PROJECT APPRAISAL DOCUMENT ON A PROPOSED GRANT IN THE AMOUNT OF US $50 MILLION TO THE REPUBLIC OF INDONESIA FOR THE

Transcription

1 Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Document of The World Bank PROJECT APPRAISAL DOCUMENT ON A PROPOSED GRANT IN THE AMOUNT OF US $50 MILLION TO THE REPUBLIC OF INDONESIA FOR THE Report No: ID ACEH - ECONOMIC DEVELOPMENT FINANCING FACILITY PROJECT December 5, 2008

2 CURRENCY EQUIVALENTS (EXCHANGE RATE EFFECTIVE DECEMBER 1, 2008) Currency Unit = Indonesian Rupiah (IDR or Rp.) IDR 1,000 = US$ US$ 1 = IDR 12,837 FISCAL YEAR January 1 December 31 ADB AMDAL BAPPEDA BAPPENAS BPKP BRR CAS CQ DIPA EA EDFF EIA EMP ESMF EST FM FMS GoA GOI IBRD ICB IC IDA IFR KPA KPDT KPI LGIP MBD MDF MOF MoU MTR NCB NGO O&M PGIP OM PA PMU QBS QCBS ABBREVIATIONS AND ACRONYMS Asian Development Bank Analisa Mengenai Dampak Lingkungan or Environmental Impact Assessment Badan Perencanaan Pembangunan Daerah (of Government of Aceh) State Ministry for Development and Planning (of GOI) Financial and Development Supervisory Board (Badan Pengawasan Keuangan dan Pembangunan Bureau for Rehabilitation and Reconstruction for Aceh and Nias Country Assistance Strategy Selection Based on Consultants Qualifications Daftar Isian Pelaksanaan Anggaran or Government of Indonesia annual budget allocation document Environmental Assessment Economic Development Financing Facility (The Project) Environment Impact Assessment Environmental Management Plan Environmental and Social Management Framework External Support Team Financial Management Financial Management Specialist Government of Aceh Government of Indonesia International Bank for Reconstruction and Development (The World Bank) International Competitive Bidding Individual Consultants International Development Association Interim Financial Report Kuasa Pengguna Anggaran or Authorized Budget Holder Ministry for Disadvantaged Areas (of GOI) Key Performance Indicator Local Government Annual Investment Plan Model Bidding Documents Multi-Donor Trust Fund for Aceh and North Sumatra Ministry of Finance Memorandum of Understanding Mid Term Review National Competitive Bidding Non-Governmental Organization Operations and Maintenance Provincial Government Annual Investment Plan Operations Manual Pengguna Anggaran or Budget Holder Project Management Unit Quality-Based Selection Quality and Cost Based Selection

3 RFP RKL/RPL RPJMD SA SBD SIE SOE SP2D SPP-LS SSS TA TOR UKL/UPL UNDP Request For Proposal Rencana Pengelolaan Lingkungan/Rencana Pemantauan Lingkungan or Environmental Management Plan /Environmental Monitoring Plan Medium Term Development Plan of the Government of Aceh Special Account Standard Bidding Documents Sub-project Implementing Entity Statement of Expenditures Surat Perintah Penyaluran Dana or Letter of Instruction for Disbursement (issued by KPPN) Surat Perintah Membayar Langsung or Letter of Instruction for Payment (issued by KPA) Single-Source Selection Technical Assistance Terms of Reference Upaya Pengelolaan Lingkungan/Upaya Pemantauan Lingkungan or Environmental Management Efforts/Environmental Monitoring Efforts United Nations Development Program Vice President: Country Director: Sector Director/Sector Manager: Task Team Leader James W. Adams Joachim von Amsberg Vikram Nehru/Tunc Uyanik Thomas A. Rose

4 INDONESIA ACEH- ECONOMIC DEVELOPMENT FINANCING FACILITY PROJECT TABLE OF CONTENTS Page I. STRATEGIC CONTEXT AND RATIONALE... 1 A. COUNTRY AND SECTOR ISSUES... 1 B. RATIONALE FOR MDF AND BANK INVOLVEMENT... 3 C. HIGHER LEVEL OBJECTIVES TO WHICH THE PROJECT CONTRIBUTES... 4 II. PROJECT DESCRIPTION... 4 A. LENDING INSTRUMENT... 4 B. PROJECT DEVELOPMENT OBJECTIVE AND KEY INDICATORS... 4 C. PROJECT COMPONENTS... 5 D. LESSONS LEARNED AND REFLECTED IN THE PROJECT DESIGN... 6 E. ALTERNATIVE DESIGNS CONSIDERED AND REASONS FOR REJECTION... 8 III. IMPLEMENTATION... 9 A. PARTNERSHIP ARRANGEMENTS... 9 B. INSTITUTIONAL AND IMPLEMENTATION ARRANGEMENTS... 9 C. MONITORING AND EVALUATION OF OUTCOMES/RESULTS D. TRANSITION STRATEGY AND SUSTAINABILITY E. CRITICAL RISKS AND POSSIBLE CONTROVERSIAL ASPECTS F. GRANT CONDITIONS AND COVENANTS IV. APPRAISAL SUMMARY A. ECONOMIC AND FINANCIAL ANALYSIS B. TECHNICAL C. FIDUCIARY D. ANTI-CORRUPTION ACTION PLAN E. SOCIAL F. ENVIRONMENT G. SAFEGUARD POLICIES H. POLICY EXCEPTIONS AND PROJECT READINESS LIST OF ANNEXES ANNEX 1: COUNTRY AND SECTOR BACKGROUND ANNEX 2: MAJOR RELATED PROJECTS FINANCED BY THE BANK AND/OR OTHER AGENCIES 46 ANNEX 3: RESULTS FRAMEWORK AND MONITORING ANNEX 4: DETAILED PROJECT DESCRIPTION ANNEX 5: PROJECT COSTS ANNEX 6: CRITICAL RISKS, MITIGATION MEASURES AND RATING ANNEX 7: IMPLEMENTATION ARRANGEMENTS ANNEX 8: FINANCIAL MANAGEMENT ASSESSMENT ANNEX 9: PROCUREMENT ARRANGEMENTS ANNEX 10: ECONOMIC AND FINANCIAL ANALYSIS ANNEX 11: SAFEGUARD POLICY ISSUES ANNEX 12: ANTI-CORRUPTION ACTION PLAN ANNEX 13: COMMUNICATIONS STARTEGY ANNEX 14: PROJECT PREPARATION AND SUPERVISION ANNEX 15: DOCUMENTS IN THE PROJECT FILE

5 ANNEX 16: STATEMENT OF WORLD BANK LOANS AND CREDITS ANNEX 17: COUNTRY AT A GLANCE ANNEX 18: MAPS LIST OF TABLES TABLE 1: ECONOMIC GROWTH IN ACEH (PERCENT) TABLE 2: AGRICULTURAL PRODUCTION IN ACEH (RP. BILLION) TABLE 3: GDP COMPOSITION BASED ON EXPENDITURES (%) TABLE 4: GROSS CAPITAL FORMATION (AS % OF GDP) TABLE 5: ACEH S WORK FORCE TABLE 6: RECONSTRUCTION PLAYERS IN LIVELIHOODS SECTOR IN ACEH TABLE 7: RESULTS MONITORING FRAMEWORK AND ARRANGMENTS TABLE 8: PROJECT COSTS AND SOURCES OF FUNDING (US$ MILLION) TABLE 9: ESTIMATED ALLOCATION TO PROJECT COMPONENTS (US$ MILLION) TABLE 10: DETAILED PROJECT MANAGEMENT (COMPONENT 2) COSTS BORN BY EDFF, KPDT AND GOVERNMENT OF ACEH (IN US$) TABLE 11: CRITICAL RISKS AND PROPOSED MITIGATION MEASURES TABLE 12: RISK ASSESSMENT AND SUMMARY OF MITIGATING MEASURES TABLE 13: ALLOCATIONS OF GRANT PROCEEDS TABLE 14: FINANCIAL MANAGEMENT ACTION PLAN AND CONDITIONALITIES TABLE 15: GENERAL RISKS ASSESSMENT TABLE 16: ENVIRONMENTAL AND SOCIAL SAFEGUARD POLICIES TABLE 17: INSTITUTIONAL ARRANGEMENT FOR ESMF IMPLEMENTATION LIST OF FIGURES FIGURE 1: ACEH S UNEMPLOYMENT RATE FIGURE 2: CONSUMER PRICE INDEX OF ACEH AND INDONESIA SINCE THE TSUNAMI FIGURE 3: ACEH S MINIMUM PROVINCIAL WAGES IN COMPARISON WITH NATIONAL LEVELS FIGURE 4: IFES SURVEY 2007: SPECIFIC CONDITIONS IN ACEH FIGURE 5: OVERVIEW OF THE METHODOLOGY FIGURE 6: EDFF PROJECT GENERAL STRUCTURE FIGURE 7: BAPPEDA ORGANIZATION STRUCTURE AND PROCURING UNITS

6 INDONESIA ACEH- ECONOMIC DEVELOPMENT FINANCING FACILITY EAST ASIA AND PACIFIC REGION EASPR - EASFP Date: December 5, 2008 Country Director: Joachim von Amsberg Sector Director/Sector Manager: Vikram Nehru /Tunc Uyanik Project ID: P Lending Instrument: Grant (MDF) Team Leader: Thomas A. Rose Sectors: Private Sector Themes: Private Sector Development Environmental Screening Category: B Safeguard Screening Category: Limited Impact Project Financing Data [ ] Loan [ ] Credit [ X ] Grant [ ] Guarantee[ ] Other: Total Project Costs: US$52.85 million MDF Grant Amount: US$50 million Government Contribution: US$2.85 million Financing Plan (US$ million) Source Local Foreign Total Borrower MDF Total Grant Recipient: Ministry of Finance, Government of Indonesia Responsible Agency: Ministry for the Development of Disadvantaged Areas (KPDT) and Government of Aceh Address: Jl. Abdul Muis No. 7 Jakarta Pusat, Contact Person: For KPDT: Ir. Rachmat Tatang Bachrudin, Deputy Minister for Economic and Private Business Development For Government of Aceh: Prof. Munirwansyah, Head of BAPPEDA (Regional Body of Planning and Development in Aceh Province)) Estimated disbursements (FY/US$ 50 million) FY FY09 FY10 FY11 FY12 FY13 Annual Cumulative Project implementation period: January 2009 End: June 2012 Expected closing date: Jun 30, 2012 Does the project depart from the CAS in content or other significant respects? [ ]Yes [ X ] No Does the project require any exceptions from Bank policies? [ ] Yes [ X ] No Have these been approved by Bank management? [ ] Yes [ X ] No Is approval for any policy exception sought from the Board? [ ] Yes [ X ] No Does the project include any critical risks rated substantial or high? [X ]Yes [ ] No Does the project meet the Regional criteria for readiness for implementation? [ X]Yes [ ] No Project development objective: To promote post-tsunami economic recovery and foster sustainable equitable long-term economic development in Aceh in line with the GoA s own plans for economic development (RPJMD). Project description: The project will support sub-project initiatives for the economic development of Aceh and provide assistance in project management and capacity building. Which safeguard policies are triggered, if any? Environmental Assessment (OP. 4.01) Significant, non-standard conditions, if any: None

7 INDONESIA ACEH- ECONOMIC DEVELOPMENT FINANCING FACILITY PROJECT EXECUTIVE SUMMARY 1. The devastation of the December 2004 Tsunami coupled with the preceding years of civil unrest contributed to high unemployment and poverty in Aceh. A large share of the Aceh population remains vulnerable with average consumption just above the poverty line, so that a small shock such as the end of the reconstruction effort could send some of them back into poverty. The Tsunami not only caused tremendous loss of life, but ended the prospects of long term employment for many people. Some 80,000 small and medium sized enterprises, providing employment to some 140,000 people were destroyed. The reconstruction has created new job opportunities in some sectors (construction, transport), but these jobs have been closely linked to the availability of reconstruction funds and are not likely to be sustainable in the long run. 2. The Government of Indonesia (GOI) and the provincial Government of Aceh (GoA) have committed to building the community of Aceh back to being stronger and better than it was pre- Tsunami. Both have identified economic growth and development as essential elements of recovery from the Tsunami. The GoA, in its Medium Term Development Plan (RPJMD), has identified key factors hampering Aceh s economic development as weak government institutions, damaged infrastructure and low investment levels. It has elaborated its strategic framework for economic development which identifies three lead economic sectors-- agriculture, trade and services, key because of their contribution to both regional production as well as employment. The GoI, through BAPPENAS has likewise produced a broad blue print for the future development of Aceh. 3. The current reconstruction effort, estimated at approximately US$7.7 billion spread over a five years period ( ), is one of the largest such efforts in a developing country. The generosity of donors and the reconstruction program have been lifting Aceh s economy in the short run. The reconstruction effort has been creating a construction boom in some parts of the province. Aceh s economy is dominated by oil and gas production, which accounts for 28 percent of regional GDP (2007) and over 90 percent of the province s exports. However, the mining and related manufacturing sectors have been declining for several years and known gas reserves are projected to decline to near zero by This together with current growth trends, concentrated in sectors linked to the availability of large funds for reconstruction reinforces concerns regarding Aceh s economy beyond Therefore, new efforts are needed to create conditions for sustainable long term economic recovery and development in Aceh s economy in order to create jobs and reduce poverty. 4. The proposed Economic Development Financing Facility project (EDFF), a MDF Grant consisting of two main components to be implemented during January 2009-June 2012 period, will support initiatives to promote sustainable economic growth and job creation in the whole of Aceh, in line with the GoA s RPJMD and BAPPENAS blueprint. Component One (US$44.5 million) will support sub-projects that address critical issues affecting economic development in Aceh by contributing to economic recovery post-tsunami and building a more competitive and supportive business environment necessary to create broad based private sector job opportunities and growth, targeting the poor and other vulnerable groups. Component Two (US$5.5 million) i

8 will fund project management and capacity building including an international consultancy to assist the project management. 5. The sub-projects to be supported under the project should contribute to the following development objectives identified by the GoA as key for sustainable economic recovery and development in Aceh: (i) development of job-creating, market-driven enterprises engaged in value-added processing and manufacturing, especially in agriculture and fisheries; (ii) sustainable improvement of production quality and value in agriculture, fisheries and estate crops that contributes to alleviation of poverty; (iii) increase in international trade, especially direct exports; and (iv) increased domestic and foreign investment in Aceh. To achieve these goals, the EDFF will support sub-projects in the following broad areas: (i) Improving the business environment; (ii) Private Sector Support; and (iii) Public Infrastructure. 6. The State Ministry for Disadvantaged Areas (KPDT) will be the GOI s lead implementing agency at the central level. The implementation of the project rests with the GoA thru BAPPEDA Aceh, which will house the Project Management Unit (PMU) with support by an international consultant management firm. The sub-projects will be implemented by different entities (such as NGOs (local and international), private sector organizations and international aid agencies). They will prepare the sub-project application and be responsible for tracking performance of their individual sub-project consistent with the agreed upon milestones and performance indicators. The progress in achieving the project's objectives will be measured through a comprehensive monitoring and evaluation system. The World Bank will serve as the partner agency under the MDF legal framework and will be responsible for EDFF project supervision. The World Bank will conduct implementation reviews, as part of its normal supervision, on a semi-annual basis, supplemented by more frequent reviews during the initial implementation period. 7. The project faces several risks, the most important of which are: that the GoA is not able to fulfill its role in overseeing the implementation of the project; weak governance and capacity at various levels impact the timely implementation of sub-projects; and the risk that conflict may recur. The mitigation measures identified are either currently underway, or are built into the project design. An Anti-Corruption Action Plan has been designed for the project, during implementation; World Bank team will monitor the elements of this Action Plan. 8. Procurement will be carried out in accordance with the World Bank s Guidelines: Procurement under IBRD Loans and IDA Credits dated May 2004 as amended in October 2006, Guidelines: Selection and Employment of Consultants by World Bank Borrowers dated May 2004 as amended in October 2006, and the provisions stipulated in the Grant Agreement. The accounting policies and procedures will substantially follow GOI s financial management procedures, strengthened where appropriate. Grant expenditures and activities will be reported to the World Bank on a quarterly basis. 9. The EDFF is classified as a B category project as defined in the World Bank Operational Policy. As such, all sub-projects to be financed by the EDFF must be in compliance with national environmental rules and regulations, as well as with environmental policies of the World Bank. The sub-projects that will be financed by the EDFF are small and medium scale and as such the level of associated social risks is limited. It is anticipated that none of the World Bank social ii

9 safeguards policies will be triggered. There is a need to ensure that the project will benefit both men and women and takes women s special needs into account, strengthening their participation in the economy and considers constraints to their participation. This will be addressed and monitored at the subproject level. iii

10 INDONESIA ACEH- ECONOMIC DEVELOPMENT FINANCING FACILITY PROJECT I. STRATEGIC CONTEXT AND RATIONALE A. COUNTRY AND SECTOR ISSUES 1. The devastation of the December 2004 Tsunami coupled with the preceding years of civil unrest contributed to high unemployment and poverty in Aceh. A large share of the Aceh population remains vulnerable with average consumption just above the poverty line, so that a small shock such as the end of the reconstruction effort could send them back into poverty. The Tsunami not only caused tremendous loss of life, but ended the prospects of long term employment for many people. It is estimated that 80,000 small and medium sized enterprises (SME) 1, providing employment to 140,000 people were destroyed. The reconstruction has created new job opportunities in some sectors (construction, transport), but these jobs have been closely linked to the availability of reconstruction funds and are not likely to be sustainable in the long run. Annex 1 provides details on country and sectoral issues. 2. The Government of Indonesia (GOI), through the Agency for Rehabilitation and Reconstruction for Aceh and Nias (BRR), and the provincial Government of Aceh (GoA) have committed to building the community of Aceh back to being stronger and better than it was pre- Tsunami. Both have identified economic growth and development as essential elements of recovery from the Tsunami. The GoA, in its Medium Term Development Plan (RPJMD), has identified key factors hampering Aceh s economic development as weak government institutions, damaged infrastructure and low investment levels. The RPJMD also identifies key constraints for economic activity for some sectors: in agriculture, availability of land, low productivity, low quality of production and lack of access to inputs and markets are identified as constraints in manufacturing, weak business environment, low quality of production as well as the failure to adopt recent technological changes. Aceh s economy is dominated by oil and gas production, which accounts for 28 percent of regional GDP (2007) and over 90 percent of the province s exports. However, the mining and related manufacturing sectors have been declining for several years and known gas reserves are projected to decline to near zero by This together with current growth trends, concentrated in sectors linked to the availability of large funds for reconstruction reinforces concerns regarding Aceh s economy beyond Aceh s economy contracted in 2004 (pre-tsunami) by 10 percent and experienced a further 10 percent decline in 2005 (post-tsunami). The contraction in the economy was the result of the declining mining and related manufacturing sectors, and the impact of the Tsunami, which caused a decline of the manufacturing and agricultural sectors. The economy grew at a modest 1.6 percent in 2006, driven mostly by growth in the services sector, related to the reconstruction effort. In 2007 Aceh s economy continued to decline, a result primarily of the decline in the oil and gas sectors. Without a significant recovery of the agricultural and manufacturing sectors, 1 BAPPENAS, 2005, Indonesia: Preliminary Damage and Loss Assessment. The December 26, 2004 Natural Disaster, A Technical Report prepared by BAPPENAS and the International Donor Community. 1

11 Aceh will be facing a structural downturn as the reconstruction effort winds down in This could have negative implications for employment and poverty alleviation efforts The current reconstruction effort, estimated at approximately US$7.7 billion spread over a five years period ( ), is one of the largest such efforts in a developing country. The generosity of donors and the reconstruction program have been lifting Aceh s economy in the short run. The reconstruction effort commenced in 2005 and by 2006 was the main driver of economic growth. The reconstruction effort has been creating a real construction boom in some parts of the province, but since it has not addressed issues related to the competitiveness of Aceh s economy and the sustainability of current growth trends, it is not strictly in line with the BAPPENAS Master Plan which foresees the recovery of Aceh s economy as part of the third phase of the province s reconstruction. In addition, the large aid influx and initial supply side constraints have contributed to high inflation levels. Inflation reached over 40 percent year-onyear in December The differential between Aceh and the national inflation level has been declining since then, but in May 2008 inflation in Aceh, at 15.3 percent, was still significantly higher than the national inflation level, at 10.4 percent. 5. In Aceh, investment as a share of GDP was only 7 percent in 2004, well below the levels in the rest of Indonesia or other countries in the region. Investment has increased significantly since then, a result of the massive reconstruction funds being invested in the province, and by 2006 it was worth 14 percent of GDP. This is still significantly lower than investment in the rest of the country. A renewed effort is needed to rehabilitate the agricultural sector to improve job opportunities in the longer term. The pre-conditions for economic recovery are in place. There is better political stability and greater institutional support for economic growth. Knowledge is accumulating as to the realistic possibilities of critical sectors to develop and the framework for a coherent economic growth strategy is coming into place. The next phase in providing assistance to the communities and rural areas in Aceh should expand upon the past successes. 6. GoA s Economic Development Strategy. Recognizing the extent of the devastation, the GOI declared the Tsunami in Aceh a national disaster and formulated a master plan for the reconstruction of Aceh. Challenges to the successful recovery of Aceh were identified, which included socio-economic needs of all sectors, restoration of local institutions and implementation capacity as well as building peace and reconciliation. One of the key principles of this plan was that reconstruction should not rebuild poverty, but ensure that local economies are robust enough to prevent poverty over the long term. The GoA through its elected Governor has again become the leader in strategic planning and direction for Aceh. Recently, it released its Medium Term Development Plan and (details on the RPJMD can be found in Annex 1). The GoA has elaborated its strategic framework for economic development based on the Triple-A concept, comprising of an Atlas (compilation of relevant economic data), Agenda (providing the economic development vision and strategies to promote economic development) as well as the Aturan-main, which explains the institutional mechanisms by which this vision and strategies can be implemented. This framework identifies three lead economic sectors for the province (agriculture, trade and services), key because of their contribution to both regional production as well as employment. 2 World Bank, 2008, Aceh Poverty Assessment 2008, Jakarta. 2

12 B. RATIONALE FOR MDF AND BANK INVOLVEMENT 7. Rationale for MDF Involvement 3. The Multi-Donor Fund for Aceh and Nias (MDF) brought together a pool of over US$650 million in pledged grant resources, provided by donor countries and international organizations to support the implementation of the Government s rehabilitation and reconstruction blueprint. The MDF was designed to contribute to the reconstruction of Aceh and to fund reconstruction gaps and enable a full rehabilitation of Aceh and Nias to at least their pre-disaster condition, while recognizing that more was needed to ensure that reconstruction was not simply to rebuild poverty. One of the targets of the reconstruction is the sustainable recovery of the region s economy (production, trade, banking, etc.). 4 The overall goal of the GoI is to Build Back Better the whole of Aceh, which is supported by the goals of the MDF: poverty alleviation, livelihoods restarted, community infrastructure regenerated, larger infrastructure repaired, governance rebuilt and the environment sustained. 8. Rationale for World Bank Involvement. The World Bank will serve as the partner agency. Its extensive involvement in Aceh as well as its broader developmental work in Indonesia and else where in the world provides it with a strong background for the project (Annex 2 provides a list of projects supported by the World Bank Group and other agencies). The World Bank has responded to the GOI request for assistance across areas where the institution possesses comparative advantage, building much on the central directions set out in the Indonesia Country Assistance Strategy FY04-07, namely the emphasis on the role of communities and local governments in shaping their own development objectives, and on the emphasis of the recently approved Country Partnership Strategy (CPS) for Indonesia on relying and strengthening government systems. The CPS also foresees continued World Bank involvement in Aceh and Nias for the duration of the CPS (until 2012) and the need for the MDF to support the transition from post-tsunami reconstruction towards sustainable economic development in Aceh. 9. The proposed EDFF project builds upon the networks and work by the World Bank at different levels in the province, namely, the Kecamatan Development Program, at the village level and the Support for Poor and Disadvantaged Areas at the district level. In addition, the World Bank has also been managing a research program on sustainable economic development in Aceh since 2006 to guide the dialogue with the regional government authorities preparing this project, monitoring macro-indicators in the province and more in-depth analysis on poverty, investment climate, sustainable development strategies as well as public finance. 10. The World Bank is well positioned to add value in supporting the Indonesian authorities in the development and implementation of their economic development program, including providing technical assistance and advice on a broad range of policy issues relating to private sector development and job creation. The World Bank has a dedicated team which works closely with other teams based in Aceh working on conflict issues, infrastructure, land management and community development as well as the local staff of the International Finance Corporation (IFC), the private sector arm of the World Bank Group. The Team will supported by a larger team 3 The rationale for the MDF involvement in funding the EDFF is based upon the March 31, 2005, memorandum from the Office of the President of the World Bank proposing its creation. 4 Master Plan for Rehabilitation and Reconstruction for the Regions and People of the Province of Nanggroe Aceh Darussalam and Nias Islands of the Province of North Sumatra (p. II-13). 3

13 based in Jakarta with wide-ranging expertise in economic management, rural and social development as well as private and financial sector development. In addition, the team is closely linked to the Private and Financial Sector Unit in the East Asia Region, thus will have access to a wider range of expertise and knowledge. C. HIGHER LEVEL OBJECTIVES TO WHICH THE PROJECT CONTRIBUTES 11. The higher level objectives to which the project contributes are post-tsunami economic recovery, sustainable economic development and poverty alleviation. In line with GOI s and GoA s own plans for the reconstruction of Aceh post Tsunami, the EDFF will also contribute to rebuilding those areas indirectly affected by the Tsunami. It will provide financing for ongoing activities which focus on the promotion of sustainable economic growth and the rehabilitation of livelihoods, with proven results to scale up quickly for greater impact on employment and long term economic development and will seek to finance new projects designed to fill other economic development gaps. II. PROJECT DESCRIPTION A. LENDING INSTRUMENT 12. The EDFF project, a US$50 million Facility funded by a grant from the MDF, consists of two components-- the first is a financing facility (US$44.5 million) and the second component will facilitate and strengthen the operation of the GoA s and KPDT project management capacity (US$5.5 million). B. PROJECT DEVELOPMENT OBJECTIVE AND KEY INDICATORS 13. The project will promote post-tsunami economic recovery and foster sustainable equitable long-term economic development in Aceh in line with the GoA s own plans for economic development (RPJMD). To achieve this, the project will finance sub-projects that contribute toward the following development objectives, identified by the GoA as key for sustainable economic development in Aceh: (a) (b) (c) (d) Development of job-creating, market-driven enterprises engaged in valueadded processing and manufacturing, especially in agriculture and fisheries; Sustainable improvement of production quality and value in agriculture, fisheries and estate crops that contributes to alleviation of poverty; Increase in international trade, especially direct exports; and Increase in domestic and foreign investment in Aceh. 14. These development objectives will be achieved through the following intermediate outcomes: (i) Improving the Business Environment: a better enabling environment for private sector development and investment; (ii) Private Sector Support: support to improving the productivity of the private sector, farmers and fishermen; and (iii) Public Infrastructure: financing of economic infrastructure necessary for business development and job creation. The 4

14 beneficiaries of sub-projects will be either directly or indirectly the people and communities of Aceh. As a result of the defined beneficiary pool, the proponents of sub-projects will not be individuals. The focus of the project is on sustainable and equitable economic development. The project, while a sizable amount, is very small when measured against the economic development challenges and needs of Aceh and as such will serve as a starting point and demonstration of what can be done in the Aceh province. 15. An important aspect of the project will be the building of capacity at BAPPEDA, the Development and Planning Agency of Aceh. BAPPEDA, with the assistance of an international consultant firm, will learn through hands on experience how to evaluate, select and monitor the implementation of sub-projects to support long term economic development. This is particularly important in light of the large amount of resources available to the provincial government and the recent decision to allocate the Special Autonomy Fund on a programmatic basis between the provincial and district governments. The experience gained under the project will better position the GoA to further its economic development agenda from its own resources. 16. The following key performance indicators (KPI) will be used to assess progress toward achieving results in the development outcomes mentioned above: (a) (b) (c) (d) Number of business constraints that were successfully alleviated in Aceh Employment generated in enterprises supported by the project Number of users of public infrastructure financed by the project Success rate of sub-projects financed by the project C. PROJECT COMPONENTS 17. The project consists of two main components that will be implemented during the January 2009 June 2012 period. The Facility will closely coordinate with activities related to economic development that have been implemented by others since the Tsunami as well as addressing some of the identified gaps. Later, it is anticipated that the GoA may supplement the Facility s funds with its own resources in order to further the implementation of its strategy for economic development. 18. Component One. This component will support specific activities designed to promote economic recovery and development through addressing areas identified as needing further efforts, or which have not yet been addressed. It will support sub-projects that address critical issues affecting economic development in Aceh by contributing to building a more competitive and supportive business environment necessary to create broad based private sector job opportunities and growth in Aceh, targeting the poor and other vulnerable groups. 19. The EDFF will support sub-projects which fill-in strategic and financing gaps, based upon the vision for economic development explicit in the RPJMD, in the following areas: (a) (b) (c) Improving the Business Environment Private Sector Support Public Infrastructure 5

15 20. The EDFF sub-projects will be based upon their ability to contribute to the EDFF development objectives and focus on the three areas mentioned above. Special attention will be paid to increasing the poor and women s participation in the economy. A more detailed analysis of specific issues to be addressed and results to be accomplished by the individual sub-projects will be done at the sub-project level. Analysis of the constraints to sustainable economic growth and job creation and evaluation of activities proposed by the sub-project to address those constraints will be part of the selection process of any sub-project. In addition, as part of the application process, subproject proponents will be asked to discuss relevant activities in their sector that have been undertaken in Aceh by themselves or other reconstruction actors, with the aim of elaborating on success factors and lessons learned toward ensuring successful implementation. The analysis of the constraints for economic growth and job creation and possible activities to be financed at the project level is necessarily of a more macro or general nature given the fact this is a facility-type project and individual sub-projects and activities will only be identified at a later stage (Annex 4 provides a more detailed project description with the type of sub-projects that the project could finance to address identified constraints). 21. Component Two. This will fund project management and capacity building including an international consultancy to assist the GoA in the establishment and management of the Project Management Unit (PMU) and the KPDT in the implementation of the project at the central government level. This will include sub-project assessment and review, procurement, financial management, safeguards compliance, implementation, supervision, monitoring, etc. In addition, the firm will also provide training and skills development to the local staff at PMU and the KPDT. D. LESSONS LEARNED AND REFLECTED IN THE PROJECT DESIGN 22. The project builds upon a large body of research and experience in private sector development and specifically draws upon the World Bank s broad experience and specific Indonesian experience. A number of lessons have been learned from the review of reconstruction related economic development efforts to date. The project design takes into account the following lessons: (a) (b) The project reflects lessons learned from analytical work following the Tsunami undertaken by the World Bank. The GoA has large resources at its disposal and it will continue to have resources for the foreseeable future. An inefficient allocation of resources and weak public financial management capacity however, is preventing translating such large resources into better public services or a stronger economy 5. Analysis of economic fundamentals has also identified some of the key problems facing Aceh today which this project will try to address. The need for government commitment and ownership. It has been seen in a number of projects that without government s real commitment, the project will not maximize the benefit and could fail to be sustainable. The GoA is highly committed to this project and has identified job creation, sustainable economic development and a viable private sector as essential to addressing post Tsunami 5 World Bank, 2006, Aceh Public Expenditure Analysis Spending for Reconstruction and Poverty Reduction 6

16 reconstruction, objectives to be supported by the EDFF. The GoA has also committed to assign a team responsible for the EDFF project. (c) (d) (e) (f) (g) (h) The need for transparency and a clear communications strategy. Clear and available information about the sub-projects, their successes and failures will help to provide valuable lessons to others in the community and may help to lessen distrust and the suspicion of favoritism. It will also facilitate managing expectations of citizens which will be critical as people seek jobs and face uncertain economic times. The need to balance reconstruction needs. It is critical to design a sub-project selection process that originates with the local government so that investments financed respond to community needs and at the same time provide added capacity to the implementing party if it is the local government. As a result, the EDFF is designed to provide coordination and efficient management of available resources and sub-projects which reflect the overall economic development needs and priorities outlined in the GoA s own economic development strategy. This will be achieved by requiring that EDFF-financed sub-projects be selected by the GoA based upon established criteria. The importance of a strong focus on results coupled with achievable realistic milestones has been incorporated in project design. The need for professional assistance in setting up and operating the PMU has also been incorporated in the EDFF. Lessons from other projects in the area of economic development being implemented in Aceh. There have been a series of projects focusing on livelihoods and economic recovery in the province. After over 3 years of implementation, these projects offer important lessons of what works and what does not and what are some of the success factors. The next CFAN meeting end of 2008 will focus on lessons learned in the reconstruction effort, including economic development. In addition, BRR will lead an exercise to distill lessons learned by agencies implementing projects in Aceh in the area of livelihoods and economic development and how these can be applied to the design of projects to be financed by EDFF. The need to ensure that the project will benefit both women and men. The project recognizes that without particular attention being paid to women s special needs and constraints to increased participation, their ability to benefit from this project as well as to contribute to economic development in the province will be reduced. Therefore the project will take women s special needs into account, strive to strengthen women s participation in the economy and consider constraints for their participation. This will include measures for ensuring that gender considerations are addressed and monitored in the design and implementation of subprojects wherever possible. An inception report in the early stages of project 7

17 implementation will further elaborate on the strategy to take women s special needs into account in the preparation of subprojects. E. ALTERNATIVE DESIGNS CONSIDERED AND REASONS FOR REJECTION 23. The proposed design was based on proposals of the GoA, BRR and the World Bank, and assessments of the best possible solution to begin to address the reconstruction needs for long term economic development in Aceh. Options for financing economic development sub-projects as envisioned under the EDFF are limited in the context of Aceh. However, the following approaches were considered: (a) (b) (c) (d) (e) (f) Seeking multi-lateral and bi-lateral support specifically for economic development in Aceh. Given the Multi Donor Trust Fund for the reconstruction of Aceh, this was rejected as duplicative and could result in various competing programs which may not necessarily address the gaps identified by the GoA. Direct financing by the GoA. Current capacity constraints limited this option, but the project design recognizes that this approach for funding such activities in the future and thus the EDFF can serve as a good demonstration example. Co-financing the EDFF with funds from the GoA. It was determined that possible misalignment of the budgetary cycles and administrative procedures could create undue delays. The project as designed still provides GoA with a framework to build upon for its current and future economic development financing and does not foreclose the ability of the GoA to supplement the Facility with additional funds should it so desire. This may well be the case if the EDFF identifies a number of worthy proposals for which it does not have sufficient funding. Financing by banks and others in the private sector. Discussions were held with the banking sector and the local bankers association, and it was determined that it would be several years of lost opportunity by waiting for a time when banks were ready to proceed. There are several concerns which have delayed lending and private sector investment. Third party implementation. Concern over the speed of implementation resulted in discussions concerning using a third party to implement the project. While there were considerable advantages to this, it was decided that for the overall long term development of Aceh it was important to have the local government in the lead role. Sub-project identification. The team (which includes the GoA, BRR and the World Bank) considered soliciting sub-projects to fill very narrowly defined areas and to address very specifically defined needs. The team however decided that pre-determining specific sub-projects in advance and their required financing needs during preparation could result in gaps not being addressed in an optimal manner since not all information would be available at the time of project preparation. The GoA will benefit from a fairly strong PMU to assist in the subprojects selection process facilitating the identification of gaps and needs. 8

18 Furthermore, the team recognized that there is a wealth of information on gaps to promote sustainable economic growth and ways to address them by agencies currently implementing projects on the ground, and the best way to use that information is by soliciting proposals that allow Sub-project Implementing Entities (SIEs) maximum flexibility in project design through a guided call for proposals as proposed in the EDFF. III. IMPLEMENTATION A. PARTNERSHIP ARRANGEMENTS 24. The EDFF is structured as a programmatic operation with a framework type design in that it will fund a number of sub-projects which will be prepared, implemented and supervised by others. An agreement will be signed with the GOI and the KPDT which will be GOI s implementing agency for the project at the central level. The KPDT will delegate the budget to the provincial government in Aceh as Dana Tugas Pembantuan and will establish a project Sakter, which will also be appointed by the Governor of Aceh as PMU for the project, located in BAPPEDA Aceh, and which will be responsible for the overall management of the annual budget. The World Bank will serve as the partner agency under the MDF legal framework, responsible for project supervision. B. INSTITUTIONAL AND IMPLEMENTATION ARRANGEMENTS 25. Implementation Players and Functions. The project will use a management structure supportive of local government participation, capacity building and achieving the maximum benefits from the EDFF. The implementation of the overall project rests with the GoA thru BAPPEDA, which will house the PMU. The PMU will be supported by an international consultant management firm. The individual sub-projects will be implemented by third parties as specified in this document. The overall process of evaluating, selecting and monitoring of selected sub-projects has been designed to minimize unnecessary interference and duplication. Sub-project selection will take place after project approval to ensure transparency and consistency in the selection process. The BAPPEDA will manage the PMU and will play a key role in the selection process of sub-projects through leadership and participation in the Selection Committee. Although BAPPEDA Aceh will be the implementing agency of the EDFF at the provincial level, to ensure EDFF supports the implementation of the GoA strategies related to economic development in the province, it will be key to ensure the support of the relevant Dinas and district governments for activities financed through this project. The EDFF will support provincial level programs for the development of economic clusters; as such the fiscal responsibility for continuing activities financed through EDFF lies with the provincial government. Nonetheless it will be important to ensure the participation of the relevant districts and/ or Dinas in the identification of priorities and the design of subprojects. BAPPEDA Aceh has initiated discussions with the relevant Dinas which will intensify in the initial phases of project implementation. In addition, entities proposing subprojects for EDFF funding will be required to consult extensively with the relevant Dinas and district governments and to report their consultation efforts in the application. 9

