ASIAN DEVELOPMENT BANK

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1 ASIAN DEVELOPMENT BANK TAR: INO TECHNICAL ASSISTANCE (Financed by the Japan Special Fund) TO THE REPUBLIC OF INDONESIA FOR PREPARING THE INTERISLAND TRANSPORT PROJECT December 2002

2 CURRENCY EQUIVALENTS (as of 1 December 2002) Currency Unit rupiah (Rp) Rp1.00 = $ $1.00 = Rp8,978 ABBREVIATIONS ADB Asian Development Bank AP Angkasa Pura (Airport Corporation) ASDP Angkutan Sungai Danau Penyeberangan (River, Lake, and Ferry Transport Corporation) BAPPENAS Badan Perencanaan Pembangunan Nasional (National Development Planning Agency) BIMP-EAGA Brunei Indonesia Malaysia Philippines-East ASEAN Growth Area CSP country strategy and program DGAC Directorate General of Air Communications DGLC Directorate General of Land Communications DGSC Directorate General of Sea Communications EIA environmental impact assessment IA implementing agency IEE initial environmental examination IPC Indonesia Port Corporation ISA initial social assessment JBIC Japan Bank for International Cooperation JICA Japan International Cooperation Agency MOC Ministry of Communications PELNI Pelayaran National Indonesia (National Shipping Corporation) PPMS project performance monitoring system PPP public-private partnership PROPENAS Pembangunan Lima Tahun (Five Year Development Plan) PSA poverty and social analysis PSP private sector participation (in public infrastructure) RENSTRA Rencana Strategis (Strategic Development Plan) R&D Research and Development Agency (of MOC) SGMOC Secretariat General (of MOC) SIDA Swedish International Development Cooperation Agency SOE state-owned enterprise TA technical assistance NOTE In this report, "$" refers to US dollars. This Report was prepared by a team consisting of P. Poinsignon (Team Leader), S. Chatterjee, F. Ahmed, L. Blanchetti-Revelli, Y.L. Feng, T. Hayakawa, and X. Jia.

3 I. INTRODUCTION 1. During the 2002 Country Programming Mission, the Government of Indonesia requested the Asian Development Bank (ADB) to provide technical assistance (TA) to prepare the Interisland Transport Project. 1 In September 2002, a Fact-Finding Mission visited Indonesia and reached an understanding with the Government on the objectives, scope, terms of reference for consulting services, cost estimates, financing plan, and implementation arrangements of the TA. 2 Appendix 1 gives the preliminary project logical framework. II. ISSUES 2. Indonesia is an archipelago comprising some 17,000 dispersed islands with a total land area of 1.9 million square kilometers (km 2 ) and with a population of over 210 million. Eastern Indonesia comprises Kalimantan, Maluku, Nusa Tenggara, Sulawesi, and West Papua with a total population of about 37 million and a land area of 1.3 million km 2. It has several relatively affluent provinces, but its development has lagged compared with that of western Indonesia (Java, Bali, and Sumatra), 3 partly because it has a low population density with scattered communities in difficult terrain, a generally low human resource base, inadequate transport facilities, and high transport costs. 3. Interisland transport systems are a strategic component of the national transport system and provide essential economic and social lifelines for poor and remote areas in the outer islands of eastern Indonesia. Transport in eastern Indonesia is multimodal, with significant intermodal linkages; however, intermodal competition is limited because each mode has developed its own, often supply-led, market niche. Sea passenger and ferry passenger/vehicle services have different route and vessel characteristics. Ferries operate short routes, with frequent service, carrying vehicles and passengers on old and slow vessels. The private sector operates few ferry services in eastern Indonesia, and concentrates on the denser routes in western Indonesia. Sea passenger routes are generally long distance, with infrequent and passenger only services but using more modern and larger vessels. Private sector vessels carry the majority of sea cargo, as well as a significant proportion of sea passengers, but are few in eastern Indonesia. Interisland air transport is the only realistic means of transport in terms of travel time in some areas, but is usually more expensive than alternative modes when they are available. 4. The impact of the economic crisis in on traffic trends varied considerably in the transport subsectors. After 1998, sea cargo and ferry vehicles/cargo recovered quickly, and sea passenger traffic grew rapidly, due to the transfer of some air passengers. Domestic sea cargo and passenger traffic volumes in 2001 were 12 and 83 percent higher than in 1997, respectively. Ferry passenger trends have been volatile since the crisis, and total traffic in 2001 was still 2 percent below 1997 level. The most severely affected subsector was air transport, where domestic passenger and cargo traffic volumes in 2001 were still 35 and 53 percent below 1997 levels, respectively. 5. The sea, ferry, and air transport subsectors are under the technical responsibility of the directorate generals of sea, land, and air communication (DGSC, DGLC, and DGAC, 1 Interisland transport comprises sea, ferry, and air transport links and their connections to intraisland transport networks. 2 The TA first appeared in ADB Business Opportunities (internet edition) on 5 August Sulawesi, Maluku, West Papua, and Nusa Tenggara all have a poverty incidence generally well above the Indonesian national average.

