IN THE AMOUNT OF US$64.7 MILLION

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1 Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Environment and Social Development Unit East Asia and Pacific Region Document of The World Bank FOR OFFICIAL USE ONLY PROJECT APPRAISAL DOCUMENT ON A PROPOSED MULTI DONOR TRUST FUND FOR ACEH AND NORTH SUMATRA GRANT IN THE AMOUNT OF US$64.7 MILLION TO THE REPUBLIC OF INDONESIA FOR A COMMUNITY RECOVERY THROUGH THE KECAMATAN DEVELOPMENT PROJECT August 22,2005 Report No: IND 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 May 25,2005) Currency Unit = Rupiah Rp. 1,000 = US$O.lOS US$1 = Rp.9,470 FISCAL YEAR January 1 - December 31 APBD APBN Bappeda Bappenas BPKP BPS Bupati CAS CPAR DAU DPRD FAD Go1 Kabupaten KDP Kecamatan KPKN M&E MIS MoF MOHA NGO PAD Pj OK PMD PMU Susenas UPK UPP VIP WSSLIC ABBREVIATIONS AND ACRONYMS District Development Budget National Development Budget Provincial and District Development Boards Ministry of Planning National Development Audit Agency National Statistics Bureau District Head Country Assistance Strategy Country Procurement Assessment Review General Block Grant to Districts Provincial and District Parliaments Inter-village forums Government of Indonesia District Kecamatan Development Project Sub-District Provincial Office of the National Treasury Monitoring and Evaluation Management Information System Ministry of Finance Ministry of Home Affairs Non-Government Organization Project Appraisal Documents Local Project Manager Village Development Agency (Ministry of Home Affairs) Project Management Unit National Expenditure Survey Sub-district Financial Management Unit Urban Poverty Project/ Village Infrastructure Project Water Supply and Sanitation for Low Income Communities Project Vice President: Country Director: Sector Director/Sector Manager: Task Team LeadedCo-Team Leader: Jemal-ud-din Kassum Andrew D. Steer Maria Teresa Serra/Cyprian Fisiy Scott E. Guggenheim

3 FOR OF'F'ICLAL USE ONLY INDONESIA COMMUNITY RECOVERY THROUGH THE KECAMATAN DEVELOPMENT PROJECT PROJECT APPRAISAL DOCUMENT EAST ASIA AND PACIFIC REGION EASES Date: August 22,2005 Country Director: Andrew D. Steer Sector Director/Sector Manager: Maria Teresa SerraKyprian Fisiy Project ID: PO97535 Lending Instrument: Emergency Recovery Loan Team Leader : Scott E. Guggenheim Sector: Social Services Themes: Social Analysis; Social Development Environment Screening Category: Partial Assessment Safeguard Screening Category: Limited Impact Government Contribution: N/A Source Borrower MDTFANS Total Financing Plan (US%m) Local Foreign Total Project implementation period: Start July 1,2005 End: June 30,2008 Exnected closing date: December This document has a restricted distributionand 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 Does the project depart from the CAS in content or other significant respects? [ ]Yes [XI No Does the project require any exceptions from Bank policies? [ ]Yes [XINO Have these been approved by Bank management? [ ]Yes [XINO Is approval for any policy exception sought from the Board? [ ]Yes [XINO Does the project include any critical risks rated substantial or high? [XIYes [ ] No Does the project meet the Regional criteria for readiness for implementation? [XIYes [ ] No Refi PAD Project development objective Re$ PAD: The purpose of this grant is to support community recovery in the areas of Aceh and North Sumatra that were affected by the December 26,2005 earthquake and tsunami. All affected subdistricts and villages will be covered by the grant program. The grant supports (i) earmarked block grants to communities; (ii) block grants for developing village level recovery plans; (iii) recovery and capacity development for local government; (iv) technical and social facilitator services; and (v) monitoring and evaluation. To accelerate recovery, the procedures for the pre-existing Kecamatan Development Project were revised to allow for more rapid disbursement and adjustment to post-disaster conditions. Project description [one-sentence summary of each component] Re$ PAD: The proposed USD64.7 million MDTFANS-financed KDP project will be 100 percent grant financing, with large amounts of up-front funding over an eighteen month implementation period during 2005/ 2006 and will be executed through the Ministry of Home Affairs. The Project will consist of the following components and activities: 0 Block grants to tsunami affected kecamatans [(79%) $49.9 million] 0 Planning grants to tsunami affected kecamatans [(3%) $2.1 million] 0 Social and technical facilitators [(13%) $8.5 million] 0 capacity programs for village and kecamatan management units [(4%) $3.4 million] 0 monitoring and evaluation [(1%) $0.8 million] Which safeguard policies are triggered, if any? Re$ PAD: Environmental Assessment (OP/BP/GP 4.0 1) Natural Habitats (OP/BP 4.04) Involuntary Resettlement (OP/BP 4.12) Indigenous Peoples (OD 4.20) Significant, non-standard conditions, if any, for: Re$ PAD: 0 GO1 issuing the revised budget allocations for each participating sub-district; 0 MOHA completes staffing for the provincial and district management teams; 0 MOHA authorizes decentralized management for the reconstruction program. iv

5 INDONESIA COMMUNITY RECOVERY THROUGH THE KECAMATAN DEVELOPMENT PROJECT CONTENTS Executive Summary , ,, vi Technical Report , , ,, Background and Rationale...,...,,,...,...,..,,...,.,...,,,,,... 1 Detailed Project Description.,..,......,...,...,......,... 2 Project Costs Relationship/Coordination with other RehabilitatiodReconstruction Activities Implementation... 5 Social Issues Procurement Arrangements......,...,......,......,., Financial Management, Audit and Disbursement Arrangements,..,...,...,....,.., Safeguard Policies , ,., Complaints Handling and Anti-Corruption Strategy Results Summary , , , ,,,,, Annexes Annex 1 Annex 2 Annex 3 Annex 4 Annex 5 KDP Aceh Implementation Schedule Management Organization of KDP KDP Planning Cycle KDP Funds Flows System Grievance Resolution Mechamism

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7 EXECUTIVE SUMMARY Background and Rationale. The earthquakes and tsunamis which struck Indonesia and several other countries in the Indian Ocean region on December 26, 2004, resulted in one of the worst natural disasters in recorded human history. Indonesia bore the brunt of the disaster. In Aceh and North Sumatra, the disaster left more than 230,000 people dead or missing, caused an additional 700,000 homeless, washed away hundreds of communities, collapsed many local governments, and devastated normal social, economic, and political life in the affected areas. While the relief effort has prevented large-scale disaster and in many areas NGOs have started reconstruction programs, a key challenge for the reconstruction program is to identify mechanisms that could reach large numbers of affected villages quickly in ways that provide a maximum amount of resources directly to villagers and which maintain effective corruption mitigation measures. The ongoing Kecamatan Development Program (KDP)' is a nationwide community development project implemented by the Ministry of Home Affairs. Currently covering nearly 30,000 village across Indonesia, KDP has operated in Aceh without interruption since KDP strengthens the ability of communities across Indonesia to plan and manage local development. By doing so, not only do communities produce high-quality, economically useful social and infrastructure investments, but district level agencies can concentrate their resources on technically more complex and higher-value programming. Equally important for a transitional country such as Indonesia is that participatory development programs, such as KDP, provide local governments with concrete examples of alternative ways to manage decentralization. Prior to the earthquakes and tsunamis, the KDP was already operating in approximately 45% of the kecamatans in Aceh that were affected by the tsunamis. The Aceh damage assessment prepared by Bappenas, and the reconstruction blueprint, both designated the proposed project to be one of the key recovery vehicles. The government has requested that KDP scale-up to support the reconstruction of Aceh and North Sumatra. The MDTFANS-financed KDP has the primary objective of providing block grant funding to support reconstruction in a large number of villages affected by the disaster. It will provide an effective, large-scale way to help Acehenese and Nias communities plan and manage their reconstruction. The Project. The proposed USD64.7 million MDTFANS-financed KDP project will be 100 percent grant financing, with large amounts of up-front funding over an eighteen month implementation period during 2005/ 2006 and will be executed through the Ministry of Home Affairs. The Project will consist of the following components and activities: 1. block grants to tsunami affected kecamatans - These consist of uneannarked block grants that are transferred directly to communities for investing in village development. The block grants support a participatory planning process that includes special measures to involve women and the poor. Project menus are open - with the exception of a short negative list that bans civil servant salary payments, weapons, and environmentally destructive activities, villagers can invest the money across the full gamut of local priorities. 2. planning grants to tsunami affected kecamatans - These are small, pre-investment grants transferred to communities to cover the costs of technical and social facilitation; 3. the provision of social and technical facilitators - The functions of KDP's facilitators are to (i) promote district and subdistrict coordination across donors, NGOs, and government programs; (ii) support participatory planning and management procedures; (iii) provide technical support to villagers, including guidance in earthquake resistant infrastructure design and how to assess and repair damaged village infrastructure; and (iv) monitor project quality and prevent corruption ' Kecamatan means subdistrict in Indonesian. vi

