Document of

The World Bank

Report No. 13154-IND

STAFF APPRAISAL REPORT

INDONESIA

KALIMANTAN URBAN DEVELOPMENT PROJECT

FEBRUARY 24, 1995

Infrastructure Operations DivisionCountry Department IIIEast Asia and Pacific Region

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CURRENCY EQUIVALENTS(As of May 1994)

Currency Unit = Indonesian Rupiah (Rp)$1.00 = Rp 2,154Rp 1 million = $464

WEIGHTS AND MEASURES

Metric Units

FISCAL YEAR

Government of Indonesia: April I - March 31Provincial and Local Governments: April I - March 31Water Enterprises: January I - December 31

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ACRONYMS USED

AMDAL - GOI environmental assessment processANDAL - GOI detailed environment impact assessment studyAPBD 1/11 - Annual provincial/local govemment development budgetAPBN - Annual central government development budgetBANGDA - Directorate General for Regional Development, MHABAPPENAS - National Development Planning AgencyBAPPEDA I/11 - Provincial/Local Development Planning AgencyBPKP - Central Audit BureauBPD - Regional Development Bank (Provincial Level)CPMO/FO - Central Project Management Office/Finance OfficeDATI 1/11 - Provincial/local level governmentDGCK - Directorate General Cipta Karya (Human Settlements), MPWDGBM - Directorate General Bina Marga (Roads and Bridges), MPWDGM - Directorate General Monetary Affairs. MOFDGWRD - Directorate General for Water Resource Development, MPWDPUK - Kabupaten/Kotamadya department of public worksDIP/DIPDA - Central/regional project budgetGOI - Government of IndonesiaIDC - Interest during constructionIKK - Kecamatan headquarter town[MG - ItJIDP Implementation Management Group. BAPPENASINPRES - Presidential Instruction, including a class of GOI grantsIUIDP - Integrated UIrban Infrastructure Development ProgramKabupaten - Local (Level 11) districtKampung - Urban neighborhoodKIP - Kampung Improvement ProgramKotamadya - Incorporated municipality/city (Level 11)Kecamatan - Kabupaten or kotamadya administrative districtl,IDAP - Local Institutional Development Action ProgramMCK - Communal lavatory and toilet facilityMIP - Market Improvemcnt ProgramMHA - Ministry of Home AffairsMOF - Ministry of FinanceMPW - Ministry of Public WorksMurni - Rupiah murni, or money from "pure" domestic sourcesNGO - Non-governmental organizationO&M - Operations and maintenancePADS - Pendaliatan Asli Daerah (local government taxes and charges)PBB - National land and buildings taxPDAM - Local government water enterprisePIA - Program Implementation AgreementPIL - Preliminary environmental assessmentPimpro - Project managerPIU - Project Implementation UnitPJM - Medium-Term Expenditure ProgramPMDU - Provincial Management and Development Unit (for water enterprises)PMO/FO - Local Project Monitoring Office/Finance OfficePMU - Project Management UnitPPF - Project Preparation FacilityPUtOD - Directorate General for Public Administration and Regional Autonomy, MHARAKORBANG 1/11 - Provincial/local annual budget coordination meetingRepelita - Five-year Development PlanRIAP - Revenue Improvement Action PlanRKL - Environmental Management PlanRPL - Environmental Monitoring PlanSDO - Routine central GOI grant, primarily for salariesSLA - Subsidiary Loan AgreementSK - Surat Keputusan. decree of a senior officialSPABP - Special grants to lower level governmentsTKPP - Urban Development Coordination TeamUNDP - United Nations Development ProgrammeWalikota - Kotamadya chief executive (mayor)

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INDONESIA

KALIMIANTAN URBAN DEVELOPMENT PROJECT (KUDP)

STAFF APPRAISAL REPORT

LoAN AND PROJECT SUMMARY

Borrower: The Republic of Indonesia

Beneficiaries: The Cities of Banjarmasin, Balikpapan, Palangkaraya, Pontianak,Samarinda and their respective Water Enterprises (PDAMs).

Amount: US$136 million equivalent

Terms: Repayable in 20 years including five years of grace, at the Bank'sstandard variable interest rate

Onlending Terms: Out of the loan proceeds, US$33.5 million equivalent would be onlentby the Central Government to the five municipalities and their WaterEnterprises (PDAMs) at an annual interest rate of 11.5%,,the prevailing6 month average of the 3-month Sertifikat Bank Indonesia (SBI) rate atthe time of appraisal for a term of 20 years, including 5 years grace.Both Municipal Governments and their PDAMs are fully responsible forthe interest during construction. The Central Government bears theforeign exchange risk.

Project Objectivesand Description: The main objectives of the project are to (a) increase the provision of

urban infrastructure and services and the efficiency of urbaninvestments, (b) promote stronger, more autonomous, and financiallymore independent municipal governments, and (c) contribute towardsurban poverty alleviation, mainly through better access to essentialservices and an improved urban environment.

The project would finance priority investments in the five municipalitiesin: (a) urban roads; (b) water supply and distribution systems;(c) storm drainage and flood control; (d) solid waste collection anddisposal; (e) human waste disposal (sewerage and on-site sanitationfacilities); (f) multi-sectoral programs for kampung (low incomeneighborhood) improvements, market improvements, and infrastructurefor urban renewal pilot projects and for low cost housing developments,(g) programs for the development and strengthening of local institutions,(h) programs to increase local revenue generation, and (i) technicalassistance for implementation.

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Benefits and Risks: The project would benefit the urban populations in the five citiesthrough provision of better quality and more reliable and accessibleurban infrastructure and services. The water supply, drainage, andhuman and solid waste disposal investments would greatly improve theliving environment by providing safe and reliable water, reducingproperty damage and productivity losses, and decreasing pollution andthe incidence of diseases. The urban road investments would assist thelocal economies by lowering transport costs and travel times. Kampungand market improvement investments would help low incomepopulations by bettering living conditions and local commercialfacilities. The main risks are the limited capabilities at the local levelto manage and implement investment programs. In order to mitigatethese risks, appropriate measures have been taken, such as the use otstandardized procurement documents, increased involvement of theprivate sector in O&M delivery, training of staff, introduction of anMIS system and employment of consultants, managed at the local level,to assist with implementation. Another positive factor is the strongownership of the proposed program by the five municipalities developedthrough their close involvement in the preparation process.

Estimated Costs: Local Foreign Total % of------------- (US$ million) ------------ Base Cost

Water Supply 24.8 19.2 44.0 21Drainage 16.2 7.6 23.8 11Urban Roads 38.1 17.8 55.9 26Solid Waste Management 5.7 2.6 8.3 4Human Waste Disposal 9.0 2.8 11.8 6KIP and Other Infrastructure 14.4 6.7 21.1 10

Subtotal 108.1 56.7 164.9 77

Incremental O&M (all sectors) 13.6 7.3 20.9 10Implementation Support TA 8.0 2.3 10.3 5Institutional Development TA 6.8 4.9 11.7 5Administration 5.2 0.0 5.2 2

Total Base Cost 141.8 71.2 213.0 100

Physical Contingencies 10.5 5.7 16.2 8Price Contingencies 16.4 4.0 20.4 9PPF Repayment 0.0 1.7 1.7 1

Total Project Cost /a 168.7 82.6 251.3 118

/a Includes taxes and duties of US$21 million equivalent.Note: Due to rounding, totals may not add up.

Financing Plan: Own IBRD % ofSources Loan Total Cost

--------------------- (US$ mil!ion)/a---------------------

Local Governments 41.0 13.0 54.0 22Water Enterprises 28.2 20.5 48.7 19Provincial Government 3.2 - 3.2 1Central Government 42.9 100.8 143.7 b/ 58

Total 115.3 134.3 249.6 100

shares 46% 54% 100%PPF repayment - 1.7 1.7Int. During Construction 10.7 - 10.7

Total Financing Required 126.0 136.0 262.0

/a Due to rounding, totals may not add up./b Includes amounts to be transferred as grants to lower level governments.

Loan Disbursements:---------------------- US$million-----------------

Bank FY 1995 1996 1997 1998 1999 2000

Annual 3 32 42 42 14 3Cumulative 3 35 77 119 133 136

Poverty Category: Targeted intervention: the KIP/MIP component (20 percent of projectcost) will favor the poorer neighborhoods and all the other componentswill also, directly or indirectly, benefit the urban poor more than thenon-poor, except probably tor the road component.

Estimated EconomicRate of Return: 15% to 40% for roads, minimum 12% for water supply, not quantified

for other components for which however benefits have been estimatedand are expected to cover or exceed costs.