4 2 respectively) under the Ministry of Communications (MOC). Intraisland road connections fall under the responsibility of the Directorate General of Regional Infrastructure under the Ministry of Settlement and Regional Infrastructure. Management of major seaports, ferry ports and airports has been transferred to state-owned enterprises (SOEs); Indonesia port corporations (IPC) I-IV for seaports; the River, Lake, and Ferry Transport Corporation (ASDP) for ferry ports (and some ferries); and airport corporations (AP) I-II for airports. The National Shipping Corporation (PELNI) is the SOE that operates most of the sea passenger vessels. Other smaller seaports, ferry ports, and airports, categorized as noncommercial, together with pioneer sea and air transport services in more remote areas, are subsidized and managed directly by the respective directorate generals. It has been proposed that infrastructure with only a local function be transferred to local governments under the ongoing decentralization process. The Ministry of State-Owned Enterprises has responsibility for the financial aspects of SOEs. 6. Interisland transport subsectors face common issues: (i) poor subsector and intermodal planning with limited integration of subsector development plans with economic development needs, and poor connections with intraisland transport networks; (ii) poor infrastructure and aging transport fleet, which often do not meet both operator and user needs as well as economic development needs, resulting in a poor level of service; (iii) difficulties to achieve cost recovery due to the long distances involved, often low volumes of traffic, and low tariffs resulting in unprofitable transport routes and financially nonviable infrastructure facilities; (iv) low operational efficiency and weak management; (v) poor implementation of safety standards; and (vi) limited human resource capital. Other constraints include the lack of clear funding policies and mechanisms for central/local government, SOEs, and private sector to finance the development of commercial and noncommercial transport infrastructure and services, particularly to improve access and level of service in remote areas; and unresolved issues related to the ongoing decentralization of ownership and management of smaller transport infrastructure facilities. While the above constraints may be observed throughout Indonesia, they particularly contribute to and exacerbate retarded development and poverty in eastern Indonesia. In particular, there is evidence that shipping deregulation, which yielded considerable benefits to the country as a whole, and more recently the economic crisis have left some areas in eastern Indonesia worse off, as transport services in some low-traffic routes were reduced or withdrawn. 7. Government planning for the sector is based on PROPENAS/RENSTRA and the draft Transport Development Blueprint Short- and medium-term priorities include (i) rehabilitating transport infrastructure/superstructure; (ii) maintaining/improving existing transport services; 5 (iii) ensuring transport safety; and (iv) developing human resources. Specific geographical focus includes regions with peace and order problems and balanced development for both eastern and western Indonesia. 8. While the main thrust of the ADB strategy for the transport sector in Indonesia, 6 as spelled out in the country strategy and program (CSP) for , is in the road subsector, an increased involvement in interisland transport is envisaged, dependent on detailed assessment of needs through provision of TA. The CSP emphasizes the need for maintaining, rehabilitating, and selectively developing strategic transport systems, including interisland transport of passenger and cargo, as well as for balanced distribution of transport services 4 Five-Year Development Plan/Strategic Development Plan. 5 Funding priorities include subsidies for pioneer transport services and renewal of transport fleets. 6 ADB sector strategy was derived from the Transport Sector Strategy Study, completed in June 2000 and financed under Loan 1089-INO: Inland Waterways.