19 26. The BAPPENAS, as the GoI s executing agency, will be responsible for EDFF s overall planning and evaluation consistent with the grant agreement between the World Bank and the GOI. It will also provide the necessary coordination with the Ministry of Finance (MOF), the KPDT and other central government agencies. The BAPPENAS will be responsible for counterpart financing (government staff honoraria, taxes and other operational expenses) for BAPPENAS and KPDT. The KPDT will be responsible for overall project implementation and budget execution including making an annual budget application to the MOF and establishing a project satker (Satuan Kerja) to be located in BAPPEDA Aceh that will be responsible for overall management of the annual budget (DIPA). The budget application will be allocated in the following manner: (i) payment to the consulting firm assisting BAPPEDA and KPDT, (ii) operating costs of BAPPEDA Aceh and KPDT, (iii) block grant for sub-projects at the provincial level. Further allocation of the block grants will not be possible at the time of the preparation of budget document (DIPA) since projects selection (and allocation of funds to sectors and districts) is part of project implementation. Finally, it will be responsible for dealing with withdrawal applications by the SIEs after they have been approved by the PMU. 27. Project Management Unit. The PMU, to be located in BAPPEDA, will consist of the consulting management firm (to be hired with EDFF funding) as well as the GoA staff. The consulting firm will have two key interrelated roles. First, the firm will be responsible for the effective operation of the PMU and secondly, it will build capacity within the GoA to progressively assume the lead managerial role over the PMU. The firm will assist PMU in the evaluation of sub-project applications and monitoring. The Consultant firm will also ensure that the operation of the PMU with regards to financial management, procurement, communications are at an acceptable level to minimize risk and ensure good reporting. The PMU will prepare an Operations Manual (OM) that will guide project implementation and will list all project-related policies and procedures including details on the sub-project eligibility and monitoring criteria. The Operations Manual will be subject to approval by the World Bank. 28. The World Bank. The World Bank, as partner agency will oversee the project. Its responsibilities, as specified in the Operations Manual for the MDF, will include: appraisal of the project, supervision, monitoring and evaluation and administration of the EDFF. The World Bank will also have responsibility for reviewing the Selection Committee s selection of subprojects and issuing a No-Objection Letter (NOL) for the selection of each sub-project as well as issuing a NOL for each subproject s detailed plan. In addition, the World Bank will regularly and randomly review sub-projects and will monitor results and report to the MDF on an on-going basis. 29. Sub-project Eligibility and Selection. The sub-projects will be implemented by different entities (such as NGOs (local and/or international), private sector associations and international aid agencies) which will be responsible for ensuring that the sub-projects remain consistent with EDFF goals and are in line with the GoA RPJMD and BAPPENAS blueprint for Aceh s recovery. They will prepare the sub-project application and, be responsible for tracking performance of their individual sub-project consistent with the agreed upon milestones and performance indicators. The sub-projects will be supervised by the PMU with general oversight by the KPDT and the World Bank as the partner agency responsible for the EDFF. In order to ensure that sub-projects financed under the EDFF project meet the World Bank and international standards for quality of investment and are sustainable, investments financed under the EDFF 10

20 will be evaluated prior to selection based upon eligibility criteria. The eligibility and selection criteria are available in Attachment 2 of Annex 7 and will be adopted by the PMU before the call for sub-project proposals. They will also be included in the Operations Manual. To keep the project manageable and avoid a large number of disintegrated sub-projects, the EDFF will accept applications between US$1 million and US$7 million and on an exceptional basis will consider sub-project applications larger than this amount, subject to World Bank approval. The EDFF will also consider up to three sub-projects between US$500,000 and US$1 million. A Selection Committee will be established to make the final selection of sub-projects. It will review subproject applications which have already successfully passed a preliminary screening performed by the PMU. The World Bank will review the PMU s evaluation report on all proposals submitted to the Selection Committee as well as the Selection Committee s report on the selection process of selected sub-projects to ensure compliance with the EDFF criteria and process, and issue No-Objection for each selection. C. MONITORING AND EVALUATION OF OUTCOMES/RESULTS 30. The progress in achieving the project's objectives will be measured through a comprehensive monitoring and evaluation (M&E) system (details are provided in Annex 3). Ongoing reviews of sub-project implementation and progress as well as a formal Mid-Term Review (MTR, to be held during the second year of project implementation), will include a detailed assessment of the progress and achievements. The PMU, supported by its consultants and technical assistance (TA) as required, will implement the M&E framework, including the monitoring and evaluation of sub-projects. Each Sub-project Implementation Entity will be responsible to prepare a monitoring and evaluation plan consistent with the established criteria. Monitoring and evaluation at the subproject level will need to work with the beneficiary communities to ensure that the impact that the project is having on affected communities is adequately monitored. The PMU will evaluate progress on the indicators for each sub-project through regular reporting by SIEs. It will submit to the World Bank quarterly and more detailed yearly reports including output and outcome indicators for each of the selected sub-projects. The World Bank will conduct implementation reviews, as part of its normal supervision, on a semiannual basis, supplemented by more frequent reviews during the initial implementation period. The World Bank will be responsible for the monitoring and evaluation of the project as a whole and will provide reports every six months to the MDF of progress achieved, based on the M&E framework detailed in this document. D. TRANSITION STRATEGY AND SUSTAINABILITY Transition Strategy 31. Re-establishing, rebuilding and commencing businesses as well as the business community and business environment is necessary in order to reverse the destruction and impact (direct and indirect) caused by the Tsunami. This is also necessary to compensate for the underdevelopment caused by years of political strife and to unlock the medium to long term development potential of Aceh. This is an enormous task. The risk that the efforts now underway might prove unsustainable is real. The EDFF can address but a small portion of the needs for achieving real economic development. The expiration of BRR s mandate scheduled for April 2009, beyond which local and provincial governments will need to undertake greater 11

21 responsibility for reconstruction program management, including economic development, are all factors to be considered in determining real impact. BRR s exit and the need for new institutional arrangements to facilitate continued progress in economic development and private sector reconstruction require a transition strategy to prepare for the post-brr period. The BRR has been the GOI instrument to interact with donors and other reconstruction actors. The EDFF will facilitate the transition from the BRR to the GoA by working with both during the early phases of project preparation. The KPDT will facilitate the transition of responsibilities from BRR to the provincial and district governments. In the meantime, the project will benefit from BRR s experience in the identification and implementation of reconstruction and rehabilitation projects. 32. Building Institutional Capacity: The incentive framework under which the provincial government officials will operate in the context of EDFF is geared toward building lasting institutional capacity. For example, making EDFF resources available to finance the establishment and management of PMU is expected to enhance the ability to select and prepare similar economic development sub-projects in the future. Since this project is essentially being developed based upon the application of a post BRR process, no stand alone transition strategy is included, but will provide for institutional mechanisms aimed at facilitating exchanges of experience between the GoA and the BRR. In addition, the consulting firm assisting PMU will provide capacity building activities and it will be performing some key functions (financial management, procurement, safeguard compliance, monitoring and evaluation) to ensure sustainability of the project and a continuation of international best practices after the consulting firm has completed its assignment, and after the EDFF has been completed. 33. Post-BRR Arrangements: The capacity building measures described above are designed to help the GoA work together with the BRR at the preparation and early stages of project implementation. The KPDT will continue to assist the GoA to implement this project after the BRR has phased out. In addition, the lessons and experience from the use of these measures should help to enhance local authorities ability to perform similar functions related to economic development and project management in the future. Sustainability 34. A number of steps in the context of the EDFF are being (and will be) undertaken to promote the sustainability of economic development based upon the private sector and to facilitate the transition of local and provincial governments beyond BRR s mandate. Sub-project applications will be evaluated based upon a number of factors, one of those will be (to the extent appropriate), the likely sustainability of the impact and results of the sub-project as well as its ability to enhance the capacity of those involved in the sub-project as well as those who may later have some role in managing to ensuring continued results of the sub-project. To that effect, the evaluation of subprojects will pay particular attention to the inclusion of the relevant Dinas and/ or District governments in consultations and the design of the subproject as appropriate. To the extent that activities will require the relevant Dinas and/ or District Government to assume responsibilities related to the subproject after completion, this should be clearly reflected and addressed in the application. Project sustainability is further enhanced by the GoA s commitment to improve it business environment and to help facilitate private sector development and 12

22 resulting job creation. The EDFF has been under preparation for sometime and, throughout this period, the GoA and the BRR have been very active and committed to EDFF objectives. The project approach permits attention to be paid initially to sub-projects with the greatest likelihood to show immediate results in addition to others that meet the terms and conditions of the facility. Support provided under the project also aims to further support sustainability by establishing a mechanism within the Facility to enhance GoA capacity to oversee similar activities in the future through the use of its own resources. These benefits should continue beyond the end of EDFF. 35. Technical Assistance: The EDFF and some of the sub-projects will include TA components that emphasize hands-on training of those involved (often including beneficiaries) in the sub-project as well as GoA staff. Such TA is an important tool that will contribute to ensuring quality in the economic development sub-projects and should help to prepare local authorities for the post-brr era. These capacity building efforts will cover a number of aspects of sub-project selection and implementation, including sub-project preparing detailed design and tender documents, safeguards compliance, procurement, sub-project supervision, and other development monitoring tools and anti-corruption measures. 36. Ownership: Steps will be taken to ensure that the GoA and as applicable the local communities in which sub-projects are implemented develop a sense of ownership with respect to the sub-projects financed by the EDFF. The GoA (thru its PMU) will be selecting all subprojects. All sub-project proposals will be required to show endorsement by the beneficiary communities or districts. The extent to which the agency proposing a subproject has undertaken consultations with the beneficiary communities and the relevant Dinas and/ or District Government and the degree of ownership of the project by these will be key selection criteria. E. CRITICAL RISKS AND POSSIBLE CONTROVERSIAL ASPECTS 37. The EDFF faces several risks, the most important of which are: that the GoA is not able to fulfill its role in overseeing the project implementation; weak governance and capacity at various levels impact the timely implementation of sub-projects; and the risk that conflict may recur. The team has discussed these risks and concluded that the overall risk assessment is substantial, after mitigating factors are considered and in place. The mitigation measures identified are either currently underway, or are built into the project design. The key areas of risk have been identified as General, over which the project and the parties implementing have little control, but are nonetheless important factors which could impact negatively on the project; Externalities which are much more specific to the project, but still not totally within the control of the project, but must be considered and to the extent possible mitigated; Implementation risks are those risks viewed by the team as being to a much greater extent within the control of the project. The implementation risks are addressed through government actions currently underway or planned, or through efforts linked to the project itself. The potential rewards of the project are seen as sufficient to outweigh the risk in that without efforts such as the EDFF the risks in the community will only go higher. See Annex 6 for a listing of risks and proposed or existing mitigation steps. 38. The size of the proposed project, the number of sub-projects to be undertaken, and the complexity of coordinating the programs to be financed with other programs to support economic development in Aceh, tasks assigned to a newly-established PMU, creates financial 13

23 management challenges. In addition, there are a number of risks associated with sub-project implementation. Anticipating and addressing these challenges in advance will significantly reduce the overall risk to the project. It is important that financial management processes and systems be in place such as an independent financial audit at the end of the fiscal year, the participation of Aceh Inspectorate in regular internal audits as well as the hiring of financial management experts to assist the implementation agencies (at the provincial and central government levels). Additional information on financial management provisions is provided in Annex 8. F. GRANT CONDITIONS AND COVENANTS 39. Standard World Bank conditions and covenants apply. The following action(s) will be taken prior to effectiveness: (a) (b) (c) (d) The Project Management Unit with a staffing plan, terms and conditions satisfactory to the World Bank has been established within BAPPEDA. The sub-project Selection Committee with members, terms and conditions satisfactory to the World Bank has been established. The KPDT has established the Project Secretariat with a staffing plan, terms and conditions satisfactory to the World Bank. Bappeda Aceh has designated at least one staff with primary responsibility for procurement of the EDFF project either part-time or full-time in the PMU 40. The following action(s) will be taken prior to the review and evaluation of subprojects in component 1 begins: (a) The Operations Manual has been finalized and adopted (b) the Project Management Consultants has been appointed 41. In addition to standard implementation actions, the following actions will be taken during implementation and will be reflected in the Grant Agreement: (a) (b) Contents of the Operations Manual. The Procurement Section of the Operations Manual shall include: (i) procurement methods and procedures compliant with the Bank Procurement/ Consulting Guidelines, including the clarifications/ modifications of NCB procedures acceptable to the Bank, (ii) sample procurement plan, (iii) Standard Bidding documents (ICB/NCB/Shopping) and RFP to be used, (iv) Reporting requirements, (v) Record keeping requirements, (vi) TOR and detailed procedures for including independent members of civil society as observers for procurement process. The Project Operations Manual will include payment verification for sub-projects. The Manual should be agreed with the Bank. Revisions to the Operations Manual as necessary. The PMU will review/revise, subject to World Bank approval, the Operations Manual at least once every year. 14

24 (c) Selection of Sub-projects. The PMU will submit a list of sub-projects proposed for funding along with supporting documentation, after Selection Committee approval, to the World Bank for review and No Objection, before notification to sub-project proponents of approval for funding and approval to prepare the sub-project. The PMU will review each of the approved sub-project appraisal documents, prepare comments and submit the sub-project file to the World Bank for review and NOL. (d) Audit Arrangements. KPDT will appoint BPKP as external auditor for the project. In addition, yearly internal audits will be conducted by the KPDT Inspectorate General, in collaboration with Aceh Inspectorate. Audit of the project as well as sub-project financial statements will be submitted to the World Bank not later than 6 months after the end of each fiscal year. IV. APPRAISAL SUMMARY A. ECONOMIC AND FINANCIAL ANALYSIS 42. The EDFF is a framework type project and the activities will be selected and be subject to analysis only after effectiveness of the Grant. As such, it is not possible at this stage to assess the economic benefits of this project through cost-benefit analysis or assessment of the financial soundness of SIEs. Therefore, at this stage the analysis will focus on the soundness of the approach undertaken, to support the strategies of the provincial authorities to promote sustainable economic growth in the province and to improve the capacity of BAPPEDA and other relevant agencies to select, implement and monitor sub-projects that support economic development in Aceh. 43. As elaborated in other sections of the PAD (see Annex 1) the economy in Aceh pre- Tsunami was driven by the oil and gas fields in the East Coast, now in decline and with very little linkages to the rest of the economy. The reconstruction of the province after the Tsunami, with a large influx of funds and the implementation of vast reconstruction activities, has resulted in relatively high growth in the construction sector and other sectors closely related to the construction sector (trade, utilities, banking). As the bulk of the reconstruction effort comes to an end, and bearing in mind a relatively large number of unemployed people and the social unrest that may cause, the reconstruction agency, the national and provincial authorities and many donors have recognized the need to focus on putting Aceh s economy on a more sustained and longer-term growth path with an effort to create more jobs at the center of this growth path. 44. The provincial authorities, led by BAPPEDA, and with the assistance of several donors, have invested significant resources in identifying areas in which public funds can support economic growth in the province and address existing constraints to growth (see Attachments 1 and 2 of Annex 1), such as improving the security condition in the province, investing in human capital, a focus on sectors where Aceh has a comparative advantage, such as agriculture, fisheries and agro-industry, infrastructure and the need to open the province to trade and investment. This project seeks to support the GoA s own strategies to support economic growth. The GoA is likely to have the best information as to what are the key constraints for growth in the province and what sectors have the greatest potential. Technical assistance will be provided through this project to leverage that information and select a number of sub-projects to be 15

25 financed by the EDFF to provide the greatest benefits in terms of sustainable economic growth and the creation of jobs. Supporting the GoA s own initiatives and priorities also increases the likelihood of the ownership and endorsement of financed activities by the local authorities and through that their sustainability. The project will also finance a consulting firm to support the government implementing agencies in managing this project. A key responsibility of this consulting firm will be to assist BAPPEDA in the evaluation of sub-projects, guided by a selection criteria spelled out in this project document and that will be further elaborated in the Operations Manual, to ensure that individual activities being financed have the highest pay off. B. TECHNICAL 45. The proposed approach, putting the provincial authorities, particularly BAPPEDA, in the driver s seat, in designing and implementing the EDFF, will be important in improving the allocation of significant public resources in Aceh. The GoA will have significant public resources for the foreseeable future. As identified in the Aceh Public Expenditure Analysis (World Bank 2006), the key constraint regarding public spending in Aceh is not the availability of resources but how to spend these effectively. The provincial authorities, led by BAPPEDA, will be responsible for the allocation and joint implementation of the Special Autonomy Fund, worth Rp. 3.5 trillion in This project, by assisting BAPPEDA in the allocation of resources to support economic development according to an agreed set of priorities and criteria, will assist the agency in the management of the Special Autonomy Fund in the future, key in the development of the province over the next 20 years. C. FIDUCIARY Procurement Arrangements 46. Procurement for the project will be carried out in accordance with the World Bank s Guidelines: Procurement under IBRD Loans and IDA Credits dated May 2004 as amended in October 2006, Guidelines: Selection and Employment of Consultants by World Bank Borrowers dated May 2004 as amended in October 2006, and the provisions stipulated in the Grant Agreement. International Competitive Bidding (ICB) will be used for all works packages estimated to be equivalent to or cost more than US$5 million each and goods packages estimated to be equivalent to or cost more than US$200,000 each. National Competitive Bidding (NCB) will be used for all works packages estimated to cost less than US$5 million each and goods packages estimated to cost less than US$200,000 each. Shopping will be used for all works and goods packages estimated to cost less than US$50,000 each. At the project appraisal, it was identified that a contract of consulting services for project management will be procured following QCBS method. Other consulting contracts will be included in the procurement plan of each sub-project. The procurement plans will be reviewed by the PMU and afterwards by the World Bank team. Details of the Procurement Plan and procurement capacity assessment are presented in Annex The Government of Aceh has expressed concern on the capacity, timeliness and quality of procurement of the potential sub-project implementation entities. As a result, it was agreed with BAPPEDA that, in the sub-project selection process, the capacities of SIEs will be assessed; and for those lacking procurement skills and capacities, PMU will provide necessary support for 16

26 conducting procurement. The PMU and its consultant team will also have full-time experienced staff to supervise how the SIEs are conducting procurement. Financial Management 48. Accounting and Reporting. The accounting policies and procedures of EDFF will substantially follow government financial management procedures, with strengthened procedures where appropriate. These government procedures include, for instance, government budgeting procedures, accounting standards (PP no. 24, 2005) and government accounting systems (PerMenKeu no. 59/PMK.o6/2005), which have all been issued following the enactment of the Finance and Treasury Laws. All project activities and expenditures will be included in the respective KPA (Budget Holder) budget and administrative and accountability procedures for approving expenditures and disbursing funds to beneficiaries will follow government procedures. 49. To have better project information, grant expenditures and activities will be separately reported to the World Bank under project financial report on a quarterly basis through Interim Financial Reports (IFRs). This would include information on procurement progress, physical progress of budgeted activities and financial source and use of funds. A reconciliation of the special account transactions with the financial statements will also be prepared. Formats for these would be agreed at appraisal and confirmed during negotiations. Quarterly project financial report should be received at the Bank no later than 45 days after each quarter end. The quarterly reports will be collated annually for annual financial audit purposes. The KPDT Secretariat will ensure that IFRs will be submitted to the World Bank on timely basis. Details of these procedures will be included in the Operations Manual. All financial transactions should be recorded properly supported with adequate evidence that the recipient is as intended according to the Grant objectives and the record should be publicly available to ensure transparency. 50. Internal Controls and Internal Audit. For sub-projects, payment verification will rely on the sub-grantees financial management system. The PMU will assess adequacy of internal control of SIEs. Payment verification at PMU level will rely on the government system, applying segregation of duties between technical and financial aspects. The Operations Manual will document the financial management systems and procedures to be followed to ensure that the project has sound financial management practices. KPDT has agreed to include the project in their routine annual audit program and they will include sub-projects to their sample, preparing a separate report for the project to be submitted to the World Bank. In addition, they will also have a special team to respond any complaints received in regards to the project. 51. External Audit. The project financial statements prepared by the project executing agency will be based on the compiled project Interim Un-audited Financial Reports (IFR). The annual IFR will be subject to a financial audit by an auditor acceptable to the Bank. The Terms of Reference (TOR) for the project audit will be agreed by the Bank. A copy of the project audited financial statements, along with the management letters issued by the auditors, if any, will be submitted to the Bank no later than 6 months after the end of each fiscal year. The audit will include audit of sub-projects below US$1 million. Sub-projects above US$1 million will also be audited separately by auditors acceptable to the Bank, and the audit reports will be submitted to the Bank no later than 6 months after the end of each fiscal year. 17

27 52. Disbursement Arrangements. The disbursement method will be Advance. In order to facilitate the disbursement, a Designated (Special) Account (DA) denominated in US dollars will be opened by Director General Treasury in the Central Bank or a commercial bank acceptable to the Bank under the name of the Ministry of Finance. The Director General Treasury will authorize its relevant Treasury Offices (KPPNs) located in Banda Aceh and Jakarta to authorize payments of eligible project expenditures and provide guidelines regarding eligible project expenditures in accordance with the Grant Agreement. Applications for reporting of the use of DA funds will be supported by the necessary documentation (see Annex 8 for details). 53. The KPDT Secretariat will be responsible for reconciling the DA and preparing applications for withdrawal of advances and reporting the use of the DA, duly approved by Director General Treasury before their submissions to the Bank. All documentation for expenditures submitted for disbursement will be retained at the implementing unit and shall be made available to the auditors for the annual audit and to the Bank and its representatives if requested. For selected sub-projects proposals, Sub-Grant Agreement/Contract will be signed between the PMU and the SIE. The document will include budget and procurement plan. After signing the Sub-Grant Agreement, SIEs will receive an advance adequate to cover three months expenditure plan. Details of flow of fund mechanism will be described in the Sub-grant OM. D. ANTI-CORRUPTION ACTION PLAN 54. The implementation of an Anti-Corruption Action Plan (ACAP) for the EDFF depends on the strong support from the GoA through its PMU. The Action Plan (Annex 12) will be part of the Operations Manual. During implementation, World Bank staff will monitor the elements of this Action Plan and Aide Memoirs will clearly state progress in relation to the Action Plan. Any changes to the Action Plan will be made in agreement with the World Bank. The Bank supervision may be enhanced by support from an External Supervision Team (EST), which advises the Bank s internal Anti-Corruption Committee for Indonesia to help identify the risks of fraud and corruption at an early stage, and bring these to the attention of the Bank and Government institutions for further action. In particular, the EST may aid Bank supervision by identifying and tracking indicators of corruption, and carrying out sub-project site checks at strategic times between formal supervision missions. The EST may also assist the Bank s supervision team in designing complaint handling processes as well as mechanisms for coordination with other institutions. These inputs do not reduce the need for the GoA to monitor the project implementation through the agreed mechanisms. The GoA will regularly share with the Bank the findings of technical and financial audits, to be held during (interim audits) and after (post audits) each year for a significant sample of sub-projects. The GoA and the PMU consultant will also ensure that any suspected cases of corruption related to this project be reported immediately to the Bank. 55. Disclosure of Information. To encourage a healthy sharing of information concerning sub-project selection and implementation, the PMU will ensure that information concerning the EDFF will be made publicly accessible, including the procurement plans and schedules, contract information for large contracts, a Mid Term Review report as well as audit reports and formal responses from the government to these reports. This will be done using established procedures (e.g. advertisements in newspapers, government websites ( etc. In addition, SIE through the PMU will also respond to individual requests of the public for information (as 18

28 elaborated upon in Annex 13 and OM). To avoid misinformation circulating about the project, the PMU will ensure that groups interested in individual sub-projects are able to obtain data concerning progress during the procurement and implementation phases through various methods. The PMU will also ensure that lessons learned from the implementation of sub-projects is widely shared and specifically shared with those who have indicated an interest. 56. Collusion Mitigation. Special attention will be given to the planning and preparation of procurement processes in general and more specifically at the sub-project level, as this may entail very different package types and sizes, different levels of responsibility, and different capacities in terms of process management and oversight (internal and external). The Operations Manual will provide guidelines on this. The measures outlined in the procurement and financial management sections of the Operations Manual must be closely followed at each stage and any deviation from the agreed rules must be carefully investigated with appropriate sanctions strictly applied. The PMU s consulting firm will assign enough procurement experts to assist PMU in the selection of proposals and build capacity of the GoA. The consulting firm will also support PMU in overseeing procurement at the sub-project level. In those instances where the sub-project implementing entities do not have the required procurement capacity or when procurement involves large and highly complex packages, the PMU may take over the procurement role. 57. Mitigation of Forgery and Fraud: Forgery and fraud risks will be minimized by adherence to fiduciary management practices. The Operations Manual will outline measures such as payment validation procedures, documentation and reporting mechanism and internal and external audits. Measures undertaken will include strict payment validation procedures that will be rigorously enforced. Project/sub-project filing/bookkeeping will be tightly controlled and subject to strict reviews. Internal and external audits will be held to ensure that fiduciary management is in accordance with the agreed procedures. Special attention will be given to aspects that have proven vulnerable in previous projects, such as soft categories like working capital, training, workshops and information dissemination. The firm supporting PMU will provide the necessary financial management expertise to ensure that PMU can perform its duties in this area. Financial management reports of PMU and the sub-projects will be subject to internal audits by the Inspektorat Daerah (Aceh). The State Development and Financial Supervisory Board (BPKP) or the BPK will perform regular external audits. All final audit reports and the government s responses will be disclosed in the project s website. 58. Complaint Handling. The EDFF, as a project being funded by the MDF, will also be subject to the complaint handling mechanisms of the MDF. As such, there is no need to create a new system to handle complaints. In addition, as a project implemented through the GoA, the normal government procedures to handle complaints, particularly the Inspektorat Daerah which receives and follows up complains from various sources, will apply. The GoA and the PMU will also use its communications strategy to avoid many of the complaints that misunderstandings or poor communications may cause. The overall approach of the project is to ensure fairness and transparency in the selection and management of sub-projects. Depending on the gravity of the complaints, Inspektorat Daerah may decide to refer the complaints to the relevant agencies/ individuals or law enforcement agencies. The Inspektorat Daerah has signed agreements with the BPKP and the Anti Corruption Commission (KPK) for referral of corruption findings. 19

29 59. Remedies and Sanctions: To the extent this project will finance several individual economic development sub-projects in an environment of weak institutions and local government capacity, there may be cases of abuse during the implementation phase. The PMU and the GoA will follow up on each reported or discovered case appropriately, taking into consideration the size and nature of the case as well as the level of evidence available. The PMU will activate and monitor referrals to Inspektorat Daerah and external authorities to gauge if legal and/ or administrative sanctions (administrative sections against public officials, sanctions and remedies governed under Keppres 80/2003) as envisioned by GoA/GOI are being effectively applied. The PMU will ensure that proven cases of corruption get high publicity so that they will act as a social ( name and shame ) deterrent. The World Bank may also suspend disbursement to the project or sub-projects until issues are resolved. Misprocurement and cancellation of grants may be declared when there are evidences of corrupt practices committed. E. SOCIAL 60. In general, the economic development sub-projects will entail public goods/enabling environment and other areas in support of long term job creation and economic development. As a result, the level of associated social risks is likely to be limited. However, it is important for planning purposes associated with sub-project selection that the PMU ensure that sub-projects reflect community needs - specifically those of vulnerable groups, such as women, children, those directly impacted by the Tsunami and the poorest in society. The focus of the project on agriculture and fisheries will benefit primarily rural areas, where a majority of the poor live in Aceh. A requirement for entities presenting proposals for financing will be endorsement of key government entities for the implementation of the project. The EDFF will be guided by the blueprint prepared by BAPPENAS, RPJMD and the provincial authorities own economic development strategies, focused on poverty alleviation and with rural communities at the center. The EDFF design recognizes the importance of empowering women and anticipates that some of the sub-projects will contain components to enhance the role of women in economic development and employment. Proposals will be screened with regards to main beneficiaries of sub-projects being proposed, ensuring that the poor and vulnerable groups are the main beneficiaries of the EDFF.. F. ENVIRONMENT 61. The sub-projects are small and medium scale and as such the level of associated environmental risks is limited. EDFF subprojects may entail financing of projects which could involve environmental issues associated with agriculture, fisheries and other economic development and job creation projects. Under EDFF it is expected that most of the investment will contribute to improving environmental conditions. Any adverse environmental impacts under this project are therefore expected to be limited and highly localized, and these can be readily mitigated through the project s negative list or through environmental management plans. 62. The GOI s environmental review procedures, which include specific procedures for Aceh 6, are broadly consistent with those of the World Bank, and will form the framework for the 6 Ministry of Environment Decree No. 308/2005 on Implementation of Environmental Impact Assessment, Environmental Management Measures and Environmental Controlling Measures for Rehabilitation and Reconstruction Activities of Nanggroe Aceh Darussalam and Nias Islands of North Sumatra. 20

30 project s approach to environmental screening and mitigation (Annex 11 and the comparison of the procedures in the Operations Manual). Part of the PMU sub-project application evaluation process will be an environmental screening to identify the environmental category. Each subproject application will include a mandatory environmental screening form. It is expected that all sub-projects will fall into category B and C. For category B sub-projects, the PMU will determine the extent of the environmental assessment that is necessary and clear any mitigation measures that are required for each sub-project. Although not expected due to limitations placed on applicants, if a sub-project is categorized as a category A sub-project, special mitigation measures will be required under OP 4.01 and require SIE to retain independent environmental assessment experts not affiliated with the project to carry out the environmental assessment, normally a full environmental impact assessment. 63. The PMU will be required to review the required environmental management plans (EMP or UKL/UPLs) during sub-project preparation and will ensure integration of EMP results into design documents or contracts prior to approval of the detailed sub-project appraisal documents. Further, the PMU will provide The Bank with copies of the EMP or UKL/UPLs of projects requiring same prior to giving the subprojects final approval. During supervision, the Bank will receive bi-annual monitoring reports covering environmental safeguards issues. G. SAFEGUARD POLICIES 64. It is anticipated that none of the World Bank social safeguard policies will be triggered by the EDFF. It may be that some of the sub-projects, after careful screening, need mitigation measures as foreseen by the World Bank. A range of safeguards specialists will be retained by the PMU (funded by the EDFF) as needed. All sub-projects will be screened for compliance with environmental and social safeguards policies. The Operations Manual for the project entails an Environmental and Social Safeguards Framework with detailed social and environmental management procedures. The Environmental and Social Safeguards Framework is outlined in Annex 11 primarily as a screening tool for environmental and social impact. This framework provides guidance to the PMU as well as SIEs to determine to what extent the sub-projects will affect the environment and communities and will ensure that environmental and social concerns are duly incorporated in the sub-project design. The EDFF does not trigger any policies related to land acquisition. No land acquisition will be financed by the EDFF and no Sub-project will be approved that would result in Displaced Persons. Sub-project implementation will be through non-government entities all of which do not have the power of imminent domain and thus have no ability to force relocations or land sales. Given the short implementation period for the project, sub-projects which would involve involuntary relocation will not be funded; only those with voluntary relocation will be considered subject to verification as required in the Operations Manual. 65. EDFF sub-projects may entail financing of activities which could involve environmental issues associated with agriculture, fisheries and other economic development and job creation projects. The EDFF is classified as a B category project as defined in the World Bank Operational Policy. As such, all sub-projects that will be financed by the EDFF must be in compliance with national (GOI) environmental rules and regulations, as well as with environmental policies of the Bank. The direct environmental impact of sub-projects that will be funded under the project is expected to be small i.e., potential impacts are site-specific; few if 21

31 any of them are irreversible; and in most cases mitigation measures can be designed. The PMU and its consultant will need to have a good understanding of sub-project proposal related environmental impacts and how such impacts can be mitigated as they evaluate sub-projects for approval. Safeguard Policies Triggered Safeguard Policies Yes No Environmental Assessment (OP/BP/GP 4.01) [x ] [ ] Natural Habitats (OP/BP 4.04) [ ] [x] Pest Management (OP 4.09) [ ] [x] Cultural Property (OPN 11.03, being revised as OP 4.11) [ ] [x ] Involuntary Resettlement (OP/BP 4.12) [ ] [x] Indigenous Peoples (OD 4.20, being revised as OP 4.10) [ ] [x ] Forests (OP/BP 4.36) [ ] [x ] Safety of Dams (OP/BP 4.37) [ ] [x ] Projects in Disputed Areas (OP/BP/GP 7.60) * [ ] [x ] Projects on International Waterways (OP/BP/GP 7.50) [ ] [x ] *By supporting the proposed project, the Bank does not intend to prejudice the final determination of the parties claims on the disputed areas H. POLICY EXCEPTIONS AND PROJECT READINESS 66. Policy Exceptions None 67. Project Readiness and Startup Plan (a) (b) (c) (d) The PMU consultant s selection process is at an advanced stage of selection. The members of the sub-project Selection Committee, acceptable to the World Bank, have been identified. A draft first year Work Plan has been submitted to the World Bank by BAPPEDA Annual Budget Estimates for the PMU and the KPDT have been prepared and steps taken to secure government funding for the budgets. 68. Project Inception Report. A project inception report will be prepared by the implementing agency with assistance from the World Bank in the early stages of the project. The inception report will inform the finalization of the Operations Manual. The inception report will report on the start of implementation activities in the early phases of implementation, particularly: (a) Further elaboration on priorities identified by the implementing agency (BAPPEDA Aceh) and sectors likely to receive EDFF funding. BAPPEDA Aceh will conduct further discussions with the relevant Dinas/ District Governments to further elaborate 22

32 on the priorities for economic development and identification of concrete issues to be addressed through activities financed by EDFF (b) Further elaboration on ways in which the selection of subprojects can be streamlined to ensure timely subproject approval for those subprojects that are ready to start implementing soon after the subproject being approved. (c) Revised Results Framework aligned to the MDF results framework. The revised results framework should include indicators capturing process and not only outcomes. (d) Elaborate on a strategy to include gender concerns in the design and monitoring of subprojects. The inclusion of gender should also translate into specific targets in the subproject outputs where possible. 23

33 ANNEX 1: COUNTRY AND SECTOR BACKGROUND 1. The devastation of the December 2004 Tsunami coupled with the preceding years of civil unrest contributed to high unemployment and poverty in Aceh. BPS data reports that 28.4 percent of the population in Aceh was living below the poverty line in 2004, almost double the national poverty level of 16.7 percent in The World Bank estimates that poverty went up slightly after the Tsunami (to 32.6 percent). This increase masks much larger increases in areas badly affected by the Tsunami and the conflict as well as higher poverty levels in rural areas. By 2006 the poverty rate had fallen slightly to 26.5 percent, below pre-tsunami levels, attributable in large part to the sizable reconstruction effort and the end of the conflict. Poverty has continued to decline and BPS estimates that 23.5% of the population in Aceh was below the poverty line in However, a large share of the population remains vulnerable with average consumption just above the poverty line, so that a small shock such as the end of the reconstruction effort could send them back into poverty. Creating sustainable employment remains a challenge. Unemployment has been increasing for several years (see Figure 1). Much of the unemployment during the period can be attributed to civil unrest and weak security, but the impact of the Tsunami, aside from the short term reconstruction efforts, has also had an impact. The Tsunami not only caused tremendous loss of life, but ended the prospects of long term employment for many people. It is estimated that 80,000 small and medium sized enterprises, providing employment to 140,000 people were destroyed. Figure 1: Aceh s Unemployment Rate Thousands 2,000 1,500 1, % 12% 10% 8% 6% 4% 2% 0% Source : BPS Employed Unemployment Unemployment was growing as a result of some shedding of labor in the agricultural sector and there has been a lack of private sector investment coupled with the failure of other sectors (services, manufacturing) to create new job opportunities, when the devastation of the Tsunami hit Aceh. Although there was a slight decrease in unemployment in 2007, it is primarily attributable to reconstruction. The 24

34 reconstruction has created new job opportunities in some sectors (construction, transport), but these jobs have been closely linked to the availability of reconstruction funds, are not likely to be sustainable in the long run. The GoI, through the BRR, and the GoA have committed to building the community of Aceh back to being stronger and better than it was pre-tsunami. Both have identified economic growth and development as essential elements of recovery from the Tsunami. The GoA in its Medium Term Development Plan (RPJMD), the GOI in BAPPENAS Master Plan for the reconstruction of Aceh after the Tsunami and BRR at its Coordination Forum for Aceh and Nias (CFAN) meeting with development partners in April 2007, all identify Aceh s reconstruction phases, starting with the emergency phase of relief work followed by a second phase dealing primarily with rehabilitation and physical reconstruction and noted as crucial, the third phase of long-term economic development. The GoA, in its Vision for Aceh, published in 2007, identified key directives for the development of the region s economy (see Attachment 1 for details), such as a new focus on private sector development and the need to recognize entrepreneurs as development actors, the need to address Aceh s competitiveness challenges, starting by the high costs of doing business in the province as well as the promotion of trade with countries in the region and reaching international markets as a way of increasing demand for Acehnese agricultural products. In addition, the Government Vision also mentions the need for equitable and sustainable growth that respects the environment. The GoA, in the RPJMD identifies key factors hampering Aceh s economic development. As a result of the 30 year conflict, at the time of the Tsunami, there were weak government institutions, damaged infrastructure and low investment levels. The Tsunami brought further interruption of normal economic activities. The RPJMD identifies key constraints for economic activity for some sectors: in agriculture, availability of land, low productivity, low quality of production and lack of access to inputs and markets are identified as constraints. In manufacturing, the RPJMD mentions the weak business environment, low quality of production as well as the failure to adopt recent technological changes as key constraints for the development of the sector. These deficiencies together with the impact of the Tsunami have led to potential imbalances in Aceh s economy. Aceh s economy is dominated by oil and gas production, which accounts for 28 percent of regional GDP (2007) and over 90 percent of the province s exports. Known gas reserves are projected to decline to near zero by 2014 and the mining and related manufacturing sector have been declining for several years in a row. This together with current growth trends, concentrated in sectors linked to the availability of large funds for reconstruction reinforces concerns regarding Aceh s economy beyond Aceh s economy contracted in 2004 (pre-tsunami) by 10 percent and experienced a further 10 percent decline in 2005 (post-tsunami). The contraction in the economy was the result of the declining mining and related manufacturing sectors, and the impact of the Tsunami, which caused a decline of the manufacturing and agricultural sectors. The economy grew at a modest 1.6 percent in 2006, driven mostly by growth in the services sector, related to the reconstruction effort. In 2007 Aceh s economy 25

