Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized PROJECT INFORMATION DOCUMENT (PID) CONCEPT STAGE Report No.: AB7282 Project Name Road Asset Preservation Program ( P113936) Region EAST ASIA AND PACIFIC Sector Indonesia Project ID Transport (100%) Borrower(s) Government of Indonesia, Ministry of Finance Implementing Directorate General of Highways, Ministry of public Works Agency Environment B Partial Assessment Category Date PID April 2 nd, 2013 Prepared Estimated Date of June 15 th 2013 Appraisal Authorization Estimated Date of December 16 th, 2013 Board Approval 1. Key development issues and rationale for Bank involvement 1. The Directorate-General of Highways (DGH), which is part of the Ministry of Public Works (MPW), has responsibility for the management and development of the national road network and a supporting advisory role to sub-national government agencies for the management of provincial, district (kabupaten) and urban (kota) roads. DGH receives funding for three programs, the road and bridges maintenance program, the road and bridges construction program, and the state leadership and governance program. The former two finance all developmental expenditures related to the management of the national road system, while the latter is funding establishment costs of DGH, including salaries of DGH staff. The Directorate for Planning and Programming in DGH identifies priority activities which are included in the annual work plan of MPW and submitted to BAPPENAS as an input for the Government work plan (RKP) which is submitted to Parliament in May. A key decision in the DGH planning and budgeting process is between expenditures for new construction and maintenance. This decision is taken by the Directorate of Planning and Programming based on expected budget constraints as reflected in the indicative and temporary ceiling and existing commitments, with priority given to maintenance activities. 2. Budget allocations are influenced by the five year master plan which outlines the ministry s five-year policy priorities, objectives and strategic plan for roads. This plan highlights all roads that are considered national priority. Maintenance of roads is priority one. Within road maintenance, routine maintenance is given first priority followed by periodic maintenance and then limited betterment (or capacity expansion). The remaining budget is prioritized for new construction, with a primary advantage given to roads that are identified as national priorities, for example the maintenance activities of the north corridor in Sumatra and the South Corridor in Java which are seen as vital for transportation flows. For maintenance expenditures, the Integrated Road Management System (IRMS) is used to inform allocation
decisions. While IRMS simulations affect actual allocations, there are some priorities that are set outside the IRMS system based on policy priorities as explained above. 3. In recent years, spending on maintenance and rehabilitation has received greater attention, increasing from 25 percent in 2005 to 37 percent of total expenditure on roads in 2009. Expenditure on national roads has nominally almost increased by 6 fold from 5.3 trillion IDR in 2005 to 30 trillion in 2011 (Figure 1). DGH has overseen the addition of 8,300 km of national roads (by reclassification and improvement of sub-standard roads), increased capacity by more than 10 percent, and kept the overall condition of national roads to 86 percent in good and fair condition in 2009, about the same level as in 1984. However this additional budget appeared to go almost entirely into much higher costs of treatment while the output increased by less than 20 percent. Figure 1: Central government spending on roads doubled (real term) between 2005 and 2011 Source: Ministry of Finance, Ministry of Public Work, World Bank staff estimates. Note: * 2011 are budget allocation 4. The spending level on maintenance and rehabilitation in 2010 of IDR 5.9 trillion was close to the estimated annual cost needed to properly maintain national road condition of IDR 6.0 trillion (or US$665 million), pointing to possible inefficiencies1. Output costs grew from 1.2 IDR billion/km to 3.5 IDR billion/km for maintenance and from 1.4 IDR billion/km to almost 6 billion/km for new construction between 2005 and 2009 (Figure 2). The average cost of preservation treatment in 2009-10 of over IDR 3 billion/km, which equates to over USD 300,000/km, seems high by international norms and is equivalent to reconstruction or major structural rehabilitation. Although general inflation and a sharp rise in petroleum costs (affecting asphalt prices) doubtless contributed to this increase, it is more likely that the rise in unit costs was largely driven by additional, more expensive betterment works and the use of higher cost treatments, such as thicker construction, especially within the maintenance program. Figure2: Disconnect between the increase in spending and the outputs (2005-2009) 1 Exchange rate used was from budget assumption 2009 of Rp 10,408/US$.
