal expenditures can be misleading, as costs of living can differ substantially. Yet adjusting for costs of living can be tricky, as BPS cost of living indices have two major limitations. First they are geared to wealthy urban consumers, and second they are not designed to compares costs of living between areas. Some efforts have been made to adjust costs of living for the costs of a standard

129 consumption bundle (see, e.g., Ravallion & Bidani, 1993). But these can be subject to substantial substitution bias, as the optimal consumption bundle can differ dramatically due to significant differences in relative prices. Instead we deflate nominal expenditures by local poverty lines. If drawn correctly, these lines should represent a comparable level of consumer welfare, and should therefore satisfy the requirements for an appropriate deflator. Figure 4. Real Expenditures by KDP Group These differences are displayed in Figure 4. As with the nominal expenditures, the largest differences are between KDP and non-kdp groups in urban areas. Though the more important differences are between KDP and non-kdp groups in rural ones. The latter differences are relatively small - only about a 9% difference between the KDP and non-kdp groups

130 Table Al. Poverty Rates, by Kecamatan KDP Participation First Year of KDP Participation Yr None '99/ /'01 Total Total Table A2. Urban and Rural Desa Poverty Rates by Kecamatan Year of KDP Participation Non-KDP KDP Yr.1 KDP Yr.2 Total rban Total Rural Total

131 Nominal Expenditures Non-KDP KDP Yr.1 KDP Yr.2 Total 93 59,171 38,691 41,514 58, ,918 39,987 44,762 61, ,149 47,851 48,276 70, ,376 57,801 59,090 88, ,067 61,690 65,918 87, ,663 75,694 74, , , , , ,491 Total 97,000 65,430 67,253 95, ,532 28,320 28,976 30, ,983 30,237 30,744 33, ,495 36,415 37,126 39, ,104 41,245 41,328 45, ,110 43,489 45,012 47, ,948 54,481 55,820 59, ,143 91,029 91,428 98,078 otal 52,347 46,845 47,993 51,187 Real Expenditures Non-KDP KDP Yr.1 KDP Yr.2 Total Total Total

132

133 MAP SECTION

134

135 Sea ~~Thailand MYAN 'C~~~~~OA~~~ Andaman -~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ INDONESIA -r PACIFIC ~~~~~~~~~~~~~~~~~~~~~MAIN ROADS ~~~~0 SELECTED CITIES AND TOWNS Oufof~CEA N lb PROVINCE HEADQUARTERS NATIONAL CAPITAL T ~IA D SuuPROVINCE BOUNDARIES C ea ~~~~~~~~~~INTERNATIONAL BOUNDARIES PRCV1NES: LT ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~2 SUMARTERA 23 SULAWESI -Ii YiOGYAKARTA ~ ~~~~~~~~~~~~~~~~ 2U GOROWIALO UTARA o A '~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ A 4 ~~~~~~~~~~~~~~~~sumatma BAAl IBA 26 SULAWESI BSNEIAMBI SELATAN /y 14NUSA TENGGARA BARAT ~P~BENGKUWS 27 SULAWESI TENGGARA 1? NUSA TENGGARA nmur 2* MAALUKUUTR / S -~~~~~~~~~ '-it~cle e 7 SUMATEPA SELATAN If TIMOR 29 MLK Banda,- RAU ACHIPELAGO 14 AWA TIMUR 2 UAEITNA Acels. V,~~~~~. BRUNEI 6 1, I~~~~~~~~~~~~~~~~~~~~~~~~~~~~ LAMPUNG It KAUMAWTAN BARAT ai- 3.2 */ PO$W11oIo,ISAIYKSATNSEAA lnjt ' I~~~~~~~NGAPORE ~ r~~ 1 2 Manado /135, N$~) ~ ekanbru. ginong ~ "" ' TerMS 0 Wog.o22 30 IRIAN JAYA BARAT (5 ogc llppn2-4> in ('j ~~~~~~~~~~~~~~~~20i-3 Polangkaroyao SUm d.~bengkl 2 h- 31 E,iggono~~~~~~~~ ~~~ Jaya Sea Ujung Pand= g ana.- Z o- \-< 3 KARTA DI E ~~~~~ S ASe t* air,. J', r-.t.,~~~~~~~~~~~~~~~~~~~' a cycx>~~~~~~s.g --P Clo ~~~~~~~~~~~~~~~~ ~We*.r - 16 ('cicž~j ude ~ ' ASTTIMOR OIJT9P 18 ~~~6O 9 ~Araifura Sea o #' ~~~~~~~~~~~~~~ ~~Kupanvg I N DIA N O-CE A N ~7~ KiIo.ler II II Gulf of :-: ~~~~~~~~~~~~~~~ <N ~~~Carpentaria this mop o'~po.do.d by ih. Mop Deogo U.It of the Wodd SeAC. The bo,nd6ri.,, 1 on d do..,doon,iol and onyoho. ifonoiio hbo- 4 -< oo P~~~~~~~~~~~~~~~~~~~~hi, op do, ni.iply, oo 1h6 poo of The Wd,d 8OOf Goop. -fy 0 c0 0 i-b--t ~~~~~~od O-ao lb. logoloolons of oy jeotn'ii,yor -y.lo ~ U T A I occ~oe,c. sof o ~~~~~~~~~~~~~~~~~1050 rn booodorie. 12D0A U ST0