Corrupcion en Indonesia

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Indonesia

Fiduciary Review of the Second Sulawesi Urban Development Project

Overview Report

This World Banks overview report on the fiduciary review of the SecondSulawesi Urban Development Project (Loan No. 4105-IND) is the outcome of a jointreview by the World Banks Office in Jakarta and its Department of Institutional Integrityin Washington. This report is being released with the concurrence of the Government ofIndonesia. The Project, initially approved in November 1996 for a total sum of US$155million, but scaled back to US$88 million following the financial crisis, aims atimproving the delivery of infrastructure services, strengthening operations andmaintenance activities, and improving environmental management by local governmentsin some 40 cities on the Indonesian island of Sulawesi. Some US$76 million has been

disbursed to date.

The review was part of a program of work initiated by the World Bank, followingits new Country Assistance Strategy approved in January 2001, to strengthen fiduciarycontrols and reduce corruption in World Bank-financed projects in Indonesia through areview of fiduciary practices in selected projects. Sulawesi Urban was selected fromamong those projects where the fiduciary risks were judged to be high and because itinvolved all aspects of procurement including civil works, goods, and consulting services.Because of the high fiduciary risks in Indonesia, the World Bank in its new CountryAssistance Strategy has aimed at redesigning its portfolio to concentrate its lending onprojects where strong community involvement could better monitor projectimplementation, and intensified its fiduciary work on ongoing operations.

The Sulawesi Urban fiduciary review involved a broad overview of procurement,implementation and financial management practices accompanied by an intensive reviewof a sample of contracts in four cities. Despite a severe problem of missingdocumentation, the review found evidence of collusion among bidders, and commonownership of shell companies. The review also found inadequate project oversight byimplementing agencies and consultants resulting in departures from compliance with thecontracts, failure to complete work and changes in contracts without appropriateapprovals. Similar problems were found in financial management. These issues are nowbeing investigated thoroughly by the Investigation Unit of the World Banks Departmentof Institutional Integrity.

Immediately after completion of field work in early March, the World Bankalerted the Government of Indonesia to its serious concerns and suggested that furtherexpenditures on the project from the World Bank loan be halted until remedial actionshave been taken. The Government concurred with this suggestion and has provided fullcooperation to the World Bank in its current investigations. Since April, the World Bankhas held several discussions with the Government on the findings of the fiduciary


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review, and to reach an agreement on the future of the project. The Government has alsoconsulted with local implementing agencies on future options for the project, taking intoaccount that only six months remain before the loan is scheduled to close.

Going forward, the Government and the World Bank have agreed on the

following next steps:

Expenditures on the Sulawesi Urban Project from the World Bank loan willremain on hold until a final decision on the future of the project is taken.

The World Banks Department of Institutional Integrity will complete its work onfollow up actions to the field investigations, and appropriate remedial actions willbe taken, in accordance with the loan agreement. The World Bank will alsodeclare misprocurement as appropriate.

The Government of Indonesia will prepare with the World Banks support an

action plan to address the issues raised by the fiduciary review so that suchproblems do not occur in any new urban project financed by the World Bank.

Until the Department of Institutional Integrity has completed its work, the WorldBank intends to maintain confidentiality on the individual cases being investigated.

Mark BairdCountry Director, IndonesiaWorld Bank Office, Jakarta

June 2002


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INDONESIA

Fiduciary Review of the Second

Sulawesi Urban Development Project

OVERVIEW REPORT

June 2002

The World Bank Office, Jakarta

The World Bank Department of Institutional Integrity, Washington


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INDONESIA

FIDUCIARY REVIEW OF THE SECOND SULAWESI URBAN DEVELOPMENT PROJECT

OVERVIEW REPORT

Page

Summary i

I. Introduction 1A. Objectives of the Fiduciary ReviewB. Basis for the Selection of a Pilot ProjectC. Methodology

II. Findings.. 5A. Maintenance of Records

B. Procurement ProcessC. ImplementationD. Financial Management

Annex 1. Basic Project Information


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Summary

i. This fiduciary review is part of the World Banks program of work1to strengthen itsfiduciary controls in Bank financed projects. It has a limited focus -- a review of the Governmentsfiduciary practices in the implementation of the Second Sulawesi Urban Development Project (Sul2

UDP) in selected contracts in four of the 41 cities and towns under the project2

. An assessment of thedevelopment impact of the project was therefore beyond the scope of this review. The DirectorGeneral, Urban and Rural Development, supported the review as a way to ensure that borrowed fundswere being used well and to draw lessons for future projects.

ii. The review was hampered by the overwhelming amount of missing documentation for amajority of the contracts, relating to the administration of the procurement process and payments tocontractors and other project related financial information. The methodology therefore involvedthree main steps: (i) an overall assessment of the entire population of the 277 contracts in the fourcities which included an assessment of completeness and documentation quality; (ii) a detailedprocurement review of 26 contracts with a value of $1.4 million; and (iii) a detailed financial

management review of 85 contracts with a value of $5.9 million. The results of all three assessmentsindicated weak fiduciary practices in procurement, implementation and financial managementsystems. The overall conclusion of this limited review in the four cities is that the procurementprocess was manipulated in order to give the appearance of competition. It appears that the winnerswere pre-arranged in a majority of the contracts reviewed. Fiduciary weaknesses also occurredduring contract management, implementation, and financial management (i.e., disbursements,accounting, record keeping and auditing). In addition, the review indicated shortcomings in thefiduciary oversight by the Government in the four cities, and poor performance of consultants whowere expected to support the Government in project implementation, supervision and overallcoordination of the project.

iii. The contracts with significant fiduciary concerns are now being investigated by theInvestigation Unit of the World Banks Department of Institutional Integrity, consistent with theBanks policy on fighting fraud and corruption.

iv. Chapter I describes the objectives of the fiduciary review, selection of the project for the pilot,and the methodology for the review. Chapter II presents the findings of significant fiduciaryconcerns in a sample of the contracts reviewed, in four areas maintenance of records, procurementprocess, implementation, and financial management.

v. Following presentation of the findings to the Government of Indonesia, the Bank and the

1 The World Banks Country Assistance Strategy for Indonesia, approved in January 2001, proposed a proactivestrategy for fiduciary work.

