PROJECT INFORMATION DOCUMENT (PID) APPRAISAL STAGE

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1 Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Project Name Region Sector Project ID Borrower(s) Implementing Agency PROJECT INFORMATION DOCUMENT (PID) APPRAISAL STAGE ID-KDP Additional Financing Report No.: AB2816 EAST ASIA AND PACIFIC Sub-national government administration (25%);Water supply (20%);Irrigation and drainage (20%);Roads and highways (20%);Primary education (15%) P REPUBLIC OF INDONESIA Department of Community Development, Ministry of Home Affairs Jl. Pasar Minggu Raya, Km. 19 Indonesia Republic of Indonesia Indonesia Environment Category [ ] A [X] B [ ] C [ ] FI [ ] TBD (to be determined) Date PID Prepared January 19, 2007 Date of Appraisal November 13, 2006 Authorization Date of Board Approval February 20, 2007 INTRODUCTION 1. This Project Paper seeks the approval of the Executive Directors to provide additional financing of US$130 million for the Indonesia: Third Kecamatan Development Project, second phase (KDP3b). This support would be provided via a combination of IDA (US$75 million) and IBRD (US$55 million) resources. 2. KDP3b was approved by the Executive Directors for a total amount of US$160 million in March The project became effective on June 30, It is the latest operation in a long running series the KDP Program -- initiated in To date, the total financing provided under the KDP Program is approximately US$1.45 billion. The proposed additional financing is needed to provide a bridge for KDP activities in Support to a larger national anti-poverty program (described below) will be considered at a later stage. 3. On August 16, 2006, President Yudhoyono of Indonesia announced a national anti-poverty program. This initiative will be the first Indonesia-wide Government program for sustainable poverty reduction since the East Asian crisis in 1997 plunged nearly 40 percent of Indonesia s population into poverty. The national program will have two separate components: a "National Program for Community Empowerment" and a "Conditional Cash Transfer Program". The National Program for Community Empowerment or Program Nasional Pemberdayaan Masyarakat (PNPM) would cover both rural and urban areas. By 2009, all 70,000 villages in the 5,300 rural and urban sub-districts (or kecamatans) in Indonesia would be covered. 3

2 4. Additional financing for the successful KDP Program is particularly well suited in this regard as it can quickly and effectively expand coverage to very poor and marginalized communities. The additional financing will not only allow expansion of a successful program, but will also signal support for the larger effort by GOI to emphasize inclusive development and sustainable poverty reduction. 5. The proposed additional financing would help finance the costs associated with scaling up a welltargeted project that is reaching the intended beneficiaries and providing them opportunities for increased income generation, decision making, and accessing better services. There will be no change to the project s original development objectives. The additional financing will not involve any significant changes to the profile of beneficiaries, safeguard requirements and implementation and fiduciary arrangements. BACKGROUND AND RATIONALE FOR ADDITIONAL FINANCING 6. The KDP Program provides block grants to finance economically productive activities, identified through bottom-up and participatory development planning, using the community driven development (CDD) approach. It is the hallmark of Indonesia s CDD interventions and is now the largest Bankfinanced CDD program in the world. More than 27,000 Indonesian villages have benefited in 1,592 subdistricts, with 75 percent of the funds going for socioeconomic infrastructure and 25 percent for economic activities. 7. The World Bank has been involved with KDP since its launch in The project has also received substantial grant support from donors, and, as Indonesia emerges from the economic crisis, contributions from national and local government budget resources are increasing very rapidly. 8. Project Objectives and Design. KDP3b has an overall development objective of reducing poverty and improving local-level governance in rural Indonesia. It is part of a long-term village level governance program that began with the first KDP in The development objectives for KDP3b include: (i) institutionalizing participatory processes in local government; (ii) providing cost-effective, basic social and economic infrastructure; (iii) strengthening the capacity of the micro-finance institutions to manage and monitor funds sustainably; and (iv) providing emergency reconstruction assistance. 9. KDP s block grants are planned through facilitated village and sub-district meetings. Sub-district grant amounts are fixed within categories established by population density. Village proposals can vary within a pre-determined range. Grants are disbursed directly to collectively held village accounts (through a transfer bank), without entering the inter-governmental financial transfer system. Villagers can receive a small planning grant to hire technical advisers to help design proposals. KDP also provides engineering assistance and oversight, as well as training in proper double-entry book-keeping and procurement. 10. The KDP Program has introduced a number of unique design features, that include: (i) a clear focus on Indonesia's poorest rural communities; (ii) a boost to Indonesia's ambitious decentralization program through a mechanism which has introduced local level planning, decision making and management; (iii) a direct disbursement system, which channels funds to communities and seeks to minimize transfer loss (this system has now been adopted by all Indonesian CDD projects); (iv) a mechanism to channel funds common to multiple donors, including Australia, Canada, Japan, Netherlands, and the United Kingdom instead of parallel support; and (v) a robust and comprehensive anti-corruption framework, including community participatory monitoring, government oversight, 4

