Project Appraisal Document

Transcription

1 Date: April 18, 2005 Sector Manager/Director: Mark D. Wilson Country Manager/Director: Andrew D. Steer Project ID: P Lending Instrument: Specific Investment Loan (SIL) INDONESIA Initiatives for Local Governance Reform Project Project Appraisal Document East Asia and Pacific Region EASRD Project Financing Data [X] Loan [X] Credit [ ] Grant [ ] Guarantee [ ] Other: Team Leader: Erman A. Rahman Sector(s): General transportation sector (40%), Sub-national government administration (30%), Irrigation and drainage (15%), Water supply (10%), Power (5%) Theme(s): Decentralization (P), Participation and civic engagement (P), Public expenditure, financial management and procurement (P), Other accountability/anti-corruption (P), Rural services and infrastructure (P) For Loans/Credits/Others: Loan Currency: United States Dollar Amount (US$m): $29.50 Borrower Rationale for Choice of Loan Terms Available on File: Yes Proposed Terms (IBRD): Variable-Spread Loan (VSL) Front end fee (FEF) on Bank loan: 0.50% Proposed Terms (IDA): Standard Credit Commitment fee: -0.50% Financing Plan (US$m): Source Local Foreign Total BORROWER IBRD UK: BRITISH DEPARTMENT FOR INTERNATIONAL DEVELOPMENT (DFID) LOCAL GOVTS. (PROV., DISTRICT, CITY) OF BORROWING COUNTRY Total: Borrower: GOVERNMENT OF INDONESIA Responsible agency: MINISTRY OF HOME AFFAIRS, DIR.GENERAL OF REGIONAL AUTONOMY Address: Jl. Medan Merdeka Utara No. 7, 7th Floor, Jakarta Pusat Contact Person: Dr. I Made Suwandi, Director of Local Government Functions Tel: Fax: kapasda@telkom.net Other Agency(ies): BAPPENAS Address: Jl. Taman Suropati 2, Jakarta Contact Person: Mr. Deddy Koespramoedyo, Director for Regional Autonomy Development Tel: Fax: deddyk@bappenas.go.id

2 Estimated Disbursements ( Bank FY/US$m): FY Annual Cumulative Project implementation period: Four years Expected effectiveness date: 10/01/2005 Expected closing date: 06/30/2009 OPCS PAD Form: Rev. March,

3 A. Project Development Objective 1. Project development objective: (see Annex 1) The development objective of the proposed Initiatives for Local Governance Reform Project (ILGR) is to pilot support to district (kabupaten) governments in improving transparency, accountability and public participatory practices and in undertaking reforms in financial management and procurement. Primarily the Project would assist advances in good governance at the district level through establishment of a set of minimum reforms in the key cross-cutting governance areas of public participation, transparency, financial management and procurement as well as in preparing a participatory Poverty Reduction Strategy and Action Plan (PRSAP) through provision of general facilitation, technical assistance and capacity building. The Project would also provide incremental poverty targeted investment funds to kabupatens that complete a predefined set of the minimum reforms to finance priority rural infrastructure identified in the PRSAP that brings the cross-cutting reform elements together, including more pro-poor budget allocations, to demonstrate and test reform implementation at the district level. Lastly, the Project would give visible recognition of the kabupatens reform initiatives and disseminate good governance practices emerging from the districts so that the lessons learned can help to influence reforms in other kabupatens not participating directly in ILGR. 2. Key performance indicators: (see Annex 1) The key performance indicators are: (a) (b) (c) (d) (e) (f) (g) Extent to which recommendations from consultations/public hearings are incorporated into district plans and regulations (perdas); Greater public availability of information; Twelve district budgets show increases in poverty targeted expenditures by the end-of-project (EOP); Economic Internal Rate of Return for project-funded infrastructure; Greater than 12 participating district governments practicing accepted standards of procurement as verified by audits and studies by EOP; Greater than 12 participating district governments practicing sound financial management as verified by audits and studies by EOP; and Percentage increase in stakeholder satisfaction with government service delivery. B. Strategic Context 1. Sector-related Country Assistance Strategy (CAS) goal supported by the project: (see Annex 1) Document number: IND Date of latest CAS discussion: November 25, 2003 The main objective of the Country Assistance Strategy is to assist the Government of Indonesia with poverty reduction over the medium and long term, through: (a) improving the investment climate by maintaining macroeconomic stability, building a stronger financial sector, fostering a competitive private sector, building Indonesia s infrastructure, and creating income opportunities for poor households and farmers; (b) making service delivery responsive to the needs of the poor by helping Indonesia accelerate education and health outcomes, reducing environmental degradation, and improving access to clean water and sanitation, and helping Indonesia revamp the management and accountability systems for service delivery (such as making providers more directly accountable to their clients, especially the - 3 -

4 poor); and (c) improving governance by making development planning more responsive to constituents, improving transparency and public financial management, effective implementation of decentralization, strengthening the accountability of local governments under a more coherent decentralization framework, and enhancing the public establishment of a credible, impartial and accessible justice sector. The proposed ILGR supports all three goals identified in the CAS through its focus on improved local governance and service delivery at the district level, as well as investment in rural infrastructure. One of the key CAS business platforms is the Local Services Platform (LSP), which is intended to support enhancement of governance accountability at the district level. Indonesia decentralization has put district-level governments in charge of service delivery and given them authority to influence and regulate their local investment climate. The proposed ILGR project, which focuses on basic, cross-cutting governance reforms, is the first in a series of operations identified in the new CAS period to support the implementation of the LSP. It is meant to strengthen the foundation for good governance on which other, more sectoral focused project interventions will be able to build. 2. Main sector issues and Government strategy: Decentralization and Local Governance The decentralization Laws 22 and 25/1999 (on local government and fiscal balance) which became effective in January 2001 have led to a fundamental shift in Indonesia's governance and service delivery. Bu October 2004, the country has 440 kabupatens (districts) and kotas (urban centers) responsible for providing basic services to their citizens. In the past, financial and human resources were allocated and appointed by Jakarta. With decentralization, all government functions apart from national economic and monetary affairs, defense, legal and judicial systems, international relations, trade and monetary affairs have been devolved to the kabupatens/kotas. The Law 25/99 mandates that central government shares revenues with local and provincial governments. At least 25 percent of total national revenues are channeled to the local level through the general allocation grant (DAU). The Law also mandates the allocation of special specific purpose grants (DAK) and a further sharing of portions of national tax and natural resources revenues with local governments in production areas. Currently the local share in government spending has nearly doubled from 17 to 31 percent and is likely to grow to over 40 percent. For the majority of kabupatens, the DAU constitutes 70 percent of their revenues, and total central transfers including shared taxes account for 85 percent of revenues. The "Big Bang" decentralization program of 2001 led to some 2 million out of 3.4 million central civil servants being transferred to the provinces and kabupatens, a number of central government departments in the provinces being disbanded (Kanwils), and some 16,000 facilities transferred to the regions. Many kabupatens have rationalized their service delivery agencies (Dinas) by consolidating several agencies into one and requiring extension agents to provide a range of technical services. Though these administrative changes have been put in place, the concomitant changes in culture and systems required to make public services and public servants more demand driven and community responsive are still lacking. Dinas agencies prepare their individual budgets and Renstras (policy documents) with little outside consultation and compete with each other for limited resources. Budgets are still decided at the kabupaten-level through lobbying the planning department (Bappeda), the Bupati's office (Sekda) and local parliament (DPRD)

5 Communities have limited voice in the process and input from the kecamatan or village remains minimal. Projects requiring construction or purchase of goods are favored, as these provide means for civil servants to supplement their low wages through kick-backs from contractors. The kabupaten budget, despite the rhetoric of decentralization, remains an opaque document, with limited transparency, and accountability of expenditure outcome. Overall the environment for good governance at the local level is weak and corruption similar to the national situation is endemic. In September 2004, the decentralization laws were revised with the passage of Laws 32 and 33/2004. The key significant changes introduced by laws include the direct election of regional heads, review of district budgets by the province on behalf of the central government and a greater role for the province in monitoring of district performance, and new requirements on local borrowing. The national government is working on developing guidelines and procedures for implementing the decentralization laws. Areas of focus include: reforms in financial management, auditing, procurement, local revenue generation, and freedom of information. The national government is also concerned about inter-governmental fiscal transfers--ensuring that there is some equalization between rich and poor districts and that basic services and development investment continues in a sustainable manner i.e. roads get built and health and education standards are maintained. Rural Poverty The economic crisis of the late 1990s revealed the vulnerability of millions of Indonesians to poverty. A World Bank analysis showed that around half of all Indonesians face a chance of experiencing an episode of poverty every three years (World Bank, 2001: Constructing a New Strategy for Poverty Reduction). Prior to the crisis, the poverty headcount index was 15.7 percent, but rose to a peak of 27 percent in early Since then poverty levels in Indonesia have fallen as rice prices declined and real wages increased, and in 2002 the rural poverty headcount ratio was 23.1 percent, three times higher than the urban rate. Java accounts for 61 percent of the poor, and the rest are scattered through eastern Indonesia as well as other areas (South East Sulawesi, East Java, East Kalimantan, and Central Java). Poverty is concentrated in rural areas, where 78 percent of the poor reside and 65 percent of poor households are considered agricultural, as about half of their income comes from agriculture. Access to markets and services remains a major determinant of rural poverty. In the past, government poverty programs focused on providing subsidies and handouts from the center to households targeted in poor areas through programs such as the Inpres Desa Tertinggal (IDT) which provided block grants to poor villages, and the Social Safety Net (JPS) program and programs to compensate reduction of fuel subsidy. In addition, government approaches to poverty alleviation programs have generally been centralized sectoral allocation of funds. In early 2005 Indonesia finalized its five-year national poverty reduction strategy (PRSP) which is an integrated part of the country s five-year development plan (RPJM). The PRSP was consulted broadly with civil society and across the country. The consensus was to view poverty as multi-dimensional that poverty is not only about lack of income but also lack of access to basic rights that should be respected, protected and fulfilled; as stated in the RPJM. These rights include access to food, health services, education, employment, housing, water, land, environment and natural resources, security and participation in process of public policy making. The PRSP rightly links poverty reduction to governance that better governance will create more opportunities for people to participate in decision making and empower the - 5 -

6 poor as well as allow the private sector and others to play a strategic role in poverty reduction. The PRSP will become the reference for local governments to develop their own poverty reduction strategies. The key sector issues, thus, are how to ensure that the national governance reform agenda is incorporated at the district-level, and that key priorities and investments identified in poverty reduction strategies are included in district-level budgets and have local ownership and support. National Framework for Local Government Capacity Building The Government has developed an overall national framework for capacity building to support decentralization (October 2001). Key elements of this strategy include: Understanding and disseminating the regulatory framework for decentralization, tasks and functions for the regions, so that all stakeholders in the region participate in decentralized local governance. Developing the roles and functions of the DPRD and village councils (BPD), developing a code of conduct and interaction between the councils and civil society. Building a new system of fiscal transfers including accountability and transparency in the Kabupaten budget (APBD) and an open inclusive process for its formulation and implementation. Establishing a human resource management system with clear personnel management and ensuring institutions are capable for their tasks and functions. Developing patterns of interaction with other regions to allow transfer and exchange of good practices. Developing a new mechanism to promote regional economic development, employment and poverty alleviation. Donor support for Indonesia s Decentralization Program The donor consultative group for Indonesia has highlighted a number of issues that the Government needs to address: Develop a cohesive management framework for decentralization which includes appropriate mechanisms for coordination between agencies, internal reform for the Ministry of Home Affairs, and strengthening of monitoring and evaluation functions. Define minimum standards for basic service provision involving stakeholders in the process. Utilize the full range of fiscal decentralization instruments such as the DAK, and improve procurement, accounting and auditing systems. Fully enforce the regulations on public participation as stipulated in Law 28/1999. Improve implementation of supervisory functions. Provide additional funds to the regions for capacity building purposes. Support civil service reform. Involve regional and local governments in pro-poor policy formulation. The UNDP-World Bank-ADB supported Partnership for Governance Reform in Indonesia provides a mechanism for donors to coordinate efforts in multi-donor supported governance reform activities in Indonesia. In January 2005, the World Bank, DFID, UNDP, ADB and the Government of Netherlands have established a multi-donor trust fund to support decentralization (Decentralization Support Facility, DSF). This facility will help donors harmonize their local government programs and help support an overall government vision for implementing decentralization - 6 -

7 3. Sector issues to be addressed by the project and strategic choices: Indonesia s ongoing decentralization process has resulted in financial resources, personnel and responsibilities for delivery of basic services being devolved to district governments. Nonetheless, comprehension of procedures and regulations relating to new decentralized mandates at the kabupaten level is limited, and most district-level funds are being allocated for routine rather than development expenditures. Moreover, the potential for misuse of public funds is high. Civil society and the local legislature though legally mandated under decentralization laws, are not actively involved in the preparation of development priorities and plans or reviewing expenditure outcomes. Poverty issues and programs are receiving limited investment support from constrained kabupaten budgets. There are, however, a small but growing number of kabupatens who have initiated reform measures to address some of these highlighted problems. There is an opportunity to build on these initiatives by providing incentives at the right level and establishing information forums which allow for negotiated decision-making between the executive, legislature, and civil society which should lead to better investment patterns. One way to achieve this is by investing in a process of civic participation in local governance, budget oversight and improved expenditure allocations leading to better targeted and quality investment. Using a cross-sectoral approach, the proposed ILGR will address systemic capacity issues that affect kabupaten governments including weaknesses in public policy, exclusionary budget planning and management practices; poor standards of service delivery and accountability to end users; weak financial management, procurement and internal controls; limited local resource mobilization capacity, and barriers to improving the local investment climate. The poverty reduction is cross-sectoral by nature and sectoral interventions required to address poverty will depend on the geographical location and the nature of rural poverty in the kabupaten. The proposed ILGR takes a cross-sectoral approach towards addressing the issues identified above through a system that builds local ownership for the reform agenda through improved transparency, accountability, civic participation, and local level poverty analysis, and will leverage better use of the kabupaten budget through complementary investment support for poverty programs. A series of district level poverty reduction strategies, currently being piloted in proposed ILGR kabupatens, uses participatory poverty assessment (PPAs) techniques to encourage broad local partnerships and ownership of the local poverty agenda and prepares cross-sectoral district-level poverty strategies which also supports the national PRSP process. C. Project Description Summary 1. Project components (see Annex 2 for a detailed description and Annex 3 for a detailed cost breakdown): The proposed ILGR project has the following components: Component A: Local Governance Reform Component B: Poverty Targeted Investments Component C: Implementation Support and Monitoring Component A: Local Governance Reform will continue supporting kabupatens participated in the Project preparation (batch 1, approximately 15 kabupatents) which meet minimum Entry requirements to undertake more advance reforms to meet minimum Pre-investment and Investment requirements stipulated in the Local Governance Reform Framework (see Attachment 1 to Annex 2). Simultaneously, starting in Year 2 of the Project implementation, about 25 other kabupatens will be selected to participate in ILGR and be assisted in meeting minimum Pre-Investment requirements for months. Sub-components include: - 7 -

8 A1. Reform of the Kabupaten Planning and Budgeting Process which, focuses on the enhancement of participation and strengthening links with local pro-poor priorities; A2. Reform of the Kabupaten Budget Implementation and Financial Management and Reporting, which improves local procurement and financial management practices; and A3. Strengthening Accountability Mechanism, which helps increase information disclosure and cross-district networking. Component B: Poverty Targeted Investment will support incremental financing in approximately 15 batch-1 kabupatens for pro-poor development expenditures which are identified and prioritized through an enhanced planning process linked to the development of the district PRSAP. Investment funds for batch 2 kabupatens will come from the subsequent project ILGR2. Component C: Implementation Support will fund specialized technical, facilitation and monitoring supports for the activities in Components A and B at the district, regional and national levels. Sub-components include: C1. General Facilitation and Specialized Technical Assistance, which provides facilitation and technical assistance to the districts; C2. Capacity Building and Institutional Training, which provides training to district staff and other local stakeholders to institute governance reforms; and C3. Monitoring, Evaluation, and Studies/Surveys, which supports the overall monitoring and evaluation framework for the Project and finances studies on local governances. The Bank has also received a Japan Social Development Fund (JSDF) grant of US$2.0 million to provide parallel financing to an international NGO to support civil society institutional strengthening in analyzing and disseminating local government budget information as well as in monitoring the quality of service delivery and budget execution through civic report card in the ILGR districts. The results of this activity will be used as one of the monitoring tools of the Project

9 Table 1. Project Costs by Components Total Including Contigencies Component Indicative Costs (US$M) % of Total Bankfinancing (US$M) % of Bankfinancing A. Local Governance Reform Reform of the Kabupaten Planning and Budgeting Process 2. Reform of Kabupaten Budget Implementation and Financial Management Reporting 3. Strengthening Accountability Mechanisms B. Poverty Targeted Investments C. Implementation Support General Facilitation and Specialized Technical Assistance Capacity Building and Institutional Training Monitoring/Evaluation & Studies/Survey Total Project Costs Front-end fee Total Financing Required Table 2. Project Costs by Components Base Costs (Bank and DFID Financing) Component Indicative Bank- % of DfID % % of Costs financing Bank- Financing of DfID Total (US$M) (US$M) financing (US$M) financing A. Local Governance Reform Reform of the Kabupaten Planning and Budgeting Process 2. Reform of Kabupaten Budget Implementation and Financial Management and Reporting 3. Strengthening Accountability Mechanisms B. Poverty Targeted Investment C. Implementation Support General Facilitation and Specialized Technical Assistance 2. Capacity Building and Institutional Training 3. Monitoring, Evaluation and Studies/Survey Total Project Costs Price Contigencies Front-end fee Total Financing Required

10 2. Key policy and institutional reforms supported by the project: Decentralization and strengthening local government capacity to deliver basic services to citizens is a major thrust of Indonesia s development strategy. However much remains to be completed in terms of issuance of clear guidelines and standards from the central government in areas such as financial management, audit requirements, accounting standards, and minimum standards for basic services. To support the agenda, the World Bank through a Dutch Trust Fund for Decentralization has funded a program of technical assistance, training and analytical work, working closely with other donors through the donor decentralization working group. The ILGR provides an opportunity to continue to support the overall decentralization policy and institutional reform agenda both at the national level (through support for policy reforms) and at the local level (through direct implementation of activities in selected districts). Policy and institutional reforms are proposed in the following four key areas. (i) (ii) (iii) (iv) Enhancing accountability and transparency in the local planning and legislative process. The Project will assist local government executives and legislatures to develop, through broad public consultation, local laws and regulations that will allow greater freedom and access to public information (including planning and budget documents, general audit reports, procurement information and requirements for licensing) and broader public participation in policy planning, budgeting, program execution and monitoring. Once the local legislation is passed, the local government is mandated to finance these measures through budgetary allocation thus ensuring sustainability and commitment towards the reform process. Strengthening local government financial management and accounting standards practices. The Project will support reform in several financial management areas including: (a) overall institutional and legal framework through the issuance of enabling local regulations relating to financial management, budget preparation and execution, overall budget classification and construction. These changes would allow for budget classification by function in accordance with international best practices and better align local financial management regulations with the latest central regulations. (b) Specific administrative reforms in public expenditure management that enhance accountability of district government staff and introduction of financial controls to improve fiduciary safeguards and efficient handling of public funds. Supporting a sub-national procurement reform agenda. The latest Country Procurement Assessment Review (CPAR) in Indonesia, conducted in , identified that from all accounts, the public procurement system does not function well. It is not market driven, has been prone to misuse and abuse, and reduces value for money for public funds. Based on the CPAR agenda the following areas have been identified as essential for sub-national reforms and thus a key focus of project interventions, which further strengthened by the recent issuance of Keppres 80/2003 that provides the overall framework for national-level procurement reforms. The Project will support the implementation of the Keppres at district level, particularly in establishing a procurement focal point, streamlining existing regulations to promote economy, efficiency, transparency and open competition, improving information systems, improving control, auditing and feedback system, and training and capacity building of local staff involved in procurement. Supporting the national poverty reduction agenda. Being the first to pilot district PRSAP, the methodology (PPAs), which has been developed during the Project preparation, will be scaled up through the national Poverty Reduction Committee (Komite Penanggulangan Kemiskinan,