8 4. capacity building programs for village and kecamatan management units - Programs will train villagers and local governments in a range of topics tied to improved governance, participation, and local development planning ; and 5, monitoring and evaluation - which includes both quantitative and qualitative impact evaluations, participatory monitoring methods, corruption assessments, and independent monitoring by Acehnese NGOs. Coordination. The newly established Baden Rehabilitasi dan Rekonstruksi (BRR) for NAD-Nias will work with MOHA and the provisional and kabupaten working groups in coordinating rehabilitation and reconstruction in Aceh and North Sumatra. International NGOS are also part of this, and there is a growing consensus that a consolidated village planning process, supported by various donors and MDTFANS will be the most efficient way to work at the village level. The three other project concepts endorsed by the MDTFANS Steering Committee being the Urban Poverty Program (UPP), the Reconstruction of Aceh Land Administration System (WAS) Project, and the Housing and Settlement Program will all work with, and build on, the platform of community facilitators and committees either already in place or being expanded under the KDP project. Support by other donors. Because it provides an efficient, locally popular delivery system, KDP is also being supported by several other donors. The Netherlands currently provides approximately $40 million in grant support to the national KDP program, and this support has allowed KDP to respond quickly to crises such as the Bali bombing and the tsunami. In Aceh, DFID is providing an additional $4 million to help KDP support IDP return and reintegration. AusAid is contributing $2.3 million so that the MDTFANS grant can be complemented by a program to rebuild village meeting halls. CIDA is adding $5 million to support local investments and KDP s gender programs. NZ Aid will provide TA to train KDP facilitators in earthquake resistant technical designs. Although not counted here, the Japanese Social Development Fund also provides about $3.0 million dollars to support KDP linked programs for widows and internallydisplaced people. Total parallel financing by other donors for the Aceh program totals approximately $12.0 million Partnerships - KDP cooperates with a large number of national and international civil society and UN organizations. KDP is part of the Aceh community development working group hosted by PMD that meets bi-weekly in Banda Aceh and includes some 20 NGOs and bilateral agencies. CARE, EO, IOM, UNDP, WFP, World Vision, and UN-Habitat already support varying degrees of cooperation with KDP, including collaboration on damage assessments, community consultations, participatory planning and training. Under the project, these partnerships will be expanded. An additional 36 information facilitators will be hired by KDP to support subdistrict level coordination groups managed jointly by local government and NGOs. Transparency and Accountability. Projects in Indonesia operate in a high-risk environment when it comes to issues of leakage and corruption. The anti-corruption strategy for the highly dispersed community driven KDP project addresses the fact that it is a different institutional environment to standard projects. It makes greater use of social controls and transparency thus ensuring higher levels of confidence than traditional project designs operating in the same villages. Its three main themes are: (i) eliminating complexity; (ii) focusing on every financial transaction; (iii) responding quickly to complaints. The strategy and action plans have been in place since the first KDP project, but have been updated based on anti-corruption diagnostics and evolving decentralization. Risks. The KDP in Aceh and North Sumatra is expected to face three major risks. The high risk fiduciary environment in Indonesia is expected to be exacerbated in Aceh where KDP has faced problems of illegal levies by both the rebel movement (GAM), and fkom the army. A second risk is that because the KDP platform exists in many areas, other programs might overload the technical teams with additional vii

9 tasks and responsibilities. Finally, poor coordination between KDP and other private and public reconstruction programs might lead to wastage and confusion. There is a well- developed risk mitigation program that addresses each of these risks. The project s anti-corruption action plan has generally been effective and the other risks are to a large extent being mitigated through the increasingly effective local level coordination networks. The 36 information facilitators that will be hded through this grant are an essential part of malung those networks even more effective. Effectiveness Conditions. The following are the conditions of effectiveness for the grant: GO1 issuing the revised budget allocations for each participating sub-district; MOHA completes staffing for the provincial and district management teams; MOHA authorizes decentralized management for the reconstruction program.... Vlll

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11 TECHNICAL REPORT PART 1 - BACKGROUND AND RATIONALE Community-based recovery planning has been at the core of the Acemias reconstruction planning process virtually since the disaster struck on December 26, It is not difficult to understand why. Global as well as Indonesian experience show that community-based recovery strategies are under most circumstances quicker, involve more affected people in their own recovery, and are more likely to lead to sustainable solutions than top-down strategies can achieve. For Aceh and North Sumatra, community-based recovery programs are part of a phased strategy that builds on the presence of successful community projects that can jumpstart the recovery but then moves into larger, more technical programs such as larger infrastructure rehabilitation, support to health and education systems, and the reconstruction of district government line agencies. Because Indonesia has a history of support for successful community even before the crisis, using a community-based approach also provides the foundation for a sustainable system over the long term, after recovery is complete and normal development can take over. The project being proposed for MDTFANS funding builds on the government s pre-existing Kecamatan Development Project (KDP). Prior to the earthquakes and tsunamis that struck Indonesia (and several other countries in the Indian Ocean) on December 26, 2004, KDP was already operating in approximately 45% of the kecamatans in Aceh that were affected by the tsunamis. In January 2005, the Governor of Aceh and the head of Satkorlak issued a letter instructing KDP to become one of the focal points for community recovery. By early March, some 250 kecamatan facilitators had been trained and deployed. The government has requested that MDTF support the government s ongoing scale-up of KDP to support the reconstruction of Aceh and North Sumatra. The proposed MDTFANS contribution to the KDP program in Aceh and North Sumatra will be valuable in a number of keyareas. Preparation of the proposed MDTF project has involved substantial modifications to the core KDP approach to better reflect both the priorities of Aceh reconstruction and the numerous opportunities provided by the presence of other donors, NGOs, and technical specialists. First, the MDTF and BRR will provide oversight and pressure on what all stakeholders (even government) agree is an extraordinarily poor fiduciary environment. MDTF participation therefore contributes greatly to the effectiveness by which aid is used. MDTF supervision missions will provide additional oversight and support for improved financial and program management. KDP will also be monitored by BRR s financial trackmg system. Second, KDP is significantly revamping its operational manual and procedures to respond to the disaster and recovery. Particularly useful innovations that will be introduced through the project include: Technical manuals and training that guide communities in earthquake resistant construction and in local assessment and repair of damaged infrastructure; 9 Information facilitators in each district government whose job is to disseminate reconstruction policies and elicit policy questions from sub district multistakeholder workmg groups that will be formed in each sub district; Cooperation with Muhammidiyah on a substantial program of community-based trauma healing; - IDP reintegration monitoring

12 Third, Indonesian agencies normally do not carry out very rigorous monitoring and evaluation programs. Constantly evolving projects such as KDP require much closer monitoring and evaluation because of their wide geographical coverage, diverse scope, and the need to have real-time information on progress. The project also values the importance of learning what works and what doesn t in order to make procedural and policy improvements. MDTF, will help GO1 use quantitative and qualitative measurements to improve the program s design. Such studies are appreciated and used when they are done, but they will not be done without MDTF involvement. Fourth dialogue with the MDTF and its member agencies brings global experience to bear that would not be otherwise available. Specific examples include the new district and sub district multistakeholders forum, which developed from dialogue with UNDP, Habitat, and other agencies that have supported community based reconstruction programs in Afghanistan, Cambodia, and Rwanda; and the improved approach to facilitator training and management, which has come from recent discussions with Oxfam, CARE, World Vision, and Save the Children UK. PART I1 - DETAILED PROJECT DESCRIPTION Objectives. At the request of the Government, the KDP is designated to be one of the key vehicles for the recovery of Aceh and North Sumatra. The MDTFANS-financed KDP has the primary objective of providing block grant funding to support reconstruction in a large number of villages affected by the disaster. It will provide an effective, large-scale way to help Acehenese and Nias communities plan and manage their reconstruction. The project will (i) initially support quick injections of cash into communities, with a special focus on the poorest and most vulnerable groups; (ii) rebuild productive infrastructure and social services; and (iii) support bottom-up planning and management. KDP s bottom-up planning system will also allow for effective sub district level coordination and information sharing at the sub district level. The KDP also has higher overall development objectives of reducing poverty and improving locallevel governance in the affected areas. Development objectives for the MDTFANS-financed KDP include: (i) institutionalizing participatory processes in local government; (ii) providing cost-effective, basic social and economic infrastructure; and (iii) strengthening the capacity of the micro-finance institutions to manage and monitor funds sustainably. Components. The proposed US$64.7 million MDTFANS-financed KDP project will be 100 percent grant financing with large amounts of up-front funding over an eighteen month implementation period during 200Y The Project will consist of the following components and activities: (i) block grants to tsunami affected kecamatans [(79%) $49.9 million] - These consist of unearmarked block grants that are transferred directly to communities for investing in village development. Planning begins in the hamlets and villages but allocations take place in kecamatans, where the project maintains a financial management unit to keep records and to provide oversight. With the exception of a small negative list that prohibits items such as weapons, civil servant salaries, and environmentally destructive activities, menus are open. The majority of investments in the KDP program throughout Indonesia to date typically go for basic economic infrastructure, particularly farm-to-market roads, water supply, and irrigation, but there are also significant investments in education. A number of special provisions to the basic KDP framework have been introduced to support the Aceh and North Sumatra reconstruction work. First, grant sizes for the affected areas are adjusted to match estimated damage impacts. Kecamatans in the tsunami zone will receive cycles of 4, 3, 2, and 1 billion rupiah over the eighteen month 2

13 reconstruction period (1 billion is the standard, sustainable allocation for KDP) based on the kecamatan damage impact scale developed by KDP during its field survey. Second, during the emergency phase, a maximum of 25% of the grant can be used as a social fund whose purposes are to provide micro-grants to highly vulnerable groups, and to recapitalize micro-enterprises destroyed by the tsunami; in subsequent cycles, a maximum of 20% can go to women s revolving funds. Third, the planning cycle has been compressed into emergency, short term reconstruction, and sustainable planning cycles. The emergency cycle is for immediate use. During the emergency cycle, villages make their own individual assessments and no kecamatan decision meetings are required. Subsequent cycles do require more planning and technical review, though they are still highly compressed, since they should start leading communities back to more normal recovery. planning grants to tsunami affected kecamatans [(3%) $2.1 million] - These are small, pre-investment grants transferred to communities to cover the costs of technical and social facilitation by candidates (one man and one woman) proposed by the village and trained by the project; socialization meetings; dissemination materials, and, where justified, small travel grants so that poor villagers can attend planning meetings. social and technical facilitators [(13%) $8.5 million] - Technical support for KDP comes from a tiered program of consultant facilitators, all of whom are Acehnese. A regional management unit in the province includes operations support, training, and a monitoring/complaints management unit. Each district includes a technical and social facilitator, and for Aceh, a small dissemination unit that supports government-ngo partnerships. Each kecamatan also has a technical and social facilitator whose job is to train and supervise village facilitators, provide technical support and advice for larger infrastructure proposals, and ensure that records are properly managed. Finally, this component also includes funding to support approximately 30 information facilitators who will be attached to the KDP district coordination team. Their job is to visit each sub district on a fixed schedule, during which they will disseminate information about government policies and reconstruction programs, and gather queries from the field for discussion with district government. capacity programs for village and kecamatan management units [(4%) $3.4 million] - This activity covers training for kecamatan and village governance units. Typical programs include village cross-audits, village visioning exercises, training in bookkeeping, procurement, and technical assessments, and basic social mapping exercises. However, in the Aceh context, these programs can be expanded to take advantage of the skills available from high quality NGOs experienced in community development training. monitoring and evaluation [(1%) $0.8 million] - Covers the costs of NGO, university student, andor journalist monitoring; commissioned baseline and impact surveys, and qualitative case studies. Readiness Status. KDP was already fully operational across Aceh and North Sumatra before the tsunami, so it is not surprising that preparation for using the grant is well advanced. Approximately 350 facilitators were already in place. The network is currently being expanded through the recruitment of an additional 300 facilitators. This number is sufficient to cover the entire area affected by the disaster. Baseline damage and needs assessments have already been completed for all villages that were part of KDP in Aceh before the tsunami. The special operational manual and project implementation plan were issued in May, The improved management plan and terms of reference for all new positions have already been prepared; advertisements for new positions have 3

