Document of The World Bank FOR OFFICIAL USE ONLY PROJECT PAPER ON A PROPOSED ADDITIONAL LOAN IN THE AMOUNT OF US$300 MILLION TO THE

Transcription

1 Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Document of The World Bank FOR OFFICIAL USE ONLY PROJECT PAPER ON A PROPOSED ADDITIONAL LOAN IN THE AMOUNT OF US$300 MILLION TO THE REPUBLIC OF INDONESIA FOR THE Report No ID NATIONAL PROGRAM FOR COMMUNITY EMPOWERMENT IN RURAL AREAS Sustainable Development Department Indonesia Country Unit East Asia and Pacific Region March 13,2009 This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.

2 CURRENCY EQUIVALENTS (Exchange Rate Effective December 3,2008) Currency Unit = Indonesian Rupiah IDR 1,000 = US$ US$1 = IDR 12,585 WORLD BANK FISCAL YEAR January 1 - December 3 1 ABBREVIATIONS AND ACRONYMS APBD APBN AusAID BAPPENAS Bawasda BPKP CCT CDD cosu CPS CQS DA DANIDA DFID DDO DG DIPA DPL EIRR FD FK FMC FMS FSL GO1 HH IBRD ICB IDA IF AD IP JBIC Anggaran Pendapatan dan Belanja Daerah (Regional Government Budget) Anggaran Pendapatan Belanja Negara (National Government Budget) Australian Agency for International Development Badan Perencanaan dun Pembangunan Nasional (National Development Planning Agency) Badan Pengawas Daerah (Local Auditor) Badan Pengawasan Keuangan dun Pembangunan (State Internal Audit Commission) Conditional Cash Transfer Community-driven development Central Operational Services Unit Country Partnership Strategy Consultant Qualification Selection Designated Account Danish International Development Agency Department for International Development, United Kingdom Deferred Drawdown Option Directorate General Daftar Isian Proyek Pusat (Approved Central Government Detailed Project Budget) Development Policy Loan Economic Internal Rate of Return Fasilitator Desa (Village Facilitator) Fasilitator Kecamatan (Subdistrict Facilitator) Financial Management Consultant Financial Management Service Fixed Spread Loan Government of Indonesia Household International Bank for Reconstruction and Development International Competitive Bidding International Development Association International Fund for Agricultural Development Implementation Progress Japan Bank for International Cooperation

3 KDP KM KAB KM PROV KRRP MDG M&E MDTF MIS MOF MOHA NCB NGO NMC NRM O&M PAD PDO PMD PMU PNPM RESPEK RISE RMC RPM Q AG QCBS SAD1 Satker SPADA SPP SUSENAS TA TKPK TOR TPK UPK UPP WB FOR OFFICIAL USE ONLY Kecamatan Development Program Koordinator Manajemen Kabupaten (Kabupaten Management Coordinator) Koordinator Manajemen Propinsi (Province Management Coordinator) KDP Recovery and Rehabilitation Project in Nias Millenium Development Goals Monitoring and Evaluation Multi-Donor Trust Fund Management Information System Ministry of Finance Ministry of Home Affairs National Competitive Bidding Non-Governmental Organization National Management Consultants Natural Resources Management Operation and Maintenance Project Appraisal Document Project Development Objective Directorate General of Village Community Empowerment, within MoHA Project Management Unit Program Nasional Pemberdayaan Masyarakat (National Program for Community Empowerment) Rencana Strategis Pembangunan Kampung (KDP scale-up, with locally funded block grants in Papua & West Papua Provinces) Regional Infrastructure, Social and Economic Project Regional Management Consultants Regional Procurement Manager Quality Assurance Group Quality and Cost-Based Selection Smallholder Agribusiness Development Initiative Satuan Kerja (Project Management Unit) Support for Poor and Disadvantaged Areas Payment Request National Socioeconomic Survey Technical Assistance Tim Koordinasi Penanggulangan Kerniskinan (National Government Poverty Reduction Coordination Committee) Terms of Reference Tim Pengelola Kegiatan (Implementation Teams) Subdistrict Management Unit Urban Poverty Project World Bank Vice President: Country Director: Sector Director: Sector Manager: Task Team Leader: James W. Adams, EAPVP Joachim von Arnsberg, EACIF John A Roome, EASSD Sonia Hamrnam, EASIS John Victor Bottini, EASIS This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not be otherwise disclosed without World Bank authorization.

4

5 INDONESIA National Program for Community Empowerment in Rural Areas Project Project Paper for Proposed Additional Financing TABLE OF CONTENTS Project Paper Data Sheet I. Introduction... 1 I1. Background and Rationale for Additional Financing... 1 I11. Proposed Changes... 6 IV. Consistency with Country Partnership Strategy V. Economic Analysis of Financing Gap... 8 VI. Appraisal of Scaled-up Project... 8 VII. Expected Outcomes VIII. Benefits and Risks... 9 IX. Annexes... ~inancia1'~erms and Conditions for the Additional Financing 10 Annex 1 : Detailed Project Description Annex 2: Results Framework Annex 3: Project Costs Annex 4: Financial Management and Disbursement Arrangements Annex 5: Procurement Arrangements Annex 6: Safeguard Policy Issues Annex 7: Better Governance Action Plan. 48 Annex 8: Project Processing Annex 9: Documents in the Project File MAP IBRD

6

7 INDONESIA National Program for Community Empowerment in Rural Areas Project Project Paper for Proposed Additional Financing Data Sheet Empowerment Program in Rural Areas - nvironrnental Category: B The Project Development Objective remains the same as the original loan. PNPM-Rural's project development objective is for villagers to benefit hom improved socio-economic

8

9 I. Introduction 1. This Project Paper seeks the approval of the Executive Directors to provide an additional loan in the amount of US$300 million to Indonesia's National Program for Community Empowerment in Rural Areas Project, PNPM-Rural (P105002, Ln , Cr IND). The proposed additional loan will help finance the costs associated with the geographical scale-up of the ongoing, well- performing project. This new loan will support expansion of the PNPM-Rural Project from its current geographical coverage of 2,864 rural subdistricts (kecamatan) to approximately 4,371 total rural subdistricts in 2009, increasing significantly the coverage of community block grants and technical assistance and thus scaling-up the project's poverty impacts. 11. Background and Rationale for Additional Financing 2. Original CreditJLoan. The original amount of the Specific Investment Loan Project is US$23 1 million (IBRD loan $41.19 million, IDA credit SDR million/ $190 million). The Loadcredit agreements were signed on June 6, 2008 and the Project became effective on July 16, The initial Project was to be implemented from with a closing date of June 30, With additional financing, project implementation will be extended to December 3 1, to allow for full disbursement of all funds and final reporting on project impact. 3. Government Strategy. Despite impressive macro-economic growth rates over the past several years, poverty remains high in Indonesia with 35 million people or 15.4 percent below the national poverty line (US$1.55/day) as of March Many households are clustered just above the poverty line, making large numbers of Indonesians vulnerable to poverty. Nonincome poverty remains a serious problem in terms of high malnutrition and maternal mortality rates, inadequate access to safe water and sanitation, and education outcomes. Furthermore, inequality is increasing and disparities between regions remain high. To accelerate the Government's efforts to reduce poverty and ensure equity and inclusiveness, on August 16, 2006 President Yudhoyono of Indonesia announced PNPM as the policy and operational umbrella for all community empowerment programs in the country. PNPM builds primarily upon the previous ten years of successful experience with the World Bank-supported Kecamatan Development Program and the Urban Poverty Program. The Government expects that PNPM will be the flagship poverty,reduction program at the community level. The Government outlined a PNPM policy roadmap in January 2008 and some progress has been made over the past year towards realizing several policy and organizational arrangements contained within. (See Annex 1) 4. World Bank Support. The current proposed additional financing for PNPM-Rural is part of a series of poverty reduction interventions supported by the WB, beginning with KDP1, which was approved in 1998, followed by KDP2, KDP3a, KDP3b, KDP3 Additional Financing, and PNPM-Rural in Total IBRDIIDA financing for these operations is approximately US$1.2 billion (See Table 1); with this proposed additional financing to PNPM-Rural, this would increase to US$1.5 billion and would cover almost 70 percent of all subdistricts in the country. Table 1: Overview of KDPIPNPM-Rural Scale-up ( )

10 Program KDP 1 KDP Supplemental KDP2 Years IBRDJIDA (US$ million) GO1 Contrib. (US$ million) No. of Kec ,316 % of total 25% 25% 33% No. of Villages 20,671 20,671 % of total 30% 30% 22,000 32% /a Total areas for the country change -each year due to district, subdistrict and village splitting and changes in geographical boundary demarcations. Percentage of total represents the percentage with total specifically for the said year. 5. Project Objectives and Design. PNPM's overall objective is to reduce poverty and improve local-level governance in Indonesia through the provision of investment resources to support productive proposals developed by communities, using a participatory planning process. PNPM-Rural's project development objective is for villagers in these rural locations to benefit from improved socio-economic and local governance conditions. The project, using a community-based approach, will help fill Indonesia's large tertiary infrastructure gap efficiently. Objectives are being achieved through: (a) communities' participating in an open planning process; (b) provision of grants to communities directly and transparently to finance an open menu of poverty alleviation activities; and (c) enhancing the capacity of central government and local governments to partner with community organizations in service provision. 6. There are no changes to the original objective or design, and all parties have complied with the relevant legal covenants. The program's core architecture will not deviate in any significant way. PNPM-Rural and its predecessor, KDP, have expanded geographically over the past ten years, and their core operating systems were designed for future scale-up. They have already demonstrated their ability to adjust to an increased scope. 7. Project Components. Project Components will be primarily the same as the original loan, focusing upon four main components for WB funding: Block Grants (US$ million) for approximately 4,371 subdistricts across the country to support planning and investment in social and economic infrastructure. Facilitation and Training (US$ million) to provide technical advisory services and other material support and training at the subdistrict level. Goods, Consultants' Services, Training and Workshops (Implementation Support). (US$ million) This component provides implementation support and technical assistance at the national, provincial and district levels to manage the program and strengthen the capacity of local governments. This component includes the monitoring, evaluation and audit activities. Incremental Operating Costs (US$ million). PNPM's special programs place several additional demands on normal government budgeting, particularly as the

11 program scales-up. Most of these operational costs will be covered by the Government through their national and local budgets; a minimal amount is budgeted from the loan. Table 2: Project Costs for PNPM-Rural Additional Financing 2009 US$ million (rounded) I Component ( IBRD 1 National I Local I Community I Total I I I I Government I Government I I I 1. Subdistrict (Kecamatan) Grants 1 b. Planning Grants 2. Facilitation and Training subdistrict level 3. Goods, Consultants' Services, Training and Workshops (Implementation Support) 4. Incremental Operating Costs.925 TOTAL (ABPN) * *The calculation of Go1 inputs include funds obtained through a loan from IFAD. 8. PNPM-Rural Pilots. In addition to the core subdistrict planning and block grant scheme, PNPM-Rural includes six major operational pilots funded through loans and grants from several bilateral donors (The Netherlands, United Kingdom, Australia, Canada, and Denmark). All of the pilots build upon the main PNPM platform and principles of community participatory engagement. These include: (i) the PNPM MDG achievement grants (or conditional cash transfer 'CCT' pilot) in 178 subdistricts in five provinces across the country to achieve education and health outcomes; (ii) Green KDP to support natural resource management and renewable energy initiatives; (iii) support for agricultural development initiatives (SADI) to provide technical assistance and financial resources for poor farmers; (iv) Papua RESPEK which supports Papua and West Papua's customized approach to adapting PNPM to the distinct conditions of those two provinces; (v) Aceh Multi-Donor Trust Fund activities for post-tsunami recovery and PNPM specific adaptations for Aceh and Nias; and (vi) Creative Communities pilot in 30 subdistricts aimed at cultivating a cultural approach to poverty reduction. 9. Stand-By Loan. The Government and the WB have recently - negotiated - a DPL Stand-By Loan (DDO) ii response to the global financial crisis. The Government is looking towards PNPM-~ural and other national poverty programs to provide possible channels to disburse quickly critical spending to the poor if needed due to the financial crisis. The WB Social Development team will provide technical assistance for establishing a poverty monitoring system as well as a response mechanism to the crisis. The WB PNPM-Rural team is part of the DDO task team (APBD)* , , Project Implementation Arrangements. The Coordinating Ministry of People's Welfare chairs the PNPM Program Steering Committee, an inter-ministerial coordination body, which consists of representatives from the Ministries of Public Works, Finance, Home Affairs, People's Welfare, Cooperation and Small Medium Enterprises, and Industry and Trade, etc. The