Source: DGH, MTEF, 2010 5. An analysis of DGH s data from 1,243 national road maintenance contracts shows that (i) the average size of the contracts is small and more than a half of the total routine maintenance contracts have a value of less than USD100,000; (ii) most of the periodic maintenance contacts have a value of less than USD500,000; and (iii) An average unit cost of USD4,455/km and USD159,920/km for routine and periodic maintenance respectively. The unit costs are on the high side of the international range of USD2,000-5,000 for routine maintenance and USD70,000-100,000 for periodic maintenance. 6. There is an extensive use of force account labor for national road routine maintenance, which is increasingly out of line with international best practice. As a result, the national road agency retains a large number of workers which generally leads to less efficient maintenance work. Improving road preservation management by phasing out the force account approach and gradually moving to performance-based contracts (PBC) could further improve efficiency through competition and garner value for money. Over the last three years, DGH has implemented two small PBC pilot road maintenance projects and is currently preparing three additional pilot projects which will integrate the lessons learnt from the first two projects. To mainstream the PBC approach in its road management practices, DGH has issued a Circular (DG Circular No. 06/SE/Db/2011) which recommends the use of the PBC contracting approach for any road project equal or worth more than IDR100 billion (USD10 m). 7. Indonesia is currently implementing a wide-ranging reform of its public financial management practices. The Government has elected to involve several Ministries / Agencies in the pilot exercise. The Ministry of Finance (MoF) requested that the World Bank support Government Institutions in improving their use of budget allocations. DGH has long recognised the importance of the MTEF approach for programming national highway expenditures, and volunteered to participate in this exercise. 8. MoF requested that the World Bank support Government Institutions in improving their use of budget allocations. This will provide a concrete means for the Bank to engage in-depth at DGH level on issues related to improving planning, budgeting, investment execution, and monitoring and evaluation. Improving the usage and effectiveness of road preservation program spending will not only preserve the national road asset which represent around 4% of Indonesia s GDO but will also lead to significant efficiency gains which could be allocated to the much needed road development program.
9. Present funding is sufficient for preservation if applied with optimal policies. DGH has long recognised the importance of improving its management practices and is one of the pilot agencies that developed an MTEF approach for programming national highway expenditures (2010). The MTEF has identified a set of activity performance indicators which could be structured as Disbursement Linked Indicators, DLI2 using a Program for Results (PforR) to support DGH s national road preservation programs. This will provide a concrete means to address issues related to improving planning, budgeting, investment execution, and monitoring and evaluation. 10. This concept note describes the initial outlines for Road Asset Preservation Program. This program benefits significantly from lessons and insights from the Bank s ongoing investments and analytical work in this area, and serves to deepen the Bank s overall engagement in improving country systems. This program would contribute directly to the Bank s current Updated Country Partnership Strategy (CPS) for Indonesia 2013-2015, Investing in Indonesia s Institutions. Through the CPS, the Bank seeks to strengthen both central government and existing LG institutions, rather than develop separate stand-alone Bank projects, in order to increase the effectiveness of planning processes and the impact of budget expenditures. 11. Present funding is sufficient for preservation if applied with optimal policies. DGH has long recognised the importance of improving its management practices and is one of the pilot agencies that developed an MTEF approach for programming national highway expenditures (2010). The MTEF has identified a set of activity performance indicators which could be structured as Disbursement Linked Indicators, DLI using a Program for Results (PforR) to support DGH s national road preservation programs. This will provide a concrete means to address issues related to improving planning, budgeting, investment execution, and monitoring and evaluation. 2. Proposed objective(s) 12. The objective of this proposed program is to support the GOI in promoting greater efficiencies and quality in the delivery of outputs in the infrastructure sectors. More specifically, the objective of this program is to improve the effectiveness and efficiency of road preservation expenditure. This will be achieved by disbursing against results and actions specified in the PforR s Disbursement Linked Indicators (DLIs), which will be structured around the DGH own activity performance indicators as identified in the MTEF (2010). 13. The objective of this proposed program is to support the GOI in promoting greater efficiencies and quality in the delivery of outputs in the infrastructure sectors. More specifically, the objective of this program is to improve the effectiveness and efficiency of road preservation expenditure. This will be achieved by disbursing against results and actions specified in the PforR s Disbursement Linked Indicators (DLIs), which will be structured around the DGH own activity performance indicators as identified in the MTEF (2010). 2 Example of DLIs: Development of a detailed road investment program. Development of a 3-year rolling road preservation program - Bundling of routine and periodic maintenance packages to an average contract value of around USD Xm - Coverage of routine maintenance work by contact vs force account