14 already been issued and final shortlists completed. Draft budgets were also appraised and only require confirmation. Local socialization seminars have already been completed with all local governments. Documents prepared for either the wider KDP3 project or specifically for Aceh and North Sumatra recovery that were reviewed by the MDTF appraisal and which are part of the MDTFANS-funded KDP appraisal package include: a) Project operational manual b) Project Implementation Framework and timeline c) Draft Project budgets d) Project anti-corruption action plan e) Technical manuals f) Facilitator training program In brief, the delivery mechanisms and project structure are either already in place or are well advanced. PART PROJECT COSTS Total estimated costs for the eighteen month program are approximately $ million. The budget also assumes that the majority of shelter programs will be funded by NGOs and other specialist agencies. The contribution sought from MDTFANS is $64.7 million with additional funding provided from the following sources: (i) US$20 million already committed by /GO& (ii) US$4 million from DFID (iii)us$5 million from Canada (iv) US2.3 million from AusAid Indicative MDTFANS- Component costs Yo of financing (US%M)/a Total (US$M) 1. Block Grants to Tsunami Affected Kecamatans Planning Grants to Tsunami affected Kecamatans Social and Technical Facilitators Capacity programs for village and kecamatan management units M&E and Studies Yo of MDTFANSfinancing Total Project Costs I I I 100 Total Financing Required I I la Indicative Costs include Government and other donor contributions PART IV - RELATIONSHIP/ COORDINATION WITH OTHER REHABILITATION/ RECONSTRUCTION ACTIVITIES Global experience and experience elsewhere in Indonesia shows that multi-sectoral village development programs can deal with local level coordination challenges effectively provided that they have sufficient information about sectoral investment plans. The reason is that villages can adjust their own preferences to take into account funding sources fi-om elsewhere. 4

15 To promote this type of demand-driven coordination, the Ministry of Home Affairs (MOHA), as Executing agency, has established provincial and kabupaten working groups whose job is to provide a forum for sharing information about local recovery plans. The newly established Baden Rehabilitasi dan Rekonstruksi (BRR) for NAD-Nias will also work with MOHA and the provisional and kabupaten workmg groups in coordinating rehabilitation and reconstruction in Aceh and North Sumatra. International NGOS such as Oxfam, Care, World Vision, PCI are also part of these mechanisms, and there is a growing consensus that a consolidated village planning process, supported by various donors and MDTFANS will be the most efficient way to work at village level. The MDTFANS grant-financed KDP, which focuses on rural communities, is an extension of the wider KDP3 and, as such, already coordinates with the other large government recovery programs such as the World-Bank assisted Community Recovery through Urban Poverty Program (UPP), which focuses on urban communities, and also water supply projects funded by the Asian Development Bank. In addition to the MDTFANS assisted KDP and UPP projects, the Reconstruction of Aceh Land Administration System (RALAS) Project and the Community Driven Housing and Settlement Program, concept proposals for which have also been endorsed by the MDTFANS Steering Committee, will both work with, and build on, the platform of community facilitators and committees either already in place or being expanded under the KDP project. By using the existing or expanding pool of KDP (and UPP) facilitators, (i.e. pooling resources) with the possibility of additional facilitators in land management or housing being provided by the W AS or housing Projects respectively, good coordination and harmonization between all these projects will be ensured. PART V - IMPLEMENTATION Institutional and implementation arrangements. The MDTFANS grant-financed KDP, like the wider KDP3, will be executed through the Ministry of Home Affairs. The core executing team is guided through a coordinating group at each level of government that includes the finance department, the development planning board, and the relevant line agencies such as health, education, and public works. Monitoring and evaluation of outcomes/results. KDP has a robust monitoring program that includes both quantitative and qualitative evaluations. The internal monitoring system includes: A computerized Management Information System (MIS). The KDP projects maintain a master database that records progress on planning and works, levels and types of participation, complaints and their resolution, and end result evaluations. MIS data are aggregated and used in each of the regional management units, with a master system maintained by the national oversight team. Grievance and complaints resolution mechanism - communities can direct their questions or complaints to KDP facilitators, government staff, NGOs, or send inquiries directly to a PO Box. KDP maintains a complaints handling unit at national and provincial levels to record and follow up on inquiries and complaints. Financial management oversight - the national KDP team includes a seven person financial unit that provides on-sight supervision and training to improve the quality of local recordkeeping. Supervision by consultants. * The UPP is also being extended through MDTFANS grant financing 5

16 The external monitoring includes: 0 Community participatory monitoring - the most effective means of monitoring is through the beneficiary communities, themselves, who elect a monitoring committee to oversee project implementation and finances. Committee members check on prices, quotations, supply of goods (quality and quantity), benefits to the community, financial book-keeping, and the progress of infrastructure implementation. The implementation team also reports to the communities twice in accountability meetings (such meetings are stipulated in the MDTFANS Operations Manual) regarding project progress and finances. KDP also requires project information to be posted on village information boards. 0 KDP is routinely audited by BPKP. To date, it has also received supplemental audits from both Price Waterhouse and Moores Rowland. For Aceh and North Sumatra, the standard 2.5% audit sample will be increased to 5%. The revised audit manual for Aceh and North Sumatra includes direct feedback to village and kecamatan assemblies on the findings from BPKP audits. 0 Independent civil society monitoring - through contracts to 28 independent provincial NGOs, and 32 independent journalists. Consideration is also being given to including university students. The journalists contracts provide them with operational expenses so they can visit and report on KDP project sites in regional and national newspapers. They do not provide any prior report to the project for review before publication. Two copies of their published articles are sent to Home Affairs, and an annual review summarizes their findings. The journalists provide a route by which the independent NGO monitors and other civil society groups can report on KDP activities. KDP has already accumulated a large body of evaluation information in both Indonesian and English that is online and can also be made available to the MDTFANS Secretariat and Steering Committee. These evaluations include: i. NGO evaluation reports ii. Economic and financial retums to KDP investments in poor villages iii. Studies on participation by women and the poor iv. Reviews of grievance resolutions and accusations of corruption in KDP v. Environmental and technical reviews Quantitative evaluations to date include a 100-village economic evaluation, and a 55,000 household expenditure questionnaire drawn from Susenas, the government s national expenditure survey. Both studies found high rates of return to KDP investments and effective poverty targeting. More qualitative methods, in particular community-based monitoring, draw on tools such as participatory monitoring, using the photo documentation methods that were developed for the linked widows in conflict areas project supported through the Japanese Social Development fimd, and community monitoring and evaluation techniques developed by the Aceh NGO forum during KDP 1. Risks. Despite its structure, KDP is not exempt or immune from corruption and other forms of leakage. Indonesia s lax system for sanctioning clear cases of corruption aggravates the risk since, once it is clear how few risks there are to stealing money, new entrants quickly join the corruption market. KDP s general strategy for combating this hinges on two elements: high levels of social control through the various mechanisms (including community participation) to promote social oversight and financial transparency; and prompt action by government to pursue cases of documented corruption. The government has announced a national anti-corruption campaign. Sustained, follow-on enforcement would reduce corruption risks considerably; correspondingly, a failure to implement the campaign would allow for the continuance of bad practices. 6

17 Risk RiskRating 1 Risk Mitigation Measure Component 3: Data collection quality is bad Component 4: 5 core regulations not adopted Extemal autonomy of revolving fund management Locally available human resources for training in local fund management is insufficient. Matching grants in non-tsunami districts do not materialize From Components to Outputs Component 1: Matching grant formula for long-term sustainability achieved Component 4: Regulations inadequate Corruption risks: Block Grants: Minimal risks are expected to affect the block grant transfer. Village Planning Capacity: Collusion risks exist with suppliers; nepotism with withinvillage selection Implementation Support: Main risks lie with procurement and with company transfers to field consultants Microfinance -- Main risks are collusion among bidders and forced partnerships Studies -- Main risk is procurement collusion and substitution of personnel Overall Risk Rating S H M S S M M M M TOR and contract will specify on-site supervision. Follow-on support from KDP is keyed to adoption of regulations. Operational Manual requires Bank review Outsourcing to NGOs and banks Refusing service to the districts that do not honor agreements Working group within BAPPENAS and MoF Consultations with specialists and local governments underway Using block grants and independent document counterflows minimizes risk. Publicallydisclosed audits provide an additional check. End use oversight remains vulnerable. Public accountability for all procurement limits supplier collusion. Open elections for FD positions limits favorite son choices Main mechanism has been to switch to direct contracting of consultants, with standard monthly payments transferred through payroll Disclosure rules will ensure competition Close monitoring by MDTF Risk Rating - H (High Risk), S (Substantial Risk), M (Modest Risk), N (Negligible or Low Risk) PART VI - SOCIAL ISSUES KDP's primary objectives are to support social development. Three topics deserve special mention. These are social issues related to inclusion, poverty targeting, and the strategy for local institutional reform. 7