Maps: IBRD No. 26065: Key Map - Indonesia and KalimantanIBRD No. 26066: Project Cities - Water and Drainage/Flood ControlIBRD No. 26113: Project Cities - Urban Roads, KIP/MIPIBRD No. 26114: Project Cities - Solid Waste and Sanitation

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INDONESIA

KALMIANTAN URBAN DEVELOPMENT PROJECT (KUDP)

STAFF APPRAISAL REPORT

TABLE OF CONTENTS

Page

1 THE URBAN SECTOR ................................ I

A. Sector Overview .................................. 1B. Government Strategy ................................ 3C. Bank Experience .................................. 4D. Bank Sector Strategy ................................ 5

2 URBAN DEVELOPMENT IN KALIMANTAN ................ 6

A. Population and Urban Services ..................... ..... 6B. Urban Planning and Financing .......................... 8C. Water Enterprises (PDAMs) ............................ 9

3 THE PROJECT ..................................... 10

A. Project Origin and Formulation ......................... 10B. Project Objectives .................................. 11C. Project Description ................................. 11D. Project Costs ..................................... 13E. Financing Plan .................................... 13

4 PROJECT IMPLEMENTATION ......................... 16

A. Implementation Agencies ............................. 16B. Project Coordination and Monitoring ...................... 17C. Implementation Schedule ............................. 18D. Procurement and Disbursements ......................... 18E. Project Accounts and Audits ........................... 21F. Project Reporting, Monitoring and Bank Supervision .... ........ 21G. Operations and Maintenance ........................... 22H. Land Acquisition, Resettlement and Compensation ............. 221. Environmental Impacts .............................. 23

5 FINANCIAL ASPECTS ................................ 24

A. Local Governments ................................. 24B. Water Enterprises (PDAMs) ........................... 25

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6 PROJECT JUSTIFICATION AND RISKS ................... 26

A. Economic Justification ............................... 26B. Poverty Impacts ................................... 28C. Environmental Improvements ........................... 29D. Risks ......................................... 30

7 AGREEMENTS REACHED AND RECOMMENDATION ........ 30

TABLES IN TEXT

Table 2.1: Kalimantan's Five Project Cities ..................... 7Table 2.2: Local Taxes and Charges, 1992 ...................... 10Table 3.1: Project Cost Summary ........................... 14Table 3.2: Financing Plan ................................ 15Table 4.1: Procurement Arrangements ........................ 19Table 4.2: Expected Number of ICB and LCB Packages by Sector ...... 20Table 4.3: Disbursements ................................ 20

ANNEXES

1. Previous Urban Infrastructure Projects2. Project Descriptions by City3. Documents in Project File4. Summary Cost Table5. Financing Plan6. Implementation Responsibilities7. Technical Assistance8. Implementation Schedule9. Disbursements by City and Category10. Estimated Schedule of Disbursements11. Supervision Staffing and Schedule12. Land Acquisition, Resettlement and Compensation13. Mitigation of Negative Environmental Impacts14. Financial Projections: Kotamadyas15. Financial Projections: PDAMs16. Summary of Project Indicators

CHARTS

MAPS

The report is based on the findings of preappraisal mission in November 1993 and an appraisalmission in May 1994. The appraisal mission comprised Mmes/Messrs June Bsaies (RoadEngineer), John Darmody (Water Sector Engineer), Dianne Hughes (Sanitation Engineer),Frida Johansen (Principal Economist), Safari O'Humay (Financial Analyst), Bob Scouller(Engineer), George Soraya (IUIDP Specialist), and Keiichi Tamaki (Financial Analyst).Anupam Khanna (Chief EA31N) and Marianne Haug (Director EA3) have endorsed theproject.

1. URBAN SECTOR

A. SECTOR OVERVIEW

1 . 1 Demographic Trends. The urban population in Indonesia exceeds 55 million and isgrowing at over 5 percent per year, more than twice the overall national population growth rate. About80 million or 40 percent of Indonesians will be city dwellers by the year 2000. Indonesia's urbansettlements include 15 metropolitan and large cities of more than half a million people, 40 secondarycities of over 100,000 (provincial headquarters and incorporated municipalities), 200 small towns (districtheadquarters) over 20,000 and about 3,200 service centers (subdistrict headquarters) with 3,000 to 20,000people. Seven out of the ten largest metropolitan areas are in Java.

1.2 Institutional Framework. At the national level, there is no single ministry for urbandevelopment. The National Development Planning Agency, BAPPENAS, is responsible for overallplanning and allocation of resources, focussed on Five-Year Development Plans (Repelita) and AnnualNational Development Budgets (APBN). Within BAPPENAS, the Bureau for Urban Development,Settlement and Public Housing, under Deputy V (Regional and Provincial Development), is responsiblefor oversight and coordination of urban infrastructure development. All key agencies with responsibilitiesin the urban sector are represented in the Inter-agency Coordinating Team for Urban Development (TimKoordinasi or TKPP) chaired by BAPPENAS.

1.3 The principal central ministries involved in urban issues are the Ministry of Home Affairs,the Ministry of Public Works, and the Ministry of Finance. The Ministry of Home Affairs (MHA) isresponsible for oversight of the regional governments, primarily through its Directorate General forPublic Administration and Regional Autonomy (PUOD) and Directorate General for RegionalDevelopment (BANGDA). The Ministry of Public Works (MPW or DPU) is responsible for oversightof most infrastructure. Within MPW, the following directorates-general are responsible for urbaninfrastructure: the Directorate General for Human Settlements (Cipta Karya or DGCK) is responsiblefor oversight of city and regional planning, water supply, urban drainage, sanitation and sewerage, solidwaste management, kampung improvement programs (KIP), and market improvement programs (MIP);the Directorate General for Roads (Bina Marga or DGBM) is responsible for oversight of urban roadsand bridges; and the Directorate General for Water Resource Development (Pengairan or DGWRD) isresponsible for urban flood control and bulk water supply. The Ministry of Finance (MOF) is responsiblefor central and local finance through its Directorate General for Monetary Affairs (DGM), while theDirectorate General for Budget (Anggaran or DGA) administers budget transfers.

1.4 At the regional levels, provincial (Level I) and local (Level II) governments operate withincreasing responsibilities and delegated authority. In all, there are 27 provinces and 301 localgovernments, including 54 kotamadyas (urban municipalities) and 247 kabupatens (districts). Legislativepowers at both provincial and local levels are held by People's Representative Councils (DewanPerwakilan Rakyat Daerah or DPRD).

1.5 Provincial governments are headed by appointed governors who represent the Presidentand the central government; the governors also head the semi-autonomous provincial administrations.Bupatis (district heads) and Walikotas (municipal mayors) represent provincial governments, and headtheir own local governments. Regional Development Planning Agencies (BAPPEDA I and II) reportdirectly to their respective governors, district heads or mayors, and are responsible for planning andresource allocation. Regional government services are provided by separate departments (Dinas I andII) analogous to line ministries of the central government.

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1.6 Sectoral Coordination and Local Participation. Due to the hierarchical administrativesystem, coordination of the urban sector has been difficult and local participation in the decision-makingprocess has been limited. The large size and diversity of the country, the rapid pace of urbanization, thenumber of concerned agencies, the lack of effective management information systems and, perhaps,cultural constraints to communication within and among agencies, have led to a somewhat fragmentedapproach to urban development. In order to improve coordination, especially at the local level, GOI'spolicy of decentralization needs to be pursued more effectively.

1.7 Sector Constraints and Priorities. Average incomes in urban areas have risensubstantially over the past decade; however, income distribution remains relatively unequal and in 1990,over 17 percent of urban dwellers were estimated to be "absolute" poor based on their expenditure levels.The problems of low income are exacerbated by deficiencies in basic services and degraded environmentalconditions causing health risks among the low income population. Country-wide, only about 20-25 percent of urban households have direct access to piped water supply, another 15 percent buy drinkingwater from vendors or standposts, and the rest rely on shallow wells and sometimes on surface watercourses. Surface water courses in urban areas are frequently polluted due to discharge of inadequatelytreated wastewater. Only about 40 percent of urban households have access to adequate sanitationfacilities. In the larger cities, inadequate industrial water supply, and liquid and solid waste disposal areserious problems. To meet GOI's service and equity objectives, more investment is needed in local ortertiary systems in poorly served urban areas. The Bank's 1993 Urban Public Infrastructure ServicesReport (No. 12154-IND) estimated that the 1990 infrastructure investment backlog was at least someUS$5 billion for the main four subsectors (piped water, sewerage, urban roads, and drainage). Further,a substantial backlog prevails in the maintenance of facilities, which has resulted in decreased productivityof the infrastructure.

1.8 Sector Finances. Finances of provincial and local governments have long been dominatedby central government transfers and are characterized by weak local resource mobilization, low per-capitabudgets and limited use of credit for capital investment. The dominant role of central government grantsfor financing local government services is partly due to the limited local authority for levying taxes.Grants are a way to resolve the disparity between local needs and local resource mobilization. Althoughgrant allocation criteria have been modified to respond better to local needs and shortfalls (compared tominimum standards), there is a need to relate grant allocations more to performance and productivity.The larger infrastructure projects are financed directly from the national budget (APBN/DIP) and areexecuted by the regional offices of central government agencies. These projects sometimes lead tooperations and maintenance (O&M) obligations which the local governments are not fully capable oftaking on.

1.9 Urban Infrastructure Issues. The main problems and issues faced by cities are: (a) largeinfrastructure deficiencies and O&M backlogs; (b) lack of coordination in integrating infrastructureinvestments with land management and transport objectives; (c) weak management of water enterprisesand municipalities, as evidenced by deficient accounting practices, the lack of adequate cost recovery,revenue generation, and little use of credit as well as poor information systems; (d) inefficientprogramming of the design and construction cycles, often compressed into single fiscal years; (e) complexrelationships among local, provincial and central agencies with respect to responsibilities for project andprogram preparation, appraisal, financing, implementation, and O&M; (f) shortage of trained andexperienced managerial and technical personnel at all levels; and (g) limited involvement of the privatesector in urban service provision.

