Letter No. CD-143/PFM/III/2013 March

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1 Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized THE WORLD BANK I BANK DUNIA Sharing Development Solutions for an Erneging Indonesia OFFICIAL/ 7/ 77 OCUMENTS Letter No. CD-143/PFM/III/2013 March Ms. Cheryl Urban Director Indonesia, Philippines, China and Southeast Asia Regional Program 200 Promenade du Portage Gatineau, Quebec Canada, KI A 0G4 Dear Ms. Urban: Re: Administration Arrangement between the Government of Canada as represented by the Minister for International Cooperation acting through the Canadian International Development Agency (CIDA) and the International Bank for Reconstruction and Development concerning the Support to Public Financial Management and Revenue Administration in Indonesia Multi-Donor Trust Fund (TFO71375) 1. The International Bank for Reconstruction and Development (the "Bank") acknowledges that the Government of Canada, as represented by the Minister for International Cooperation acting through the (CIDA) (the "Donor") agrees to provide the sum of five million Canadian Dollars (C$5,000,000) (the "Contribution") for the Support to Public Financial Management and Revenue Administration in Indonesia Multi Donor Trust Fund. TF (the "Trust Fund") in accordance with the terms of this Administration Arrangement. Other donors are also expected to contribute to the Trust Fund on the terms and conditions specified in Annexes I and II to this Administration Arrangement. 2. The Contribution will be used to finance the activities set forth in the "Description of the Operation" attached hereto as Annex II, and will be administered by the Bank on behalf of the Donor in accordance with the terms of this Administration Arrangement, including the "Standard Provisions" attached hereto as Annex I. 3. The Donor will deposit the Contribution in accordance with the following schedule and in the currency specified in Section I above ("Contribution Currency") into such bank account designated by the Bank (each amount deposited hereinafter referred to as an "Installment") upon submission of a payment request by the Bank: (a) Promptly following countersignature and by March 31, CS3,000,000 for CIDA fiscal year ; (b) By January C$2,000,000 for CIDA fiscal year ISEB Tower 2, 121h Floor, JI. Jend. Sudirman Kay , Jakarta X Owww.worldbank.org/id

2 Ms. Cheryl Urban 2 of 22 March 27, 2013 Canadian 'International Development Agency 4. When making such deposit, the Donor will instruct its bank to include in its deposit details information (remittance advice) field of its SWIFT deposit message, information indicating: the amount deposited, that the deposit is made by the Donor for TF (the Support to Public Financial management and Revenue Administration in Indonesia Multi Donor Trust Fund), and the date of the deposit (the "Deposit Instructions"). In addition, the Donor will provide a copy of the Deposit Instructions to the Bank's Accounting Trust Funds Division by sent to tfremitadvice@worldbank.org or by fax sent to +1 (202) Notwithstanding Section 6.1 of the Standard Provisions (Administrative Cost Recovery) set out in Annex I to this Administration Arrangement, in order to assist in the defrayment of the costs of administration and other expenses incurred by the Bank under this Administration Arrangement, the Bank may, following deposit of the Contribution by the Donor, deduct from the Contribution and retain from the Bank's own account an amount equal to 3% of the Contribution. In addition, the Bank may charge the managing unit's actual costs to administer the Trust Fund, up to a maximum equal to 3.94% of the Contribution. 6. Except with respect to the Deposit Instructions, any notice, request or other communication to be given or made under this Administration Arrangement will be in writing and delivered by mail, fax or to the undersigned respective address specified below or at such other address as such undersigned notifies in writing to the other undersigned from time to time: For the Bank (the "Bank Contact"): Theo David Thomas Senior Public Sector Specialist, EASPI The World Bank Indonesia Stock Exchange Building, Tower 2 J1. Jenderal Sudirman Kay Jakarta 12190, Indonesia Tel: Fax: For the Donor (the "Donor Contact"): Program Manager Embassy of Canada World Trade Centre, 6 th Floor Jl. Jend. Sudirman Kay Jakarta Tel: Fax: In the event any amounts are to be returned to the Donor under this Administration Arrangement, the Bank will transfer such amounts to the Donor's applicable donor balance account with the Bank, unless otherwise agreed with the Bank. 8. No member of the House of Commons of Canada will be admitted to any share or part of this Administration Arrangement or to any benefit arising therefrom. ISEB Tower 2, 1 2 1h Floor, JI. Jend. Sudirman Kay , Jakarta X

3 Ms. Cheryl Urban 3 of 22 March 27, No current or former public office holder or public servant of the Government of Canada who is not in compliance with the Conflict of Interest and Post-Employment Code for Public Office Holders or the Values and Ethics Code for the Public Service will derive a direct benefit from this Administration Arrangement. 10. Any transfer into the Trust Fund to be made under this Administration Arrangement is subject to there being an appropriation by the Parliament of Canada for the fiscal year in which such transfer is to be made. If CIDA's appropriation is changed by the Parliament of Canada, CIDA may reduce the Contribution. or terminate this Administration Arrangement. 11. No offer, gift or payment, consideration or benefit of any kind, which constitutes an illegal or corrupt practice, has or will be made to anyone, either directly or indirectly, as an inducement or reward for the award or execution of this Administration Arrangement. Any such practice will be grounds for terminating this Administration Arrangement or taking any other corrective action as required. 12. All annexes hereto constitute an integral part of this Administration Arrangement, whose terms taken together will constitute the entire agreement and understanding between the Donor and the Bank. Unless otherwise specified in an annex hereto, this Administration Arrangement may be amended only by written amendment between the Bank and the Donor; provided, however, that any annexes to this Administration Arrangement may be amended only by written amendment of all donors contributing to the Trust Fund 13. It is understood that this Administration Arrangement, including any annexes, is not an international treaty. 14. All references made in the Annexes to "shall" will have the same meaning as the term "will" herein. ISEB Tower2, 12 th Floor, JI. Jend. Sudirman Kay , Jakarta O