12 Coordinating Ministry of People's Welfare also chairs the Government's National Poverty Reduction Coordination Committee. Overall project oversight is the responsibility of the Ministry of Home Affairs (MoHA), while the day-to-day coordination is undertaken by a Project Management Unit (PMU) assisted by administrative units (satuan kerja or 'Satker ') at central, provincial, and district levels. 11. Project Performance to Date. Past KDP and PNPM-Rural projects have been rated consistently as "Satisfactory" for both progress towards the Project Development Objective (PDO) and overall Implementation Progress (IP). QAG gave satisfactory ratings for quality-atentry to KDP3B Additional Financing. For the existing loan, PDO and IP are rated as "Satisfactory". Table 3: PNPM-Rural ISR Ranking Summary Development Objective Rating loverall Implementation Progress (IP) Financial Management Project Management Counterpart Funding Procurement Monitoring and Evaluation Current ISR Ranking Satisfactory Satisfactory Satisfactory Moderately Satisfactory Highly Satisfactory Moderately Satisfactory Satisfactorv 12. Progress Against Key Performance Targets. Almost all the key performance targets for the existing project are on track or exceeded. For subdistrict coverage, the existing PNPM- Rural Project has covered 2,864 subdistricts across the country as compared to the original target of approximately 2,300 subdistricts. Participation rates in activities for women and poorer members in 2008 average 54 to 60 percent respectively, against the minimum target of 40 percent. Ninety percent of planned consultant positions were filled and consultants trained by the time the project began its annual socialization and planning cycle this year, compared to the target of 70 percent. Most of PNPM construction activities begin during the last quarter of the calendar year, but the workplans for these activities are on track. Over 93 percent of all subdistricts have already begun implementation on activities funded through the 2008 community block grants. (See Annex 1 for progress against original project key performance indicators.) 13. In terms of concrete outcomes over the past ten years, the achievements through the KDP and PNPM-Rural series have been significant: Poverty reduction: A rigorous 2008 impact evaluation of KDP2 (PNPM-Rural's predecessor) showed that real per capita consumption gains were 11 percentage points higher among poor households in KDP areas compared with control areas. Also, the proportion of households moving out of poverty in poor subdistricts was 9.2 percent higher in KDP2 areas compared with control areas. Vulnerable households near the poverty line were less at risk of falling into poverty as a result of KDP participation. An impact evaluation of KDPl shows that KDP had a significant

13 impact on rural household expenditure. The longer a subdistrict received KDP funding, the greater the estimated impact on rural household expenditure. Employment generation: KDP2 reduced unemployment by 1.5 percent in comparison with control areas. Some 72 million workdays have been created as of December 2007 from KDPIPNPM-Rural. Physical economic infrastructure: As of April 2008, over 40,000 kilometers of roads, 10,500 clean water supply units, 11,000 irrigation schemes, 3,800 village health posts and 6,700 new schools have been built or rehabilitated, along with 23,000 other types of economically productive infrastructure since KDP 1 began in Economic productive infrastructure built by KDP has resulted in expanded business opportunities and employment. Economic rates of return on sample infrastructure have ranged from 39 to 68 percent. Quality, cost-effective infrastructure: Independent evaluations of the technical quality for infrastructure works classified 91 to 93 percent of the infrastructure as "good" to "very good". Also, an independent evaluation found that village infrastructure built through KDPRNPM methods costs significantly less - on average 56 percent less - than equivalent works built through government contracts. Participation rates: Community participation is high. Participation of women in PNPM-Rural meetings averaged 48 percent in Nearly 60 percent of those who attend KDP/PNPM-Rural planning meetings are from the poorer segments of the community. The recent impact evaluation and gender review did find however, that PNPM could do much more to promote participation of women and vulnerable groups. Education and health benefits: PNPM-Rural and its Generasi MDGICCT pilot have led to higher levels of participation by women (60 percent on average) in village meetings; greater enrollment and attendance rates at elementary and junior secondary levels; school facility improvements; and lessening of school costs for poor families; for health, program results are higher attendance at village and community health centers, improved nutritional feeding, and increased child and maternal healthcare. 14. Sustainability. The Government has discussed continuing PNPM until 2015, using two phases. The current phase, 2007 through 2009, is the scale-up to full national coverage of all 70,000 villages and wards. Currently, the national and local governments already pay for approximately 75 percent of PNPM-Rural through their own resources. After the scale-up mode, PNPM shifts into a more sustaining mode, whereby local governments will take on greater responsibility for financing. Also over time, small poverty reduction initiatives will be folded into PNPM in order to make programming at the community level more streamlined, coordinated, and responsive to beneficiaries' needs. 15. Total Financing Requirements. As mentioned in the original Project Document, the existing loan of US$231 million provides for only one year of project funding for community block grants and technical assistance. As of December 31,2008, a total of US$150 million or 65 percent of the original project loan has been disbursed. Actual expenditure to the subdistrict accounts is US$109 million. Disbursement trends over the last several KDPs have revealed that project disbursements will further increase over the next three months. At this rate, disbursements for the initial Project amount for community grants will be completed during the

14 first half of 2009, and additional funds will be needed by July 2009 for this year's cycle. To ensure the availability of sufficient funds for programming, the Government has requested that the additional financing loan be approved by the Board no later than April 2009 (see Annex 3 regarding financing and projected disbursements). Pending budget and borrowing approval by the Indonesian parliament, it is probable that the Government will request funds for future years through Financing Gap. In order to reach full national coverage in 2009, total financing requirements for PNPM-Rural are expected to reach approximately US$1.22 billion next year. Approximately US$760 million is budgeted from national and local government resources, US$68 million is provided by a loan from the International Fund for Agricultural Development (IFAD), and an estimated US$91 million comes from community contributions. This leaves a funding deficit of US$300 million to be met through WB additional financing. If WB financing is not made available this year, there will be a shortfall in financing for PNPM community grants in 2009 and the Government will not be able to cover all subdistricts in the country as originally planned. 17. PNPM Support Facility. In addition to loan and government budget funds, a PNPM Support Facility was established in December 2007 with contributions from the Royal Embassy of the Netherlands, the Danish International Development Agency (DANIDA), UKYs Department for International Development (DFID), and Australia (AusAID). This trust fund is designed to support the Government's management and technical support to the overall PNPM program and harmonize donor contributions towards this national poverty reduction flagship. To date, there are commitments of US$60 million to the Facility. An additional contribution is being finalized now with Japan Proposed Changes 18. Changes to Project Scope Resulting from the Additional Financing. There will be no change to the overall objectives or basic design of the project as outlined in the original loan. Additional financing will support the expansion of the project scope: (i) to provide supplemental block grants to PNPM-Rural's existing 2,864 rural subdistricts which were covered under the original loan in ; and (ii) to expand coverage for an additional 1,507 rural subdistricts. Thus PNPM -Rural will cover a total of approximately 4,371 subdistricts in 365 districts in all rural provinces in PNPM-Urban and other programs under the PNPM umbrella are expected to cover all the remaining areas of the country next year. 19. Enhanced Oversight Arrangements. Some new operational arrangements will be introduced for the purpose of larger scale operations. Fiduciary oversight will be strengthened through improving the financial management function of the national, provincial, district and subdistrict level consultants, and providing additional training to those supervisors. Second, MoHA will add a financial management and microcredit specialist in each district who will focus on fiduciary controls and monitoring subdistrict financial accounts. Third, MoHA will receive technical assistance for procurement and financial management at the national Project Management Unit level funded and contracted through AusAid. This additional technical expertise, requested by MoHA, should help to expedite the procurement and budgeting processes. Fourth, the Project will almost double the audit sample size of subdistricts from 12

15 percent this year to approximately 20 percent in Past studies have shown that increasing the audit sample along with announcing in advance scaled-up audit plans help to lessen the possibility of funds misuse. Lastly, MoHA will strengthen the complaints handling mechanism and public socialization in 2009 by upgrading the database and instant messaging functions to receive and track reported grievances. There will also be wider distribution of socialization materials publicizing the PNPM grievance hotline. 20. Financial Management. All project risks and mitigation for the original loan apply to PNPM-Rural's Additional Financing. Overall, the financial management risk rating for this financing is assessed as "substantial" before mitigation and moderate after mitigation. State Audit Agency (BPKP) audits for FY 2007 have been completed for KDPIPNPM-Rural with "unqualified" opinions. The implementing agencies and WB are now in discussions with BPKP to prepare for the 2008 audits which will use agreed audit terms of reference (TOR) and include expanded coverage of areas in light of the scale-up next year. 21. World Bank Supervision. As a response to the expansion, the WB will augment its supervision in several ways. The WB primarily supervises the systems that deliver funds to villages and the facilitators/consultants providing technical assistance. As all subprojects on the ground and covered by PNPM-Rural will be financed by a combination of WB and Government funds, the WB will provide supervision of the oversight consultants and the field monitoring systems. Moreover, the PNPM-Rural Task Team will add two consultants at the national level to monitor systems related to budget tracking, operations oversight, and reporting. These consultants will be paid out of the PNPM Support Facility. The Task Team and COSU will also work closely to ensure that the audit TOR for PNPM 2009 contains adequate coverage and resources to make audits more effective. Finally, the team will continue to undertake regular field visits and supervisions on at least a bi-monthly basis. Routine field visits to different sites have proven effective in the past to ensure that project systems and procedures are in place. WB consultants stationed in field offices in Aceh, Nias, Makassar, and Papua provinces will continue to provide ongoing supervision in these remote regions. Increasingly, supervision responsibilities have and will continue to be assumed by the Government, especially the PNPM Program Steering Committee and MoHA, the executing ministry. IV. Consistency with Country Partnership Strategy 22. The recently approved Country Partnership Strategy (CPS) for FY emphasizes engagements with government counterparts and other stakeholders who are committed to addressing critical governance and institutional challenges. This approach aims to improve existing government programs, strengthen the institutions involved, both state and non-state, and encourage others to replicate them. In addition to its cross-cutting engagements to strengthen central and sub-national government institutions and systems, the CPS identifies five thematic areas that are expected to form the core of the WBG's engagement: (i) Private Sector Development; (ii) Infrastructure; (iii) Community Development and Social Protection; (iv) Education; and (v) Environmental Sustainability and Disaster Mitigation. This proposed additional financing of PNPM-Rural supports both the approach suggested under the CPS as well as thematic areas of engagement for Infrastructure and Community Development and Social Protection. The PNPM program forms the WBYs operational centerpiece for the core engagement area of community development.

