Republic of Indonesia Indonesia. [ ] A [X] B [ ] C [ ] FI [ ] TBD (to be determined) Category Date PID Prepared December 4, 2006

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1 Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Project Name Region Sector Project ID Borrower(s) Implementing Agency PROJECT INFORMATION DOCUMENT (PID) CONCEPT STAGE Report No.: AB2722 ID-KDP Additional Financing EAST ASIA AND PACIFIC Sub-national government administration (25%);Water supply (20%);Irrigation and drainage (20%);Roads and highways (20%);Primary education (15%) P REPUBLIC OF INDONESIA Department of Community Development, Ministry of Home Affairs Jl. Pasar Minggu Raya, Km. 19 Indonesia Republic of Indonesia Indonesia Environment [ ] A [X] B [ ] C [ ] FI [ ] TBD (to be determined) Category Date PID Prepared December 4, 2006 Estimated Date of November 13, 2006 Appraisal Authorization Estimated Date of February 20, 2007 Board Approval Key development issues and rationale for Bank involvement 1. This additional financing will provide an additional $116 million loan and $90 million credit to the Indonesia: Third Kecamatan Development Project, second phase. The proposed additional loan and credit would provide additional financing to enhance the scale-up of the KDP program. 2. Launched in 1998, by 2007 KDP was expected to scale-down to 550 subdistricts from its 2006 high of 1,350. However, the president s announcement of a national program that builds on KDP is an important opportunity to help Indonesia tackle poverty reduction using a well-tested instrument. The additional financing will be sufficient to cover a scale-up, to 2,000 poor subdistricts. 3. In 2008 the national program will be fully on-budget. It is expected to cover all 70,000 villages in Indonesia. Donor support by that time will be through a larger partnership

2 approach with additional support requested from the Asian Development Bank and the Japanese Bank for International Cooperation. 4. KDP introduced a number of design innovations that are relevant for reviewing the proposed additional financing. The main ones are: a. KDP s direct disbursement system results in very little transfer loss, and it is now adopted by all Indonesian community projects; 1 b. KDP s facilitators are paid through a payroll managed by a chartered bank rather than through consulting firms, which has improved the timeliness of payment and lowered costs significantly (an estimated $15 million/year). It also reduced the number of management consultant contracts required from 26 to 4; c. KDP was the first World Bank project to appraise an anti-corruption action plan (now mandatory for all projects in Indonesia) and to carry out empirical measurements of interventions designed to reduce project leakage; Evaluations KDP is among the most thoroughly evaluated CDD operations in the Bank s portfolio. Positive evaluations demonstrate the following: Poverty targeting is successful (Alatas, 2005) Infrastructure built by KDP has high economic returns (Dent, 2001, Torrens, 2005) Infrastructure quality is good to very good (Ekart et al, 2004; Torrens, 2005; MOHA 2005) KDP s construction costs are 30-50% less than. alternative means (Torrens 2005) There were no significant safeguards cases in 250 randomly selected subprojects (Gnagy 2005) Corruption rates are low (PwC, Moore s Rowland, BPKP, MIS) Participation of women and the poor is generally high (MIS) Voluntary community contributions are high (MIS) KDP forums reduce conflict (Barron et. Al. 2006) Table 2: Outputs from the Kecamatan Development Project, Subproject Type KDP Phase 1 ( ) KDP Phase 2, ( ) Totals to Date ( ) Infrastructure Roads 16,700 roads 19,000 kms 9,632 roads 11,097 kms 26,332 roads built or upgraded 30,097 kms built or upgraded Bridges 3,500 bridges 3,006 bridges 6,506 bridges built or reconstructed Clean water supply 2,800 units 4,378 units 7,178 clean water supply units built Sanitation 1,300 units 1,604 units 2,904 sanitation units built 1 Donors contributing to KDP include Australia, Canada, Japan, Netherlands, and the United Kingdom

3 Irrigation 5,200 irrig 2,126 irrig systems 7,326 irrigation systems built systems Public Markets 400 new markets 16 rehabilitated 327 new markets 91 rehabilitated 727 public markets built 107 markets rehabilitated Electrification 260 activities 254 activities 514 rural electrification activities Workdays generated from infrastructure projects 25 million workdays 14 million workdays * 39 million workdays generated from infrastructure projects Economic Loan Activities (incl. women s loans) Loan activities 18,000 economic loan activities 24,931 loan activities Loan recipient/ 280,000 loan 471,554 loan Loan group recipients recipients members 42,931 loan activities 751,554 loan recipients Education and Health Health 140 health posts 1,868 health posts 2,008 health posts supported Education 285 new schools built 190 school rehab 380 individual Scholarships 1,046 new schools built 1,159 schools rehab 94,801 individual Scholarships 1,331 new schools built 1,349 schools rehabilitated 95,181 individual scholarships Workday figures not yet complete for last cycles in 2005 Evaluations have also shown the main areas requiring improvement: New statistical methods can improve targeting (Alatas 2005) Heightened audit samples and improved audit procedures will lower losses (Olken 2005) Community institutions lack adequate representation (Evers, Olken) Management capacity is weak (aide-memoirs) O&M is inadequate (MOHA 2005) 5. KDP s planning for 2007 responds to these concerns. Poverty targeting will be improved by using the new village mapping techniques to recalculate the eligibility list. KDP s Aceh reconstruction program piloted an improved audit design based on the Olken study on corruption and village roads, and, pending final evaluation, will extend the approach to the national program. Also as part of the national program, GOI is working with donors through the Decentralization Support Facility (DSF) and the DPL policy series to design a policy reform program for improving subdistrict and village governance. And a DSF-financed study will be assessing village cash flows to identify whether the poor communities covered by CDD programs can afford user fees to improve maintenance. 6. KDP is part of the World Bank s overall community driven development program in Indonesia. That program rests on three strategic directions. KDP and its urban sister UPP provide the main architecture for bottom-up development planning. Linked to KDP and

