Document of

The World Bank

FOR OFFICIAL USE ONLY

Report No: 71180-ID

PROJECT APPRAISAL DOCUMENT

ON A

PROPOSED LOAN

IN THE AMOUNT OF US$650 MILLION

TO THE

REPUBLIC OF INDONESIA

FOR THE

NATIONAL PROGRAM FOR COMMUNITY EMPOWERMENT IN RURAL AREAS 2012-2015

November 8, 2012

Indonesia Social Development Unit Sustainable Development Department East Asia and Pacific Region

This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.

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CURRENCY EQUIVALENTS (Exchange Rate Effective November 7, 2012)

Currency Unit = Indonesian Rupiah IDR 1,000 = US$ 0.10

US$ 1 = IDR 9,605

FISCAL YEAR January 1 – December 31

ABBREVIATIONS AND ACRONYMS

ACS Administrative Client Support AF Additional Financing APBD Anggaran Pendapatan dan Belanja Daerah (Local Government Budget) APBN Anggaran Pendapatan dan Belanja Nasional (National Government

Budget) AMARTA Agribusiness Market and Support Activity AusAID Australian Agency for International Development BAPPENAS Badan Perencanaan dan Pembangunan Nasional (National Development

Planning Agency) BAPPEPAM-LK

Badan Pengawas Pasar Modal dan Lembaga Keuangan (National Oversight Body for Capital Markets and Financial Institutions

BGAP Better Governance Action Plan BKAD Badan Koordinasi Antar Desa (Inter-Village Cooperation Board) BPKP Badan Pengawas Keuangan dan Pembangunan (National Government

Audit Agency) BP-UPK Badan Pengawas – Unit Pengelola Kegiatan (Community-Appointed

Oversight Body of the Sub-district Management Unit) CDD Community Driven Development CHS Complaint Handling System CPS Country Partnership Strategy CSO Civil Society Organization DA Designated Account DG Directorate General DOK Dana Operasional Kegiatan (Activity Operational Funds) EIRR Economic Internal Rate of Return FM Financial Management FMS Financial Management Systems G20 Group of Twenty Finance Ministers and Central Bank Governors GoI Government of Indonesia HR Human Resources IBRD International Bank for Reconstruction and Development ICT Information & Communication Technology

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IDA International Development Association IDR Currency Code for the Indonesian Rupiah IFR Interim Financial Report IGSES Implementation Guidelines for Social and Environmental Safeguards INT Institutional Integrity Vice Presidency IT Information Technology IVPs Isolated and Vulnerable Peoples JMC Joint Management Committee KAT Komunitas Adat Terpencil (Indigenous Peoples) KDP Kecamatan Development Project KEMENKUMHAM Kementerian Hukum dan Hak Asasi Manusia (Ministry of Justice and

Human Rights) KPPN Kantor Pelayanan Perbendaharaan Negara (Treasury Office) KRRP KDP Recovery and Rehabilitation Project LGCD Local Government Capacity Development LLI3 Local Level Institutions III Study LSP-FPM Lembaga Sertifikasi Profesi-Fasilitator Pemberdayaan Masyarakat

(Professional Certification Institute for Community Facilitators) M&E Monitoring and Evaluation MAD Musyawarah Antar Desa (Sub-district Inter-village Forum) MCC Millennium Challenge Corporation MD Musyawarah Desa (Village Assembly) MENKO KESRA Kementerian Koordinator Bidang Kesejahteraan Rakyat (Coordinating

Ministry for People‘s Welfare) MIS Management Information System MOF Ministry of Finance MOHA Ministry of Home Affairs NGO Non Government Organization NMC National Management Consultant NPL Non-Performing Loans O&M Operations and Maintenance OM Operations Manual OP Operational Policy ORAF Operational Risk Assessment Framework OSU Operational Services Unit of the World Bank PDO Project Development Objective PEKKA Program Pemberdayaan Perempuan Kepala Keluarga (Women-Headed

Household Empowerment Program) PIU Project Implementing Unit PjOK Penanggung-jawab Operasional Kegiatan (Local Government Project

Officer at the Sub-District Level) PMD Pemberdayaan Masyarakat dan Desa (Directorate for Community and

Village Empowerment) PMU Project Management Unit

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PNPM Program Nasional Pemberdayaan Masyarakat (National Program for Community Empowerment)

PNPM Generasi PNPM focusing on Millennium Development Goals (MDGs) PNPM Green PNPM focusing on environmental sustainability PNPM Peduli PNPM focusing on marginalized groups Pokja Pengendali Kelompok Kerja Pengendali (National-level oversight body of PNPM) PPK Pejabat Pembuat Komitmen (Commitment Officer) PPP Purchasing Power Parity PPSPM Pejabat Penerbit Surat Pemerintah Membayar (Payment and Verification

Officer) PSF PNPM Support Facility PODES Potensi Desa (Village Potential) POT Provincial Oversight Team(s) QCBS Quality and Cost Based Selection RBM Ruang Belajar Masyarakat (Community Learning Forum) RLF Revolving Loan Fund RPO Rural Producer Organization RMC Regional Management Consultant Satker Satuan Kerja (Project Management Unit) SIL Specific Investment Loan SOP Standard Operating Procedures SP2D Surat Perintah Pencairan Dana (Remittance Order) SPM Surat Perintah Membayar (Payment Order) SPP Surat Permintaan Pembayaran (Payment Request) SPP Simpan Pinjam Perempuan (Women Saving and Loan Activities) SW Staff Weeks TA Technical Assistance TKPKD Tim Koordinasi Penanggulangan Kemiskinan Daerah (District

Coordination Team for Poverty Alleviation) TNP2K Tim Nasional Percepatan Penanggulangan Kemiskinan (National Team

for the Acceleration of Poverty Reduction) TOR Terms of Reference TPK Tim Pengelola Kegiatan (Village Implementation Team) TPM Tim Penyelesaian Masalah (Problem Resolution Team) TPMD Tim Pertimbangan Masyarakat Desa (Village Advisory Team) TSA Treasury Single Account TV Tim Verifikasi (Verification Team) TTL Task Team Leader UPK Unit Pengelola Kegiatan (Sub-district Management Unit) UPP Urban Poverty Project WB World Bank

iv

Regional Vice President: Pamela Cox Country Director: Stefan G. Koeberle

Sector Director: Sector Manager:

John A. Roome Jan Weetjens

Task Team Leaders: Susanne Holste and Kevin Tomlinson

v

INDONESIA

Indonesia: National Program for Community Empowerment in Rural Areas 2012-2015

TABLE OF CONTENTS

Page

I. STRATEGIC CONTEXT .................................................................................................................. 1

A. Country Context ............................................................................................................... 1

B. Sectoral and Institutional Context .................................................................................... 1

C. Higher Level Objectives to which the Project Contributes .............................................. 7

II. PROJECT DEVELOPMENT OBJECTIVES AND INDICATORS ............................................. 7

A. PDO .................................................................................................................................. 7

Project Beneficiaries ................................................................................................................ 8

PDO Level Results Indicators ................................................................................................. 8

III. PROJECT DESCRIPTION ............................................................................................................... 8

A. Project components .......................................................................................................... 8

B. Project Financing............................................................................................................ 10

Lending Instrument ............................................................................................................... 10

Project Cost and Financing .................................................................................................... 10

C. Lessons Learned Reflected in the Project Design .......................................................... 10

IV. Implementation ................................................................................................................................. 11

A. Institutional and Implementation Arrangements ............................................................ 11

B. Results Monitoring and Evaluation ................................................................................ 12

C. Sustainability .................................................................................................................. 13

V. Key Risks and Mitigation Measures ............................................................................................... 13

A. Risk Ratings Summary Table ......................................................................................... 13

B. Overall Risk Rating Explanation.................................................................................... 14

VI. Appraisal Summary.......................................................................................................................... 15

A. Economic and Financial Analysis .................................................................................. 15

B. Technical ........................................................................................................................ 16

C. Financial Management ................................................................................................... 16

D. ProcurementThreesia Mariana/Person/World Bank@WorldBank, ............................... 17

E. Social (including safeguards) ......................................................................................... 18

F. Environment (including safeguards) .............................................................................. 20

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Annex 1: Results Framework and Monitoring....................................................................................... 21

Annex 2: Detailed Project Description .................................................................................................... 28

Annex 3: Implementation Arrangements ............................................................................................... 37

Annex 4: Operational Risk Assessment Framework (ORAF) .............................................................. 62

Annex 5: Implementation Support Plan ................................................................................................. 69

Annex 6: Better Governance Action Plan ............................................................................................... 73

vii

ctor

PAD DATA SHEET

Indonesia

National Program for Community Empowerment in Rural Areas 2012-2015

PROJECT APPRAISAL DOCUMENT .

East Asia and the Pacific

East Asia Social Development

.

Basic Information

Date: November 8, 2012 Sectors: Water supply (20%); Irrigation and drainage (20%); Rural roads and highways (20%); Pre-primary education (20%); Sub-national government administration (20%)

Country Director: Sector Manager: Sector Director:

Stefan G. Koeberle Jan Weetjens John A. Roome

Project ID: Lending Instrument:

P128832 Specific Investment Lending (SIL)

Themes: Rural services and infrastructure (35%); Participation and civic engagement (45%); Social inclusion (20%)

Team Leader(s): Susanne Holste Kevin A. Tomlinson

EA Category:

B Partial Assessment

Does the project include a CDD component? Yes

Joint IFC: No

Borrower: Republic of Indonesia

Responsible Agency: Ministry of Home Affairs (MOHA), Directorate General of Village and Community Empowerment (PMD)

Contact: Tarmizi Karim Title: Director General Village and Community Empowerment

Telephone No.: 6221-79191684 Email: ppkpmd@yahoo.com

Project Implementation Period: Start Date: February 01, 2013 End Date: August 31, 2015

Expected Effectiveness Date: January 31, 2013

Expected Closing Date: December 31, 2015

viii

Project Financing Data(US$ M)

[X] Loan [ ] Credit

[ ] Grant [ ] Guarantee

[ ] Other

For Loans/Credits/Others

Total Project Cost : 4,500 Total Bank Financing : 650

Total Cofinancing : 0 Financing Gap : 0

Financing Source Amount (US$ M)

BORROWER/RECIPIENT 3,850.00

IBRD 650.00

IDA: New 0

IDA: Recommitted 0

Others 0

Financing Gap 0

Total 4,500.00

Expected Disbursements (US$ M)

Fiscal Year FY13 FY14 FY15 FY16

Annual 333.00 125.00 150.00 42.00

Cumulative 333.00 458.00 608.00 650.00

Project Development Objective(s)

The PDO for the proposed project is: For villagers in PNPM-Rural locations to benefit from improved local governance and socio-economic conditions.

Components

Component Name Cost (US$ M)

Kecamatan Grants 3,723.77

Community Empowerment and Facilitation 496.21

Implementation Support and Technical Assistance 280.03

Compliance

Policy

Does the project depart from the CAS in content or in other significant Yes [ ] No [X]

ix

respects?

Does the project require any waivers of Bank policies? Yes [ ] No [X]

Have these been approved by Bank management? Yes [ ] No [ ]

Is approval for any policy waiver sought from the Board? Yes [ ] No [X]

Does the project meet the Regional criteria for readiness for implementation? Yes [X] No [ ]

Safeguard Policies Triggered by the Project Yes No

Environmental Assessment OP/BP 4.01 X

Natural Habitats OP/BP 4.04 X

Forests OP/BP 4.36 X

Pest Management OP 4.09 X

Physical Cultural Resources OP/BP 4.11 X

Indigenous Peoples OP/BP 4.10 X

Involuntary Resettlement OP/BP 4.12 X

Safety of Dams OP/BP 4.37 X

Projects on International Waterways OP/BP 7.50 X

Projects in Disputed Areas OP/BP 7.60 X

Legal Covenants

Name Recurrent Due Date Frequency

Disbursement Condition: No withdrawal shall be made under category (1) in the table in Section I.A of this Schedule 2 for Kecamatan Grants unless the Borrower has adopted a revision to the Operations Manual satisfactory to the Borrower and the Bank.

No Prior to disbursement of Category (1)

Once

Implementation Covenants: The Borrower, through PMD, shall establish the Joint Secretariat comprised of representatives of the relevant directorates in PMD to improve coordination and programming, including budgeting, of PNPM activities by July 1, 2013.

No July 1, 2013 Once

x

The Borrower, through PMD, shall ensure that the relevant Camat and Bupati in each Project Kecamatan and Project Kabupaten shall make publicly available, in a manner acceptable to the Borrower and the Bank, a report on the results of Project implementation and accounts for funds used during each year of Project implementation, by no later than May 15 of each subsequent year.

Yes Each May 15 Annually

The Borrower, through PMD, shall ensure that all annual audit reports referred to in Section II.B of this Schedule 2, including Kabupaten audit reports, shall be published on the PNPM Website by no later than September 30 in each year of Project implementation.

Yes Each September 30 Annually

Team Composition

Bank Staff

Name Title Role Unit

Achmad Zacky Wasaraka

Procurement Analyst Designated Procurement Specialist

EASR1

Ahsan Ali Lead Procurement Specialist Procurement Specialist EASR1

Alexander B. Setiadji

Social Development Specialist Fiduciary and CHS Specialist EASID

Amien Sunaryadi Sr. Operations Officer Governance Specialist EACIF

Catrini Pratihari Kubontubuh

Operations Analyst Safeguards Analyst EASID

Christina Natalia Team Assistant Team Assistant EASID

Charles R. Brigham Operations Officer ICT Specialist EASID

Citra Lestari Communications Associate Communications EASID

Dennie Mamonto Consultant Safeguards Analyst EASID

Edward W. Bresnyan

Sr. Rural Development Specialist

Economic Inclusion Specialist LCSAR

Eric T. Wattimena E T Consultant Microfinance Specialist EASFP

xi

Fajar Pane Research Analyst Revolving Loan Fund Analyst EASFP

Franciscus Prahastanto

Operations Assistant PNPM Operations EASID

Griya Rufianne Operations Analyst PNPM Operations EASID

Harry Sudewa E T Consultant PNPM Operations EASID

Juan Martinez Sr. Social Scientist Safeguards Specialist EASIS

Kevin A. Tomlinson Sr. Operations Officer Co Task Team Leader EASID

Lilis Suharti Operations Analyst Fiduciary Analyst EASID

Lily Hoo Monitoring and Evaluation Specialist

Monitoring and Evaluation Specialist

EASID

Mariangeles Sabella Sr. Counsel Lawyer LEGES

Melinda Good Sr. Counsel Lawyer LEGES

Natasha Hayward Sr. Social Development Specialist

Monitoring & Evaluation Specialist

EASER

Nia Yuniarti Program Assistant Program Assistant EASID

Rajat Narula Sr. Financial Management Specialist

Financial Management Specialist

EAPFM

Renaud Rodier Social Development Specialist Social Development Specialist EASID

Sentot Surya Satria Social Development Specialist Social Development Specialist EASID

Sri Kuntari Social Development Specialist Social Development Specialist EASID

Sonja E. Litz Sr. Counsel Governance and Justice Specialist

EASID

Susanne Holste Lead Social Development Specialist

Task Team Leader EASID

Unggul Suprayitno Sr. Financial Management Specialist

Financial Management Specialist

EAPFM

Yoko Doi Financial Specialist Revolving Loan Fund Specialist

EASFP

Yoseph Lucky Consultant PNPM Operations EASID

Zulfi Novriandi Operations Analyst Procurement Analyst EASID

Locations

Country First Administrative Division

Location Planned Actual Comments

Indonesia Province Aceh, Sumatera Utara, Sumatera

X X

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Barat, Riau, Jambi, Sumatera Selatan, Bengkulu, Lampung, Bangka Belitung, Kepulauan Riau, Jawa Barat, Jawa Tengah, D.I. Yogyakarta, Jawa Timur, Banten, Bali, Nusa tenggara Barat, Nusa Tenggara Timur, Kalimantan Barat, Kalimantan Tengah, Kalimantan Selatan, Kalimantan Timur, Sulawesi Utara, Sulawesi Tengah, Sulawesi Selatan, Sulawesi Tenggara, Gorontalo, Sulawesi Barat, Maluku, Maluku Utara, Papua Barat, Papua

1

I. STRATEGIC CONTEXT

A. Country Context

1. Indonesia’s poverty rate fell from 23.4 percent in 1999 to 12.5 percent in 2011, but 30 percent of the population hovers around the poverty line and remains vulnerable to falling into poverty. During the global financial crisis, Indonesia outperformed its regional neighbors in terms of economic performance, joining China and India as the only G20 members recording growth in 2009. In 2011, 12.5 percent of households (32.5 million Indonesians) lived below the national poverty line of IDR 233,700 per person per month (around PPP$1.19 per day). However, much of the population is clustered just above this line, and earns about PPP$2.37 per day. Thus living standards remain low for many Indonesians, and relatively small shocks to income and consumption can send them into poverty.

2. Of the total population living in poverty, 65 percent live in rural areas. Income and employment opportunities in these rural areas remain constrained or non-existent and the rate of coverage and quality of basic services is poor. The rate of incidence of poverty in rural areas is 15.1 percent, compared to 8.8 percent in urban areas. Regional disparities are also pronounced in the rural areas, with the gap between socio-economic development on and off Java apparently widening. Non-income poverty, as demonstrated by the level of access to and the quality of health and education services, continues to be a serious problem.

3. Service provision and effective local governance are lagging. The reforms following the 1997 Asian financial crisis, including the move from a centralized to a decentralized form of government were expected to lead to improved service provision and to more effective local governance. While recent history has shown a positive trend in terms of economic and political achievements, the transition remains incomplete and the reform process has started to slow. Many of the country’s institutions and local governments are not effective at delivering services in an accountable manner. These shortcomings often prevent the poorest members of society from benefiting more fully from growth and poverty reduction initiatives and risk increasing overall inequality and instability in the long-term.

B. Sectoral and Institutional Context

4. PNPM: A nationwide CDD program. In 2007 the Government of Indonesia (GOI) demonstrated its commitment to community-led development and to mitigating the potential effects of the Global Financial Crisis by launching the National Program for Community Empowerment (Program Nasional Pemberdayaan Masyarakat, PNPM) through the scale up of the Kecamatan Development Project (KDP) and the Urban Poverty Project (UPP). The coverage of the program in rural areas increased rapidly, from approximately 1,000 sub-districts in 2006 to more than 5,000 sub-districts in 2011. At present the program covers all rural villages (PNPM-Rural) and urban wards (PNPM-Urban) in Indonesia and is one of the largest community-driven development (CDD) programs in the world. When PNPM was launched it integrated a multitude of community level poverty initiatives into a coherent poverty alleviation and governance approach at community level. PNPM is the flagship program under ‘Cluster 2’ of the GOI’s

2

three-cluster poverty reduction strategy1. The program seeks to empower communities by giving them control over decision-making and management of their development needs through direct financial and technical support to improve basic infrastructure and access to services.

5. The core PNPM program now covers 70,000 villages and continues to perform well despite some of the implementation challenges that the program has faced in its rapid scale up to national coverage in 2008. Several peer-reviewed quantitative assessments have demonstrated significant impact in terms of effective, attributable poverty reduction. The main findings confirm that: (a) benefits are heavily skewed to the poor - the two lowest quintiles of the participating population receive the largest share of project benefits; (b) benefits are significant - household expenditures among the poor increased by an average of 11 percent as a result of project investments, benefitting approximately 45 million poor people; (c) benefits are sustained, physical assessments of PNPM/KDP built infrastructure found that 85 percent of the infrastructure built by communities was in good to very good condition five years after its completion, and impact simulations found that after three years the majority of benefits came from increased economic activity attributable to the investments made by the program, not from project grants; (d) benefits are shared - labor composition in PNPM programs averages 40-70 percent (which is on the high end of global measurements). PNPM created over 20 million person-days of paid employment, and PNPM’s focus on financing public rather than private goods ensures that investments benefit a broad range of poor people; (e) investments are efficient - infrastructure built by communities is 30-50 percent cheaper than building it through normal government systems; and (f) adverse impacts are minimal - a resettlement review of 50 percent of the participating districts found no cases of adverse impacts from involuntary resettlement. Reviews also found no examples of adverse impacts associated with ethnic minorities. Environmental impacts are largely confined to poor site management.

6. More remains to be done, however. There is little sign of PNPM’s participatory planning and improved governance procedures being adopted into the working of Local Governments or in front line sector service delivery. PNPM’s high rates of women’s participation (48%) in particular did not turn into changed roles for women in other programs. In addition, impact evaluations found diminishing returns to PNPM investments in wealthier sub-districts, where access to services is more likely the binding constraint than lack of tertiary infrastructure. Furthermore, PNPM’s revolving loans to women’s groups, which account for approximately 20 percent of the program, are not sustainable in the long-term.

7. The massive scaling-up of PNPM presents major institutional challenges. The implementing agency, Directorate General of Village and Community Empowerment (PMD), within the Ministry of Home Affairs (MOHA), has not yet fully adjusted to the program’s massive scale-up over a short period of time. Basic processes of recruitment, training, and site visits have struggled to cope with a sudden tripling or even quintupling of the number of staff who need to be trained, deployed, and reviewed. While hands-on implementation support to PMD has helped mitigate governance and fiduciary risks and build more robust management systems, continuous attention to the quality of project management is required.

1 Cluster 1 focuses on social protection through targeted poverty and social protection programs at the household level; Cluster 2 promotes community level development and empowerment; Cluster 3 supports small and medium enterprises, and micro-finance.

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8. Including the proposed loan, total Bank lending for the rural KDP/PNPM program since 1998 will amount to almost US$3.5 billion. Since the first implementation of KDP, the program has financed the construction of more than 100,000 km of rural roads; 17,000 small bridges; 40,000 clean water systems; and the rehabilitation or construction of 43,000 schools and health facilities. It has also supported more than 301,000 business activities conducted by women.

Table 1: KDP/PNPM-Rural Program - Approved & Proposed World Bank Financing

Project Phase Period No. of sub-

districts IBRD/IDA

(US$ million) Closing Date KDP 1 1998-2002 986 225.0 31 Dec 2002 KDP Supplemental 2000-2002 986 48.2 31 Dec 2002 KDP 2 2000-2006 1,316 335.5 31 Dec 2007 KDP 3A 2003-2009 760 91.0 31 Dec 2009 KDP 3B + AF 2005-2009 1,800 283.0 31 Dec 2009 PNPM-Rural 2008 2,600 231.2 30 Jun 2011 PNPM-Rural II AF 2009 4,258 300.0 31 Dec 2011 PNPM-Rural III 2010-2012 4,791 785.0 31 Dec 2012 PNPM-Rural IV 2011-2013 4,978 531.2 30 Jun 2014 PNPM-Rural 2012-2015 2012-2015 5,070 650.0 31 Dec 2015 TOTAL 3,480.1

9. In addition to investment lending, the Bank supports Indonesia’s community based poverty program by managing a multi donor support facility that provides technical assistance and strategic inputs to PNPM. The PNPM Support Facility (PSF) focuses on improving the quality of the delivery of PNPM as well as providing flexible capacity to test innovative demand side approaches to poverty reduction and service delivery. The facility now also focuses particularly on building the capacities of Government and Civil Society Organizations (CSOs) to take on more of its role. Grant funding provided through the PSF is used to build Indonesian capacity for large-scale poverty reduction, with the aim of making the program a sustainable operation. Capacity building programs supported by the facility engage a broad range of partners, including national and local governments, universities and research centers, CSOs and grassroots initiatives. Grant funding also supports a number of innovative pilot operations, including:

(a) PNPM Generasi: PNPM Generasi is a community-based CCT program that uses performance-based block grants to increase community utilization of basic health and education services and promote closer interaction between community groups and front-line service providers. An impact evaluation shows significant impact on twelve education and health target outcomes.