4 Ms. Cheryl Urban 4 of 22 March 27, Each of the undersigned represents, by confirming its acceptance below, that it is authorized to enter into this Administration Arrangement and act in accordance with its provisions. The Bank and the Donor are each requested to sign and date this Administration Arrangement, and upon possession by the Bank of this fully signed Administration Arrangement, this Administration Arrangement will become carried out as of the date of the last signature. INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT By 3 Name :Jos ine Bassinette Title Acting Country Director Date : /0 THE GOVERNMENT OF CANADA AS REPRESENTED BY THE MINISTER FOR INTERNATIONAL COOPERATION ACTING THROUGH THE CANADIAN INTERNATIONAL DEVELOPMENT AGENCY By : Name :V_L-m_Avi Title.>Ir C tr Date : 7OF ISEB Tower 2, 1 2 th Floor, Ji. Jend. Sudirman Kay , Jakarta i O

5 Ms. Cheryl Urban 5 of 22 March 27, General Annex I - Standard Provisions Applicable to the Trust Fund 1.1 The following terms and conditions shall govern all arrangements entered into between the Bank as Trustee of the Trust Fund, on the one hand, and donors and donor agencies (herein referred to collectively or individually as the "Donors"), on the other, that provide contributions in the form of grants to the Trust Fund. 2. Definitions 2.1 Unless the context otherwise requires, the several terms defined in this Administration Arrangement have the respective meanings therein set forth, and the following additional terms and expressions have the following meanings: (a) (b) (c) (d) (e) (f) (g) (h) "Bank-Executed Activities" means Activities executed or to be executed by the Bank under the Trust Fund: "Contribution" means any contribution to the Trust Fund made by a Donor pursuant to an agreement between the Bank acting as Trustee and the Donor; "Donor" means any entity which has made a Contribution to the Trust Fund; "Grant" means a grant made or proposed to be made to a Recipient out of the resources of the Trust Fund to support Activities under the Trust Fund, and to be administered by the Bank; "Grant Agreement" means an agreement entered or proposed to be entered into between the Bank and a Recipient governing a Grant; "Recipient" means the Republic of Indonesia or any agency of the Republic of Indonesia, or other entity, for the benefit of which a Grant has been, or is proposed to be, made; "Recipient-Executed Activities" means Activities executed or to be executed by a Recipient under the Trust Fund; "Trustee" means the Bank acting as Trustee of the Trust Fund. 3. Purposes and Description of Activities; Eligible Categories of Expenditure 3.1. The purpose of the Trust Fund is to support the Government of Indonesia to enhance the public sector contribution to the socio-economic development of its population, by improving the effectiveness of public finance management through strengthening capacity, efficiency, governance and transparency in public resource mobilization, management and oversight. The Trust Fund is being established to support and complement the Government Financial Management and Revenue Administration Program (GFMRAP). ISEB Tower 2, 1 2 th Floor, JI. Jend. Sudirman Kay , Jakarta l O

6 Ms. Cheryl Urban 6 of 22 March 27, 2013 Canadian!nternational Development Agency 3.2. The Trust Fund is intended to finance a program of activities to be executed by both the Government of Indonesia and the World Bank in the following program areas: (a) budget preparation and budget execution, (b) revenue administration, (c) legislative oversight, (d) procurement reform, (e) policy capacity development, (f) change management, human resources management and communications, and (g) management, strategy and visibility. Under each focus area, a mix of Government-executed and Bank-executed activities are expected to be pursued The Contribution will be used exclusively for the financing of the following categories: (a) (b) Recipient-Executed Activities: consultants' services; goods; training, study tours and workshops; and incremental operating costs; and Bank-Executed Activities: short- and extended-term consultants' services, contractual services, and associated overheads; temporary staff costs and staff costs (salaries, benefits and indirect costs); travel expenses; and media and workshops costs. 4. Administration of the Contribution 4.1. The Bank will be responsible only for performing those functions specifically set forth in this Administration Arrangement and will not be subject to any other duties or responsibilities to the Donor, including, without limitation, any duties or obligations that might otherwise apply to a fiduciary or trustee under general principles of trust or fiduciary law. Nothing in this Administration Arrangement will be considered a waiver of any privileges or immunities of the Bank and International Development Association (IDA) under their Articles of Agreement or any applicable law, all of which are expressly reserved. 5. Commingling, Exchange and Investment of the Contribution 5.1. The Contribution funds may be commingled with other trust fund assets maintained by the Bank, but will be kept separate and apart from the funds of Bank The Contribution funds may be freely exchanged by the Bank into other currencies as may facilitate their disbursement The Bank will invest and reinvest the Contribution funds pending their disbursement in accordance with the Bank's policies and procedures for the investment of trust funds administered by the Bank. The Bank shall credit all income from such investment to the trust fund established under this Administration Arrangement to be used for the same purposes as the Contribution funds. 6. Administrative Cost Recovery 6.1. In order to assist in the defrayment of the costs of administration and other expenses incurred by the Bank under this Administration Arrangement, the Bank shall, following deposit of the Contribution by the Donor, deduct from the Contribution and retain for the Bank's own account an amount equal to five percent (5 %) of the Contribution. ISEB Tower 2, 12 th Floor, JI. Jend. Sudirman Kay , Jakarta Owww.worldbank.org/id