16 V. Economic Analysis of Financing Gap 23. There are no major changes from the economic analysis done previously on the original Project. Rates of return and economic feasibility remain relevant. VI. Appraisal of Scaled-up Project 24. Appraisal for the proposed Additional Financing took place between December 2008 and January The appraisal focused upon readiness for 2009 expansion including the final list of project sites, recruitment of consultants, fiduciary oversight, financial management, procurement, project management, and absorptive capacity. The main decisions made during appraisal were: The financing modality for the additional financing will remain the same as in previous KDPs and PNPMs. The final 2009 list of subdistricts for PNPM-Rural following poverty targeting criteria was confirmed. The policy and strategy for the requirement of local government contributions towards block grants was discussed and more detailed instructions will be issued. The procurement strategy and action plan for recruiting facilitators (approximately 14,000 persons) were confirmed for both PNPM-Rural and PNPM-Urban Projects in MoHAYs plan to strengthen the Satker managing PNPM, especially in terms of staffing adequacy and authority was reviewed and revisions made. Procurement, financial management and audit arrangements were finalized to ensure satisfactory performance and action plans were agreed upon with MoHA to improve financial management and procurement arrangements. Overall preparations for quick start up in 2009 including carry-over funds from 2008 and procurement of technical assistance was mostly completed. PNPM-Rural Results Framework was reviewed and finalized for the 2009 expansion. Withdrawal of the block grant under the additional financing is subject to utilization and documentation of the advance to the designated account of the original project of at least, US$100 million. 25. Safeguards. The proposed PNPM-Rural Additional Financing will not raise the environmental category of the project; it will remain as a Category B project. No new safeguard policies will be triggered. This project will not be financing any Category A type of subprojects. In addition, since there will be no change to the overall objectives or basic design of the project, no significant environmental issues are anticipated. PNPM-Rural's investments are very small, and under the Indonesia Environmental Assessment rules, they all fall below the minimum size required for a formal environmental assessment. The Operational Manual has been reviewed by a range of environmental arid environmental engineering specialists and they meet all WB standards. Further details on safeguards are included in Annex Procurement. Additional financing will use the ongoing PNPM-Rural procurement arrangements: the PMU at the central level will be responsible for procurement including for the major consultant services, goods, and non-consulting services. The Provincial Satker (budget

17 holders) will hire all district and subdistrict facilitators, and each community group will carry out procurement under community grants following the procedures as described in the Project Operations Manual. The main task of the PMU for this Additional Financing is to amend several critical consultant contracts, i.e. contract for National Management Consultant (NMC) (additional US$1.3 million) and six Regional Management Consultants (RMCs) (additional US$0.6 to US$0.98 million each). These contracts are expected to be awarded in early 2009, and the amendments will likely take place in April In case there is an unexpected need for a new selection process of RMCs, MoHA may explore the possibility of using non-consulting services methods. In addition to the above amendments, there will also be procurements for additional individual facilitators (US$17.7 million for subdistrict level and US$4.9 million for districts), agricultural consultants (US$139,000), and several new procurements for agricultural facilitators (US$230,000), consultant services for base-line studies (US$120,000), printing (US$ 1.5 million), community-based monitoring (aggregate US$835,000) and event organizing (est. US$l million). An event organizer may be procured using NCB method since it is not likely to attract international bidders and use of ICB (mainly due to language issues) may deter wider participation locally. Furthermore, the legal agreement will be revised to add NCB, Direct Contracting and CQS options which were not included in the original legal agreements. All procurement will be handled through transparent mechanisms in line with World Bank consultant and procurement guidelines of 2004, as revised in October Procurement arrangements are in Annex The overall procurement risk assessment for this additional financing continues to be "Substantial", due to delays in selection of NMC and RMCs, and since the mitigation measure proposed for PNPM-Rural is not in place, i.e. hiring of the Procurement Advisor (AusAID funded and contracted). Once the Procurement Advisor is on board - currently scheduled for March it is expected that the residual risk will be "Moderate". VII. Expected Outcomes 28. This scale-up will expand the coverage of the program from 2,864 rural subdistricts currently to a total of approximately 4,371 rural subdistricts in reaching a population of approximately 125 million. As a result, the project expects that poverty and employment generation impacts will significantly increase, employing some 15 to 17 million additional workers through infrastructure works and indirect economic activities. Additionally, the expansion will lead to increased access of communities to public and private services. However, much of the expansion's impact is also dependent on other factors, such as the effects of the global financial crisis, the price of basic food items, jobs created elsewhere, and other poverty reduction programs. VIII. Benefits and Risks 29. Risks and Mitigation Measures. There are two main risks related to the scale-up of PNPM-Rural. The first risk is the low management capacity of the executing agency, MoHA. The expansion of locations in 2009 involves a 54 percent scale-up in subdistrict coverage. The largest challenge MoHA faces is in procurement and recruiting the needed technical assistance. The expansion will require approximately 9,700 consultants at the national and local levels. Significant progress has been made by MoHA over the last four months to recruit approximately

18 94 percent of the needed pool of consultants but there are still some important vacancies which must be filled, especially at the national level. At the same time, MoHA must ensure sound financial management both at the national and local levels. This includes accurate budget planning and oversight, and strong supervision of resources in the field. This risk is rated as "Substantial" prior to mitigation. It should be emphasized however that this risk has been rated "Substantial" in the past ten years of KDPIPNPM and the Government and WB have nevertheless managed to mitigate this risk successfully through regular supervision, frequent communications and ongoing technical advice. There are a number of applicable measures which can effectively mitigate against this risk, and a supporting action plan was discussed with the Government during appraisal. As mentioned above, MoHA plans to strengthen its national project management unit and field consultant levels in financial management and procurement, recruit additional financial oversight persons in every province, and hire an AusAid-funded Procurement Advisor at the national level. The subdistrict audit sample will almost double. Another measure to mitigate this risk is the increased strategic, policy and operational oversight by the PNPM Program Steering Committee over the past year. The Government is encouraging MoHA to strengthen its management and oversight capabilities. On the WB'side, the PNPM- Rural Task Team will enhance its supervision as described above. 30. The second risk is a structural risk - the continuous delay in the authorization of the budget and slow processing through the regional treasury office. This risk is considered "Substantial", prior to mitigation. In the past, there have been significant delays in carrying-over funds from previous years and in the release of annual budgets. These delays have occurred in the past and the Task Team has worked closely with MoHA and Ministry of Finance to ensure the least disruption to field operations as a result of these delays. Mitigation measures currently being discussed include using national government funds to pre-finance the block grants. Several measures to expedite budget releases have also been incorporated into the Fifth Development Policy Loan and Stand-By Loan currently being finalized between the WB and the Government. Other risks as outlined in the original loan remain relevant, and the risk ratings have not changed. 31. It is worth mentioning that parliamentary and presidential elections are scheduled for April, July and September 2009 (the September round only if needed). The Project must exercise caution in ensuring that activities remain apolitical and that funds are not appropriated for other uses. Since its beginning in 1998, KDP has experienced four elections and changes of presidential power, and local elections are a regular occurrence throughout the country. In the past, the Project has established strict instructions and special procedures in the field so that funds are not used for electioneering and political purposes. These same precautions will be taken for this year's elections. IX. Financial Terms and Conditions for the Additional Financing 32. The additional financing will be an IBRD Fixed Spread Loan (FSL) in USD currency with annuity based repayment of principal, with interest rate and currency conversion options. The loan maturity is 24.5 years, including 9 years grace period. The front-end fee of 0.25% is to be paid out of the Government's own proceeds. The Government has elected to borrow a US dollardenominated LIBOR-based Fixed Spread Loan (FSL). FSL offers a fixed spread over LIBOR, flexible repayment terms and embedded conversion options to change the loan currency and fix the interest rate. The Government wishes to use the flexibility which FSL offers to borrow in US

19 dollars and subsequently undertake swap transactions in order to repay the loan in Indonesian rupiah.

20 Annex 1: Detailed Project Description INDONESIA: National Program for Community Empowerment in Rural Areas - Additional Financing 1. PNPM's overall objective is to reduce poverty and improve local-level governance in Indonesia through the provision of investment resources to support productive proposals developed by communities, using a participatory planning process. PNPM-Rural's project development objective is for villagers in these locations to benefit from improved socioeconomic and local governance conditions. PNPM-Rural also supports the development of responsive institutional structures that enable bottom-up planning and provide for development oversight at the local level. Decision-making is left to the communities themselves, and all important decisions are made in community-wide meetings. Monitoring of activities is undertaken by many actors, including district legislatures, NGOs, and independent teams selected by the communities themselves. 2. There are no changes to the original project objective or design as a result of this additional financing. The program's core architecture will not deviate in any significant way. PNPM and its 'predecessor, KDP, have scaled-up geographically every year, thus their core operating systems were designed for future expansion and through ten years of experience, they have already demonstrated their ability to adjust to an increased scope. 3. The Government's aim is for PNPM to cover all areas of the country by PNPM- Rural will support approximately two-thirds of the total or 4,371 subdistricts next year. Other areas of the country will be covered by PNPM-Urban and three other projects. Table 1.1: PNPM Core Programs for 2009 Name of Project 1. PNPMRural Number of Subdistricts Covered 4,371 % of Total Subdistricts 68% Executing Agency: Ministry of Home Affairs 2. PNPM Urban 1,145 18% Executing Agency: Ministry of Public Works 1. Regional Infrastructure, Social and Economic Project (RISE) Executing Agency: Ministry of Public Works 2. Rural Infrastructure Program % Executing Agency: Ministry of public works 3. Support for Poor and 186 3% ~iiidvanta~ed Areas (SPADA) Executing Agency: Ministry of Less Developed Areas Total Subdistricts in Indonesia 6, %

21 4. Activities that will be supported include: Building or repairing basic productive infrastructure, such as small roads, bridges, irrigation, and clean water supply systems. Building or repairing social infrastructure such as school buildings and clinics. Training for revolving funds management and village-level revolving funds by women's groups Assistance for the development of district and subdistrict management and technical capacities. Carrying out a number of carefully designed pilot programs to provide special assistance to disadvantaged or marginalized groups. These pilots include the MDGICommunity CCT pilot and Green KDP windows. Table 1.2: Project Costs for PNPM-Rural Additional Financing 2009 US$ million (rounded) Component IBRD National Local Community Government Government (ABPN) (APBD) Subdistrict (Kecamatan) Grants lb. Planning Grants 2. Facilitation and Training - - subdistrict level 3. Goods, Consultants' Services, Training and Workshops (Implementation Support) 4. Incremental Operating Costs TOTAL Total , , Component 1: Subdistrict Grants. The main activity in PNPM-Rural will be the construction of economic and social infrastructure that is desired and needed by the communities. The selection of activities is open except for items specifically excluded through the project's negative list. All assistance is given as a grant to the subdistrict and village by the government. Criteria for activities include: Can be undertaken by the village, with locally available technical assistance Technically and financially feasible A public need Gives benefits to the community, especially the poor in the village 6. PNPM funds can be used for infrastructure such as roads or irrigation, for social services such as schools and clinics, or for training. PNPM will not support economic activities except for village-level revolving funds managed by women's groups, although the project will provide special training for the existing revolving fund management units. Funds also cannot be used for items on the project's negative list, or for land purchase of any kind.