2 It is important to note that project implementation is the responsibility of the Borrower (in this case the Governmentof Indonesia), and the World Banks role is to supervise the Borrowers implementation of Bank-financed projects.The Government (and its project implementing agencies) is responsible for carrying out projects with due diligenceand efficiency and in conformity with appropriate practices to achieve their development objectives. This includesresponsibility for putting in place and maintaining adequate financial management systems (including accounting,financial reporting and auditing systems), and procurement and progress monitoringarrangements for the project aspart of overall arrangements for projectmanagement. Thesesystems should also be adequate to ensure that they canprovide to the Bank accurate and timely information regarding project resources and expenditures.


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Government are jointly discussing the following: implications and actions related to the contractsspecifically reviewed in the four cities; implications and actions for the project; and other lessons andpossible actions. The Bank also plans to do an in depth implementation completion report3for theproject to assess the projects development impact.

3 The Bank prepares an implementation completion report for all projects it finances within six months ofcompletion of the activities financed under the loan. In this case, a more in depth study will be undertaken.


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I. Introduction

A. Objective of the Fiduciary Review

1. The main purpose of this work was to review the fiduciary practices in a project. It was doneas part of the World Banks program of work4to strengthen its fiduciary controls in Bank financed

projects.

B. Selection of the Project

2. The Second Sulawesi Urban Development Project (Loan Number 4105-IND) or Sul2 UDPwas chosen for this review. The World Bank had assessed the project to be performing satisfactorilymost of the time since the project start up, but had also considered that the fiduciary risks in theproject were high. The project was also selected because it involved all aspects of procurement,namely, civil works and goods in a decentralized setting, and a very large component of consultantsservices (Annex 1)5. One allegation of fraud and corruption had been brought to the attention of theWorld Bank in one location in Central Sulawesi6. The Director General, Urban and Rural

Development, supported the review of Sul2 UDP as a way to ensure that borrowed funds were beingused well, and to draw lessons for future projects.

3. Sul2 UDP covers 41 cities and towns in Sulawesi. Only four cities were selected for thereview to allow an in-depth assessment Makassar and Pare Pare in South Sulawesi, and Manadoand Bitung in North Sulawesi. The idea behind the four locations in two provinces was to allow thelearning to be spread across different environments -- administrative systems, project managementand implementing units and staff, government officials and elected leaders overseeing theimplementation of the project, consultants, and business associations that would not be connected.

C. Methodology

4. The methodology for the fiduciary review of Sul2 UDP in the four cities involved thefollowing steps:

A broad review of the project information provided by the implementing agencies in anattempt to capture as many indicators of fiduciary concerns as possible.7

Selection of 26 contracts based, in part, on the availability of documentation, and withrelatively more significant and obvious indicators of fiduciary concerns for a more detailed

4 The World Banks Country Assistance Strategy for Indonesia, approved in January 2001, proposed a proactive

strategy for fiduciary work.5 Annex 1 provides basic information on the project and the role and responsibilities of the various consultants for

project implementation support.6 The Bank has received an allegation of corruption in the Sul-2 UDP program in Central Sulawesi, which was referred

to the World Banks Department of Institutional Integrity, Investigation Unit (INTIU) for investigation, but due tosecurity issues related to travel in Central Sulawesi this investigation was deferred. In addition, there have beenseveral complaints related to the procurement process in other cities not included in the fiduciary review. Two casesof misprocurement ($46,800 on September 28, 1998, and $170,474 on August 3, 2001) also occurred.

7 The broad overview involved a cursory review of all 253 procurement packets and contracts available for review(Table 1). This excluded 24 contracts in Manado for which no information, even copies of the contracts, wasavailable. See footnote 14.


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analysis8. The analysis was based upon three core areas: procurement, implementation andfinancial management.

Selection of 78 goods and services contracts and 7 consulting contracts for a detailed financialmanagement analysis.9

As required under Bank policy, where serious indicators of fiduciary concerns were noted, animmediate referral was made to a separate Investigation Team of the World BanksDepartment of Institutional Integrity, Investigation Unit (INTIU)10.

5. The initial review, and subsequent detailed review, was hampered by the overwhelmingamount of missing documentation from the procurement packets11. The missing documentationrelated to the administration of the procurement process and payments to contractors and otherproject related financial information. This problem made a more complete analysis by the fiduciaryreview team impractical. The sample of high-risk contracts could therefore be selected only from afraction of the total population of procurement packets which were substantially complete, as noteven a single packet in any of the four cities contained all the required information. As summarizedin Table 1, about two-thirds and more of the packets listed in each city did not have bid proposals

including those of the losing bidders. Similarly, a very large share of the packets did not includecontract document details such as bid evaluation reports, bid opening attendance sheets, bid priceread-out sheets, Owners Estimates, bid prices, pre-qualification details, and technical specificationsand drawings indicating the scope of work.

6. The extent of the missing bid proposals and contract document information varied from cityto city. For example, of the 79 contracts awarded in Manado, only 55 contract documents were madeavailable to the fiduciary review team. In addition to missing information in the contract documents,49 of packets for the 55 contracts reviewed did not have bids of the losing bidders, further limitingthe ability of the fiduciary review team for its assessment. The agency responsible for managing theproject indicated that many of the documents were lost during the flooding of the offices in

December 2000.

7. The sample size of 26 contracts for a detailed analysis was 9% of the total 277 contracts in thefour cities (Table 1). The total value of the sample was Rp. 14.1 billion ($1.4 million)12or 15% ofthe total value of Rp. 96.6 billion ($9.7 million) of all contracts for civil works and goods in the fourcities (Table 2). The 78 contracts for civil works and goods selected for a detailed review of financial

8 This detailed analysis included interviewing government officials, consultants responsible for projectimplementation, contractors and members of the community, reviewing project related financial information,conducting site visits, and reviewing the detailed project specifications. In addition, further analysis of company

ownership patterns and other activities indicating significant fiduciary concerns, was conducted where sufficientinformation allowed. In total 26 contracts were selected for a detailed analysis (Table 1) and this selection tried toensure that at least one sub-project, from each Sul2 UDP sector, was chosen.

