Document of The World Bank

FOR OFFICIAL USE ONLY

i_oiJ0 3!7 - /A/j>

Public Disclosure Authorized Report No. 8756-IND

STAFF APPRAISALREPORT

REPUBLICOF INDONESIA Public Disclosure Authorized

FOR AN URBANDEVELOPMENT PROJECT

IN THE PROVINCESOF EAST JAVA AND BALI

FEBRUARY 25, 1991 Public Disclosure Authorized

Asia Country DepartmentV Public Disclosure Authorized InfrastructureDivision

This documentha a restrided distibudon and may be used by recpients only In the perfonnrmn of their officiil duties. its contents may not otherwisebe dWcosed wikhoutWodd Bank authorizaLto CURRENCY EQUIVALE NTS (As of January, 1991)

Currency unit = Indonesian Rupiah (Rp) $1 = Rp 1,901 Rp 1 million = $526

WEIGHTS AND MEASURES

Metric Units

FISCAL YEAR

Governn.ent of Indonesia: April 1 - March 31 Provincial and Local G9vernments and Enterprises: April 1 - March 31

PRINCIPAL ABBREVIATIONS AND ACRONYMS USED

ADB - Asian Development Bank AMDAL - GOI environmental assessment process ANDAL - GOI detailed environmental impact assessment study APBD I/II - Annual provincial/local government development budget APBN - Annual central government development budget BADAN - Agency BANGDA - Directorate General for Regional Development, MHA BAPPENAS - National Development Planning Agency BAPPEDA I/II - Provincial/Local Development Planning Agency BPAM - Transitional (pre-PDAM) water supply enterprise owned and operated by DGCK, MPW BPKP - Central Audit Bureau BPD - Regional Development Bank BPN - National Land Agency Bupati - Kabupaten chief executive (district head) CPMO/FO - Central Program Management Office/Finance Office DATI I/II - Provincial/local level government Desa - Rural village DGCK - Directorate General Cipta Karya (Human Settlements), MPW DGBM - Directorate General Bina Marga (Roads and Bridges), MPW DGWRD - Directorate General for Water Resource Development, MPW Dinas I/II - Provincial/local government departments DIP/DIPDA - Centrallregional project budget DLA - Domestic Lending Arrangements for local governments and enterprises DPRD I/II - Provincial/Local People's Representate Councils DPUK - Kabupaten/Kotamadya department of public works DPUP - Provincial department of pvblic works DUP/DUPDA - Central/regional preliminary project budget GOI - Government of Indonesia GRDP - Gross Regional Domestic Product IKK - Kecamatan headquarters towns IMG - IUIDP Implementation Management Group, BAPPENAS FOR OMCIAL USEONLY

INPRES - Presidental Instruction,including a class of 001 grants INS/89/014 - UNDP IUlDP ImplementationSupport Project IUIDP - Integrated Urban InfrastructureDevelopment Program Kabupaten - Local (Level II) district government Kampung - Urban neighborhood KANWIL - Provincial branch of central GOI department Kecamatan - Kabupaten or kotamadya administrativesut-district Keluruhan - Urban administrativeunit comparable to a rural desa KEPRES - Presidentialdecision KIP - Rampung ImprovementProgram Komisi Da-rah - Provincial Commission for EnvironmentalManagement Kotamadyt - Local (Level II) city government (incorporatedmunicipality) Kotip - Kota administratip,large kabupaten town designated as kotamada for administrativepurposes only LIDAP - Local InstitutionalDevelopment Action Program LKMD - Rural desa or urban keluruhan development council lpd - Litres per capita per day llsec - Litres per second Lurah - Kelurahan Head HCK - Communal lavatory and toilet facility MOC - Ministry of Communications MIIP - Market InfrastructureImprovement Program MHA - Ministry of Home Affairs MENPAN - Ministry of State for AdministrativeReform MOF - kinistry of Finance MPW - Miniitry of Public Works NGO - Non-governmentalorgarnization NUDS - National Urban DevelopmentStudy O&M - Operations and maintenance PADS - Pendapatan Asli Daerah (local taxes and charges) PeB - National land and buildings tax PDAM - Local governmentwater enterprise PIA - Program ImplementationAgreement PIL - Preliminary environmentalassessment PMO/FO - Local Program Management Office/FinanceOffice PPIAILPIA - Provincial/LocalProgram ImplementationAgreement PPMO/FO - Provincial Program Management Office/FinanceOffice PJH - Local governmentmedium-term (five-year)development plan PP - Government regulation PUOD - DirectorateGeneral for Public Administrationand Regional Autonomy, MRA RAKORBANG I/It - Provincial/localannual budget coordinationmeeting Repelita - Five-year Development Plan RIAP - Revenue ImprovementAction Program RKL - EnvironmentalManagement and Monitoring Plan SDB - Subsidi Daerah Bawahan (provincialdevelopment grant) SDO - Routine central GOI grant, primarily for salaries SERWILDA I/II - Provincial/localgovernment chief administrativeofficer SR - Surat Keputusan, decree of a senior official SKB - SR Bersama, joint SK of two or more senior officials TKPP - Urban DevelopmentCoordination Team UNCHS - United Nations Center for Human Settlements UNDP - United Nations DevelopmentProgram USL - Urban Sector Loan (2816-IND) Walikota - Kotamadya chief executive (mayor)

Thisdocument has a restricted distribution and may be used by recipients only in the performance oftheirofficial duties. Its contents may not otherwise be disclosed without World Bank authoriation. - i -

INDONESIA

EAST JAVA - BALI URBANDEVELOPMENT PROJECT

Loan and Project Summary

Borrowers The Republic of Indonesia

Beneficiariess Forty-five local governmentsof East Java and Bali and their water enterprises,including the City of Surabaya water enterprise

Amounts $180.3 million equivalent

Terms Repayable in 20 years including five years of grace, at the Bank's standardvariable interest rate

Onlending terms: Part of the proceeds of the loan, the equivalentof up to $50 million, would partially reimbursethe Government for loans through domestic lending arrangements(DLA) to qualifying local governmentsand their water enterprises for periods keyed to the economic life of investments(5- 20 years) and at interest rates indexed to and gradually approachingmarket rates, resultingin rates ranging from 9 percent to 11.5 percent per annum. Interest and commitmentcharges would be paid during the grace period. The Central Governmentwould bear the foreign exchange risk.

ProJect ObJectives and Description: The proposed project would improve the quality of urban infrastructureinvestments and service delivery in East Java and Bali. Operationalobjectives would be to: (a) support urban infrastructureinvestment (including rehabilitation)and O&H in 45 local governmentsin East Java and Bali, includinga limited expansionof the water distributionsystem of the City of Surabaya (other investmentsin Sursbaya,East Java's capital and largest city, would be covered under a separate project); (b) improve urban infrastructureexpenditure programming, financialplanning and informationmanagement for these local governmentst(c) encourage local revenue generation, improve financialmanagement and, more generally, strengthen local governmenthuman resourcesand institutionsincluding capacities for more effective communityparticipation and environmentalmanagement; and (d) support sector development.As GOI's and the Bank's first opportunityto test and develop the full Integrated Urban InfrastructureDevelopment Program (IUIDP)approach, the project would also provide a programmaticmodel for evaluationand the choice of approaches for other provinces. In order to achieve these objectives,the project would provide financingfors (a) infrastructure - ii -

developmentand O&M (a conservativelyestimated five-year expenditureprogram for water supply, drainage, solid waste management,sanitation, urban roads, neighborhood improvementand market improvementand market infrastruc- ture improvement)t(b) project implementationsupport; and (c) institutionaldevelopment.

Benefits and Risks: The most importantexpected benefits ar.4risks of the project are inherent in GOI's gradualmovement toward regional autonomy. The chief benefitswould flow from more efficientuse of resources allocatedto the sector through improved delivery of urban infrastructureand services by increasinglycapable and responsiblelocal governments. Earlier Bank-supportedprojects have demon- strated that such improvementsare feasible and highly beneficial,especially for living environmentsof the poor. The chief risk is that the pace of required insti- tutional developmentis difficultto predict and may con- strain achievementof project objectives. Project prepa- ration and implementationquality will be a focal point of Bank supervisionas local governmentslearn new roles. These risks are considered relatively low in East Java and Bali. The five-yearexpenditure programs are not substantiallygreater in real terms than those actually delivered during the last five years, further reducing risks, and there will be few if any new or complex kinds of subprojects.Finally, the UNDPIUNCHSIUIDP ImplementationSupport Project and funds provided by a Japanese grant would provide substantialassistance to GOI and the Bank in carrying out effectiveproject supervision and in supportingessential institutional development. - ili -

Estimated Cost: la Local Foreign Total ------($ million) ------

Urban Infrastructure 171.1 93.1 264.2 Program Management 7.5 5.9 13.4 Institutional Development 2.9 4.0 6.9

Total Base Costs 181.5 103.0 284.5

Physical Contingencies 11.0 6.9 17.9 Price Contingencies 44.5 13.6 58.1

Total Project Cost 237.0 123.5 360.5

Interest during construction 2.9 10.0 12.9

Total Financing Required 239.9 133.5 373.4

La Includes taxes and duties estimated at $24.9 million equivalent, land at $5.8 million equivalent, and current O&M at $68.7 million equivalent.

Financing Plan: Local Foreign Total ------…$ million) ------

Local governments 69.9 - 69.9 Water enterprises 60.9 - 60.9 Provincial governments 13.1 - 13.1 Private contributions 6.9 - 6.9 Central government 25.2 - 25.2 Japanese grant - 4.2 4.2 IBRD 61.0 119.3 180.S

Total Project Cost 237.0 123.5 360.5

Interest During Construction 2.9 10.0 12.9

Total Financing Required 239.9 133.5 373.4 INDONESIA

EAST JAVA - BALI URBAN DEVELOPMENTPROJECT

Table of Contents

Page No.

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

A. Sector Overview ...... 1 DemographicTrends .h.i.c.T.n.d.s...... 1 InstitutionalFramework for Sector Development ...... 1 Sector Constraints and Priorities ...... 3

B. Urban Development in East Java and Bali ...... 5 East Java ...... 5 Bali ...... 6

II. SECTOR STRATEGY AND BANK EXPERIENCE ...... 8

A. Government Strategy ...... 8 B. Bank Experience ...... 10 C. Bank Strategy ...... 14

III. THE PROJECT ...... 17

A. Project Origin and Formulation ...... 17 B. Project Objectives and Rationale for Bank Involvement . . 18 C. Project Description ...... 19 D. Project Costs ...... 20 E. Financing Plan ...... 22

IV. PROJECT IMPLEMENTATION...... 24

A. Responsibilities...... 24 B. Program Implementation Agreements ...... 27 C. Implementation Schedule ...... 27 D. Procurement ...... 28 E. Disbursement ...... 30 F. Accounts and Audits ...... 32 G. Project Reporting,Monitoring and Bank Supervision. . . . 32 H. Land Acquisitionand Reeettlement . . . 33 I. Operations and Maintenance...... 33 J. EnvironmentalImpact Assessment and Management ...... 34 K. Local Participation .... 35

The report is based on the findingsof an appraisalmission which visited Indonesiaduring MarchlApril1990. The mission consistedof H.B. Fisher (Leader),C. Godavitarne,L. Lovei, M. Nuch, S. O'Humay, U. Sadikin (IBRD) and J. Aden, S. Dice, B. Binder, B. Lane and E. Wegelin (consultants). The peer review team comprisedof Messrs. J. Herbert, J. Hicks, J. Silverman,Y. Uchimura and D. Williams. Messrs. L. Jeurling,Chief (AS5IN)and R. Cheetham, Director (AS5DR)have endorsed the project. - vi -

Page No.