(b) PNPM Green: PNPM Green is an environmental pilot program for PNPM-Rural that utilizes block grants and technical assistance to promote community investments in natural resource management and renewable energy. The program is moving from a focus on financing inputs in the form of specific green sub-projects towards incentivizing results and addressing the overall village development process, placing particular importance on participative natural resource mapping, and planning local green growth strategies.

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(c) Local Government Capacity Development: This program tests the effectiveness of social accountability processes and tools ('soft' incentives) to improve local government responsiveness in community-level service delivery. The Local Government Capacity Development (LGCD) is a coordinated program of analytics, TA and small-scale field experiments that explores how to further strengthen PNPM as a platform which supports collaboration between communities, local governments and sectors to address governance and service delivery gaps at the district level. The LGCD program will begin testing a number of practical approaches and tools, ranging from community scorecards to toolkits for pro-poor budgeting, and continue to sponsor a multi-stakeholder dialogue on how community institutions can more effectively engage with supply-side decision making.

(d) PNPM Peduli: The program, recognizing the findings of impact evaluations that PNPM’s broad brush approach was not reaching marginalized groups and individuals, works through CSOs to further social inclusion principles through CSO engagement. The program works through national CSOs that are awarded grants to reach and empower the most marginalized, including street children, landless farmers, HIV and AIDS survivors, sex workers, indigenous peoples and many others.

10. Moving forward, the Government is in the final stages of a wide ranging consultation process to articulate the roadmap for PNPM up to the end of the current administration in 2014 and beyond. The Roadmap is one, ultimately, of integrating the operating principles of PNPM into regular government operations, thus strengthening accountability mechanisms at the community level, above and beyond the sphere of the program itself. There are interim twin goals of strengthening the program’s integration both horizontally (among PNPM projects and with sectoral programs) and vertically (with sub-national governments), though details of how and in what way this would be sequenced remain to be elaborated. Related to this, a potential future is outlined in which there may only be a single ‘PNPM’ budget instrument, but it may be flexible enough to allow for different types of funding sources and development outcomes. Action areas currently described in the Roadmap include: (a) effective integration of PNPM programs at the local level; (b) strengthening the roles and capacity of PNPM facilitators, including their linkage with sector agencies; (c) strengthening the capacity of local level institutions and clarification of the legal framework; (d) adoption of core PNPM principles in the functioning of local government, including the integration of development planning and budgeting; and (e) good governance and downward accountability. 11. The Bank’s analytical and operational portfolio supports the implementation of the Government’s Roadmap. Particular attention goes to:

(a) Continued poverty impact: Now that the program is at national scale, the challenge

increasingly is to make sure that the program achieves its objectives for as many people as possible and at reasonable cost. Another important issue is maximizing impacts of PNPM’s block grant investments, through for example, varying the size of block grants based on criteria that capture the multidimensionality of poverty and incentivizing communities to utilize basic services. Key focal areas include: (i) customizing/differentiating PNPM’s platform to maximize impact on specific poverty priorities, adjusting for different needs, priorities, capacities; (ii) leveraging the impact

5

of Indonesia’s social protection programs through stronger linkages with its community empowerment programs; and (iii) building on the revolving loan funds scheme in PNPM to enhance support to livelihoods.

(b) Improved accountability: While significant reforms and decentralization have taken place in Indonesia, a relationship of generalized trust between citizens and reliable, responsive institutions of the state remains somewhat embryonic. At present, PNPM provides one of the few platforms at the village level for information sharing, collection of complaints and grievances, bottom-up reporting, and a direct interface between communities and frontline services providers through PNPM Generasi. Key focal areas include: (i) rebalancing asymmetries of information including via innovative ICT tools; (ii) identifying incentives and roles for both communities and service providers in the co-production/co-delivery of services; and (iii) testing and scaling up effective mechanisms to improve local level governance, foster better downward accountability and transparency, including channels for recourse and grievance redressal.

(c) Social justice and inclusion: These are essential dimensions of any poverty reduction effort, so that resulting benefits are sustainably distributed and basic rights are realized, ironing out the socioeconomic disadvantages of particular groups. Better articulation of social dynamics and the dimensions of exclusion at the local level, and testing of effective operational instruments to respond, whether through adjustments to a program such as PNPM, or via other modalities, will be needed to overcome patterns of exclusion and to create greater opportunities for participation of the most vulnerable in development processes. Key focal areas include: (i) supporting reforms that promote inclusion and empowerment of marginalized groups; (ii) improving targeting to address the needs (institutional, social, financial) of poor rural women; and (iii) improving PNPM’s effectiveness in Indonesia’s most disadvantaged and poorest regions.

(d) A supportive enabling environment: This encompasses primarily (though not

exclusively) the role of government in providing resources, ensuring capacities and creating a policy, regulatory and administrative environment conducive to the goals of the Government’s PNPM Roadmap. While community empowerment can increase demand for (and, to some extent, delivery of) better services and governance, it needs complementary efforts to foster a supporting and enabling environment, with adequate core systems, financing and accountable institutions. Key focal areas include: (i) identifying critical local level institutional arrangements that underpin sustainable local development and good governance to support the proposed reforms; (ii) investing in PNPM core functions and systems; and (iii) identifying regulatory constraints and/or necessary policies to further consolidate community empowerment and its linkages to ensure improved budgeting, planning and implementation processes.

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Box 1. PNPM 2007 to post-2014 The Bank’s 2007 Regional Operations Committee review described a long-term approach for PNPM’s scale-up. For the 2007-2010 period, Bank support would help GOI expand the program from approximately 25,000 villages to all 70,000 villages nationwide. From 2010 to 2013, the Bank would work with GOI to consolidate PNPM management. From 2014 and beyond, GOI and its development partners would use the PNPM platform to launch a range of anti-poverty programs that would go beyond the PNPM village grant program.

By and large, both PNPM and the PSF have followed this approach. While innovation and long-term strategies are important, the bulk of the Bank’s operational work has concentrated on shoring up PNPM’s managerial infrastructure in critical areas such as improving its management information systems, corruption control, procurement, and training for the large number of facilitators and local governments brought in through the scale-up. Government procurement, audit, and evaluation functions are at present still not able to manage the program’s needs without help, particularly given donor and public sensitivities to what in a program as large as PNPM are relatively small cases of corruption and malfeasance.

PNPM has served as an incubator for CDD programs around the world, either through visits by delegations from over eleven countries or through dissemination of evaluations and program design. This south-south learning is being intensified through development of internet platforms for knowledge exchange.

The GOI and the Bank have been laying the foundation for the next generation of PNPM-based programming. PSF’s village infrastructure census shows that the GOI still has a long way to go with the current PNPM simply to close the country’s gaps in basic village infrastructure. As the program stabilizes within government, Bank support to PNPM should facilitate the introduction of new strategies and innovations that deepen and broaden the basic approach.

PNPM post-2014 is being prepared through a mix of analytical studies and large-scale operational pilots that are being carried out through the PSF. These will be developed further under the current PNPM program, with rollouts starting in 2014 as part of the new government’s action plan. They include the following:

• Improving the social safety net: Since 2011, PNPM and the PSF have been working with the GOI anti-poverty commission and the PREM poverty team to improve the targeting efficiency of GOI programs for social assistance. The key action to date has been the unification of targeting systems. Use of the unified poverty database will be compulsory for all GOI agencies as of 2013. However, the major risk of a unified targeting database is that potential exclusion of unregistered vulnerable families. Ongoing collaborative work is testing new ways to use community facilitators and community identification to verify the database, providing poor households who were not registered with a way to seek redress, and improving safety net targeting for the vulnerable. • PNPM as a platform for service delivery: The PNPM Roadmap outlines a vision in which PNPM could become an operational platform for the accountable delivery of a range of services to communities and address the varied causes of poverty throughout the archipelago, including limited access to quality health and education services, embedded patterns of marginalization and exclusion, environmental degradation, and shocks affecting communities and vulnerable households. PNPM 2012-14 will contribute in a number of ways to achieve this goal. Component Two (Community Empowerment and Facilitation) will increase investment to more effectively train and empower communities, broadening the scope beyond facilitators to include village institutions and community cadres. The next phase of PNPM Generasi will scale-up a model to improve health and education

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services. The Enhanced Empowerment Experiment will test the impact of increased facilitation in various areas of community participation, including the participation of those groups which may currently be excluded, and the expected outcomes of this investment. The LGCD will strengthen the capacity of community groups to work across sectors and improve public services delivered by frontline agencies such as primary schools and community health centers. • Livelihoods: PNPM has financed limited yet promising initiatives proposed by communities in local economic development. Looking ahead there is an opportunity to deepen support for rural livelihoods with the aim of making local economic development more inclusive, in line with the PNPM Roadmap. This would be achieved through: (a) adopting a value-chain approach to better organize producers, production and market access; (b) establishing Partnership forums that bring together the array of stakeholders, including local government and the private sector, across a value chain to generate mutually beneficial outcomes; and (c) extending the reach of the Revolving Loan Fund toward greater investment in productive assets for Rural Producer Organizations.

C. Higher Level Objectives to which the Project Contributes

12. The project, which covers approximately 76 percent of Indonesia’s sub-districts, directly supports the GOI’s efforts to accelerate poverty alleviation and to expand employment opportunities for the poor. The project is consistent with the FY2009-12 Country Partnership Strategy (CPS) for Indonesia, Investing in Indonesia’s Institutions for Inclusive and Sustainable Development. This strategy emphasizes engagement with government counterparts (including counterparts at the sub-national level) and other stakeholders to address critical governance and institutional challenges. In addition to its cross-cutting engagements to strengthen central and sub-national government institutions and systems, the CPS identifies five thematic areas that form the core of the Bank’s engagement: (a) Private Sector Development; (b) Infrastructure; (c) Community Development and Social Protection; (d) Education; and (e) Environmental Sustainability and (f) Disaster Mitigation. 13. A new CPS covering fiscal years 2013 to 2015 is being prepared for Board delivery in 2012 and is proposing a four-pronged approach: pro-poor, pro-growth, pro-job, and pro-environment. The proposed project would be at the center of the new CPS, with its CDD approach aiming to improve existing government programs, to strengthen institutions and to improve the links between different levels of government. II. PROJECT DEVELOPMENT OBJECTIVES AND INDICATORS

A. PDO

14. The PDO for the proposed project is: For villagers in PNPM-Rural locations to benefit from improved local governance and socio-economic conditions. This objective maintains continuity with PNPM-Rural IV’s PDO, while focusing additional attention on issues related to governance.

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Project Beneficiaries

15. The project is expected to benefit approximately 40 million community members in approximately 5,070 rural sub-districts. It is expected to achieve this by facilitating increased employment opportunities and improved access to a wider range and higher quality of basic services. At least half of the beneficiaries are expected to be women.

PDO Level Results Indicators

16. The expected specific outcomes of the project will be measured by the following indicators (details are provided in Annex 1):

(a) Households have low-cost access to infrastructure or services selected by the community;

(b) Communities are involved in participatory and democratic forums for planning, implementing and overseeing initiatives that directly address local development priorities;

(c) Projects funded by PNPM provide economic benefits (direct and indirect) for community members; and

(d) Beneficiaries feel project investments reflect their needs.

III. PROJECT DESCRIPTION

A. Project components

17. The proposed project has been designed on the basis of proven success and experience in poverty reduction generated through the PNPM-Rural series. The project supports the Government’s national poverty alleviation and community empowerment program and has national coverage. The project consists of the following three components (see Annex 2 for details):

Component 1: Kecamatan Grants (US$3,723.77 million, of which US$200.00 million is from IBRD). This component will provide grants to participating kecamatan to finance sub-projects identified by communities, including block grants for:

(a) The provision of Kecamatan Grants to beneficiaries to the support the provision of basic social and economic infrastructure and services, including: (i) planning for and preparation of Sub-Project proposals; (ii) training and capacity building for communities (Beneficiaries); (iii) construction of socio-economic infrastructure identified through community development planning; (iv) investing in activities using Revolving Loan Funds for women’s savings and loan groups and productive activities developed under sub-component C in Component 2 of the project; and (v) preparing for and responding to disaster, emergency or catastrophic events; and

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(b) Provision of Kecamatan Grants to beneficiaries to support pilots and special programs: Currently there are two grant-funded special programs, PNPM Generasi (which focuses on the delivery of health and education services) and PNPM Green (which focuses on natural resources management). The GOI may also develop other initiatives to support implementation of the PNPM Roadmap.

Component 2: Community Empowerment and Facilitation (US$496.21 million, of which US$356.39 million is from IBRD). This component will provide technical assistance to support three sub-components:

(a) Community empowerment and facilitation, including training related to technical support and facilitation of central or local government activities, as well as Pilot or Special Programs;

(b) Strengthening the existing Revolving Loan Fund (RLF) scheme to improve operational and fiduciary management; and

(c) Rural economic empowerment through the development of a viable strategy and piloting and subsequent mainstreaming of implementation arrangements for economic inclusion of women’s groups through participation in private and institutional markets, including development of business plans for Rural Producer Organizations (RPOs).

18. This component aims to improve overall community participation and skill levels, with the intention of strengthening the governance of the program. In addition, new grant-funded legal services will be available for the use of both communities and PMD. Through an Enhanced Empowerment Experiment, this component will also test the impact of increased facilitation in various areas of community participation, including the participation of those groups which may currently be excluded (including women).

Component 3: Implementation Support and Technical Assistance (US$280.03 million, of which US$93.61 million is from IBRD). This component will provide oversight, technical advisory services, training and other support for: (a) PNPM at the national and sub-national levels; (b) strengthening PMD; and (c) supporting the management of the incremental activities generated by the project. There will be a strong focus on strengthening the delivery system to ensure that this system can respond effectively to the demands resulting from national-level delivery of the program. This will include monitoring and evaluation and enhanced financial audits.

19. Crisis response. PNPM’s platform, with its established structures (e.g., disbursement channels) and operating systems (e.g., facilitators on the ground with local knowledge) and with its nationwide presence, has the potential to respond quickly and effectively to emergency situations. Where extra block grants are made available in such situations, and when needed in

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the opinion of the government and the Bank, PMD will hire an extra technical facilitator to support rapid implementation2.

B. Project Financing

Lending Instrument

20. The proposed loan is a Specific Investment Loan (SIL). The Borrower has selected an IBRD Loan denominated in US$ with a Variable Spread and a final maturity period of 24.5 years, including a grace period of 9 years and annuity principal repayment at a rate equal to LIBOR for the Loan Currency plus the Variable Spread.

Project Cost and Financing

21. The total project financing requirements are estimated to be US$4.5 billion. Table 2 shows the project cost and financing.

Table 1: Project Cost and Financing, US$ Million Component Project cost IBRD* 1. Kecamatan Grants 3,723.77 200.00 2. Community Empowerment and Facilitation 496.21 356.39 3. Implementation Support and Technical Assistance

280.03 93.61

Total project cost 4,500.00 650.00

Interest during implementation - - Front-end fees** 1.63 -

Total Financing Required 4,500.00 650.00 *The Bank will finance each respective project component in parallel and at 100%. ** The front-end fee of the 0.25% is excluded from the project costs.

C. Lessons Learned Reflected in the Project Design

22. The proposed project incorporates lessons learned from the KDP and the PNPM-Rural series and from other CDD programs financed by the Bank:

(a) PNPM community communication platforms: Systems to effectively express the voice of beneficiaries are critical to fostering transparency, accountability and stronger management. So far PNPM has used various forms, such as accountability meetings and information boards, for this purpose. Going forward, communities will be encouraged to acquire new skills, including Information and Communication Technology (ICT) skills and tools. These may involve tools such as social/online platforms and mobile phone applications. Communities will be encouraged to utilize such mechanisms to better manage and monitor PNPM.

2 PNPM’s potential to respond to disaster situations where emergency resources are made available is hampered by rigid procedures for budgetary revision and approval. The GOI has had limited progress in addressing these rigidities, which resulted in limiting the program’s potential to respond as effectively as it is capable of.

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(b) Qualified facilitators are the backbone of PNPM: Strong facilitation is one of the most important foundations for PNPM’s success. Facilitators who are familiar with the social dynamics of the villages in which they operate (or who have the necessary technical skills) are hired and trained to assist communities to plan and implement the construction and maintenance of infrastructure and the delivery services of their choice. Facilitators are crucial to ensuring that all members of the community, and not just the elite, participate in the program. However, pressure to disburse (on which MOHA’s performance is judged), heavy workloads, difficulties with deploying and recruiting facilitators, and unrealistic reporting requirements have led to a decline in the quality of supervision and facilitation. During the past year, training programs for facilitators have been revised to better reflect the complexity of their tasks. Facilitators in remote areas, such as Papua, have been provided with additional incentives and benefits to make such postings more attractive. A professional certification institute for community facilitators has been established to improve professional standards.

(c) A robust governance framework is critical to program success: The program has a robust governance framework, which will be further improved on the basis of: findings from the 2012 Local and National Level Governance reviews; the assessment of sub-district financial management units (UPK) performance on RLFs; and the biannual PSF Governance updates. One of the recommendations from the Governance Review was to provide legal support to communities and lawyers at PMD. It is expected that this recommendation will be implemented with PSF funding starting in 2013. The biannual update provides an overview of current governance issues and enables a better understanding of the measures required to mitigate fiduciary risk and implement practical controls and initiatives. Amongst other needs, the UPK assessment conducted under the RLF Capacity Building and Sustainability Pilot Project identified the need for better qualified FM staff and for audits for the larger RLFs. Measures to address these issues have been agreed upon with PMD.

IV. Implementation

A. Institutional and Implementation Arrangements

23. Institutional and implementation arrangements for National Program for Community Empowerment in Rural Areas 2012-2015 (PNPM-Rural 2012-2015) build on successful elements of the existing structure of PNPM-Rural. PNPM-Rural implementation occurs across five levels: the national, provincial, district, sub-district, and village. A Joint Secretariat is being established at the national level to facilitate better integration of the management of the different PNPM programs, including PNPM-Rural, PNPM Generasi, and PNPM Green. The Secretariat will operate under PMD.

24. Responsibility for project implementation will remain with the Directorate for Village and Community Empowerment (PMD), under MOHA. PMD will continue to be supported through the deployment of a combination of National Management Consultants (NMC), Regional Management Consultants (RMC) and field-based facilitators. Proposed investments will be identified by the communities, who will become responsible for implementation and oversight. Guidelines for project implementation are detailed in the Operations Manual (OM), which is

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continuously updated to meet Bank requirements. A more user-friendly manual will be prepared for PNPM 2012-2015.

B. Results Monitoring and Evaluation

25. Results monitoring informs project stakeholders (community members, government officials, development partners, etc) on progress and enables them to determine whether the project is meeting its objectives and stated outcomes. Regular monitoring by PMD is complemented by special studies, evaluations, and analysis, the implementation of which is supported through the PSF Trust Fund.

26. Monitoring. It is acknowledged that the MIS was not very robust during the KDP series. With the 2007 decision to scale up to nationwide coverage and with the consequent increased complexity, information flow and data management issues have become more critical. To address MIS inadequacies, a comprehensive systems analysis is being carried out by a leading IT firm. This will form the basis for a complete redesign of the MIS platform. While this analysis is being completed, some improvements are being made to optimize utilization of the current MIS; these include the development and implementation of a web-based disbursement system and a web-based complaints handling system. The new system will integrate internal controls and management data requirements. The MIS will include a module to enable systematic collection and analysis of data on procurement performance and outcomes for the overall program which would then be consolidated and publically reported by PMD on a regular basis. It will capture gender-disaggregated data, allowing for robust monitoring and evaluation as well as informed decision making. This system will be adapted to the decentralized requirements of data entry and retrieval. It will also support website usage, which will enable stakeholders to access and search PNPM data at all levels, from the central level down to village level. This will also increase the level of transparency as the redesigned complaints handling mechanism and the procurement performance information are being incorporated into the MIS.

27. Evaluation. PNPM and KDP have one of the most innovative and comprehensive evaluation agendas of any Bank CDD program. The GOI and the PSF have sought out the most qualified partners to facilitate this evaluation: the Abdul Latif Jameel Poverty Action Lab (JPAL) within the Economics Department of the Massachusetts Institute of Technology, and the Indonesian research institutes SMERU and AKATIGA. Past PNPM-Rural Impact Evaluations (2007 and 2010) used a propensity score matching technique and explicitly fielded accompanying qualitative pieces to facilitate a better interpretation of findings. The recently conducted and Village Infrastructure Census (2011) provided the GOI with the first integrated database to provide information on the availability and quality of basic infrastructure nationwide (including health and education infrastructure) in more than 76,000 rural and urban villages across Indonesia. It is now being used to target resources, differentiating the size/use of the block grant according to local needs. Local Level Institutions 3 is a longitudinal mixed-methods study that helps track changes in local institutional development and community capacity since 2001. For the proposed project, additional evaluations are planned. These include an evaluation for the RLF Pilot Project and a study on Community Accountability Mechanisms in PNPM Generasi. Thematic issues that will receive special attention are livelihoods, gender, inclusion, and social accountability (see Annex 3 for details).

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28. Evaluations and studies carried out under the PNPM/PSF umbrella have typically been subject to a peer review process at design and completion stage, and are then presented to the GOI, donor and civil society partners, prior to publication. In recent years annual national workshops have been organized, at which findings from key studies/evaluations were presented for discussion. An area for future focus will also not only be on innovating locally in terms of dissemination methods and media, but also assure greater global outreach. One avenue will be the recently initiated regional "M&E for CDD" community of practice, led by the Social Development anchor in Washington DC, with the aim of better coordinating and supporting knowledge exchange across teams/projects for M&E initiatives. A further avenue are online platforms which would enable access and collaboration round key themes and findings at much more decentralized levels in Indonesia and across the globe. The team is also setting up 'advisory boards' for flagship pieces, with international representation, whose task would be include quality control and dissemination across member networks.