9 There is an overlap between the 26 contracts selected for the procurement, implementation and financial managementdetailed analysis and the 85 contracts selected for the financial management detailed analysis only.

10 The fiduciary review team briefed the Director General of Urban and Rural Development, in Jakarta, on February 8,2002, on progress of the fiduciary review in one city, and informed him that the team was going to refer cases ofserious fiduciary concerns to INTIU for immediate investigation.

11 A procurement packet consists of the information regarding the pre-qualification process, the selection process andthe contract document. Each of these items is comprised of numerous other documents and information.

12 Assuming an exchange rate of Rp. 10,000 per US dollar.


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management aspects represented 28% of the total number of contracts awarded in the four cities.

Table1: Sul-2 UDP Available Population of Procurement Packets for Sampling(Civil Works and Goods Contracts)

Total

No. ofPackets13

Period

Covered

No. of

PacketswithMissing

BidProposals

% of

PacketswithMissing

BidProposals

No. of

PacketswithMissingContract

DocumentDetails

% of Packets

withMissingContract

DocumentDetails

Sample

Size forDetailedReview

Sample

Size forDetailedReview(as % of

TotalPackets)

Makassar 72 1998-2000

49 68 43 60 714 10

Pare Pare 47 1998-2000

30 64 19 40 12 26

Manado 7915 1997-2001

74 94 62 78 416 5

Bitung 79 1997-2001

65 82 74 94 317 4

Total 277 218 79 198 71 26 9

8. High-risk contracts were selected18, initially focusing on procurement and financialmanagement issues, based upon the following risk indicators:

Indication of different firms being owned by the same party and bidding on the same contract.

Similarity of the bid proposals between the winning and losing bidders.

Inconsistencies noted in the documentation of the bidding process.19

The lowest qualified bidder not being accepted.

Implementation or financial management issues noted in the auditor's working papers.

9. The implementation analysis in a few contracts involved a review of the original contractspecifications in comparison with the as-built drawings, back-up data calculation sheets, site visitsand core samples.

10. For the purposes of the financial management analysis, the various Provincial ProjectManagement Units (PPMUs), Project Management Units (PMUs), and Project Implementation Units(PIUs) did not provide a large number of payment vouchers and related accounting records to theBanks fiduciary review team. The team however made arrangements to obtain many of the requiredpayment vouchers from alternative and independent sources, including the Central Treasury Offices

13 The number of packets equals the number of contracts awarded.14 Includes one consultants services contract.15 Out of these, no information was available for 24 contracts including even copies of the contracts.16 A broader analysis with respect to the cross-ownership patterns and bidding practices and its affect on the entire

procurement process in Manado and Bitung was also performed.17 See footnote 15 above.18 The selection of high-risk contracts was also based, in part, on the availability of documentation.19 The inconsistencies noted include similarities in the formatting of the bids and the signatures of various parties

involved in the bid process varying from one document to another.


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in the provinces (KPKN). The financial management analysis included a review of KPKNsdisbursement procedures and control structure. The team then focused on tracing disbursements andsupporting documents for the contracts selected. Additional contracts were also sampled as part ofthe financial management review based on comments in the audit reports, aide memoirs of the Banksupervision missions, and reports produced by the consultants. The expanded sample size for thefinancial management analysis is summarized in Table 2.

11. The analysis of procurement, implementation and financial management aspects of thecontracts was further supplemented by interviews with officials of the Provincial ProjectManagement Units (PPMUs), Project Management Units (PMUs) and Project Implementation Units(PIUs) in the cities and towns, representatives of the Director General, Urban and Rural Development(Project Officer located in Makassar, and Sub-Directors), and consultants.

12. It should be noted that the plan for the overall fiduciary review had allowed approximatelyone week in each of the four cities for the fiduciary review. The separate Investigation Team alsospent approximately one week in each location.

Table 2: Sul-2 UDP -- Expanded Sample Size of Contracts for theFinancial Management (FM) Analysis

Total No. of Packets(Civil Works and Goods)

Sample Size of PacketsSelected for the FM

Analysis

Sample Size of Packets for theFM Analysis (as % of TotalPackets for Civil Works and

Goods)

No. Rp. Billion(US$ millions)

No. Rp. Billion(US$ millions)

% No. % Rp.

Makassar 72 44.6 ($4.6 mil) 17 10.6 ($1.1 mil) 24% 24%

Pare Pare 47 14.2 ($1.4 mil) 22 8.8 ($0.9 mil) 47% 62%

Manado 7918

14.520

($1.4 mil) 20 7.6 ($0.8 mil) 25% 52%Bitung 79 23.3 ($2.3 mil) 19 3.0 ($0.3 mil) 24% 13%

Subtotal 277 96.6 ($9.7 mil) 78 30.0 ($3.0 mil) 28% 31%

Consultantsservicescontracts

7 28.7 ($2.9 mil)

Sample size forFM analysis20

85 58.7 ($5.9 mil)

13. Chapter II summarizes the findings of the fiduciary review of a sample of the contracts in thefour cities.

18 Of these, no information (even the contracts) was available for 24 contracts.20 The amount of Rp. 14.5 billion refers only to 55 contracts for which the contracts were available.20 Includes 7 consultants services contracts in South and North Sulawesi and Jakarta (amount reviewed Rp. 28.7

billion)


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II. Findings

14. The main findings of the fiduciary review of Sul-2 UDP in the four cities are organized intothe following four areas:

Maintenance of records.

Procurement process. Contract management and implementation.

Financial management, including disbursements, accounting, record keeping and auditing.

