Document of The World Bank

Report No: 25820

PROJECT APPRAISAL DOCUMENT

ON A

PROPOSED LOAN

IN THE AMOUNT OF US$17.1 MILLION

TO THE

REPUBLIC OF INDONESIA

FOR A

PRIVATE PROVISION OF INFRASTRUCTURE TECHNICAL ASSISTANCE LOAN

April 25,2003

Infrastructure Unit East Asia and Pacific Region

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CURRENCY EQUIVALENTS

(Exchange Rate Effective 03/10/2003)

Currency Unit = Rupiah Rp 100 = US$O.O11

US$1 = Rp 9000

Bappenas BOT BUMD BUMN CIDA cso DIT? DPR EA GO1 Greenfield GTZ ICR IPP Jabotabek JARNS Jasa Marga JBIC Keppres Keuangan Kimpraswil KKPPI Krismon M O C M S R I NGO OCMEA OED PAD P3 or PPP Perhubungan Pimpro P I U P L N P M U PPA PPIAF

FISCAL YEAR January 1 -- December 3 1

ABBREVIATIONS AND ACRONYMS

National Development Planning Board Build, Operate, Transfer Badan Usaha Milik Daerah - Enterprise owned by local government Badan Usaha Milik Negara - Enterprise owned by central government Canadian International Development Agency Community Service Organization Annual government budget allocation National parliament Executing Agency Government o f Indonesia Absence o f pre-existing infrastructure German Aid Agrency Implementation Completion Report Independent Power Producer Jakarta, Bogor, Tangerang and Bekasi Java Arterial Road Network Study State-owned tol l road company Japan Bank for International Cooperation Keputusan Presiden - presidential decision Ministry o f Finance Ministry o f Settlements and Regional Infrastructure Committee on Policy for the Acceleration o f Infrastructure Development K r i s i s Monetar - Monetary Crisis (1997-99) M n i s t r y o f Communications Ministry of Settlements and Regional Infrastructure Non-Government Organization Office o f the Coordinating Ministry for Economic Affairs Operations Evaluation Department (World Bank) Project Appraisal Document Public-Private Partnership Ministry o f Communications Project Manager Project Implementation Unit State Electricity Company Project management Unit Power Purchase Agreement Public-Private Infrastructure Advisory Facility (multi-donor)

PPITA Propenas National Five-Year Development Program SOE State-Owned Enterprise TAP41 Technical Assistance Project for the Public and Private Provision o f Infrastructure (2

projects) UNCHS United Nations Center for Human Settlements USAID United States Agency for Intemational Development Watsal Water and Sector Adjustment Loan

Private Provision o f Infrastructure Technical Assistance (Project)

Vice President: Jemal-ud-din Kassum Country ManagerDirector: Andrew D. Steer

Sector Managermirector: Keshav Varma Stephen R. Dice Task Team Leader/Task Manager:

INDONESIA PRIVATE PROVISION OF INFRASTRUCTURE TECHNICAL ASSISTANCE LOAN

CONTENTS

A. Project Development Objective Page

1. Project development objective 2. Key performance indicators

B. Strategic Context

1. Sector-related Country Assistance Strategy (CAS) goal supported b y the project 2. Main sector issues and Govemment strategy 3. Sector issues to be addressed by the project and strategic choices

2 2

2 3 9

C. Project Description Summary

1. Project components 10 2. Key policy and institutional reforms supported by the project 3. Benefits and target population 4. Institutional and implementation arrangements 5. The Indonesian Pilot for Enhanced Disclosure o f Information being pursued in the context

11 11 11 12

o f the Bank’s revised Information Disclosure Policy

D. Project Rationale

1. Project alternatives considered and reasons for rejection 2. Major related projects financed by the Bank andor other development agencies 3. Lessons learned and reflected in the project design 4. Indications o f borrower commitment and ownership 5. Value added o f Bank support in this project

E. Summary Project Analysis

1. Economic 2. Financial 3. Technical 4. Institutional 5. Environmental 6. Social 7. Safeguard Policies

13 15 20 22 22

24 24 24 24 26 26 27

F. Sustainability and Risks

1. Sustainability 2. Critical r isks 3. Possible controversial aspects

G. Main Loan Conditions

1. Effectiveness Condition 2. Other

H. Readiness for Implementation

I. Compliance with Bank Policies

Annexes

Annex 1: Project Design Summary Annex 2: Detailed Project Description Annex 3: Estimated Project Costs Annex 4: Cost Benefit Analysis Summary, or Cost-Effectiveness Analysis Summary Annex 5: Financial Summary for Revenue-Earning Project Entities, or Financial Summary Annex 6: (A) Procurement Arrangements

(B) Financial Management and Disbursement Arrangements Annex 7: Project Processing Schedule Annex 8: Documents in the Project Fi le Annex 9: Statement o f Loans and Credits Annex 10: Country at a Glance Annex 11: Summary of Project Environmental and Social Safeguards Process Annex 12: (A) Baseline Conditions

Annex 13: Subproject Screening and Selection Criteria Annex 14: (A) M S R I Private Sector Participation Framework Assessment

(B) M O C Private Sector Participation Framework Assessment (C) C M E A Country Private Participation in Infrastructure Framework Assessment

(B) Init ial Workplan Matr ix

Annex 15: Anti-Corruption Action Plan

28 28 29

29 29

31

31

32 37 43 44 45 46 54 64 65 66 68 70 79 86 90 95 97 99

101

MAP(S) none

INDONESIA Private Provision of Infrastructure Technical Assistance Loan

Project Appraisal Document East Asia and Pacific Region

EASUR

Date: April 25,2003 Sector Manager: Keshav Varma Country Managermirector: Andrew D. Steer Project ID: PO7627 1 Lending Instrument: Technical Assistance Loan (TAL)

Team Leader: Stephen R. Dice Sector(s): General industry and trade sector (100%) Theme(s): Infrastructure services for private sector development (P)

IBRD Total:

[XI Loan [ ]Credit [ ]Grant [ ]Guarantee [ ]Other: For Loans/Credits/Others: Loan Currency: United States Dollar Amount (US$m): 17.1 Borrower Rationale for Choice of Loan Terms Available on File: Yes Proposed Terms (IBRD): Variable-Spread Loan (VSL) Grace period (years): 5 Commitment fee: 0.75%

Years to maturity: 20 Front end fee (FEF) on Bank loan: 1.00% Payment for FEF: Capitalize from Loan Proceeds

12.10 5.00 17.10 14.00 5 .OO 19.00

Borrower: REPUBLIC OF INDONESIA Responsible agency: OFFICE OF COORDINATING MINISTRY FOR ECONOMIC AFFAIRS (OCMEA) Address: Gedung Utama Dep. Keuangan (#502), J1. Lapangan Banteng Timur 2-4, Jakarta 107 10 Indonesia Contact Person: Mr. Jinny Katuuk, Deputy 11 Coordinating Ministry for Economic Affairs Tel: 62-21-351-1462 Other Agency(ies): KKPPI SecretariatelPPITA-PMU Address: Menara Kebon Sirih- Lt.15- Room 1503; Jalan Kebon Sirih 17-19; Jakarta Pusat Contact Person: Dr. Bambang Susantono, Head of Project Management Unit (PMU)-PPITA Tel: 62-21-3983-6556 Fax: 62-21-3983-7053 Email: ppita-id@yahoo.com

Fax: 62-2 1-35 1- 1644 Email: jinny.ck@ centrin .net.id

Estimated Disbursements ( Bank FY/US$m):

Cumulative Project implementation period: 3 years Expected effectiveness date: 0613012003 Expected closing date: 1213 112006

A. Project Development Objective

1. Project development objective: (see Annex 1)

The project's development objective i s to assist GO1 develop and implement the policy and regulatory reforms and build the institutional and social foundations needed to enable, promote and facilitate efficient and sustainable large-scale private investment in infrastructure.

2. Key performance indicators: (see Annex 1)

The key performance indicators w i l l include:

Sound cross-sector policies for promoting and realizing public-private partnerships (P3) in infrastructure are developed and operationalized. Improved sector policies, regulations and procedures enable and facilitate efficient private investment in infrastructure. Independent / non-ministerial regulatory bodies wi th sound operating procedures and capable staff are established for key sectors. Organization structures, skill-mixes, and cultures o f sector ministries are changing to reflect the further evolution of government's role f rom provider o f infrastructure to enabler o f P3 in infrastructure. Key government and public enterprise officials have an improved understanding o f the prerequisites for successful P3 in infrastructure. Reliable and up-to-date information relating to P3 policies, regulations, best practices and project opportunities i s readily accessible and where appropriate effectively disseminated. Public awareness and acceptance o f the needs for and benefits o f well-managed P3 in infrastructure i s increasing.

Note that i t i s not considered appropriate to adopt outcome indicators relating to number and value o f private infrastructure projects transacted for the fol lowing reasons:

(a) the full impacts o f most o f the activities to be supported under the project wi l l at best not be felt until towards the end o f the implementation period-for example, new regulatory agencies need time to establish credibility-while preparing, tendering, negotiating, and reaching financial closure on private infrastructure projects typically takes several years;

(b) the successful implementation o f the project activities i s viewed as a necessary but not a sufficient condition for restoring large-scale private infrastructure investment, and substantial progress wi l l also be needed in other key areas affecting the overall investment climate.

B. Strategic Context 1. Sector-related Country Assistance Strategy (CAS) goal supported by the project: (see Annex 1) Document number: 21580-IND Date of latest CAS discussion: January 30, 2001 for Full CAS: 2002 CAS Progress Report (Document No. 24608) discussed with Board on September 3, 2002

The Indonesia Country Assistance Strategy for FY 200 1-2003 identifies three broad avenues through which the Wor ld Bank Group w i l l pursue i t s overarching goal o f reducing poverty and

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vulnerability in a more open and decentralized environment, namely:

0 Sustaining economic recovery and promoting broad-based growth; 0 Building national institutions for accountable government; and

Delivering better public services for the poor.

The proposed project w i l l support all three o f these avenues, but i s focused primarily on sustaining economic recovery and promoting broad-based growth.

The CAS recognizes infrastructure bottlenecks could become a drag on growth as economic recovery takes hold. I t notes that public spending on infrastructure maintenance and preservation has declined since the onset o f the crisis, and that Indonesia’s ability to develop new capacity in line with growing demands wi l l be constrained by long project preparation and implementation lead-times as well as by financing capacity. The CAS also recognizes that decentralization wi l l complicate the challenges, and that service standards and investments may further deteriorate and inter-regional linkages may suffer while responsibilities are being clarified. The adopted assistance strategy accordingly aims at:

providing assistance for essential investments in maintenance and rehabilitation through ongoing and proposed investment projects; improving the policy and legal framework for key sectors to facilitate competitive private sector investment, including through better cost-recovery, phasing-out o f inefficient subsidies, development o f regulatory capacity, and restructuring o f sector entities. facilitating implementation o f agreed government reforms through joint action by the donors and contributing to financing o f future infrastructure needs by mobilizing co-financing from ADB, JBIC, and others, and, where appropriate, using the Bank Group’s various instrument ’ s-including guarantees.

The project i s specifically designed to support the second element o f this support strategy,

The reforms that w i l l be needed to enable and attract efficient and sustainable private investment in infrastructure -including improved legal and regulatory frameworks, more capable institutions, cost-reflective pricing, and more transparent procedures and processes-will also contribute to improving public sector accountability and delivery o f better public services for the poor. For example, adoption of transparent competitive processes for involving the private sector in public service delivery wi l l help address one o f the more visible areas o f corruption during the build-up to the crisis, while increased competition in service delivery should help improve quality and efficiency and lead to lower prices in sectors that are currently dominated by inefficient SOEs. Likewise, the introduction o f negative concessioning-possibly supported by output-based aid-will help improve access to public services at least cost. More generally, efficient private participation should relieve the fiscal burden and hence free-up government resources for expenditure programs specifically designed to help the poor.

2. Main sector issues and Government strategy:

Background: Indonesia has long recognized the vital role o f basic infrastructure in enabling and supporting sustained and rapid economic development, and in improving public welfare and

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opportunities for the poor. This i s reflected in the high priority accorded to the expansion, rehabilitation and-somewhat more recently-sound maintenance o f transport, energy, urban and other infrastructure under six successive Five-Year Development Plans (Repelitas) and the current National Development Program (Propenas 2000-2004).

For many years infrastructure provision had remained-with few exceptions-the exclusive preserve of government and state-owned enterprises (SOEs). B y the late 1980s, however, i t was clearly evident that the public sector was no longer able to finance all needed investments in new infrastructure capacity and, moreover, that government agencies and poorly performing public corporations lacked the managerial capacity to deliver services to the standards increasingly demanded by users. Indonesia accordingly embarked upon parallel programs to promote private investment in new infrastructure projects and to reform and privatize i t s many (160+) SOEs.

The first major private infrastructure project was the Cawang-Tanjung Priok section of Jakarta’s inner ring toll road, construction o f which commenced in the mid-1980s. This originated with an unsolicited proposal from a politically-connected group that was able to drive the concession negotiation process and secure financing largely from public sector sources. A far more significant step was taken in the power sector in 1990, when Government solicited proposals for Indonesia’s f i r s t Independent Power Producer (IPP) project, a 1,200 MW coal-fueled station in East Java. The Power Purchase Agreement (PPA) for Paiton I was signed in early 1994 and financial closing was achieved in April 1995, with debt financing provided by a combination of export credit agencies and commercial lenders. Many other private infrastructure projects, most unsolicited, were by then already in the pipeline and-when the economic crisis struck in the second half o f 1997-Indonesia had committed to long-term power purchase agreements with 26 independent power producers and awarded concessions for numerous toll road, telecoms, water supply, and other projects. In l i t t le over three years from the Paiton I PPA signature, over US$20 billion in investment commitments had been secured for private infrastructure projects, dominated by electricity (US$10.2 bn), telecoms (US$8.4 bn), and transport (US$2.1 bn). In stark contrast, the SOE reform and privatization program had moved very slowly. Nine years after i t s launch, GO1 had sold only minority stakes in only a handful o f SOEs, o f which only two (Telkom and Indosat) were infrastructure providers.

In summary, Indonesia’s strategy for involving the private sector in infrastructure provision centered mainly on the development o f new “greenfield” projects rather than on transformation o f public infrastructure enterprises. Implementing projects took precedence over improving policies and regulations, with the eagerness shown by private equity investors and lenders helping to dissuade Government from pursuing much-needed structural reforms. Lit t le progress was made towards improving pricing policies and eliminating untargeted subsidies, or to introducing competitive market structures and establishing sound regulatory arrangements. The procedures by which private partners were appointed were generally opaque, with the vast majority o f projects being either unsolicited or otherwise awarded through non-transparent processes to consortia with “politically connected” local partners.

Impacts of the Economic Crisis: Private infrastructure projects-and particularly those with foreign financing--were quickly impacted as the Rupiah plunged. In September 1997, Keppres 39 o f 1997 decreed that many major investment projects, including private infrastructure schemes for which contracts had already been signed, were to be postponed or reviewed.

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Subsequently, other private projects that had been cleared to proceed failed to reach financial closing or were halted as their financing sources dried-up. Affordability concerns and mounting social pressures caused Government to abandon automatic tariff adjustment mechanisms in the power and telecoms sectors and defer other tariff increase proposals, thereby affecting the commercial viability o f private projects already in operation or close to completion. Agreements for most operating and committed private projects-including all IPPs-were “re-opened”, with the subsequent renegotiations generally proceeding slowly. Sponsors generally accepted the need to renegotiate, and several subsequently agreed to “close-out” their projects. However, a few opted for international arbitration and / or to claim under political risk insurance, and decisions to date have so far favored the project sponsors.

The rate o f growth in demand for infrastructure services i s showing signs o f picking-up as Indonesia slowly emerges from the crisis,. However, severe constraints on the State Budget have necessitated sharp cutbacks in the level of development spending, while most infrastructure SOEs are in very poor financial shape. With the flow o f new private investment for infrastructure having all but ceased, there i s l i t t le new infrastructure capacity currently under construction while in some sectors-such as roads--existing assets are deteriorating as a result of inadequate maintenance. This, coupled with the long lead-times for developing new capacity, poses the risk that infrastructure constraints w i l l impede restoration o f rapid and sustainable economic growth and limit the quality and coverage of public services for the poor.

Key Challenges: The public sector was unable to finance all needed infrastructure investments before the crisis, and i t s capacity to do so now i s much diminished. Unless Indonesia i s prepared to accept further deterioration in l iving standards, i t wi l l need to mobilize substantial new private resources while striving to optimize the utilization and financial self-sustainability of existing assets. Securing renewed private sector participation on reasonable terms w i l l be extremely difficult in the present environment, and w i l l require Government to confront several difficult and inter-related challenges. These can be grouped into four broad areas:

1. Restoring Indonesia’s overall attractiveness to investors. The level o f new investment in Indonesia, and particularly new foreign direct investment, has slumped since the onset o f the crisis. While many other countries in the region also suffered badly during 1997/98, Indonesia fe l l further and has since recovered more slowly due to a combination of factors including political uncertainty, systemic corruption, a dysfunctional judicial system, and sporadic social unrest and disorder. The magnitude o f the challenges now facing Government in seeking to attract new investment i s starkly reflected in assessments that show Indonesia as having one o f the highest country risk ratings in the region, and being among the most corrupt countries in the world.

2. Restoring Indonesia’s attractiveness to infrastructure investors. Infrastructure projects are characterized by their capital-intensity, long lead-times, long pay-back periods, and-in some instances-social sensitivity. Globally, investor appetite for infrastructure opportunities i s likely to have been impacted by the fall-out from California’s power crisis, the Enron collapse, and the bursting o f the G3 mobile telephony bubble. Even without these external factors, Indonesia faces a much tougher task in persuading investors to commit to infrastructure schemes than, say, to labor-intensive manufacturing (and even here the picture remains somewhat bleak!). Meeting the challenge wi l l require concerted action on several

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fronts.

Tarifland Subsidy Reform: Tariffs in many infrastructure sectors remain well below the levels needed for long-term commercial viability. A rapid transition to cost-covering tariffs, coupled with mechanisms for delivering well targeted subsidies to the most needy, i s needed to restore fiscal sustainability and attract new private investment. Modem Regulatory Frameworks: Heightened perceptions o f country risk mean that private investors and their lenders wi l l be much more demanding as regards the clarity, predictability, and credibility o f regulatory frameworks. New models o f arm's length regulation have been under study for some years, but decisions need to be taken, new laws enacted, and new institutions put in place. As part o f this process, the additional regulatory uncertainties arising from regional autonomy need to be resolved. Other Risk Mitigation Measures: Investors in new infrastructure projects in Indonesia wi l l likely demand some form o f public support to mitigate country and project risks. Even in ordinary circumstances, such support packages require careful design to avoid expanding public exposure beyond prudent levels or undermining incentives for efficient risk bearing. Formulating sound policy and strategy in the current circumstances wi l l be extremely challenging. Procurement Processes: In order to provide comfort to prospective investors, help rebuild the legitimacy of private infrastructure in the eyes of local stakeholders, and help ensure the best terms possible for the country, private partners wi l l need to be chosen through fully transparent, competitive processes so as to preclude later claims that projects were awarded corruptly. Disputes on Existing Private Projects: Until disputes concerning existing projects are satisfactorily resolved, Indonesia w i l l find i t difficult to persuade mainstream private investors, lenders and insurers to return. Moreover, the manner in which Indonesia handles ongoing disputes on private infrastructure projects may have more general implications for future foreign direct investment flows. Link with SOE Privatization: To realize the full potential benefits o f private participation, Government w i l l need to accelerate the restructuring and privatization o f infrastructure SOEs. In addition to generating resources for the Government, this w i l l help enable effective competition and enhance efficiency and service quality. I t can also help lock-in cost-covering retail tariffs, thus ensuring investments in new wholesale facilities--such as power plants-will have credit-worthy customers. Preparation of sound projects: Many o f the projects that were offered to the private sector in the past were poorly prepared and, in some instances, ill-chosen. In seeking to persuade private investors to return quickly, Indonesia w i l l need to be able to offer well conceived and prepared schemes that are amenable to early and rapid implementation. Building institutional capacities: Concerted efforts w i l l be needed to strengthen the capacity o f the central and regional agencies and enterprises charged with developing and implementing policy and regulatory reforms and with dealing with prospective private investors. Few central government officials and SOE staff currently have relevant training, in part because there are few, if any, quality programs offered in Indonesia. Even fewer have sound practical experience as most o f the private infrastructure deals concluded pre-crisis were concentrated in a few sectors and originated with unsolicited

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proposals. And the situation i s worse at the sub-national level.

3. Building domestic financing capacities: To reduce the impact of currency risks, Indonesia w i l l need to strengthen i t s domestic capacity to finance infrastructure projects. Success with financial sector restructuring wi l l help, but there may also be a need and opportunity to develop new infrastructure-specific financing mechanisms and instruments.

4. Building public acceptance of private infrastructure. There are continuing indications o f strong resistance to restoring private investment in infrastructure, both from within the public sector and from civ i l society. Three underlying causes can be identified:

0 Private participation requires sector departments and infrastructure SOEs to accept a paradigm shift in their roles and in the way they do business. I t also requires effective inter-agency cooperation and coordination, areas where Indonesia has traditionally not been strong. Experience with the privatization program suggests that securing the needed cultural changes w i l l be a slow and difficult process in the absence o f concerted efforts to anticipate and deal with problems. Closely linked with this, involving the private sector in traditional public sector domains through transparent processes w i l l likely threaten vested interests by squeezing opportunities for supplementing personal incomes or diverting funds for political ends. The public's perception o f private infrastructure delivery has been colored by vigorous--but often poorly-informed--debate on the failings o f the power, toll-road, water supply, and telecoms deals concluded during the Suharto era. This i s reflected in the negative stance o f many civ i l society organizations, which in turn i s open to exploitation by those with vested interests in maintaining the status quo.

Recent achievements. The Government has recognized the importance o f addressing these challenges, and has prepared the draft o f an Infrastructure "White Paper" which overviews current status and issues in each o f the major infrastructure sectors. A draft o f this paper, prepared by the Infrastructure Deputy Chairman o f BAPPENAS, was presented at the annual Consultative Group on Indonesia (CGI- donors forum) meeting in January o f 2003 as a discussion paper for further refinement based on additional sector studies and other inputs expected. I t i s hoped that a "final" version of the paper wi l l be ready for Cabinet discussion by late 2003. One additional input to this process and to guide future Bank activities in the infrastructure sectors i s a planned AAA review o f priority infrastructure issues in Indonesia during the current Bank FY 03 (report to be completed by June 2003). This work has been focused on power, transport, water supply, telecommunications and rural infrastructure sectors due to resource constraints, but w i l l provide valuable insights to the options for Bank and GO1 cooperation in "Averting The Coming Infrastructure Crisis in Indonesia", as the report i s tentatively titled. These reports wi l l serve as a well-advanced starting point for the sector assessments and strategy options work o f the advisory teams to be mobilized by the project, and facilitate the development o f the Country Framework Assessment for PPI (per PPIAF guidelines - see Annex 14) now incorporated in the draft TOR for the OCMEA advisory team. Additionally, GO1 has already made significant progress in several areas, including:

Tarqfand subsidy policy. The Government has announced i t s commitment to restoring the

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power tariff to i t s pre-crisis US$ level by 2005. A series of substantial increases has already been implemented, with the main brunt having so far fallen on large consumers, and a targeted subsidy scheme has been introduced to protect very small residential customers. Tariffs have also been increased in several other sectors, including--after much delay--fixed-line telephone services. However, the picture i s far from uniform and--for example--toll road tariffs have not increased since 1992.

0 Regulatory reform: Presidential Decree 7 o f 1998 (Keppres 7), issued in January 1998, provided an important f i rst step towards establishing a overarching framework for private participation in infrastructure projects, including on matters such as the choice o f projects to be offered for private participation, the processes for selecting private partners and dealing with unsolicited proposals, and basic principles relating to provision o f public supports. Achievements at the sector level include: o Telecommunications: A new Telecommunications Law, passed in 1999, has enabled

more effective competition by removing the “exclusivity” and other special rights previously enjoyed by the two partially privatized SOEs, PT Telkom and PT Indosat.

o Oil and Gas: A new O i l and Natural Gas Law, approved by the DPR in October 2001, provides among others for the removal o f Pertamina’s downstream monopoly and the establishment o f an independent regulatory body whose key duties w i l l include regulation of gas transportation infrastructure.

o Electric Power: The DPR has also adopted a new Electricity Law in September 2002 that would enable bulk and retail competition and permit the vertical and horizontal unbundling o f P L N in line with the policies mapped out in the Government’s August 1998 White Paper. The law also provides for the establishment o f an independent regulatory agency, and o f a mechanism for channeling targeted subsidies and supports, although not yet implemented.

o Water: The Bank-financed WATSAL sector policy reform initiative i s supporting the amendment of water resources legislation that would, inter alia, enable private participation in water resources development. In September 200 1 DKI Jakarta established Indonesia’s first urban water supply regulatory body and a number o f municipalities, including Pekan Baru, are also now exploring such arrangements.

o Transport: Government has recognized the need to revise existing modal laws for Transport (Roads, Roads Traffic and Transport, Railways, Sea and Inland Waterway Transport, and Civi l Aviation) to align with the laws relating to regional autonomy and to broaden the modalities for private participation, and preliminary discussions have started for some sectors (e.g., maritime transport).

Infrastructure SOE Restructuring and Privatization. Progress on SOE reform and privatization accelerated sharply in the period immediately following the onset o f the crisis, although i t has since slowed again. A master plan for SOE reform and privatization was launched in December 1999 and several significant transactions were concluded shortly thereafter, including sales of stakes in two international container terminal concession companies (Jakarta and Surabaya) and o f a further stake in PT Telkom. Political commitment then faltered in the face of public opposition to privatization in general and privatization o f infrastructure SOEs in particular. Another private placement o f shares in PT Telkom was concluded in late 2001, and GO1 i s now completing arrangements for PT Indosat

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to be majority private-owned as a result o f a late-2002 tender and i s acting to address the serious concerns created by i t s failure to conclude the planned further privatization of Semen Gresik in late 200 1.

Inter-Agency Coordination. In June 200 1 the Government established a Minister-level Committee on Policy for the Acceleration of Infrastructure Development (KPPI Committee). The Committee i s chaired by the Coordinating Minister for Economic Affairs, and i ts other members include the Ministers for Finance, National Planning (Bappenas), and the key infrastructure sectors. KKPPI’s duties include: (a) formulating policy and strategy for accelerating infrastructure development, including through creating a climate conducive to private investment and participation; (b) coordinating integration o f plans and programs and monitoring implementation o f adopted policies and resolving emerging problems; and (c) preparing an improved cross-sectoral regulation on public private partnerships to replace Keppres 7. The Committee i s assisted by a Secretariat and supported by a Sub-committee for Planning and Investment, both o f which are already operational. Work on the revision o f Keppres 7 i s now well advanced.

3. Sector issues to be addressed by the project and strategic choices:

The Project wi l l assist Government’s efforts to address two o f the four broad challenges highlighted in Section B.2, namely restoring Indonesia’s attractiveness to private infrastructure investors, and promoting better public understanding and acceptance o f private participation in infrastructure provision. I t w i l l focus in particular on the following areas:

Improving cross-sectoral and sectoral policies and strategies, regulatory frameworks, and related operating practices and procedures. Strengthening the organization and capacities o f regulatory bodies and other key sector agencies, and enhancing inter-agency coordination and cooperation.

0 Improving the availability, accessibility, dissemination and sharing o f information on or relevant to private infrastructure development. Building public understanding o f the need for, approaches to, and benefits o f well managed private participation in infrastructure delivery. Supporting the preparation o f an initial set o f demonstration infrastructure projects that are feasible for private investment.