C. Sustainability

29. The sustainability of the PNPM-Rural program has been broadly demonstrated. Strong community participation ensures buy-in and demand, while local government participation brings additional support and institutionalization of the process. Investments have been proven to be of good quality. A recent independent technical evaluation in twelve provinces has confirmed that investments made on the basis of a community-driven approach rather than a traditional contracting approach is more economical and cost efficient. 30. This program has been scaled-up through successive operations, which have built on the successes of and expanded the geographic scope of previous cycles. The scale-up has taken place in the context of one of the world‘s largest decentralization programs, despite government changes, a major economic crisis, and catastrophic natural disasters. The success of this program in spite of the socio-political challenges highlights the program’s long-term sustainability and flexibility in the face of a changing environment. 31. The GOI is strongly committed to the program with a substantial portion of the program being funded by government. Funding has been confirmed at least until 2014 as part of the five-year Medium-Term Development Plan and program oversight has been elevated to the Vice President’s office.

V. Key Risks and Mitigation Measures

A. Risk Ratings Summary Table

Risk Rating

Project Stakeholder Risks

- Stakeholder Risk Low

Implementing Agency (IA) Risks

- Capacity Substantial

- Governance Substantial

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Project Risks

- Design Moderate

- Social and Environment Low

- Program and Donor Low

- Delivery Monitoring and Sustainability Moderate

- Long-term Sustainability of the program Moderate

B. Overall Risk Rating Explanation

Description

32. While PNPM-Rural operates on a well-institutionalized platform, successfully sustaining a nationwide program of its scale and scope presents several risks, as outlined below. Details are presented in the Operational Risk Assessment Framework (ORAF) in Annex 4.

33. Capacity. PNPM-Rural achieved national coverage in 2009. The GOI has stated its commitment to ensuring that all sub-districts will continue to receive block grants at least until the end of 2014, the period to which the mandate of the current administration runs. This underscores a strong government commitment to the program, but it also implies continued pressures on national and local budgets and on capacities to maintain standards of program delivery, fiduciary safeguards, management and oversight. The quality of facilitation is vital to ensuring that the poor are empowered to participate in planning and that investments are targeted toward their needs and utilized to achieve our outputs that meet good quality standards. PMD has been struggling to overcome years of under-investment in facilitators’ training and remuneration. This has resulted in a high turn-over and empty positions, particularly in remote areas. PMD has already revised the training curriculum and has budgeted for a complete training cycle. Under the proposed project, the GOI will enact revised salary and allowance scales for facilitators in remote areas.

34. Governance. Large, decentralized programs such as PNPM-Rural carry risks of leakage, fraud and corruption. This is demonstrated, for example, by the submission of fraudulent invoices by the NMC for PNPM Rural IV, which resulted in the debarment of this NMC in December 2011 and the procurement of a new NMC in October 2012. Program monitoring and analysis shows the current significant issues pertaining to governance risks related to RLF, the pressure to disburse, capacity of communities and local staff, and the electoral cycle. Proper fiduciary controls and strong governance structures are essential to achieve improved accountability for funds and to reduce risks and incidences of unaccounted funds, fraud and corruption. Such controls and structures have been well-institutionalized, particularly at the lower levels, where the bulk of funds are disbursed. This has been achieved through a combination of internal controls and oversight mechanisms, and social controls and downward accountability. At the national level, although there have been significant improvements, risks associated with the implementation capacity of PMD remain substantial. Therefore, mitigation measures are being strengthened as a part of the new operation. MOHA has determined to set up a Joint Secretariat to improve coordination and programming (including budgeting) between the PNPM-Rural and its special programs (e.g., PNPM Generasi and PNPM Green). Furthermore, it has requested additional technical assistance to overcome capacity constraints. Pokja

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Pengendali, the GOI’s national-level oversight body, has created a Governance Working Group that focuses specifically on corruption. Using the GOI’s own resources, Pokja Pengendali is recruiting experienced staff with a demonstrated high level of integrity at central and provincial levels to assist with monitoring corruption cases and governance trends. Pokja Pengendali has repeatedly made the fight against corruption a top priority of the program.

35. There is also risk associated with the very large number of contracts procured at the community level. The National Government Audit Agency’s (BPKP) audits and the Bank’s supervision, including ex-post reviews, have identified governance and fiduciary weaknesses. In collaboration with PMD, the World Bank is planning an independent fiduciary review to be conducted by a consulting/audit firm. The firm will be engaged by the World Bank. This review will evaluate compliance with the agreed procurement procedures of a representative sample of contracts on an ex-post basis and the financial management systems at the community level. It will also evaluate recent audit reports and make recommendations on how future audits can be further strengthened to provide greater assurance of effective verification of compliance of community procurement transactions with the specified procurement procedures. Based on its findings the review will recommend control and accountability improvements, which will be followed-up by PMD to guide and put in place further strengthened fiduciary oversight arrangements under the Program. PMD is strongly committed to further increasing transparency in the project. For this purpose, it has allocated significant resources for, amongst other purposes, strengthening the complaints handling system and exploring ways to use ICT to improve transparency and information flow.

VI. Appraisal Summary

A. Economic and Financial Analysis

36. Economic Analysis. Two economic analyses, conducted in 2005 and 2012 respectively, found that economic rates of return for completed PNPM-Rural sub-projects averaged approximately 50 percent. Both the 2004/5 study and its 2012 small-scale replication analyzed four distinct topics: (a) the internal “rate of return” (EIRR) on infrastructure investments; (b) the size of the income or consumption multiplier on PNPM block grant monies used to build infrastructure; (c) the cumulative costs of construction that PNPM projects incurred relative to estimated costs for local-government procurement and construction of the same/similar infrastructure items; and (d) a technical evaluation of the quality of the infrastructure built by PNPM. The 2012 study was carried out in four provinces (Jawa Tengah, Kalimantan Barat, Sulawesi Barat, and NTT). The study covered 48 recently-completed PNPM infrastructure projects, including road or bridge building or improvement; clean water supply construction; and drainage or irrigation construction or improvement projects. The replication suggests rates of return of between 35 percent and 75 percent for recent road/bridge, irrigation/drainage, or clean water supply PNPM projects. This is broadly in line with the finding of the 2004/5 study, which indicated rates of return of between 39 percent and 68 percent for a similar range of projects. Both the 2005 economic analysis and the 2012 technical evaluation also found that village infrastructure built through a CDD approach costs significantly less than equivalent works by the Ministry of Public Works or through local government contracts. Savings accrue from the elimination of costs such as contractor overheads, bribery payments, multiple handling of materials, frequent on-site design modifications, and extra charges for the supervision of projects

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in remote areas. Cost savings range from between 15 percent to 20 percent for projects involving a high level of engineering and technical expertise and up to 50 percent for labor-intensive infrastructure works.

37. Financial Analysis: Financial analysis is only applicable for the use of revolving loan funds (RLFs). A recent in-depth assessment measured financial, management and governance performance of a sample of RLFs in four provinces and found that 28 percent of the PNPM Rural RLFs reviewed in four pilot provinces are operating in a sustainable way. It also, however, found a trend of declining loan repayment rates with a consequent increase in the level of non-performing loans (NPLs). At the end of 2011, NPLs accounted for 23 percent of the sample loan portfolio and many were deemed unsustainable. The project, because of the mixed performance of RLFs, will focus on strengthening fiduciary oversight of the program and recovery of outstanding loans. While efforts will be made to strengthen RLF operations, performance-based allocation of additional grants to RLF will be introduced in 2013, with the key performance indicators to determine the additional allocation to be agreed upon in late 2012. Under the existing framework of the RLF rating system, the performance of RLFs is currently measured by a number of financial indicators, such as the level of loan risk (i.e., NPLs, collectability), ratio of revenues and expenses, and ratio of profit/surplus. A simplified rating system to assess the financial health of the RLFs will be introduced in 2013.

B. Technical

38. The proposed project will build on earlier PNPM-Rural projects, under which small scale infrastructure investments were made at good quality and at lower costs compared to traditional approaches. Technical guidelines and quality control measures for PNPM-Rural investments will be further enhanced.

C. Financial Management

39. Financial management risks. The financial management (FM) assessment of the implementing agencies of the proposed project identified two risks, taking into account the experience of the previous PNPM-Rural projects: the lack of effectiveness of national and regional consultants and the uneven capacity of facilitators to assist community groups on FM, including FM aspects of the revolving loan funds; and at the national and provincial levels, FM staff have limited capacity and heavy workloads. 40. Measures to mitigate FM risks. Community level risks will be mitigated stronger community oversight, better information flow, and an improved complaint handling mechanism facilitated through a web-based system. FM consultants from the NMC and respective RMCs will continue to work closely with the facilitators to strengthen FM practices on the ground. BPKP will continue to audit a sample of at least 20 percent of all sub-districts, with the enlistment and involvement of local government inspectorates. This is expected to enhance FM capacity. The project also will support improvements to the MIS, particularly aspects covering block grant disbursement, consultant contracting and payment progress, FM performance of the community groups, and the follow up of audit findings. A strategy has been agreed with PMD and is detailed in the revised operations manual that includes the following: UPKs with large revolving loan funds (i.e., assets greater than IDR 2 billion) will be required to hire a dedicated

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FM staff with a finance or an accounting background. Such staff should have at least a high school diploma, but preferably a college degree in accounting or financial management, and at least three years relevant working experience. Additionally, independent audit firms registered by the National Oversight Body for Capital Markets and Financial Institutions (Bappepam-LK) will conduct annual audits. More detail on the mitigation of FM risks is provided in Annex 3.

D. Procurement

41. Procurement under this project will be carried out in accordance with the World Bank’s Guidelines: Procurement under IBRD Loans and IDA Credits, issued in January 2011; Guidelines: Selection and Employment of Consultants by World Bank Borrowers, issued in January 2011; and the procurement procedures specified in the Legal Agreement, which also includes by reference the Project Operations Manual that sets out the detailed procedures for Community Participation in Procurement. 42. The procurement capacity assessment for PNPM-Rural 2012-2015 confirmed that project procurement processes should build on the lessons learned from the implementation of the previous PNPM-Rural projects, with the introduction of specific measures to enhance competitiveness, transparency and accountability. These measures focus particularly on community driven procurement processes, which account for the bulk of project procurement.

43. Community-level procurement will be substantially strengthened through the implementation of a rigorous multi-pronged approach that has been agreed to include:

(a) Removing unnecessary steps, which may be contributing to restricting competition and

creating opportunities for discretion and collusion; emphasizing proper documentation in the bidding process; and enhancing publicity and disclosure. Details of the procedural improvements are provided in Annex 3.

(b) Rationalizing the composition and enhancing the ownership, responsibility and accountability of the Community Procurement Committee through various measures. These include: developing and applying clear criteria and procedures for the selection of committee members based on capabilities, character, and the inclusion of at least one female member; requiring signed statements of ethical conduct by each committee member; and reducing the involvement of the village implementation team (TPK) and excluding the participation of the technical facilitators in the invitation and evaluation of quotations.

(c) Enhancing oversight through the implementation of additional checks and measures to verify compliance with agreed procurement procedures, for example, systematic, integrated fiduciary reviews of transactions on an ex-post basis and reviews of recent reports by a qualified external firm, initially to be engaged by the Bank.

(d) Enhancing procedures for complaints handling and for the investigation of fraud and corruption in procurement and contract implementation, with remedies and sanctions defined by the GOI and/or the Bank for non-compliance.

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(e) Enhancing systems for monitoring and regular public reporting of procurement performance and outcomes of the project, as part of the establishment and implementation of a functional MIS system, currently under development; and

(f) Strengthening procurement capacities and awareness.

44. Facilitators and Consultants. The selection and/or extension of the existing contracts of approximately 13,400 technical, social and financial facilitators at the sub-district and district levels will be based on strengthened criteria and procedures agreed with the Bank. In addition, a small number of firms will be contracted to organize events. Based on the findings and recommendations of the integrated fiduciary review, the future need for other consulting services to guide and further strengthen the procurement oversight arrangements will be discussed and agreed between the Bank and PMD and incorporated in future updates of the procurement plan. The NMC and seven RMCs contracted under PNPM-Rural IV will also support the proposed project for two years. Additional NMC and RMC services for the remaining period of this project will be based on the updated Procurement Plan, acceptable to the Bank.

E. Social (including safeguards)

45. The project will continue to support broad-based social development, with special emphasis on demand-side governance, gender, and indigenous peoples.

(a) Demand-side governance: The project will empower communities in some of Indonesia’s poorest areas and will benefit marginalized groups, including women, enabling these groups and communities to demand better services by:

(i) Promoting broad-based participation and increased transparency, downward accountability, and strengthened governance institutions (e.g., village and sub-district inter-village bodies);

(ii) Supporting reforms to the bottom-up planning and budgeting processes to ensure citizen participation; and

(iii) Stimulating community demand for improved district-level service delivery through community monitoring and feedback on frontline service performance.

(b) Gender: The project will continue to: (i) respond to women’s basic needs by funding water supply, health and education facilities; (ii) increase the potential for women to engage in economic activities through investments in local infrastructure, such as roads and markets; (iii) work with the GOI to improve the RLF, which is intended to assist women to engage in income-generating activities and to expand their businesses; and (iv) ensure that women are active participants in planning and decision-making, and that their voices are heard. Drawing on recommendations from the recently concluded gender review, which included feedback sessions and consultations with women-focused CSOs, the proposed project will implement a number of simple changes, such as introducing female village monitoring teams and having women in procurement committees, to ensure that the level of participation of women is maximized. In addition, the project will implement measures to determine in greater depth the impact

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of PNPM on the lives of poor women. An Enhanced Empowerment Experiment and a stronger focus on good and inclusive participation will also strengthen the level of women’s participation in PNPM-Rural (See Annex 2, Component 2).

(c) Indigenous peoples: The proposed project triggers the application of the Bank’s Operational Policy on Indigenous Peoples (OP 4.10). The PNPM-Rural series has already applied good-practice principles for indigenous peoples’ participation and involvement, including the recruitment and tailored training for facilitators from the same ethnic groups as beneficiary groups; the use of local languages, where needed; independent reviews by socio-cultural specialists; and modifications to the planning process to ensure free prior and informed consultation with broad community support. Under the proposed project enhanced training will be provided to facilitators to improve cultural awareness, particularly in matters related to indigenous peoples. In addition, a review will be conducted to determine how PNPM Peduli3 can work more effectively with CSO/NGOs that support indigenous people.

Box 2: Gender: PNPM-Rural and PNPM Peduli

PNPM-Rural A central principle of PNPM is gender equality and justice, as highlighted in the project Operations Manual: “a community of both men and women who have equal roles in every stage of the program and in enjoying the benefits of development.” One of the central factors influencing women is individual PNPM actors who find creative ways to engage women. These actors are dedicated in applying existing formal program guidelines that support women’s participation and create additional locally-relevant strategies. Moreover, they serve as role models to both men and women in the community. One of the standout village cadres in Sumba Barat is a young man who could not finish his school exams due to his family’s poverty. His desire to make a change in his community led him to reach out at traditional gathering places to women and to poor groups to get involved with PNPM, and to form a village women’s weaving collective. Led by the cadre, who was recently promoted to a field worker, the collective is marketing their products online. Female sub-district facilitators serve as role models to both women and men in their localities. One such facilitator in Central Java did not know how to ride a motorcycle but is proud that she has since learned to do so as a necessity for her job. She has won over traditional local communities to support her activities, even when they do not consider it acceptable for women being out at night. She has also deliberately introduced additional activities and rules to encourage women to speak up; reports from villages indicate that women are now speaking up because of her efforts. PNPM Peduli PNPM Peduli, a new pilot under the PNPM umbrella, was developed in response to government awareness that the broad brush approach of PNPM was not always reaching the most marginalized. It provides funding and capacity building support for CSOs to partner with marginalized groups to address different forms of social and economic exclusion. The program reaches over 9,000 men and women in 24 provinces across Indonesia, 63 percent of whom are women (including victims of domestic violence, female and child sex workers, migrant workers, street singers and garbage collectors). Through Peduli,

3 PNPM Peduli aims to unlock the potential of those who are marginalized so they become more self reliant, live more dignified lives and make a positive contribution to Indonesian society. The program works through national CSOs that are awarded grants to reach and empower the most marginalized, including street children, landless farmers, HIV and AIDS survivors, sex workers, indigenous peoples and many others.

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CSOs and their constituents are gaining a better understanding of systemic discrimination. CSOs are learning more inclusive ways to assist marginalized women in developing alternative livelihood skills, advocating for access to services and participating in community planning, as well as learning about their rights and developing their own support networks.

F. Environment (including safeguards)

46. The proposed project is rated as a ‘Category B’ project due to its potential environmental impact, and triggers the application of the Bank’s Operational Policy on Environmental Assessment (OP 4.01). No large scale, significant or irreversible environmental impacts are anticipated under the project. PNPM-Rural investments are very small and uniformly fall below the threshold size that requires a formal environmental assessment. The 2012 Technical Evaluation involving the evaluation of more than 1,200 sub-projects found that only one percent of sub-projects had environmental problems, mainly relating to poor drainage. Experience from previous PNPM-Rural projects points to two kinds of environmental risks: communities living in or near protected habitats may use natural resources from these areas, regardless of formal regulations, unless suitable awareness campaigns are conducted, and the messages are clearly understood by the communities and reinforced by the imposition of sanctions; and poor placement of water supply sources, which can lead to contaminated water supplies. 47. The OM, which includes the Implementation Guidelines for Social and Environmental Safeguards (IGSES), was updated based on the implementation experience so far. The IGSES includes Environmental and Social Codes of Practices, and provides clear guidance to minimize negative impacts on the community and the environment and to ensure that project activities comply with applicable laws, regulations and policies, as well as Bank OP 4.01. The preparation of the updated IGSES included a series of discussions among PMD, the NMC, and safeguards team of the World Bank. It was also discussed with facilitators at several sample locations: Kabupaten Buleleng - Bali Province on July 26-27, 2012, Kabupaten Karanganyar and Kebumen – Central Java Province on August 1-3, 2012, and Manado – North Sulawesi Province on August 15-16, 2012. The IGSES was disclosed in Bahasa Indonesia on PNPM-Rural website: www.pnpmperdesaan.or.id on September 17, 2012. An English language executive summary of the IGSES was disclosed on the Bank’s InfoShop on October 17, 2012 and the Integrated Safeguards Data Sheet for the project was disclosed on October 5, 2012.

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Annex 1: Results Framework and Monitoring INDONESIA: National Program for Community Empowerment in Rural Areas 2012-2015

PDO Level Result

Indicators Core

Unit of Measure

Baseline 2012

Cumulative Target Values

Frequency Data Source/ Methodology

Responsibility for Data

Collection

Description (Indicator

definition etc) 2013 2014 2015

Project Development Objective (PDO): For villagers in PNPM-Rural locations to benefit from improved local governance and socio-economic conditions

Indicator One: Households have low-cost access to infrastructure or services selected by the community.

% N/A4 80% 80% 80% Bi-annual field visits/supervision reports, 2012 surveys and impact evaluations, 2013 economic analysis.

Regular reports from field visits/ supervision, 2012 Incidence of Benefits Survey, Generasi and Rural Impact Evaluations, including 2013/2014 economic analysis.

MOHA and WB for regular field visits/ supervision, Bappenas and WB for evaluations/ surveys.

Quantifies increases in goods and services consumed, determines reduced cost of access to goods and services.

Indicator Two: Communities are involved in participatory and democratic forums for planning, implementing and overseeing initiatives that directly address local development priorities.5

# 2.27 million participating in hamlet-level consultative meetings (2011)

2.27 million

2.5 million 3 million Biannual field visits/supervision report, annual studies.

MIS, regular reports from field visits/supervision, 2012, LLI3 Study, 2013/2014 “100 Villages/50 sub-district Sentinel” Study.

MOHA for MIS, MOHA and WB for regular field visits/supervision, Bappenas and WB for studies.

Quantifies # of participants in consultative activities during project implementation.

4 Not previously tracked systematically and not previously compiled 5 Core Sector Indicators – Participation and Civic Engagement (http://intresources.worldbank.org/INTOPCS/Resources/380831-1177599583121/3719948-1248469457617/6332446-1330008912550/PARTICIPATION&CIVICENGAGEMENT-CSIGuidance2-21-12.pdf)

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PDO Level Result

Indicators Core

Unit of Measure

Baseline 2012

Cumulative Target Values

Frequency Data Source/ Methodology

Responsibility for Data

Collection

Description (Indicator

definition etc) 2013 2014 2015

Indicator Three: Projects funded by PNPM provide economic benefits (direct and indirect) for community members.

Change in productivity and/or lower cost of access Cost savings over regular procurement Local-level multipliers

N/A6 Cost Savings: 56% (2005)7 Multiplier: 1.17 (2005)

10% increase in productivity / 10% reduction in access cost 35% (cost savings) 1.2 (local-level multiplier)

10% increase in productivity / 10% reduction in access cost 35% 1.2

10% increase in productivity / 10% reduction in access cost 35% 1.2

2013/2014 economic analysis.

2013/2014 economic analysis.

Bappenas and WB.

Quantifies the increase in productive activities and/or reduction in time and cost of accessing public services, cost savings in regular procurement and local-level multipliers.

Indicator Four: Beneficiaries feel project investments reflect their needs.8

√ % N/A*9 80% 80% 80% Annual field reports, 2012 survey.

Regular reports from field visits/supervision, 2012 Incidence of Benefits Survey, 2013/2014 economic study.

MOHA and WB for regular field visits/ supervision, Bappenas and WB for evaluations/ surveys.

Beneficiaries judge that PNPM sub-projects reflected their needs (samples to include at least 25% of poor).

Project Beneficiaries.10

√ Beneficiaries (in millions)

40 40 40 40 Annual field reports.

MIS MOHA

6 Not previously tracked systematically nor compiled. 7 The 56% figure in the baseline is the upper level figure from a 2005 study which assessed a variety of infrastructure, for which cost savings ranged from 15-56%. Using updated figures (from a July 2012 study) which had similar findings, an average is being taken across the figures (for different sub-projects), which is more compatible with the 35% target value. 8 Core Sector Indicators – Participation and Civic Engagement (http://intresources.worldbank.org/INTOPCS/Resources/380831-1177599583121/3719948-1248469457617/6332446-1330008912550/PARTICIPATION&CIVICENGAGEMENT-CSIGuidance2-21-12.pdf) 9 Not previously tracked systematically nor compiled. 10 Core Sector Indicators – Project Beneficiaries (http://intresources.worldbank.org/INTOPCS/Resources/380831-1177599583121/3719948-1248469457617/6332446-1330008912550/BENEFICIARIES-CSIGuidance2-21-12.pdf )

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PDO Level Result

Indicators Core

Unit of Measure

Baseline 2012

Cumulative Target Values

Frequency Data Source/ Methodology

Responsibility for Data

Collection

Description (Indicator

definition etc) 2013 2014 2015

Of which female beneficiaries.11

√ % 48% 50% 50% 50% Annual field reports.

MIS MOHA

INTERMEDIATE RESULT (Component one) : Kecamatan Grants

% poor community members who participate in planning, decision-making. 12

√ % 45% 45% 45% 45% annual MIS MOHA PNPM Roadmap mainstream PNPM planning process into the regular village process.

% of participants in planning and decision-making meetings who are women.13

√ % 50% 50% 50% 50% annual MIS MOHA see above.