V. FINANCIAL ASPECTS ...... 36

A. Local Governments ...... * . 36 Current Financial Condition ...... 36 Key Issues ...... 37 B. WaterEnterprises ...... 39 Financial Appraisal Process ...... 39 Performance and Current Conditions ...... 40 Financial Projections ...... 40 C. Domestic Lending Arrangements ...... 41

VI. PROJECT JUSTIFICATION AND RISKS ...... 43

A. Economic Justification ...... 43 B. Cost R^ecovery ...... 44 C. Poverty Impact ...... 45 D. Environmental Impact ...... 45 E. Local Participation ...... 46 F. Project Benefits and Risks ...... 46

VII. AGREEMENTS TO BE REACHED AND RECOMMENDATION ...... 47

ANNEXES

1. Detailed Project Cost Estimates ...... 49 2. Financing Plan ...... 54 3. Summary of Technical Assistance ...... 55 4. Implementation Arrangements ...... 66 A. Schedule ...... 66 B. Responsibilities and Organization ...... 67 C. Program and Subproject Appraisal Process ...... 70 D. TechnicalCriteria ...... a.. . 73 E. Economic Criteria ...... 77 F. Model Provincial Program Implementation Agreement . . 80 G. Model Local Program Implementation Agreement . . . . . 86 H. Summary of Domestic Lending Agreements (DLA) . . . . . 90 5. Batch I Contracts and Procurement Method ...... 102 6. Disbursement Arrangements and Schedule ...... 106 7. Key Implementationand PerformanceIndicators and reporting Systems ...... 115 8. Local GovernmentProfiles ...... 116 9. Revenue Improvement Action Programs ...... 119 10. Local InstitutionalDevelopment Action Programs ...... 123 11. Water Enterprise FinancialAnalysis ...... 126 12. Local GovernmentFinancial Projections ...... 138 '.3. Operations and Maintenance ...... 139 14. Sample Infrastructure Expenditure Programs ...... 144 15. Environmental Assessment and Management ...... 151 16. Key Documents in the Project File ...... 154 -vii -

MAPS j

IBRD No.: 22163 Project Pro4incesand Local Governments IBRD No.s 22164 Kotamadya Paobolinggo (East Java): Water Supply IBRD No.: 22165 KabupatenBqdung (Bali): Water Supply IBRD No.: 22263 Kotamadya Probolinggo (East Java)s Roads and Drainage IBRD No.: 22264 Kabupaten Badung (Bali): Roads and Drainage STAFF APPRAISALREPORT

INDONESIA

EAST JAVA - BALI URBAN DEVELOPE4ENTPROJECT

I. THE URBAN SECTOR

A. Sector Overview

DemographicTrends

1.1 The urban sector in Indonesia is important for economic and social developmentof the country.,The urban populationexceeds 45 million and has grown by about 4.7 percent per year during the past decade, more than double the overall national population growth rate. By the year 2000, about 75 million or 36 percent of Indonesianswill be city dwellers. Urban employment has also grown at about 4.7 percent per year, much more rapidly than the national rate and offering hope for absorptionof surplus rural labor. Indonesia'surban settlementsinclude ten metropolitanand large cities of more than 500,000, forty secondarycities of over 100,000 (typically provincialheadquarters and incorporatedmunicipalities), two hundred small towns (typicallydistrict headquarters)over 20,000 and about 3,200 service ceaters (typicallysubdistrict headquarters) with populationsof 3,000 to 20,000. While changes in urban boundariesand census definitionsmake intercitycomparisons difficult, it appears that metropolitancities over one million and secondarycities between 100,000 and 500,000have grown most rapidly since 1970. Service centers under 20,000 have grown most slowly.l/

InstitutionalFramework for Sector Development

1.2 National Administration. The National DevelopmentPlanning Agency (BAPPENAS)is responsiblefor overall planning and the allocationof resources,with focus on Five-YearDevelopment Plans (Repelita)and Annual National DevelopmentBudgets (APBN). The Ministry of Home Affairs (MHA) is responsiblefor oversightof the regional governments,primarily through its DirectorateGeneral for Public Administrationand RegionalAutonomy (PUOD) and DirectorateGeneral for Regional Development(BANODA). The Ministry of Public Works (MPW) is responsiblefor oversightof most infrastructure.Within MPW, the DirectorateGeneral for Human Settlements(Cipta Karya or DGCK) is responsiblefor oversightof city and regional planning,water supply, urban drainage, sanitationand sewerage,solid waste management,kampung neighborhoodimprovement (KIP) and market infrastructureimprovement (MIIP). Also within MPW, the DirectorateGeneral for Roads (Bina Marga or DGBM) is responsiblefor oversightof urban roads and bridges and the Directorate General for Water Resource Development (DGWRD)is responsiblefor oversightof

1/ Cipta Karya, National Urban DevelopmentStrategy Final Report. September 1985, page 3, and Biro Pusat Statistik, IntercensalPopulation Survey (SUPAS 85). urban flood control and bulk water supply. The Ministry of Finance (MOP) is responsiblefor central and local finance through its DirectorateGeneral for Monetary Affairs (DGM), though the DirectorateGeneral for Budget (DGA - Angaran) actually administer3grant transfers;property tax administration through its DirectoratsGeneral for Taxation (DGP - Pajak); and analysis of regional finance through its Agency for FinancialAnalysis (BAK - Badan Analisa Keuangan). Other concernedcentral agencies include the National Land Agency, the Ministry of State for AdministrativeReform, DJrectorate General for Land Transportof the Ministry of Communications,the Ministry of State for Environmentand Population,the Ministry of State fot Housing, the Ministry of Educationand Culture and the Ministry of Health. All key agencies are representedin the InteragencyCoordinating Team for Urban Development (Tim Koordinasior TKPP) chaired by BAPPENAS.

1.3 Regional Administration. Indonesiahas a highly centralizedunitary government in which all powers are held by the center that are not specificallyassigned to lower levels. Since 1974, however, the provincial (Level I) and local (Level II) governmentshave been given increasing responsibilitiesand delegatedauthority. They are now responsiblefor delivery of most urban services. In all there are 27 provincesand 301 local governments,including 54 kotamadyas (municipalities)and 247 kabupatens (districts). Legislativepowers at both provincialand local levels are held by People's RepresentativeCouncils (Dewan PerwakilanRakyat Daerah or DPRD) consisting of mostly elected representatives.

1.4 The executivebranches of provincialgovernments are headed by governorswho serve as representativesof the President and the overall central government (GOI), and also as head of the semi-autonomousprovincial administrations. Bupatis (kabupatenbeads) and walikotas (kotamadyamayors) have parallel roles in representingthe governorsand provincialgovernments, and in heading their own local governments. Regional DevelopmentPlanning Agencies (BAPPEDA I and II) report directly to their respectivegovernors, district heads or mayors, and have planning and resource allocationrespon- sibilitiesthat are analogous to those of BAPPENAS in the central government. Among these responsibilitiesare preparationof Five-YearRegional Development Plans (RepelitaDa- ah I and II) and Annual Regional DevelopmentBudgets (APBD I and II). They often play a particularlyimportant role in coordinating central, provincialand local governmentdevelopment programs. Regional governmentservices are provided by separate departments (Dinas I and II) analogousto line ministries of the central governmentand routine administrationis provided by bureaus under the regional secretaries(SEKWILDA I and II). Most central line agencies are representedat the provincial level by their KANWIL (KantorWilayah or regional offices). KANWIL of MPW are located in all provinces and their primary role in the urban sector is now shifting from executionof infrastructureprojects to provision of technical guidance and assistanceto the concernedprovincial and local Dinas I and II public works departments(DPUP and DPUK). PresidentialExecutive Order t 14 (PP14) of 1987 significantlyexpanded urban infrastructureresponsibilities assigned to DPUPs and DPUKs, and MPW has made two supportingannouncements: (a) that approximatelyhalf of the Jakarta-basedMPW staff would be relocated to the provincial level or lower, and (b) that in the future most urban projectmanagers would be appointedwithin the DPUPs and DPUKs (up to now, with the exception of KIP, most urban project managers have been appointed within the KANWIL). MPW's announced intentionis for the KANWILs to provide technicalassistance and guidance,confining their respcnsibilityfor project implementationto activitieswhich are purely national (e.g.,national roads), in accordancewith a functionalclassification system defined under PP14.

Sector Constraintsand Priorities

1.5 The Bank's 1984 TirbanServices Sector Report (No. 4800-IND) estimatedconservatively that total expendituresby central and local goverNmenton urban services investment,operation and maintenance (0OM) during Repelita IV (1984-89)should be about Rp 900 billion per year (1986 prices) to overcome service backlogs at minimal levels and meet reasonable growth needs for the additional2.2 million urban residentseach year together with and for the associatedgrowth in economic activity. Actual expenditures increasedto an average of Rp 700 billion per year with the initiationof the Bank's Urban Jector Loan (USL - Ln. 2816-IND). Current estimatesindicate that about 76 percent of the urban populationdoes not have direct access to a piped water supply. Almost,two thirds of all urban households still r;!.yon wells, and about 11 percent are dependent on a system of water vendors. About 65 percent o..low-income groups share toilets and use of canals for sanitation purposes remainscommon. In the larger cities, inadequateindustrial water supply and waste disposal is a serious problem. In terms of GOI's service and equity objectives,more low-cost, local or tertiary systems investmentare needed in existing underservedurban areas. Overall, there is a growing need for public investm.entsin, and rehabilitationof, primary and secondary systems to support local infrastructureneeds adequately and to support adequate operationsand maintenance (O&M).

1.6 While average incomes in urban areas have risen substantiallyover the past eight years, distributionof income remains unequal and in 1987, over 20 percent of urban dwellers were -stimated 2/ still to be poor or near poor. The problems of income die 'butionare exacerbatedby deficienciesin basic services and degradationof _..vironmentalconditions leading to poor health among the low-incomepopulation in particular.