11 KPK). In ILGR districts the poverty reduction strategies will be incorporated in the district five-year and annual development strategies. This would ensure that over time an increasing percentage of the kabupaten budget is allocated to poverty related expenditures. 3. Benefits and target population: The nine target ILGR provinces of West Sumatra, Banten, West Java, Central Java, Yogyakarta, East Java, Gorontalo, North Sulawesi and South Sulawesi, have a combined population of 111 million people or 54 percent of Indonesia s population. There are currently 130 kabupatens in these provinces of which 40 would be eligible to participate in the Project. The number of poor households living in these districts is estimated to be 22 million (based on Susenas) and approximately 2 million of them live in the first batch of 15 ILGR districts. These districts, which are geographically clustered for more efficient technical assistance and information sharing/cross learning, are Solok, Tanah Datar (West Sumatra), Lebak (Banten), Bandung, Majalengka (West Java), Kebumen, Magelang (Central Java), Bantul (DI Yogyakarta), Ngawi, Lamongan (East Java), Bolaang Mongondow (North Sulawesi), Boalemo (Gorontalo), Gowa, Takalar, and Bulukumba (South Sulawesi). The Project would have a direct impact on poor households and indirectly have a positive impact on all citizens in the districts through increased budget allocation for pro-poor service delivery and reduction in corruption and the overall cost of doing business leading to improvements in the investment climate. The benefits of the Project can be categorized under three main areas: (i) (ii) (iii) Enhancement of governance and improvement of the local investment climate. Measures supported by the Project should improve governance through greater transparency, more public control, reduced corruption and more efficient use of public resources. Local contractors/businesses would benefit from a more competitive, less corrupt procurement process and permitting process. Hence, the Project will lead to overall improvements in the local investment climate. Poverty reduction. The Project design, through its up-front investment in local capacity building in poverty analysis and strategies, and follow-up investment financing for poverty linked rural infrastructure, attempts to mainstream poverty reduction in overall district s policies and budgetary allocation. Capacity building to help implement decentralization. The Project s main beneficiaries of capacity building and institutional strengthening are local government officials and DPRD members, as well as local civil society (NGOs, community based organizations, local universities, journalists) involved in the project activities. The Project will also improve the capacity of national and, less directly, provincial government officials in supervising, monitoring and coordinating ILGR-related reforms in the districts. 4. Institutional and implementation arrangements: National Level Institutional Arrangement The Project will be implemented by national, provincial and local governments with supports from consultants and facilitators

12 National Steering Committee (NSC) National Implementation Committee (NIC) National Project Secretariat (NPS) National Management Consultant (NMC) Regional Management Consultant (RMC) Provincial Coordination Team (PCT) Kabupaten Facilitator (F-Kab) Project Management Unit (PMU) Legend: = governmental organization unit = consultant = accountability line = coordination line National Steering Committee (NSC), chaired by the Deputy Chairman for Regional Development and Autonomy of the National Development Planning Agency (Bappenas). NSC supports and promotes legal and regulatory aspects of implementation, issues the Local Governance Reform Framework and approves the participating list of districts. National Implementing Committee (NIC), chaired by the Director General for Regional Autonomy (DGRA), Ministry of Home Affairs (MOHA). NIC approves and issues the project operational manuals, evaluates the program performance, and coordinates with other related programs. National Project Secretariat (NPS), chaired by the Director for Local Government Functions, DGRA, MOHA. NPS coordinates overall project management, including reviewing district performance and monitoring, procurement and preparation of annual budgets for all components and verifying sub-project eligibility. Bappenas will manage the implementation of evaluation and studies under Component C-3. Provincial Coordination Team (PCT), chaired by the Provincial Planning Board (Bappeda). PCT facilitates information sharing between districts and coordinates the scaling up of reforms to other kabupatens/kotas, as well as facilitating selection of second batch of kabupatens. Project Management Unit (PMU), chaired by the kabupaten s Regional Secretary will manage the overall implementation at local level. National Management Consultants (NMC) will be hired to help NPS preparing training modules technical backstopping, and program monitoring. Regional Management Consultants (RMC) will be based in three regional offices covering participating kabupatens in nine provinces. When batch 2 kabupatens start being facilitated, the RMC's coverage will expand. The regional consultants would include experts in poverty assessments, procurement, financial management, participation safeguards, and engineering. These regional consultants would provide capacity building assistance to local governments and DPRD members as well as the multi-stakeholder working groups. Kabupaten Facilitators (F-Kab) will support Project implementation at district level. Each kabupaten will have one lead facilitator and one technical facilitator (engineer). The lead facilitator will focus in facilitating the reform process, including bringing together different stakeholders to participate in the process, while the technical one is responsible to help identifying, assessing the feasibility and monitoring sub-project(s) implementation

13 District Level Institutional Setting. Participating local governments, through a Bupati Decree, will establish a Project Management Unit (PMU) that will manage the overall implementation at the local level, including coordination with multi-stakeholders working groups. Finance Division/ Agency Project Management Unit Chairperson Regional Secretary Basic Democratization (Transparency & Participation) Working Group Poverty Working Group Financial Management Reform Committee Sub-project Planning and Implementation Coordinator Assistant on Economic & Development, Bappeda Project Implementation Unit (Technical Agencies)* Governance Reform Coordinator Bappeda, Regional Assistant on Governance, Legal Bureau, Public Relation/ Information Bureau Procurement Reform Focal Point Legend: = governmental = multi-stakeholders organization unit working group = accountability line = coordination line Notes: * ILGR sub-projects will be implemented by related technical agency(ies) or dinas based on the results of the PRSAP. Since the sub-projects may differ from one year to the next, the technical agencies involved in the project may differ as well. Each unit of the PMU have the following roles and responsibilities: Chairperson: provides overall project coordination; Finance Division/Agency: manages the disbursement of the funds; Coordinator for governance reform: coordinates governance reform activities and development of PRSAP; Coordinator for sub-project planning and implementation: organizes public consultation on the PRSAP and annual budget and planning process, as well as monitoring sub-project implementation Project Implementation Unit -PIU (technical agencies): prepares detailed design of and draft budget documents for the sub-project(s); procures contractors (private or community) who will implement the sub-projects; supervises sub-project implementation; verifies sub-project completion of contract milestones and processes payment requests; prepares quarterly reports. In financial management (FM) and procurement reforms, which are more technical and within the primary domain of the local government, the government will establish two teams: FM Reform Team, a multi-sectoral committee of government officials, is responsible to prepare an action plan and the necessary regulations, to lead and to coordinate FM reforms, to prepare quarterly reports, and to organize public consultations on the reforms. Procurement Focal Point will lead procurement reforms at the district level, including preparation of action plan and necessary regulations, leading and coordinating procurement reforms, preparing

14 quarterly reports, implementing capacity building, organizing public consultations on and networking activities in procurement reforms. Bupati Decree(s) will be issued to establish these entities that clearly states the functions and target outputs of each. To promote governance reforms with broader-based support ILGR creates space for local stakeholders to participate in reform-related activities. The Project facilitates the establishment of multi-stakeholder working groups whose membership include government officials, DPRD members and local NGOs that are selected democratically through public meetings (multi-stakeholders forum). There will be at least two working groups working in two of the areas required in the Local Governance Reform Framework: Basic Democratization/governance promotion of improved public access to information and decision-making process. The working group will prepare and draft local regulation, on transparency and participation, including holding public consultations, and will monitor the implementation. Poverty formulation of the district-level PRSAP. The poverty working group will formulate the participatory PRSAP, hold public consultations and monitor the implementation of the PRSAP. D. Project Rationale 1. Project alternatives considered and reasons for rejection: The proposed ILGR focuses on governance reforms linked to poverty alleviation. The project builds on lessons learned from on-going CDD initiatives, and the results from analytical work on decentralization. It also aims to pilot mechanisms to reward reform-minded governments that are willing to develop local, participatory poverty alleviation initiatives based on citizen choice. There are a number of other Bank projects and on-going analytical work and pilot activities on decentralization which attempt to address issues not covered by ILGR but equally important for the governance agenda such as: judicial reform, anti-corruption strategies, civil service reform, inter-fiscal government allocations; community empowerment, poverty monitoring and analysis. ILGR will reinforce these efforts but will not try to address all aspects of governance, or replicate activities carried out by others. The following project alternatives were reviewed and rejected: (i) (ii) Investment lending versus adjustment lending: The alternative of adjustment lending was rejected in favor of investment lending because implementation of key governance reforms at the local level needs to be accompanied by significant facilitation and capacity building. Moreover, providing incremental investment funds to participating kabupatens which complete an initial set of prescribed reforms will allow demonstration and testing of reform implementation at the district level, which can then be expanded to a larger number of kabupatens. SIL vs LIL or APL: The alternative of a Learning and Innovation Loan (LIL) was rejected because the maximum size of a LIL would limit the geographic coverage needed for a representative pilot operatation in a large and diverse country such as Indonesia. Governance reform is a long-term program, and an Adaptable Program Loan (APL) would have been one alternative. This alternative was rejected, however, as it would commit the country program in a potentially experimental Governance operation, where much still needs to be piloted and tested. A SIL was preferred because

15 it provides enough flexibility in design to allow for an appropriately sized pilot operation and a follow-up loan for program expansion to other kabupatens, once the basic model has been tested. (iii) Geographical Coverage: For ILGR to succeed, a strategic choice was made to be selective in the initial phase and limit the total numbers of kabupatens by focusing on existing good performers. Initial kabupaten selection was based on three sets of criteria: poverty criteria, project strategy related criteria (working in geographical clusters), and "proof of willingness" to participate and pursue a reform agenda. Ultimately selection would be based on the kabupaten's commitment to pursue an overall reform program that meets basic reform criteria (Local Governance Reform Framework) established by the project as a means of verification. Thus, the coverage of the project is limited to areas where reform initiatives are underway, so as to maximize the current reform efforts. Kalimantan and Eastern Indonesia (Irian Jaya, Nusa Tenggara Timur and Barat) are not covered by the project due to lack of good governance examples, limited institutional capacity, and poor performance of KDP. If there is a follow-on operation to ILGR, these would be areas for expansion, provided there are on-going governance initiatives and local governments are willing to engage in the program. (iv) Sectoral reform project versus cross sectoral reform: The project could have looked at governance reform from a sectoral lens, but the Country Team endorsed a cross-sectoral operation that looks at cross-cutting or platform governance reforms at the kabupaten level in areas such as participation, transparency, disclosure, procurement, and financial management. The Indonesia program has a series of decentralized sectoral programs (health, roads, agriculture) which will respond to the kabupaten sectoral investment needs and build in sector-specific reform requirements. To ensure complementarity, these sectoral investments over the next CAS period are intended to be clustered in kabupatens that meet the ILGR minimum entry requirements. ILGR investment financing will focus on priority rural infrastructure identified through participatory poverty assessments. If successful, ILGR would provide a vehicle for central government to scale-up and expand governance reform in all kabupatens beyond the initial set of reformers, improve utilization of scarce public resources, maintain minimum national standards for basic social services, and help attain the Millennium Development Goals. Based on this reasoning strategic choices were made not to include sectoral interventions such as health and education reforms, as these are better dealt with through sector-wide approaches or by projects that cut across kabupaten boundaries at provincial or national levels (such as the Bank s Provincial Health Project). 2. Major related projects financed by the Bank and/or other development agencies (completed, ongoing and planned). Sector Issue Bank-financed Participatory methodologies, competitive allocation, NGO/civil society monitoring. Linking service providers to beneficiaries through committees. Project Indonesia -Kecamatan Development Project. Indonesia-Decentralized Agriculture and Forestry Extension Project. Latest Supervision (PSR) Ratings (Bank-financed projects only) Implementation Progress (IP) S Development Objective (DO) CDD-Governance Mexico-Rural Development in S S S HS S

16 CDD Sub-national lending CDD lending linked to adjustment lending on governance. Other development agencies Local service delivery Capacity Building for Local Governments Good governance in Cities Regional Development Policy Project, and Human Resource Development in Local Government Marginal Areas Project. Brazil- State of Bahia Rural Poverty Reduction Project. India-District Poverty Initiatives Project. DELIVERI and DINAMIS (DfID) PERFORM, BIGG, LGSP (USAID), Sustainable Capacity Building Development (ADB) BUILD, BRIDGE, LOGIC (UNDP) JICA projects IP/DO Ratings: HS (Highly Satisfactory), S (Satisfactory), U (Unsatisfactory), HU (Highly Unsatisfactory) S S S S 3. Lessons learned and reflected in the project design: The overall design of the project has benefited significantly from Bank economic and sector work, which has helped both in defining a theoretical framework for the project design and providing an in-depth diagnostic base-line for governance, corruption and decentralization issues in Indonesia. For example: The World Bank s World Development Report 2003, Making Services Work for the Poor, helps provide a theoretical framework to look at accountability in Indonesia from the perspective of the relationship between citizens, politicians and policy makers, and implementing agencies/service providers and helps to identify areas where failures occur in the accountability framework. Combating Corruption in Indonesia, and Village Justice In Indonesia: Case Studies on Access to Justice 2003 provides detailed analysis and diagnostic information on how corruption takes place in local governments and in development projects and the types of remedial actions taken by citizens and reform-minded local governments to combat corruption. Local Governments and Local Economic Development and Investment Climate in Indonesia 2003, provides diagnostic data on constraints relating to user fees and taxes facing local businesses working in kabupatens and kotas. Education in Indonesia: Managing Transition to Decentralization provides a clear sector strategy on how to finance and improve local educational standards, services and capacity in a decentralized setting. Decentralizing Indonesia: The World Bank Regional Expenditure Review Overview Report provides detailed diagnosis of the outcomes and impact of decentralization in 3 regions (North Sumatra, West Java and Nusa Tenggara Barat). Initial results from the RPER indicate that though the decentralization process has gone relatively smoothly, regulatory uncertainty, budgetary pressures, unequal distribution of resources, and imperfect governance remain an obstacle. Community Driven Development initiatives, such as Indonesia s successful Kecamatan Development Program (KDP) and Urban Poverty Project (UPP), are good at delivering resources directly to communities to plan and reinforce transparency and accountability at the village-level, but communities have limited leverage or influence on how higher levels of government plan, implement development investments and

17 deliver public services. Local government administrators also use the opaqueness of the public budget planning and allocation system for private benefit through over inflated contracts, kick-backs on inputs and limited accountability on outcomes. Identifying the right incentive framework to change this type of behavior within local government systems is a challenge. The World Bank has financed several projects which work at the sub-national/district level and focus on reform and capacity building. A new generation of sub-national projects are now just getting off the ground in India, but these are based on budget-support for State governments willing to implement key governance reforms. However few projects combine the higher level sub-national governance reform with community-driven initiatives. A few key lessons from local government reform projects in Uganda, Ethiopia, Mexico and Brazil indicate that successful projects need a combination of the following: Intergovernmental rules of the game need to be clear and well understood by local governments. Local governments should have capacity to finance basic services. Strengthening civil society's role in bodies such as local councils can provide a strong base for participation. Mobilizing support from stronger local governments to assist weaker ones can reduce technical assistance costs and develop sustainable partnerships. Developing standard sub-project documents and technical designs can help to reduce costs. Supporting dissemination of best practice between local governments and communities, rewarding innovation, and developing a core group of local governments willing to take a stand against corruption, can help to expand adoption of reforms. Demand driven projects can be a key tool for institutionalizing the decentralization process and linking reforms to different levels of administration (national- sub-district -village). In Indonesia there are a number of other donors active in the field of decentralization and governance. These include GTZ, USAID, DfID, UNICEF, ADB, JICA, AUSAID, CIDA, Ford Foundation and Asia Foundation and the Partnership for Governance Reform. For example, the GTZ support for decentralization measures has several areas of assistance including support for participatory regional development planning; transparent regional budgeting and financial management; development of local stakeholder forums and democratic village administration; and improving strategies towards poverty alleviation oriented service delivery. A number of donor projects such as PERFORM, BIGG (USAID) and BUILD (UNDP) have experience with developing and running kabupaten and kota stakeholder forums using local facilitators. NGO groups, such as FITRA, have developed a menu of modules and training materials on citizen participation in budget monitoring. The Bandung Institute of Governance Study (BIGS) and Indonesian Corruption Watch (ICW) are experimenting with citizen score-cards for service delivery. The lessons learned from these experiences will be directly used by ILGR in: (a) developing training materials for local government and civil society capacity building; (b) developing operational manuals and guidelines for kabupaten stakeholder forums; (c) using examples of existing practices for stakeholder inclusion and conflict resolution; and (d) supporting on-going forums where they exist and mainstreaming their efforts into the kabupaten budgetary oversight system. The recently established Center for Local Government Innovation (CLGI) is also assisting in developing capacity of these stakeholder forums and provides a mechanism for disseminating innovations through kabupaten local government and legislative networks. ILGR proposes to develop partnerships with other donor-financed capacity building interventions and will support existing kabupaten civic forums to reform planning, budgeting processes and access to investment funds

18 During the Project preparation a Study on Kabupaten Reform Dynamics in Indonesia was commissioned. The study, which was carried out in three ILGR districts, resulted in findings that help fine-tune the Project design. These findings include: District leadership matters. Support from the Bupati as the top executive is essential. However change agents among the mid-level bureaucrats are also important. These are the people that can push or stall the reforms. Hence sufficient time should be allocated to assess and map them. Outsiders can help drive reforms. The role of external agents is crucial, especially in places where civil society is weak or fragmented and good governance practices are new. Providing on-the-ground facilitation, including bridging between the government and civil society, becomes a crucial support at a time of transition. Competition promotes innovation among regions. Key politicians and civil servants want and need recognition for successful reform initiatives. Recognizing and promoting enlightened leadership through dissemination at different levels will serve as an incentive to boost further reforms as well as providing opportunities for cross learning. Nascent reforms require support to have real impacts. External agents should be aware about the on-going reform initiatives and latch on to them. Piggy backing on their initiatives will create a high level of ownership and at the same time providing facilitation, technical support and local level capacity building will deepen the initiatives impacts. Overall, the following key elements have informed the project design: (i) (ii) (iii) Effective channels for citizen-civil servant communication. Even though decentralization places the decision-maker closer to the beneficiaries, it does not automatically translate into an enhancement of communication between government and society. Projects or programs promoting broad-based reform require a set of reformers based not just within Government, but also from an increasingly active civil society. Local networks of journalists, NGOs and activists will play a large role in pushing reforms from outside the system. Just as important as kabupaten-level demand for reform, is harnessing community demand for reform. The project addresses this issue by providing mechanisms for greater civil society participation in decision-making, demystifying the budget process and simplifying bureaucratic procedures. Legal framework. Past decentralization projects have encountered problems resulting from the vague demarcation of powers and responsibilities of the local governments. The project aims to strengthen the legal framework of decentralization through the issuance of revised guidelines that would assist local governments implement national laws and support legally mandated consultation processes concerning the use of public funds, preparation of local regulations and provision of governmental services. Technical assistance. The provision of technical assistance to local governments is an important element for the success of the reforms. Experience from past projects have shown how technical assistance can fail when they are designed externally and do not have the buy-in of local governments. Technical assistance in this project will be demand-driven, based on the identification of needs by local authorities and tailored to local conditions. Technical assistance will also, as much as possible, tap into locally available resources in local universities, NGOs and the private sector. (iv) Promotion of transparency in decision-making. The administrative monopoly on decision-making, the culture of patronage, and the existence of elite networks from the previous

19 (v) (vi) centralized system may serve to frustrate and undermine the decentralization process. The project addresses this issue through the promotion of transparent processes such as the formation of the kabupaten multi-stakeholder forum as a broad-based citizen s group that engages with the local government in the reform process. The selection of project sites will be based on the existence of pro-reform executive leadership and where there is already community demand for changing the system. Dissemination of good practices. Local governments often have very little idea of what strategies have succeeded and tend to repeat the failures of others. The project will facilitate the exchange of experiences between different kabupatens and between NGOs working in different areas to hasten learning and reward innovation. Support for local-level dynamics of decentralization. The devolution of power from the center to local governments is often an uneven and messy affair. In recognition of this process the project has adopted a flexible approach that supports the dynamics of decentralization through the development of local reform action plans that build-upon minimum entry criteria. 4. Indications of borrower commitment and ownership: Strong borrower support for this project is evident and can be seen in the following: (i) (ii) (iii) (iv) (v) (vi) Memorandum of Understanding signed by Bupatis and DPRDs regarding their interest in participating in the program, and allocation of counterpart budget by pilot kabupatens participating in the preparation phase (US$4,000-17,000 per kabupaten). Official request from BAPPENAS for the project and inclusion in the lending program. Establishment of a GOI preparation team and National Steering Committee (by ministerial decree) at the center and active participation in field visits, meetings, drafting of term of reference, and overall project preparation. Support from the Government to convene meetings with other donors working on governance. Successful implementation of a PHRD grant for project preparation and use of DFID grant funds to pilot initial facilitation on governance reform and participatory PRSAP formulation. Support from the National Poverty Alleviation Committee and their commitment to use the project manual on local level poverty analysis for all kabupatens participating in the PRSP exercise. 5. Value added of Bank support in this project: There are four major areas where the Bank adds value through this project: (i) (ii) The cross sectoral approach builds on strong sectoral and CDD expertise: The Bank program in Indonesia has for the past few years worked in a decentralized environment through a number of sectoral programs (basic education, provincial health water in low income communities) that have helped develop relationships, capacity and some sectoral reforms at the local level. The Bank has also supported civic participation and improved local level governance at the village and kecamatan-level through KDP and UPP. ILGR builds on these two approaches through a focus on cross-sectoral reforms targeted at the kabupaten-level. Mobilizing substantial grant and investment funds: The Bank is able to mobilize substantial grant and investment funds to help finance kabupaten capacity building and development budgets. The donors are providing resources for technical assistance and capacity building, but few of them are providing the investment funds required by kabupatens to finance basic services and reform use of existing public expenditures