3 consultants and civil society monitoring, financial reviews and audits, and a grievance and complaints resolution mechanism Project Performance to Date. Project performance for the KDP Program series has been satisfactory. Economic and social impact evaluations are positive, with a weighted average IRR of approximately 35 percent. Quality of output reviews is similarly favorable. The project has also been very robust in the face of Indonesia s post-crisis turbulence. Not only did it scale up rapidly during the crisis, when much of the Bank s portfolio was being cancelled or restructured, but in many poor parts or conflict-affected parts of the country, KDP has been the only donor-supported project able to function. 12. The project is currently active in 1,300 sub-districts about 26,000 villages and it covers 30 of Indonesia s 31 provinces. Table 1 summarizes the main financial inputs into KDP 2. Table 1: KDP s Financial Structure and Coverage (in US million) Project Phase IBRD/IDA Trust Funds No. of No. of Subdistricts Villages No. of Government Total Districts Contribution Covered Covered Covered KDP ,671 KDP ,671 Supplemental a/ KDP ,592 27,244 KDP3a b/ ,206 KDP3b ,794 KDP3b with ,800 36,000 Additional Financing c/ Total a/ The KDP1 Supplemental Credit covered additional years for KDP areas. b/ Figures include MDF Aceh and linked donor funding as follows: Aceh KDP: US$79.0 million; KDP Nias: 50.0 million; Aceh Post Conflict: US$30 million; and MDF KDP-BRR: US$65.0 million. c/ Figures for KDP3b with Additional Financing are projections. Government contribution includes approximately US$360 million from 2007 national budget and US$100 million projected from local district government budgets. 13. As of December 1, 2006, KDP3b has disbursed US$35.4 million, although almost all funds are now committed. The program has helped rehabilitate schools, health facilities, water and sanitation systems, roads, bridges and market systems. The unique design of the program involves engagement of social and technical facilitators who know the communities well. Overall, evaluations and international audits of these sub-projects show that return rates average percent. Table 2 summarizes the main outputs from the program. 1 It should be noted that KDP was the first World Bank funded project to appraise an anti-corruption action plan -- now mandatory for all projects in Indonesia -- and to carry out empirical measurements of actions designed to reduce project leakage. 2 In addition, 26 provincial and district governments have launched parallel KDP programs of their own. 5

4 Subproject Type Infrastructure Roads Table 2: Outputs from the Kecamatan Development Project, KDP KDP Totals to Date ( ) ( ) ( ) 16,700 roads 19,000 kms 9,632 roads 11,097 kms 26,332 roads built or upgraded 30,097 kms built or upgraded Bridges 3,500 bridges 3,006 bridges 6,506 bridges built or reconstructed Clean Water Supply 2,800 units 4,378 units 7,178 clean water supply units built Sanitation 1,300 units 1,604 units 2,904 sanitation units built Irrigation 5,200 irrig systems 2,126 irrig systems 7,326 irrigation systems built Public Markets 400 new markets 16 rehabilitated 327 new markets 91 rehabilitated 727 public markets built 107 markets rehabilitated Electrification 260 activities 254 activities 514 rural electrification activities Workdays Generated from Infrastructure Projects 25 million workdays 14 million workdays* 39 million workdays generated from infrastructure projects Economic Loan Activities (incl. women s loans) Loan Activities 18,000 economic loan 24,931 loan activities 42,931 loan activities activities Loan Recipient/Loan 280,000 loan recipients 471,554 loan recipients 751,554 loan recipients group members Education and Health Health 140 health posts 1,868 health posts 2,008 health posts supported Education 285 new schools built 190 school rehab 380 individual scholarships * Workday figures not yet complete for last cycles in ,046 new schools built 1,159 schools rehab 94,801 individual scholarships 1,331 new schools built 1,349 schools rehabilitated 95,181 individual scholarships 14. KDP is among the most thoroughly evaluated operations in the Bank s portfolio. Positive evaluations demonstrate the following: Poverty targeting is successful (Alatas, 2005); Infrastructure built by KDP has high economic returns (Dent, 2001, Torrens, 2005); Infrastructure quality is good to very good (Ekart et al, 2004; Torrens, 2005; MOHA 2005); KDP s construction costs are 30-50% less than. alternative means (Torrens 2005); There were no significant safeguards cases in 250 randomly selected sub-projects (Gnagy 2005); Corruption rates are low (PwC, Moore s Rowland, BPKP, MIS); Participation of women and the poor is generally high (MIS); Voluntary community contributions are high (MIS); and KDP forums reduce conflict (Barron et. al. 2006). 15. Evaluations have also shown the main areas requiring improvement: (i) new statistical methods can improve targeting (Alatas 2005); (ii) heightened audit samples and improved audit procedures will lower losses (Olken 2005); (iii) community institutions lack adequate representation (Evers, Olken 2005); (iv) management capacity is weak (aide-memoirs); and (v) O&M is inadequate (MOHA 2005). 16. KDP s planning for 2007 responds to these concerns. Poverty targeting will be improved by using new village mapping techniques to recalculate the eligibility list. KDP s Aceh reconstruction program piloted an improved audit design (based on the Olken study) on corruption and village roads, and, 6