1.7 Sector Finances. The finances of provincial and local governments have long been dominatedby central governmenttransfers and characterizedby weak local resource mobilization,low per capita budgets and very limi'eduse of credit for capital investment. In 1983/84, explicit central government transfers3/ financed over three quarters of aggregate recurrent expendituresand almost 80 percent of capital investments. By 1986187, central governmentbudgetary constraints caused by falling oil revenues led to a severe curtailmentof local investmentprograms which were reduced from almost half of local budgets in 1983/84 to less than one quarter in 1986/87. Thus a marked deteriorationhas taken place in the structureof local budgets and the contributionof finance available to local governmentsfor overall sector development. The high level of growth (18.5 percent per year) in locally generated revenues failed to significantlyclose the gap. Borrowings,

2/ Central Bureau of Statisticsas reviewed in the Bank's Poverty Report.

3/ Including SDO central routine expendituregrants and Inpres central developmentgrants, but not includingAPBN DIPs (centralGOI budget grants-in-kind). - 4 -

at 1.2 percent of total local receipts,continue to be an insignificant feature of the financing system for most local services.

1.8 The dominant role of grants in the system of financinglocal government services is the result of very limited local taxing authority. For example, the potentiallymost promising local revenue source, the property tax, has an effective rate of 0.1 percent set by the central government. Since the central governmentis reluctantto delegate substantialtaxing authority to local governments,grants are a way to resolve the conflict between local governments'taxing authority and expenditureresponsibility.

1.9 Inter-governmenttransfers are not the only contributionfrom the central government to the urban infrastructuresector. As it was mentioned in paragraph 1.4 above, the regional offices of central governmentagencies execute a large number of infrastructureprojects financed from the national budget (APBN DIP). While the classificationof urban infrastructure responsibilitiesis still an ongoing exercise,it is clear that several of these projects create infrastructurewhich, according to PP14, is classified as local responsibility. These central governmentgrants-in-kind contributionsare justifiedon the basis of weak institutionalcapabilities and lack of financialresources at the local government level. In the past, however, these projects frequentlyled to operation and maintenance responsibilitieswhich the local governmentswere not able to fulfill or, since the infrastructurecreated was of low priority for them, did not want to fulfill.

1.10 Sector coordinationand local participation. Despite the essential simplicityof GOI's formal organizationalstructure and its steeply hierarchicaldeci- -n systems, coordinationof the urban sector has been poor, and local participationin the decision processeshas been limited. The sheer size and diversityof the country, the rapid pace of urbanization,the number of concernedagencies, the lack of effectivemanagement information systems and, perhaps most importantly,cultural constraintsupon horizontal communicationwithin and among agencies,have led to a fragmentedand inefficientapproach to urban development. As national attentionto urban problems increases,so too is the real potential for further fragmentationand inefficiency. Improvementsmust begin at the local governmentand community level, where effectivecoordination is much easier to sustain than in the large central government. Only recently,however, have local levels begun to participatedirectly and meaningfullyin GOI's developmentplanning and implementationsystems, via mechan'sms such as the IUIDP process.

1.11 Secondarycity infrastructureissues. Major issues faced in the sector by cities with 20 to 500 thousand residentsare similar to those faced in larger cities: (a) Ficreasingoverall infrastructuredeficits and O&H backlogs; (b) inadequatewater resource and waste management; (c) lack of coordinationin planning of transportationand land use; (d) weak financial management as evidencedby deficientaccounting practices and the lack of adequate cost recovery,revenue generation,use of credit and considerationof private sector options; (e) inequitabledistribution of facilities,particula- rly to the poor; (f) need for strengtheningmanagement of water enterprises and municipal improvementprograms includingdrainage, solid waste disposal, and kampung microinfrastructure;(g) inefficientcompression of the design and constructioncycles into single fiscal years; (h) poor informationsystems, and (i) awkward and rapidly changing relationshipsamong local, provincialand central agencieswith respect to assignmentof responsibilitiesfor project and program preparation,appraisal, financing, implementationand O&M. There is also a lack of trained and experiencedmanagerial and technicalpersonnel at all levels. While the scales of these problems are smaller in secondary cities targeted in the proposed project than in large and metropolitancities such as Jakarta and Surabaya,so too are the resourcesavailable for their solution.

B. Urban Developmentin East Java and Bali

1.12 A combined total of about 36 million people live in East Java and Bali. Were they to comprise an independentcountry, the provinceswould rank 27th in the world and be larger than 159 other independentcountries listed in the World Bank Atlas. In terms of population,planning for the two-province region is rather like planning for Spain, Poland or the combined states of California, Oregon and Washington. Appreciation of the project region's size and dive iity is a crucial first step in planning for its development.4/

East Java

1.13 Background. East Java has for centuries included some of Indonesia'srichest and poorest areas. Surabaya in the north has been a national urban center since early in the colonial period and a long belt of farmland reaching from Ngawi in the west to Banyuwangiin the east has been regarded as some of the best in Java. In contrast, the infertilenorthern plain from Bonjonegoro to Madura and the dry Pacitan-Blitar region in the south was until the 1970s characterized by abject poverty and agricultural "involution,' relying on their own meager resourceswith few externalmarket links. Dramatic improvementscame in the late 196Os and 1970s with political and economic stabilization,the green revolutionand overall growth of the national economy. The provincial economy of East Java is dominatedby agricultureand the trade and services sectors, each contributingabout a third of Gross Regional Domestic Product (GRDP). The manufacturingsector comprisesabout 15 percent of GRDP. East Java in the 1980s had a relatively lower portion of its workforce in manufacturing(22 percent) than other Java provinces,but the highest percentageof value added (27 percent) in the nation's manufacturingsector. This probably reflects the relative capital intensityof the sugar, cement, metal and other industriesin the Surabaya conurbation.

1.14 East Java today is the most populous Indonesianprovince (about 33 million), though its annual rate of population growth in the mid-1980s (about 1.4 percent) was far below that of Java (about 1.8 percent) and of the nation

41 Data in this section are mainly from (a) NUDS Final Report, Provincial Reports. National Urban DevelopmentStrategy Project, DGCK/MPW and UNCHSIUNDP,September 1985; (b) East Java - Bali Urban Development ProJect: ProJect PreparationReport. October 1989 and March, 1990. East Java -Bali Urban DevelopmentProject Task Force, CoordinationTeam for Urban Development,Government of Indonesia,and Governmentof East Java; and (c) Repelita V (FifthDevelopment Plan), 1989-1994,East Java Province and Bali Province. - 6 -

as a whole (about 2.1 percent). A low fertilityrate and significantout- migration are often cited as the explanation, with credit given to the national family planning and transmigrationprograms. Out-migration has exceeded in-migrationby a factor of about three since the late 1970s, but over half of the in-migrantshave settled in urban areas.

1.15 Settlements. The province's settlementstructure is dominatedby the planning regior.of GERBANGKERTOSUSILA(a mnemonic for Gresik, Bankalan, Mojokerto, Surabaya,Sidoarjo and Lamongan),which includes an urban populationof about 2.7 million or a third of the provincial urban population of eight million. This is the most advanced of nine developmentregions used as a basis for regionalplanning by the provincial government. Malang, to the south, is the second largest incorporatedmunicipality after Surabaya and the major center of economic growth outside GERBANGKERTOSUSILA.Strong linkages extend from Surabaya to the south toward Malang as well as the secondary cities of Kediri,Madiun, Pasuruan and Probolinggo. Economic links to the north and west through Gree4k along the north coast tend to be weaker. Banyuwangion the east coast is major port connectingJava with Bali. GOI's policies to stimulategrowth in the eastern islands are expected, if successful,to induce significantincreases in activity for this port.

1.16 Issues and Priorities. Urban growth in East Java is expected to continue at a far more rapid rate than the province as a whole, so that the 1990 urban population of about eight million will increase to about 12 million by 2000. GERBANGKERTOSUSILAwill increase to account for more than a third of the total urban populationand Malang about a tenth. Provincialdevelopment policy emphasizes reductionof congestion in Surabaya; structuringof developmentpatterns in GERBANGKERTOSUSILAand giving priority to growth in its subcenters;dispersal of key industrialand commercialactivities to Malang and other centerswhen possible;development of the Banyuwangiport and related economic activities;and developmentof regionalmarket and service centers throughoutthe province. Within the urban sector agenda, priority will be given to water supply where acceptablealternatives to piped supplies are not available; alleviationof congestionand improvementof deteriorating roads and bridges; improvedmanagement of human and solid waste; strengthened O&M systems; increasedlocal revenues;and upgraded local government institutions. East Java's Fifth Five Year Plan makes explicit referenceto the IntegratedUrban InfrastructureDevelopment Program (IUIDP)as the primary program for improvementof urban infrastructure.

Bali

1.17 Background. With a total populationof only about 2.6 million includingan urban population of about 700 thousand,Bali is nevertheless prominentnationally and internationallyas a center of tourism and cultural wealth. Its agriculturaleconomy and society,which has for some years put into intensiveuse virtually all cultivable land in the province, are of particularnote. Bali's fertile southernplain has for centuriesprovided the best agriculturalland and, more recently,provided most tourist attractions. The central part of the island is mountainous,much of it uncultivable. The northern areas include a relativelynarrow plain between Gilimanuk and Kubu, centered on the colenial capital, Buleleng, that is suitable for intensive cultivationand urban development.In 1987, the trade and services sectors (includingtourism) accounted for about 46 percent of GRDP and agriculture accountedfor about 43 percent. Manufacturinglagged far behind at about 5 percent, though it is probably increasingrapidly at present (particularly garments for export).

1.18 Populationgrowth was lower, at about 1.7 percent per annum during the 1970s, than Java (2.0 percent) or the nation as a whole (2.3 percent) during the same period. Data for 1980-85 indicate a yet lower growth rate of about 1.4 percent per annum, reflectinglow rates of natural increase encouraged by a successfulfamily planning program based upon the traditional "banjar"system of communitymanagement and organization,and substantialout- migration. More than half of the in-migrantssince 1970 appear to have settled in Bali's urban areas, particularlyin Badung Kabupatenand its center, the administrativemunicipality (Kotip) of Denpasar.

1.19 Settlements. Bali has a fine-grainnetwork of small settlements spread over the island,most of which are located in the southern half. The system is dominatedby Denpasar,which accounts for almost half of the province'surban population and much of its substantialrevenue from tourism. Badung's local revenues are higher than any other kabupaten and all but four kotamadyas in Indonesia. The main transport linkages extend east and west along the southern coast with a weaker linkage to the northern coast. Urban growth is likely to continue well above national and regional rates, while total growth continue below those rates. The chronic shortage of agricult 1l land will continue to push farmers to other occupationsand migration to cities and other provinces. Economic opportunitiesassociated with the tourist industrywill, at the same time, pull rural Balinese to the cities.