20 (iii) (iv) Building on our analytical work: The Bank has invested in substantial Economic and Sector Work through our work on local institutions (LLI study), decentralization (RPERs, GDS surveys, on-going work on local government platforms ), monitoring impact of user fees (SMERU, ASEM), and poverty (Poverty Report). More analytical work is required and through this operation the Bank can link proposed ESW directly to an on-going investment operation. Building on our global knowledge base: The project builds on the lessons learned from our global knowledge base on decentralization, good governance, CDD and anti-corruption. Information on on-going operations in Uganda, Ethiopia, Mexico, Brazil, India provide valuable inputs and opportunities for cross-country knowledge exchange. E. Summary Project Analysis (Detailed assessments are in the project file, see Annex 8) 1. Economic (see Annex 4): Cost benefit NPV=US$ million; ERR = % (see Annex 4) Cost effectiveness Other (specify) The proposed project focuses on improving local governance and accountability, building capacity at the local level and financing community initiated sub-projects aimed at reducing poverty, particularly rural infrastructure. A conventional economic analysis of ILGR will fail to capture the various expected potential benefits from the project. It renders its importance, however, to better identify the nature of these benefits and where possible, their scope, in view of designing the appropriate tools and indicators for ex-post monitoring and evaluation system. It is nevertheless important to note that ILGR effectively generates two different sets of economic benefits. First, from Components A and C, there are the expected benefits from improved governance and accountability in the kabupatens. Second, from Component B, there are the expected benefits from the investment sub-projects. With respect to quantifiable economic benefits, which will mainly accrue as a result of sub-projects implementation, the programmatic nature of the project loan does not allow a detailed cost-benefit calculation ex-ante. However, experience from similar projects in Indonesia and other regions indicates that demand driven projects, involving community participation, are highly cost-effective and economically viable. Because communities are actively involved in the prioritization, implementation, operations and maintenance, it can be assumed that the projects they select will be of high priority and socially productive. In the case of ILGR, kabupatens that recently completed their participatory poverty analysis and their poverty reduction strategies formulated their priorities for the use of investment financing. Based on extensive experience from other projects in Indonesia (KDP, UPP, VIP, WISMP), small scale kecamatan and kabupaten level infrastructure projects have been shown to be economically viable. For example, the ex-post evaluation study for KDP 1 and 2 identified an overall EIRR for the project of between 20 to 53%, with roads/bridges and water supply projects being especially productive in economic terms. The ICR for the Java irrigation loan indicates that rehabilitation of small scale irrigation systems generate EIRRs from around 16 to 30%. During the MTR, the project management unit will run a detailed economic analysis of implemented sub-projects under ILGR in order to estimate benefits generated and identify problems (if any) that need to be addressed. Non-quantifiable benefits include: (a) improved governance, enhanced public participation and accountability of local governments to their constituencies as a result of the endorsement and implementation of a comprehensive package of reform measures (see Annex 2), and (b) enhanced project effectiveness through the mobilization of greater resources under the same budget to finance pro-poor projects. These lessons could serve to provide policy recommendations for necessary corrective measures

21 aimed at maximizing the benefits of decentralization for more efficient service delivery at the local level. The project s monitoring and evaluation system described in Annex 2 will ensure the necessary tools and indicators to measure outputs and outcomes generated by these reforms and their induced benefits are in place. 2. Financial (see Annex 4 and Annex 5): NPV=US$ million; FRR = % (see Annex 4) ILGR s funding will not have a significant fiscal impact at the macroeconomic level. They represent percent of the national expenditure (2004), and only a small component of the national development expenditures (0.093 percent). At the local level, ILGR covers 40 of the 440 local governments in the country with an estimated population of 34 million (BPS 2002) representing 16 percent of Indonesia s overall population. Depending on the location and population size of kabupatens, ILGR s fund represent between 1.1 and 5.1 percent of the local budget and around 5 to 18 percent of district-level development expenditures. The project would finance local public infrastructure sub-projects. It will therefore not aim to fully recover the capital cost from beneficiaries. Kabupatens should be able to meet their financial commitments towards the project in terms of additional O&M without detrimental impact on finances, in case active steps are taken to improve their revenue generation effort. Many of these kabupatens have been accumulating budget surpluses over the past few years. In the short-term, kabupatens ability to finance incremental O&M will largely depend on the stability of the expected stream of revenues generated by fiscal transfers from higher level governments. Fiscal Impact: The positive fiscal impact of the project will result from various sources: An increase in national and kabupaten fiscal resources being allocated to support poverty targeted development sub-projects. Procurement reforms will improve competitiveness of the bidding process and render the procurement cycle more transparent resulting in reduction in prices offered for public contracts, and additional savings in the local governments budget. Improvement in the financial management systems of participating kabupatens will generate direct benefits to the budget. More efficient use of public funds will generate greater savings and prospects for a more efficient allocation of resources among the local level dinases. An increase in economic activities expected from sub-projects will yield tax revenues generated by additional income. These additional revenues would widen the pool of resources available for kabupatens to finance other development programs and Operations and Maintenance. 3. Technical: Meeting the Reform Requirements: The single biggest challenge will be for kabupatens to meet the program requirements in transparency, procurement and financial management reforms, in addition to preparing a participatory PRSAP. This is a result of stark differences in regional capacities and generally poorer oversight arrangements. In addition the national architecture for financial management reforms is still evolving, and remains highly uncertain. Implementing regulations for the new State Finance Law (No. 17/2003 passed in March 2003), particularly those related to regional government are yet to be issued. Some other key regulatory and organizational changes that are planned at the national level will change the financial management landscape dramatically when fully implemented. This has presented some challenges, as the dividing lines of authority between the Center and regions are not always very clear and regions often look up to the Center to prescribe what they should be doing to progress reforms. The current set of program requirements therefore represent a combination of existing kabupaten good practice, and basic

22 reform measures that are in compliance with the national reform agenda. During preparation, several kabupaten diagnostic and base-line assessments were carried out on existing practice in drafting Perdas and information disclosure, procurement practices and financial management and audit practices. The current set of revised requirements is building on these assessments and making gradual improvements in these three core governance requirements. In this way a core group of kabupatens (at least 40) will be able to meet the basic entry and first phase requirements. The project will dedicate substantial technical and training support to ensure kabupatens fulfill these requirements. Technical quality of the infrastructure- a significant portion (9-14 percent) of kabupaten development budgets are allocated to small scale infrastructure ranging from US$10, ,000. The kabupaten public works dinas use technical standards and guidelines issued by the Ministry of Public Works to ensure technical quality of civil works. In addition kabupaten projects meeting a standard threshold size are supervised using third party consultants. The project design includes a number of mechanisms to ensure quality. These include the use of standard design and specifications of typical kabupaten infrastructure, financial and other criteria (roads, bridges, markets, irrigation rehabilitation- based on guidelines used in other Bank financed projects), technical review and monitoring support by technical facilitator based in kabupaten clusters and annual review by kabupaten technical review teams. Operations and Maintenance (O&M) - Sustainability of sub-projects will be an essential element of the project design. With the reclassification of local government budget starting in 2003, some of the O&M expenditures previously placed under development expenditure, now are more explicitly classified as O&M. This has led to an increased level of O&M expenditure in most kabupatens. For example in Bandung the O&M expenditure has increased from 1.6 percent of the recurrent budget in 2002 to 18.6 percent in Though kabupatens have sufficient resources, including surplus funds, the funds presently allocated for O&M of kabupaten infrastructure are minimal. Monitoring of process, outputs, impacts of governance reform and sub-projects The project places a premium on effective and results-oriented monitoring and evaluation (M&E). The project s M&E system is designed to: (a) track the progress of project activities, including inputs and outputs, and take corrective measures as necessary; and (b) assess the longer-term outcomes and impact of project interventions. The M&E system will provide a continuous learning and feedback system to improve the project s approach. The Project s M&E system includes internal monitoring, external monitoring and independent evaluation. For a fuller description of the M&E system, see Annex Institutional: The key institutional issue will be the relationship between the local governments (districts) and central government with the provincial government in between. The Project will attempt to work directly with the districts while the operational role of the center is defined in terms of standard setting, developing overall guidelines and regulations for the national reform agenda, supporting implementation of the national reform agenda at the local level, developing guidelines for issues that cut across districts and provincial boundaries, and other related policy guidelines. The provincial government will be particularly helpful in inter-district coordination within its jurisdiction. 4.1 Executing agencies: The Ministry of Home Affairs, Directorate General of Regional Autonomy, is currently involved in executing a number of donor-financed projects aimed at strengthening the decentralization process and

23 developing district capacity. The Ministry has also worked closely with the Bank in the execution of the US$6.9 million Dutch Trust Fund for Decentralization. Locating the project secretariat in MOHA is appropriate as it will: (a) build on the on-going analytical work supported through the Dutch Trust Fund; and (b) ensure that the agency responsible for issuing national guidelines related to clarifying decentralization laws and procedures is centrally involved in implementing the project. MOHA will also be one of key government counterparts of the newly established multi-donor Decentralization Support Facility (DSF). The DSF could facilitate the exchange and dissemination of good practices from the Project, reduce undesirable duplication or overlap of donor support, provide cross-linkages of donor support beneficial to the Project, and reduce donor coordination transaction costs for MOHA. 4.2 Project management: National. The current institutional arrangements, which include relevant agencies in the National Steering Committee (NSC) chaired by Bappenas, will ensure that coordination with other Ministries such as Ministry of Finance and the National Audit Agency (BPKP), takes place at regular intervals. MOHA will head the National Program Secretariat which basically will manage the operations of the Project. Hence establishing a strong, fully staffed and functioning secretariat to play this role, will be a key aspect for the Project's success. The secretariat will have to provide adequate information, technical support and timely back-stopping to the districts and they will be assisted by a team of national management consultants. Provincial. The province will have a coordination team of related, cross-sector agencies, chaired by the Province Development Planning Agency (Bappeda). The team will facilitate information sharing among ILGR and non-ilgr districts, as well as promote relevant reforms, which the Project has supported, to non ILGR districts. In addition, the team will help resolve cross-districts issues that fall under its jurisdiction and facilitate selection of batch 2 kabuparens. Districts. Capacity of the district as well as its civil society, which is included in local decision-making process and as independent program monitors, vary considerably both on and off Java, making inter-district assistance crucial. The Project, through its decentralized technical support teams and facilitators will provide substantial training to regional staff, civil society groups and DPRD members, in the first year of project implementation. The results would be disseminated through cross-visits by district teams, regional and national issues-based workshops and training events. The regional technical assistance team will also be located by cluster, and would allocate their time between districts, based on existing district capacity and needs. During preparation, 15 pilot districts have already undergone training in areas ranging from Perda drafting to poverty assessment. Other donors such as USAID and GTZ are already working in some ILGR districts and providing training in participatory planning and budgeting. The Project will build on existing capacity and ensure the second batch of districts complete a training needs assessment prior to receiving further training. The district reform action plan also provides a mechanism to tailor training and capacity building inputs based on their current base-line of reform. Training modules for this will be centrally developed. Recruiting suitably qualified kabupaten facilitators and regional technical support teams will be essential in ensuring a successful program. During preparation, recruitment of facilitators was carried out nationally, and most facilitators placed in kabupatens were from the province or region. During this time it was clear that facilitators recruited from within the kabupaten were less effective than those from outside. A detailed training manual and program has been piloted for facilitator training and will be modified during implementation for the second batch of facilitators. During preparation the Project has trained some 25 kabupatens and regional facilitators, who will continue through implementation and some may graduate to the regional technical support teams. Given the large number of donor-funded governance projects, there is

24 currently substantial national expertise available to assist kabupatens in the core governance areas that are the focus of the project. 4.3 Procurement issues: The procurement assessment identified local governments as having limited capacity and weak procurement systems. Two main actions will be required to minimize procurement risk: (i) (ii) Local governments will participate in implementing the procurement reform program under this Project, to reach a minimum standard of procurement as mandated by Keppres 80/2003. The reform program will help establish a satisfactory and sustainable procurement system at the kabupaten. Activities financed under the reform program are described in Annex 2. Increase kabupaten capacity in project implementation through: Quality assurance and evaluation of the procurement reform component under the Project will be provided by the Secretariat of LPKPP at the Directorate of System and Procedures at BAPPENAS. A draft Project Operational Manual has been developed during project preparation and will be finalized prior to Effectiveness. The manual includes all applicable procurement, procedures, and monitoring and reporting requirements. A procurement training program for all project actors are developed and agreed with the Bank. As part of strengthening the capacity of the Executing and Implementing Agencies, there will be two sets of technical assistance teams, who will be hired under the Project. At the national level, there will be a National Management Consultant (NMC) to assist the Executing Agency in coordinating this Project. At the regional level, there will be Regional Management Consultants (RMC) to provide management supports to the PMU and PIUs at Kabupaten level. An Evaluation Committee, comprising of qualified members acceptable to the Bank, will be formed at National Project Secretariat, to assess the performance of the consultants. The assessment report will be sent to and agreed with the Bank on annual basis. This report will provide the basis for continuation of consultants services. NCB will follow the Open Competitive Bidding procedures as described in Keppres 80/2003, subject to clarification. The selection of consultants will completely follow the Bank Consultant Guidelines. With the effectiveness of Keppres 80/2003, it is expected that the following actions will be strengthened under the project: (i) transparency in the procurement process, including mandatory announcement of award of contracts in the public domain; (ii) sanctions and enforcement against collusive practices, both to consultants/bidders and to the government officials; (iii) sanctions and enforcement against poor performances of consultants/bidders. In addition, the implementing agencies have an option to follow the Pemilihan Langsung procedures as described in Keppres 80/2003 to satisfy the Bank s shopping procedures which will be included in the Project Manuals. Procurement processing is the responsibility of the procuring unit. Therefore, in the case of investment projects, the procurement will be the responsibility of each PIU at the Dinas level. However, to maintain quality assurance and consistency on procurement, all correspondence

25 with the Bank related to procurement (including requests for prior review) will be conducted through the EA at the central level, in which case both the procuring unit and the EA must have agreement on the proposed procurement action or query. The overall procurement risk for the local governments is high. The prior review thresholds will be based on this capacity assessment. Overall project procurement includes hiring technical assistance through large consultancy contracts at the central level and small to large contracts of works and goods at the local government level. MOHA has already prepared the draft procurement plan for project implementation. Given the size, nature of procurement and the experience of executing and implementing agencies in dealing with similar types of projects, the overall risk is high. Annex 6(A) describes project procurement aspects in further detail. 4.4 Financial management issues: A financial management assessment of this project was carried out between September-November 2003 and has involved an assessment of financial management capacity of the key implementing agencies and an evaluation of the adequacy of financial management arrangements proposed for the project, including accounting systems for project expenditures and underlying internal controls. Recent Bank experience in other projects in the concerned Ministries, the shortage of financial management skills in the Indonesian civil service generally and a consideration of the Country Financial Accountability Assessment report (issued April 2001) and development thereafter suggest that financial management capacity at these central agencies is likely to be generally low. A significant part of the project expenditure will be executed and accounted for at the district governments. In districts, there is an even greater shortage of accounting skills, and financial management systems are generally weaker than at the center. An analysis of project specific risks indicates that substantial risks may arise from several other features. The lead implementing agency (DGRA, MOHA) has prior experience in managing Bank projects. However, risks arise from geographical spread of PIUs and use of multiple agencies and community organizations. The geographical spread of project activities to about 40 kabupatens and inherently weak and variable financial management capacity in the regions imposes substantial risks on financial accounting and reporting. Validation of payments is traditionally a weak area and vulnerable to malfeasance and fraud. Based on these factors financial management risks inherent in the project entity and risks specific to project design have been rated as high. Although the risks are rated as high, the project will be working with regions that have shown an interest and commitment in moving in the right direction, and the risks are worth taking. Further several measures have been designed to mitigate these risks. These include deployment of trained financial management consultants in districts to assist in the preparation of project financial statements and more intensive payment validation procedures, including community disclosure and oversight mechanisms where applicable. A series of these measures and other operating authorities and procedures for each project activity are expected to be clearly documented in the Project Operational Manual. Full details of these measures are given in Annex 6(B). With the completion of the action plan, the project will have acceptable financial management arrangements when the project becomes effective. Funds for the project are expected to be channeled through a Special Account opened for the purpose. Fund flows to the regional treasuries (KPPN) will be on a block grant basis. Disbursements into these accounts will be made through Special Account procedures by central treasury offices. Fund flows to local Dinas offices (spending units) will follow the local government system. FMR-based disbursements will be introduced, under which replenishments will be made based on quarterly Financial Monitoring Reports. Annual financial audits will be conducted by BPKP, Government auditors, based on Terms of Reference

26 that will seek specific feedback on internal controls in sub projects. Harmonized financial management arrangements will be agreed with other donors (DFID). 5. Environmental: Environmental Category: B (Partial Assessment) 5.1 Summarize the steps undertaken for environmental assessment and EMP preparation (including consultation and disclosure) and the significant issues and their treatment emerging from this analysis. Under the proposed ILGR, sub-project investment will be identified during project implementation, after the participating kabupaten has completed a minimum set of prescribed reforms during the pre-investment phase. Therefore, no environmental assessment was conducted ex ante. Instead, in line with the programmatic nature of the investments under the project, a Safeguards Framework, including an Environment Framework, was developed during preparation and adopted as part of the Project Operational Manual, along with more specific guidance for implementation of the framework. Also, a screening process employed as part of the Environment Framework will ensure that the sub-projects will not be located in sensitive areas. As is the norm in the Bank's Indonesia portfolio, the project will rely heavily on government guidelines as the basis of the project s environmental screening requirements. Four scenarios are possible under Indonesia regulations: (i) No EA, (ii) Full EA, (iii) EMP, and (iv) Standard Operating Procedures (SOP). However, under the proposed ILGR, the sub-project screening procedure of the Environment Framework will exclude financing any projects that would have potential impacts significant enough to require ANDAL (full EA) under Indonesian regulations, or located in sensitive areas. No large-scale impacts are envisaged, also because investments will be of relatively modest-scale. The minimum investment in each Kabupaten in any one year will be between US$ million, and the total investment in any Kabupaten will be between US$1.5-3 million over 3 years. A negative list will preclude funding of projects that would involve pesticides, asbestos or other hazardous materials, commercial logging. Moderate impacts are possible, primarily those associated with new roads, construction of buildings, and small-scale infrastructure. The following measures will be used for sub-project related consultation with and disclosure to key stakeholders, including local government, local parliament, community members and specific interest groups such as women and indigenous people, and civic organizations (environmental NGOs etc.): (i) (ii) All project investments and reform initiatives will be defined by a process of civic participation in the Kabupaten, and the safeguard issues will be key part of the discussion and decisions. Potential Project Affected People would be part of the group that proposes the project. When they are not, there will be a special consultation process to obtain their views. The overall citizen participation processes should include an explanation of the rationale and consequences of the Bank s safeguard policies, so these are understood. Investment proposals submitted will thus be pre-screened and meet safeguards requirements. (iii) Before being finalized each report and plan required under the Safeguard Framework is to be disseminated widely, especially among the affected people, for public comments and the comments received should be taken into account as appropriate in the final report and/or plan. The final report and/or plan should be disclosed in a public place in a form and language accessible to affected groups and local NGOs

27 (iv) As part of project information dissemination, the project will work closely with local press, radio and strategic civil society networks. 5.2 What are the main features of the EMP and are they adequate? ILGR is a demand driven project, executed by local level government. An overall Safeguards Framework has been prepared and discussed with participating local governments. The Safeguards Framework, includes environmental screening procedures, guidelines for preparation, review and implementation of subproject management plans or application of standard operating procedures to prevent adverse impacts, a policy framework for land acquisition and resettlement, a framework for addressing the needs and requirements of indigenous peoples, and guidelines for consultation and disclosure. Institutional arrangements for safeguards have been defined to suit the range of capabilities that may be encountered, from kabupatens with functioning environmental management agencies (BAPEDALDA) or environmental committees, to kabupatens in which there is little or no capacity to address environmental issues. Facilitators will be trained in safeguards procedures, to enable them to assist in the development and implementation of the project safeguards screening and review. The proposed project design incorporates several levels of intervention to ensure compliance to applicable safeguards policies: The project operational manual has a section on safeguards and includes standardized formats relating to land acquisition, environmental screening and participation of vulnerable and disadvantaged groups. The complaints handling unit at the central level will also monitor and follow up on any complaints received by potential project affected people, so that remedial action can be taken quickly. The management consultant teams will include safeguard specialists in the regional cluster who will conduct training for kabupaten safeguards teams and facilitators. The consultants will also review all infrastructure proposals to ensure compliance with both Indonesian law and Bank requirements. The kabupaten safeguards team will undergo a specialized training to ensure comprehension of the safeguards procedures. The Bank supervision team will include dedicated safeguards specialists who will participate on bi-annual project supervisions. 5.3 For Category A and B projects, timeline and status of EA: Date of receipt of final draft: February 24, How have stakeholders been consulted at the stage of (a) environmental screening and (b) draft EA report on the environmental impacts and proposed environment management plan? Describe mechanisms of consultation that were used and which groups were consulted? The project social and environmental safeguards framework was sent by the national steering committee to all batch 1 kabupatens (15 pilot kabupatens) during preparation. The framework was presented by the project facilitators to the multi-stakeholder forums comprised of NGOs, village representatives and local government staff. Since project investments under component B will be identified during the budget planning and allocation process (during project implementation), the discussion focused on the general framework screening procedures and establishment of the Kabupaten safeguards committee. 5.5 What mechanisms have been established to monitor and evaluate the impact of the project on the environment? Do the indicators reflect the objectives and results of the EMP?

