Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized

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1 Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Report No. PID6725 Project Name Indonesia-Urban Poverty Project (+) Region Sector Project ID Implementing Agency East Asia and Pacific Urban IDPE55821 Date PID Prepared August 11, 1998 Projected Appraisal September 7, 1998 Projected Board Approval Date October 5, 1998 Background BAPPENAS (National Development Planning Agency) and PMDs (Directorate General of Community Development) at kecamatan level 1. Country and Sector Background The banking sector in Indonesia collapsed following the July 1997 collapse of the Thailand financial system. Enterprises that relied on credit can no longer obtain it to finance their working capital, and this has led to a vicious circle of lay offs and loss of purchasing power both by employeesconsumers and by enterprises. In addition, severe drought in many places affected rural livelihoods. Thus, many urban residents returned to their rural roots, and rural migration to cities increased - when both urban and rural areas were hard placed to sustain additional people, let alone the standard numbers. The foreign exchange crisis exacerbated the problem, and more recently, the social unrest made it even worse. The pre-crisis unemployment estimates were very low, less than 2% - though there was substantial underemployment. Earlier in 1998, from a 91 million labor force, the potential for open urban unemployment was estimated at some 14 million (15%), and the potential for under-employment was estimated at 45% by the Indonesian Federation of Workers. The pre-crisis number of urban "absolute" poor was estimated at 7 million, at a 10% incidence (and 15 million in rural areas, 12%). To this now should be added perhaps another 7 million who hovered over the poverty line but are now under it, and an unknown number of people-- maybe another 7 million - who had higher incomes but lost. The larger cities are the most affected, in terms of concentration of lost jobs, but it is possible that overall the unemployed are dispersed and their numbers are also high in the many smaller cities and towns. The Government strategy to cope with the crisis included assistance first to the rural areas with new income opportunities and encourage temporary urban residents who lost their job to leave. In particular, the Government provided some new credit programs and continued with other rural programs. The Bank's Village Infrastructure Project coverage was doubled to 3000 villages in 1998/9 (taking over financing of the government's share). The Kecamatan (subdistrict) Development Project was approved by the Board June 2 and is expected to assist 250 kecamatans in FY99, fitting current needs. Two Bank

2 financed agricultural projects are being restructured to allow more participatory, small infrastructure construction and income generating activities. In the urban areas, the Government implemented quickly with its own resources: a) a labor intensive program (padat karya) to undertake small works that were already in the municipal plans; from December 1997 to May 1998 it spent some Rp7O billion on this program and is estimated to have employed some 4 million persons at Rp7,500 per day in the first 2 months. b) subsidy programs for necessities. The subsidy ensured that a food distribution program (operasi pasar) provide rice, sugar and cooking oil at pre-crisis prices, and food coupons for free meals. It also subsidized medicines and ensured supplies. The Government avoided fuel price increases at a time of income loss. More recently, school fees have been waived. To provide relief to the urban areas, the Bank a) amended on-going urban loans to assist with further labor intensive works, to be managed by the Directorate General of Urban Settlements. b) proposed this new urban poverty project; In March 1998 a project concept note was sent to Bappenas, which has endorsed the concept. 2. Objectives. The objective of the proposed urban poverty project is to improve poor urban neighborhoods and to provide income to poor urban residents who a) have lost their jobs or sources of income in the economic crisis, b) have income eroded by high inflation; or c) are "long term" poor. 3. Description. The proposed project will provide funding for small public infrastructure works as well as economic activities in urban areas, by demand from community groups. The menu will be open except for a negative list (e.g., arms, harmful drugs, depositing project funds in banks to earn interest, land acquisition). Activities such as urban agriculture and group training in communities are encouraged. Funds for small public infrastructure works will be on a grant basis. Funds for economic activities have to be repaid within a year, with a 2t per monthly interest rate and a repayment schedule reflecting the cash flow of the financed activity. 4. Financing. The proposed loan is US$ 100 million. GOI will provide US$ 10 million as counterpart financing. 5. Implementation. The project will begin in the 40 districts in the northern half of Java, where most of the dense urban areas and urban poor are located. Starting in year 2, funds will also be available to other areas. Provincial governments will select the poorest kecamatans and local governments will select the poorest kelurahans in selected kacamatans. A Kelurahan Forum (KF) will be established consisting of representatives of the communities. Community groups will prepare subproject proposals, which will be evaluated and approved by the KF. Grants to the kelurahans would be authorized by the local treasury office with presentation of the project implementation agreement. The agreement has to be signed by the representatives of the community group and the KF, the project manager from -2 -