1.20 Issues and Priorities. The provincial governmentof Bali has focused its developmentstrategy on accommodating,and benefittingfrom, the healthy and rapidly growing tourist industrywhile strengtheningthe hierarchy of service centers throughout the island. Special attentionwould be given tot (a) ensuring the availabilityof acceptablewater supply with priority tp current and potential tourist centers and full cost recovery; (b) provision W adequatelymaintained roads and bridgeswith attentionto relievingcongestion in Denpasar and the tourist centers of Sanur and Kuta; (c) improved management of human and solid wastes, includingpossible installationof a small sewerage scheme in Kuta; (d) increasedlocal revenue collectionand improved financial management,with special focus on Badung Kabupaten; and (e) generally strengthenedurban institutionalcapacities. The initial impact of this strategy is expected in the southernpart of the island, but adequate provision and management of infrastructurein the northern and central parts can be expected to facilitateand acceleratethe developmentthere also. Bali's Repelita V also makes referenceto the need for diversificationof Badung/Denpasar'seconomic base which will require improved infrastructure provision and management. As East Java, the Repelita V for Bali refers to IUIDP as the framework for urban infrastructureimprovement. II. SECTOR STRATEGY AND BANK EXPERIENCE

A. GovernmentStratesy

2.1 Faced with large deficienciesin urban infrastructureservices and fast growing urban populations,GOI's strategy emphasizesphysical infrastructureprovision targets. These targets, describingthe capacity of water supply systems to be constructed,length of roads to be built, percentageof population to be suppliedwith safe water, sanitationservices, etc., usually have a prominent place in the medium-termnational development plans. For example, in connectionwith the UN Drinking Water and Sanitation Decade, GOI set the target of providingsafe water supply to 75 percent of the urban and 60 percent of the rural populationby 1990 and asked for the help of multi- and bilateral donor agencies. The latest estimates indicate that 36 percent of the rural and,46 percent of the urban populationhad access to clean water in 1988, compared to 26 percent and 38 percent, respectively,in 1980.51 Even though targetswere not achieved, this is still an impressive performancein view of the almost 40 percent increase in the urban population in that period. The main constrainthas not been the availabilityof funds but the capacity to prepare and implementprojects. The government'sresponse -1iat has been (a) to develop standardized,mass delivery programs planned he Wecuted by the central government (but with operationand maintenance responsibilityat the local level) in order to reduce service deficienciesin the short-run,and (b) to build up implementationcapacity through local governmentinstitutional strengthening, reinforced through decentralization, as an importantelement of GOI's long-termstrategy.

2.2 GOI has taken importantstrides toward reducing urban infrastructure deficits and establishinga basis for improved sectoralmanagement. The core j rategyemphasizes integratedand deconcentrated/decentralizedmanagement of 07ban development. BAPPENAS has been designated to lead a high-level inter- agency team (Tim Koordinasi- TKPP) representingthe concerned agencies and charge with responsibilityfor overall sector policy developmentand coordination.

2.3 IUIDP. The policy prioritiesfor urban developmentin Indonesia were articulatedin the 1984 Urban ServicesReport (4800-IND)and the 1987 Public Resource Management Report (7007-IND),in particular i.s chapters on O&M and local government finance. To address these priorities,the government issued a Statementof Policies for Urban Developmentin 1987 which represented a consolidatedview of the principalconstraints arising from, and the objectivesprescribed for, developmentin the sector. This Policy Statement, which is incorporatedin the current national five-yearplan (RepelitaV), includes: (a) strengtheninglocal governmentsto assume the leading role in developing,operating and maintaininglocal services on a sustainablebasis over the long-term;(b) improvingthe planning and, programmingof urban infrastructureinvestments; (c) revising grant flows mobilizing local revenues and optimizing their use; (d) implementinga coordinatedfinancing

5I See IndonesiaUrban Services Sector Report, No. 4800-IND and Indonesia Poverty Assessment and Strategy Report, No. 8034-IND. - 9 -

system for the developmentand administrationof local services;and (e) strengtheningthe consultativeprocess at various levels of government,with emphasis on upgrading participationof local municipalitiesand districts. The Policy Statementcalled for IntegratedUrban InfrastructureDevelopment Programming (IUIDP)as an operationalapproach for achieving these objectives in the context of typical local governments. The provincialfive-year plan for East Java and Bali (RepelitaV Propinsi) refer explicitlyto IUIDP as the appropriatevehicle for overall improvementof the urban sector.

2.4 The Policy Statement,including IUIDP, was translatedinto an action plan of institutionalreforms and Improvementsin local resourcemobilization, sector planning and financingarrangements which were incorporatedexplicitly into the Urban Sector Loan (USL, Loan 2816-IND) and which, since then, has provided a strategic frameworkto guide the focus and process of urban developmentin Indonesia. In addition,with USL support, strategieswere formulatedfor the major urban service subsectorsof water supply, drainage and flood protection,human and solidwastes, roads and KIP.

2.5 Poverty reductionand regional balance in developmentare prominent objectivesof the current national medium term developmentplan (RepelitaV). Overall GOI strategy for regional developmentis still evolving,but specific investmentprograms targeted to poorer areas and increasedgeneral resource availabilityfor regional governmentsthrough the INPRES grant transfer system are the key building blocks. GOI strategy is to increase the use of the INPRES grant channel to financeurban expendituresfor which local governments are responsible. This gives local governmentsmore control over their expenditureprogram by reducing grants-in-kindby central agencies.

2.6 Also under Repelita V, GOI has targeted the expansion of borrowing by local water enterprisesas a special priority. Recognizingthe need for operationalguidelines to induce a higher level of credit financing,GOI has adopted less conservativefinancial criteria for borrowing by local governmentsand their enterprises (debt service coverage ratio of not less than 1.5 for local governmentgeneral fund operationsand not less than 1.3 for local enterprisessuch as water supply PDAMs). This would bring the legal borrowing capacity for local governments,particularly the large cities, more in line with their considerablyunused paying capacity.

2.7 The government'sstrategy is to move interest rates towardsmarket rates over the medium- to long-term. Given the substantialgrant element in the financing system for local services in Indonesia,the question of interest rate must be viewed in the context of overall sector finances. Many local governmentshave little or no experiencewith loan financing,having preferred instead to rely on central governmenttransfers in spite of the very low (frequentlytwvo to four percent) or, in some cases zero, interest rate on domestic loans for the vast majority of local governments. Only the nation's largest cities have significantexperience with interest rates in the range of nine to twelve percent. There is a widespreadconcern in GOI that, unless the interest rate applied is low, it will not be possible to induce local governmentsand their enterprisesto adopt a more active borrowing posture, within prudent limits.

2.8 GOI has issued several regulationsand policy clarificationsto help make the sector policy statementoperational: (a) PP14 of September 1987 - 10 - provides guidelinesfor classificationof public works infrastructure responsibilitiesfor the central, provincialand local levels; (b) PP6 of June 1988 clarifies relationsbetween regional offices (KANWILs)of MPW and provincialpublic works departments (dinas)under the authorityof the provincial governors;(c) the Minister of Home Affairs' Surat Edaran P3KT (IUIDP)of July 1988 explains IUIDP process and substance to all governorsand their steffs; (d) a t4HAinstruction (Kepmen) is now being finalizedto raise provincialpublic works units by one level, from sub-dinas to dinas; (e) another MHA Kepmen is under preparationto require higher level agencies to coordinatemore directlywith sub-districts(kecamatans). Perhaps most significantly,MPW has announcedits intentionto relocate about half of its Headquartersstaff to provincial and local governments (para. 1.4). GOI has also undertakena nationwide program for IUIDP preparationand implementation with donor-supportedteams working in all provincesand large citiess the Bank in eleven provinces includingJakarta, the Asian DevelopmentBank in ten provinces,the Australian Internationaldevelopment Assistance Bureau in four provinces,Dutch aid in three provinces,Canadian InternationalDevelopment Agency in two provinces and Swiss aid in one province (some overlapping,but not with the Bank). The US Agency for InternationalDevelopment and the UK's Overseas DevelopmentAdministration, among other bilateral donors, are addressingkey financialand institutionaldimensions of the strategy on a nationwide basis. The UNDP and UNCHS have provided umbrella support for a Central IUIDP Management AssistanceTeam (INS/85/005). This umbrella support will be continued throughmid-1994 under the IUIDP ImplementationSupport Project (INS/88/014),which will also provide for improved coordinationand management of foreign assistance.Approximately 125 of the 301 local governmentshave adopted IUIDP plans and, despite some delays, all donors are proceedingwith their respectiveIUIDP operations.Leadership is provided by TKPP and the BAPPENAS-basedIUIDP ImplementationManagement Group (IMG).

B. Bank Experience

2.9 Worldwide Experiencein Water Supply.6/ The Bank has been involved in this sector since the 19609. There has been relativelylittle evolution in the Bank's approach. The scale of projects became larger and many involved assiRtance to a number of smaller entities under one operation. Some operations re.ied on intermediariesto exercise control over implementationand to provide assistance to be the beneficiaryentities. Many operationsaimed at the consolidationof water entities. While the majority of projects provided substantialeconomic and health benefits,experience show that (a) the achievementof institutionaland cost recovery objectiveshas been slow and difficult; (b) there are persistentlyhigh levels of unaccounted-for-water;(c) there are delays iR project implementationdue to inadequateproject preparation,slow land acquisition,cumbersome procurement procedures; (d) inadequateattention is paid to the disposal of wastewater in densely populated areas.

61 Based on OED 'AnnualReview of EvaluationResults" in 1987, 1988, 1989 (ReportNos. 7404, 8164, 8970) and severalproject audit reports. - 11j-

2.10 Worldwide Experience in the Urban Sector.71 Bank involvementin the urban sector started in the early 1970s with low cost investmentprojects in shelter,water supply, sanitationand urban transport aimed at alleviating urban poverty. Sites-and-servicesand slum upgradingprojects were intended to demonstratereplicable approaches that could provide benefits to the poor while recoveringcosts and reducing the financialburden on the public sector. Many of these projects have been reasonablysuccessful in meeting physical objectives,but they have not had an impact on the policies of national and local governmentsand on the issues of managing the urban economy. The policy dialogue between the Bank and governmentsfocussed on physical aspects and some institutionalissues but there was insufficientattention to the broader policy frameworksuch as intergovernmentalfiscal relations. More importantly,because many urban programs did not achieve sustainablepolicy reform and institutionaldevelopment, the projectswere generallynot replicable. In only a few cases, such as the Kampung ImprovementProgram in Jakarta, have citywide impactsbeen achieved. Like water supply, urban operations also experiencedsubstantial implementation delays due to insufficientproject preparationand very ambitious implementationtimetables.

2.11 Experience in Indonesia. Generally,Bank experienceconfirms that (a) the combinationof limited planning and implementationcapacity at the central level and the difficultiesinherent in providingessentially local services by central governmentdepartments decreases the efficiencyof mass delivery programs; (b) capacity building at the local level is a long-term process that mu- be accompaniedby an increase in local responsibilityand accountability;and, (c) central-localfinancial relations need to develop in the directionor more local governmentautonomy. As summarizedin Table 1 below, the Bank has financed six completedand eight ongoing urban and water supply projects in Indonesia since 1974, touchingmore than fifty local governmentsand many of their water enterprises. Urban lending operations in Indonesiahave progressed from demonstrationprojects in Jakarta through more programmaticinvestments in selected other large cities, still limited in geographicand subsectoralscope, to sector lendingwithin an agreed policy and institutionalframework. Water supply projects initiallycovered only a few cities, but later, like Bank projects in other countries, assisted a large number of urban settlementsunder one operation.