28 The project monitoring team will conduct quarterly and annual reviews of all sub-projects implemented under component B. This will be carried out by the consultant engineers assisted by the safeguards specialist. The reports will be available for review prior to Bank supervision missions. 6. Social: 6.1 Summarize key social issues relevant to the project objectives, and specify the project's social development outcomes. Social development issues most pertinent to ILGR project goals are threefold: (i) (ii) Poverty Reduction Recent research points to the fact that national-level poverty reduction efforts frequently overlook root causes of poverty and fail to accurately target the most disadvantaged groups at the local level. By taking a district-based approach that aims to substantiate participatory poverty analyses, the ILGR project aims to develop locally appropriate poverty reduction strategies that will be more sustainable, albeit smaller in scope, than those developed by the central government. Civic Participation Improving governance necessarily means a higher degree of involvement of the citizenry in the affairs of government. In countries like Indonesia where there are no long-standing traditions of civic participation, the challenge for ILGR is to provide practical means for ordinary people to understand government business and then participate in those aspects most relevant to them. The ILGR will endeavor to enhance participation in critical aspects of government business that are most correlated to poverty reduction efforts, namely the development planning, budgeting, budget tracking and delivery of key public services. (iii) Gender Mainstreaming Projects such as ILGR must make a consistent effort to improve the status of women in Indonesia. To this end, the proposed ILGR will proactively mainstream gender concerns as an integral part of good governance programs. More specifically, the proposed project will help to create a multi stakeholder forum in participating kabupatens, where the interests of marginal groups, such as the poor and women, would be given particular attention, particularly in relation to budget decision of the local government and poverty reduction efforts. However, as this arena alone will not be sufficient to consistently increasing mainstreaming gender concerns, a project-associated JSDF grant for assisting civil society initiatives, will put specific effort on fostering women participation on the participatory budgeting and public service delivery evaluation. Through the JSDF grant, the women s groups in ILGR kabupatens will receive assistance to develop their own advocacy focus and strategy on the budget development process and on public service delivery. Within the strategy development, they also will create milestones to measure their success. This measurement will also be used by the project to evaluate the project s ability to consistently mainstream gender. 6.2 Participatory Approach: How are key stakeholders participating in the project? Planning and Design The key mechanism for involving a range of public stakeholders is a multi-stakeholder forum to be constituted at the kabupaten level. In order to represent the broadest possible range of stakeholders, the forums are intended to include members from: - Civil Society organizations including local NGOs - Academics - Customary ethnic and/or religious leaders

29 - The private sector (including professional associations) - People s organizations, especially those with a constituency amongst the poor (e.g. farmers or workers associations) The intent is not to establish these forums in accordance with any prescriptive formula, but rather to build upon existing pro-reform momentum, often utilizing pre-existing loose coalitions of civil society activists. Emphasis is placed on having the forums broadly representative of the socio-economic realities at the local level. At the same time, efforts need to be made to ensure both a reasonable geographic (so as to ensure all areas of the kabupaten are represented) and gender balance amongst forum members Preparation Phase In practice, during the project preparation phase in 15 pilot kabupatens, the majority of stakeholder forums, following up on a large-scale public meeting, have been divided for practical purposes into two distinct working groups one tasked with undertaking the Participatory Poverty Analysis (PPA) and the other forming a Transparency, Participation and Accountability (TPA) working group (although the names of the working groups vary from district to district). On average, each working group has 7-15 active members, mostly constitutes representatives from civil society, local government officials, and local parliament members. The PPA working group is responsible for carrying out community assessments to produce a Poverty Reduction Strategy and Action Plan (PRSAP) for reference during the annual district-based development planning mechanism (Musrenbang) and eventual endorsement by the local Planning Department and ratification by the district parliament. At the same time, the TPA working group assists with the drafting and socialization of a Perda (local regulation) that ensures a higher degree of participation and transparency in the annual planning, budgeting and public service delivery activities of local government Future Implementation Moving beyond the development of the PRSAP and the local regulation on Transparency and Participation, the working groups may be reassembled into a stakeholder forum to reinforce public participation in annual development planning and budgeting practices or they may help oversee implementation of the PRSAP, either in the context of a stakeholder forum or specific issue-based working groups. Significant variation in terms of the nature of civic engagement can be expected from participating kabupatens. However, a degree of consistency will be attained by focusing public participation efforts on certain key benchmarks that are likely to include: Public consultation and the endorsement of the stakeholder forum (or a designated working group) with respect to the use of ILGR investment funds. It is anticipated that ILGR funds will target mainly pro-poor rural infrastructure; A Transparency Commission comprised primarily of civil society leaders to provide independent monitoring of the implementation of the Perda on Transparency and Participation; Public consultation mechanisms (envisioned in some kabupatens as distinct and ongoing Working Groups) on specific issues deemed crucial to district-level poverty reduction; and Enhanced access to information and the possible involvement of independent non-government participants in tendering committees as part of the financial management and procurement reform package

30 6.3 How does the project involve consultations or collaboration with NGOs or other civil society organizations? Civil society organizations, including NGOs, have been instrumental in the design of the civic participation mechanisms that are being put into place as part of the ILGR initiative. They will continue to play a critical role both within the stakeholder forums and their corresponding working groups, as well as with envisioned implementation phase mechanisms such as the Transparency Commission. Along with independent media, Civil Society groups will provide the most important means of monitoring progress towards ILGR good governance goals. At the same time, it is important to ensure that NGOs not become overly dominant within the designated civic participation mechanisms. Given that a large portion of NGOs do not have a genuine grassroots constituency amongst the poor, ILGR must exercise caution in order to avoid the perception that stakeholder forums are not being established as an alternate form of local government. 6.4 What institutional arrangements have been provided to ensure the project achieves its social development outcomes? The ILGR team includes several members well grounded in methods of civic engagement as well as specialists long involved with Indonesian civil society. They have been involved in all aspects of ILGR design and will continue to play a role throughout the project s intended implementation phase. Field-level facilitators and regional coordinators also have extensive experience in liaising between local governments and the public. The best facilitators will be retained for the proposed expansion of ILGR into new districts in Finally, the recently approved JSDF is intended to foster innovative civil society-based means of enhancing participatory budgeting, budget tracking and public service delivery (using a Civic Report Card model) and will add value to institutional arrangements already in place. 6.5 How will the project monitor performance in terms of social development outcomes? The overall M&E framework (see Annex 2) for the project includes a series of independent assessments and qualitative and quantitative studies on governance that will measure: (a) poverty and improved governance outcomes; (b) steps taken to enhance civil society participation in kabupaten budget planning and execution activities; and (c) overall steps taken to improve inclusion of disadvantaged groups (poor households, women and vulnerable groups) in project activities. 7. Safeguard Policies: 7.1 Are any of the following safeguard policies triggered by the project? Policy Triggered Environmental Assessment (OP 4.01, BP 4.01, GP 4.01) Yes No Natural Habitats (OP 4.04, BP 4.04, GP 4.04) Yes No Forestry (OP 4.36, GP 4.36) Yes No Pest Management (OP 4.09) Yes No Cultural Property (OPN 11.03) Yes No Indigenous Peoples (OD 4.20) Yes No Involuntary Resettlement (OP/BP 4.12) Yes No Safety of Dams (OP 4.37, BP 4.37) Yes No Projects in International Waters (OP 7.50, BP 7.50, GP 7.50) Yes No Projects in Disputed Areas (OP 7.60, BP 7.60, GP 7.60)* Yes No

31 7.2 Describe provisions made by the project to ensure compliance with applicable safeguard policies. O 4.01 Environmental Assessment An Environment Framework has been developed as part of the Safeguards Framework and is included in Project Operational Manual along with more specific guidance for its implementation. OP Natural Habitats The project s negative list will ensure that no subprojects which adversely affect critical natural habitats will be eligible for project financing. OP Pest Management The project will not procure any pesticides nor will an increased use of pesticides result from the project. No further action is required under the policy. OPN Cultural Property The negative list indicates that no subproject would be financed which degrade or damage physical cultural property. Construction contracts include provisions for chance finds and the procedure to follow in such events. OD Indigenous Peoples (IP) A Indigenous Peoples Framework has been developed as part of the Safeguards Framework and is included in the Project Operational Manual along with more specific guidance for its implementation. OP Involuntary Resettlement A Land Acquisition and Resettlement Framework has been developed as part of the Safeguards Framework and is included in the Project Operational Manual along with more specific guidance for its implementation. OP Forestry The project will not finance activities that would involve significant conversion or degradation of critical forest areas or related critical natural habitats as defined under the policy. No action is required under this policy. OP Safety of Dams The project will not finance construction or rehabilitation of any large dams as defined under this policy. No action is required under this policy. OP International Waterways There are no known project components involving international waterways as defined under the policy. No action is required under this policy. OP Disputed Areas The project is not located in any known disputed areas as defined under the policy. No action is required under this policy. F. Sustainability and Risks 1. Sustainability: Sustainability of operations is crucial at both the district and national levels

32 (i) At the district level maintaining governance reforms will require: (a) Support from the district executive and legislative groups. For Bupati and DPRD, one of the key incentives to buy into the reform agenda will be national recognition for their efforts and assurance that these efforts will eventually increase private sector investment and donor support. The Project will promote the efforts of the Bupati and DPRD through various opportunities, including cross-exchange and discussions with other districts and national and international actors. This exposé will create a leverage to increasingly direct additional Bank and other donor projects to this group of reform-minded districts. (a) Budget to demonstrate and eventually institutionalize reforms, particularly for pro-poor allocation beyond the Project. When the district has implemented the Local Governance Reform Framework, the Project provides investment funds that go into the district budget to finance its own poverty strategies (financing is limited to rural infrastructure in the first batch districts). Once the central government sees that local governments can be fiscally responsible and are making efforts to allocate resources for poverty alleviation purposes, additional funds could be provided through the DAK mechanism. Hence this Project allows the central government to test and pilot initiatives and reward better performing kabupatens with additional poverty targeted financing. (b) Civil society demand. The Project provides space for multi-stakeholder participation to develop reform action plans and to monitor the implementation of the plans. This participation will create not just ownership but also raise awareness and empower civil society, which enable them to demand for more reforms. At the same time the Project helps develop a media strategy to publicize the reform action plans and the annual outcomes to ensure widespread support and monitoring. (ii) At the national level there are at least the followings to maintain: (a) Enabling laws and regulations. In the relatively early years of decentralization many laws and regulations, including guidelines and standards, are still lacking. Without these regulations, the reforms that have started will not be able to evolve further to create the desired impacts. The central government has been aware of the issues. At present financial management reforms are beginning to gain momentum at the center. Many key aspects are expected to be legislated and implemented over the next few years. Regional financial management reforms will need to be deepened and continued well beyond the project period in response to those changes. The Project enables such response through an empowered FM Reform Committee which will be constituted in each participating region to develop detailed implementation plans and technically supervise implementation of reforms. In procurement reforms, the Project in line with the central government guidelines in Keppres 80/2003 facilitates the establishment of a focal point to gear up district reforms. Although there is yet a law which specifically mandates information disclosure and broad-based participation, there are other laws and regulations that support some kind of information disclosure and public participation (see Annex 8 for the regulatory framework). The Project is able to facilitate the creation of Regional Law(s) on Transparency and Participation in the participating districts. (b) Adequate supervision and responses. The National Project Secretariat, assisted by the National Management Consultants and Regional Management Consultants, will have regular supervision and monitoring to respond to district s needs and problem solving related to the Project. In addition, a clear reward-and-sanction mechanism is developed to create a healthy competition among districts and build up the Project s credibility. From

33 the Bank side funding for supervision during implementation is adequate and sustained from a dedicated cross-sectoral team. 2. Critical Risks (reflecting the failure of critical assumptions found in the fourth column of Annex 1): Risk Risk Rating Risk Mitigation Measure From Outputs to Objective M Laws No. 32/2004 and 33/2004 are revised and backtrack decentralization process (including fiscal relation) The laws are recently enacted and the Bank, through its policy advice, will work with MOHA and MOF to strengthen decentralization process. Lack of political accountability and there is no incentive for change. From Components to Outputs Lack of core group of reformers particularly DPRD members, Bupati and civil society within the kabupaten who are willing to push the reform agenda forward. Communities and civil society groups are not enthusiastic to participate in local planning and decision making. Local government s policies and plans which are developed in participatory manner are not reflected in the budget allocation. Delay in district level budgeting process, procurement or disbursement. The Law No. 32/2004 mandates province to review district-level budget prior to its enactment. M M M S H Upcoming direct Bupati election and newly elected DPRD members are expected to improve local political accountability. Improvement of local accountability is also inherent in the Project design. See risk mitigation measure on the lack of political accountability above. The Project s entry requirements include commitment from the executive and legislative and some concrete actions that demonstrate reform mindedness of the local leaders. Civil society and community are involved in the Project implementation from the very beginning. Issuance of the Perda to guarantee their access to information and decision making process is expected to increase the level of participation. The Project will enhance planning and budgeting process and will require kabupaten to implement PRSAP through their budget. The Project will attempt to reduce the delay by decentralizing sub-project verification process to regional consultants and kabupaten facilitators. The Kabupaten-level staff will be trained in project procurement and FM. The procurement and mobilization of Project staff are not efficient and delayed. Capacity building activities are not provided in timely manner Overall Risk Rating Risk Rating - H (High Risk), S (Substantial Risk), M (Modest Risk), N(Negligible or Low Risk) S M S Procurement plan is a requirement for Project negotiations. The activities will be a part of RMC contract that will be recruited as soon as the project is effective

34 3. Possible Controversial Aspects: Corruption is a major risk associated with all Bank-financed projects in Indonesia. Though ILGR is a project that supports good governance, given the overall climate of corruption in Indonesia, the possibility of corruption occurring in the project is more than likely, and the overall reputational risk to the Bank s program in Indonesia is high. The project design proposes to mitigate and reduce the overall risk of corruption through the program design and heavy emphasis on disclosure and external monitoring (see Annex 12); and through its emphasis on de-selecting kabupatens who fail to meet clearly defined governance requirements. There are no other controversial aspects related to the project. G. Main Loan Conditions 1. Effectiveness Condition (a) (b) (c) (d) (e) the Loan Agreement has been executed and delivered and all conditions precedent to its effectiveness or to the right of the Borrower to make withdrawals thereunder, except only the effectiveness of the Development Credit Agreement (DCA), have been fulfilled; the DFID MOU and the DFID Grant Agreement have each been executed and delivered and all conditions precedent to the effectiveness of the DFID Grant Agreement or to the right of the Borrower to make withdrawals thereunder, except only the effectiveness of the DCA, have been fulfilled; the Project Operational Manual, acceptable to the Association, has been adopted in accordance with the provisions of paragraph 4 of Schedule 4 to the DCA; at least eight (8) Kabupatens have been selected by the Borrower for participation in the Project in accordance with the provisions of paragraph 5 of, and Annex A to, Schedule 4 to the DCA; and the National Management Consultants (the contract for which services is included in the Procurement Plan) have been selected in accordance with the provisions of Part A of Section II of Schedule A and of paragraph 9 to Schedule 4 to the DCA. 2. Other [classify according to covenant types used in the Legal Agreements.] At Negotiations, the following was provided: (a) (b) (c) (d) Copy of Decree establishing the National Project Secretariat and National Implementation Committee in the Ministry of Home Affairs Procurement plan and draft Request For Proposals for the first eighteen months of project implementation; Letter from the National Steering Committee adopting the Local Governance Reform Framework; and Draft project operational manual that includes Financial Management and Procurement procedures. Project Management and Implementation The Borrower shall: (a) maintain until completion of the Project: (i) the National Steering Committee and the National Implementing Committee, each with functions and responsibilities acceptable to the Association, and (ii) the Project Secretariat with functions and responsibilities, and headed by a Project Manager with qualifications and experience, in each case acceptable to the Association; and (b) provide said Project Secretariat at all times with such facilities, staffing and funding as shall be necessary to accomplish its functions, responsibilities and objectives. The Borrower, through MOHA, shall ensure that each Participating Kabupaten and Additional

35 Participating Kabupaten shall (a) establish and thereafter maintain until completion of the Project, with functions and responsibilities acceptable to the Association, a PMU, and (b) provide each said PMU at all times with adequate funds and other resources, and with qualified and experienced personnel in adequate numbers, acceptable to the Association and in all cases as shall be necessary to accomplish its functions, responsibilities and objectives. The Borrower, through the National Steering Committee, shall ensure that the Project is carried out pursuant to the provisions of this Agreement and those of the Local Governance Reform Framework. In the event that a provision of the Local Governance Reform Framework. shall be inconsistent with any provision of this Agreement, the provision of this Agreement shall prevail. For the purposes of ensuring that said framework at all times facilitates the attaining of the objectives of the Project, the Borrower, through the National Steering Committee, shall carry out regular reviews of said framework as part of, and in accordance with, its undertakings set forth in paragraph 12 of Schedule 4 to the DCA. The Borrower shall not amend, suspend, abrogate or waive the Local Governance Reform Framework without the Association s agreement. The Borrower, through MOHA, shall adopt and thereafter apply, and cause each Participating Kabupaten and Additional Participating Kabupaten to adopt (through a Surat Keputusan) and thereafter apply, a Project Operational Manual acceptable to the Association for the carrying out of the Project and their respective responsibilities therefore. The Borrower shall, through MOHA, take all such action as shall be necessary to ensure that: o not later than September 30 in each year, commencing September 30, 2005, and until completion of the Project, a draft annual work program for all components of the Project to be implemented during the following Fiscal Year (including, without limitation, all training and workshops to take place under Parts A and C of the Project during said year) is prepared and furnished to the Association for its review and comments, including (i) the scope of the program; (ii) time-based implementation schedules; (iii) cost estimates; and (iv) budget arrangements; and o not later than November 30 in each year, commencing November 30, 2005, finalize the above-mentioned work program, taking into account any such comments, and promptly thereafter carry out said action program. Kabupaten Eligibility Without limitation upon the provisions and requirements of the Project Operational Manual, the Borrower shall: Ensure that only those Kabupatens that have met the eligibility criteria set forth in Annex A to Schedule 4 to the DCA and in the Project Operational Manual may participate in the Project as Participating Kabupatens and Additional Participating Kabupaten; Make available Phase 1 Grants only to those Participating Kabupatens that have met the eligibility criteria set forth in the Local Governance Reform Framework and in Part 1 of Annex B to the Schedule 4 to the DCA; Make available Phase 2 Grants only to those Participating Kabupatens that have met the eligibility criteria set forth in the Local Governance Reform Framework and in Part 2 of Annex B to Schedule 4 to the DCA; Make available Phase 3 Grants only to those Participating Kabupatens that have met the eligibility criteria set forth in the Local Governance Reform Framework and in Part 2 of Annex B to Schedule 4 to the DCA; Ensure that only those investment projects (i) which have met the eligibility criteria set forth in Part 1 of Annex C to Schedule 4 to the DCA, (ii) for which a technical report has been issued in accordance