3 PMD, and the oversight consultant, who is to ensure quality and compliance with project guidelines. Overall coordination, management, budgeting and monitoring responsibilities will be carried out by a Secretariat in Bappenas, under the regional development deputy. An interministerial coordination committee, chaired by Bappenas, would resolve coordination problems. The PMDs at kecamatan level will be the implementation agencies. They will preselect poor kelurahans and poor RWs, and provide information and fliers on the project at the neighborhood level. Three levels of TA for implementation are anticipated: a) The Secretariat at Bappenas will be strengthened by a team of management consultant to assist with the management, organization, monitoring, etc. b) a consultant firm will be selected for each of West, Central and East Java and Jakarta for the first project year, to establish an oversight consultant team in each of the 6 municipalities in each province. This team is to approve, and help design if necessary, the proposals made by the community groups, and supervise implementation progress to certify payment requests. c) facilitators will be selected and trained for 6 months by the oversight consultants in the first year. The facilitators should come from nearby the districts that they are to assist. They will first disseminate information about the project, then help identified groups prepare proposals, and after approval of proposals, assist with implementation as may be needed. After 6 months, the facilitators would be selected by each group making a proposal for development of its concept. 6. Sustainability. Unlike the VIPs and KDP, which were designed with a long term approach, the proposed project has important but limited term objectives: provide people with immediate relief, with purchasing power in a better way than simply distributing cash. It may be that lessons are learnt that can be used to deal more permanently with urban poverty reduction: for instance, in the promotion of urban agriculture, assistance to improve housing, credits in the absence of a functioning banking system, etc. 7. Lessons Learned from Past Operations in the Country/Sector. The various social funds and similar projects undertaken in the Bank have been reviewed and their lessons taken into account. Furthermore, the characteristics of the Indonesian society have been taken into account in designing the project - their spatial and social structures, customs such as gotong royong (community work), informal safety nets and cooperative systems; the available skills; the current bleak situation. The government structure also has been taken into account: it has a hierarchy that facilitates dissemination of information, so that a "model" can quickly be replicated across many cities. This allows a relatively large project to be implemented through small parallel, independent and varied subprojects - by establishing standard criteria, allowing demand driven solutions at each location, proceeding through relatively small assistance "units". For this to work, the basic organization needs to be relatively centralized, as does the monitoring. 8. Poverty Category. This project is considered part of the Program of -3 -

4 Targeted Interventions. 9. Environmental and Social Aspects. Environment Category B is proposed. Works under the project are expected to be small-scale and should enhance the environment. The environmental guidelines developed for the Municipal Innovations Project will be used. Urban renewal and upgrading will be encouraged, rather than moving people out of their neighborhoods, and little involuntary resettlement is expected. Standard guidelines have been prepared. 10. Program Objective Categories. The categories that this project supports are poverty alleviation and environmentally sustainable development. 11. Benefits. The benefits would be provision of some purchasing power and creation of jobs from community improvements (small public works and improvements tend to have high economic returns), food production, and creation of small businesses and of skills through training. Returns from these activities by the poor are normally good and have shown high repayment rates. The target group may comprise some 15 million poor people. 12. Risks. Major risks consist of improper use of funds, lack of market for economic activities, inconsistent incentives among various poverty programs, and lack of counterpart funds. Risk minimization measures include penalties for misuse of funds, wide public disclosure about availability and uses of funds, outside reviews and audits, assistance to poor to focus on marketable products, assistance to Bappenas to monitor all on-gong poverty programs and ensure consistency among them. 13.Contact Point: The InfoShop The World Bank 1818 H Street, N.W. Washington, D.C Telephone No. (202) Fax No. (202) Note: This is information on an evolving project. Certain activities and/or components may not be included in the final project. Processed by the InfoShop week ending August 14,

5 Annex Because this is a Category B project, it may be required that the borrower prepare a separate EA report. If a separate EA report is required, once it is prepared and submitted to the Bank, in accordance with OP 4.01, Environmental Assessment, it will be filed as an annex to the Public Information Document (PID). If no separate EA report is required, the PID will not contain an EA annex; the findings and recommendations of the EA will be reflected in the body of the PID.