18 Inclusion of women and the poor have been problematic issues for development projects in Indonesia, including KDP. The overall participation of women in Indonesian governance has generally dropped as decentralization progresses and traditional social institutions are revived. Nevertheless, KDP's gender action program has made good progress in some areas, and operational analysis is also doing a good job identifying new methods for increasing the involvement of women. The introduction of a separate planning stream for women has been particularly effective, as have project decision making rules that require the physical presence of women in decision meetings. KDP2 included a competition for all KDP facilitator groups to advance their best proposals for increasing the involvement of women. Results from the competition will be brought into the KDP3 operational manual and training programs and will be applied in the disaster affected areas under the MDTFANS grant-financed KDP. Poverty targeting. KDP uses a fairly sophisticated method of general poverty targeting. It begins with the development of a master poverty list using the national expenditure survey and an infrastructure gap assessment survey assembled by Bappenas. The latter will be very much to the fore in the disaster stricken areas of Aceh and North Sumatra. Provinces then select eligible districts from this list, and the districts then propose eligible subdistricts. The final lists are then re-verified by Bappenas. While there are problems with both the quality of survey data and some local manipulation of eligibility criteria, by and large this method appears to be reasonably effective at identifying poor regions. This overall success however, diminishes significantly when one examines poverty targeting within sub districts and villages. Because KDP's decision-making process is based on public review of proposals, wealthier and therefore more educated groups are more able to succeed in the competition. Other variables that can act against the poor within sub districts and villages include distance, language differences, and deep-seated hierarchies that make the poor unwilling to speak up in public meetings. Better facilitation can break through some of these barriers, but the ability of local elites to control the KDP process remains a major challenge to the program. For Aceh, the overall master targeting framework was updated in March and April 2005 through a comprehensive village damage assessment carried out by facilitators during preparation of the MDTFTRANS project. All villages drew maps identifying the levels and scope of damage. These village maps and records formed the basis of the MDTF reconstruction budget assessments (the village data has also been used by IOM and will soon be available online). Working with local institutions. An important question is how can development projects work effectively with community and local government institutions? Indonesia's ongoing decentralization program and the accompanying revival of "adat" (customary) institutions and practices add a new level of complexity to the question. While in general all studies show that people prefer their "own" organizations to development groups newly formed by government agencies, not all traditional organizations are equally well received. "Adat" institutions in many parts of Indonesia already face resistance from community members who see them as espousing sectarian rather than village-wide interests. Also, for both traditional and modem institutions of governance in rural Indonesia, lack of alternative channels of access and redress continue to be central challenges. A long-term challenge is the need to develop a full fledged system of multiple checks and balances between different branches of government and the smooth flow of information between different levels of political and civil society. PART VI1 - PROCUREMENT ARRANGEMENTS Procurement for the proposed MDTFANS grant-financed KDP project will be carried out in accordance with the World Bank's "Guidelines: Procurement Under IBRD Loans and IDA Credits" dated May 2004; and "Guidelines: Selection and Employment of Consultants by World Bank 8

19 Borrowers dated May 2004, and the provisions stipulated in the Grant Agreement with MOHA. A Procurement Plan will stipulate the different procurement methods or consultant selection methods, estimated costs, prior review requirements, and timeframe as agreed between the Borrower and IDA, as Partner Agency. The Procurement Plan will be updated at least annually or as required to reflect the actual project implementation needs and improvements in institutional capacity. Selection of Consultants. Consultant services under the MDTFANS grant-financed KDP will consist of: (i) Consultants to provide Implementation Support: National Management Consultants, District Consultants and Kecamatan Facilitators; (ii) Consulting firms for surveys, audits, impact monitoring, and special programs. Considering that this is an extension to the wider KDP3 project and that selection of entirely new consultants would be disruptive as well as confusing in the field, these consultants are planned to be single sourced through extensions to the contracts of existing consultants which originally were selected through a competitive process under earlier KDP projects subject to satisfactory performance. If a new selection is required, this will be processed on a competitive basis. Some exceptions are for selection of consultants with unique qualifications, such as the National Statistics Bureau (BPS) which were initially single-sourced under the earlier KDP projects. Goods. A small number of computers, associated office equipment, and motorcycles will be needed in each district or subdistrict to replace items lost to the tsunami. No one district or subdistrict is expected to require goods worth more than $10,000. These will be purchased through local shopping. Operating Costs. These consist of expenditures for kecamatan and village staff training, workshops, minor office equipment, supplies, and utilities. Expenditures for training and workshops cover costs for travel, accommodation, meals, and venues, which will be processed following standard government procedures. A semi-annual estimated travel schedule for these operating costs is prepared and submitted to IDA. Tickets are purchased through normal government procedures. Per diem allowances for travel follow standard government procedures. Kecamatan Block Grants. These are block grants to the community in which procurement will be undertaken using the community participation method. Around 9598% of these activities will be works for village infrastructures and a smaller part will be used for sub-districtskecamatan planning grants and revolving fund schemes. Procurement under the community participation scheme requires a price comparison from at least three suppliers for transactions estimated to cost less than IDR 15 million (around USD 1,560 equivalent). For transactions estimated to cost IDR 15 million (around USD 1,560 equivalent) or more, a bidding process has to be arranged by the community groups. The procurement procedures and standard forms to be used for each procurement method as well as model contracts, are presented in the Project Management Manual. Assessment of the agency s capacity to implement procurement. Procurement activities will be carried out by the Directorate General of Community Empowerment - Pemberdayaan Masyarakat dan Desa (PMD), of the Ministry of Home Affairs (MOHA). The agency is staffed by a Project Manager, assisted by Treasury and Financial Management Officers and the procurement function is staffed by a Procurement Specialist. Since this MDTFANS, is basically an expansion of the current KDP projects, the assessment of the capacity of the Implementing Agency (PMD) to procure for the project refers to the PCAR of KDP3 / KDP3b. The assessment reviewed the organizational structure for implementing the project and the interaction between the project s staff responsible for procurement and the Ministry s relevant central unit for administration and finance. 9

20 Risks. The key issues and risks conceming procurement for implementation of the wider KDP project have been identified in the PCAR of KDP3KDP3b and include legal issues, project cycle management, organization and functions, support and control systems, record keeping, staffing, and the general procurement environment. Some of the applicable corrective measures for this MDTFANS are: a a a a a a Employ three additional procurement specialists in PMD. Enhanced disclosure of information to further enable civil society oversight. The procurement plan has been updated and an updated procurement plan will be required for each new fiscal year before disbursements can be initiated. A Project Operations Manual has been developed during preparation. This manual contains a section on procurement which covers procurement procedures, procurement methods, and reporting requirements. The manual was reviewed during appraisal. The project Grant Agreement specifies that all changes to the manual must be approved by IDA, as Partner Agency. Procurement supervision will be conducted every six months and the procurement plan will be monitored on a continuous basis. To enhance procurement capacity of the villages, procurement training will be conducted as part of the capacity building for project management in all participating villages. The overall project risk for procurement is medium. Procurement Plan. The PMD developed a procurement plan for project implementation that expands the procurement plan of the KDP3b project. This plan provides the basis for the procurement methods. This plan has been agreed between MOHA and IDA is available in the project file. It will also be available in the project s database and on the World Bank s extemal 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. Frequency of Procurement Supervision. In addition to the prior review supervision to be carried out from Bank offices, the capacity assessment of the Implementing Agency has recommended bi-annual supervision missions to visit the field to cany out post review of procurement actions. Details of the Procurement Arrangements (a) The following tables explain the procurement arrangements under the MDTFANS: (b) All procurement of Goods through Shopping will be post reviewed. The prior review threshold for Consulting firms is USD 100,000 and for consulting contracts with individuals the prior review threshold is USD 50,000. All sole source selection will be subject to prior review. The prior review thresholds will be set forth in the Procurement Plan of the project and may be revisited following the capacity improvement of the Borrower. (c) Shortlists composed entirely of national consultants: Shortlist of consultants for services estimated to cost less than US$ 400,000 equivalent per contract, may be composed entirely of national consultants in accordance with the provisions of paragraph 2.7 of the Consultant Guidelines. 10

21 ~ Sele :tion of Consulting. Services: - Ref No Description of Assignment Additional Sosial and Technical Facilitators in NAD Province and Nias including office support Additional Specialist Consultants at Provincial level including office support Additional Individual Consultant at KDP Secretariat including office support Province Based Monitoring in NAD Province Province Based Monitoring in Nias, North Sumatera Province Organizer for Pre services Training & Refreshment Training and Trauma Healing Support in NAD Province and Nias Bank services for managing Community Training funds Estimated 1,993, Contr Selectio n Method sss sss IC CQS I 55,556 CQS I 833,333 sss sss I Review 1 by Bank (Prior I Post) Prior Post Expected Proposals Sub mission 05 I December 05 I February 06 Comments Contract Amendments of KDP contract to PT Phibetha Kalamwijaya Contract Amendments of KDP contract to PT Amyhtas Expert Consultant, Local NGO Local NGO Modification Existing Contract PT. Amythas Expert Consultant - 10 Audit for MDTFNS Grant 111,111 sss 11 Journalist Monitoring 55,556 CQS 13 Impact Monitoring - 14 District Profiles Baselines Survey - 83,333 83,333 CQS sss ICQS March 06 Statistics Board) 1 Autonomous Gov. Universit Proci Ref. No. 1. Contract (Description) Procurement Office Equipment for Support Provincial KDP Estimated Procurement Review Expected Comments cost Method bybank Bid- (Prior / Opening Post) Date 18,556 Shopping Post November,