36 with the provisions of Part 2 of Annex C to Schedule 4 to the DCA, and (iii) which further meet and comply with the criteria and procedures set forth in the Project Operational Manual, qualify as Sub-projects and be financed out of the proceeds of the Credit; Ensure that the proceeds of Grants shall not be used to finance the acquisition of land. Safeguards Without limitation upon the requirements of the Local Governance Reform Framework or the Project Operational Manual in carrying out Part B of the Project, the Borrower shall ensure that each Participating Kabupaten applies the Safeguards Framework submitted to the Bank on February 24, Audit The Borrower shall ensure that auditing activities under the Project, including the audits referred to in Section 4.01 of the Legal Agreement, are carried out in accordance with: (a) BPKP s audit manual dated April 13, 1999, as such manual may be amended from time to time with the prior agreement of the Association, and (b) in accordance with terms of reference agreed with the Association; and By October 31, 2005, inform each Participating Kabupaten that all auditing activities with respect to Sub-projects are to be carried out exclusively by independent auditors appointed by the Project Secretariat in accordance with Section 4.01 (b) of the Legal Agreement and in accordance with the operational manual. Monitoring and Evaluation The Borrower shall: (a) Maintain policies and procedures adequate to enable it to monitor and evaluate on an ongoing basis, in accordance with the indicators set forth in Schedule 5 to the DCA, the appropriateness of the Local Governance Reform Framework in furthering the attainment of the objectives of the Project, the carrying out of the Project and the achievement of the objectives thereof; (b) Engage, in accordance with the provisions of Schedule 3 to this Agreement, by not later July 31, 2006, consultants with terms of reference acceptable to the Association for the purpose of carrying out independent evaluation of the Project, including the Local Governance Reform Framework; (c) Prepare, under terms of reference satisfactory to the Association, and furnish to the Bank, by December 1 and June 1 of each year, commencing December 1, 2005, and until completion of the Project, a report integrating the results of the monitoring and evaluation activities performed pursuant to sub-paragraph (a) of this paragraph, on the progress achieved in the carrying out of the Project during the preceding six months and setting out the measures recommended to ensure the efficient carrying out of the Project and the achievement of the objectives thereof during the six months following such date, which measures shall include (i) in each report due by December 1 in any year, (x) proposed modifications, where considered appropriate, to the Local Governance Reform Framework, for the Association s consideration and approval, and (y) a detailed procurement plan for carrying out the Project during the next fiscal year following the date of such report, and (ii) in each report due by June 1 in any year, an update of the detailed procurement plan for the fiscal year in which such month falls; (d) Review with the Association, on or about January 2 and July 1 of each year, commencing January 2, 2006, or such later date as the Association shall request, the report referred to in sub-paragraph (c) of

37 this paragraph, and, thereafter, take all measures required to ensure the efficient carrying out of the Project and the achievement of the objectives thereof during the twelve months following the date of such report, based on the conclusions and recommendations of said report and the Association s views on the matter; (e) Prepare, under terms of reference satisfactory to the Association, and furnish to the Association, on or about December 31, 2007, a report integrating the results of the monitoring and evaluation activities performed pursuant to sub-paragraph (a) of this paragraph, on the progress achieved in the carrying out of the Project during the period preceding the date of said report and setting out the measures recommended to ensure the efficient carrying out of the Project and the achievement of the objectives thereof during the period following such date; (f) Review with the Association, by February 1, 2008, or such later date as the Association shall request, the report referred to in sub-paragraph (e) of this paragraph, and, thereafter, take all measures required to ensure the efficient completion of the Project and the achievement of the objectives thereof, based on the conclusions and recommendations of the said report and the Association s views on the matter, and (g) Make publicly available the report referred to in sub-paragraph (f) of this paragraph, at the same time as it is furnished to the Association pursuant to said sub-paragraph. Procurement To ensure end-user participation in the procurement of goods, works and consultant services under the Project, the requestor/user of such goods, works or consultant services (as the case may be) to be acquired, shall be represented on the relevant procurement/selection committee. The criteria for the selection of procurement committee/selection members shall in all cases be consistent with the provisions of the Procurement Guidelines and the Project Operational Manual (provided, however, that in the event of any inconsistency between the Project Operational Manual and the Procurement Guidelines, the provisions of the Procurement Guidelines shall apply). The Procurement Plan, including all updates thereof; shall be made publicly available promptly after their finalization. All bidding documents and requests for proposals issued in accordance with Schedule 3 of the DCA shall be made available to any member of the public promptly upon request, subject only 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 such document will continue to be made publicly available until a year after completion of the contract entered into for the goods, works or consultants services in question. All short lists of consultants and, in cases of pre-qualification, lists of pre-qualified contractors and suppliers shall be made available to any member of the public promptly upon request. A summary of the evaluation of all bids and proposals for specific contracts shall be disclosed to all bidders and parties submitting proposals therefor, promptly after the notification of award to the successful bidder/consultant. Information in such 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, all bids and proposals declared non responsive (together with reasons for such an assessment), the name of winning bidder/consultant and the contract price. Such summaries will be made available to any member of the public promptly upon request. Contract award information for all contracts for goods and works of $100,000 equivalent or more and all contracts for consultants of $50,000 equivalent or more shall be made publicly available and published widely, and be made available to any member of the public upon request, promptly after such award. A list of all contracts awarded in the three months preceding the date of such request, including, with

38 respect to each such contract, the name of the contractor/consultant selected, the contract amount, the number of bidders/makers of proposals in respect thereof, the procurement method followed and the purpose of such contract shall be made available, promptly upon request by member of the public. Representatives of the end-users of goods or works being procured shall be permitted to attend public bid openings in respect thereof. H. Readiness for Implementation 1. a) The engineering design documents for the first year's activities are complete and ready for the start of project implementation. 1. b) Not applicable. 2. The procurement documents for the first year's activities are complete and ready for the start of project implementation. 3. The Project Implementation Plan has been appraised and found to be realistic and of satisfactory quality. 4. The following items are lacking and are discussed under loan conditions (Section G): The Draft Operational Manual has been appraised and found to be realistic and of satisfactory quality. I. Compliance with Bank Policies 1. This project complies with all applicable Bank policies. 2. The following exceptions to Bank policies are recommended for approval. The project complies with all other applicable Bank policies. Erman A. Rahman Mark D. Wilson Andrew D. Steer Team Leader Sector Manager/Director Country Manager/Director

39 \ Annex 1: Project Design Summary INDONESIA: Initiatives for Local Governance Reform Project Key Performance Data Collection Strategy Hierarchy of Objectives Indicators Critical Assumptions Sector-related CAS Goal: Sector Indicators: Sector/ country reports: (from Goal to Bank Mission) Making service delivery responsive to the needs of the poor. Increased role of local governments and stakeholder groups in planning and monitoring service delivery Project monitoring, assessments, studies on combating corruption. Political accountability evolving, local capacity is weak. Development planning responsive to constituents. and funds utilization. Local governments open their budgeting, planning and financial management practices to greater public scrutiny. Governance and Decentralization Survey, Project Evaluation Report. Local level governments face a legacy of over centralization and little capacity. Project Development Outcome / Impact Objective: Indicators: Pilot district governments improve transparency, accountability and participatory practices and undertake reforms in financial management and procurement. Extent to which recommendations from consultations/public hearings are incoporated into district plans and regulations (perdas) Project reports: Independent NGO budget and expenditure tracking (JSDF funded) Stakeholder feedback and evaluations Annual review of poverty strategies and budget planning (from Objective to Goal) No back-tracking on Laws 32/2004 and 33/2004 relating to decentralization and fiscal relations Political accountability evolves over time Greater public availability of information, in particular financial and procurement information GDS Qualitative governance study Procurement survey Financial management study Incentives for change develop sufficiently Twelve district budgets show increases in poverty targeted expenditure by end-of-project (EOP) Susenas data Annual review of poverty strategies and budget planning EIRR for project-funded infrastructure Economic feasibility study >12 district governments practicing accepted standards of procurement as verified by audits and studies by EOP Procurement survey Audit reports >12 district governments practicing sound financial management as verified by audits and studies by EOP % increase in stakeholder satisfaction with government Financial management evaluation Audit reports GDS Qualitative governance study

40 Output from each Component: A. Local Governance Reform. service delivery Independent NGO budget and expenditure tracking (JSDF funded) Output Indicators: Project reports: (from Outputs to Objective) A1. District development policies and budgets are prepared through a participatory process and reflect local priorities for poverty reduction 40 districts meet entry requirements 12 districts issue local regulations on mechanisms for public consultation and access to information by mid-term and functioning satisfactorily, and 20 other districts prepare draft local regulations by EOP Supervision & monitoring reports, project progress reports Project documentation (e.g. regulations, strategies, action plans, frameworks) Minutes of meetings Local government planning needs and participatory poverty analyses are complementary and reflected in actual budget allocations Communities and civil society groups take advantage of opportunities to participate in local planning and decision-making Poverty reduction strategies & action plans are issued and implemented in 12 districts by mid-term and in 20 other districts by EOP Core group of reformers & leaders within the districts are committed to pushing the reform agenda forward and support capacity development A2. Improvements are made in procurement and financial management processes Action plans in FM reform are prepared and implemented in 12 districts by mid-term and in 20 other districts by EOP Action plans in procurement reform are prepared and implemented in 12 districts by mid-term and in 20 other districts by EOP Financial management evaluation Procurement survey Local legislative assembly (DPRD Kabupaten) and executive (Bupati) agree on the reform agenda and support it B. Poverty Targeted Investment: Priority investment in Kabupaten-level pro-poor infrastructure implemented under enhanced governance conditions A minimum of 24 sub-projects supported by mid-term and 72 sub-projects supported by EOP, all following proper technical, financial & procurement procedures. MIS, regular monitoring reports by TA teams, infrastructure quality technical review, audits. There are no delays in district budget allocations, disbursements or procurement

41 C. Implementation Support Technical, monitoring and supervisory support for project implementation. 40 project districts receive capacity development assistance in the core governance reform areas (transparency & participation, procurement & financial mgmt) by EOP. 10 staff at the center supporting project monitoring and implementation, 45 regional staff supporting project implementation and monitoring, 55 staff supporting kabupaten governments Project M&E system in place and providing accurate timely data on progress and outcomes Capacity development plans & training records Supervision and monitoring reports, project progress reports MIS Complaints handling database Technical studies and evaluations reports Independent NGO budget and expenditure tracking (JSDF funded) The procurement and mobilization of project staff occur efficiently and without significant delays. Capacity development initiatives are provided in a timely manner Complaints received/resolved satisfactorily Project Components / Sub-components: A. Local Governance Reform Inputs: (budget for each component) US$1.33 million Project reports: Project progress reports Mid-Term Review (from Components to Outputs) Counterpart funds are available 1. Reform of the Kabupaten Planning and Budgeting process US$0.44 million 2.Reform of Kabupaten Budget formulation, execution & Financial Management reporting practices US$0.44 million 3. Strengthening Accountability Mechanisms B. Poverty targeted investment US$0.45 million US$31.17 million Project progress reports APBD available on time and disbursed C. Implementation Support 1. Technical assistance & Facilitation US$11.90 million US$7.44 million Project progress reports Procurement process completed on time 2. Capacity building and training US$3.32 million

42 3.Monitoring, Evaluation & Studies US$1.13 million

43 Annex 2: Detailed Project Description INDONESIA: Initiatives for Local Governance Reform Project The Project seeks to pilot support to kabupaten governance and link them to poverty reduction activities. Primarily the Project assists advances in good governance at the district level through establishment of a prescriptive set of minimum reforms in the key cross-cutting governance areas of public participation, transparency, financial management and procurement as well as in preparing a participatory Poverty Reduction Strategy and Action Plan (PRSAP). Next, by providing incremental poverty targeted investment funds to kabupatens that complete an initial set of the prescribed reforms, the Project brings the cross-cutting reform elements together, including more pro-poor budget allocations, to demonstrate and test reform implementation at the district level. Lastly, the Project also gives visible recognition of the kabupatens reform initiatives and disseminates good governance practices emerging from the districts so that the lessons learned can help to influence reforms in other kabupatens not participating directly in ILGR. More specifically, the project proposes to support in selected kabupatens which meet the ILGR minimum requirements (see Attachment 1 to this Annex for a detailed description of the requirements): 1. A set of prescribed minimum reforms in kabupaten policies and procedures on access to information and access to decision making to improve transparency of and participation in the local government s budget planning, allocation and implementation process, with a view to enhancing the responsiveness of local government; 2. A set of prescribed minimum reforms in kabupaten policies and procedures on procurement and financial management, with a view to reduce corruption and increase overall efficiency in fiscal management and lead to overall improvements in the kabupaten investment climate; 3. Development of a kabupaten-level PRSAP and its formal integration into an enhanced approach to the existing kabupaten budget (APBD) planning, allocation, implementation and monitoring process, with a view to enable citizens voice to be better heard both by the executive and the legislative parts of the kabupaten government, and thus allow local government s to make allocative choices that are more responsive to citizen needs and lead to increasing pro-poor expenditures. These requirements are staged into three phases: entry, pre-investment, and investment (year 1 and year 2 year 3 has no new reform requirements). Participation in each phase entails undertaking a separate and progressively difficult set of reforms, and the performance of each kabupaten will be evaluated at the end of each phase to confirm its eligibility for the subsequent phase. Once a kabupaten meets the prescribed set of minimum requirements of the entry phase, the Project will provide facilitation and technical assistance in the pre-investment phase to support the kabupaten to graduate to the investment phase. In this last phase the Project will provide investment funds to finance key rural infrastructure sub-projects which are identified through the PRSAP. See Figure

44 Figure 1. ILGR Implementation Framework PRE-INVESTMENT PHASE (18-24 months) INVESTMENT PHASE (3 years) Component A. Local Governance Reform Component B. Povertytargeted Investment Component C. Implementation Support Minimum Entry Requirements Governance Reforms (Pre - Investment) Participatory PRSAP Formulation Technical Support & Monitoring Minimum Pre-Investment Requirements Governance Reforms (Year 1) ILGR Investment Year 1 Technical Support & Monitoring Minimum Investment Year 1 Requirements Governance Reforms (Year 2) ILGR Investment Year 2 Technical Support & Monitoring Minimum Investment Year 2 Requirements ILGR Investment Year 3 Technical Support & Monitoring Note: Component B is available only for the first batch of kabupatens. ILGR would be implemented over a four-year period ( ), and be comprised of three components: Component A- Local Governance Reform Component B- Poverty Targeted Investments Component C-Implementation Support and Monitoring The components would be funded through a combination of several sources, including Government of Indonesia domestic resources both central ($0.18 million) and local governments ($4.63 million); the proposed IDA credit and IBRD loan ($29.50 million) and grant co-financing from the Department for International Development (DFID) of the United Kingdom ($12.00 million). Component A, which comprises local government activities linked to the governance reforms and PRSAP preparation, would be funded entirely by the participating local governments themselves. The technical assistance and capacity building support linked to these activities, as well as monitoring, evaluation and impact studies, are included in Component C which will be funded principally through the IDA credit, IBRD loan and DFID grant, with some GOI counterpart funds. Component B would principally finance sub-project investments in rural infrastructure and will be funded by the proposed IDA credit and IBRD loan, blended with DFID grant with local government counterpart funds. Entry. All 130 kabupatens in the 9 provinces comprising the ILGR project area (West Sumatra, Banten, West Java, Central Java, Yogyakarta, East Java, Gorontalo, North Sulawesi, and South Sulawesi) are eligible to compete for entry into the program (See Attachment 2 to this Annex). Entry is limited to 40 kabupatens selected on a competitive basis from among kabupatens who apply and provide satisfactory documentation of their compliance with the minimum entry requirements and a commitment to undertake the prescribed set of minimum reforms in the key cross-cutting governance areas of public participation,

45 transparency, financial management and procurement. Under Component C, the participating kabupatens will receive general facilitation, specialized technical assistance and capacity building to equip and assist them to undertake the reforms. The participating kabupatens will be divided into two groups. The first, comprising approximately 15 kabupatens which participated during project preparation will enter the program at project effectiveness. The second, comprising approximately 25 kabupatens still to be identified will enter the program later in the second year of implementation. Pre-Investment Phase. At project effectiveness, the first batch of participating kabupatens will commence the pre-investment phase, followed by the second batch of participating kabupatens in the second year of implementation after having met the minimum entry requirements. The pre-investment phase will last for months in which each participating kabupatens will conduct a poverty assessment and prepare a PRSAP, as well as initiate prescribed reforms in participation, transparency, financial management and procurement. The participating kabupatens will start receiving capacity building and technical assistance from the Project at this phase. However, as kabupatens in the first batch have commenced work on some of the requirements of the pre-investment phase (e.g., PRSAP, participation, transparency) during project preparation, they will need approximately 3-6 months before commencing the investment phase. Investment Phase. The participating kabupatens which fail to meet the prescribed requirements in the pre-investment phase will not be eligible to access the ILGR investment. Those which complete the prescribed requirements graduate to the investment phase and are then obliged to undertake additional reforms. The project will continue providing capacity building and technical assistance for the additional prescribed reform agenda and ensure that the reforms undertaken in the pre-investment phase are institutionalized and well grounded. During the investment phase, only the first batch participating kabupaten is eligible to receive funding for sub-project investments in rural infrastructure for three years under Component B, providing they meet the reform requirements. This Project does not provide investment funds for batch 2 kabupatens. These funds will come from the subsequent project ILGR2. By Component: Project Component A - US$1.33 million Component A: Local Governance Reform A-1 Reform of the Kabupaten Planning and Budgeting Process (Approximate Project Costs are US$0.44 million) A-1-1 Strengthening strategic links with pro-poor local priorities Under this sub-component, the Project supports development of a kabupaten-level PRSAP and its formalized integration into the APBD process with a view to move toward a more pro-poor budgetary allocation. The output of this sub-component is two-fold: (i) piloting a participatory process in preparing kabupaten-level pro-poor policy; and (ii) identifying activities that will be financed through project investment. The PRSAP will be developed by a multi-stakeholder poverty working group (PWG) which is established through a public meeting (multi-stakeholders forum, MSF) and, when necessary, legalized by a Bupati Decree. At the request of the National Poverty Reduction Committee, this working group, serves as a technical team for the Kabupaten s Poverty Alleviation Committee (Komite Penanggulangan Kemiskinan

46 or KPK). The working group, which conducts the Participatory Poverty Assessment (PPA), is comprised of: Local government officials from the Development Planning Board (Bappeda) and technical agencies such as community empowerment, family planning and social welfare, statistics office, agriculture; Non-government individuals, typically from non-government organizations, civil society organizations, community-based organizations (religious-based, women, farmer/fishermen association) and private sector; and Local parliament (DPRD) members. The majority of working group members should be from non-government and women should be well represented. Development of the PRSAP comprises the following tasks: Preliminary analysis of the local poverty situation. The analysis aims to analyze the poverty situation from several aspects, such as: socio-economic situation of the kabupaten, existing policy, budget and programs, distribution of the poor and their access to basic services (education, health, basic infrastructures, market), as well as structural (access to information and decision-making process) and external factors (beyond the authority of the kabupaten). This quantitative and, to some extent, qualitative data is used to develop preliminary hypotheses and to select sites for field assessments. The preliminary analysis is used as the basis for an initial consultation with a wider group of stakeholders through a public consultation process. Field assessment. The field assessment is intended to verify the preliminary hypotheses and to provide a better understanding of the voice of the poor. Participatory poverty assessment tools, such as problem tree analysis, seasonal analysis, welfare classification, Venn diagrams, are used for this purpose. The poverty working group conducts the assessment in at least 3 locations that represent poverty typologies in the kabupaten, spending 4-5 days in each site. Formulation of the strategy. Based on the verified hypotheses, the working group develops poverty problem statements and strategy alternatives to cope with the problem. The strategy (for each problem) is selected against four attributes, i.e. authority, capability, budget, and institutional capacity. The strategy formulation process will involve public consultation, both through individual/limited meetings and general public consultation. Formulation of action plan. The strategy is expanded in a detailed action plan that includes an implementation framework, timeframe, and institutional arrangements. At this point a series of issues-based discussions are conducted to involve non working-group members, such as technical agencies (public work, forestry, etc.) and non-governmental interest groups. Institutionalization of the PRSAP. To ensure that the strategy and action plan will be referred to in the future (3-5 years) development of the kabupaten, it is necessary to institutionalize the PRSAP in the form of Bupati s decree/local regulation. The PRSAP is then implemented through a participatory planning mechanism supported by Component A-1-2. Under this sub-component, the participating kabupaten governments finance local stakeholder participation, including government staff, who are involved in poverty assessments and working groups. General facilitation, specialized technical assistance and capacity building support is provided to the Kabupaten poverty reduction working group from Kabupaten Facilitators and regional and national Poverty Specialists under Component C