> 85% of work plans completed in one program cycle (18 months).

% 85% 90% 90% 90% Program cycle MIS MOHA

% of infrastructure works of high quality.

% 67% 75% 80% 80% annual Technical reviews, field reports, World Bank supervision missions.

MOHA for regular reports/supervisions, WB for technical reviews/supervision.

11 Core Sector Indicators – Project Beneficiaries (http://intresources.worldbank.org/INTOPCS/Resources/380831-1177599583121/3719948-1248469457617/6332446-1330008912550/BENEFICIARIES-CSIGuidance2-21-12.pdf ) 12 Core Sector Indicators – Social Inclusion (http://intresources.worldbank.org/INTOPCS/Resources/380831-1177599583121/3719948-1248469457617/6332446-1330008912550/SOCIALINCLUSION-CSIGuidance2-21-12.pdf) 13 Core Sector Indicators – Social Inclusion (http://intresources.worldbank.org/INTOPCS/Resources/380831-1177599583121/3719948-1248469457617/6332446-1330008912550/SOCIALINCLUSION-CSIGuidance2-21-12.pdf)

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PDO Level Result

Indicators Core

Unit of Measure

Baseline 2012

Cumulative Target Values

Frequency Data Source/ Methodology

Responsibility for Data

Collection

Description (Indicator

definition etc) 2013 2014 2015

% of infrastructure works utilized by community members.

% 0% 90% 90% 90% annual Technical reviews, field reports, World Bank supervision missions.

MOHA for regular reports/supervisions, WB for technical reviews/ supervision.

Sub-projects for which O&M arrangements involving community members are established and functional.14

√ % 85% 85% 85% 85% annual MIS, Technical reviews, field reports, World Bank supervision missions.

MOHA for MIS, regular reports and supervision, WB for technical reviews and supervisions.

% of RLF groups that are evaluated as mature/ready to be channeled to regular financial institutions.

% 5% 5% 7.5% 10% annual MIS, supervisions MOHA for MIS and supervision, WB for supervision.

Borrower groups that are evaluated as “mature”, ie graduated from PNPM RLF and ready to obtain financing from financial institutions such as cooperatives, banks, MFIs.

14 Core Sector Indicators – Participation and Civic Engagement (http://intresources.worldbank.org/INTOPCS/Resources/380831-1177599583121/3719948-1248469457617/6332446-1330008912550/PARTICIPATION&CIVICENGAGEMENT-CSIGuidance2-21-12.pdf)

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PDO Level Result

Indicators Core

Unit of Measure

Baseline 2012

Cumulative Target Values

Frequency Data Source/ Methodology

Responsibility for Data

Collection

Description (Indicator

definition etc) 2013 2014 2015

INTERMEDIATE RESULT (Component Two) : Community Empowerment and Facilitation

% of districts that conduct annual coordination meetings between PNPM-Rural (Satker) and other GOI teams to discuss PNPM-Rural activities.

% 80% 85% 90% 90% annual Facilitators regular reports.

MOHA

% of district that link the district‘s progress report into the local government‘s website.

% 0% 10% 20% 30% annual Facilitators regular report, district website.

MOHA

% of villages which are assisted to review their mid-term village development plans.

% 60% 65% 70% 70% annual Facilitators regular reports.

MOHA To mainstream PNPM into regular village planning process.

% of BP-UPK that conducted audit minimum once a year.

% <60% (est) 60% 65% 65% annual Facilitators regular reports.

MOHA

% of BKAD that conduct supervision and M+E

% 40% 45% 50% 50% annual Facilitators regular reports.

MOHA

% of villages with a functional community oversight team.

% 50% 55% 60% 60% annual MIS, supervisions. MOHA for MIS and supervision, WB for supervision.

% of members of the community oversight team who are women.

% 30% 30% 30% 30% annual MIS MOHA

% of villages with updated information board.

% 70% 75% 80% 80% annual Facilitators regular reports, supervisions.

MOHA for regular reports and supervision, WB for

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PDO Level Result

Indicators Core

Unit of Measure

Baseline 2012

Cumulative Target Values

Frequency Data Source/ Methodology

Responsibility for Data

Collection

Description (Indicator

definition etc) 2013 2014 2015

supervision.

# of districts which establish Economic Empowerment Stakeholder Fora.

# 0 tbc tbc tbc Annual Facilitators regular reports, supervisions.

MOHA for regular reports and supervision, WB for supervision.

Economic Empowerment pilot will be developed and values for indicators determined later.

# of business proposals funded.

# 0 tbc tbc tbc Annual Facilitators regular reports, supervisions.

MOHA for regular reports and supervision, WB for supervision.

% of UPKs that are evaluated as healthy administrative and financially for RLF.

% 60% 65% 70% 70% annual MIS, supervisions MOHA for MIS and supervision, WB for supervision.

Current rating definition of healthy is “Sehat & Cukup Sehat” Simplified RLF rating system under discussion.

% of Non Performing Loans (Collectability 2-5).

% 23% 23% 18% 12% MIS MIS MOHA This captures the level to which villagers are repaying their loans, under the RLF, to the UPKs.

INTERMEDIATE RESULT (Component Three) : Implementation Support and Technical Assistance

% of corruption cases that are resolved.15

√ % 40% 40% 45% 50% annual MIS, regular reports, supervisions.

MOHA for MIS, regular reports and supervision, WB for supervisions.

15 Core Sector Indicators – Participation and Civic Engagement (http://intresources.worldbank.org/INTOPCS/Resources/380831-1177599583121/3719948-1248469457617/6332446-1330008912550/PARTICIPATION&CIVICENGAGEMENT-CSIGuidance2-21-12.pdf)

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PDO Level Result

Indicators Core

Unit of Measure

Baseline 2012

Cumulative Target Values

Frequency Data Source/ Methodology

Responsibility for Data

Collection

Description (Indicator

definition etc) 2013 2014 2015

% of sub-districts audited each year and for which the results are published.

% 20% 20% 20% 20% annual BPKP audits, local inspectorate audits, WB audits

BPKP, local inspectorate, WB

% of province that provide complete monthly report in timely manner.

% 70% 90% 90% 90% monthly Monthly reports MOHA Province provides monthly reports in time and complete to be used as source for program’s progress tracking and decision-making.

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Annex 2: Detailed Project Description INDONESIA: National Program for Community Empowerment in Rural Areas 2012-2015

A. Introduction 1. The total project cost is estimated at US$4.5 billion, of which US$650 million will be financed from the proceeds of the IBRD loan. The remainder will be financed from the GOI’s own resources. The project design is based on that of its predecessor, but with a renewed focus on community empowerment and governance. These modifications, which will be reflected in the revised Operational Manual, are based on recent experience with the implementation of the PNPM-Rural series, and the results of a number of evaluations carried out during 2011 and 2012.

2. Improved Design Principles. The proposed project will incorporate the following aspects:

(a) Community Communications Platforms: The project will explore how Information Communication Technologies (ICT) can be used more effectively to provide information, share experiences, and promote transparency and accountability within PNPM communities. Communication and knowledge-sharing using Social Tools and ICT, such as Facebook, Twitter, SMS, Multimedia messaging, and Geomapping, will be used. The platform will also strengthen the ability of communities to ask questions and raise issues for debate, particularly concerning budgets and service delivery. In addition, the platform will provide the means to aggregate this participation and information from the local to the national level.

(b) Strengthening of Fiduciary Controls and Accountability Mechanisms of Revolving Loan Funds: Revolving loan funds for savings and loan groups have not had a dedicated implementation and oversight mechanism appropriate for such economic activities. Based on CHS data, RLF related claims account for over 70 percent of all complaints submitted through complaints handling mechanisms. An in-depth assessment of RLF performance in four provinces revealed a number of weaknesses in RLF operations and systems, including:

• Widespread perception that loans provided by RLFs are effectively grants and subsidies, erodes financial discipline and repayment morale in many RLFs.

• Legal ownership of the RLF funds is unclear.

• Declining loan repayment rates and consequent increase in the level of non-performing loans. At the end of 2011, non-performing loans (NPL) accounted for 23 percent of the loan portfolio.

• Weak management capacity in most RLFs in need of strengthening. Sub-district facilitators need to be trained on the principles and practices of loan management. Only about half of the RLFs assessed in the pilot provinces have realistic prospects of becoming sustainable operations, with adequate capacity building support. A middle group of RLFs need to make significant efforts to improve performance, while a smaller number of RLFs are not sustainable.

29

(i) The GOI has agreed to address areas of governance, transparency, accountability and supervision of RLFs. The Operations Manual (OM) has been revised and facilitators are being informed of the changes.

(ii) Three major activities will be launched among better performing RLFs in the four pilot provinces to address issues identified by the assessment:

• A legal assessment on the ownership of RLF funds and a potential legal status for RLF/UPK which will be completed by February 2013;

• A dedicated MIS platform for RLF operations which will be integrated with the overall MIS by late 2013; and

• Prototype training modules for building the capacity of UPK staff will be developed and tested and training will be delivered during 2013.

(iii) The RLF Pilot Project is finalizing a revision and simplification of the RLF rating system, and is developing guidelines for the external auditing of RLFs.

(iv) The RLF Pilot Project will function as a “laboratory” to test good practices in Indonesia and elsewhere in the selected pilot areas. Successful pilots will be rolled out nationwide and scaled up by the project and PNPM. It will also function as a “clinic” for under-performing RLFs, where treatment solutions are being developed, tested and prepared for roll out.

(c) Economic Empowerment Activities: The project includes the development of a strategy and associated implementation arrangements for a rural economic empowerment program.

3. Implementing the PNPM Roadmap. The PNPM Roadmap will guide the long-term implementation of the program and strengthen its integration with local governments. Key areas of focus of the PNPM Roadmap include:

(a) Integration of multiple PNPM programs at the local level;

(b) Clarification of roles of facilitators (generalist versus sector specific);

(c) Strengthening of capacity of local level institutions and clarification of legal framework;

(d) Adoption of core PNPM principles in functioning of Local Government; and

(e) Good governance and downward accountability.

The project includes several activities in Component 2 to foster the implementation of the Roadmap, e.g., the One Village – One Plan, to guide the development of each community through a single plan. 4. Geographical Scope. The project will support approximately 5,070 rural sub-districts in all Indonesian provinces, with a total beneficiary population of approximately 40 million. The average population of rural sub-districts is estimated at 64,000 in Java, 29,000 in Sumatra and 18,000 in other provinces. The block grant size per sub-district will range from $66,667 to

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$333,333, depending on population size and level of poverty; Table 2.1 indicates the Kecamatan Block Grant allocation.

B. Project Components 5. Component 1: Kecamatan Grants (US$3,723.77 million, of which US$200.00 million is from IBRD). This component will provide block grants directly to participating sub-district, each of which on average consists of 14 villages. Each village will prepare proposals for discussion at an inter-village meeting (MAD) held at the sub-district level where village representatives determine collectively which proposals will be financed. (see Figure 2.1 for a description of the block grant cycle). Villages can submit up to three proposals in typical sub-districts, of which two must come from women’s groups, one of which would be an RLF proposal. All villagers will be given the opportunity to participate in the proposal preparation process and decisions will be made democratically. Social organizers will facilitate wide and inclusive community participation. The cost of the average sub-project is approximately US$10,000.

Table 2.1: Kecamatan Block Grant Allocation

AREA TOTAL POPULATION

POVERTY CATEGORY

*

PNPM-RURAL 2012 BLOCK

GRANT ALLOCATION (IDR Million)

PNPM-RURAL 2012 BLOCK

GRANT ALLOCATION

(US$)**

JAVA-BALI

< 40,000 Less poor 600 66,667 Near poor 900 100,000 Poor 3,000 333,333

40,000 – 60,000 Less poor 700 77,778 Near poor 1,050 116,667 Poor 3,000 333,333

> 60,000 Less poor 800 88,889 Near poor 1,250 138,889 Poor 3,000 333,333

OFF JAVA-BALI

<7,500 Less poor 500 55,556 Near poor 650 72,222 Poor 1,750 194,444

7,500 – 15,000 Less poor 600 66,667 Near poor 750 83,333 Poor 3,000 333,333

15,000 – 25,000 Less poor 700 77,778 Near poor 900 100,000 Poor 3,000 333,333

> 25,000 Less poor 800 88,889 Near poor 1,100 122,222 Poor 3,000 333,333

*Areas categorized as less-poor may still have deficiencies in rural infrastructure and access to services. **Currency rate: IDR 9,000 = US$ 1

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Figure 2.1 Block Grant Cycle – PNPM Rural

Field Orientation and

Assessment

Inter Village Meeting

Dissemination

Village Meeting Socialization

Consultative Meetings

Special Women Meeting

Village Planning Meeting Village

Proposals

2nd Inter Village Meeting Prioritized

Proposals

Inter Village Meeting Final Funding

Decision

Village Meeting Report IVM

Results, discuss work plan

Village Accountability

Meeting (2x min.)

Village Meeting, Completion

Report, Hand Over

Evaluation

Nomination of Village Cadres, Village Committees

Training for Village Cadres, Village Committees

Proposal writing with/without cost estimate & design

Proposal Verification

Formation of Verification Team

• Funding options

• Kecamatan representatives

• Proposal Ranking

• Link-up to District Planning District Agencies

Forum

District Development

Forum

Preparation for sub-project implementation (procurement/construction plan/village training)

Supervision and Cross Village visit

Transfer of Funds & Sub-project implementation

Certification of Completion, Training of O&M Team

Last Transfer Funds & Sub-project Completion

Operation and Maintenance

Revolving Fund Management

Final Proposal/Design & Cost Estimate

1

2

3

4

5

6

7

10

9

8

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6. Project funds will be transferred directly to the collective village account at the sub-district level. These funds will then be released for implementation of the approved sub-projects or to women’s savings and loan groups (RLF). Funds for RLF activities must be repaid at market interest rates into a sub-district-level revolving fund, to be made available to future borrowers. Funds may be used for any activity, except for activities specifically excluded through a negative list or for land purchases of any kind. Activities that are eligible for funding through the grants include those that:

(a) Can be undertaken by the village, with locally available technical assistance;

(b) Are technically and financially feasible;

(c) Are determined to be a public need;

(d) Benefit the community, especially the poor; or

(e) Prepare for and respond to disaster, emergency or catastrophic events.

7. The project is expected to continue to support revolving loan funds (RLFs), although these funds may later be absorbed into the Economic Empowerment sub-component. In the interim, the funding will be closely coordinated with the activities under Component 2 in regard to strengthening the existing RLF scheme. Allocation of additional Kecamatan grants to RLF operations under the project will be based on: (a) performance of RLF, especially non-performing loans (NPL); and (b) demand for additional funds. The latter aspect takes account of the high liquidity levels in some RLFs. 8. The PNPM-Rural platform has been used to develop special programs which pursue specific development objectives. Currently there are two such initiatives which could receive funding from the proposed project or grants from PSF:

(a) PNPM Generasi: This program provides incentivized block grants to accelerate the achievement of government priorities and lagging Millennium Development Goals. The specific goals of this program are: to reduce poverty, maternal mortality, child mortality and to ensure universal coverage of basic education. PNPM Generasi has been piloted in 164 sub-districts in eight provinces since 2007. A rigorous impact evaluation found that from 2007 to 2010 the program was successful in increasing community use of, and access to, basic health and education services. Child malnutrition rates fell by 10 percent in program locations relative to rates in control areas. Education indicators also showed improvements, with the largest improvement observed in school participation rates among primary school students. Based on this evidence, the GOI has decided to expand PNPM Generasi coverage from 2010 to 2014.

(b) PNPM Green: This environmental pilot program for PNPM-Rural utilizes block grants and technical assistance to promote community investments in natural resource management and renewable energy. Since 2007, the program has financed four annual rounds of block grants (2008, 2009, 2010, and 2011) totaling US$34 million primarily for community-selected ‘green’ activities (e.g., reforestation/agro-forestry, conservation, watershed management, micro-hydro and bio-gas power schemes, environmental awareness raising and education. Additional financing has been used to

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expand PNPM Green’s coverage to additional environmentally sensitive locations in Sumatra and Sulawesi in 2011, and to fund block grants for an additional two years (2011 and 2012) in all locations.

9. Component 2: Community Empowerment and Facilitation (US$496.21 million, of which US$356.39 million is from IBRD). This component will finance three sub-components: (a) community empowerment and facilitation; (b) strengthening the existing Revolving Loan Funds scheme; and (c) support to rural economic empowerment.

(a) Community Empowerment and Facilitation: This sub-component will broaden the scope of the program to include community institutions and village cadres through:

(i) Assistance to facilitate community-led planning, improving capacity in the area of

fiduciary management, audit and skills in understanding budgets and improving the technical quality of sub-projects;

(ii) Sharing knowledge and developing community communication to promote better transparency and accountability;

(iii) Capacity development of village, sub-district and district institutions related to poverty alleviation and community empowerment; and

(iv) Fostering stronger inclusion, including of women and indigenous people.

This sub-component will finance three district facilitators in each district, in addition to a minimum of two facilitators (a social specialist and a technical specialist) in each sub-district. It will also provide support to non-salaried community cadres and local partners to assist and facilitate improved community awareness campaigns, planning, social mapping, technical assistance, budget literacy, community organizing, and oversight of sub-projects. A well recognized certification program will enhance the qualifications and status of the facilitators. At the district level, PNPM will improve coordination with the GOI District Coordination Team for Poverty Alleviation (TKPKD) to foster improved responsiveness by local government agencies to community needs. An Enhanced Empowerment Experiment, funded through the PSF Trust Fund in selected districts, is being planned. This experiment is intended to enhance the PNPM operational model by providing targeted additional assistance to achieve better outcomes in terms of community empowerment, the provision of information, social accountability mechanisms, and the inclusion of women and indigenous peoples.

(b) Strengthening the existing Revolving Loan Fund. This sub-component will support

the implementation of a strategy, comprising:

(i) Making loan recovery a priority in the work program of RLF and program facilitators;

(ii) Building loan loss reserves in RLF balance sheets and loan loss provisions in income statements;

34

(iii) Separating the accounting of, and reporting on, RLF operations from accounting and reporting on the other activities financed by block grants;

(iv) Hiring a dedicated and qualified book-keeper or accountant in larger RLFs with assets of a value of more than IDR 2 billion (US$220,000 equivalent);

(v) Annual audits of large RLFs by registered public accountants, especially of RLFs with assets of a value of more than IDR 2 billion (US$220,000 equivalent);

(vi) Management and oversight of RLF operations in a separate RLF unit under the UPK;

(vii) Allocating a dedicated economic empowerment facilitator at the district level that manage RLF assets of a value more than IDR 25 billion (US$2.75 million equivalent) to provide women’s group with better advice on business opportunities; and

(viii) Rolling out activities tested successfully under the PNPM RLF pilot to other provinces.

In addition to these initial activities, this sub-component will also finance:

• Capacity building and training of RLFs through modules developed and tested

under the RLF Pilot; and

• Facilitation of linkages between RLFs (including women’s groups) with formal financial institutions.

Support to Rural Economic Empowerment: This sub-component will develop a strategy and associated implementation arrangements under PNPM that responds to community demand for sustainable economic activities. It will take into account good practice from projects already underway in Indonesia. These include, for example, those funded in Indonesia by USAID (such as AMARTA, which supports partnerships among GOI, private businesses, and small farmers in the coffee, cocoa, and high-value horticulture value chains in the provinces of South Sulawesi, North Sumatra, Bali, West Java, and Papua) and AusAID, through its Partnership for Rural Economic Development (AIPD), operating across East Java, NTT, NTB, Papua and West Papua. In addition, they will be also informed by experiences from others countries, such as Brazil (under the Pernambuco Rural Economic Inclusion Project) and Andra Pradesh, India (most recently the Andra Pradesh Rural Poverty Reduction Programme). It will finance:

(i) District-level Stakeholder Forums, to encourage information-sharing and the

building of partnerships across villages and sub-districts, and among various stakeholders along a given value chain or productive activity (e.g., rural producer organizations/RPOs, local governments, institutional buyers, marketing cooperatives, wholesalers, value-added processors, research and development, technical service providers). It will also facilitate improved access to knowledge on markets. Kecamatan will be represented in the Stakeholder Forum by RPOs and representatives of MAD (inter-village meetings). Business plans from these

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Stakeholder Forums will indicate productive investments (i.e., sub-projects), primarily at the Kecamatan level, to be financed under the project. Facilitation support will be provided to build RPO entrepreneurial capacities to: collect and manage commercial and technology information; acquire business administration skills (e.g., basic bookkeeping and accounting skills); and identify business opportunities and partners, technology adoption,and capital investment.

(ii) Marketing research on specific markets and value chains.

(iii) Business plan development for RPOs to identify and develop viable business alternatives and to ensure quality control of economic empowerment sub-projects.

(iv) Sub-project grants to support business plans that would finance fixed capital (e.g., plant and equipment, minor small-scale infrastructure), working capital and technical assistance expenditures. In order to become eligible for a sub-project grant, a business plan must be consistent with a defined territorial strategy (as agreed through the stakeholder forum), and demonstrate financial feasibility.

10. Eligible RPOs under the sub-component will primarily be those: (a) with demonstrated production capacity; and (b) willing to adopt and co-finance (either in-cash or in-kind) new technologies and processes.

11. Component 3: Implementation Support and Technical Assistance (US$280.03 million of which US$93.61 million is from IBRD). This component will finance implementation support and technical assistance to: (a) strengthen the capacity of PMD staff, provincial and district level government agencies, participating districts and sub-districts in project implementation and monitoring, including through the National Management Consultants (NMC) and the Regional Management Consultants (RMCs); and (b) carry out monitoring and evaluation. The arrangements for project management are the same as for other Bank-financed PNPM projects. The Bank will co-finance the cost of: (a) program management; (b) monitoring; and (c) evaluation.

(a) Program management: Technical assistance would be provided through the NMC at the central level, and RMCs teams at the provincial level. Attention will be given to ensuring that better support and oversight is provided by technical specialists to the facilitators, and intensification of collaboration with local governments. A high level of transparency in community decision-making and accountability with regard to flow of funds will be achieved through a series of measures that were first introduced by earlier projects in the PNPM-Rural series: (i) randomized audits and dissemination of their findings; (ii) severe penalties for misuse of funds; (iii) use of oversight bodies at the sub-district and village level; and (iv) a robust complaints handling mechanism.

(b) Monitoring: The project will use the redesigned management information system (MIS) of PNPM-Rural to monitor the achievement of project objectives and intermediate results against agreed key performance indicators.

(c) Evaluation: The project will finance in-depth surveys to evaluate the outcomes and impacts of PNPM-Rural, including surveys on satisfaction levels, efficiency and

36

assessment of improved access to social and infrastructure services. These surveys will complement the data generated by the MIS. Through the PSF, the project will also provide support to the implementing agency for capacity building on program evaluation.