22 7. Subdistricts are normally made up of 20 to 40 villages. They receive an allocation from the project which for 2009 will range from 900 million to 3.0 billion rupiah (US$90,000 to US$300,000). For 2009, an extensive subdistrict poverty mapping exercise was completed, resulting in a rural subdistrict ranking of non-poor, mediudnear poor, and poor. The poverty categories and population figures were used to determine the amount of the subdistrict block grant for (See Table 1.2) In PNPM, district governments with lower fiscal capacities provide contributions of 20 percent of the subdistrict grant and those with higher fiscal capacity provide contributions 50 percent from their own budgetary resources. The different amounts are based on local government fiscal capacity classifications that are issued by MOF. Table 1.3: Subdistrict Block Grant Allocation Criteria in 2009 I I Near ~ oor I 900 I I I Poor I I JAVA-BALI I I Near ~ oor I I I I Poor I I OFF JAVA-BALI I I Near noor I I < 15,000 15,000-25,000 Poor Non-poor Near poor Poor Non-poor Near poor 3, , ,000 I I Poor I 2,000 I I I Near poor I 2,000 I I I Poor I I It should be noted that the areas categorized as non-poor may still have deficiencies in rural infrastructure and access to services. 8. Before the proposals are discussed at the Subdistrict Decision-Making Forum, they undergo a verification process by a team of elected citizens with advice from the subdistrict consultants. Verification is undertaken of each proposal on the basis of technical feasibility, financial feasibility, and other criteria. The team does not determine rankings or priorities. If any proposals are found to be not feasible, these would be discussed with the communities so that the proposal could be modified or at least the community could understand the reason for recommending rejection by the facilitators. However, while facilitators can recommend rejection, the communities must still make the decision themselves. 9. Subproject rules for procurement, financial management, technical oversight, and reporting to government and to the Bank are provided through the Project's Operational Manual.

23 The Manual is re-issued annually as part of each year's overall performance review and programming for the coming stage. 10. Component 2: Facilitation and Training. PNPM-Rural develops further the community capacities for planning and project management supported previously under KDP. This component supports the subdistrict level social and technical facilitators who assist with program socialization, planning, social mapping, village planning, technical assistance, and oversight of chosen projects. These subdistrict level facilitators work closely with village level facilitators and community project teams to develop their capacities in planning and project management. 11. Component 3: Goods, Consultants' Services, Training and Workshops (Implementation Support). This component provides implementation support and technical assistance to the national, provincial and district governments. The bulk of this component covers the costs of experienced technical and social facilitators at each of these levels who provide technical advice, field oversight, and local-level coordination to the program, and strengthen the local government councils. PNPM also provides both quantitative and qualitative monitoring, and it commissions a mix of internal and outsourced evaluations. This component will fund several studies and evaluations to support the Government in examining the impact of PNPM-Rural on: poverty and socio-economic welfare; access to services; cost effectiveness and service quality; sustainability; and governance and empowerment issues (social capital, accountability, inclusiveness, access to information, conflict prevention and dispute resolution, and corruption). The internal system will be strengthened through better technology, additional training, and improved oversight. PNPM reserves approximately two to three percent of its budget for monitoring and evaluation. Improving government's ability to monitor and evaluate the PNPM program is a key objective of the multi-donor PNPM Support Facility. This component of PNPM also includes an enhanced audit program that expands sampling, provides capacity development support for district government auditors, and funds to address problems that audit reviews attribute to project shortcomings. 12. Component 4: Incremental Operating Costs: PNPMYs special programs place several additional demands on normal government budgeting, particularly as the program prepares for the national scale-up. Most of these operational costs will be covered by the Government through their national and local budgets; a minimal amount is financed through the loan. 13. Progress of PNPM Policy Roadmap. The Government has made steady progress on its PNPM roadmap plan, issued in early As originally planned, progress over this past year focused upon two main areas: PNPM scale-up and consolidation, and integration of other technical support programs aimed at harmonizing development support to urban and rural communities. Sub-district coverage has expanded by 172%' from 2,361 total sub districts in 2007 to the entire country (6,408 subdistricts) in Plans are to continue PNPM through The scale-up will rely on increased management capacity of the programs under the PNPM umbrella. Four operational guidelines have been issued on general principles and operations, communication strategy, complaints handling and monitoring and evaluation, including management information systems. A national PNPM Congress was held in April 2008 followed by regional coordination meetings across the country. Administrative units (satker) are in place

24 at the national, provincial and districts levels and plans are to increase the capacity of these units through additional funds, staff, training and auditing. 14. Coordination and harmonization of PNPM with other programs. The Government is making efforts to coordinate other poverty alleviation programs through the creation of three program clusters. The first cluster is for individual social welfare programs, the second cluster for community-based programs such as PNPM, and the third cluster for small and medium enterprise (SME) programs. These clusters are coordinated under the National Government Poverty Coordination Committee or TKPK. The Government is also currently exploring ways to harmonize interventions from some 60 community-based projects executed by 22 sectoral ministries as well as activities from non-governmental organizations. This consolidation was scheduled for 2009 onwards and some preliminary steps have been taken to integrate gradually funding for several agriculture and community programs into the overall PNPM programming. 15. Presidential Decree on Poverty Reduction. As part of the roadmap, a Presidential decree is in draft form awaiting the President's signature in order to formalize the TKPK structure and functions at the national and local levels and to establish the aforementioned three poverty clusters. The decree is expected to be issued by April 2009, and outlines six main areas of particular interest to PNPM. The decree confirms the structure of the Poverty Coordination teams at the national, provincial and district levels. Second, it confirms that funds for PNPM will be made available from national and district level contributions during the annual budgeting process. Third, the PNPM community participatory planning process will be integrated into the Government's formal village to district planning process. This provision will allow for greater responsiveness of departments to meet villages' needs which are not yet met through PNPM. Fourth, community organizations and NGOs should play an important role in supporting villagers' development plans. Fifth, community procurement should be assisted by relevant technical agencies in the event that procurement is not possible through community means alone. Finally, the decree states that subdistrict block grant funds belong to the community, and any misuse of those funds will be processed according to prevailing law. This provision allows for funds to be returned to the community subdistrict and village accounts in case of misuse of funds.

25 Implementation Arrangements INDONESIA: National Program for Community Empowerment in Rural Areas Government Consultants/Facilitators NATIONAL LEVEL /: Inter-Ministerial - Management Consultants PROVINCE LEVEL Coordination Team - National PNPM-Rural Secretariat I f J (NMC) - Inter-Ministerial - Management Consultants Coordination Team - Provincial Secretariat (KMProp) DISTRICT LEVEL f - Inter-Ministerial Coordination Team - District Secretariat J - Management Consultants (KMKab) I KECAMATAN LEVEL f \ - Kecamatan Head - Kecamatan Facilitators - - Project Admin Budget Officer \ J (FK) - Assistant Kec Facilitators VILLAGE LEVEL - Village Head - Village Facilitators - Village Council

26 Table 1.4: Performance Against Key Project Indicators for Original Project Performance Indicator Progress to Date Progress Summary Outcome Indicators Improved HH expenditure rates and improved acces; to economic and social services in a minimum of 2,300 poor subdistricts in 2008; min. of 2,600 subdistricts in 2009 (representative sample) Economic internal rates of return >30% for major rural infrastructure types Through the MDGICCT pilot, improved health and education indicators in 130 subdistricts in 5 provinces >80% satisfaction levels from beneficiaries regarding improved services and local level governance. Intermediate Results Indicators Min. 40% participation rate of women and poorest community members in planning and decisionmaking meetings 85% of agreed workplans completed each year #/type of infrastructure works, economic and education and health subprojects/activities completed in Baseline survey completed in 2007 so that HH expenditures can be measured. PNPM-Rural exceeded coverage target of 2,300 subdistricts in 2008 to 2,864 subdistricts. Coverage in 2009 will exceed target of 2,600;.. 4,371. subdistricts will be covered. Too early in cycle to report. Studies planned for Past track record on EIRR ranged fkom 39% to 68%. First year impact evaluation is currently in the field with results due out by June MIS data indicates progress on school enrollment and attendance rates and increase in health post attendance for prenatal and antenatal care. Too early in cycle to report study reports 92% satisfaction with project activities that year cycle is showing an increase of women's participation from an average of 44% in 2007 to 48% in The CCT pilot shows even higher average participation rates of 60%. For participation of poorer members, average is 60%. On track for this year with coverage of areas exceeding target. Project activities just began during last quarter of calendar year On track. Subdistrict coverage targets exceeded Too early to report On track I Too early to report. Exceeded target during initial stages of 2008 cycle. On track Ontrack evaluated as of high quality infrastructure not yet completed. 1 Too early to report Studies in 2007 show 78% to 94% infrastructure rated as excellent or good quality. O&M arrangements are in place 2008 infrastructure not yet completed. and functioning for >70% of infrastructure works By the end of 2009, >70% of local I Results will be available at end of government councils are actively involved in PNPM management and oversight. >70% of planned consultant 90% of planned consultant positions were positions are filled and consultants filled by the time cycle began in are trained by the time the project Target exceeded by 20%. begins is annual socialization and - planning cycle Too early to report. I Too early to report Exceeded target 1

27 >70% of studv and evaluation findings used to improve the project. By 2009, audit sample size increases to 10% of all villages and audit results are made public. >70% of planned consultant positions are filled and consultants are trained by the time the project begins its 2009 socialization and planning cycle. >70% of sampled villages receive socialization material packages for PNPM in early >40% of local district government bodies (1 rep) undertake crossvisits to observe PNPM in other sites by By 2009, a minimum of 15 ~overnment PNPM managers use their new skills in management, fiduciary controls and evaluation for the betterment of the program. Recent findings from impact evaluation, microcredit and government poverty programs are being used now to reformulate program. It was agreed in December 2008 that the audit for 2009 would cover almost 20% of all kecamatan and audit results would be made public. Min, of Home Affairs has filled 94% of positions for Development of new socialization materials completed. Printing to begin soon with immediate distribution to follow in early Not yet Some progress but needs improvement I On track On track. Exceeded target. Behind schedule Too early to report Too early to report

28 Annex 2: Results Framework INDONESIA- National Program for Community Empowerment in Rural Areas I1 - Additional Financing The only major change in the Results Framework from the original loan is the increase of subdistricts covered under PNPM-Rural to a minimum of 4,000 subdistricts in cycle. PROJECT DEVELOPMENT OBJECTIVE Villagers in PNPM-Rural locations benefit from improved socio-economic and local governance conditions OUTCOME INDICATORS Improved HH expenditure rates and improved access to economic and social services in a minimum of 4,000 subdistricts in 2009 (impacts taken from representative sample) EIRRs >30% for major rural infrastructure types Through the MDGICommunity Conditional Cash Transfers pilot, improved health and education indicators in 130 sub districts in 5 provinces: Health: immunization coverage for month olds increases by 10% points from 38% in 2005 to 48% in 2010; Prenatal care visits increase by 10% points from 56% in 2005 to 66% in 2010; Deliveries assisted by trained professionals USE OF OUTCOME INFORMATION Determine if PNPM is having its desired effects on socioeconomicwelfare. Determine if the PNPM-Rural CCT pilot is having an impact on specific education and health conditionalities. increased primary school enrolment rates from 96.5% in 2005 to 97% in 2010; Increased junior high school enrolment rates fi-om avg. of 57% in 2006 to 72% in >SO% satisfaction levels from beneficiaries benefiting from KDP financing completed in 4,000 subdistricts by >70% of infrastructure works are evaluated as having high quality. Determine if program needs to increase its inspection and

29 Component Two: Facilitation and Training Local government councils use their improved skills to fulfill their local community development functions. Component Three: Implementation Support and Technical Assistance Consultants at the national, provincial and district levels are providing assistance to communities and local governments to implement PNPM. Project stakeholders use results of M&E activities and studies to improve project performance. O&M arrangements are in place and functioning for >70% of infrastructure works. Component Two : By 2010, >70% of local government councils are actively involved in PNPM management and oversight. Component Three: >70% of planned consultant positions are filled and consultants are trained by the time the project begins its 2009 socialization and planning cycle. >70% of study and evaluation fmdings used to improve the project. By 2009, audit sample size increases to min. of 18% of all PNPM-Rural subdistricts and audit results are made public. >70% of sampled villages receive socialization material packages for PNPM in early supervision of technical works and O&M arrangements. Component Two: Review if training and capacity building plans need adjustment and if learning interventions meet the needs of the councils to perform their duties. Component Three: Determine if technical assistance is in place Assess if fmdings from M&E and studies will allow the project to adjust and improve its operations and procedures. By announcing audits and their findings to the public, the program expects to reduce corruption. Assess whether or not the program is ready for national implementation in 2009.