22 Secretariat at NAD Province 2. Procurement 15,000 Shopping Post Computer Equipment for Support Provincial KDP Secretariat at NAD Province 3. Procurement Office 12,000 Shopping Post motorcycles for Support Provincial KDP Secretariat at NAD Province November, 2005 November, 2005 PART VI11 - FINANCIAL MANAGEMENT, AUDIT AND DISBURSEMENT ARRANGEMENTS Executive Summary and Conclusion The Executing Agency for the Trust Fund will be the Ministry of Home Affair (MOHA). The financial management assessment takes into account the existing constraints arising fkom the security conditions in Aceh, and inadequacies of project management staff of sub-districts that were directly affected by the Tsunami. The central project management (CPMU) in MOHA as the lead implementing agency has had prior experience in managing Bank financed projects. However, in managing financial management risks, it is anticipated that special challenges will be posed by weak coordination among different government agencies at the centre and the districts that are involved in planning approval of budgets for this project, weak financial management capacity at the local level and project implementation and the wide geographic spread of project work at the community level. Based on these factors, financial management risks in the project entity have been rated as substantial. To help mitigate these risks, a detailed operating procedures manual that has been adapted from the other KDP projects funded by the bank will be provided, together with a team of consultants and community facilitators to support project staff in maintaining financial controls. Internal Controls and Risk Analysis The project s major risks relate to block grants implementation at the community group (sub-district and village) level, particularly on how effectively grant beneficiaries use and account for the funds that have been used for intended purposes; coordination among government agencies and project management capacity. The project includes several mechanisms to mitigate the risks. Among them are: 0 Channeling the project funds directly to community operated bank accounts. The community groups will manage and execute the project implementation and account for these collectively. 0 Coordination with other agencies with Government s rehabilitation agency for Aceh (BRR) 0 Providing technical support to the national and local management teams. The consultants will assist central as well as local project implementing unit on project administration and implementation. 0 Independent reporting by trained facilitators, who supervise and monitor developments of project implementation 0 Adaptation of other proven management tools and systems used successfully under existing KDP project. Some of these are already in operation in other areas in Aceh as part of the ongoing KDP projects. 12

23 0 The central project management unit (PMU) will issue the project operational manual for the project as a key risk mitigation measure. Besides the above risks, some risks may arise due to delays in the issue of budget approval documents (DPA) by the Ministry of Finance and other related documents, such as project manual and budget circular letter. In the past, delay in issuing such documents has been significant, and this has disrupted fund flows. The Bank proposes to mitigate these risks by requiring drafts of the above documents to be available before effectiveness of the grant agreement. We also require all required procedures to be documented in a Project Operational Manual. A detailed analysis of financial management risks arising from the country situation, the proposed project entities and specific project features and related internal controls has been completed during the assessment, and is summarized below. These risks have been rated on a scale from High, Substantial, Moderate and Low. 1. Budgetary procedures H Overall pragress in budgeting reforms is slow. Risks arise from incomplete implementation guidelines on a new finance and treasury laws. There are many implementation guidelines which need to be issued by MOF. 2. Public Sector Accounting S Public sector follows single entry and cash basis with a partially computerized system. Govt. Accounting Standards Board on modified accrual basis have issued been prepared and formally adopted in Auditing Arrangements M BPK now has legal mandate for external audit of central and all regional governments, though coverage is currently limited due to resource constraints. BPK thus has legal mandate for external audit of all reconstruction projects in Acehr OVERALL lnherehit COUNTRY RISK Substantial 1. Implementing Entity Organization 2, Accounting -~ capacity, staffing. 3. Audit arrangements 4. Information systems. Reporting and monitoring. Overall Entitv mecific Risk M S S M Substantial Lead implementing agency is MOHA, which has past experience in managing Bank projects. However, capacity of local government is weak. Accounting capacity at MOHA is adequate, but capacity in local government is weak. Risks arise from integrity constraints and limited capacity of the auditor There is risk of not getting reliable and timely financial reports from the local level. KDP has management information system which will be used for the project. 1. Organization Structure 2. Budgetary procedures H H MOHA has several experiences in managing Bank projects. However, coordination and capacity in the local level are weak. Group of consultant team will be provided to assist PIU to manage the project in the local level. Budget document issuance may create delays in fund flows and hence project implementation. Budget documents should be drafted and mocessed earlv. 13

24 ~~ 3. Flow of Fund I 4. Selection and out put of M consultants e M 7. Payment validation S 8. Audit arrangements M I The fimd will transfer to communitv account in three tranches (40%, 40% and 20%). Except the first tranche, the transfer will depend on progress implementation. There will be independent facilitators who will ensure that the fund goes to eligible community. Risks may also arise from decentralized use of imprest bank accounts for field consultant payment. Mitigation of these risks will be through extension of financial audit to include such imprest accounts. Timely mobilization of consultants and facilitators in the fields. consultant payment related to presentation of consultant in the field I The community group will execute the project implementation. M Aadoption of proven management tools and systems used of existing I KDP. I Traditionally a weak area in Govt. executed projects. To mitigate risks, additional documentation and internal control requirements will be prescribed in Project Operational Manual to enhance I documentary trails. Risks arise from the auditors integrity and capacity constraints. I Option of hiring a private audit firm to work under BPK Proiect Financial Management Staffs MOHA finance staffs have experience in financial management of many other Bank financed project. They meet the government requirement as project finance officer. Some districts which have previous KDP experience have staffs have adequate experience and knowledge. Some other districts that were affected by tsunami do not have adequately trained staff. The mitigation actions to reduce the above risks, include providing technical assistance and independent monitoring to the project management operation. The project consultants will provide technical assistance and training in project screening, financial management, procurement included budget document preparation, disbursement mechanism, accounting and reporting. The project also provides technical assistance for oversight and monitoring at the local level. Accounting and Reporting The financial transactions for this project will all be recorded in the Government accounting systems and included in Government accountability reports. However, since these reports are not entirely suitable for project financial monitoring, for project financial reporting a separate set of special purpose financial statements will be prepared and submitted to the Bank / Trustees. The specific accounting procedures for the project s activities will be included in the Project Manual. The Project Management Unit (PMU) in MOHA and PJOK in sub district level will maintain separate accounting records, on cash basis. The community groups are also required to maintain simple accounting and prepare financial reports for disclosure to communities. Project consultants will assist all implementing agencies on financial administration. PMU in MOHA will be responsible to prepare a consolidated Financial Monitoring Report (FMR) and submit this to the Bank on quarterly basis, in formats to be agreed with the bank. This will include information on financial, physical progress as well as procurement activities. Special purpose financial statements for this project will be prepared annually for audit purposes. Audit Arrangement The audit of the annual special purpose financial statements will be carried out by independent auditor acceptable to the Bank. The annual audit report will be furnished to the Bank / Trustees no later than six months after the end of the government s fiscal year. The acceptability of auditors will take into 14

25 account specific audit methodologies that are needed to audit widely dispersed community based activities, as has been established under other on-going KDP projects in the country. Audit Report Project Financial Statement Due Date A single annual Audit Report, no later than six months after the end of each Fiscal Year Special Account GO1 will establish a Special Account (SA) at Bank Indonesia denominated in U S dollars, with an authorized ceiling in accordance with the standard Bank disbursement procedures. The SA will be under the name of the Directorate General of Treasury (DG Treasury), Ministry of Finance. The DG Treasury shall provide copies of the weekly bank statements of the SA to the central project management unit. Special Account withdrawal procedures will be followed the govemment procedures which have been accepted to the Bank in the past. The project will follow FMR-based disbursement procedures for replenishments into the Special Account. The Withdrawal Application (W/A) will be submitted to the Bank on quarterly basis and supported by quarterly FMR and cash forecast for the next six months. Flow of Fund The project will follow the standard govemment flow of fund mechanism for payments to beneficiaries, which is acceptable to the Bank. The project manager will be responsible to administer and prepare reports on project activities. The project manager in the central as well as PJOK in the local level, submit their payment requests (SPM) to the nearby Treasury Offices (KPPN) who will issue payment orders (SP2D) to the operational bank; to transfer the money directly to the third parties or community bank account. For the sub-grants, once a community financial unit (UPK) received the sub-grant fund in its bank account, UPK may pay the fund to suppliers, wages to village worker or other beneficiaries. Payments to field consultant salary will utilize impress account mechanism to administration services firm which developed and applied in existing KDP. The first payment will cover 90 days (3 months) of field consultants operation cost. The detail mechanism will be in the operation manual. After the operational bank transfer the fund to third parties or community account the operational bank will issue a debit memo to the Bank Indonesia which will debit the project Special Account. Based on SP2D issued, the PMU prepares a project financial report which should be submitted to the World Bank on a quarterly basis and used as the basis for disbursement. The flow of fund diagram is as in diagram 1. 15

26 Diagram 1 Flow of Fund & Reporting Mechanism I WorldBank [ A T FMWA Central 0 erational Tr asuryoffice 4- ~1 Il.r SP2D SPM ~1 Operational - 4 ( k n a s ( Treasury Office 4- SPPD ~1 SPM FFacilitator l payment to third parties, communities & beneficiaries Allocations of Grant proceeds Total Procurement The project will follow procurement procedures for community demand driven (CDD). The risk may come from availability of material in the local market, since there will be a big demand for such materials in tsunami affected area.. Another risk is selection of reliable and trained consultants who will need to assist the project management units as well as community groups. Arranging hundreds of trained individual consultants locally, in the face of similar needs of other projects in Aceh, will present challenges. 16