7 Ms. Cheryl Urban 7 of 22 March 27, Governance Structure 7.1 In addition to the role of the Bank as Trustee, the governance structure of the Trust Fund shall also include a Policy Advisory Committee and a Management Committee, as well as a Secretariat, whose respective functions shall be as follows: (a) The Policy Advisory Committee ("PAC"), to be chaired by or on behalf of the Minister of Finance, and consisting of representatives of the Recipient, the Trustee and Donors, as well as representatives of the business community, will be responsible for: (i) reviewing, endorsing and commenting on the Republic of Indonesia's priorities as laid out in the annual Strategy Note; (ii) providing strategic guidance and ensuring coherence between the Trust Fund and the Strategy Note; (iii) reviewing the progress and achievements of the Trust Fund in support of the Republic of Indonesia's policies and priorities; and (iv) promoting donor coordination and coherence in the areas included in the Program. The PAC will meet annually or as often as necessary to conduct its business. (b) The Management Committee ("MC"), to be chaired by the Bank Country Director or his designate, and consisting of the relevant staff of the Bank and Donors, will be responsible for reviewing financing proposals under the Trust Fund and, to the extent that they are consistent with the objectives of the Trust Fund and satisfy the relevant selection criteria, endorsing them for financing under the Trust Fund. The MC will meet quarterly or as often as necessary to conduct its business. (c) The Secretariat to be headed by the GFMRAP Task Team Leader, and consisting of the relevant technical staff of the Bank, will be responsible for: (i) receiving and providing guidance on financing proposals, and screening them for quality control; (ii) making recommendations to the MC on whether to endorse or reject them, keep them on hold or return them to their sponsors for revisions. The Secretariat will provide administrative support to the PAC and MC in the management of the Trust Fund, and the organization and conduct of meetings. 8. Use of the Resources of the Trust Fund 8.1. The resources of the Trust Fund shall be applied in accordance with the objectives of the Trust Fund to provide financing to support eligible activities under the Trust Fund, whether in the form of Grants to Recipients to support Recipient-Executed Activities or by way of internal transfers of resources to support Bank-Executed Activities In the case of Recipient-Executed Activities, the Bank will, as administrator on behalf of the Donor, enter into one or more Grant Agreements with Recipients for the provision of any part of the Contribution funds for the purposes of this Administration Arrangement, and on the terms and conditions set forth in the respective Grant Agreement. The Bank will furnish a copy of each Grant Agreement to the Donor The Bank will be solely responsible for the supervision of activities under each Grant Agreement. ISEB Tower2, 1 2 th Floor, JI. Jend. Sudirman Kay , Jakarta * Owww.worldbank.org/id

8 Ms. Cheryl Urban 8 of 22 March 27, Employment of Consultants and Procurement of Goods 9.1. In the case of Bank-Executed Activities, the employment and supervision of consultants and the procurement of goods financed by the Contribution will be the responsibility solely of the Bank and will be carried out in accordance with its applicable policies and procedures. In the case of Recipient- Executed Activities, the relevant Grant Agreement will provide that the Contribution will be used by the Recipient to finance expenditures for goods and services, as the case may be, in accordance with the Bank's Guidelines on "Procurement under IBRD Loans and IDA Credits" and the Bank's Guidelines on the "Selection and Employment of Consultants by World Bank Borrowers," as in effect on the date of the Grant Agreement. 10. Authority to Deny Funding The Bank, as Trustee, has a duty to ensure that Contribution funds are actually applied for the purposes for which they are intended Where, in the Bank's view, there is reasonable doubt as to whether the proceeds of any proposed financing will be effectively utilized for its intended purposes, the Bank will have the authority to deny funding to the corresponding financing proposal Accounting and Financial Reporting 11.1 The Bank shall maintain separate records and ledger accounts in respect of the funds deposited in the Trust Fund and disbursements made therefrom The Bank shall furnish to the Donors current financial information relating to receipts, disbursements and fund balance in the Holding Currency with respect to the Contributions via the World Bank's Trust Funds Donor Center secure website. Within six (6) months after all commitments and liabilities under the Trust Fund have been satisfied and the Trust Fund has been closed, the final financial information relating to receipts, disbursements and fund balance in the Holding Currency with respect to the Contributions shall be made available to the Donors via the World Bank's Trust Funds Donor Center secure website The Bank shall provide to the Donors via the World Bank's Trust Fund Donor Center secure website, within six (6) months following the end of each Bank fiscal year, an annual single audit report. comprising (i) a management assertion together with an attestation from the Bank's external auditors concerning the adequacy of internal control over cash-based financial reporting for all cash-based trust funds as a whole; and (ii) a combined financial statement for all cash-based trust funds together with the Bank's external auditor's opinion thereon. The cost of the single audit shall be borne by the Bank If a Donor wishes to request, on an exceptional basis, a financial statement audit by the Bank's external auditors of the Trust Fund, the Donor and the Bank shall first consult as to whether such an external audit is necessary. The Bank and the Donor shall agree on the appropriate scope and terms of reference of such audit. Following agreement on the scope and terms of reference, the Bank shall arrange for such external audit. The costs of any such audit, including the internal costs of the Bank with respect to such audit, shall be borne by the requesting Donor. ISEB Tower 2, 12th Floor, JI. Jend. Sudirman Kay , Jakarta