2.12 Multi-subsectorurban developmentprojects, Urban I-V (Loans 1040, 1336, 1653, 1972 and 2408-IND),provided substantialassistance for deconcentratedprograms of low-costmicro-infrastructure (KIP), city-wide drainage and solid waste management in eleven major cities. They also assisted developmentof GOI's low-incomehousing program, -,owsupported under the Housing Sector Loan (2725-IND),and several import"..itinstitutional initiatives,including local governmentfinance, planning and programming, O&M, and land information. Separate sub-sectoralprograms in water supply, sewerage and urban transporthave been supportedby seven loans to date. The first two such loans (1049 and 1709-IND)helped in the developmentof water sector organizationand financingpolicies. Under subsequentprojects in East

71 Based on OED reportsmentioned above, on draft PRE Report "Urban Policy and Economic Development. an Agenda for the 1990s", dated November 30, 1990 and also on PRE Report "FY89 Sector Review Urban Development Operations",Report No. INU-OR3. - 12 -

Java (Loans 2275 and 2632-IND)water sector developmentwas emphasizedand deconcentrationof implementationcapacity was introducedto increase the program scale and pace. Loan 2236-IND (JakartaSewerage and Sanitation)has sought to implementpilot human waste disposal projects and strengthenwaste disposal institutionsin Jakarta. Two recent loans (2817 and 2932-IND) focus on urban transportsector developmentin Indonesia'sfive largest cities, emphasizingleast-cost traffic and public transportsolutions and local institutionaldevelopment. The combined experienceof these projects is reflected in the Urban Sector Loan (2816-IND)and also in the Second and Third JABOTABEKUrban DevelopmentProjects which focus, respectively,on water resourcesand kampung improvementin the Jakartametropolitan area.

Table 1. URBAN AND WATER SUPPLY PROJECTS IN INDONESIA

Loan Fiscal Year Project Name Original PPARJPCR No. Effective Closed Loan Rep. No. Year

1040 1975 1931 Jakarta Urban Development 25.00 4620 1983 1049 1975 1982 Five Cities Water Supply 14.50 6256 1986 1336 1977 1984 Second Urban Development 52.50 6329 1986 1653 1979 1987 Third Urban Development 54.00 8583 1990 1709 1981 1987 Second Water Supply 36.00 8622 1990 1972 1982 1988 Fourth Urban Development 43.00 8583 1990 2236 1983 Jakarta Sewerage/Sanitation 22.40 2275 1983 East Java Water Supply 30.60 2408 1984 Fifth Urban Development 39.25 2632 1986 Second E. Java Water Supply 43.30 2725 1986 Housing Sector Loan 200.00 2816 1987 Urban Sector Loan 270.00 2817 1987 Reg. Cities Urban Transport 51.00 2932 1988 JabotabekUrban Development 150.00 3219 1990 Second JabotabekUrban Dev. 190.00* 3246 1991 Third JabotabekUrban Dev. 61.00* 1,282.55

* not yet effectiveas of December 31, 1990.

2.13 CompletedProlects. Of the six loans closed to date, four have been evaluatedby the Bank's OperationEvaluation Department. Urban III and IV were combined in one project completion report. The issues and lessons from these reports are discussed below.

2.14 Water Supply. While about one million people received improved water supply due to the two projects, the project performanceaudit reports (No. 6256 and 8622) emphasized the followingproblemss (a) substantialdelays in project implementationwere caused by inadequatepreparation, especially by the late preparationof detailed designs (after the loans became effective); (b) over-optimisticwater d-nand and unaccounted-for-waterprojections and underestimatedproduction costs led to the inabilityof the water enterprises to fulfill (too ambitious) financialcovenants and difficultiesin servicing - 13 - debt; (c) inadequateattention was given to institutionaldevelopment and managementof technicalassistance. For the initialgroup (Batch I) of localitiesin the proposed project, detailed designs have been prepared in advance, the availabilityof alternativewater sources and the forecast levels of water tariffs have been taken into account in water demand projections,and similar analyseswill be completed for all other participatingwater systems during the project. Also, technicalassistance will be managed on a regional basis, close to the sites where the project is implemented.

2.15 Urban Projects. According to the project performanceaudit reports (No. 4620 and 6329), the civil works included in the first two urban projects were completedaccording to appraisal schedules. However, considerabledelays were experiencedin the selectionand appointmentof consultants,therefore the loan closing dates had to be extended by three years to complete the technicalassistance components(for institutionaldevelopment on the national level and preparationof subsequentprojects). Water supply componentsunder the kampung improvementprograms experiencedthe same problem as the free standingwater supply projects, that is, the water demand projectionswere over-optimisticand willingnessto pay for the piped water was less than expectedwhere alternativegroundwater sources existed. The need for formal maintenancearrangements was noted and it was proposed that the maintenance issue should be addressedmore carefullyin future projects. The proposed project includesboth maintenanceexpendituras and institutioncapacity building for O&M.

2.16 The combined Project CompletionReport (PCR) for the most recently completedurban projects (Urban III, 1653-lND;and Urban IV, 1972-IND) highlightedthe followingissues and prioritiesof urban developmentin Indonesia: (a) successfulproject implementationrequires local participation and visible leadershipby the chief executive (bupatior mayor) of the local government;(b) operations and maintenancebudgets and institutional capacities are inadequateand must be improved at all levels; (c) coordinated planning and programmingof urban infrastructureis essential; (d) improved local resourcemobilization is necessary for sustainingurban development programs; and (e) decentralizationof urban developmentprogram implementation requires strengthenedmunicipal management, technical staff capacitiesand operationalsystems. Some of the functionalrequirements and policy reform options to address these issues are now being explored under the ongoing Urban V project (Loan 2408-IND)and the USL (Loan 2816-IND)on a national basis (see below). The need for coordinatedinfrastructure planning was the key to the developmentof the IUIDP concept, which will be implementedunder the East Java - Bali Urban DevelopmentProject.

2.17 Beneficiaryhouseholds and communitiesare involved routinely in the identification,participation and implementationof KIP neighborhood improvementprograms that have been supportedunder Bank loans for more than ten years. Market neighborhoodimprovement (MIIP) programs have a similar participatorybase. GOI's successfulsolid waste management and sanitation programs also rely on participationof beneficiaryhouseholds and communities, and have received increasingsupport under the Urban III, IV and V projects. On-site sanitatior schemes introducedunder the Urban V project, for example, emphasizehousehold financingand the use of NGOs for communitymanagement of implementation. Water supply investmentssupported by the Bank now require assessmentof cost recoverypotential from the beneficiaryhouseholds; road - 14 -

Investmentsmust be based upon specific road-userneeds; drainage investments emphasizeneeds expressedby communitiessubject to flooding. Most importantly,the overall infrastructureplanning (IUIDP)process supportedby GOI and the Bank is designed to upgrade the effective role of local participationt (a) to start planning and decision processesat a level low enough in government so that beneficiariescan participatedirectly; (b) to start early enough in the budget process so that adequate attention can be provided to subprojectdesign in meeting beneficiaryneeds; (c) to place increasedemphasis on local responsibilityfor O&M, and (d) to take advantage of local human resource and institutionalcapacities through the entire project cycle.

2.18 The Sector Loan. Performanceof the USL in supportingpriority expendituresand increasingdisbursements in the sector has been satisfactory. Provisionof counterpartfinancing through the USL enabled Indonesia to expand sector expendituresin keeping with (if not yet achieving)the recommendations of the Bank's Urban Services Sector Report. Progress in institutionalization of IUIDP has been good in most provincesand preliminaryassessments indicate that progress is being made in local resourcemobilization. However, implementationof the financialpolicy agenda under the USL has lacked clear directionand has not been coordinatedeffectively. A new draft law on local taxes has been prepared for legislativeaction, for example, but little progress has taken place to clarify the incentive frameworkfor local fiscal and financialmanagement through measures to rationalizethe system of grants and to articulatethe policies for financingof local infrastructure.

2.19 East Java and Bali. The Urban Sector Loan and eight Bank-financed urban projects to date have involved parts of East Java and Bali (fourmulti- subsectorprojects, three water supply projects and one urban transport project). Experiencewith these projects has generallybeen good, though limited to the provincialcapital cities of Surabaya and Denpasar and some twenty five water enterprisesin other local governments. Most physical targetshave been achieved,and in some cases surpassed;there has been compliancewith most loan covenants,despite some delays and problems with financialcovenants in the case of water enterprises;project implementation and monitoring systemshave steadily improved;outright mistakes (such as use of inappropriatedesigns for small water supply schemes for subdistrict headquarters)have been corrected;a fruitful dialoguewith concerned local and central governmentofficials has been maintained and strengthened; collaborationwith the provincialgovernments has been initiated,and there has been significantprogress in overall human resource and institutional development.

C. Bank Strategy

2.20 The Bank seeks to assist in implementingbroad urban sector policies codified by GOI in its Urban Sector Policy Statementof 1987 and Five-Year DevelopmentPlan for 1989-1994. The Bank strategymirrors the government strategywith emphasis on (a) improvingservice levels in a regionally balanced fashion and particularlyfor the poor; (b) impro;ingurban productivityand the effectivenessof investmentsthrough better infrastructureplanning and programming,especially at the city level and through enhanced local governmentcapacity for fiscal management,revenue - 15 - mobilization,project implementationand O&M; (c) improvingthe urban environmentby enhancing local governmentcapacity to plan, implementand operate infrastructurein an environmentallysound fashion and also by enhancing communityparticipation. The strategy responds to the experienceof ongoing Bank projects, in particular to problems encounteredwith regard to project preparationand implementationcapacity. It recognizesthe limits to central governmentmass delivery of urban servicesand stresses the importance of building capacity at local level to plan, implementand operate urban service.

2.21 Improvingservice levels and urban management capacity. Having contributedto the formulationof GOI's sector strategy through the 1984 Urban Services Sector Report (4800-IND,1984) and subsequent studiesunder the Urban IV and Urban V projects, the Bank supports the integrated infrastructure programmingand decentralizationapproach adopted by GOI as the optimalway to address urban sector issues in Indonesiaand, in the long run, the solution to the implementationcapacity problem. Based on experiencegained under the six completedand eight ongoing urban projects, the Bank strategy recognizesthat implementationof this approach depends on the institutionalcapacity of individual local governmentsand local water enterprises. In parts of the countrywhere institutionalconstraints are less pronounced it is possible to establishprovincial intermediationcapacities, programmatic Bank lendingand high levels of cost recovery. In other less develeped parts of the country such as East Indonesia,where local capacity is less developed, regular project lending is more appropriateand cost recovery is more difficult. The Bank strategy recognizesthat regionallybalanced developmentis a legitimate concern of GOI and developmentof urban areas in the Eastern part of the country is necessary to achieve that. The Second Water Supply,Urban III and Urban V projects demonstratedthat well prepared,traditional project type interventionsrestricted to a few urban areas could help GOI improve delivery of urban infrastructureservices in areas with weak currentmanagement capacities.