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Annex 3: Implementation Arrangements

INDONESIA: National Program for Community Empowerment in Rural Areas 2012-2015

A. Institutional and Implementation Arrangements

1. Institutional and implementation arrangements for the proposed project build on successful elements of the existing structure for the implementation of PNPM-Rural. The project implementation operates across five levels: national, provincial, district, sub-district, and village. Each of these levels has: (a) government policy and coordinating bodies with larger mandates, into which PNPM fits; (b) administrative bodies (Satuan Kerja/satkers, or project management units/PMUs at the national, provincial and district levels) that provide program oversight and coordination; and (c) bodies or teams for implementation and oversight (see Figures 3.1 and 3.2).

2. At the national level, a steering committee (Pokja Pengendali), chaired by the Coordinating Ministry of People’s Welfare (MENKO KESRA), will provide policy guidance and oversight. This steering committee includes representatives of the National Development Planning Agency (Bappenas), the Ministry of Finance, and several sectoral ministries whose areas of responsibility relate to PNPM. The Directorate for Community Institutions and Training, in the Directorate General of Community and Village Empowerment (PMD) under the Ministry of Home Affairs, is the implementing agency. Within PMD, a Joint Secretariat is being established to better integrate the management of the different PNPM programs, including PNPM-Rural, PNPM Generasi, and PNPM Green. PMD has hired a National Management Consulting (NMC) firm to assist with day-to-day implementation and to oversee technical assistance.

3. At the provincial level, PMUs (Provincial Satkers) will manage the administrative arrangements and budgets for district and sub-district facilitators. Seven Regional Management Consultant (RMC) firms have been contracted by PMD to support implementation in clusters of provinces. The RMCs have established oversight and technical support teams that will work closely with the facilitators at the district and sub-district levels. A stand-alone administrative services firm manages social mobilization and MIS specialists working for the PNPM Generasi project at the provincial level. These specialists report to the PNPM-Rural provincial coordinator.

4. At the district level, PMUs (District Satkers) will provide administrative support and oversight of the program. In addition, the PMUs will help manage block grant disbursements. The PMUs will control funds, based on the basis of strictly defined and established procedures. They will facilitate disbursements and oversee the use of these funds, both from the national and local government budget. However, to ensure the integrity of the program, they will not themselves manage nor have direct access to the funds. Each district will have a team of three senior facilitators, an engineer, a social facilitator, and a financial facilitator. In selected districts these teams will include an economic empowerment facilitator. District facilitators will provide technical oversight to sub-district facilitators. In districts in which PNPM Generasi operates, two additional facilitators are deployed, these being a social organizer and a financial specialist.

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5. At the sub-district level, the program will employ a social facilitator, a technical facilitator, and when necessary an assistant facilitator to support communities on project implementation. The facilitators will play an important role in ensuring that all villagers are aware of, and benefit from, PNPM. They will explicitly be required to make a special effort to include marginalized groups. The facilitators will also work closely with sub-district officials, particularly the local government project manager (Penanggung-Jawab Operasional Kegiatan, PjOK), and liaise with staff from line agencies, including agencies under the Ministry of Agriculture and the Ministry of Education. Several committees have fiduciary oversight or coordinating roles, including the Community-Appointed Financial Management Oversight Body (BP-UPK) and the Board for Inter-Village Coordination (BKAD). In sub-districts where PNPM Generasi operates, an additional empowerment facilitator is mobilized to provide direct support to communities to plan and implement health and education initiatives.

6. At the village level, communities will prioritize development needs and prepare project proposals through village assemblies (MDs). The MDs will select village cadres or facilitators, one male and one female, to assist with the planning process and to support village implementation teams (Tim Pengelola Kegiatan, TPKs). The cadres and TPKs are responsible for ensuring that poor villagers benefit from the sub-projects, in part by hiring them for construction work. TPKs will also ensure accountability and transparency by reporting on construction progress and budget use to villagers. Village MDs will establish teams to assist with proposal writing, operations and maintenance, and community monitoring. These MDs will elect representatives to the inter-village meetings, which are held at the sub-district level. Villages participating in PNPM Generasi will add members to village implementation teams to strengthen village capacity to manage sub-project implementation. In addition, communities will elect an 11-member village advisory team (Tim Pertimbangan Masyarakat Desa, TPMD) to coordinate with local health and education service providers in matters related to the planning and utilization of local health and education budgets, including the PNPM Generasi incentivized grants.

Complaints Handling

7. To mitigate the risks of under-reporting of complaints, inconsistency in complaints handling, and delays in processing complaints, PMD is redesigning the complaints handling mechanisms and will further revise the standard operating procedure for complaints handling. Beneficiaries and/or other program stakeholders can file complaints either directly with facilitators or through SMS messages, email or mail. Complaints are reported on a website, in a manner designed to protect the identity of the party making the complaint. The results of the investigation are made publicly available. Improved complaints handling data systems and processes will enable better analysis of trends to target audit and supervision, and to identify areas for improvement. Locations that do not take adequate follow-up action in 30 days will be suspended.

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Figure 3.1: Project Implementation and Organization Chart

Village ----------------------------------------------------------------------------------------------------------------------------------------------------------

Central ----------------------------------------------------------------------------------------------------------------------------------------------------------

District ----------------------------------------------------------------------------------------------------------------------------------------------------------

Sub-district ----------------------------------------------------------------------------------------------------------------------------------------------------------

National Management Consultant

Directorate General of Community and Village

Empowerment/National Satker

PNPM Steering Committee (Pokja Pengendali)

Ministry of Home Affairs

Provincial Satker Governor Regional Management Consultants

TKPKD

Kabupaten Satker Bupati Kabupaten Facilitators (3)

Kecamatan Inter-village Forum (MAD)

Camat/Kecamatan Head Kecamatan Facilitators (2-3)

Activity Management Unit (UPK)

Local Project Officer (PjOK)

Village Assembly Meetings (MD)

Kepala Desa/Village Head Village Cadres

Village Implementation Team (TPK) and other

village-level teams Elected Village Representative Council (BPD)

Community Beneficiaries

TNP2K

TKPKD

PjOProv

PjOKab

PMCs

Directorate of Community Institution and Training

PNPM Joint Secretariat

BKAD (Inter-village Cooperation Board)

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Figure 3.2. PNPM Technical Assistance Structure

Organizational Structure Main task Capacity Building/training

National

Regional

Province

Kabupaten

Kecamatan

Village

Manage and oversee the

overall PNPM rural implementation,

Develop participatory development system that support integration between PNPM rural and local government planning cycle

Design training and capacity building framework and materials

Develop fiduciary systems Inter regional coordination and

monitoring

Inter-province coordination and monitoring, quality control,

regional adaptation

Inter district coordination and monitoring, supervision to progress implementation,

support to program management,

Provide supervision and facilitation at Kabupaten level, inter kecamatan monitoring and

coordination, responsible for report and data validation

Provide facilitation and Implementation support to

villages in line with program cycle (including horizontal

integration with regular development planning process)

Assist village stakeholders in implementing the program sycle

National Dissemination Master Training/ TOT Orientation National workshop (4x /

year) Supervision, Internal

audit Evaluation Knowledge management

Regional workshop (1x / year)

Coordination meeting (bimonthly)

Supervision, Internal Audit

Coordination meeting

(bimonthly) Supervision, Internal

Audit Knowledge management

Refresher training Coordination meeting RBM activities Workshop with

legislatives On the job training In service training Knowledge management

Self learning On the job training In service training Cadre training Community training SPP group training

Local Facilitators

Regional Management Consultant (RMC) with at least 7 specialists

including Infrastructure, FMS, MIS, A di

Provincial RMC Oversight Teams with 7 Specialists including Training,

Communication, and RLF

Kabupaten Facilitators (4 Facilitators: Social, Engineer, Financial, and RLF in

selected Kabupaten)

Kecamatan Facilitators with assistants

Village Cadres (technical and non technical cadres)

Village stakeholders : BKAD, BP UPK, monitoring teams, Implementation team, village head, village legislatives, SPP groups,

Assistants and Comp.Opr

National Management Consultant (NMC) 50 specialists include: • CHS • FM • RLF • Community-

Based Monitoring

Advisory Team

to Support the Joint

Secretariat

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B. Financial Management, Disbursements and Procurement

Financial Management

8. A financial management (FM) assessment was carried out during supervision of the ongoing program. The proposed project will follow the control framework of the current project, with improvements to strengthen FM control.

9. The project has two main FM risks: at the community level, on the use and accounting for funds, due to the lack of effectiveness of national and regional consultants and the uneven capacity of the facilitators to assist community groups on FM; and at the the national and provincial levels, due to the stretched capacity of PMU/PIU staff (Satuan Kerja, Satkers) to exercise effective financial control. As a result, the overall FM risk is assessed as “substantial” before mitigation and “moderate” after mitigation. 10. Several actions have been implemented to mitigate the identified risks: community control will be improved through stronger community oversight based on improved information flow and an improved complaint handling mechanism, facilitated through a web-based system; FM consultants from the NMC and the respective RMCs will continue to work closely with the facilitators to strengthen FM practices on the ground; BPKP will continue to audit a sample of at least 20 percent of all sub-districts; UPKs with large revolving loan funds (i.e., assets greater than IDR 2 billion) will be required to hire a dedicated FM staff with a finance or an accounting background; and independent audit firms registered by the National Oversight Body for Capital Markets and Financial Institutions (Bappepam-LK) will conduct annual audits.

11. The main features of the financial management arrangements, including strengthened controls, include:

(a) Each PMU/PIU has FM staff who will function as payment and verification officers, treasurer for petty cash, and accounting officers. The NMC will (i) assist the PMUs with day-to-day management, (ii) assume overall responsibility for field-level implementation, and (iii) supervise and coordinate the seven RMCs. The NMC includes financial management consultants whose duties relate to internal audit, disbursement of funds, FM support, and other duties relating to the management of RLFs. The RMCs have established provincial oversight teams, which consist of a coordinator and supporting specialists in each province, including a financial management consultant. These oversight teams will provide implementation support to district and sub-district facilitators.

(b) Each district PIU will be supported by a team of at least three district facilitators, of whom one will be a financial specialist. These facilitators will oversee the sub-district facilitators.

(c) Payments to PIUs will be made through the GOI’s single treasury account. The system is working well and there have been no reports of significant delays in the delivery of funds from the treasury office to intended recipients.

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(d) The Commitment Officers (PPKs) at the PMU/PIUs will receive and review all payment requests, together with supporting documents. After the review of these documents, the Commitment Officer forwards the requests to the Payment and Verification Officer (PPSPM). After document verification, the PPSPM issues a payment order (SPM) to the Treasury Office (KPPN). The Treasury Office issues remittance orders (SP2D) to the operational bank for the remittance of funds from Government General Account (BUN) for component 1 or from the Designated Account (DA) to the beneficiaries’ accounts for Components 2 and 3. A monthly bank reconciliation will be conducted, involving the treasury office at the local level and the Designated Account at the central level.

(e) An internal audit will be conducted regularly by NMC, RMC and district facilitators for the respective levels. One of the focus areas of the internal audit process will be financial management. The audit will include a hierarchical supervision process, in which NMC supervise the performance of RMCs, while RMCs will supervise the performance of district facilitators.

(f) UPKs will prepare simple accounting and financial reports for financial transactions. UPKs will retain supporting documents for transactions financed through the block grants. The sub-district facilitators will assist UPKs in administering the block grants and certify the validity of the monthly UPK reports, which are submitted to the district. UPKs will also prepare a separate balance sheet and income statement for the RLFs.

(g) The provincial and district PIUs will maintain separate financial records covering all payment orders (SPM) and SP2D on a cash basis. All financial transactions will be recorded in the government accounting system and will be included in government accountability reports.

(h) The national PMU will prepare a separate set of financial reports to facilitate the monitoring of projects for which it is ultimately responsible. The PMU will prepare aggregate Interim Financial Reports (IFR) and will submit them to the Bank on a quarterly basis. These reports will include comprehensive information relating to the deployment of consultants and facilitators, the contracting of suppliers, and the disbursement of block grant payments. The PMU will retain supporting documents only for transactions conducted at the central level (Jakarta). In addition, the PMU will receive copies of SP2D from all local PIUs, on the basis of which it prepares a consolidated project financial report. These reports will also facilitate the implementation of Special Account reconciliation processes. For auditing purposes, a financial statement for this project will be prepared annually;

(i) Community-based controls include a review by facilitators and their certification of the validity of the community report. At least three signatures are required to withdraw funds from the community account. In addition to cross-village audits (review), the BP-UPK, the community-appointed sub-district management oversight body, supervises the performance of UPK. The UPK is required to display the financial reports and other relevant documents in a public area for general inspection.

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(j) Larger revolving loan funds (i.e., those with assets of a value greater than IDR 2 billion) will hire a FM staff with background in finance or accounting. This member of staff should at least be a high school graduate, and preferably a university graduate with a major in accounting or financial management and with at least three years working experience. In addition, RLFs are now required to have annual audits by independent audit firms registered by the National Oversight Body for Capital Markets and Financial Institutions (Bappepam-LK). Fees for these audits are paid from RLF earnings.

(k) The complaints handling system is being strengthened through the implementation of a web-based platform to facilitate the ongoing monitoring of complaints received. In addition, the rate of coverage of monitoring activities by district and provincial FM consultants is being increased. Regular borrowers’ confirmations are also being introduced to manage the risks associated with revolving funds.

(l) The Bank received the current PNPM audit report for the period ending on December 31, 2011 with an unqualified (clean) opinion. BPKP will continue to audit project financial statements and will provide input on the internal control framework. The same audit manual, which follows a risk-based approach and focuses on internal controls, will be used for PNPM-Rural 2012-2015. BPKP will continue to work with local government inspectorates to audit sub-grants and related expenditures. BPKP will continue to review IFRs and conduct interim audit on a semesterly basis. BPKP will submit the reviewed reports to the Bank not later than 45 days after the end of the period of report coverage.

12. The program continues to strengthen financial management controls, as described in Table 3.1.

Table 3.1: Continuous Strengthening of FM Control: from KDP to PNPM

KDP PNPM-Rural Based on research recommendations, auditors conduct exit meetings in district/sub-district level

Introduced in KDP 3 and ongoing

Internal audit assignment Introduced in KDP 3 and will be strengthened in PNPM 2012-2015

Local auditor (inspector) involvement Introduced in PNPM I and ongoing Web-based complaints handling system Introduced in PNPM I and will be strengthened in

PNPM 2012-2015 FM Information System for Consolidation Need to be restructured in PNPM 2012-2015 Based on research recommendation, the audit sampling is 20% of sub-districts and is risk-based

Introduced in PNPM II and ongoing

Cross village audits (review) Introduced in KDP II and ongoing but will be formalized in PNPM 2012-2015

Separate UPK report for RLF Introduced in PNPM II and ongoing Hierarchical supervision Introduced in PNPM II and ongoing FM Consultant in all district level Introduced in PNPM II and ongoing Audit Report open for public access Introduced in KDP III and ongoing UPK Community Oversight Board Introduced in PNPM I and ongoing Independent Oversight by journalists Introduced in KDP I and will be reintroduced in PNPM

2012-2015

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Table 3.1: Continuous Strengthening of FM Control: from KDP to PNPM

KDP PNPM-Rural IFR review (interim audit) by BPKP Introduced in PNPM IV and ongoing All sub-grants information and report should be published through village information board

Introduced in KDP I and ongoing; template will be developed for more meaningful and consistent information

Disbursements

13. Loan funds will be disbursed against eligible expenditures, as shown in Table 3.2.

Table 3.2: Allocation of Loan Proceeds

Category

Amount of the Loan Allocated (Expressed in US$ Million)

% of Expenditures

to be Financed (1) Kecamatan Grants under Component 1

200.00 100

(2) Community Empowerment and Facilitation Support under Component 2

356.39 100

(3) Implementation Support & Technical Assistance under Component 3

93.61 100

TOTAL 650.00

14. Disbursements will be implemented through a ‘Reimbursement’ method for Component 1 (block grants), and through either ‘Advance’, ‘Reimbursement’ or ‘Direct Payment’ methods for other expenditures. Payments for block grants will be made from GOI sources and reimbursed by the Bank through the MOF treasury account. Disbursements for the block grant will be based on fund transfer (remittance order) from the Treasury Office to the community account. For other components, a Designated Account (DA) denominated in US dollars will be opened by DG Treasury (MOF) at Bank Indonesia or a commercial bank acceptable to the Bank. The DA will be used solely to finance eligible expenditures for Component 2 and for Component 3. Disbursements for Component 2 and Component 3 will be based on actual expenditures incurred. The upper limit to the value of advances made to the DA will be variable, with the advance(s) being made on the basis of projected expenditures for a six month period. Reports on the use of funds disbursed through the DA and for reimbursement of the block grants will be submitted through quarterly IFRs. Retroactive financing up to US$130 million may be used for expenses incurred in categories 1, 2, and 3 prior to loan effectiveness, but after January 1, 2012.

15. The Bank will finance each respective project component in parallel and at 100 percent. The disbursement under Component 1 will be on a reimbursement basis and the Bank would reimburse at the rate of 100 percent of eligible grants up to the limit of US$200 million. PMD should issue a revised manual formally prior to disbursement of Component 1. A designated account will be set up for Components 2 and 3. The Bank would finance 100 percent of

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facilitators' expenditures under Component 2. Other expenditures under Component 2 will be financed by GOI. These include expenditures for local project secretariats, facilitators' recruitment and mobilization, monitoring and evaluation and local inspectorate audits. Similarly, under Component 3, the Bank would finance 100 percent of expenditures related to national and regional consultants (NMC and RMCs), while GOI will finance expenditures related to the national project secretariat, external audits and national workshops.

16. Applications for reimbursement of block grants will be submitted together with: (a) a statement of expenditures; and (b) either copies of records providing evidence of eligible expenditures and amounts actually paid, or the certification for reimbursement of kecamatan grants issued by MOHA.

17. Applications for the replenishment of the DA advance will be submitted together with the quarterly IFRs, supported by:

(a) A list of payments for contracts under the Bank’s prior-review, together with records providing evidence of such expenditures.

(b) A statement of expenditures.

(c) IFRs for other expenditures and a cash forecast for the next two quarters.

(d) The DA reconciliation statement and a copy of the related bank statement. Applications for direct payments will be supported by records providing evidence of eligible expenditures.

18. All documentation for expenditures submitted for disbursement will be retained by PMD, as the implementing agency. Such documentation will be made available to the auditors for the annual audit, and to the Bank and its representatives if requested.

19. The DG Treasury will authorize its branch Treasury Offices to authorize payments for eligible project expenditures by issuing a SP2D, charging the GOI account or the DA as appropriate. For this purpose, the DG Treasury shall issue a circular letter to the relevant Treasury Offices, providing guidelines and criteria for eligible project expenditures in accordance with the loan agreements. When expenditures are due for payment, project implementing units will prepare a payment request (SPP) to the Payment Officer within the project implementing unit. After document verification, the Payment Officer will issue the payment order (SPM) together with the supporting documentation for submission to the relevant Treasury Office.

20. The Treasury Office will check the budget eligibility and issue the remittance order to the Treasury Office’s operational bank, which will transfer funds directly to the payee’s account and arrange a debit for the loan portion to the DA. Although the DA will be in the name of DG Treasury MoF, the National Satker will be responsible for reconciling the DA and preparing separate applications for the withdrawal of reimbursements and advances of DA. These must be duly approved by DG Treasury before their submission to the Bank. Copies of DA bank statements will be provided to the national PMU by DG Treasury, MOF.

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Procurement

21. The Bank conducted a capacity assessment of National Program for Community Empowerment in Rural Areas 2012-2015 (PNPM-Rural 2012-2015). The procurement risk is rated as “high” and remains “substantial” after mitigation. Procurement under this project will be carried out in accordance with the World Bank’s Guidelines: Procurement under IBRD Loans and IDA Credits, issued in January 2011; Guidelines: Selection and Employment of Consultants by World Bank Borrowers, issued in January 2011; and the procurement procedures specified in the Legal Agreement which also includes by reference the Project Operational Manual that sets out the detailed procedures for Community Participation in Procurement.

22. For each contract financed through the Loan, the different procurement methods or consultant selection methods, estimated costs, prior review requirements, and time frames are agreed upon by the Borrower and the Bank through the Procurement Plan. The Procurement Plan, satisfactory to the Bank, is available on the Project’s website (www.pnpm-perdesaan.or.id) and on the Bank’s external website. The Procurement Plan will be updated at least annually, or as required to reflect actual project implementation needs and improvements in institutional capacities.

23. As with most CDD projects, the principle of giving communities control over the management of funds and associated procurement processes creates both advantages and risks. Making communities responsible for the project procurement gives them a direct stake in this process. If the information flow and controls at the community-level are strong, beneficiaries are empowered to ensure that funds are used correctly. At the same time, the large number and dispersed nature of small community contracts procured under community participation in procurement creates challenges to ensuring effective procurement implementation. The Bank’s implementation support, involving measures such as the recent ex-post procurement reviews conducted by the Task Team and procurement reviews conducted by BPKP, have identified weaknesses in the procurement procedures specified in the OM and in the supervision process. The project will build on the lessons learnt from the implementation of procurement under the previous PNPM-Rural projects. On the basis of this experience, the project will introduce a wide range of measures to strengthen procurement procedures, with these improvements specifically designed to enhance competitiveness, transparency and accountability. These improvements will focus particularly on the community driven procurement processes implemented under the Kecamatan grants. A strong and effective hierarchical supervision is needed to ensure that procurement follows the procedures stipulated in the OM and that sanctions are applied when necessary.

Procurement of small-scale infrastructure schemes

24. Sub-projects financed under Kecamatan Grants (Component 1) and carried out by communities would follow Community Participation in Procurement method as per para. 3.19 of the Procurement Guidelines whose detailed procedures are provided in the OM, and would include inter alia small-scale infrastructure investments. The same procedures would also apply to Component 2c (Economic Inclusion) if the pilot concept (yet to be developed), determines that producer organizations could invest in small scale productive infrastructure. Procurements carried out by communities will mainly involve purchases of construction material for small

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socio-economic infrastructure schemes, with a maximum total value of US$40,000 per community/village. Labor and transportation will be provided as community contribution in kind and/or paid based on competitive market rates. Wholesale contracting of the infrastructure schemes is not allowed.