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B. GOVERNMENT STRATEGY

1.10 IUIDP Approach. With large deficiencies in urban infrastructure and a fast-growingurban population, GOI's strategy in the past has emphasized physical infrastructure targets: length ofroads to be built, percentage of population to be supplied with piped water, sanitation services, etc.These targets have a prominent place in the five year national development plans (Repelitas). In 1987,GOI issued a Statement of Policies, representing a consolidated view of development in the sector. ThisPolicy Statement for Urban Development, incorporated in Repelita V (for the period 1989-94) includes:(a) strengthening local governments to build, operate and maintain local services; (b) improving theplanning and programming of urban infrastructure investments; (c) mobilization of local revenues andthe optimization of their use; (d) implementing coordinated financing and administration systems for localservices; and (e) strengthening consultative processes at various levels of government, particularly theparticipation of municipalities and districts.

1.11 GOI's Policy Statement called for Integrated Urban Infrastructure Development Programs(IUIDP) as the operational approach for achieving the above objectives. The policy was translated intoaction plans for local institutional reforms (Local Institutional Development Action Plan or LIDAP) andimprovements in local resource mobilization (Revenue Improvement Action Plans or RIAP), sectorplanning, and financing arrangements. GOI is providing (with domestic funds) further support to thereform effort of the local government revenue departments (DISPENDA), initiated under the Urban Vproject. GOI has continued to develop the IUIDP process to emphasize the following priorities: (a)expanding the scope of the IUIDP process to include additional subsectors which are important inpromoting the economic development of cities; (b) strengthening local government institutionalcapabilities; (c) improving O&M of urban infrastructure; (d) improving cost recovery and implementationof a more fully integrated system for the financing of urban infrastructure services; and (e) increasingattention to urban land and environmental management.

1.12 GOI has issued regulations and policy clarifications to operationalize urban sector policyand the IUIDP approach; with World Bank, Asian Development Bank (ADB) and bilateral assistance,GOI has undertaken a nation-wide program for IUIDP preparation and implementation since 1987; andUNDP and UNCHS have supported a central assistance team to the IUIDP Management Group (IMG).More than 50 percent of local governments have so far adopted IUIDP planning.

1.13 Local Borrowing. Under Repelita V, GOI has also given priority to the expansion ofborrowing by local governments and their water enterprises. To induce a higher level of credit financing,GOI has adopted less conservative financial criteria for borrowing by local entities (debt service coverageratio of not less than 1.5 for local government general fund operations and not less than 1.3 for localenterprises like water supply PDAMs). This has brought the legal borrowing capacity of localgovernments, particularly the larger municipalities, more in line with their considerably underutilizedfinancial capacity. GOI's strategy is to move interest rates toward market rates over the medium to longterm, but suitable reference rates reflecting market rates for long-term borrowing still need to be defined.

1.14 Repelita VI. Repelita VI and the 25 Year Plan II, both of which started in April 1994,emphasize sustainable urban development through improvement in the quality of the living environment,support for economic growth, reduction in regional imbalances, and poverty alleviation. Whilecontinuing the basic premises of Repelita V and the National Policy Statement for Urban Developmentmentioned above, Repelita VI takes a broader approach by expanding the IUIDP into an Integrated UrbanDevelopment Program (IUDP) that includes: (a) a larger number of smaller cities and towns; (b) broaderspatial planning and urban planning in addition to public works infrastructure development plans; (c)expanding the scope to cover low income and rental housing, infrastructure provision for low-income

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areas, and urban renewal; (d) involving the private sector and communities to a greater extent; and (e)strengthening environmental sustainability. To accelerate decentralization and implementation of plans,emphasis will be placed on better use of resources, mobilization of local revenues, developing financingmechanisms, and increasing cost recovery by municipalities and their agencies. Better coordination andstrengthening of local agencies will also be sought.

1.15 Environment and Resettlement. In late 1993 the GOT enacted Law 51/93 onenvironmental impact assessment and mitigation and monitoring measures, and Presidential Decree,Kepres 55, on land acquisition for public facilities, to improve on earlier decrees and their application.Law 51 makes further refinements to GOI's environmental assessment procedures, which were alreadyin line with Bank policies and consistent with best practices under Bank-financed projects. Decree 55seeks to ensure adequate access to information, fair negotiations, compensation awards based on marketvalues, and rights of appeal to the courts. A first tier of implementing regulations and guidelines wasissued in March 1994 for Law 51. Kepres 55 still has gaps primarily in the areas of entitlementeligibility and funding sources, and time will be required to develop implementation capacities based onlocal experiences.

C. BANK EXPERIENCE

1.16 Overall Sector Experience. The Bank has been involved in the urban water supply sectorsince the 1960s, with relatively little change in approach. While many projects have provided substantialeconomic and health benefits, the experience indicates: (a) supply of water has lagged behind increasingdemand; (b) delays in project implementation are common; (c) improving institutions and achieving cost-recovery have been slow and difficult; (d) water quality is a persistent problem; and (e) disposal of wastewater in densely populated areas has been difficult.

1.17 Bank involvement in the urban sector started in the early 1970s with low cost investmentprojects in shelter, water supply, sanitation, and urban transport, aimed at alleviating urban poverty.Sites and services and slum upgrading projects were to demonstrate replicable approaches benefitting thepoor, while recovering costs and reducing the financial burden on the public sector. Many of theseprojects succeeded in physical terms, but had little impact on the policies of national and localgovernments and on urban management. The Bank had not paid adequate attention to the policy andinstitutional requirements for improving the productivity of the urban economy and reducing urbanpoverty, and improving management of the urban environment. Further, as many of the urban programsdid not achieve sustainable policy reform and institutional development, project approaches were generallynot replicable outside the framework of Bank financial support.

.18 By the mid-1980s the experience of donor-assisted projects had led to shifts in approachesto the urban sector. It was recognized that central governments alone were unable to meet the increasingneeds for infrastructure services of rapidly growing urban populations and greater efforts had to bedevoted to: (a) improving the management capability of urban institutions and inter-governmental fiscalrelations; (b) improving local resource mobilization; (c) enhancing the management and quality of urbaninfrastructure, particularly with regard to maintenance; (d) establishing enabling rather than constrainingregulatory frameworks; (e) expanding financial services for urban development; and (f) promoting privatesector participation in urban service delivery. Recent initiatives by governments and donors in these areasreflect a growing appreciation of the importance of policies, institutions, and regulations in formulatingeffective strategies to manage urban growth.

1 .19 Experience in Indonesia. The Bank has financed 12 completed and 8 ongoing urban andwater supply projects in Indonesia since 1974, for more than fifty local governments and many of theirwater enterprises (see Annex 1). Urban lending operations in Indonesia have progressed fromdemonstration projects in Jakarta through more programmatic investments in selected other large cities,to sector lending within an agreed policy and institutional framework (although still limited in terms ofarea and subsectoral scope). Water supply projects initially covered only a few cities at a time, but later,like Bank projects in other countries, assisted a large number of urban settlements under one operation.Details concerning Bank-funded water and urban infrastructure projects are available on file. In urbantransport projects, or the transport components of urban development projects attention has focussed onroad construction and maintenance. Even so, implementation of road schemes has been slower thanexpected, quality of construction was frequently an issue related to reduced facility lifespan. Inadequateattention has been given to traffic management, to improvement of public transport services and facilitiesfor pedestrians.

1.20 Bank experience confirms that: (a) limited planning and implementation capacity at thecentral government level, and the difficulties inherent in providing essentially local services by centralgovernment departments, reduces the efficiency of mass delivery programs; (b) capacity building at thelocal level is a long-term process that needs to be accompanied by training to achieve an increase in localresponsibility and accountability; and (c) to develop such responsibility and accountability, central-localfinancial relations need to provide more local government autonomy and enable private sectorinvolvement. The proposed project design takes into account these lessons. Significant responsibilityin project implementation will be handled by the local governments and their water enterprises; suitabletraining in project management, local revenue administration, and improvements in operations andmaintenance will be provided; and management advisory services will be provided to the waterenterprises.

D. BANK SECTOR STRATEGY

1.21 The Bank has oriented its overall sector lending to assist the Government to deliveradequate urban infrastructure services in cost-effective ways. GOI and the Bank emphasize improvementsin: (a) service levels, in a regionally balanced fashion, and particularly for the poor; (b) urbanproductivity and the effectiveness of investments through better infrastructure planning and programming,especially at the city level, and through enhanced local government capacity for fiscal management,revenue mobilization, project implementation and O&M; and (c) the urban environment by enhancinglocal government capacity to plan, build and operate infrastructure in an environmentally sound fashionand also by enhancing community participation.

1.22 In promoting efficient urban development, the Bank's strategy supports the expanded IUDPapproach; however, implementation should include both sectoral and integrated approaches asappropriate. While all plans should be integrated, in some cases, implementation could be handledthrough separate sectoral projects. For example, in smaller municipalities multisectoral projects aregenerally of manageable size and complexity; an integrated investment approach would, therefore, bemore appropriate. In other cases, where the requirements of a particular sector are sufficiently large andcomplex, both in technical terms as well as on policy, institutional and financial matters, sectoral projectswithin the framework of an integrated plan may be better.