2.22 The Bank agrees with GOI that increasedaccess to infrastructure services,especially for the poor, is an importantobjective. However, there is no simple solution to the problem of institutionalcapacity constraintsand attempts to mass deliver standardizedsystems are fraughtwith problems. Inflexibilityin design leads to solutionsill adapted to local circumstances, low willingnessto pay by the consumersand lack of funds and institutional capability for maintenance. This is a very high price to pay and may hinder the achievementof another equally importantobjective, the maximum contributionfrom urban infrastructureto the economic developmentof the cities. Therefore,while the Bank strategy supports targeted interventionsto increase access for the poor (e.g., subsidizedwater standpipeand kampung improvementprograms), it also emphasizesthe importanceof long-term programs to enhance the capacity of local governmentsand communitiesto implementand finance infrastructureprojects and maintain the assets created. Provisionof the proper financialand managerial incentivesfor the local governmentsfor improved implementationand maintenanceperformance is another equally importantaspect of the strategy.

2.23 Financingof urban development. Based on the Bank's experience that local services are mast effectivelyprovided when responsibilityand accountabilitylies with competent local governments,Bank strategy aims at - 16 - increasingthe importanceof local governmentresources in financingurban infrastructureservices. Therefore,the Bank supportsmeasures that increase local revenues,especially the reform of the system of local governmenttaxes and charges, and increase prudent borrowingby local governments. The system of a multitude of local governmenttaxes with very limited revenue base and yield should be overhauled. Also, local governmentsshould be encouragedto establish pricing policies ca an increasinglycost recoverablebasis, thereby enabling availablegrants to be targeted to the neediest regionswith less potential for local resource mobilization,thus supportingthe Government's regional equity objectives. If GOI's Repelita V strategy of increasingthe relative importanceof credit in the sector succeeds,it will help encourage more efficientallocation of resourceswithin the sector. However, an interest rate which is well below market rates (currently18 - 20 percent annually)maintains a degree of interest rate segmentationwhich could inhibit the ability of the sector to mobilize loan funds from domestic savings in the long-run. The Bank thereforesupports a program geared to measured progress towardsmarket-related rates of lending to local governmentsand enterprises.

2.24 The Bank also recognizesthat infrastructuredeficiencies are large and the financialcapability of local governmentsis limited, so central governmentgrants will continue to be an importantsource of financingfor urban infrastructure. In order to avoid inefficienciesexperienced in the past, improvementof the grant system is desirableby making it less fragmentedand more equalizing,predictable and discretionaryfor the recipient local governments. The superior financialresources of the central governmentcoupled with superior implementationcapacity led to the important role played by the grants-in-kindsupport. Grants-in-kindfor servicesunder the responsibilityof local governmentshave, however, been eliminatedunder the approved financingarrangements described in Chapter 3. The Bank supports a strategywhich graduallylimits Central Governmentdirect involvementonly to servicesclassified as national responsibilitiese.g., national roads in urban areas.

2.25 Lending Strategy. The Bank's strategy is to (a) move toward programmaticlending operationsfor selected areas (e.g., East Java and Bali) with adequate institutionalcapacities, which could serve as models for provinces and cities nationwide;and (b) carry out more traditionalproject lendingwith a more focused approach on some subsectorswhere either the institutionalcapacities are too weak for programmaticlending (e.g.,most of eastern Indonesia)or subsectoralrequirements are so large and complex that they are best dealt with individually(e.g., metro Jakarta).

2.26 ProgrammaticLending. Through programmaticlending, as under the proposed project, the Bank would provide financing for time-slicesof multi- subsectorurban expenditureprograms for local kotamadya (municipal)and kabupaten (district)governments. The subsectoraland geographicscopes of such operationswould be wider than in traditionalurban project lending, and the Bank would rely more on intermediaryinstitutions. There would be more attentionto detail of specific subprojectsand delivery mechanismsthan is possible in sector lending,however, and sector policy and nationwideaction plans could not be emphasizedto the same extent. The programmaticapproach would facilitatethe Bank's involvementin large numbers of typical local governments. It would also help to facilitatethe many transitionsrequired to carry out GOI's long term policies of deconcentration,co-administration - 17 -

and decentralization. The central governmentrole would graduallybecome mainly one of providing overall program guidance and technicalassistance to the lower level governments;provincial governmentswould graduallyassume more responsibilityfor assistingsmaller local governmentsin project identification,preparation, appraisal of subprojectproposal", and monitoring of their implementation;local governmentswould become increasingly responsiblefor project identification,preparation, implementation and O&M. The transitionwould be gradual, and there would be considerabledifferentia- tion among regions dependingupon institutionalcapacities for change. The Bank's strategywould therefore require every effort to adapt loan processing and supervisionto existing GOI planning and implementationsystems and capacities. Few if any new GOI policies would be required,and projects would rely as much as possible upon existing institutions(e.g., the provincialand local BAPPEDA planning agencies)and processes (e.g., the RAKORBANGbudget consultstionprocess beginningat the communitylevel). Radical improvements in loca:.government capacities, in particular,would not be anticipatedduring the short or medium (five-year)term. Moreover, the expenditureprograms to be financedwould not differ radicallyin size or overall compositionfrom comparablnprograms that have already been delivered (albeitwith more reliance on experiencedcentral governmentagencies).

III. THE PROJECT

A. Pro3ect Origin and Formulation

3.1 The proposed project has been under discussion since 1980, during implementationof the Urban III project (Loan 1653-IND)and preparationof the Urban IV project (Loan 1972-IND). At that time, it was envisioned that a future Urban V project would focus on the province of East Java and include its capital (Surabaya,a city included in the Urban III Project) along with a large number of its secondarycities. As preparationof the proposed East Java project moved forward,however, it became clear that the central and provincial governmentscould not agree on an appropriatedivision of responsibilityand authority. The Governor decided that he did not want to be responsiblefor a province-wideproject unless the provincialand local governmentscould play a stronger implementationrole than was at that time acceptable to the central government. As a result, the Urban V project scope was changed to focus on a straightforwardcontinuation of the Urban III project and infrastructureinvestment in its four large cities, including Surabaya. The central and provincial governmentsagreed that Bank financing under this project could be provided mainly through subsidiary1 .oanswhich would automaticallygive the lead decision roles to regional governmentsas the ultimate borrowers. Preparationof a province-wideproject was suspended, however, and did not begin again until 1987.

3.2 The proposal of a province-wideurban project for East Java extended to include the neighboringBali province,was revived in the immediatecontext of GOI's 1987 Urban Policy Statement,in particular its call for improved planning of urban infrastructureand service delivery through the IUIDP process. GOI identifiedEast Java and Bali as the most appropriateprovinces for testing and implementationof the full "IUIDP approach,"as it would be - 18 - called, given their urban infrastructureneeds and relativelywell developed provincialand local governmentinstitutions. Similar, but in most cases more limited, applicationsof the approachwould then be attempted in other provinces and selectedkotamadya municipalities with support of the Bank and other donors. The Bank was consideredas the logical source of support for an East Java - Bali project given its commitment to the Policy Statementthrough the Urban Sector Loan and its experienceunder past and on-going urban project operations in the two provinces. From the Bank's view, the IUIDP approach was seen as a logical first step in program lending that could expand its role to cover whole provinces and all seven of the urban subsectorsin single operations. While mostly successful,the Bank's earlier and ongoing project operations in East Java and Bali have only covered small numbers of local governmentsand individualsubsectors or small clusters of subsectors.

3.3 Funding under the Urban Sector Loan (Loan 2816-IND)and UNDP's IUIDP Advisory Support Project (INS/851005)was provided in 1987 to introducethe IUIDP approach in East Java and Bali and to prepare a project suitable for financingunder a Bank loan. A nationwide IUIDP training programwas initiated at about the same time with support from the USL and the Government of the Netherlands,though its implementationin East Java and Bali was delayed until late 1988. Introductionof the IUIDP approach proved to be more difficult than originallyhoped, though from the beginningthere was steady progress and widespread recognitionthat detailed preparationof a possible project should not (indeedcould not) be rushed. All parties learned a great deal and are still learning. It is worth highlightingthats (a) central government participantshave become significantlymore aware of the need to understand urban infrastructureand service issues from the local governmentperspective; (b) those responsiblefor individualsubsectors have learned that they cannot work successfullyin isolationfrom other subsectors;and (c) multisectoral planners have been reminded that comprehensiveplans are useless if they are not carried through to detail at the subprojectlevel.

B. Prolect Objectives and Rationale for Bank Involvement

3.4 Project Objectives. The fundamentalobjective of the proposed proj- ect would be to improvethe quality of urban infrastructureinvestment and service delivery in East Java and Bali. Operationalobjectives would be to: (a) supporturban infrastructureinvestment (including.ehabilitation) in up to 45 local governmentsin East Java and Bali, includinga limited expansion of the water distributionsystem in the City of Surabaya;8/ (b) improve urban infrastructureexpenditure programming, financial planning and informationmanagement for these local governments;(c) encourage local revenue generation,improve financialmanagement and, more generally, strengthenlocal governmenthuman resourcesand institutionsincluding capacities for more effectivecommunity participation and environmental management;and (d) assist sector developmentnationwide, including preparationof future projects.

3.5 Rationale. The proposed project deserves the Bank's fullest support insofaras it (a) supports the urban sector strategiesof GOI and the Bank;

8/ Other investmentsin Surabaya City would be covered under the proposed Surabaya Urban DevelopmentProject (FY92 lending program). - 19 -

(b) provides financingfor types of subprojectsserving both economic and social needs that have been confirmedto be feasible and beneficialin a wide variety of SOI and Bank experiencesin these two provinceswith capable governmentsknown well to the Bank; (c) provides for improvedprogramming and implementationof such subprojectsin a manner that should lead to greater net benefits in the future,primarily by involvinglocal governmentsand beneficiariesmore directly and by increasingthe transparencyof urban resource allocation decisions; (d) introducesthe full IUIDP-basedprogram lending approach to the urban sector in Indonesiaand the prospect of Bank assistance for urban developmenton a "wholesale,"multi-city and multi- subsectoralbasis; and (e) offers GOI and the Bank their first opportunityto test and develop the full IUIDP approach that will be a model for evaluation and a referencefor other provinces.