Restoration o f efficient large scale private investment in infrastructure i s an imperative rather than an option if Indonesia i s to achieve rapid and sustainable economic growth, and in this sense the design o f the project does not entail making strategic decisions, rather the project seeks to enhance GOI’s capacity to make such decisions during the course of the project. Many of the technical assistance services to be undertaken under the project w i l l involve identifying and evaluating options for how best to realize such investment.

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C. Project Description Summary 1. Project components (see Annex 2 for a detailed description and Annex 3 for a detailed cost breakdown):

Overview

The project i s designed around and to support two important and inter-linked initiatives by Government to restore private investment in public infrastructure, namely:

0 the establishment o f the KPPI Committee; and the preparation and operationalizing o f improved cross-sectoral policies, practices and procedures for handling private participation in infrastructure provision.

The KPPI Committee i s already operational and well advanced with drafting an improved cross-sectoral regulation on PPI to replace Keppres 7.

The Project’s core focus i s on assisting the KPPI Committee to make timely and well-informed decisions, on operationalizing the new cross-sectoral framework through supporting sector-specific policy and regulatory reforms, on strengthening institutional capacities in areas related to PPI, and on improving the quality and availability o f information on PPI-related topics. Also see Annex 12 for the Initial Project Work Plan. This w i l l be accomplished through:

0 Cross-sectoral technical assistance and advisory services, including the development o f a country framework assessment for PPI policies;

0 Sector-specific technical assistance and advisory activities, including sectoral assessments of PPI potential and strategy;

0 Capacity building, training assistance, and public informatiodeducation activities, and; P M U support services.

The agencies that w i l l be involved in the implementation o f the project--notably the KPPI Committee and key sector ministries-have limited expertise in the PPI area, but o f necessity are already being required to take decisions on important and complex issues (including the drafting o f the new Keppres 7). Accordingly the project will, as a top priority, support the recruitment of “in-house” PPI advisors to assist these core agencies with their ongoing activities. Terms of reference (TOR) for these advisory services and for high priority studies have been developed and reviewed during project appraisal. However, the urgency o f mobilizing the “in-house” advisory support w i l l preclude the TORS for all envisaged activities being fully developed prior to project start. I t i s accordingly intended that the TORS for many activities w i l l be firmed-up during the initial stages o f project implementation with the assistance o f the “in-house” advisors.

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2. Sector-specific TA and advisory services 3. Capacity building and training 4. Incremental P M U support services @ 80%

Repayment o f PPF Advance

9.53 1.65 0.49 0.44

50.2 8.58 8.7 1 S O 2.6 0.39 2.3 0.40

Total Project Costs Front-end fee

Total Financing Required

% of Bank-

financing 35.4 50.2

8.8 2.3 2.3 0.0

99.0 1 .o

100.0

0.0 18.83 99.1 16.93 0.17 0.9 0.17

19.00 100.0 17.10

2. Key policy and institutional reforms supported by the project:

The project wi l l support the effective functioning o f the KPPI Committee, the development of PPI assessments/strategies, and the operationalization o f the planned cross-sectoral regulation on public-private partnerships for infrastructure provision (the new Keppres 7 and related regulations). These w i l l in turn provide the twin supporting pillars for the project. I t i s accordingly important that: (a) GO1 commit to maintaining the KPPI Committee and i t s Secretariat throughout the implementation period o f the project; and (b) the key policies and principles contained in the new Keppres 7 on public-private partnerships be acceptable to the Bank.

3. Benefits and target population:

The ultimate beneficiaries o f the project wi l l be users o f public infrastructure in general, and users of transport, telecommunications and urban infrastructure services in particular. Renewed private investment in infrastructure wi l l also create new employment opportunities in infrastructure construction, management and maintenance fields and contribute more generally to economic growth.

4. Institutional and implementation arrangements:

The project wi l l be implemented over a period o f three years and involve several central government agencies-principally M O C and MSRI as well as OCMEA-as primary implementing agencies. A Project Management Unit w i l l report to and work under the technical direction of the KKPPI. The P M U i s chaired by OCMEA’s Assistant Deputy for Transportation and Telecommunications Infrastructure Development, which should help ensure the project supports and i s highly responsive to top-level decision-making. Administratively, the project wi l l form part of the OCMEA budget.

The P M U i s a newly-established (February 2003) body but i t s design and financial management procedures have been based on those developed for the ongoing Corporate Restructuring Technical Assistance Project (Loan 4448-IND) and reflect the extensive experience gained through the implementation o f the two TAP41 projects (First and Second Technical Assistance

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Projects for the Public and Private Provision o f Infrastructure; Loans 3385-IND and 3913-IND). The project f low o f funds arrangements are designed to be broadly similar to those for the TAP4I-I1 project. OCMEA has already recruited qualified staff to manage the project preparation process and i t s subsequent implementation.

5. The Indonesian Pilot for Enhanced Disclosure of Information being pursued in the context of the Bank’s revised Information Disclosure Policy:

As part o f the implementation o f the Bank’s revised disclosure policy, countries were selected for piloting enhanced disclosure if the governments o f these countries were interested in participating. In Indonesia during the CAS consultations and other discussions, both the government and civi l society expressed keen interest in substantially greater access to information on Bank activities, especially during project implementation, to allow full public discussion o f project implementation findings. Under the Indonesia pilot enhanced disclosure i s proposed to enable civi l society oversight leading to greater transparency and openness. I t i s expected that initially c iv i l society w i l l require time to become familiar and reach the level o f understanding o f the information being provided, to use it constructively to reduce fiduciary r isks

In the Indonesia Pilot for enhanced information disclosure being carried out in the context o f the Bank’s revised Information Disclosure Policy, an approach to enhanced information disclosure has been agreed with BAPPENAS on behalf of the Borrower. This approach consists o f the following arrangements:

a.

b.

C.

Agreement on the approach for disclosure o f information for new projects to the effect that specific provision for enhanced disclosure w i l l be built into the project arrangements during project preparation for an agreed upon l i s t o f projects to be included in the initial phase o f the pilot. This agreed l i s t consists o f 4 projects, including the proposed Private Provision o f Infrastructure Technical Assistance Project. (The other 3 projects are the proposed Water Resources and Irrigation Sector Management Project, the proposed Health Workforce and Services Project and the proposed Third Kecamatan Development Project.) Annex 15 provides in more detail the arrangements developed by the KKPI secretariat to put in place an anti-corruption action plan.

The specific issues where enhanced disclosure has been agreed upon concern: (i) final audit reports issued under projects in the pilot w i l l be made publicly available by both the Borrower and the Bank: (ii) the mid-term report on progress under a project in the pilot wi l l be made publicly available by the Borrower; and (iii) the procurement process, where the Borrower has agreed that additional information concerning parts o f the procurement process in projects in the pilot w i l l be made publicly available. The Loan Agreement for this Private Provision o f Infrastructure Technical Assistance Project (PPITA) includes specific undertakings to effectuate these agreements. These undertakings would eliminate the need for GO1 approval to be obtained prior to the public release o f such information.

For documents other than those referred to in sub-paragraph b above (and which are currently not disclosed without Borrower consent), the Bank w i l l continue to consult GO1 prior to

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disclosure o f such documents. GO1 may consider moving to a more general practice o f automatic release o f such documents after the Government completes i t s review o f enhanced information disclosure concerning the public provisions o f services that i t i s currently undertaking. In this regard, the anti-corruption guide for task teams and the anti-corruption annex (15) based on this guide (together with the covenants on disclosure o f audits, mid-term review report and procurement documents) are expected to facilitate the adoption o f enhanced disclosure, and more open and transparent practices.

d. Agreement to utilize an IDF grant to support activities for developing GO1 policies for increased information disclosure under all government projects in Indonesia. A GO1 implementation team has been established, and a Bank counterpart team has also been formed. Start-up activities for administrative arrangements and preparation o f terms o f reference o f consultants under this grant have been launched.

The experience under this pilot wi l l be reviewed after two years and recommendations for future developments under the Bank's disclosure policy would be developed.

D. Project Rationale 1. Project alternatives considered and reasons for rejection:

Loan versus Grants. Realizing the project objectives wi l l require a comprehensive and coherent, cross-sector approach that wi l l be very difficult to accomplish using fragmented grant financing. The project w i l l not, however, finance all PPI-related TA needs in the target sectors and the project's PPI advisory teams wi l l assist government to secure supplementary grant-financed assistance and to ensure this i s integrated with other activities and i t s outputs are used effectively.

Private sectorfocus: Unlike the two TAP41 projects, the proposed project focuses narrowly on activities that wi l l support restoring private investment in infrastructure. This decision reflects: (a) the scale and complexity o f the challenges this presents in the current environment (there was strong private sector interest in Indonesia infrastructure projects when TAP41-11 was prepared); (b) lessons emerging from TAP4I-11's implementation indicating i t s broad scope detracted from i t s effectiveness in achieving the strategic private infrastructure agenda; and (c) the availability of other instruments to support improved public provision o f infrastructure (e.g., the Eastern Indonesia Region Transport Project supports more efficient planning, programming and implementation of road infrastructure works).

Sector focus: The Project w i l l focus primariZy on those infrastructure sectors where there are seen to be good prospects for attracting private investment in the medium-term, and where needed technical assistance i s not already being provided from other sources. The identified core sectors are transport (including potentially roads, railways, ports and shipping, inland waterways, and civi l aviation), telecommunications, and urban infrastructure. Although the energy sector i s o f critical importance, regulatory reform and sector restructuring are already well-advanced, and existing and planned TA support from the Bank, ADB and USAID appears sufficient to meet

- 1 3 -

PPI-related needs in the power and domestic gas sectors. While there i s also a considerable body o f recent, ongoing, and planned PPI-related TA in the urban infrastructure sector-and particularly the water supply sub-sector-and the transport sector, the coverage i s far from complete and there are substantial unmet need. During project preparation, the focus has been on the core sectors but the project design has le f t open the possibility o f financing PPI-related TAs in other sectors later, providing that a compelling case i s made by the proposing agencies.

Shaping public perceptions. The project design accords high priority to “socializing” the need for and benefits of well managed PPI. While the conduct of policy studies, drafting of improved regulations, and delivery o f training wi l l help inform opinions and attitudes, i t i s considered that these activities wi l l need to be complemented by a conscious “outreach” effort specifically targeted at building a strong constituency for change. Primary responsibility for championing the case for private infrastructure within GO1 and with the DPR with rests with the KPPI Committee, and the project wi l l play an important role in supporting i t s efforts in this area. In addition, the Project w i l l also assist the central P3 unit and network to make available better information on private infrastructure provision to NGOs, the media, and the general public.

Privatization. Project activities that involve improving sector policies, reforming legal and regulatory frameworks, and strengthening capacities of regulatory and other institutions wi l l necessarily support efforts to accelerate the privatization o f Indonesia’s infrastructure SOEs. In addition, i t i s envisaged that the project could also support the privatization program more directly through support for studies that encompass developing privatization strategies for specific sectors or sub-sectors. However, the project would not finance legal, financial or other advisors to handle specific privatization transactions.

Financing of private infrastructure investments. The activities encompassed by the project are designed generally to enhance the bankability o f infrastructure projects proposed for private financing. More particularly, i t i s envisaged the project would support the formulation o f policies concerning public support for private infrastructure projects. However, i t i s not envisaged the project’s scope would extend into the financial sector reform domain or, for example, to providing support for activities designed to strengthen domestic capital markets and develop new infrastructure-specific financing vehicles.

Dispute resolution. During project preparation the KKPPI felt that i t would not be appropriate to include in the design o f this project provision for financing legal and other specialist advisors to assist with the resolution o f individual high profile disputes, such as those that have arisen in power and telecoms sectors, but that i t probably would be important to include provision for the development o f guidelines and procedures for anticipating and dealing with the types o f disputes that may arise with smaller projects. I t i s anticipated that dispute resolution w i l l be a part of the sectoral and cross-sectoral policy and regulations development.

Project Preparation Support. Provision has been made for the preparation and tendering o f a number o f demonstration projects for private participation for two main reasons. First, the credibility of Indonesia’s private sector infrastructure program w i l l be greatly enhanced by i t s being in a position to offer and bring to early financial closure an initial set o f soundly prepared projects. Second, the process o f preparing demonstration projects also provides an important avenue for capacity building. The selection o f initial projects w i l l be demand-driven, with proposals being subject to rigorous screening against criteria which have been broadly agreed

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during appraisal o f the Project (see Annex 13), and which w i l l be further refined during the development of sectoral policy and strategy assessments with each participating ministry.

2. M a j o r related projects financed by the Bank and/or other development agencies (completed, ongoing and planned).

Several recent and ongoing projects financed by the Bank and other lenders have addressed, in some way or form, issues encompassed by the scope o f the proposed Project. These may usefully be divided into two broad groups: (a) cross-sectoral technical assistance projects with a specific focus on private participation in infrastructure, and (b) sector-specific infrastructure investment projects that include technical assistance components aimed at building the foundations for private participation. In addition, some important technical assistance has also been financed under various grant programs.

Cross-Sectoral Infrastructure TA Projects. The Bank has financed two technical assistance projects that were specifically designed to support Indonesia's efforts to promote private investment in Indonesia.

Technical Assistance Project for the Public and Private Provision of Infrastructure (TAP4I-I; Loan 3385-IND). TAP4I-I was approved in 1991 and closed in March 1997 after a total extension o f 30-months. I t s objectives were to assist GO1 in the implementation of i t s framework for infrastructure development by initiating immediate actions to: (a) assess priorities in current infrastructure plans for reducing infrastructure bottlenecks; and (b) (i) augment and enhance program evaluation capability (including, in particular, in cross-sectoral linkages and environment aspects) within BAPPENAS and (ii) project preparation capability in line agencies responsible for key infrastructure sectors, including projects financed by or jointly with the private sector. OED's Performance Audit report, issued in June 1999, rated the outcome as Satisfactory, institutional development impact as Substantial, and sustainability as Likely.

TAP4I-I contributed significantly to the assessment o f infrastructure plans and bottlenecks in the power and transport (railways, toll roads and ports) sectors, and helped to identify and establish a basis for increased private participation in service delivery in these sectors. In the power sector, i t provided technical assistance on the negotiation o f technical and tariff aspects of the Paiton I private power project, and on the formulation o f a strategy for sector restructuring, regulatory reform and private participation (in conjunction with the Cirata Hydroelectric Phase I1 Project (Loan 3602-IND)) and for more effective development of Indonesia's large geothermal energy resources. In the maritime transport sector, i t supported a study to develop a long-term strategy for port development in western Java and southern Sumatera, while in the toll road sector i t financed major feasibility studies used in soliciting private proposals. B y contrast, the project provided only limited support in the urban infrastructure sector and none in the telecommunications sector. As implied by the title, TAP4I-I's scope was not restricted to private infrastructure and a significant proportion o f the available resources were used to support preparation of infrastructure projects intended for public sector financing. Although not explicitly envisaged during project preparation, the PMU-which was located in Bappenas-quickly became the locus o f GOI' s cross-sectoral initiatives relating to private participation in infrastructure. The project's impacts were, however, ultimately limited inasmuch

- 15-

as politically connected project sponsors were basically able to drive the PPI agenda in all sectors.

Second Technical Assistance Project for the Public and Private Provision of Znfrastructure (TAP4Z-ZZ; Loan 3913-ZND). TAP4I-I1 was approved in June 1995 and closed on December 31, 2001 after a total extension o f 21 months, with the Draft ICR rating i t as Satisfactory on achievement of development objectives and implementation performance. The original project objectives were to: (a) assess strategic priorities for reducing infrastructure bottlenecks; develop an updated strategy for public-private partnerships and sustainable frameworks for private participation in provision of infrastructure; (c) redefine the role o f central and local authorities in the identification, preparation, and implementation o f infrastructure projects, and (d) enhance program evaluation capacity within Bappenas and regional planning bodies and project preparation and implementation capabilities (including development o f sound environmental and social practices) in line agencies and local organizations responsible for various infrastructure investments. These were subsequently broadened to enable the project to support Government’s efforts to contain and minimize possible disruption to economic and social infrastructure that might be caused by the transition to Year 2000. The implementation period o f the project was bisected by the onset o f the economic crisis and more specifically by the issue of Keppres 39 of September 1997, which required many major private and public infrastructure projects to be postponed or reviewed, and by the subsequent issue o f Keppres 7 in January 1998, which belatedly established an overarching framework for private participation in infrastructure.

The project was managed by the P M U established for TAP4I-I. I t s sector focus was primarily on sub-national / urban infrastructure, and particularly water supply. In addition to supporting development of specific water supply schemes for private participation, the project also assisted in paving the way for establishing regulatory bodies-notably for Jakarta-and in developing strategies for dealing with projects that had stalled as a result o f the crisis. In contrast to TAP4I-I, there were no sub-components specific to the energy sector, principally because adequate resources were available from other sources. However, TAP4I-I1 did support several important initiatives in the transport sector, including most notably the Java Arterial Road Network Study (JARNS) and preliminary studies concerning the feasibility o f establishing a road fund. The P M U continued to serve as Indonesia’s de facto Public-Private Partnership (P3) center and played an important role in the drafting o f Keppres 7 and i t s implementing regulations and guidelines. I t also served as the central repository o f information and expertise on private participation, and i t s in-house advisors provided extensive ad hoc advice and assistance to sectoral and sub-national agencies. The ICR for TAP4I-I1 rates the project outcomes as Satisfactory for both achievement o f Development Objectives (DO) and Implementation Progress (Ip).

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Sector Investment Projects.

Several Bank-financed infrastructure projects approved during the 1990s had significant TA components aimed at supporting sector reform and restructuring. These include, for example:

0 Power sector: A series of Bank-financed power projects supported technical assistance in the broad area o f power sector restructuring and regulatory reform. Notable among these are the Cirata Hydroelectric Phase I1 Project (Loan 3602-IND; closed June 1999), which--along with TAP4I-I-financed important back-to-back studies on Power Sector Regulatory Reform and Development o f Private Power that provided the analytical foundations for the Government's August 1998 White Paper on Power Sector Reform Policy. The ongoing Second Power Transmission & Distribution Project (Loan 3978-IND) i s financing technical assistance to P L N with i t s corporate and financial restructuring, an important element of the adopted reform agenda, and a planned follow-on energy sector operation-now scheduled for Board presentation in late FY03-will finance continuation o f this work. ADB and USAID are also important actors in the power sector, and both are currently financing assistance to the Directorate General o f Electricity and Energy Utilization with the implementation o f the adopted sector restructuring and reform agenda. The US AID-financed Energy Restructuring Activities Group i s playing a lead role in assisting GO1 to develop a strategy for restoring private investment in the sector. Telecommunications Sector: The Bank, through the ongoing Telecommunications Sector Modernization Project (Loan 3904-IND; Satisfactory on DO and IP) and the now-closed Telecommunications I V Project (Loan 3482-IND; ICR overall rating o f Satisfactory), was instrumental in promoting important sector reforms. These include the opening-up to private participation in the mid-1990s and the subsequent passage o f a new Telecommunications Law in 1999 that, among others, removes "exclusivities" previously enjoyed by the two telecommunications SOEs and permits effective competition. The closing date for the Sector Modernization Project was extended by one year to June 2002 to enable completion o f the physical investment components, but the balance o f MOC's allocation for technical assistance on sector reform issues was cancelled due to M O C being late in submitting proposals to M O F for using these funds. The Bank i s supporting the ongoing Informatics Infrastructure Project (Loan 4244-IND). While this project does not focus directly on telecommunications sector reform, some o f the project components are complementary in character. USAID i s currently providing very limited ad hoc advisory assistance in this sector-including on interconnection, universal service obligations and regulatory arrangements-through i t s "PEG7 project, but has no plans to provide expanded support and welcomes Bank involvement. Transport Sector: During the last decade, the Bank's investment lending for transport has focused exclusively on the land transport sub-sector, including inter-urban and rural roads, urban transport, and railways. During the early 90s, the first Jabotabek Urban Development Project financed preliminary studies on the development o f a strategy and policies for securing private participation in the development o f a rail-based mass transit system for Jakarta. GOI's subsequent plans to proceed with two mutually inconsistent mass transit schemes proposed by politically connected groups precluded planned further Bank assistance in this area. The ongoing Railway Efficiency Project (Loan 4106-IND) i s providing support for restructuring and commercializing the railway company and reforming i t s financial

0

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relationship with Government in l ine with a policy framework adopted in the mid-1990s. While not specifically aimed at enabling and promoting private participation, many elements o f the agreed reforms are prerequisites for effective private investment in the rail subsector. Progress on implementing the reform program has been patchy, however, and the Project i s currently rated Unsatisfactory on implementation performance. In the roads sector, the principal sources o f financing for technical assistance relating to private participation have been the two TAP41 projects. In addition, PPIAF i s currently financing a study requested by GO1 (MSRI) for a review of policy options for restructuring the state-owned toll road company, Jasa Marga. ADB has financed studies and technical assistance relevant to private participation in the transport sector under sub-sectoral investment loans and TA Grants. This assistance includes a recent Transport Sector Strategy Study financed under an inland waterways project and some broad-scope private participation TA in the mid-1 990s. Urban Sector: The very innovative Urban Sector Loan and accompanying Policy Action Plan, agreed in 1988 between the Bank and GOI, established the agenda for a very active urban program in Indonesia from 1988 through 1998 and the onset o f the multifaceted crises which have changed the sociopolitical agenda. The ten years of urban sector policy reform and investment saw major progress infrastructure decentralization and services provision in most Indonesian urban areas. The Bank's nearly $1 bi l l ion in lending in the sector was matched by other donors, including the ADB, USAID and others, while UNCHS, GTZ and other donors also worked cooperatively in attempting to build capacity at all levels to improve the management o f urban services delivery. However, the enormity o f the task had become increasingly clear even before the crisis and the new decentralization laws fundamentally changed local government fiscal and manpower capacities. Many local governments had begun to consider the benefits o f private sector involvement with the support o f the integrated planning and needs analysis approach advocated in the Urban Policy Action Plan and subsequent projects. In most cities these discussions were limited to revenue-producing facilities and services, such as water supply and solid waste disposal. In all cases major potential investments were not discussed with potential private investors if the cities perceived the possibility o f central government grant funds becoming available (e.g., sewerage, public transport, etc.). The implementation o f GOI's new decentralization laws should clarify the responsibilities o f local governments for providing services to their citizens, and bring into sharp focus the need to involve private investors to help close the huge gaps in almost every locality between services needs and current delivery capacities (e.g., the almost total lack o f functioning sanitation and sewerage systems in Indonesian cities cannot be overcome by public investment alone, particularly in the post-crisis financial conditions). An Urban Sector Review was recently completed by the Bank and should assist the dialogue among the Bank, Kimpraswil and urban local governments regarding the needs, priorities and strategies to address urban services deficiencies, which w i l l necessarily involve significant roles for the private sector in investment, management and maintenance o f urban service systems. Water Supply: Since the last major Bank water supply project (JUDP 11) closed in 1996, the Bank has attempted to engage GO1 in a policy dialogue to reform the regulation and management o f water supply provision, including appropriate roles for the private sector. In 1997 the Bank produced a sector policy paper which recommended GO1 rely on private investment, management and other forms o f partnership to improve water supply coverage

0

0

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and quality. However, with the onset o f the economic/political crises and the rapid changes in government during the past five years, i t has been very difficult to sustain such a dialogue. As a crisis response, the Bank has provided technical assistance (with ASEM grant support) aimed at assisting local PDAMs (water utilities) to reschedule their debts to the Central Government after reaching a tripartite agreement between the Ministry o f Finance, the concerned local government and the P D A M on tariff structures and accomplishment of key financial and operational indicators. In 2001, WBI and the ADB jointly hosted a major seminar in Jakarta to discuss water sector reforms in the context of decentralization. In the meanwhile, the government renegotiated the two concession contracts for Jakarta water supply, and constituted a regulatory body at City Government level to oversee the contracts. The outcomes have been quite disappointing, and tariff issues have become extremely political. In the past year, however, the Center for Infrastructure Investment Development in the Ministry Kimpraswil (MSRI) has facilitated the successful conclusion o f concession contracts with the local governments o f the cities o f Pekanbam, Tegal and Tanggerang for water supply (as well as solid waste management in Depok), with TA support from the Asian Development Bank. This i s significant because i t validates the availability o f private sector financing for water supply investments in Indonesia. However, in general, problems related to (a) lack o f adequate regulatory measures, (b) political interference by local government officials, and (c) the absence o f clear definitions o f roles and responsibilities o f local governments and central ministries continue to hinder credible PSP interest in the sector. The Bank anticipates that GO1 and several local governments w i l l utilize the technical assistance funds made available under this project to strengthen the policy and regulatory framework for private water supply investments, as well as to conduct selected local studies to attract private sector interest in water supply.

0

Sector issue

Ban k-financed Legal and Regulatory Frameworks for Public and Private Provision o f Infrastructure

Project

Technical Assistance Project for Public and Private Provision o f Infrastructure-Loan 3 3 8 5-IND Second Technical Assistance Project for Public and Private Provision o f Infrastructure- Loan 3913-IND

Other development agencies Feasibility of private participation

Latest Supervision (PSR) Ratings

Asian Development Bank Technical Assistance US Agency for International Development "PURSE" and "WET" Projects

(Bank-finance Implementation

Progress (IP)

S

S

projects only) Development

Objective (DO)

S

S

Highly Unsatisfactory)

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3. Lessons learned and reflected in the project design:

(First) Technical Assistance Project for the Public and Private Provision of Infrastructure. The OED Project Performance Audit Report (Report 19462, June 16, 1999) identified the following main lessons learned:

Counterpart funding should be significant to ensure increased ownership and sustainability o f this type of project. The effectiveness o f the project management unit depends on the PMU's capacity to access key decision-makers in both the national development planning agency and the executing agencies, as well as the strength o f i t s operational staff. Free-standing and open-ended technical assistance projects need to emphasize 1) rapidity o f review and approval process o f requests for financing and 2) agreement at appraisal on a series o f terms o f reference and project development packages. Technical assistance projects involving executing agentddecentralized units should focus more on these units. Intermediate results from project components to overall project objectives (from implementing studies to concluding contracts) must be made clear to them from the beginning. Specific guidelines must be provided by the P M U to such agencies to avoid having to reject requests for financing. Good supervision and continuity in the supervision team i s critical for satisfactory project implementation. The size and skill mix of the team should be adjusted depending on the complexity o f project components and the sectors they address.

Second Technical Assistance Project for the Public and Private Provision of Infrastructure. TAP41-I1 was approved in June 1995, some 21 months before TAP4I-I was completed, and some four years before the above OED Performance Audit Report was issued. I t s design nonetheless attempted to address some but not all-of the lessons flagged by the OED audit. In particular, i t sought to ensure a substantial pipeline of well prepared sub-components was ready by the time of appraisal, although in the event many o f those identified subsequently lost the support o f the sponsoring sector agencies or were financed from other sources. The Project closed in December 2001 and preparation o f the ICR was completed in June 2002.

The task of identifying meaningful lessons i s complicated by the dramatic change in Indonesia's circumstances and attractiveness to private infrastructure investors as a result o f the economic crisis. Nonetheless, a number o f important points emerged with regard to the overall strategy for restoring PPI:

Sector institutions need to better integrate private sector participation within their overall infrastructure development policy formulation, planning, and implementation activities. Private infrastructure projects are often being handled by different groups within sector institutions, and there has been a tendency for those promoting traditional public sector programs to undermine the case for private participation and hence send mixed messages to prospective investors. Moreover, officials involved with promoting private participation often show a limited grasp o f what the private sector can bring to infrastructure projects and what they wi l l require in retum (including with respect to tariffs and possible needs for government supports).