9 Ms. Cheryl Urban 9 of 22 March 27, The Bank shall make available to the Donors copies of all financial statements and auditors' reports received by the Bank from Recipients pursuant to any Grant Agreements (as defined below) in accordance with the Bank's Access to Information Policy." 12. Coordination and Reporting The Bank, as Trustee, shall provide the Donor with semi-annual reports on the progress of Activities financed by the Contribution. Within six (6) months of the final disbursement date specified in paragraph 13.1 of this Annex, the Trustee shall furnish to the Donor a final report on the activities supported under the Trust Fund The Bank will promptly inform the Donor of any significant modification to the terms of any Grant Agreement and of any contractual remedy that is exercised by the Bank under the Grant Agreement. To the extent practicable, the Bank will afford the Donor the opportunity to exchange views before effecting any such modification or exercising any such remedy. 13. Disbursement Deadline; Cancellation; Refund It is expected that the Contribution funds will be fully disbursed by the Bank in accordance with the provisions of this Administration Arrangement by April 30, The Bank will only disburse Contribution funds for the purposes of this Administration Arrangement after such date with the written approval of the Donor Either party may, upon giving three (3) months' prior notice in writing to the other, cancel all or part of any remaining balance of the Contribution funds that is not committed pursuant to the Grant Agreement or any other agreement entered into between the Bank and any consultants and/or other third parties for the purposes of this Administration Arrangement prior to the receipt of such notice Upon the final disbursement date specified in paragraph 13.1, or upon the date of cancellation of uncommitted Contribution funds in accordance with paragraph 13.2, as the case may be, the Bank shall return any remaining funds to the Donor, or otherwise dispose of such funds in accordance with the Donor's instructions Where there is more than one Donor contributing to the Trust Fund, any reference in this Section to the balance of uncommitted Contribution funds outstanding in the Trust Fund account and to be returned to the Donor, or otherwise disposed of, shall be construed as a reference to each Donor's prorata share of the outstanding balance (defined as the ratio of the Donor's paid-in Contribution to the total paid-in Contributions of all Donors) of any uncommitted funds remaining in the Trust Fund, including any applicable investment income. 14. Commencement; Donor Visibility; Disclosure 14.1 The Trust Fund will commence its operations as of the date of deposit of the first Contribution by any Donor to the Trust Fund. ISEB Tower 2,1 2 th Floor, JI. Jend. Sudirman Kay , Jakarta i

10 Ms. Cheryl Urban 10 of 22 March 27, The Bank, in consultation with the appropriate Indonesian authorities, will promote visibility of achievements of the Trust Fund and Donors on information materials pertaining to the Activities, at the sites of the Activities, and through specific dissemination events, such as press conferences and an annual conference The Trustee may disclose this Administration Arrangement and information on this Trust Fund in accordance with the Bank's policy on disclosure of information. ISEB Tower 2, 121h Floor, JI. Jend. Sudirman Kay , Jakarta I * O

11 Ms. Cheryl Urban 11 of 22 March Annex II Description of the Operation Public Financial management Multi-Donor Trust Fund to Support Indonesia's Government Financial Management and Revenue Administration Program (GFMRAP) Summary Recipient Trust Fund Budget (preliminary) Project Period { Republic of Indonesia European Commission: Euro 9.2 million Royal Netherlands Embassy: Euro 5 million US Agency for International Development: US$ 3 million Switzerland: US$4.5 million CIDA: C$5 million The period of this award will last from the date of the signing of the award through April 30, 2014 Description The multi-donor trust fund seeks to assist the Government of Indonesia achieve its medium-term objectives in public financial management. The trust fund is administered by the World Bank and finances Bank and Recipient activities - particularly those related to capacity building, analytical & advisory services, and technical assistance. The trust fund is intended to support and complement the Bank-financed GFMRAP, the Government's integrated Public Financial Management program that locks in major policy and institutional reforms across broad areas of Public Financial Management. I. INTRODUCTION 1. The World Bank and several development partners are establishing a Public Financial Management Multi Donor Trust Fund to support the Government's medium-term public financial management and revenue administration reform agenda. Currently, the European Commission and the Government of the Netherlands have made preliminary commitments totaling Euro 14.2 million. Other donors may also commit additional funding. The trust fund is proposed for six years and is intended to support and complement Indonesia's Government Financial Management and Revenue Administration Program (GFMRAP), financed by World Bank programmatic investment loans. The proposed Public Financial Management Multi Donor Trust Fund would provide complementary and flexible support to all stages of GFMRAP by providing quick and key technical assistance in the initial pilots and especially the more difficult and risky stages of the reform process. The Public Financial Management Multi Donor Trust Fund will consequently pay particular attention to tax and customs reforms. In addition to flexibility, the principles of government ownership, policy engagement, donor coordination, and participation will underlie the implementation of the Public Financial Management Multi Donor Trust Fund. ISEB Tower 2, 121 Floor, JI. Jend. Sudirman Kay , Jakarta ib O