5 pending final evaluation, will extend the approach to the national program. Also as part of the national program, GOI is working with donors through the Decentralization Support Facility (DSF) and the Development Policy Lending (DPL) series to design a reform program for improving sub-district and village governance. And a DSF-financed study will be assessing village cash flows to identify whether the poor communities covered by CDD programs can afford user fees to improve maintenance. PROPOSED CHANGES 17. The only major change with the proposed additional financing is the expansion of geographic coverage. Neither the original project objectives nor the components will change. The implementation arrangements would also be the same as for the ongoing project. 18. GOI has not yet fully formulated the details of PNPM other than to confirm that it will build on KDP and UPP to cover the entire country by 2009 and continue until However, for the 2007 launch of the scale-up, GOI wants to introduce no changes to the project s operational procedures other than normal technical adjustments required to cope with the scaled-up project. 19. The proposed scale-up for which additional financing is requested consists of the following: The number of participating sub-districts will rise from a planned to approximately 1,800; and The block grant amount per sub-district used for investment will rise from a current Rp. 1.0 billion to Rp. 1.2 billion. 20. In 2008, the national program will be fully on-budget. It is expected to cover all 70,000 villages in Indonesia. Donor support by that time will be through a larger partnership approach with additional funding requested from the ADB and the Japan Bank for International Cooperation (JBIC). 21. Revised Project Description. The five project components -- with minor modifications from the description in the PAD for KDP3b -- are summarized below: (a) Block Grants to Poor Communities: These constitute approximately 80 percent of KDP. The block grants consist of unearmarked transfers to sub-district financial management units, where they are used to support priority investments identified and selected through a participatory planning process and ratified in a sub-district selection meeting. Other than a small negative list (e.g., weapons, civil service salaries etc), menu choices are open. Up to 10 percent of the block grant can be used to purchase engineering services. Sub-categories of the block grant cover: i) Planning Grants: These cover the cost of the participatory planning process, engineering design services, and village level training. ii) Main Block Grants: Approximately 65 percent of these funds are used for economic infrastructure such as roads, tertiary irrigation and the like, although in the past two years there has been an increase in using the grants for education and health services as well. The block grants are allocated based on the decisions of the sub-district decision meeting. Up to 25 percent of the grant can be allocated to village-level revolving funds for women. iii) MDG Achievement Grants: These fund a randomized pilot evaluation that will test whether using KDP grant mechanism to support village-level poverty reduction action proposals produces results on MDG performance indicators. 3 Launched in 1998, by 2007 KDP was expected to scale-down to 550 sub-districts from its 2006 high of 1,350. 7

6 (b) Implementation Support: Villages are supported by social and technical kecamatan facilitators. These facilitators oversee the planning process, provide technical advice and training, manage the project s reporting system, and certify project completion. There are usually two facilitators per kecamatan, although in particularly isolated areas there are three. (c) Technical Assistance: This constitutes the formal project administration. It consists of three levels, each of which reports to a corresponding level of government. Overall coordination is through a national management team within the Ministry of Home Affairs, which is implementing the project. (d) Monitoring and Evaluation: KDP provides both quantitative and qualitative monitoring, and it also has a mix of internal and outsourced evaluations. For the proposed additional financing, the internal system will be strengthened through better technology, additional training, and improved oversight. KDP reserves approximately 2.5 percent of its budget for monitoring and evaluation. (e) Operational Expenses: This component (less than 1 percent of project costs) covers government incremental expenses, particularly for the incremental travel and contract management costs. It does not cover salaries. 22. The Bank team believes that the proposed changes, although minor, offer substantial benefits with few risks. KDP is already operating in 1,350 sub-districts, so the total increase is relatively small. The increase in the block grant amount is also long overdue: total block grant amounts have remained unchanged since the project s launch in 1998, while the cost of labor and materials has risen substantially. CONSISTENCY WITH CAS 23. The proposed scale-up of KDP is fully consistent with the Bank s Country Assistance Strategy (CAS) for Indonesia. The 2006 CAS update states that: The Bank s large Community Driven Development (CDD) portfolio seeks to combine high-return investments with innovations in participation, planning and monitoring, designed to improve governance in sub-districts and villages. The CDD platform has performed very strongly over the CAS period, improving access to community level infrastructure and services, while contributing to improvements in transparency and accountability in over half of Indonesia s villages and towns. The government has announced its plans to scale up and apply the approach as a nationwide, pro-poor service delivery program. 24. KDP is part of the World Bank s overall CDD program in Indonesia. That program rests on three strategic directions. KDP (and the UPP) provide the main architecture for bottom-up development planning. Linked to KDP and UPP are an increasing number of sectoral programs that provide specialized inputs to improve the delivery of poverty services. Finally, KDP, working together with IFC and AusAid, recently launched a long-term program to promote private sector linkages to community development programming. 25. The long-term sustainability of the program to some extent hinges on stabilizing the public administration environment within which community development operates. GOI and the Bank agree on a three-year action program that will cover the following themes through a mix of analytical and advisory 8