1.23 Improving local management capacity is another area where the Bank's strategy is alignedwith that of GOI. Local governments and local institutions such as PDAMs should have well qualifiedand well trained staff. In addition, local resource mobilization and retention should be increased. These

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issues could be addressed through revenue improvement programs, greater attention to tax collections,pricing policies to effect cost recovery (O&M costs and a portion of or full investment costs), flexibilityto use funds as needed in priority areas, and increased local borrowing at market interest rates. The Bankalso recognizes that the infrastructure deficiencies are large and that the financial capabilities of localinstitutions are limited in the short run; GOI has most tax bases and transfer grants will therefore continueto be an important source of local financing. In order to optimize their use, grants should be allocatedon an incentive basis.

1.24 The Bank's strategy also promotes establishing an enabling regulatory and planningframework for urban land management. A key focus of the Bank's strategy will be to support GOIefforts to establish an effective land management system and simplify other regulations to facilitate moreefficient and environmentally sound urban land use and strengthen land tenure. The Bank is helping theGovernment develop improved implementation frameworks for addressing environmental and socialimpacts of urban projects.

2. URBAN DEVELOPMENT IN KALIMANTAN

A. POPULATION AND URBAN SERVICES

2.1 Population. The Indonesian region of Kalimantan covers the southern three-quarters ofthe island of Borneo that is located north of Java. It comprises some 30 percent of Indonesia's total landarea, but no more than 5 percent of the country's population, and even less of its urban population. Theregion is divided into the four provinces of West, Central, South and East Kalimantan.

2.2 Kalimantan's most developed urban areas are the three coastal cities and old trading portsof Pontianak (West Kalimantan), Banjarmasin (South Kalimantan) and Balikpapan (East Kalimantan) andthe inland cities of Samarinda (old center of East Kalimantan) and Palangkaraya (new capital of CentralKalimantan). Except for Balikpapan, the cities are provincial capitals. Palangkaraya is located some 60km inland, accessible only by water and air. All five cities are located on at least one major river thatprovides them with access to their extensive hinterlands; navigable waterways are the transportationbackbone in Kalimantan. Roads have been developed in and around the major cities but interurban roadsare few, the main ones lying between Balikpapan and Samarinda and in the valley northeast ofBanjarmasin.

2.3 In 1990, about 28 percent or 2.5 million people of Kalimantan's 9.1 million populationlived in urban areas. East Kalimantan contained more than one third of Kalimantan's urban population,slightly less than one third lived in South Kalimantan, one quarter in West Kalimantan, and less than 10percent in Central Kalimantan. East Kalimantan has the highest ratio of urban to rural population ofKalimantan's provinces, followed by South Kalimantan (about one quarter), West Kalimantan (one fifth)and Central Kalimantan (slightly more than 15 percent). The five largest cities comprised 1.9 millionpersons by 1993.

2.4 During the 1980s, Kalimantan's population grew on average at 3.1 percent per annum,compared to an urban population growth rate of 5.7 percent. Most of the urban population increase inthe decade was absorbed by Kalimantan's five major cities; on average, the increase was 60 percent(ranging from 35 percent in Banjarmasin to 100 percent in Palangkaraya). During its rapid expansionin the 1970s and for the most part of the 1980s, Kalimantan's economy attracted labor from other islands,with in-migration occurring in particular in the industrializing cities of Samarinda and Balikpapan, whereoil, gas and timber dominate the economy, and Banjarmasin, the center of plywood and rubber processing

industries. Kalimantan's rural populations decreased-except for Palangkaraya where rural populationalmost doubled (although from a relatively low base). Between 1980 and 1990, rural populations shrunkon average by nearly 40 percent.

TABLE 2.1: KALIMANTAN'S FIVE PROJECT CITIES

Total Pontianak Banjarmasin Balikpapan Samarinda Palangkaraya

1993 Population 1,911,600 436,000 515,600 386,000 464,000 110,000% of provincialpopulation 19 13 20 18 21 71980-90 growth% p.a./a 3.5 3.0 2.4 3.9 5.7 6.7Built-up area, kin2 127.1 33.0 22.3 34.0 26.4 11.4Average densitypersons/ha 150 132 231 114 176 96

1990 prov. GDP West K. South K. East K. East K. Central K.$/capita 425 460 1,670Lb 1,670Lb 490

Sources: BPS; Project Preparation Report.

/a For the kotas; growth in suburbs was normally higher, with average urban population growth of 5.7% inKalimantan in the 1980-90 decade.

/b Excluding direct oil and gas revenues, most of which accrue elsewhere.

2.5 In 1990, regional GDPs varied markedly among the provinces; from Rp 1.4 trillion inCentral Kalimantan to Rp 10.8 trillion in East Kalimantan, of which about Rp 6.4 trillion due to oil, gasand related products. Likewise, per capita regional GDPs varied greatly, from about Rp 850,000 ($425)in West Kalimantan to Rp 3.3 million ($1,670) without direct oil, gas and related product revenues thataccrue only in part to the local populations, in East Kalimantan. Despite these relatively high averageGDPs per capita, Kalimantan's provinces still have considerable poverty: some 30 percent of thepopulation in West Kalimantan, 20 percent in Central Kalimantan, and some 15 percent in South and EastKalimantan, are estimated to be "absolute" poor.

2.6 Urban Services. There are significant backlogs in urban infrastructure services. In thefive cities, between one quarter and less than half of the population is supplied with water by localPDAMs, either in the form of house connections (20-38 percent) or public taps (2-8 percent). In 1993,the five water enterprises sold piped water at average tariffs between Rp 415 (Palangkaraya) and Rp 681(Balikpapan) per m3 , and minimum tariffs between Rp 230 and Rp 421 per rn3 . Per capita waterconsumption from house connections varied from less than 80 liters per day in Pontianak andPalangkaraya to 140 liters in Samarinda- and 20-30 liters per capita per day from public taps. Servicetends to be rather unreliable, in particular during dry seasons. Most people depend on low-quality waterfrom shallow wells, rivers and canals as well as rain water, and on high-priced water bought fromvendors or neighbors.

2.7 Between half (Banjarmasin) and more than three quarters (Balikpapan) of the householdsare equipped with on-site sanitation facilities, either in the lorm of septic tanks or pit latrines. Theremainder of the population uses public sanitation facilities or open places and rivers for their toilet needs.In addition, the cities have few desludging facilities and disposal sites, and public as well as privatesanitary facilities are poorly maintained. In particular, overflowing septic tanks result in fecalcontamination of ground (shallow well) water and thus cause water-borne diseases like diarrhea and skindiseases. High water tables make standard on-site sanitation technologies ineffective and alternativesolutions are required.

2.8 Only 50-60 percent of the population has solid waste collection in the five cities. Whilein Samarinda about three-quarters of domestic waste gets collected, it is only one-third in Pontianak.Frequently, households dispose of their waste by either burning it in their yards, or by dumping it neartheir homes or into the nearest river. Burning waste contributes to air pollution; waste accumulation inrivers and canals reduces the capacity of the drainage system, and contaminates river and coastal waters.Service levels for non-domestic waste collection tend to be relatively high, varying between 75 and 100percent. However, municipalities lack environmentally-sound final disposal sites, and adequate collectionand transfer facilities.

2.9 Flooding is a major environmental problem in the five low lying cities covered by KUDP.Along the rivers, land is often below the high tide water level. Due to insufficient drainage and floodcontrol capacities, which are at least partly attributable to poor maintenance, floods bring contaminatedwater into direct contact with mostly lower income people. Floods also affect buildings and disrupttraffic.

2. i0 Rapid growth in motorized urban traffic--about one motorized vehicle every 10 personsin 1990--narrow roads, rights-of-way encroachment, and inadequate traffic management measures, haveresulted in frequent traffic congestion, in particular in the central business districts. In the absence ofeffective pollution control measures by central government (e.g., by requiring emission standards andcleaner engines and enforcement strategies and measures), as well as of local measures to reducecongestion, air pollution affects the health of urban populations. It is in particular the poor who are moreexposed to detrimental environmental conditions and, thus, to health risks.

2.11 Deficiencies remain both in coverage and quality of services as in Indonesian citieselsewhere, specifically in or related to: (a) transport infrastructure and planning capability to guide urbangrowth and traffic engineering and management to make the most of existing facilities; (b) waterdistribution and/or bulk water supply; (c) micro-infrastructure and services and effective and safe low-costsanitation techniques in the kampungs, where most low income people live; (d) policies and operationalprograms for: (i) O&M of infrastructure and utility services; (ii) revenue generation and the use ofmunicipal borrowing; (iii) private sector participation in delivery of municipal services; and (e) complexrelationships between municipal and central government authorities with respect to preparation, appraisal,financing and implementation and O&M of infrastructure services.

B. URBAN PLANNING AND FINANCING

2.12 Development Planning Framework. The problems call for an efficient metropolitandevelopment strategy matched with a balanced intersectoral investment program using low-costtechnologies where practicable. The poorer communities can participate in upgrading their infrastructure,without moving out. Much of the growth will continue to take place at the cities' peripheries and theneed to expand investments there, particularly in basic services, is high. Without adequate spatial

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planning, the cost of providing these services rises rapidly and unnecessarily over time, andenvironmental resources are lost or degraded.