5 3 between resource-rich and resource-poor provinces. Key concerns for the transport sector include (i) reducing/eliminating network deficiencies in each system (air, land, sea), in line with a defined strategic level of service; (ii) reviewing the policies and regulatory issues that adversely affect interisland transport services; (iii) supporting increased private sector participation (PSP) and public-private partnership (PPP), and the needed regulatory reforms to attract private sector funds; and (iv) strengthening coordination between agencies involved in multimodal transport planning at national and local levels. 9. The CSP promotes more geographical focus so as to increase the impact of ADB's assistance, and several provinces of eastern Indonesia have been identified as priority areas for intervention. Improved interisland transport systems in the outer islands of eastern Indonesia will foster better communication, trade, and tourism, and stimulate investment and facilitate economic recovery, thus contributing to balanced regional development and poverty reduction. Improved transport links will also facilitate both inward and outward access for social purposes including education, health, and other services. This is in line with the recommendations of the Poverty Reduction Partnership Agreement for Indonesia, which promotes improvements in regional equity and emphasizes the need to enhance long-term growth prospects through necessary investment to provide for infrastructure, services, and human development. The project initial poverty and social assessment is in Appendix The main source of external assistance for interisland transport is the Government of Japan. The Japan Bank for International Cooperation (JBIC) has been the only active aid agency for ferry transport with loans for seven ferry links. The Japan International Cooperation Agency (JICA) has financed a study of the nationwide ferry service roads, which was completed in For sea transport, JBIC is funding the development of 15 ports in eastern Indonesia through the Small Ports Development Project, as well as the Kupang and Bitung Ports Development Project, while JICA has funded a port development strategy for Indonesia in 1999, and will provide assistance for a study of the development of the Indonesian domestic sea transport and marine industry starting in late For air transport, JBIC has been funding the upgrading of international and regional airports, as well as the rehabilitation of 36 small airports, while the Swedish International Development Cooperation Agency (SIDA) is providing assistance for preparing an integrated modernization plan for air transport in eastern Indonesia. 7 The World Bank has presently no significant involvement in interisland transport in Indonesia. ADB has focused its assistance on ports development (with 10 loans amounting to $312 million and 13 TAs amounting to $3 million) and, to a lesser extent, on airports development in eastern Indonesia (with 2 loans amounting to $234 million and 3 TAs amounting to $1.7 million). ADB has not been involved in ferry transport in the past. While past ADB projects in the port subsector have been generally successful, the two airport projects have encountered implementation difficulties, mainly due to the impact of the Asian financial crisis and peace and order problems. 8 The lessons learned have been incorporated in the TA design. 7 Outputs of the study include a network plan, completed in 2001, and master plans for 20 small airports in eastern Indonesia, to be completed by November The latest ADB-financed port project, Loan 1559-INO: Belawan, Banjarmasin and Balikpapan Ports Project, for $100 million, approved on 30 September 1997, was cancelled in May 1999 as a result of the financial crisis. The latest ADB airport project, Loan 1586-INO: Eastern Islands Air Transport Development Project, for $124 million, approved on 8 December 1997, is also likely to be cancelled by the Government, due to air traffic downturn, JBIC withdrawal from the financing plan, and institutional constraints on funding SOE projects. Loan 1220-INO: East Indonesia Airports Project was delayed by 6 years due to the financial crisis and peace and order problems in Ambon.

6 4 III. THE TECHNICAL ASSISTANCE A. Purpose and Output 11. The TA will help the Government formulate and prepare an interisland transport project that will rehabilitate/improve priority infrastructure and connections to intraisland networks, reorganize/improve transport services, and improve transport safety. Outputs will include (i) an integrated interisland transport plan for eastern Indonesia; (ii) a project formulation framework with recommendations on priority areas for ADB intervention and a program of subprojects 9 suitable for ADB financing; and (iii) project preparation for selected subprojects, and supporting recommendations for policy and institutional reform. B. Methodology and Key Activities 12. The two-phase methodology proposed for the TA places strong emphasis on sound project formulation through carefully assessing the institutional and implementation constraints. Poverty and social analysis will be an integral part of subproject selection and design, and will identify the necessary policies, mechanisms and complementary interventions to channel project benefits to the poor. Phase 1 (project formulation) will (i) review the output of relevant studies, the lessons learned from previous projects, the Government policies and programs, the organization of interisland transport systems, the traffic demand, the existing institutional framework and constraints, and existing PSP projects; (ii) consult with all relevant stakeholders; (iii) prepare traffic forecasts; (iv) prepare an interisland transport development plan for eastern Indonesia, covering policies, infrastructure, transport network organization, transport services (including transport fleets), funding mechanisms including opportunities for PPP, and transport safety systems (including security aspects); and (v) identify suitable areas of intervention for ADB, select candidate subprojects, and recommend an investment program for evaluation and preparation in phase 2. At the end of phase 1, ADB and the Government will agree on the candidate subprojects keeping in view the need to maximize pro-poor growth impact, and the principles guiding financing and implementation arrangements. The implementing agencies (IAs) will be requested to confirm their participation within 1 month. In view of the number, type and readiness of the subprojects, it will be decided whether a project/sector loan approach will be followed in phase 2. Funding policies and mechanisms for central/local government, SOEs and private sector to finance the development of interisland transport under decentralization will be a key issue for subproject selection and policy dialogue. 13. Phase 2 (project preparation) will (i) carry out feasibility studies of the subprojects selected during phase 1, including technical, economic and financial appraisal, and assessment of environmental, social, and poverty impacts; and (ii) finalize the project scope, implementation and financing arrangements, and required capacity building measures. A key output of the TA will be the policy and institutional reform dialogue, which will be initiated in phase 1 with the analysis of sector and subsector constraints, and will result in the preparation of an action plan in phase 2. Outline terms of reference for the TA consultants are in Appendix 3. C. Cost and Financing 14. The total cost of the TA is estimated at $1.275 million equivalent, comprising a foreign exchange component of $720,000 and a local cost component of $555,000 equivalent. The 9 Such subprojects may include rehabilitation/upgrading/development of secondary airports and pioneer airstrips, seaports and ferry ports, and their connections to intraisland networks; improvement of pioneer transport services through PPP; and improvement of air, maritime, and ferry transport safety, including security aspects.