4 UPP are an increasing number of sectoral programs that provide specialized inputs to improve the delivery of poverty services, including the new conditional cash transfer program. Finally, KDP, working together with IFC and Ausaid, recently launched a longterm program to promote private sector linkages to community development programming. 7. The long-term sustainability of the program to some extent hinges on stabilizing the public administration environment within which community development operates. GOI and the Bank agree on a three year action program that will cover the following themes through a mix of analytical and advisory activities supported through the Decentralization Support Facility, DPL triggers, and policy actions sponsored through KDP s high level coordination group: a. Clarifying the national procurement law to allow for community participation (2007) b. Reforming the bottom-up planning regulations (2007); c. Revising the law on village government (2008); d. Stabilizing subdistrict structure and functions under decentralization (2008); and e. Developing a long-term budget transfer mechanism for community planning (2009). 8. Economic and Financial Analysis of Financing Gap 9. Economic analysis of the scaled-up project does not change the analysis presented in the PAD. Even at full funding, total amounts remain less than 5% of district budgets. Although up-to-date surveys of Indonesia s tertiary infrastructure gap are not available, it remains quite large, particularly off-java. Lack of access infrastructure reduces the viability of rural production. KDP economic rates of return are high in large part because KDP infrastructure creates substantial producer surpluses. 10. Analysis of the financing gap is straightforward. KDP currently has funds sufficient for 575 subdistricts in 2007, which receive approximately Rps. 0.8 billion each. Factoring in an additional 25% to cover the costs of technical assistance, training, and evaluations, this means that 2007 without the national program would require project financing of approximately $72.0 million. This amount is available from the original KDP3b. 11. The proposed 2007 scale-up consists of approximately 2,000 kecamatans, with their block tentatively grants set at an average of Rps 1.2 billion, or $260 million. The MDG performance program costs $60 million. Total costs of all other KDP components amount to approximately 22% of the block grant, or $64 million. Scaling up KDP to the level proposed by government for 2007 therefore requires additional financing of $406.0 million. Subtracting the $72.0 million available from KDP3 leaves a financing gap of

5 $334.0 million, of which the government has already allocated US$130.0 million from the national budget. 12. Benefits and Risks 13. Benefits of the project are twofold. First, KDP provides demonstrably valuable benefits to poor communities across Indonesia. These would be increased and they would reach a larger number of poor communities. More importantly however, is that GOI is now making the transition into transforming these community based programs into on-budget support for all villages across Indonesia. Making community transfers predictable and sustained will allow the model to expand into new areas already being piloted: a. Partnerships for improved education and health service delivery; b. Village links to private sector suppliers and marketing; c. Village-based safety nets; d. Rapid responses to disasters and emergencies. 14. Risks are primarily macro and are unchanged from the risk matrix described in the KDP3b appraisal report. KDP s higher profile (and bigger block grant) increases the corruption risks; for that reason a strengthened anti-corruption plan is attached to this concept note as Annex 3. However, to date KDP s confirmed corruption rate has been quite low and the risk should be appraised as medium rather than high. 15. Appraisal carried out a full fiduciary review, which is available IRIS. The purpose of this assessment was to identify improvements needed both for the additional financing in 2007 but also for the larger national program that will start in Recommendations from that assessment were to: a. Strengthen the fiduciary training program for local government and communities; b. Strengthen the financial management teams and financial controls within PMD; c. Provide an expanded FM training and supervision to facilitators; d. Increase BPKP audit sampling of at least 20% of the kecamatan using the special audit program that has been developed for CDD projects; e. Train local government auditors (Bawasda) and include them in auditing of the kecamatan financial management groups; f. Introduce and train a kecamatan supervisory board and make them the community auditor for the UPK g. Expand the current program of community-based cross audits and to provide small fund for helping CG to pursue their own legal cases; h. Place the complaints handling data based, including audit findings, online. Proposed objective(s)