35 continued to decline, a result primarily of the decline in the oil and gas sectors. Without a significant recovery of the agricultural and manufacturing sectors, Aceh will be facing a structural downturn as the reconstruction effort winds down in This could have negative implications for employment and poverty alleviation efforts. Table 1: Economic Growth in Aceh (percent) Sector * Agriculture, Forestry, & Fishery Mining and Quarrying Oil & Gas Quarrying Manufacturing Industry Oil and Gas Industry , Non Oil and Gas Industry Electricity, Gas & Water Supply Construction Trade, Hotel and Restaurant Transport & Communication Financial, Ownership and Business Services GDP GDP w/o Oil & Gas *preliminary figures Source : BPS Agriculture and fisheries are key sectors for any efforts to promote sustainable economic growth and the creation of sustainable jobs in the province. It still accounts for 23 percent of Aceh s economy (or 32 percent if oil and gas are excluded) and provide employment to 57 percent of the population. However, growth in the agricultural sector has been fairly week in the immediate aftermath of the Tsunami, and production has only returned to pre-tsunami levels in 2007, led by growth in estate crops, up by 15 percent since the Tsunami, followed by food crops and the fisheries sectors. Table 2: Agricultural Production in Aceh (Rp. billion) Agriculture Sub Sector Farm Food Crops 3,022 3,253 3,145 3,179 3,449 Non-food Crops 1,188 1,454 1,530 1,534 1,674 Livestock & Products 1,428 1,414 1,296 1,326 1,206 Forestry Fishery 1,147 1,326 1,253 1,287 1,365 Total 7,609 8,069 7,755 7,873 8,263 Source: BPS, in constant 2000 prices The current reconstruction effort, estimated at approximately US$7.7 billion spread over a five years period, is one of the largest such efforts in a developing country. The generosity of donors and the reconstruction program have been lifting Aceh s 26

36 economy in the short run. The reconstruction effort commenced in 2005 and by 2006 was the main driver of economic growth. The reconstruction effort has been creating a real construction boom in some parts of the province, but since it has not addressed issues related to the competitiveness of Aceh s economy and the sustainability of current growth trends, it is not strictly in line with the BAPPENAS Master Plan which foresees the recovery of Aceh s economy as part of the third phase of the province s reconstruction. In addition, the large aid influx and initial supply side constraints have contributed to high inflation levels, at over 40 percent year-on-year in December The differential between Aceh and the national inflation level has been declining since then, but in May 2008 inflation in Aceh, at 15.3 percent, was still significantly higher than the national inflation level, at 10.4 percent. Three years of high inflation mean that Aceh s consumer price index (CPI) has risen well above the national average (Figure 2). Figure 2: Consumer Price Index of Aceh and Indonesia since the Tsunami 250 CPI Banda Aceh National Source: BPS Nominal wages have also been increasing rapidly since the Tsunami, partly to maintain purchasing power of the population. Aceh s monthly minimum provincial wage is Rp. 1 million, the second highest in the country and 1/3 higher than the national average. The increase in prices of goods and labor has contributed to the lack of competitiveness of Aceh s economy and will make the sustainability of current growth rates more difficult. 27

37 Figure 3: Aceh s Minimum Provincial Wages in Comparison with National Levels Source: Manpower Office, Aceh Aceh North Sumatra National Average The share of consumption (private and public) and domestic investment in the economy have increased significantly post-tsunami. The reconstruction effort is driving both consumption and domestic investment, while trade (both domestic and international) continue to decline. Although reconstruction will continue to fuel the economy for a few more years, and the public sector is likely to continue being a source of strong demand for the local economy, 7 the continuing decline in exports is a cause for concern and may signal a lack of competitiveness in Aceh s economy. Table 3: GDP Composition Based on Expenditures (%) Expenditures ** 2006* Private consumption Govt. consumption Investment (GDCF) Change in inventory Exports Imports) Inter-province trade * Preliminary figures; ** Revised figures Source: BPS There are no disaggregated data on investment in Aceh, but investment as a share of GDP was only 7 percent in 2004, well below the levels in the rest of Indonesia or other 7 Based on LOGA No. 11/2006, Aceh will receive an additional 2 percent from the national DAU for 15 years starting in

38 countries in the region. Investment has increased significantly since then, a result of the massive reconstruction funds being invested in the province, and by 2006 it was worth 14 percent of GDP. This is still significantly lower than investment in the rest of the country. Table 4: Gross Capital Formation (as % of GDP) Aceh Indonesia Malaysia Philippines Thailand Source: BPS (Aceh) and World Development Indicators (for rest) The decline of Aceh s economy pre- and post-tsunami has contributed to the growing unemployment problem. Limited growth in some sectors has not translated into significant employment generation. Unemployment increased from about 6 percent in 2000 to 10 percent in , despite the large reconstruction effort post-tsunami which created significant job opportunities. The agricultural sector remains stagnant three years after the Tsunami, even though it is the single largest employer in Aceh, estimated at 57 percent of the workforce in Agricultural production just recovered and gone back to pre-tsunami levels in 2007 and is of concern to the GoA. Most of the recent employment creation (2/3) appears to have been linked to the reconstruction program and thus, is not likely to be sustainable. Therefore, a renewed effort is needed to rehabilitate the agricultural sector to improve job opportunities in the longer term. Table 5: Aceh s Work Force Agriculture 1,020, , , , ,835 Mining 7,433 8,914 4,511 7,670 17,386 Industry 79,070 51,613 54,989 72,497 56,605 Utilities (Electricity, Water) 1,295 8,486 3,784 5,322 1,924 Construction 48,076 62,879 58,041 74, ,038 Trade 244, , , , ,849 Transportation 65,417 59,849 80,155 69,078 68,634 Finance 5,979 5,687 4,884 3,343 10,096 Services 172, , , , ,350 Total 1,645,244 1,522,504 1,541,973 1,538,494 1,644,717 Source: BPS 8 There are two seemingly contradictory trends in Aceh s labor market, where both unemployment and nominal wages are increasing. This could be the result of (i) supply shortages for particular labor categories in high demand (such as semi-skilled construction workers), (ii) lack of population mobility, creating labor shortages in some areas; and (iii) wide availability of safety nets from NGOs and donors reducing incentives for many people to actively seek low-paying employment. 9 The increase in employment in agriculture in 2007 is primarily the result of the timing of the Sakernas survey, at the time of a late harvest. Therefore the real increase in agricultural employment is probably smaller than that suggested by the data published by BPS. 29

39 This concern with the sustainability of current growth trends are also in line with popular sentiment. A post-election survey of Aceh s citizens by the International Foundation for Election Systems (IFES) conducted in February 2007 identified their concerns across a number of socio-economic conditions which seem to support the broader view of the need for more to be done to sustain economic development. Further, in the same survey, citizens registered their priorities as to the most important issues the new Governor should address, with 74 percent identifying economic development as the most important. Figure 4: IFES Survey 2007: Specific Conditions in Aceh Specific Condition in Aceh (in %) Availability of Jobs Economic Conditions Reconstruction Program Free movement without harrasment Political Freedom Security condition Source: IFES (2007) Good Bad The pre-conditions for economic recovery are in place. There is more political stability and greater institutional support for economic growth. Knowledge is accumulating as to the realistic possibilities of critical sectors to develop and the framework for a coherent economic growth strategy is coming into place. The GoA will add resources to support growth and economic development initiatives in the future, at least in part funded through central government transfers which began in 2008 as a result of the LOGA 10. One key challenge facing the GoA will be the quality of spending and choice of projects. The EDFF is designed to begin to fill the long term development gaps by seeking to build capacity within the GoA to select, evaluate and supervise projects which promote economic development and job creation, based upon a model 10 For a full analysis of public finances in Aceh see World Bank, 2006, Aceh Public Expenditure Analysis Spending for Reconstruction and Poverty Reduction. 30

40 that can be easily continued with government resources after the EDFF has terminated. The report Aceh and Nias Two Years after the Tsunami prepared by BRR in collaboration with donor agencies at the end of 2006, elaborates on the reconstruction work done. It highlights successes, like the rehabilitation of fields for food crops as well as major gaps (e.g., fisheries infrastructure) and some failures (e.g., replacement of small vessels for fisheries). The BRR report also highlights two areas, key for economic recovery in the province that did not receive attention during the initial stages of reconstruction, private sector development and the improvement of the investment climate. Livelihoods programs implemented after the Tsunami primarily targeted household income recovery. They were designed in the aftermath of a disaster for which the major feature of these programs were cash-for-work components designed to inject liquidity quickly into the households and to some extent the rehabilitation of community livelihoods assets. The goal of many of the livelihoods projects was to restore activities in the communities as they were before the Tsunami by replacing lost assets, enhancing skills and providing finance (often grants or small loans). As such many of the smaller initiatives have been successful and can show good results in rehabilitating the livelihoods of small scale farmers or fishermen. On the other hand, some of the larger scale projects involving distribution of specialized inputs and services, such as the reconstruction of boats, the purchasing of industrial equipment or ridding agricultural land of diseases have not shown the same degree of success. (See Annex 2 for a listing of some of the livelihoods programs implemented since the Tsunami). The programs were for the most part very targeted to narrow and specific post Tsunami needs. They were not designed to and overall did not result in an increase in the general competitiveness or long term sustainability of economic development of Aceh. They also were not directed toward correcting many of the long standing structural issues hampering or in some cases, preventing long term sustainable economic growth and job creation. The next phase in providing assistance to the communities and rural areas in Aceh should expand upon the past successes, the lessons learned, and the availability of GoA guidance on economic development and help to address those areas not previously targeted. This is in part, what EDFF will do. New efforts will, in some instances build upon what others have done, and in others take a new direction, but all will be in line with stated GoA priorities for economic development in the province, focusing on increasing the productivity of Aceh s private sector and agricultural and fisheries sectors, improving the quality and quantity of production (directly or indirectly) to make Aceh private sector and its economy more competitive. It will also help Aceh move beyond subsistence farming or selling to local markets and introduce more value added production to the community. GoA s Economic Development Strategy. Recognizing the extent of the devastation, the GoI declared the Tsunami in Aceh a national disaster. It appointed the National Coordinating Board for Disaster Management (BAKORNAS PBP) to implement its 31

41 emergency response. The Minister for Social Welfare was appointed the coordinator of the emergency response phase and an operations centre was established in Banda Aceh. Following the initial emergency response phase, in April 2005 the GoI assigned the BRR to execute and coordinate the reconstruction effort in Aceh and Nias. The GOI formulated a master plan for the reconstruction of Aceh. The plan focused on three key stages of recovery and reconstruction. The first stage was to recognize the immediate needs by addressing emergency measures (3-6 months), the second stage was to focus on rehabilitation needs (up to 2 years) and finally, the third stage which was to focus on reconstruction 11 (4-5 years). Challenges to the successful recovery of Aceh were identified, which included socio-economic needs of all sectors, restoration of local institutions and implementation capacity as well as building peace and reconciliation. One of the key principles of this plan was that reconstruction should not rebuild poverty, but ensure that local economies are robust enough to prevent poverty over the long term. During the initial stage of addressing recovery and rehabilitation, it was the central government which was taking the lead and there was little involvement of the local Aceh government. It was only recently with the release of RPJMD or Medium Term Development Plan for Aceh that the GoA through its elected Governor has again become the leader in strategic planning and direction for Aceh. This plan and its relation to post-tsunami reconstruction and the GoA will play a central role in the EDFF and its selection of sub-projects. The RPJMD describes to an extent a measurable development and budgeting plan for use in the next 5 years (2007 to 2012). The document provides direction, but will also be used as the basis for monitoring the progress of development in Aceh province. The RPJMD identifies two key issues confronting the economy of Aceh: a high level of poverty and unemployment compared to other provinces and developmental gaps between Kabupaten/Kota (districts) resulting in unwelcome disparities. It addresses additional concerns such as unfavorable economic and social conditions, human resources limitations and the impact of many years of conflict. It reflects generally the concern that unless the earlier relief and reconstruction phases are adequately followed by this next phase that the improved economic conditions currently experienced could potentially be followed by a period of economic slowdown and resulting rising unemployment. A discussion of the content of the RPJMD can be found at Attachments 1 and 2 of Annex 1. The GoA has further elaborated its strategic framework for economic development based on the Triple-A concept, comprising of an Atlas (compilation of relevant economic data), Agenda (providing the economic development vision and strategies to promote economic development) as well as the Aturan-main, which explains the institutional mechanisms by which this vision and strategies can be implemented. This framework 11 The objective is stated as rebuilding the region. This includes the economy as a whole, transportation system, telecommunications, social and cultural system, etc. 32

42 identifies three lead economic sectors for the province (agriculture, trade and services), key because of their contribution to both regional production as well as employment. The EDFF, through its focus on improving the business environment, support to the private sector (in particular in agriculture and fisheries) and the financing of public infrastructure needed for economic development, will contribute to the development of all three lead sectors identified by the provincial authorities. 33

43 Attachment 1: RPJMD (Rencana Pembangunan Jangka Menengah) Medium Term Development Plan Aceh and the Government of Aceh Vision 2. The RPJMD describes a measurable development and budgeting plan for use in the next 5 years, ( ). The document provides direction, but will also be used as the basis for monitoring the progress of economic development in Aceh province. The RPJMD identifies two key issues confronting the economy of Aceh: a high level of poverty and unemployment compared to other provinces and developmental gaps between Kabupaten/Kota (districts) which often results in unwelcome disparities. It addresses additional concerns such as unfavorable economic and social conditions, human resources limitations and the impact of many years of conflict. A. The RPJMD also addresses several causes of concern such as: 3. Unfavorable economic and security conditions. These conditions are seen to have affected almost every aspect of Acehnese society. Economic and social conditions have been adversely affected by the weakening of trade between the province and other regions. Local infrastructure, needed to support the economy has been destroyed or left dilapidated through neglect, affecting the health and education infrastructure and leading to increased poverty and unemployment rates. 4. Human resources limitations. Prolonged conflict and limited employment opportunities have contributed to a brain drain in Aceh, as many left Aceh for better opportunities outside the province. The Tsunami, with the loss of life and business has further discouraged people and could result in further migration. If the conditions contributing to the brain drain are not addressed, including creating good job opportunities in the local Communities, it will further restrict Aceh ability to enjoy renewed economic growth. 5. Economic expansion and growth. The prior hostilities and resulting security situation contributed to hampering some of Aceh s economic sectors, including industry, mining and tourism. As Aceh s economy currently relies heavily on rapidly depleting oil and gas production, refocusing its economic on other activity such as agricultural, could better enable future economic growth. The Tsunami helped to highlight this situation as well as the need to bring businesses and business networking back to Aceh. 6. Trade and investment. In addition to trade and investment which were affected by the prior security conditions, other factors also give raise to concern. The reconstruction efforts following the Tsunami have brought to light several issues: notably, trade regulations that remain unclear, and poor infrastructure conditions which have added to high costs and are perceived to be a deterrent to many investors. 7. Infrastructure. Pre-Tsunami, Aceh s infrastructure was not in good condition generally, and its irrigation, roads, water and electricity assets were in poor condition. During the conflict period, the maintenance of infrastructure was inadequate, contributing to a continued decline in conditions which have since been exacerbated by the Tsunami. 34

44 B. The Government of Aceh Vision seeks to bring fundamental changes in Aceh in all sectors at both the society as well as government levels, by putting high respect for transparency and accountability, establishing a Government of Aceh free of corruption and abuse of power. The RPJMD identifies several key actions to assist in economic development, which also reflect the Government of Aceh Vision on Economic Development: 7. Rebuilding Aceh s fragmented economic infrastructure. 8. Embracing economic actors as development partners. 9. Ensuring that economic development activities are applicable and open to all to ensure fairness and transparency. 10. Identifying the sources of high costs in the economy and seeking solutions to address these. 11. Encouraging the awakening of an entrepreneurial spirit within the Acehnese people and businesses. 12. Encouraging international trade, especially with Malaysia and Thailand (IMT-GT) 12, particularly in agribusiness through sound research and promotion of investment opportunities. 13. Providing a framework for ex-combatants and conflict victims to help ensure they are given opportunities to benefit from economic growth. 14. Influencing economic growth based on Community involvement, a sustainable environment and better disaster preparedness. C. The RPJMD also directs attention to important elements to be used as the basis for sound economic development in Aceh: 15. Natural Resources and Environmental Base. Aceh is rich in natural resources which have yet to be fully utilized in building its economy. Agriculture and fisheries could potentially be among alternatives to the depleting oil and natural gas reserves as sources of future economic growth. The RPJMD in addressing the need for economic growth also recognizes the importance of the environment as a precious asset of Aceh and seeks growth with a sustainable natural environment. 16. Community Based. The needs and aspirations of the Community must be considered when planning future economic development activities. Community 12 Established in 1993, its main goal to foster the economic growth among the region. The 2 nd summit was held in Cebu, Jan 2007 and has prepared a road map of IMT-GT ( ). The IMT-GT has marked significant gains in various sector, and Medan (North Sumatera) as the main hub (e.g. tourism, medical tourism, etc). 35

45 participation at every stage of Aceh s economic development is viewed as essential in order to eradicate poverty and provide a sustainable economy to the province. 17. Value Added and Open Market. Economic development should focus on value added activities in addition to improving the quality and quantity of production. The business environment should allow for open and fair Competition, and restrict monopoly and oligopoly business opportunities D. The RPJMD also identifies examples to support sustainable economic growth: Example of activities identified to support the revitalization of agriculture and fisheries: (a) (b) (c) (d) (e) (f) (g) (h) (i) Strengthening of farmers cooperatives; Improvement of available data on agricultural production; Facilitating access to finance for farmers and fishermen; Improving rural infrastructure and irrigation facilities; Facilitating access to newer technologies; Increasing productivity through improved seeds, pest control, land utilization and integrated farming; Promote organic farming where the result would be higher value added; Promote agro industry to increase value added and local demand; and Enhance the capacity of government institutions to provide services to the agriculture and fisheries sectors. Examples of activities identified support SMEs: (a) (b) (c) (d) (e) Strengthening of SME cooperatives Promoting access of SMEs to newer technologies Facilitating access to finance Improving the business environment for SMEs Strengthening SME networks Example of activities identified to support the promotion of exports: (a) (b) (c) (d) (e) Improve distribution systems, deter market concentration in distribution systems; Improve Competitiveness of domestic production e.g. through improving quality of production and facilitating certification of international quality standards; Improve market information; Facilitate trade through capacity building of institutions involved in export/ import activities; Increase the role of the provincial government in regional economic cooperation (e.g. the Indonesia-Malaysia-Thailand Growth Initiative); and Improve the business environment 36

46 Example of activities identified to support attracting investment: (a) (b) (c) (d) (e) (f) Improving the general investment climate, e.g. reducing the days necessary for obtaining approval for investment proposals; Passing clear Qanun and regulations on investment; Enhancing the capacity of government institutions to promote investment (BKPMD, IOO); Strengthen the intermediation role of the banking sector; Create one-stop-shops for investors; Improve availability of information as well as the investment promotion capacity of the relevant government institutions. 37

47 Attachment 2: Identification of Priorities for EDFF from RPJMD and other GoA Plans 1. The earlier stages of the post-tsunami reconstruction effort focused primarily on humanitarian aid and physical rehabilitation of housing and infrastructure. There is now a broad consensus among GoA, the BRR and the donor community that the emphasis must shift to sustainable economic development and creation of jobs and incomes. To better address the priorities and gaps in the GoA s economic development plans and to be able to play a better role as a partner agency in this project, the World Bank commissioned a study that identified priorities and gaps based upon the GoA s own plans. 2. Multiple sources were used as references in preparing this report. On the one hand, planning documents of GoA and BRR, and on the other hand, reference documents prepared by experts, donors and NGOs. Among the documents that were reviewed were the provincial Medium-term Development Program, or RPJMD, and the Triple-A documents, Comprising an Atlas, an Agenda, and Aturan-main (=Rules-of-the-game). The identification of priorities focused on agriculture and fisheries, which complies with sectors identified by GoA as lead sectors. In addition, these are the sectors where a majority of the population works and which has a disproportionate number of the poor and vulnerable. The agriculture and fisheries sectors also have numerous backward and forward linkages with the rest of the economy, which warrants this focusing. 3. The study looked at the economy of the individual districts in Aceh, since each district has its own specific economic potential and constraints based upon its location, assets and resources. Some districts act as engines of growth in a region, while some others are lagging behind. Through synergistic urban-rural linkages and inter-municipal cooperation economic growth poles can serve as engines of balanced regional economic development, another key priority of the GoA. 4. The methodology used for the preparation of this report was based on a systematic analysis of readily available data. In logical steps, the development programs are distilled from existing Planning Documents and Sectoral Documents. These programs were then prioritized based on the following ranking criteria: (a) Sustainable economic growth (i) Expansion of economic sectors (GDP and growth) (ii) Stimulating business investment (domestic and foreign investors) (iii) Environmentally sound (natural resources, environmental impacts) (b) Generation of jobs and incomes (i) Incomes in formal sector (through jobs and entrepreneurship) (ii) Incomes in informal sector (through self-employment and livelihood (iii) Poverty reduction (education, health care, access to basic needs) (c) Post-Tsunami and post-conflict recovery (i) Rehabilitation of Tsunami survivors (and affected areas) (ii) Reintegration of ex-gam Combatants (and affected areas) (iii) Balanced regional economic growth (reducing gaps among districts) 38

48 5. The report then presents a short-list of activities identifying those activities for which there is a financing gap. The methodology is depicted in the figure below. Figure 5: Overview of the Methodology 6. The report also identifies strengths and weaknesses in key sectors (agriculture, value added manufacturing, trade and investment promotion) which then guide the identification of gaps and priorities: Agriculture 39

49 Strengths (a) Availability of vast natural resources for agriculture (land, climate, soil) and fisheries (extensive coastline, Exclusive Economic Zone, potential for mangrove forests and coral reefs) as well as forestry (potential, previous use of forestry resources and conservation). (b) Government commitment (identification of priorities, Green Aceh strategy) and institutions (Technical Service Implementation Units (UPTD), BPP, BBI). (c) Strong role for the private sector (e.g. farmers associations, although limited ole), partnership with entrepreneurs (ALSINTAN) (d) High external demand for both agriculture and fisheries (commodities prices high, potential for import substitution) as well as forestry products, including higher value added markets in which Aceh has a comparative advantage (eco-labeling, organic products) (e) Linkages between sectors (e.g. sources of livestock feed from agro-industry waste, e.g. from food crops and plantations) (f) Technological developments in maritime and fishery sectors that increases productivity in the sector (g) Improved infrastructure (transportation, distribution) as a result of the reconstruction and end the of conflict (h) High awareness of sustainability concerns and the importance to conserve biological resources and ecosystems Weaknesses (a) The sector lacks competitiveness (infrastructure, transport, low productivity (b) Low human capital in the agricultural sector (education levels of farmers, limited number of extension personnel in the agriculture sector) (c) Most farmers are working only small plots of land (average <1ha, which does not allow for economies of scale and investments to improve productivity linked to this is tenure of land, difficult to achieve necessary quantity (e.g. as inputs for agroindustry) (d) Limited capital for farmers and agriculture in general (only 4 percent of Commercial bank credit allocated to the agricultural sector) (e) Weak marketing systems (information, access to markets, technology) (f) Lack of good quality inputs in the desired quantities (g) Quality issues, especially for exports, pest control (particularly in fisheries, use of antibiotics), (h) Disputes over farmers land with business operators and government (i) Unsustainable level of resources use (e.g. illegal fishing, illegal logging and smuggling) (j) Tsunami damage and its impact on fisheries level (mangroves, coral reefs) (k) Redesign of Forest Concession Rights still incomplete (l) Forest management practices are not in accordance with forest conservation principles 40

50 Value Added Manufacturing (a) (b) (c) (d) (e) (f) (g) (a) (b) (c) (d) (e) (f) (g) (h) Strengths Manufacturing industry sector among the three sectors receiving greatest amounts of credit from commercial banks Operational presence of some large industries in NAD province, including PT. PIM, PT. AAF, PT. SAI and PT. KKA, has extensive experience and outlook for management of large industries in Aceh Increasing role of prime agro-industry Commodities to supply the market, both domestic and international Great potential in agro-industry (linked to natural resources availability in the province) Demand for agro-industry products steadily rising in line with population growth, economy, social/ cultural factors, both domestic and abroad Based on export values of 15 world exporting nations, Indonesia has strong competitiveness vis-à-vis processed products based on local resources, especially agro-industry and foods, compared with Thailand, Malaysia and Philippines; the region will have a positive impact from this phenomenon Integrated in regional and world markets (e.g. the IMT-Triangle) Weaknesses Lack of supporting infrastructure and services Limited working capital, obsolete technologies, lack of investment, business development services, etc. Human resources to support industry sector still limited, especially mastery of IT and marketing Continuing weakness in linkages and partnerships between primary sector and processing industries Lack of use of technological innovations (Shortage of R&D in process technologies among industry, research institutes, and universities in the region, dependence on licenses for products and technology from abroad) Lack of GoA support for industrial development Negative impact of the disaster both on operations and key personnel from several large companies Fair and unfair competition (dumping) by trading partners Trade Strengths (a) Availability of finance (b) GoA s drive to increase and diversify exports (raw materials, manufactured goods) (c) Presence of large industries in NAD Province, such as PT. Exxon Mobil, PT. PIM, PT. AAF, PT. SAI and PT. KKA, which produce gas products, fertilizer, paper, and cement as prime export Commodities (d) Sabang as a Free Trade and Port Zone pursuant to Law No. 37/2000 to promote export and import activities 41

51 (e) Geographical location (India, China, South East Asia, one of the fastest growing regions in the world, close to trading nations such as Malaysia and Singapore, trade with rest of Indonesia) (f) Trading with foreign countries is well ingrained in local tradition as substantiated by the province s history (g) The province is rich in natural resources on which to build a strong export base (h) Strong demand for some of the province s commodities (coffee, rubber) (a) (b) (c) (d) (e) (f) (g) Weaknesses Institutional setting not optimal (e.g. Sabang, as a Free Trade and Port Zone, not functioning properly) Supporting infrastructure and services for trade sector are still limited, particularly sea transport Trade from the province (rather than transshipment) conditional on current production volumes significantly increasing Local traders serve mostly the local market. Insufficient skills and networks to reach markets in other provinces and abroad. Lack of a market information system Aceh is not competitive when compared to other provinces in the country and other countries in the region The province s imports are heavily skewed in favor of consumption rather than investment Investment Strengths (a) There is ample idle capacity for production; unexploited land, natural resources, and labor is abundant (b) Favorable disposition of many investors toward emerging economies (such as Indonesia) (c) Neighboring countries (Malaysia, Singapore, and Thailand) are net foreign investing countries. Large domestic firms may also be interested in investing in Aceh Weaknesses (a) Past public investments had been focused mostly on government apparatus and not on catalyzing economic growth (b) Low levels of technology diffusion and absorption, partly because of the prolonged conflict (c) Low rate of investment may have rendered existing production facilities obsolete (d) Human capital has not been sufficiently developed (e) Image of Aceh in the world is still linked to the Tsunami and to a certain extent the conflict, not to a province with a booming economy, rich in natural resources and a large amount of available financial resources (f) New government, lack of clear strategy to attract investment and develop the economy 42

52 (g) Lack of diversification in the economy, making it more vulnerable to the volatility of commodity prices, particularly oil and gas. Activities Identified as priorities and gaps Food Crops and Horticulture (a) Improvements of agricultural inputs (seeds, fertilizer) in all districts (b) Improvements in pest control in all districts (c) Rehabilitation of agricultural lands (d) Development of facility for integrated agro tourism and agribusiness (support to product manufacturers and marketing) (e) Support to the development of ALSINTAN (pre and post harvest) (f) Support the development of human resources in food crops and horticulture in all districts (g) Establishment of partnerships for melinjo nuts and banana Plantations (a) Eco-farming program (b) Plantation diversification program (c) Improvement and upgrading of local roads (d) Extension of power supply network in rural areas (e) Irrigation facilities (f) Rehabilitation and construction of offices, storage, sorting and post-harvestprocessing facilities for cooperatives (g) Establishment of Micro-finance institutes through local cooperatives Livestock (a) Setup/ Re-establishment of (semi-)intensive beef cattle cultivation cooperatives, establishment of partnerships between beef cattle cooperatives and beef processing industries, training for beef cattle farmers via cooperatives and facilitation of access to capital for cooperatives in Simeulue, Aceh Tenggara, Aceh Timur, Aceh Tengah, Aceh Barat, Aceh Besar, Pidie, Bireuen, Aceh Utara, Gayo Lues, Bener Meriah and Pidie Jaya (b) Setup/ Re-establishment of dairy cattle cultivation cooperatives, establishment of partnerships between dairy cattle cooperatives and milk processing industries, training for dairy cattle cultivation farmers via cooperatives and facilitation of access to capital in Aceh Besar, Bireuen and Aceh Timur (c) Setup/ Re-establishment of poultry farmers cooperatives, establishment of partnerships between poultry farmers cooperatives and egg end poultry processing industries and training for poultry farmers via cooperatives in Aceh Singkil, Aceh Selatan, Aceh Timur, Aceh Barat, Pidie, Bireuen, Aceh Utara, Aceh Tamiang, Pidie Jaya, Banda Aceh and Langsa 43

53 Fisheries (a) Rehabilitation of brackish water ponds and shrimp hatchery in Banda Aceh, Bireuen, Aceh Utara, Lhokseumawe, Aceh Besar, Pidie, Aceh Timur, Aceh Barat, Abdya (b) Training in fish cultivation in the areas viral disease endemy (SCHM) (c) Operationalization of intensive vannamei cultivation in Banda Aceh, Aceh Besar, Pidie and Bireuen (d) Operationalization of extensive windu lobster cultivation in Banda Aceh, Bireuen, Aceh Utara, Lhokseumawe, Aceh Besar, Pidie, Aceh Timur, Aceh Barat, Abdya (e) Operationalization of Windu and Gracilaria cultivation in Banda Aceh, Bireuen, Aceh Utara, Lhokseumawe, Aceh Besar, Pidie, Aceh Timur, Aceh Barat, Abdya (f) Operationalization of grouper fish hatchery in brackish water ponds in Bireuen (g) Rebuilt hatcheries to certification standards: (i) Develop LBAP Ujung Batee as broodstock center of vannamei shrimp (ii) Monodon hatcheries rebuilt and producing high health status seed in Aceh Utara, Pidie. Bireuen, Aceh Besar, Banda Aceh and Lhokseumawe (iii)milkfish and other hatcheries built (iv) Managers of hatcheries receive training in operating and health management in Pidie, Biruen, Lhokseumawe (v) Established systems of quality control and laboratory testing for shrimp post larvae in Bireuen and Pidie (vi) Restoration of fish cages: (vii) Rehabilitation of floating keramba in Aceh Besar and Simeulue (viii) Attract investor for develop sea weed processing in Banda Aceh (ix) Rehabilitation and operationalization BBIP/hatchery research centre in Simeulue (x) Operationalization groper mari culture in Aceh Besar and Simeulue (xi) Operationalization euchema mariculture in Aceh Besar and Simeulue (xii) Operationalization sea cucumber and molusca culture in Aceh Besar and Simeulue (xiii) Operationalization groper hatchery in Aceh Besar and Simeulue (h) Provision of supporting equipment for fish catching (i) Support to the modernization of the fishing vessels/boats to improve productivity (j) Construction Boat Yards (k) Construction fish auction facilities in Simeulue, Aceh Selatan, Abdya, Aceh Jaya, Aceh Barat, Aceh Besar, Banda Aceh, Sabang, Pidie, Bireuen, Aceh Utara and Lhokseumawe (l) Construction cold storage facilities in Simelue, Aceh Selatan,, Aceh Jaya, Aceh Barat, Aceh Besar, Banda Aceh, Pidie, Bireuen, Aceh Utara and Lhokseumawe (m) Construction ice factories in Simelue, Aceh Selatan, Aceh Jaya, Aceh Barat, Aceh Besar, Banda Aceh, Pidie, Bireuen, Aceh Utara, Lhokseumawe, Abdya, Nagan Raya, Singkil, Aceh Timur, Langsa and Aceh Tamiang 44

54 (n) Construction seaweed factories (o) Construction animal food factories (p) Support fishing activities through: (i) Facilitate access to finance in the fisheries sector (ii) Providing training to trainers (PL) and villagers 45

55 ANNEX 2: MAJOR RELATED PROJECTS FINANCED BY THE WORLD BANK AND/OR OTHER AGENCIES Table 6: Reconstruction Players in Livelihoods Sector in Aceh Players Their Initiatives/Activities How this project relates to these activities UNDP Rural Livelihoods Small Enterprises and Trade ADB Earthquake and Tsunami Emergency Support Project (ETESP), Components in Agriculture, SMEs and Fisheries World Bank IRFF The EDFF project will Research on economic development complement activities IFC Investment climate, (Investor Outreach underway by either scaling up Office), Business environment and or continuing existing Livelihoods project successful initiatives, USAID Coffee project identifying gaps in ongoing activities and creating an Business environment related TA opportunity to enhance the Asia Foundation One-stop shop ability of the GoA to coordinate GTZ Triple A Project with BAPPEDA (TA this project with efforts by other planning), Microfinance donors as well as its own World Bank SPADA Local Government capacity economic development building, private sector development strategy. In addition, with its BRR, NGOs (Oxfam, Projects focusing on: emergency relief, cash more comprehensive approach, CARE, International, for work programs, livelihoods, the EDFF will be able to exploit Mercy Corps, Save the rehabilitation of fish ponds and agricultural synergies between different Children, World Vision) land activities being financed as well Oxfam Research (Poverty Assessment in Aceh) between its own activities and ILO Employment generation, local economic those of other donors. recovery, microfinance and skills training FAO Swisscontact Livelihoods projects, primarily in fisheries Grants and loans to businesses (SMEs) recovering from tsunami damage and to start new businesses. 46

56 1. Objective ANNEX 3: RESULTS FRAMEWORK AND MONITORING 1. The purpose of the overall monitoring and evaluation (M&E) system is to provide all interested parties with timely information on how the EDFF project progresses relative to its plans and schedules and on how its activities affect both its implementing agencies and its intended beneficiaries (the target group). The system is designed to provide information to guide decision-makers on plans and operations for the project itself and to assist in the design of future projects and programs and on strategies and policies for development in Aceh. 2. The major users of the M&E system will be: (a) (b) (c) (d) (e) (f) (g) PMU, to check project performance against plans, to prepare annual work plans, to identify strengths and weaknesses in implementation and to assess the outcomes and their impacts (real, perceived and potential) on beneficiaries, using the information to discuss subproject review and adjustment as necessary; Sub-project implementing entities, to assess performance towards improving their sub-projects using EDFF funds and their other operations GoA, primarily BAPPEDA, to incorporate lessons learnt from project experience into its policies and design of future programs and projects GoA and the World Bank jointly, to assess project performance, impacts and outcomes against agreed criteria The GOI (KPDT, BAPPENAS), to assess the success of the model and the possibility of replicating it in other provinces to support sustainable private sector development and economic growth The World Bank, to formulate its policies and program/project design principles for future support to Aceh. The World Bank will also use the M&E system to identify bottlenecks and assess to what extent adjustments, at the project or subproject level, are necessary, and in discussion with MDF decide on course of action. MDF and its donors to assess the success of the project 3. The nature of the project precludes the specification at this stage of all inputs and outputs and the likely outcomes as these will be determined by the number and nature of the sub-projects approved. The M&E framework and procedures must therefore reflect the needs of very diverse sub-projects to be incorporated into the overall system and allow for elaboration of the system as sub-projects are prepared and implemented. The M&E Framework will be revised once subprojects to be financed have been selected and will be further revised during project implementation as needed. 47

57 4. Each approved applicant seeking EDFF support will be required to submit detailed plans for M&E consistent with the overall project s M&E framework which should include: (a) (b) (c) (d) (e) a logical framework matrix with clear specification of goal, objectives, outputs and expected outcomes and impacts. To the extent possible these should be gender-disaggregated detailed quantities of inputs in the sub-project costing. procedures for collecting and analyzing data required. staff responsibilities. elaboration on the degree and modality of beneficiary communities involvement in the M&E of the subproject 2. Results Monitoring Framework 5. The results monitoring framework (table in the next page) sets out what the project aims to achieve and how it intends to do so. The sub-projects to be supported under the project should contribute to one or more of the following development objectives identified by the GoA as key for sustainable economic recovery and development in Aceh: (i) development of job-creating, market-driven enterprises engaged in value-added processing and manufacturing, especially in agriculture and fisheries; (ii) sustainable improvement of production quality and value in agriculture, fisheries and estate crops that contributes to alleviation of poverty; (iii) increase in international trade, especially direct exports; and (iv) increased domestic and foreign investment in Aceh. To achieve these goals, the EDFF will support sub-projects in the following areas: (i) Improving the Business Environment; (ii) Private Sector Support; and (iii) Public Infrastructure. 6. The EDFF will be judged by its ability to show results in the following outcomes: (a) (b) (c) (d) Improving the business environment. Outcome Indicator: Number of clearly identified business constraints that were successfully alleviated in Aceh; Private Sector Support. Outcome Indicator: Employment generated in enterprises supported by the project (in man-day per year); Private Sector Support: Outcome Indicator: Farmers and fishermen communities supported (in total number of beneficiaries) Public Infrastructure. Outcome Indicator: Number of users of public infrastructure financed by the project 48

58 7. Performance indicators in the results monitoring framework will give early and continuing notice of whether the most important parts of the project are leading towards results in the three key outcomes. The Results Framework will be revised when all the sub-projects are documented and approved. Not all the outcome indicators shown in the results monitoring framework will apply to all sub-projects; implementing entities will be required to specify how their sub-projects will lead to outcomes and to select appropriate key performance indicators.. 8. Timeliness of reporting on performance indicators will be critical for the success of this element of the M&E system. Values for some of the indicators will come from routine reports of implementing entities at short intervals. Other indicator values will come from reports of those (such as consultants and NGOs) providing technical assistance to implementing entities and beneficiaries. Some data primarily for production, profitability, value added and exports - will be available only from sample surveys at the mid-term review and completion. The reporting periods and sources of data for performance indicators will be set out in the agreements between PMU and the subprojects implementing entities, who will be provided with clear guidelines and templates to collect required data. In addition, independent verification of some data will be done as and when considered appropriate. The results monitoring element places reporting at quarterly, six-monthly and annual intervals. 9. To the extent possible, sub-project implementing entities will disaggregate reporting of results by gender, to assess to what extent subprojects are contributing to more equitable outcomes. The reporting of gender-disaggregated outputs and outcomes often informs about the effectiveness of the subproject, since often activities are performed by one or the other gender (e.g. in rice production) and as such the gender of direct beneficiaries becomes relevant. 49