7 5 Government has requested ADB to finance $1,000,000 equivalent, covering the entire foreign exchange cost and $280,000 equivalent of the local currency cost. The TA will be financed on a grant basis by the Japan Special Fund, funded by the Government of Japan. The Government will provide the remaining $275,000 equivalent in kind to cover the costs of office accommodation, counterpart staff, as well as traffic surveys and studies related to TA implementation. A detailed cost estimate is in Appendix 4. The Government has been advised that approval of the TA does not commit ADB to finance any ensuing project. D. Implementation Arrangements 15. The TA will require about 65 person-months of consulting services: about 24 international and 41 domestic. The consultants will have expertise in (i) transport planning and economics; (ii) airport and port engineering, operations, and management; (iii) air, sea, and ferry transport policies, finance, institutional reform, and institutional development; (iv) financial analysis and PPP; (v) development economics; and (vi) environmental, social, and resettlement issues. An international consulting firm in association with domestic consultants will be selected in accordance with ADB s Guidelines on the Use of Consultants, using quality-and-cost based selection, and other arrangements satisfactory to ADB for engaging domestic consultants. 16. The Secretariat General of MOC (SGMOC) will be the executing agency for the TA. MOC's Research and Development Agency (R&D) will be the IA for phase 1. A counterpart team led by R&D and including SGMOC, Planning Service, DGAC, DGLC, and DGSC will be established to coordinate TA activities and work with the consultants daily. For phase 2, DGAC, DGLC, and DGSC, under the coordination of SGMOC, will be the IAs for the subprojects falling under their responsibility, and will establish counterpart teams. A steering committee chaired by SGMOC and comprising relevant agencies of MOC, BAPPENAS, the Ministry of Finance, the Ministry of State-Owned Enterprises, and SOEs will be established to oversee TA implementation. Local stakeholders, including local governments, nongovernment organizations, private sector, and civil society, will be involved through national workshops and regional consultations. Local governments involved as subproject IAs, if any, will be represented in the steering committee during phase 2. R&D will provide the consultants with office accommodation (suitably furnished) and communications facilities for both phases of the TA. Equipment for the TA office will be procured under the consultant contract with arrangements satisfactory to ADB, and will be transferred to the Government upon completion of the TA. 17. The consultants will be fielded in May 2003, and will carry out their work over 9 months ending in February They will submit an inception report, interim report, phase 2 inception report, draft final report, and final report before the end of months 1, 4, 5, 8, and 9, respectively. Brief progress reports will be prepared at the end of months 2, 3, 6, and 7. Tripartite meetings involving ADB, the Government, and the consultants will discuss the findings of the inception, interim, and draft final reports. IV. THE PRESIDENT'S DECISION 18. The President, acting under the authority delegated by the Board, has approved the provision of technical assistance not exceeding the equivalent of $1,000,000 on a grant basis to the Government of Indonesia for preparing the Interisland Transport Project, and hereby reports this action to the Board.

8 6 Appendix 1 PROJECT LOGICAL FRAMEWORK Design Summary Performance Indicators Monitoring Mechanisms Goal Economic development of the project area Regional income Per capita income Agriculture indicators Trade indicators Employment Baseline surveys Government official statistics Asian Development Bank (ADB) monitoring of baseline indicators Assumptions and Risks Interisland transport development will impact economic, social, and other activities. Poverty reduction in the project area Relevant regional indicators, e.g., facilities increased or improved health, schools, shops, etc. Poverty indicators - subsistence farmers - unemployment levels - income/wage levels - access to water, education, and health Baseline surveys ADB poverty assessment Government official statistics ADB monitoring of baseline indicators Economic and political stability Objectives and Purpose Significant rehabilitation and improvement in interisland transport infrastructure and services for operators and users Increase in traffic (passengers/cargo/vehicle) Frequency of services Increase in productivity, especially port cargo operations Traffic surveys, local statistics Operator surveys Counterpart funding for implementing the project is adequate. Traffic growth occurs as projected. Development of new routes and new traffic Improved access to poor areas Kilometers of new routes Frequency/capacity of transport services Operator surveys, Directorate General of Land Communications, Directorate General of Sea Communications, and Directorate General of Air Communications surveys Reduced transport costs and travel time Decrease in transport costs and travel time Operator surveys Facilities will be properly maintained and not be allowed to deteriorate. Improved transport safety Decrease in accidents/ deaths, injuries/overloading of vessels and trucks Local official statistics Subprojects impact on safety and enforcement of safety standards improves. Increased private sector participation (PSP) in interisland transport infrastructure and services Drafting and implementation of policies Number of PSP projects implemented Balance of public/private providers Processing and review missions; Project Completion Review (PCR), Project Performance Audit Reports Legal and regulatory framework for PSP is improved. (Reference in text: page 1, para. 1)