A. Maintenance of Records

15. In the four cities under the fiduciary review, the problem of missing documents andincomplete information relating to procurement is significant (Table 1). Even the substantiallycomplete contracts did not have all the information they should have (e.g., bid proposals ofunsuccessful bidders, bid evaluation reports, bid opening attendance sheets, bid price read-out sheets,Owners Estimate, bid prices, pre-qualification details, and technical specifications and drawings

indicating the scope of work). This problem is also applicable to the implementation of contracts andfinancial management (e.g., the lack of proper analysis, authorizations and appropriate records tosupport contract amendments, proper documents verifying actual performance prior to the paymentsbeing made, the lack of information showing the recipients of the payments made, findings ofGovernments supervision of the contractors and consultants work, and restrictions on the scope ofaudits).

16. The findings of the fiduciary review have raised concerns about the authenticity and integrityof the documents. In addition to non-compliance with the loan agreement for the project, the non-availability of adequate records is a significant risk to the integrity and accountability of the projectmanagement process.

.B. Procurement Process

17. The overall conclusion of this limited review is that the procurement process, in the sample of26 contracts reviewed in detail in the four cities, was manipulated in order to give the appearance ofcompetition. It appears that the winners were pre-arranged in a majority of the contracts reviewed.The main findings of a detailed review of the sample of contracts, and a review of other contractswhere sufficient information was available for the analysis, which lead to this conclusion aresummarized below.

18. Simi lar it ies between bid prices: Bid prices (total and unit prices) of the winning bidder and

of losing bidders were similar and clustered around the Owners Estimate almost universally in allcontracts in the sample. In many cases, the lowest evaluated bid differed by only a minute fractionfrom the Owners Estimate. In one case, the difference was 0.01% on a contract size of some Rp.440 million. In another case of a similar size, the difference between the prices of the three lowestevaluated bids was 0.2%. In another contract over Rp. 1 billion, the difference between the OwnersEstimate and the lowest evaluated bid was 0.05%, and the difference between the highest and lowestbids was 0.2%. In most contracts different bidders shared the same unit prices, which, for mostitems, were identical to the unit prices in the Owners Estimate. In several cases, the arithmeticmistakes in the Owners Estimate were carried over to the bids. The extent of these findings suggest


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that the bidders in the four cities had access to the detailed calculations of the Owners Estimate andthat they colluded in preparing bids.

19. Other simil ari ties in the bids: The bid proposals generally used the same formatting andlanguage. Documentation contained in the bids appeared to be photocopies of information fromcompeting bid documents. Bidders propose common items (i.e., the same make and model). These

similarities and other problems noted in the procurement process strongly suggest active collusionamong bidders. It also appears that these practices continued throughout project implementationdespite government and consultant oversight.

20. Contractor ownershi p issues: More than one contractor being affiliated at the same address,and bidding on the same procurement package, was common to the majority of bids in the four citieswhere sufficient information was available to make such comparisons. In one city, 18 instances ofcontractors sharing the same address were found. Several cases of contractors sharing the sameaddress and even telephone numbers and bidding against each other on the same procurement packetwere noted. In some cases, different contractors maintained the same bank account. Further analysisof contractor ownership in another city revealed that 7 clusters21of companies were involved in 29 or57% of the contracts reviewed, and in 28% of these contracts companies from the same ownershipcluster were both winning and losing bidders on the same procurement packet.

21. In another city, the analysis of a portion of the total number of the contracts showed that fivegroups of companies for which common ownership could be established were involved in 70% of theprocurement packets and were awarded 37 contracts. In many cases, firms from the same ownershipgroup were both awarded the contract and submitted losing bids for the same procurement packet.

22. The Indonesian Contractors Association (GAPENSI) has been responsible for certifying theclassification of contractors in Indonesia, including in the four cities covered by this fiduciaryreview. Large contractors are generally prominent members of GAPENSI and hold key Officepositions in the GAPENSIs Offices in the provinces, cities, and other branch offices.

23. Similarities in the membership of the tendering committees were noted in all four cities. Inone city, the membership of the tendering committees has generally remained unchanged over time,and across sectors and procurement packets.

24. Authentici ty of documentation in the bids: The above concerns and others discussed in thisparagraph have raised questions about the authenticity and validity of the bids and the procurementprocess in the sample of contracts in the four cities. For example, the signatures of the sameindividual vary across documents in the same bid documents such as on the bid read-out sheet and thebid opening attendance sheet. The dates at which different events have taken place in theprocurement process are inconsistent or out of order. The bid prices are reported differently in thebid evaluation reports. It appears that bid prices may have been altered in some cases after thesubmission of bids. There are also concerns about the authenticity of the bid bonds.

25. Bid evaluation: The detailed review of the 26 contracts and a review of other contracts wherepossible have raised concerns about the quality of the bid evaluation process. In some cases, basedon the information available in the bid proposals, a bidder should have been disqualified. In other

21A cluster of companies is a group of companies that are owned by the same person.


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cases, the bid evaluation reports where available did not provide explanation for not awarding thecontract to the lowest evaluated bidder. Information necessary to evaluate the appropriateness of theprocurement process was however missing in many cases examined by the fiduciary review team.

26. Conclusions on the Procurement Process: The overall conclusion of the fiduciary review isthat the procurement process for the 26 contracts reviewed in detail was manipulated to give the

appearance of competition. The winners appear to have been pre-selected in most cases. Forexample, the findings of the fiduciary review in the four cities, included the following:

The large number of companies within a single ownership cluster appears to be consistentwith the creation of shell companies. A shell company involves the appointment ofnominal directors who are without any real organizational powers or functions, and merelysign documents on behalf of the company.

The similarities between the bid proposals of the winning and losing bidders is consistent withthe possibility of government contracts having pre-arranged winners. The fiduciary reviewnoted that all bidders were members of GAPENSI, and certification from GAPENSI is a

condition of participating in the bidding process for government contracts. Furthermore, thesimilarities between the bid prices is likely to be indicative of the bidders having access to theunit price details of the Owners Estimate in advance of preparing their bids.

The inconsistencies noted in the bid documents are indicative that all bidders are notindividually represented at the pre-qualification or bid selection meetings. In suchcircumstances a single representative could be acting for multiple companies, which isconsistent with the finding that companies from the same ownership cluster submitted boththe winning and losing bids for the same contract.