59 Project Development Objective To promote post-tsunami economic recovery and foster sustainable equitable long-term economic development in Aceh in line with the GoA s own plans for economic development (RPJMD) through: (i) development of job-creating, marketdriven enterprises engaged in value-added processing and manufacturing, especially in agriculture and fisheries; (ii) sustainable improvement of production quality and value in agriculture, fisheries and estate crops that contributes to alleviation of poverty; (iii) increase in international trade, especially direct exports; and (iv) increased domestic and foreign investment in Aceh. Table 7: RESULTS MONITORING FRAMEWORK AND ARRANGMENTS CHART 1. RESULTS MONITORING FRAMEWORK Project Outcome Indicators Number of clearly identified business constraints that were successfully alleviated in Aceh Employment generated in enterprises supported by the facility (in man-day per year); Number of users of public infrastructure financed by the project Intermediate Outcomes Intermediate Outcome Indicators Use of Intermediate Outcome Monitoring Outcome 1: Outcome 1: Outcome 1: Improving the Business Environment Regulations Improved- number and types of PY2-4: Determine effectiveness of project support for regulations enacted and procedures operationalized Procedures for registration and licensing revised improving the regulatory framework and processing of investment applications Better service to potential investors Outcome 2: Outcome 2: Outcome 2: Private Sector Support Enterprises Supported Employment in supported enterprises created Farmers and fishermen communities supported Primary producers linked to market Outcome 3: Outcome 3: Outcome 3: Public Infrastructure Infrastructure built Infrastructure built being used by intended beneficiaries Outcome 4: Outcome 4: Outcome 4: PY2-4: Assess the aptness of criteria for funding for enterprises PY2-4: Measure the impact of the project on target groups incomes PY2-4: Assess whether further investment in various types of facility is justified 50

60 Effective Project Management Sub-projects successfully implemented Capacity of implementing agencies built Facilitate corrective action to strengthen project and to assess if skills transfer is adequate 51

61 CHART 2. RESULTS MONITORING ARRANGEMENTS Data Collection and Reporting Results Indicators for Outcomes Baseline Target Values Frequency and Reports Data Collection Instruments To be established by subproject Indicative targets to be set Annual Financial analyses to proponents and by PMU s M&E staff as preliminary be prepared by sub- PMU s M&E staff prior to sub-projects are estimates. Final project implementers sub-project start-up considered and approved assessment on completion of each sub-project Outcome 1: Improving the Business Environment Regulations Improved Procedures for registration and licensing revised Better service to potential investors Outcome 2: Private Sector Support Enterprises Supported Employment in enterprises supported created Farmers and fishermen communities supported Outcome 3: Public Infrastructure Infrastructure Built Infrastructure built being used by intended beneficiaries Outcome 4: Effective project Management Subprojects successfully implemented Identification of regulations/ procedures that need revision by project proposals Identification of key areas of improvement in project proposal To be established by Subproject proponents and PMU s M&E staff prior to sub-project start-up, based on subproject proposals. To the extent feasible, disaggregated by gender. Identification of infrastructure to be built/ rehabilitated in project proposal. Identification of business opportunities/ value added that will be facilitated by infrastructure. Number of subprojects approved Targets to be established by project proposals. Targets to be established by project proposals To be established in subproject proposals To be established in subproject proposals 75% of sub-projects with a satisfactory rating Annual Bi-annual Three- and sixmonthly indicative figures, with annual estimates Annual estimates Bi-annual supervision mission by World Annual progress reports from Subproject implementers Annual progress reports from Subproject implementers Progress reports from sub-project implementers Progress reports from sub-project implementers Supervision Mission Aide Memoire Quarterly and yearly Data Collection Responsibility Implementers M&E officers. Collated/ analyzed by PMU M&E staff Implementers M&E officers. Collated/ analyzed by PMU M&E staff Implementers M&E officers. Collated/ analyzed by PMU M&E staff Implementers M&E officers. Collated/ analyzed by PM Implementers M&E officers. Collated/ analyzed by PMU M&E staff PMU World Bank 52

62 Bank. Identification of problem projects PMU reports to World Bank Capacity of implementing agencies built Number of BAPPEDA Aceh and KPDT staff involved in the implementation of the project full time 5 people from KPDT 5 people from BAPPEDA Aceh Bi-annual supervision mission by World Bank. Supervision Mission Aide Memoire World Bank 53

63 . 3. Impact Evaluation and Project Completion Report 10. The objective of impact evaluation is to determine how the intended beneficiaries have responded to and benefitted from the activities of the project. This will look at both the intended and unintended consequences of project activities. The Impact evaluation will assist in the judgment of the adequacy and aptness of the project s concepts and designs. It will facilitate the completion report to address the lessons learned for design of future projects and programs. Procedures for Evaluation 11. It is recognized that undertaking such an evaluation may be hampered by the brevity of the sub-projects. Delays in implementation may prevent a full impact evaluation by the time the project is scheduled to close. The results monitoring framework will provide an initial set of outputs and impacts for sub-projects, which form the base for evaluation. It will be amended once all of the sub-projects have been selected. 12. Establishing baselines from which to judge performance will commence during Subproject preparation by reviewing official data sources, secondary sources such as NGOs, and to the extent available, survey data. Following sub-project preparation, Implementing Entities will attempt to build further data based upon various means, including contact with the intended beneficiaries. 13. It is anticipated that formal evaluation will come as part of the mid term review (MTR), which will be conducted toward the middle of the project s second year. The MTR will help to serve as a source of information necessary to make judgments on how the project s activities facilitate favorable changes in the productive lives of the beneficiaries and whether any activities are giving less than expected benefits to the target groups and should be revised. The second evaluation will be at the end of the project and will feed into the completion report. Its results will expand upon and be similarly used as those of the MTR. 4. Management Arrangements 14. Responsibilities are spread among a number of parties, but the overall responsibility of the M&E at the project level rests with the World Bank, which will report to the MDF on a sixmonthly basis on physical and financial progress as well as in achieving results. The PMU will take the lead in the final design of the M&E system, assessing proposals in light of the M&E framework, assisting SIEs and preparing on-going assessment reports and providing the World Bank with timely reports to enable the World Bank to fulfill its M&E responsibilities. Progress reports of the project as a whole and the individual subprojects will also be used by the World Bank to identify bottlenecks and assess to what extent adjustments, at the project or subproject level, are necessary, and in discussion with MDF decide on a course of action. 54

64 ANNEX 4: DETAILED PROJECT DESCRIPTION The proposed EDFF project consists of two main components that will be implemented during the January 2009 June 2012 period. The first Component covers the key objectives of the EDFF and relates to supporting initiatives which will implement specific sub-projects designed to promote post-tsunami economic recovery and sustainable and equitable longterm development through addressing areas identified by the GoA as needing further efforts, or which have not yet been addressed. The second Component funds capacity building including an international consultancy to assist the GoA in the establishment and management of the Project Management Unit and to assist KPDT in the implementation of the project at the central government level through a project Secretariat. Component One. The first component will support sub-projects that address critical issues affecting economic development in Aceh by contributing to building a more competitive and supportive business environment necessary to create broad based private sector job opportunities and growth in Aceh, targeting the poor and other vulnerable groups. Component Two. This component aims to ensure strong project management. An international consulting firm will be contracted to work along side the GoA and KPDT and will assist with the setting up and operation of the PMU in BAPPEDA Aceh and a project Secretariat in KPDT to assist implementation of the project at the central government level. This will include sub-project assessment and review, procurement, financial management, safeguards compliance, implementation, supervision, and monitoring. In addition to assisting the GoA and KPDT with these important areas, the consulting firm will provide training and skills development to the local staff of the PMU and the KPDT. It is expected that through the working relationship, the GoA and KPDT staff will enhance their skills in managing project design and management. This is an important aspect of the component given the longer term needs of Aceh for economic development which will not be addressed through the EDFF. In this way the EDFF will help to build capacity within the GoA and others closely involved in the project, to plan, identify development gaps, evaluate and select sub-projects to address identified gaps, to prioritize competing proposals as well as to monitor, evaluate and supervise the implementation of sub-projects. The capacity building will primarily be the result of hands on experience by working in this project alongside an experienced team of consultants hired to support PMU. The main beneficiary of this capacity building will be BAPPEDA, the agency tasked with coordinating development in the province, but other institutions which might be involved in the implementation of sub-projects (such as dinas agriculture, BKPMD the investment board, district governments) will also benefit, although that will depend on the nature of individual sub-projects. In addition, the selection criteria for the EDFF sub-projects also reflect the focus on capacity building and sustainability, including the ability of the sub-project to improve the capacity of government agencies involved in sub-project implementation. The EDFF,will support sub-projects proposals which fill-in strategic and financing gaps based upon the vision for economic development explicit in the master plan prepared by BAPPENAS as well as the RPJMD, within the broader focus outlined below for poverty alleviation, equitable and sustainable long term economic development and job creation, in the following areas: 55

65 Improving the Business Environment Private Sector Support Public Infrastructure (i) Reform of regulations and procedures related to investment, business formation, land use, etc to improve the business environment; (ii) Promotion of Aceh to domestic and foreign investors; (iii) Building capacity of government to promote private sector development. (i) Improvement to access to finance to small and medium enterprises beyond the current focus on micro-finance by many donors; (ii) Developing capacities and competitiveness of local entrepreneurs stimulating innovation, providing world class training, facilitating access to business development services; (iii) Assistance to local entrepreneurs, especially in productive and export sectors, to gain better access to markets (focus on packaging, branding and marketing, improve access to information); (iv) Scalable, market-oriented programs that improve productivity and quality in agriculture and fisheries. (i) Strategic, complementary economic infrastructure activities, to be provided by the public sector (alone or in partnership with the privates sector) that enable access to market for Aceh producers and enterprises. Infrastructure to be provided under this component should not duplicate with what is being provided by the local governments or Dinas. (a) Improving the Business Environment A better enabling business and investment environment is key factor to the creation of jobs and market driven enterprises. Given that approximately 80,000 SMEs were destroyed during the Tsunami, it is important to bring back business to Aceh. The Doing Business Report (2008) of the World Bank ranks Indonesia in place 123 out of 178 countries considered and identifies areas where reforms are most urgently needed, such as the procedures to start a business or the labor laws. Recent research has shown that improving the regulatory environment has a significant and positive impact on growth (Djankov et al, 2006). Much of the regulatory environment has to be improved at the national level, and Aceh has limited influence on that. But many regulations are local, and the implementation is often the responsibility of local institutions, in that sense, there is much that Aceh can do to improve the business environment and through that improve the prospects for the creation of enterprises and jobs. An improved business environment will result in a larger number of firms being willing to invest in productive capacities in Aceh both already located in the province and new potential 56

66 investors. One of the keys to Building Aceh Back Better for long-term sustainable economic development is business and capital investment: private investment that can modernize and add value to Aceh s products and services, and public investment that can provide for the infrastructure needed for a growing economy. The RPJMD identifies the need to attract both domestic and foreign investment as key to fostering long term economic growth in Aceh. The EDFF seeks to support this important area. There are no disaggregated data on investment in the province, but as mentioned above, investment as a share of GDP was only 7 percent in 2004, between 1/3 and ¼ of investment levels in the rest of the country. The lack of investment has resulted in obsolete technologies being used, low levels of training and human capital development and deteriorated capital stocks. There are a number of reasons for the lack of investment in the province. Potential investors have identified several factors in Aceh s business environment as problematic 13 which require government attention: There are difficulties in accessing or leasing land, there are multiple departments to deal with, different maps in different departments and it is difficult to obtain clear information on zoning and land ownership and title; Investors are encouraged by reforms at the national level (BKPM, the OSS, changes to Investment and Tax Laws and changes in the pipeline for companies Law and Labor Law), but perceive the uncertainty in Aceh as well as the potential time it may take local authorities to actually implement the national changes as a disadvantage compared to other Indonesian provinces; Aceh s Special Autonomy is perceived to add some extra financial burdens (e.g. extra charges for palm oil production) and uncertainty in terms of roles and responsibilities between the different government levels; Safety/ security is still a concern for many potential investors, citing special taxes being asked from the business community; Economic and political security is a concern, e.g. rule of law, predictability of the local economy are also often difficult to determine. The GoA has identified investment goals for the next 5 years to ensure a supportive investment climate and to target an investment growth of at least 5 percent per year. The GoA also seeks to improve competitiveness of the investment climate through clear and effective use of Qanun 14 and improved regulations, to reduce the bureaucratic requirements that currently delay the timely introduction of new investments, to support the continuation of the regional economic cooperation (IMT GT) and to improve exports through building capacity of local governments to facilitate trade and exports and promoting local economic resources through information dissemination. 13 IFC/FIAS, 2008, Aceh Investment Climate Policy Note. 14 Regional Regulations from the GoA 57

67 Access to finance also has been identified by the GoA in the RPJMD as one of the key constraints for both agriculture and manufacturing. While banks are collecting deposits locally, they are reluctant to lend locally. They have taken a wait and see position until they are satisfied that sustainable reconstruction is well underway, there is political stability, private and public investment has returned and there is a manageable process for addressing non-performing loans. Increasing the opportunities for financing of business development consistent with good lending practices, increasing long term employment and wage generation of potential borrowers would help to address some of bank s concerns. Though there is micro finance capacity in Aceh, these address mostly the demand for very small loans, and gaps in accessing finance for SMEs remain. Although credit has increased significantly in Aceh since the Tsunami, credit for consumption and working capital accounted for approximately 88 percent of all credit in 2007, leaving only 12 percent for investment purposes. Of all credit going to businesses (working capital and investment), over 50 percent goes to the trade and hospitality sector, with less than 6 percent going to the agriculture and fisheries sectors. Foreign direct investment in Aceh has been lacking. Such investment could help to provide needed capital and job generation, improved linkages with global markets, technology spillovers and international best practices, all of which are needed to help turn around the economy. The challenge is to reshape disparate elements of government policy into an effective package that encourages good investment. A variety of technical assistance may be required to build the capacity to attract investment, and to manage outside investment such that there is a transfer of knowledge and technology to improve the productivity of Aceh s businesses and workforce. Key initiatives identified by the team preparing this project 15 that the EDFF could support to improve the enabling environment would be: (a) (b) (c) To change investor perceptions of political risk, the GoA could consider providing, on an assisted basis, insurance against physical/property losses attributable to conflict. To address the perception of corruption and added fees attributed to rent seeking. To that end, (i) the Governor and district heads sign joint security guarantees; (ii) adopt reform framework for Aceh district revenue administration to minimize arbitrary fees and other charges; and (iii) create a fast track response system to address investor complaints about illegal treatment/ extortion. To reduce administrative costs and uncertainties in establishing a business, the GoA should minimize regulatory and licensing complexity and provide clear guidance to investors on required clearances. To that end, the GoA should (i) establish and publish clear rules for issuing licenses, publish license/permit costs, set maximum time limits for issuance of provincial/local clearances; (ii) identify and act on opportunities to bundle/eliminate license steps once national investment regulations have been clarified; (iii) construct a publicly available road-map to registration and 15 Recommendations based on research commissioned by the World Bank: CSIRO 2008 and IFC

68 approval; and (iv) create a reliable record of business registrations and actual investments. (d) (e) (f) (g) To facilitate access to land, the GoA should coordinate land use and titling information by establishing a single available plantation/industrial land register. To that end, it should identify provincial and district owned lands immediately to determine what land might be available for plantation and industrial lease purposes. It should also adopt a competitive tendering approach for the allocation of government owned land for plantation and other purposes. To that end, it should (i) seek agreement at the district/kota level to a standard and transparent tendering approach, (ii) make available to potential investors information concerning the tendering process through the appropriate mechanisms (BKPMD, Investment Outreach Office). To improve access to market price information for agribusiness suppliers, the GoA should strengthen grower bargaining power with traders through better price information. To that end, it should determine (i) price information gaps (shrimp industry pilot), (ii) best model for continued information gathering and distribution, and commit funding to do it. To develop culturally based market niches and improve market access, the GoA should develop direct ties with Malaysian halal standards authorities. To that end, the GoA should (i) conduct Standards mission to Malaysian Accreditation Council and NCER Implementation Authority, and (ii) prepare a subsequent implementation plan for 5 year convergence with Malaysia. To improve agricultural productivity growth and efficient scale operations in key sectors the GoA should develop effective extension services training, staff retention and a strong implementation program. To that end, it should (i) review extension services budgets, (ii) set minimum extension budget shares for staff training and service implementation at provincial and district levels, and (iii) identify potential private suppliers of extension services. (b) Private Sector Support The private sector in Aceh is dominated by micro and small enterprises, which account for over 99 percent of formal sector businesses in Aceh. There are only 36 large and medium enterprises in Aceh according to the 2006 BPS industrial survey, down from 52 large and medium enterprises in These enterprises employ approximately 5,500 workers, less than 4 percent of Aceh s total work force, illustrating the dominance of small enterprises in Aceh s business landscape. A large majority of the labor force works in the informal sector 16, again highlighting the relative weakness of Aceh s private sector and the need to support it and addressing key constraints for private sector development, particularly in those sectors where Aceh has a comparative advantage and where a large percentage of the population works, agriculture and fisheries. 16 BPS and Dinas Industry estimated in 2004 total formal sector employment below 50,000 people, which would be less than 3 percent of Aceh s labor force. 59

69 Almost 60 percent of the labor force in Aceh works in agriculture and fisheries. Prior to the Tsunami, agriculture, which today is relatively stagnant, was a significant driver of the local economy, constituting about 25 percent of the economy and a growth rate of 3.5 percent between 2000 and Poverty in Aceh is predominantly a rural phenomenon. Before the Tsunami, 33 percent 17 of rural households lived below the poverty line, compared to 18 percent in urban areas. In Aceh, alleviating poverty will require the recovery and scaling up of those sectors that provide livelihoods for the poor particularly agriculture and fisheries and position Aceh to more fully participate in the value chain associated with its local products. The RPJMD identifies revitalization of agriculture and fisheries as two of its key strategies in alleviating poverty in Aceh, but points to the following constraints: weak or damaged rural infrastructure, low productivity and quality of agricultural production, the lack of available land for agricultural purposes, access to finance and markets fragmentation. In the RPJMD, the GoA has defined its goal for the agriculture sector, which is to have it grow by 3.16 percent per annum. It projects that by 2010 the sector will have grown by 16.8 percent compared to 2006 and will employ an estimated 950,000 people. It expects to achieve this by improving infrastructure, empowering farmers, enhancing supervision of the agriculture sector, ensuring that relevant and timely agriculture market information is available and generally accessible to communities and encouraging farmers to adapt and use new farming technology. The RPJMD identifies the promotion of trade and diversification of exports toward non-oil and gas exports as key for the longer term development of Aceh s economy. 18 Given the projected decline in production it is crucial to diversify the base of Aceh s economy. Aceh s non oil and gas exports, for a variety of reasons (the Tsunami, low productivity, conflictrelated security issues, and infrastructure problems) have been progressively decreasing 19. Non-oil and gas exports from Acehnese ports were worth US$84.3 million in 2007, less than 2 percent of non oil and gas GDP. That compares with 31 percent for the whole of Indonesia, 46 percent for the Philippines or 74 percent for Thailand. Additional revenue from export earnings could spur investment, increase employment, and increase both household incomes and domestic spending while also contributing to the adoption of international export standards, better technology, and increased productivity and improved management practices. 20 The GoA is concerned about the lowering levels of exports coupled with its depleting oil and gas reserves and seeks a growth in other activities. Both fisheries and agriculture will be key sectors for the success of the GoA s efforts to diversify the export base. The fisheries sector contributes significantly to Aceh s total exports, although this has been declining since Previously Aceh had a vibrant fisheries industry 17 World Bank, 2008, Aceh Poverty Assessment Currently, oil and gas account for over 90 percent of Aceh s exports. 19 Trade data used in this analysis primarily capture trade going through Acehnese ports. A large percentage of Aceh s products are sold to other provinces or uses Medan for shipment and are therefore not captured by these data. Therefore, these data are likely to underestimate trade in Aceh, particularly exports of non-fuel commodities such as coffee and palm oil. 20 Radelet, S., 1999, Manufactured Exports, Export Platforms and Economic Growth, Harvard Institute for International Development, Collier, P. and Dollar, D., 2001, Globalization, Growth and Poverty: Building and Inclusive World Economy, The World Bank. 60

70 producing a total of 140,000 tonnages of both marine and inland fish harvested in This declined to 109,000 ton in Although the sector accounts for only 5 percent of GDP, it is estimated to employ over 100,000 people, ranging from fisherman to sellers. The Tsunami had a direct impact on the fishing industry where it is estimated that the total indirect loss was about US$ million. A similar trend can be seen in the export of agricultural commodities, such as coffee, where exports fell from US$12.7 million in 2000 to below US$5 million in This decline is also reflected in the number of people working in agriculture, which fell from over one million people in 2003 to less than 900,000 three years later. Preliminary 2007 data show a significant increase in non oil and gas exports, signaling a recovery both from the destruction of the Tsunami and the end of the conflict in Identifying and developing Aceh s comparative advantages and encouraging private sector investment will help to facilitate economic recovery and growth. To access regional and global markets, Aceh will need to become more competitive. The GoA has identified several opportunities in a range of commodities which Aceh could produce. These areas are for the most, part consistent with those identified post Tsunami by the BRR and donors. The EDFF will consider funding proposals to support technical assistance to build the capacities of public institutions to facilitate trade as well as public-private alliances which support exports and regional trade initiatives. Provincial government policies to better manage the natural resources of Aceh are needed to help slow and stop their current over exploitation. Forestry areas are being poorly managed and some marine resources are being over harvested as a result of the movement of people following the Tsunami. The GoA is interested in having local communities become more involved in the management of these resources. The EDFF will consider sub-projects which facilitate the development of such resource management policies and regulations by strengthening capacity of local governments and working with communities to develop appropriate resource management plans that provide for greater opportunities for communities to benefit from the harvesting of these resources and downstream processing opportunities. Little processing is at the moment done in Aceh, with most of the excess production being sold as commodities to traders or processors in other provinces or exported. Much of the poverty alleviation that occurred in Indonesia in the 70s and 80s was actually through the creation of off-farm labor opportunities, in agro-industry and labor intensive industries. Given Aceh s comparative advantage in agriculture and strategic geographical position, it would not be difficult, if constraints to investment and private sector development are addressed, to attract investment into agribusiness. A strong local agro-processing industry would also increase demand for Acehnese agricultural products, create sustainable jobs absorbing some of the excess labor in rural areas. Limited processing of some commodities such as coffee is already taking place. The EDFF could address constraints along value chains of key commodities to facilitate processing of agricultural production in the province. 21 Aceh in Figures, Damage & Loss Assessment, Join Report, Bappenas,

71 The role of women in economic activities is of special concerns in the agricultural sector, where female farmers are dominant in the production and processing of key commodities, but lack equitable access and control over productive resources (land as assets and collateral), lack access to information and newer technologies, lack access to capital and lack an equitable voice in decision making at all levels. Lack of women s recognition as farmers means that support services for women farmers are generally inadequate and misdirected and often do not benefit from capacity building and training programs. There is a growing feminization of agriculture in Aceh, as men leave the agricultural sector for employment outside the sector. With peace, women are moving out of their homes and villages to engage in enterprises linked to production, processing, marketing and services. As such, it is important that EDFF recognizes this and subprojects to be financed address the issue of gender inequity and where feasible contain components to enhance the role of women in economic development and employment. Key initiatives identified to support the private sector (primarily in the agriculture and fisheries sectors) that the EDFF could support would include: (a) (b) (c) To promote development in the agricultural sector, (i) promote modernization and technology up-take for increased productivity in the agricultural sector, (ii) facilitate market-based mechanisms that enhance access to capital for entrepreneurs, (iii) provide cooperative frameworks for shared capital and market access combined with individual land tenure rights, (iv) improve the provision of agricultural inputs (fertilizer, seeds) and pest control, (v) develop a facility for integrated agro-tourism and agri-business (support to product manufacturers and marketing), and (iv) analyze value chains of key commodities, identifying constraints and ways to address them through market oriented interventions, attracting private investment as well as public interventions to address any market failures. To promote development in the livestock sector, the GoA could support cooperatives that are being established in the (semi-)intensive beef cattle, dairy cattle and poultry farmers businesses. Cooperatives will need support in terms of setting up costs, establishing partnerships with processing industries, training as well as access to finance. To promote development in the fisheries sector, the GoA could (i) prepare and integrated coastal spatial plan, (ii) improve the coordination of different development activities, (iii) promote investment in post-harvest facilities, (iv) improve human capacity, access to information, technology in-take as well as access to finance, (v) promote the formation of joint ventures with national or international investors to establish fish processing industries, (vi) rehabilitate brackish water ponds and shrimp hatcheries, (vii) Operationalization of pilot projects for vannamei cultivation, extensive windu lobster cultivation and grouper fish hatcheries, (viii) rebuilding hatcheries to certification standards, including training and establishing systems of quality control, and (ix) restoration of fish cages. In addition, the GoA could facilitate private sector investments in fisheries related industries such as seaweed factories and animal food factories. 62

72 (d) To better manage natural resources for sustainable economic development, the GoA should (i) increase the efficiency of timber utilization, (ii) improve data and information availability, (iii) provide disincentive regulations, (iv) Increase the potential of non-timber products, (v) audit of exiting laws and regulations regarding environmental management, (vi) develop natural resources laws and regulations, taking into consideration customary and traditional practices, and (vii) establish courts and tribunals to deal exclusively with land and the environment. (c) Public Infrastructure The EDFF may support strategic, complementary economic infrastructure sub-projects, but will not fund general infrastructure sub-projects, an area currently being addressed by other sources of funding. Infrastructure to be financed should be public or have a public good character, meaning that there will be positive externalities (e.g., cold storage, irrigation, fishing port facilities, product testing and certification facilities, etc.). To the extent that the private sector can become involved, the GoA should encourage private sector participation, on its own or in partnership with the government and market based solutions will be preferable. The EDFF should not duplicate or substitute for what is already being financed by the local governments. In that sense, it will be important for SIE to coordinate with local governments and ensure that EDFF is complementary to LG efforts to provide the necessary infrastructure for economic development. Key initiatives identified to invest in public infrastructure (or provide incentives for private sector involvement) that the EDFF could support would include: (a) (b) (c) (d) For aquaculture, improve facilities such as laboratory and hatcheries. For fish capture, improve facilities for small ports (in a very limited way) and boat yards, fish auction facilities, cold storage, ice factories, etc. For marine culture, improve facilities such as hatchery and fish feed industry. For agriculture, support the rehabilitation of cultivation land damaged by the Tsunami or that had been abandoned, supporting it with irrigation infrastructure, improve and upgrade local roads, extend power supply network in rural areas. (d) Capacity Building Capacity building linked to job creation, employment and sustainable economic growth will be a part of the project and through the sub-projects it is anticipated that it may be addressed at various levels. Capacity building is anticipated at the local community, both for individuals and groups of individuals. Local community organizations and community leaders may need assistance to better understand needed local regulatory changes and other steps that can be taken to support job growth and sustainable economic development. The extent to which proposed sub-projects will build local capacity by working with local communities, district governments, academia and civil society in general will be given weight in the sub-project selection process. 63

73 ANNEX 5: PROJECT COSTS Table 8: Project Costs and Sources of Funding (US$ million) Component MDF GoA GOI 1. Financing of Sub-projects Support for the supervision of the EDFF, planning, design, selection of sub-projects, supervision, and implementation oversight (i) TA support to the GoA and BAPPEDA for PMU (ii) Incremental Operating Costs and performance and financial audit of project financial statements Total Table 9: Estimated Allocation to Project Components (US$ million) Component Estimated Value No. of Sub-projects Component One: Financing of Sub-projects larger sub-projects and 4-6 small sub-projects (a) Improving the Business Environment large sub-project and 3-4 small sub-projects (b) Private Sector Support large sub-projects and 1-2 small sub-projects (c) Public Infrastructure large sub-projects Component Two: Support to the PMU in BAPPEDA Aceh and Secretariat in KPDT (consulting firm, audits and impact evaluation as well as incremental operating costs, e.g. supervision missions)

74 Table 10: Detailed Project Management (Component 2) Costs born by EDFF, KPDT and Government of Aceh (in US$) Costs of BAPPEDA Aceh Costs of KPDT Costs of consulting firm Items financed by BAPPEDA Aceh Items financed by EDFF Items financed by KPDT Items financed by EDFF Items financed by EDFF Staffing 68,200 75,000 83,000 65,000 Travel 16,000 17,700 18,500 19,500 Utilities ( water and electricity ) 1,800 2,000 2,200 1,000 Team Coordination 40,000 44,000 45,000 45,000 Internal Audit 10,000 25,000 25,000 25,000 Miscellanous 5,000 5,500 6,000 4,600 Subtotal BAPPEDA Aceh own finance 141, , , ,100 Travel Cost, Hotel and Transport Jakarta 4,500 5,000 5,000 2,500 Office Costs PMU 37,000 35,000 35,000 23,000 Selection Committee 11, Impact Evaluation Survey ,000 Subtotal BAPPEDA Aceh financed by EDFF 52,500 40,000 40,000 75,500 Total Costs BAPPEDA Aceh 193, , , ,600 Piloting EDFF in other provinces 500, , , ,000 Staffing 50,000 50,000 50,000 50,000 Subtotal KPDT own finance 550, , , ,000 Travel Cost to Aceh 14,000 14,000 14,000 14,000 Office Costs PMU KPDT 9,000 9,000 9,000 9,000 Annual External Audit 50,000 50,000 50,000 50,000 Subtotal KPDT financed by EDFF 73,000 73,000 73,000 73,000 Total Costs KPDT 623, , , ,000 Staffing (includes per diem and other benefits) 1,700,000 1,100,000 1,100, ,000 Travel 80,000 90, ,000 60,000 Other operating costs 50,000 40,000 40,000 40,000 Total Costs Consulting Firm 1,830,000 1,230,000 1,240, ,000 Total Costs Management Project 2,646,500 2,062,200 2,082,700 1,558,600 65

75 ANNEX 6: CRITICAL RISKS, MITIGATION MEASURES AND RATING 1. Risks and mitigation measures are divided into risks at the project level, which can be mitigated at this stage through project design, and risks at the sub-project level, that can be mitigated at this stage through careful definition of sub-project selection criteria and later through sub-project selection as shown below. Table 11: Critical Risks and Proposed Mitigation Measures Risk Rating Mitigation Rating After Mitigation RISKS AT THE PROJECT LEVEL General Currency fluctuations and the potential negative impact just as Aceh pushed for more exports Macroeconomic framework: Slow growth in Aceh related to the decline of gas production and weak business environment. Unemployment is high and reconstruction jobs are not sustainable. Traditional sectors not linked to reconstruction show low or negative growth rates. M M Aceh accounts for only 2 percent of national GDP. So a strong increase in Aceh s exports is unlikely to result in a strong appreciation of the nominal exchange rate. On the other hand, the real exchange rate might appreciate slightly as prices of those factors of production use more intensively in the exports sector increases. Reforms have been underway to reduce the country s macroeconomic risks. Aceh has prepared its strategy for developing its economy as a means to addressing its specific macroeconomic risks. These will help to address the needs for economic development and job creation. In addition, The GoA hopes to use the EDFF as a pilot for what it can do to further sustainable economic development in the future using funds transferred from the central government. The transfer of substantial public funds in the form of the Special Autonomy Fund until 2028 (embedded in Law on Government of Aceh 11/2006) should mitigate the risk of a hard landing after the reconstruction effort slows down in mid M M 66

76 Risk Rating Mitigation Rating After Mitigation Security and conflict, a Peace Agreement signed in The ex- Combatants have not seen the jobs and prosperity they were promised. Unless economic conditions can be changed, there is a chance that unrest will return. Provincial and local elections in the next few years might heighten tensions. A different provincial administration may not support the EDFF in the way the current administration does. There is a slight chance that national elections in 2009 pick up on the different regional issues. A different central administration may try to roll back some of the concessions given to Aceh. S The Government is very much aware of the potential and its economic development strategy addresses the issue. The EDFF, although specifically designed to address Tsunami related reconstruction needs related to economic development will directly impact job creation and it is expected that the jobs created will serve the greater Aceh. Further separation of administrative units seems to have been stopped at the highest level, at least until after the national election in This would ensure that at least the selection of projects is undertaken with a single provincial administration as the counterpart, although separation during project implementation would need readjustment of implementation modalities foreseen in the project. M Further separation of administrative units involved in the implementation of the project. Externalities Political interference in funds flow process Late budget releases cause delay Implementation Inadequate capacity of the implementing agencies (BAPPEDA and KPDT) S The establishment of PMU with consultants as well as the M sub-project selection process coupled with an independent financial management team will be supplied as part of the consultant team to monitor fiduciary arrangements. H Dialogue with the MOF M S TA consultants will provide the required capacity and will help the GoA to establish PMU staffed by experienced technical, administrative, procurement and financial management staff as well as KPDT at the central government level. M 67

77 Risk Rating Mitigation Rating After Mitigation Limited availability of foreign and local TA consultants Consultant teams do not meet performance requirements M S All consultants will be procured using standard Bank procedures. Maximum coverage will be given to advertisements requesting interest from consultants. The Bank will support GoA in closely monitoring performance of consultants through intensive supervision. The TORs of the consultants have clauses included that mandate replacement of underperforming staff; also as part of the contract, consultants must sign an integrity clause. M M GoA has hired a procurement advisor to assist GoA in the selection of the consultant s team. World Bank has extensive experience of assisting government (particularly in Aceh) in setting up such TA, most recently the TA provided to BRR for implementation of the Infrastructure Reconstruction Financing Facility in Aceh. Fiduciary Risks H Involvement of key government counterparts in the design of the project to increase ownership and apply local knowledge to mitigation measures. S Operations Manual that sets clear rules understood by all stakeholders. Use of on-budget mechanism, allowing the local government to use its own institutions to supervise the allocation and use of funds. Capacity of the Bank to meet its responsibilities with respect to review and supervision of subprojects RISKS AT THE SUB-PROJECT LEVEL Externalities Lack of involvement and support of key government agencies S M Inclusion of an agreed upon anti-corruption plan throughout the live of the project Although theoretically the EDFF could finance a substantial number of sub-projects across several economic development areas, each of which would require Bank review, the selection process should ensure a fewer number. The Bank will assess its staffing needs and allocate adequate resources to ensure the constitution of a strong team that can shoulder its responsibilities towards sub-projects financed as sub-projects are actually selected. The selected sub-projects must have prior government endorsement and will be selected by the government itself. The GoA, BAPPEDA and BRR have been actively involved. Continued involvement will be encouraged M M 68

78 Risk Rating Mitigation Rating After Mitigation Systemic corruption: - H Project design, through the selection criteria and the Petty corruption is selection process (3-tiered approval process), will S Common. Historically, minimize the likelihood of unworthy projects being Rent Seekers have selected. attempted to interfere with other projects Implementation of sub-projects may still be subject to petty corruption. The EDFF will be owned by GoA and BAPPEDA, which may reduce the likelihoods of projects being subject to such petty corruption or increase the likelihood of remedial action. Implementation Technical/design: delays in sub-project implementation, overly optimistic estimates of outcomes, underestimation of time to implement Failure of sub-project implementation to have adequately addressed Social and environmental safeguards Ability or willingness of entities implementing subprojects to implement according to World Bank policies and guidelines Misuse of and failure to account for project funds M M H H In most cases, implementing entities have already been implementing projects in Aceh for the last 3 years. Most will have developed their own strategies and ways in dealing with petty corruption. Most entities implementing sub-projects are likely to have already gained experience in implementing subprojects in Aceh, which should make their implementation plans more realistic. The team preparing the EDFF project is well aware of the need to monitor the projected outcomes and timelines, and will liaise with entities implementing sub-projects accordingly, managing also expectations from the government and donors sides. Addressing safeguards will be reviewed at sub-project application review and again after project selection and preparation. Further, PMU will be assessing Compliance with sub-project as part of its monitoring program Many entities have approached the World Bank enquiring about EDFF financing, therefore the interest is high. PMU will have expertise to assist entities to implement according to World Bank guidelines. Initial discussions with some entities that have different policies and guidelines took place, indicating the willingness of these entitites to adopt World Bank guidelines for the purpose of implementing activities financed through EDFF Outsourcing of accounting and reporting functions. Public disclosure of audit report and anti-corruption initiatives as outlined in the Anti Corruption Action Plan. M N S S Ineffective accounting and audit functions H Procurement and FM capability of entities implementing sub-projects will be key selection criteria. Inclusions of an independent audit as part of the FM component. FM consultants apply professional best practices to implementation. S Procurement and FM capability of entities implementing sub-projects will be key selection criteria. 69

79 Risk Rating Mitigation Rating After Mitigation Weak procurement H To ensure transparency in the procurement process, S environment and enhanced procurement procedures are included in the collusive practices in past Anti-Corruption Action Plan. Procurement training projects activities and a capacity assessment will also be conducted with consultant s assistance if needed. Early on, PMU will rely on international consultants expertise on procurement issues to assess the procurement capacity of entities implementing subprojects as well as monitoring procurement processes. Sub-project contracts will not be executed to standards and costs as designed All sub-projects financed by EDFF will not be fully implemented by the time the project closes in June 2012 Weak Monitoring and Evaluation: - Lack of realistic benchmarks in subproject design - Low capacity to conduct monitoring and evaluation of the subprojects S S S The procurement ability of the sub-project proponent will be considered as one of the sub-project selection criteria. Most entities implementing sub-projects are likely to have entities gained experience in implementing subprojects in Aceh. Many entities have learned important lessons over the last three years both in terms of realistic planning (timelines, costs as well as outputs) and how to improve their ability to implement projects. In addition, improved bid documents and tight control by PMU are expected. Selection of sub-projects will be undertaken early in implementation and will strive to identify projects with the greatest likelihood of completion within the timeframe. Selection evaluation will include looking at the ability to benchmark and track performance. When the subproject documents are prepared they will be reviewed by the PMU for benchmarks as well as ME capacity. Outside consultants will be extensively involved and Bank will spot check as part of project supervision. Most entities implementing sub-projects are likely to have already gained experience in implementing subprojects in Aceh, which should make their benchmarks more realistic. M N M Lack of sustainability of sub-projects financed by EDFF S The project design foresees a relatively strong presence of M&E staffing at PMU level, showing the focus of the design on being able to demonstrate results. Selection evaluation will require sub-projects to address sustainability of investments (e.g. through Commitment of local governments to provide funds for operations and maintenance as necessary or design exit strategy for the implementing party). OVERALL RISK H S Risk Rating - H (High Risk), S (Substantial Risk), M (Modest Risk), N (Negligible or Low Risk) M 70