9 Appendix 1 7 Design Summary Performance Indicators Monitoring Mechanisms Outputs Strategic planning framework for Plan prepared by September Technical Assistance interisland transport in Eastern 2003 and agreed upon by (TA) review missions Indonesia the end of October 2003 and tripartite meetings, TA reports, and TA Completion Report Assumptions and Risks Implementing agencies (IAs), local governments, and private sector are willing to assist in planning phase and relevant data available on time. Rehabilitation/upgrading /development of priority infrastructure Rehabilitation/improvement program implemented Review missions, PCR Counterpart funds and onlending mechanism (if required) are available. Sustainable improvement/ reorganization of transport services Level of service improved Sustainable funding mechanism established Review missions Consultants, contractors, and IAs implement the Project effectively, and local governments support it. Improvement of traffic safety systems Traffic safety measures implemented Review missions, PCR Local governments support implementation. Institutional strengthening/ capacity building Services implemented Improvement of IAs capacity Review missions, PCR Government implements services as planned. Inputs PPTA Consultants Consultants recruited by May Final Report available by February 2004 Tripartite meetings, consultants reports, and approval Budget sufficient Design Consultants Consultants To be determined (TBD) Review meetings and approvals Budget sufficient Civil Works Civil Works Contracts TBD Disbursements Loan amount disbursed effectively and efficiently Equipment and Others Equipment Others TBD Disbursements Approval of needs and disbursements Equipment needed identified properly and procured Note: The project logical framework, including quantitative performance indicators, and details of inputs, will be finalized during project preparation under the TA.

10 8 Appendix 2 SUMMARY INITIAL POVERTY AND SOCIAL ANALYSIS (IPSA) A. Linkages to the Country Poverty Analysis Sector identified as a National Priority in Country Yes Poverty Analysis? Sector identified as a National Priority in Country Poverty Reduction Partnership Agreement? Yes Contribution of the sector/subsector to reduce poverty in Indonesia. By targeting isolated areas with high poverty incidence and including not only improvement but also development of transport infrastructure such as small ports and airports or sea/air landing facilities, the Project will contribute to link remote communities to provincial centers/markets and foster both economic growth and poverty reduction in the targeted areas. Moreover, as one of its components focuses on transport services, the Project has potential to address transport users needs, and thus to target direct poverty reduction objectives. During technical assistance (TA) implementation, the pursuit of this objective in various directions will be studied: establishment of mechanisms fostering lower transport prices; development of initiatives favoring private sector transport services and increased competition; improvement of transport logistics, cargo/storage space distribution, and schedules so as to fit the needs of the poorer transport users; or provision of small infrastructure or services that may improve the trading potential of the poor and improve their access to transport. B. Poverty Analysis Proposed Classification What type of poverty analysis is needed? Poverty analysis will be an integral part of subproject selection/design and will be based on quantitative and qualitative methodologies. Subproject selection will include the combined analysis of sector poverty data with country, region, and subproject level poverty data and will involve field-based poverty assessments/stakeholder consultation. Subproject planning/design will entail comprehensive social analysis to identify the type of intervention that may directly benefit the poor. Poverty Classification (final classification will depend on TA and loan processing findings) NC C. Participation Process Stakeholder analysis. Project selection will involve the organization of consultation workshops at national and regional level, involving all major stakeholders, including transport providers, transport users, and concerned nongovernment organizations (NGOs) with interest in interisland transport issues. Once the subprojects are selected, consultation with local stakeholders will be at the core of subproject design and implementation. Participation and consultation mechanisms will have particular intensity in defining intervention under the transport services component. For small-scale subprojects targeting specific communities, project planning and implementation may be carried out through communitydriven design mechanisms directly involving the beneficiary communities and NGOs facilitation. Participation strategy required Yes D. Potential Issues Issues Significance Strategy to Address Issues Plan Required Resettlement Uncertain Land acquisition and resettlement needs and significance will be determined for each subproject after subproject selection. Not known Gender Significant The gender dimension of poverty will be assessed by social assessment Not known and poverty analysis to identify pro-poor measures fitting beneficiaries across gender lines. Women will be fully represented in consultation and participation mechanisms so as to ensure that project provisions reflect needs arising from their role in the domestic economy and trading processes. Affordability Nonsignificant No Labor Uncertain Each subproject implementation plan will consider the distribution of project-derived jobs to beneficiaries. Indigenous Uncertain Subprojects in remote areas may involve indigenous peoples issues. The People magnitude and type of documentation required will be established by the initial social assessment to be prepared in parallel with subproject Other Risks/ Vulnerability selection. The possibility that outsiders will receive greater project benefits than people in project areas needs to be mitigated through project design. Issues of HIV/AIDS and human trafficking are to be addressed in the project design. Not known Indigenous Peoples Policy Framework Not known (Reference in text: page 3, para 9)