12 Ms. Cheryl Urban 12 of 22 March 27, 2013 II. STRATEGIC CONTEXT AND GOVERNMENT STRATEGY 2. The proposed Public Financial Management Multi Donor Trust Fund supports the Government's overall goal of accelerating economic growth and sustained poverty alleviation. The logical framework assumes that better public financial management facilitates poverty reduction through improved revenue mobilization and administration, and more effective and pro-poor expenditure allocation. While there have been impressive successes in the macroeconomic front, efforts to improve public administration have lagged. Despite some progress, public investment levels are not back to pre-crisis levels and, more broadly, the quality of public services remains inadequate. This is a reflection of institutional weaknesses, a lack of transparency and accountability, and corruption. The fragmented and overlapping structures within the Ministry of Finance pose major constraints. leading to inefficiencies, poor resource allocation, and unreliable reporting. These weaknesses affect both sides of the fiscal equation: public resource use and revenue generation. They in turn pose continuing constraint to the Government's efforts to alleviate poverty. 3. The Government estimates that overall revenues need to increase by about 0.5 percent of GDP per annum to meet development needs and spending needs to be reprioritized. Revenue goals cannot be achieved solely through enforcement and litigation; hence an emphasis on improved resource mobilization and a reallocation of spending toward education, health, and infrastructure, taking into account the roles of regional governments. The significant reduction in fuel subsidies provides Indonesia additional discretionary resources to improve public service delivery. However, as history demonstrates, the availability of resources does not automatically increase or improve government services. Good public financial management is needed to improve the allocative and operational efficiency of budgetary resources to support the Government's development priorities. 4. The core of the Government's strategy for reforming public financial management derives from the Economic Policy Package prepared for The Economic Policy Package builds on earlier work from the World Bank Country Financial Accountability Assessment and the Government's post-imf "White Paper", outlining a twin strategy to (i) improve the legal and regulatory framework to sustain the government's fiscal position and build public confidence in these functional areas; and (ii) to invest in efficient and transparent systems to manage these functions and promote accountability and integrity. In total, some major reforms have been initiated though their impact has yet to be felt. 5. In 2004, the Ministry of Finance announced that the GFMRAP would act as an umbrella to integrate donor technical assistance for public financial management reform. The Government Financial Management and Revenue Administration Program (GFMRAP) is a World Bank funded programmatic series of Adaptable Program Loans that the Government considers as an operational framework for coordinated donor support for technical assistance and related investment in the public financial management domain. GFMRAP was originally designed as a three-stage reform process, each focusing on a priority area of reform within Public Financial Management'. The GFMRAP-I ( ) focuses on public financial management, covering budget preparation and execution, treasury payments system modernization, public procurement, and accountability systems. It provides limited technical support for broader revenue administration reforms in subsequent phases. GFMRAP-II ( ) will concentrate on tax administration, covering improvement in taxpayer services, business process simplification and implementation of a new governance framework including a code of conduct for tax officers, ISEB Tower 2, 121h Floor, JI. Jend. Sudirman Kay , Jakarta