80 ANNEX 7: IMPLEMENTATION ARRANGEMENTS 1. The EDFF project is structured as a programmatic operation with a framework type design in that it will fund a number of sub-projects which will be prepared, implemented and supervised over the next 3.5 years by others (Attachment 3 includes a Gantt Chart with the project s timeline). An agreement will be signed with GOI s State Ministry for Disadvantaged Areas (KPDT) which will be GOI s lead implementing agency for the project. The KPDT in turn will simultaneously enter into a similar agreement referencing the primary agreement, with the GoA, who will be the implementing agency of the EDFF. The World Bank serves as the partner agency under the Multi Donor Fund for Aceh and Nias legal framework and will be responsible for EDFF project supervision. The individual sub-projects will be implemented by third parties. Sub-project selection will take place after project approval to ensure transparency and consistency in the selection process. Following this solicitation for proposals, the selection process will commence. If sufficient acceptable applications are not received, the first round selections will be made so that their implementation will not be delayed and a second more narrow solicitation will follow. 2. Operations Manual (OM) will guide project implementation and will list all projectrelated policies and procedures. This Manual will contain, among other things, specific accounting and reporting procedures for all organizations involved in project implementation, preparation of Interim Financial Reports (IFRs), and details of procurement, environmental and safeguards compliance procedures. It will contain a detailed anti-corruption action plan as well as the evaluation and monitoring that will be undertaken by project management and audit requirement by different government institutions. In addition, the document will include details of the sub-project application eligibility criteria. The Manual will provide detailed guidelines as well as templates which sub-project proponents that have been selected will have to follow to prepare and present a final sub-project document. A draft Manual has been prepared and will be finalized by the PMU (assisted by the consulting firm) during the early stages of project implementation. Any subsequent changes to the Manual will be done by the PMU subject to approval by the World Bank. 71

81 Figure 6: EDFF Project General Structure INSTITUTIONAL AND IMPLEMENTATION ARRANGEMENTS 3. Implementation, Players and Functions. The EDFF project will use a management structure (Figure 6) supportive of local government participation, capacity building and achieving the maximum benefit of the EDFF project. The project will be driven by the GoA and assisted in implementation by both the BRR (until its sunset date) and the KPDT, be responsive to local needs while striving to be responsive and timely in the review, selection and funding of sub-projects. The implementation of the overall facility rests heavily with the GoA thru BAPPEDA, which will house PMU. The GoA and its PMU will be supported by an international consultant management firm. The KPDT will be the GOI s implementing agency. The BRR will continue to be engaged and will help to provide advice to the GoA and PMU based upon their past experience in selecting and overseeing similar projects during their term in Aceh. The overall process of evaluating, selecting and monitoring of selected sub-projects has been designed to minimize unnecessary interference and duplication. In addition to these parties which are involved in the implementation of the facility, third parties will manage and implement selected sub-projects. 4. Government of Aceh - Government institutions in Aceh and Jakarta have provided the overall operational and strategic guidance necessary to ensure the sub-projects selected are in line with regional development priorities as specified by the GoA generally and specifically in its economic development strategy (RPJMD) and triple A project. The GoA will ensure that the investments and activities of the sub-projects are consistent with its priorities. 72

82 5. Office of the Governor of Aceh. The office of the Governor of Aceh will be a part of the Selection Committee. It will ensure that the Governor s views are represented in the Selection Committee and the implementation of the project. 6. BAPPEDA will manage the PMU and will be key factor in the selection of sub-projects through leadership and participation in the Selection Committee. It will monitor the progress of the sub-projects primarily through the PMU and be responsible for progress reports and monitoring and evaluation of Sub-projects Implementing Entities. Further, the PMU will review requests for payment from the sub-projects and will follow the disbursement mechanism through the KPPN (Treasury Office). Although BAPPEDA Aceh will be the implementing agency of the EDFF at the provincial level, to ensure EDFF supports the implementation of the GoA strategies related to economic development in the province, it will be key to ensure the support of the relevant Dinas and district governments for activities financed through this project. The EDFF will support provincial level programs for the development of economic clusters; as such the fiscal responsibility for continuing activities financed through EDFF lies with the provincial government. Nonetheless it will be important to ensure the participation of the relevant districts and/ or Dinas in the identification of priorities and the design of subprojects. BAPPEDA Aceh has initiated discussions with the relevant Dinas which will intensify in the initial phases of project implementation. In addition, entities proposing subprojects for EDFF funding will be required to consult extensively with the relevant Dinas and district governments. 7. BRR. The BRR, due to its experience in reconstruction in Aceh, will until it phases out, play an advisory role to BAPPEDA and the GoA in project implementation. It will also facilitate, as it has done until now, the interaction between the provincial and central government. 8. BAPPENAS, as the GOI s executing agency, will be responsible for the overall planning and evaluation of the project consistent with the Grant agreement between the World Bank and GOI. It will also provide the necessary coordination with the MOF, the KPDT and other central government agencies. It will also facilitate the smooth exit of the BRR from the project as BRR phases out in early The BAPPENAS also will be responsible for setting up a Project Steering Committee at the central government level that will provide policy guidance to the KPDT and the GoA on project implementation, to ensure all administrative procedures are in accordance with GOI laws and regulations, as well as the adherence of the project as a whole to BAPPENAS blueprint for Aceh s reconstruction. The BAPPENAS will be responsible for counterpart financing (government staff honoraria, taxes and other operational expenses) for BAPPENAS and KPDT. The preparation of the budget document (DIPA) will reflect the funds allocation in the following manner: (i) payment to the consulting firm assisting BAPPEDA and KPDT, (ii) operating costs of KPDT, (iii) block grant for subprojects at the provincial level. Further allocation of the block grants will not be possible at the time of the preparation of the DIPA since projects selection (and allocation of funds to sectors and districts) is part of project implementation. The BAPPENAS will provide staff sufficient to fulfill these responsibilities, the cost of which will be borne by BAPPENAS. 9. The KPDT, as the implementing agency at the central level, will be responsible for overall implementation of the project. KPDT will be a member of the Selection Committee, it will also provide operational guidance to facilitate as well as monitor and evaluate project implementation. It will be responsible for budget execution, including making an annual budget 73

83 application to the Ministry of Finance and setting up a project satker (Satuan Kerja), to be located in Aceh, which will be responsible for overall management of the annual budget (DIPA). KPDT will delegate the budget to the provincial government in Aceh as Dana Tugas Pembantuan. It will be responsible for dealing with withdrawal applications by the sub-project implementing entities (SIEs), after they have been reviewed and approved by the PMU. The KPDT will establish a Secretariat to assist with project implementation at the central government level as well as study project implementation to possibly replicate in other provinces. Finally, KPDT wil also be responsible for the internal audits of the project as well as overseeing the external audit to be conducted by BPKP. The operational costs to finance Satker, Secretariat and staff sufficient to fulfill these responsibilities are taken from counterpart financing allocated by BAPPENAS to the KPDT. 10. Sub-project Selection Committee. A Selection Committee, consisting of four persons will be established to make the final selection of sub-projects. The Committee, which will be composed of a representative of the Office of the Governor of Aceh, the Head of BAPPEDA Aceh, a representative of KPDT and a member selected from the academic community in Aceh, will review sub-project applications which have already successfully passed a preliminary screening performed by the outside consultant team with the PMU. The selection of the member of the Selection Committee from the academic community in Aceh will be open and transparent. The person should have thorough knowledge of local economic development issues in Aceh and have a high standing in the academic community and civil society in general. The selections made by the Committee will then be provided to the World Bank for its No-objection. The Selection Committee will have a relatively short duration, as it is expected that the totality of sub-projects will be selected in the initial stages of the project. Following formal selections and approval of the selections, the PMU assisted by its consulting firm will assume management of the project. 11. Project Management Unit. The PMU, to be located in BAPPEDA, will consist of the consulting management firm as well as the GoA staff 23. It is expected that rotation of GoA staff assigned to PMU will be minimal, to allow for capacity building and a functioning of PMU as the consulting firm phases out in later stages of the project. A project management consulting firm will be hired by the GoA utilizing EDFF project funding. Staffing will be required for both core and support functions. 12. Consultant Management Firm. The consulting firm will have two key interrelated roles. First, the firm will be responsible for the effective operation of the PMU and secondly, it will build capacity within the GoA to progressively assume the lead managerial role over PMU and build the capacity of the KPDT to implement similar projects in other provinces if the approach proves successful. The firm will oversee and work with the PMU and a project Secretariat in the KPDT. It is envisioned that the PMU will be staffed by the management firm along with GoA staff. The management firm will be responsible for assisting the GoA to establish PMU and for preparing a transition strategy (along with a training plan) to build capacity of GoA staff at PMU so PMU can function effectively without the need for extensive outside assistance by the end of the consultancy. The firm will assist PMU in the evaluation of 23 The GoA will assign staff on a full time basis to the PMU. Initially this staffing will be small, but may grow as functions are being transferred to the PMU and GoA from the consultant management firm. 74

84 sub-project applications and in the preparation of recommendations to the Selection Committee, the drafting of sub-grant agreements between the PMU and entities selected to implement subprojects, as well as in the monitoring and evaluation of sub-projects. The Consultant firm will also ensure that the operation of PMU with regards to financial management, procurement, communications are at an acceptable level to minimize risk and ensure good reporting. The consulting firm will also provide limited assistance to the Secretariat being established by the KPDT in the implementation of the project at the central level, in particular in solving any administrative issues that may arise, dealing with withdrawal applications in a timely manner to facilitate project implementation, facilitating the communication between the implementation agencies at the central and provincial level as well as assisting KPDT in its role of monitoring project implementation. Assistance will also be provided to the KPDT to assess whether the EDFF is a model that can be replicated in other provinces in Indonesia and build their capacity to implement similar projects in the future. 13. The World Bank. The World Bank as partner agency will oversee the project. Its responsibilities will include: (i) appraisal; (ii) supervision of the project; (iii) will review the PMU s evaluation report on each of the proposals submitted to the Selection Committee as well as the Selection Committee s report on the selection process of selected sub-projects and issue No-Objection for each selection. (iv) will review all completed sub-project packages before they are commenced and issue an NOL to each, (v) will monitor results and report to the MDF on a six-monthly basis and (vi) administer the grant. 14. Sub-project Management. The sub-projects will be implemented by different entities groups (such as NGOs (domestic and international), private sector organizations and international aid organizations). The SIEs will prepare the sub-project application and be responsible for tracking performance of their individual sub-project consistent with the agreed upon milestones and performance indicators. They will also be responsible for ensuring that the sub-projects remain consistent with EDFF goals. The sub-projects will be supervised by the GoA through its PMU with general oversight by the KPDT and the World Bank as the partner agency responsible for the EDFF. 15. Private Sector. Ultimately, businesses together with individuals will be the beneficiaries of the EDFF project, and therefore will be ineligible to submit applications for sub-projects. The private sector will however be the primary beneficiary of the EDFF, having been identified by the RPJMD as a key partner of the GoA in the development of Aceh. It is anticipated and will be encouraged that the private sector as well as local communities and local governments be consulted at various stages during the life of the EDFF. The private sector was consulted during project preparation to help identify key constraints and opportunities in brining about economic growth. At a minimum, the GoA/PMU will organize consultations with representatives of the private sector before launching a call for proposals to present the priorities for economic development identified by the project that is likely to receive financing and seek opinions of the Acehnese business community. Beneficiary communities will be involved primarily at the subproject level. Sub-project proposals should elaborate on the type of consultations that have already taken place as well as the type of involvement foreseen to discuss subproject design, implementation as well as to include the opinion of beneficiary communities in the monitoring and evaluation of subprojects. The extent to which the entity proposing a subproject has undertaken consultations with the beneficiary communities and the relevant Dinas and/ or 75

85 District Government and the degree of ownership of the project by these will be key selection criteria. SUB-PROJECT ELIGIBILITY AND SELECTION 16. In order to ensure sub-projects financed under the EDFF meet the World Bank and international standards for quality of investment and are sustainable, investments financed under the project will be evaluated prior to selection based upon eligibility criteria. These eligibility criteria aim to ensure that sub-projects submitted for final approval by the PMU to the Selection Committee meet simple requirements for (i) inclusion in the proposed project; (ii) appropriate design of technical solutions; (iii) economic and financial viability, including ensuring that mechanisms are in place for operation and maintenance of EDFF-financed investments (to the extent applicable); (iv) analysis of relevant activities already implemented in the relevant sectors, including a focus on success factors and lessons learned that can improve the subproject implementation; (v) consultation with appropriate groups; (vi) compliance with the agreed-upon approach on environmental, social, and fiduciary safeguards, and (vii) capacity to fulfill appropriate procurement, FM requirements and M&E tracking. Details of these eligibility and selection criteria are available in Attachment 2 to this Annex. Eligibility and selection criteria will be adopted by the PMU prior to the evaluation and selection of subprojects. In addition, each selected sub-project will have its individual components reviewed for consistency with the overall objectives of the EDFF project. To keep the project manageable and avoid a large number of disintegrated sub-projects, the EDFF will accept applications between US$1 million and US$7 million and on an exceptional basis will consider sub-project applications larger than this amount, subject to World Bank approval. The EDFF will also consider up to three subprojects between US$500,000 and US$1 million. 17. As discussed above, applications will be received and reviewed against defined criteria. The sub-project applications will first be reviewed against essential pre-selection criteria. Those projects applications that meet the first tier of essential criteria will be looked at in greater detail to ensure they meet the technical and implementation capacity criteria contained in phase two and three of the review process. All sub-projects meeting the criteria will be sent to the Selection Committee for consideration based upon the needs and priorities outlined by the GoA. The World Bank will then review the selected sub-project to ensure it meets the EDFF criteria and issue a No-objection Letter (NOL). Selected entities should only be contacted by the PMU after issuance of NOL by the World Bank. 18. Preparation and Approval of Individual Sub-project: All selected sub-projects receiving an NOL will be notified by the PMU. Once the selection has been finalized a subgrant agreement between the PMU and the SIEs will be agreed to and will include a clear statement of the approved sub-project to be financed by EDFF. Those selected for sub-project financing will be responsible for detailed sub-project preparation, including preliminary design, analysis of alternatives, conducting feasibility studies (including required safeguard assessments, environmental and social studies), followed by detailed design, budgets, procurement plan, 76

86 bidding documents 24, monitoring, evaluating and supervision plans. Final sub-project designs and tender documents will be submitted to the PMU for review. They will be reviewed to ensure they meet the technical, economic, financial and environmental and safeguards compliance criteria developed at the outset of the project. The final approved (by the PMU) sub-project document of each sub-project will then be submitted to the World Bank for issuance of an NOL. Upon issuance of NOL to the final sub-project document and signing of the subproject agreement, implementing entities may request reimbursement of up to US$100,000 toward financing the preparation of the project. This reimbursement is subject to approval of the subproject document by the World Bank (through NOL) and eligibility of expenses so entities which have sub-projects that have not received an NOL from the World Bank or that have not signed a sub-project grant agreement are not eligible for reimbursement for project preparation. 19. Monitoring and Evaluation of Sub-project Outcomes/Results. The PMU will evaluate progress on the proposed indicators for each sub-project through regular reporting by the SIEs and will submit to the World Bank quarterly and more detailed yearly reports including output and outcome indicators for each sub-project. Each SIE will be responsible to prepare a monitoring and evaluation plan consistent with the agreed criteria (see Annex 3). The World Bank will be responsible for the monitoring and evaluation of the project itself, preparing reports every six months on physical and financial progress as well as the achievement of results. 20. Sub-project Financing and Disbursement Procedures. The KPDT will follow the regular procedures for payment by a government entity. The KPDT will set up a project satker (Satuan Kerja) to be responsible for the overall management of the annual budget to be located in BAPPEDA Aceh. The GoA and KPPN (Regional Treasury Office) will establish an effective means of confirming eligibility of sub-project bills for payment to contractors, other suppliers, and to cover pre-approved day-to-day operating expenses. The EDFF will disburse funds directly to the contractors or consultants providing goods or services for the implementation of subprojects; it will replenish the project accounts of SIEs. 21. Each sub-project will be reviewed based upon its unique characteristics to determine the appropriate disbursement stream for it. When some sub-projects come on stream, contractors will be paid a percentage of the contract price (as stipulated in the contract) directly into their designated account on signing the contract. The advance will be secured by a bank guarantee as stipulated in the contract. To process the balance of the payments, the contractor will submit invoices, along with supporting documents, to PMU according to payment provisions included in the contract. The invoices submitted will be verified by, and bear the signatures of, PMU and its Lead Consultant. Verification by PMU and consultant will require review and confirmation that the progress of the work defined in the sub-project is in accordance with the contract and the contractor s invoice, and that all required supporting documentation is complete. The GoA PMU will not process invoices that do not have the Manager of PMU and PMU s Lead Consultant s signatures attesting to his/her verification of the invoice. When all documentation is complete, PMU will prepare SPP-LS, which will be signed and stamped by both PMU Manager and the Lead Consultant to PMU. The KPA will prepare SPM-LS by which KPPN will issue instruction 24 Environmental studies (AMDAL, UKL/UPL) will be carried out in such a way as to inform the completed detailed designs. Therefore environmental mitigation should be integrated, as necessary, into finalized technical drawings and in the bill of quantities (as appropriate). 77

87 for payment (SP2D) to a designated account of third party implementing subprojects less any retention for guarantees or advances provided for in the contract and for any taxation obligations. Invoices verified by PMU will then be forwarded to the KPDT. After checking that all supporting documents are in order and that the claim has been correctly authorized by both PMU Manager and PMU s Lead consultant, KPDT will forward the withdrawal application to the World Bank after being approved by the Director General, Treasury, who will proceed for payment according to the agreed contract terms (see Annex 8 for further details on disbursement mechanism). 22. The focus of EDFF is on bringing back lost jobs and businesses and improving the business environment to facilitate a smoother process for the development of the private sector. A number of proposed projects have been identified covering many different areas, agricultural, livestock and fisheries, SME development, export promotion and value added enhancements along with improving the business environment. Some of the prior economic development projects 25 due to their proven results and ability to expand or continue to show positive results (in line with EDFF) may be potential candidates for funding under EDFF and thus they will be targeted. A public solicitation for sub-projects will be made shortly after the EDFF is approved, focusing on the scaling up or continuation of projects that can show results as well as other proposals for innovative sub-projects that demonstrate clear objectives in line with the EDFF. Transparent selection criteria and selection will be applied to all project proponents. Should a second round of solicitation be necessary, it will be based on an on-going assessment of remaining gaps in the economic development strategy outlined in the RPJMD and BAPPENAS blueprint. 25 Those on-going projects identified as meeting all of the EDFF selection criteria and which can demonstrate proven results which require additional funding to scale up. 78

88 Attachment 1: Project Management Unit Staffing and Assistance to KPDT 1. The PMU will have core and support functions that will need to be covered through (a) GOI/GoA staff seconded full time to PMU and the Secretariat in KPDT, (b) staff of the consulting firm that will assist in the management of the EDFF and (c) support provided of the consulting firm for some of the support functions. The consulting firm will have two key interrelated roles. First, the firm will be responsible for the effective operation of the PMU and effective implementation of the EDFF at the central government level by the KPDT, and secondly, it will build capacity within the GoA to progressively assume the lead managerial role over PMU and in the KPDT to implement a similar approach in other provinces in the country. The firm will assist PMU in the evaluation of sub-project applications and monitoring. The firm will provide assistance to the PMU to draft subgrant agreements between the PMU and subproject implementing entities. The Consultant firm will also ensure that the operation of PMU with regards to financial management, procurement, communications are at an acceptable level to minimize risk and ensure good reporting. The PMU will prepare an Operations Manual that will guide project implementation and will list all project-related policies and procedures including details of the sub-project eligibility and monitoring criteria. The consulting firm will also assist the KPDT to fulfill their role in the monitoring and processing of expenses and withdrawal applications. Core Functions: (a) Project Management (b) Project Evaluation (includes technical expertise, safeguards specialists, financial management and procurement specialists, etc.) (c) Project Monitoring (d) Reporting Support Functions: (a) Logistics (b) Human Resources (c) Legal Advice (d) IT (website) (e) Communications/ Public Relations (f) Financial Management of PMU (g) Administration 2. The timing and staffing of PMU and the EDFF Secretariat in the KPDT will depend mostly on work load being frontloaded to the first two years, where sub-project selection and the start of implementation takes place (and most bottlenecks will have to be addressed) and the GoA, the KPDT and the firm should plan accordingly. Years 2-3 1/2 will be heavier on the monitoring and evaluation of sub-project implementation, with less staff required for M&E as the sub-projects are finalized toward the end of the EDFF and more are needed for reporting and auditing as the project comes to a close in year four. 3. There might be need to retain staff for only part time work, as the work becomes less intense in the final years of the project. The firm could then assign different responsibilities to 79

89 available staff (e.g. the same person could be working on procurement and financial management) and some of the government staff assigned to work in PMU could start working on different projects. 4. The ToR for the consultant firm will specify that: (a) Some of the people working in the PMU (e.g. the Manager) will have to be long term employees of the firm and not consultants hired for this project only; (b) The contract will have a clause that commits the firm to providing at least 40 weeks of technical expertise as needed and on a short term notice, based on the need to evaluate project proposals in the different calls for proposals; (c) (d) The ToR will specify that the contract is subject to performance review, the ToR will also specify how the firm s performance will be evaluated; The ToR will specify the type of functions (and maybe one or two key staff) that PMU in BAPPEDA and the EDFF Secretariat in the KPDT will have to perform, but it will let firms doing proposals tell the GoA what their ideas of staffing and contribution would be, to allow also for more creativity and to make full use of experience that many firms may have on managing such units. 5. The consulting firm will place consultants in the KPDT to assist the KPDT with the implementation of the project and build its capacity to implement similar projects in the future through on-the-job training. The consulting firm will assist the KPDT in its role as the implementing agency at the central government level, including, but not limited to: (i) liaison with BAPPENAS, the executing agency, as well as other central government agencies to facilitate implementation of the project at the central level and solve any administrative problems and bottlenecks, (ii) making annual budget application to the Ministry of Finance, (iii) dealing with withdrawal applications by the entities implementing sub-projects, after they have been reviewed and approved by the PMU, (iv) monitor and evaluate project implementation. To this end, the KPDT will establish a small Secretariat to facilitate coordination of the EDFF at the central government level. 6. The scope of work of the consulting firm can be summarized as follows: (a) (b) Assist the GoA to establish the PMU and for preparing a transition strategy (along with a training plan) to build capacity of GoA staff at the PMU so the PMU can function effectively without the need for extensive outside assistance by the end of the consultancy; In the first year of operation, assist the PMU in the evaluation of sub-project applications and in the preparation of recommendations to the Selection Committee this means that a relatively large number of technical and sectoral experts will be needed to evaluate project applications and make recommendations; 80

90 (c) (d) (e) (f) (g) (h) (i) (j) (k) Assist the PMU with the drafting of subgrant agreements between the PMU and entities selected to implement sub-projects Assist GoA with a communications strategy of the project, including the production up of a project website that provides a platform for all required public announcements (e.g. regarding procurement, audits, etc.), the sharing of information related to project implementation, public relations and a general platform to interact with the public and other stakeholders. Assist GoA/KPDT in the preparation of all reports necessary for the project and the oversight of the project and sub-projects. In the subsequent years of operation, assist the PMU to monitor and evaluate the sub-projects on an on-going basis the type of expertise is likely to be different after the first year, with greater emphasis on the monitoring of projects, transactions as well as the achievement of results; Ensure that the operation of the PMU with regards to financial management, procurement, reporting and communications are at an acceptable level and in accordance to World Bank guidelines to minimize risk and ensure good reporting. When entities implementing sub-projects do not have the capacity to follow World Bank procurement guidelines, as indicated by the assessments undertaken by the PMU, the PMU might in that case provide procurement services to subprojects implementing entities; Provide limited assistance to the Secretariat being set up by the KPDT in the implementation of the project at the central level, in particular in solving any administrative issues that may arise, facilitating the communication between the implementation entities at the central and provincial level as well as assisting the KPDT in their role of monitoring project implementation; Assist the KPDT to assess whether the EDFF project is a model to promote economic and private sector development that can be replicated in other provinces in Indonesia and assist in the design of the replication of the model as deemed appropriate by KPDT; Design, coordinate and implement capacity building training programs to increase the capacity of BAPPEDA and GoA staff to implement similar projects in the future. Programs should start within 6 months of the Consultants mobilization; Develop partnerships with NGOs and donors already involved in local government capacity building. 81

91 Attachment 2: EDFF Sub-project Application Eligibility Criteria 1. The EDFF sub-projects can be primarily grouped into three program areas: (a) Improving the Business Environment; (b) Private Sector Support; and (c) Public Infrastructure 26. Depending on the type of project, the application of the selection criteria may vary. But there are some aspects of the selection criteria which apply to all and are Pre-Selection criteria. It is possible that applications for the use of the EDFF grant facility will be a combination of more than one of the three areas listed above. The Selection Criteria and Process have been designed to minimize subjectivity in sub-project selection. To better ensure strong projects consistent with both the economic development strategy of the GoA and the principles of EDFF the evaluation process has been divided into three phases: (a) Phase One: Pre-selection evaluation to ensure in the most basic of terms that the proposals are designed to meet the principles of economic and private sector development set by the GoA and the requirements of the facility and the basic goals of EDFF. Those meeting these standards will receive further consideration under Phase Two of the evaluation process. Those that do not meet the standards will be rejected. (b) Phase Two: At this stage the proposal is assessed in more depth; focusing on the technical criteria, project design and application of lessons learned and economic justification and will be rated quantitatively. Those projects passing this phase of the evaluation with a minimum average score above percent will receive further consideration under Phase Three. Those not meeting the minimum score will be rejected. (c) Phase Three: This phase focuses on assessing the proposed arrangements for implementation as well as the ability of the proponents to implement the sub-project. Only those projects passing this evaluation with a minimum average score above 70 percent will be presented to the Selection Committee (although not necessarily recommended for funding). (d) Selection of Proposals: Only those proposals which have successfully advanced through the three phase process will be sent to the Selection Committee for consideration. (e) No Objection: The World Bank will review the PMU s evaluation report on each of the proposals submitted to the Selection Committee as well as the Selection Committee s report on the selection process of selected sub-projects to ensure compliance with the EDFF criteria and process, and issue No-Objection for each selection. 26 These are wholesale operations. Any on-lending of funds to final beneficiaries should be through a financial intermediary. 27 Guidelines for scoring will be produced by the PMU for the Selection Committee. In principle, a rating above 70 will only be awarded for projects that meet minimum requirements in that selection criterion. Scoring above 70 should reflect to what extent the criterion is met and the quality of the proposal. 82

92 Sub-Project Evaluation Process Phase One Pre-selection Criteria Criteria Yes No Explanation Amount of project above US$0.5 million? Priorities defined in EDFF -Contributes to Development Objective -Consistent with areas to be financed through EDFF Quick implementation and long- term impact Fills gaps in the current economic and private sector development activities Only projects above a minimum threshold of US$0.5 million will be considered for financing. Only a limited number of projects between US$0.5-1 million will be considered and projects above US$7 million will be considered only in exceptional circumstances. It is essential that the proposed sub-projects meet the Government s strategy for economic development and the overall principles of participation of EDFF. The proposal spells out clearly how it will be contributing to the development objectives of EDFF: (i) development of job-creating, market-driven enterprises engaged in value-added processing and manufacturing, especially in agriculture and fisheries; (ii) sustainable improvement of production quality and value in agriculture, fisheries and estate crops that contributes to alleviation of poverty; (iii) increase in international trade, especially direct exports; and (iv) increased domestic and foreign investment in Aceh. The proposal spells out clearly how it fits into the areas that the EDFF will support: (i) Improving the business environment; (ii) Private Sector Support; and (iii) Public Infrastructure Applications should explicitly indicate an implementation period consistent with the time frame of the EDFF (implementation finalized in the first quarter of 2012) The application illustrates convincingly how the results of the project will have a long-term impact. The facility will not approve sub-projects which are duplicative or for which alternative sources of funding are readily available Local Community Involvement The EDFF facility seeks to ensure that sub-projects selected are those which are demand driven and have been prepared in consultation or partnership with the district government and/or local communities and benefit those communities, or Aceh as a whole. As a result, proponents must include information concerning this consultation and demonstrate support from the relevant institutions/ beneficiaries The proposal should also elaborate on the plan for continuous involvement of the beneficiary communities in the design of the subproject, its implementation as well as the monitoring and evaluation or results. The proposal should also elaborate on the degree of support by the relevant Dinas and/or 83

93 Phase One Pre-selection Criteria Criteria Yes No Explanation district government, whether follow-up funding will be allocated if required and how the subproject fits in with the Dinas/ District government plans for sustainable economic development Government support There is evidence of Government support for the proposal. Evidence could be a signed letter by the relevant authorities supporting the project, co-financing or a joint-proposal. Capacity to implement Given the desire of the GoA and the EDFF to show success, applicants should demonstrate experience in implementing similar projects as is being proposed. Otherwise they should be in partnership with an NGO or other organization that can bring in this know-how. Detailed assessment of this capacity will be conducted for all sub-projects progressing to Phase Three of the selection process. Meeting environmental guidelines If the sub-project has a potential environmental impact, it must be discussed in the project proposal. The actual assessment of suitability of the environmental mitigation will be made in Phase Two. Sustainability of project For projects that need ongoing funding (e.g. operation and maintenance) the source of funding has been identified, and the likelihood of that funding coming forward has been assessed. An assessment of the sustainability of the proposal and possible risks associated with this at a minimum. Not in the EDFF Exclusion List There are a number of sectors/ activities that the EDFF will not finance, as it is opposed to World Bank policies. Please see notes at the end. Phase Two Technical Criteria Criteria N/A Explanation points points points Market oriented solutions Is it a solution to a market failure? Are interventions suggested market oriented, in that they intervene in the markets as necessary minimizing distortions? Does it support development of institutions and organizations that facilitate economically efficient market activity? 84

94 Criteria N/A 0 70 points Clear results in one of the three areas to be supported by Component 1 of EDFF: (i) Improving business environment (ii) Private Sector Support (iii) Public Infrastructure Phase Two Technical Criteria points points Explanation Does it enhance local entrepreneurship activities? Proposal identifies clearly what will be the results of the subproject. The proposal has well defined Key Performance Indicators (KPI) with clear targets. The proposal explains convincingly how the KPI of the subproject will support the achievement of the development objectives of the EDFF: (i) development of job-creating, market-driven enterprises engaged in value-added processing and manufacturing, especially in agriculture and fisheries; (ii) sustainable improvement of production quality and value in agriculture, fisheries and estate crops that contributes to alleviation of poverty; (iii) increase in international trade, especially direct exports; and (iv) increased domestic and foreign investment in Aceh. The proposal should explain how the proposed KPI are in line with result indicators specified in the EDFF M&E framework in one or more of the areas to be supported by EDFF: (i) Improving business environment; (ii) Private Sector Support, (iii) Public Infrastructure. The M&E Framework will be made available to subproject proponents. The proposal should explain convincingly how KPI for the project will be measured, including availability of baselines and information collection Creates an economic multiplier Proposal should identify in which way the subproject will have an impact on the economy, creating economic multipliers: o o o Allows a number of people to generate income Creates jobs Project will enable people to participate in 85

95 Criteria N/A 0 70 points Quality of project design and identification of success factors and lessons learned from other activities already implemented Phase Two Technical Criteria points points o Explanation productive private sector activities. Focuses in higher value added products and processing of raw Commodities in Aceh Proposal includes an analysis of relevant activities that have been implemented in Aceh during the reconstruction effort The analysis leads to the identification of success factors for implementation or lessons learned Success factors and lessons learned have been incorporated in the sub-project design Low risk of failure Proposed activity has a low technical and implementation risk. Proposal includes a risk assessment which objectively assesses risks and convincingly describes mitigation measures. Equitable Outcome Proposed activity promotes equitable outcomes addressing socioeconomic imbalances by benefiting primarily, directly or indirectly, the poorest and most disadvantaged groups (e.g. poor, vulnerable, women). Criteria 0 70 points Past record of the implementing body Cost proposal demonstrates the project will be cost effective Phase Three Implementation Criteria points points Explanation Proposal includes information on experience and demonstrable results of implementing entities with regards to procurement, Financial Management and Monitoring and Evaluation Proposal includes an estimate of cost as detailed as possible at the proposal stage (to be refined in the project document). The proposal will also provide a cost-benefit-analysis of the proposed activities. 86

96 Criteria 0 70 points Composition and skill of the team Acquisition of needed inputs necessary for success are readily attainable Degree of local government support Can be monitored using a predeveloped monitoring and reporting process Provable results of past success and ability to rapidly replicate and/or scale up activities Degree of capacity building of local institutions (provincial or district governments, local NGOs, universities) Transfer of knowledge and newer technologies or business models Degree of private sector involvement Phase Three Implementation Criteria points points Explanation Proposal includes information of the team that will be in charge of the subproject, including CVs, positions, etc. As applicable Highest degree of local government support would be cofinancing for the project by local government or the relevant dinas Project has clear financial and technical project monitoring procedures, e.g. -Fund disbursement linked to verification of project progress (e.g., stage gates) -Fund and technical monitoring audited by a third party This is applicable to all sub-projects seeking to scale up past activities, or to duplicate them in other areas. Project foresees the transfer of knowledge to local institutions throughout the life of the project, e.g. joint implementation, sub-granting to local institutions, capacity building embedded in the project design, etc. Project design promotes the transfer of knowledge and business models or technologies to the local private sector, through implementation or as a result of the project implementation (e.g. by promoting technology transfer and diffusion). Projects should show the degree of involvement of the private sector in the project, e.g. in design, implementation, co-financing, etc. EDFF Exclusion List: The EDFF Exclusion List defines the types of projects that EDFF will not finance: 87

97 Production or trade in any product or activity deemed illegal under host country laws or regulations or international conventions and agreements, or subject to international bans, such as pharmaceuticals, pesticides/herbicides, ozone depleting substances, PCB s, wildlife or products regulated under CITES. Production or trade in weapons and munitions. Production or trade in alcoholic beverages (excluding beer and wine). Production or trade in tobacco or tobacco products. Gambling, casinos and equivalent enterprises. Production or trade in radioactive materials. This does not apply to the purchase of medical equipment, quality control (measurement) equipment and any equipment where World Bank considers the radioactive source to be trivial and/or adequately shielded. Production or trade in unbonded asbestos fibers. This does not apply to purchase and use of bonded asbestos cement sheeting where the asbestos content is less than 20 percent. Production or activities involving harmful or exploitative forms of forced labor/harmful child labor. Commercial logging operations for use in primary tropical moist forest. Production or trade in wood or other forestry products other than from sustainably managed forests. Production, trade, storage, or transport of significant volumes of hazardous chemicals, or Commercial scale usage of hazardous chemicals. Hazardous chemicals include gasoline, kerosene, and other petroleum products. Production or activities that impinge on the lands owned, or claimed under adjudication, by Indigenous Peoples, without full documented consent of such peoples. Activities producing liquid or gaseous effluent emissions at harmful levels Activities related to fisheries that are not in compliance with standards set by the appropriate Fishery Services Agency Land acquisition or projects that would result in involuntary resettlement (Displaced Persons) 88

98 No Activities 1 PAD Finalization and Approval 2 EDFF dissemination to potential applicants 3 Grant Agreement with GOI and launching 4 Bidding of Consulting Firm 5 Consulting Firm selected 6 Stakeholder consultations 7 Sub project Request for Proposal 8 Sub project review and selection 9 World Bank No Objection Letter 10 Negotiation of subprojects 11 Submission final subproject proposals 12 Start subproject implementation 13 Subproject Monitoring 14 Subproject Implementation 15 Subproject Monitoring 16 First progress Report 17 Mid Term Review 18 Subproject Implementation 19 Subproject Monitoring 20 Second Progress Report 21 Subproject Implementation 22 Subproject Monitoring 23 Third Progress Report 24 Finalization Project Implementation and Disbursements 25 Impact Evaluation and Closure of Project Attachment 3: EDFF Project Timeline Q4 $ Q1 Q2 Q3 Q4 $ Q1 Q2 Q3 Q4 $ Q1 Q2 Q3 Q4 $ Q1 Q2 $ 11,000,000 $ 15,500,000 $ 15,500,000 89

99 ANNEX 8: FINANCIAL MANAGEMENT ASSESSMENT Summary 1. The overall objective of the EDFF project is to contribute to creating improved conditions for post-tsunami economic recovery and equitable and sustainable economic development and through it, poverty alleviation. Total budget estimate is US$50 million and will be implemented in 3.5 years. This Grant will be funded by several donors, under a multi-donor trust fund. 2. This project will be executed by BAPPENAS and implemented by Ministry of Disadvantaged Areas (KPDT) at central level and BAPPEDA (Regional Development Planning Agency) Aceh at provincial level. The project consists of the following components: (a) (b) Component One (US$44.5 million). Financing of Economic Development subprojects, this component will fund sub-projects that address critical issues affecting economic development in Aceh by contributing to building a more competitive and sustainable economy. The EDFF will seek proposals to fill-in strategic and financing gaps based upon the vision for economic development explicit in the RPJMD (Medium Term Development Plan of the GoA) and BAPPENAS blueprint. Component Two (US$5.5 million). Targeted support for planning, design, selection of sub-projects, supervision and implementation oversight, this component addresses project management and aims to ensure strong project management through strengthening the ability of the GoA and KPDT, the project foresees the hiring of international and national expertise to work alongside the government officials in charge of the project. 3. The purpose of the project s financial management assessment is to determine whether the financial management system of the grant implementing agencies, the KPDT and BAPPEDA of NAD province, have capacity to produce timely, relevant and reliable financial information on the project activities, and if the accounting systems for the project expenditures and underlying internal controls are adequate to meet fiduciary objectives and allow the Bank to monitor compliance with agreed implementation procedures and appraise progress towards its objectives. 4. Risks will arise from some factors: (i) the project might be influenced by the weak overall fiduciary environment in the country. In such an environment, a set of fiduciary policies and procedures are needed to ensure that proceeds of the grant are used only for the purposes intended, with due regard to economy and efficiency. It is also important to have a system to ensure that these policies and procedures were complied, (ii) sub-grants will be provided to entities which will not be identified until project implementation and sub-projects (activity that will be funded) will be identified later after proposals selection process (submitted by prospective organizations), (iii) PMU has no experience in managing the Bank s project, and (iv) inadequate capacity of FM consultant. 5. Some measures have been proposed to mitigate the risks arising from these factors. An independent financial audit will be carried at the end of fiscal year, together with a review of 90