Instances were noted where the most competitive bidder was excluded from further

evaluation. This is consistent with the possibility that administrative or weak technicalgrounds could be found to exclude competitive bidders from the selection process.

C. Implementation

27. A review of the contract management aspects of a few contracts in the four cities has raisedquestions about the quality of technical work, performance of the consultants, and projectmanagement, as summarized below.

28. I nabili ty to ver if y contract perf ormance: The as built22drawings for a few contractsreviewed in detail in the four cities generally did not contain the information necessary to evaluate

whether or not the actual work performed was consistent with the contracts. The use of the as builtmeasurements enables a calculation of the volume of different items of work executed by thecontractor necessary to evaluate the actual work performed.

29. Technical specif ications vs. actual work completed: A detailed review of the back up datasheets in a few contracts indicates that the actual work performed as stated in the documents is notsupported by actual field survey data. The purpose of the survey information is to demonstrate that

22As built drawings are provided by the contractor at the completion of the work verifying the details of the work done.


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the work was actually completed and in accordance with the scope of work. In one packet selectedfor a detailed review of one back up data sheet, the review revealed that the actual work appeared tobe less than that described in the scope of work, and therefore the Government may have beeninvoiced beyond the actual work performed.

30. Site visit observations indicate problems in contract performance: Site visits of thecontracts selected for a more detailed review indicated that the scope of work may not have beenproperly implemented, and the percentage of completion of works indicated in invoices was beyondthe actual work performed. Some facilities as constructed did not to conform to the bid drawings,and there were no change orders available for the design changes. For example, (i) in a drainagesubproject, drain covers were missing despite the scope of work indicating that such work wasincluded in the contract23; (ii) in a roads project, coring analysis indicated that hot asphalt may nothave been applied as per specifications on a particular road surface, however, such work wasincluded in the invoices; (iii) in a subproject for footpaths, the work on a footpath had not beenproperly completed; (iv) in a water treatment subproject, equipment appeared to be missing or notproperly installed despite the scope of work indicating that such work was included in the contract;and (v) in another water treatment subproject, the inside of water storage tanks did not seem to havebeen properly finished, and the equipment was not operating.

31. Based on the site visits concerning two contracts for the construction of a water treatmentfacility, the descriptions of the scope of work in these contracts were inadequate for the purpose ofdetermining specifically what work was to be performed, and thereby making the evaluation ofperformance difficult. However, items included in the scope of work of the contracts were already inexistence at the site. In addition, an item included in the scope of work of one contract was likely tohave been added to the scope of work of the second contract. As a result it appears that theGovernment was invoiced beyond the actual scope of work performed and goods supplied byapproximately 11% of the contract value.

32. Contract splitti ng: Review of the various contracts in the four cities has raised concerns

about the criteria used in procurement planning, whether adequate attention was given to the need foreconomy and efficiency in project implementation and technical and operational aspects of thefacilities to be constructed under the project, and the adequacy of design, technical specifications anddrawings. In one city, procurement of goods and civil works required for the construction of a watertreatment facility was split into four separate contracts. Although it was anticipated that the fourcontracts would complete the sub-project, the water treatment facility is not operational andadditional work is necessary. The four contracts did not include all of the equipment and materials,and the work required according to the overall detailed engineering design drawings did not appear tohave been performed. Furthermore, the addition and deletion of various items of work appears tohave occurred during contract execution without appropriate authorization or an assessment of theoverall impact to the project completion and ultimate functionality. None of the contracts seemed to

contain the support drawings for the separate contract work although this was the responsibility of theconsultants.

33. In another city, a sub-project involved a solid waste disposal facility. Following the designwork, procurement of goods and civil works required for the facility was split in four separate

23 In addition, no documentation was available to support the changes that were made in the field to change the scope ofwork.


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contracts. The work performed did not appear to be in accordance with the scope of work ortechnical specifications for any of the four contracts reviewed. In addition, as constructed it did notappear that the facility would be functional upon completion. In this case also, none of the contractscontained the supporting drawings for the separate contract work.

34. It is not clear whether the practices of splitting contracts were due to: (i) the desire to award

contracts to several contractors for non-economic reasons; (ii) a practice of limiting bidding tocompanies domiciled in the geographical area of works/goods; (iii) inadequate technical capacity inthe implementing agencies; (iv) poor performance of the consultants; (v) weak oversight; and/or (vi)problems with the current system of budgeting whereby Government funds are made available on anannual basis and counterpart funds can not be carried forward from one year to the next year.

35. Consul tants performance21: Despite the very large component for consultants services in theproject to support the agencies responsible for project implementation and coordination at the variouslevels of the Government (Central, Provincial and Local Governments), the overall conclusion of thefiduciary review team is that the performance of the consultants has been generally poor. This isamply demonstrated in the four cities by the amount of missing documentation, poor quality oftechnical specifications and bid documents, the lack of or poor verification of the works in the field,issuance of completion certificates for incomplete works, and weak reporting on the status of projectprogress.

36. One consultants firm in one of the two provinces reviewed was required to certify theprogress reports and completion certificates verifying that the work by the contractors had beenproperly completed. Site visits indicated instances where the progress reports and completioncertificates were not signed by the consultants, indicating a possible lack of verification that thecontracts had been satisfactorily executed prior to disbursements. The Management Letter attachedto the audit report for the fiscal year 2000, received in December 2001, contain references to lapses inthe supervision of the implementation of the project in many cities, including the four cities coveredby the fiduciary review.

37. The addition and deletion of various items of work during contract implementation allowscontractors to charge for goods provided and civil works performed without the safeguards of acompetitive tendering process. The consultants were to ensure that all of the scopes of work were fullydetailed in the technical specifications and bid drawings such that after the work was completed, theactual work performed could be verified. This did not appear to be the case in a majority of thecontracts reviewed in detail.