13 Ms. Cheryl Urban 13 of 22 March 27, 2013 current or first stage of GFMRAP is financed by a combination of loan, credit, and grant2. The newly appointed Minister of Finance is now keen on a combined GFMRAP II-Ill phase, which would cover tax and customs modernization, for which a follow-on Bank loan is currently being considered In her attempt to accelerate the reform agenda, the new Minister has proposed an additional reorganization to be completed by mid This reorganization will create two new Director Generals, one on intergovernmental relations (decentralization) and the other for consolidated debt management (foreign and domestic along with contingent liabilities). In addition, there will also be a revamped and empowered Fiscal Policy Unit. Comprehensive policy packages focusing on tax and customs administration reform and infrastructure investment regulation were announced in February 2006, and the replacement in April 2006 of the Heads of Tax and Customs Directorate Generals is also a sign of the government's commitment to reform in these areas. The time seems therefore ripe to accelerate reforms in the tax and custom areas. 7. Donors working in the areas of budget, taxes and customs have been asked to accelerate assistance to allow the ministry to accomplish core reforms by the end of calendar The government has also indicated that reforms are not sustainable without systematically addressing human resource constraints and civil service reform. The Bank is exploring various reform scenarios with the Government. 8. The current World Bank Country Assistance Strategy (CAS) specifically addresses two major challenges: low investment and weak provision of services. The Bank Group's entire efforts, which comprise of analytical and advisory services, lending, contributions by the International Finance Corporation and the Multilateral Investment Guarantee Agency activities, and donor partnerships and coordination, are to complementarily address these issues. Of the tour business platforms defined for implementation of the Bank's Country Assistance Strategy. the National Lending Platform is critical to the public finance management reform and modernization. The proposed multi-donor Public Financial Management Trust Fund specifically addresses the challenges associated with this platfor-a " a taxpayer "bill of rights", and an investigations unit. It would also continue to support improvements in public financial management, and Customs modernization. GFMRAP-III ( ) may support Customs modernization, focusing on improving efficiency, accountability, transparency and integrity through revenue performance, trade facilitation, business process and information technology modernization, and staff development. GFMRAP-II is expected to continue support for public financial management. 2 Indonesia GFMRAP I (PO85133): see Project Appraisal Document no IND, November 24, The commitment was comprised of $55 million from International Bank of Reconstruction and Development (IBRD) and $5 million from the International Development Agency (IDA). The Japanese Government through the Policy and Human Resources Development Fund (PHRD) has provided $5 million in co-financing, while the Indonesian Government has contributed $15 million. The Board approved the loan on December and it became effective on October 27, A Bank supervision mission was conducted in June 2006 and a pre-identification was held in November 2006 with a view to prepare the loan for Board discussion in FY2008. ISEB Tower 2, 1 2 th Floor, JI. Jend. Sudirman Kay , Jakarta X Owww.worldbank.org/id

14 Ms. Cheryl Urban 14 of 22 March 27, The Bank has worked closely with other development partners to develop the Country Assistance Strategy and has intensified the partnerships with key development partners in implementing the Country Assistance Strategy goals. Both the European Union (EU) through the delegation of the European Commission (EC) and the Government of Netherlands through the Royal Netherlands Embassy in Jakarta have been close partners of the World Bank Office Jakarta over the past years. The intention of all parties is to intensify the cooperation. This program also complements the substantial work done by the World Bank through the Netherlands Technical Assistance Trust Fund on improving the investment climate. III. THE PROPOSED TRUST FUND A. General Overview 1. The overall objective of the proposed Trust Fund is to support the Government of Indonesia to enhance the public sector contribution to the socio-economic development of its population. The purpose of the proposed activities is to improve the effectiveness of public finance management in Indonesia through the support to the Government Financial Management and Revenue Administration Program (GFMRAP). Special emphasis will be put on taxation and customs. 2. The underlying principles by which the Public Financial Management Multi Donor Trust Fund will function include: (i) government ownership; (ii) policy dialogue; (iii) flexibility; (iv) coordination; and (iv) participation. These principles are manifest in the governance structure and the overall administration of the Public Financial Management Multi Donor Trust Fund. 3. The Trust Fund builds on existing partnerships between the Bank and bilateral donors through which trust funds have been established. It takes into account lessons that the Bank has learned from administering other trust funds, particularly in the area of governance. As the administrator of the Public Financial Management Multi Donor Trust Fund, the World Bank has overall management and financial accountability, as well as an obligation to demonstrate achievement of expected results. Given this responsibility, the Bank takes management, program, and financial decisions to achieve the objectives of the Public Financial Management Multi Donor Trust Fund. B. Governance Structure 4. The governance of the Public Financial Management Multi Donor Trust Fund is centered on a Policy Advisory Committee and a Management Committee. 5. The Policy Advisory Committee will consist of the Minister of Finance (or designate) who will chair the committee, selected Directors General (Echelon 1 levels) of the Ministry of Finance, the Country Director of the World Bank, and the head representatives in Indonesia of contributing donors. Other major stakeholders involved in the public financial management arena may also join the Policy Advisory Committee in an advisory capacity. The views of the business community will also regularly be invited to ensure that the activities undertaken in the context of the Public Financial Management Multi Donor Trust Fund are relevant to them as well. The Policy Advisory Committee provides a platform for policy engagement and donor coordination in the public financial management arena. In this regard, the Government's annual Strategy Note is a crucial to the Policy Advisory Committee's objectives. ISEB Tower 2, 1 2 th Floor, JI. Jend. Sudirman Kay , Jakarta X O