100 internal controls over project implementation. Regular internal audit will be conducted by KPDT to assure achievement of effectiveness and efficiency of operations and reliability of financial data and report. KPDT will include an internal audit activity of the grant in their annual work plan. Sufficient segregation of duties between technical and financial/administration aspects will be applied. To assist the PMU which has no prior experience in managing Bank projects, a consultant firm will be hired under the project including FM consultants. FM consultants will assist PMU in reporting and monitoring of project and sub-projects. FM consultants will also be responsible to conduct FM assessment to prospective sub grant recipients to ensure that they have adequate financial management system in place. To ensure that the FM consultants have adequate capacity and skills, their selection process will be subject to Bank s prior review (included in the procurement plan). 6. Taking into account the risk mitigation measures proposed, overall, the financial management risks for this financing are assessed as High before mitigation, and Substantial after mitigation. This assessment has concluded that with the implementation of the action plan, the proposed financial management arrangements will satisfy the Bank s minimum requirements under OP/BP10.02 and are adequate to provide, with reasonable assurance, accurate and timely information on the status of the grant required by the Bank. More details of the financial management assessment are given below. Summary of Risks and Proposed Mitigating Arrangements 7. The project s overall risk assessment and summary of mitigating measures is as follows: Table 12: Risk Assessment and Summary of Mitigating Measures Risks [High / Moderate / Low] Assessment Summary Comments & Risk Mitigation Measures. A. Inherent Risks 1. Country Level Risks High This operation will rely on government financial management systems. Fiduciary risks normally associated with use of Government systems will therefore apply, especially the wide prevalence of corruption which may impact on the control environment to some degree. The Bank is assisting GOI to improve its financial management systems through the Government Financial Management and Revenue Administration Project. 2. Entity specific risks Implementing Entity Organization High BAPPEDA Aceh has no experience in implementing the World Bank project, but has experience in implementing aid from other donors. The implementing agency at central level, KPDT, has experience in Risk Rating after Mitigation Measures Substantial Substantial Conditionality N N 91

101 Risks [High / Moderate / Low] Assessment Summary Comments & Risk Mitigation Measures. managing the Bank s project (SPADA). Most part of the grant will be implemented by organizations that have not yet been decided and will be selected until later through a selection process. This may create risks since the Bank can not ensure the FM system adequacy at this point. Risk Rating after Mitigation Measures Conditionality FM requirements will be included in selection criteria. FM consultants hired under this project will conduct FM assessment of all prospective subprojects implementing entities. Final sub-project documents to be reviewed by Bank FMS prior to Bank s NOL of the sub-project appraisal document. Overall Entity specific Risk B. Control Risks High 1. Budgeting Substantial Most activities will be financed 100% by the donors fund and budgeted at the central level (KPDT). The risk of timely availability of budget funds may arise due to possible delays in APBN issuance and Satuan Kerja/ Satker (Working Unit) appointments. The Bank has experienced in other project with KPDT as implementing agency (SPADA), where the budget was delayed causing delays in implementation. PMU should work together with MOF and ensure that budget documents could be issued timely. 2. Internal Controls High At sub-project level, payment verification will rely to each sub grantee financial management system. Risk may raised from organizations selected that do not have adequate FM capacity and the Bank will rely to the project FM consultants to conduct FM assessments for these proposed organizations during proposals selection. At PMU level, payment verification will rely on the government system. Although the implementing agency Substantial Substantial Substantial N Y Operations Manual should be agreed with the Bank prior to disbursement of sub-grants (component 1) 92

102 Risks [High / Moderate / Low] Assessment Summary Comments & Risk Mitigation Measures. will have a sufficient segregation of duties between technical and financial/ administration aspects, the project will still face the risk of insufficient payment verification. Risk Rating after Mitigation Measures Conditionality Satker arrangement should ensure sufficient segregation of duties between technical and financial/administration aspects. This will be emphasized in the Operational Manual. Inclusion of minimum organizational FM requirements in proposals selection process. FM will provide a draft TOR to be included in the PMU consultant package. This TOR will clearly define the PMU FM team s responsibilities in conducting FM assessments during review of project applications as well as the review of the sub-project document, Payment verification for sub-projects will be arranged in more detail in the operational manual. The project will be audited by KPDT Inspectorate, in collaboration with Aceh Inspectorate, on regular basis. TOR should be agreed by the Bank. 3. Accounting High BAPPEDA and KPDT will follow government accounting standards. Government accounting software is used to record all transactions. Manual backup (general cash book and supporting books) is still maintained in the PMU and KPPN. The system is closed monthly and budget realization reports are submitted to MOF. Sub-projects Implementing Entities are expected to have adequate reporting and accounting system. FM consultants will assess accounting system of sub-projects implementing entities during selection process. Substantial N 93

103 Risks [High / Moderate / Low] Assessment Summary Comments & Risk Mitigation Measures. Sub-grants received from the project will be included in their accounting system to ensure the fund accountability. 4. Flow of Fund High For selected sub-projects proposals, Sub-grant agreement/contract will be signed between PMU and the implementing entities. The implementing entities will receive an advance of the sub-grant as agreed in the Sub-Grant Agreement/Contract based on cost estimation proposed. The following payments will be paid after outputs from the previous stages were delivered. Financial and technical report from these implementing entities will be verified by PMU, before processing the next payments. The project should strengthen payment verification process. Payment verification for sub-projects will be arranged in more detail in the sub-projects operational manual. 5. External Audit Substantial The project will be audited by BPKP. Sub-grants are considered bear higher risk, since the Bank cannot assess the adequacy of financial management system of the sub grantee and type of activity funded at the beginning. Risk Rating after Mitigation Measures Substantial Moderate Conditionality N N Overall project specific Risk High Annual audit TOR for the project, which will include subprojects below US$1 million, and appointment of BPKP. Sub-projects above US$1 million will be audited separately. BPKP will have access to books of accounts of sub-grantee. Audit of the project s and sub projects Financial Statements will be submitted to the Bank not later than 6 months after the end of fiscal year. Substantial 94

104 Project Financial Management & Disbursement Arrangement 8. Based on the project design features and the risk analysis summarized above, the following arrangements are proposed for financial management and disbursements; these include measures to mitigate risks identified above: Institutional and staffing arrangements 9. The KPDT will take role as implementing agency at the central government level. It will be responsible for budget execution, including preparing an annual budget application to the MOF, preparing a budget execution report to MoF and setting up a project Satker located in Bappeda Aceh that will be responsible for overall management of the annual budget and submission of withdrawal application after being reviewed and approved by the PMU. The budget for this project will be classified into three categories, (i) payment to the consulting firm assisting BAPPEDA Aceh and KPDT, (ii) operating costs of KPDT and BAPPEDA Aceh, (iii) block grants for subprojects at the provincial level. The block grants cannot be further specified in the DIPA, in terms of sectoral or district allocation, since the selection of sub-projects and what exactly will be financed will only be known after the project has started and the call for proposals and evaluation of proposals has taken place. The budget will be delegated to the provincial government in Aceh as Dana Tugas Pembantuan (supporting fund). KPDT will be responsible for setting up a project Sakter, to be located in Bappeda Aceh, and GoA will appoint the same people in the Project Management Unit (PMU). KPDT will provide staff and establish a Secretariat to assist the project implementation at central level. 10. The implementation of the project will rest heavily with the Government of Aceh (GoA)/BAPPEDA, which is to be supported by an international consultant management firm and the establishment of a PMU. The GoA will manage the PMU and will be integral in the selection process of sub-projects through participation in the selection committee. The BRR, with its experience in similar projects, will, until it is phased out, support the Government of Aceh through its advice both on the selection of sub-projects and implementation of the project itself. The progress of the sub-projects will be monitored primarily by the GoA through the PMU. 11. During the assessment, project management (Satker) at BAPPEDA has not been assigned. However, the head of finance in BAPPEDA has two years experience as part of Satker in BRR before residing in his position now. BAPPEDA has applied new finance law; hence segregation of duty between the payment verification function, procurement and project management will be in place. BAPPEDA will assign staff on a full time basis to the PMU. Satker at BAPPEDA will be appointed by GoA, but the decree will be signed by Minister of KPDT. 12. A project management consultant firm will be hired by the GoA under the project to oversee and work with the PMU (BAPPEDA) and the Secretariat (KPDT). The project management firm will locate a number of consultants (part time and full time) in Aceh to assist the PMU and a small number of consultants will assist Secretariat at KPDT. The project manager will be located in Aceh and a deputy project manager will be located in or readily available to KPDT. 95

105 13. The firm and the PMU will be responsible for the review of sub-projects applications, making recommendations to the Selection Committee, monitoring and evaluating the subprojects on an on-going basis, financial management and procurement, and facilitate communications among the different government levels. Three financial management specialists (FMS) will be available to the PMU in Aceh, two FMS hired by the PMU Consultant firm and one provided full time by BAPPEDA. They as well as the PMU will be responsible for (among other items) conducting FM assessments of the selected subproject proponents and for reviewing cost estimates submitted by the selected entities. An FMS hired by the PMU Consultant firm will also be placed full time with KPDT who will be primarily responsible for IFR/FMR preparation and submission of withdrawal application. 14. A Selection Committee will be established to make the final selection of sub-projects. The committee will be comprised of a representative of the Office of the Governor of Aceh, the Head of BAPPEDA Aceh, a representative of KPDT and a representative of the academic community in Aceh. This Committee will review sub-project applications which have already successfully passed a preliminary screening performed by the outside consultant team and a review by the PMU. 15. The sub-projects will be implemented by different entities (such as NGOs (domestic and international), private sector organizations and international aid organizations) who will be responsible for ensuring that the sub-projects remain consistent with project goals. They will prepare the sub-project proposals and be responsible for tracking performance if their individual sub-projects consistent with the agreed upon milestones and performance indicators. 16. From US$44.5 million budgeted for sub-projects (component 1), it is expected there will be 7 to 8 high valued sub-projects (US$1-7 million each). The rest of the allocation will be divided to not more than three sub-projects with much lower allocation (not less than US$500,000 each). Since implementing entities for these sub-projects have not yet been identified, there will be FM assessment of the candidate recipients. The candidate should meet minimum FM requirement. The PMU FM consultant will be responsible to conduct the FM Assessment. 17. Pre-selection criteria for sub-projects will include minimum FM requirements that need to be fulfilled by the applicants. The minimum FM requirements for the entities are as follows: (a) (b) (c) Legal basis to operate in Indonesia (supported by notary deed) and to receive Grant funds The last two years of audit report with preferably Unqualified opinion; however, Qualified opinion with non-significant findings will also be considered The entity has developed and implemented a Standard Operation Procedures, included FM manual 18. The Bank will provide approval to the selected entities. The Bank approval included FM clearance on the FM assessment result done by the PMU FM consultants. 96

106 Accounting and Reporting 19. The accounting policies and procedures of this project will substantially follow government financial management procedures, with strengthened procedures where appropriate. These government procedures include, for instance, government budgeting procedures, accounting standards (PP no. 24, 2005) and government accounting systems (PerMenKeu no. 59/PMK.o6/2005), which have all been issued following the enactment of the Finance and Treasury Laws. All project activities and expenditures will be included in the respective KPA (Budget Holder) budget and administrative and accountability procedures for approving expenditures and disbursing funds to beneficiaries will follow government procedures. 20. To have better project information, grant expenditures and activities will be separately reported to the Bank under project financial report on a quarterly basis through Interim Financial Reports (IFRs). This would include information on procurement progress, physical progress of budgeted activities and financial source and use of funds. A reconciliation of the special account transactions with the financial statements will also be prepared. Formats for these would be agreed at appraisal and confirmed during negotiation. Quarterly project financial report should be received at the Bank no later than 45 days after each quarter end. The quarterly reports will be collated annually for annual financial audit purposes. Secretariat at KPDT will be responsible to ensure that IFR will be submitted to the Bank on timely basis. Details of these procedures will be included in the Operations Manual. 21. All financial transaction should be recorded properly supported with adequate evidence that the recipient is as intended according to the Grant objectives and the record should publicly available to ensure transparency. Internal control 22. For sub-projects, payment verification will rely on the sub-grantees financial management system. At this point, the Bank could not assess adequacy of internal control of subgrantee, since they have not been selected yet. Therefore, there will be a requirement of FM assessment that will be performed by FM Consultant to assess financial management system of the proposed sub-project implementing entities. 23. Payment verification at PMU level will rely on the government system. Segregation of duties between technical and financial aspects will be applied to ensure adequate internal control. The Operations Manual will document the financial management systems and procedures to be followed to ensure that the project has sound financial management practices. The Manual will include: organization structure, job descriptions, budgeting, procurement, record management for finance unit, asset management, flow of funds, payment verification, accounting (including use of government chart of account for the project), reporting (IFR format, IFR preparation and time line), annual audit arrangements, supervision plans, monitoring and evaluation mechanisms for project implementation, and inspectorate review of project implementation (internal audit). 97

107 24. KPDT has agreed to include the project in their routine annual audit program and they will include sub projects to their sample. To this end they will collaborate with Aceh Inspectorate They will prepare a separate report for the project to be submitted to the Governor, PMU and the Bank. The report will consist of findings, recommendations and status of follow up actions. In addition, they will also have special team to respond any complaints received in regards to the project. Disbursement Arrangements 25. The disbursement method will be Advance. In order to facilitate the disbursement, a Designated (Special) Account (DA) denominated in US dollars will be opened by Director General Treasury in the Central Bank (BI) or a commercial bank acceptable to the Bank under the name of the Ministry of Finance. The Director General Treasury will authorize its relevant Treasury Offices (KPPNs) located in Banda Aceh and Jakarta to authorize payments of eligible project expenditures by issuance of SP2D (remittance orders) charging the DA. For this purpose, Director General Treasury shall issue a circular letter to the relevant KPPN Offices providing guidelines and criteria for eligible project expenditures in accordance with the Grant Agreement. 26. The ceiling of the advance provided to the DA is US$5 million. Applications for reporting of the use of DA funds will be supported by: (i) list of payments together with records evidencing such expenditures, against contracts for goods, consultants that are subject to the Bank s prior-review; or (ii) statement of expenditures (SOEs) for all other expenses. In addition, a DA reconciliation statement is required for applications for reporting of use of the DA funds. Reporting of use of DA funds and application for an advance to DA may be submitted in a single application on monthly basis. 27. The DA will be solely used to finance eligible project expenditures. Although management of the DA will be under the responsibility of Director General Treasury MOF, KPDT Secretariat will be responsible for reconciling the DA and preparing applications for withdrawal of advances and reporting the use of the DA, duly approved by Director General Treasury before their submissions to the Bank. 28. The PMU in Banda Aceh will be responsible for authorizing payments for the subprojects and consultant services in which the DIPA budget is entrusted to them. 29. All documentation for expenditures submitted for disbursement will be retained at the implementing unit and shall be made available to the auditors for the annual audit and to the Bank and its representatives if requested. Table 13: Allocations of Grant Proceeds Amount of Grant % of expenditures to Category Description (US$ equivalent.) be financed (1) Block Grant for Sub-projects 44,500, % 98

108 (2) Consultant Services 5,255, % (3) Incremental Operating Costs ,000 15% 50,000,000 * Total project costs are higher (US$ million) which include contributions by the Government of Indonesia and the Government of Aceh. No retroactive financing will be allowed. 30. For selected sub-projects proposals, Sub-Grant Agreements will be signed between the project Satker and the implementing entities. The document will include budget and procurement plan. After signing the Sub-Grant Agreement/Contract, implementing entities will receive an advance which adequate to cover three months expenditure plan. The implementing entity will report the use of advance on quarterly basis supported by financial and technical reports. Financial and technical reports from these implementing entities will be verified by PMU, before processing the next payments. Sub-Grant Agreements will clearly define output and documents to be submitted to the PMU for verification purposes. Further detail of flow of fund mechanism will be described in the Sub-grant operational manual. Remedies 31. If ineligible expenditures are found to have been made from the grant, or if expenditures are made from the Grant and Sub-Grant without adequate supporting documentation to validate these, the Recipient will be obligated to refund the same amount to the Bank. 32. The Bank will have the right to suspend disbursement of the funds if significant terms of the Grant agreements, including reporting requirements, are not complied with. This will be reflected in the Grant agreement. Audit Arrangement 33. The project financial statements prepared by the project executing agency will be based on the compiled project Interim Un-audited Financial Reports (IFR). The annual IFR will be subject to a financial audit by an auditor acceptable to the Bank. The Terms of Reference (TOR) for the project audit will be agreed by the Bank. A copy of the project audited financial statements, along with the management letters issued by the auditors, if any, will be submitted to the World Bank no later than 6 months after the end of each fiscal year. The audit will cover a sample of sub-projects. 34. Sub-projects above US$1 million will also be audited separately by BPKP, and the audit reports will be submitted to the Bank no later than 6 months after the end of each fiscal year. Supervision Plan 35. Supervision of project financial management will be performed on a risk-based approach at least twice a year. The supervision will review the project s financial management system, 28 Incremental operating costs include additional costs that government agencies will incur as a result of implementing the project, e.g. monitoring and supervision trips, secretariat expenses, transport costs, dissemination, etc. It includes travel and office costs, but excludes government salaries and honoraria. 99

109 including but not limited to accounting, reporting and internal control. Supervision will also cover sub project on random sample basis. As part of supervision, the Bank will also review all FM assessment done by the project s FM consultant to prospective sub grantees. The financial management supervision will be conducted by financial management specialist and Bank consultants. Table 14: Financial Management Action Plan and Conditionalities Action Responsibility Due Date 1. The Operations Manual will include payment verification for sub-projects. The Manual should be agreed with the Bank. PMU Prior to disbursement of sub-grants (component 1) 100

110 ANNEX 9: PROCUREMENT ARRANGEMENTS A. General 1. Procurement for the proposed project would be carried out in accordance with the World Bank s "Guidelines: Procurement under IBRD Loans and IDA Credits" dated May 2004 as amended in October 2006 and "Guidelines: Selection and Employment of Consultants by World Bank Borrowers" dated May 2004 as amended in October 2006, and the provisions stipulated in the Legal Agreement. The various items under different expenditure categories are described in general below. For each contract to be financed by the Grant, the different procurement methods or consultant selection methods, the need for pre-qualification, estimated costs, prior review requirements, and time frame are agreed between the Recipient and the Bank in the Procurement Plans. The Procurement Plan of the project management consultant will be prepared by the PMU. The procurement plan of each sub-project will be proposed by each sub-project implementation entity and will be reviewed by PMU and afterwards subject to approval by the Bank task team. 2. Procurement of Works: Works procured under this project would be identified in selection of sub-projects. International Competitive Bidding (ICB) will be used for all works packages estimated to be equivalent to or cost more than US$5 million each. National Competitive Bidding (NCB) will be used for all works packages estimated to cost less than US$5 million each. Shopping will be used for all works packages estimated to cost less than US$50,000 each. The procurement will be done using the Bank s Standard Bidding Documents (SBD) for all ICB, and Model Bidding Documents (MBD) agreed with or satisfactory to the Bank for all NCB. For procurement of smaller works through shopping, the PMU should prepare a model quotation document which should be agreed with the World Bank team before implementing related procurement. 3. Procurement of Goods: Goods procured under this project would be identified in the selection of sub-projects. International Competitive Bidding (ICB) will be used for all goods packages estimated to be equivalent to or cost more than US$200,000 each. National Competitive Bidding (NCB) will be used for all goods packages estimated to cost less than US$200,000 each. Shopping will be used for all goods packages estimated to cost less than US$50,000 each. The procurement will be done using the Bank s Standard Bidding Documents (SBD) for all ICB, and Model Bidding Documents agreed with or satisfactory to the Bank for all NCB. For procurement of goods through shopping, PMU should prepare a model quotation document which should be agreed with the World Bank team before implementing related procurement. 4. Selection of Consultants: At project appraisal, it was identified that a consulting service contract of project management will be procured using Quality and Cost-based Selection (QCBS) with the contract estimate of US$5 million. Besides, consulting firms will also be employed for external auditing and impact evaluation study; and an individual consultant (a professor) will be employed as a member of the selection committee of sub-projects. More consulting services may be identified in selection of sub-projects. In addition to QCBS, Qualitybased Selection; Least Cost Selection; Selection Based on Consultants Qualifications; Singlesource Selection; Selection of Individual Consultants; and Sole Source Procedures for the 101

111 Selection of Individual Consultants may be used. Short lists of consultants for services estimated to cost less than US$400,000 or equivalent per contract may be composed entirely of national consultants in accordance with the provisions of paragraph 2.7 of the Consultant Guidelines. 5. The procurement procedures and SBD/MBD to be used for each procurement method, as well as model contracts for works and goods procured, will be specified in the Operations Manual prepared by the PMU which be finalized before procurement at sub-project level starts. B. Assessment of Agency s Capacity to Implement Procurement 6. Procurement activities will be carried out by sub-project implementation entities or, in case the implementation entities do not have the necessary capacities, by the PMU of BAPPEDA with assistance from PMU s the project management consultant. 7. An assessment of the BAPPEDA to implement procurement actions for the project was conducted by the Bank project team on May 13-14, The assessment reviewed the organizational structure for implementing the project, experience, expected working procedures and other related aspects of BAPPEDA. 8. The key issues and risks concerning procurement for implementation of the project have been identified and include: (b) Corruptive and collusive environment and practices (c) Weak capacity of the Project Management Unit (d) Uncertainties of sub-projects 9. The corrective measures which have been agreed are (i) at least one staff with primary responsibility for procurement of EDFF project either part-time or full-time in the PMU, (ii) appointment of an Individual Procurement Advisor to assist BAPPEDA in the selection of the Project Management Consultant (firm), (iii) appointment of a Project Management Consultant to assist in the implementation of the Project, including capacity building and training of BAPPEDA for procurement; procurement support will be one of the assignment and the consultant should also provide necessary assistance to sub-projects when necessary; (iv) adoption of a Project Operations Manual, and (v) review of Procurement Plan and Capacity Assessment for each Sub-Project 10. In the implementation process, PMU will be responsible for monitoring overall progress of project procurement and all procurement documents will be submitted to the Bank through PMU when requested by the World Bank. 11. The overall project risk for procurement is high. C. Procurement Plan 12. BAPPEDA will develop a procurement plan for selection of the project management consultant by the time of project negotiations. The Sub-project applications will contain basic information on expected procurement for the application screening process. A procurement plan 102

112 will be included in the approved final sub-project documents. Following PMU review of the sub-project document, the Bank team will review and clear the sub-project proposal including approving the procurement plan. This review and approval will be required prior to procurement activity commencing. D. Frequency of Procurement Supervision 13. In addition to the prior review to be carried out by the World Bank, the capacity assessment of the implementing agency resulted in a recommendation that one supervision mission every 12 months (including special procurement supervision for post review/audits) be conducted. E. Details of the Procurement Arrangements Involving International Competition 1. Goods, Works, and Non-Consulting Services 14. At the project appraisal, no sub-projects have been identified. A detailed procurement plan will be included in the sub-project appraisal document of each sub-project which will be reviewed by the PMU and the Bank team. It is expected that the following contracts will be subject to prior review by the Bank team: Goods contracts: equivalent to or above US$200,000; Civil works contracts: equivalent to or above US$1 million; and The first two NCB contracts and first two shopping contracts shall be subject to prior review, regardless the value. 2. Consulting Services At appraisal, it was identified that a project management consultant (firm) will be selected following QCBS procedure and with participation of international firms. The estimated cost is about US$5 million. Besides, consulting firms will also be employed for external auditing and impact evaluation study; and an individual consultant (a professor) will be employed as a member of the selection committee of sub-projects. More consulting services may be identified in selection of sub-projects. Consultancy services estimated to cost above US$200,000 per contract, the first contract using selection method other than QCBS, regardless the value and single source selection of consultants (firms/individual) will be subject to prior review by the Bank. Short lists composed entirely of national consultants: Short lists of consultants for services estimated to cost less than US$400,000 or equivalent per contract may be composed entirely of national consultants in accordance with the provisions of paragraph 2.7 of the Consultant Guidelines. PROCUREMENT CAPACITY ASSESSMENT REPORT (PCAR) 103

113 Project: Executing Agency: Project Implementing Unit: Country: Economic Development Financing Facility Project The State Ministry for Development and Planning (BAPPENAS) The State Ministry of Poor and Disadvantaged Areas (KPDT) and the Provincial Development Planning Agency (BAPPEDA) of Aceh Province through its Project Management Unit (PMU) and selected sub-project implementation entities Indonesia SUMMARY 1. The procurement risk of Economic Development Financing Facility Project (EDFF) falls under the High category due to the identified aspects listed in Table 15, General Risks Assessment. Sections below provide further descriptions of procurements under EDFF and an. action plan to mitigate the procurement risks. Table 15: General Risks Assessment 1. General findings including corruption and collusion environment in public procurement in Indonesia 2. Weak capacity of BAPPEDA and its Project Management Unit 3. Uncertainties of sub-projects BACKGROUND 2. The World Bank Office in Jakarta carried out a Procurement Capacity Assessment (PCA) of BAPPEDA of Aceh Province for the EDFF. The PCA took place in May 2008 and was conducted in accordance with the instructions from OPCPR. The objective of the PCA is to assess the capabilities of the project implementation units to do procurement and the adequacy of the procurement systems in place, to assess the potential risks in project s procurement, to develop an action plan to enhance procurement capacities and minimize procurement risks, and to propose a suitable procurement supervision plan. 3. The assessment refers to the Country Procurement Assessment Report (CPAR) for Indonesia which was issued in February In this respect, the CPAR already includes general assessment of adequacy of the procurement systems, the procurement environment, the risks and suggested actions to mitigate these risks. These risks apply to all implementing entities operating within this environment, including the project implementation units under this project. PROJECT DESCRIPTION 4. The EDFF is a US$50 million umbrella project that will finance a set of sub-programs and sub-projects to support post-tsunami economic recovery and equitable and sustainable longterm economic development in Aceh Province. It will support a Comprehensive approach that focuses on improving the investment climate and removing barriers to private sector 104

114 development, in addition to improving existing initiatives addressing supply side constrains that is necessary to ensure the sustainability of the economic recovery. It will support the Government of Aceh Province (GoA) s efforts to bring about a viable and sustainable economy; an economy which universally supports business development and job creation. 5. Component One (approximately US$44.5 million) The first component will fund subprojects that address critical issues affecting economic development in Aceh Province by contributing to building a more competitive and sustainable economy. The project will promote broad based private sector job opportunities and growth in Aceh Province, targeting the poor and other vulnerable groups. 6. The focus of component one is to promote the development objectives described in the paragraph above and will comply with priorities as outlined in the Medium-term Development Plan of the Government of Aceh Province (RPJMD) and BAPPENAS blueprint for Aceh s recovery. The EDFF will seek sub-projects where implementing entities are contributing toward three different areas: (a) Improving the business environment (ii) Reform of regulations and procedures related to investment, business formation, land use, etc., to improve the business environment; (iii) Promotion of Aceh Province to domestic and foreign investors; (iv) Building capacity of government to promote private sector development. (b) Private Sector Support (i) Improvement to access to finance to small and medium enterprises beyond the current focus on micro-finance by many donors; (ii) Developing capacities and competitiveness of local entrepreneurs stimulating innovation, providing world class training, facilitating access to business development services; (iii) Assistance to local entrepreneurs, especially in productive and export sectors, to gain better access to markets (focus on packaging, branding and marketing, improve access to information); (iv) Scalable, market-oriented programs that improve productivity and quality in agriculture and fisheries. (c) Public Infrastructure (i) Strategic, complementary economic infrastructure projects, to be provided by the government (alone or in partnership with the private sector) that enable access to market for Aceh producers and enterprises. 7. The PMU will select sub-projects for this component by assessing proposals from international organizations and NGOs, etc. 8. Component Two (US$5.5 million) - This component addresses project management and incremental operating costs and aims to ensure strong project management through strengthening 105

115 the ability of the GoA and KPDT-- the project foresees the hiring of international and national experts to work alongside the government officials in charge of the project. A firm will be contracted to assist with the setting up and operation of PMU, this will include sub-project assessment and review, procurement, safeguards compliance, implementation, supervision, and monitoring. The presence of the firm also will help to build capacity within the GoA to manage similar work in the future. Besides, consulting firms will also be employed for an impact evaluation study; and an individual consultant (a professor) will be employed as a member of the selection committee of sub-projects. Figure 7: BAPPEDA Organization Structure and Procuring Units Inspectorate General (IG) BAPPEDA of Aceh Province Secretary General Boards of Development Planning for Economy & Manpower, Infrastructure, Human Resources, Research, etc. and the sub-boards PMU Project Management Consultant Sub-project Implementation Agencies 9. The institutional structure of BAPPEDA of Aceh Province can be found in Figure 7 above. The head of BAPPEDA is chairing the project preparation and will be responsible for the implementation of the project. The BAPPEDA has experience with selecting consultants for the emergent reconstruction of Aceh after the disasters of Tsunami and earthquake in But that procurement followed the government rules and procedures. BAPPEDA has no experience in implementing projects financed by the World Bank. 10. The BAPPEDA will set up a Project Management Unit which will coordinate project implementation at the provincial level. The PMU will comprise of full time staff in adequate number, which include a designated team of procurement specialists. As described above, a component of the project is to employ a consulting firm for project management. The consultants will work together with PMU for selecting and managing implementation of sub-projects. In selecting sub-projects, The PMU and project management consultant will assess procurement 106

116 capacities of the implementation entities and, based on the assessment, provide necessary assistance in implementation. PROCUREMENT ACTIVITIES 11. Procurement activities in this project will consist of selection of a consulting firm for project management, and procurement of goods, works, services and consulting services for subprojects. PROCUREMENT OF GOODS AND WORKS 12. Procurement plan will be included in the sub-project appraisal document for each subproject. After PMU review, the Bank team will review and clear the sub-project proposal including approving the procurement plan. Goods and works to be procured under the subproject should be properly grouped into contracts in the procurement plan. CONSULTANCY SERVICES 13. A consulting firm will be employed for project management. The cost is estimated as US$5 million. Besides, consulting firms will also be employed for external auditing and impact evaluation study; and an individual consultant (a professor) will be employed as a member of the selection committee of sub-projects. Further consulting services may be identified in sub-project selection process and included in the procurement plans of sub-projects. LEGAL ASPECTS 14. The last Country Procurement Assessment Report, issued in February 2001, has identified inconsistencies between the previous Government s public procurement regulation, Keppres 18/2000 and the Bank Procurement Guidelines, particularly on the National Competitive Bidding (NCB) process. Among these inconsistencies are: restrictive bidding, inadequate advertising, no post qualification, bracketing and automatic re-bidding if the number of responsive bidders is less than three or contract price is above the budget allocation. 15. The Government of Indonesia issued Public Procurement Regulations in the form of Presidential Decree no. 80 year 2003, or Keppres 80/2003, to replace the Keppres 18/2000. Subsequently, the Government has made up to four revisions to Keppres 80/2003. The most recent one is the Presidential Regulation no. 8 year 2006, or Perpres 8/2006. Keppres 80/2003 includes modifications and improvements below: (a) (b) (c) (d) (e) (f) (g) Requirements to encourage professional bidders. Requirements for procurement certification for staffs assigned to project procurement. Procurement procedures which provides a closer link to international practices on procurement planning, standard bidding documents, post-qualification, etc. Revision to the existing procedures for self managed activities using SOE. Disclosure and transparency mechanism for contract awards and evaluation. Mechanism of sanctions and Complaint handling. Definition of conflict of interest. 107

117 (h) (i) (j) Handling of fraud, corruption, and collusive practices. Description and foundation for the national procurement policy formulating body called Lembaga Pengembangan Kebijakan Pengadaan Pemerintah (LKPP) Provisions on e-procurement. Further elaboration on the above is provided in the attachment to this Annex. 16. The PCA recommends that the clarifications on NCB as the result of the 2001 CPAR be included as part of the Procurement Section of the Grant Agreement to provide clarifications and legal basis needed for conducting NCB that is acceptable to the Bank. Keppres 80/2003 includes improvements that eliminate differences with Bank s Procurement Guidelines. To take into account these improvements, the NCB clarifications attached to this report include some modifications to refer to Keppres 80/ Similar to its predecessor, Keppres 80/2003 clearly provides that the Donor procurement procedures shall apply in Donor funded projects in case of conflicts with the government procedures. The Operations Manual should clearly state that Bank rules shall apply in the case of conflicts with local rules and regulations. 18. Keppres 80/2003 treats selection of consultants with the same philosophy as for procurement of Goods or Works. For example, Keppres uses the term prequalification and treat consultant s proposals to be similar as bids. 19. This assessment anticipates the risk of confusion between shopping method in Bank s Guidelines and Direct Selection or Pemilihan Langsung procedure as defined in the Keppres 80/2003. Attached is a comparison and clarification of two methods. The clarification should be a part of Manual. 20. Keppres 80/2003 has introduced a provision in which only staff members who holds a procurement certificate can be a member of the procurement Committee. The certification program is developed by the State Development Planning Agency (BAPPENAS). The assessment found that the program has a low rate of passing. Currently, BAPPEDA has three procurement certified staff (L2 certificate), and some staff are taking trainings on procurement and will be certified in the near future. The procurement committee of this project may include members of certified procurement staff from outside BAPPEDA. 21. The following misunderstanding are quite common with respect to applicability of Bank s Guidelines vis-à-vis Keppres 80/2003: (a) The implementing unit interprets that the applicability of NCB in the Financing Agreement extends to shopping and selection of consultants. Sometimes Keppres 80/2003 is applied in shopping procedure and procurement of consulting services. 108

118 (b) As mentioned in paragraph 21 above, shopping method is sometimes confused with direct contracting method. One of the major differences between the two methods is the fact that negotiation is allowed under direct contracting. PROCUREMENT CYCLE MANAGEMENT 22. It was clarified to and agreed with BAPPEDA that the procurement of the proposed project should follow the procedures of the World Bank Procurement/Consulting Guidelines. PROCUREMENT PLANNING 23. The PMU will prepare a procurement plan for selecting the project management consultant. 24. A summary procurement plan of sub-projects will be included in each sub-project proposal. These will be reviewed by the PMU prior to selection and by the World Bank team prior to issuing NOL to the selection. Approved sub-projects must include a detailed procurement plan in their sub-project appraisal document which will be reviewed by the PMU and its project management consultants. The appraisal document will be sent to the Bank team for review and NOL. As a part of this review process, the Bank team will review and approve the detailed procurement plan. 25. There is a tendency in the Government to treat a Procurement Plan similar to and as rigid as a budgeting plan with restricted possibility for revisions. Once approved, the use of the procurement plan emphasizes on the requirement to fulfill administrative conditions. Under the Government s regulations, the Procurement Plan cannot provide flexibilities in case the bid price is above the allocated budget. The PMU was reminded of this and will take measures to ensure consistency between the latest contract estimate and allocated budget. PREPARATION OF PROCUREMENT DOCUMENTS 26. During the assessment, it was agreed with BAPPEDA that the World Bank Standard Bidding Documents and Request for Proposals will be used for all ICB procurement or selection of consultants with participation of international firms. The GOI does not have an official NCB Documents for Goods and Works. For NCB contracts, the PMU and project management consultants should develop model bidding documents based on the World Bank SBD which should be agreed with the Bank team before procurement starts. 27. The NCB bidding document for Goods and Works should include a provision that requires suppliers and contractors to permit the Bank to inspect their accounts and records relating to the performance of the contract and to have them audited by auditors appointed by the Bank. 109

119 MANAGEMENT OF BIDDING PROCESS, BID EVALUATION, CONTRACT AWARD AND CONTRACT ADMINISTRATION 28. The Law No.1/2004 defines that the main responsibility of a contract, from its procurement to its execution, rests with the Budget Holder (Kuasa Pengguna Anggaran KPA). The Budget Holder may delegate its authority to Officers in charge to make commitments (Pejabat Pembuat KOMitmen PPK). In this project, the Ministry of Poor and Disadvantaged Areas (KPDT) will be the budget holder (PA) and BAPPEDA or sub-projects will be authorized as the implementation entities. All the procurement of this project will be conducted by either PMU or sub-project implementation entities with support from PMU. BAPPENAS will not conduct procurement directly. 29. The PMU or the sub-project implementation entities will initiate a procurement process by setting up a procurement committee and going through the required procurement steps up to contract award. Procurement committee members may come from within or outside the implementation entities. 30. The assessment identifies that the implementation entity of a sub-project may not have the required capacity to conduct procurement. In this case, the PMU will provide necessary support and assistance for conducting procurement by the sub-project implementation entity. In other cases, the PMU will review all the procurement documents and monitor procurement process. SUPPORT AND CONTROL 31. Within the GoA, the Inspectorate General (IG), see (Figure 7) carries out internal audit of BAPPEDA. The IG establishes regular internal control mechanisms which also oversees the implementation of project s procurement. Inspectorate General Aceh will work together with KPDT to conduct internal audits of the project. 32. Externally, the audit is carried out by the Financial and Development Supervisory Board (Badan Pengawasan Keuangan dan Pembangunan BPKP, Government s Audit). BPKP has extensive experience in both financial and procurement audit of the World Bank funded projects. 33. The Bank Team requires that a specific Anti Corruption Action Plan (ACAP) is defined and included in the PAD. In the ACAP, BAPPEDA should include in the Operations Manual steps to report and investigate all cases of collusion, fraudulent, corrupt and coercive practices, and take remedial actions. This should also include automatic referrals to BPKP and KPK (the national Corruption Eradication Commission) to conduct investigative audits in the case of strong indication of fraud, corruption, collusion and coercive practices in the procurement processes. RECORD-KEEPING 34. It was agreed that both BAPPEDA and sub-project implementation entities should maintain written records of procurement. Such records should include advertisement for bidding, bidding documents and addenda/clarifications if any, minutes of bid opening, bids submitted by 110

120 bidders, bid evaluation report, contract, implementation records, etc., which should be subject to auditing or ex-post review. All the above documents should be kept for at least one year after closing of the project. STAFFING 35. At least one staff of BAPPEDA will be working on procurement as procurement specialist in the PMU, with support from other technical experts. The project management consultants will also include at least one procurement expert. These procurement specialists will be responsible for quality control of all the sub-projects. In each of the sub-project implementation entities, at least one procurement specialist should be designated, who should have adequate qualifications and experience. GENERAL PROCUREMENT ENVIRONMENT 36. The general procurement environment is weak as detailed in the CPAR. There are cases of collusive practices and corruptions in previous Bank financed projects. The culture among the government officials is changing to be more open and transparent. However, since this is a cultural change, it will take time. 37. Culture of accountability. There is increased awareness of this issue but effective accountability is still lacking and violations by staff are rarely investigated. 38. Salary structure. Private sector offers much higher salaries. However, most public officials do not leave to work in the private sector. Keppres 80/2003 provides that some special allowances should be budgeted for Project Managers and Procurement Committees. It is unclear whether the rate for these allowances will be sufficient to provide the required incentives. 39. Political or other interference. It is possible in a decentralized environment to have pressure on project officials to favor local firms and individuals even though these are expressly forbidden by Keppres 80/2003. The project officials may also face pressure from political groups, professional associations, local media and non governmental organizations that may negatively influence procurement. 40. Ethics. The Keppres 80/2003 notably introduces Integrity Pact which aims to ensure high ethics of officials involved in procurement. However, favoritism and accepting attitude towards kickback are still common. The prevailing environment poses strong challenges for officials to maintain integrity. 41. System. The current standards and procedures are quite extensive and detailed. The main challenge is consistent implementation of these regulations. GENERAL RISK ASSESSMENT 42. As explained above, the assessment of procurement risk of this project recommends a High. Such rating is due to the following aspects: 111