47 A-1-2 Enhancing participation in decision making process In general, the Project supports enhancement of wider public participation in decision-making processes as one of the project objectives and also as a means to reach the broader objective of improved local governance and accountability. Under this sub-component a multi-stakeholder basic democratization (transparency and participation) working group is established, and support is provided to the working group to develop local legislation (perda) ensuring public access to the decision making process will be practiced and sustained beyond the life of the Project. Furthermore, once the PRSAP has been formulated, the Project will support enhancement of the decision making process (including usage of ILGR funds). The Perda on Participation will cover at least three areas: (i) public involvement in formulation of kabupaten policies and legislation process, including regional strategic plan, spatial plan, taxes and user charges; (ii) public involvement in annual planning, budgeting, and budget execution (including procurement); and (iii) public complaint mechanism, both in the implementation of public investments and public services. The Project will also support the implementation of the Perda, particularly on the annual planning and budgeting process as described below. The issuance of the Perda and initial implementation of the action plan are the requirements that must be fulfilled in the first year of investment while full implementation is the second year's requirement. The Project s main intervention in the APBD planning and budgeting process is to open up dinas level programming process, inter-dinas planning discussion (Musrenbang Kabupaten) and in final budgeting processes, so that civil society, local community, sectoral associations/organizations representatives as well as the Poverty Working Group (PWG) can be engaged and give their input to the draft budget from an early stage. The perdas on transparency and participation would enhance this process. There are 4 important steps required to effectively influence the substance of the APBD (See Table 1): First, the PRSAP should be an integral part of the kabupaten Renstra (strategic plan), and thus becomes a guideline for the dinas Renstra (dinas strategic plan based on the kabupaten Renstra). The legalization of PRSAP (see Sub-Component A-1-1 above) is expected to establish this link. Second, the Dinases proposals for PRSAP-related investment should be planned in the following steps: (i) PRSAP coordination workshops, led by Bappeda and involving Poverty Working Groups, to determine basic preliminary allocation of fund; (ii) the results of the workshops will be disseminated to wider stakeholders and Musrenbang Kecamatan meetings; and (iii) concurrently each related Dinas will develop the detailed proposal with participatory process involving civil society interest groups and related community representatives for the kabupaten poverty reduction strategic investment. The result will be consulted with a wider audience. Third, Bappeda compiles sub-project lists for Musrenbang Kabupaten workshops based on Dinas and Musrenbang Kecamatan proposals, as well as DPRD and Bupati inputs. Related stakeholders such as community representatives, interest groups (civil society, water-users, peasant associations, etc.), DPRD members, and Poverty Working Group will attend these meetings. At this stage the proposals already include further feasibility studies and detailed cost calculations and Bappeda has reviewed the estimate of overall budget availability in detail. Since a preliminary estimation of budget and process of prioritizing the proposals has been done earlier, the Rakorbang will focus in refining the priority and cross-dinas consistency of strategic investment. The output of

48 these series of Rakorbang workshops is a clearly defined budget proposal and priority that will be agreed by the executive and DPRD in the form of a MoU. Fourth, the draft budget, before it is approved by the DPRD, will be consulted with the community and civil society representatives. Table 1. Kabupaten Planning and Budgeting Process Timeline Step Detailed Existing Process ILGR Intervention Every 5 years Renstra (strategic plan) March-April Musrengbang Desa (village development planning discussion) Strategic medium-term plan of the regions that is detailed into Dinases annual programs Issues: lack of public consultation in the formulation of Renstra, the plan is not detailed enough to be referred to in the annual planning Community discuss their project priorities Issues: the forum is not inclusive, lack of enthusiasm based on previous experience, lack of budgeting power March-April Field survey Dinases do field survey for detail design of the proposed projects April-May May-July Musrenbang Kecamatan (kecamatan level development planning discussion) Musrenbang Kabupaten (kabupaten development planning coordination meeting) Compilation of village priorities in one kecamatan Dinases bring their project list so that community can align their priorities to this list Issues: no community representative involved, lack of budgeting power Confirming dinases projects that will be financed. Issues: no community representative involved, limited DPRD participation, lack of division of roles of each stakeholders involved, no budget constraints. Jun-Nov Budget Formulation Budget team (executive) prepares budget Kabupaten receives information on DAU estimated in November Issues: some priorities that are not discussed in Musrenbang Kabupaten are inserted during the process and no public consultation in the process ( black box ) Jun-Nov Feasibility Study Feasibility study (technical and economic aspects) for several complicated projects Dec-Feb Budget Approval Budget committee (legislative and executive) finalizes the budget March-Dec Budget Execution Each dinas/agency execute the budget Bawasda and/or BPKP audits the Dinases proposals are aligned to PRSAP upfront PRSAP is formulated through a participatory processes PRSAP has specific time-bound action plans Local governments are required to provide substantial amount of block grant to support village budget Dinases prepare draft list of project and discuss it with Poverty Working Group (PWG) to align with PRSAP PWG and dinases participate to discuss and verify proposals they have agreed before (above) Participation of PWG (and other multi-stakeholders forum or MSF working groups) and community representatives Division of roles and responsibilities of each stakeholder group in Musrenbang Kabupaten (including DPRD) ILGR investment ceiling has been confirmed prior to Musrenbang Kabupaten Public consultation during budget formulation Clear threshold on feasibility study requirements Public consultation on the draft budget MSF monitors the projects implementation

49 implementation Issues: lack of technical monitoring and evaluation Annual review and evaluation of implementation of PRSAP Under this sub-component, the local governments will finance local stakeholder participation, including government staff, who are involved in the development of the Perda on participation as well as those participating in implementation of the Musrenbang Kabupaten. General facilitation, specialized technical assistance and capacity building support is provided to the Kabupaten basic democratization working group from Kabupaten Facilitators and regional and national governance specialists, including training, workshops and consultation meetings under Component C. A-2 Reform of Kabupaten budget implementation and Financial Management (Approximate costs are US$0.44 million) To complement the basic good governance principles of transparency and participation, the project will support implementation of more technical reforms in Kabupaten procurement and financial management practices with a view to ensuring efficiency, fairness, and transparency in management of public funds and reduction in corruption. It is envisaged that improved financial management and procurement systems and practices will help bring all public funds into the public accountability framework and at the same time bring flexibility in budgeting for legitimate variations. In addition it is hoped that these improved practices will reduce the chances for corruption, and create an enabling environment for improved governance in other areas. Under this sub-component, participating kabupatens will be required to institute a series of graduated reforms in financial management and procurement over a period of 3-4 years, with agreed benchmarks for monitoring progress. These will be institutionalized through the issuance of Bupati decrees and kabupaten-level Perdas, and supported by capacity building of kabupaten staff, and provision of equipment and software. National and Regional Procurement and Financial Management Specialists will assist local government in meeting pre-determined requirements for the various program phases though technical backstopping and capacity building programs that include training, and cross-kabupaten workshops. The key beneficiaries of the activities under this sub-component are the office in the kabupaten appointed as the focal point for the procurement reforms, the FM Reform Committees, as well as other government officials of Regional Secretary (Sekda) Office, Internal Audit Agency (Bawasda), Finance Division/Office, and DPRD members. A-2-1 Procurement At entry, participating kabupatens are required to assign an appropriate office in the kabupaten government as focal point to take on the functions of leading and coordinating the procurement reforms. In most kabupatens, the focal point will likely be within the Sekda office (particularly Assistant for Economics and Development). The procurement reform focal point will lead and coordinate procurement reform and develop a local procurement policy which is in line with national procurement reforms stipulated by newly issued Presidential Decree (Keppres) 80/2003. The procurement reform focal point will work with other key parts of the kabupaten government to streamline regulations (or remove them when necessary) to promote economy, efficiency and open competition. Transparency, related to procurement policies, procedures and practices, will also be ensured. A workable mechanism to handle complaints and apply sanctions will be established in addition to an annual survey of bidders and civil society about kabupaten procurement practices (see Sub-component C-2). Another important aspect of the reform is that the focal

50 point functions will formally become a permanent part of kabupaten government function through issuance of a revision of the existing perda on kabupaten organizational structure and functions to include the new functions of the procurement focal point, within Year 1 of ILGR investment. A-2-2 Financial Management At entry, each participating kabupaten will be required to establish a Financial Management (FM) Reform Committee, to lead and coordinate the prescribed financial management reforms. The kabupaten through the FM Reform Committee will implement phased reforms of financial management, including the following seven areas of reforms: (a) Provide an appropriate enabling legal framework for financial management reforms; (b) Strengthen procedures for authorization of budget expenditure; (c) Improve financial controls over management of public funds; (d) Strengthen monitoring and accountability of all public funds generated or received; (e) Enhance accountability of Work Unit Heads for compliance with regulations; (f) Strengthen effectiveness of internal audit function; (g) Implement greater transparency in local financial management. See Attachment 2 for details in each area. Under this sub-component, the participating local governments will finance the establishment and operations of the Procurement Reform Focal Point and the FM Reform Committee, as well as the incremental costs of development of and consultation on the required SK Bupatis and Perdas, and their public disclosure. The participating local governments also finance local stakeholder participation, including government staff, who are involved in the training and workshops. The Sekda office and Regional Finance Office will be the key counterparts. General facilitation, specialized technical assistance and capacity building support is provided to the kabupaten Procurement Reform Focal Point and the FM Reform Committee from Kabupaten Facilitators and regional and national procurement and financial management specialists, including preparation of guidebooks, kabupaten training, roadshows, workshops and consultation meetings under Component C. A-3 Strengthening Accountability Mechanisms (Approximate costs US$0.45 million) A-3-1 Information Disclosure/Transparency The Kabupaten Working Group on Transparency and Participation will prepare a local regulation (Perda) on people s access to public information (transparency) and monitor the implementation of concrete initiatives in information disclosure taken by local government. Specifically, the working group members local government officials, DPRD members and nongovernment representatives and the facilitators will be trained by national and regional consultants on what should be in the draft regulation, how to prepare a white paper, how to conduct the public consultation process on the draft Perda, and orientation for the DPRD who have to approve the Perda. The implementation framework of capacity building activities and Transparency Perda and detailed action plan formulation is similar to Participation Perda formulation process (see Sub-component A-1-2 above). On concrete initiatives, requirements for disclosing public information by actively disseminating the

51 availability of public documents and summaries of budget and Bupati accountability speech (LPJ) in mass media are part of the project s entry criteria. In the Pre-investment Phase, when the Transparency Perda is being drafted, it is required to announce the procedures, costs, and time needed to obtain licenses and other public services in the mass media and at the designated locations. In addition, all draft local regulations (transparency, participation, budget preparation and execution principles, PRSAP) required by the project will also actively disseminated at this phase. The transparency initiatives will be continued in the Investment Phase until the Perda is fully implemented in Year 2. The government, particularly Public Information/Public Relation Office and Bappeda, and DPRD will receive technical assistance from the project to disclose information, such as in preparing press releases and summaries of medium term plans (regional development plan, strategic plan, spatial plan), budget and annual planning document, and LPJ; licensing and public service requirements; as well as technical aspects of preparing other information dissemination means (such as website, newsletter). As in other areas, the project will also support inter-kabupaten exchange and peer-learning through intra- and inter-region workshop and cross visits. A-3-2 Networking and Inter-kabupaten Exchange The project would support a series of regional exchanges and workshops for kabupatens to share experiences and directly learn from each other. The administrative costs of the workshops and management of the exchanges would be covered through the regional consultant contracts (Component C) but all funds for kabupaten staff travel would be covered by the APBD. Under this sub-component, the participating local governments will finance the establishment and operations of the Kabupaten Working Group on Transparency and Participation, as well as the incremental costs of development and consultation on the required Transparency Perdas, its public disclosure, and the cost of public disclosure of other documents named under the Perda. The participating local governments also finance local stakeholder participation, including government staff, who are involved in the training and workshops. The Public Information/Public Relation Office, Legal Bureau, and Bappeda are the key counterparts. General facilitation, specialized technical assistance and capacity building support is provided to the Kabupaten Working Group on Transparency and Participation from Kabupaten Facilitators and regional and national specialists, as well as capacity building including training, workshops and consultation meetings under Component C. Project Component B - US$31.17 million Component B Poverty Targeted Investments The ILGR investment component, which will only be used for batch 1 kabupaten graduates (batch 2 kabupaten graduates will get investmen funds from the subsequent Project - ILGR2), uses three over-arching principles as the basis for investment financing linked to improvements in governance: (a) The PRSAP provides the overall policy framework for kabupatens to reduce poverty which should be financed by the APBD. The ILGR investment funds provide only partial financing of the strategy. (b) The ILGR investment decision-making process is fully integrated into the regular kabupaten planning and budgeting system, with enhancement in transparency and participation

52 (c) The ILGR investment funds are on-granted to the kabupatens and are included in the APBD budget document to ensure budget transparency. Once batch 1 kabupatens, which are facilitated in the Project preparation, successfully meets the pre-investment requirements, the project provides investment funds to finance priority infrastructure needs defined and prioritized in their PRSAP. However, the main objective of the fund is not only financing sub-projects, but providing a means for leveraging governance improvements. How the money is allocated, managed, used and monitored is a process through which local government will increase transparency, responsiveness, effectiveness, and accountability to local citizens. Types of sub-projects and selection criteria Each local government (executive and legislative), civil society, private sector and community representatives will determine, in a participatory manner, the subprojects that will be financed by ILGR. Financing is open to public infrastructure and non revenue generating investments that are identified as local priorities in the kabupaten-level poverty reduction strategy and action plan (PRSAP) and are eligible based on the following table. In addition, the investment will not finance: (i) military or paramilitary purpose; (ii) civil works for government administration or religious purposes; (iii) activities relate to the manufacture or use of environmentally hazardous goods (including asbestos, pesticides and herbicides), arms or drugs; (iv) government salaries; (v) production, processing, handling, storage or sale of tobacco or products containing tobacco; (vi) activities within a nature reserve or any other area designated by the Government agency responsible for the management and/or protection of such area; (vii) activities relate to mining and excavation of live coral; (viii) activities relate to alterations to river courses; (ix) activities relate to reclamation larger than 50 hectares; (x) new irrigation larger than 50 hectares; (xi) construction of water retaining or storage structures of a capacity greater than 10,000 cubic meters activities that can not be financed by ILGR investment based on the safeguard framework; or provision of micro-credits

53 Table 2. List of Eligible Kabupaten Sub-Projects under ILGR Eligible Sub-Projects In-eligible Sub-Projects Water Supply (includes civil work and complementary equipment) - Wells - Water catchments/harvesting structures - Ponds - Community water supply systems (incl. motor pumps and electric pumps) - Community water storage facilities - Spring improvement (incl. simple water treatment system) - Community filtration systems. - Public taps - MCK (Public bath room) - Community drainage system - Chemical water treatment systems - Stand alone motor pumps and electric pumps Energy (includes civil works and complementary equipment) - Electricity distribution systems - Stand alone generators - Solar system generators Transportation (includes civil works only) - Roads (earth, laterite surfaced, gravel surfaced, paved) - Culverts - Bridges - Vented causeways - Rakit landing facilities - Inland waterways improvements - Bus/public transport waiting areas - Improvement or rehabilitation of national/provincial roads and bridges Irrigation and Flood Protection (includes civil works and complementary equipment) - Earth dams and reservoirs - Stand alone motor pumps or electric pum - Spillways - Canals and distribution systems - Diversion structures - Pumping station structures - Drainage structures - Flood protection structures/facilities Natural Resources Management (includes civil works only) - River bank protection structures/facilities - Erosion protection structures and works Community Buildings (includes civil works and complementary equipment) - Communal meeting areas - Communal agricultural centers - Communal training centers - Communal libraries - Administration buildings - Police or army buildings - Buildings for religious activities - Building for commercial financial activiti Size of investments funds and sub-projects The size of the investment funds will be determined by the population size of the kabupaten, taking into account the difference in population densities on and off-java. Table 3. Maximum Investment Size

54 Location Population Maximum size of investment funds per year (in IDR) Java < 750, billion 750,000-1,500, billion > 1,500,000 9 billion Off-Java < 250, billion 250, , billion >500, billion The size of each subproject should be larger than that financed by the World Bank s Kecamatan Development Project- (village-level sub-projects), but smaller than sectoral (central-government) projects. The project will finance sub-projects ranging from Rp.300 million upwards in size (that includes counterpart funds). ILGR Kabupatens have an annual budget (APBD) ranging from Rp billion, with an average budget of Rp.285 billion for FY2003. ILGR finances approximately 10 percent of the development budget. It is expected that the subprojects in one kabupaten will not be concentrated in one sector. Sub-project decision making process and implementation The Program Management Unit (PMU), with assistance of Kabupaten Facilitators, will identify sub-projects that will be proposed for financing by ILGR investment funds. The selection of sub-projects will be based on the type of sub-projects, relevance with PRSAP, an appraisal of the cost-effectiveness of the sub-project following the method prescribed in the Project Operational Manual, compliance with the project safeguards framework, and the total cost of the sub-projects for the budget ceiling. Kabupaten Facilitators will submit the kabupaten proposal to the Regional Management Consultant (RMC) who will verify it based on the criteria above. The verified proposal will be then sent to the National Project Secretariat (NPS) which will be compiled by the National Management Consultant (NMC). If the kabupaten meets the relevant minimum governance reform requirements, the NPS will then prepare the national budget (APBN) and inform the results to PMU to prepare the kabupaten budget (APBD). Once the budget is approved, related Dinas(es) will then procure private contractor(s) to physically implement the sub-project(s) in the field following project procurement guidelines. Project Component C - US$ million Component C: Implementation Support C-1 General Facilitation and Specialized Technical Assistance (Estimated Project Costs: US$7.44 million) To support the implementation of ILGR at each level of organization national, regional, kabupaten consultants will be hired by the National Project Secretariat. At the national level, a team of National Management Consultants (NMC) will assist the project manager and secretariat in managing and monitoring the project implementation. The NMC will train the other consultants, including the Regional Management Consultants (RMC) and kabupaten facilitators (F-Kabs). Through frequent site visits, the NMC will evaluate whether the main goals of the project are being met and that physical, economic and social targets are being achieved. The NMC will be responsible for overseeing the work of the other ILGR consultants and reporting on progress at regular intervals. In addition, the NMC will assist the project manager prepare an annual report that includes the lesson learned, project achievements and impact. The NMC will also provide on-the-job training to counterparts in the Project Secretariat

55 The NMC will consist of the following (see Project Operational Manual for detailed TORs): - 1 team leader - 1 procurement specialist - 1 legal/policy specialist - 1 poverty specialist - 1 safeguard specialist - 1 financial management specialist - 1 monitoring and evaluation specialist - 1 MIS data base specialist - 1 communications/media specialist - 1 complaints handling staff - plus support staff. The RMC will be based in three regional offices. Both NMC and RMC will backstop the Kabupaten working groups and facilitators in areas such as poverty assessment, financial management, procurement, participation, environmental and social safeguards and review quality of infrastructure financed through the investment funds. The regional coordinators will also help facilitate cross-kabupaten exchanges, dissemination of best practice and coordinate regional training events. RMC in each cluster will include the following staff complement: - 1 regional coordinator - 1 engineer - 1 governance/legal drafting specialist - 2 FM specialists - 2 procurement specialists - 1 MIS specialist - 1 safeguards specialist - 1 poverty specialist - plus support staff Each participating kabupaten will receive facilitation assistance from two Facilitators. The lead kabupaten facilitator will have a governance background and will be responsible for general facilitation of the working groups and supporting the PMU in coordinating the working groups and reform committees. The second facilitator will be an engineer who will work closely with the Poverty Working Group and facilitate the sub-project decision-making process and monitoring of the sub-project implementation. The engineer will be recruited once the PRSAP is completed, prior to the investment phase. An assistant will help both Kabupaten Facilitators in administrative and data entry. In total the project will hire 80 facilitators and 40 assistants. Under this sub-component the project will finance the cost of consultants and facilitators salaries and allowances, administrative costs, operational costs, publications and dissemination materials. C-2 Capacity Building and Institutional Training (Estimated Project Costs: US$3.32 million) The project would provide a combination of pre-set training and capacity building modules provided by the

56 regional and national management consultants to the Kabupaten working groups and staff responsible for procurement and financial management reforms. The support would be in the form of technical back-stopping and a series of kabupaten and regional workshops and specific field based exercises such as the Participatory Poverty Assessments. The RMC would periodically identify the training and technical assistance needs and look for opportunities to coordinate and share training sessions across kabupaten clusters. The following Table summarizes the type of modules to be provided by the NMC/RMC (and additional expertise if required) under the four areas. Reform Area Table 4. Summary of Capacity Building and Institutional Training Types of Modules Developing the PRSAP Quantitative Analysis Community Assessment Strategy Formulation Integrating Strategy in the Regular Planning Process Transparency/Participation Legal Drafting Transparency, participation, accountability implementing the Perda, budgeting Safeguards Procurement Reform Socialization of KEPRES 80 Training for procurement focal point/up3d Training of Key Dinas personnel in new procurement methods and planning Training of BAWASDA and procurement watch groups Training on procurement monitoring Financial Management Training of DPRD in basic regional financial management Reform Training for BAWASDA staff on financial and performance audit Training of finance accounting staff in double entry book-keeping Training of finance department staff on budget execution, cash management, control systems Training of work units on budget execution and accounting In addition to the project prescribed training each kabupaten could request some specific training in areas to be identified by the Kabupaten working groups. Some of the unallocated resources from the project would be directed towards this type of training. This request would also be packaged in the formats and sent to the national project secretariat though the RMC. In the first year of project implementation a more detailed capacity building needs assessment survey would be carried out in the participating Kabupatens to identify complementary training required by local government beyond the current menu provided by the project. C-3 Monitoring, Evaluation, and Studies/Surveys (Estimated Project Costs US$1.13 million, excludes costs for Internal Monitoring that is covered under Sub-component C-1) Internal Monitoring Internal project monitoring will be implemented using a Management Information System (MIS). Basic information will be collected and entered at the kabupaten level, and stored in a master database. The database will be available to all at national and district levels. The MIS will serve two main functions:

57 to monitor progress in project implementation, and generate a series of monthly, quarterly and annual reports to support project implementation; and to identify problems in a timely manner and provide the necessary information to develop appropriate solutions to ensure the project remains on track. The internal project monitoring and evaluation, uses several types of interventions: Consultant Monitoring The NMC will be responsible for internal project monitoring, essentially process monitoring of both inputs and outputs. The central team will receive monthly reports from the Kabupaten facilitators and the RMC. The NMC will in turn assist the Project Secretariat prepare regular reports for the World Bank and DfID. The NMC will assist MOHA prepare a report for the national steering committee, which highlights the following progress indicators: The progress of reform measures implemented in each of the core governance areas; Proposed reforms for the coming period; Kabupaten priorities for service delivery and development projects implemented during the past year financed by ILGR through the poverty strategies; Major problems encountered (including complaints) and recommendations for improvements; Planned investment activities for the following year; A summary of fiscal performance for each kabupaten; and Case studies of Kabupaten best practice or governance innovations. For investment planning and the sub-project execution process, the Facilitators will monitor local government compliance with operational rules specified in the operations manual on: Involvement of Kabupaten stakeholders in the budget (APBD) planning process and the steps required for public disclosure and participation; Compatibility of investment proposals with those outlined in the PRSAP; and Documentation of Kabupaten stakeholder reviews and comments on the APBD proposal including ILGR investment funds prior to submission to the DPRD finance committee. The main monitoring tool for kabupaten sub-projects is the project secretariat MIS which will host the database for kabupaten sub-projects and information regarding financial flows, costs, characteristics, and the expected number of beneficiaries. Government Monitoring and Reporting From the government s side, each kabupaten is required to submit their reports to the National Project Secretariat. Monthly reports, using standardized formats (see project manual) will be prepared by PMU and will be sent to the NPS to report upon progress on or related to the core reform requirements against Kabupaten-level action plans. In parallel, the Kabupaten facilitator will be responsible for validating implementation of the action plan

58 Stakeholder Feedback The project will develop special activity feedback forms that will be distributed by the F-Kabs so that at every stage of the process (entry, pre-investment phase, and investment phase), stakeholders will be given a chance to provide feedback on how the process is proceeding. Government officials, NGOs and other civil society actors will comment on their satisfaction with the quality of the outputs and the decision-making process. These feedback forms will assist the project in systematically identifying strengths and weaknesses in the activities in order to take corrective action if necessary. The feedback forms will also be used on a longitudinal basis to assess whether there is improvement as the project cycle progresses and from one year s cycle to the next. Complaints Handling One major objective of the M&E is the identification and resolution of problems encountered during implementation, so that they can be resolved at the earliest possible stage. The project will maintain a separate communication channel to facilitate the reporting of grievances and complaints. The project will publish project contact information and PO Boxes where citizens can send inquiries and complaints. The complaints handling unit will ensure that problems are collated at the regional and central levels, and the project secretariat through the NMC team deals with the grievances quickly and in a timely manner. Table 5. Summary of Internal Monitoring Activities Activity Objective Implementing agencies/actors Monitoring by the Monitor and regularly report ILGR staff ILGR consultants progress Monitoring by Monitor and regularly report Government officials at Government progress, and troubleshooting the national, and officials kabupaten level Stakeholder feedback Complaints handling process Provide feedback at every stage of the process in order to identify strengths and weaknesses in activities To document and resolve field problems Govt officials, NGOs, civil society actors NMC/RMC staff for handling complaints Outputs Development of MIS Monthly reports Quarterly reports and problems solved Periodic feedback at every stage Resolved cases Database of complaints The cost for internal monitoring is included under Sub-component C-1. External Monitoring and Evaluation Activities This sub-component activity will focus on external independent project monitoring and evaluation that will be managed by Bappenas, using several types of interventions: JSDF financed monitoring by NGOs Local NGOs will receive separate financing through an approved JSDF grant to enable them to analyze local budget, to disseminate the budget to the community, to conduct citizen score cards of services and budget tracking activities in the ILGR kabupatens

59 Annual Review of Poverty Strategies and Budget Planning The Project will commission an external review of the district poverty strategies, action plans and budgets to assess their technical quality and feasibility. This annual review will examine how data and poverty information has been integrated into strategies and plans, as well as the soundness of the plans and budgets. This review will provide valuable information to improve the next planning and budgeting cycle. Evaluation of Economic Feasibility and Cost Effectiveness of ILGR Infrastructure Investments The socio-economic impact of sub-projects, generated by improved planning, implementation and maintenance at the level of local government administration, will be evaluated using standard cost-benefit analysis tools specifically designed to fit the type of proposed sub-project (water, and sanitation, rural roads, irrigation projects). The study will analyze the Economic Internal Rate of Return (EIRR) for ILGR infrastructure investments and also compare these costs with similar non- ILGR infrastructure projects in order to assess cost-effectiveness. These studies will be carried out at mid-term and at the end of the project period by an external consultant. Evaluation of Procurement Reforms The project secretariat will commission an annual survey of contractors and cost of kabupaten project goods and services to monitor the impact of reforms in the procurement process. The results from the survey will be made publicly available and provide a quantitative measure of governance reform impact. Regional Financial Accountability Assessment This study, to be conducted by external consultants and the Ministry of Finance, will evaluate the impact of financial management reforms. Evaluation of the Impacts of Overall Governance Reforms Governance and Decentralization Survey (GDS) During preparation, the Project commissioned a baseline perception survey of governance- the GDS-implemented by Gadjah Mada University in the 16 pilot ILGR Kabupatens. The GDS tracks local public service delivery and governance trends in the wake of Indonesia s wide-sweeping 2001 decentralization reforms. The results from the baseline, show that overall the ILGR kabupatens have higher performance than the average Indonesian Kabupaten in areas such as participation, accountability, transparency and poverty-targeted programs. This baseline survey will be repeated in 2005 and 2007 (future dates are still tentative), with modifications in the questionnaire to include more household interviews from the initial sampling of kabupatens and to include comparison districts (allowing for comparisons between ILGR and non-ilgr districts). The GDS results will be used for the mid-term and final project evaluation, and is a key longer-term outcome measure for the Project. Overall the project will focus on improving the governance trajectory for the ILGR Kabupatens, as opposed to absolute percentages in governance reform. The project will finance the costs of the survey through the project secretariat. Qualitative Study of Governance Reforms - The project will also commission bi-annually an external consultancy firm or NGO to conduct a qualitative study of governance reforms. This qualitative work will complement the quantitative GDS exercise. The qualitative study will use focus group discussions and key informant interviews to understand better the evolving, complex dynamics of governance change, especially in terms of attitudes, changes in perception, practices, and spill-over effects of improved local governance reforms. Beneficiaries of ILGR TA such as government officials, NGOs, civil society representatives and

60 other stakeholders will be interviewed. This study will give the project a fuller, richer description of the incremental, qualitative changes taking place that otherwise would not be captured in all its dimensions through a survey questionnaire. Mid-term Project Evaluation - In Year 2 the Project will commission a review of the project performance and design. Some important areas to look at are: (i) the Local Governance Reform Framework how realistic the framework is and how big is its impacts, (ii) the project phasing, and (iii) the impact of the Project s investment funds. The results will help improve the current design and particularly the subsequent design of the Project ILGR2. Final Project Evaluation - The final evaluation will assess whether the Project meets its development objectives. Specifically the evaluation will look at the overall impact of the Project on governance practices related to the Project intervention, including the budgeting process and poverty-targeted allocation. The evaluation will provide lessons learned for similar projects in the future. Semi-annual supervision missions along with the project financial audits will also be conducted. Table 6. Summary of External Monitoring and Evaluation Activities Activity Objective Implementing agencies/actors NGO budget and To monitor the budgeting and NGOs expenditure tracking, expenditure process. citizen report cards To assess citizen s satisfaction with public service provisions (JSDF financed) Annual review of poverty strategies and budget planning Economic feasibility and cost effectiveness Regional Financial Accountability Assessment Procurement evaluation/survey Governance impact study GDS survey Qualitative governance impact study Mid-term project evaluaton Final project evaluation World Bank DfID cross-sectoral supervision missions To evaluate the technical quality and feasibility of the poverty strategies and budget formulation To evaluate the rate of return and cost effectiveness of ILGR infrastructure investments To evaluate the impact of financial management reforms To evaluate the impact of ILGR s reforms on prices of good, services To evaluate changes in governance and service delivery in ILGR districts To evaluate the impact of the program on governance indicators in qualitative terms To evaluate the project performance and provide inputs to the current as well as ILGR2 design To evaluate the project overall performance To supervise ILGR s progress and implementation of activities External evaluators External consultant team External consultants and MOF External team University Gadjah Madah External consultant firm or NGO External consultant External consultant World Bank, DfID Bappenas, MOHA, NMC, MOF Outputs Analysis of budget proposals and reporting on kabupaten budget expenditures, citizen report cards providing feedback on satisfaction with service delivery Report assessing the quality and feasibility of the poverty strategies and budget formulation Study evaluating the benefits and costs derived from ILGR financed infrastructure projects Study evaluating changes in financial management practices. Survey report on kabupaten procurement practices Updated GDS for ILGR s kabupatens and reports on findings (baseline, mid-term and final) Bi-annual qualitative studies to complement the GDS and provide descriptive information regarding governance changes Mid-term evaluation on project impacts on governance practices in all areas of ILGR intervention Final evaluation on project impacts on governance practices. Aide Memoire (twice a year) Financial Audits To audit ILGR finances BPKP Audit findings and reports

61 - 61 -

62 Attachment 1 to Annex 2 ILGR Local Governance Reform Framework A. General Requirements Detailed Requirements Be located in 9 ILGR provinces ii, exclude high-fiscal-capacity kabupatens iii Submit a Letter of Agreement addressed to the National Steering Committee signed by Bupati and chairperson of DPRD expressing interest to participate in the program, and a commitment to: (a) implement specific governance reforms (participation, transparency, procurement, financial management) to be undertaken in subsequent phases as Governance Reform Framework; (b) commit to establish the Transparency and Participation, and Poverty Working Groups through public meeting; iv (c) undertake participatory poverty analysis and to institutionalize the poverty reduction strategy and action plan (PRSAP) into the Kabupaten planning and budgeting process; and (d) adopt the Operational Manual, including the participatory planning and budgeting process, safeguards framework v, and appraisal procedures for sub-projects. Issue a Bupati Decree (SK Bupati) vi comprising instructions to: (a) establish kabupaten-level project management unit to coordinate project activities; (b) implement the ILGR governance framework as agreed, in form, substance and timing; (c) follow the procedures in the Operational Manual, including the participatory planning and budgeting process, safeguards framework and appraisal procedures for sub-projects; and (d) amend the Bawasda s annual general audit program to include verification that the procurement and FM reform measures stipulated in the regulations have actually been implemented Have no loan arrears, either repay or reschedule Verification to be provided by Kabupaten (Local Project Mgmt Unit To Send to Project Secretariat) Verification by Project Secretariat Entry (Requirements to Participate in ILGR) i Letter of Agreement Copy of Bupati s Decree Pre-Investment Verify fiscal capacity and certify eligibility of kabupatens in letter to World Bank Compile letters from kabupatens and submit copies to World Bank. Submit letter vii to World Bank as certifying that the SK Bupati for each of the eligible kabupatens are available at the Project Secretariat, and are satisfactory in form and substance. Check loan status and certify eligibility of Kabupatens in letter to World Bank Monitoring and Supervision by World Bank Review to confirm satisfactory in form and substance. Review letter to confirm satisfactory in form and substance. External Monitoring

63 B. Transparency and Participation Requirements Detailed Requirements Announcement in mass media of the summaries of budget and Bupati s accountability speech (LPJ) in mass media. Verification to be provided by Kabupaten (Local Project Mgmt Unit To Send to Project Secretariat) Verification by Project Secretariat Entry (Requirements to Participate in ILGR) i Proof of Submit letter vii to announcement in World Bank as mass media. certifying that the proof of the announcement for each of the eligible kabupatens are available at the Project Secretariat, and are satisfactory in form and substance. Monitoring and Supervision by World Bank Review letter to confirm satisfactory in form and substance. External Monitoring Verify announcement in media and quality of summary of budget and Bupati s accountability speech available. Announcement in mass media of the availability of the following documents (locations, requirements, time, and the costs to get it): budget, Bupati s accountability speech, regional strategic plan (Propeda, Renstra), annual plan (Repetada, AKU and Strategies and Priorities), local regulations and spatial plan are available at the designated location(s). Establish Transparency and Participation, and Poverty Working Groups through public meeting within 3 months of entry. i Announcement in mass media of the procedures, costs, and time needed to get licenses and other services, such as ID cards, birth certificate, business license and building permits at least once a year, as well as being permanently posted at designated locations. This activity will be continued in Investment Phase. Proof of announcement in mass media. Documentation verifying establishment of working groups Pre-Investment Phase Proof of announcement in mass media Submit letter vii to World Bank as certifying that the proof of the announcement for each of the eligible kabupatens are available at the Project Secretariat, and are satisfactory in form and substance. Check, on a sample basis, availability of documents in designated locations. Review documentation and verify that working groups are established with appropriate composition of membership. Submit letter to World Bank as condition of eligibility for investment certifying that the proof of the announcement for each of the eligible kabupatens are available at the Project Secretariat, and are satisfactory in form and substance. Check, on a sample basis, availability of posted information in designated locations Verify announcement in media. Verify availability of documents. Check announcement and public posting, and verify procedures, costs and time to obtain licenses and other services

64 Announcement in mass media of the procedures, costs, and time needed to get licenses and other services, such as ID cards, birth certificate, business license and building permits at least once a year, as well as being permanently posted at designated locations. This activity will be continued in Investment Phase. Submission of draft local regulation (perda) on public access to information (transparency) to DPRD, which contains assurance and mechanisms of public access to: Information related to discussion on public policies in DPRD; Planning documents (Propeda, Renstra, Repetada, and spatial plans); Draft and final documents of all perdas, budget (APBD) and budget realization reports; Audit reports and their follow-ups, Bupati s accountability reports (LPJ), information on procurement policies, procedures and practices, on complaint resolution mechanism and results (follow-up). Proof of announcement in mass media Copy of draft perda. Proof of submission of draft perda to DPRD. Minutes of public meetings and attendance list of at least 3 public meetings to discuss the draft. Submit letter to World Bank as condition of eligibility for investment certifying that the proof of the announcement for each of the eligible kabupatens are available at the Project Secretariat, and are satisfactory in form and substance. Check, on a sample basis, availability of posted information in designated locations Review content of draft perdas, summary of public comments and changes made to the drafts as results of inputs from the public. Submit copies of perdas along with letter to World Bank as condition of eligibility for investment certifying that the draft perda for each of the eligible kabupatens are available at the Project Secretariat, and are satisfactory in form and substance. Review draft perda to confirm satisfactory in form and substance. Check announcement and public posting, and verify procedures, costs and time to obtain licenses and other services Check community involvement and the process of formulating the draft perda. Submission of draft local regulation (perda) on public access to decisionmaking process (participation) to DPRD, that contains assurance of: Public participation in drafting and finalization discussion of any perda in DPRD, planning documents and budgeting processes (including Propeda, spatial plans, Repetada and APBD); Establishment of monitoring and evaluation mechanism of public satisfaction on service delivery; Establishment of complaint resolution mechanism (incl. for procurement). Copy of draft perda. Proof of submission of draft perda to DPRD. Minutes of meetings and attendance list of at least 3 public meetings to discuss the draft. Review content of perda, summary of public comments and changes made to the drafts as results of inputs from the public. Submit letter to World Bank as condition of eligibility for investment certifying that the draft perda for each of the eligible kabupatens are available at the Project Secretariat, and are satisfactory in form and substance

65 Finalize PRSAP and prepare draft local regulation (perda) on implementing the PRSAP. Implement enhanced public participation in annual planning and budgeting that covers: Set budget ceiling as an input for dinas and kecamatan planning discussions Allocate block grant to village/kecamatan level. The information of the allocation and guidelines are disclosed to public. Public meetings on dinas programming (at least for 5 poverty priorities sectors) Public meetings on inter-dinas programming Public consultation on final draft of APBD This activity will be continued in Investment Phase. Issue local regulation (perda) on access to public information (transparency) Issue local regulation (perda) on access to decision-making process (participation) Issue local regulation (perda) on implementation of the PRSAP. Copy of PRSAP and draft perda. Documentation of PRSAP process (including results of communitylevel assessment, minutes and attendance lists of public meetings) Documentation on the process (including budget estimates, minutes of meetings and attendance lists) on current year planning and budgeting process. Budget allocation and guidelines of village/kecamata n block grant Documentation on changes reflected in final APBD documents reflecting the inputs from the public. Investment Phase (Year 1) Copies of issued perdas. Submit letter to World Bank as condition of eligibility for investment certifying that PRSAP and draft perda for each eligible kabupatens are available in the Project Secretariat, and are satisfactory in form and substance. Submit letter to World Bank as condition of eligibility for investment certifying that the planning and budgeting process for each eligible kabupatens is being implemented with enhanced public participation and that documentation of the process are available in the Project Secretariat, and are satisfactory in form and substance. Review on the changes made to the draft perdas. Submit copies of perdas along with letter to World Bank certifying that the final perdas for each of the eligible kabupatens are available at the Project Secretariat, and are satisfactory in form and substance. Review draft perdas to confirm satisfactory in form and substance. Review process and output of participatory planning and budgeting process. Random review of final perdas on a sample basis to confirm satisfactory in form and substance. Annual review of poverty strategies and budget planning Annual review of poverty strategies and budget planning that verifying that the enhanced public participation process is followed, and that the APBD appropriately reflects the content of the discussions

66 Implementation of perda on access to public information (transparency) by announcing the summary of planning documents (Propeda, Renstra, AKU, Strategies and Priorities) and list of all perdas being issued in the last 1 year in mass media. This activity will be continued in Investment Phase Year 2. Implementation of perda on access to decision-making process (participation) by at least discussing 50% of the perdas being issued in Year 1 of investment through intensive public consultations Continued implementation of perdas on access to public information (transparency) and access to decision making (participation). Proof of announcement in mass media. Submit letter to World Bank as condition of continued eligibility for investment certifying for each participating kabupaten that the perda on access to public information and access to decision making are being implemented satisfactorily. Review to confirm satisfactory in form and substance. Verify that perda is implemented as reported. List of perdas issued in Year 1 (incl. those discussed in public consultations) Documentation of public consultation process (incl. minutes of meetings and attendance lists) Investment Phase (Year 2) Same as above Same as above Same as above Same as above

67 C. Financial Management Requirements Detailed Requirements Issue a Bupati s Decree (SK Bupati) vi establishing a Financial Management Reforms Committee, with members from key stakeholder departments, and tasked with preparing the detailed reform implementation plan and guiding the implementation of reforms. Financial Management Reform Committee to prepare detailed phased implementation plans for the reform measures. These plans will be completed and presented to the Bupati and Project Secretariat within 3 months after the Committee has been established. Provide an appropriate enabling legal framework for financial management reforms, by issuing A local regulation (perda) on the Principles of Regional Finance in line with GR 105/2000 and Kepmendagri 29/2002 covering the reform areas to be implemented in Year 1 and 2 of Investment below; and a Bupati s decree (SK) on the policies, systems and procedures for the preparation and execution of the APBD, in accordance with existing central regulations. The SK to also include reform agenda proposed in this project for implementation during the investment period, as stated below. Verification (Local Project Mgmt Unit To Send to Project Secretariat) Verification by Project Secretariat Entry (Requirements to Participate in ILGR) i Copy of Bupati s Decree establishing the Committee, and copy of its Terms of Reference. Pre-Investment Phase Phased action plan with time targets for implementation is submitted to Bupati and Project Secretariat. Issued Perda and SK Bupati with the required coverage Submit copies of SK Bupati along with letter vii to World Bank as certifying that the SK Bupati for each of the eligible kabupatens are available at the Project Secretariat, and are satisfactory in form and substance. Review action plan to confirm satisfactory in form and substance. Submit letter to World Bank as condition of eligibility for investment certifying that the action plan for each of the eligible kabupatens are available at the Project Secretariat, and are satisfactory in form and substance. Review form and content of perda and SK Bupati. Submit copies of perdas and SK Bupati along with a letter to World Bank as condition of eligibility for investment certifying that the perda and SK Bupati for each of the eligible kabupatens are available at the Project Secretariat, and are satisfactory in form and substance. Monitoring and Supervision by World Bank Review SK Bupati, membership and TOR to confirm satisfactory in form and substance Review to confirm satisfactory in form and substance. Review perda and SK Bupati to confirm satisfactory in form and substance. External Monitoring