27 Compliance with Audit Covenants. There is no outstanding Audit Report either from the ministry or DG level on the Bank financed project. Therefore, there is no restriction for the agency to proceed with the project. Supervision Plan Supervision of project financial management will be performed on a risk-based approach at least twice a year. The supervision will review the project s financial management system, including but not limited to sub-grant expenditures, accounting, reporting and internal control. The financial management supervision will be conducted by financial management specialist and Bank consultants. Action Plan There is several action plans that central government need to implement before project became effective. Table below shows action plan as agreed Issues/ Problems Remedial Action Responsibility Unit 1. Project staffing Appointment of project management staff, MOHA inc. financial officer for the project management unit and draft TOR for FM consultants should be agreed with the Bank 2. Project management Recruitment of FM Consultants MOHA capacity 3.Project Operational Project Operational Manual issued MOHA Manual (POM) or JuklaWJuknis, inc. FM Due Date Before execution of Grants Agreement In the first quarter Year 1 ofproject implementation Before project effectiveness 4. Budget & Funding I The government budget is calculated and MOHN I Before execution for the first year implementation documented, including budget for local level MOF of Grants Agreement Kecamatan Grant - Disbursement process. KDP begins with a fixed total amount that is assigned to a sub-district. This amount is standard and is widely publicized so that all stakeholders know how much total money is available. Within the sub-district or village, the money supports individual proposals that come from village assemblies. The allocation of funds to a particular village is based on completed designs and budgets drawn up together by the village and the field engineer and approved by the local government s project manager. Once determined, this amount of funds is never changed, although how it is spent and the physical works undertaken can easily be amended by the three parties. Upon ratification of,the plans by the project manager and responsible party from the village, the village implementation team requests an initial withdrawal from the local branch of the treasury at the district level. They use a standard administrative format that simply withdraws a standard percentage of the allocated funds. It is signed by the village representatives and by the project manager. The size of the withdrawal is a standard percentage of the budgeted total. The treasury office undertakes a few simple checks when processing each withdrawal: proof that the project manager and village representative are indeed the authorized parties, a copy of the grant agreement with the village, and signature samples. The funds are transferred directly into the account of the village implementation team in a local branch of a government or commercial bank. 17

28 Even though the funds are in their own bank account, the village team cannot withdraw funds without countersigning by the consultant. Both the consultant and the responsible person from the village would have previously submitted their signature samples to the bank, along with proof that they were the authorized persons. In order to obtain the approval of the field engineer, the village implementation team has to produce an acceptable Funds Utilization Plan - a detailed list of anticipated expenditures for the immediate future. The frequency of withdrawals depends in part on physical proximity to the bank from the village, but in principle the amount of cash kept in the village should be as small as practical. In the affected regions, special contracts with commercial or state banks are signed to provide regular cash deliveries to outlying locations. Every expenditures made by the village has to be accounted for in an Expense Report. An adequate receipt is one that has the signature of the person receiving the funds, a clear description of what the expenditure was for, a clear amount, and date. All receipts of materials and services in the Expense Report require the attachment of delivery orders, wherein a designated person notes the items and quantity received, countersigned by the person delivering them. Withdrawals from the bank continue to be made until the first tranche s funds are nearly exhausted. At this point the village requests additional funds from the treasury, using the same form countersigned by the project manager. This shows both the funds requested and cumulative status. In addition to this request, the project manager requires two other items prior to submitting the request to the treasury. The first is the summary of expenses found in the Expense Report, and the second is a status report signed by the local bank saying how much funds remain deposited from the previous tranche. The full expense report includes a summary of expenses and receipts, including the amount of cash on hand in the village. This sheet is backed up with the proof of every expenditures and their associated delivery notes, all of which are glued to blank sheets of paper and bound. One expense report book is prepared for each withdrawal from the treasury, but these books stay in the village. They can be examined by the consultant, the project manager or his designate, any inspectors, and any person in the village who is interested. Payment of incentive wages to villages is accomplished through the use of two standard payment forms. These are used for any payment to a villager, whether working at a daily rate or working on a piece rate based on accomplishment. The form for pay based on attendance lists the workers in a particular group (usually around 20 workers, men and women), their attendance, their accrued wages this period, and their signature (or thumb print if they are illiterate) confirming that they have received the given amount of money. Most payments are on a weekly or bi-weekly basis. Payment based on accomplishment also shows the list of workers, the basis for calculating the volume accomplished, the division of payments to each individual (decided amongst themselves), and their individual signatures. All of these payments and rates are displayed publicly on notice boards. The Cash Book. A key to financial control is the requirement that the implementation team maintain an accurate cash book in a standard format, updated daily. The key features of the cash book are that: 0 The information is maintained in a ledger so that corrections and additions are apparent; 0 It contains a detailed list of all financial transactions, both receipts and expenses; 0 Expenses are described at the same level of detail as the official receipts, with each expenditure entered into a column corresponding to the appropriate project subcomponent (including the village team s administrative expenses) 0 All expenses are coded with a simple expense category and listed with the number written on the proof of expense 0 Two kinds of incoming funds are recorded: from the treasury into the bank, and from the bank into the village treasurer s hands. Balances are calculated using the latter. 0 Erasures, white-out, and obliterating marks are forbidden, so that corrections are visible. 18

29 0 Books are closed near the end of each month and books are then signed by four persons: the village treasurer, the responsible party, the field engineer, the village chief in his capacity as controller, and two villagers as witnesses. 0 A running balance is maintained, with the proviso that the balance cannot be negative. In this way, the books always show the actual status of expenses and cash, without hidden expenses and loans to complicate the understanding of an inspector. Village-level meetings are held during implementation to review procurement and expenditures, and all information is posted on public signboards (avg. 10 per village). An accountability meeting is held at project completion for the village implementation team and the facilitators to account for funds and to hand over the project to the village, represented by the council and the village head. Inspection: Several government inspection agencies will make formal inspections of a given KDP village. The district and provincial inspection offices typically made inspections during implementation to a small sample of villages in their area. They are usually more concerned with administrative inspections, but they also review the physical works to some extent. The National Development Auditing Agency BPKP performs a larger scale inspection several months after the end of the fiscal year, again on a sample of villages. In the field, representatives of their regional branch offices inspect both the administrative and physical aspects, as well as the visible benefits. Their reports are sent both to the project manager in Jakarta as well as to IDA as Partner Agency. More frequent inspections are made by other project consultants. Senior engineers are assigned to each district, and more than half their time (by contract and TOR) is spent in visiting villages to check on the physical works and on the work of the field engineers. This includes checking the administration. In cases where the works or. administration is below standard, recommendations and instructions are left with the implementation team and field engineer. An independent inspector visits villages at random without any accompanying consultants, and this serves as a crosscheck of all the above. Conclusion. Although lacking in sophistication, experience from previous KDP projects show the financial control system in the community projects for the most part is effective in limiting leakages and in detecting leakages that occurred. The system includes checks and balances in funds withdrawals, detailed bookkeeping and records of expenses, and periodic inspections in the field. The formal systems are coupled with the communities social controls and fueled by transparency. Village s capacities to manage these systems vary, but for the most part the differences can be remedied through hands-on training and follow-up. This is not to say that malfeasance never occurs, but it is usually relatively easy to detect, often reported when it does occur, and in enough cases actors have been subjected to administrative sanctions when it was detected to prevent any widespread contagion effects. Weaknesses in the system appear to revolve largely around implementation externalities rather than aspects of the system itself. For example, while the community projects financial management systems can usually detect leakages, there is a much less well developed system for imposing sanctions on people who steal. Similarly, local government auditors have been accused of falsifying reports or to ask villagers for money to not report supposed financial abuses. 1. Environmental Safeguards PART IX - SAFEGUARD POLICIES Any construction activity will have some impact on the environment although the significance is largely proportional to the scale of the construction activity. The scale of the various construction 19

30 activities under the Kecamatan Development Program is relatively small. However, KDP is concerned about preserving the environment and ensuring that any negative effects from KDP activities can be avoided or at least mitigated. The Kecamatan Development Program follows official Indonesian government policy in regards to environmental impacts. Although exempt from formal studies due to the scale of the works, planners of KDP infrastructure are required to consider environmental effects. Experience from Previous KDP Projects. A total of 14,175 small scale infrastructure projects were financed during the third year of the first KDP project. These were considered to be representative of investments in all years and were classified into one of ten infrastructure development types. From the data, the following conclusions were drawn: 0 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 0 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 there was some new construction as well. To provide some perspective, for new construction, the average investment of around 25.3 million rupiah (US$2,850) would finance only 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, but some utilize electrical or diesel pumps. Field oversight reviews did not identify significant or recurrent environmental impacts. Nevertheless, some environmental issues were reported to the KDP complaints unit. Response and Strategy for Controlling Environmental Impacts. Previous experience showed that only a small number of environmental issues were encountered. Most of the issues had their origin in apparent failure to follow best civil engineering practice and it is likely that this can be addressed through continued training and supervision of engineering staff providing technical advice to participating kabutpatens. The method used to ensure that proper attention is paid to environmental problems is a combination of standard checklists and a special checklist for the environment. For each type of subproject, 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. The completion of the special checklist for the environment 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 the midpoint of construction, the same form is brought out to the field and inspected again, at a time when it is still feasible to easily repair deficiencies. At the end of construction, the form is checked one more time against the original plan. 20

31 The kabupaten engineering consultant is responsible for reviewing all infrastructure designs on KDP projects in the kabupaten. He or she will reject any design not accompanied by a completed checklist, 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. Having regard to the environment, the following items are included on the project s negative list: 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 and/or protection of biodiversity except with the prior explicit and written approval of the government agency responsible for the management andor 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. 2. Social Safeguards. Guidelines for Resettlement, Land and Asset Acquisition. During the construction of village infrastructure it is nearly inevitable that some land, crops, trees, houses, or other assets might need to be acquired 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. KDP 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. Previous KDP Experience. On earlier KDP Projects, World Bank supervision missions have never reported any case of families being involuntarily displaced, but there were cases both of facilitators not following the rules, and also cases of the rules being followed but families nevertheless being dissatisfied with their outcome. However, World Bank missions 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 21