30 Outcome Indicators Improved HH expenditure rates & improved access to economic and social services in a min. 4,000 subdistricts in 2009 (taken from representative sample) Through the CCT pilot, improved health and education indicators in 130 subdistricts in 5 provinces EIRRs >30% for major inkstructure types >80% satisfaction levels from beneficiaries regarding improved services Component One : Subdistrict Grants Min. 40% participation rate of women and poorest community members in Baseline Baseline & subsequent values depend upon area. Values will be taken from baseline survey in CCT baseline (using randomized approach) in Will repeat in 2008 and/or Infrastructure is not yet built under this phase so EIRRs are 0 (previous weighted avg of 53% for KDP2) Infrastructure & services not yet provided so baseline is 0 (previous satisfaction levels 80% & above for KDP2) Baseline = 0. Mtgs have not yet taken place (In YR Improved expenditure rates and access in 4,000 subdistricts in 2009 See education and health targets in Results Framework 40% Arrangements for Results Monitoring Calendar Years YR ,000 subdistricts (as part of cycle) >30% * >SO% * 40% YR Most targets will be reached by 2010, with final reporting and evaluation results in Most targets will be reached by 2010, with final reporting and evaluation results in Frequency and Reports 2007 baseline impact survey completed. Will be repeated in baseline impact survey completed by end of Will be repeated in 2008 and/or 2009 EIRRs were recently calculated in Exercise will be repeated again in 2009 Monthly field reports, surveys and field reports at end of each project cycle, biannual technical evaluations. Data Collection and Data Collection Instruments 2007 baseline surveys and 2009 impact surveys. Randomized surveys Economic analyses study in 2009 Monthly field reports form consultants, government and NGOs, field surveys, supervision mission reports, technical evaluations Monthly and Project monthly annual project reporting. MIS. cycle reporting. Reporting Responsibility for Data Collection National Coordination Team, Bappenas, and World Bank. Surveys will be commissioned to independent survey firm. National Coordination Team, Bappenas, and World Bank. Surveys will be commissioned to independent survey firm. External consultant team Consultants, Government. MoHA

31 Outcome Indicators planning and decision-making meetings Baseline 2005, 48% part. Rate) YR Calendar Years YR YR Frequency and Reports thru facilitators. Data Collection and Data Collection Instruments Reporting Responsibility for Data Collection 85% of agreed work plans completed. #/type of infrastructure works, economic, education and health subprojects/activities completed in 4,000 subdistricts In 2006, 95% completed In 2008, KDP is in 2,600 kecs. 85% 4,000 85% * Monthly and annual project cycle reporting Monthly and annual project cycle reporting Monthly and annual project cycle reporting Monthly and annual project cycle reporting MoHA MoHA >70% of infrastructure works are evaluated as high quality Component Two: Facilitation and Training By 2010, 40% of local government bodies are actively involved in PNPM-Rural management and oversight. Component Three: Implementation Support and Technical Assistance >70% of planned consultant positions are filled and trained by the time the project begins its annual socialization and planning cycle. KDP2 evaluation in 2005 showed 70% evaluated as high quality By beg. of 2009, 0 because consult contract packages need to be rebid. >70% 70% 70% * 40% >70% Technical reviews every 2 years, field reports, World Bank supervision missions NMC monthly and annual reports, PNPM Governance Study in 2008 & 2010 HR database Technical reviews every 2 years, field reports, World Bank supervision missions Field reports, PNPM Governance Study Monthly reports and HR database MoHA, World Bank MoHA MoHA >70% of study and evaluation findings used to improve the project. Currently at 70% >70% >70% Monitoring occurs continuously Evaluations and studies occur periodically Project MIS, field and supervision mission reports, audits, evaluations, commissioned studies MoHA, Bappenas, World Bank, National Coordination Team

32 Outcome Indicators By 2009, audit sample size increases to min. of 18% of all subdistricts and audit results are made public Baseline >70% of sampled villages 0 by beg. of 2009 >70% receive socialization because contracts material packages for PNPM in early Calendar Years * Data for 2009 project cycle will not be available hlly until 2010 as the project cycle usually runs 1.0 to 1.5 years. Data Collection and Reporting YR1 I YR2 I YR3 I Frequency and I Data Collection I Responsibility for Data Reports Instruments 12% in % Annual BPKP Annual BPKP audit reports and audit reports and World Bank World Bank audits audits Monthly reports, Regular budget and reporting, I procurement procurement and documents budget documents I I I I I I I Collection BPK, MoHA, World Bank

33 Annex 3: Project Costs INDONESIA: National Program for Community Empowerment in Rural Areas - Additional Financing Table 3.1: Financial Summary for Two Years ( ) Local Foreign Total Project Cost By Component andlor Activity US US US $million $million $million A. Subdistrict Grants for Investment Subdistrict grants for planning and capacity B. building Facilitation and Training C. Goods, Consultants' Services, Training and Workshops D. Monitoring, Audit, Evaluation E. Information, Education, and Communications F. Incremental Project Costs Total Baseline Cost Physical Contingencies price contingencies Total Project costs1 Interest during construction Front-end Fee Total Financing Required Table 3.2: Total Project Financing Sources fo Financing Arrangements IBRDIIDA Government Central (Loan) Central (GOI) District Beneficiaries Total Project Costs Sources Total US$ m ,224

34 Table 3.3: Disbursement Forecast for Original Loan and Additional Financing Bank FYs To date (as of Jan 2009) Total Estimated Disbursements for Original Loan Annual, (USD m) Estimated Disbursements for Proposed Addtl Financing Loan Annual, (USD m) Total Estimated Disbursements Annual (USD m)

35 Annex 4: Financial Management and Disbursement Arrangements INDONESIA: National Program for Community Empowerment in Rural Areas - Additional Financing Executive Summary 1. The project will be financed through the use of the additional financing instrument under OP The Government of Indonesia (GOI) has requested additional financing of US$300 million to further scale-up the PNPM-Rural project. The original project became effective on July 16, 2008, with the approved amount of US$231 million. The initial project was to be implemented from , with a closing date of June 30, With additional financing, project implementation will be extended to December 3 1, Unless stated differently, the Financial Management assessment dated January 22,2008 (last revision) for PNPM-RuralI'KDP will apply, including all project risk and mitigation factors. This note has taken into account current supervision findings for the ongoing project. This additional financing may stretch the capacity of the project implementation in the PMU which may create higher risks at the national level. However, the risk at the community level remains the same. Overall, the financial management risk rating for this financing is assessed as substantial before mitigation and moderate after mitigation. 3. As confirmed during supervision on the existing project, there are two major risks in the PNPMI KDP projects. The first risk is the capacity of the community group to manage the block grants, particularly with respect to how effectively community groups (UPWTPK) use and account for the funds. The second major risk is the capacity of the field consultants, who are responsible for monitoring and implementation of the subprojects, to assist the UPWTPK on financial management aspects. 4. Under the existing PNPM, there will be several mechanisms to mitigate these risks that include provision of financial management training programs to the community groups. There is provision to recruit additional FM consultants at central as well as at local levels. There will be one financial management consultant (Pendamping UPK) for each district. In addition, the project auditor has agreed and will increase the audit sample size and involve the local auditor (Bawasda) on the audit assignment. The audit will be conducted using a risk-based approach. Budgeting 5. The annual budget document (DIPA) for the ongoing PNPM-Rural project was issued on schedule in January However, the DIPAYs supporting documents (which require a decree from the working unit or Satker) were only made available in February 2008, thus the DIPA went into effect in March In addition to this delay, community socialization, planning, and budgeting activities must take place prior to actual expenditures. The actual budget realizations took place in September and October Additional delays may occur when matching funds from local governments are late. The team has not found significant differences on issuances of budgets between central and local governments. However, the central government and local governments can increase their

36 efficiency in processing budget documents. Unless the central and local governments can speed up the budget documentation process, the additional financing retains this substantial risk. FM Implementation 7. While the financial management manual has been issued for the current PNPM project, implementation of the project depends in part on the capacity of the local community and field facilitators. During project supervision for the ongoing project, there have been weaknesses with some local management of revolving funds (credit management), including the ability of facilitators to provide technical assistance to community groups. 8. The following mitigation measures have been agreed to: There will be at least one senior Financial Management Consultant (FMC) in each province's oversight consultant office. Each district will add at least one Financial Management Consultant (Pendamping UPK) for each local Financial Management Unit (UPK) who will be responsible to act as the local counterpart of the FMS and will focus on supervising fiduciary controls, book-keeping and financial accounts, and handling revolving funds. The Financial Management Consultant will work closely with the Complaints Handling Officers. At least one dedicated Complaints Handling Specialist will be placed in each province. The FMC and Complaints Handling Specialist will follow up on local audit findings, report on actions taken, and results achieved. Starting in 2009, revolving funds will be handled separately from investment funds (books, reports, etc.) Preparation of standard formats for the books and the reports for revolving funds and investment funds is complete. Socialization, training, and the application of accounting segregation for revolving funds and investment funds will take place early in FMC and Pendarnping UPK will reach an agreement on increased minimal levels of field supervision. FMC and Pendamping UPK will receive specialized training in financial management and meet regularly with colleagues to share experiences and best practices. The Project will improve how UPKs are mapped and categorized. The Project will include supervision of financial books in the revised consultant TORS and formal criteria for consultant performance evaluations. (The "accountability matrix" used in PNPM Urban will be studied and adapted for PNPM Rural.) An internal study on the effectiveness of the UPK Supervisory Board - Badan Pengawas UPK (BPUPK) will be carried out in 2009 and the BPUPKs will be strengthened. The project will provide more training to these local bodies, as well as facilitators and the UPKs themselves. Village information boards will be improved to ensure that essential information is posted and updated routinely. A sanction regime for non-compliance will be developed that requires information boards be updated prior to sign-offs for withdrawal of funds from local collective accounts or disbursement from UPKs to TPKs. Facilitators will face serious code of ethics sanctions if they sign for a

37 withdrawal of funds without ensuring information on village boards is updated. Audit Arrangements 9. The PNPM-Rural Project became effective in July 2008, and had actual block grant expenditures in SeptemberIOctober Thus there is no audit report for the PNPM project yet. The latest audit report is for the on-going KDP. The first audit report for PNPM will be due June 30, The existing PMU is responsible for preparing the project financial statements, including financial resources from additional financing. The audit of these statements will be carried out by Government auditors acceptable to the Bank. 10. The audit assignment will be in accordance with the agreed Terms of Reference (TOR) for PNPM-Rural Area. The auditor will work together with local auditors (Bawasda) as far as possible to increase coverage areas. Bawasda will follow the same audit TOR and submit the report to BPKP for consolidation. The Government is planning to almost double the sample size from 12 percent of subdistricts covered now, to 20 percent. 11. Given the large sample size, villagers will be informed about the possibility of an audit, and be told that the auditors will report key findings directly to village assemblies. When and how the reports take place will vary by location. If cost considerations are a major factor then reports will be presented at the time of the audit rather than after the reports are finalized. Local facilitators TOR will be changed to include the responsibility to give information to villagers about audits and reporting of audit results at the village level. 12. Formal audits and supervision, especially by the FMS, has demonstrated that more attention should be given to strengthening the Complaints Handling System (see above). The system has been operating since the start of KDP in 1998 but reporting accurately, data handling, and proper follow-up could be improved and made more efficient. Instant phone messaging (SMS) is the predominant medium for reporting complaints, but development and maintenance of a web-based complaints information system is a necessity. The CCT pilot is testing the SMS complaints handling system in 2008, and, if effective, this system will be integrated into the main PNPM-Rural operations in Disbursement Arrangements 13. As of December 31, 2008 total disbursement for PNPM-Rural amounted to US$150 million or 65 percent of the original loan. Actual expenditures to kecamatan accounts amount to US$109 million. This amount is expected to rise quickly as community block grants are released over the next two months. 14. Unless there is a change in disbursement arrangements, the project will follow an "Advance" disbursement method and use an existing Designated Account (DA) for PNPM- Rural. Applications for advance payment to the DA will be submitted together with the reports on the use of DA funds, consisting of: (i) list payments for contracts under the Bank's priorreview and records evidencing, such expenditures; or (ii) statement of expenditures (SOEs) for all other expenses, and (iii) the DA reconciliation statement.