25. Given the community-driven nature of the activities, it is not possible to accurately estimate the total number of community contracts. However, this number could be in the range of 50,000 contracts located across 32 provinces over the four-year life of the project. The total cumulative value of the amount allocated for the Kecamatan Grants under the overall Program is US$3.7 billion, of which US$200 million is IBRD financing. Thus, community contracts constitute the bulk of procurement processes under the project, both in terms of total value and in terms of the number of contracts. The Bank’s supervisory processes, including the recent ex-post procurement review of a sample of contracts carried out by the task team, as well as procurement reviews conducted by BPKP, have identified some weaknesses and vulnerabilities in the OM related to specified procurement procedures; their implementation in practice; and in the oversight mechanisms this manual defines. These weaknesses and vulnerabilities may restrict competition and otherwise lead to collusion, discretion, manipulation in decision making of contract awards, and other undesirable outcomes. Based on lessons learned, the community participation in procurement under the project would be substantially strengthened through a rigorous multi-pronged approach that includes the following risk mitigation measures:

(a) Strengthened and streamlined procurement procedures: Existing gaps in the Community Participation in Procurement procedures set out in the OM will be filled and strengthening measures incorporated to increase competiveness and transparency. This will mainly include removing certain steps in the existing procurement procedures that are unnecessary for procurement of such simple nature and very small value and may in fact be contributing to restricting competition and creating opportunities for discretion and collusion; emphasizing the requirements for proper documentation of the bidding process, and enhancing publicity and disclosure. Free and open access to participation in the bidding process will be allowed by removing existing pre-conditions such as administrative screening of bidders and pre-bid meetings. Procurement of construction material estimated to cost IDR 15 million or more per contract would continue to require obtaining written quotations from at least three different suppliers in response to a written request based on standard forms provided in the OM which would include the required quantities, minimum technical specifications, terms and conditions for delivery and payment, and selection criteria, For construction material estimated to cost less than IDR 15 million per contract, streamlined procedures would allow the community procurement committee to obtain prices from at least three different suppliers using a revised form which will specify the requirements and also require each bidder to separately fill in the form its offered unit prices and amounts, address, telephone/fax number, signature and date (doing away with verbal invitations and quotations). Consolidation of the procurement requirements into larger packages will be encouraged for promoting economy and efficiency, and for this purpose splitting of the total requirements of the same material into smaller packages will be discouraged by requiring any exceptions to be justified by the community procurement committee and documented in the bid evaluation reports. Wider publicity of invitation for quotations and disclosure of contract award information will be required, including direct delivery of invitations to as many as

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possible of the shopkeepers in the local commercial market, providing summaries of contract award information to all bidders who submitted quotations, public announcements through loud speakers, community radio stations and community meetings, postings in local mosques/community centers and quarterly publishing of notices in local newspapers inviting the general public to inspect the consolidated quarterly summaries of contract award information maintained in the sub-district offices and also published on the Project’s website, in addition to the existing information boards in villages. All exceptional cases where less than three quotations are received or Direct Contracting, will have to be justified and documented by the community procurement committee in the bid evaluation report, explaining the specific circumstances, confirming that maximum effort was made to publicize the invitation for quotations. Also prior approval of the BP-UPK will be required before awarding such contracts. Construction material that is locally available free of cost from public sources, such as sand, and stone from quarries, may be procured by paying labor costs based on wage rates determined by the TPK, using competitive market rates as reference. The improved procurement procedures will be incorporated in the revised OM as a condition for disbursement. To allow adequate time required for dissemination of the revised procurement procedures, use of the revised OM will be mandated for the new fiscal year as of March 1, 2013.

(b) Rationalized and Accountable Community Procurement Committees: Communities will select representatives to the TPK and to the community procurement committees, based on capabilities and character; participation of women on committees will be required. The establishment of procurement committees will involve strengthening the criteria and procedures for selection of community procurement committee members as well as their responsibilities and accountabilities. These measures will include an elective process requiring a specified minimum level of capability and assurance of character. Additional measures will require the inclusion of at least one female member in the procurement committee, the formulation or more tightly defined responsibilities and accountabilities, with statements of ethical conduct to be signed by each member of the procurement committee and other measures as required. Greater independence and ownership of the procurement process by the community procurement committee will be provided by reducing the involvement of the TPK in the procurement process (invitation and evaluation of quotations) and limiting only the Chairperson of TPK to be one of the members of the community procurement committee. Also, the participation of technical facilitators in the procurement process will be eliminated altogether. This is necessary for promoting check and balance and to avoid excessive control since TPK is also responsible for the design and implementation of the community construction scheme, and the technical facilitators are responsible for providing guidance prior to start of the procurement process and checking compliance on ex-post basis after completion of the procurement process and award of contract, which would be the exclusive responsibility of the community procurement committee. Strengthened criteria and procedures for the selection and working of community procurement committees will be incorporated in the revised Operational Manual, with their implementation mandated from March 1, 2013.

(c) Enhanced procurement oversight: Improved supervision by the technical facilitators at the sub-district and district levels are a key aspect of improved oversight. Both facilitators will independently survey and collect price information from suppliers for

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their own independent assessment, on an ex-post basis after award of the contracts (without any involvement in the procurement process), the reasonableness of the contract award prices and compliance with required procedures of the procurement processes carried out by the community procurement committees, for which the facilitators will use improved checklists provided in the OM and they will also provide an annual report on the assessment of the of the procurement processes in each of their villages which will be available to the public. Enhanced procurement oversight will also include additional checks and measures in cascade level to verify that all procurement transactions are conducted in compliance with the required procedures. Currently, the first internal reviews are conducted by the kecamatan facilitators to cover completed procurements, In 2009, an internal audit was introduced and conducted by the NMC (sampling crosschecks 20% kabupaten and 5% kecamatan), RMC’s provincial consultants (30% kecamatan) and Kabupaten facilitators (60% of Block grant expenditure). The standard operating procedure for internal audits is being substantially revised, including the procurement module. External audits are conducted by BPKP. Notwithstanding the existing audits, which mainly focus on financial transactions, there is a particular need for strengthening review of the procurement processes conducted by the communities. To provide an increased level of assurance that procurement processes are conducted in full compliance with the mandated procedures, the existing review arrangements will be supplemented by additional independent integrated fiduciary (Procurement and FM) reviews. These reviews will be carried out on ex-post basis by qualified external consulting firm to be initially engaged by the Bank (PSF) to include review of a representative sample of community procurement transactions as well as recent past audit reports. The findings and recommendations of the review will be followed and used by PMD to further strengthen the procurement oversight arrangements, including internal and external audits, for the overall program. An external consulting firm will be engaged by PSF in early 2013 and the review will be completed by August 2013. PMD will use the findings and recommendations to develop and implement an action plan for further strengthening the procurement oversight arrangements for the overall Program by May 2014.

(d) Improved implementation of complaints handling mechanism, follow-up and remedies: Improvements to the complaints handling system will build on the existing system to further refine, elaborate and disseminate the procedures for submission and equitable redress of complaints related to procurement. Amongst other measures, invitations for quotations will include procedures for submission of complaints and appeals as a standard measure. Options for removing constraints on the submission of genuine complaints will be thoroughly explored, with these options including the wider dissemination of related information and the establishment of additional avenues for submitting complaints at public locations, including local mosques, community centers, and other venues acceptable to the community. The improved Complaints Handling System (CHS) would include a category for procurement complaints. These measures are intended to provide assurance of the independence and integrity of the review and appeal process, with clearly defined steps, response time standards, and responsibilities for follow-up. The measures and delineations of responsibility for dealing with cases of suspected fraud and corruption in procurement and for the remedies and sanctions that could be applied by GOI for non-compliance and breach of integrity under the national procurement rules and regulations will be further refined, as will remedial actions that

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could be independently taken by the Bank for contracts financed by the Loan under the Bank’s Procurement Guidelines, etc. Refined procurement complaints handling and follow-up procedures will be agreed upon by the Bank and PMD and incorporated in the revised Operational Manual, with implementation mandated from March 1, 2013.

(e) Systematic monitoring and public disclosure of procurement performance and outcomes. This will include the development and implementation of a procurement module as an integral part of the broader MIS system, which is currently under redesign. This will enable the systematic collection and analysis of data related to procurement performance and outcomes under the overall program, which will be consolidated and publically reported by PMD on a regular basis. MIS system to be made operational by October 2013 and first procurement performance report published by PMD by December 2013.

(f) Increased procurement capacity and awareness. Measures to achieve improved capacities and awareness will include the design and implementation of a procurement capacity and awareness-building program by PMD. This program will be based on the revised Operations Manual and will be implemented through training of trainers at the national and regional levels. This will facilitate the onward training of facilitators at the district and sub-district levels, who will in turn guide and train communities and their representative organizations. Particular attention will be paid to procurement conducted by communities, including those involving local suppliers. All facilitators to receive training by December 31, 2013.

Selection of Consultant Services

26. Individual Consultants. The selection of individual consultant services will mainly involve the selection and/or extension of the existing contracts for approximately 13,400 technical, social and financial facilitators at the sub-district and district levels. The facilitators will be hired and individually contracted under annual contracts by the 32 Provincial Satkers. Each individual contract at the sub-district level has a value of approximately US$7,500 per year, while individual contracts at the district level of a value of approximately US$17,000 per year. The total cumulative value of these contracts is approximately US$240 million over the two year period. As is currently the practice, vacancies for such positions will be publicly announced in provincial newspapers and posted on the project website, with minimum qualification requirements, criteria and procedure for selection, and contact address in case of complaints clearly stated through these means. The most qualified applicants will be selected and the results of the selection process will be announced in national and provincial newspapers, on the website and through other means. These notifications will also include the names and details of the selection committee and approval authorities. The roles and responsibilities of the facilitators will also be clearly stated to eliminate any suggestion of undue involvement or interference in the implementation of the procurement process. It will be emphasized that the procurement process is the exclusive responsibility of the communities, as the facilitators’ involvement in the procurement process could create conflicts of interest if the facilitators were also responsible for ensuring compliance with the procurement procedures on ex-post basis.

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27. Consulting Firms. At this time no new procurement of consulting firms is expected under the project. The firm for the integrated fiduciary review would initially be procured by the Bank (PSF) and based on the findings and recommendations, the need for hiring of firms for other consulting assignments will be determined and incorporated in the updated procurement plan. Consulting firms would be procured through competitive selection methods, including QCBS, Least Cost Selection, or Selection Based on Consultants Qualifications. Services of an intellectual/technical nature will be procured as consultant services, rather than as non-consulting services. The specific contract packages for the hiring of consultant firms, applicable selection methods, and the Bank’s review requirements will be set out in the agreed procurement plan. No new procurement processes are expected to be undertaken under this project for the selection of the NMCs and RMC firms, as the NMC and 7 RMCs have recently been selected under PNPM-Rural IV for 2 year contracts. The procurement of any further NMC and RMC services required during the remaining period of this project will be negotiated between the Bank and PMD and agreed upon in the procurement plan at least 9 months before expiry of the current contracts. At that time, it will be determined whether extension of the existing contracts or a new selection process is justified. The Provincial Satkers and PMD will closely monitor and submit biannual reports on the performance and outputs of each of the facilitators and of the firms engaged under the project, including the NMC and RMCs. Performance will be measured against the terms of reference and performance milestones relevant to each facilitator and firm, with the strict application of contractual remedies for non-performance and of sanctions for misconduct.

28. Procurement of Goods and Non-Consulting Services. Some contracts will be required to facilitate the provision of printing and non-consulting services of non-technical and logistical nature, such as event organization. The specific contract packages for goods (other than construction material which will be procured through Community Participation in Procurement method) and non-consulting services, applicable selection methods, which are expected to be NCB and Shopping, and the Bank’s review requirements will be specified in the procurement plan.

29. Procurement Plan. The procurement plan will form the basis for all procurement methods and activities relating to the project. Thresholds mandating prior review of specific contract packages will also be determined through the procurement plan. All contract packages expected to be procured under the project will be listed in the procurement plan, along with their applicable methods of procurement and the Bank’s review requirements, with the exception of the community contracts for construction material which due to their nature and large numbers and also the programmatic design of the project cannot be predicted in advance and will be part of the project implementation plan identifying the community infrastructure schemes. The procurement plan was agreed to during appraisal and will be made available on the project’s website and on the Bank’s external website. The procurement pan would be updated at least once a year or as required to reflect the actual project implementation needs and improvements in institutional capacity.

Ex-post Reviews

30. In recent years, the Bank has engaged BPKP to carry out ex-post reviews of CDD projects in Indonesia, including PNPM-Rural. However, these reviews have focused mainly on systems and controls, rather than on specific contracts and transactions. Therefore, such reviews are not a

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substitute for the Bank’s mandated ex-post review of contracts that are not subject to prior review. Thus, the Bank will conduct its own ex-post reviews for this project. For this purpose, it will utilize its own staff and/or consultants, with the ex-post reviews being conducted on the basis of a strategic risk-based sample. Given the large number of community contracts involving Kecamatan Grants and facilitator contracts, it is not possible or effective for the Bank to carry out ex-post reviews involving a sample to the same proportions that would typically apply in non-CDD projects. Therefore, the Bank will supplement its own ex-post reviews by conducting desk reviews and spot checks in the field. These reviews and checks will be conducted on the basis of information and findings made available from audits conducted by BPKP under the Borrower’s standard audit requirements and from the integrated fiduciary reviews carried out by the external consulting firm(s), to be engaged initially by PSF . The Bank and the findings and recommendations of the integrated fiduciary review will provide guidance to PMD which will be used for further strengthening the procurement oversight arrangements under the overall Program, including procurement process audit by BPKP. . This will ensure that the multiple review processes conducted respectively by the Borrower and the Bank complement each other and further strengthen oversight of the project’s procurement systems and procedures.

31. After mitigation, the residual procurement risk under the project is categorized as ‘Substantial’.

32. Details of the Procurement Arrangements Involving International Competition. Given the nature and value of procurement expected under the Project, at this time there are no new contracts for goods, works, non-consulting, or consulting services that are expected to be procured through international competition.

C. Better Governance Action Plan (BGAP)

33. A BGAP was adopted under PNPM-Rural IV, with this plan being disseminated to the project consultants and published through a project website. The BGAP has been revised to include: social accountability, supervision and management, monitoring, and internal controls. The BGAP is included in Annex 6.

D. Environmental and Social (including safeguards)

34. Two safeguards policies are triggered under the project. These are: OP 4.01: Environmental Assessment; and OP 4.10: Indigenous Peoples.

35. The Implementation Guidelines for Social and Environmental Safeguards (IGSES), which is an annex to the Operations Manual, has been updated to reflect lessons learned from implementation and to make them more user-friendly. It includes Environmental and Social Codes of Practices, which also covers land acquisition, either through voluntary donations or donations with compensation.

Environment

36. Ongoing PNPM-Rural projects have shown no significant non-reversible negative environmental impacts from activities implemented under these projects. Any adverse

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environmental impacts are typically site specific and small in scale. Typically, such impacts can be managed locally by adopting screening criteria, good engineering designs and construction practices. This will also be the case for PNPM-Rural 2012-2015. Because of the national scope of the program and its operation in environmentally and socially sensitive areas, sufficient attention will need to be paid to implementation of IGSES.

Indigenous Peoples

37. Indonesian communities covered by the World Bank’s policy on indigenous people can generally be classified in two categories:

(a) Masyarakat Adat /Adat communities/Customary law communities: These are based on lineage or locality and are bound by customary law.

(b) Komunitas Adat Terpencil (KAT)/Isolated and Vulnerable Peoples (IVPs): This is a government-designated category of customary law communities that live in isolated areas.

38. Both categories are included in the IGSES to ensure the full participation of indigenous communities, including the application of the principle of free prior and informed consultation during sub-projects preparation.

39. As a project that is grounded in grassroots participation and flexible project designs determined through local planning, PNPM should not have any significant adverse impacts on indigenous or culturally distinct populations and project supervision has indeed found no adverse impacts.

40. Rapid Social Assessment. A rapid social assessment (SA) was conducted during project preparation and confirmed that PNPM follows good practice principles for the involvement of IPs. Recommendations from the assessment include improvements in facilitation measures and in capacity-building, to be achieved through enhanced training modules. The project design has also proven to be flexible to adapt to specific cultural circumstances.

Land Acquisition

41. The IGSES guides land acquisition for village sub-projects and meets the standards of World Bank policies on voluntary land donations. The project allows for land acquisition through two methods:

(a) Voluntary Donations: In accordance with local custom, community members have the right to donate their land or other assets or to move their homes temporarily or permanently without seeking or being provided with compensation (with appropriate informed consent and documentation); and

(b) Donations with Compensation: Persons who donate their land or other assets have the right to seek and receive compensation (this compensation may be partial or equivalent to the full market value of the property).

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42. Supervision missions have confirmed that IGSES modalities are correctly implemented; however, systems to document land donations need to be strengthened. This will be achieved through the revised IGSES and through improved reporting formats.

43. The preparation of the updated IGSES included a series of discussions among PMD, the NMC, and safeguards team of the World Bank. It was also discussed with facilitators at several sample locations: Kabupaten Buleleng - Bali Province on July 26-27, 2012, Kabupaten Karanganyar and Kebumen – Central Java Province on August 1-3, 2012, and Manado – North Sulawesi Province on August 15-16, 2012. The IGSES was disclosed in Bahasa Indonesia on PNPM-Rural website: www.pnpmperdesaan.or.id on September 17, 2012. An English language executive summary of the IGSES was disclosed on the Bank’s InfoShop on October 17, 2012 and the Integrated Safeguards Data Sheet for the project was disclosed on October 5, 2012.

E. Project Monitoring and Evaluation

Management Information System (MIS)

44. The objective of the PNPM-Rural M&E system is to provide stakeholders with timely information to monitor and improve the program and to assess results, including results relating to the PDO level indicators defined in Annex 1. M&E activities are funded through Component 3 of the loan (primarily for development of the MIS and other monitoring activities) as well as through a separate trust fund (M&E Special Studies) under the PSF.

Monitoring

45. The current MIS system is acknowledged to be sub-optimal and the system’s design, hardware, software and the associated human resource capacity are all insufficient. A comprehensive systems analysis is being carried out by a leading IT firm to form the basis for a complete redesign of the MIS platform. In the meantime, some improvements are being made to optimize utilization of the current MIS, e.g., the development of a web-based disbursement system, a web-based complaints handling system, the deployment of technical advisors at central level, and the recruitment of an MIS Assistant in each district. Each RMC now has an MIS Specialist who will validate and consolidate data from respective provinces prior to consolidating regional level data into the national database.

46. The new system will integrate internal controls and management data requirements and will be readily adaptable to facilitate data entry and retrieval in a manner that supports the decentralized requirements of the program. The MIS design will support portal / website systems which will facilitate stakeholders’ ability to access and analyze data related to the PNPM program down to village level. The GOI will procure the hardware and software required to support the new system. The full development and launch of the new system, including the recruitment, training and deployment of new staff, is expected to be completed by the end of 2013.

Evaluations

47. The overall evaluation framework includes: (a) evaluations designed to measure achievement of the PDO; and (b) studies planned to provide evidence for critical policy issues.

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All research designs involve mixed methods approaches and include both qualitative and quantitative components where feasible. Analytical and evaluation work is increasingly contracted to national research institutes. It is anticipated that Bappenas will increase its participation in PNPM-related analytical activities as a supervisory partner and peer reviewer at the concept design stage and final results stage. The Vice President’s Office for Poverty Reduction (TNP2K) is also taking a lead role in the implementation of a number of PNPM studies. TNP2K will play an increasingly important role as an active participant and collaborator in policy-based research and the development of policy proposals based on research and evidence.

Economic Impact Simulation

48. A key feature of previous PNPM-Rural impact evaluation (IE) designs has been the use of a well-identified control group (i.e., a set of sub-districts not receiving PNPM monies, resources, and capacity) from which reasonable counterfactuals could be estimated. However, PNPM is now a national program and the last treatment-control impact evaluation, which examined outcomes such as levels of consumption, poverty transition, employment, access to services, and social capital, was conducted in the period from 2007 to 2010. Without such a control group, the proposed economic impact evaluation for PNPM-Rural 2012-2015 will rely on an economic impact simulation. The simulation recognizes that basic infrastructure (delivered through PNPM) has proven to be a successful poverty reduction tool. It will seek to determine the level of locally experienced benefits and livelihood enhancements experienced by communities participating in PNPM, and to determine how such benefits and enhancements measure up against the same infrastructure activities delivered through regular, state-led contracting, procurement, and construction processes.

Specific activities to achieve program goals

49. In order to continue to improve project design and to ensure that it meets the overall goals of the program, a number of specific initiatives have been planned, a number of which will be supported by impact evaluations:

(a) PNPM Generasi: A 3-year evaluation of PNPM-Generasi was completed, and plans for an IE of the new, scaled-up project design are being developed.

(b) Revolving Loan Fund: The PSF-funded Revolving Loan Fund Capacity Building and

Sustainability Pilot Project is being implemented in four provinces (Central Java, Yogyakarta, West Sumatera and NTT). A randomized evaluation for this pilot is in preparation, with monitoring data to supplement the analysis.

(c) Improving social inclusion: PNPM-Rural IE and several other studies have indicated

that marginalized and vulnerable groups are often left out of the PNPM-Rural process. PNPM-Rural plans to achieve a greater level of social inclusion by experimenting with enhanced efforts to include marginalized and vulnerable groups in the development process, e.g., through the PNPM Peduli pilot program. This program involves the provision of funds to strengthen civil society and civil society organizations (CSOs) and to empower marginalized groups represented by these organizations to play a more

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significant role in development processes and in other aspects of community life. An Enhanced Empowerment Experiment is also planned to provide selected districts with a full set of empowerment and inclusion tools to be reinforced through the deployment of well-trained facilitators with specific knowledge and experience to enable them to foster social inclusion. This experiment will facilitate the establishment of local forums through which disadvantaged groups can interact and the provision of training to local government agencies to raise their level of awareness and improve their understanding and ability to address the public service needs of disadvantaged populations.

(d) Improving social accountability: An integral goal of PNPM-Rural is to empower communities to hold government at all levels, particularly the local level, accountable, especially for the quality and level of access to basic services, including health and educational services. A number of initiatives have been planned to achieve this goal, including pilot projects to improve linkage between community and education and health service providers.

Thematic Studies

50. In addition to project and program evaluation, several areas of policy interest are being explored through thematic studies, including:

(a) Local Level Institutions: This thematic study involves a mapping of the power, political and incentive-based relationships between institutions and elements of the community at the district and village levels. The study is designed to determine changes in the nature and level of participation, collective problem-solving and the development of social capital. One goal of this study is to determine the role PNPM plays in influencing these changes at the local level.

(b) Incidence of Benefit: This thematic study explores how benefits from development programs are distributed among households at the village level across socio-economic characteristics, including gender, poverty, and relationship with village government.

(c) Community Management of Development Portfolio or ‘Integration’ study: The GOI is currently developing a strategy to integrate all community-based poverty reduction programs into a single platform. The study will determine the mechanisms communities are using to manage the proliferation of these programs as an input to the overall integration strategy.

(d) PNPM-Rural “Sentinel” Villages: The GOI is keen to understand the impact of PNPM on governance, especially at the local level. This study aims to provide information and examples on changing nature of community’s participation in PNPM-Rural and to understand factors that influence these changes, with this information to be updated annually. The results will be used as an input to support the development of the PNPM Roadmap and to improve local government engagement in CDD-type poverty reduction programs. See Table 3.3 for details on completed evaluations/studies and Table 3.4 for the ongoing/planned evaluations/thematic studies.