32 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. Minimizing acquisition. Both the Third Kecamatan Development Project and the MDTFANS grantfinanced KDP follow the same acquisition procedures as the first two Kecamatan Development Projects. Policy guidelines and procedures meet the standards of World Bank policies on resettlement. KDP's guidelines and reporting formats are incorporated into the project operations manual and are tracked through the MIS. The overarching objective of KDP'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 changed as necessary. Proposals to widen road right-of-ways must also be reviewed carefully. 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: a. 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; b. Donations with compensation. Persons who donate their land or other assets have the right to seek and receive compensation. Voluntary contribution of land and other assets is quite common in Indonesian villages, assuming that no individual loses too significant a 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 KDP is not unusual. Paying compensation for land is also beyond the financial capacity of the village. Providing appropriate compensation. Guidelines have been established to manage compensation for persons in the second category so that all these persons improve or at least hold steady their quality of life, income, and production capacity compared to pre-project conditions. Principle of Compensation. The village must guarantee that one of the following methods is used in timely fashion to compensate the persons who are affected by the project (project funds absolutely cannot be used for compensation): a. acquired land is replaced with other land of equal productivity, or with other productive assets of equal value b. materials and labor are given to replace permanent structures that are removed c. plants destroyed or missing or damaged are compensated in accordance with their value d. other acceptable compensation is given Principle of Consultation. Each village must ensure that all the people affected by the project are consulted at a public meeting. During this meeting, an individual's right to compensation must be explained and justified, as well as other alternatives as found in the guidelines. Formal minutes of the meeting shall be made and must include the main points of discussion as well as any decisions reached, including: a. for voluntary contributions, the name of the donor and details of the donation; 22

33 b. for 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 (m ) 2. Other lands Area affected (m ) Houses or buildings (units/m2) 3. Plants affected by the project Table 3: Summary of Compensation Affected Assets I Compensation I Additional Promised 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. The kecamatan 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 were reached, and their complaints (if any). Project Approval. As the process of determining compensation is the responsibility of the village, wherein the facilitator has no decision-making power, the kecamatan facilitator is bound to do the following: 0 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. 0 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 successklly delivered. 0 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. This has never occurred in the experience of the KDP. Right to Voice Complaints and Take Legal Action. 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 kecamatan. If still not solved, it can be further submitted for a decision by the Bupati. Complaints also can be sent to the Complaints Handling Unit of KDP at the regional or national level, where they will be analyzed and an investigation organized. Verification. At any time, all records regarding compensation, including minutes of the meeting and proof of receiving compensation must be available for inspection by the kecamatan facilitator, kabupaten 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 kecamatan empowerment facilitator assisting the village, to supervising engineers, auditors and socio-economic monitors when they undertake reviews under the project. Conclusion, While no process of land acquisition will ever be fully free of problems, KDP s small size and the need for a local-level consensus does appear to provide an effective control system that 23

34 minimizes the scope and impact of land acquisition. The MDTFANS grant-financed KDP will continue to monitor impacts closely. PART X - COMPLAINTS HANDLING AND ANTI-CORRUPTION STRATEGY Projects in Indonesia operate in a high-risk environment when it comes to issues of leakage and corruption. Project preparation for the wider KDP3, and the MDTFANS grant-financed KDP, build on the 2002 financial management assessment and disbursement action program for KDP2, which provides the compliance framework for fiduciary management. Nevertheless, highly dispersed community projects such as KDP operate in somewhat different institutional environments than standard projects do which must be addressed by their anti-corruption strategies. A well-implemented strategy that makes greater use of social controls and transparency can ensure levels of confidence demonstrably higher than traditional project designs that operate in these very same villages. 1. Overall performance. There are three major sources of evidence which suggest that there is less corruption in KDP than most other community projects. First, KDP s infrastructure is found to be on average 55% less expensive than comparable government-executed infrastructure. These cost savings do not yet include community voluntary contributions which nationally in KDP average 17% of project costs. Technical reviews also conclude that output quality is the same or better. A 2004 infrastructure independent evaluation found that out of the 108 infrastructure projects reviewed, 94% of the projects were found to be of very good or good technical quality. Villagers reported to evaluators that 95% of the projects had significant impacts in their daily quality of life. 2. Identifying Corruption in Indonesian Community Projects. Traditional community development projects have a relatively limited number of well-known points of leakage. A non-exhaustive list would include: Transfers. Financial transfers to communities usually come earmarked or in kind. The Local Level Institutions (ESW) study found that less than 50% of the nominal IDR 20 million cash grant per village got there at all, and less than 15% of that amount actually came as a cash grant. The Government s IDT (Inpres Desa Tertinggal), a $200 million nationwide poverty program, also suffered badly from delivery of goods in kind (usually of an inferior lund). Poor contractor management. Contractor management for communities is normally handled by district technical offices, not by villages. Contract awards are often directed to favored companies, regardless of qualifications or experience. Anecdotal interviews by WB staff have found endemic problems of substitution of inferior materials, unfinished works, and off the top payments for contract awards. There are no sanctions for inferior work. Poor pricing practices. Because contractor markets are not competitive, both over billing and over design are endemic. False taxes and charges. Government charging for services is so common that officials will even issue receipts for blatantly illegal practices, such as a standard 5% charge on all funds going through a Village Head. Virtually every financial transaction in a development project has a charge on it to get the proper forms signed and the funds released. 24

35 Standard fznancial control systems often work against rather than in favor of sound fznancial management. Villagers everywhere report recurrent charges being levied by auditors and inspectors to not find fault with financial reporting, often on formats that either have never been given to villagers or else contradict the ones already in use. The corruption problems with technical assistance for community projects are also well known and, while they are not very different from Indonesian development projects in general, they stand out in the case of community programs because communities often have few alternative suppliers and nobody from whom they can seek redress: Improper billing practices by consultantfzrms. In KDPl, students from one company called the WB to complain about how they and all other candidates (more than 100) were given instructions on how to falsify their CVs to meet the project s TOR. Another (fired) company claimed that it was forced to swallow a merger with the second-ranked company, including an IDR 300 million cash payment and the absorption of 20 entirely unqualified staff. Cuts in salaries and travel allowances. Often QCBS winners can beat the competition because apparently competitive overhead costs are subsidized by later cuts from staff salaries and travel allowances. Price fzxing between TA staff and local government (including village heads) is also common, aided by a general lack of public information about prices. 3. Anti-corruption Strategy and Action Program. Existing Strategy. KDP s anti-corruption strategy has three main themes: (i) eliminate complexity; (ii) shine bright lights on every financial transaction; (iii) respond quickly to complaints. The guiding principle underlying the anti-corruption program is that, KDP procedures must encourage oversight and action by multiple stakeholders, not just the World Bank or the government. Eliminate complexity. In many traditional community-oriented projects, money disappears due to the welter of transfer levels, intermediaries, and processing requirements involved in turning World Bank project funds into tangible infrastructure such as bridges, roads, and water supply systems in distant villages. KDP simplifies every aspect of this system. Because money goes straight from the national level to the village accounts, there are almost none of the delays or leakages normal to designs that step funds down through inter-governmental transfers. The project s handover of budgets to the villagers also supports simplified management: when agencies start listing the many forms and procedural requirements needed to get started, the villagers almost always take their business elsewhere. KDP has also simplified all of the steps involved in financial management and disbursement so that many kinds of stakeholders can easily understand and use them. There are no hidden charges allowed other than those listed on the forms, and Ministry of Finance ratification included notes to auditors that no other financial reporting or license documents were to be used other than those negotiated with the project. All of the basic formats attached to the appraisal report are the same as those used in the field. Shine a bright light. Transparency lies at the core of KDP s anti-corruption work, and it takes place in three main arenas. First, there are a broad range of materials and procedures to ensure that all financial information is both public and publicly displayed within the villages. For example, local shopping price quotations for materials must be read out loud in public meetings to be valid; signboards posted around the villages state material and labor unit costs; and all bookkeeping is managed by an elected 25

36 implementation committee. Unlike standard practice, there isn t a single format in KDP that would allow a lone official to withdraw or transfer funds: all require at least three signatures, including one from an elected villager and a second fiom the project facilitator. Second, KDP involves a broad range of entirely independent groups whose job it is to inspect KDP sites for signs of irregularity. These groups have full access to KDP documents. The provincial NGOs also have monthly meetings with the consultant and government management teams to list the problems they encounter and review proposed corrective actions. Third, the government management group has also taken many steps to ensure national level transparency. KDP is the first World Bank project in Indonesia to send its audit summaries to civil society oversight groups. Contract provisions and follow-up letters for the NGO monitors provide them with full discretion to share all findings, and the independent journalist contracts specify that there is no prior review. MOHA s implementing agency, PMD, also publishes a list of the problems encountered in commonly read provincial newspapers so that independent organizations can check for themselves whether problems have been reported and fixed. Response to complaints. The last major element in the strategy is to follow-up on reported cases of corruption - and to be seen to be following up on corruption by villagers and other stakeholders. KDP has several channels for villagers to complain, including a well-used national complaints box whose address is printed on all village information materials. This complaint handling system was introduced under the first KDP and continues to handle a high volume of complaints and project inquiries. Under the second KDP, in keeping with the evolving decentralized management, the project decentralized the complaints handling process and now there is at least one officer in each of the 16 Regional Management Unit offices. The Project maintains a national and regional level complaints database, updated weekly, which is routinely shared with civil society watchdog groups, including the press. At the provincial level, reports by field staff, villagers, and the monitors are logged in, reported to local government and the national team, and then pursued every two weeks until resolved. In several districts and provinces, increasingly active project coordination teams also pursue corruption problems. In some extreme cases they have removed abusive village heads and sub district heads and succeeded in getting missing funds restored. More common than restoring funds is fixing bad quality infiastructure, and project files document several cases where corrective action plans were proposed and implemented. Approximately 5% of the TA staff has also been replaced because of corruption or letting corruption happen without reporting it. Tables 4 and 5 summarize the reporting and follow-up from the second KDP (January 2003 to June 2004). During this period, the Complaints Handling Unit (HCU) managed a total of 2,381 cases, with a 68 percent resolution rate. Total cases handled to date (1998 to June 2004) are 3,367 cases with an overall resolution rate of 80 percent. Grievances or inquiries originate primarily from consultants reports (83 percent of reported cases), followed by other sources, audits, and community letters. Types of Cases Total Resolved YO of Total Cases Still YO of Total Cases Cases In Process Cases in I Resolved I Process Violations against KDP % % Principles aid Procedures Funds Misuse % % Inappropriate Intervention % 11 15% - Force Majeur % 16 33% Other % 29 7% Total 2,381 1,619 68% % 26