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Don ’t under-estimate resistance to change within public institutions. As noted in Section B .2, transparently managed private section participation-whether through green-field projects or privatization-may threaten vested interests. This applies in particular to private projects that would encroach on the domains o f public enterprises that are now enjoying monopoly or quasi-monopoly positions. Efforts to promote rapid and sustainable private infrastructure development should therefore include carefully designed and coordinated actions to anticipate and address such resistance. Champions are needed. As indicated previously, the TAP4I-PMU has functioned as Indonesia’s de facto promoter of private infrastructure investment and P3 center. However, i t s influence and effectiveness was constrained by the absence o f strong political champions and by i t s remoteness from key decision-makers. Champions are needed both to lend weight to efforts to overcome institutional resistance and to help shape efforts to overcome public opposition to an expanded private sector role. Demonstration projects have value. The preparation and implementation o f demonstration or pilot projects provides an important means o f refining and applying policies, and can play a catalytic role in attracting private investment. Negative lessons in particular can greatly assist the design o f future projects. While institutional and regulatory reform should ideally precede project interventions, there may be instances where such reforms can appropriately be refined in parallel with the design o f demonstration projects.

The key lessons and issues from TAP4I-11 relevant to the design o f a new technical assistance operation include:

Need for clear and well-focused objectives. The objectives o f TAP4I-I1 were very broad, as also were the criteria for deciding whether proposed studies or technical assistance would be eligible for support under it. While the Project financed much useful assistance, i t i s difficult to relate the resultant outputs meaningfully to i t s overarching development goals. The objectives o f a follow-on operation should be more narrowly focused on enabling private participation in infrastructure rather than on infrastructure development in general. Need for an efSective linkage to senior decision-makers. The TAP4I-II steering committee did not function as envisaged and the PMU-and hence the project-became increasingly isolated from high-level decision-making on key infrastructure policy and strategy issues. These problems were further exacerbated by changes in the structure o f government changes that resulted in Bappenas’ authority on infrastructure issues diminishing. A future project should be attached to and support a functioning high level coordinating agency or central agency that enjoys effective support within Government. Need for strong ownership by TA users. Follow-up on some o f the technical assistance packages funded under TAPI-11 has been very limited. While this i s partly attributable to the onset of the crisis and subsequent widespread changes in government organization and staffing, there are also indications that some agencies did not fully “own” the assistance they managed. A future project should therefore be more selective and focus on supporting agencies that are pro-active in committing staff resources to work on proposal development, and should employ competitive mechanisms for allocating scarce TA resources. Need for clear roles of participating agencies. Many individual technical assistance services suffered long delays due to lack o f clarity regarding the respective roles o f the P M U and

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individual implementing agencies. In principle, the P M U was responsible for ensuring funds were used in accordance with the terms of the Loan Agreement while implementing agencies were responsible for ensuring the quality o f outputs and their transformation into outcomes. In practice, there were numerous instances of procurement-related issues causing long implementation delays. The design o f a follow-on project accordingly needs to incorporate a clearer accountability framework. Positioning technical assistance at the right level. I t i s not realistic to expect agencies to reform themselves. Thus for example, providing technical assistance relating to the development of a new non-ministerial regulatory body through a Directorate General that wi l l lose powers if such a body i s established i s unlikely to be successful. I t w i l l be important therefore to ensure that technical assistance serves the right clients.

4. Indications of borrower commitment and ownership:

The initial request for the Bank to support the project was taken at the f i r s t meeting o f the KPPI Committee in July 2001. Earlier, in April 2001, the Coordinating Minister for Economic Affairs had written to advise that GO1 was planning to establish the KPPI Committee and would be looking to the Bank to support i t s efforts to restore private investment in infrastructure.

Following the change o f Government in August 2001, the KPPI Committee did not meet for several months and l i t t le progress was made towards setting up a project preparation team or involving the key sector ministries. The reconstituted KPPI Committee met for the f i rst time in mid-November 2001 and since then interest in the private infrastructure challenge and commitment to the project has strengthened considerably. In late December 2001, the Coordinating Minister for Economic Affairs re-affirmed GOI’s intention to proceed with the project, and the Bank completed the preparation o f a Project Concept Document which was reviewed and approved as the basis for project preparation in April 2002. In July 2002 a Project Preparation Facility (PPF) advance was formally requested by the Ministry o f Finance for this project. After protracted discussion regarding the scope and size o f the PPF advance, the Bank approved the advance in November 2002 and the counter-signature o f the Ministry o f Finance was completed on December 31, 2002. OCMEA then moved quickly to appoint staff to assist with i t s preparation and management and to secure the active participation o f M O C and MSRI. Project preparation i s being handled by GO1 personnel supported by consultants, and this i s helping to build a sound and common understanding o f the issues and a strong sense o f ownership o f the individual project components. The KPPI Committee now meets frequently and high priority i s being given to finalizing the revised Keppres 7.

5. Value added of Bank support in this project:

The Bank brings to the project an unrivalled combination o f global knowledge and expertise in the broad area o f private participation in infrastructure and in-depth understanding o f Indonesia’s key infrastructure sectors and i t s experiences to date with private participation.

The Bank’s Private Sector Advisory Services Department, through i t s Private Provision o f Public Services (PPPS) group, has r ich experience in critically important sector policy areas-including regulatory reform and regulatory agency development, public supports for private projects-and i s developing “tool kits” designed to provide practical guidance on PPI-related topics. The group

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was the driving force behind the establishment o f the multi-donor Public-Private Infrastructure Advisory Facility (PPIAF) and i s responsible, at arm’s length, for the ongoing management o f the Facility. The PPPS group has long been involved in Indonesia, including through providing guidance on the shaping of a cross-sectoral regulatory framework for private participation in infrastructure that was ultimately issued as Keppres 7. I t i s intended that this important link would be maintained during project preparation and implementation.

The Bank has been closely involved in supporting Indonesia’s efforts to establish sound overarching policies and strategies for private participation since the early 1990s, including through the two TAP41 projects described earlier. I t has also worked closely with Indonesia on regional initiatives aimed at promoting PPI and, for example, in 1996 co-hosted with Bappenas the Ministerial Level International Conference on Infrastructure Development (proceedings published as “Frontiers o f the Public-Private Interface in East Asia’s Infrastructure” (Institute for National Development Studies). The Bank has also has been actively involved in helping shape the policy and regulatory reform agenda in all key infrastructure sectors, including transport (roads, railways, ports), energy (power, domestic gas), urban (water supply, public transport, solid waste), telecommunications, and water resources through both lending and ESW support activities.

This combination o f global and local and cross-cutting and sector-specific expertise enables the Bank to provide effective support for the Project, a capacity that wi l l be further enhanced by the recent consolidation o f EAP’s Transport, Urban and Energy Sector Management Units into a single Infrastructure Department, as well as the completion o f the on-going Infrastructure AAA work by June 2003, as noted previously.

ADB and USAID have and w i l l continue to play very important roles in supporting Indonesia’s efforts to promote private participation in infrastructure. ADB, along with USAID, has now taken the lead in providing assistance on regulatory reform and private sector development in the power sector, and has provided parallel assistance for the domestic gas sector. ADB has also been active in promoting private sector participation in urban infrastructure development, and i s considering to continue this support through a proposed Private Sector Participation (PSP) Facility for Urban Infrastructure. I t has also financed relevant technical assistance in the transport sector. USAID has also been very active in the past in promoting reforms designed to facilitate private provision o f urban infrastructure (e.g., through the “PURSE’ project), and continues to provide limited and narrowly targeted support in the transport and telecoms sectors through i t s “PEG” project. CIDA has financed technical assistance to Bappenas in the broad area o f infrastructure development policy, but as yet there are no firm plans for further support in this area.

The project has been designed to complement, reinforce and integrate ongoing and planned initiatives, including through helping to ensure that each o f these activities i s positioned within a sound overall PSP strategy and that outputs and lessons emerging from them are properly analyzed and disseminated.

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E. Summary Project Analysis (Detailed assessments are in the project file, see Annex 8)

1. Economic (see Annex 4): 0 Cost benefit 0 Cost effectiveness 0 Other (specify) No economic issues are envisaged for this technical assistance project, and i t i s not possible to conduct an economic evaluation.

NPV=US$ million; ERR = % (see Annex 4)

2. Financial (see Annex 4 and Annex 5): NPV=US$ million; FRR = % (see Annex 4) No significant financial issues are anticipated and i t i s not proposed to conduct a financial analysis.

The project wi l l form part o f the OCMEA budget and the project financial management arrangements have been modeled on those developed for the ongoing Corporate Restructuring Technical Assistance Project (Loan 4448-IND) and reflect lessons learned from the implementation o f the two TAP41 projects.

Fiscal Impact:

Minimal

3. Technical: Not applicable for the proposed project

4. Institutional: The project wi l l be attached to the KKPPI Secretariat. The PMU i s chaired by OCMEA’s Assistant Deputy for Transportation and Telecommunications Infrastructure Development, and OCMEA wi l l be the primary executing agency. Key positions in the Project Management Unit have been staffed by suitably qualified personnel from the Office of the Coordinating Ministry for Economic Affairs (OCMEA). 4.1 Executing agencies:

The client / implementing agencies for technical assistance services included under the project wi l l include:

a

a

The Coordinating Ministry o f Economic Affairs and the Planning and Investment Sub-committee o f KKPPI; Ministry o f Communications (through i t s Secretariat General and, as appropriate, i t s Directorates General for Telecommunications and for Land, Sea and Air Communications, and i t s Research and Development Agency); and Ministry of Settlements and Regional Infrastructure (through i t s Agency for Investment and Construction and, as appropriate, i t s Secretariat General and Directorates General for Regional Infrastructure and Urban and Rural Development).

a

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4.2 Project management:

Technical Management. A key challenge during project implementation w i l l be the limited technical capacities o f the executing and implementing agencies on matters relating to PPI. During preparation, this has been addressed through inter-active support from the Bank preparation team and the PPF-financed project preparation consultants. GO1 personnel have been closely involved and in consequence have developed a stronger ownership o f the program. During implementation, the OCMEA Core Advisory Team and the M O C and M S R I PPI Advisors wi l l play a key role in assisting the implementing agencies to prepare TORS for the additional TA packages to be identified / firmed-up during project implementation, and to guide and oversee their implementation and support subsequent assimilation and dissemination o f outputs.

Administrative and Financial Management. The administrative and financial arrangements for the management o f the project have been modeled on those developed for the ongoing Corporate Restructuring Technical Assistance Project and draw heavily on the experience gained during the implementation o f the recently closed TAP4I-11 Project. Particular attention was given to streamlining the review and approval process for those TAs to be identified / firmed-up during project implementation as this was frequently a source o f long delays on TAP4I-II. Selection criteria for subsequent projects are broadly summarized in Annex 13 which w i l l be further refined during the sectoral and cross-sectoral PPI assessments and strategy formulation. Overall project administrative procedures and financial management arrangements have been carefully documented in operating manuals which were agreed during project appraisal.

4.3 Procurement issues:

The 2001 CPAR for Indonesia, prepared in close collaboration with ADB and a GO1 working group, concluded that Indonesia’s public procurement system i s severely prone to corruption and collusion, lacks transparency, and fails in i t s principal objectives o f procuring goods and services with due consideration to maximizing economy and efficiency and promoting competition and fair and equitable treatment o f all suppliers, contractors and consulting f i rms. The report has generated a continuing high-level dialog with GOI, and agreement has been reached on a number o f important elements o f an action plan for addressing the problems.

The procurement plan for the project has been designed in the context o f these findings and reflects experience gained with the implementation o f the Corporate Restructuring Technical Assistance and TAP4I-I1 projects. I t i s not expected to pose any unusual procurement issues or risks. A detailed procurement procedures manual has been prepared and agreed during project appraisal, as well as an Anti-Corruption Action Plan (see Annex 15). (Indonesia: Country Procurement Assessment Report - Reforming the Public Procurement System, March 27, 2001 Principal author: Surendra K. Agarwal)

4.4 Financial management issues:

Financial management i s not expected to pose significant problems, in part because the project does present any unusual challenges and in part because the systems to be used have been

- 25 -

modeled on those recently developed for the ongoing Corporate Restructuring Technical Assistance Project and reflect lessons learned from the recently closed TAP4I-I1 Project. As noted above, a detailed Financial Management Manual was prepared and agreed during project appraisal. 5. Environmental: 5.1 Summarize the steps undertaken for environmental assessment and E M P preparation (including consultation and disclosure) and the significant issues and their treatment emerging from this analysis.

The project wi l l not finance any physical investments and no significant environmental issues are envisaged. Where applicable-for example in technical assistance packages involving the design o f proposed PPI pilot projects-appropriate provision wi l l be included in TORs for identifying, evaluating and mitigating adverse environmental impacts and for consultation with stakeholders. Such TORs w i l l be required to be cleared by the Bank before consultant recruitment commences. Annex 11 provides a summary of the procedures and a checklist o f potential issues to be used in screening all TORs, resulting recommendations, and potential demonstration projects for safeguards issues to incorporate appropriate provisions. (The Bank wi l l NOT finance the implementation o f these demonstration projects; the project w i l l only assist in the design, tendering and negotiation with private investors for the pilot schemes.) 5.2 What are the main features o f the E M P and are they adequate?

Not required. 5.3 For Category A and B projects, timeline and status o f EA:

Environmental Category: B (Partial Assessment)

Date o f receipt o f final draft: No EA required, per EAP Safeguards Team meeting o f 3/13/2003

5.4 How have stakeholders been consulted at the stage of (a) environmental screening and (b) draft EA report on the environmental impacts and proposed environment management plan? Describe mechanisms o f consultation that were used and which groups were consulted?

Where applicable, TORs for individual TA packages wi l l specify arrangements for stakeholder consultation that conform to the Bank's policies. Such TORs wi l l be required to be cleared by the Bank before consultant recruitment commences. 5.5 What mechanisms have been established to monitor and evaluate the impact o f the project on the environment? D o the indicators reflect the objectives and results o f the EMP?

Not applicable.

6. Social: 6.1 Summarize key social issues relevant to the project objectives, and specify the project's social development outcomes.

Appropriate provision w i l l be made in TORs for individual technical assistance packages for identifying potentially important social issues and impacts. 6.2 Participatory Approach: H o w are key stakeholders participating in the project?

The project design w i l l seek to ensure the effective involvement of stakeholders in the formulation of policy and in the design of PPI pilot projects. This wi l l be accomplished through the careful design o f TORs for the technical assistance packages to be financed under the project.

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More generally, the project design recognizes the importance o f building public awareness, understanding and acceptance o f the need for and benefits of PPI, and incorporates outreach activities design to help accomplish this. 6.3 H o w does the project involve consultations or collaboration with NGOs or other c iv i l society organizations?

The roles o f and approaches for involving c iv i l society w i l l differ significantly for individual technical assistance packages and TORS wi l l be designed accordingly. I t i s not envisaged that the project would provide resources to NGOs or disburse resources through them. 6.4 What institutional arrangements have been provided to ensure the project achieves i t s social development outcomes?

The principal social development outcome envisaged to result directly from project implementation i s improved public awareness o f the need for and benefits o f well managed PPI. The planned P3 network i s expected to play an important role in promoting improved public awareness and also in gathering feedback from NGOs / CSOs (e.g., through participation in workshops and seminars and through more targeted outreach and survey activities). 6.5 H o w wi l l the project monitor performance in terms o f social development outcomes?

See above.

7. Safeguard Policies:

7.2 Describe provisions made by the project to ensure compliance with applicable safeguard policies.

Annex 11 provides the screening criteria, procedures and summary checklist to be applied to any/all subprojects which may involve safeguards issues during the course o f project implementation (e.g., demonstration schemes for private investment not yet identified during project preparation).

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F. Sustainability and Risks 1. Sustainability:

Indonesia needs to attract large scale and efficient private investment in infrastructure on reasonable terms in order to sustain i ts economic recovery, maintain and improve i t s international competitiveness, and expand and improve delivery of basic public services. This need should in principle provide strong and sufficient incentives for ensuring the sustainability o f project benefits. There will, however, be a need for strong political commitment to ensuring the private sector i s involved through processes that are transparent, competitive and maximize public benefits, and to resisting vested interests urging a return to business-as-usual. More generally, there wi l l also be a need for significant progress towards improving the overall investment climate and strengthening the domestic banking system and capital markets i f improvements in policy and regulatory environments and institutional capacities are to result in increased private investment flows in infrastructure.

Risk Rating

M

S

M

At the more micro level, the sustainability o f project benefits w i l l also depend on the ability and willingness o f the key participating agencies to assign sufficient competent and suitably motivated staff to work as counterparts to the advisory teams and consultants, to offer career development opportunities that encourage such staff to further develop and utilize their sk i l l s and expertise, and to actively promote cross-boundary working within their own organizations.

Risk Mitigation Measure

Regular inter-action between Bank supervision team and KPPI Secretariat / Sub-committee members to assess how outputs are being communicated and how the process might be improved. Ensure key economic Ministers in the KPPI Committee are well briefed on the l ikely fiscal and other consequences o f inappropriate policy or project decisions.

Require agencies to commit up-front to nominating capable counterpart staff and providing other needed resources (e.g., office accommodation). Allocate TA resources selectively, working with those agencies that demonstrate strongest interest and commitment. Institute an output and outcome monitoring system and ensure the KPPI Committee i s briefed on successes and failures.

2. Critical Risks (reflecting the failure o f critical assumptions found in the fourth column o f Annex 1):

I Risk From Outputs to Objective KPPI Secretariat and Subcommittee are not effective in communicating the recommendations o f advisors and consultants to the KPPI Committee.

KPPI Committee consistently fails to follow recommendations developed b y consultants and advisors I accedes to pressures from vested interests I ceases tc meet / function effectively. Implementing / client agencies are not fully committed to utilizing TA resources effectively.

Reluctance of implementing agencies to appoint consultants I advisors o f the

M Careful attention to reviewing definitions o f s k i l l / expertise needs in TORS and to design o f

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calibre required (fee rate issue) Inadequate advisor I consultant inter-action wi th counterparts and decision-makers and lor inadequate access to data and other information. Delays in recruitment o f advisors I consultants.

Overall Risk Rating

M

M

M

3. Possible Controversial Aspects:

none identified

proposal evaluation criteria. Advisors I consultants to be located where possible in the offices o f the client agency. Active supervision.

Recruitment o f consultants for initial high priority TAs to be underway by negotiations. Advisors to assist with design o f TORS for subsequent packages so as to minimize r isks of their not being acceptable to the Bank.

qegligible or Low Risk)

G. Main Loan Conditions 1. Effectiveness Condition

(a) that the Project Operations Manual, acceptable to the Bank, has been adopted by the Borrower;

(b) that the Project Implementation Units have been established in the Ministry o f Communications and the Ministry o f Settlements and Regional Infrastructure in accordance with paragraph 4 o f Schedule 5 o f the Loan Agreement; and,

(c) o f the Project, and for the Ministry o f Communications and the Ministry o f Settlements and Regional Infrastructure under Part B.l through B.4 of the Project, have been issued.

that requests for proposals for the consultants' contracts for the KKPPI Committee under Part A. l

2. Other [classify according to covenant types used in the Legal Agreements.]

1. The Borrower shall maintain until completion o f the Project, the KKPPI, chaired b y i t s Coordinating Ministry for Economic Affairs and including representatives f rom BAPPENAS, Ministry of Agriculture, Ministry o f Communications, Ministry o f Field Development Acceleration in East Indonesia, Ministry o f Finance, Ministry o f Energy and Mineral Resources, Ministry o f Home Affairs and Regional Autonomy, Ministry o f Industry and Trade, Ministry o f Settlements and Regional Infrastructure, and the Investment Coordination Board (BKPM), and responsible for the implementation o f i t s policy for the acceleration o f infrastructure development.

2. for the overall management and coordination o f the Project, chaired by the Deputy Coordinating Minister for Infrastructure Development and Fiscal and Economic Decentralization, and said Secretariat to be provided at a l l times with adequate funds and other resources and staffed b y qualified and experienced personnel in adequate numbers as shall be necessary to accomplish i t s objectives.

The Borrower shall maintain until completion o f the Project, the KKPPI Secretariat responsible

3. KKPPI Secretariat, responsible for the implementation o f the Project, chaired by the Assistant Deputy for Transportation and Telecommunications Infrastructure Development in the Coordinating Ministry for

The Borrower shall maintain until completion o f the Project, a Project Management Unit in the

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Economic Affairs, and said Unit to be provided at all times with adequate funds and other resources and staffed by qualified and experienced personnel in adequate numbers as shall be necessary to accomplish i t s objectives.

4. The Borrower shall establish and, thereafter, maintain until completion o f the Project, a Project Implementation Unit in M O C and in MSRI, responsible for the implementation o f Project activities within each such Ministry and each said Unit to be provided at a l l times with adequate funds and other resources and staffed by qualified and experienced personnel in adequate numbers as shall be necessary to accomplish i t s objectives.

5. shall:

In carrying out the infrastructure needs assessment (Part A.2 (i)) of the Project, the Borrower

(a) prepare the assessment in accordance with terms o f reference acceptable to the Bank; and

(b) not later than September 30, 2004, furnish to the Bank for comments the results o f the assessment.

6. projects in accordance with criteria agreed with the Bank. The agreed criteria shall be set out in the Project Operations Manual.

7. Borrower shall:

In carrying out Parts A.2 (v) and B.5 o f the Project, the Borrower shall select proposed pilot

In carrying out Part B.3 (i) of the Project regarding sector policy and strategy studies, the

(a) select studies in accordance with criteria agreed with the Bank, including a focus on pricing and subsidy policies and a focus on the development o f structures for promoting efficient delivery o f affordable basic public services; and

(b) furnish the terms o f reference for each study to the Bank for approval.

8. Indonsia under Part B.6 o f the Project, and, thereafter, incorporate the lessons learned from the review in the training program under Part C. 1 of the Project.

The Borrower shall, b y September 30,2004, carry out the reviews o f past P3 experience in

9. The Borrower shall carry out Part C.2 o f the Project in accordance with a training program and a timetable acceptable to the Bank, and shall select the candidates for the training program in accordance with criteria agreed with the Bank. The agreed criteria shall be set out in the Project Operations Manual.

10. The Borrower shall:

(a) maintain policies and procedures adequate to enable i t to monitor and evaluate on an ongoing basis, in accordance with the indicators set forth in Schedule 6 o f the Loan Agreement, the carrying out o f the Project and the achievement o f the objectives thereof;

(b) prepare, under terms o f reference satisfactory to the Bank, and furnish to the Bank, on or about September 30, 2004, a report integrating the results o f the monitoring and evaluation activities performed pursuant to paragraph (a) o f this Section, on the progress achieved in the carrying out o f the Project during the period preceding the date o f said report and setting out the measures recommended to ensure the efficient carrying out o f

- 30 -

the Project and the achievement o f the objectives thereof during the period following such date:

(c) review with the Bank, by January 15, 2005, or such later date as the Bank shall request, the report referred to in paragraph (b) of this Section, and, thereafter, take al l measures required to ensure the efficient completion o f the Project and the achievement o f the objectives thereof, based on the conclusions and recommendations o f the said report and the Bank's views on the matter: and

(d) make publicly available the report referred to in sub-paragraph (b) o f this paragraph at the same time as i t i s furnished to the Bank pursuant to said sub-paragraph.

H. Readiness for Implementation 1. a) The engineering design documents for the f i rs t year's activities are complete and ready for the

start o f project implementation. 8 1. b) Not applicable.

0 2. The procurement documents for the f i r s t year's activities are complete and ready for the start o f

8 3. The Project Implementation Plan has been appraised and found to be realistic and of satisfactory

4. The following items are laclung and are discussed under loan conditions (Section G):

project implementation.

quality.

Completion o f procurement documents for at least 40% o f the loan proceeds w i l l be a condition of effectiveness.

I. Compliance with Bank Policies 1. This project complies with a l l applicable Bank policies.

E 2. The following exceptions to Bank policies are recommended for approval. The project complies with a l l other applicable Bank policies.

&lL K 1 kJdAL-ii Stephe6 R. Dice Team Leader

-31 -

Annex 1 : Project Design Summary INDONESIA: Private Provision of Infrastructure Technical Assistance Loan

very and promoting

'y: Building national ns for accountable

Large scale private investment BPS, BKPM and other reports Improved governance coupled supports provision o f on investments flows. with political stability. infrastructure services o f the capacity, quality and infrastructure sector efficiency needed to sustain performance. rapid economic growth. Effective competition in Periodic reports on sector infrastructure service delivery structure and performance. realized where feasible. Reports of regulatory Effective independent agencies. regulation prevents abuse of market power. Increased coverage and quality BPS and sector agency o f basic infrastructure services. specific performance Tariffs reflect efficient costs assessments except where well designed and targeted subsidies enhance initial affordability.

Periodic reports on

statistical reports. Sector-

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ierarc

provision.

Local govemments understand the role o f PPI, factors conducive to a favorable investment climate, and their roles and responsibilities in enabling PPI

Project Development 3bjective: 4ssist GO1 develop and implement the policy and -egulatory reforms and build .he institutional and social Foundations needed to enable, xomote and facilitate efficient ind sustainable large-scale xivate investment in public nfrastructure.

positions (as gathered and reported by P3 network).

Monitoring and assessment by core teams o f progress on specific PPI schemes that have been supported by the Project.

Outcome / Impact Project reports: (from Objective to Goal) Indicators: Sound cross-sectoral and Conduct o f country and sector Improving overall investment sectoral policies for promoting framework assessments at start climate. and realizing PPI are based on and end of the Project by the

Information relevant to PPI i s actively maintained, more accessible, and more

sound analysis, embodied in laws and regulations, and operationalized.

Stakeholder feedback through discussions with supervision missions.

Independent I non-ministerial regulatory bodies with sound operating procedures and competent personnel are established for key sectors.

Organization structures, skill-mixes, capacities and cultures o f govemment agencies understand and are pro-active in the expansion and evolution o f their current roles as providers o f infrastructure and services to

core teams using PPIAF model Strengthening domestic and guidelines. capacity and willingness to

finance infrastructure projects. Progress reports of the KKPPI, MOC and MSRI core Firm political wi l l to press advisory team. ahead with SOE privatization

and expanded private PMU reports on numbers o f participation in key officials who have participated infrastructure sectors, and to in project supported training. resist pressure for "business as

usual". SekKab website of laws and regulations.

Volume o f relevant material publicly acccessible on P3 network websites.

Public awareness and understanding o f the needs for and benefits o f well-managed PPI has increased.

Opportunities for public participation, by both groups and individuals, are ensured in Formulating and formalizing laws, policies, regulations and ?rocedures conceming PPI at 111 levels of govemment

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Private sector investors are informed o f the efforts by government to promote PPI and participate in the formulation and enactment of a favorable investment climate

Soundly conceived PPI schemes have been developed and tendered through transparent competitive processes.

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tives - lutput from each :omponent: Zross-Sector TA I Advisory iervices 0 Recommendations

developed on: cross- cutting PPI policy and strategy issues; handling o f specific major PPI project proposals; and improving inter-agency coordination.

Central P3 Unit has been established and i s operational.

iector-Specific TA I Ldvisory Services

0 Recommendations developed on sector policy and strategy, legal and regulatory reform, and regulatory institutions.

0 Sectoral P3 units have been established and are operational.

0 Lessons learned from previous PPI projects objectively analyzed and disseminated.

:apacity Building and 'raining

0 Quality training courses delivered by competent trainers.

0 Opportunities provided to

Output Indicators:

Number of briefing papers prepared for consideration by KPPI Committee, inccluding: *Sector and Country PPI framework assessments and strategy options papers *Revisions to Kepres 7 and related regulations *Revised Local Govemment Enterprise Laws and regulations *Lessons learned analyses

Donor programs coordination

Overall PPITA management effectiveness National PPI website actively maintained. Frequency of interactions with stakeholders.