38 15. The existing PMU at PMD, MOHA will be responsible for reconciling the DA and preparing separate applications for the withdrawal of advances and reports on DA transactions. Copies of DA bank statements will be provided to the PMU by DG Treasury, MOF. Loan Allocation Disbursement Category 1. Subdistrict (Kecamatan) Grants 2. Facilitation and Training - subdistrict level 3. Goods, Consultants' Services, Training and Workshops (Implementation Support) 4. Incremental Operating Costs Total Amount (in Million USD) , Disbursement Percentage

39 Annex 5: Procurement Arrangements INDONESIA- National Program for Community Empowerment in Rural Areas - Additional Financing Because the proposed additional financing is a scale-up of the ongoing PNPM, this section is an amendment to the annex of PAD for PNPM-Rural. Except as stated below, all the descriptions in the PAD for PNPM-Rural will apply to the proposed Additional Financing. A. General 1. Procurement for this Project will be carried out in accordance with the World Bank's Guidelines: Procurement under IBRD and IDA Credits, May 2004, as revised October 2006 (the Procurement Guidelines) and Guidelines: the Selection and Employment of Consultants by the World Bank Borrowers, May 2004 as revised October 2006 (the Consultant Guidelines) and the provisions stipulated in the Legal Agreement. The various items under different expenditure categories are described in general below. For each contract to be financed by the Loadcredit, the different procurement methods or consultant selection methods, the need for prequalification, estimated costs, prior review requirements, and timeframe are agreed between the Borrower and the Bank in the Procurement Plan. The Procurement Plan will be updated at least annually or as required to reflect the actual project implementation needs and improvements in institutional capacity. 2. Procurement will follow the ongoing PNPM-Rural arrangements which mainly consist of amendment of contracts for National Management Consultant (NMC), six Regional Management Consultant firms, and a number of individual consultants (including facilitators at district and sub- district levels). The hiring of all facilitators, and their respective contract administration, will be done by the Provincial Satkers, while procurement under community grants will be carried out by communities following the procedures as described in the Project Technical Operations Manual (PTOM). Any other procurement will be done by the Project Management Unit (PMU) at the central level. 3. Sub-district (Kecamatan) Grants: The additional financing will increase the Kecamatan Grants from the original amount of US$490 million equivalent for to US$982 million to expand coverage for an additional 1,541 rural sub districts. The Grants will be mostly for infrastructure works, and will be disbursed in various villages scattered in all provinces. The procurement under community grants will follow the principle of community participation, using the forms and simplified procedures as defined in the existing Project Operations Manual of PNPM-Rural Additional Financing after incorporating the lessons learned from the existing project. 4. Selection of Consultants: Under the ongoing PNPM-Rural, the PMU will hire a National Management Consultant (NMC) for an estimated contract amount of US$3.9 million equivalent to assist in the overall management of the project as well as to deliver training of trainers. The PMU is currently completing the selection process of the NMC following QCBS

40 procedures. The PMU will use the additional financing to amend the contract for NMC to up to US$5.2 million equivalent for an expanded coverage which includes pilot program in health and education at the early stage of its implementation, in April There will be six Regional Management Consultant (RMC) firms (including one for Papua and West Papua Province) to monitor, provide support and quality assurance to the implementation of community grants, payroll administration service, including delivering training to facilitators for an aggregate amount of US$14 million. The PMU expects to award contracts for the RMCs (the selection process for these contracts is ongoing using LCS method) early in Additional financing will be used to amend the scope of the RMCs to cover activities in additional sub-districts and to increase the current cost estimate to US$22.3 million in aggregate. 6. Under the ongoing PNPM-Rural, the PMU will contract consulting firms for developing the training modules (US$ 1.26 million equivalent), development of MIS and website (US$ 269,000 equivalent), and an NGO for independent monitoring (US$ 0.84 million equivalent) following QCBS procedures. These contracts have not been awarded and will now be financed from proceeds of the additional financing. 7. Additional district and sub-district facilitators, out of the current estimate of the $95 million allocated budget, will be hired and individually contracted directly by the Provincial Satker to cover the additional sub-districts. The individual contracts will be less than US$ 20,000 equivalent. Following the ongoing arrangement, all positions will be advertised, clearly spelling out the minimum qualifications requirements. Then through a proper selection mechanism, the most qualified among those who apply should be selected as Facilitators, provided they all meet the minimum qualification requirements. Details of the procedure are provided in the Operations Manual. 8. Procurement of Goods and Non Consulting Services: There will be selection of Event Organizer firms (US$l million equivalent in aggregate) that will organize events for PNPM training and workshops, and printing services (US$1.2 million equivalent in aggregate). Due to the nature of the services and the requirement of local knowledge and logistics, these contracts will likely attract only local companies. Hence procurement of these contracts may follow NCB procedures for non-consulting services using bidding documents that are acceptable to the Bank. Additionally, if for any reason any of the ongoing selection process for the RMCYs fail or a need will arise to launch a new selection process, the scope of work will be modified in order to launch a new selection process under non-consulting services instead of consulting services. The reason is that the majority of the scope of works for RMC can be fitted under this type of services and use of this method would expedite and facilitate any new procurement process. 9. Other methods of procurement: To provide more flexibility in the procurement management of this project, additional procurement methods that were not reflected in the current PNPM legal agreement will be added. For goods, works and services these will be handled through National Competitive Bidding and Direct Contracting. While for procurement of consultants these will be Selection Based on Consultants Qualifications and Single Source Selection.

41 Prior Review 10. The thresholds for prior review as well as revised procurement method will be determined in the procurement plan which will be updated on a yearly basis, taking into account inputs from the Bank's supervision missions. B. Assessment of the agency's capacity to implement procurement 1 1. Procurement activities for PNPM-Rural will be carried out by the PMU at the Ministry of Home Affairs through the Directorate General of Village Community Development (DG PMD). The PMU lacks procurement staff with sufficient knowledge in the World Bank's procurement and will be receiving support from a Procurement Advisor to be contracted by AusAID by early The lack of capacity has caused delays in completing critical consultant packages (NMC and six RMCs) and may create potential problems during contract amendments of these packages as well as execution of other contracts under PNPM-Rural. 12. Based upon the above assessment, the overall project risk for procurement continues to be "Substantial". Subject to placement of a Procurement Advisor at the PMU, the risk rating can be lowered to "Moderate". C. Procurement Plan 13. The Borrower has developed a Procurement Plan for project implementation which provides the basis for the procurement methods. This plan will be available at Ministry of Finance c/o Directorate General of Debt Management, Jalan Lapangan Banteng Timur 2-4, Jakarta 10710, Indonesia. It will also be available in the Project's database and in the Bank's external website. The Procurement Plan will be updated in agreement with the Project Team annually or as required to reflect the actual project implementation needs and improvements in institutional capacity. D. Frequency of Procurement Supervision 14. The project under the Additional Financing will follow the recommendations for PNPM-Rural, i.e. that BPKP will carry out ex-post procurement review for the community grants contracts and individual facilitator's contracts.

42 Procurement requiring international competition A. Selection of Consultants: Ref. No. 1 1 Description of Assignment 2 National Management Estimated Cost under PNPM (US$ million) Estimated Extension Amount (Us$ million) 1.3 Date of Extension 7 April Regional Management Consultants (6) Training Development Consultant Development of MIS and Website NGO Independent Monitoring Evaluation Studies 14.8 (aggregate) (aggregate) April 09 B. Procurement of Goods and Non Consulting Services NIA

43 Annex 6: Safeguard Policy Issues INDONESIA: National Program for Community Empowerment in Rural Areas - Additional Financing 1. Environmental Screening A. Review of Experience to Date and Proposals for PNPM-Rural 1. PNPM-Rural is concerned about preserving the environment, ensuring that any negative effects from PNPM-Rural activities can be avoided or at least mitigated. Though any construction activity will have some impact on the environment, and the significance is largely proportional to the scale of construction. Nevertheless, as part of preparation, a review of environmental management experience has been carried out and the results have been incorporated into the design of the proposed PNPM-Rural program. This Annex: Describes procedures for environmental impact analysis in Indonesia; Summarizes the general approach to environmental management that was taken on the KDP projects; Summarizes the results of a review of investments and impacts implemented during KDP2; and, Describes the proposals for incorporating the results of the review into the design of PNPM..B. Environmental Impact Analysis in Indonesia 2. PNPM-Rural follows official Indonesian government policy regarding environmental impact. Government Regulation 29 of 1986 established the required methodologies for environmental impact analyses. This regulation was superseded by Government Regulation 51 of 1993, which was intended to clarify and simplify regulations. This regulation also contributes to an improved level of project planning. Planned development activities were divided into two classes: 1) activities with large potential impact that require a formal impact analysis; 2) activities with relatively minor potential impacts, for these an explicit impact analysis is not required. According to the later Decree of the Minister for the Environment No. 11 of 1994 for Activities Obligated to be Supported by Impact Analysis, the types and sizes of activities undertaken by PNPM-Rural are exempted from formal impact analyses due to the very small scale of the investments and construction activities supported. 3. Though exempt from formal studies, planners of PNPM-Rural infrastructure projects are required to consider environmental impacts. The planner is a graduate in civil engineering who works with the local communities and is assisted by a village technical facilitator. In analyzing environmental effects, the planner must be able to identify a range of impacts that might arise from the proposed activity. Environmental effects are defined as those changes, both positive and negative, that arise directly as a result of the development activities. The types of problems likely to be encountered are determined based on the expert experience, the planner's field

44 experience, interviews, literature, simulations and the like. Analyses of potential impacts during PNPM-Rural projects examine effects during construction and operations. 4. An example of environmental effects for a rural road can be seen in the table below: Table 1: PNPM-Rural and Environmental Impacts Category I: Serious localizedproblems Water flow concentration Landslides Loss of productive land due to landslides Category 3: Negative effects of slight probability or less important impact Category 2: Serious negative impact on environment Sale of land to outsiders Deforestation Increased sediment load due to road erosion Category 4: Unclear effects, positive or negative Air pollution from vehicles Flooding due to improper locating of bridge Increase in airborne dust Increase in criminal activity in the village Noise pollution Category 5: Clearly positive impact Reduction in erosion from agricultural land due to application of improved technologies Availability of construction materials in village Increase in communication, including access to health and education facilities Increase in use of chemical fertilizers and pesticides Establishment of small industries that pollute Increased intensity in farming or livestock Residents seek employment outside the village Moving houses to roadside Outsiders move into the village Category 6: Negative impact, but clearly acceptable to the local community Traffic accidents Loss of land required for road widening 5. Categories 1,2, and 4 require significant consideration from project planners. To address these potential issues, standardized design, and operational procedures are applied during implementation across the project. Standard design and operational procedures are also in place to address deforestation and increased sediment in Category 2. C. Approach to Controlling Environmental Impacts in PNPM-Rural 6. The principle behind controlling environmental impacts in PNPM-Rural is to limit possible negative effects and to develop the positive effects of any infrastructure construction activity. A form indicating potential environmental problems is completed as part of the planning process. Potential problems are then monitored during and after implementation by the village and technical facilitator. The assessment is quite complete; it includes serious problems (however unlikely they are to occur) as well as relatively minor problems that are highly likely to occur. 7. The determination of negative effects requires facilitator experience coupled with the use of input from existing PNPM-Rural manuals. Negative environmental effects for roads and