21As shown in Annex 1, Sul2 UDP included a substantial component for consultants services to support projectimplementation and management ($16.2 million or 18% of the net loan commitments excluding $2 million fortraining). There were four types of consultants services: (i) project implementation coordination (PCO) and project

implementation support (PIS) consultants to support the Central Government in overall coordination, technical matters,oversight and monitoring in all areas of project implementation, including financial management implementation, andregular reporting on the project progress; (ii) provincial project implementation support (PPIS) consultants in each ofthe four provinces in Sulawesi to provide technical expertise to provincial and local governments in projectimplementation (i.e., in engineering, financial management, capacity building and operations and management), andreport regularly on the project progress status; and (iii) detailed engineering design and supervision (DED) consultantsfor roads and non-roads components of the project in each province to prepare bid documents including bid drawings,supervise the implementation of works, certify the progressive and final measurements of the completed sub-projects,and ensure that contracts are completed according to contract specifications. They were to also review and suitablyendorse the actual physical progress in implementation of the sub-projects in order to support requests for payments.


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38. The consultants issued the quarterly progress reports entitled Summary of ProgramActivities, to support project implementation at the provincial level. The purpose was to report therates of progress for the individual contracts awarded. However, the reports only provided somesubjective analysis and overall conclusions. One section of these reports entitled Problems andIssues was generally limited in size22. None of the reports referred to any significant problems in

the implementation of the project in the four cities or the overall project.

39. Conclusions on the implementation process: There is little evidence based on a review ofthe 26 contracts to suggest that an appropriate amount of project oversight was conducted byGovernment and its various agencies, and the supervisory and advisory consultants in theimplementation of the project in the four cities. There were a number of cases where (i) the workperformed was not in accordance with the technical specifications included in the contract; (ii) sub-projects were either not complete or functional; (iii) there were errors or duplicate entries in the backup data sheets; (iv) the detailed drawings necessary to determine that the actual work was inaccordance with that required in the contracts, were not complete; and (v) the contract change ordersappear to have been made without appropriate approvals.

40. The lack of documentation needed to evaluate the implementation process or verify thecompletion of work prior to releasing payments is a significant problem in the sample of the contractsreviewed. There is evidence to conclude that some disbursements under the sample of contracts inthe four cities were made without the required supporting evidence of contract completion.

41. Furthermore, despite the elaborate institutional structure to support and monitor projectimplementation at the various levels of the Government and a large contingent of the consultants withspecific roles and responsibilities, which include project oversight, there does not seem to be areporting of the significant problems observed by this fiduciary review in the sample of contracts inthe four cities.

D. Financial Management

42. The sample findings of the financial management review indicate that some project relateddisbursements were made in the absence of adequate and appropriate supporting documentation.This violates a fundamental financial management requirement of Governmental oversight, which isto ensure that the activities of Government are auditable. The findings, which lead to this conclusion,are summarized below.

43. Completion of civi l works contracts: Civil works contracts typically include a detailed list ofsub-components for which estimated volumes and unit prices are specified in the contract and inrelated documents. In one city, in each case the fiduciary review team analyzed, the actual volume ofworks completed was stated in payment documents to be exactly equal to contracted volumes withrespect to each sub-component activity. The construction of a road, drainage, and a solid wastedisposal facility is unlikely to occur exactly in accordance with the estimated quantities contained inthe contract, bid documents and the detailed engineering design drawings. In some cases, thecontract change orders appeared to have been issued recognizing significant variations in actualvolumes compared to original contracts in some sub-components, yet it seems that compensatingchanges may have been recorded in other parts of the job such that there was no change in the total

22 In several cases, to a maximum of three sentences.


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value of the contract. This could raise questions whether the documentation may have been adjustedin order that the actual amounts would match the amount included in the contract documents, andconcerning the validity of the documents showing that the civil works contracts were completed.

44. Unsupported project disbursements: In one city, there were numerous instances whereappropriate supporting documentation including the back up data sheets duly certified by the

supervising consultants was not available to assess the basis for disbursements under the contractsreviewed. As a result, it was not possible to assess whether the actual work performed was consistentwith the contractual scope of work. According to staff of the auditor, they have estimated that backup data sheets were not provided for about 60% of the disbursements under civil works contracts. Inthese instances, the only document to support the work done is generally a written statement signedby the concerned project manager or pimpro stating the completion of work.

45. In one city, in every contract reviewed, appropriate supporting documentation was notprovided, and in each case disbursements appeared to have been made based upon a claim written outon a plain piece of paper, without the formal, sequentially numbered invoice from the contractor ontheir letterhead. This is a financial management weakness, though Central Government guidelines donot specifically require such documentation. In the same city, contracts relating to a sub-projectrequired the procurement of goods. None of the payment vouchers included: (i) the transit ortransportation documents for the delivery of goods received; (ii) the evidence of physical countsbeing performed to determine quantities actually received; (iii) documentary evidence of quality ortechnical capacity verification conducted with respect to the goods received; and (iv) themanufacturers warranty documents where the equipment was branded or procured by the contractorsfrom other manufacturers.

46. Based on a site visit to a sub-project, none of the four contracts appeared to have been fullyimplemented. The contractors and the pimpro themselves estimated that only 80% of the work hadbeen completed. However, the financial records seem to indicate that in each of these four contracts100% of the contract disbursements had been made. In another contract of Rp. 900 million for amajor equipment in the same city, documents -- the certificate of origin and the manufacturerswarranty do not appear to have been submitted in support of the payment claim, even though theywere required under the contract. In addition, it seems that no other documentation was obtainedfrom the manufacturer to substantiate the specification of the goods supplied. From the disbursementrecords, it was therefore not possible to assess whether the goods were delivered in accordance withthe contract.