11 Appendix 3 9 OUTLINE TERMS OF REFERENCE FOR CONSULTANTS A. Phase 1. Project Formulation 1. Phase 1 will prepare an interisland transport plan for eastern Indonesia, identify priority areas of intervention for an Asian Development Bank (ADB)-financed interisland transport project, and screen candidate subprojects. The following tasks will be carried out. 2. Task 1. With a focus on east Indonesia, collect updated information and data on the air, sea, and ferry transport sub-sectors in Indonesia: (a) networks; (b) operators and operations; (c) civil aviation, shipping and ferry industry; (d) safety; and (e) fares and tariffs. 3. Task 2. Discuss and review with the Government and other stakeholders: (a) the Government medium-term and long-term strategies for air, sea, and ferry transport subsectors; (b) transport and development/poverty reduction issues; (c) the status of policy reforms; (d) recommendations of recent policy studies; 1 and (e) lessons learned from previous projects. 4. Task 3. Analyze the existing interisland transport systems in eastern Indonesia using available data on infrastructure network, cargo and passenger flows, 2 connection with intraisland transport systems, links with other Brunei Indonesia Malaysia Philippines-East ASEAN Growth Area (BIMP-EAGA) countries, 3 transport fleets, and cost of transport including interisland transport fares and tariffs. 5. Task 4. Review the existing economic development plans and data (including integrated development areas) and national/regional planning studies and reports, which will form the basis for subsequent analyses. 6. Task 5. Following review/update of existing data and forecasts in the above tasks, determine base year and future traffic for the various modes of transport, disaggregated as appropriate, to identify the main interisland transport corridors, modes, and flows in order to assess priority development needs. 7. Task 6. Review the institutional framework for interisland transport infrastructure and services, including decentralization, state-owned enterprises (SOEs), and financing issues. Identify the constraints to the development of interisland transport infrastructure and services under decentralization, and their implications for project financing and implementation. 8. Task 7. Review the current legal and institutional framework, and recent and ongoing initiatives for private sector participation (PSP) in interisland transport infrastructure and services; and determine the opportunities and potential operational modalities for public-private partnerships (PPP) in interisland transport in eastern Indonesia. 1 The following studies will be of particular relevance for the TA: (i) air transport: Study on Integrated Modernization Plan for Air Transport in East Indonesia (Phases I and II), SIDA, ongoing; (ii) sea transport: Port Development Strategy for Indonesia, JICA, 1999, and Maritime Traffic Safety System Development Plan, JICA, 2002, Study on the Development of Indonesian Domestic Sea Transportation and Marine Industry, JICA, starting in December 2002, and preparatory studies for the Small Ports Development Project in East Indonesia, JBIC, ongoing; (iii) ferry transport: Development Study on the Nationwide Ferry Service Roads in Indonesia, JICA, 1998; and (iv) transport in general: Transport Sector Strategy Study for Indonesia, ADB, For this purpose, the consultants will review the results of the National Transportation Origin- Destination Survey, which will be available by early Including review of the recommendations of ADB Regional Technical Assistance 6013 on Subregional Cooperation in the Transport Sector in the IMT-GT and BIMP-EAGA Areas, to be completed by the end of March (Reference in text: page 4, para. 13)

12 10 Appendix 3 9. Task 8. From the review of the organization of pioneer air, shipping, and ferry services, make recommendations for sustainable improvements, particularly for establishing a sustainable funding mechanism within the Project. 10. Task 9. Hold regional and national consultation workshops with the actors and stakeholders in interisland transport: local governments, transport operators and users, nongovernment organizations, private sector, and civil society. 11. Task 10. Develop an integrated plan to overcome/mitigate problems, take account of economic development opportunities, and improve efficiency and safety of interisland transport systems in east Indonesia. The plan will cover policies, infrastructure, network organization, transport services (including transport fleets), and transport safety (including security aspects). 12. Task 11. Recommend priority areas for ADB assistance and financing, as well as key issues for policy dialogue. 4 Prepare a long list of candidate subprojects for medium-term implementation (by 2012) including priority projects of national/local governments, taking into account ongoing studies and other sources. 13. Task 12. Recommend a short list of candidate subprojects: (a) develop criteria for screening and ranking them covering technical, economic, financial, environmental, 5 and poverty/social/resettlement aspects, as well as Government priorities, project readiness, 6 and geographic focus of ADB country strategy and program; and (b) screen and rank candidate subprojects in the long list, and make recommendations for including them in the Project. 14. Task 13. For each recommended candidate subproject: (i) (ii) (iii) (iv) determine the scope of work to prepare/complete/upgrade the corresponding feasibility studies and environmental and social evaluation during phase 2; identify the IA for subproject preparation, review its project preparation capability, and assess the need for institutional strengthening in technical, economic, financial, environmental, and social fields; identify the IA for subproject implementation (national government agency, SOE, local governments) and review its financial and implementation capacity to carry out the subproject; identify the environmental category of the subproject using ADB s rapid environmental assessment checklist; review the IA's environmental management and monitoring capacity; and prepare an initial social assessment (ISA) in line with ADB's Handbook on Poverty and Social Analysis; identify and analyze any constraints to finance and manage land acquisition and resettlement activities that may affect subproject preparation and implementation, and recommend ways to overcome them. 4 Such key issues will include policy and institutional constraints to interisland transport development under decentralization, project implementation and sustainability, and channeling of project benefits to the poor. 5 The environmental screening criteria should reflect the site-specific considerations listed in ADB rapid environmental appraisal checklists, and note possible wider environmental impacts of improved access to islands. 6 Project selection should ensure that (i) institutional and policy constraints to implementation are included in the criteria; (ii) implementation of a first batch of subprojects can start during the first year of loan effectiveness; and (iii) overall project completion can be achieved within 5 years from loan effectiveness.