68 Implementation of reform actions proposed will be completed in each investment year in accordance with the SK on FM reforms and the implementation plan prepared by the FM Reforms Committee. 1) Strengthen procedures for authorization of budget expenditure, including Authorize local government officials to make mid-year revisions in the budget allocation or budget target line items within certain pre-determined financial limits, similar to the authorities given to central government officials. To prevent potential misuse of contingency budget (Belanja Tidak Tersangka), specify clear criteria for expenditures that shall be funded from these funds, and the procedures governing the authorization and commitment of such expenditure. 2) Improve financial controls over management of public funds, by Segregate the functions of the finance department (which shall be responsible for the issuance of payment instructions (SPM) and the regional treasury (kas Daerah). Kas Daerah shall not receive, disburse or hold cash, but only process banking transactions. Instruct Bagian Keuangan (Finance Dept) to undertake periodic comprehensive reconciliation of cash accounts covering accounting records, bank statements, official and temporary proof of collections, and actual cash collection. To improve checks and balances, do not locate Kas Daerah at the same premises as regional development banks (BPD). 3) Strengthen monitoring and accountability of all public funds generated or received, by ensuring All regional government bank accounts can be opened only with authority from the Bupati Heads of all Work Units shall submit quarterly reports to Finance Dept & Bupati declaring the name, location, and balances of all bank accounts in the name of the Work Unit or officials thereof. Investment Phase (Year 1) Verification of compliance with the action plan in undertaking the prescribed reform requirements is done by Bawasda as part of their annual general audit program. Progress and exceptions will reported to FM reform committee and Bupati. The Committee verifies and reports quarterly to National Project Secretariat status of action plan implementation. Submit letter to World Bank as condition of continued eligibility for investment certifying for each participating kabupaten that the phased action plan for financial management reform is being implemented satisfactorily and in accordance with SK Bupati on reforms. Post review during supervision

69 Implementation of reform actions proposed will be completed in each investment year in accordance with the SK on FM reforms and the implementation plan prepared by the FM Reforms Committee. 4) Enhance accountability of Work Unit Heads for compliance with regulations. Require Work Unit Heads to issue annually a Statement of Responsibility to Bupati, with copy to Bawasda, affirming compliance with applicable rules and regulations, and that all revenue collected and donations received are deposited to the authorized Kas Daerah account. 5) Strengthen procedures and systems for revenue collections. Require all tax/levy payments and other local collections to be deposited directly by taxpayers to the bank accounts of the local government, except for small payments like parking fees and admission fees to museums, recreation centers etc. Adopt use of serially numbered accountable receipt forms for all revenues. Investment Phase (Year 2) Verification of Submit letter to World compliance with Bank certifying for each the action plan participating kabupaten in undertaking that the phased action the prescribed plan for financial reform management reform is requirements is being implemented done by satisfactorily and in Bawasda as part accordance with SK of their annual Bupati on reforms. general audit program. Progress and exceptions will reported to FM reform committee and and Bupati. The Committee verifies and reports quarterly to National Project Secretariat status of action plan implementation. Post review during supervision. Verify availability of documents 6) Strengthen effectiveness of internal audit function, by requiring that copies of all Bawasda general audit reports are provided to DPRD within 30 days of being issued. 7) Implement greater transparency in local financial management, by requiring completion and publication in local newspapers or websites of summary quarterly financial reports/budget realization reports within 2 months of quarter-end

70 D. Procurement Reform Requirements Detailed Requirements Issue an SK Bupati vi on establishment of a work unit as focal point in procurement reform, with the following tasks: Coordination with LPKPP Lead and coordinate procurement reform in kabupaten Implement trainings on procurement to other work unit Oversee, monitor and report procurement practices Issue Procurement Bulletin in quarterly basis to publish information and opportunity in procurement including practices Take initial step to operationalize procurement focal point by providing supplemental budget for expanded functions. Issue an SK Bupati vi on the systems and procedures for implementation of the Keppres 80/2003, with special attention to the following: a) Adoption of standard bidding documents for kabupaten procured contracts, regardless of source of funding. b)establishment of clear and robust mechanism for recording and handling of procurement complaints. c) Enforcement and public disclosure of sanctions relating to procurement deficiencies. Verification (Local Project Mgmt Unit To Send to Project Secretariat) ix Verification by Project Secretariat x Entry (Requirements to Participate in ILGR) i Copy of Bupati s Decree establishing the unit, and copy of its Terms of Reference. Pre-Investment Copy of annual budget plan. Copy of issued SK Bupati; submit copy of standard bidding documents adopted. Submit copies of SK Bupati along with letter vii to World Bank as certifying that the SK Bupati for each of the eligible kabupatens are available at the Project Secretariat, and are satisfactory in form and substance. Review SK Bupati to confirm satisfactory in form and substance. Submit letter to World Bank as condition of eligibility for investment certifying that the SK for each of the eligible kabupatens are available at the Project Secretariat, and are satisfactory in form and substance. Monitoring and Supervision by World Bank Review SK Bupati, membership and TOR to confirm satisfactory in form and substance Post review during supervision. External Monitoring xi Procurement survey that verifying: procurement process is transparent adequate complaint handling system in place adequate disclosure in place

71 Implement provisions of Keppres 80/2003 related to the following: a) Removal of pre-qualification system for small contracts (<RP 50 Billion), and move towards a post qualification system for all contracts b) Public disclosure of results of bid evaluation, name of the winning bidder and contract scope/price. Revise existing perda on kabupaten organizational structure and functions to include new functions of procurement focal point. Monitor and publicly disclose unit rates for major components of civil works contracts, as well as prices for major categories of goods. a) Copy of documents for three major contracts, including records on procurement processing which certify the required practices. b) Documentation of public disclosure of bid awards (e.g., Quarterly Procurement Bulletin including publication of contract awards). Investment Phase (Year 1) Copy of revised perda. Copy of Quarterly Procurement Bulletin with annual update on unit rates and prices. Ex post review on sample basis to confirm implementation satisfactory in form and substance. Submit letter to World Bank as condition of eligibility for investment certifying that the implementation for each of the eligible kabupatens have been confirmed by the Project Secretariat, and have been found satisfactory in form and substance. Review revised perda to confirm satisfactory in form and substance. Submit letter to World Bank as condition of eligibility for investment certifying that the revised perda for each of the eligible kabupatens are available at the Project Secretariat, and are satisfactory in form and substance. Review submitted documents to confirm satisfactory in form and substance. Submit letter to World Bank as condition of continued eligibility for investment certifying that the required documentation for each of the eligible kabupatens are available at the Project Secretariat, and are satisfactory in form and substance. Post review during supervision. Post review during supervision. Procurement survey that verifying: procurement process is transparent adequate complaint handling system in place adequate disclosure in place

72 Implement provisions of Keppres 80/2003 related to the following: a) Removal of the restriction on bidding to bidders registered in the respective district area only, and open the competition to qualified bidders. b) Ensuring that only appropriately trained/certified staff are involved in procurement decision/actions/monitoring, including the Pimpro, members of tender committee, as well as the Bawasda staff involved in procurement audit. c) Ensuring that at least one qualified representative of civil society participates in the bid evaluation process. d) Public disclosure of the following procurement documents: procurement plans of kabupaten work units; contract rosters; and project progress reports for all kabupaten projects e) Conducting and public disclosure of an annual survey on the experience of bidders participating in kabupaten procurement, as well as views and perceptions of civil society about kabupaten procurement practices. Implement provisions of Keppres 80/2003 related to the following: a) ensuring professionalism of procurement function; and b) efficient and effective handling of complaints a) Copy of documents for three major contracts, including records on procurement processing which certify the required practices. b) A list of Pimpro, members of tender committee, and Bawasda indicating the relevant procurement training that they have received. xii c) A list of contracts indicating which had a qualified member of civil society participate in the bid evaluation process. d) and e) Copy of Quarterly Procurement Bulletin including results of annual survey and documents requiring public disclosures. Investment Phase (Year 2) a) List of Pimpro, members of tender committee, and Bawasda staff involved in procurement audit showing that at least 50% are professionally certified xiii b) List of complaints and how handled showing at least 75% of complaints are addressed appropriately and within the established deadline, and sanctions are imposed as published in the Quarterly Procurement Bulletin. Review submitted documents to confirm satisfactory in form and substance. Submit letter to World Bank as condition of continued eligibility for investment certifying that the required documentation for each of the eligible kabupatens are available at the Project Secretariat, and are satisfactory in form and substance. Review submitted documents to confirm satisfactory in form and substance. Submit letter to World Bank as condition of continued eligibility for investment certifying that the required documentation for each of the eligible kabupatens are available at the Project Secretariat, and are satisfactory in form and substance. Post review during supervision. Procurement survey that verifying efficient and effective handling of complaints

73 Reduce procurement delays and improve timeliness of award of contracts. Ensure that all procurement activities are audited by Bawasda, and results of audit included in Bawasda s regular audit report. Analyze and report on price trends Copy of the Quarterly Procurement Bulletin showing additional information on the length of time of bid evaluation process and showing that at least 75% of bids for that period awarded within bid validity period. Copy of report on audit of procurement done by Bawasda. Copy of the Quarterly Procurement Bulletin showing trends in unit costs and prices. Procurement survey that verifying timeliness of contract awards and verifying disclosure Procurement survey that verifying unit prices and related quality of construction / goods i For the first batch of kabupatens (15 kabupatens participate in Preparation Phase), these requirements must be met within 3 months after Loan Negotiation. ii The 9 provinces are: West Sumatera, Banten, West Java, Central Java, DI Yogyakarta, East Java, Gorontalo, North Sulawesi, and South Sulawesi. iii Fiscal Capacity is according to Ministry of Finance Decree (KMK) No.538/KMK.07/2003 dated December 12, 2003 concerning Fiscal Capacity Map. iv Only applied to the second batch of kabupatens. v Safeguard Framework is including safeguard in social (land acquisition, resettlement and indigenous people) and environmental vi These requirements can be combined and covered in a single SK Bupati as appropriate. To be available within 3 months after Loan Negotiation for the first batch of kabupatens. vii These verifications can be combined into a single letter as appropriate. viii Only for second batch of kabupatens. ix Focal Point to provide to Local Project Management Unit. x Dir Keuangan Daerah (with capacity building form Secretariat of LPKPP). xi Civil society, NGOs, and Secretariat of LPKPP. xii Assuming that the national procurement certification system is not yet in place. If the national procurement certification system is in place, this verification will be those who have been certified under the system. xiii Assuming that national certification system is in place

74 Attachment 2 to Annex 2 - List of the Kabupaten in 9 Provinces of ILGR I. West Sumatera 47 Kab. Klaten 95 Kab. Tulungagung 1 Kab. 50 Kota 48 Kab. Kudus VII. Gorontalo 2 Kab. Agam 49 Kab. Magelang 96 Kab. Boalemo 3 Kab. Dharmasraya 50 Kab. Pati 97 Kab. Bonebolango 4 Kab. Kep. Mentawai 51 Kab. Pekalongan 98 Kab. Gorontalo 5 Kab. Pdg. Pariaman 52 Kab. Pemalang 99 Kab. Pohuwato 6 Kab. Pasaman 53 Kab. Purbalingga VIII. North Sulawesi 7 Kab. Pasaman Barat 54 Kab. Purworejo 100 Kab. Bolmong 8 Kab. Pes. Selatan 55 Kab. Rembang 101 Kab. Minahasa 9 Kab. S.Lunto Sij. 56 Kab. Semarang 102 Kab. Minahasa Utara 10 Kab. Solok 57 Kab. Sragen 103 Kab. Minahasa Selatan 11 Kab. Solok Selatan 58 Kab. Sukoharjo 104 Kab. Kep. Sangihe 12 Kab. Tanah Datar 59 Kab. Tegal 105 Kab. Kep. Talaud II. Banten 60 Kab. Temanggung IX. South Sulawesi 13 Kab. Lebak 61 Kab. Wonogiri 106 Kab. Bantaeng 14 Kab. Pandeglang 62 Kab. Wonosobo 107 Kab. Barru 15 Kab. Serang V. DI Yogyakarta 108 Kab. Bone 16 Kab. Tangerang 63 Kab. Bantul 109 Kab. Bulukumba III. West Java 64 Kab. G. Kidul 110 Kab. Enrekang 17 Kab. Bandung 65 Kab. Kulon Progo 111 Kab. Gowa 18 Kab. Bekasi 66 Kab. Sleman 112 Kab. Jeneponto 19 Kab. Bogor VI. East Java 113 Kab. Luwu 20 Kab. Ciamis 67 Kab. Bangkalan 114 Kab. Luwu Timur 21 Kab. Cianjur 68 Kab. Banyuwangi 115 Kab. Luwu Utara 22 Kab. Cirebon 69 Kab. Blitar 116 Kab. Maros 23 Kab. Depok 70 Kab. Bojonegoro 117 Kab. Majene 24 Kab. Garut 71 Kab. Bondowoso 118 Kab. Mamasa 25 Kab. Indramayu 72 Kab. Gresik 119 Kab. Mamuju 26 Kab. Karawang 73 Kab. Jember 120 Kab. Mamuju Utara 27 Kab. Kuningan 74 Kab. Jombang 121 Kab. Pangkep 28 Kab. Majalengka 75 Kab. Kediri 122 Kab. Pinrang 29 Kab. Purwakarta 76 Kab. Lamongan 123 Kab. Polewali Mamasa 30 Kab. Subang 77 Kab. Lumajang 124 Kab. Selayar 31 Kab. Sukabumi 78 Kab. Madiun 125 Kab. Sidrap 32 Kab. Sumedang 79 Kab. Magetan 126 Kab. Sinjai 33 Kab. Tasikmalaya 80 Kab. Malang 127 Kab. Soppeng IV. Central Java 81 Kab. Mojokerto 128 Kab. Takalar 34 Kab. Banjarnegara 82 Kab. Nganjuk 129 Kab. Tana Toraja 35 Kab. Banyumas 83 Kab. Ngawi 130 Kab. Wajo 36 Kab. Batang 84 Kab. Pacitan 37 Kab. Blora 85 Kab. Pamekasan 38 Kab. Boyolali 86 Kab. Pasuruan 39 Kab. Brebes 87 Kab. Ponorogo 40 Kab. Cilacap 88 Kab. Probolinggo 41 Kab. Demak 89 Kab. Sampang 42 Kab. Grobogan 90 Kab. Sidoarjo 43 Kab. Jepara 91 Kab. Situbondo 44 Kab. Karanganyar 92 Kab. Sumenep 45 Kab. Kebumen 93 Kab. Trenggalek 46 Kab. Kendal 94 Kab. Tuban Note: Kabupatens participating in ILGR preparation (First Batch)

75 Annex 3: Estimated Project Costs INDONESIA: Initiatives for Local Governance Reform Project Project Cost By Component Local Foreign Total US $million US $million US $million A. Local Governance Reform B. Poverty Targeted Investments C. Implementation Support and Monitoring Total Baseline Cost Price Contigencies Front-end Fee Total Financing Required Project Cost By Category Local Foreign Total US $million US $million US $million Sub-project grants Local Counterpart Fund Goods/Consulting Services/Workshops/Trainings for Central Government Local Government Reform Cost Incremental Operating Costs - Honoraria Incremental Operating Costs - Other Total Baseline Cost Unallocated Front-end Fee Total Financing Required

76 Annex 4: Cost Benefit Analysis Summary INDONESIA: Initiatives for Local Governance Reform Project Summary of Benefits and Costs: See main text below. Main Assumptions: See main text below. Sensitivity analysis / Switching values of critical items: See main text below. Economic Justification & Analysis Although the majority of ILGR s resources focus on physical investments aimed at poverty alleviation in rural areas, the main development objective of the project is to enhance the efficiency and effectiveness of the planning and resource allocation process of participating kabupatens, leading to more appropriate, and better quality infrastructure and service delivery in the context of an improved governance and accountability framework at the local level. This is consistent with the Bank s Country Assistance Strategy (CAS), which supports decentralization and the investment climate by focusing on capacity enhancement and strengthening of accountability at local and central governments levels. This Annex aims at justifying the design features and implementation arrangements of ILGR from an economic point of view. It will explain why there is a need for an ILGR type of interventions in the targeted kabupatens; present the approach to the economic analysis given the demand driven nature of the investment sub-projects and how the project s design will promote economic efficiency in the use of funds; it will also discuss the main conclusions drawn from the fiscal analysis for 16 ILGR kabupatens before highlighting finally major risks of the project (the analysis was conducted when 16 kabupatens were facilitated. In June 2004, facilitation in one kabupaten, Bantaeng -South Sulawesi, was discontinued that change the total numbers of Batch 1 ILGR Kabupatens to 15 kabupatens). I) The need for the intervention ILGR targeted kabupatens are characterized by a relatively high level of poverty. Despite progress in governance related reforms, they still manifest weaknesses in institutions and lack of accountability. Compared to the national average, income poverty indicators deteriorated substantially despite the moderate improvement in lowering the number of the poor over time. The average poverty head count index in ILGR kabupatens stood at 19.7% in 2002, higher than the 18.2% national level poverty rate. In 1999, it registered 22.5%, significantly lower than the national poverty rate of 23.4%. In 2002, Amongst the 15 Kabupatens, the number of kabupatens whose poverty level stands above the national level increased to 7 compared to 6 in Six kabupatens experienced worsened poverty levels compared to See table 1 and chart 1 below

77 Table 1. Poverty Head Count Index 1999 (%) 2002*(%) National Poverty Rate Average ILGR Kabupaten Source: National Poverty Rate: BPS Estimate (2003), Kabupaten s Poverty Rate: DAU Data Base, MOF ( ) Chart 1. ILGR Kabupatens Poverty Rate, % 35% 30% 25% 20% 15% 10% 5% 0% Tanah Datar Takalar Bulukumba Boalemo Bolmang Solok Gowa Bantul Lebak Majalengka Ngawi Magelang Lamongan Kebumen Bandung Poverty Rate 1999 Poverty Rate 2002 National Poverty Rate 1999 National Poverty Rate 2002 Source: National Poverty Rate: BPS Estimate (2002), Kabupaten s Poverty Rate: MOF ( ) The majority of ILGR Kabupatens still experience considerable levels of deprivation despite improvements in income. Non-income indicators of poverty reveal higher levels of needs in ILGR kabupatens compared to the national average. 7 out of 15 of ILGR kabupatens have a higher proportion of population without access to sanitation and to safe water compared to the national average (see chart 2a and 2b below). 70% 60% 50% 40% 30% 20% 10% 0% Chart 2a. Proportion of Household Without Access to Proper Sanitation Boalemo Solok Bolmong Lebak Bulukumba Takalar Tanah Kebumen Ngawi Bandung Magelang Gowa Lamongan Majalengka Prop. Household without access to Proper Sanitation National Average Bantul 60% 50% 40% 30% 20% 10% 0% Chart 2b. Proportion of Household Without Access to Safe Water Prop. Household without access to Safe Water National Average Source: SUSENAS

78 Despite a reform-minded executive and progress in implementing good governance related measures, corruption is still pervasive. The GDS 2002 revealed that corruption is rather systemic with money politics at the political level, corruption in core government operations such as recruitment, and government procurement, as well as petty corruption at the service delivery level all widespread. See Charts 3 below. Charts 3. Results of GDS 2002 Governance Situation in ILGR Kabupatens People perceive that public service is improving (People s perception on public service in Bupati office during ) 80% 70% 60% 50% 40% 30% 20% 10% 0% 29.2% 26.4% 26.2% 43.5% 42.0% 42.5% 1.2% AVE ILGR (22 KAB) 2.2% AVE NONILGR(137) Worse Equal Better 2.2% NATIONAL AVERAGE But corruption still linger (NGO activist s perception on the level of corruption in various government offices) % Bupati's Office DPRD Health Dinas Sub-District Village ILGR Non-ILGR Transparency still low (Percentage of NGO Activist who perceived that Budget transparency is high) % 22 and law enforcement still weak (Most common solution for misconduct by village officials) ILGR Non ILGR Source: Governance and Decentralization Survey