47. I nvoicing by contr actors beyond the scope of work per formed: A detailed review ofdisbursements under a roads contract was undertaken because of the concerns raised by theimplementation review of the contract that actual was less than that specified by the scope of work. Itindicated that about Rp. 211 million or 17.5% of the value for a roadwork contract might have beeninvoiced beyond the scope of work performed. A similar analysis on a drainage contract resulted insimilar findings of invoicing beyond the scope of work performed. Similar cases have been reportedin a majority of the Kabupatens audited by the auditor in one province in their audit reports for thefiscal year 2000, received in December 2001. According to staff of the auditor, their requests forauthorization to further audit a case in one Kabupaten have been twice denied. The fiduciary reviewteam did not have access to the documentation necessary to make such an assessment on a widersample of the contracts. Supporting calculations for the completed work were unavailable for reviewwhenever the fiduciary review team made such requests.


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48. A porti on of contract payments made to the Regional Government s bank accounts:Financing of sub-projects in the project includes a Government portion ranging from 10% to 35%under contracts for civil works and goods, depending upon the actual expenditure category beingfinanced, and a portion from the Bank loan. In many contracts in every city, the Governmentsportion of financing did not appear to have been paid directly to the contractors. It appeared to be acommon practice for the Governments portion of each payment to be made by the Central Treasury

(KPKN) to bank accounts in a Regional Development Bank (BPD), whereas the payments from theBank loan for the same payment voucher were transferred to the contractors account at a privatebank. Payments remittances of the Governments portion of contract financing to these bankaccounts specified the contractor as the payee. However, in a few instances, these bank accountswere held in the name of the Regional Government Treasury. In a few other instances, the amountsdeposited into the BPD account in the name of the Project Treasurer were withdrawn in cash thesame day of the deposit. In one city, none of the payment vouchers issued by the Regional Treasuryfor the Governments portion of the contract financing, listed the payees bank account.Representatives of the Finance Division of the Regional Administration in that city indicated that itwas a standard practice to issue payment vouchers on a bearer basis, which could be cashed atthe local BPD.

49. The KPKN representatives explained to the fiduciary review team that the practice of payingthe Governments portion of contract financing to the accounts in BPD is followed at or near the endof the fiscal year in order that the Central Government funding for the project would not lapse. Therationale being that the Central Government project funding may not be available if the contractcompletion was delayed into the following fiscal year, whereas the regional budgeting systemsallowed carry forward of unexpended but committed budgeted expenditures to the next fiscal year.Thus such transfers were made on the basis of documents that certified full completion of the works,when the works had not been fully completed. It was also noted that this practice occurred even attimes unrelated to the end of the fiscal year period.

50. Audits: The auditor did not audit all expenditures under the project in one province as notall local governments in that province had completed their financial statements for the fiscal year2000, for which the audit report was issued in December 2001. As a result, the auditor did notinclude 6.7% of the total project expenditures in that province in their financial statement audit. Inaddition, staff of the auditor indicated that they were not provided access to the assets and facilities ofthe project in 11 local governments for the fiscal year 2000, and, therefore, these locations did notform a part of their audit for that fiscal year, issued in December 2001. The denial of access of 11Kabupatens financial records and project facilities (out of a total of over 40 Kabupatens in thatprovince) is a significant limitation to the scope of any financial audit. Similar limitations to theaudit of the project occurred in the second province for the same fiscal year. In total, the auditor didnot include 12% of total project expenditures in the province in their financial statement auditbecause not all local governments permitted an audit of their project financial records, by the auditorappointed by the Central Government. In addition, staff of the auditor indicated that they were notprovided access to a number of sites for the physical verification of project implementation.

51. Such limitations were noted in a Management Letter, appended to the audit report for thefiscal year 2000, received in December 2001. The consolidated audit report also suitably contained aqualified audit opinion. The audit report also reported that many of the matters raised in the previousyears audit reports had still not been resolved as of July 2001. This included matters dating back tothe 1998/99 audit.


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52. F inancial issues relating to payments to selected consultants: In one large consultantscontract, the out-of-pocket expenses claimed by the consultants were not consistently supported, andin some instances the utility bills attached to the invoices were visibly altered. It appears that the out-of-pocket expenses were invoiced beyond those actually incurred under the contract concerned(approximately Rp. 352 million or 55% of the total reimbursable expenses did not appear to havebeen supported through documentation).

53. In a different province, invoices for only four billing periods were provided with respect to aconsultants contract for the fiscal year 2000. A set of photocopies of the supporting documentsappeared to be a random selection and was not related to the four invoices in question. The fiduciaryreview team could not obtain further documents from the implementing agency. In the sameprovince, invoices and payment vouchers were provided with respect to another consultants contractfor the period between March 1998 and December 2000. Disbursements for about 70% of the itemsreviewed under this contract23seem to have been made without supporting documentation.

54. Other signi fi cant financial ri sksobserved during the fiduciary review include the following:(i) retention money was released before the end of the retention period without adequate explanation;(ii) the payee bank accounts were common to more than one contractor/supplier; (iii) payments weremade at times to accounts different from those in the contract without proper authorization from theconcerned contractor/supplier; (iv) disbursement approvals made by junior staff or senior governmentofficials, under a single signature authority; (v) limitations were placed by Government agencies onthe scope of audit by the appointed auditor; and (vi) the weaknesses noted in the audit reports withrespect to the projects procurement, implementation or financial management were not followed upeffectively.

55. Conclusions on financial management: The payment of the Governments portion offinancing under the project to an account in the name of the Project Treasurer, in the cities covered bythe fiduciary review, is disturbing. In addition, the ultimate disbursement of those funds in cash is aweak fiduciary practice. This is inconsistent with the fundamental financial management principlesthat Government transactions must be supported by appropriate and auditable documentation.

56. Following presentation of the findings of this review to the Government of Indonesia, theBank and the Government are now jointly discussing the following:

Implications and actions related to the contracts specifically reviewed in the four cities.

Implications and actions for the project.

Other lessons and possible actions.

The Bank has also recommend that the findings of this review be made public.

57. The Bank also plans to do an in depth implementation completion report24for the project toassess the projects development impact.

23 Mobilization and demobilization, staff travel, office, field and lab expenses, housing allowances, and reportpreparation.

24 The Bank prepares an implementation completion report for all projects it finances within six months ofcompletion of the activities financed under the loan. In this case, a more in depth study will be undertaken.