15 Ms. Cheryl Urban 15 of 22 March 27, The Indonesian Government, with the help of the Bank, will derive from its broader medium-term program, an annual Strategy Note that prioritizes the policy areas and activities for funding by the Trust Fund. The Policy Advisory Committee will review and endorse the Strategy Note and provide a debate forum to discuss the cooperation objectives of the Bank and of Trust Fund donors. The Policy Advisory Committee will provide: (i) strategic guidance to support the public financial management reforms and ensuring coherence between donor funded activities and the Strategy Note; and (ii) review general achievements of donor support. The Policy Advisory Committee will convene on an annual basis. 7. The Management Committee is responsible for reviewing and approving proposals to be funded under the Public Financial Management Multi Donor Trust Fund. Proposals are to be submitted in the form of detailed proposals for Components also known as Child Trust Funds. The Management Committee will review and discuss results and impact achieved based on periodic reporting, and suggest dissemination and visibility actions. The Management Committee will meet on a quarterly basis to review proposals unless a more/less frequent schedule is decided upon by its co-chair persons. 8. Governments buy-in is critical to the success of the Public Financial Management Multi Donor Trust Fund program. Accordingly, proposals must be endorsed by the Government before presentation to the Management Committee for consideration. This applies to Bank-executed as well as Recipientexecuted proposals. Non-government agencies may submit proposals for financing under the Multi Donor Trust Fund. Government is required to endorse such proposals just as is the case for all proposed activities. The endorsement should include an endorsement on the execution arrangement which will then be reviewed and approved by the Multi Donor Trust Fund's Management Committee in compliance with World Bank policies and procedures. Government should execute recipient activities while the Bank should execute Bank activities. Under exceptional circumstances, Bank execution of recipient activities maybe allowed if the activities are within the limits set by Bank policies, Bank execution is requested by Government, is approved by the World Bank Regional Vice President and will be covered by a grant agreement to be executed between the World Bank and Government. 9. The Management Committee is co-chaired by the Bank Lead Economist and the Operations Manager. Other voting members include the Bank Regional Financial Management Hub Leader and two relevant sector co-coordinators or Country Assistance Strategy platform leaders. The GFMRAP Task Team Leader will act as overall Task Team Leader of the Public Financial Management Multi Donor Trust Fund and will act as secretariat for the Management Committee. The Task Team Leader will not have voting rights at the Management Committee. Technical staff of contributing donors and the Government may be part of the Management Committee acting in an advisory capacity. 10. Proposed Components should be aligned with the overall objective of facilitating the realization of poverty-reduction goals through a modern, efficient, and pro-poor public financial management system. A Component could be implemented by the Bank and/or Government agencies. 11. Proposals for Component financing are to be submitted to the Task Team Leader at least two weeks in advance of the quarterly meetings of the Management Committee. The exact date for the meeting will be announced by the Task Team Leader on behalf of the Co-Chairs. Proposals are to be submitted with a summary sheet by Bank staff. Proposals will be sent by the Task Team Leader to Management Committee members for comments. The Management Committee may decide to ISEB Tower 2, 12th Floor, JI. Jend. Sudirman Kay , Jakarta R Owww.worldbank.org/id

16 Ms. Cheryl Urban 16 of 22 March 27, 2013 accept or reject proposals, or put a proposal on hold, in case it endorses the proposal, but wants to delay implementation for cash management reasons. In the case of hiring of co-terminous staff prior consultation with the participating donors in Jakarta is required regarding the Terms of Reference; such staff will be hired through competitive process. 12. Specific selection criteria for financing include the following: A. Proposals for funding must be fully aligned with the priorities of the Government's Annual Strategy Note and should complement GFMRAP objectives. B. A written statement of endorsement of the Component should be given by an authorized representative of the relevant Indonesian counterpart organization. A representative of the relevant Indonesian counterpart organization will be invited to present the motivation for supporting the Component at the Management Committee meeting considering the proposal. 13. Both criteria apply to Bank-executed as well as recipient-executed proposals. 14. A semi-annual review of activities with the Task Team Leader, and if so desired by the contributing donors, with the Component Task Manager will be held. This review will also be used to discuss impact of the activities, and possible adjustments or additions to the Component. A mid-term review, by the Management Committee funded by the Component for administration, will be conducted to review the overall effectiveness of the program, and the Bank will on a best effort basis, implement recommendations regarding the program made in such review. Six months before expiry of the Trust Fund, a review will be held to decide on possible closure or extension of the Program. C. Areas of Intervention and Indicative Projects 15. The Public Financial Management Multi Donor Trust Fund is intended for a program of activities to be executed by both the recipient or Government of Indonesia and the World Bank. It is further anticipated in the initial stages of Trust Fund implementation, that there will be much more Bankexecuted activities (focusing on Analytical and Advisory Activities and Technical Assistance) than recipient-executed activities. Government's buy-in is critical to the success of the Public Financial Management Multi Donor Trust Fund program; hence, Government endorsement is required for all activities. 16. The Trust Fund will address issues across a broad range of public financial management related areas. Table 1 below provides an indicative list of policy and institutional areas of focus, as well as potential activities/projects. Table I also provides a provisional allocation of funding per areas of focus. However, as indicated, given the relatively long timeframe of the Public Financial Management Multi Donor Trust Fund and the fluid nature of the reform environment, flexibility and the avoidance of a pre-determined approach to activities is essential. ISEB Tower2, 121h Floor, JI. Jend. Sudirman Kay , Jakarta Owww.worldbank.org/id