2.13 Each of the five kotamadyas has prepared a master plan containing the main planningguidelines for urban development, in accordance with central government guidelines. The master plans,which cover 20 years, were officially approved around 1986; detailed spatial plans were ratified in 1987by Local Government Regulation No. 8. The broad nature of the master plans as well as changingsocioeconomic factors justify the preparation of more detailed 5-year plans (PJMs); PJMs have beenprepared in the cities since about 1990.

2.14 Central Grant Dependency. Infrastructure investments in Kalimantan cities have notmatched the rapid growth of the five urban areas. Like other Indonesian local governments, the fivemunicipalities under the KUDP are dependent on central transfers to a considerable extent because of theprevailing centralized tax structure.

2.15 Local Revenues. Local governments' main non-grant revenue sources fall into threecategories: local government taxes; local service charges; and assigned central government revenue.Growth in local revenues has been fairly good overall in recent years with Palangkaraya and Samarindadoing better than the others. PBB (land and building tax) is the largest of these sources in EastKalimantan and the lowest in South Kalimantan (Table 2.2). Registration, valuation and assessment dutiestor this centrally administered tax are performed by local offices of the Directorate General of Taxationof MOF. However, major parts of the collection work relating to PBB are performed by, or under thesupervision of, the local governments; 64.8 percent of the gross proceeds, irrespective of the collectingagency accrues to local government.

2.16 Borrowing. Local governments, apart from their own enterprises, have not made muchuse of borrowing for capital projects. Savings after routine expenditures are generally too low to coverany level of debt service. Until recently local governments were required to restrict the levels of theirborrowing by reference to the "debt service ratio" criterion, broadly defined as the ratio of debt service(principal repayments plus interest charges) payable in a year, to total revenues available for developmentin that year. However, the application of that criterion was unclear and open to varying interpretations.The maximum permitted ratio was 0.15, which was very conservative. GOI has recently decided toreplace it with one based on a more closely defined minimum "debt service coverage ratio" (DSCR).This has been stipulated for any given year as: [projected grant and local revenues for the year in questionless projected routine account expenditure on staff, administration and O&M needs] divided by [totalestimated loan charge obligations (interest charges plus principal repayment) arising in that year fromcurrently outstanding loans and future proposed borrowing]). The minimum ratio required is 1.5.

C. WATER ENTERPRISES (PDAMs)

2.17 The five largest PDAMs of Kalimantan are located in the five project cities. All PDAMssuffer from weak management and shortage of skilled personnel partly due to the less attractive conditionsof employment the local governments offer and the limited training the staff receive. The managementis normally appointed by the mayor and does not have operational autonomy. All PDAMs are organizedand managed according to national guidelines for water enterprises, which stipulate ownership andoperation by local governments, establishment as a local enterprise, the use of the accrual accountingconvention, and adoption of the National Standard Water Rate Structure (NSWRS) for tariffs. Tariff ratesvary depending on the cost structure of the enterprise and the make-up of its commercial base. Theauthority to set the tariff rates sits with the local parliament, as does the distribution of profits.

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Table 2.2: LOCAI, TAXES AND CHARGES, 1992(In Rupiah million)

% annual % annual % annual RupiahLocal growth growth overall per

taxes/charges 1986/92 PBB 1986/92 Other Total growth capita

Palangkaraya 587 12 240 19 457 1,284 31 11,672Banjarmasin 4,318 15 616 18 170 5,104 16 9,891Pontianak 5,224 21 1,499 41 118 6,841 24 15,690Balikpapan 6,033 14 4,900 37 325 11,258 22 29,165Samarinda 4,980 22 5,306 43 80 10,366 31 22,340

Source: Project Preparation Report.

2.18 All PDAMs are required to prepare annual financial reports for audit either by the BPKPor public accountants. Financial reports to 1993 have been audited. The financial reports of the last fouryears indicate a range of performances from very weak to generally sound. Of the five PDAMs, onlyPalangkaraya has growing operating deficits, and it also has the lowest tariffs. PDAM Balikpapan wasable to cover its O&M expenses except for 1992 partly due to an expansion in the distribution system,and a new treatment plant of 250 I/s which were completed in 1989 and 1991 respectively. PDAMsBanjarmasin, Samarinda and Pontianak showed relatively stable financial results, Samarinda showingbetter performance; however the PDAM Banjamasin recently received an Italian loan to expand its supplycapacity that will strain its finances.

3. THE PROJECT

A. PROJECT ORIGIN AND FORMULATION

3.1 In Kalimantan, the IUIDP process began in 1988 when a decision was made to assist thefour provincial governments prepare multi-year expenditure programs based on priority infrastructureneeds, and related financing packages, for the five largest cities on the island, including their waterenterprises. The preparation process itself is seen as a first phase of the project. The assistance forpreparation was provided through consultant services funded initially under the Urban Sector Loan (No.2816-IND) and subsequently supplemented by a PPF; the technical assistance services were managedoverall by DG Cipta Karya. A first full project preparation report (30 volumes) was completed in August1992. This report required some revisions, and an in-house team of staft drawn from IMG, Bina Marga,and Cipta Karya in collaboration with local governments, was set up in May 1993 to finalize thepreparation of the project. A revised report became available in October 1993, and a final report wascompleted in May 1994. The preparation phase has been long for a variety of reasons, some withpositive effects on the design and ownership of the project in each city. First, there was a question ofthe novelty to the local and provincial staff and their authorities, of the concept of integrated multi-yearprogramming embodied in the IUIDP process; consultants had to work hand in hand with the local teams,who were being exposed to new planning approaches; second, Cipta Karya could not adequately supervisethe preparation work of the consultant and local teams due to staff constraints; third, there was lack ofclarity concerniiig the size and both sectoral and geographic scope. However, the efforts have paid off;

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the cities have been following the IUIDP approach for their own expenditure planning since about 1990and have been closely involved in completing project preparation, and the in-house effort, assisted by aminimum of consultants, was a learning-by-doing exercise that has increased Cipta Karya's capability.

B. PROJECT OBJECTIVES

3.2 The 1994 Bank Group's Country Assistance Strategy for Indonesia, presented to the Boardshortly before the proposed project was appraised, highlighted the need to focus on interregional equity,delivery of higher quality services and enhanced competitiveness in a climate of macroeconomic stability.The 1995 CAS further endorses the Government strategy of outward-oriented, labor-intensive growth,more targeted delivery of social services, and more region-specific interventions. This will be addressedthrough a lending program of smaller, regional and more locally managed investments to overcomebottlenecks in infrastructure services and human resource development; decentralizing responsibilities andincreasing community participation are also part of the objectives, as is reducing pollution andenvironmental sustainability. This project is part of a series of urban development projects supported bythe Bank under the IUIDP framework in line with the above objectives. It will make a contribution inthese areas in the five largest cities in Kalimantan and has the following principal objectives: (a) improvethe provision of urban infrastructure services and the efficiency of urban investments, (b) promotestronger, more autonomous, and financially more independent municipal governments and PDAMs,(c) contribute towards poverty reduction, mainly through better access to essential services for the urbanpoor, and (d) improve the urban environment.

C. PROJECT DESCRIPTION

3.3 The project will support a 5 year program of high priority expenditures in the five cities(Banjarmasin, Balikpapan, Palangkaraya, Pontianak and Samarinda) in roads, water supply, drainage andflood control, human waste management, solid waste management, and KIP/MIP and infrastructure forpilot urban renewal schemes, complemented by local institutional development action programs toincrease the capacity of implementing agencies and revenue improvement action plans to improve weakmanagement and revenue generation and collection. The project is summarized below and is describedby city in Annex 2. The detailed plans, by year and financial source by component (the PJMs) are inseparate reports in project files (Annex 3).

3.4 Water Supply. The proposed project component includes in the five cities, investmentsin water treatment plants and transmissions and distribution networks, to increase and balance thesystems' capacities; also, investment in rehabilitation and leakage control, to reduce the high proportionof non-revenue water; and increased operations and maintenance. In all, the expenditures will allow some105,000 new connections to the piped water system, more reliable services, and better quality water.Feasibility studies and systems' optimisation studies have identified the exact sizes and lengths of pipes,reservoirs and booster pumps needed and their location in the cities for increased piped water distributionin accordance with estimated demand; preliminary engineering studies have been prepared defining thesize, type and location of new water treatment plants and their intakes; programs for leakage control,house and bulk water meter replacement and new installation are planned early under the project. Whilethe distribution systems will be laid in rights of way of roads, some land acquisition is necessary for 5new water reservoirs--a total of about I hectare--affecting, but not displacing, 5 families. Detailedengineering and procurement documents will be prepared under the project. The project will also assistin financing supervision of the works.

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3.5 The project also includes a) studies to identify future raw water sources; the currentsources in some cities are river locations subject to tidal variation and sea water intrusion; b) advisoryservices to improve management, operations and finances of the PDAMs.

3.6 Urban Roads: The five cities have an urban road network of some 1000 km includingnational, provincial and local roads. The project would improve its routine maintenance, contribute toperiodic overlays/rehabilitation of some 125 km and improve (widen, upgrade or other works) some 280km. In addition, the project would assist in constructing 30 km of new major roads needed toaccommodate traffic flows. Traffic management programs would be implemented in four cities.