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Table 3.3: Completed Evaluations/Studies

Evaluations/Studies Methodology Main Findings

1 PNPM-Rural Impact Evaluation

Quantitative (propensity score matching); endline 2010

• Real per capita consumption gains of 9.1 % for households in PNPM-Rural areas

• The gains were higher for poor households and poor sub-districts (11.8% and 12.7% respectively)

• Households in PNPM areas were 2.1% more likely to move out of poverty

• Access to health services increased 5.1% for households in PNPM areas

2 PNPM-Rural Qualitative Impact Evaluation

Qualitative, multi-years (2007 and 2010)

• Participation, transparency and accountability were strong within the program, especially at the sub-district and village levels

• PNPM is most effective at reducing poverty and impacting poor households when the needs of the poor are aligned with those of the community

3 PNPM-Rural Marginalized Groups Study

Qualitative (2010) • Marginalized groups have limited participation in PNPM meetings which were still dominated by elites and interest groups

• Although facilitation/project procedures have often led to increased participation rates, it has not encouraged active or influential participation of marginalized groups in the development of proposals

• Officials and leaders of interest groups (religious and traditional elites) still possess the greatest influence over which proposals are developed and selected, therefore reducing opportunities for marginalized groups to impact decision-making on the use of project resources

4 Village Capacity in Maintaining Infrastructure Study: Evidence from Rural Indonesia

Quantitative (repeated quarterly surveys to capture cyclical income fluctuation, 2010)

• Many communities found it difficult to maintain existing infrastructure

• The cost of maintaining infrastructure was up to 2.8 percent of a household’s total consumption – although small itis likely burdensome for poor households

• Although villagers are willing to pay for the maintenance of infrastructure, the amount communities are willing to pay does not cover infrastructure maintenance needs in full

• The community’s willingness to pay is strongly influenced by the direct impact of the infrastructure on individual households and institutional responsiveness in terms of complaint handling

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Evaluations/Studies Methodology Main Findings

5 PNPM Generasi Impact Evaluation

Quantitative (randomized control trial, baseline 2007, endline 2010)

• Significant impacts on all 12 indicators • Strongest improvements among the

health indicators were in the frequency of weight checks for young children

• Improvement in education indicators was most notable in the increased school participation rate among the primary school-age group

• In terms of long-term impact, there was about a 10% decrease in malnutrition compared with control areas

6 PNPM RESPEK Infrastructure and Community Organization Capacity Evaluation

Mixed-methods (2011)

• All infrastructure samples evaluated are of good to moderate quality – a significant achievement considering the huge implementation challenges in Papua and West Papua

• 67% of the infrastructure built were utilized by the community

• PNPM RESPEK improved administrative capacity of local facilitators but not facilitation capability

Table 3.4: Ongoing/Planned Evaluations/Studies

No Name of Study Description of Study Methodology Expected

Timeline for Result

1 PNPM-Rural Economic Impact Simulation

This evaluation seeks to determine the level of locally experienced benefits and livelihood enhancements experienced by communities participating in PNPM and to determine how such benefits and enhancements measure up against the same infrastructure activities delivered through regular, state-led contracting, procurement, and construction processes.

Quantitative Concept note expected Q4 2012

2 Village Infrastructure Census

Collects data on basic infrastructure availability and quality (including health and education facilities) in nearly all urban and rural villages in Indonesia. Data has been used to create supply readiness index for health and education (to support PNPM Generasi in location selection/targeting). Further analysis will be done to calculate financing gaps (pending data availability on costs) and to provide more information for PNPM-Rural in terms of location selection and allocation of block-grants

Quantitative (census) – piggybacking PODES 2011

Supply readiness index available for health and education, other data expected Q1 2013

3 Local Level Institutions 3 (LLI3)

Observes changes in local organizational capacity and social capital (embodied in participation in community-based

Mixed-methods (longitudinal study, first in

First draft report expected Q4 2012

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No Name of Study Description of Study Methodology Expected Timeline for

Result organizations); links changes in such capacity to shifts in community-members’ influence over development decision-making, project implementation, and service provision at the district and community levels.

1996 and then in 2001)

4 Incidence of Household Benefits

Determining who actually benefits from PNPM as well as understanding community’s perspective of PNPM, including its uses and its capacity to target the poor and vulnerable in particular.

Quantitative Report expected Q3 2012

5 Rapid Assessment of Women’s Participation in PNPM

Examining strategies that have been used to encourage women’s participation in PNPM and factors that impact their uptake, success, sustainability, and outcomes.

Qualitative Report expected Q3 2012; results expected to be used to improve the design of PNPM V

6 Rate of Return Analysis (EIRR) of PNPM-Rural Infrastructure Sub-Projects

Replication of previous EIRR exercises in a small sample of infrastructure projects built recently by PNPM-Rural.

Quantitative Final report due July 2012; results will inform PNPM I and PNPM II ICRs.

7 Integration of Community-based Poverty Reduction Programs at Community Level

Examining integration of CDD programs at community level and observing local community capacity to manage diverse development programs; lessons learned will be used as inputs to the development of the integration strategy in the PNPM Roadmap.

Qualitative First draft report expected Q1 2013

8 Papua Operational Research and Evaluation

Several analytic pieces to be done related to PNPM RESPEK and conflict issues in Papua: (a) a qualitative ‘beneficiary assessment’ to elevate voices from the field; (b) piggybacking SUSENAS with specific PNPM module to collect quantitative data from Papua and West Papua; and (c) mapping/profiling of conflict and conflict events in Papua.

Mixed-methods Concept note completed by Q4 2012

9 PNPM-Rural Sentinel Villages

This cyclical study (based on 50 in-depth “ethnographies” observed and written at the community level) aims to examine changes in community experience in participating in PNPM-Rural and factors that influenced these changes. As they become available, results will support PNPM policy and strategy focused on improved local government engagement in poverty reduction programs.

Mixed-methods, with focus on qualitative methodology

Concept note completed by Q4 2012

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F. PNPM Support Facility (PSF)

51. The PSF was established in 2007 through a multi-donor trust fund to support the management and technical implementation of PNPM-Mandiri (of which PNPM-Rural is the largest single component). The specific objectives of the PSF are as follows:

(a) To ensure better coordination among development partners and across grants supporting PNPM;

(b) To develop capacity at all levels to plan, manage, and improve poverty reduction programs;

(c) To reduce poverty through government and civil society partnerships; and

(d) To support high quality monitoring and evaluations efforts.

52. PSF Structure and Development Partners. A Joint Management Committee (JMC), chaired by the National Development Planning Agency (Bappenas) and co-chaired by the Bank, governs the PSF. In addition to Bappenas and the World Bank, Australia, Denmark, the European Commission, the Netherlands, the United Kingdom, and the United States are members of the JMC. Menko Kesra and the MOF are also members of the JMC. The Vice President’s Poverty Commission (TNP2K) actively coordinates with the PSF. The Asian Development Bank, the Islamic Development Bank, Japan and Canada, which contribute significant resources to PNPM Mandiri and other community empowerment programs, maintain coordination with the PSF, but are not members of the JMC. Preparation for the Millennium Challenge Corporation (MCC), which plans to contribute between US$70 to US$80 million to address stunting through the PNPM Generasi program, are underway.

53. The PSF is a key vehicle for GOI and other stakeholders coming together to discuss strategic directions. Four strategic issues emerge as priority items: (a) integration of various community-driven development programs within Cluster 2 of the government’s poverty alleviation framework; (b) adjustment of the core PNPM model to different kinds of poverty across Indonesia’s diverse regions; (c) bringing the social capital created through PNPM to bear to strengthen the downward accountability of local government; and (d) strengthening the “handshake” between PNPM and sector service delivery.

54. The PSF and its development partners have been able to respond well to the GOI’s request for increased finance and technical assistance to support its poverty reduction efforts and sustain and expand achievements already made through the PNPM programs. For the second year, PSF commitments more than doubled in 2011, reaching US$195 million. These commitments are set to increase to between US$265 and US$300 million by the end of 2012. The bulk of these commitments (almost 85 percent) are being delivered by the Government through PNPM pilot or special programs that directly benefit communities across Indonesia. Approximately 15 percent of the new commitments are being invested in sustaining the building blocks of PNPM, including building capacity across all levels of government, strengthening management systems, and producing high quality analytical work to support key decision makers. Commitments are channeled through four windows:

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(a) Window One: This Window provides direct budget and co-financing support for community empowerment programs, in particular, to implement pilot projects such as PNPM Generasi and PNPM Green. In addition, through this Window, PSF resources are used to provide additional support to communities who face particular challenges, such as those impacted by natural disasters and to those particularly vulnerable to falling into poverty as a result of significant economic disruptions.

(b) Window Two: This Window provides incremental implementation and coordination support to PNPM’s oversight bodies and executing agencies, with a focus on assisting the Indonesian Government to strengthen PNPM’s core management systems, to mitigate corruption risks, and to maintain program quality and efficiency. With the establishment of PNPM Mandiri as a nation-wide program, there is a need for increased oversight and action by multiple stakeholders to ensure the ongoing integrity and transparency of the program and to ensure that its design and implementation support the achievement of the program’s objectives. Activities under this Window include the provision of specialized training, deployment of additional staff/consultants for field supervision and the conduct of systems audits, dissemination and awareness raising activities, as well as information management programs and institutional strengthening.

(c) Window Three: Through Window Three and its sole component, the PNPM Peduli program, the PSF provides support for Indonesian CSOs that work to alleviate poverty and to empower communities, particularly those working with marginal, disenfranchised and vulnerable groups. The JMC also requested a special window for Persons with Disabilities.

(d) Window Four: This Window provides technical assistance to enable the Indonesian Government to access global experience and expertise in poverty reduction and community-driven development as well as technical and financial resources for rigorous evidence gathering. PSF also offers an objective platform to review, share and apply lessons across poverty programs and foster debate on solutions to poverty programs. Activities implemented through Window Four consist primarily of monitoring and evaluation, special studies, and technical assistance to national and local governments. A built-in function of this window is to develop the capacities of Indonesian organizations such as universities and think-tanks to provide specialized services for PNPM and poverty reduction. PSF’s strategy links operations with applied research to optimize the design of community-based programs to improve their effectiveness in alleviating poverty and to better understand social dynamics in Indonesia and their influence on development and poverty reduction.

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Annex 4: Operational Risk Assessment Framework (ORAF)

INDONESIA: National Program for Community Empowerment in Rural Areas 2012-2015

1. Project Stakeholder Risk Rating : Low

Description: Risk Management:

At the local level, some villagers may be marginalized by village elites or communities become complacent about participation and rely on established committees. Social media and cultural events will be used for information campaigns and to generate interest. Facilitator time freed up from administrative duties and facilitators provided training on enhanced facilitation skills.

Implementation of agreed information campaigns.

Resp: Client

Stage: Impl

Due Date: Ongoing

Status: In Progress

2. Implementing Agency Risks (including fiduciary)

2.1. Capacity Rating: Substantial

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Description: PMD has been able to manage the national scale-up and growing complexity of PNPM and is now responsible for about US$1.2 billion disbursed as block grants to about 5,000 sub-districts each year. However, PMD is overstretched and requires additional capacity to effectively manage the additional tasks and responsibilities. Over the last twelve months PMD has strengthened important areas (cf Risk Management) but other important improvements still need to be completed. PMD will be strengthened through the installation of a Joint Secretariat to oversee the management of the different PNPM programs in MOHA and the provision of additional TA. PMD has revised various Standard Operating Procedures, e.g., internal audit and problem resolution, including risk management measures, as well as the MIS.

Risk Management: The implementation of the revised program management arrangements will be monitored by the Joint Secretariat/PMD and by regular Bank implementation support. Appropriate remedial measures will be agreed to address issues identified.

Community procurement procedures, oversight and monitoring mechanisms have been revised to further enhance competition, transparency and accountability in the procurement process.

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Resp: Client & Bank

Stage: Impl

Due Date: Ongoing

Status: In Progress

2.2. Governance Rating: Substantial

Description: MOHA is committed to the objectives of PNPM-Rural and considers it to be a strategic vehicle for reaching the rural poor but capacity for oversight and accountability has been stretched. There has been under-investment in the facilitators and many positions are vacant, especially in remote areas. Complaints handling mechanisms need to improve and often local government involvement and support to solving cases is limited. Also PNPM exists in a variety of governance environments and might be vulnerable in more corrupt areas.

Risk Close oversight and support by Pokja Pengendali. More effective implementation of existing governance mechanisms, e.g., information boards for broad community information plus use of modern media; meaningful accountability meetings; facilitator rewards and evaluation linked to use of such mechanisms. A nationally-recognized facilitator certification program is being set up which will raise professional standards. The MIS and CHS systems are being redesigned. Improved and expanded analysis of data from the Complaints Handling System will be used to identify trends and emerging governance risks. This analysis will inform risk-based supervision and auditing.

Performance by previous NMC and RMC firms was mixed and PMD struggled with oversight.

A contract monitoring tool has been developed and is being tested to strengthen PMD’s oversight of the consulting firms. This tool will enable close monitoring of consulting firm invoices and performance to ensure contractual commitments are being met. An independent integrated fiduciary review will provide information on the current strength of procurement and financial management systems at community level. Recommendations from that review will be used to further strengthen program delivery.

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The Bank will monitor implementation of the above arrangements and address issues identified through dialogue with PMD.

Resp: Client & Bank

Stage: both

Due Date: Ongoing

Status: In Progress

3. Project Risks

3.1. Design Rating: Moderate

Description: Risk Management:

Overall PNPM-Rural design is proven and has shown very good results. However until now the RLF activities do not have a specific implementation arrangement and fiduciary system. The PSF-funded RLF Sustainability Pilot has completed an in-depth analysis of UPKs in four provinces and findings have already been used to revise the fiduciary arrangements for the RLF activities. The operations manual has been revised accordingly.

PMD and the Bank will continue to monitor the appropriateness of program design, in particular the implementation of the agreed improvements to the RLF activities. Modifications will be made to the program based on issues identified.

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Government has decided to explore options to strengthen rural economic empowerment under PNPM. The transition between the current RLF approach and the new livelihoods concept will benefit from strong technical advice.

Resp: Client & Bank

Stage: both

Due Date: August 31, 2015

Status: In Progress

3.2. Social & Environment Rating: Moderate

Description: Risk Management:

Implementation Guidelines for Social and Environmental Safeguards (IGSES) were issued for PNPM-Rural IV and have been revised for greater effectiveness. After a decade of KDP/PNPM implementation there have been no serious cases of safeguards problems.

Implementation of the IGSES will be carefully monitored by PMD and the Bank. Any issues identified would be addressed promptly discussions.

Resp: Client & Bank

Stage: Impl

Due Date: Ongoing

Status: In Progress

3.3. Program and Donor Rating: Low

Description: Risk Management:

There has been strong support for PNPM from the donor community. A consortium of donors supports PNPM through the PNPM Support Facility (PSF) and the Joint Management Committee coordinates all donors supporting PNPM. There is minimal risk that donors might withdraw their support.

PSF will continue to review and improve its engagement with partners to ensure that it supports the program effectively.

Resp: PSF

Stage: both

Due Date: Ongoing

Status: In Progress

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3.4. Delivery Monitoring and Sustainability Rating: Moderate

Description: Risk Management:

PNPM-Rural has a decentralized system for delivery monitoring and sustainability. The MIS has been problematic for many years and project scale has led to some weakening of key design features, e.g. social accountability mechanisms. An MIS audit and redesign is ongoing and will lead to an enhanced and integrated system. Independent reviews monitor quality of sub-projects. PMD will adopt a technical review methodology into its oversight arrangements. PMD’s monitoring of project implementation is being supplemented by a very strong evaluation program supported by PSF. This employs a global partnership of leading universities and researchers. Evaluation findings are being used to strengthen program design, for example it was found that the reading out of audit findings in the community and with local officials improves audit effectiveness.

PMD and the Bank will monitor the completion of the redesign of the MIS and its effective implementation.

Resp: Client & Bank

Stage: both

Due Date: December 2012 for new MIS design proposal December 2013 for fully functioning MIS.

Status: In Progress

3.5. Long term sustainability of the program

Rating: Moderate

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PNPM currently uses institutions and mechanisms that parallel local government planning and implementation processes. Government has declared its intention to reform local government planning, implementation, and accountability mechanisms drawing on the lessons learned from PNPM. However, Government can only commit to the support for PNPM until the end of its mandate. Government is finalizing the “PNPM Roadmap” that articulates the key principles to mainstream core PNPM features into local government.

The Bank will continue to engage with government at senior levels on the future of the PNPM program after national elections in 2014.

Resp: Client & Bank

Stage: Impl

Due Date: August 31, 2015

Status: In Progress

4. Overall Risk

Implementation Risk Rating: Moderate

Comments:

The project builds on a strong program that has achieved positive and large scale development results on the ground. While the prevailing risks highlighted above are of concern, the mitigation measures that are being put in place will counteract recent weaknesses. Financing will be channeled to existing participating sub-districts, which have a proven track record in community based resource and project management. Pokja Pengendali’s engagement during implementation will give PMD the necessary support but will also exert oversight. The Bank will continue to provide close oversight.

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Annex 5: Implementation Support Plan

INDONESIA: National Program for Community Empowerment in Rural Areas 2012-2015 1. The strategy for implementation support has been developed with reference to the nature of the project and to the ORAF risk profile (Annex 4). The key aim of the implementation support is to assist the Government in the overall monitoring and supervision of the project. This support will come mainly from the PSF and the Bank’s Indonesia Country office. The team will have regular review meetings with PMD to monitor progress. It will meet jointly with PMD and Pokja Pengendali to review implementation on a quarterly basis.

2. Capacity. The Bank has a dedicated team of eight field staff who provide ongoing implementation assistance in the provinces. This team has adopted a portfolio approach by which it monitors the entire PNPM portfolio at any given location. The Bank is providing significant technical assistance through its support of ongoing projects to address weaknesses in systems that have been exacerbated by the program’s scale up, particularly in matters related to fiduciary and governance issues. The Bank will also provide assistance in the following areas:

(a) The development of a formal certification program for PNPM facilitators;

(b) A reinvigoration of the program’s focus on key principles, including community empowerment and downward accountability (e.g., through communication materials and in training modules);

(c) The development and provision of support for third party/community-based monitoring practices, including peer-peer oversight modalities.

3. Governance. The Bank has assisted the GOI in the conduct of a comprehensive Governance Review of the program at both Management and Systems and governance at the Community Level. The recommendations from the Management and Systems review cover a range of issues relating to the strengthening of human capacity and systems for the management of PNPM-Rural. The recommendations from the Community Level review relate to strengthening the transmission of program knowledge and skills to improve the level of community oversight of the program. The Bank will support GOI/PMD in the implementation of these recommendations.

4. The Bank’s dedicated Governance Team, which incorporates the Fiduciary, Justice, and Local Government Teams, undertakes regular monitoring of case data (via the Accountability Working Group) and large case progress as well as reporting large case data to INT and producing a biannual Governance Update discussing the current status of the governance environment. The Team will also continue to assist PMD’s and Pokja’s governance task forces and supplement their analytical capabilities. Closely linked to fraud and corruption monitoring is the redesign of the MIS and CHS. The Bank will provide specific support to test and roll out a new web-based complaints-handling system. It will also provide support to the implementation of new protocols for the escalation of complaints, particularly for stagnant and deadlocked cases.

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Additional legal support will be provided through a PSF-funded grant aimed at providing legal assistance to communities and to PNPM management.

5. Delivery Quality. The Bank will work closely with PMD to ensure that the key design features of the program, including vital elements such as strong facilitation, formal and informal fiduciary controls, and social accountability mechanisms, are in place. Bank supervision will focus on monitoring that agreed upon quality standards and other requirements for pre- and in-service training for facilitators and government staff are being met. PSF will continue to finance Bank-executed evaluations and special studies to assess the program’s impacts and to provide insights into possible program adaptations, such as block grant size, facilitation/socialization, degree of infrastructure deficit and the varying capacities, skills and other attributes of local governments and communities.

6. Role of other partners. Many of the donors most active in Indonesia are members of, or are affiliated with, the PSF. There will continue to be joint implementation support missions and thematic review missions.

A. Implementation Support Plan

7. Project implementation will be supported by a task team based in the PSF and the Bank Jakarta office and in key locations across Indonesia. Joint missions with the GOI and PSF donor partners will be conducted three times a year, while formal supervision missions with the GOI will be organized semi-annually. The Bank field team has a program of ongoing implementation support. The selection of locations to be visited will be based on a risk assessment. Each of the country’s thirty-two provinces will be visited at least twice a year. PSF is developing a web-based ‘issue management’ tool to ensure that information reported and recommendations made in Back to Office Reports and Aide Memoires is integrated into a single platform. This will support pro-active monitoring and the development of the appropriate follow-up action plans.

8. A description of the inputs from the various teams is set out below:

(a) Technical: Technical specialists will focus on a review of the quality of infrastructure works financed in a sample of locations. Findings from these Technical Evaluations will be disseminated at regional workshops, with recommendations being developed to strengthen implementation.

(b) Fiduciary: Financial Management specialists will conduct regular financial assessments in a risk based sample of project locations to gauge compliance with key elements of formal and informal fiduciary controls, including: budgeting and counterpart funding; disbursement status; internal controls, including internal audits; accounting and financial reporting; FM facilitation; and management of the RLF. Formal supervision of financial management systems will be undertaken twice a year. In addition to the prior review, regular support missions will assess the quality and degree of compliance of community-level procurement systems and processes. The procurement team will provide training at the national level and will provide input to facilitate improvements to the operation manual.

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(c) Gender: Gender specialists will participate in formal and routine supervision missions and will assist with the implementation of the recommendations of the recent Gender Review of PNPM.

(d) Safeguards: A Safeguards specialist will participate in formal supervision missions to assess the status of safeguard implementation and reporting.

(e) Operations: Day-to-day operations of the project will be supported from the Jakarta office.