37 Other TOTAL Other newspaper clippings % 2, % They include carry-over cases from 2002 (XDPl) Previous KDP have also enforced a vigorous financial management improvement campaign for national level contracts. This included: e e e e e e letters from the implementing agency, PMD, and the companies to all field staff informing them of their salaries and entitlements; spot on-site inventory reviews of equipment and paycheck stubs; retroactive payment corrections as conditions for contract extensions (esp. for travel); semi-annual meetings with all companies to review their performance; spot ex-post reviews of staff qualifications; and replacement of recurrent offending companies. Action Program. KDP's anti-corruption action program consists of three major sets of actions. First, the project design uses a variety of procedures to minimize leakage during national level procurement, contract management, and financial transfers. Second, prior to appraising the previous second KDP in 2000, the project carried out an anti-corruption diagnostic that supplemented project specific fiduciary requirements with an incentive map of opportunities for corruption within the village planning process (Table 6). The village-level action plan used that map to identify opportunities for minimizing corruption risks, although it should be noted that this is an ongoing process. 27

38 Preparations for implementation: funds are released Implementation: Materials are bought Village labor is mobilized Roads &bridges are built Post-implementation: Loans repaid; revolving funds set up Maintenance of infrastructure leads to bad projects High Main threat is collusion among three signatories of bank withdrawal to take a cut of funds before transferring to village Extremely high Most common source of corruption in KDP (apart from operational funds & consultants' payments) is with procurement of materials. Implementation teams buy cheaper materials than those specified and pocket the difference. Medium Loan repayments managed badly; risk of corruption with user fees for maintenance. KDP's design allows for graduated sanctions because funds cannot be released to the field unless the facilitators are present to sign off on transfers. Removing the facilitators from the field location is relatively easy to carry out and has become a sanction preferred by MOHA as a response to supervision findings. Conversely, once restitution has been made, the facilitator can be returned to the field and the project continues. Although initially reluctant to use this sanction, MOHA has become increasingly confident that it produces rapid results. In a number of cases, MOHA will temporarily suspend an entire kecamatan until corruption problems reported by individual villages have been rectified. This is an effective remedy because it introduces peer pressure rather than making corruption entirely a matter of enforcement by the center. Second, interviews with field staff and companies by Bank missions and reporters suggest a strong downwards trend in diversions. A growing number newspaper reports and village self-reporting point to spillover effects: villagers reject demands for kickbacks and in several cases have run people asking for bribes out of town. Finally, independent reviews by professionally qualified auditors (i.e. SGS) also report generally low corruption levels in KDP subprojects. So much for the good news! The bad news is that: (i) there is still corruption in KDP; (ii) not all remedies work; and (iii) there has been little progress in improving the overarching fiduciary environment within which the project must work. Local level collusion, often with district and village governments, remains the single biggest source of problems. Of special difficulty has been the endemic tendency to avoid sharing information, or limiting its access only to officials and elites. Another recurrent problem has been the harassment and the physical intimidation of staff who report corruption. Fear of reprisals inhibits facilitator's willingness to report corruption, although reports from the facilitators still remain the best source of information about diversions and leakage. Overall, the reporting of problems and their disposition needs to be improved and better protection provided for the whistleblowers who are threatened. Sanctions and remedies. Three of the project's consulting firms (of 19) were not extended in the project's second year because of concerns over delays or cuts in payments to field staff. Not surprisingly, the poorest and most isolated provinces have suffered most from corruption. A very informal group discussion with government counterparts suggested that aggregate corruption in KDP amounts to 10% (project audits estimated that only 5% of funds could not be accounted for) but all such numbers must be treated as working assumptions, at best. By and large official complaint channels have proved to be of little use and complaints to authorities have not provided an effective corruption sanction. Nevertheless, there has been progress over time. In the final year of the 1' KDP, at least 15 legal cases were successfully brought against village and sub 28

39 district officials by communities working with NGOs and justice officers. When pursuit of official corruption happens, sanctions are nearly always the outcome of villager and consultant appeals to higher-level officials, like bupatis, or the outcome of WB supervision follow-up, and are not due to a functioning, accessible system of legal redress. Central government response to the corruption problem has been relatively encouraging. The project management secretariat has expanded the program of legal assistance to KDP villages. They have also initiated monthly meetings with the independent journalists and with the NGO monitors to review progress on their findings. A particularly relevant indicator of growing government interest in the anticorruption work has been the suspension of two provinces because of failure to act on corruption reports. In one case the suspension was lifted when the offending parties were removed and the funds returned, while in the other, the main district where the problems were happening was dropped from the project entirely. Revised strategy. Both the wider 3 d KDP and the MDTFANS grant-financed KDP will extend the basic principles of the strategy outlined above by adding some additional elements to it. The most important new decision will be how to deal with decentralization. Decentralization in principle offers new opportunities to promote government accountability. In practice, at least during the transition to a decentralized administration, the opportunities for rent-seeking are more likely to rise than to fall. Nevertheless, just as center-district relationships are being entirely re-worked, executive-legislative relationships are also a site of struggle. KDP s anti-corruption strategy will chart a course through this broken landscape in the following ways: Technical assistance procurement will remain centralized (a pilot program under a previous community project to decentralize contracting to the provinces failed), although all field staff will be from their province; Increasingly deep involvement of DPRDs, including routine provision of audit reports and the joint implementation monitoring teams; Increasing audits by BPKP and carrying out spot audits from the center by the national management consultant company; Using prior year performance as the basis for increasing each district s KDP allocations; Preparation of an on-site auditing manual that will be issued by MoF and distributed to all KDP participants with an MoF cover letter saying that no other auditing formats are allowed; No projects will be allowed to enter a new project year until problems in the master MIS complaints database have been satisfactorily resolved; Distribution and public posting in each district of a unit cost price table based on real expenditures; and More sharing of information with civil society watchdog groups. At least two independent NGOs and 5 independent journalists will be contracted to monitor KDP Acemias. In the past, government commitment to pursuing corruption problems was at times lackadaisical in part because of the conflict of interest created by the unified civil service. That is, the district level civil servants involved in unauthorized diversions were often outposted members of the same central agencies. Sanctions by past or future colleagues were minimal, and usually taken only in response to strong World Bank (and a times, community) pressure. Decentralization changes this configuration somewhat. All of KDP s local implementing agencies are now part of local government, not Jakarta line agencies and ministries. At least in theory, the built-in conflict between regulation and implementation is eliminated. Part of the anti-corruption strategy of the new projects, therefore, consists of encouraging the Jakarta group to exert their regulatory role 29

40 more forcefully. Evidence that there is some willingness to move this way is already appearing within the current KDP: 0 a a a Strong PMD support for the idea of legal advocacy by using university-based lawyers to help bring legal cases against corruption in KDP; Suspending entire provinces and kabupaten because of local corruption. Strong involvement in DPRD alliance-building; Increased, critical audits by BPKP. MDTF's program for KDP oversight not only in the wider 3rd KDP, but also as Partner Agency under the MDTFANS grant-financed KDP in Aceh and North Sumatra, involves a number of managerial innovations. IDA involvement in capacity assessment and prior reviews is extended much further. MDTF staff will routinely join field supervision, and they will also organize hands-on short courses for task teams and senior counterpart staff. In addition to KDP's collaboration with MDTF, three additional activities promote anti-corruption work in the project. First, because KDP is managed through the World Bank's resident mission, it is feasible to adopt a supervision strategy that involves constant rather than periodic oversight. Supervision missions will visit field sites every month. Second, MDTF will play a very active role in pursuing corruption cases. Project supervision is not done randomly: the project's MIS is used to select cases where corruption or other anomalies have been reported. The government and MDTF pursue verified cases until restitution has been made or the subproject suspended. Third, the World Bank's ESW program on governance and anti-comption includes several KDP-based activities, such as work on mapping corruption in community development projects, an activity on how poor communities can access the legal system, or a recently started program to conduct research on the effectiveness of incentive and sanction regimes in community programs. While results from such programs benefit the Bank's overall governance reform strategy, they also provide immediate benefits to KDP implementation. MDTF oversight for the 3rd KDP and the MDTFANS grant-financed KDP can be strengthened in a number of ways. First, supervision in the initial year will pay special attention to the quality of mechanisms for receiving and responding to complaints from the field. The MDTF team will provide monthly reviews of this system for the first six months of operation. Second, the World Bank's new disclosure policy allows for a more in-depth involvement by civil society organizations, particularly those concerned with transparency and governance reform in Indonesia. Third, the pilot program to outsource additional auditing to private firms will be extended to the 3rd KDP and the MDTFANS grant-financed KDP. Last, MDTF and government will agree on an appropriate regime of sanctions for cases where corruption is discovered. PART XI - RESULTS SUMMARY Results from this twenty-four month program are expected to be as follows: 1. Restoration of all basic community-based infrastructure in the affected areas. Budget calculations are based on a comprehensive village infrastructure assessment carried out in February/ March This covers tertiary roads, culverts, and bridges; water supplies and drainage; village school buildings, community assembly halls, and village offices; and local market places; 2. Comprehensive village training programs for at least 1,000 villages in village level financial management, procurement, community infrastructure assessments, sanitation, and mediumterm development planning. 3. Approximately 150,000 man-days of minimum wage labor; 4. Recapitalization of approximately 4,000-6,000 micro-enterprises among the very poor. 30

41 KDP will also provide another important short-term benefit. Because it has a pre-existing delivery structure in place, it will be able to start disbursing funds to a large number of Acehnese communities - at least 1,000 - as soon as they are approved for funding. The Government has already authorized a special Aceh reconstruction manual for KDP that expands the range of eligible activities and compresses the planning cycle. The planning and disbursement structure can begin to disburse funds directly to villages as soon as they are released from the budget 31

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43 Aanex J:

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