14. This program will focus on the national road preservation activities which represent around 17 percent of the total national roads spending. A second reason for focusing on the road preservation is to align the program with the GOI s stated medium-term strategy of improving the quality and quantity of infrastructure expenditures and outputs.the program will disburse when DLIs are met. The indicative areas for the DLIs consist of reforms for central and local governments. The proposed size of the program will be US$ 200 million over four years. Disbursement under this program will be based on central government performance as measured by achievement of the DLIs. The DLIs will be structured around compliance with the GOI s own regulations for improved performance and increased transparency. The table below presents the indicative areas within which the DLIs will be developed. During project preparation this will be done jointly with the GOI. Table 1 presents examples of DLIs which will be developed and discussed together with their respective verification protocol with DGH during appraisal. Table 1: Indicative Areas of Results and Associated DLIs Results Area Description of DLIs to be developed jointly with the GOI partners 1. 1000 km of roads maintained using Performance based contracts; Outputs 2. Average Annual Program costs for Preservation works reduced by 15%; 3. Annual routine maintenance network coverage increased by 20%; 4. Preparation of 3-year rolling road preservation program on technical economic basis; Planning 5. Development of clearly defined and robust road investment plans; 6. % of routine maintenance packages contracted out; Procurement 7. Increase the value of contract (to reduce fragmentation) or bundling the work in few contract packages; 8. Annual performance evaluation report on DGH targets; Monitoring and Evaluation (M&E) 9. Road management and performance evaluation information updated and available; 10. Development and operation of road asset planning and performance monitoring systems.
3. Preliminary description 15. The proposed Road Asset Preservation Program finance part of DGH s road preservation program which consists of routine, periodic and rehabilitation work intervention on national road network. The Program will focus on improving the effectiveness and efficiency spending and the quality of outputs. With reference to an existing baseline, targets will be set for the DLIs for each year of the program, with appropriate mechanisms to reward performance with respect to the targets achieved. The proposed DLIs for this program include actions, reporting, intermediate and/or final outputs. More specifically, this proposed RAPP will support DGH s road and bridge preservation program, the Program consists of routine, periodic and rehabilitation works, to be carried out by DGH within the National Road Network from 2014 until 2018. 16. In addition, as an incentive for DGH, MOF is planning to set up a mechanism to reward good performance. When DGH meets or exceeds certain performance targets will be rewarded through additional allocations the following year or through other means of transfers. The performance targets will focus on DLIs dealing with improved planning, budgeting, fiduciary aspects, and improvements in implementation, including the quality of outputs delivered. Disbursements of Bank financing will be made at the request of the borrower upon achievement of the DLIs. The Bank will discuss further with the GOI a third-party entity that will be responsible for verifying achievement of the DLI, and for requesting disbursement. This third-party will most likely be the independent inspectorate general (Irjen) of the MOF in conjunction with that of the MPW, or it could also be the State Financial and Development Board (BPKP). The MOF will transfer the rewards based on DLIs met. Based on experience from the on-going LGDP/DAK Reimbursement, the GOI requested that the Bank team adjust the project cycle for disbursement to match with the Government s budget cycle, which is based on the calendar year. 4. Safeguard policies that might apply 5. This is a PforR operation. The team will undertake a system assessment against OP/BP 9.00 core principles and key planning elements and, if necessary, the formulation of measures for inclusion in the overall Program Action Plan to enhance environmental and social management and outcomes in a manner agreed on with the borrower during implementation. 6. Tentative financing Source: Financing Source (M USD) Amount Borrower 0.00 International Bank for Reconstruction and Development 200.00 Total 200.00 Total 7. Contact point World Bank Mustapha Benmaamar Senior Transport Specialist
5781+3056 / mbenmaamar@worldbank.org Borrower/Client/Recipient Government of Indonesia Directorate of General Highways, Ministry of Public Works Harris BATUBARA Director of planning (62-21) 720-0281, 727-6581 Harris_batubara@hotmail.com Implementing Agencies Directorate of General Highways, Ministry of Public Works Harris BATUBARA Director of planning