17 Ms. Cheryl Urban 17 of 22 March 27, 2013 Table 1. Proposed Areas and Indicative Activities under the Public Financial Management Multi Donor Trust Fund Indicative Areas Activity & Output Expected Outcome Fund Allocation 4 A. Budget Advisory services on "How-To" 9 Improved budget Preparation & guidance on developing and planning and 25% Execution implementing a budget & treasury development in system (SPAN) through an selected line Independent Verification & ministries Validation (IVV) Consultancy based on international good Improved budget practices implementation * Strengthen capacity of pilot Reducedleakage ministries (Finance, Agriculture, of resources Education, Health, & Public Works) in preparing annual budget submission, adoption of new accounting and reporting procedures, etc. * Advisory services to develop capacity building & training modules for public treasurers, budget officials, & staff * Strengthen HR development and capacity in DG Treasury, DG Budget and Bappenas B. Revenue * Analytical work on establishing Improved tax and administration pilot call centers for tax customs Tax: 25% I administration * Consultancy to conduct a DG Tax Customs: 25% specific IT/IS plan Reducedleakage of resources * Consultancy to conduct a DG Tax specific HR reform Improved Investment climate * Strengthen HR development and by offering capacity in DG Tax * improved tax_and 4Actual allocation will be determined based on agreement with the Management Committee. ISEB Tower 2, 12 1h Floor, JI. Jend. Sudirman Kay , Jakarta X Owww.worldbank.org/id

18 Ms. Cheryl Urban 18 of 22 March 27, 2013 Indicative Areas Activity & Output Expected Outcome Fund Allocation 4 * Analytical work on the reform customer service roadmap development & to businesses implementation in customs (large and small). * Advisory support on the national single window development in Customs * Strengthen HR development and capacity in DG Customs & Excise * Non-tax revenue modernization C. Legislative * Diagnostic and analytical reports * Improved Oversight parliamentary 3% * Training & study visits budget analysis and oversight * Institutional development plans D. Procurement, * Diagnostic and analytical reports Improved public asset manage- procurement in 3% ment moderni- * Public disclosure websites terms of zation and efficiency, value reform & Audit * Advisory support for money and Reforms competition * How-to guidance * Improved audit capacityi *Improved asset omanagement E. Policy Capacity * Regulations drafting e. Improved policy Development framework for 3% Workshops, training, study visits f public financial management ISEB Tower 2, 12 th Floor, JI. Jend. Sudirman Kay , Jakarta X * ojwww.worldbank.org/id

19 Ms. Cheryl Urban 19 of 22 March 27, 2013 F. Change * Advisory services for Change Improved Management, Management & Communications organizational 7% Human planning, Resources * Advisory services for Human coordination, and Management, Resources communications and within and among Communication * Strengthen Human Resources central ministries s development and capacity in and relevant project management and stakeholders procurement execution *Strengthen * Diagnostic reports ministry's readiness for broad scale SWorkshops, training reforms Contrlforrogrmoututs&relets development plans cinstitutional & advisory services on Human Resources Conrolfo prgrm management, otmini policies, & practices within the of Finance. canalytical rstrysredns aministry G. Management, 9 Strategic policy advisory Har-monized Strategy and Sprogram execution 4% Visibility * Quality Assurance/Quality for maximum outcomesautomated Improve donor coordination and ensure technical support and intra-agency coordination f capturing of program knowledge for continual * t improvement * Advisory services to the Minister of Finance and her office Improved team on project Analytical & advisory services to management in the support the overall GFMRAP Indonesian implementation i Government. Advisory to develop "How-To" guidance to implement the Ministry of Finances Information Technology Infrastructure Services Support Plan *Ipoestaegy & policy framework on public financial management ISEB Tower 2,1l21h Floor, J1. Jend. Sudirman Kay , Jakarta * O

20 Ms. Cheryl Urban 20 of 22 March 27, 2013 * Establish a project management Institutionalized & knowledge portal to facilitate GFMRAP and GFMRAP implementation related projects as part of standard * Strengthen project monitoring & operating procedures evaluation /routines in the Indonesian * Visibility: conduct dissemination Government. and outreach events to promote visibility of contributing donors I Automated project management * Promote transparency and accountability on ndonors fund Note: The remaining 500 of the Grant total is a customized administrative It*e to the World Bank to he deducted upofrontffrom the principal. 17. The resources of the Fund will be used for the financing of the following categories: a) Consultants' services, including Short Term Consultants, Short Term Temporaries, Extended Term Consultants, Extended Term Temporaries, and coterminous staff 6, as well as related expenses, which is estimated to cost an aggregate amount not to exceed 68 % of the total amount of the Grant Funds; b) Studies, surveys, workshops and in-country training logistics, which is estimated to cost an aggregate amount not to exceed 10% of the total amount of the Grant Funds; c) Overseas training and study tours, which is estimated to cost an aggregate amount not to exceed 10% of the total amount of the Grant Funds; d) Equipment, particularly IT software and hardware required to support the capacity building activities, which should not exceed 5% of the total amount of the Grant Funds, e) Operating costs, which is estimated to cost an aggregate amount not to exceed 1% of the total amount of the Grant Funds; c) Visibility activities, which are estimated to cost an aggregate amount not to exceed 1% of the total amount of the Grant Funds; and Visibility activities are estimated to cost an aggregate amount not to exceed 1% of the total amount of the Grant Funds. See also Para 26(f). 6 Scope of work for coterminous staff is limited to non-administrative technical assignments. Coterminous staff can not work in support of Bank Management and supervision of the Multi Donor Trust Fund. Coterminous staff and related expenses are estimated to cost an aggregate amount not to exceed 9% of the total amount of the Grant Funds. In the case of hiring of co-terminous staff prior consultation with the participating donors in Jakarta is required, regarding the TORs. ISEB Tower 2,12th Floor, JI. Jend. Sudirman Kay , Jakarta i o