45 bridges, for example, arise especially from the disturbances of unstable soils that are sensitive to landslides or from changes in the flow of water. Excavation and embankment construction frequently result in landslides or erosion. Landslides bring with them four kinds of negative impacts: Disturbing traffic (not an environmental problem, per se) Endangering agricultural land or housing Increasing erosion because the soils are not compact Diverting the flow of rain water 8. Erosion of road shoulders can have large negative impact if the soil is transported to productive land or if the soil is carried in suspension to a reservoir, as this will reduce its storage capacity. At the same time, both landslides and serious erosion will result in unsightly scars near the road. Changes to water flow can destroy productive lands or irrigation canals, as well as disturb the road itself. 9. There are four steps in the process of reducing environmental damage: Identifying potential dangers; Selecting an alignment that reduces environmental disturbances; Utilizing civil works and vegetative treatments to limit negative impacts; and Undertaking maintenance and repairs in a timely fashion. 10. The first two are the most efficient, and they are the responsibility of the surveyor and designer. A good survey can truly reduce or eliminate many environmental problems. This is emphasized in pre-service training. 11. Roads are often located in critical lands that are sensitive to erosion and landslides, where soil types and climate combine to multiply risks. The designer must consider a variety of treatments to build infrastructure that will not harm the environment while still bringing sustainable benefits. To analyze the environmental effects one needs to record information about three things stated below. (a) Treatments necessary to overcome environmental problems include: Changing the alignment to reduce steep grades Moving houses Building civil works to stabilize side slopes Using vegetative treatments to stabilize side slopes or prevent erosion Using special treatments to reduce problems with standing water, such as drains (6) Negative environmental impacts that might still exist after construction: Side slopes that are unstable and endanger housing or agricultural land Excavation that results in the stockpiling of unstable soil Sideslopes that are left bare, without any vegetative cover The muddying of rivers as a result of construction

46 Changes in the course of a stream, which could cause flooding, erosion, or sedimentation Changes in water flow that damage productive land An increase in erosion and sediment as the result of uncontrolled discharge from ditches or culverts The cutting down of the forest Socioeconomic problems that arise as the result of constructing a bridge or road. 12. These problems include the sacrifice of productive lands or other land holdings. If other problems arise, it is necessary to record all relevant information about the type and extent of the problem. 13. For water supply projects or sanitation projects, there is always the possibility of increasing contamination, for example, a water source contaminated by surface water, or ground water contaminated by a poorly designed or constructed waste control system. In addition, communities must form an operations and maintenance committee for water or sanitation projects. D. Environment Impact Control Strategy 14. The method used to ensure that proper attention is paid to environmental problems is a combination of standard checklists and a special environmental checklist. 15. For each subproject type, a technical standard is included in project manuals, and these include considerations of environmental effects. For example, the magnitude of the grade of a road and the steepness of the cross-slope perpendicular to the road are limited. Drainage for the road must be installed, together with culverts to discharge water safely. Leeching fields from latrines have to be located at least ten meters from any water supply, and located downstream as groundwater flows. Water supplies cannot be located near any potential source of contamination. 16. The completion of the environmental impact form is an obligatory part of the planning process. Each type of project is checked for the various treatments that must be performed on it to avoid or repair environmental problems. At any point during construction, the same form is brought out to the field and reviewed, at a time when it is still feasible to easily repair deficiencies. At the end of construction, the form is reviewed again. The district engineering consultant is responsible for reviewing all infrastructure designs on PNPM-Rural projects in the district. He or she will reject any design not accompanied by a completed environmental impact form and may also request clarification for any feature where a problem is anticipated. One other element of handling environmental problems is the use of technical inspection forms, which exist for many types of subprojects. Among the items inspected are those dealing with aspects of environmental impact, such as for roads where the forms include slope protection, drainage ditches, and shoulders. These forms are filled out incidentally by anyone who inspects the infrastructure.

47 E. Review of Experience in the Kecamatan Development Projects 17. of the years, A total of 14,175 small-scale infrastructure projects were financed during the third year first KDP project. (Since there were no technical changes to the design manuals in later these were considered to be representative of investments in all years) The infrastructure investments have been classified into one of ten infrastructure development types and the investment costs tabulated. The summary data is shown in the table below. Summary points from this table include: Of the ten categories of development, only five are of a type which would raise any potential concern from an environmental point of view, namely; roads, irrigation, bridges, water supply and wharves; and The average scale of construction was extremely small. For example, the average road investment financed development of only 1.2 kilometers of new road at a cost of about 36.6 million Rupiah (US$ 4,100) per kilometer. Most of the irrigation development involved rehabilitation of small schemes, although some new construction did occur. To provide some perspective, for new construction, the average investment of around 25.3 million Rupiah (US$2,850) finances five or six hectares of new, low-technology irrigation command. The other forms of development were similar: bridges include small scale steel girder bridges with wooden decks, concrete bridges, wooden bridges, and suspension bridges; water supplies come from a variety of sources, but mostly come from springs and dug wells. Most distribution systems are gravity fed, although some utilize electrical or diesel PUPS. Table 2: Infrastructure in KDP 18. Field oversight reviews have not identified significant or recurrent environmental impacts. Site visits by oversight engineers and the national project management database record environmental concerns, and these were reviewed during the appraisal of KDP2 and KDP3a and 3b. Bank supervision missions also include environmental impact specialists as well as engineers with environmental training.

48 19. Nevertheless, some environmental issues were reported to the KDP complaints unit. Typical examples are set out in the following table along with comments, where appropriate, on possible control strategies that could be used to avoid similar problems in the future. Location Subdistrict Sosopan, South Tapanuli, North Sumatra Lancap Jae, Subdistrict Arse Riau province South Central Java Table 3: Sample Cases of Environmental Impact in KDP Activity Irrigation project Aek Bustak Use of heavy equipment in constructing a new road Construction of a road leading to protected forests Culverts in general built without protective structures including wing walls, drop structures, and lined discharge channels. Construction of a bridge with a reduction in the wetted perimeter of the channel I Environmental Impact 1 Comment Caused downstream areas to suffer drought from lack of flow Disturbed wildlife in the surrounding forest Became a link in the transportation of illegal logging In relatively flat areas the uncontrolled discharge damaged field or orchards. In mountainous areas led to landslides on the side slopes of the road. Reduction in flow area caused the stream to overflow, causing damage to productive rice fields. Incorporate standard guideline requiring design engineer to check effects of incremental water demand on downstream users. Largely unavoidable and only of short term effect. No special safeguards recommended Potentially significant but difficult problem to deal with. One option might be to include a prohibition of such investments in the negative list. Failure to follow good design principles. Need to find out why communities or their engineering advisers were not applying standard design safeguards. Failure to follow good design principles. Need to find out why communities or their engineering advisers were not applying standard design safeguards. 20. In general, the number of complaints formally recorded in the system was quite small. This may be due to one or a combination of three reasons: A lack of importance associated with environmental problems. An inability to identify environmental problems. A reluctance to report problems upwards F. Proposed Responses for PNPM-Rural 21. The review illustrated several key facts: The basic environmental impact potential of investments supported through the

49 project is low, so the general strategy followed under KDP remains relevant; Desk and field reviews suggest that a small number of environmental issues were encountered. With block grants doubling in size there is some potential for increased impacts should more villages cooperate on large investments (even though subproject maximum sizes will remain unchanged from KDP). Most of the issues had their origin in apparent failures to follow best civil engineering practice and it is likely that these can be addressed through continued training and supervision of engineering staff providing technical advice to participating districts; and The small number of environmental complaints made to the KDP complaints unit may be a reflection of the very low adverse impact potentials of investments supported under the project, but may also reflect of lack of interest in environmental issues on the part of beneficiaries or a reluctance to report problems upwards. 22. These four items have been addressed in the design of PNPM-Rural. It has been made clear that the national government, the donors, and the national consultants place high importance on attention to the environment. It is the responsibility of the subdistrict facilitators to explain the basis for this to the villages and to monitor implementation. Causing environmental damage is enough to cancel an activity. Facilitators that are insufficiently engaged with project environmental impacts will be replaced. Attention to the environment is equally important at the district level, where the district consultants and especially the district engineering consultant enforce environmental standards. In addition, the following items have been added to the project's negative list (reflected in the project's legal documents): Procurement of any products containing asbestos; Procurement of pesticides or herbicides; Production, processing, handling, storage or sale of tobacco or products containing tobacco; Any activities within a nature reserve or any other area designated by the Government of Indonesia for the management andlor protection of biodiversity except with the prior explicit and written approval of the government agency responsible for the management andlor protection of that area; Mining or excavation of live coral; Water resources developments on rivers which flow into or out of other countries; Alterations to river courses; Land reclamation larger than 50 ha; New irrigation larger than 50 ha.; and Construction of water retaining or storage structures of capacity greater than 10,000 cubic meters. 23. Reluctance to report problems is widespread in most projects. Problems will be reported faithfully only if several conditions are met: There are no negative effects from reporting problems There are positive results from reporting problems, i.e. help is given There are negative effects from not reporting problems

50 24. The design of PNPM-Rural attempts to address all three of these conditions. Reporting of problems is a major point in the performance evaluation system. Problems that are reported are discussed and handled at monthly meetings, and doing this is a major point in the performance evaluation of district consultants. The first item is connected with the attitude of senior consultants, government officials, and donor representatives when confronted with reported problems. They should perceive these reports as evidence that the system is working and as opportunities to improve performance in the field. 25. Success in the field depends upon the discipline of project actors meeting these three conditions, which is a task for senior management. A review of the effectiveness of these measures will be included in the first-year evaluation and measures for correction will be agreed with the Bank prior to the approval of the second year program. 26. Supported by nearly $30 million in grants from Denmark and Canada, PNPM-Rural will also be piloting new approaches for community based environment work in the fragile upland areas of Sumatra and Sulawesi. These Green programs cover watershed management, renewable resource energy, and environmental education. Detailed design documents are in the project files. They include the direct involvement of experienced green NGOs in promoting environmental awareness and community based resource management. A core Bank environment specialist provides oversight and support to these programs). Guidelines for Resettlement, Land and Asset Acquisition 27. During the construction of village infrastructure resettlement, land andfor asset acquisition may occur to allow the most effective, efficient, and beneficial use of resources. For example, existing village paths are often upgraded to become all-weather roads with slightly wider running surfaces, plus shoulders and drainage ditches. The so-called right-of-way therefore needs to be increased one or two meters, and this can only happen if the land bordering the road is acquired. Similarly, it is not always possible or desirable to locate water supplies, latrines, bridges, markets, or jetties on communally held land. 28. PNPM-Rural has a simple policy framework and set of operational procedures to guide cases of land acquisition in village subprojects. The objective of these guidelines is to ensure that no family affected by land acquisition experiences a material reduction in their income, living standards, or livelihoods. Implementation of these guidelines is built into the project oversight and facilitator terms of reference, and the project provides both internal and independent monitoring of their implementation. Minimizing acquisition 29. PNPM-Rural follows the same acquisition procedures as the Kecamatan Development Project. Policy guidelines and procedures meet the standards of World Bank policies on resettlement. PNPM-Rural's guidelines and reporting formats are incorporated into the project operating manual and are tracked through the MIS. The overarching objective of PNPM-Rural's guidelines is to ensure that the acquisition of lands is minimized and does not result in persons losing their home or suffering any decline in income, livelihood, or living standards as a result of the project. All proposals must be reviewed and their location, alignment, or specifications