7 activities supported through the Decentralization Support Facility, DPL triggers, and policy actions sponsored through KDP s high level coordination group: Clarifying the national procurement law to allow for community participation (2007); Reforming the bottom-up planning regulations (2007); Revising the law on village government (2008); Stabilizing sub-district structure and functions under decentralization (2008); and Developing a long-term budget transfer mechanism for community planning (2009). 26. KDP and the National Community Empowerment Program (PNPM): KDP is well-rooted in a long history of the Indonesian government s efforts to push development resources to the poor. As early as the mid-1980s the government supported a series of district-level reform programs, and by the early 1990s an array of donor-assisted projects such as the Water Supply and Sanitation for Low-Income Communities, the Village Infrastructure Project, and the government s own small grants program for disadvantaged areas were launching innovative mechanisms to work directly with communities. 27. KDP drew heavily on these experiences. What is different from past programs is to some extent its scale and scope. While KDP grew most directly out of the Village Infrastructure Project, over time it has broadened its scope from being a more efficient way to provide tertiary infrastructure to a more consolidated form of multisectoral village-level planning. A broad range of donor-assisted pilots have helped KDP develop a number of innovative, efficient ways to link community-based planning to public and private service delivery. 28. World Bank engagement with PNPM is close and deep. The 2004 CAS organized almost a third of the lending program around a community development platform, and it is this platform that has now become the foundation for the PNPM. The 2006 CAS update projects a sustained involvement with PNPM as it becomes the flagship program for poverty reduction in Indonesia. However, the scale being requested by the government is considerably larger than previously envisioned. Key issues for the Bank would include how to structure the lending program to meet the government s requests; which mix of lending instruments support the system objectives most effectively; and how best to involve sectoral programs and technical expertise into PNPM support. APPRAISAL RESULTS 29. GOI s additional financing request was appraised in November 2006 by a multi-sectoral World Bank team that included headquarters representatives of OPCS and the East Asia Region s Operational Services Unit. Appraisal concentrated on fiduciary oversight, project management, and absorptive capacity. During appraisal, the Bank agreed with GOI on a number of technical improvements. They include: Restructuring the national management arrangements; A strengthened and outsourced MIS system; Increase BPKP audit sampling to at least 20 percent of the kecamatan using the special audit program that has been developed for CDD projects; A revised consultant management and evaluation system; and Strengthened training for facilitators and village leadership. 9

8 Economic and Financial Analysis 30. Economic analysis of the scaled-up project does not change the analysis presented in the PAD for KDP3b. Even at full funding, total amounts remain less than 5 percent of district budgets. Although upto-date surveys of Indonesia s tertiary infrastructure gap are not available, it remains quite large, particularly off-java. Lack of access infrastructure reduces the viability of rural production. KDP economic rates of return are high in large part because KDP infrastructure creates substantial producer surpluses. 31. KDP currently has funds sufficient for 575 sub-districts in 2007, which receive approximately Rp. 0.8 billion each. Factoring in an additional 25 percent to cover the costs of technical assistance, training, and evaluations, this means that 2007 without the national program would require project financing of approximately US$72.0 million. This amount is available from the original KDP3b. 32. The proposed 2007 scale-up consists of approximately 1,800 kecamatans, with their block tentatively grants set at an average of Rp. 1.2 billion, or US$240 million. Total costs of all other KDP components amount to approximately 20 percent of the block grant, or US$50 million. Scaling up KDP to the level proposed by government for 2007 therefore requires additional financing of US$290 million. Subtracting the US$110 million available from KDP3b leaves a financing gap of US$180 million, of which the government has already allocated US$49 million. Scale-up and Absorption Issues 33. Of special relevance for the proposed additional financing is KDP s modular structure. Each subdistrict is a self-contained unit which supports activities that are not dependent on a master procurement or disbursement plan other than the overall budget. As a result, each year the number of sub-districts can expand or contract depending on the availability resources without jeopardizing contracts or budgeting. KDP s management structure is also flexible. The large majority of staff are hired as individual consultants and paid directly through a payroll managed by a bank. This minimizes the extent to which contracts must be procured and amended as the annual plan is adjusted. 34. The proposed changes should have little impact on KDP s disbursement arrangements. The project disburses quickly and, because of its modular structure, can absorb extra sub-districts with little difficulty. KDP currently disburses approximately US$165 million per year. The scaled-up program will disburse approximately US$400 million over the following 18 months. Experience suggests that this amount will be absorbed without difficulty. At present KDP only disburses to a small number of villages within each sub-district. The larger per sub-district amount will allow a larger number of villages to participate. 35. The first possible issue with scale up, increasing the block grant amount by 20 percent should not pose absorption problems. In fact, an even larger increase has been a long-standing recommendation of the Bank given the good performance of the current project and the need to increase the poverty benefits flowing to the poor from this system. In Aceh and Nias reconstruction, though admittedly operating under abnormal conditions, KDP disbursed as much as Rp. 6 billion per sub-district in less than 8 months and, with 90 percent of its US$79.0 million disbursed by May 2006, was by a significant margin the fastest disbursing project funded through the Multi-Donor Fund for Aceh and Nias. 36. A second possible scale-up issue is whether a sufficient number of technical and social facilitators can be mobilized and deployed quickly enough. KDP currently employs 75 percent of the staff that would 10