6 16. On August 16, 2006, the President of Indonesia announced that his government would support a national program for poverty reduction. This will be the first national program for sustainable poverty reduction rather than crisis management -- since the East Asian Crisis plunged nearly 40% of Indonesia s population into poverty. 17. The program consists of two main approaches. Approximately $4.0 billion would be invested in a conditional cash transfer program to improve poor people s use of social services. In its first year the CCT program would target 1.7 million poor families, with a plan to rise to 18.0 million poor families by The second wing of the poverty program is called the National Program for Community Empowerment. Called PNPM in Indonesian, (Program Nasional Pemberdayaan Masyarakat), the PNPM covers both rural and urban parts of Indonesia. Both rural and urban areas will be built by scaling up two World Bank-financed community driven development projects, the Urban Poverty Project and the Kecamatan Development Project. By 2009, all 5,300 rural and urban subdistricts in the county will be covered with one of these two programs. 19. Total financing requirements for the national community empowerment program will reach $1.5 billion per year. Most of this amount will be provided from the national budget. However, because of the late presidential announcement, insufficient provisions were made in the 2007 budget to cover the approximately $930 million to launch the first phase scale-up of the KDP and UPP projects. The purpose of the additional financing being proposed here is to help Indonesia fill that gap. There is no change to the project s original development objectives or closing date other than to adjust their scope to reflect achievements from the extra funding Preliminary description 20. KDP consists of unearmarked block grants that are spent to finance economically productive activities that have been planned through facilitated village and subdistrict meetings. Subdistrict grants amounts are fixed within categories established by subdistrict population density, but village proposals can vary within a pre-determined range. Grants are disbursed directly from the Special Account to collectively held village accounts (through a transfer bank), without entering the inter-governmental financial transfer system. 21. KDP3b has 5 components: a. Block grants to poor communities These constitute approximately 80% of KDP. They consist of unearmarked transfers to subdistrict financial management units, where they are used to support priority investments identified selected through a participatory planning process and ratified in a subdistrict selection meeting. Other than a small negative list that blocks use of funds for activities prohibited by World Bank and government policy (i.e. weapons, civil service salaries etc), menu choices are open. Up to 10% of the block grant can be used to purchase engineering services. Subcategories of the block grant cover:

7 i. Planning grants ( DOK ) covers the cost of the participatory planning process, engineering design services, and village level training; ii. Main block grants In the past approximately 65% of these funds are used for economic infrastructure such as roads, tertiary irrigation and the like, although in the past two years there has been an increase in using the grants for education and health services as well. They are allocated based on the decisions of the subdistrict decision meeting. Up to 25% of the grant can be allocated to village-level revolving funds for women; iii. MDG achievement grants thes block grants fund a randomized pilot evaluation in 300 kecamatans that will test whether using KDP grant mechanism to support village-level poverty reduction action proposals produces results on MDG performance indicators. b. Implementation support consists of social and technical kecamatan facilitators. They oversee the planning process, provide technical advice and training, manage the project s reporting system, and certify project completion. There are usually two facilitators per Kecamatan, although in particularly isolated areas there are three. c. Technical assistance is the formal project administration. It consists of three levels, each of which reports to a corresponding level of government. Overall coordination is through a national management team within the Ministry of Home Affairs. d. Monitoring and Evaluation KDP reserves approximately 2.5% of its budget for monitoring and evaluation. The full monitoring system is described in the main PAD for KDP3b. KDP provides both quantitative and qualitative monitoring, and it also has a mix of internal and outsourced evaluations. For the proposed additional financing, the internal system will be strengthened through better technology, additional training, and improved oversight. e. Operational expenses This category covers government incremental expenses, particularly for the extra travel and contract management caused by KDP. It does not cover salaries. This catergory is less than 1% of project costs. 22. Of special relevance for the proposed additional financing is KDP s modular structure. Each subdistrict is a self-contained set of activities that is not dependent on a master procurement or disbursement plan other than the overall budget. As a result, each year the number of subdistricts can expand or contract depending on the availability resources without jeopardizing contracts or budgeting. KDP s management structure is also flexible. The large majority of staff are hired as individual consultants and paid directly through a payroll managed by a bank. This minimizes the extent to which contracts must be procured and amended as the annual plan is adjusted.

8 23. Safeguard policies that might apply Both environment and social safeguard policies apply, but in a context where individual subprojects are all very small and do not pose cumulative threats. Environmental policies primarily refer to proper site management to avoid shoddy disposal or the use of banned materials, including protected species such as rock corals for foundations. Social policies refer to land acquisition. However, a random review of 215 subprojects found no significant environment or social impacts. The primary mechanism for improved environmental management will be improved training and oversight. A grant from CIDA for Sulawesi is experimenting with ways to develop a positive environmental menu that would provide communities with incentives for improved natural resource management. Tentative financing Source: ($m.) BORROWER/RECIPIENT 120 INTERNATIONAL BANK FOR RECONSTRUCTION AND 110 DEVELOPMENT INTERNATIONAL DEVELOPMENT ASSOCIATION 90 Total 320 Contact point Contact: Scott E. Guggenheim Title: Lead Social Development Specialist Tel: Fax: Sguggenheim@worldbank.org Location: Jakarta, Indonesia (IBRD)