Studieslrecommendations on policies, legallregulatory aspects and procedures in each sector Number o f detailed and actionable PPI-related proposals developed for top-level decision within sector agencies.

Sectoral PPI websites are actively maintained and linked to national PPI site. Frequent interaction with stakeholders Number o f assessments zompleted and made available to decision-makers and other parties. Formulation o f an HRD program responding to PPI program needs Numbers o f courses delivered and numbers of participants. Willingness o f agencies to pay For staff participation. Number and value o f

Jroject reports:

ldvisors' I consultants' I P M U rogress and other reports.

idvisors' I consultants' I PMU rogress and other reports.

ldvisors' I' consultants' I P M U xogress and other reports.

ldvisors' I consultants' I P M U Irogress and other reports.

lonsultants' I P M U reports.

lonsultant's I P M U progress eports

'MU reports

Critical AssumDtions from Outputs to Objective)

$ecretariat/Sub-com'tee :ommunicates effectively with (PPI Committee. Zommittee utilizes inputs rovided and resists pressures rom vested interests.

Z i r m GO1 commitment to naintaining the P3 network in ippropriate institutional letting.

llient agencies communicate ecommendations effectively o their top managements. (PPI Committee effective in :muring cross-sectoral :onsistency in decision- naking. iirm GO1 commitment to naintaining the P3 network in ippropriate institutional ,etting. Zlient agencies do not 'censor' issessments.

nterest o f universities and )ther credible institutions to leliver and further develop the :ourses. lgency commitment to ensure

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attend short courses, workshops, conferences, etc.

project Components / ;ub-components: e e e

?MU Support 0 P M U successful in

managing project in full compliance with agreements reached at negotiations.

Inputs: (budget for each component)

participations supported. Number o f participants fulfilling obligation to share lessons learned.

Effective P M U management o f PPITA implementation: * In-house advisors in place * Timely mobilization o f others * T A proposals processed * Disbursements on schedule * PPITA components achieved successfully

?MU progress reports

Jroject reports:

hat training opportunities are Irovided on basis o f job need tnd individual capacity, and hat expertize gained i s ffectively shared.

Zffective linkage between 'MU and KPPI Secretariat md advisors.

from Components to lutputs)

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Annex 2: Detailed Project Description INDONESIA: Private Provision of Infrastructure Technical Assistance Loan

By Component:

Project Component 1 - US$6.06 million 1. Cross-sectoral technical assistance and advisory services

This component w i l l encompass:

0

0 Core support to the KPPI Secretariat and Planning and Investment Sub-committee. Supplementary support to the KPPI Secretariat and Planning and Investment Sub-committee.

0 Support for the establishment and initial operation o f a central Public-Private Partnership (P3) unit.

Core support for the KPPI Secretariat and Sub-Committee: The Secretariat and Planning and Investment Sub-committee play important and complementary roles in enabling the KPPI Committee to function efficiently and effectively, including through: (a) helping to shape and prioritize i t s agenda; (b) providing concise, well-analyzed, and decision-oriented briefings on policy, strategy and project issues and proposals; and (c) assisting i t to function as an effective political champion for private participation in infrastructure provision. They are also positioned, in conjunction with Bappenas, to play a pivotal role in guiding and supporting the development of an over-arching strategy and policy framework for infrastructure development and private participation. The Sub-committee has primary responsibility for developing recommendations on cross-cutting policy and strategy issues (e.g., i t has the lead on the drafting o f the revised Keppres 7) while the Secretariat has primary responsibility for supporting the Committee on more ad hoc issues, including matters specific to individual projects.

The project wi l l provide support to the Secretariat and Sub-committee in the form o f a small KPPI Core Advisory Team for the period of the project’s implementation. This team wi l l also be available to provide limited ad hoc advice and assistance to individual sectoral and regional agencies on an “as needed and able” basis. I t i s envisaged that the size o f the team w i l l diminish as sk i l l s and expertise are transferred to GO1 counterpart personnel. The lead advisor wi l l be expected to have extensive broad-based, high-level international experience in the preparation and implementation o f private infrastructure projects, and w i l l be able to demonstrate, among others, an in-depth understanding o f the key success factors for PPI.

Supplementary support for the KKPPI Secretariat and Sub-Committees. I t i s envisaged that the Secretariat and the Sub-committee w i l l from time-to-time need additional technical assistance over and above what can be provided by the Core Advisory Team. Such needs may arise when the core team advisors are already heavily loaded, and / or when there i s a requirement for specialized s k i l l s and expertise that are not available within the core team, and may include, for example: (a) assistance with the drafting o f an over-arching infrastructure needs assessment and provision options paper; (b) development o f practical guidelines to assist sectoral and sub-national agencies with the implementation o f the revised Keppres 7; (c) conduct o f independent expert reviews o f proposed major private infrastructure projects; (d) development o f cross-sectoral policies on public supports for private projects and on project risk allocation; (e)

- 3 7 -

assistance to local and provincial governments in the preparation o f demonstration infrastructure projects aimed to attract private sector investors; and (0 assistance in efforts to increase the efficiency of state and regional enterprises engaged in the infrastructure sectors and to make them attractive to private sector investors. These w i l l be met through the funding o f short-term advisors / experts (team or individuals) with specialized ski l ls and experience pertinent to the specific assignments.

Development ofP3 Network / Central Unit: GO1 plans to develop a Public-Private Participation (P3) network to support i t s efforts to socialize, promote and facilitate private participation in infrastructure provision. This reflects international experience indicating a network approach i s more effective than the “National BOT Center” approach initially favored by several countries. A core function of the envisaged P3 network would be to assemble and maintain information on policies, regulations, lessons o f experience and current and potential project opportunities, and to disseminate and share this with interested parties, including public institutions and agencies (both central and regional), prospective investors, and the general public. I t would also play an important role in supporting and complementing the KPPI Committee’s efforts to foster greater public awareness of the need for and expected benefits of PPI, and to promote institutional capacity building on PPI topics. The draft o f the revised Keppres 7 provides for the development o f a central P3 unit whose role would include supporting the development o f a P3 network. The project wi l l support the planning and establishment o f this central unit, which i s to be attached initially to the KPPI Secretariat, and the initial period o f i t s operation. A short study w i l l be conducted to identify and evaluate possible options for the development and operation o f a P3 network, and to prepare detailed proposals, including a work program and budget for establishing the central P3 unit. The study i s expected to include a small and carefully planned program of visits to P3 networks / centers in other countries in the region.

Project Component 2 - US$8.58 million 2. Sector-specific technical assistance and advisory activities

The largest part of the project resources wi l l be allocated sector-specific activities aimed at establishing conditions conducive to sustainable private investment in infrastructure, and to developing specific opportunities for such investment. The project w i l l focus primarily on the transport, telecommunications, and urban infrastructure sectors, and support activities involving:

0

0

0

legal and regulatory reform (drafting of sector laws and implementing regulations); design and establishment o f regulatory institutions; conduct of sector policy and strategy studies with a strong PPI focus and impact (including sector / sub-sector privatization strategy studies); establishment o f key sectoral “nodes” in the national P3 network; preparation and tendering o f pilot PPI projects; conduct and dissemination o f “lessons learned” analyses for recent private infrastructure projects and privatization initiatives.

The project wi l l also finance small teams o f “in-house” PPI advisors to work with each o f the two key sector agencies, namely the Ministry o f Communications (MOC) and the Ministry of Settlements and Regional Infrastructure (MSRI). The M O C advisors w i l l be attached to i ts Secretariat General and report on a daily basis to the Head o f the Bureau of Planning, while the

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MSRI advisors wi l l be attached to i t s Agency for Investment and Construction, whose structure already includes an embryonic P3 unit.

TORs for the priority assistance in these sectors, including in particular for the PPI advisors, have been drafted during project preparation. However, a significant pool o f funds has been left un-earmarked so as to enable the project to respond effectively and promptly to evolving needs and opportunities. The M O C and MSRI-PPI advisors w i l l play an important role in developing the TORs for such activities, and in helping to guide and manage their implementation and ensure outputs are disseminated and used effectively.

Legal and regulatory reform: The Government recognizes the need to replace the four MOC-administered modal transport laws (Road Traffic and Transport, Railways, Civ i l Aviation, and Maritime Transport) and the MSRI-administered Roads Law. Changes are needed to align with the Law on Regional Autonomy as well as to create an improved environment for private participation by enabling more effective competition and private participation in sectors currently controlled by SOEs, and through establishing improved regulatory arrangements and licensing procedures. MSRI and i t s predecessor agencies have already prepared several drafts o f the new Road Law, although there i s as yet no clear consensus on several key policy issues, including the restructuring o f the toll road sector. Discussions on the revision o f four modal laws administered by M O C are at a much earlier stage, in part because consideration i s now being given to the possible need for an over-arching “umbrella” transport law to create an environment conducive for efficient multi-modal transport and inter-modal connections.

The project w i l l support the revision o f the transport Laws through a three-phase approach designed to avoid problems that impeded the drafting o f other sectoral laws in recent years. The f i rs t phase would focus on developing the overall “architecture” for the new legal framework, including assessing the need for an umbrella transport law, determining the topics to be addressed under this and the individual modal laws, and ensuring consistency between, for example, the laws on road infrastructure and on road traffic and transport. The second phase would encompass assisting the teams charged with drafting the individual laws and their implementing Government Regulations to assess options in key policy areas and to develop conceptual drafts for review by top-level decision-makers. I t would encompass reviews o f international best practices and involve extensive consultations with the key stakeholders. The third stage, which should be the most straightforward, would involve the preparation o f Indonesian language drafts o f the Laws and associated Elucidations (in a style and format suitable for immediate submission to the DPR), and o f the implementing Govemment Regulations.

Regulatory institutions. Some infrastructure sectors have advanced further than others towards placing regulatory authority at arm’s length from the political process. Most notably, the new Oi l and Gas law and the new Electricity Law make explicit provision for the establishment o f independent / non-ministerial regulatory agencies. Considerable preparatory work has also been done to develop arm’s length regulatory models for the water supply sector, with the f i rst such agency having been established by DKI Jakarta and another in process o f being designed for Pekanbaru. B y contrast, the transport and telecommunications sectors are lagging well behind, with regulation remaining firmly in the hands o f MOC and MSRI or regional government agencies. Likewise, the 1999 Telecommunications Law does not explicitly provide for an

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independent regulatory agency, although the need i s now recognized and there has already been some discussion o f possible options.

The project wi l l provide support in this area through technical assistance to evaluate alternative regulatory models, and to design and assist with the establishment o f regulatory agencies. The initial focus would be on the flagship telecommunications sector, where deficiencies in the regulatory environment are already deterring much needed new private investment, on the railway and toll road sectors, where the roles o f government and SOEs remain blurred, and on the water supply sector.

Sectorpolicy and strategy studies. Indonesia’s PPI program during the Suharto era was driven principally by unsolicited proposals, with l i t t le prior attention being given to establishing sound policy and regulatory frameworks or to shaping and positioning individual projects in the context o f sound sector development strategies. While significant progress has made in some areas since the mid-l990s, many important gaps remain. Moreover, some of the recommendations already developed have been partly overtaken by subsequent events-notably the economic crisis and regional autonomy-while others are too broad in scope to provide an actionable framework for supporting private participation.

The project w i l l support the conduct of a wide range o f policy and strategy studies whose common theme wi l l be development o f recommendations that contribute to a more conducive environment for PPI. The particular focus wi l l be on pricing and subsidy policies, and on developing structures for promoting efficient delivery o f affordable basic public services using output-based supports (e.g., for “pioneer” transport services or rural telecommunications services). The project w i l l also assist with the preparation or updating o f sector / sub-sector needs assessments, development options and privatization strategies for key sectors (e.g., telecommunications, toll roads) where there i s strong interest and ownership by the key agencies. TORs for the highest priority studies have been drafted during project preparation, but i t i s intended that a major part o f the study needs wi l l be defined during the initial year o f project implementation. Sector agencies, assisted by the M O C and MSRI-PPI advisors w i l l be invited to submit outline TORs for such studies to the PMU, which would then screen them against agreed criteria (see Annex 13) before forwarding to the KPPI Secretariat and the Bank for clearance.

P3 network nodes: In parallel with supporting the establishment o f a central P3 unit, the project wi l l also assist with setting up P3 “nodal” units in MSRI and MOC. Within MSRI, the Agency for Investment and Construction has been given clear responsibility for promoting private investment within i t s sectoral domain. The project w i l l assist the Agency to strengthen i t s capabilities, including initially through knowledge management technical assistance aimed at helping i t improve the accessibility o f MSRI’s extensive PPI-related information resources. While M O C has not yet established a structural unit to be responsible for promoting PPI, the Head of Planning Bureau (in the Secretariat General) has been charged with coordinating the Ministry’s activities in this area. The project wi l l provide support for the development o f an embryonic P3 capacity in the Ministry, again focusing initially on knowledge management and most probably located within the Bureau o f Planning.

Demonstration projects. The project w i l l support the preparation o f a limited number o f demonstration projects designed to be feasible and attractive for private investment. The choice

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o f projects wi l l be demand-driven, with the PPI advisors assisting M O C and MSRI (in conjunction with regional agencies where appropriate) to firm-up suitable proposals, and the focus wi l l be on schemes that wi l l be amenable to replication (e.g., possible pilot for rural connectivity). The support to be provided under the project would extend through the tendering, award and contract negotiation stages. Clear criteria w i l l be established for deciding whether proposals qualify for the allocation o f preparation financing under the project (see Annexes 11 and 13), and the preparation process for the approved schemes wi l l include documenting key decision issues so as to assist the design of future projects o f a similar nature and the preparation o f case study materials.

Lessons learned analyses. I t w i l l be important for Indonesia to learn effectively from i t s past initiatives to attract private investment in infrastructure and restructure and privatize state-owned infrastructure enterprises, and to be able to relate these lessons to international experiences. Where possible, such lessons-learned analyses would be funded from grant resources (e.g., PPIAF). However, i t i s planned that a small number o f high priority reviews wi l l be supported by the project, and that the outputs would be used as case studies for the proposed training program.

Project Component 3 - US$ 1.50 million 3. Capacity building and training

The project w i l l contribute to capacity building and training in areas relating to private participation in infrastructure through three main channels:

assistance with development of curricula and training modules on issues relevant to PPI and training o f trainers for a range of courses designed to be delivered by qualified universities and other institutions; support for key staff from agencies directly engaged in dealing with prospective private infrastructure investors or responsible for sector policy matters and regulation to participate in short training courses, conferences, workshops or other developmental programs o f relevance to their specific duties; technical transfer to counterparts from the conduct o f studies and provision o f technical advisory services.

A range of domestic training courses i s required and these w i l l be developed sequentially. The most pressing need i s for short courses (in Bahasa Indonesia) to familiarize senior government and SOE officials with the issues they wi l l confront when seeking to involve private investors in infrastructure provision. I t i s envisaged that this need would be met through a very short (one-day) overview course for top-level government officials (e.g. Mayors, Bupatis, and senior central agency officials with no prior PPI involvement), and short (circa two-week) introductory course for “working level” officials. The content of the overview and introductory courses wi l l need to be linked to the revised Keppres 7 and designed for delivery in the regions as well as in Jakarta. Beyond this, there i s also an urgent need for a more comprehensive modular, case study-based PPI training program targeted at practitioners who wi l l be actively involved in the detailed preparations for and processing o f PPI projects.

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Limited provision wi l l also be made for supporting individual participation in short overseas courses, study tours, and overseas placements programs, and in domestic and overseas conferences and workshops where this demonstrably offers a cost-effective means o f acquiring PPI-related expertise and where the participants occupy positions that wi l l enable them to use i t effectively. To ensure good use o f limited resources, prospective participants wi l l be required to identify up-front how the proposed activity would contribute to the better performance o f their duties. In addition, they would also be expected on completion to provide written assessments of the relevance and quality o f the program content, to make copies of papers and materials obtained available to the P3 network, and to make presentations to colleagues and peers outlining what was learned.

Project Component 4 - US$0.39 million 4. PMU support services

The PMU wi l l be accommodated in rental offices near to OCMEA’s office, and the key management positions w i l l be staffed by GO1 personnel. The project wi l l finance contract employees for administration, accounting, and office support.

Please see Annex 12 for additional discussion and details of the project work plans.

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Annex 3: Estimated Project Costs INDONESIA: Private Provision of Infrastructure Technical Assistance Loan

Front-end fee Total Financing Required

Cross Sectoral Technical Assistance Sectors Specific Technical Assistance Capacity Building and Training Incremental Operating Costs o f PMU Project Preparation Faci l i ty (PPF) Repayment Total Baseline Cost Physical Contingencies Price Contingencies

0.17 0.17 12.42 6.58 19.00

4.52 6.20 0.95 0.49 0.26

12.42

Total Project Cost: Front-end fee

Total Financing Required

Foreign US $million

2.20 3.33 0.70 0.00 0.18 6.4 1

0.00 12.42 6.41 18.83

0.17 0.17 12.42 6.58 19.00

Total US $million

0.00 6.72 9.53 1.65 0.49 0.44

18.83 0.00 0.00

I 12.42 I 6.41 I 18.83 1 Total Project Costs

Consultant Services and Training Incremental Operating Costs of PMU Project Preparation Facility (PPF) Repayment

11.67 0.49 0.26

6.23 0.00 0.18

17.90 0.49 0.44

Identifiable taxes and duties are 1.7 (US$m) and the total project cost, net o f taxes, i s 17.3 (US$m). Therefore, the project cost sharing ratio i s 98.84 % of total project cost net of taxes.

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Annex 4 INDONESIA: Private Provision of Infrastructure Technical Assistance Loan

No Economic or Financial Analysis is Required or Appropriate for a Technical Assistance Loan.

- 4 4 -

Annex 5: Financial Summary INDONESIA: Private Provision of Infrastructure Technical Assistance Loan

Years Ending June 30

I Year1 I Year2 I Year3 1 Year4 I Year5 1 Year6 I Year7 I Total Financing Required

Project Costs investment Costs 5.7 7.8 4.2 0.7 0.0 0.0 0.0

Recurrent Costs 0.1 0.1 0.1 0.1 0.0 0.0 0.0 Total Project Costs 5.8 7.9 4.3 0.8 0.0 0.0 0.0

Front-end fee 0.2 0.0 0.0 0.0 0.0 0.0 0.0 Total Financing 6.0 7.9 4.3 0.8 0.0 0.0 0.0

Financing IBRDllDA 5.4 7.1 3.9 0.7 0.0 0.0 0.0 Government 0.6 0.8 0.4 0.1 0.0 0.0 0.0

Central 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Provincial 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Co-financiers 0.0 0.0 0.0 0.0 0.0 0.0 0.0 User FeesBeneficiaries 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Other 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Total Project Financing 6.0 7.9 4.3 0.8 0.0 0.0 0.0

Main assumptions: GO1 w i l l pay 10% VAT on al l project contracts. Loan w i l l finance 80% of PMU incremental operating costs

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Annex 6(A): Procurement Arrangements INDONESIA: Private Provision of Infrastructure Technical Assistance Loan

Procurement Procurement Guidelines

1. Project (PPITA) wi l l be carried out in accordance with the World Bank’s Guidelines for Selection and Employment of Consultants by World Bank Borrowers (January 1997, revised September 1997, January 1999, and May 2002). There i s no procurement o f goods or works in the Project design.

Procurement o f services on the Private Provision o f Infrastructure Technical Assistance

Standard Procurement Documents

2. sample evaluation report, and standard contracts wi l l be used.

For selection o f consulting services, the World Bank’s Standard Request for Proposals,

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3. Business online on 11 March, 2003, and for publication in paper form in Issue 603 dated 31 March 2003, announcing the major consulting services to be procured under the Project. The GPN wi l l be updated annually for all outstanding procurement over the lifetime of the Project. Invitation for Expression o f Interest for all consulting assignments to f i rms w i l l be advertised in a newspaper o f national circulation, and for contracts o f US$400,000 or above, the assignment wi l l also be published in Development Business (UNDB On-line) and in the dgMarket.

A General Procurement Notice (GPN) was submitted for publication in UN Development

Procurement Capacity Assessment

4. February 2000, with the final report being issued in February 2001. A Procurement Capacity Assessment Report (PCAR) has been completed for the Project and i s available in the Project file. This covered legal issues, project cycle management, organization and functions, support and control systems, record keeping, staffing, the general procurement environments, and overall risk assessment in accordance with the instructions issued by OCSPR. The tendency o f implementing agencies to negotiate rates in the case o f QCBS does not pose a significant risk in this case since staff o f the PMU are aware o f the Bank’s requirements and these are clarified in the PMM.

The last Country Procurement Assessment Report for Indonesia was carried out in

5. the following reasons:

The assessment o f procurement r i sk o f this proposed Project i s rated as ‘average’, due to

(i) Contracting i s simpler since i t consists entirely o f selection o f consultants. There are no goods or works under this project o f only US$19 mil l ion

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(ii) The Project Management Unit (PMU) i s operational with adequate capacity and staff experienced with Bank procedures for selection o f consultants. The procurement officer has many years' experience with procurement in Bank funded projects and has strong back-up by a financial management specialist with four years' experience in a Bank-funded project where she supervised the procurement activity; All contracting wi l l be done by the P M U or PIUs with the guidance and oversight o f the PMU. Since the P M U and PIUs are located in Jakarta extensive supervision i s possible. All selection procedures are clearly defined in the PMM, which i s based on an existing TA project financed by the Bank; An anti-comption action plan has been agreed (see Annex 15) which includes appointment o f members from civi l society in the evaluation committees. Since the general procurement environment i s weak, therefore a rating of "high to average" was considered, but given the strong procurement capacity of the P M U a rating o f "average" risk i s appropriate. However, the thresholds and supervision intensity i s similar to a "high" r i s k case. Based on the experience o f the first year an adjustment in the thresholds and supervision intensity can be considered.

(iii)

(iv) (v)

(vi)

(vii)

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A C T I O N P L A N

P M U

PMU

PMU

6.

Within three months after effectiveness

BY Negotiations (Completed) November of each year

The fo l l ow ing action p lan i s proposed to mitigate the r i sks identif ied.

Action

Capacity enhancement by adding Capacity 1. Project Implementing Units w i l l be established in M S R I and MOC. This would include the appointment of a qualified Procurement Officer in each PIU. Procurement Traininp 2. A Procurement and Financial Management Training w i l l be conducted by the PMU for Procurement and FM officers.

Enhanced planning and controlling mechanisms 3. The draft procurement plan for the overall project and the f i rs t year implementation should be prepared and finalized with the implementing units. 4. Updated Procurement Plan for the 2nd and following fiscal year w i l l be submitted to the Bank at least annually before disbursements can be initiated 5. The draft Project Management Manual (PMM) should be prepared to document procedures to be followed b y al l the implementing units, covering job descriptions, procurement, financial management, record management, fixed assets and inventory management, bookkeeping, reporting, monitoring, and evaluation mechanism for the FM system. The Procurement section should include: 0 Procurement methods and procedures 0 TOR o f procurement specialist/officers 0 Standard RFP

Reporting requirements complete with standard reporting forms in line with the FMR.

6. Draft RFPs for the 1st year implementation should be prepared. 7. An anti-corruption action plan w i l l be prepared and w i l l be included in the PAD. (See Annex 15)

8. All cases of collusion and other fraudulent and corrupt practices w i l l be reported and investigated by the Borrower and the Bank. and remedial actions w i l l be taken.

Progress in Planning and Preparation

Effectiveness

P M U Negotiation (Completed)

I Before Effectiveness

Negotiation (Completed)

7. A draft Procurement Plan for the Project and the f i rst year implementation p lan have been prepared and finalized with the PMU and implement ing agencies. Since the design of this technical assistance Project i s such that advisors work ing with the various agencies wi l l assist the

- 4 8 -

various ministries and agencies involved in identifying their needs for technical assistance in the Project, the demand-driven need for services wi l l thus be based on emerging needs. Selection o f consultants for the f i rst year has been defined and planned including preparation of Terms of Reference and cost estimates. The updated procurement plan for the second and following fiscal year w i l l be submitted to the Bank annually before disbursements are initiated. The draft Financial Management System Manual for the Project has been completed, including a general Financial Management Manual, Accounting Manual, Disbursement Manual, Procurement Manual, and Operations Manual. These are based on the Financial Management System Manual developed and used in the Corporate Restructuring Technical Assistance Project (CRTAP), which qualified for Project (now Financial) Management Report-Based Disbursement. The PMU Financial Management Specialist was responsible for preparing the quarterly reports to the Bank on the CRTAP, which included procurement reporting, and brings this experience with her to this Project. (See further discussion in Annex 6B below.)

Supervision Plan and Prior Review Thresholds

8. supervision plan are proposed that may be reviewed after the f i r s t year:

Due to the r isks identified for this assessment, the following prior review thresholds and

Consultant Services: US$lOO,OOO for f i r m s and f i rst contracts through CQ by each implementing unit and US$50,000 for individual consultants. All single-source selection contracts. TORS for all contracts, and the following positions at any implementing agencies: project managers, procurement, and financial management. First ten contracts procured in the Project regardless o f value Post Review ratio: one of every five (5) contracts Frequency of procurement supervision proposed: Every three months (note: post-review/audits every one (1) year).

0

0

0

Selection methods

9. planned for the P M U under OCMEA and the PIUs under MSRI and MOC. All contracting wi l l be done by the P M U and the two PIUs. The procurement plan wi l l be updated after the f i rs t year based on emerging needs.

The Procurement plan gives the details o f various selection methods for contracting

Given below are the planned selection methods:

a. QCBS (US$14.36 million) w i l l be used as the default method and wi l l be used for most o f the assignments. These assignments are normally greater than US$200,000 including assignments l ike the: advisory services to KKPPII Secretariat, in-house advisor to MOC, and, in-house advisor to MSRI. Short l i s t s may comprise entirely o f national consultants for assignments estimated to cost less than US$400,000. QBS (US$1.32 million) wi l l be used for assignment which are complex in nature and with substantial downstream impact. These assignments include the following: research and development, legal and regulatory reform complex assignment, design and

b.

- 4 9 -

development o f regulatory institutions with substantial downstream impact, and, cross-sectoral policy and strategy complex studies. CQ (US$1.61 mill ion) for assignments for f i r m s to organize events and training. Individual Consultants (US$1.54 mil l ion) these includes consultants selected on a single-source basis due to the unique qualifications o f the consultants. Fourteen consultants were selected under the PPF on a competitive basis. These consultants from various specializations were hired as needed. I t i s not feasible to hire a firm with the diverse specializations required. The estimated aggregate disbursement for single-source selection i s US$S20,000 that wi l l be for consultants with unique qualifications or for continuance in accordance wi th paragraph 5.4 o f the consultant guidelines.

c. d.

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Procurement methods (Table A)

ICB I NCB I Expenditure Category Other 2, I N.B.F

1. Works 0.00

(0.00) ~

2. Goods

3. Services

4. Incremental Operating Costs of PMU 3,

0.00 0.00 0.00

(0.00) (0.00) (0.00)

5. Refunding of Project Preparation Facility

0.00

(0.00)

0.00

(0.00)

0.00

(0.00)

6. Front-end Fee

0.00 0.00 0.00

(0.00) (0.00) (0.00)

0.00 17.90 0.00

(0.00) (16.14) (0.00)

0.00 0.49 0.00

(0.00) (0.39) (0.00)

I Total

0.00

(0.00)

Table A: Project Costs by Procurement Arrangements (US$ million equivalent)

0.00 0.44 0.00

(0.00) (0.40) (0.00)

0.00

(0.00)

0.00 0.00 0.00

(0.00) (0.00) (0.00)

0.00

(0.00)

~

0.00 18.83 0.00

(0.00) (16.93) (0.00)

1) Fees in parenthesis are the amounts to be financed by the Bank Loan. All costs include contingencies.