9 be required for the scale-up and while there are some difficulties securing qualified facilitators for the most isolated islands, for the large majority of proposed locations a trained body of facilitators already exists. However, providing sufficient amounts of proper training to the new facilitators is going to be challenging and will require special efforts by PMD. This issue was flagged during appraisal and an appropriate action program would be reviewed by the Bank before the project is launched. 37. The third issue concerns local government financing. The current KDP requires local government participation at a rate ranging from percent depending on their ability to pay. However, with block grant amounts increasing and the number of sub-districts rising well after the normal budget preparation period for local governments has passed, it would not be realistic to maintain this level of local government participation. It is proposed that mandatory local government participation be waived for 2007 while a realistic and equitable formula can be developed that will apply to all districts in the 2008 cycle of the program. Provincial and district governments that have already allocated counterpart funds for 2007 would be encouraged to use them to add additional kecamatans. 38. The fourth innovation concerns a pilot program to improve poor villager performance on MDG indicators. In this pilot, KDP villages sign a compact to improve their performance on a number of Indonesia s most difficult MDG indicators. In return, they receive an extra allocation of KDP funds. There are no changes to KDP s normal disbursement, accounting, or management procedures; changes come from more specialized facilitation and additions to KDP s systems for performance measurement. This pilot is highly relevant to the overall PNPM strategy since, if successful, it would be scaled up through the national program. Project Implementation, Financial Management and Procurement Arrangements 39. The institutional and implementation arrangements would be largely the same under the additional financing as for the ongoing KDP3b, as they are working effectively. KDP is executed through the Ministry of Home Affairs. The core executing team is guided through a coordinating group at each level of government that includes the finance department, the development planning board, and the relevant line agencies such as health, education, and public works. 40. A major outcome of the project has been to build the capacity of sub-district teams to plan and manage resources, and in addition creating demand for transparent resource allocation at the village level. Financial Management 41. The financial management capacity in the institutions involved in the project is satisfactory, having been strengthened over the years under the different phases of the KDP Program. In view of the proposed additional financing, an updated financial management assessment of the project has been undertaken. The following aspects were reviewed: country situation, performance of existing project entities, additional project features and related internal controls. A major risk is posed by KDP s block grants, particularly with respect to how effectively beneficiaries and community groups use and account for the funds. Another area of potential risk is the capacity of district and sub-district staff to supervise and monitor sub-project implementation, especially for local governments that do not have previous experience with the KDP program. However, KDP has a successful record of mitigating these risks through a strong training and oversight system. 42. Overall, the financial management risk for additional financing is assessed as being high. Over the past year, KDP has also taken several steps to strengthen its financial monitoring and reporting, including progress in cleaning up its backlog of unresolved cases. Supervision of project financial 11

10 management would be based on a risk-based approach and would be conducted at least twice a year. Supervision would review the project s financial management system, including but not limited to subgrant expenditures, accounting, reporting and internal controls.. Procurement 43. A revised procurement plan has been prepared and is being reviewed by the Bank s procurement team. There will be very little new procurement; existing contracts will be amended to reflect the changed scope of work. The final amendment will not be approved without RPM sign-off on the procurement plan. Contracts will be re-tendered for the national scale-up. 44. The villagers follow simple procurement procedures cleared by the Bank s procurement team. Procurement risk is higher at the national PMU level that selects project consultants, including field consultants. The large majority of KDP consultants are hired as individual consultants and paid directly through a payroll system managed by a commercial bank. EXPECTED OUTCOMES 45. The increase in outputs is largely linear, without qualitative changes to the development objectives or performance indicators. Because the additional financing is justified as Bank bridging support to the national program, the logframe will assess progress on planning the national program and its associated policy reforms. The revised performance matrix is attached as Annex 1. BENEFITS AND RISKS 46. Benefits of the project are twofold. First, KDP provides demonstrably valuable benefits to poor communities across Indonesia. These would be increased and they would reach a larger number of poor communities. Second, and more importantly, GOI is now making the transition into transforming all these community based programs into on-budget support for all villages across Indonesia. Making community transfers predictable and sustained will allow the model to expand into new areas already being piloted: Partnerships for improved education and health service delivery; Village links to private sector suppliers and marketing; Village-based safety nets; and Rapid responses to disasters and emergencies. 47. Risks are primarily macro and are unchanged from the risk matrix described in the KDP3b PAD. KDP s higher profile (and bigger block grant) increases corruption risks; for that reason a strengthened anti-corruption plan is proposed (see Annex 2). However, to date KDP s confirmed corruption rate has been quite low and the risk should be appraised as moderate rather than high. Indonesia s ever-changing institutional environment is also always a challenge. 48. Appraisal carried out a full fiduciary review, which is available IRIS. The purpose of this assessment was to identify improvements needed both for the additional financing in 2007 but also for the larger national program that will start in Recommendations from that assessment were to: Strengthen the fiduciary training program for local government and communities; Strengthen the financial management teams and financial controls within PMD; Provide an expanded FM training and supervision to facilitators; 12

11 Increase BPKP audit sampling to at least 20 percent of the kecamatan using the special audit program that has been developed for CDD projects; Train local government auditors (Bawasda) and include them in auditing of the kecamatan financial management groups; Introduce and train a kecamatan supervisory board and make them the community auditor for the UPK Expand the current program of community-based cross audits and to provide small fund for helping community groups to pursue their own legal cases; and Place the complaints handling database, including audit findings, online. 49. Anti-corruption Plan: A summary of KDP s anti-corruption action plan and the improvements proposed for the additional financing is attached in Annex 2. Corruption levels in KDP are generally low, with independent audits by national and international audits recording them as less than 1 percent of the total value and 90 percent of them for US$4,000 or less. Corruption rates have declined over time. KDP, the Bank, and the national audit board work closely together to improve the quality and suitability of fiduciary control measures for KDP. 13