3.7 Routine and periodic maintenance needs have been identified with the assistance ofconsultants and DGBM/Binkot, following accepted standards in the road administration. Costs have beenbased on standard material volumes and unit rates from previous contracts. Road improvements have beenprepared to preliminary design stage, in accordance with the function/traffic on the road. Final designsand procurement documents will be prepared as needed under the project. The new major roads--duallingthe airport access road in Pontianak, a new ring road/airport access road in Balikpapan and a new ringroad in Banjarmasin--require detailed designs, that will also be done under the project. The final designof the Banjarmasin ring road will include an environmental study to protect the wetland the road willtraverse.

3.8 Solid Waste Management: The component consists of construction of new final disposalsites for each city, procurement of bulldozers, dump trucks and containers and construction of transferstations. Some 32 ha have to be acquired for landfills, transfer depots and interim disposal sites in thefive cities. The identified landfill sites are on vacant land in low density suburbs. Care will be takenin not disrupting recycling activities currently undertaken by private operators.

3.9 Sanitation/Human Waste Disposal: The component includes construction of on-sitefacilities, including pilot schemes, of pilot sewerage/interceptor schemes and of septic sludge disposalsites, within the solid waste disposal sites, and procurement of septic sludge disposal trucks. The highwater tables of the project cities make technically ineffective standard on-site sanitation solutions. Theproject will try to identify more appropriate and cost-effective technologies through collaboration of thecentral and local public work agencies and communities in Banjarmasin, in a pilot effort. The results willbe used in the other cities, and education campaigns, especially targeted at women, will be undertakento improve sanitation.

3.10 KIP/MIP/Infrastructure for Low-cost Housing: This component aims at improving allpoor kampungs by 1999: 64 kampungs with an area of about 1000 ha would be upgraded throughprovision of roads/paths, drainage, sanitation and water supply, with community participation. Theproject would also provide infrastructure, mainly roads, for new low-cost housing developments coveringa total area of about 100 ha, and roads for 3 pilot urban renewal programs, covering 64 ha in down-townareas. And, the project would improve the infrastructure of 29 markets, with an area of 134 ha in verypoor condition.

3.11 Preliminary surveys and estimates have been made of the KIP/MIP needs by local andcentral agencies; consultants under the project will help in finalizing consultations with beneficiaries, finaldesigns/preparation and procurement documents either for small local contractors or for materialpurchases for self-help works. Preliminary designs have been prepared for the pilot urban renewalprograms, that will be undertaken with private participation outside the scope of the project; the projectwill assist with final design preparation of roads/paths and their construction. The new low cost housing

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developments are being built by GOI's housing agency, and the project will assist with the needed roadsand water supply. No land acquisition is required for these components.

3.12 Drainage: This component includes rehabilitation and improvement of primary andsecondary drains, normalization of river banks and deferred and incremental O&M. The final designsfor the drainage components will incorporate flood control system needs and will review the usefulnessof hydraulic flushing gates for selected locations.

3.13 Project Implementation Support TA: As described above, the project providesengineering services to help with final designs of works in the program and supervision of theirconstruction to be done by contractors. The administrative budget to handle the increased workload, 2percent of the base costs for water supply and 4 percent for other sub-sectors, has been included in theproject cost and will be provided domestically.

3.14 Institutional Development TA and Training: This component consists of assistance forprogram management and monitoring, municipal management, improved environmental and resettlementpractices, institutional capacity-building for each of the agencies and technical and management trainingfor the water enterprises. The project also includes assistance to Bappenas to further, country-wide, theIUDP concept and practice. The project includes the preparation of strategic urban plans and of medium-term expenditure programs (PJMs) to follow the proposed project period, but envisages that alternativesources of finance will be found later, when needed. Annex 7 provides a summary of the proposed TA.

D. PROJECT COSTS

3.15 The total cost of the project, as summarized in Table 3.1 is estimated at Rp 541.2 billion(US$251.3 million equivalent) including contingencies of Rp 78.8 billion (US$36.6 million) over theproject period, and taxes and duties of approximately Rp 45 billion (US$21 million). Direct and indirectforeign costs are estimated Rp 177.9 billion (US$82.6 million or about 33 percent of the total projectcosts). Base costs have been estimated as of appraisal date. Physical contingencies for civil works andequipment are estimated at 8 percent and price contingencies are estimated at 9 percent of the base costover the implementation period; physical contingencies are lower than average in other projects due tothe program nature of this project; cost of subprojects reflect preliminary estimates but the globalenvelopes are relatively firm, under the PJMs. Price contingencies reflect current Bank estimates ofdomestic (5 percent) and foreign (2.5 percent) inflation until 2001 and front loading of implementation.Interest during construction is estimated at US$1 1 million equivalent. The base cost of implementationsupport, engineering and supervision, is US$10.3 million (5 percent) and that of technical assistance andtraining, is US$1 1.7 million (5 percent). The share of total costs by city is as follows: Balikpapan 19percent, Banjarmasin 28 percent, Palangkaraya 11 percent, Pontianak 25 percent, and Samarinda 16percent. Details are in Annex 4.

E. FINANCING PLAN

3.16 The proposed Bank loan of US$136 million equivalent would repay the PPF of US$1.45million (plus accrued charges and interest) and finance 54 percent of total project costs, or about67 percent of the project costs net of identifiable taxes, increased administration budget costs andincremental O&M expenditures. The loan would cover foreign exchange costs of investment estimatedat US$75 million equivalent and local investment costs of US$61 million equivalent. Counterpart fundingwould be provided by the central government (US$42.9 million equivalent), provincial governments(US$3.2 million equivalent), local governments (US$41.0 million equivalent), and water enterprises(US$28.2 million equivalent). Further, the central and local agencies will fully fund current O&M for

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Table 3.1: PROJECT COST SUMMARY

Rp billion $ million % ofLocal Foreign Total Local Foreign Total Total

1. Water supply 53.5 41.4 94.8 24.8 19.2 44.0 212. Drainage 34.8 16.4 51.2 16.2 7.6 23.8 113. Urban roads 82.0 38.4 120.4 38.1 17.8 55.9 264. Solid waste 12.2 5.5 17.8 5.7 2.6 8.3 45. Human waste 19.5 5.9 25.4 9.0 2.8 11.8 66. KIP/MIP/Other 31.0 14.5 45.5 14.4 6.7 21.1 10

Subtotal 233.0 122.2 355.2 108.2 56.7 164.9 76

7. Incremental O&M 29.2 15.7 44.9 13.6 7.3 20.9 108. Imple. Support TA 17.3 5.0 22.3 8.0 2.3 10.3 59. Instit. Development TA14.7 10.6 25.3 6.8 4.9 11.7 510. Administration 11.2 0.0 11.2 5.2 0.0 5.2 2

Total Base Cost 305.4 153.4 458.7 141.8 71.2 213.0 100

Physical Contingencies 22.6 12.2 34.8 10.5 5.7 16.2 8Price Contingencies 35.3 8.7 44.0 16.4 4.0 20.4 9PPF Repayment - 3.7 3.7 0.0 1.7 1.7 1

Total Project Cost 363.3 177.9 541.2 168.7 82.6 251.3 118

Note: Due to rounding, totals may not add up.Base costs are in May 1994 prices.

infrastructure and interest during construction on subloans under their respective responsibilities estimatedto add US$48 million to the project cost. Annex 5 provides details of the financing plan; a summary isprovided in Table 3.2 below. Final financing plans for the central and local governments and PDAMswere confirmed during negotiations, and assurances were obtained regarding timely provision ofcounterpart funds. Budget approvals will be issued each project year by January 15 for PDAMs and MayI for other agencies.

3.17 On-lending. Of the Bank loan to the GOI, Rp 28 billion and Rp 44 billion (US$13million and US$20.5 million equivalent) are to be on-lent by the central government to the kotamadyasand to the water enterprises. The amount of borrowing was determined on the basis of the willingnessand financial capability of local governments and water enterprises to borrow under subsidiary loanagreements (SLAs) satisfactory to the Bank. Proceeds of the subloans would cover 91 percent of thecosts (excluding administration costs) to the kotamadyas and water enterprises under the project. Centralgovernment will bear the foreign exchange risk and the risk of interest rate variation. The lending termsof funds onlent through SLAs are for 20 years, including five years of grace and will carry a fixedinterest rate. The interest and commitment charges would be paid during the grace period. The interestrate for subloans is 11.5% p. a., the six-month average of the three month Sertifikat Bank Indonesia (SBI)rate prevailing at the time of appraisal. The onlending rate and amounts and draft SLAs were agreed atnegotiations. Final SLAs acceptable to the Bank should be completed for loan effectiveness and the

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Table 3.2: FINANCING PLAN

Local Foreign Total Local Foreign Total Percentage------- (Rp billion) ------- ------ (US$ million) ------

Central Government 87.2 5.2 92.4 40.5 2.4 a/ 42.9 17

Provincial Government 6.9 - 6.9 3.2 - 3.2 1

Local Government 84.0 4.3 88.3 39.0 2.0 a/ 41.0 16

PDAMs 53.2 7.5 60.7 24.7 3.5 a/ 28.2 11

IBRD 132.0 160.9 292.9 61.3 74.7 136.0 54

Total Financing 363.3 177.9 541.2 168.7 82.6 251.3 100

Interest During Construction (municipal & PDAM) 10.7 - 10.7Current O&M (municipal & PDAM) 27.6 9.2 36.9

38.3 9.2 47.6

a/ On incremental O&M, fully financed domestically.

overall SLA mechanism will also be discussed in the framework of a sectoral dialogue, as recorded inminutes of negotiations.