Figures outside parenthesis include Value Added Tax (VAT) of lo%, except item No. 6: Front-end Fee

Total Cost I 0.00

(0.00)

0.00

(0.00)

17.90

(1 6.1 4)

0.49

(0.39)

0.44

(0.40)

0.17

(0.17)

19.00

(1 7.1 0)

2) Includes consulting services, services of contracted staff of the project management office, training, TA setvices and

3) Incremental Operating Costs of PMU (costs are the amounts to be financed at 80% for Contracted Services) costs related to managing the project.

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Consultant Services Expenditure Category

A. Firms

B. Individuals

C. Front-end Fee

Total

1 ) a. Figures in parenthesis are the amounts to be financed by the Bank Loan. b. Figures outside parenthesis include Value Added Tax (VAT) of 10%

Selection Method 1) Total Cost INDV

COMP QCBS QBS SFB CQ Sole Source

14.36 1.32 0.00 1.61 0.00 0.00 17.29

(12.88) (1.20) (0.00) (1.46) (0.00) (0.00) (15.54)

0.00 0.00 0.00 0.00 0.91 0.63 1.54

(0.00) (0.00) (0.00) (0.00) (0.82) (0.57) (1.39)

0.00 0.00 0.00 0.00 0.00 0.00 0.17

(0.00) (0.00) (0.00) (0.00) (0.00) (0.00) (0.17)

14.36 1.32 0.00 1.61 0.91 0.63 19.00

(12.88) (1.20) (0.00) (1.46) (0.82) (0.57) (17.10)

Note: QCBS QBS SFB LCS CQ INDV ss COMP

= Quality and Cost-Based Selection = Quality Based Selection = Selection under a Fixed Budget = Least-Cost Selection = Selection Based on Consultants' Qualifications = Selection of Individual Consultants = Sole Source Selection = Competition by at least 3 (three) candidates

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Table B: Thresholds for Procurement Methods and Prior Review 1)

Procurement Methods Methods costs

QCBS 13.67

QBS 1.32

CQ 1.61

INDV (SS) 0.91

INDV (COMP) 0.39

Expenditure Category

I

.Works

!. Goods

1. Services

4. Incremental Operating Costs of PMU *)

5. Refunding Project Preparation Facility

6. Front-end Fee

Total

(US$ Contract Value

Threshold

USD 100,000

USD 100,000

USD 100,000

AI I

USD 50,000

USD 100,000 0.49

QCBS I

Contracts Subject to Prior Review

12.00

1.32

1.61

0.75

0.39

0.49

0.44

0.17 I I 19.00 I 16.56 I

Total value of contracts subject to prior review: Overall Procurement Risk Assessment:

16.56 Average

Frequency of procurement supervision missions proposed: One every 3 (three) months (includes special procurement supervision for post-review/audits)

1) a. All costs figures include Value Added Tax (VAT) of lo%, except item No. 6. Front-end Fee b. QCBS = Quality and Cost-Based Selection; QBS = Quality Based Selection; LCS = Least-Cost Selection;

basis)

2) Incremental Operating Costs of PMU (costs are the amounts to be financed at 80% for Contracted Services)

. .

INDV (COMP) = Selection of Individual Consultants (Competition by at least 3 (three) candidates)

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Annex 6(B): Financial Management and Disbursement Arrangements INDONESIA: Private Provision of Infrastructure Technical Assistance Loan

Financial Management

1. Summary of the Financial Management Assessment The Private Provision o f Infrastructure Technical Assistance Loan i s designed to assist GO1 to develop and implement policy and regulatory reforms and build the institutional foundations required for sustainable large scale private investment in infrastructure. Towards his outcome, the project wi l l support the establishment o f the KPPI Committee that i s already operational and finance the preparation and operationalization o f improved policies, practices and procedures for handling private investment in infrastructure. The program wi l l be carried out as a Technical Assistance Loan (TAL) over a three (3) year period.

The Project involves a total expenditure o f US$19 million, o f which Bank financing wi l l comprise US$17.1 million. All of this amount wi l l be for technical assistance and training activities, except for notional amounts o f US$0.39 mil l ion for incremental operating expenses of the PMU, and the recovery o f the PPF Advance of US$0.4 million.

The Project Management Unit (PMU) w i l l be located at the Office o f the Coordinating Minister for Economic Affairs, with Project Implementing Units (PIUS) in the Ministry o f Communications and the Ministry o f Settlements and Regional Infrastructure. Inter-agency coordination wi l l be undertaken by the Committee on Policy for Acceleration o f Infrastructure Development (KKPPI). I t i s anticipated that essentially all o f the project activities and expenditure wi l l actually be managed by centralized P M U and PIUs, who have had prior experience in managing Bank financed projects, i t i s anticipated that implementation and financial management w i l l not impose special challenges. Based on these factors, financial management risks inherent in the project entity have been rated as “moderate”.

An analysis of project specific r isks indicates that moderate r isks may arise from several features. The inherently weak financial management capacity in Government organizations imposes moderate risks on financial accounting and reporting, particularly in view o f the proposed introduction o f quarterly Financial Monitoring Reporting for this project. This i s sought to be mitigated by concentrating all project accounting activities at the P M U level and the recruitment o f a trained individual financial management consultant to assist in the preparation o f project financial statements. Accounting w i l l be computerized. Payment validation systems have traditionally been weak in Bank financed projects in Indonesia and consequently r isks here are rated as substantial. To mitigate these, more intensive validation procedures, including community disclosure and oversight mechanisms where applicable, have been suggested and documented in a Project Manual.

I t i s proposed that we accept BPKP as project auditors, given the relatively moderate financial management risks. Based on the on-going efforts to strengthen the Supreme Audit Agency (BPK), there wi l l be discussion during project implementation regarding the possible use o f this project as a training example for BPK staff auditors to familiarize themselves with project audits procedures.

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Summary of Project Description

The project i s designed as a set o f four distinct components, all o f which are for technical assistance, capacity building and training, except the small P M U support component. The components on advisory services wi l l focus on Cross Sector policy and strategic issues; a sector specific component wi l l help prepare similar sector policies and strategies on a selection of infrastructure investments, including the development o f appropriate regulatory institutions. These wi l l be arranged through suitably qualified consultants. Capacity building and training activities wi l l also be undertaken. A notional amount o f US$700,000 w i l l also be spent in assisting local govemments with specific PPI studies.

Project organization proposed

The Project w i l l involve several central government agencies, notably the Ministry o f Communications and the Ministry o f Settlements and Regional Infrastructure, as well as OCMEA, as Project Implementing Units. A Project Management Unit w i l l work under the KPPI Secretariat. The P M U i s chaired by the OCMEA’s Assistant Deputy for Transportation and Telecommunications Infrastructure Development, and i t s administrative budget w i l l be included in the OCMEA’s budget. The PMU was recently established (February 2003), but i t s administrative and financial management procedures are similar to the on-going Corporate Restructuring Technical Assistance Loan (Ln. 4484).

A local individual consultant has been appointed for assisting the PMU in financial management, including preparation o f project financial accounts. The consultant w i l l be trained by Bank staff in the preparation of FMRs and other Bank requirements on financial management.

Impact of procurement arrangements on financial management

Technical Assistance packages and training consulting contracts w i l l be procured centrally at the P M U and international bidding wi l l be used for about 60% o f the project expenditures, all of which wi l l be subject to prior review procedures. The expenditure proposed in regional governments wi l l be defined in the second project year and thereafter. These wi l l be undertaken and accounted for centrally at the PMU.

Overall procurement risk has been assessed by the project DPS as “Average ”. Project supervision in this area w i l l need to be intensive in the beginning. In the area o f financial management a stringent scrutiny o f payment validation systems w i l l be undertaken to mitigate risks of collusion.

Internal controls and risk analysis

The financial management r isks o f this project are rated as moderate overall. A detailed analysis o f r isks arising from the country situation, the proposed project entities and specific project features i s attached as Table 4. These have been rated on a scale from High, SubstantiaZ>

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Moderate and Low. A summary of the main findings i s as follows.

Table 2 Rkks I Assessment 1 Summary Comments

A. Inherent Country Risks Budgetary procedures

See detailed risk assessment attached as Table 4.. CFAA diagnostic completed in 2001 rated country control environment as weak. White Paper has been prepared by Government to address issues. New Finance law passed in March 03, others yet to be passed by Parliament. Minimal progress in implementation o f CFAA recommendations. National accounting continues on a single entry and cash basis with a semi-manual system. Public expenditure accounting standards not yet issued, though a Standards Board has been constituted. BPKP now has legal mandate for government audit of GO1 agencies. An Institutional Development Plan for BPK i s under slow implementation. Audit reDorts are not uubliclv disclosed.

Substantial

Public Sector Accounting Substantial

Auditing Arrangements Moderate

Overall Inherent Country Substantial Risk B. Project Entity specific See detailed risk assessments attached as Table 4.

P M U at OCMEA has prior experience in managing Bank projects. Other implementing agencies have clear, narrow roles that are well defined. Generally limited accounting capacity at the PMU. Risks arise from manual

risks 1. Implementing Entity Low

2. Capacity - accounting Moderate Organization

I and project management accounting systems in government agencies. S k i l l requirements for FMR reporting wil l place demands. Mitigation through use o f individual financial management consultant.

Y

3. Funds Flow

4. Audit arrangements Moderate

Low Central Treasury and budgeting systems to be used for all payments and disbursements.. Risks arise from uneven quality o f BPKP's past performance as extemal auditors and absence o f internal audits at PMU

RISKS 1. Organization Structure Low

2. Completion o f project Moderate

Project activity wi l l mainly be training and technical assistance studies. This simplifies organization needs and risks. Most expenditure i s on TA and training through consultants. This has some inherent weaknesses. Mitigation through improved validation procedures included in Project Manual.

works & services

3. Receipt o f project N A Not applicable goods 4. Payment validation Substantial

5. Disbursement and fund Moderate

Traditionally a weak area in Bank financed projects. To mitigate additional documentation requirements are proposed. KPKN control procedures wi l l be used for payments. Risks arise in

based disbursement to apply. FMR reporting wi l l be introduced from inception.

Risks arise from traditional single-entry and semi-computerized accounting. Appropriate reconciliation systems recommended to mitigate risks. BPKP proposed as auditors. Risks arise due to their variable staff quality and

flows management o f special accounts due to semi-computerized accounting. FMR

6. Project monitoring and Low reporting

7. Accounting

8. Extemal audits

Moderate

Moderate I capacity.

Overall Project Specific Risks Moderate

- 56 -

Strengths and weaknesses

The primary strength o f this project i s i t s simple design in terms of both categories and organizational framework. Most of the project expenditure w i l l be on consultant expenditure. Implementation w i l l also be managed by a small group o f two (2) implementing agencies in central ministries in Jakarta and the PMU. This narrow focus w i l l facilitate supervision and provide an opportunity to strengthen financial controls during implementation.

Payment validation systems have often been weak in Bank financed projects. This weakness may get emphasized here because o f the intangible nature o f outputs or services that are generally inherent in technical assistance and wi l l be paid for through consultants. Recent experience in other Bank projects i s that expenditure on consultant expenses are vulnerable to misuse. To mitigate this risk, additional procedures have been prescribed in the project FM manuals to incorporate lessons from recent experience, notably a requirement for direct and independent documentary evidence to verify completion of contracted services before payments are released to consultants. For training activities, payment validation procedures w i l l require attachment o f direct original supporting evidence o f completion o f all these activities, duly certified by agencies I’ entities receiving the training.

To further strengthen accountability, i t i s proposed to encourage FMR based disbursements. To help prepare accurate and timely financial reports and FMRs on a quarterly basis, an individual local consultant wi l l be appointed, to whom appropriate training wi l l be provided.

Project Financial Management arrangements

Organization. For purposes o f financial management a simple project organization i s proposed, comprising a project treasurer at each o f the three (3) PIUs (including the PMU at OCMEA). Payment requests (SPP) w i l l be prepared and validated by project treasurer and authorized for release after validation and approval by the Pimpro. A l i s t o f payments vouchers wi l l be prepared by each P IU and sent monthly to the PMU for accounting.

Accounting. Given capacity constraints expected, i t i s proposed that financial accounting for all project activities i s done at the P M U offices instead o f at each PIU, for which the source documents wi l l be collected at P M U office and reconciled monthly or quarterly with records o f KPKN. Detailed arrangements for this has been incorporated in the Project Financial Management manual. A qualified local individual financial management consultant has been hired, tasked with ensuring that project financial accounting reports and FMRs are prepared accurately and at regular quarterly intervals. This consultant w i l l also train government staff in the preparation o f FMRs.

Accounting policies and procedures. Accounting w i l l be on cash basis, in l ine with government accounting standards. The formats for project financial statements prescribed by the Bank wi l l include accounting for categories specified in the Loan Agreement as well as components and sub-components as defined herein. These have been fully defined in the Project

- 57 -

Manual. Procedures have been provided agreed to reconcile project financial accounts with financial reporting to the government on a quarterly basis. A set o f Financial Monitoring Reports wi l l be required from the Project on a quarterly basis to support withdrawal applications. These reports wi l l comprise information on procurement activity, implementation progress, sources and uses of funds and a forecast o f funds required for the project. Detailed formats for these have been included in the Project FM Manual. The f i rs t such reports wi l l be required to be submitted no later than 45 days after the end o f the first quarter after effectiveness, and thereafter every quarter within 45 days o f the quarter-end.

Expenditure Category Amount in US$million Consultants' Services & Training 16.14 PMU Incremental Operating Costs 0.39 Refunding of Project Preparation Advance 0.40

Total Project Costs with Bank Financing 16.93 Front-end fee 0.17

Total 17.10

2. Audit Arrangements

Financing Percentage 100 80

The GO1 Administrative Audit Agency (BPKP) wi l l be proposed as auditors for this project. Terms o f reference for these audits wi l l be agreed at negotiations. I t i s intended that all project audit reports w i l l be publicly disclosed. The detailed mechanisms for this has been agreed and included in the Project Manual. An integrated audit w i l l be sought o f the project financial statements, the Special Account and the Statements o f Expenditure. I t i s proposed that audited financial statements be submitted to the P M U and to the Bank within six months o f the year-end.

3. Disbursement Arrangements

Method o f Dayments: Most o f the project expenditure w i l l be paid out to contractors / consultants through Central Government treasury offices (KPKN) and debited to the Special Account to be opened for the purpose. These include primarily centrally procured technical assistance and training packages and the P M U support expenses. Existing government budgeting and payment mechanisms w i l l be used for these payments. Payments from K P K N offices wi l l be based on duly approved payment requests (SPP) and contracts, and payment vouchers (SPMs) wi l l be sent to project offices for accounting purposes. Responsibility for exercising accountability controls on these payments w i l l be with the Project Managers and Treasurers.

Allocation of loan proceeds (Table C)

Table C: Allocation of Loan Proceeds

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A summary o f expenditure proposed under each category i s as follows (Table C-1, figs. in US$ mils.).

Proiect ComDonent

Indicative Bank costs financing

(US$ mil.) (US$ mil.) Component I : Cross-sectoral technical assistance Component 11: Sector-specific technical assistance Component 111: Capacity Building and training assistance Comuonent I V : P M U Incremental Oueratinn Costs

6.72 6.06 9.53 8.58 1.65 1 S O 0.49 0.39

Project Preparation Facility (PPF) Repayment 0.44 0.40

Special account: Special Account management and replenishments. A special Account wi l l be opened in Bank Indonesia. The actual size o f the initial deposit wi l l be within this allocation and wi l l be for six-months projected expenditures. Withdrawal from the Special Account wi l l be based on payments by the K P K N offices. Replenishments into the Special Account w i l l be based on quarterly Withdrawal Applications supported by Financial Monitoring Reports (FMRs) prepared by the project offices and approved by Ministry of Finance. The Withdrawal Applications wi l l be prepared by the Project Management Unit (PMU), who wi l l also undertake regular reconciliation o f these Bank statements with project financial accounts.

Total Project Costs Front-end fee

Action Plan

The next steps and action plan are summarized below:

18.83 16.93 0.17 0.17

rable 3

1. Organizational arrangements

Issue Action required Appointment of project manager and treasurer staff at P IU to be formalized.

L Accounting

Responsibility Due Date P M U Before effectiveness

1. Audit

I

Formats for FMRs to be developed and agreed.

Accounting and FMR training at be

Bank

P M U With Bank

Bank imparted to project staff and consultant. TOR for audit o f project financial statements to be agreed with Borrower

Mechanisms for public disclosure o f all audit reports to be agreed with Bank.

P M U

Before negotiations (Completed)

Before effectiveness Agreed at negotiations (completed)

Agreed at negotiations (completed)

- 59 -

Supervision arrangements

Given the geographic spread and simplicity of the project, and i t s moderate overall risk classification, financial management supervision w i l l be undertaken annually by Bank staff. In addition SOE and internal control reviews wi l l be undertaken through contractors. Quarterly FMR reports w i l l be reviewed regularly through the year where financial, procurement and contract management issues wi l l be reviewed. Risk ratings at appraisal w i l l be refreshed annually following supervision. Payments for prior review contracts should be reviewed during supervision missions.

A. Country Issues Inherent Risks relate to the impact on the Project offactors arising from the environment in which the Project will operate, such as country rules and regulations and the environment of the specijic entity.

Budgetary procedures

Table 4. FINANCIAL MANAGEMENT RISK ASSESSMENT Rating scale: High, Substantial, Moderate, Low.

I

Public Sector Accounting Standards

Auditing Arrangements I

4SSESSMENT Moderate

Substantial

Moderate

COMMENTS An assessment o f the country’s budgeting system has been comprehensively made in recent diagnostic products from the Bank, including CFAA (Report No. 21824-IND April 27,2001) and Indonesia Public Spending in a Time o f Change Report (No. 19845 IND March 30, 2000). The CFAA has classified the control environment in the country as “weak’, and has recommended a series o f measures to strengthen this. Since then, the Government has drafted a set o f three new laws to reform the Public Expenditure systems in the country. These laws, covering State Finance, State Treasury and State Finance Accountability have been submitted to the Indonesian Parliament. Subsequently, in May 2002, a White Paper titled “Reform o f Public Financial Management System in Indonesia” has been issued b y the ministry o f Finance. This White Paper addresses most o f the recommendations made in the CFAA Report. A new law on State Finance has been passed by Parliament in March 03. Public Expenditure accounting continues to be on a cash basis. However, recently in July 2002 the Ministry o f Finance has set up an Accounting Standards body to coordinate the development of accounting standards in Indonesia generally. BAKUN (of MOF) i s also worlung to plan the introduction of modified accruals based accounting systems for public expenditure in the country. The first set o f draft standards on this basis have been issued in Oct. 2002. State Finance i s audited by BPKP, the Administrative Audit Agency o f the Government. BPKP has undergone a peer review in 2002 which confirmed internal audit capacities.

- 60 -

?.Project Entity Specific fisk Entity Specijic Risks relnte t( he risks inherent in the Project mplementntion Units (PIU) . Organization Structure -

Implementation Entity

!. Capacity: Account ing and Project Management.

1 . Funds Flow

.. Audit

ASSESSMENT

Low

Moderate

Low

Moderate

COMMENTS

The project has a relatively simple organization, with a central P M U (Office o f Coordinating Minister for Economic Affairs) and 3 PIUs in other Ministries (Ministry of Communications, OCMEA and MSRI). Job descriptions for project staff at each locations have been prepared and included in the Project Manual. Much of the project activity wi l l be procured and implemented in central ministries in Jakarta, with some limited activity in the regions. This reduces organizational r isks.

The PIUs normally have full time accounting staff available at their finance divisions, for basic government accounting. The capacity i s limited, similar to that in government cadres. A qualified accounting consultant has been hired for the project preparation period, and i s expected to be available for the project period also, considering that additional support may be needed in view o f the technical accounting requirements o f the FMR system proposed for this project. I t i s therefore proposed the individual Financial Management consultant i s retained to coordinate accounting work and znsure regular compilation o f accurate and reliable financial and procurement reports through the project. Appropriate training w i l l be provided by Bank staff.

Under existing GO1 systems, financial accounting i s based on payment vouchers (SPM) issued by local treasury offices o f the M O F (KPKN). GO1 accounting systems follow a standard chart o f accounts, and are prepared on a cash and single entry basis. Loan funds w i l l be paid out through Central Treasury Offices (KPKN) using GO1 procedures, and reimbursed by the Bank based on FMR based Withdrawal Applications through a Special Account in Bank Indonesia. PMU, PIUs and DG Budget (MOF) have prior experience in this area. Counterpart funds w i l l be accessed through the Govt. Dudgeting system. The P M U i s subject to audit by BPKP, the GO1 Audit 4gency. BPKP has undergone a peer review in 2002. The other PIUs are subject to audit by the internal audits o f :heir respective Ministries.

-61 -

C. Project Specific Risks These are r i s b inherent in the Project, arising from the Project design and implementation

3. Receipt of Project Goods

(Risk of goods paid for not meeting contracted quantities or specifications) 4. Payment validation

(Risk of erroneous payments, or payments not warranted by or in excess of value of work done)

(The risk of the Project Organization not adequatel: supporting project activity and related financial management).

2. Completion o f Project Work & Services

(Risk of the actual project implementation not meeting the requirements contracted and paid for)

ASSESSMENT

L o w

High

NA

High

COMMENTS

Project activity wi l l main ly b e training and technical assistance studies. This simplif ies organization needs. Project Treasurers wi l l b e appointed at each PIU f r o m Central Government c i v i l service cadres. Project Account ing for a l l PIUs to b e undertaken at the central PMU in Jakarta. The task o f maintaining and consolidating financial accounting, and the introduction o f FMRs wi l l require placing greater demands o n the accounting capacity.

An individual local financial management consultant has been appointed to help maintain financial accounting. They w i l l also be tasked with suitably training full time Govemment staff and handing over the accounting work by the end o f the project. All the project expenditure w i l l be for consulting services. There i s no expenditure envisaged on civ i l works or procurement o f goods. Completion o f consulting work w i l l need certification by beneficiary organizations or agencies. The intangible nature o f such benefits o f TA gives i t a higher inherent risk.

Under existing GO1 systems, financial accounting i s based on payment vouchers (SPM) issued by local treasury offices o f the M O F (KPKN). GO1 accounting systems follow a standard chart o f accounts. Not applicable.

Payment validation w i l l be undertaken by the respective PKJ. Current payment verification systems prescribed by GO1 w i l l be followed.

Past experience in other Bank projects i s that expenditure on consultant expenses are vulnerable to misuse. To mitigate this risk, additional procedures have been prescribed in the project FM manuals to require direct and independent documentary evidence to be furnished to verify completion before payments are released to consultants. For training

- 62 -

5. Disbursements and Fund Flows

6. Project Monitoring and Reporting

(The risk of lapses in projecl implementation not being promptly identified and reoorted.

of unauthorized from Special

ccount)

7. Accounting

(The risk of incorrect financial reporting due to inappropriate accounting policies, standards and practices)

8. External Audit

(The risk of audit of project financial transactions and accounts not meeting acceatable standards J

Moderate

L o w

Moderate

Moderate

activities, payment validation procedures w i l l require attachment of direct original supporting evidence of completion o f a l l these activities, duly certified by agencies / entities receiving the training.

Conditions for eligibility o f financing o f incremental operating expense should be clearly specified in project documents. Contractor payments w i l l be approved by Pimpro and paid out through central treasury offices (KPKN). These w i l l be subject to standard K P K N control procedures.

A l l components are expected to be procured at the PMU, with about 60% o f project activity procured subject to prior review procedures. The cases above the prior review threshold w i l l be authorized for payment by the P M U subject to N O L mechanisms. All payments w i l l be paid out through a Special Account. Replenishments are expected to be based on quarterly FMRs and Withdrawal Applications prepared by P M U and approved by DG Budget. Quarterly FMRs w i l l be introduced from inception, for which training w i l l be given.

FMR based disbursement w i l l be implemented.

Since a single entry system w i l l be in use, inaccuracies may arise. Computers w i l l be provided for these applications. Procedures have also been prescribed in the FM Manual to reconcile project financial accounting statements with comparable statements issued internally by PMUs to central GOI.

Quarterly financial accounting & reporting w i l l be reconciled to Special Account bankinn transactions on a auarterlv basis. BPKP i s proposed as project auditors for this project, based an TORS to be agreed at negotiations. Agreement has been reached with GO1 to have al l audit reports publicly disclosed.

- 6 3 -

Annex 7: Project Processing Schedule INDONESIA: Private Provision of Infrastructure Technical Assistance Loan

I Negotiations I 0 1/30/2003 I 04/22/2003 I I Planned Date of Effectiveness I 03/01/2003 I 06/30/2003 I Prepared by: Staff o f the GO1 Coordinating Ministry o f Economic Affairs in cooperation with the National Development Planning Agency (BAPPENAS), the Ministry o f Communications and the Ministry of Settlements and Regional Infrastructure

Preparation assistance: The Ministry o f Finance requested and received a Project Preparation Facility (PPF) advance o f US$400,000 which was used to retain consultants to assist in the preparation o f this project.

Bank staff who worked on the project Name

Stephen Dice David Hawes Aniruddha Dasgupta Naseer Ahmad Rana Rajiv Sondhi Yogana Prasta Karin Nordlander Anthony Toft Albert Wight

ncluded: Speciality

Sr. Urban SpecialistJTTL Infrastructure SpecialistJConsultant Urban Sector Coordinator-Indonesia Sr. Procurement Specialist Sr. Financial Management Specialist Sr. Disbursement Officer Lead Counsel Senior Counsel Operations AdvisorIConsultant

- 64 -

Annex 8: Documents in the Project File* INDONESIA: Private Provision of Infrastructure Technical Assistance Loan

A. Project Implementation Plan 1. Project Implementation Plan 2. Financial Management System Manual 3. 4. 5. (Draft) Project Operations Manual

Project Activities and Implementation Schedule Project Procurement Plan and Procedures Manual

8. Bank Staff Assessments 1.

2.

3.

Proposed Private Provision o f Infrastructure Technical Assistance Loan (PPITA) - Summary of Project Preparation Activities, February 2003 Proposed Private Provision o f Infrastructure Technical Assistance Loan (Initial Preparation Mission), Mission Aide Memoire. May 2002 Private Provision o f Infrastructure Technical Assistance Loan, Project Concept Document, April 2002.

C. Other 1. 2.

3. 4.

5.

6.

7.

8.

9.

10.

Lesson Learnt From TAP4I-2 Loan, Bappenas, May 2001 Infrastruktur Indonesia Sebelum, Selama dan Pasca Kr is is , Deputi Bidang Sarana dan Prasarana Bappenas, October 2002 Implementation Completion Report TAP41 -2, the World Bank, June 2002 Umbrella Strategy for Private Sector Participation in the Provision o f Infrastructure in Indonesia, Bappenas, July 1999 Discussion Paper for an Urban Waste Management Policy and Strategy Framework for the National Planning Process, Bappenas/ADB TA 2805-INO, July 1998 White Paper on Regulatory Strategy and Legal Framework to Support Infrastructure Reform, Bappenas, June 2000 Indonesia Urban Water Supply Sector Policy Framework, Discussion Paper Series, October 1997 Keputusan Menteri Negara Koordinator Bidang Perekonomian Nomor :

Bahan Rapat Menteri Permukiman dan Prasarana Wilayah Pada Rapat Komite Kebijakan Percepatan Pembangunan Infrstruktur, February 2003 Johannesburg Summit 2002, Key Outcomes o f The Summit, September 2002.