12 ANNEX 1: REVISED RESULTS FRAMEWORK AND MONITORING ADDITIONAL FINANCING PDO Outcome Indicators Use of Outcome Information Improved HH expenditure rates and improved Determine if KDP3 is having its desired access to economic and social services in effects on socio-economic welfare. 2,000 poor subdistricts or over 30,000 villages. Villagers in KDP3 locations benefit from improved socio-economic and local governance conditions Improved health and education indicators for: 3 Health: immunization rates, antenatal care, and weighing 3 Education: increased enrollment and attendance rates for primary and jr. secondary schools EIRRs >30% for major infrastructure types In disaster areas, to determine if assistance is getting to populations in need Intermediate Results One per Component Component One: Kecamatan Grants Villagers participate in a process to plan, select and manage basic social and economic infrastructure provided through block grants. Component Two: Developing Local Government Capacities for Successful Community Development Local government councils use their new skills to fulfill their local governance functions. Component Three: Micro-Finance Support Subdistrict micro-finance institutions (UPKs) have the skills to carry out their credit activities successfully and sustainably. Component Four: Implementation Support Local governments and communities use planning and facilitation skills for participatory planning of development projects. Component Five: M&E, Studies Project stakeholders use results of M&E activities and studies to improve project performance. 80% satisfaction levels from beneficiaries regarding improved services and local level governance Results Indicators for Each Component Component One: Min. 40% participation rate of women and poorest community members in planning and decision-making meetings 85% of agreed workplans completed. #/type of infrastructure works, and education and health subprojects/ activities completed in 2,000 kecamatan 70% of infrastructure works are evaluated as high quality 80% of the devastated areas (Aceh and Nias) benefit from KDP technical and economic assistance. Component Two : 65% of KDP villages forming implementation regulations (perdas) Local government adoption and level of contributions to the program. Component Three: Min. 200 UPKs retaining >Rps 100 million in financial reserves Component Four: >70% of planned consultants and facilitators mobilized and recruited in time for project launch kecamatan. Component Five: >70% of study and evaluation findings used to improve the project. Studies on long-term maintenance and sustainable finding options completed and findings used to improve the program. Component One: Use of Results Monitoring Assess if planning and inclusion procedures and policies need adjustment to encourage greater participation. Assess if sub-district sites are benefiting from KDP assistance. Monitor and evaluate if reconstruction aid is assisting those areas in need and speeding area recovery Component Two: Review if training and capacity building plans need adjustment and if learning interventions meet the needs of the councils to perform satisfactorily their new duties. Component Three: Assess if the UPKs are performing well and if additional technical assistance is needed. Component Four: Monitor and evaluate whether local governments and communities are receiving the type of support they need in a competent and timely fashion. Findings from M&E and studies will allow the project to adjust and improve its operations and procedures. Studies will help the program examine options for sustainability and integration into government budgeting and financing system. 14

13 Arrangements for Results Monitoring Outcome Indicators Target Values Baseline YR1 YR2 YR3 YR4 YR5 Frequency and Reports Data Collection and Reporting Data Collection Responsibility for Data Instruments Collection Improved HH expenditure rates & improved access to economic and social services in 2,000 poor subdistricts (30,000 villages) Baseline & subsequent values depend upon area. Values will be taken from baseline surveys, Susenas and Podes data 2005 Susenas analysis of expenditures completed; 2007 review underway for next phase. Susenas, Project MIS, Survey for education and health scheduled for 2007 Bappenas Bureau of Statistics, project MIS, WB EIRRs >30% for major infrastructure types Infrastructure is not yet built under this phase so EIRRs are 0 (previous weighted avge of 53% for KDP2) EIRRs > 30% EIRRs> 30% EIRRs were recently calculated in Exercise will be repeated again for 2007 and 2009 EIRR study External evaluation firm >80% satisfaction levels from beneficiaries regarding improved services Infrastructure & services not yet provided so baseline is 0 (previous satisfaction levels 80% & above for KDP2) >80% >80% >80% >80% Monthly field reports, surveys and field reports at end of each project cycle, bi-annual technical evaluations. Monthly field reports form consultants, government and NGOs, field surveys, supervision mission reports, technical evaluations Field consultants, NGOs, government coordination committees, external evaluators, supervision missions 15