C. Proiect Description

3.6 Project Components. There would be three principal componentss

(a) InfrastructureDevelopent, Rehabilitationand 0&M. This component representsabout Rp. 647.0 billion ($340.2million equivalent)or 94 percent of total project costs, providing the core of five-year urban infrastructureexpenditure programs for the 45 participating local governments,including a limited expansionof the water distributionsystem for the City of Surabaya. Financingwould be provided for urban infrastructureexpenditure programs covering seven subsectorsin up to 36 of the 37 local governmentsin East Java and all eight in Balis civil works and equipmentfor water supply, urban roads, kampung improvement,market infrastructure improvement,solid waste management,drainage and sanitation. O&H expendituresof Rp 183.0 billion ($96.3million equivalent)would be included in the expenditureprograms, but would not be financedby the Loan. Contracted engineeringcosts have been included, amounting to Rp 24.9 billion ($13.1 million equivalentor 6 percent of total investmentcosts). The expenditureprograms and supporting financingplans would cover the five-yearperiod beginningwith 60I's PY91/92.

(b) Program Management. This component representsabout Rp 25.5 billion ($13.4 million equivalent)or four percent of total project costs. The projectwould be managed and implementedby existing structural agencies at the central, provincialand local levels of government. In order to achieve the project's objectives,however, several of these agencieswill require technicalassistance, task-specific training and equipment. All expendituresunder this componentwould be essentialfor physical implementationof the project. They would support:

(i) furtherprogram and subprojectprepsration; and

(ii) management of program implementation.

(c) InstitutionalDevelopment. This componentwould include two sub- components. - 20 -

(i) Municipalmanagement improvement. This sub-component representsabout Rp 6.5 billion, ($3.4 million equivalent)or about one percent of total project cost. It would support implementationof on-going national management improvement programs in East Java and Balis

a. revenue administrationreform;

b. local governmentfinancial accounting and managementand reform;

c. Environmentalassessment (AMDAL) institutionaldevelopment; and

d. IUIDP training

(ii) Sector Development. This sub-componentrepresents about Rp 6.7 billion ($3.5 million equivalent)or one percent of total project cost. It would support sector developmentactivities that are importantfrom a national perspective:

a. co-financingof the UNDPIUNCHS-executedIUIDP ImplementationSupport Project (INS/89/014);and

b. preparationof future projects that cannot otherwisebe financed.

D. Project Costs

3.7 The total project cost, as summarizedin Table 1 below and in Annex 1, is estimatedat Rp 685.4 billion ($360.5million equivalent)including contingenciesof Rp 144.5 billion ($76.0million equivalent),taxes of Rp 47.4 billion ($24.9 equivalent),and land acquisitionof Rp 11.0 billion ($5.8 million equivalent). Direct and indirect foreign exchange costs are estimated at Rp 235.1 billion ($123.5million) or about 34 percent of total project costs. Base costs are estimatedas of January 1991. Physical contingencies are estimatedat 10 percent for civil works and equipment. Price contingen- cies are estimated at 6 percent per annum for domestic costs and for foreign costs at 3.2 percent for 1991 and thereafter. Price contingenciestotal Rp 110.4 billion ($58.1 million equivalent)or 19 percent of base costs plus physical contingencies. In addition to the project cost, interest during construction(IDC) on regional borrowingfinanced by the Bank's Loan would be about Rp 19.0 billion ($10.0million equivalent)and IDC on other loans would be about Rp 5.5 billion ($2.9 million equivalent). Land acquisitioncosts are included in the base costs. Detailed cost estimatesa:e provided in Annex 1. Table 1 below summarizesproject costs by componentand subcomponent. A more highly aggregated summary is presented in the top rows of Table 2 as the expenditure program to be financed under the proposed project. - 21 -

Table 1t PROJECTCOST SUMMARY

RtPLIIoIn S mlilion U Local Foreign Total Lncal Foreign Totnl TotalCost

A. ProgramInfrastructure Developmnt and DIM 1. WaterSupply La 102.1 81.4 188.6 58.7 42.8 90.6 26.8 2. Drainage 81.6 128.6 45.1 18.6 2.1 28.7 6.6 8. SolidWaste Management 18.6 6.6 26.8 9.7 8.6 18.8 8.7 4. Sanitatlon/Seweraes 12.6 5.4 17.9 6.6 2.8 9.4 2.6 5. UrbanRoads 118.6 60.9 169.6 62.3 26.8 89.1 24.7 6. K MPU"gImproveent 14.4 6.2 20.6 7.6 8.8 10.9 8.0 7 MarketInfrastructure Improvement 1.6 0.6 2.1 0.6 0.8 1.1 0.8 Subtotal Program Infrastructure Investment /b 209.2 164.8 484.0 1L7. 86.7 244.0 87.7 S. OAM Currentlevel 96.2 84.4 180.6 60.6 18.1 68.7 19.1 9. ON, Incrementon new Infrastructure86.6 16.7 62.4 18.7 8.8 27.6 7.6 SubtotalOCM 181.7 51.1 182.8 cs. 2N.J 96.2 26.7 SubtotalInvestment and OM 480.9 216.9 646.6 226.6 118.6 840.2 94.4 8. ProgramManagement 14.8 11.2 25.5 7.6 5.9 18.4 8.7 C. InstitutionalDevelopment

1. MunicipalManagement Improvement 4.0 2.5 b .6 2.1 1.8 8.4 0.9 2. SectorDevelopment 1.4 6.2 6.6 0.8 2.7 8.6 1.0 SubtotalInstitutionw Development 5.4 7.7 18.1 2.9 4.0 6.9 1.9 TotalProject Cost 450.6 284.8 685.4 287.0 128.5 860.5 100.0 InterestDuring Construction on Bank Loan 0.0 19.0 19.0 0.0 10.0 10.0 Interest During Construction on other Loans 6.5 0.0 5.6 2.9 0.0 2.9 Total-Fnancina Raguired 466.1 258.8 709.9 289.9 188.6 878.4

/ Includes$18.1 millionfor UsbulanSprings distribution pipeworks In KotamadysSurabays. Includes818.1 million for contractedengineering design and supervision.

3.8 Costs were estimatedmainly on the basis of local expenditure programswhich, in turn,were basedupon standardunit costsand detailat the preliminaryengineering level for representativesubprojects and O&M in a firstbatch of 13 localgovernments (nine in East Java and four in Bali) and identification-leveldetail for a secondbatch (15 in East Java and four in Bali).These two batchescover about seventy-fivepercent of the urban populationof East Java, excludingSurabaya, and all urban residentsof Bali (seeAnnex 8). Estimateshave also been checkedagainst unit costs incurred in similarsubprojects financed by the Bank under similarconditions in Indonesia.These indicatorswere also used to includean indicativeamount in the expenditureprogram for a thirdbatch of 12 localgovernments in East Java, includingthe City of Malang. - 22 -

E. Financing Plan

3.9 The total financingrequirement is Rp 709.9 billion ($373.4million equivalent)including interest during constructionof Rp 24.5 billion ($2.9 million equivalent). The proposed Bank loan of $180.3 million would finance 48.3 percent of this total, or about 69.1 percent of the project cost net of identifiabletaxes, duties, current O&M and interest during construction. The loan and a Japanese grant of $4.2 million equivalentwould cover all foreign exchange costs estimatedat $123.5 million equivalent and local costs of $61.0 million equivalent. Counterpartfunding would be provided by the central government ($27.0million equivalent),provincial governments ($13.1million equivalent),local governments($72.5 million equivalent), water enterprises ($69.4million equivalent)and private sector contributions ($6.9 million equivalent). The Bank loan includes a Project Preparation Facility Advance of $1.5 million and retroactivefinancing estimated at $2 million covering consultancyservices and early FY91/92 infrastructure costs. Annex 2 provides details of the financingplan. A summary of the com- bined expenditureprogram and financingplan is provided in Table 2. Assuranceswere obtained at negotiationsregarding timely provision of counterpartfunds, which would also be specifiedin Program Implementation Agreements to be executedby the central, provincial and local governments (para. 4.9).

3.10 Cofinancing. Cofinancingof Yen 607.5 million (Rp 7.6 billion or $4.2 million equivalent)has been provided by a grant of the Governmentof Japan signed April 19, 1990, for consultancyservices required during the final stages of project preparationand during the early years of project implementation.

3.11 Lending to Local Governmentsand Water Enterprises. Of the financingcontributions by local governmentsand water enterprises, respectively,about Rp 23.5 and Rp 91.0 billion ($12.4 and $47.9 million equivalent),would be borrowed from the central government.91 Central GOI would bear the foreign exchange risk and the risk of interest rate variation. The loans would be made for varying periods keyed to the economic life of each investment(up to 20 years) includingup to five years of grace. Individual loans would be at fixed interest,but the interest rate would be progressively moved closer to market rates by applying an indexed rate system (describedin para. 5.19) over the life of the project. Interest and commitmentcharges would be payable during the grace period. Section C of Chapter V provides a descriptionof the agreed central governmentlending arrangements.

3.12 Regional Financing. About Rp 422.3 billion ($222.1million equivalent)or 59 percent of the total financing requirement is indicatedas being financed from regional level resources. Included in these figures are interest during constructionof Rp 16.0 billion ($8.4 million) on water enterpriseborrowing and Rp 5.1 billion ($2.7 million ) on local government

91 This includesRp 10 billion ($5.6million equivalent)already being borrowed in FY91192 by KotamadyaMalang's water enterprisefrom the central governmentthat will not be financed under the proposed loan. It also includes Rp 23.4 billion ($12.3 million equivalent)borrowing by PDAM Surabaya for the Umbulan Springs distributionpipelines. - 23 -

Table 2: PROJECT FINANCING PLAN SUMMARY

Rp $ Percent Percent Billion Million Project Loan

Regional Level Financing Local Governments Borrowing 23.5 12.4 3.3 Local Revenues and Property Tax Share /a 88.2 46.4 12.4 INPRES Development Grants 45.1 23.7 6.4 SDO Routine Staff Salary Grant 4.6 2.4 0.6 Water Enterprises Borrowing for Investment /b 91.0 47.9 12.8 Internal Finance for InveiiEment /c 31.6 16.6 4.5 Internal Finance for O&M 100.2 52.7 14.1 Provincial Government Direct Funding 24.8 13.1 3.5 Private Sector Contributions 13.1 6.9 1.8 Subtotals Regional Level 422.3 222.1 59.5 Central Level Financing Central Level Responsibilities Ld 143.3 75.4 20.2 Regional Level Responsibilities 144.3 75.9 20.3 Subtotal: Central Level 287.6 151.3 40.5 TOTAL FINANCING le 709.9 373.4 100.0 Donor Funding Bank Loan (69.12 Eligible Amount) If 342.8 180.3 48.3 Japanese Grant 8.0 4.2 1.1 Subtotal 350.8 184.5 49.4 100.0 Distributed As Subsidary Loans Water Enterprises 72.9 38.4 21.3 Local Governments 21.2 11.1 6.2 Central Grants-in-kind Central Responsibilities 112.4 59.1 30.4 Regional Responsibilities 144.3 75.9 42.1 Regional Level Domestic Funding 307.8 161.9 Central GOI Domestic Funding 51.3 27.0 TOTAL /e 709.9 373.4 la Including borrowing interest during construction of Rp 5.1 billion ($2.7 million equivalent). lb Including Rp 23.4 billion ($12.3 million equivalent) borrowing by PDAM Surabaya for Umbulan Springs distribution pipeworks. /c Including Rp 16.0 billion ($8.4 million equivalent) for interest on borrowing during construction. /d Including Rp 3.4 billion ($1.8 million equivalent) interest luring construction (for domestic loan to PDAM Malang). /e Icluding interest during construction of Rp 24.5 billion ($12.9 million equivalent). If For Bank loan calculation, eligible amount is total cost less taxes and duties, current O&M, land acquisition and interest during construction (Rp 213.5 billion or $112.3 million equivalent). tE Includes $4.2 million equivalent of Japan Grant Funds to GOI. - 24 - borrowing. These resourcesinclude water enterprise charges to consumers, second level regional governmenttaxes, assigned revenues,service charges and other local revenues,contributions from the provincialgovernment budgets, and private sector-sourcedfunding (principallyrelating to contributionsof land and repaymentsto the proposed local small credit schemes for the financingof on-site sanitation infrastructure). Finance from the normal central governmentroutine SDO and INPRES general developmentgrants is also counted because the uses of these formula-drivengrants are substantially under local control. Borrowingsby water enterprisesand regional governments are also included under this heading. The borrowing figures for the regional governmentsinclude the sums needed for the initial capitalizationof the proposed small scale credit schemes for on-site sanitationand possible loan finance for other parts of the second level regional governmentsinvestment programs (notably in the solid waste and KIP subcomponents).