51 changed as necessary. Proposals to widen road right-of-ways must also be reviewed carefully. 30. As it will not be possible in many cases to eliminate the need for acquisition, the guidelines allow for acquiring assets through the following two methods: 3 1. Voluntary Donations. In accordance with local custom, community members have the right to donate their land or other assets or to move their homes temporarily or permanently without seeking or being given compensation; 32. Donations with compensation. Persons who donate their land or other assets have the right to seek and receive compensation. 33. Voluntary contribution of land and other assets is quite common in Indonesian villages, assuming that no individual loses a significant portion of their land. Losing a meter or two of land on the side of the road is quite attractive to farmers, who will then have an all-weather road directly abutting their fields. Voluntary contribution for other purposes besides PNPM-Rural is not unusual. Paying compensation for land is also often beyond the financial capacity of the village. Providing appropriate compensation 34. Guidelines have been established to manage compensation for persons in the second category so that all these persons improve or hold the same quality of life, income, and production capacity compared to pre-project conditions. 35. Principle of Compensation. The village must guarantee that one of the following methods was used in timely fashion to compensate the persons who were affected by the project (but project funds absolutely cannot be used for compensation): 36. Land was replaced with other land of equal productivity, or with other productive assets of equal value; 37. Materials and labor were given to replace permanent structures that were removed; 38. Plants destroyed or missing or damaged were compensated in accordance with their value; 39. Other acceptable compensation was given. 40. Principle of Consultation. The village must ensure that all the people affected by the project are consulted at a public meeting in the village. During this meeting, their right to compensation must be explained, as well as such alternatives as found in the guidelines. Formal minutes of the meeting are made and must include the main points of discussion as well as any decisions reached, including: 4 1. Voluntary contributions, the name of the donor and details of the donation;

52 42. Compensated assets, the names of the persons receiving compensation, and details of the type and amount of compensation, such as seen in the table below: 1. Agricultural land (mz) 2. Other lands Area affected (m2) Houses or buildings (units/mz) 3. Plants affected by the project Table 4: Summary of Compensation Affected Assets Compensation Promised Additional Agreements c. In addition, the minutes will contain the signatures of the affected persons and the village chief. There will be notes about complaints made by the affected persons. And there will be a map showing the location of the affected assets. 43. The subdistrict facilitator will deliver a copy of the above notes to all those people who are affected by the project, to determine directly their wishes in regards to compensation, their perception of whatever agreements had been reached, and their complaints (if any). Project approval 44. As the process of determining compensation is the responsibility of the village, and the facilitator has no decision-making power, the subdistrict facilitator is nevertheless bound to do the following: He or she must delay final approval until all persons affected by the project are satisfied with the compensation they are to receive, even if this causes a stalemate, the changing of design, and interminable negotiations. Outsiders must not intervene to impose a solution. He or she must delay implementation until compensation is realized. Whenever a project has reached the implementation stage, the senior consultants, government officials, and donor should assume that compensation has been successfully delivered. 45. In principle, if more than 200 persons are affected and require compensation, a compensation plan must be produced and then agreed to by the Secretariat of the National Coordination Team prior to project approval. In the six years of the Village Infrastructure Project (VIP) and eight years of KDP, this has never occurred. Right to voice complaints and take legal action 46. All complaints should be handled and solved at the village level. If the problem cannot be solved in the village, complaints and legal action against these guidelines, the implementation of agreements found in the minutes, or other grievances can be filed by the person affected or his or her representative to the subdistrict. If still not resolved, the complaint can be further submitted for a decision by the Bupati. Complaints also can be sent to the Complaints Handling

53 Unit of PNPM-Rural at the regional or national level, where they will be analyzed and an investigation organized. Verification 47. At any time, all records regarding compensation, including minutes of the meeting and proof of receiving compensation must be available for inspection by the subdistrict facilitator, district management consultants, auditors, and persons assigned to monitor aspects of the project by the project Secretariat or National Management Consultants. The Village Minutes and evidence of compensation having been made shall be provided to the subdistrict empowerment facilitator assisting the village, to supervising engineers, auditors and socio-economic monitors when they undertake reviews under the project. KDP experience 48. Aside from the national oversight team and the implementation consultants, KDP is monitored extensively by more than 30 independent NGOs and the media. TOR for the NGOs specify that problems associated with land acquisition should be checked on site and any problem reported. NGO and media reporting is not censored or confined to government transmission routes, so this form of monitoring provides a useful check on safeguard performance independent of the project implementation structure. There have not been any reports of involuntary displacement, and only a very small number of cases of land compensation disputes have been reported by either group of monitors. 49. Supervision by the World Bank has also never found any case of families being involuntarily displaced by either VIP or KDP, but, as noted above, there are cases both of facilitators not following the rules and also cases of the rules being followed but families nevertheless dissatisfied with their outcome. However, Bank missions have never found cases of people visibly losing significant productive resources or experiencing drops in income, livelihood, or living standards because of a KDP project. In general, the Bank's field reviews suggest that lack of government involvement in KDP, whether by national or local agencies, seems to limit land acquisition to a bare minimum, and where it does happen, direct negotiations by villagers with the community councils produce outcomes that meet the Bank's policy objectives of safeguarding against adverse impacts. Conclusion 50. While no process of land acquisition will ever be fully free of problems, PNPM-Rural's small size and the need for a local-level consensus does appear to provide an effective control system that minimize the scope and impact of land acquisition. PNPM-Rural will continue to monitor impacts closely. Indigenous Peoples and Special Program for Papua and Nias 51. Overview. Indonesian communities covered by the World Bank's policy on indigenous

54 people can generally be classified as falling in to one of three categories. First, there are small pockets of highly isolated, vulnerable groups, such as the Mentawai or other small island populations. Such groups can easily be adversely affected by development projects because of unfamiliarity with modern market mechanisms, cultural and administrative prejudices against them, or inability to retain control over productive and natural resources. 52. A second category refers to the much larger ethnic populations that meet most of the World Bank's typological requirements (own language, sense of identity, traditional attachments) but exhibit varying degrees of vulnerability. Populations such as the tribal groups termed Dayak of Kalimantan or the tribal groups of East Nusa Tenggara fit here. 53. The third group refers to heterogeneous communities, where a segment of the population is culturally or economically marginalized. Several of the fishing populations of the eastern islands, for example, have unique identities and also occupy subordinate positions within local social structures. 54. Review of Experience. As a project that holds grassroots participation and flexible project designs determined through local planning as a core value, KDP did not anticipate any significant adverse impacts on indigenous or culturally distinct populations and none have been found during project supervision. Test cases specifically supervised for this purpose have included the Baduy, on Java, who as a rule reject outside development projects, and indigenous communities on the island of Nias, near West Sumatra. In both cases KDP practice proved highly adaptive. In Baduy, the project did not enter until it was approached by traditional leaders and the terms of encounter negotiated and recorded by both sides. In Nias, KDP initially experienced several implementation problems because of its isolation and the deeply hierarchical village structures, but again no adverse impacts could be identified. Ongoing post-tsunami reconstruction is closely supervised by the Bank through the closely linked KRRP (KDP Recovery and Rehabilitation Project) funded by the MDTF for Aceh and Nias and, again, no adverse impacts have been identified on any of the indigenous communities. General supervision in the eastern islands also failed to turn up any systemic adverse impacts on ethnic minorities. Specific measures in the project design that appear to promote culturally appropriate activities include the villager's own election of their representatives to the project, use of sub-village planning units, and flexibility in facilitator's operational funds that allows them to support traditional rituals. 55. The project design itself has also proven to be somewhat more flexible than anticipated when it first started. Thus, in provinces such as Aceh or West Sumatra, where kin-based descent units also carry out important administrative functions, the project produced special guidelines that used these traditional units rather than the standard subdistrict.and village structures. (Both provinces benefited in this respect from the 2004 decentralization laws). Needless to say, in parallel with the increased use of culturally apposite forms of social organization has come an entirely new generation of problems associated with the people excluded by traditional social structures, such as, for example, women, immigrants or low status groups. These problems do not have easy solutions. For the moment the primary means for addressing them is through better facilitation, with some trials (i.e. in Aceh) to work with traditional leaders on making their

55 group's workings more inclusive. Special Program for Papua. 56. KDP has been active in Papua since its inception. As in other areas, the program in Papua has the goal of empowering villagers to undertake their own development through a process of village and subdistrict-wide meetings with the facilitation of consultants. Villages have undertaken the construction of infrastructure as well as group economic activities. Local governments have been eager to expand KDP activities, funding more subdistricts with districtlevel funds than any other province. 57. As noted previously, to ensure a longer-term flow of benefits to rural communities even after PNPM finishes, PNPM-Rural in Papua also includes a large training program for promising graduates from the indigenous communities, who will be trained for six months in civil engineering before joining PNPM. Eight full-time coaches have already been assigned to Papua to provide the engineering students with operational oversight and practical supervision. A second program developed in partnership with the British Council that provides for extended training in social facilitation for Papuan facilitators, The first 50 facilitators have graduated from the program.

56 Annex 7: Better Governance Action Plan INDONESIA: National Program for Community Empowerment in Rural Areas - Additional Financing 1. All anti-corruption measures mentioned in the original loan document apply to this Additional Financing program. With the scale-up of activities to every village in the country, good governance measures are particularly important and the PNPM-Rural Better Governance Action Plan builds upon field experiences over the past ten years of KDPPNPM implementation. In preparing the Additional Financing, the Government's Poverty Coordination Team and WB Task Team have been mindful of the need to ensure that proper fiduciary management and bottom-up accountability mechanisms are in place. 2. For the 2009 geographical scale-up supported through this Additional Financing, several measures for strengthening internal and external controls will be established: A web-based MIS system pilot was launched in December This system will be augmented in 2009 following the field test piloting. The MIS also includes an instant text messaging (SMS) component to report complaints and grievances directly into a database. PNPM has been using SMS grievance handling in the past but due to high volume, this function needs to be computerized for ease of reporting and follow-up. Review of complaints handling system. This review began in September 2008 and several areas of improvement were identified. While response times for complaints remain on the whole very efficient and the system is operating, the speedy resolution of complaints and accurate reporting of cases require more attention by MoHA and the national consultants. Strengthening MoHA management. As the PP mentions, MoHA will strengthen its project management Unit and Satker management. Enhancing and strengthening procurement capacity at MoHA. An AusAid funded and contracted procurement advisor will be placed with MoHA to assist with procurements. Also, as occurred in 2008, additional training will be provided to MoHA and its evaluation committees. Increased audit capacity. The audit sample for 2009 will increase to 20 percent of all kecarnatan from the current 12 percent level in Also, the WB plans to strengthen the Bawasda training, compliance mechanisms and quality controls. Strengthening World Bank supervision. In 2008, the WB already increased its field supervisions and placed consultants in four provincial offices to assist with monitoring PNPM systems. This regular supervision and monitoring will continue in Civil Society Oversight. In 2008, PNPM-Rural encouraged community-based groups to monitor activities. Last year, two attempts were made to strengthen the NGO monitoring wing of PNPM-Rural by bringing in an apex organization which would provide more regular trainings, mentoring, and quality oversight to provincial NGOs. The apex organization arrangement did not materialize, thus in 2009, there will be another attempt at contracting a firm. Increase transparency of information. Funds are budgeted in 2009 for a broader