14 Results Indicators for Each Component Component One : Min. 40% participation rate of women and poorest community members in planning and decision-making meetings Target Values Baseline YR1 YR2 YR3 YR4 YR5 Frequency and Reports Baseline = 0. Mtgs have not yet taken place (In 2005, 48% part rate) >30% >30% >35% >35% >40% Monthly and annual project cycle reporting thru facilitators. Data Collection and Reporting Data Collection Responsibility for Data Instruments Collection Project monthly reporting. MIS Project Mgmt. 85% of agreed workplans completed. In 2005, 95% completed. 85% 85% Monthly and annual project cycle reporting Project MIS Project Mgmt. #/type of infrastructure works, and education and health subprojects/ activities completed in 2,000 kecamatan 70% of infrastructure works are evaluated as high quality KDP is currently in 1,400 kecs in 2006 KDP2 evaluation in 2005 showed 70% eval as high. 70% 70% 70% Monthly and annual project reporting Technical reviews and audits after each project cycle Project MIS Technical reviews and surveys Project Mgmt Project mgmt & external evaluation firm. 80% of devastated areas benefit from KDP technical and economic assistance (Aceh) By 2006, 100% of Aceh s 221 kecs rec d assistance 70% 80% Emergency cycle in Year 1 followed by regular project cycles Project MIS Field supervision reports Project mgmt, Supervision teams 16

15 Components Two: Developing Local Government Capacities for Comm Dev. Villages will be gradually assisted over the course of five years. Field reports, implementation regulations, MIS, government records Project mgmt and trainers, local government councils. 65% of KDP villages forming implementation regulations New activity so currently 0 30% 40% 50% 65% Component Three: Micro- Finance Support Min. 200 UPKs retaining>rps 100 m in financial reserves Component Four: Implementation Support >70% of planned consultants and facilitators mobilized and recruited in time for 2007 project launch 2,000 kecamatan. In 90% of consultants & facilitators mobiled, however, problems in Aceh and Papua 100 UPKs 150 UPKs 150 UPKs >70% >70% >70% >70% >70% 200 UPKs Continuous reviews and assistance will be provided to UPKs. Evaluations will occur bi-annually. Quarterly and annual reviews of TA performance throughout the project Project monthly reports and evaluations of UPKs, audits. HR database, project performance evaluations Project mgmt, outside evaluators, auditors. Project mgmt. Component Five: M&E, Studies >70% of study and evaluation findings used to improve the project. M&E activities and studies not yet taken place for KDP3 >70% >70% >70% >70% >70% Monitoring occurs continuously, Evaluations and studies occur periodically Project MIS, field and supervision mission reports, audits, evaluations, commissioned studies Project mgmt, NGOs, journalists, audit firms, supervision missions, external evaluators and consultants 17

16 ANNEX 2: ANTI-CORRUPTION ACTION PLAN 50. This Annex summarizes the general anti-corruption strategy for the activities in KDP as it expands during 2007 and begins to lay the groundwork for an even larger program in It draws on the general anti-corruption framework used for Bank-funded operations in Indonesia, the recently issued World Bank guide for fiduciary management in CDD projects and on KDP field experience. It outlines the general good governance principles that form the basis on which KDP innovations are built and it also signals some of the fine-tuning that will take place in the coming years. 51. Identifying Corruption in Indonesian Community Projects. Traditional community development projects in Indonesia have a relatively limited number of well-known points of leakage, inter alia: Transfers: Financial transfers to communities usually come earmarked or in kind. Loss rates from the transfer system can be very high. Poor contractor management: Contractor management for communities is normally handled by district technical offices, not by villages. With this system there is a danger of contract awards being directed to favored companies, regardless of qualifications or experience. Reviews have found endemic problems of substitution of inferior materials, unfinished works, and off-the-top payments for contract awards. Under-delivery of materials: Suppliers frequently deliver fewer materials than were purchased. This can often happen through collusion (e.g. with village leadership). Poor pricing practices: Because contractor markets are not competitive, both over-billing and over-design are common. False taxes and charges: Government charging for services are so common that some officials will even issue receipts for illegal practices, such as a standard 5% charge on funds requested through a village head. Virtually every financial transaction in traditional development projects has a charge on it to get the proper form signed and the funds released. Standard financial control systems often work against rather than in favor of sound financial management: Villagers report recurrent charges being levied by auditors and inspectors to not find fault with financial reporting, often on formats that either have never been given to villagers or else contradict the ones already in use. Cuts in salaries and travel allowances: Often QCBS winners can beat the competition because apparently competitive overhead costs are subsidized by later cuts from staff salaries and travel allowances. Price fixing between TA staff and local government (including village heads) is also common, aided by a general lack of public information about prices. Sanctions are rarely imposed even for dire levels of performance or serious cases of abuse of power. 52. KDP and the ACI s Six Key Elements. The World Bank s Anti Corruption Committee for Indonesia is trying to promote six key elements in the fight against corruption. Enhanced disclosure of information. KDP ensures that information is disclosed to a wide range of interested groups through a series of sub-village, village and sub-district meetings. The process is assisted and monitored by KDP s facilitator network. This two-way communication system, further strengthened through the use of public information boards and creative use of local media, tries to ensure that villagers know about the project and have multiple opportunities to participate in its processes. 18