13 Appendix The Government and ADB will jointly review the consultant s methodology, findings, and recommendations during a tripartite meeting at the end of phase 1. ADB and the Government will agree on (i) priority areas of intervention for the ensuing Interisland Transport Project, (ii) a list of candidate subprojects, (iii) the corresponding IAs for project preparation (phase 2 of the TA) and implementation; and (iv) the principles guiding the financing arrangements for each subproject (contributions of central Government, SOE, and local governments) and relending arrangements, if required. The list of feasibility studies to be undertaken during phase 2 will also be determined at the tripartite meeting, and the scope and terms of reference of phase 2 will be finalized. The consultants will incorporate the comments of ADB and the Government and prepare a phase 1 final report/inception report for phase 2, including any needed changes to the scope of work in phase 2. B. Phase 2. Project Preparation 16. Phase 2 will prepare the subprojects selected in phase 1 to develop a project suitable for ADB financing. The following tasks will be undertaken. 1. Technical, Economic, and Financial Appraisal 17. Task 1. Carry out technical, economic, and financial appraisal of the selected subprojects and prepare/review/update feasibility studies in accordance with ADB guidelines by: (i) (ii) (iii) (iv) (v) (vi) reviewing the key outputs from phase 1, the socioeconomic data collected, and assumptions and methodology used for traffic forecasting, especially for projects prepared from other sources; reviewing the scope of each subproject, and preparing capital and recurrent cost estimates; the scope should include costed road connections where required to achieve the anticipated benefits and service quality; preparing the economic analysis of the proposed project and each subproject in accordance with ADB guidelines, including determining the economic development benefits; carrying out a risk analysis in accordance with ADB guidelines, and recommending measures to eliminate or mitigate such risks; preparing the financial analysis of the proposed project and each subproject in accordance with ADB guidelines, including impact on the financial performance of project operating entities; analyzing tariffs and fares, and making recommendations for cost recovery measures for the project operating entities to consider, and for setting up financial and operational performance targets for more autonomy and accountability; reviewing the existing management and operating systems for the project facilities and recommending organizational change, if required; and for PSP subprojects, making recommendations on a legal and regulatory framework, project structuring and risk sharing, incentives for the private sector, financing arrangements for the public/private sector contribution, mode of procurement, and contractual arrangements.

14 12 Appendix 3 2. Environment, Poverty, and Social Analysis 18. Task 2. Based on the environmental categorization of phase 1, carry out a detailed review of the environmental reports prepared by the Government. 7 Ascertain their conformity, including format, with ADB s Environmental Assessment Requirements (March 1998), make appropriate technical comments to assist the Government in finalizing an environmental impact assessment (EIA)/initial environmental examination (IEE) report for each subproject, and prepare a summary IEE/summary EIA report for the Project, as appropriate. Make recommendations for IAs capacity building in environmental management and monitoring, if required. 19. Task 3. In conjunction with the feasibility studies, determine the need for land acquisition and compensation/resettlement arrangements for the selected subprojects; prepare a compensation policy framework and procedural guidelines, indicating general compensation provisions and implementation procedures for land acquisition/resettlement for the whole project, and individual land acquisition and resettlement plans for each subproject, in accordance with applicable laws and regulations and ADB s Policy on Involuntary Resettlement Task 4. Prepare an indigenous peoples policy framework for the Project, and, if necessary, an indigenous peoples development plan for each relevant subproject, in line with ADB s Policy on Indigenous People. 21. Task 5. Conduct desk/field investigations for poverty and social analysis (PSA) and prepare a PSA report meeting the requirements of ADB s Handbook on Poverty and Social Analysis. Plan and undertake additional consultations with local stakeholders as part of PSA preparation. In the PSA, identify (a) poverty issues related to livelihood, trade, and transport patterns in project areas; and (b) necessary policies, mechanisms and complementary interventions to channel project benefits to the poor and maximize the project poverty reduction impact, including activities suitable for funding under the Japan Fund for Poverty Reduction. 22. Task 6. Assess quantitatively the poverty impact of the Project using ADB methodology. Select the project area or project influence area as the basis for the analysis and outline the mechanisms through which the Project will help reduce poverty. 9 Identify relevant indicators and formulate a methodology to monitor the Project s impact on poverty in the project influence area, and ensure that such indicators are introduced in the project framework and the project performance monitoring system (PPMS). 3. Financing and Implementation Arrangements 23. Task 7. On the basis of the feasibility studies cost estimates, help finalize the financing arrangements for each subproject, including contribution of central/local governments and SOEs, and onlending arrangements, if required. Propose ways to ensure proper maintenance of the subprojects, including financial incentives, as necessary. 24. Task 8. Prepare a detailed implementation schedule for each project component, as well as an overall project implementation schedule. Prepare the project disbursement schedule. 7 The IAs will prepare environmental reports in English for ADB s review and comments. 8 Please refer to ADB Handbook on Resettlement: A Guide to Good Practice. Manila. 9 The analysis should follow ADB s Handbook on Poverty and Social Analysis and Guidelines for the Economic Analysis of Projects.