3.18 Central Government Non-Repayable Financing. Of the total central financing of projectcosts which are non-repayable by the local agencies, one part, Rp 44.2 billion (US$20.6 millionequivalent) consists of the formula driven and ad-hoc development grants (INPRES Dati II and INPRESJalan) that provide cash supplements to regional budgets (Annex 5). The other part, Rp 309.5 billion(US$143.7 million equivalent), consists of central government development budget (APBN) funds, whichcan also be divided into two parts. One part, about Rp 221.5 billion is for infrastructure and technicalassistance and is classified as central government responsibility. These are APBN DIP (national project)funds and would be distinguished in practical terms by having central government staff as projectmanagers (Pimpros) and assistant managers (Pimbagpros) responsible for signing contracts. The otherpart (Rp 88 billion) is central government grants to local and provincial governments on the basis of anapproved multi-year expenditure program (SPABP) for infrastructure and TA classified as provincial orlocal responsibility. Typically the projects financed under the SPABP are implemented and managed bythe staff or project managers of the local governments.

3.19 Regional Financing. About Rp 156.0 billion (US$72.4 million equivalent) or 28 percentof the total project costs would be financed from regional level resources. These resources include waterenterprise operating revenues (Rp 60.7 billion), second level regional government taxes, assignedrevenues, service charges and other local revenues (Rp 88.3 billion), and contributions from theprovincial government budgets (Rp 6.9 billion).

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3.20 Retroactive Financing. Retroactive financing for project expenditures started after May1994 hut before loan signing, could facilitate project implementation. Expenditure incurred for civilworks contracts and technical assistance and engineering services, would be eligible tor up to US$5million. Procurement should be in accordance with Bank procurement guidelines and procedures("Guidelines for Procurement under World Bank Loans and IDA Credits" of May 1992, as amended, and"Guidelines for the Use of Consultants by World Bank Borrowers and by World Bank as ExecutingAgency" of August 1981). A Project Preparation Facility in the amoupt of US$1.45 million had beengranted by the Bank and was used to finance part of the preparation services. The PPF, charges andaccrued interest will be repaid from the loan after its effectiveness.

4. PROJ.ECT IMPLEMENTATION

A. IMPLEMENTATION AGENCIES

4.1 Implementation of the project will follow standard IUDP procedures being applied under3 ongoing IUIDP Bank projects and one approved in FY94, although increasing attention is given toenvironmental and resettlement aspects. Existing organizations at the municipal level will be responsiblefor implementation of the project as mentioned below and schematized in Annex 6:

(a) Urban Roads and Traffic Management. The Roads and Bridges Section of theMunicipal Public Works Agency (DPU 11) is responsible for the construction, maintenance andsupervision of local roads and bridges. Provincial and national roads are the responsibility of theDirectorate of Urban Roads (BINKOT) in D.G. Bina Marga and its provincial offices (DPU 1).IEngineering consulting support is being provided under the project to assist the agencies.

(h) Water Supply. The PDAMs are responsible for implementing their respective programs.Consultants will be appointed by each PDAM under general guidance from Cipta Karya to help themimplement the programs. A project implementation unit will be set up in each PDAM.

(c) Solid Waste Management. Dinas Kebersihan (Cleansing Agency) in the municipalitieswill be responsible for solid waste management activities. It will be supported by technical assistanceto be managed under the PMU.

(d) Human Waste Disposal/Drainage. Dinas PU TkIl will be responsible for on-sitesanitation system activities and drainage improvements at the local government level. Implementationof pilot off-site systems will be the responsibility of DGCK.

(e) KIP/Infrastructure for Low-cost Housing. The municipal housing agency (DinasPerumahan) in each city will be responsible for the implementation of the KIP components. Consultantteams, providing assistance on the technical, financial, economic, institutional and environmental aspects,will be located in the Dinas Perumahan, but will be responsible to the Directorate of Housing, DGCK.

(t) MIP. The market agency in each city (Dinas Pengelola Pasar) prepares the plans and theDPU will be responsible for implementation of the MIP component of the project.

4.2 Provincial Agencies. Provincial governments of Kalimantan will have directimplementation responsibility for subprojects financed from INPRES I and APBD I funds, that are arelatively small share of the project funding. The provincial planning agencies (BAPPEDA I) assist localgovernments in the normal preparation of funding requests for approval by the central government.

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4.3 In order to ensure the availability of full-time staff in the implementation units, themunicipal governments will issue special Letters of Assignment to release staff from their regular duties.An IMG-approved draft of the official Instruction (SK) on Implementation Arrangements and a final draftof the Instructions from the city mayors on the establishment of the implementation units were availablefor negotiations. Staff for the units have been selected and will be trained prior to loan effectiveness.

4.4 In order to improve project implementation, the GOI will prepare and agree with the Bankon a training program within 6 months of loan effectiveness, aimed at development of local institutionalcapability more broadly (identifying who will provide each of the courses, the duration of each course,and the prior academic requirements of trainee applicants; and a detailed statement of how the localgovernments can access the training program for their staft).

4.5 Project Implementation Agreements (PIA). Project Implementation Agreements (PIA)have been drawn up between GOI. the five Kotamadyas, and their PDAMs confirming essentialunderstandings and commitments based upon the medium-term expenditure programs (PJM), financingplans, Revenue Improvement Action Plans (RIAP), Local Institutional Development Action Plans(LIDAP), and sound criteria for land acquisition and resettlement. Through the PlAs, Kotamadyas andtheir PDAMs commit themselves to comprehensive sectoral expenditure programs (including O&Mbudgets), specific revenue targets and measures to strengthen the institutional capabilities of urbanmanagements as included in this project. The investment and sector plans can be amended annually toreflect changing conditions during project implementation, as is the IUDP approach. Amendmentproposals, if necessary, should include an environmental assessment, a resettlement plan, and amanagement and monitoring plan. Draft PlAs acceptable to the Bank between GOI and the KotamadyasBanjarmasin, Balikpapan, Pontianak, Samarinda and Palangkaraya and their PDAMs were available atnegotiations and will be finalized by loan effectiveness.

B. PROJECT COORDINATION AND MONITORING

4.6 Central Agencies. Coordination and guidance for the project will be provided by theUrban Development Coordination Team (TKPP, composed of director-general level officials), with theassistance of the IUDP Implementation Management Group (IMG, composed of directorate-chief levelofficials). BAPPENAS chairs TKPP and IMG, and is responsible for daily management of the IUDPImplementation Support Unit. Overall responsibility for technical supervision and management of theproposed project in the central government will be assumed by DGCK and DGBM of MPW. DGCK andDGBM will also be responsible for direct implementation of infrastructure programs classified as centralresponsibility, assisted by the DGCK-based Central Project Management Office (CPMO) and CentralProject Finance Office (CPFO). Established under earlier urban projects financed by the Bank and otherdonors, the CPMO would be responsible for monitoring all program and subproject implementation. TheCPFO, similarly, was established under past projects and would be responsible for oversight, monitoring,consolidation, and preparation of all project accounts. It would also be responsible for preparing annualproject accounts for audits (see para 4.16) with the help of core consultants/staff resident in each of thefive cities assisting with technical auditing of the projects physical works.

4.7 Municipal Governments. Each municipal government will have primary responsibilityfor project coordination and monitoring at the local level. A Steering Committee (SC) and a TechnicalTeam (Tim Teknis) established at the local level planning board (BAPPEDA 11), functioning as a ProjectMonitoring Office (PMO), will provide overall guidance. A Project Management Unit (PMU) will beestablished under the Dinas PU by the city mayor to coordinate the activities of the units implementingthe various sector programs. Local Project Finance Offices (PFO) will be established under the

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jurisdiction of the finance section of each Mayor Secretary's Department for financial monitoring of theproject. The project will provide technical assistance to the municipal IUDP teams.

C. IMPLEMENTATION SCHEDULE

4.8 Project implementation is expected to commence in GOI's FY1995/96 and be completedover a five-year period ending FY2000/2001. The technical teams at the local level which will beresponsible tor implementation were involved during the preparation phase. The first year program willconcentrate on a) implementing relatively standard components that require little technical preparation,such as road overlays, KIP/MIPs, pipe and meter installations for water supply components; and b) inpreparing other components that require more detailed technical preparation, resettlement and landacquisition, and terms of reference for more detailed studies and follow up assistance. Theimplementation schedule is included in Annex 8.

4.9 In order to facilitate project implementation to start early a high priority technicalassistance and engineering services package has been identified for the required first year activities.Terms of reference, a shortlist of consultants and a letter of invitation were approved by the Bank andare in project files. A tirm had been preselected by negotiations; the selected firm is to start work beforeloan effectiveness with financing from another Bank loan.

D. PROCUREMENT AND DISBURSEMENTS

4.10 Procurement of civil works, goods and consultant services will follow Bank guidelines.Large civil works contracts costing US$3 million or more and goods contracts costing US$200,000 ormore will be procured following International Competitive Bidding (ICB) procedures, using the Bank'sstandard bidding documents (SBD). A General Procurement Notice would be issued in advance toencourage participation of eligible parties. Smaller civil works contracts, valued at less than US$3million up to an aggregate amount of US$113 million and goods contracts valued at less than US$200,000up to an aggregate amount of US$6 million would be procured under Local Competitive Bidding (LCB)procedures acceptable to the Bank (Table 4.1). Goods contracts for less than US$20,000 each up to anaggregate total of US$2 million, may be procured through prudent international and/or local shoppingunder procedures satisfactory to the Bank. All consulting services under the Bank loan would beprocured in accordance with the Bank guidelines for the use of consultants (para. 3.20). Domesticpreference would be provided during bid evaluation at a rate of 15 percent of the CIF price or theapplicable customs duty, whichever is lower for local manufacturers participating in the ICB procurementof goods.