Table 5.1: Implementation support focus Time Focus Skills Needed Resource Estimate

(Staff Weeks) First twelve months

Implementation of benchmarks to improve governance and management framework

Institutional capacity building 3 Governance 6 MIS 3 Training 3 HR 3

Environmental monitoring Environmental Specialist 4 Social monitoring Social Specialist 4 Financial management Financial Specialist 4 Gender Gender Specialist 3 Community Infrastructure Engineering 3 Procurement training and support at central level

Procurement Specialist 3

Procurement ex-post review spot check Procurement Specialist 6 Communications Communications Specialist 3 M&E M&E Specialist 8 Safeguards Safeguards Specialist (environment

and indigenous people) 4

Implementation Support ACS 4 Team Leadership TTL 20

12-48 months

Implementation of benchmarks to improve governance and management framework

Institutional capacity building 12 Governance 12 MIS 3 Training 3 HR 3

Environmental monitoring Environmental Specialist 8 Social monitoring Social Specialist 8 Gender Specialist Gender 6 Engineering Community Infrastructure 6 Financial management Financial Specialist 8 Procurement training and support at central level

Procurement Specialist 2

Procurement expost review spot check Procurement Specialist 6 Communications Communications Specialist 6 M&E M&E Specialist 16 Safeguards Safeguards Specialist (environment

and indigenous people) 8

Implementation Support ACS 8 Team Leadership TTL 40

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Table 5.2: Skill Mix Required

Skills Needed Number of Staff Weeks Number of Trips Comments Institutional capacity 10 4 international Governance 18 4 international MIS 6 2 international Training 6 2 international HR 6 2 international Environmental Specialist 12 6 local Social Specialist 12 6 local Gender 9 6 local Community Infrastructure 9 6 local Financial Specialist 12 6 local Procurement Specialist 9 10-12 local Communications Specialist 9 6 local M&E Specialist 24 6 local ACS 12 6 local TTL and co TTL 60 10 local Technical specialists 20 5 International and local

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Annex 6: Better Governance Action Plan INDONESIA: National Program for Community Empowerment in Rural Areas 2012-2015

A. Introduction

1. Since 2003, the Better Governance Action Plan (BGAP) has formed an integral part of the design of Indonesia’s National Community Empowerment Program (Program Nasional Pemberdayaan Masyarakat or PNPM) and its rural and urban projects. It provides umbrella guidance on the broad structure of governance efforts. The overall objective of the BGAP for PNPM is to minimize the risk of corruption for the entire program. In order to achieve this objective, the BGAP seeks to:

(a) Identify corruption risks; and

(b) Develop an action plan to mitigate corruption risks.

2. These measures are taken in addition to the requirements of the standard control systems employed by the Bank. The BGAP is expected to change over time, in response to lessons learned during implementation and adapting to new risks as and when they arise. PNPM-Rural and PNPM-Urban have separate but linked components under BGAP, in recognition of the varying risks and required appropriate responses for each of the two programs.

3. PNPM relies on community participation, transparency, social accountability mechanisms, and simplicity of processes, as well as regular supervision and audit processes, to ensure low levels of corruption. At the community level, strong facilitation and participation, coupled with a number of mechanisms to ensure transparency and oversight, provide citizens with the tools that they need to effectively oversee the program. At the sub-district level, BP-UPK and BKAD have important oversight and coordination roles. Consultants and facilitators at all levels, from province to village, have supervision responsibilities. In turn, facilitators are overseen by RMCs, NMC and PMD. PSF provides extra supervision services, particularly through the Field Team, which regularly conducts on-site visits, and through the Fiduciary Team, which augments the GOI’s capacities in the area of financial oversight. The strong commitment from the most senior levels of the GOI to strengthen governance in PNPM, and the steps taken by the Pokja Pengendali to build a network of supporters who all contribute to better governance, bode well for the future efforts in this area.

4. The decision in 2007 to expand the coverage of PNPM to cover the entire country brought huge benefits for individual communities and for poverty reduction for Indonesia more generally. However, it also placed a great deal of burden on PNPM systems. While the systems which help to keep the program corruption-free and accountable continue to work, they are increasingly under strain, largely due to the expansion and the pressures that have accompanied it. There is a need for new thinking on how to augment accountability at the community level, within the program delivery mechanisms, and within government.

5. PNPM’s governance and integrity framework builds on more than a decade of field experience and specific research trials under KDP and PNPM. The benchmarks developed for

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PNPM IV are the operational steps determined by the Bank and GoI as essential to achieving the BGAP. These focus on:

(a) Strengthening institutional and managerial capacity; (b) Making the Management Information System more robust; (c) Improving the Complaints Handling System; (d) Enforcing existing fiduciary controls; and (e) Improving the deployment of facilitators.

6. Biannual Governance updates highlighting the current state of the governance environment, the status of recent initiatives, and new emerging challenges provides a forum to bring together the Governance work being done and that which is needed. These reviews also include an analysis of the governance and corruption trends during implementation and thereby lend strength to the evolution of the BGAP to address the ever-changing environment and challenges of the program.

7. Local and national level governance reviews16 commissioned by the Bank and PMD have contributed to the analysis of program design and therefore the BGAP. These reviews have identified a number of governance initiatives at the community and central level, needed to strengthen the program.

B. Social Accountability

8. Social accountability rests on two key principles: community members have a full understanding of their rights and responsibilities in relation to PNPM as active, engaged participants; and the mechanisms to hold the program to account work well. Over the past 14 years, the program (and its predecessor KDP) has developed the necessary strong mechanisms, including the consultative approach to determining proposals submitted by communities, village accountability meetings during implementation, special women’s meetings, socialization meetings to disseminate information about PNPM, funding and projects, and the requirement to post funding received and recipients on village noticeboards. However, the program exists within a changing governance environment and continues to build the skills of the members of the communities that it serves. As a result, it must continue to improve its support to these communities.

C. Management structures and controls

9. The program has a range of management and monitoring systems which combine with the social accountability measures to ensure that: the program is appropriately managed with due account given to changing risks; and when corruption does occur, there is appropriate oversight to detect it, even if it has not been reported. The following systems are currently in place for this purpose:

16 Governance Review of PNPM Rural – Community Level Analysis 22 January 2012 and Improving Management of PNPM 16 July, 2012

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Tools/Mechanisms/Controls Responsibility Management systems

MIS and CHS PMD, NMC, RMC

Detection and response systems

Supervision and monitoring CHS Oversight Consultants Facilitators Media Monitoring

PSF & PMD PMD, NMC, RMC PMD through NMC and RMC PMD through PMC and Faskab PMD through PMC and Faskab

D. Political Activities

10. The Loan Agreement and subsequently the project’s Operations Manual specifically prohibit the use of funds to finance activities related to political practices or parties. This prohibition will be publicly reinforced to ensure community awareness and compliance. There will be a declaration on the prohibition for the funds to finance activities related to political practices or parties.

E. BGAP Matrix

11. The PNPM-Rural IV BGAP placed much emphasis on analyzing the areas where PNPM implementation had come under particular strain due to the rapid upscale and increasing complexity of the program, including: (a) institutional capacity and management of PMD; (b) the Management Information System; (c) the Complaints Handling System; and (d) fiduciary standards, and (e) facilitator management and deployment. Much of the work related to addressing these areas was focused at the district level and up and is still ongoing. Consistent with PNPM-Rural 2012-2015’s renewed emphasis on the empowerment process, the BGAP keys on social accountability actions.

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Status of Better Governance Action Plan

Action Plan Existing instrument Progress since PNPM IV preparation

Assessment/Lessons Learned

Key Actions Going Forward

Social Accountability Social Accountability Community participatory and integrated planning processes

- Broad, facilitated community engagement to identify village priorities and develop proposals.

- Specific meetings held for women to share their views, and put forward their proposals

- In place since KDP.

- Ongoing and working well.

- Working well, though quality of participation weakening over time and continued efforts needed to engaged women and the marginalized.

- Improved/ increased facilitation (see below).

- Mainstreaming Legal Empowerment and Legal Aid component, including additional efforts to clarify roles, rights and responsibilities of communities by December 2013.

- Guidelines for creative engagement of communities, continued sharing of lessons by December 2012.

- Uploading PNPM progress reports to PMD’s website by December 2012.

Competition between communities for funding of proposals

- Project funding decisions made through a competitive process at the sub-district level by village representatives.

- In place since KDP.

- Ongoing and working well.

- Ongoing and working well. - No change, continue process.

Local control of funds - Direct transfer of funds from treasury to community accounts.

- Community accounts have multiple signatures.

- Government officials sign off on competition results, but do not have discretionary authority.

- Ongoing and working well.

- Ongoing and working well.

- No change, continue process.

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Action Plan Existing instrument Progress since PNPM IV preparation

Assessment/Lessons Learned

Key Actions Going Forward

- In place since KDP. Transparency, communication and information sharing

- Public village accountability meetings held.

- Project and budget information publicly available on information boards.

- In place since KDP.

- Updated village information boards have become part of facilitator’s performance evaluation criteria.

- Information boards missing in some locations.

- Information is available through meetings and boards, but often difficult for community members to understand.

- Transparency can be further improved by better information sharing with local governments and civil society.

Continue implementation and improve enforcement: - Improve information board:

develop guidelines on information, consequences for facilitators if information board not in place (by December 2012).

- Develop communication and transparency strategy, including approach to sharing information with communities, government and civil society by (December 2012).

Local social controls and oversight mechanisms

- “Cross audits” between villages

- Engagement of women in monitoring groups.

- Community elected BP-UPK formally oversees UPK.

- BKAD oversees program, including UPK.

- PMD has sent reminder to facilitators to include women in the procurement committee.

- Working fairly well. - Guidelines for accountability in

multiple documents. - Cross-audits and engagement of

women working well, but under-resourced.

- BP-UPK and BKAD performance varied, linked to capacity issues and resources.

- Continue to build oversight by directly assigning a task (learning- by-doing) and providing communities with additional skills and improved facilitation.

Continue, clarify and strengthen existing mechanisms: - Pull accountability guidelines

into one place for use by communities and facilitators (Operations Manual attachment) (by December 2012).

- Require women in monitoring team, (by January 2013 and ongoing).

- Strengthen social audit, by (December 2012 and ongoing).

- Provide additional capacity building for BP-UPK, BKAD and community members including women’s groups so that they can expand oversight roles, (design for additional training by February 2013 and ongoing).

- Support community based

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Action Plan Existing instrument Progress since PNPM IV preparation

Assessment/Lessons Learned

Key Actions Going Forward

monitoring, ongoing. Press and NGOs - PNPM engages with media

to provide project information and publicize reported cases of fraud and corruption.

- Specialized NGOs provide training to journalists interested in covering PNPM.

- Ongoing and working well

- Working well. Continue. Support this work through: - Development and

implementation of communication and transparency strategy (see above).

- Implementation of media strategy.

Management structures and controls Program Delivery PMD institutional and managerial capacities

- PMD personnel augmented by TA, managing NMC.

- Additional technical advisors were recruited

- Appointment of new DG at PMD and new management team

- PMD staff are dedicated to managing PNPM, but the expansion of the program means that more needs to be done to build the capacity of the management system in line with the size and complexity of the program.

- Roles and reporting lines clarified and intensive, targeted training (including for proposed joint Secretariat) provided

- Roles of consultants (TA) working with PMD.

- Augment staff numbers in PNPM-Rural Secretariat (including dedicated risk management and compliance team), by December 2012.

- Augmenting contract management capacity by December 2012.

- Dedicated capacity for the delivery of PNPM in difficult areas including Papua in place.

- Strengthen the analytical capacity of PMD to improve project data collection and understanding, and the way risks are evaluated and responded to, by December 2012.

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Action Plan Existing instrument Progress since PNPM IV preparation

Assessment/Lessons Learned

Key Actions Going Forward

Coordination of CDD programs within MoHA

- Agenda item in the regular PMD monthly meeting.

- Finalized plans for a Joint Secretariat to provide better planning and coordination of PNPM programs in MOHA

- PNPM Roadmap stipulates how programs at community level should be planned and executed

- Management of the PNPM cluster of programs will be more effective if there is a coordination function which brings together community driven programs, but deliver a range of community outcomes.

- Joint Secretariat has established a coordination process among community driven programs under PMD.

Strengthening the Roles of Local Government

- District Government provides cost sharing. Permendagri 42/2010 on Establishment of TKPKD (Coordinating Team for Local Poverty Alleviation) has not yet been implemented fully

- PNPM Roadmap includes specific actions needed to strengthen role of local government

- Proposed law RU Desa will redefine support and funding to villages

- To ensure the sustainability of PNPM it needs local government direct involvement in all phases of program, from planning to evaluation

- Development of Guidelines for PNPM Partnership with Private Sector, Local Government and Communities, by December 2012

Knowledge Management

- Ad hoc MIS, paper and electronic files, internet, social media.

- PMD has added staff to assist with bridging solution for MIS while system is being redesigned

- PMD’s website regularly updated

- Many UPKs have Facebook sites texchange program information

- In order to increase the management capacity for PNPM-Rural, knowledge management systems need to be strengthened.

- Develop and implement a knowledge management strategy by May 2013.

- Improve documentation produced and the handling, distribution and storage of documents and information by June 2013.

Facilitation and staffing Supervision - Routine supervision by

PMD, NMC, PSF, RMC, Provincial Management Consultants and Facilitators

- Supervision efforts were hampered by delays in recruitment of RMCs (now all

- Working well, additional efforts needed in remote locations.

- Strengthening the existing system with additional resources in remote locations, ongoing.

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Action Plan Existing instrument Progress since PNPM IV preparation

Assessment/Lessons Learned

Key Actions Going Forward

at District and sub-district level.

- In place since KDP.

mobilized) and NMC - Instructions were

issued to clarify roles and responsibilities

- Increased PMD capacity for supervision over time, ongoing.

Facilitation - The role that facilitators play in ensuring application of program procedures, transparency, and limiting corruption is crucial.

- Facilitators train and monitor community sub-district financial management units and village implementation teams (UPKs and TPKs, respectively).

- Government has enacted new salary and allowances for facilitators in remote areas.

- Pre-service training held.

- Special training for technical facilitators in Papua launched.

Facilitation is working, but weakening and under stress:

- Scale up and low salary scales mean that many positions are open, putting greater strain on existing facilitators. Reporting requirements have continued to increase.

- Training has continued to be cut back.

- Facilitation seen as an ongoing investment.

- Budget provisions createed 20% reserves.

- Competitive salary scales restored.

- New guidelines on recruitment and instruction on performance evaluation, by Dec 2012.

- Budget provision made for twenty-one days of pre-service training and semi-annual week long refresher trainings.

- 95% positions filled in accessible areas, by August 2013.

- Develop certification programs for facilitators, by September 2013.

Code of Ethics - All consultants employed by PNPM projects have to abide by the Code of Ethics for consultants. Any serious violation results in termination of employment.

- Ongoing Working well, however, the code of ethics is not applied to consultants at the provincial level and above.

- Revised Code of Ethics applicable to all consultants and facilitators;, ongoing.

Complaints Handling Systems CHS - Complaints Handling System

in place, including SMS, email and post.

- Complaints Handling Specialists and Financial Management specialists in all

- New web-based CHS system designed and operationalized.

- Dissemination of BGAP.

- New standard

System working, but weak: - Low awareness/use of reporting

mechanisms. - Low capacity to respond to the

cases that are reported. - Communities are committed to

- Provide additional legal resources at the national and provincial levels, by August 2013.

- Zero tolerance for corruption campaign.

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Action Plan Existing instrument Progress since PNPM IV preparation

Assessment/Lessons Learned

Key Actions Going Forward

provinces. - PNPM coordinates with law

enforcement agencies, generally through complaints handling specialists.

- Through RBM (district learning forum), PNPM provides grants that can be used for local CHS training and litigation, if needed.

operating procedure on problematic locations.

- Consultant and facilitator training for complaints handling.

-

resolving cases, but can only access very limited resources to help them.

- All consultants and facilitators receive anti-corruption awareness training and sign off an Integrity Pact, by August 2013.

- Improve coordination with local governments and law enforcement agencies, by Aug 2013.

- Refresher training provided for CHS and Financial Management Systems (FMS).

- Improve web-based CHS by November 2012.

Management Information Systems MIS - MIS system in place since

KDP. - Recruited firm to carry

out system analysis and redesign.

- Implemented bridging solution to stabilize and improve existing MIS

- Increased salaries of MIS staff to competitive levels.

- System is functioning poorly. - A preliminary assessment of

gaps in MIS systems shows that current system’s design, hardware, software and human resource capacity are all insufficient resulting in fragmentation, inefficiencies and inaccuracies in data gathering, transmission and reporting. Current MIS cannot be used for effective management and decision making.

- MIS Analysis & Redesign with system prototype, by January 2013.

- New MIS developed, which integrates quality control and data covering key performance indicators, all implementation aspects and oversight features, by October 2013.

- MIS staff trained, deployed and equipped, by December 2013.

Financial Management Fiduciary - Local control of funds (see

above). - Routine supervision (see

above). - Independent contract

monitoring undertaken.

- Internal audit in 100% of sub-districts, revision of internal standard operation procedure.

- Fiduciary oversight

- Important strengthening of existing systems has been undertaken, these need to be supported by sufficient capacity and enforcement.

- PNPM Generasi to provide financial consultant in Generasi locations.

- Guidelines on Asset Management, by December 2012.

82

Action Plan Existing instrument Progress since PNPM IV preparation

Assessment/Lessons Learned

Key Actions Going Forward

- SOP on Internal Audit. - Compliance with

management controls included in facilitator’s performance evaluation.

consultant positions filled.

- Refresher training for FM Consultants, by November 2012.

- Capacity improvements for community self-monitoring groups, using activity operational funds/DOK Community Training, by December 2012.

- Use of bank transfer instead of cash payment to suppliers introduced at locations having reasonable access to bank service, by May 2013

Audits - BPKP performs annual audits and reviews the program’s financial management controls.

- Local Inspectorates engaged since 2010 to allow increase of samples to 20% of all sub-districts.

- Audit results are shared at district level and on the website.

- BPKP conducts sub-district audits and provides exit briefings.

- Audit findings and recommendation are posted on project website and implementation is monitored.

- Coordination of audit has become more complex because of sharing audit responsibilities with local governments.

- BPKP will train local auditors prior to the audit, by November 2012.

- Integrated fiduciary review by a consulting/audit firm to evaluate compliance with agreed procurement procedures and FMS at the community level.

Sanctions - Sanctions for non-performing or corrupt behavior are built into the project cycle and widely socialized.

- Individuals face criminal charges if they steal from the program.

- Disbursements to an offending village, sub-district or district can be freezed until corruption is addressed.

- Ongoing and strengthened with governance working group at Menko Kesra.

- Sanctions applied to districts as needed and publicized.

- Working well. - Sanctions are important if

problems occur, but continued monitoring is needed to ensure consistent and fair application.

- Local sanctions provide peer pressure to complete projects and pay back loans. No performing location has so far been excluded from PNPM by peers.

- Continue implementation of sanctions.

- Revise the SOP for problematic location to have clearer criteria and resolution mechanism, by October 2012.

83

Action Plan Existing instrument Progress since PNPM IV preparation

Assessment/Lessons Learned

Key Actions Going Forward

- “Local sanctions”, agreed between villages within a sub-district.

Procurement Procurement - Communities procure goods

and services but implement projects on their own.

- Procurement reviews conducted by BPKP and supervision teams.

- Ongoing but can be strengthened .

- Systems have been under strain and need to be strengthened without becoming overly complicated. Complicated systems undermine the value gained through the community procurement process and the ability of communities to oversee the program effectively (weakening social accountability).

- Operations Manual to increase competiveness and transparency in the procurement process.

- Clear criteria and procedures for the selection of community procurement committees developed, based on technical know-how, integrity and gender equality considerations, and responsibilities and accountabilities defined clearly.

- Improve procurement capacities and awareness building, by February 2013 and ongoing.

- Integrated fiduciary review by a consulting/audit firm to evaluate compliance with agreed procurement procedures and FMS at the community level.

Puncak JayaPuncak Jaya(5030 m)(5030 m)

ObiObi

CeramCeram

BuruBuru

SULAWESISULAWESISUMATERASUMATERA

BaliBali

KALIMANTANKALIMANTAN

RabaRaba

PematangsiantarPematangsiantar

SorongSorong

TimikaTimika

FakfakFakfakAmahaiAmahai

PaluPaluJambiJambi

MataramMataram

BandungBandungSurabayaSurabaya

SemarangSemarang

PalembangPalembang

PekanbaruPekanbaru

PalangkarayaPalangkaraya

Bandar Bandar LampungLampung

SerangSerang

PAPUAPAPUA

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2121

2222

2626

2929

2020

2323

2525

2424

28282727

3030

3232

3131

3333

1212

1111

1313

14141515

8

67

3

54

2

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APA

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GU

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NEW

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A U S T R A L I AA U S T R A L I A

THAILANDTHAILAND

MYANMARMYANMAR

19

21

22

26

29

20

23

25

24

2827

30

32

31

33

12

11

13

1415

8

67

3

54

2

1

16

17 18

10

9

Balikpapan

Parepare

Baubau

Tarakan

Raba

Ende

Waingapu

Pematangsiantar

Sorong

Merauke

Timika

FakfakAmahai

Palu

Ambon

Gorontalo

Jambi

Medan

Kupang

Padang

Manado

Mataram

Bandung

Kendari

Denpasar

Surabaya

Semarang

Bengkulu

Jayapura

Palembang

SamarindaPontianak

Pekanbaru

Yogyakarta

Banda Aceh

Bandjarmasin

PalangkarayaPangkalpinang

Makassar

Ternate

Bandar Lampung

Serang

Manokwari

Mamuju

Tanjungpinang

JAKARTA

PAPU

AN

EW G

UIN

EA

A U S T R A L I A

SINGAPORE

VIETNAM

THAILAND

MYANMAR

TIMOR-LESTE

BRUNEI

PHILIPPINES

MA L A Y

SI

A

CelebesSea

Java Sea BandaSea

Arafura Sea

SuluSea

PACIFIC OCEAN

I N D I A N O C E A N

PAPUA

AruIs.

KaiIs.

TanimbarIs.

Halmahera

Biak

Yapen

Morotai

Misool

Waigeo

Peleng Obi

Muna

Ceram

Buru

SULAWESI Sula Is.

Timor

FloresAlor

WetarMoa

Babar

Sumba

SumbawaLombokJAWA

NatunaBesar

Belitung

Madura

SUMATERABangka

Lingga

Nias

Siberut

Enggano

Simeulue

TalaudIs.

Bali

KALIMANTAN

Men t a w

a i I s .

Puncak Jaya(5030 m)

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95° 100° 105°

115° 120° 125°

95° 100° 105° 110° 115° 120° 125°

130° 135° 140°

135° 140°

INDONESIA

NANGGROE ACEH DARUSSALAMSUMATERA UTARARIAUSUMATERA BARATJAMBIBENGKULUSUMATERA SELATANLAMPUNGBANGKA-BELITUNGBANTEND.K.I. JAKARTA

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PROVINCES:

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JAWA BARATJAWA TENGAHD.I. YOGYAKARTAJAWA TIMURBALINUSA TENGGARA BARATNUSA TENGGARA TIMURRIAU KEPULAUANKALIMANTAN BARATKALIMANTAN TENGAHKALIMANTAN SELATAN

KALIMANTAN TIMURSULAWESI UTARAGORONTALOSULAWESI TENGAHSULAWESI BARATSULAWESI SELATANSULAWESI TENGGARAMALUKU UTARAMALUKUPAPUA BARATPAPUA

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400 Kilometers

IBRD 33420R2

AU

GU

ST 2008

INDONESIASELECTED CITIES AND TOWNS

PROVINCE CAPITALS

NATIONAL CAPITAL

RIVERS

MAIN ROADS

RAILROADS

PROVINCE BOUNDARIES

INTERNATIONAL BOUNDARIES

This map was produced by the Map Design Unit of The World Bank. The boundaries, colors, denominations and any other information shown on this map do not imply, on the part of The World Bank Group, any judgment on the legal status of any territory, o r any endo r s emen t o r a c c e p t a n c e o f s u c h boundaries.