KEP-lO/M.EKON/O2/2001, March 2001

*Including electronic files

- 65 -

Annex 9: Statement of Loans and Credits INDONESIA: Private Provision of Infrastructure Technical Assistance Loan

16-Apr-2003 Difference between expected

and actual disbursements' Original Amount in US$ Millions

Project ID FY Purpose IBRD IDA GEF Cancel. Undisb. Orig Frm Rev'd PO40578 2002 ID-Eastern Indonesia Region Transport 200.00 0.00 0 00 0.00 160.11 23.11 0.00

PO72852 PO73970 PO49539 PO40528 PO88051 PO68949 PO73025 PO49545 PO59477 PO59930 PO56074 PO55821 PO36049 PO401 96 PO63732

PO03967 PO41895 PO64118 PO39644 PO40061 P 0 0 3 9 9 3 PO40062 PO4871 5 PO36956

PO36048 PO42540 PO41894 PO03987 PO03700 PO36047 PO401 95 PO49051 PO04026 PO04008 PO0401 1 PO37097 PO04016

2002 ID-URBAN POVERTY II 2002 ID-GLOBAL DEV LEARNING (LlL) 2001 ID-PROVINCIAL HEALTH II 2001 ID-W JAVA ENVMT MGMT 2001 ID-GEF-W JAVA ENVT MGMT 2001 ID-LIBRARY DEVELOPMENT PROJECT - LIL 2001 ID-SECOND KECAMATAN DEVELOPMENT PROJ 2000 ID-PROVINCIAL HEALTH I 2000 ID-WSSLIC II 2000 DECNT AGRICULTURAUFORESTRY EMENSI 1999 ID-MUNICIPAL INNOVS 1999 ID-URBAN POVERTY 1999 ID-EARLY CHILD DEVELOPMENT 1999 ID-SUMATRA BASIC EDUCUATION 1999 ID-CORPORATE RESTRUCTRG 1999 ID-FIFTH HEALTH PROJECT 1999 ID-SULAWESI BASIC EDUC

1999 WATSAL 1998 ID-W JAVA BASIC EDUCATION 1998 BENGKULU REGIONAL DEVELOPMENT 1998 ID-SUMATRA REG L RDS 1998 CORAL REEF MGMT REHA 1998 Indonesia- IlDP 1998 ID-SAFE MOTHERHOOD 1998 CORAL REEF MGM REHAB 1997 ID-IODINE DEF CONTROL 1997 ID-SUMATRA SECONDARY EDUCATION 1997 ID-CENTRAL INDONESIA SEC EDU

1997 ID-Solar Home Systems 1997 ID-BAL1 URBAN INFRA 1997 ID-QUALITY OF UNDERGRADUATE EDUC (QUE 1997 BEPEKA AUDIT MODERNIZATION PROJECT 1997 ID-Railway Efficiency 1996 NUSA TENGGARA DEV 1996 SULAWESI AGRl AREA 1996 ID-E JAVA SEC EDUC 1996 ID-Strategic Urban Rds

29 50 2 66

63 20 11 70

0 00 0 00

208 90 0 00 0 00

13 00

5 00 0 00

21 50 54 50 31 50 44 70 47 90

300 00 10350 20 50

234 00

0 00 34 50 42 50 6 90

28 50 98 00

104 00 0 00

11000 71 20 1640

105 00 27 00

26 80 99 00 86 90

70 50 0 00

40 00 5 75 0 00 4 15

111 30 38 00

77 40 5 00

0 00 10000

0 00 20 10 0 00 0 00

1593

0 00 0 00 0 00 0 00

0 00 0 00 0 00 0 00 0 00 0 00 0 00 0 00 0 00 0 00

0 00 0 00 0 00 0 00 0 00 0 00

0 00 0 00 0 00

0 00 2 54 0 00 0 00 0 00 0 00 0 00

0 00 0 00 0 00

0 00 0 00 0 00 0 00 0 00 0 00 0 00 0 00 4 10 0 00 0 00 4 I O 0 00 0 00 0 00

24 30

0 00 0 00

0 00 0 00 0 00 0 00 0 00 0 00

0 00 0 00 0 00 0 00 0 00 0 00 0 00 0 00 0 00 0 00 0 00 0 00

1065 0 00

24 50

5 00 0 00 0 00 3 76 5 00

50 00

0 00 8 50 9 15 0 00 9 70 0 23 0 00

1025 36 03 9 89 0 90

47 33 4 90 3 70 3 63

1000

105 74 2 63

100 15 16 92 2 60 3 97

306 50 29 19 67 02 9 25

107 23 54 4 07

32 80 117

19 14 37 67

150 00 28 10 11 36 54 42

0 92 6 66 9 15 2 66 4 10

15 22 27 98

7 62 15 81 14 12 7 10

34 37 0 17 1 26

20 47

115

4 01 0 77

31 87 5 19 2 50 1 89

-17 91 1334 -9 28 2 86 107

24 93 14 37

20 01 25 67 20 34 30 97

150 00 -6 64 12 76 66 42

0 86 1536 16 30 2 66

1380 1545 27 98 20 15 39 94 20 81

8 00 81 69 5 07 4 66

24 11 11 15

0 00 0 00 0 00 000

0 00 0 00 0 00 0 00 0 00 0 00 1 07

3 07 14 37

000 0 21 0 00

0 00 0 00

0 00 6 66

-19 68 1 45 6 86

10 80 151

11 30 0 00 0 00

3 09 18 88 11 12 7 10 3 45 0 17

-0 10 0 00

-2 74

Total. 224876 488.13 3504 253 13 133638 72624 7839

- 66 -

INDONESIA STATEMENT OF IFC's

Held and Disbursed Portfolio Jun 30 - 2002

In Millions U S Dollars

Committed Disbursed IFC IFC

FY Approval Company Loan Equity Quasi Partic Loan Equity Quasi Partic 200 1 1994 1991 1988 1997 1989 1997 I989191194 1997 1993196 1995 1997100 1997

1995 1991 199019 1193195199101 1992194196 1995 1997 1997100 1998 1993 1996 1993 1997 2001 1992195 1997 1997 1994 1991 1980187 2001

Dianlia KDLC Bali LYON-MLF-Ibis Manulife PT AdeS Alfindo PT Agro Muko PT Alumindo PT Astra PT Astra Graphia PT BBL Dharmala PT Bakrie Pipe PT Bank NISP PT Berlian PT Grahawita PT Indaci PT Indo-Rama PT KIA Keramik PT KIA Serpih PT Kalimantan PT Makro PT Megaplast PT Nusantara PT Pramindo Ikat PT Samudera PT Sayap PT Sigma PT Viscose PT Wings PTAstra Otopart Prudential Asia SEAVI Indonesia Semen Andalas Sunson

Total Portfolio:

4.00 0.00 2.01 0.00 0.00 0.00

13.16 0.00 0.00

11.29 33.57 5.00 7.42 2.16 0.00 0.00

16.51 15.00 20.00 0.00 7.00 7.63

25.00 0.00 7.50 0.00

20.3 1 6.51 0.00 0.00 0.00 0.00

12.41

0.00 1.72 0.00 0.32 6.98 2.20 0.00 5.82 2.00 0.00 0.00 0.00

20.00 0.00 0.00 0.00 0.00 0.00

15.00 1.32 2.50 0.00 3.94 5.00 0.00 3.00 0.00 0.00 1.07 2.24 1.26 0.00 0.00

1 .oo 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 5.00 0.00 0.00 1.44 0.00 0.00 0.00 0.00 0.00 0.00 0.00

25.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

0.00 0.00 2.01 0.00 0.00 0.00

10.00 0.00 0.00

21.34 0.00 0.00

18.72 0.00 0.00 0.00

53.49 49.50

5.22 0.00 0.00 5.93

36.18 0.00 6.00 0.00

23.33 6.40 0.00 0.00 0.00 0.00 7.87

0.00 0.00 2.01 0.00 0.00 0.00

13.16 0.00 0.00

11.29 33.57 5.00 7.42 2.16 0.00 0.00

16.51 15.00 20.00 0.00 7.00 7.63

25.00 0.00 7.50 0.00

20.3 1 6.51 0.00 0.00 0.00 0.00

12.41

0.00 1.72 0.00 0.32 6.98 2.20 0.00 5.82 2.00 0.00 0.00 0.00

16.65 0.00 0.00 0.00 0.00 0.00

15.00 0.79 2.50 0.00 3.94 5.00 0.00 3 .OO 0.00 0.00 1.07 2.24 1.26 0.00 0.00

0.00 0.00 0.00 0.00 0.00 2.01 0.00 0.00 0.00 0.00 0.00 0.00 0.00 10.00 0.00 0.00 0.00 0.00 0.00 21.34 0.00 0.00 4.97 0.00 0.00 18.72 0.00 0.00 1.44 0.00 0.00 0.00 0.00 53.49 0.00 49.50 0.00 5.22 0.00 0.00 0.00 0.00 0.00 5.93

25.00 36.18 0.00 0.00 0.00 6.00 0.00 0.00 0.00 23.33 0.00 6.40 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 7.87

216.48 74.37 32.44 245.99 212.48 70.49 31.41 245.99

Approvals Pending Commitment

FY Approval Company Loan Equity Quasi Partic 2001 PT BLT I1 12.00 0.00 0.00 0.00 2002 Wings Oil Palm 11.50 0.00 0.00 10.00 2002 NISP RI 0.00 0.00 3.64 0.00 1993 PT INDORAMA SWAP 10.00 0.00 0.00 0.00 2002 ManulifePrincipl 0.00 0.00 0.04 0.00

Total Pending Commitment: 33.50 0.00 3.68 10.00

- 67 -

Annex 10: Country at a Glance INDONESIA: Private Provision of Infrastructure Technical Assistance Loan

POVERTY and SOCIAL

2002 Population, mid-year (millions) GNI per capita (Atlas method, US$) GNI (Aflas method, US$ billions)

Average annual growth, 199662

Population PA) Labor force (99)

Most recent estimate (latest year avallable, 1996-02) Poverty (9%- of population below national poverty line) Urban population p%- of tofal population) Life expectancy at birth (years) Infant mortality (per 1,000 live bidhsj Child malnutrition (% of children under 5) Access to an improved water source (?A ofpopulation) Illiteracy (77 of population age i5+) Gross primary enrollment I% of school-age population)

Male Female

Indonesia

216.7 690

149.9

1.6 2.5

16 43 66 39 34 76 12

106 110 106

KEY ECONOMIC RATIOS and LONG-TERM TRENDS 1982 1992

GDP (US$ billions) Gross domestic InvestmenffGDP Exports of goods and ServicedGDP Gross domestic savingdGDP Gross national savingdGDP

Current account baiance/GDP Interest paymentdGDP Total debffGDP Total debt serviceiexports Present value of debffGDP Present value of debffexports

94.7 139.1 27.8 30.5 25.3 27.9 29.0 33.4

.. 29.4

-5.6 -2.0 1.6 2.7

26.5 63.3

1982-92 1992-02 2001 (average annual growth) GDP 6.9 2.5 3.4 GDP oer caoita 5.0 0.9 1.9

East Asia & Pacific

1,826 900

1,649

1.1 1.3

37 69 36 12 74 14

107 106 108

2001

141.3 21.8 42.3 29.2 26.9

4.9 4.2

94.7 43.8

2002

3.7 2.2

LOW- income

2,511 430

1,069

1.9 2.3

31 59 76

76 37 96

103 88

2002

172.9 20.2 35.4 27.1 23.4

4.2 2.7

75.1 49.7

2002-06

4.1 2.9

Development diamond'

Life expectancy

T 1

GNI Gross Per 4 primary capita enrollment

1 Access to improved water source

*=*- lndonesia Low-income group

Economic ratios'

Trade

T

Indebtedness

**-~- lndonesia __ Low-income group

Exports of goods and services 6 9 3 1 1.9 -1.2 5 5 STRUCTURE of the ECONOMY

(9%- of GDP) Agriculture Industry

Services

Private consumption General government consumption Imports of goods and services

Manufacturing

(average annual growth) Agriculture Industry

Services

Private consumption General government consumption Gross domestic investment Imports of goods and services

Manufacturing

1982

23.9 37.9 11.9 38.2

59.5 11.5 24.1

1982-92

3.8 9.2

12.6 6.5

4.6 4.9 9.0 3.0

1992

17.5 36.3 19.1 46.3

57.8 8.8

25.0

1992-02

1.6 3.2 4.7 2.3

5.0 0.4

-0.6 1.9

2001

17.0 45.6 25.0 37.5

63.0 7.8

34.9

2001

1 .o 3.3 4.1 4.6

4.4 9.0 7.7 8.1

2002

17.5 44.5 25.0 38.1

64.7 8.2

28.5

2002

1.7 3.7 4.0 4.4

4.7 12.8 -0.2 -8.3

1 Growth of Investment and GDP (%) 20

0

20 00 01 02

1 Growth of exports and imports (%) 1

Note: 2002 data are preliminary estimates. Group data are through 2001 'The diamonds show four key indicators in the country (in bold) compared with its income-group average. If data are missing, the diamond will be incomplete.

- 68 -

Zndonesia ~~~ ~

PRICES and GOVERNMENT FINANCE

Domestlcprices ("A change) Consumer prices Implicit GDP deflator

Government finance ( "7 of GDP, Includes current grantsj Current revenue Current budget balance Overall surpius/deficit

1982 1992

.. 7.6 6.1 5.4

.. 17.2

.. -3.6

TRADE

(US$ millions) Total exports (fob)

Fuel Estate crop

Manufactures Total imports (cif)

Food Fuel and energy Capital goods

Export price index (7995=100) Import price index (1995=100) Terms of trade (1995=100)

BALANCE of PAYMENTS

(US$ millionsj Exports of goods and services Imports of goods and services Resource balance

Net income Net current transfers

Current account balance

Financing items (net) Changes In net reserves

Memo: Reserves including gold (US$ millions) Conversion rate (LJEC, lccal/US$)

EXTERNAL DEBT and RESOURCE FLOWS

(US$ millions) Total debt outstanding and disbursed

IBRD IDA

Total debt sewice IBRD IDA

Composition of net resource flows Official grants Official creditors Private creditors Foreign direct investment Portfolio equity

World Bank program Commitments Disbursements Principal repayments Net flows Interest payments Net transfers

1982 1992

.. 33,796

.. 10,671

.. 684

.. 14,224

.. 26,774

.. 1,274

.. 2,104

.. 11,700

86 77

.. 112

1982 1992

20,251 37,187 22,716 34,874 -2,465 2,313

-2,993 -5,664 134 571

-5,324 -2,780

3,471 4,850 1,853 -2,070

661.4 2,029.9

1982 1992

25,133 88,002 1,735 10,640

707 814

207 1,515 8 22

583 1,003 82 692

501 311 133 845 368 -533

2001

11.5 10.8

20.7 0.1

-2.4

2001

57,364 12,648

872 22,275 34,669 2,497 5,523 9,050

27 20

135

2001

62,779 50,180 12,599

-8,143 2,444

6,900

-8,278 1,378

27,890 10,260.9

2001

133,744 1 1,435

722

29,056 1,753

32

0 1,334

-13,590

0

645 585 853

-268 932

-1,200

2002

11.9 7.2

18.6 0.7

-1.7

2002

57,342 11,549 1,200

19,263 34,823 2,581 6,100 8,388

28 20

142

2002

82,751 51,048 11,703

-6,508 2,067

7,262

-3,707 -3,555

31,445 9,311.2

2002

129,793 10,728

794

32,335 1,896

34

0 -1,436

-1 1,479

0

103 41 9

1,065

865 -646

-1,511

80

!M

40

20

0 97 98 99 00 01 02

1 -"=-*GDP deflator +CPI I Export and Import levels (US$ mill.)

75,000

50 000

25 000

0 96 97 98 99 00 01

~xpor ts Imports

Current account balance l o GDP ( O h )

S T

4

2

0 98 99 00 01 02

2

4

Composltion of 2002 debt (US$ mlll.)

4 - IBRD E . Bilateral 3 - IDA D - Other multilateral F - Private 3 - IMF G - Short-term

Additional Annex 11 : Summary of Project Environmental and Social Safeguards Process INDONESIA: Private Provision of Infrastructure Technical Assistance Loan

The Indonesia Private Provision o f Infrastructure Technical Assistance (PPITA) Project focuses on institutional capacity building, policy and regulatory initiatives, training and project management unit support for the objective o f assisting GO1 in promoting and facilitating efficient and sustainable large-scale private investment in infrastructure. According the project design, none of the four project components wi l l directly produce social or environmental impacts, nor resettlement issues. These changes in policy, law and regulations could improve or detract from the ability o f GO1 to enforce the existing environmental and social safeguards requirements (generally adequate) in projects implemented by private parties. The Project wi l l include an evaluation o f the impact upon safeguards effectiveness o f all new legal and regulatory measures assessed by the project advisory team and consultants.

Additionally, the project wi l l support the preparation o f a limited number o f demonstration projects designed to be feasible and attractive for private investment. These pilot projects would generally be schemes targeting sectors such as telecommunication and transportation. These demonstration projects could produce environmental and social issues when physical works, for example telecommunication towers or public transport schemes, are carried out by selected private investors who are contracted as the results o f this project. Under the PPITA project, the Bank support to be provided would extend through the tendering, award and contract negotiation stages for such demonstration projects, as well as evaluating the replicability o f such projects. During PPITA project preparation, however, no attempt was appropriate to finalize the selection o f such demonstration schemes. I t i s therefore necessary to develop a safeguards procedure and screening requirements for environmental and social issues. This procedure and i t s environmental and social requirements are based on the existing GO1 regulations and World Bank policies, and should be applied in all demonstration project preparation and integrated into the tendering and implementing documents for each selected scheme.

1. Environmental assessment

1.1 Project screening

The EA screening should be based on the environmental screening o f the PPITA pilot projects which would utilize Prosedur Penyaringan Amdal and UKWUPL (Prosedur Kerja No. 1.1) to determine whether Amdal or UKWUPL i s required. This process was an output o f the Institutional Strengthening in Environmental Management (ISEM) project and has been adopted by Kimpraswil (Ministry o f Settlements and Regional Infrastructure) as the recommended screening procedure for all projects. The two-stage screening process consists o f

0 Initial screening to determine whether any environmental examination i s required; and

(Andal or UKIAJPL). 0 Second stage screening to determine the extent o f further environmental examination

- 70 -

The initial screening should be used to determine the classification of EA requirement equivalent to Category A, B and C under the World Bank safeguard policies. As a general rule, projects determined in the screening to require ANDAL w i l l be considered as falling into the Bank’s Category A; such schemes w i l l be included for preparation support from PPITA only if an adequate ENAndal study i s already prepared at the time i t i s proposed for PPITA support (i.e. PPITA w i l l not devote significant resources to funding ENAndal preparation, but could review such studies prepared previously). Projects determined to require U K U U P L for less intensive treatment wi l l be considered as falling into Category B and potentially acceptable for inclusion in PPITA. Any exceptions to this rule for A and B decisions can be dealt with as special cases in consultation with the World Bank environmental specialists.

As part o f the preparation o f demonstration projects designed to be feasible and attractive for private investment, each project wi l l have clear environmental requirements resulting from the EA screening available when the government invites private investors for bidding on the project. During the initial screening stage, the government can utilize existing data and maps already available during project preparation. If such data and information are not available, site visits or other means o f data and information collection w i l l be undertaken by the PPITA P M U to establish the data needed for screening (PMU budget are available for limited field work only). An approval from the World Bank for the EA classification and proposed safeguard measures for each o f the demonstration projects i s a condition before the government invites investors for bidding the proposed projects.

The second stage screening (equivalent to scoping in EA) requires a more detailed assessment o f the characteristics o f the projects, available from existing project preparation data, and more detailed assessment of the characteristics of the area to be developed or occupied. Key environmental concerns such as the scope o f impacts, assessment boundaries, sensitive factors such as nature conservation, biodiversity, etc., should be considered. I t w i l l be necessary to undertake field studies during this second stage o f screening in order to fully understand the potential environmental impacts caused by the proposed project. When the proposal for a pilot project i s initially accepted and agreed between the government and private investor(s), the government should provide at least partial financing (to be negotiated case-by-case) for the potential investor to conduct the second stage EA screening and prepare the draft environmental documentation.

1.2 EA preparation

I t i s the developer’s responsibility to carry out an environmental assessment although the local governments and institutions can provide policy guidance and technical support. In the meantime, seeking advice from the World Bank environmental staff i s always encouraged. The environmental assessment should be carried out at project feasibility stage and the results o f which should be, to the largest extent, reflected in project feasibility study and design. For projects under the Bank’s Category A and B equivalent, a formal EA i s required and the contents of the EA statement should be in consistent with the GO1 and Bank requirements. For projects under Category C, an environmental analysis should be carried out and an environmental review checklist be filled as part of the project feasibility study for appraisal (see the attached checklist).

-71 -

1.3 Project ENanalysis approval

For demonstration projects under the PPITA project, both the EA report and environmental review checklist wi l l be subject to the review and approval by relevant local environmental authority and the World Bank.

1.4 Public participation, consultation and information disclosure

During the course o f project EA screening to approval, the public should at least have two formal opportunities to be consulted and to participate in project EA activities. The f i rst opportunity should be at the screening stage and EA preparation when NGOs, local communities, and project affected people should be fully informed o f the project and consulted in the forms o f meetings, surveys, publicity through handouts, and local media. Their experience and considerations in regard to the potential environmental impacts should be fully included in screening and EA preparation. The second opportunity should be after an EA report or environmental analysis report i s completed and before the approval by the government authority and the Bank. During this period, the EA report or analysis should be made available in the local community such as local library, project development office and other venues. NGOs, local communities and project affected people should be informed o f such availability through local media and public meetings or gatherings. The time for the EA report/analysis report to be displayed for comments should be no less than three weeks.

1.5 Environmental management plan (EMP) implementation and monitoring

For Category A and B equivalent projects, an environmental management plan (EMP) should be developed in the EA. The EMP should include the major environmental impacts caused by the project during construction and operation stages, the proposed mitigation measures, and monitoring and reporting requirements (see format samples attached) to ensure the implementation o f such measures. The activities proposed in EMP should be integrated into contract tendering documents as part o f the bill o f quantities, which would allow the proper budget for implementing such mitigation and monitoring measures. The contractor should implement all the mitigation measures as required in project contracts and the supervision engineers have the responsibility to supervise the implementation o f such measures and report to the private investor. The private investor should report the results to the local environmental authorities, who would forward these to the project management office (PPITA PMU).

The local environmental authority should carry out periodic monitoring for the implementation o f EMP. The results o f which should be reported to the project management office, and the P M U should inform the World Bank o f such results and EMP implementation progress.

2. Social assessment

Social assessment, land acquisition and resettlement for pilot projects are the responsibility o f the government. Land acquisition and resettlement must be finished and land be ready for project

- 72 -

implementation before the government signs contracts with private investors for respective projects. For demonstration projects which need considerable land acquisition and resettlement, a resettlement action plan (RAP) should be prepared under the policy frameworks developed for the relevant sectors (such as that in East Indonesia Transport Project). However, such projects would generally not fit the above-stated criteria for a PPITA pilot project. For projects with limited land acquisition and resettlement, the attached Environmental/Social Review Checklist wi l l be used. For both projects with either considerable or minor land acquisition and resettlement, the implementation of a RAP or Checklist should be strictly in compliance with the policy framework developed in the Institutional Strengthening in Environmental Management (ISEM) project.

2.1 Land acquisition and compensation

ISEM prepared a set o f procedures, processes and guidelines connected with land acquisition and compensation. They incorporate the requirements o f both the GO1 and the World Bank and were accepted by both parties as the future approach for consultation. The key features o f land and building acquisition and compensation wi l l be as follows:

0

0

0

a

2.2

All affected stakeholders with legal tit le wi l l receive compensation for all land and buildings based on replacement value. The replacement value for land w i l l be determined by the open market value o f that land. The replacement value o f buildings wi l l be based on standard building costs obtainable from the Public Works Department. Consultation with all affected stakeholders wi l l take place during all phases o f acquisition and compensation process. Consultation with all affected stakeholders wi l l include information on all laws and regulations concerning valuation and compensation. Stakeholders with traditional or other tit le wi l l be compensated to an agreed and published process.

Resettlement

ISEM prepared a set o f procedures, processes and guidelines connected with resettlement. They incorporated the requirements o f both GO1 and the World Bank and were accepted by both parties as the future approach for consultation. The key elements o f the ISEM requirements for resettlement include:

0 There wi l l be extensive consultation throughout the resettlement process with all affected stakeholders (and by i t s very nature, land acquisition also). The consultation wi l l include surveys o f all affected stakeholders to determine their needs and present conditions, and monitoring o f resettled stakeholders. NGOs wi l l be actively involved in all consultations.

than 100 households are to be resettled. All affected stakeholders w i l l be given choices in terms o f cash or resettlement. Compensation for land, buildings and other assets acquired w i l l be at real replacement

0

0 A land acquisition and resettlement action plan (or LARAP) w i l l be prepared where more

a 0

- 73 -

cost. Host communities wi l l be involved in consultation process.

2.3 Isolated vulnerable people

ISEM prepared a set of procedures, processes and guidelines connected with isolated people. They incorporated the requirements o f both the GO1 and the World Bank and were accepted by both parties as the future approach for consultation. The main features o f ISEM approach in regard to isolated people include:

e

e

There w i l l be extensive consultation with all affected isolated people through the planning, feasibility, design and construction process. The consultation wi l l include an assessment o f how to balance the benefits that wi l l accrue to the project and o f maintaining the special cultural and other characteristics of the isolate peoples.

isolated peoples do not speak Bahasa Indonesia. As needed, an indigenous peoples' action plan would be developed and cleared by the Bank before the bidding documents can be released to the contractors for bidding.

e The consultation process w i l l involve close liaison with NGOs particularly where the

e

2.4 Other possible social impacts

The PPITA project has selected telecommunication, water supply, urban services and transport as the key target sectors to attract the private investment. One o f the other potential social impacts in addition to land acquisition, resettlement and indigenous people i s the effects on isolated communities and culture caused, for example, by wireless communication which can reach every comer of the islands in Indonesia. I t i s suggested that the P M U seek a grant-based fund to study this issue through the analysis o f the completed and on-going projects in telecommunications and other relevant projects which accessed to such isolated communities.

- 74 -

Table Annex 11-1. EnvironmentaVSocial Review Checklist for Proposed Pilot Projects

Name of pilot project Name of province (region) Proposed date of start of work Brief description o f pilot project:

Natural habitat and wi ld l i f e Erosion and soil control Drainage pattern Water quality

I TvDe of environmental resources IPredicted effectdimpacts I 'Minor Moderate Major

I Land use and settlement I I Historical and cultural sites Visual effects and aesthetics Relocation of people/livestock Land acquisition Reduction of access to roads/water/public

1 Type of environmental resources predicted effectdimpacts w i n o r Moderate Major

Natural vegetation and wildlife I Land use and settlement I I

I AtmosDheric Dollution I I Noise pollution Heat pollution Solid waste pollution Liquid waste pollution Other Dollution

I

D) Impacts I Environment I I Does the pilot project require large volume o f /Yes, details: N o

- 75 -

construction materials to be taken from local sources (e.g. Gravel, stones, water, timber, firewood)? Does the pilot project require, or lead to, the disposal o f wastewater or any other solids or liquids into streams. rivers and lakes?

Yes, details: No

Does the pilot project have human health and safety risks, during construction or later? Will the pilot project produce solid wastes (including packaging, oils, or discarded machinery parts)? Resettlement W i l l the pilot project involve any land acquisition?

~~

Will the uilot Droiect cause involuntarv resettlement? ]Yes. details: No

Yes, details: No

Yes, details: No

Yes, details: No W i l l the pilot project affect buildings, crops, trees, business and other assets?