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Table 1: Sul-2 UDP -- Loan Status by Broad Disbursement Categories

Net Loan

Amount

($ mil.)

% of Net

Loan

Amount

Disbursed

($ mil.)

% of

Disbursed

Amount

% of Expenditures to be

Financed from the Loan

Civil works

including laborintensive works

58.8 67 49.9 66 - 90% under subsidiary loan

agreements.- 80% for other civil works.- 100% for labor intensive small

works as of 1/1/98

Goods 10.8 12 8.5 11 - 90% under subsidiary loanagreements.

- For other goods, 100% offoreign expenditures, 100% oflocal expenditures (ex-factorycost), and 65% of other itemsprocured locally.

Consultants services& training

18.2 21 13.4 18

1. Engineeringservices

(12.3) (66) (9.3) (70) 100%

2. Implementationsupport services

(3.9) (21) (2.6) (19) 100%

3. Training (2.0) (11) (1.5) (11) 100%

Net deposit,Special Account

4.2 6

Total $87.8 100 $76 100

5. Disbursements were to be on the basis of statement of expenditures (SOE) for the followingcontracts: (a) first contract for goods and civil works for each implementing agency, and thereafterfor goods contracts below $200,000 and civil works contracts below $1 million; and (b) consultantsservices contracts with firms below $100,000 and with individuals below $50,000. Under SOEprocedures, all documentation was to be retained by the implementing agencies and made available tothe Bank for review upon request.

6. Analysis of disbursements by pri or and post r eviews of procurement: Of the total amount

disbursed , $54 million was disbursed approximately under contracts subject to ex-post review (andSOE procedures), and $18 million under contracts that were prior reviewed by the Bank. In addition,an amount of $4.2 million is a net deposit in the Special Account. A breakdown is shown in Table 2on the following page.


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Table 2: Sul-2 UDP -- Disbursements by Prior and Post Reviews of Procurement25

Disbursements under

Contracts subject to

Prior Review

($ million)

Disbursements under

Contracts subject to

Post Review (SOE

procedures)

($ million)

Total Disbursed

($ million)

Civil works 4 46 50

Goods 2 7 9

Consultantsservices includingTraining

12 1 13

Total 18 54 7226

7. Implementation arrangements and role and responsibi li ties of consultants: A simplifiedorganization chart for project coordination and management and implementation arrangements is

attached. The Sul-2 UDP included a large component for consultants services to support projectimplementation and coordination, provide oversight and report on project status progress. An amountof $18.2 million or 21% of the total net loan commitments was for consultants services (including $2million for training). The role and responsibilities of major consultants at the national and provinciallevels of the government are summarized below.

1. Project Implementation Coordination Office (PCO) Consultant

8. Under the contract, the role and responsibilities of the PCO Consultants were the following:(i) overall project implementation coordination; (ii) financial management coordination; (iii) overallconstruction progress, supervision and quality control/management, including the coordination and

evaluation of urban road implementation; (iv) KIP monitoring and benefit evaluation; and (v)technical and financial audit support. The PCO consultant was also required to prepare quarterlyreviews of the progress of implementation of the overall project for the Central Government.

2. Project Implementation Support (PIS) Consultant

9. Under the contract, the role and responsibilities of the PIS Consultants were the following: (i)overall project implementation, budgeting and financial management; (ii) overall programmonitoring, evaluation and reporting; and (iii) overall training program and material development.As a part of the supervision activities, the PIS consultant was also to prepare accounts and financialreports of the overall project for the Central Government.

3. Provincial Project Implementation Support (PPIS) Consultants

10. Under the contract, the role and responsibilities of the PPIS Consultants in each of the fourprovinces of Sulawesi were the following: (i) providing experienced municipal engineering, planning

25 Rounded.

26 In addition, there is a net deposit of $4.2 million in the Special Account.


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and budgeting/finance practitioners to support planning, budgeting and financial management bylocal governments and the Provincial Project Management Unit (PPMU); (ii) building capacitywithin local governments through on-the-job training and ensuring that results are achieved ratherthan merely reporting those results; and (iii) strengthening operation and maintenance activities forthe services being created under the project. As a part of the supervision activities, the PPISconsultants were to also prepare quarterly project reviews of the progress of implementation of the

project in their respective provinces.

4. Detailed Engineering Design and Supervision (DED) Consultants

11. Under the contract, the role and responsibilities of the DED Consultants in each of theprovinces were the following: (i) preparation of the bid documents for tenders, includingpreparation of bid drawings and ensuring the completeness of individual bid packages; (ii)supervision of the implementation of the engineering works under its charge, including thecertification of the progressive and final measurements of the completed sub-projects; and (iii)ensuring that the works are completed and goods are delivered according to the contractspecifications. As a part of the supervision activities, the DED consultants were to also review andsuitably endorse the actual physical progress in implementation of each sub-project in order tosupport requests for all payments. This aspect of the responsibilities of the DED consultants wasreiterated by the PPMU of South Sulawesi in a letter, dated November 15, 1999, to all projectpersonnel.


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Simplified Organization Chart for Project Coordination and Management

Executing Agency (EA)Directorate General of Urban and

Rural Development (former name:Directorate General of HumanSettlements/Cipta Karya), Ministry ofSettlement and Regional Infrastructure

Project Officer (representing EA)based in Makassar

Project Coordination andProject ImplementationSupport Advisors (PCOand PIS) based inakarta and Makkasa

Provincial Project Management Unit(PPMU) in respective Provinces (basedin capital cities of Provinces:Makassar, Kendari, Palu, Manado)

Project Management Unit (PMU) inrespective Kota/Kabupaten, based inKota/capital of Kabupatens

Provincial ProjectImplementation Support(PPIS) Consultants forrespective Provinces

Project Implementation Unit (PIU) foreach project component (Water Supply,Drainage, Sanitation, Roads, KIP,

MIP, Solid Waste)

Detailed EngineeringDesign (DED)

Consultants forrespective Provinces

Contractual

relationship

Corrupcion en Indonesia

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