17 Civil Society Oversight. KDP involves Non-Government Organizations under contract as formal partners in monitoring and also informally as a part of the public decision-making system described above. A further innovation has been the inclusion of journalists in monitoring over recent years. Some of these activities have not been as effective as was originally hoped, so the program still needs to seek new, more effective links to civil society. One concept that the project has successfully championed is that of Public Accountability Meetings, through which projectrelated information can be discussed openly. Mitigation of Collusion. KDP has enabled communities to manage their own funds and, wherever possible, it has allowed them to solve their own problems. Usually the issue is related to simple, small cases, such as the pocketing of an undeclared discount that is not reflected in a receipt. Communities almost invariably find such deceits as soon as details of purchases are made public (hence the importance of disclosure). Almost all known cases of collusion have been resolved by the communities forcing the perpetrators to make good on the losses either by returning funds or providing in kind support to the activity of equal or greater value. Mitigation of Forgery and Fraud. KDP relies upon strict but simple accounting processes and high levels of direct accountability. KDP has also proven that audits can be a very useful tool, particularly when the perceived threat of being audited is high (e.g. large samples), and where the audit includes an element of direct feedback at a Public Accountability Meeting. Complaint Handling Systems. KDP has been a leader in the development of complaint handling systems since its commencement in 1998, though in recent years a lack of technical support has led to some serious weaknesses that must be addressed. The M&E action plan reviewed by the mission provides a sufficient upgrade. Sanctions and Remedies. KDP enforces appropriate remedies to ensure that problems are rectified. For example, districts that have been slow in resolving sub-district level problems have faced suspension of disbursement, or even cancellation. Such actions by the KDP central team put the emphasis of problem solving back at the local level, where it should be. The central government has become increasingly adept at using sanctions to promote compliance. 53. KDP s anti-corruption strategy has four main themes: (i) eliminate complexity; (ii) shine bright lights on every financial transaction; (iii) respond quickly to complaints; and (iv) apply sanctions. The guiding principle underlying the anti-corruption program is that KDP procedures must encourage oversight and action by multiple stakeholders, not just the World Bank or the government. 54. Eliminate complexity: In many traditional community-oriented projects, money disappears due to the welter of transfer levels, intermediaries, and processing requirements involved in turning project funds into bridges, roads, and water supply system in distant villages. KDP simplifies every aspect of this system. Because money goes straight from the national level to the village accounts, there are almost none of the delays or leakages normal to traditional designs. Transferring standard block amounts directly to village accounts promotes end-user accountability. 55. KDP has specifically simplified all of the steps involved in financial management and disbursement so that many kinds of stakeholders can easily understand them, use them and monitor them. No hidden charges allowed. MoF ratification included notes to auditors that no other financial reporting or license documents were to be used other than those negotiated with the project. 56. Shine a bright light: Transparency lies at the core of KDP s anti-corruption work. There are a broad range of materials and procedures to ensure that all financial information is both public and publicly displayed within the villages. For example, local shopping price quotations for materials must be read out loud in public meetings to be valid; signboards posted around the villages state material and labor unit costs; and all bookkeeping is managed by an elected implementation committee. Unlike 19

18 standard practice, there isn t a single format in KDP that would allow a lone official to withdraw or transfer funds: all require at least three signatures, including one from an elected villager and a second from the project facilitator. 57. The government management group has also taken many steps to ensure national level transparency. KDP is the first World Bank project in Indonesia to send its audit summaries to civil society oversight groups. Contract provisions and follow-up letters for the NGO monitors provide them with full discretion to share all findings, and the independent journalist contracts specify that there is no prior review. PMD will be publishing an expanded version of the problems database summarized below in commonly read provincial newspapers so that independent organizations can check for themselves whether problems have been reported and fixed. 58. Respond to complaints: The third major element in the strategy is to follow-up on reported cases of corruption and to be seen to be following up on corruption by the villagers and other stakeholders. KDP has several channels for villagers to complain, including a national complaints box whose address is printed on all village graphical materials. However, by far the most common source for complaints are those relayed by or through the facilitators and technical consultants. 77% of all complaints received by the oversight team came from the field consultants themselves; an additional 7% were reported by Home Affairs and 2% were sent through the mass media. 59. Table 1 summarizes the reporting and follow-up from KDP. This is a national level database, updated weekly, which is routinely shared with civil society watchdog groups, including the press. At the provincial level, reports by field staff, villagers, and the monitors are logged in, reported to local government and the national team, and then pursued every two weeks until resolved. (By way of providing some perspective, the database refers to a total of 110,000 village subprojects.). Table 1: KDP s national corruption complaints report status in 2005 Type of Complaints Total received Solved 1 Further investigation KDP procedures violated Misuse of KDP funds (possible corruption) 1, Inappropriate intervention by government and consultants Force majeure Totals 1, In relation to assumed corruption cases, defined as restored original program (i.e. money returned, works finished, etc) This table contains carryover figures from previous years that have been too difficult to resolve, usually due to lack of solid evidence. A more recent estimate gives an average of less than 30 misuse of KDP funds problems being made and resolved each month during Apply sanctions: KDP has increased its use of sanctions. As a part of this effort the project supported an innovative randomized evaluation that assessed the efficacy of increased audits. The review found that increasing the frequency of audits reduced significantly the rates of unaccounted for losses. A pilot program to use these findings in the operation was tried out in 2005 using a 7.5% audit sample rather than the usual 2.5%, and a special audit manual was prepared to implement the advice on public engagement with audit findings. This new manual will be used in An expanded audit will also be carried out on the KDP activities in the Aceh recovery program. 61. The national government has become increasingly vigilant. In KDP2, three districts and two entire provinces were suspended for not providing restitution in cases where corruption was identified as 20