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Yes, details: No

Indigenous people Are there indigenous peoples communities in the area o f the pilot project? W i l l the pilot project affect the rights, traditional and water rights of indigenous peoples? H o w w i l l indigenous people participate in the environmental and social assessment activities What mitigation measures w i l l be put in place to ensure that IPS do not lose access to resources and

Yes, details: No

landyes, details: No

Details: No

Details: No

B. MONITORING PLAN

What parameter

is to be monitored?

Phase Whereis the

parameter to be

monitored:

Saseline (usually or Category A irojects only) :onstruct

How is the parameter t L

be monitorel

monitoring equipment?

/type of

When is the parameter to

be monitored - frequency of measurement

or continuous.?

)perate

)ecommission

Responsibility

parameter

monitored?

- 7 7 -

Attachment 3 Sample Format of Environment Management Plan

ENVIRONMENTAL MANAGEMENT PLAN FORMAT

I Phase I

MITIGATION PLAN c o Institutional Responsibility Comments

secondary Issue Mitigation Install Operate Install Operate (e.&

- 78 -

Additional Annex 12: Baseline Conditions and Initial Workplan INDONESIA: Private Provision of Infrastructure Technical Assistance Loan

A. Baseline Conditions - No.

1. a. -

- b.

C.

d.

Lead Agency Issues/

Su b-sectors DCMEA nf rastructure Sector ='erformance

(eppres 711 998

3overnment support

.and Acquisition

Status of PPI Policies and Framework

Bappenas in liaison with sectoral departments is undertaking a major review of policies, performance and needs in infrastructure

. This work will be reflected in a "White Paoer a draft of which is already available A revised Keppres 7 has been prepared to

reflect the implications of the decentralization legislation for projects undertaken by regional governments and

to provide a more comprehensive guidance on the various requirements for effective private participation, including on: unsolicited projects, the clarification in the contract documents of government support, the tariff setting principles and tariff adjustment mechanism, and on dispute resolution.

9 Many services provided by Government or SOEs which could potentially be provided b) the private sector do not cover their full costs. Provision by the private sector will only be viable through some form of government support

* Many worthwhile infrastructure schemes which are suitable for private sector participation are unable to secure full costs recovery and will only be viable through some form of government support

With decentralization the same issues arise at the regional/local level . Keppres 7/98 requires that the scope and extent of public support be clearly spelled out in the bid document (and later in the contract)

While the relevant regulation provides for land acquisition based on either eminent domain or negotiation, eminent domain is rarely used. Negotiation is generally very time consuming and often unnecessarily costly. Negotiation also can result in unfair compensation which does not reflect market

Comments/Evaluation I Strategy

. The Bappenas "White Paper" will provide a major input for the identification of issues and the preparation of the Country PPI Assessment to be followed by a Country PPI Strategy Paper

. There are some remaining issues with the current draft proposals, e.g. as to the mandatory versus guidance nature of the decree in particular in relation to regional projects. These issues should bc addressed in the course of a final review.

Consideration should be given to also include more specific provisions regarding the compliance of PSP projects with GOls general environmental/social requirements at each processing step, and a provision that the issuing of an operating permit is conditional on final clearance by the relevant environmental authoritv. . Government has as yet not provided policy guidelines on public support for various sectordsub-sectors as anticipated by Keppres 7

A review of past practices on

A clear general policy as well as

government support is indicated

mechanisms for Government Support should be developed:, including:

principles Development of general

. Guidelines for PSP projects at the central (sector and sub-sector) and at the local level . Capacity building

8 Issues have arisen in the implementation of the policy to decentralize management of land tenure.

encouraging the relevant authorities to address these issues on a high priority

0 KKPPI may play a role in

- 79 -

Regional *egulations on =sP

rariff setting and ariff adjustment

vlodalities of PSF

3isk allocation ind mitigation

prices. The current regulatory provisions and their application are not conducive to private investment in infrastructure. Private sector schemes requiring extensive land acquisition are generally much delayed or fail to proceed

It is GO1 policy to decentralize authority fo management of land tenure - and thus for resolving issues related to land acquisition - to reaional aovernment. . Following the autonomy laws, regulations by the regional assemblies (PERDA) serve as the legal basis for PSP projects manage( by regional authorities.

PERDA on PSP based on their understanding of KEPPRES 711 998

. Some regions have issued their own

Tariffs in many infrastructure sectors remair well below cost recovery levels

Unless tariffs provide for commercial viability and are adjusted to reflect increase: in cost under efficient conditions it will not bt possible to attract private investment

Keppres 7/98 requires that the principles foi the setting and adjustment of tariffs, fees and charges be clearly spelled out in the bid document (and the contract) PPI has mainly taken the form of joint

venture companies or joint venture operations

Other modalities (concession agreement, lease, franchise, management contract) are not clearly provided for under the existing laws and regulations

Also, standard forms of agreement which reflect Indonesia specific conditions have not been developed The nature and magnitude of project risks i: mainly determined by the selected modality of PSP (see above), and the sector/subsector. Risk allocation and mitigation always requires very careful assessment and design

Keppres 7/98 requires that the risk allocation between the implementing entity, the private party and the users be clearly spelled out in the bid document (and the contract)

basis.

. To attract private investment at th regional level, the uncertainties arising fror regional autonomy need to be resolved

guidance from KKPPI on effective regional regulations in line with the revised Keppre: 719 8

. There should be appropriate

. The strategy should be to assist Regional Government by providing input tc MOHA on amrooriate PSP auidelines

Government has as yet not developed clear policy principles nor provided guidance on tariff setting and taril adjustment by sector and sub-sector as anticipated by Keppres 7.

government support (see above) . Development of a comprehensive policy covering both tariff and government support issues is now a high priority

forms of PSP will open many more opportunities for PPI

. This issue is related to that of

. A proper legal basis for other

. A legal basis for all potentially suitable forms of contract should be established and standard contracts should be developed starting with those likely to find the most applications

. Government has as yet not provided clear guidance on risk allocation principles by PSP modality and sector/su b-sector as anticipated by Keppres 7

biased in major investments (e.g. in the contracts of PLN with independent power producers - see below) and projects fail, the general taxpayer ends up bearing the burden

. When risk allocation is very

. Development of sound policy

- 80 -

Foreign exchangt rate guarantees

As earnings of infrastructure projects are typically in domestic funds while investment is capital intensive and requires long maturities, substantial foreign exchange risks arise when financing comes from foreign investors

Even though foreign exchange rate risk was not perceived as a major issue in Indonesia by the private sector until the economic and financial crisis in the late 199Os, payments under the contracts with the independent power producers were expressed in $ terms. PLN was unable to meet its US$ payments when the currency depreciated dramatically in 1997198.

among other, aims at improving the governance structure of the regional companies. This draft will differentiate BUMD into regional companies (PD) and

MOHA needs assistance to finalize the draft law.

9 MOHA has prepared a draft law, which

limited liability companies (PT). .

qegional Govt Enterprise :BUMD) Draft -aw

principles on risk allocation by PSP modality and by sectorlsub-sector is now a high priority

unable to provide sufficient funding for PPI, and in view of the bad experience with foreign exchange risk in the recent past, the issue of how this risk and related government guarantees are dealt with will likely be critical for PPI in Indonesia

' developing a cross-sectoral Policy for dealing with foreign exchange risks and related contingent liabilities

. As local financial markets will be

KKPPI will play a role in

. An improved governance structure for regional companies is a key requirement for effective PSP at the regionalllocal level

that the law meets appropriate standards m KKPPI will play a role in ensuring

- 81 -

- No. Status of PPI Policies and Framework

a.

CommentslEvaluation / Strategy

b.

In early 2003 GO1 finalized a 6 point PDAM recovery policy. a Proposals for a regulatory framework in water supply and wastewater services have been prepared. These cover: (a) recommendations on separation of responsibilities for policy-making, regulatory and operational functions; (b) establishment of a National Regulatory Body (NRB); (c) allocation of functions among the Government (NRB) and Local Government;

covered in regulation. 9 A draft law on Water Resources has been prepared and is under consideration by the Parliament. However it does not provide the basis for establishment of a NRB. . A draft of a Government implementing regulation on Water Supply has been prepared

preparatory activities in support of PSP investment at local level is being finalized. . explore the advantages and feasibility of a road fund. The concept is gaining acceptance in wider circles . A draft to update Road Law 1311980 and

being prepared. It will provide the legal basis for the establishment of a road fund scheme . Numerous initiatives have been launched in the past to introduce appropriate road user charges

and (d) specification of the services to be

A proposal for a funding mechanism for

Several studies have been conducted to

reflect the implications of decentralization is

C.

These various initiatives begin to provide a basis for developing PSP in the water sector.

However, the Water Resources Draft law does not contain a basis for establishment of a NRB

mechanism for tariff increases continues to impede PSP

Lack of an effective policy and

Strategy: . To continue progressing these policy initiatives to successful completion; and - the various policy elements

To further develop the details of

1

charges have failed, yet appropriate charges and an effective earmarking mechanism are key requirements for establishment of a road fund

A road fund combined with an effective governance structure comprising a Road Board representing the various stakeholders provides the basis for greater involvement of the private sector in various aspects of management of the road system, including:

Past policy initiatives on road usel

.

. Road condition surveys . Road works planning activities Vehicle axle weight controls

Ensure that the provisions in the Strategy:

0

basic law and the implementing regulations establish the principles of a sound governance structure conducive to transparency and efficient management c road assets 0 Involve road users and other

Lead Agency Issues1

Su b-sectors

dSRl Vater / Sanitatior

load

‘011 Road number of joint-venture BOTIConcession schemes between Jasa Marga and private investors were implemented/initiated; but these were not based on fully transparent selection procedures. Many of these schemes failed after the crisis in late 1997 .

Up until Keppres 7/98 was issued a large

In parallel GO1 pursued a policy of partial

stakeholders in this process. . Implementation of a clear allocation of responsibilities for operating and regulatory functions is essential for both the “BOT/concession” policy approach and the divestiture policies

sector (tariff setting and adjustment, resolution of failed BOT schemes) need tc

. In parallel the other issues in the

- 82 -

- 111. a.

- b.

1oc elecommunicatic

:ail

divestiture of Jasa Marga GO1 is now considering several new toll

road investment schemes which in the current economic climate may be difficult to implement

In 2001 GO1 issued a regulation allowing a tariff adjustment every 3 years wit1 a maximum increase of 25%. However this has not been implemented yet.

The authority to develop toll roads is vested in Jasa Marga which also performs certain regulatory functions in this sector. Recommendations on the separation of responsibilities for operating and regulatory functions in the toll road sector are being develoDed.

'he basic elements of a sound enabling .amework for PSP have been outlined in the Sector Blueprint" and been established with Law 6/99. The aims are to:

Eliminate all forms of monopoly by preventing abuse of monopoly power and enabling competition in all market segments

Eliminate all forms of discrimination which would impede private provision of telecom networks and services

Distinguish between government's functions of policy-making, regulation, supervision and control and reassign responsibilities

'rivate ownership in the sector (49% in the case f Telkom and 85% in the case of Indosat) and iarket structure have evolved significantly with 'elkom emerging as the major player in a market fhich is increasingly competitive.

A policy of separation of responsibility foi track (government) and rail operations (railway corporation and potentially private operators) has been implemented . recovering track costs (TAC) and maintenance and operation (IMO) costs . A public service obligation (PSO) mechanism to compensate the railway for government imposed tariffs which do not cover costs has been established

policy initiative focused on operations, government has also been considering schemes for development of new rail with private sector involvement

Mechanisms have been established for

In parallel to the above comprehensive

be addressed Further evaluation is desirable of

the appropriate long term modality for PSP in toll roads in Indonesia taking into account the economic and business environment, the substantial value of existing toll road assets, the expected road development needs and lessons learned under toll road development in thi past

letion Plan: Jpon completion of the ongoing study on the tllocation of responsibilities for key functions, I clear follow-up work program will be leveloped

.

-he crisis has provided an impetus for iccelerating the restructuring of the market. iowever, in some areas policy implementatioi \as slowed down. Current issues impeding thl uII realization of a multi-provider market nclude:

0 Delays in tariffs increases for which a proper legal basis is provided

not well defined

effective competition and interconnection regime

body

0 licensing procedures which are

Delays in implementation of an 0

0 Establishment of a regulatory

-he priority is to update the "Sector Blueprint" o provide for a new prioritized action plan jutlining measures and steps needed to ichieve a fully competitive market benefiting he economy and the public alike . The three mechanisms to

implement the policy of separation of trac and operations provide the basis for private participation in railway operations 1 They have not been implemented effectively for a number of reasons and rail fails to play its potential role in the transport market . Given potential traffic volumes, except for mining schemes, new railway lines are not economically nor financially viable and would require central or local government support

W o n Plan: There is a need for a reevaluatioi if PSP policies in the railway sector, including . Clarification of the key reasons fo

the failure of the (TAC), (IMO), (PSO) mechanisms

Examination of alternative options to make the mechanisms work . Examination of alternative options for greater private participation . Examination of alternative source! of revenue for the railway

'his re-evaluation will be initiated as part of

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- C.

d.

’orts

irports

The adopted PSP modality (in Jakarta and Surabaya) is the joint venture “concession” company between the state corporation and private sector parties. This modality was possible within existing laws and regulations 9 In parallel GO1 has a policy of divestiture of its stake in the port corporations as part of its Masterplan for privatization of SOEs . Under decentralization regional authorities can have responsibility for secondary ports which are not under SOE management and several of these have beer transferred from MOC oversight to regional authorities.

Few of the regional governments have the capability to properly manage port businesses

Restrictions are imposed on private ports on doing business with third parties

The main PSP policy is the divesture of GOl’s stake in airport corporations as part of its Masterplan for privatization of SOEs

In parallel, schemes for joint venture ”BOT/Concession” schemes between the airport corporation and private investors haw been promoted

Under decentralization, regional authorities can have responsibility for secondary airports which are not under SOE management. Few of the regional authorities have the capability to properly manage these business

he PSP Framework Assessment. In the neantime, the revised Railway Law and its mplementing regulations should provide for al ilternative options for PSP in the railway ;ector

a The joint venture approach does not provide for competition between different operators in the ports even though the volume in Jakarta and Surabaya is sufficient to allow competition

policy the joint venture approach will lead to a private monopoly in the ports

The private sector can be involvec in many different kinds of services in addition to terminal operations

no longer appropriate in an era where private participation in infrastructure is being encouraged

lcfion Plan: There is a need for a reevaluatior I f PSP policies in the port sector, including on

The number of the port

8 Combined with the divestiture

8 Restrictions on private ports are

. corporations and their role in an institutional set-up aimed at providing for competition . The allocation of responsibilities for various port functions . The preferred modality(ties) for PSP in ports considering the need to introduce competition (in the market and/or for the market) a The issue of cross-subsidization between ports . regional authorities on PSP in ports

n the meantime, the revised Maritime rransport Law and its implementing egulations should provide for all alternative mtions for PSP in D O ~ ~ S

The guidance to be provided to

0 For a number of reasons the parallel policies of divestiture and joint venture “BOT/Concession” schemes have not yielded results so far

“BOT/Concession” schemes were based on a fully competitive procedure

involved in different kinds of activities and services in airports and some of these arc already being undertaken by private parties

W o n Plan: To achieve greater PSP if iirports, the objectives of PSP in the airpor iector need to be clarified, including:

0 It is not clear that the

0 The private sector can be

0 The preferred modality (ties) for PSP in airports considering the need tc introduce greater competition in the secto

corporations in a modern institutiona set-up leading to a possible realignmen of responsibilities for various functions

0 The role of the airport

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0 The issue of cross-subsidization between airports

In the meantime, the revised Law on Aviation and its implementing regulations should provide for all alternative options for PSP in airports

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B. Init ial Workplan Matrix WORKPLAN FOR PPITA SUPPORTED ACTIVITIES

Component/Activity I

First Year Second and Third Year

1. OCMEA a. In house Advisory

TA to KKPPI 0 Country PPI Framework Assessment taking

into account the Bappenas “White Paper” on Infrastructure Sector Performance Prioritization o f cross sectoral and sectoral issues identified in the Framework Assessment

0 Flowing from the above, develop the Country PPI Strategy

0 Input for preliminary screening/evaluation o f TA assignments based on the Country PPI Strategy

0 Input to final review for revision o f Keppres No.7/1998

0 Input to implementing guidelines for Keppres No. 7/1998 (revised version)

0 Input for revised Local Government Enterprise law

0 Input to final screening/evaluation o f TAs to be funded under PPITA and other sources and firming up o f TORS

0 Input to preparation o f guidelines for regional regulations on PSP (including on fund channeling system to local government)

0 Lessons learned under PSP in the infrastructure sector in general

0 Assistance on donor coordination for infrastructure TA funding

0 PSP specific project review/analysis as requested by KKPPI (including review o f Keppres No. 15/2002)

0 PSP specific project analysis as requested

0 Continue implementation of component by KKPPI

elements o f Country PPI Strategy Framework

issues

under PPITA and other sources and firming up o f TORS

0 Monitoring and reporting on substantive aspects o f PPI program implementation

0 Assistance on donor coordination for infrastructure TA funding

0 Continue development o f government policies on government support, tariff setting and adjustment and risk allocation

0 Worlung papers on PSP infrastructure

0 Screening/evaluation o f TAs to be funded

Monitoring and reporting on substantive aspects o f PPI program implementation

0 In liaison with M S R I and M O C Advisory TA initiate development o f policy on government support

0 In liaison with M S R I and M O C Advisory TA initiate development o f policy on pricing and tariff setting In liaison with M S R I and M O C Advisory TA initiate development of policy on r isk allocation and risk mitigation

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b. Capacity Building and Training

Training Needs Assessment 0 Training Curriculum & Module Development 0 Seminars I Workshops I Short Courses 0 Postgraduate (S-2 Program)

0 Seminars I Workshops I Short Courses 0 Postgraduate (S-2 Program) 0 Capacity Building evaluations 0 Develop sustainability mechanism for

c. P M U PPlTA support

Capacity Building & Training PMU Workplan 0 Updated PMU database

Development

f. Development of P3 Network I Center Unit I

0 Training Management Module for PPITA

0 P M U Database System 0 Monitoring and Reporting on loan

Beneficiaries

implementation, procurement and financial aspects

0 Communication Strategy 0 Media awareness program on PSP. 0 Public awareness program on PSP 0 Implementation o f Public Awareness

program 0 Implementation o f Media Awareness

program 0 Socialization o f draft Road law

Research & Development 0 Establishment o f P3 center 0 Develop Workplan for P3 Center 0 Develop sustainability mechanism of P3

0 PPP program Database 0 Design paper on P3 Center

Center

0 Monitoring and reporting o f planning and implementation o f procurement and financial aspects o f the loan

'g. Consolidated Indonesian Infrastructure Forum (CIIF)

0 Implementation o f Public Awareness

0 Implementation o f Media Awareness

0 Socialization o f revised Keppres No.

program

program

711998 (including guidelines for cross sectors and specific sectors)

0 Socialization o f Draft Local Government Enterprise L a w

0 Socialization o f government regulation and guidelines in Communication sector, Roads, Urban Infrastructures, and other related sub-sectors Socialization o f Standard Contract, Risk Management. and Economic I Finance

ILMOC

e. Research & Development

I

0 PSP database 0 PSP policies, regulatory frameworks. 0 PSP project analysis 0 Research on specific subject 0 Journal I research dissemination

0 Update database o f PSP 0 Analysis o f PSP Development and

preparation o f papers, articles, etc 0 Research on specific subject 0 Journal I research dissemination 0 Develop sustainability mechanism for

0 Establishment o f CIIF 0 Develop Workplan 0 Conduct annual forum meetings 0 Conduct special forum meetings 0 Develop report on annual and special

meetings

0 Develop Workplan 0 Conduct annual forum meetings 0 Conduct special forum meetings 0 Develop report on annual and special

0 Develop sustainability mechanism o f meetings

CIIF

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. In-house Advisory TA to Ministry o f Communication anc other support for PSP Framework Development

. Project Preparation support

[ I . M S R I . In-house advisory TA to Ministry o f Settlement and Regional

Transportation SectorISub-sector PSP

0 In liaison with OCMEA Advisory Team Framework Assessment

prioritization o f issues identified in M O C PSP Framework Assessment and development o f work program to address issues

0 Input on preliminary screening/evaluation o f TA assignments based sectorhb-sector PSP Framework Assessment and on Country PPI Strategy

B lueprint”

for the revised Keppres 7/98

regulations on railways, ports, land transport and aviation to reflect decentralization and PSP sector policies

D Lesson Learned on PSP in Communications sector

D Input on Telecom legislation D In liaison with OCMEA Advisory Team

development o f pricing and tariff setting policy for various M O C sub-sectors in relation to PSP

D In liaison with OCMEA Advisory Team development o f policy on government support for MOC sub-sectors

D In liaison with OCMEA Advisory Team development o f risk allocation and risk mitigation policy for M O C sub-sectors

D Review and analysis o f various proposals for PSP

D Input fo r the w o r k program development and a id coordination task o f the CMEA Advisorv Services

Input for update o f Telecom “Sector

Input for sectoral Implementing Guideline

D Input for revised law and implementing

D Screening o f proposals, e.g. B (Tanjung Api-Api Ocean Harbour D Kualanamu Airport development)

... b ..

D M S R I Sector/Sub-sector PSP Framework

P In liaison with OCMEA Advisory Team Assessment

prioritization o f issues identified in M S R I

0 Continued implementation o f components o f Sector PSP Strategy

0 Input for development o f Standard Contracts and guidelines on risk management, government support, pricing and tariff issues and economic/ financial evaluations for sub-sectors

regulatory frameworks for railways

regulatory frameworks for maritime sector

regulatory frameworks for aviation

0 Input on further development of

0 Input on further development o f

Input on further development o f

Legal Review on awarded PSP projects D Input on legal provisions for Regulatory

Body in various sub-sectors as appropriate

Screening o f proposals, e.g. o Trans Sumatera Railway o Ferry Transport at Sabang, Belawan,

Batam, dan Kupang

Continued implementation of component elements o f Sector PSP Strategy Input for development o f Standard Contracts and guidelines on risk

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Infrastructure and other support for PSP Framework development

. Project Preparation support

V. BAPPENAS

PSP Framework Assessment and development o f work program to address issues

0 Input on preliminary screening/evaluation o f TA assignments based sector/sub-sector PSP Framework Assessment and on Country PPI Strategy

0 Input for sectoral implementing guidelines for the revised Keppres 7

0 Input for revised road law and i t s implementing regulations Init ial review o f viability and timing o f to l l road proposals Lesson Learned under PSP in Urban Infrastructures and To l l Roads Input for Government Regulation on Regulatory Body for Water Supply and Waste Water Services Review o f PSP Funding Facility for Urban Infrastructures at local level In liaison with OCMEA Advisory Team development o f pricing and tariff setting policy for various M S R I sub-sectors in relation to PSP In liaison with OCMEA Advisory Team development of policy on govemment support for M S R I sub-sectors In liaison with OCMEA Advisory Team development of risk allocation and risk mitigation policy for M S R I sub-sectors Legal Review on awarded PSP projects Review/analysis o f specific proposals for PSP, e.g.

P Corporatization o f Perum Jasa Tirta P Promoting PSP projects for water supply in 4

cities (Pontianak, Sabang, Makassar, and Banjarmasin)

Facility (SMF) D Establishment of Secondary Mortgage

B Screening o f project proposals, e.g. B Tol l Road and/or Urban Infrastructure projecl

B Review o f Private Sector Infrastructure DeveloDment Facilitv (PSIDF)

management, government support, pricing and tariff issues and economic/ financial evaluations for sub-sectors.

D Input on guidelines on local government to l l road business

b Legal review of proposals for local legislation in relation to PSP Funding Facility

B Capacity building on PSP investment evaluation within MSRI

b Input for Government Regulation on Road Fund and Tol l Roads

b Input for Government Regulation on Water Supply Services

1 Input for Government Regulation on Sanitation Input for implementation o f PSP Funding Facility for Urban Infrastructures

b Legal Review on awarded PSP projects B Input on legal provisions for

establishment o f Regulatory Body in Water Supply

establishment o f Road Fund Board b Input on legal provisions for

B Implementation support, e.g. b To l l Roads and Urban Infrastructure

project

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Additional Annex 13: Subproject Screening and Selection Criteria INDONESIA: Private Provision of Infrastructure Technical Assistance Loan

Selection Approach and Criteria for T A Assignments

1. Introduction

Proposals for TA assignments to be supported b y the project or other funding sources in the context of Aid Coordination w i l l be very diverse in nature and scope. They will:

relate to different sectors and sub-sectors and originate in different clientshmplementing agencies

deal with cross-sectoral, sectoral and sub-sectoral issues address issueshmpediments to effective PPI at different levels (i.e., at the level o f policy development or at various levels o f policy implementation) in the process o f developing and establishing an appropriate framework for PSP.

For this reason, the selection approach w i l l be anchored in the sectorhub-sector PSP Framework Assessments and the Country PPI Strategy which w i l l be developed at the start o f the project with the assistance o f the Advisory TA in CMEA, M S R I and MOC. As the PPI Strategy w i l l set out the requirements for an effective policy and regulatory framework to enable and facilitate PPI, the approach w i l l ensure that TA assignments being proposed w i l l contribute significantly to establishment o f an appropriate enabling framework for PPI. The overall process and responsibilities for respective steps w i l l be following.

2. Sector PSP Framework Assessments and Country PPI Strategy

The PSP Framework Assessments w i l l identify impediments and constraints to private participation in infrastructure and develop the requirements o f an effective policy and regulatory framework for each of the main sectors/subsectors. The Country PPI Strategy w i l l provide an overall strategy for preparing the key component elements o f the enabling legal and regulatory framework within the timeframe o f the project. The sectoral/sub-sectoral Frameworks w i l l be prepared in collaboration between the Advisory TA and the respective Directorates General within M O C and MSRI. The Country PPI Strategy w i l l be prepared in collaboration between the KKPPI and the Advisory TA at CMEA. This work w i l l be completed within the f i rs t 3 months o f the start o f the Advisory TAs.

3. Proposal Identification and Preparation

The relevant ministries and sub-sectoral directorates w i l l identify proposals aimed at developing the key elements o f the enabling framework set out in the country PPI Strategy. The proposals w i l l be prepared with the assistance o f and with inputs f rom the Advisory TA as the case may be at MOC, M S R I and CMEA. I t i s likely that high priority tasks w i l l be identified while the sectoralhub-sectoral PSP Framework Assessments are being firmed up. Thus, the identificatiodpreparation o f high priority proposals would not necessarily have to await completion o f these assessments.

4. Preliminary Screening

Preliminary screening w i l l be undertaken at the sectoral level as follows: b y the Agency for Construction and Investment at M S R I for proposals f rom MSRI; b y the Bureau o f Planning at M O C for proposals f rom

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MOC; and by the P M U at C M E A for proposals from CMEA, Bappenas, Ministry of SOE and Local Government. This step w i l l involve verification that:

the proposal i s consistent with the priorities identified in the sub-sectoral PSP Framework

al l necessary supporting documentation i s provided, including outline TOR, preliminary budget Assessment and the Country PPI Strategy

estimate, clarification o f links with other ongoing or past work, and any other pertinent information.

5. Final Screening

The purpose o f this step i s to ensure that: (i) relative priorities f rom the perspective o f the infrastructure sector as a whole w i l l be reflected in the final proposals forwarded to the Steering Committee for approval; (ii) proposals are presented in a comparable format. Final screening w i l l be undertaken by an Ad-hoc Group appointed by the Steering Committee for purposes o f final screening I t i s envisaged that the task o f final screening could also be entrusted to the Advisory T A at CMEA. The Ad-hoc Group w i l l conduct i t s work with the assistance o f the Advisory TA at CMEA. This step w i l l involve assessment that:

w the proposal i s consistent with the recommendations o f the Country PPI strategy the supporting documentation provided i s appropriate in content and format for a decision by the Steering Committee

Proposals which are assessed as eligible for financing w i l l be forwarded to the Steering Committee together with the evaluation and recommendation o f the Ad-hoc Group.