4.11 Procurement Review. Civil works contracts exceeding US$I million equivalent in value,goods contracts exceeding US$200,000 equivalent in value, and consultant contracts with an estimatedvalue of US$100,000 or more for engagement of firms (US$50,000 or more tor the engagement ofindividuals) would be subject to prior review by the Bank. The balance of contracts for goods and civilworks, including those reimbursed under Statement of Expenditures (SOE), will be subject to selectivepost-review by the Bank. Contractors tor civil works exceeding US$1 million in value would be pre-qualified in accordance with procedures satisfactory to the Bank. Terms of reference for all consultantservices, including detailed engineering design and supervision, studies and other technical assistance,would also be subject to prior Bank review. The use of standardized bidding documents by the borrowerwill facilitate Bank review.

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Table 4.1: PROCUREMENT ARRANGEMENTS(US$ million) /a

Expenditure Category ICB LCB Other /b NBF /c Total Cost

Civil works 37.3 113.0 150.3(25.0) (74.7) (99.7)

Goods 10.0 6.0 2.0 12.0 30.0(10.0) (4.0) (1.0) (15.0)

Consultant Services:Engineering &Supervision 10.4 10.4

(9.0) (9.0)Technical Assistanceand Training 11.8 11.8

(10.6) (10.6)

Land, taxes and duties 21.0 21.0Incremental O&M and Administration 26.1 26.1

Total 47.3 119.0 24.2 59.1 249.6(35.0) (78.7) (20.6) - (134.3)

(PPF) (1.7)

/a Figures in parentheses are the respective amounts financed by the Bank./b Includes local and international shopping, and selection of consultants following Bank guidelines for

the use of consultants./c Not Bank financed.

4.12 Procurement Packaging. Where technically feasible and administratively practical,subprojects have been/will be packaged together for tendering. Procurement of physical components willbe kept separate for each agency (central and local governments, PDAMs) to avoid administrative delaysand complex payment procedures. Similarly, procurement will be kept separate for each sector (roads,drainage, etc.) as each contract will be administered by a different agency. However, consultant serviceswill be combined wherever feasible, e.g., support packages for studies, institutional strengthening for allcities, etc. Table 4.2 summarizes the number of ICB and LCB contracts expected by sector.

4.13 Disbursements. Loan disbursements would be made at the following rates for the variousexpenditure categories: (a) civil works, 60 percent; (b) 100 percent of CIF costs of directly importedgoods (ICB), and 100 percent of ex-factory costs, for goods supplied by local manufacturers, and65 percent of the costs of other locally procured goods; (c) subprojects under SLAs to local governmentsand water enterprises - 91 percent; and (d) consultancy services and training - 91 percent of the costs ofcontracts managed by the municipalities and PDAMs, and 80 percent of the costs of contracts managedby central government agencies except for the contracts signed before June 1, 1995 for which 91 percentapplies (Table 4.3). Domestic funding will be used for procurement of vehicles. No taxes will be paid

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Table 4.2: EXPECTED NUMBER OF ICB AND LCB PACKAGES BY SECTOR

Sector ICB LCB

Water 6 85Drainage 0 45Roads 6 45Solid Waste 5 45Human Waste 0 30KIP/MIP/renewal 0 70

Total 17 320

with loan proceeds. Disbursements by category by city are shown in Annex 9.

Table 4.3: DISBURSEMENTS

Category Amount Disbursement Rate(US$ equivalent)

(1) Civil Works 69,300,000 60%(2) Equip. & Supplies 5,400,000 100% of foreign expenditures

(excl. vehicles) 100% of local expenditures,ex-factory costs and 65% ofother items procured locally

(3) Goods and Works 33,500,000 91%under SLAs

(4) Consultants' Services& Training 19,600,000 80% (central) and 91 % (local) /a

(5) Refunding of PPF 1,700,000 100%(6) Unallocated 6.500.00

Total 136,000,000

Estimated IBRD DisbursementsIBRD FY 1995 1996 1997 1998 1999 2000

----------------------------- US$ million--------------------------Annual 3 32 42 42 14 3Cumulative 3 35 77 119 133 136

/a 91 % also applies for services contracted by the Central government prior to June 1, 1995.

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4.14 To facilitate loan disbursements, a Special Account will be opened by the Ministry ofFinance in Bank Indonesia for withdrawals against all eligible foreign and local expenditures. Theauthorized amount of the Special Account is US$5 million. This account would be maintained in USdollars, with an initial deposit of US$3.5 million. When disbursement will have reached US$7 million,the Special Account deposit can be increased to US$5 million. Withdrawal applications would be fullydocumented, except for civil works contracts below US$1 million equivalent and equipment contractsbelow US$200,000 equivalent, and consulting firms valued below US$100,000 equivalent and individualconsultants valued below US$50,000 equivalent, and all the training, for which the use of Statement ofExpenditures (SOEs) would be required. Replenishment of the Special Account would be made on amonthly basis or when 20 percent of the initial deposit has been used, whichever comes first. Detailedsupporting documentation for SOEs would be retained by DG TUA and the implementing agencies andmade available to the Bank for review on request. Assurances were provided at negotiations thatpayments to local contractors including contracts under SLAs, would be made from the KPKN Treasuryoffices in the respective provincial capitals (as is being done normally with SPABP payments).

4.15 The proposed disbursement period of five years is somewhat less than the disbursementprofile for IUIDP projects in Indonesia. However, as this project has been prepared taking into accountthe start up problems encountered in the earlier projects, and thus steps taken to (a) mobilize early theconsulting services, (b) use up to US$400,000 from the Jakarta Urban Development Project II for startingsome project activities prior to loan effectiveness; and (c) assure availability of counterpart funds for thefirst year, it is considered achievable. The project completion and loan closing dates are December 31,2000 and June 30, 2001 respectively. The estimated schedule of disbursements and the relateddisbursement profile are shown in Annex 10.

E. PROJECT ACCOUNTS AND AUDITS

4.16 The finance offices of each implementing agency are responsible for project accountingand audit arrangements. At the local level the Finance Offices (FOs) in each city will maintain accountsfor project related expenditures financed by all sources of funds for all project components, includingthose relating to the PDAMs. Each PDAM will maintain a separate account for the project. At thenational level, the Central Project Finance Office (CPFO) in Cipta Karya will prepare project accountsof all components implemented directly by the central agencies. CPFO will also be responsible forconsolidating quarterly project accounts for the entire project and submitting them annually for audit bythe government auditors, Badan Pengawasan Keuangan dan Pembangunan (BPKP). CPFO will alsocoordinate separate audits of the SOEs with the Directorate General for Budget, Bank Indonesia, and thecentral office of the State Audit Board.

4.17 Assurances were provided during negotiations that the consolidated project accounts,including the Special Account and SOEs, as well as the overall accounts of the PDAMs, will be auditedannually by independent auditors in a manner satisfactory to the Bank and that the audited projectaccounts would be submitted to the Bank no later than six months after the end of each fiscal year,commencing FY95/96. Audits of PDAMs overall financial statements should be retained at each PDAMfor review by Bank missions. In addition to financial audits, assurances were obtained at negotiationsthat GOI will also appoint the Inspectorate General of the Ministry of Public Works and the provinciallevel Inspectorates as auditors for technical audit of project implementation including, inter alia, civilwork contracts, procurement of goods and training programs, in a manner satisfactory to the Bank.Domestic sources will fund the audits. The first technical audit will be discussed with the Bank no laterthan I year after loan effectiveness; and at regular I year intervals thereafter. Terms of reference forboth financial and technical audits will be finalized by GOI in consultation with the Bank.

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F. PROJECT REPORTING, MONITORING AND BANK SUPERVISION

4. 18 DGCK, with assistance from its CPMO and CPFO, will prepare and submit to the Bankquarterly progress reports (QPR) on the basis of inputs from the five cities and implementing agenciesof the central government, with an overall summary and covering the progress on: (a) physical aspectsof each component; (b) institutional development (LIDAP) and revenue improvement (RIAP) actions; (c)consulting services; (d) compliance with loan agreement covenants; (e) administration and finance,including project cost, commitment and disbursement schedule; and (f) a list of actions to be taken bythe various parties. The progress reports substance including performance indicators, and the format willbe discussed at the workshop for the project launch scheduled for April 1995 (as recorded in the minutesof negotiations). QPRs would be submitted within 45 days from the end of each quarter, starting withthe quarter ending December 31, 1995. On completion of the KUDP, the DGCK, assisted by the fivecities, would prepare a Implementation Completion Report within 6 months after the loan closing date,for review by GOI and the Bank.

4.19 The project would require some 30 staff weeks of Bank supervision each year during thefirst two years and 20-25 staff weeks annually in the subsequent years of the project (Annex 11).Supervision missions would include engineering, institutional, financial and environmental expertise. Themissions will review the yearly plans and budget proposals not later than November 30 each project year.After completion of two proj