15 Appendix 3 13 Identify critical project preparation activities and prepare a detailed time-bound action plan to expedite such activities. 25. Task 9. Recommend appropriate arrangements for project implementation between the Ministry of Communications (MOC) and the various IAs (Directorate General of Air Communications, Directorate General of Land Communications, Directorate General of Sea Communications, SOEs, and participating local governments). Propose an organizational scheme (including preconstruction activities). 26. Task 10. Recommend ways to strengthen the coordination and monitoring capacity of MOC and the project implementation capacity of the IAs; organize "train the trainer" seminars focusing on project preparation and implementation for resource persons in the IAs; draft terms of reference for project coordination and implementation consulting services under the Project, and assist the IAs in preparing invitation documents for consultants selection. 27. Task 11. Identify performance monitoring parameters for benefit monitoring and evaluation of the Project and formulate a project framework in accordance with ADB guidelines. 4. Policy Dialogue and Institutional Strengthening 28. Task 12. Prepare an action plan for policy dialogue on areas identified in phases 1 and 2 as contributing to the weak performance of the sector/subsectors; the action plan should provide a full understanding of the constraints and policy alternatives to address and overcome them. Draft terms of reference to help the Government and concerned stakeholders address and overcome the issues in a time-bound manner. 29. Task 13. Identify institutional strengthening and training requirements for projectoperating entities to meet the Government s policy objectives and to improve their financial and operational status; draft terms of reference for capacity building consulting services. C. Timing and Reporting Requirements 30. The TA will be implemented over 9 months: 4 for phase 1, and 5 for phase 2. The consultants will submit to the Government and ADB (i) an inception report; (ii) an interim report, covering phase 1, including a draft ISA; (iii) a phase 1 report/phase 2 inception report including the comments and agreement of the Government/ADB on proposed subprojects for phase 2, as well as the final ISA; (iv) a draft final report, including draft summary IEE/summary EIA, draft PSA, draft land acquisition and resettlement policy framework and procedural guidelines, draft land acquisition and resettlement plans, and draft indigenous people policy framework and development plan, if required; and (v) a final report, including summary EIA/summary IEE, ISA, PSA, land acquisition and resettlement policy framework and procedural guidelines, land acquisition and resettlement plans, and indigenous people policy framework and development plans, if required. The inception report, interim report, phase 1 final report/phase 2 inception report, and draft final report will be submitted months 1, 4, 5, and 8, respectively after the TA starts. Brief monthly progress reports will be submitted at the end of the months 2, 3, 6, and 7 of TA implementation. Tripartite meetings involving the Government, ADB, and the consultants will discuss the findings of the inception, interim and draft final reports. The final report will be submitted at the end of month 9 of the TA. The consultants will submit (i) 30 copies of each report to the Government (20 in Bahasa Indonesia and 10 in English); and (ii) 10 copies of the inception report, monthly progress reports, draft final report, and final report to ADB.

16 14 Appendix 4 COST ESTIMATES AND FINANCING PLAN ($'000) Foreign Local Total Item Exchange Currency Cost A. Asian Development Bank Financing a 1. Consultants a. Remuneration and Per Diem i. International Consultants ii. Domestic Consultants b. International and Local Travel c. Reports and Communications Equipment b Workshops c Surveys d Miscellaneous Administration and Support Costs 6. Representatives for Contract Negotiations Contingencies Subtotal (A) ,000 B. Government Financing 1. Office Accommodation Remuneration and Per Diem of Counterpart Staff 3. Surveys, Data and Studies e Subtotal (B) Total ,275 ADB = Asian Development Bank a Financed on a grant basis from the Japan Special Fund funded by the Government of Japan. b Includes computers and other office equipment for the project management office, to be procured by the consultant under the contract and transferred to the Executing Agency at the end of the technical assistance (TA). c Includes consultation workshops in Jakarta and regional briefings with local stakeholders. d Includes surveys for feasibility studies during phase 2 of the TA under the consultant s contract. e Includes origin-destination surveys for eastern Indonesia and related traffic data. Source: Asian Development Bank estimates. (Reference in text: page 5, para. 14)