121 (d) (e) (f) General findings including corruption and collusion environment in public procurement in Indonesia. This has been a nationwide issue, which involves both the government officials and bidders/consultants. The general procurement environment is weak; Weak capacity of BAPPEDA and its PMU. BAPPEDA does not have experience with World Bank financed project. Without outside assistance, it would be difficult for PMU to implement or coordinate the procurement of this project; and Uncertainties of sub-projects. Before the project appraisal, no sub-project had been selected. It is difficult to predict the capacities of the sub-project implementation entities. ACTION PLAN 43. The following action plan is proposed to mitigate the high risk assessment. 112

122 Actions Due Date Responsible Party Capacity enhancement BAPPEDA Aceh found financial sources to hire an individual procurement advisor who has hands-on experiences in World Bank s Procurements, especially for selection of Consultants. The procurement advisor will assist PMU to select the project management consultant (firm). BAPPEDA has designated at least one staff with primary responsibility for procurement of EDFF project either part-time or full-time in the PMU Appointment of a project management consultant to assist in implementation of the Project. Capacity building and procurement training should be one of the assignments for the project management consultant. BAPPEDA Aceh hired a procurement advisor in November 2008 By effectiveness Before procurement starts at sub-project level Bank team and BAPPEDA BAPPEDA BAPPEDA Adoption of Operations Manual Before procurement starts at sub-project level BAPPEDA Enhanced planning and controlling mechanisms Procurement Plan for selection of project management consultant At negotiations BAPPEDA Review of Procurement Plan and capacity assessment for each subproject In implementation BAPPEDA Clarifications on NCB procedures to be included in Grant Agreement At negotiations BAPPEDA and Bank Operations Manual finalized. The Procurement section shall include: Procurement methods and procedures compliant with the Bank Procurement/Consulting Guidelines, including the clarifications/modifications on NCB procedures acceptable to the Bank Standard bidding documents and RFP to be used Reporting requirements Record keeping requirements TOR and detailed procedures for including independent members of civil society as observers for procurement process Draft at negotiations, final by implementation of the first subproject BAPPEDA with help from the Bank team 113

123 PROPOSED PRIOR REVIEW THRESHOLD AND SUPERVISION PLAN 44. The assessment proposes the following prior review thresholds and supervision plan. The Procurement Plans will incorporate these thresholds. Prior Review Thresholds Proposed (USD) Procurement Method Thresholds Proposed (USD) ICB NCB Shopping QCBS QBS CQS Least Cost SSS Overall Risk Assessment Goods 200,000* 200,000 <200,000 <50,000 High X Works 1,000,000 * 5 million <5 million <50,000 Average Consulting 200,000 for firm** default TBD <200, 000 TBD TBD Low Post Review Ratio: One in five contracts Frequency of procurement supervision missions proposed: Once every 6 months for the first 18 months. The frequency of procurement supervision (including special procurement supervision for post-review/audits) will be further defined after the first 18 months. *Note 1: First two NCB contracts and first two shopping contracts shall be subject to prior review, regardless of value. **Note 2: First contract using selection method other than QCBS shall also be subject to prior review, regardless the value. 114

124 Issue ATTACHMENT 1 CLARIFICATION OF SHOPPING PROCEDURES Bank Guidelines (National Shopping) 1. Applicability Simple and rapid procurement normally for off the shelf items and small work contracts 2. Advertisement Not required Not required 3. Principles Comparing at least three quotations from reputable suppliers 4. Registration (erroneously called pre qualification) Not required 5. Firms to be invited Reputable, well established, and are suppliers of the goods or services being purchased as part of their normal business 6. Form of requests By means of a simple Request of Quotation including the description and quantity of the goods, as well as the required delivery time and place for the goods or services, including any installation requirements, as appropriate. The request indicates the date by which the quotations are needed. 7. Bid and/or performance Not required securities 8. Prices and currencies Prices for goods supplied from within the country (including previously imported items) are requested to be quoted EXW (ex works, ex factory, ex warehouse ex show room or off-the-shelf, as applicable), including all custom duties and sale and other taxes Keppres 80/2003 Pemilihan Langsung (Direct Selection) Does not specify the types of goods or works, as long as the contract amount is less than Rp. 50 million (US$5,000 equivalent) Comparing prices from three invited firms. If any of the invited firms does not submit quotations, and it turns out that there are less than three suppliers interested, then reinvitation shall be sought. If after second trial, the procurement team fails to Come up with at least three firms, than the use of Direct Contract is allowed. Required as part of the shopping process prior to evaluation of quotations. It is required that all national firms have the certificate of pre qualification from the respective local government stating in which kind of business areas that the firms are eligible to do business No specific requirements for the firms to be invited, as long as the certificate of pre qualification of the invited firms is in the supply of the goods or services being purchased. It is normal that firms are certified for various lines of business but in reality do not actually engage in such kind of business. Also there is a requirement to give priority to invite firms within the respective districts where the procurement process takes place before seeking firms from outside those districts. By means of a standard bidding documents which are normally used for national competitive bidding process Required No specific requirement on prices and currencies. As normal practice, since shopping is intended for small contracts (below US$5,000 equivalent) then off the shelf prices in local currency are used. 115

125 Issue 9. Time for submission of quotations Bank Guidelines (National Shopping) already paid or payable on the raw materials and components. For goods offered from abroad (i.e., not previously imported), prices are requested CIF or CIP. Prices can be quoted in any currency of the Bankmember countries. There is no requirement for strict time and date for submission of quotations, but normally requests for quotes indicate the expected date of submission of quotes, within one or two weeks of the initial request. In other cases, if the purchaser has not received at least three quotations within the time set, it verifies with the missing suppliers whether they intend to do so and how soon. Unless there is extreme urgency or there are already three or more quotations available, the client may give a reasonable amount of additional time, say three more days, to get additional quotations. At this point the client may proceed with the comparison of the proposals received. Not required Keppres 80/2003 Pemilihan Langsung (Direct Selection) Deadline for submission of quotations shall be specified in the bidding documents, and if a firm does not submit the quotations by the specified date, then its quotations shall be rejected. No verification process is allowed to late quotations. 10. Public opening of Required quotations 11. Evaluation Committee Not required Required, and no requirement to include a technically qualified person in the field of goods/services being purchased 12. Evaluation criteria Lowest price with some flexibility as long as stated in the Request for Quotations Lowest price 13. Negotiation Not allowed Required with the firm offering the lowest price 116

126 ANNEX 10: ECONOMIC AND FINANCIAL ANALYSIS 1. The EDFF is a multisector framework type project and the activities will be selected and be subject to analysis only after effectiveness of the Grant. This makes it very difficult to assess the economic benefits of this project through a standard cost-benefit analysis. Therefore, at this stage the analysis focuses on the soundness of the approach undertaken, to support the strategies of the provincial authorities to promote sustainable economic growth in the province and to improve the capacity of BAPPEDA and other relevant entities to select, implement and monitor sub-projects that support economic development in Aceh. The expected benefits of the project, through an improvement of the business environment and the attraction of both domestic and foreign investment, the increase in income of beneficiaries (through increased farmers or fishermen income or the creation of jobs in manufacturing and services), and through capacity building of BAPPEDA the expected improvement of public sector spending, are likely to outweigh the costs of the project. 2. As elaborated in Annex 1, the economy in Aceh pre-tsunami was driven by the oil and gas fields in the East Coast, now in decline and with very little linkages to the rest of the economy. The reconstruction of the province after the Tsunami, with a large influx of funds and the implementation of vast reconstruction activities, has resulted in relatively high growth in the construction sector and other sectors closely related to the construction sector (trade, utilities, banking). As the bulk of the reconstruction effort comes to an end, and bearing in mind a relatively large number of unemployed people and the social unrest that may cause, the reconstruction agency, the national and provincial authorities and many donors have recognized the need to focus on putting Aceh s economy on a more sustained and longer-term growth path with an effort to create more jobs at the center of this new focus. 3. The provincial authorities, led by BAPPEDA, and with the assistance of several donors, have invested significant resources in identifying ways to support economic growth in the province and address existing constraints to growth (see Attachments 1 and 2 of Annex 1): improving the security condition in the province, investing in human capital, a focus on sectors where Aceh has a comparative advantage, such as agriculture, fisheries and agro-industry, investments in infrastructure and the need to open the province to trade and investment. This project seeks to support the GoA s own strategies to support economic growth. The GoA is likely to have the best information as to what are the key constraints for growth in the province and what sectors have the greatest potential. Technical assistance will be provided through this project to leverage that information and select a number of sub-projects to be financed by the EDFF to provide the greatest benefits in terms of sustainable economic growth and the creation of jobs. Supporting the GoA s own initiatives and priorities also increases the likelihood of the ownership and endorsement of financed activities by the local authorities and through that their sustainability. The project will also finance a consulting firm to support the government implementing entities in managing this project. A key responsibility of this consulting firm will be to assist BAPPEDA in the evaluation of sub-projects, guided by selection criteria spelled out in this project document and that will be further elaborated in the Operations Manual, to ensure that individual activities being financed have the highest pay off. Annex 4 provides an illustration of the expected results of activities financed through this project and how they will have an impact on sustainable economic growth and job creation. 117

127 4. As mentioned in the first paragraph, it is fairly difficult if not impossible to do the standard cost-benefit analysis on this type of project, before the individual subprojects and activities that will be financed are known. However, for illustrative purposes the following table shows the impact that this project would need to have on economic growth to achieve the minimum Economic Rate of Return (ERR) that the World Bank requires in its investment projects, which is 10-12% 29. Year Costs Benefits Net Benefits Discount Factor Discounted Net Benefits GDP (US$ million) w/o project GDP (US$ million with project) The table above assumes that economic growth would grow from 3.24% pre-tsunami to 3.27% for the duration of the project (or an increase in the growth rate of 0.03 percentage points) and an increase in growth to 3.25% (or an increase of 0.01 percentage points) after the project is finished until This increase in growth would fulfill the requirement of an ERR of 11%. It is debatable whether this increase in GDP as a result of this project is realistic, bearing in mind the project only represents 2% of agricultural GDP or 25% of yearly public spending on agriculture by the provincial and district governments. If the project assists in maintaining agricultural growth at its current level of 5%, partly the result of the reconstruction effort, that would increase total GDP growth to 3.6%, well above the required increase in growth for this project to be economically viable. Current growth in agriculture is partly the result of the end of conflict, but also the result of a few successful reconstruction projects in the area of livelihoods. With that in mind, it seems realistic to assume that the project will assist in maintaining agricultural growth at current levels and through that total growth above the pre-tsunami average. The above, given the limitations in the ability to do a cost-benefit-analysis, presents a fairly conservative estimate of the impact that this project could have, not taken into account the impact it could have on increased investment, the improved allocation of resources to support economic growth by BAPPEDA Aceh or the longer-term impact that improvements in the uptake of technological innovations in agriculture or fisheries could have. 29 This approach also has some limitations. Given the short duration of the project (3 1/2 years) it is not clear what the impact on GDP growth will be or whether this will be observable. In addition, there are issues with macroeconomic data at the regional level to undertake this type of analysis. The estimation assumes growth in the non oil- and gas sector to be the same as it was pre-tsunami, from It also assumes a discount factor of 11%. 118

128 ANNEX 11: SAFEGUARDS POLICY ISSUES A. Introduction 1. The objective of the EDFF project is to assist the GoA and the GOI to Build Back Better the province of Aceh through facilitating bringing back business, business networking, the creation of private sector job opportunities and fostering sustainable long-term economic development. The identification of EDFF sub-projects will be significantly based upon their ability to rehabilitate productive assets of agricultural workers, upgrade skills of laborers, promote non-farm employment in rural areas and support micro and small enterprises and as necessary address the need for supportive government policies. In addition, the EDFF will look to proposals which support key rural infrastructure for increasing productivity, improving access to markets by farmers and by selectively targeting and improving specific extension services provided by the government to farmers and fishermen to increase productivity and improve quality. This may include key economic infrastructure projects to enable communities to sustain themselves, such as fishing facilities or processing facilities. Special attention will be paid to increasing the poor and women s participation in the economy through skills enhancement and targeted job creation programs. B. Objectives of the Safeguard Framework 2. The social and environmental management framework provides general policies and guidelines to serve the following objectives: (a) (b) (c) (d) Protect human health; Prevent environmental degradation as a result of either individual investments or their cumulative effects; Enhance positive environmental outcomes; Avoid conflict among Community members and strengthen Community social cohesiveness. 3. It will be the responsibility of PMU team and consultants to support the GoA in developing detailed social and environmental management procedures for this framework, to be integrated into the Operations Manual. Although not triggered, given the uncertainty of the subprojects there could be a remote possibility that some could be potentially triggered such as OP 4.04 on Natural Habitats and OP on Pest Management. 4. All sub-projects that will be financed by the EDFF project have to be in compliance with GOI environmental rules and regulations, as well as with environmental policies of the World Bank. The Bank requires environmental screening and environmental assessment reports (if necessary) of sub-projects to help ensure that the sub-projects are environmentally sound and sustainable, and thus improve decision making. The environmental assessment runs in parallel with the process of designing a sub-project and implementing it, and the type and its detail depend on nature, scale and any potential environmental risks. It is the responsibility of the 119

129 lending institutions and the project implementation unit to ensure that these policies are not violated. C. Potential Positive and Adverse Environmental and Social Impacts from the Project 5. Potential positive and adverse environmental and social impacts envisaged from the project are mainly found in the first component. The first component will fund sub-projects that address critical issues affecting economic development in Aceh by contributing to building a more competitive and sustainable economy. The EDFF project will promote broad based private sector job opportunities and growth in Aceh, targeting the poor and other vulnerable groups. 6. Environmental Issues. The sub-projects may entail financing of activities which could involve environmental issues associated with agriculture, fisheries and other economic development and job creation sub-projects. 7. The following potential environmental issues may occur during project implementation: (g) (h) (i) (j) (k) Risk of loss of precious ecological values when a sub-projects is located within and close to a natural ecosystem such as mangroves, wetland areas, etc; Soil pollution/health risks due to excessive application of fertilizers and pesticides; Fishery activities- Risk of overexploitation of fish stocks and long-term degradation of resource base, capture of non-target species and habitat damage through use of destructive fishing methods and gears; Downstream water pollution from discharge of pond effluents with drain water, potential restriction of water circulation; and Pollution of nearby aquatic environments by pond drainage water and inadequate farm management. 8. Consequently, the consultant teams that will be engaged under the project will need to have a good understanding of related environmental and social impacts and how such impacts can mitigated via appropriate planning, design, and implementation measures. Social Issues. The sub-projects may entail financing of activities which could involve social issues associated with agriculture, fisheries and other economic development and job creation projects. In general, the sub-projects that will be designed and implemented are likely to be of small and medium scale. As a result, the level of associated social risks is likely to be limited. However, it is important for planning processes, including prioritization of economic development needs, to reflect community needs and specifically those of vulnerable groups (such as women and the poorest in the society). 120

130 D. Mitigation Measures 9. There are several mitigation measure mechanisms to be taken in terms of mitigating impacts of activities proposed by the projects, mainly through (i) a thorough screening using Bank and GOI guidelines, and (ii) monitoring efforts. (a) Screening. The GOI s environmental review procedures, which include specific procedures for Aceh, are broadly consistent with those of the World Bank, and will form the framework for the project s approach to environmental screening and mitigation. The EDFF is considered to be equivalent to World Bank Category B recognizing that the safeguard policies triggered is OP 4.01 on Environmental Assessment, Table 16: Environmental and Social Safeguard Policies Safeguard Policies Triggered by the Project Yes No Environmental Assessment (OP/BP/GP 4.01) [x] [ ] Natural Habitats (OP/BP 4.04) [] [x] Pest Management (OP 4.09) [ ] [x] Cultural Property (OPN 11.03, being revised as OP 4.11) [ ] [x] Involuntary Resettlement (OP/BP 4.12) [] [x ] Indigenous Peoples (OP 4.10) [] [x] 30 Forests (OP/BP 4.36) [] [x] Safety of Dams (OP/BP 4.37) [ ] [x] Projects in Disputed Areas (OP/BP/GP 7.60) [ ] [x] Projects on International Waterways (OP/BP/GP 7.50) [ ] [x] 10. In compliance with both Bank s policies and GOI s requirements, sub-projects being prepared, designed and implemented under EDFF will be subject to eligibility criteria at subproject identification stage and further screening during sub-project preparation, which will be spelled out in the tender documents and contracts for executing those sub-projects. The following is the GOI s screening mechanism: (a) Full environmental assessment (AMDAL); or (b) Environmental management and monitoring plan (UKL/UPL) required for less environmentally significant sub-projects; 11. Selected screening criteria for sub-projects that will require full environmental assessment or AMDAL, will be drawn from Minister of Environment (MENLH) Decree No. 308 of and will be found in the OM. The requirement for an AMDAL may also be triggered if a sub-project is likely to impact on sensitive sites either by being located in close proximity to a sensitive site, or if the nature of the sub-projects activity could directly impact on a sensitive site. Key sites or areas that will be considered sensitive under this framework include: 30 It is not expected that indigenous or isolated persons will be impacted by any of the sub-projects. Should such persons be discovered in the sub-project areas, then measures to comply with OP 4.10 will be taken by the PMU. 121

131 Natural Habitats (OP Sub-projects cannot be funded if they involve the significant conversion or degradation of natural habitats unless there are no feasible alternatives and the overall benefits from the subprojects substantially outweigh the environmental costs. If a sub-projects would significantly convert or degrade a natural habitat, the sub-projects needs to incorporate acceptable mitigation measures such as minimizing habitat loss and establishing and maintaining an ecologically similar area. These are natural habitats that: (a) (b) (c) are protected by government (e.g. parks, World Heritage Sites) or by tradition; or have known high suitability for biodiversity conservation; or are critical for rare, vulnerable, migratory, or endangered species. Pest Management (OP. 4.09) 13. A number of types of sub-projects that may be proposed under the EDFF (e.g. small-scale irrigation, tick dips, and livestock market) may results in the introduction or expansion of pest management activities in certain areas or villages. However, it is not anticipated that the Project in general will result in the promotion of widespread pesticide use. Sub-projects involving the procurement of pesticides or pesticides application equipment, or increased pesticide use, will not be funded until experience demonstrates that the local capacity exists adequately manage their environmental and social impacts. The ESMF requires the preparation of a Pest Management Plan if a sub-project is likely to raise pest management issues as described. Additional Screening Criteria (Negative List) (l) Ozone-depleting substances. No sub-project using or producing these materials will be financed. (m) Pesticides. The project will not finance the procurement or application of pesticides. (n) Asbestos. No asbestos-containing materials will be financed. (o) Hazardous materials and wastes. No sub-project will be financed that uses, produces, stores or transports hazardous materials (toxic, corrosive or explosive) or material that classified as "B3" (hazardous wastes) in Indonesian law. (p) Development in protected areas. No sub-project will be financed that would be located in a protected area or might change the purpose and/or designation of a protected area. Protected areas are identified in The Decree or the Minister of the State for the Environment of the Republic of Indonesia Number KEP- 11/MENLH/2006, entitled Concerning the Types of Businesses Activities Required Completing an Environmental Impact Assessment. The list includes notably: forest protection area; marine/freshwater conservation areas; nature tourism park; areas surrounding lakes and reservoirs; coastal mangrove areas; 122

132 national parks; coastal edges; forest parks; cultural reserves; areas surrounding springs; scientific research areas; and nature conservation areas. 14. Monitoring Efforts. The third mitigation measure tool is developing and implementing monitoring efforts both on environment and social issues. These monitoring efforts will be included in the Operations Manual. The results of this monitoring effort will be integrated into the overall project M&E reporting. The project will also conduct a social and environmental review and assessment after one year of field implementation. E. Land Acquisition and Resettlement 15. No land acquisition will be financed by the EDFF project. Further, land acquired for use in implementing or necessary to a sub-project must have been acquired through a voluntary land acquisition process. Required land for the sub-projects would be obtained through any one of the following options and must be well documented for acceptance by the Bank: 16. Direct Purchase. Where possible the required land will be acquired by the sub-projects promoter through direct purchase based on willing buyer willing seller principle, as the first option. Negotiations for direct purchase would be carried-out in a public place and in transparent manner. All proceedings will be documented and final agreement would be signed by the negotiating parties in the presence of NGOs or civil society and countersigned by the village head. The negotiated amount will be paid within three months from the date of final agreement of the negotiated settlement by the negotiating parties. 17. Voluntary Donation. The required land for the sub-projects can also be obtained through voluntary donations by the land owners. Voluntary donation of land for a sub-project would be an acceptable option where: (a) (b) (c) (d) (e) (f) The land is identified by the beneficiary communities and confirmed by technical staff to be suitable for the sub-project and free from any environmental or health risks; the impacts on the land owners are marginal and do not result in displacement of households or cause loss of household s incomes and livelihood; the households making voluntary donations are direct beneficiary of the subproject; land thus donated is free from any dispute on ownership or any other encumbrances; consultations with the affected households is conducted in a free and transparent manner; land transactions are supported by transfer of titles; and 123

133 (g) proceedings of consultation meetings, grievances and actions taken to address such grievances are properly documented. 18. A protocol for direct purchase and voluntary donation of land for sub-projects would be included in the Operations Manual. Sub-projects sponsors will be required to submit appropriate documents together with the sub-projects proposals to show the process to be used for obtaining the required land. Any sub-project without any of the above two options for land acquisition will not be accepted.. F. Indigenous Peoples Planning Framework. It is not expected that indigenous or isolated ethnic minority communities will be impacted by any of the EDFF sub-projects. 19. Although the people of Aceh are a broadly homogeneous group, some communities in the highland areas, particularly in districts Bener Meriah, Aceh Tenggah, Gayo Lues and Aceh Tenggara, may retain certain characteristics of indigenous people as defined by the Bank s OP These communities are reported to have their own language distinct from the mainstream Acehnese/Indonesian language and some of them may also have their customary cultural or social informal institutions. Although almost all of these community groups are fully integrated with the mainstream population in Aceh province, some isolated groups may still retain collective attachment to their ancestral territories. It is not expected that indigenous or isolated persons will be impacted by any of the sub-projects. Should such people be discovered in the sub-project areas through subproject screening, then this would require that measures be undertaken by the sub-project implementing entities to fully comply with OP 4.10 regulations. 20. Given the nature of proposed interventions and the potential list of subproject proposals, Indigenous people are not expected to be affected or present in the subproject areas G. Institutional Arrangements a. Institutional Arrangements and Process Table 17: Institutional Arrangement for ESMF Implementation No. Institution Safeguard Related Roles and Responsibilities Documents 1. Project Management Unit Overall management of ESMF implementation Preparing and submitting ESMF implementation report (as part of the Project Report) to the World Bank Disseminating the information about ESMF to participating district and provincial governments Regularly monitor the implementation of ESMF in the field 2. Sub-Grantee Preparing proposals and UKL/UPL or AMDAL OM 3. District-level Approving UKL/UPL or AMDAL OM Environmental Impact Monitoring the implementation of UKL/UPL or Control Board AMDAL (Bapedalkab) 4. Provincial-level Approving UKL/UPL or AMDAL OM Decree of establishment of PMU Operations Manual 124

134 No. Institution Safeguard Related Roles and Responsibilities Documents Environmental Impact Control Board (Bapedalda) Monitoring the implementation of UKL/UPL and AMDAL Identifying provincial-level NGO with interest to environmental and IVP issues to be involved in monitoring 21. Screening Process. Environmental and social screening of approved sub-projects will be carried out at this point in order to determine if an Indigenous Peoples Plan, AMDAL or UKL/UPL is required. Screening will be based on completion in advance by local governments of a standard screening format for each sub-project, to be developed by PMU team based on KepMen 308/ Based on this information, the PMU team will screen each sub-projects to be funded by the EDFF involving: (i) comparison of sub-projects information against Annex 1 of Decree 308/2005, (ii) assessment of likelihood of impact on sensitive sites, (iii) comparison against World Bank criteria for OP 4.04, OP 4.09 and OP Further information will be requested of the respective local government, as necessary, in order to complete screening. A representative from the relevant local environmental authority will be invited participate in the screening process. Screening results will be formally communicated to the respective local governments, to the relevant local environmental authority and to WBOJ safeguards staff. 23. Review and Approval of Studies. The procedures for preparation and completion of AMDALs and UKL/UPLs are set out under Ministerial Decree 308/2005. For AMDALs, a Province or local government Tim Teknis prepares and approves the AMDAL TORs, consultants carry out the studies and final review and approval is carried out by a Province Level AMDAL Commission. 24. A basic format for completion of UKL/UPLs is provided in Annex 2 to Decree 308/2005 (See Attachment 1). Completed UKL/UPL forms are submitted to the local environmental authority for review and approval. Completed environmental and social studies will be reviewed by safeguards specialists within PMU team prior to submission to the GoA for secondary review and comments. The GoA team will provide consolidated comments to the consultant for revisions to be made as necessary. 25. Environmental studies will be submitted for formal approval to the relevant local environmental authority i.e. the Provincial or District Bapedalda. All AMDAL and a sample of UKL/UPL for each sub sectors will be submitted to the WBOJ for review and approval. All documents related to acquisition of land, consultations with potentially affected indigenous communities and social assessment report, where required, will be submitted to the WBOJ for review and approval. H. Consultation and Disclosure 26. The GoA will disclose the environmental and social management frameworks in Aceh Province. The Bank will ensure that the framework is published in Infoshop and the Bank Indonesia Public Information Center. The framework will be available also on the E-Aceh 125

135 website ( All Social Assessment and Indigenous Peoples Plan and full environmental assessments (AMDAL), where required, and a samples of UKL/UPL will be made available in Indonesian language on the e-aceh website, with English language versions of Executive Summary published in Infoshop. A sample of UKL UPL for each subsector will be translated into English for Bank review. Environmental management plan (UKL UPL) documents should be disclosed in-country in accordance with bank disclosure policy. I. Reporting 27. The implementing entity will aggregate and review environmental reports and flag them in their bi-annual reports. The Operations Manual will include a matrix of likely environmental impacts and steps with which to address them. An experienced environmental consultant will be hired to summarize progress, monitor and measure the impact of the project on the environment as part of the performance evaluation of the project. The Implementing Entity will prepare biannual environmental summary reports to be submitted in English to the World Bank. This report would include: (q) (r) (s) A summary of significant mitigation measures, if any, undertake during the previous six months; A description of any significant problems or successes in environmental mitigation during the period; and Anticipated notable environmental or social events anticipated during the Coming six months. V. Environmental Management and Monitoring Program (UKL UPL Program) 28. Substances of the UKL and UPL are the program Management and Monitoring which will be done during the duration of the project. For that purpose this parts should explain cleanly and completely for all impacts, in accordance test list in the chapter III as follows: (t) Steps which will conduct to prevent and manage the impact, including the effort to mitigate the emergency / disaster. (u) Monitoring activities which will be done to know the affectivity of the environmental impact and compliance to the Regulation of Environment. (v) Standard used to measure the effectiveness of the environmental and the compliance to the regulation of environment. VI. Sign and Seal 29. After all of the forms about UKL and UPL have been filled completely, the institution(s) responsible for the activities should sign and seal the documents. 126

136 ANNEX 12: ANTI-CORRUPTION ACTION PLAN 1. The EDFF project is designed to assist the Government of Aceh and the Government of Indonesia to Build Back Better the province of Aceh. The project will seek proposals from local and international groups with programs promoting economic development and sustainability of Aceh. At the central level, the implementing entity for the project is the GOI s Ministry for Disadvantaged Areas (KPDT), and the provincial level, the implementing agency is the BAPPEDA (of GoA). An international consulting firm will be recruited to support the implementing entities in managing the project. Lessons learned from project 2. Other competitive grant projects such as the Managing Higher Education for Relevance and Efficiency (MHERE), and Better Education through Reformed Management and Universal Teacher Upgrading (BERMUTU) indicate that there are risks associated with varying capacity of individual implementing units and their dispersed locations. The projects find that there are issues with capacity, lack of transparency, and delays. 3. Lessons learned from other projects demonstrate that intensive Communications and more frequent supervision both from the Bank and PMU; and greater disclosure at local level will help address the fore mentioned issues. As additional measure to prevent corruption, some of the Japan Social Development Funds (JSDF) projects also require proposals to include specific measures to prevent corruption. Risks Identified 4. Risks associated with procurement of management consulting firm A consulting firm will be contracted to assist with the setting up and operation of PMU. There are risks associated with procurement of the consulting firm: lack of prior experience and understanding of Bank Guidelines may result in delays and poor selection of consultants. Selection of consultants performed in other projects indicates that there is also a risk that high level officials may intervene in the deliberations of the procurement Committee, as they expect returns from firms awarded the contract. 5. Risks associated with selection of proposals It is envisaged that there will be 7-8 sub-projects with grant value of US$1-7 million, and a few smaller sub-projects. The sub-project proposals will be selected based on broad range of criteria, allowing greater discretion to be exercised in the proposal evaluation. Without clear communication of the proposal evaluation process, there is also the risk that the process is regarded as unfair. 127

137 6. Risks associated with implementation of sub-projects Implementation of sub-projects may be subject to corruption. The large number of transactions at sub project level and the dispersed location may also stretch PMU s oversight role. There may be capacity issues with some of the sub-project implementation entities hence the project is exposed to the risks of delays and collusive practices in procurement; fictitious expenditures, poor reporting and the risk that intended objectives of the project are not attained. Objectives of Anti-Corruption Action Plan 7. The Anti-Corruption Action Plan (ACAP) of the EDFF project is developed to identify risks associated with the project and to propose mitigation measures. The plan will be elaborated in the Operational Manual, and status of implementation will be reviewed in supervisions and reported in Aide Memoirs, any changes made to the Plan will be subject to the Bank approval. 8. The Plan is designed in recognition that the GoA has taken stronger stance on corruption. The GoA has imposed greater scrutiny through its internal auditor, Inspektorat Daerah, and establishes working relations with external audit and law enforcement agencies. A Memorandum of Understanding (MoU) with the Anti Corruption Commission (KPK) is signed and high profile cases have been referred to the Commission for further investigation, reaffirming the government s commitment to combat corruption. 9. In recognition of the high risk involved in the EDFF project, the ACAP has the following primary features: (w) Corruption Prevention Plans at Sub-Project Level Proposals will have to include Corruption Prevention Plans the framework to identify risks and sub-projects internal mechanism to prevent corrupt practices. The Corruption Prevention Plans will be an important consideration in the evaluation process. (x) Intensive Supervision With the large number of sub-projects, dispersed location, varying nature and size of subprojects, more intensive supervision will be required both from PMU and the Bank to anticipate, prevent and address issues. (y) Clearly Defined Measures in the Manual The Operations Manual should provide, in details, steps and measures in relation to procurement, financial management, disclosure of information (and engagement with local media), complaints handling, and sanctions. 128

138 (z) Engagement of Stakeholders In order to promote transparency in the project, the project will engage stakeholders through the participation of a non-government member in the sub-project selection panel and to the extent possible for project monitoring and evaluation. 10. For the purpose of the EDFF project, an Anti-Corruption Action Plan is developed based on the following Components: 1. Enhanced Disclosure of Information 2. Mitigation of Collusion 3. Mitigation of Forgery and Fraud 4. External Oversight 5. Complaints Handling 6. Sanctions and Remedies 1. Enhanced Disclosure of Information (aa) (bb) (cc) (dd) Risks of corrupt practices may be prevented by making important information easily accessible to the public. In order to promote greater transparency in the project, a separate link to the project will be provided at the government website, which displays salient information relevant to the project, as well as the project s own website. Communication of information pertaining selection of sub-projects is also critical in ensuring the fairness of the selection. The project should disseminate information, through its website, local media and other means: the call for sub-project proposals; objectives and criteria for the selection; evaluation method and announcement (names, contacts, and value) of selected proposals. Information related to subproject selected should be disseminated as soon as agreement is signed between PMU and SIEs. To avoid misinformation circulating about the project, the PMU will ensure that groups interested in individual sub-projects are able to obtain data concerning progress during the procurement and implementation phases through various methods (refer to Annex 13 for a Communications Strategy). The PMU will also establish a good relationship with the press (particularly local press), explaining results expected by the EDFF, and ensuring a fair representation of the progress. Open public meetings will also be held at least twice a year to provide updates on progress. Information accessibility and transparency will also be made a part of the monitoring and evaluation exercise. The PMU will ensure that lessons learned from the implementation of sub-projects are widely shared and specifically with those who have indicated an interest. The World Bank Disclosure Policy 129

139 (ee) In compliance with the World Bank s disclosure policy, the PMU shall make publicly accessible on the project website the following documentation: (i) After finalization, all annual procurement plans and schedules, including all updates thereof. (ii) Contract award information for all contracts for goods above US$500,000 equivalent and all contracts for consultants above US$400,000 equivalent, promptly after such award. (iii) Promptly after the completion of a mid term review of the project, the mid term review report and the aide memoire prepared for this purpose. (iv) Promptly after receipt all final audit reports, and all formal responses of the government. (ff) Upon request, the implementing agency will: (i) Make available to any member of the public, private sector firm or any registered civil society organization all bidding documents and requests for proposals issued in accordance with the procurement provisions of this agreement, subject to payment of a reasonable fee to cover the cost of printing and delivery. In the case of requests for proposals, the relevant documents will only be made available after notification of award to the successful firm. Each document will continue to be available until a year after completion of the contract entered into for the goods, or services in question; (ii) Make available to any member of the public upon request, promptly and at no cost, any short lists of consultants and, in cases of pre-qualification, lists of pre-qualified contractors and suppliers; (iii) Promptly disclose to all bidders and parties submitting proposals for specific contracts (by or fax) notification of award to the successful bidder/consultant, the summary of the evaluation of all bids and proposals for such proposed contracts. Information in these summaries will be limited to a list of bidders/consultants, all bid prices and financial proposals as read out at public openings for bids and financial proposals, bids and proposals declared nonresponsive (together with reasons for such declarations), the name of winning bidder/consultant and the contract price. Summaries will also be made available to the public, promptly upon request and at no cost. (iv) Make available, promptly upon request by any person or company (via or fax) a list of all contracts awarded in the three months preceding the date of such request in respect of a project, including the name of the contractor/consultant, the contract amount, the number of bidders/makers of proposals, the procurement method followed and the purpose of the contract. 130

140 2. Mitigation of Collusion (v) PMU shall keep electronic records of all information requests received and documentation provided in response to such requests and shall provide this information to the World Bank upon request. (a) (b) (c) (d) (e) (f) Procurement risk in the EDFF project is high due to the degree of uncertainty at subproject level. It is agreed that in the sub-project selection process, the capacities of subproject implementation entities will be assessed. Potential sub-projects will also have to include their own Corruption Prevention Plan in their proposals. In cases when subproject implementing entities do not have the required procurement capacity or when procurement involves large and highly complex packages, procurement function will be centralized at the PMU. Operations Manual will include guidelines for each stage of the procurement process. The Manual will include provisions on greater disclosure at the local level, for instance the use of local media and public notice boards to announce procurement related events. At the project level, there is also a concern on the lack of capacity and experience in dealing with Bank funded projects. A procurement consultant will be recruited to provide assistance in the selection of consulting firm to support PMU. The consultant will be able to provide guidance to PMU in order to comply with the Bank s Guidelines and minimize delays in the process. Once selected, the consulting firm will assign a procurement consultant to provide assistance to PMU in the selection of proposals and build capacity of the government. PMU will make sure that information on selection of sub-projects is clearly communicated at every stage of the process. In order to improve transparency at the sub project selection process, the selection panel will include a reputed member of the academic community in Aceh. The selection of this fourth member, acceptable to the World Bank, is part of project readiness conditions. Written evaluations of the subproject proposals have to be submitted in the three tiered approval process, and will be subject to the Bank s No Objection. PMU will ensure proper documentation of the procurement process. 3. Mitigation of Forgery and Fraud (a) Forgery and fraud will be minimized by adherence to fiduciary management practices. Financial management capacity and measures in the proposals Corruption Prevention Plan will be assessed for the selection of sub-projects. The Operations Manual will outline measures such as payment validation procedures, documentation, reporting and disclosure mechanism, and internal and external audits. The PMU will be supported by a consultant with financial management expertise, to address capacity issues within the government, and to provide support in supervising sub-projects financial management. Regular supervision will be performed to address issues which may arise. 131

141 (b) (c) Financial management reports of PMU and sub-projects will be subject to internal audits by the Inspektorat Daerah. The agency has agreed to include EDFF project as part of its regular audit, and a separate report will be provided for the purpose. Regular supervision will be performed by PMU and/or the Bank to address issues which may arise. State Development and Financial Supervisory Board (BPKP) will perform regular external audits to the project. All final audit reports and the government s responses will be disclosed in the project s website. 4. External Oversight (gg) (hh) (ii) The EDFF project has developed communications strategy to engage with the different stakeholder groups and beneficiaries as outlined in Annex 13. Local community involvement is also a key criterion in selection of sub-projects. Potential sub-projects have to outline their plan to engage the community in the design, implementation, and monitoring of the proposed project. The project will, to the extent possible, engage civil society or academia in the monitoring and evaluation of the project. The project should reach out to potential implementing entities and the different government institutions relevant to the project. PMU will maintain communications with the press and beneficiaries throughout the implementation period. Public meetings will be organized at least twice in a year to report on progress of the project. 5. Complaints Handling (a) As EDFF project is funded by the MDF, it will also be subject to the complaint handling mechanism of the MDF. The MDF s Outreach Officer receives and records complaints, refers them to the project, and monitors resolution of complaints. The project will make use of existing government mechanism to investigate and resolve complaints. The PMU will make sure that there are multiple channels available for complaints, complaints are referred to the Inspektorat Daerah the GoA s internal audit agency tasked with investigating complaints with copies sent to the Bank, and complaints are properly recorded. (b) The Inspektorat Daerah receives and follow up complaints from various sources: those referred by the Governor s office (through website and text messages), media, mail, and complaints referred by other agencies. Specifically for the project, the agency agrees to work together with PMU and MDF in sharing information should complaints are filed against the project. (c) Upon receipt of complaints, the agency will verify whether the allegations are substantiated. Depending on the gravity of the complaints, Inspektorat Daerah may decide to refer the complaints to relevant agencies/individuals, create a special team to investigate or refer the case to BPKP or law enforcement agencies. The Inspektorat Daerah has signed agreements with the State Development and Financial Supervisory 132