If the assessment o f the Ad-hoc Group i s that the proposal would require modifications or further strengthening or clarifications it w i l l be returned to the proponent entity (as the case may be through the Agency for Construction and Investment, Planning Bureau, PMU) with guidance as to the additional work required.

6. Approval Stage

The proposal w i l l be reviewed b y the Steering Committee based on the evaluation and recommendation o f the Ad-hoc Group. The main focus o f the review of the Steering Committee w i l l be on the relative priority o f the proposal within the Country PPI Strategy and taking into account the available or potential funding identified in the context o f Aid Coordination. The review by the Steering Committee can result in the following potential outcomes:

Approval i s given subject to the proposal being finalized within the parameters o f the outline

The proposal needs modification or further clarification or development o f particular aspects and

Approval i s not provided. This w i l l likely be a situation where the proposed timing o f the

TOR and budget as provided in the proposal and any other specific guidance given b y the Steering Committee

the approval decision i s deferred until this additional work has been completed. In this case clear guidance i s provided as to the remaining work to be done

activities i s not appropriate, for example, when the start o f the activities should await the results of ongoing work or key decisions by government. I t i s possible to foresee situations where a proposal should not proceed until and unless policy on government support or guarantees, or policy on risk allocation, or on tariff setting and adjustment has been clarified.

w

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7 . Further Processing of the Proposal

Prouosals which have received a final approval f rom the Steering Committee.

These w i l l be returned, as the case may be, to Planning BureauMOC, Agency for Construction and InvestmentMSRI or PMU/CMEA to be finalized in accordance with the agreed parameters. This process w i l l be as follows. Proposals w i l l be:

finalized by the proponent with the assistance of the Advisory TA reviewed again, as the case may be, by the Planning Bureau at MOC, the Agency for

subjected to a final review by the Ad-hoc Group for consistency with the agreed parameters. The

Construction and Investment at M S R I or the P M U at CMEA, for consistency with the parameters agreed by the Steering Committee

minutes of the review by the Group recording i t s f inal approval w i l l be forwarded to the Steering Committee.

Proposals which the Steering Committee has returned for modifications or further strengthening;.

The process w i l l be as follows. Proposals w i l l be:

developed and finalized by the proponent with the assistance o f the Advisory TA in accordance

reviewed again, as the case may be, by the Planning Bureau at MOC, the Agency for

reviewed again b y the Ad-hoc Group which w i l l either forward the proposal to the Steering

Reviewed by the Steering Committee for final approval

with the guidance provided by the Steering Committee

Construction and Investment at M S R I or the PMU at CMEA, for consistency with the guidance from the Steering Committee

Committee together with i t s recommendation or return the proposal if i t deems that additional work i s s t i l l required.

8. Proposals for Investment Project Preparation Support

For investment project preparation support the same general process w i l l be followed as for proposals to develop the enabling policy, legal and regulatory framework. However, in order to ensure that the preparation o f these proposals Preparation support would extend through the tendering, award and contract negotiations stages can be finalized during the timeframe of the project additional criteria w i l l apply. The general process and the additional criteria are outlined below:

Proposal Identification and Preparation

First, proposals should be consistent with the recommendations o f the sector/subsector PSP Framework Assessment and the Country PPI Strategy. In addition the following requirements should be met:

There should be an appropriate sectoral/subsectoral policy on PSP, or if this i s not yet the case,

Environmental Safeguards. In principle, the proposed investment should not have significant there should be no major outstanding issues in regard to sectoral/subsectoral PSP policies

environmental impacts (as a general rule, projects determined to require an AND& would be considered as falling in the World Bank’s Category A). Schemes presenting Category A impacts w i l l be considered for preparation support only if an adequate EA/Andal i s already prepared at

e

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the time o f proposal preparation. Further guidance on the environmental assessment process and requirements i s outlined in Annex 11 o f the World Bank Project Appraisal Document Social Safeguards. The proposed investments should not have significant social impacts (land acquisition, resettlement, impacts on isolated vulnerable people). For projects with limited social impacts, an impact assessment should be prepared and an Action Plan should be implemented in compliance with the policy frameworks agreed between GO1 and the World Bank for the relevant sectors. Further guidance on the social assessment process and requirements i s outlined in Annex 11 o f the World Bank Project Appraisal Document. The proposed investment should have demonstrated economic and financial viability and indications o f investor interest. I f viability has not been formally demonstrated, the prima facie evidence based on costs and benefits as available f rom similar projects should clearly indicate that there are no issues o f economic viability. In that case, economic and financial viability w i l l need to be demonstrated as part o f the project preparation The proposal should indicate the merits o f the proposed project as a demonstration activity and the scope for replicability The proposal should confirm that the procurement process and procedures outlined in Keppres 7/98 (or i t s revision as o f the date o f the proposal) w i l l be followed. Alternatively, in case i t i s not the intention to adhere strictly to this Decree, the proposal should spell out the procedure that would be followed and provide justification for any deviation f rom Keppres 7 . The proposal should detail the nature and scope o f the various activities o f project preparation support that are being sought and a timetable for their implementation till f inal contracting with the private sector party.

I t i s expected that the work o f investment project preparation support w i l l include among other: developing regulatory guidance on issues o f tariff setting and tariff adjustment, o f risk allocation, and o f government support; the preparation o f standard contract documents and/or project specific contract documents: final design work and due diligence in general f rom the point o f view o f the implementing entity; and assistance on tendering and contract negotiation.

Preliminary Screening and Final Screening

The preliminary and final screening o f proposals for investment preparation support w i l l verify that in addition to the requirements for TA assignments to develop the policy, legal and regulatory framework, the above additional criteridrequirements are satisfied. Verification in the final screening step w i l l focus, among other, on the following:

That if deviations are proposed from Keppres 7/98, these are well justified and are consistent

That the proposal has clearly identified al l the preparatory activities and requirements for

That the timetable for completion o f a l l project preparation activities t i l l contracting with the

with the spirit o f Keppres 7/98

development o f a sound private sector investment

private party are compatible with the completion date o f the project

8

8

Depending on the outcome o f the review, proposals w i l l be either forwarded to the Steering Committee or returned for modifications or further strengthening.

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Approval and Further Processing o f the Proposal

The main focus of the review b y the Steering Committee w i l l be on the merits o f the project as a vehicle for testing and demonstrating the feasibility o f a particular approach. I t i s expected that only in exceptional cases the approval by the Steering Committee w i l l be final as the proposal documentation i s unlikely to include al l the final details on the nature and scope o f the activities proposed to be carried out. If the Steering Committee provides i t s approval i t would therefore generally be an approval in principle. Proposals would be returned to the proponent agency for further development in accordance with the parameters o f the proposal and guidance provided by the Steering Committee. The further processing steps w i l l be similar to those for TA assignments to develop the legal and regulatory framework.

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Additional Annex 14: Sector Assessment and Country Framework Guidelines INDONESIA: Private Provision of Infrastructure Technical Assistance Loan

Annex 14A

PPITA - ADVISORY SERVICES TO MSRI

PRIVATE SECTOR PARTICIPATION FRAMEWORK ASSESSMENT

Outline TOR

Obiectives of the PSP Assessment

The main objectives o f the assessment are the following:

0 To provide reliable information on the status and performance from the point o f view o f the users (individuals and businesses) of each major sub-sector under MSRI as well as on sectoral issues which have a direct bearing on the ability to attract efficient and sustainable PSP

constraints and gaps relating to the existing framework

developing a strategy and action plan for reform aimed at enabling and facilitating efficient PSP in the sub-sectors under MSRI

0 To describe the policy, legal, regulatory and financial framework and to identify issues,

To formulate recommendations which provide policy makers with the basis for 0

Scope of Work

The PSP Framework Assessment i s to be developed through (i) desk work; (ii) consultation with stakeholders and experts; and (iii) diagnosis and analysis as a basis for formulating recommendations.

Desk Review. The preparation o f the report wi l l benefit from available documentation and ongoing diagnostic work. Under the Project Preparation Facility (PPF) for the PPITA Project an inventory o f recent and ongoing studies, as well as brief outline assessments o f the policies, and legal and regulatory framework for each o f the sub-sectors have been prepared. Also, the National Planning Agency, Bappenas, i s currently engaged on preparing a major review (White Paper) o f all the infrastructure sectors, covering their status, performance and issues. The results of this work wi l l be an important input and starting point for the Framework Assessment.

Consultations. The consultation process w i l l include to the extent practicable discussions and interviews with stakeholders, including the concerned Directorates General, existing and potential private sector investors and financiers both domestic and international, private sector representative bodies, professional organizations, user groups or representatives. Development banks and bilateral donors active in the sector should also be included.

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Advisory Group. Input and advice should also be sought to the extent possible from a range of experts knowledgeable about the sectors and the issues being explored. Their input wi l l be particularly valuable at the diagnostic phase and at the review stage o f the initial draft. Experts to be consulted would likely include those from: multilateral banks and development agencies, private infrastructure sponsors and investors, suppliers, operators, lawyers, banks, credit rating agencies and other financial sector agents.

MSRI PSP Assessment Report

Considering the “White Paper” that i s being prepared by Bappenas, the MSRI PSP Assessment wi l l focus on discussing the policy, regulatory and financing environment and issues and on the recommendations for Government action. I t w i l l cover the following: (i) sub-sector diagnostic reviews o f performance; (ii) the status and impact o f policies, and o f the legal and regulatory aspects which affect PSP; (iii) discussion o f any cross-sectoral issues; and (iv) recommendations for government action to establish or improve the framework for PSP.

The PSP Framework Assessment i s one o f the priority tasks to be performed by the MSRI Advisory Team. A preliminary Assessment Report wi l l be prepared by the time o f the Inception Report o f the Services, Le., within two and a half months after the start o f the services. At that time, agreement wi l l be reached on the time frame and arrangements for finalization o f the assessment.

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Annex 14B

PPITA - ADVISORY SERVICES TO MOC

PRIVATE SECTOR PARTICIPATION FRAMEWORK ASSESSMENT

Outline TOR

Obiectives of the PSP Assessment

The main objectives o f the assessment are the following:

e To provide reliable information on the status and performance from the point o f view o f the users (individuals and businesses) of each major sub-sector under MOC as well as on sectoral issues which have a direct bearing on the ability to attract efficient and sustainable PSP

constraints and gaps relating to the existing framework

developing a strategy and action plan for reform aimed at enabling and facilitating efficient PSP in transport and communications

To describe the policy, legal, regulatory and financial framework and to identify issues,

To formulate recommendations which provide policy makers with the basis for

ScoDe of Work

The PSP Framework Assessment i s to be developed through (i) desk work; (ii) consultation with stakeholders and experts; and (iii) diagnosis and analysis as a basis for formulating recommendations.

Desk Review. The preparation o f the report wi l l benefit from available documentation and ongoing diagnostic work. Under the Project Preparation Facility (PPF) for the PPITA Project an inventory o f recent and ongoing studies, as well as brief outline assessments o f the policies, and legal and regulatory framework for each o f the sub-sectors have been prepared. Also, the National Planning Agency, Bappenas, i s currently engaged on preparing a major review (White Paper) o f all the infrastructure sectors, covering their status, performance and issues. The results o f this work wi l l be an important input and starting point for the Framework Assessment.

Consultations. The consultation process w i l l include to the extent practicable discussions and interviews with stakeholders, including the concemed Directorates General, existing and potential private sector investors and financiers both domestic and international, private sector representative bodies, professional organizations, user groups or representatives. Development banks and bilateral donors active in the sector should also be included.

Advisorv Group. Input and advice should also be sought to the extent possible from a range of experts knowledgeable about the sectors and the issues being explored. Their input wi l l be

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particularly valuable at the diagnostic phase and at the review stage o f the initial draft. Experts to be consulted would likely include those from: multilateral banks and development agencies, private infrastructure sponsors and investors, suppliers, operators, lawyers, banks, credit rating agencies and other financial sector agents.

MOC PSP Assessment Report

Considering the “White Paper” that i s being prepared by Bappenas, the M O C PSP Assessment wi l l focus on discussing the policy, regulatory and financing environment and issues and on the recommendations for Government action. I t wi l l cover the following: (i) sub-sector diagnostic reviews o f performance; (ii) the status and impact o f policies, and o f the legal and regulatory aspects which affect PSP; (iii) discussion o f any cross-sectoral issues; and (iv) recommendations for government action to establish or improve the framework for PSP.

Timing

The PSP Framework Assessment i s one o f the priority tasks to be performed by the M O C Advisory Team. A preliminary Assessment Report w i l l be prepared by the time of the Inception Report o f the Services, Le. within two and a half months after the start o f the services. At that time, agreement wi l l be reached on the time frame and arrangements for finalization of the assessment.

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Annex 14C

PPITA - ADVISORY SERVICES TO CMEA

COUNTRY PRIVATE PARTICIPATION IN INFRASTRUCTURE FRAMEWORK ASSESSMENT

Outline TOR

Obiectives of the PSP Assessment

The main objectives o f the assessment are the following:

e To provide reliable information on the status and performance from the point o f view of the users (individuals and businesses) o f the infrastructure sectors as well as on cross-sectoral issues which have a direct bearing on the ability to attract efficient and sustainable PPI

constraints and gaps relating to the existing framework

developing a strategy and action plan for reform aimed at enabling and facilitating efficient PPI

To describe the policy, legal, regulatory and financial framework and to identify issues,

To formulate recommendations which provide policy makers with the basis for e

Scope of Work

The Country PPI Framework Assessment i s to be developed principally from the sectoral frameworks prepared by M S R I and M O C for their respective sub-sectors and complemented with additional inputs relating to the energy sector. The preparation w i l l involve: (i) close liaison with the MSRI and MOC Advisory Teams in the course o f their work; (ii) limited desk work; (iii) consultation with stakeholders and experts; and (iv) synthesis o f the findings and recommendations developed under the MSRI and M O C sectoral PSP Framework Assessments.

Liaison with the MSRI and M O C Advisory Teams. The CMEA Advisory Team wi l l liaise closely with the MSRI and M O C Advisory Teams while these wi l l be carrying out their sub-sectoral/sectoral PSP Framework Assessments so as to be fully informed about their findings as the work progresses.

Desk Review. The preparation o f the report wi l l benefit from ongoing diagnostic work. The National Planning Agency, Bappenas, i s currently engaged on preparing a major review (White Paper) o f all the infrastructure sectors, covering their status, performance and issues. The results o f this work wi l l be used by the MSRI and M O C Advisory Teams and i t w i l l also be an important input and starting point for the Country Framework Assessment.

Consultations. The CMEA Advisory Team w i l l also benefit from the consultation process

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carried out by the MSRI and MOC Advisory Teams which wi l l include discussions and interviews with stakeholders, including the concerned Directorates General, existing and potential private sector investors and financiers both domestic and international, private sector representative bodies, professional organizations, user groups or representatives. Development banks and bilateral donors active in the sector should also be included.

Advisory Group. The CMEA Advisory Team wi l l also benefit from the input and advice being sought by the MSRI and M O C Advisory Teams from a range o f experts knowledgeable about the sectors and issues being explored. Experts to be consulted would likely include those from: - - multilateral banks and development agencies, private infrastructure sponsors and investors, suppliers, operators, lawyers, banks, credit rating agencies and other financial sector agents.

CMEA Countrv PPI Assessment Report

Considering: (i) the “White Paper” that i s being prepared by Bappenas; and, the separate sectoral PSP Assessments being prepared by MSRI and MOC, the CMEA Country Assessment wi l l focus on discussing the cross-sectoral policy, regulatory and financing environment and issues and on the recommendations for Government action. I t w i l l cover the following: (i) a broad diagnostic review o f infrastructure sector performance and of cross-sectoral issues; (ii) the status and impact o f policies, and of the legal and regulatory aspects which affect PSP; and (iii) recommendations for government action in relation to establishing or improving the framework for PPI.

The Country PPI Framework Assessment i s one of the priority tasks to be performed by the CMEA Advisory Team. A preliminary Assessment Report wi l l be prepared soon after the separate MSRI and M O C preliminary assessments are available, Le., at the time o f the Inception Report o f the Services. At that time, agreement wi l l be reached on the time frame and arrangements for finalization of the country assessment.

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Additional Annex 15: Anti-Corruption Action Plan INDONESIA: Private Provision of Infrastructure Technical Assistance Loan

1. Background

Since the resources o f PPITA wi l l be expended entirely on technical assistance, the corruption r isks inherent in infrastructure projects w i l l not be present. However, a significant performance issue in the Bank's urban sector programs in Indonesia to date has been the very uneven performance o f consultants. In exploring the reasons for poor performance by consultants, interviews with project officials and consultants indicate that the problem i s frequently caused by financial demands being made on the contract winner, in fact as a condition for winning the contract. The selected consultant then must cut other costs, perhaps by not filling some lower positions (which are s t i l l invoiced) or by providing under-qualified (less expensive) personnel. These are the primary sources o f corruption which must be avoided in the conduct o f the PPITA project. O f course, the procurement and financial management systems which wi l l be used in PPITA are based on Bank and GO1 guidelines and regulations, but these have often not been sufficient to prevent corruption in previous projects.

Nevertheless, The Project Operations Manual, which includes procurement, internal control, auditing, disbursement, accounting and reporting, wi l l be the most important control in ensuring that opportunities for corruption are reduced to the absolute minimum possible. As noted Section 9 o f the Project Implementation Plan, the procurement plan for the project has been designed in the context o f the findings o f the 2001 Country Procurement Assessment Report for Indonesia and i s not expected to pose any unusual procurement issues or risks. In addition, financial management i s not expected to pose significant problems because the project does not present any unusual challenges.

The World Bank Policy on Disclosure o f Information (June 2002) states that 'timely dissemination o f information to local groups affected by the projects and programs supported by the Bank, including nongovernmental organizations, i s essential for the effective implementation and sustainability o f projects'. The strategy enunciated in these pages i s intended to reflect the intention o f this statement.

2. Public Disclosure

A primary safeguard against corrupt practices wi l l be full and open disclosure o f all selection activities and decisions, in particular concerning short-listing, evaluation, and staffing. All activities and documents w i l l be open for public inspection and comment, but the keys to effective public disclosure are timely and complete dissemination o f information and ready availability o f documents for all who may wish to inspect them. Finally, the public must be made aware o f where and how their comments and suggestions can be received and properly taken into consideration. All Procurement Officers (see below) w i l l be instructed in mechanisms for public disclosure, and the P M U w i l l be responsible for monitoring compliance in each selection process.

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The PPITA web site wi l l contain data and information concerning the status o f project implementation, including for example an annual work plan, ongoing activities, and current problems and issues. Since the web site wi l l be interactive, persons desiring more detailed information w i l l be able to submit request through this vehicle. Web site design and content wi l l no doubt be revised as i t becomes clear what type o f information i s most frequently sought.

PPITA documents, including periodic and special reports, wi l l be available for inspection at the PPITA office. However, internal memos, invoices and other documents wi l l not be considered as available for public inspection. Annual audits by BPKP are public documents, but must be obtained from that agency.

3. Selection of Consultants by Central Government Ministries

I t i s expected that 80-90 TA contracts wi l l be entered into over the 3-year l i fe o f PPITA; these wi l l be located in the three primary ministries (CMEA, MSRI, MOC). Within each o f these ministries, there wi l l be one designated Procurement Officer to handle the normal administrative aspects o f contracting. This Officer may be from the PMU if the IA so desires. He w i l l prepare the TOR’S and Owner’s Estimates for proposed sub-projects, with the assistance o f the In-House Advisors. The P M U wi l l submit these proposals to the KKPPI Committee for review and approval/rejection, again with the assistance o f i t s In-House Advisors.

The Procurement Officers wi l l be assisted by Technical Evaluation Committees, which wi l l include at least four persons with competency in the technical and/or managerial issues of the tender concerned. These Committees wi l l include one member from the P M U and may include a consultant if specific required expertise i s not otherwise available. One member from civi l society w i l l be included on each committee. The Technical Evaluation Committees wi l l evaluate the technical proposals.

Similarly, a Financial Evaluation Committee wi l l be established in each IA, chaired by the Project Manager or P M U Financial Management Specialist and including the chairperson o f the Technical Evaluation Committee and others as required. As above, one member from civi l society w i l l be included on each committee. These Committees w i l l evaluate the financial proposals after the Technical Evaluation Report has been completed.

Technical and Financial Committee members from civ i l society w i l l be selected in accordance with the procedures and criteria contained in the Procurement manual. The Procurement Officer and TechnicalFinancial Evaluation Committees wi l l closely monitor the tender process. After receiving the evaluation reports o f the two Committees, the Project Manager w i l l submit the documents to the Bank as required to obtain the necessary NOLs.

4. Safeguarding the Selection Process

Bank guidelines concerning procurement w i l l be made known and strictly adhered to. O f particular concern i s that the short-listing i s done completely transparently, with no influence exerted by any party concerned on behalf o f any company or individual. All evaluations must be

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made in strict accordance with the procedures and criteria as stated in the Procurement Manual and made available to anyone for inspection. Another concern i s that selection for technical assistance to local governments w i l l be difficult to monitor if conducted locally; for this reason, such selection w i l l be managed by the CMEA Procurement Officer. Each Procurement Officer must ensure that a TechnicalFinancial Evaluation Committee member does not have a bias either for or against a consultant, such that his or her objectivity wi l l be compromised. I f so, such a person must be removed from the committee.

5. Selection Criteria

An important mechanism to safeguard the integrity o f PPITA i s the application o f criteria by which sub-projects wi l l be deemed suitable or not for inclusion in the program. This i s essentially a quality-control function, whereby only those proposals (TORS) which (1) meet the objectives o f PPITA and the implementing agency concerned and (2) present a cohesive, viable approach, w i l l be approved for funding under PPITA. While this wi l l ensure that in principle only proposals o f merit w i l l be approved, i t does not address the issue o f quality o f output.

6. Monitoring and Reporting

Each TOR for technical assistance services wi l l contain a statement o f objectives, description o f specific tasks to be undertaken, and requirements for reporting and/or deliverables. These services, although selected by the implementing agency concerned, w i l l be monitored by the P M U advisory team. I t i s intended that each IA w i l l have a Project Manager responsible for supervising the services contracted, including monitoring and evaluation. The PMU advisors wi l l also monitor and evaluate, with priority given to those contracts (if any) which may be in some manner problematic. P M U w i l l also conduct spontaneous, unannounced visits to observe PPITA undertakings. Reports are submitted to the Bank after clearance by the P M U and based on approval by the advisors. The In-House Advisors may also assist in this regard, but they wi l l be assumed to be less neutral in identifying and dealing with problems related to implementation quality or malfeasance. O f particular concern in this monitoring wi l l be the performance o f the consultants, and more specifically adherence to the Terms o f Reference.

As stated in the PPITA Project Operations Manual, responsibility for monitoring and reporting concerning contract implementation lies with the IA in close coordination with the PMU. The basis i s monitoring indicators as agreed at contract negotiation and as elaborated in the Terms o f Reference and signed contracts. Results o f monitoring and all periodic reports w i l l be available for public inspection at the PMU.

7. Reporting of Malfeasance

While the presence of a PMU representative and member o f civi l society on the Technical/Financial Evaluation Committees wi l l strengthen the monitoring o f all aspects o f contracting, this w i l l not provide sufficient coverage, and the assistance o f the concerned parties wi l l be solicited. In all Pre-Proposal Meetings i t w i l l be made clear that anyone, including from the public at large, may report any malfeasance or suspected malfeasance, such as collusion,

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falsification o f shortlists, unreasonable evaluation results, falsified submissions from consultants etc. Reports may be made to the P M U and/or KKPPI Steering Committee, either anonymously or with full disclosure, but must be accompanied by sufficient information to support investigation by the P M U and/or KKPPI.

8. Handling of Complaints

Upon receipt o f any such information, the P M U wi l l investigate and make a determination as to whether any malfeasance has occurred serious enough to warrant punitive action. The conclusions and recommendations for sanctions or other action wi l l be submitted to the KKPPI Steering Committee, which wi l l make a final decision as to the disposition of each case. The selection may be suspended pending resolution in a timely manner, at the discretion of the PMU. Resolution may entail disqualification in the case of a consultant or cancellation o f the selection process in the case o f malfeasance by the committee. Other sanctions may be deemed appropriate, depending on the circumstances. Documents concerning cases reported and their disposition w i l l be made available for public inspection at the PMU.

9. Conclusion

PPITA provides mechanisms for closely monitoring the selection process and contract implementation itself. However, while to some extent i t w i l l be possible to safeguard against illegal practices such as billing ‘invisible’ staff and using under-qualified personnel, ultimately the integrity o f each Implementing Agency, Project Manager, Procurement Officer, TechnicalFinancial Evaluation Committee and consultant w i l l be the determining factors in the prevalence o f corruption. Full public disclosure o f all project activities and an ‘open door’ policy concerning information which may be offered from the public w i l l be important safeguards, and hopefully wi l l act as deterrents to would-be perpetrators of malfeasance.

In particular, PPITA must scrutinize the formulation o f long and short lists, billing rates and other costs, personnel qualifications, actual staffing and the invoicing process. There wi l l be no bricks and mortar by which to judge PPITA, but only studies and other reports. I t i s clear, therefore, that every effort must be made to ensure that the best consultants possible are obtained and that PPITA gets what i t pays for.

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No. Description of Action

1.

Action By

PMU, Procurement Officers, Overall Project Management Monitoring o f adherence to Project Operations Manual in all PPITA activities WB Public Disclosure Dissemination o f information concerning a l l activities through web site, media coverage, and special documents (e.g., meeting announcemend schedule, brochure, poster, leaflet) Public attendance at and participation in major events (e.g., selection activities, Discussion Forum, socialization o f PPITA - presentations, etc.)

2. PMU, Procurement Officers

3. PMU, Procurement Officers

k. I Access to project documents at P M U office I P M U I 5. 6.

Reception, consideration and disposition o f public comments Public access (observation or membership) to technical and financial evaluation committees

PMU, Procurement Officers Each IA, P M U

7 .

8. 9. 10.

Availability o f audit reports at BPKP Management of the Selection Process One Procurement Officer per Implementing Agency (IA) One Technical Evaluation Committee per IA One Financial Evaluation Committee Der IA

BPKP

Each IA Each I A Each IA

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20.

21.

22.

involved in complaints handling. When evidence o f corruptiodcollusion i s found actions shall be initiated PMU/KKPPI against consultants and government staff involved. Mitigation o f collusion - wide advertising and clear provisions that mandatory joint ventures are unacceptable. Systematic evaluation o f consultant performance by the Government and Procurement Officers, Project the Bank Managers, P M U

Procurement Officers, P M U

OFFICIAL USE ONLYR2003-0077/1

May 5, 2003

Streamlined ProcedureFor meeting of

Board: Thursday, May 22, 2003

FROM: The Acting Corporate Secretary

Indonesia: Private Provision of Infrastructure Technical Assistance Project

Project Appraisal Document

Attached is the Project Appraisal Document regarding a proposed loan to the Republic of

Indonesia for a Private Provision of Infrastructure Technical Assistance Project (R2003-0077).

This project will be taken up at a meeting of the Executive Directors on Thursday,

May 22, 2003 under the Streamlined Procedure.

Distribution:

Executive Directors and AlternatesPresidentBank Group Senior ManagementVice Presidents, Bank, IFC and MIGADirectors and Department Heads, Bank, IFC and MIGA

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