142 Board (BPKP) and the Anti Corruption Commission (KPK), for referral of corruption findings; and has had history of close cooperation with the two. 6. Sanctions and Remedies (a) (b) PMU will activate and monitor referrals to Inspektorat Daerah and external authorities (police/prosecutors/kpk/bpkp) to gauge if legal and/or administrative sanctions are being effectively applied. Administrative sanctions will be applied against public officials proven to violate procedures. This includes written reprimand, orders for funds to be returned, transfer, demotion, exclusion from promotion/training opportunities, etc. When there are indications that crimes are committed, cases will be referred to the law enforcement agencies. (c) Sanctions and remedies governed under Keppres 80/2003 will apply for violation of the government s procurement rules. The sanction includes suspension of payment, termination of contracts, or blacklisting. The black list will be made public through the project website. (d) The Bank may also suspend disbursement to the project or sub-projects until issues are resolved. Misprocurement and cancellation of grants may be declared when there are evidences of corrupt practices committed. 133

143 ANNEX 13: COMMUNICATIONS STRATEGY Context 1. The EDFF s communications strategy will be in line with the objectives of the MDF. The strategy will address the needs of various key stakeholders such as: (i) donors/ MDF, (ii) government institutions (BRR, GoA, GOI), (iii) media, local, national and international (iv) international and local NGOs and civil society organizations, (v) the business community (including banking sector, local and outside Aceh), (vi) the communities as a whole and (vii) other beneficiaries. Although all actors involved in the project (Governor s office, BAPPEDA, KPDT, BRR and World Bank) will have a role in communications about EDFF, guidance and leadership in communicating will be lead by the PMU. The PMU should coordinate with other communications units, such as those of Biro Humas of the Governor s Office, BRR, KPDT, BAPPEDA, MDF and the World Bank. 2. The EDFF wants to reach out pro-actively to different stakeholders, potential implementing entities, beneficiaries, government agencies and the Acehnese public in general, to inform them of the EDFF funding mechanism, vision, and its objectives in order to: (jj) Inform of the role sub-project to be financed by the EDFF will have in support sustainable economic development in Aceh; (kk) Disseminate the EDFF program to both national and international development players and to invite them to participate in the economic development of Aceh through the EDFF; (ll) Manage expectations of communities, government agencies and other players as to what EDFF can and cannot achieve; (mm) Ensure transparency in sub-project evaluation and selection, keeping interested parties informed of the outcome of applications at every stage, explaining decisions, particularly the decision not to fund a particular sub-project; and (nn) Ensure that interested parties (government agencies, beneficiaries) get relevant information on the status of sub-projects, results, etc., offering also a forum for interested parties to express concerns, suggestions and to pose questions. (oo) Ensure that all public disclosure requirements, as per World Bank or GoI guidelines, are fulfilled. 3. In addition, given its objectives and ownership by the Government of Aceh, the EDFF could: (pp) Highlight constraints for the development of a strong and competitive private sector, as well as providing ideas on how the GoA can address some of those constraints; 134

144 (qq) Act as a showcase of approaches that GoA can use to address constraints to increasing competitiveness of and access for the private sector; (rr) Play a role in coordinating the activities of donors and non-government agencies in promoting economic growth in the region. Communication Stages 4. The sub-project cycle will determine where the focus in the communications strategy should be given the different type of information, decisions and stakeholders that are involved in the different stages of the sub-project cycle. The information below elaborates on activities that will be part of the communications strategy depending on the stage of the sub-project cycle. (ss) Selection of Sub-projects (i) Soon after the EDFF is approved, the project should reach out to potential implementing entities and their partners in government institutions to prepare the call for proposals, explaining the objectives and selection criteria of the EDFF. This will allow sufficient time for applicants to design, plan and discuss potential proposals for EDFF funding; (ii) The solicitation stage should include clear information on the process (independent review by PMU, selection by the Selection Committee) and criteria by which proposals will be reviewed in order to better manage the expectations of applicants. Transparency in the process will be key to avoiding misunderstandings, all decisions should be made public in a dedicated website; (iii)rejections of proposals should be accompanied by an explanation of why the proposal did not get funding (technical issues, not addressing priorities as identified by the GoA, etc.), and if at all possible providing information of other financing sources and opportunities which might be available; (iv) Successful applicants will also be informed and negotiations on sub-project agreements will be undertaken and announced when completed. (tt) Sub-project Implementation (i) Information related to sub-project selected should be disseminated as soon as an agreement has been signed between the EDFF and the implementing entities. This information should reach the interested parties, such as government institutions, private sector or beneficiary communities. (ii) Since the EDFF will be filling strategic gaps in the GoA development plans, it is also important that those units involved in development planning at the provincial and district levels as well as the 135

145 Communication Tools parliament are informed of the sub-projects being implemented and the results expected. (iii) During sub-project implementation, special attention should be given to communicating with potential beneficiaries, so they understand what to expect and what not to expect from projects being financed. (iv) It is also important that PMU defines ways in which it will continuously communicate with government agencies involved (KPDT, BRR, GoA and BAPPEDA) on any bottlenecks in the implementation of sub-projects, so that these agencies can address these bottlenecks quickly. (v) The PMU should also establish a good relationship with the media (particularly local media), explaining the results expected by the EDFF and individual sub-projects, again managing expectations and ensuring a fair representation of progress. 5. The PMU will use the following communications tools: (a) Information Dissemination (i) Use of newspaper and website for making documents (sub-projects to be financed, progress reports, financial statements, etc.) available to the public. (ii) Because newspapers are generally suitable for urban audiences, at the village level, special printed information shall be distributed for the beneficiaries or groups targeted. Information on project implementation status, issues, challenges and success stories are some examples of what could be published at community spots or information boards. (iii)the EDFF will have a dedicated website (although it might be part of an existing website, e.g. in the GoA or the MDF) with information on the selection process, updates on project implementation, contact information, public disclosure of project-related documents, etc. The website should also feature stories of some of the sub-projects being funded, showing how the project is contributing to sustainable economic growth and job creation in the province and should recognize the source of the funding. (iv) Visibility of sub-projects to be financed through news stories, information boards, socialization of activities, etc. Newsflash updates/ newsletter (b) Socialization and Community Outreach 136

146 (i) (ii) Use of outreach officers and providing a complaint handling process for all affected parties Socialization of sub-projects to be financed with direct beneficiaries at the beginning of implementation and throughout the implementation period. Socialization will take place with communities by the SIEs instead of working only with community heads or associations which could be less representative. (c) To the extent necessary to further the outreach process, the PMU will facilitate meetings of interested parties (government institutions, private sector, and communities) to discuss progress of the project as a whole as well as progress of specific sub-projects of interest. 137

147 I. Project Processing Timing ANNEX 14: PROJECT PREPARATION AND SUPERVISION Planned Actual PCN review September 2007 September 2007 Initial PID to PIC Initial ISDS to PIC September 2008 September 2008 Appraisal May 2008 May 2008 Negotiations October 2008 December 4, 2008 Board/RVP approval December 20, 2008 Planned date of effectiveness February 20, 2009 Planned date of Mid Term Review June 30, 2010 Planned closing date June 30, 2012 II. Key Institutions and People Responsible for Preparation of the Project Government of Aceh Officials Name Title Unit Prof. Munirwansyah Head Regional Planning and Development Board (BAPPEDA-NAD) T. M Bastian Head of Economic Development Panning and Labor Regional Planning and Development Board (BAPPEDA-NAD) T. Syarbaini Sub Head of Production and Productivity Regional Planning and Development Board (BAPPEDA-NAD) Teuku Said Mustafa 2nd Assistant for Idiosyncrasy, Economic Governor of Aceh Office and Development Drs. Muhammad, MM Head of Economic Bureau, Governor of Aceh Office Prof. A Rahman Lubis Formerly Head Regional Planning and Development Board (BAPPEDA-NAD) Usman Budiman Formerly Second assistant for Governor of Aceh Office development affair Badaruddin Daud, MDM Formerly Head of Overseas Cooperation Division Governor of Aceh Office Rahmadhani, M.Bus (Tourism Management) Formerly Director for Industrial and Trading Development Regional Planning and Development Board (BAPPEDA NAD) Husaini Head of General Affair Regional Planning and Development Board (BAPPEDA-NAD) Muhammad Iskandar Muslim Yunus Staff Economic Development, Planning and Labor Sub Head of Investment and Development Financing Regional Planning and Development Board (BAPPEDA-NAD) Regional Planning and Development Board (BAPPEDA-NAD) T. Syarbaini Sub Head of Production and Productivity Regional Planning and Development Board 138

148 (BAPPEDA-NAD) Government of Indonesia Officials Amin Subekti Deputy of Finance and Planning BRR Hairul Basri Director of Agriculture BRR Paul McMahon Technical Advisor for Economic and BRR Business Deputy Roy Rahendra Funding Director BRR Said Faisal Baabud Deputy of Economic and Business BRR Dr. Ir. Suprayoga Hadi MSP Director for Regional II, Deputy for BAPPENAS Regional Development and Local Autonomy Samsul Widodo, MSc Head of Sub Directorate for BAPPENAS Disadvantaged Areas Ir. Rachmat Tatang Bachrudin Deputy Minister for Economic and Private KPDT Business Development Drs. Ari Noorwidyanto, MA Assistant to Deputy for Investment, KPDT Deputy Minister for Economic and Private Business Development Ir. Bambang Sarwono, MSc. Head of Planning and Foreign KPDT Cooperation Bureau Drs. Supriadi M.si Assistant to Deputy for Financing, Deputy KPDT Minister for Economic and Private Business Development M. Andi Ilham Head of Program Division KPDT Widjang Winarno, MA Head of Investment Incentive Division KPDT Syahrul Sub Head of Budgeting KPDT Arif Setyadi Consultant KPDT Arsyad Sukendro Consultant KPDT World Bank Staff and Consultants who worked on the Project included: Name Title Unit Thomas A. Rose Advisor EASFP Hormoz Aghdaey Lead Financial Sector Specialist EASFP Enrique Blanco Armas Economist EASPR Vinod K. Goel Harry Masyrafah Consultant Consultant ECSPF EACIF Said Baabud Consultant EASFP Sylvia Njotomihardjo Temporary EASPR Lynn Yeargin Senior Program Assistant EASPR Thang-Long Ton Economist EASPR Yogana Prasta Operations Advisor EACIF Melinda Good Senior Council, LEGES Zhentu Liu Senior Procurement Specialist EAPCO Dayu Amurwanti Consultant, Corruption Prevention EACIF Andrew Sembel Consultant, Environmental Specialist EASIS Unggul Suprayitno Financial Management Specialist EAPCO Christina Donna Financial Management Specialist EACIF Pramod Agrawal Social Safeguards Consultant EASFP Robert Moreland Monitoring & Evaluation Consultant EASFP 139

149 III. Supervision Plan The proposed EDFF is structured as a programmatic operation, with multiple sub-projects being prepared, implemented and supervised over the next four and one half years. The World Bank, as partner agency under the MDF legal framework, will be responsible for project supervision of the project on behalf of the MDF. Given the lack of experience of the implementing agency with World Bank projects as well as the relatively high riskiness of the project, the World Bank will conduct two supervision missions for the first two years, and one supervision mission per year for the next two years conditional on a satisfactory management of the project by the PMU and the GoA. In addition, the World Bank will, together with the implementing agency, undertake more in depth monitoring of sub-project implementation during the first two years of the project to ensure that implementation is consistent the with the approved project proposal and EDFF operational procedures. Supervision of sub-project financial management will be done on a riskbased approach at least once a year. The supervision will review the project s financial management system, including but not limited to accounting, reporting and internal control. IV. Parties Consulted During Project Preparation Government of Aceh 1. Irwandi Yusuf, Governor of Aceh 2. Badaruddin Daud, MDM, Aceh Investment and Promotion Board, Promotion Division 3. Faizal Adriansyah, Sekretaris, BAPPEDA 4. Fuadri, Vice Bupati of Aceh Barat. 5. Husni Bahri Tob, SH, MM, M.Hum, Secretaris Daerah Provinsi NAD 6. Insyarizal, Fishery and Ocean Department. ( Dinas Kelautan dan Perikanan) Aceh, UPTD P3 Idi. 7. Muslim, Head of section Investment, Bappeda Aceh 8. Nasir Azis (Former BAPPEDA) 9. Nazamuddin, economic lecturer, Syiah Kuala University. 10. Prof. A Rahman Lubis, Former Head of Planning and Development Agency, Aceh Province 11. Rahmadani, Former Head of section Trade and Industry, BAPPEDA Aceh 12. Suryaddin, Deputy Economic (head of PP I), BAPPEDA Aceh 13. T. Zainul Arifin, Head of Investment Coordination Agency, Aceh Province 14. Usman Budiman, Governor Office, Former Second assistant for development affair 15. Zaidan, Head of Development Bureau, Aceh Governor Office. 16. Zakhwan, Head of Fishery and Ocean Department, Bireun district 17. Syarifuddin, Z, Head of Aceh Inspectorate 18. Bambang Isnaeni Gunarto, Head of Regional Office Directory General of Treasure Banda Aceh BRR 19. T. Zulfian Zulfikar, Business Development, BRR 20. Danung Wiyadi, Head of Anti Corruption task Force, BRR Ace State Ministry of Disadvantaged Areas (KPDT) 21. Lucky H. Korah, Secretary Minister of Disadvantage Areas 22. Drs. Kana Tjandra Buchari, M.Si., Expert to Minister for Economic Affairs 23. Sri Sumaryanti, SH, MH, Head of Law and Public Relation Bureau 24. Singgih Wiranto, SH, M.Hum, Head of General Affairs Bureau Others 25. Nawawi ; Head of Bank Indonesia Banda Aceh 26. Eko Hermawan (Bank Indonesia); 27. Purwo, The Indonesian Institute of Science. 28. Saifuddin Chan, Head of Investment Outreach Office 140

150 Projects 29. Ernie Leonardo, ATARP Project 30. Ian C. Barlett, Finance and Donor Coordination Team Leader., Infrastructure Financing Facility, IRFF 31. Leroy Hollenbeck, ATARP Project 32. M. Madya Akbar, APED Project, Bappeda - UNDP. 33. Rik Frenkel, Triple-A Team Leader, Swisscontact 34. Teuku Fadhla, Economist, APED Project Bappeda Aceh - UNDP. Development Agencies 35. Andre Bald, World Bank 36. David Lawrence (IFC); 37. Dean Cira, World Bank 38. Farid Selmi, GTZ International Service 39. Francisco Fontan (EU) 40. Gie Siauw, Urban and Regional Development Advisor, GTZ 41. Ginette Kidd, International Organization for Migration 42. Greg Elms, IFC 43. Hans Shrader, IFC 44. Hugh Evans, APED Project Advisor UNDP 45. Irina Scheffmann, GTZ International Service. 46. John Currie ; FAO 47. Luis Lechiguero (EU) 48. M. Adli Abdullah, National Fishery Consultant, FAO Aceh 49. Paolo Panichella, Italian Cooperation, Bireun - Aceh. 50. Parissara (ILO); 51. Pieter Smidt, Asian Development Bank 52. Richard Beresford, Asian Development Bank 53. Simon Field (UNDP); 54. Suhendra, Programme Associate, UNDP Aceh 55. Ted Burke, Deputy Coordinator, FAO Aceh 56. TOM Morris (USAID) 57. Wolfram Fischer (GTZ); NGOs 58. Ahmed Fadhil, Premire Urgence, Indonesia 59. Bruno Neri, Senior Programme Officer, Terre des Homes, Italy. 60. Fadlullah Wilmot (Muslim Aid) 61. Henny Buftheim, Programme Team Leader, Canadian Cooperative Association. 62. Henry C Harmon, Country Representative, Winrock International 63. Ian Singelton, Phd.Director, PanEco 64. Ian Small ; Save The Children 65. Kabul Sarwoto, Program Manager, YIPD 66. Lilianne Fan; Oxfam 67. Louis O Brien, Country Director, CHF International 68. Nasharuddin, International Relief and Development, Aceh 69. Ramsey Lyimo, Donor Liaison Officer, World Vision Aceh 70. Tgk. Nashruddin bin Ahmed, Director General, Aceh Society Development. 71. Umamat K, Aslanovna, International Relief and Development, Aceh Private Sector 72. Firmandez, Head of Chamber of Industry and Trade, KADIN Aceh 73. Jailani Yacob (Kadin); Aceh s Chamber of Commerce 74. M. Ramzan, Head of Permodalan Nasional Madani (PNM) Banda Aceh. 75. Prof. Raja Masbar, Commisary, Aceh Development Bank, BPD 76. Sayid Fahdil, Head of Committee Foreign Affairs, Aceh Chamber of Commerce 141

151 I. Project-related documents ANNEX 15: DOCUMENTS IN THE PROJECT FILE Number Document Date Project Concept Note (PCN) September 14, 2007 Project Preparation Aide Memoire April 24, 2008 Project Appraisal Aide Memoire May 27, 2008 Integrated Safeguard Data Sheet (ISDS) September 18, 2008 Letter of Intention Letter of Approval Operations Manual (draft) Project Appraisal Document Project Grant Agreement II. Background or Relevant Studies Number Study/Report Date 1. Aceh Green Green Economic Development and Investment Strategy for Aceh Province, Indonesia, Concept Paper presented by Governor of Aceh in the United Nations Climate Change Conference in Bali, Indonesia, December Aspinall, Edward, The Helsinki Agreement: A More Promising Basis for Peace in Aceh? Policy Studies n20, East-West Center Washington DC. 3. BAPPENAS, Indonesia: Preliminary Damage and Loss Assessment. The December 26, 2004 Natural Disaster, A Technical Report prepared by BAPPENAS and the International Donor Community. 4. BAPPENAS, Presidential Regulation of Republic Indonesia No.47/2008 tentang Amendment for Presidential Regulation No.30/2005 concerning Master Plan of Regional Rehabilitation and Reconstruction and People s Life in the Province of Naggroe Aceh Darussalam and Nias Island in North Sumatera Province 5. Barron, Patrick, Clark, S. and Daud, M., Conflict and Recovery in Aceh. An Assessment of Conflict Dynamics and Options for Supporting the Peace Process, Jakarta: The World Bank and Decentralization Support Facility. 6. Beukering, Pieter J.H. van, Cesar, H.S.J. and Janssen, M.A., Economic valuation of the Leuser National Park on Sumatra, Indonesia. Ecological Economics Blackett, Hugh and Irianto, N, Forest Resources and Forest Industries in Aceh Report of the FAO Forestry programme for early rehabilitation in Asian Tsunamiaffected countries (OSRO/GLO/502/FIN). Food and Agriculture Organization of the United Nations. 8. BPS, Analisis dan Penghitungan Tingkat Kemiskinan, BPS, Jakarta BRR and Partners, Aceh and Nias Two Years after the Tsunami Progress Report, Jakarta/Banda Aceh. 10. Budidarsono, Suseno, Wulan, Y.C., Budi, Joshi, L. and Hendratno, S., 2007 (in press), Livelihoods and Forest Resources in Aceh and Nias for a Sustainable Forest Resource Management and Economic Progress. ICRAF Working Paper, Bogor, World Agro forestry Centre, Indonesia. 11. Burke, Adam and Afnan, Aceh: Reconstruction in a Conflict Environment. Views from civil society, donors and NGOs, Indonesian Social Development Paper n8,

152 Number Study/Report Date Jakarta: Decentralization Support Facility. 12. CSIRO, 2008, Environmental Management for a Sustainable Economic Development 2008 Strategy for Nanggroe Aceh Darussalam, Policy Note prepared for the World Bank. 13. Czaika, Mathias and Krisztina Kis-Katos, Civil Conflict and Displacement. Village- Level Determinants of Forced Migration in Aceh, HiCN Working Paper No. 32, Households in Conflict Network, Institute of Development Studies, Brighton, UK Djankov, Simeon, Caralee McLiesh and Rita Ramalho, 2006, Regulation and 2006 Growth, Economic Letters, V92, I3, September 2006, pp Eye on Aceh, Aceh: Logging a Conflict Zone, Banda Aceh Eye on Aceh, Sebuah Agenda Rakyat? Bantuan Pasca Tsunami di Aceh, Banda Aceh Fahey, Stephanie, The Socioeconomic Impact of the Indian Ocean Tsunami, Presentation, Research Institute for Asia and the Pacific, University of Sydney. 18. Foreign Investment Advisory Service, International Finance Cooperation and The World Bank, Indonesia - Aceh/Nias, Mini Diagnostic Analysis of the Investment Climate, Banda Aceh 19. Friedman, Jed, "Measuring Poverty Change in Indonesia, : How Responsive is Poverty to Growth?" in Spatial Inequality and Development, R. Kanbur and A. Venables (eds.), Oxford University Press, Oxford, pp GAPERDA ( Aceh Planter Association), The Pillar for Aceh Expectation for Aceh Recovery, Presentation at Aceh Chamber of Commerce and Industry, Banda Aceh 21. Garland, Kip, Opportunities for Innovation in Economic Development for Banda Aceh, Indonesia, Final Report. 22. GTZ and Government of Aceh Province, Aceh Triple A Project, Local Economic Development, Banda Aceh 23. GTZ, Business Climate Survey, Assessment of the Investment Climate in Aceh Utara and Lhokseumawe, Final Report, Banda Aceh 24. Indonesia Centre for Agro Socio Economic Research and Development, Food and labor Market Analysis and monitoring System in Nanggroe Aceh Darussalam Province, Final Report, Indonesia Agriculture Research and Development, Ministry of Agriculture, Jakarta 25. International Finance Cooperation, 2008, Aceh Investment Climate Policy, Presentation, Banda Aceh 26. International Finance Cooperation, Marine Fisheries Master Plan for Re-Development in Aceh, Indonesia, Prepared for International Finance Cooperation, Private Enterprise Partnership for Aceh and Nias and BRR, International Finance Cooperation, Banda Aceh 27. International Foundation for Electoral Systems, 2007, 2006 Pilkada Elections in Aceh: An Overview of Pre and Post Election Surveys, Washington DC 28. Jamassy, Owin, Qualitative analysis of the impact of political conflict natural disaster and the distribution of aid on poverty in Nanggro Aceh Darussalam, background report prepared for the World Bank, Banda Aceh. Unpublished. 29. Kirkpatrick, Colin and David Parker, 2005, Towards Better Regulation? Assessing the Impact of Regulatory Reform in Developing Countries, Paper prepared for the CRC workshop June 2005, University of Manchester, UK 30. Kuru, George, FAO Assessment of Timber Demand and Supply for Post Tsunami Reconstruction in Indonesia, FAO 31. Loayza, Norman and Claudio Raddatz, 2006, The Composition of Growth Matters for Poverty Reduction, World Bank Policy Research Working Paper n4077, December

153 Number Study/Report Date Mahdi, Saiful, Where do IDPs Go? Evidence of Social Capital from Aceh Conflict and 2007 Tsunami IDPs, paper presented at the First International Conference of Aceh and Indian Ocean Studies, organized by the Asia Research Institute in the National University of Singapore and the Rehabilitation and Reconstruction Agency for Aceh and Nias (BRR), Banda Aceh, Indonesia, February McGahey, Stan, Tourism Development in Aceh, USAID/A-TARP, Presented to BRR, Banda Aceh McKeon, Jock, Using Data for Ex- Ante Preparedness for Disaster Management, tracking the 2004 Indian Ocean Earthquake and Tsunami Reconstruction Fund in Indonesia, PREM, Poverty Reduction Group, The World Bank. 35. Mehlum, Halvor, Moene, K. and Torvik, R., Institutions and the Resource Course, The Economic Journal, v116, i508, pp.1-20, January Ministry of Environment Republic of Indonesia, Rapid Environmental Impact Assessment, Banda Aceh, Sumatra, Ministry of Environment Republic of Indonesia 37. Missbach, Antje, Aceh Homebound?, in Inside Indonesia No. 90: Special Aceh Reports. 38. Multi Donor Fund, Implementing Projects, Achieving Results, Progress Report III, December Banda Aceh 39. Nkusu, Mwanza, Aid and the Dutch Disease in Low-Income Countries: Informed Diagnoses for Prudent Prognoses, International Monetary Fund Working Paper 04/ Overseas Development Institute, ODI/UNDP Cash Learning Project Workshop in Aceh, Indonesia by the Humanitarian Policy Group of the Overseas Development Institute, London, UK. 41. Overseas Development Institute, The Indian Ocean Tsunami: What Are the Economic Consequences?, News Release, London 42. Phillips, Michael, Budhiman, Agus, Ackerman, John and Subasinghe, Rohana, Aquaculture Assessment, Presentation, FAO, DGA, NACA in collaboration with Ujung Batee Regional Centre for Brackish water Aquaculture Development, Aceh, Banda Aceh 43. Project, Aceh Partnership for Economic Development (UNDP Planning and Development Agency, Aceh), Cattle and Goat livestock Portrait in Aceh and the Potential to Develop Into Agribusiness Sector in Aceh, Banda Aceh, Unpublished. 44. PT Hatfield Indonesia, Findings and Recommendations of the Ecological Risk Assessment Conducted in Aceh Singkil and Aceh Selatan, Nanggroe Aceh Darussalam. A draft report prepared for the Multi Donor Fund / BRR. 45. PT. Geotrav Bhuana Survey, Identifikasi dan Inventarisasi Sumber Daya Perikanan, Kajian Pengembangan Sumber Daya Pesisir dan Laut Pantai Timur dan Pantai Barat Propinsi Nanggroe Aceh Darusslam Pasca Tsunami, Bappeda Provinsi Nanggroe Aceh Darussalam, Banda Aceh 46. PT. Geotrav Bhuana Survey, Kajian Pengembangan Sumber Daya Pesisir Laut pantai Timur dan Pantai Barat, Provinsi Nanggroe Aceh Darusslam (Pasca Tsunami, Banda Aceh 47. Roberts, John, The Indian Ocean Tsunami: How can the region recover economically?, Overseas Development Institute, London 48. Rodriguez, Joanna, Financial Services to Rebuild Livelihoods in Aceh, ILO Aceh, submitted at Micro Finance Conference, Banda Aceh 49. Ross, Michael, Resources and Rebellion in Aceh, Indonesia, in Collier, Paul and Sambanis, Nicholas (eds.), Understanding Civil War. Evidence and Analysis, Volume 2: Europe, Central Asia and other regions, The World Bank

154 Number Study/Report Date 50. Ross, Michael, The Natural Resources Curse, in Bannon, Ian and Collier, Paul (eds.), 2003 Natural Resources and Violent Conflict Options and Actions, The World Bank 51. Save the Children, Livelihoods Assessment, North East Coast, Aceh Province, Band Aceh Schulze, Kirsten E., The Free Aceh Movement (GAM): Anatomy of a Separatist Organization, Policy Studies n2, East West Center Washington DC. 53. Sukma, Rizal, 2004, Security Operation in Aceh: Goals, Consequences and Lessons, Policy Studies n3, East-West Center Washington DC. 54. Summary of FAO, DGA and NACA Workshop, Sustainable Aquaculture Rehabilitation in Aceh, Banda Aceh 55. Timmer, C. Peter, How Indonesia connected the Poor to Rapid Economic Growth, in 2007 World Bank, 2007, Delivering on the promise of Pro-Poor Growth Insights and Lessons from Country Experiences, edited by Timothy Besley and Louise J. Cord. 56. UNDP ERTR Aceh, Feasibility of Feedlot Investment in Aceh, Banda Aceh, 2008 Unpublished 57. UNDP, Construction Boom Survey, UNDP ERTR Aceh, Banda Aceh. Unpublished United Nations Development Programme, An Assessment of Needs to Build Capacity to Support Community Recovery. Banda Aceh, Indonesia United Nations Environment Programme, Environment and Reconstruction in Aceh: Two year after Tsunami, Kenya. 60. World Bank, Aceh Poverty Assessment, The Impact of the Conflict, The Tsunami, 2008 and Reconstruction on Poverty in Aceh, The World Bank Jakarta, 61. World Bank, Indonesia Economic and Social Update, The World Bank, Jakarta World Bank, World Bank Response to the Tsunami Disaster. Washington. D.C World Bank, Aceh Economic Update April 2007, Banda Aceh/ Jakarta: The World Bank. 64. World Bank, Aceh Economic Update November 2007, Banda Aceh/ Jakarta: The World Bank. 65. World Bank, Aceh Economic Update April 2008, Banda Aceh/ Jakarta: The World Bank 66. World Bank, Aceh Reconstruction Update World Bank, Aceh Flood. Damage and Loss Assessment, The World Bank World Bank, Aceh Public Expenditure Analysis Spending for Reconstruction and Poverty Reduction, Banda Aceh/ Jakarta: The World Bank. 69. World Bank, Indonesia Public Expenditure Review 2007 Spending for Development: Making the Most of Indonesia s New Opportunities, Jakarta: The World Bank. 70. World Bank, Pengelolaan Kinerja Pemerintah Daerah di Aceh, Banda Aceh/ Jakarta: The World Bank. 71. World Bank, 2000, Empirics of the link between growth and poverty, PREM Notes Economic Policy n45, October

155 Number Study/Report Date 72. World Bank/ Kecamatan Development Program, 2006 Village Survey in Aceh: An 2007 Assessment of Village Infrastructure and Social Conditions, Banda Aceh/Jakarta: The World Bank/KDP. 73. World Bank, 2008, Aceh Economic Prospects Identification of Priorities and Gaps in 2008 the Government of Aceh s Sustainable Economic Development Plans and Strategies, draft report, prepared by Swisscontact. 74. Wu, Treena, 2006, The Role of Remittances in Crisis. An Aceh Research Study, HPG Background Paper, the Humanitarian Policy Group in the Overseas Development Institute, London, UK

156 ANNEX 16: STATEMENT OF WORLD BANK LOANS AND CREDITS Original Amount in US$ Millions Difference between expected and actual disbursements Project ID FY Purpose IBRD IDA SF GEF Cancel. Undisb. Orig. Frm. Rev d P ID-Infrastructure DPL (IDPL) P ID-BERMUTU P ID-Strategic Roads Infrastructure P ID-Farmer Empower. Agric.Tech.&Info P ID-WSSLIC III P ID-Domestic Gas Market Development Proj. P ID-Early Childhood Education and Dev P ID-UPP P Govt Finl Mgt & Revenue Admin Project P ID-HIGHER EDUCATION P ID-Support for Poor and Disadvant Areas P ID Kecamatan Development Project 3B P ID-Initiatives for Local Govern. Reform P ID-USDRP P ID-Eastern Indonesia Region Transp P ID - Coral Reef Rehab and Mgmt Prog II P ID-LAND MANAGEMENT &POLICY DEVT P ID-KECAMATAN DEV P ID-PPITA P ID-Health Workforce & Services (PHP 3) P ID-Java-Bali Pwr Sector & Strength P ID-Water Resources & Irr.Sector Mgt Prog P ID-UPP P ID-WSSLIC II Total: 1, , INDONESIA- Statement of IFC Held and Disbursed Portfolio (millions of US Dollars) Committed Disbursed IFC IFC FY Approval Company Loan Equity Quasi Partic. Loan Equity Quasi Partic Bank Danamon BonaVista School Buana Bank Centralpertiwi Medan NP School P.T. Gawi PT Agro Muko PT Alumindo PT Astra PT Astra

157 Committed Disbursed IFC IFC FY Approval Company Loan Equity Quasi Partic. Loan Equity Quasi Partic PT Astra PT Astra Otopart PT Astra Otopart PT Bank NISP PT Bank NISP PT Bank NISP PT Berlian PT Bina Danatama PT Bina Danatama PT Ecogreen PT Ecogreen PT Grahawita PT Indo-Rama PT Indo-Rama PT Indo-Rama PT Indo-Rama PT Indo-Rama PT KIA Keramik PT KIA Keramik PT KIA Serpih PT Kalimantan PT Karunia (KAS) PT Karunia (KAS) PT Makro PT Makro PT Makro PT Megaplast PT Nusantara PT Prakars (PAS) PT Sayap PT Sigma PT TAS PT Viscose PT Viscose PT Wings Sunson WOM WOM Wilmar Total portfolio:

158 Approvals Pending Commitment FY Approval Company Loan Equity Quasi Partic Bank NISP SELF Bank NISP Swap Orix Indonesia Total pending Commitment:

159 ANNEX 17: COUNTRY AT A GLANCE East Lower- POVERTY and SOCIAL Asia & middle- Indones ia Pacific income 2006 P opulation, mid-year (millions ) ,900 2,276 GNI per capita (Atlas method, US$ ) 1,420 1,863 2,037 GNI (Atlas method, US $ billions ) ,539 4,635 A verage annual growt h, P opulation (%) L abor force (%) Most recent estimate (latest year available, ) Poverty (% of population below national poverty line) Urban population (% of total population) Life expectancy at birth (years ) Infant mortality (per 1,000 live births ) Child malnutrition (% of children under 5) Acces s to an improved water s ource (% of population) Literacy (% of population age 15+) Gros s primary enrollment (% of s chool-age population) M al e F emale KE Y E CONOM IC R AT IOS and L ONG-T E R M T R E ND S GDP (US $ billions ) Gros s capital formation/gdp E xports of goods and s ervices /GDP Gros s domes tic s avings /GDP Gros s national s avings /GDP Current account balance/gdp Interest payments /GDP T otal debt/gdp T otal debt s ervice/exports P resent value of debt/gdp P resent value of debt/exports (average annual growth) GDP GDP per capita E xports of goods and s ervices D evelopment diamond* GNI per capita L ife expectancy Access to improved water source Indones ia Lower-middle-income group E conomic ratios * Domes tic savings Trade Indebtednes s Indones ia L ower-middle-income group Gros s primary enrollment Capital formation ST R UCT UR E of the ECONOMY (% of GDP ) Agriculture Indus try Manufacturing S ervices H ous ehold final cons umption expenditure General gov t final cons umption expenditure Imports of goods and s ervices Growth of capit al and GD P (%) GCF GDP (average annual growth) Agriculture Indus try Manufacturing S ervices H ous ehold final cons umption expenditure General gov t final cons umption expenditure Gros s capital formation Imports of goods and services Growth of exports and imports (%) Exports Imports Note: 2006 data are preliminary estimates. T his table was produced from the Development Economics LDB database. * T he diamonds s how four key indicators in the country (in bold) compared with its income-group average. If data are mis s ing, the diamond will be incomplete. 150

160 Indonesia P R ICES and GOVER NMENT F INANCE D omes tic prices (% change) Cons umer prices Implicit GDP deflator Government finance (% of GDP, includes current grants ) Current revenue Current budget balance Overall surplus /deficit Inflation (%) GDP deflator CPI T RADE (US $ millions ) T otal exports (fob).. 49,815 86, ,514 F uel.. 12,861 23,717 27,619 Es tate crop.. 3,998 4,918 5,483 Manufactures.. 10,795 14,402 17,190 T otal imports (cif).. 42,929 69,462 73,868 F ood.. 3,931 3,888 4,709 F uel and energy.. 3,670 17,429 19,028 Capital goods.. 17,497 15,262 4,877 Export price index (2000=100) Import price index (2000=100) T erms of trade (2000=100) Export and import levels (US$ mill.) 125, ,000 75,000 50,000 25, Exports Imports B ALANCE of P AYMENT S (US $ millions ) Exports of goods and services 15,240 56,787 99, ,032 Imports of goods and services 16,194 59,379 91,319 95,493 R esource balance -1,908-5,184 8,441 19,539 Net income -6,432-6,008-12,927-14,465 Net current transfers ,793 4,863 Current account balance -3,911-7, ,937 F inancing items (net) 1,904 16, ,035 Changes in net reserves 2,007-9, ,902 Memo: R es erves including gold (US $ millions ) 4,814 19,281 36,181 43,083 Convers ion rate (DEC, local/us $) 1, , , ,151.0 Current account balance to GD P (%) EXTERNAL DEBT and RESOURCE FLOWS (US $ millions ) T otal debt outstanding and disbursed 42, , , ,917 IB R D 5,058 11,138 8,132 7,423 IDA ,001 1,318 T otal debt service 5,984 21,543 18,045 27,345 IB R D 636 2,249 1,871 1,827 IDA Compos ition of net res ource flows Official grants Official creditors 1, P rivate creditors 528 6,869 1,485.. F oreign direct inves tment (net inflows ) 258 6,194 5,260.. P ortfolio equity (net inflows ) 0 1, World B ank program Commitments 982 1,194 1, Dis burs ements ,012 P rincipal repayments 236 1,429 1,417 1,430 Net flows Interest payments Net trans fers 180-1,370-1, Composition of 2005 debt (US$ mill.) F: 46,962 A - IB RD B - IDA C - IMF G: 24,500 A: 8,132 B: 1,001 D - Other multilateral C: 7,807 D: 9,380 E: 40,518 E - Bilateral F - Private G- Short-term Note: T his table was produced from the Development Economics LDB database. 9/28/07 151

161 ACEH AT A GLANCE (2007) Aceh Indonesia Poverty & Social (2007) Population- (thousand) 4, ,642 GDP per capita - ( US$ )* 1, , School Participation Rate (APS) 98,90 97,61 Gross primary school enrollment Unemployment Rate 10,27 9,75 Poverty ( % of population below poverty line) 26,5 16,58 Infant Mortality 31,94 26,89 Literacy Male 96,26 94,56 Female 92,38 88,39 Annual Population Growth Rate (%) 0,37 1,27 Human Development Index (2006) 68,30 68,50 Net Reproduction Rate ( %) 1,18 1,05 Life Expectancy Rate ( %) 68,21 69,90 Economic Ratios & Indicators (2007) Annual Growth (%) -2,21 6,3 Annual Growth (without oil and gas - %) 7,46 6,9 Agriculture share to GDP (%) 23,0 13,8 Industry share to GDP (%) 11,0 27,0 Economic & Trade (2007) GDP (Rp Billion, Constant) 36, ,964,000 Export (in million US$) 1, , Export without oil and gas (in million US$) 84,33 91,942 Import (in million US$) 25,51 74,441 Stucture of the economy (% of GDP) Agriculture Mining & Quarrying Industry 12,4 27 Electricity 0,2 0,9 Construction sector 5,9 7,7 Trade, Hotel & Restaurant 15,5 14,9 Transportation & Communication 7 6,7 Banking & Finance Service 1 7,7 Services 15 10,1 Economic by Expenditure ( % GDP) Household Expenditure 30,6 63,5 Government Expenditure 13,1 8,3 Gross Capital Formation 11,5 24,9 Source: BPS 152

162 ANNEX 18 Maps 153

163 154