3.13 Central GovernmentNon-Repayable Financing. These contributions constitute that part of the expenditureprogram to be funded from central GOI sources, excludingloans and formula-drivenroutine and the normal general developmentgrants to regionalAPBD budgets. Of the total central non- repayable financingof Rp 287.6 billion ($151.3million equivalent),about Rp 139.9 billion ($72.9 million equivalent)is for infrastructureand consultancywhich is classified as a central governmentresponsibility. These central agency allocationsare known popularly as APBN DIP (nationalproject) funds and are distinguishedin practical terms by having central government staff as project managers (PIMPROs)responsible for signing contracts. The amount of the central contributionwhich supports regional governmentrespon- sibilities is some Rp 144.3 billion ($75.9million equivalent). These contributionswill be channeled to local governmentsthrough a special ISPABP' mechanism under the authorityof PresidentialInstruction and will enter local governmentbudgets as special grants for the EJUDP project. The subproject componentsfinanced with SPABP transferwill be managed by staff of the regional governmentsthemselves. Of the total central GOI non-repayable financing,the Bank loan would finance about 89 percent or Rp 256.7 billion ($135.0million equivalent).

IV. PROJECT IMPLEMENTATION

A. Responsibilities

4.1 Central Agencies. Operationalpolicy coordinationand guidance for the project would be provided by The Urban DevelopmentCoordination Team (TKPP, composed of director-generallevel officials),with the assistanceof the IUIDP ImplementationManagement Group (IMG, composed of directorate-chief level officials)and its UNCHS-executedIUIDP ImplementationSupport Project (INS/89/014). BAPPENAS chairs TKPP and IMG, and is responsiblefor daily management of INSl891014. Key members of TKPP and IMG are MPW, MHA and MOF. Agencies such as a Ministry of Communications,National Land Agency and Ministry of State for AdministrativeReform may join TKPP and/or IMG in the course of project implementation,though their direct participationis not crucial. - 25 -

4.2 Overall responsibilityfor technicalsupervision and management of the proposed project in Central GOI would be assumed by DGCK, which would take the lead role in management of componentsand subcomponentsunder its own specific responsibility(as would DGBM) 101 and in ensuring (throughTKPP and IMG) that other agencies at all levels perform their own roles adequately. DGCK would be assisted in carrying out this responsibilityby the IMG-based INS189/014Project and by the DGCK-basedCentral ProjectManagement Office (CPMO) and Central Project Finance Office (CPFO). Establishedunder earlier urban projects financed by the Bank and other donors, the CPMO would be responsiblefor monitoring all program and subprojectimplementation and for arrangingmost technicalassistance and training. The CPFO, similarly,was establistedunder past projects and would be responsiblefor oversight of all project accounting and auditing and for monitoring of Loan disbursement.

4.3 ProvincialAgencies. Regional government implementation arrangementswould be assigned according to standardpolicies and practicesat each level. Provincial ProgramManagement Offices (PPMOs)have been establishedin each provincial governmentunder the ProvincialTKPP (Steering Committee) and BAPPEDA I, and headed by a senior BAPPEDA I officer designated as Program Coordinator. ProvincialProgram Finance Offices (PPFOs)have been establishedin each of the two provincesand will be responsiblefor supportingthe Central Project Finance Office (CPFO),overseeing and assisting local Project Finance Offices (PFOs), and compiling financialstatements for consolidatedprovincial audits. Each PPMO and PPFO would include a small contract staff and seconded regular staff of concernedprovincial agencies, among the most importantbeing:

(a) BAPPEDA I staff with responsibilityfor the key task of program appraisal (includingAMDAL environmentalassessment) as well as overall expenditureprogramming at the provincial level;

(b) Dinas PU (DPUP, ProvincialPublic Works Department)staff for technical subprojectpreparation support and implementation includingO&M supervision(most APBD I project managers (PIMPROs) and most APBN subprojectmanagers (PIMBAGPROs)would be DPUP staff);

(c) Dinas Pendapatan (RevenueDepartment) staff for revenue improvement;

(d) Biro Keuangan (FinanceBureau) staff for financialmanagement;

(e) Biro ORTALA (Organizationand ImplementationBureau) staff for institutionaldevelopment; and

(f) Biro BANGDA (RegionalDevelopment Bureau) staff for coordinationand use of Provincial INPRES I grants.

4.4 Local Agencies. Arrangementsat the local government level would parallel those at the provincial level. Policy coordinationand guidance

10/ DGCK and DGBM would be responsiblefor direct implementationcentral government infrastructurein addition to being responsiblefor oversight and supervisionof all infrastructure,including that implementedby the regional governments. - 26 - would be provided by BAPPEDA II, reportingto the bupati for kabupaten districts or walikota for kotamadya cities. Program Management Offices (PMOs) would be establishedin local governmentsunder BAPPEDA 11 and headed by a senior BAPPEDA II officer. Program Finance Offices (PFOs)would also be establishedin each local government,usually in associationwith the Finance Division. Each PMO and PFO would include a local consultantshared with neighboringlocal governmentsand could include seconded regular staff of the concerned local agencies (DISPENDAII, Bagian Keuangan II, etc). Most APBD II project managers (PIMPROS)would be local Dinas PU (DPUK) staff. A loan covenant was agreed at negotiationunder which the PFO is to be establishedin each participatinglocal government,after an initial three-monthperiod beginningwith first project disbursementin that local government.

4.5 Ongoing Program and SubproiectAppraisal. Appraisal criteria and procedureshave been agreed, rigor increasingwith subprojectcost and complexity.These are summarizedin Annex 4 Parts C, D and B. Provincial appraisalcapacity is already operationalin the BAPPEDA of East Java and is expected to become operationalin Bali by the time of project effectiveness. The Bank has itself appraisedall Batch I programs, includinga sample of typical subprojectsand all large subprojects(agreed to be over Rp 4 billion or about $2.1 million equivalent)proposed for Batch I 'ocal governments. Annex 14 summarizes results of the Bank's appraisalof two local government programs and their subprojects. The Bank would continue to appraise new programs as they are prepared and all revisionsto programs which change by 20 percent or more, as well as samples of typical new subprojectsand all large new subprojectsduring supervisionmissions, working closelywith the establishedprovincial appraisal capacities and project consultantsto be hired if necessary under the Japanese grant. (It is estimatedthat no more than 5-10 large subprojects,including the Surabaya Regional Water Supply Program, would require Bank appraisalduring the first two full years of project implementationand that there would be none thereafter.) Conventional economic analysis would be required for all large projects. Simplified economic analysis would be required for subprojectscosting between Rp 400 million and Rp 4 billion. Economic viabilityof small subprojectscosting less than Rp 400 million would be assumed if they are consistentwith local prioritiesand adhere to national standards. The MOF staff would confirm adequate financialanalysis of all subsidiaryloan applications. Central GOI commitmentto establishmentand maintenanceof adequate aprraisalcapacities at all levels was confirmedat negotiations.

4.6 Prior to conclusionof Batch II and III preparationand appraisal, local governmentmay utilize program resourcesfor urgently required small projects not exceedingRp 4 billion in aggregateper local government. This interim facilitymay be utilized only once by each Tk. II local governmentand should not include investmentshaving an implementationperiod longer than two years. The provincialgovernment will appraise and approve such proposed subprojectsin accordancewith the agreed criteria and to enter into a provincialPIA with the concerned local governmentwith a maximum two year validity, to be replaced subsequentlywith a comprehensiveprogram, when completed.

4.7 Surabaya RegionalWater Supply System Development. At the time of negotiations,agreement was reached to include the Surabayawater enterprise (PDAM Surabaya)as an eligible local governmentimplementing agency for the - 27 -

Project, in order to facilitateGOI's intention to acceleratethe development of the Surabaya Regional Water Supply System. The proposed scheme includes private financingfor developmentof source works at Umbulan Springs and major expansions of the distributionnetworks for the cities of Surabaya and Gresik. GOI and the Bank agreed to appraise all proposed investmentsin Gresik as part of Batch II in the EJBUDP process. Reduction in other program estimates facilitatedthe provision of up to $11 million (January1991 base costs) for major distributionimprovement in the City of Surabaya as a loan to PDAM Surabaya in the program, without revision of the EJBUDP loan total. However, water supply expendituresfor the Gresik and Surabaya componentsof the larger regional system would be dependentupon successfulappraisal of the regional water supply program, includingthe proposed BOT arrangementwith the private sector consortiumfor Umbulan Spztings,to be conductedby the Bank as part of the scheduledappraisal of the proposed SurabayaUrban DevelopmentProject.

4.8 Summary. The responsibilitiesfor implementingcomponents and subcomponentsof the proposed project are in general assigned to different agencies and levels of governmentaccording to current GOI policies and practices,which provide for increasinglocal participation. No new structuralentities would be required, though severalwould be strengthened under the project. A summary of agency responsibilitiesby project component is provided in Annex 4B.

B. Program ImplementationAgreements

4.9 Program Imn,lementationAgreements. While all authoritiesrequired for successful Implementationof the proposed project are already held by existing structural agencies and each level of government,Program ImplementationAgreements (PIAs) have been drawn up to confirm essential understandingsand commitmentsbased upon preparationdocumentation for Batch I including the medium-termexpenditure programs, financingplans, revenue improvementaction plans (RIAPs)and local institutionaldevelopment action plans (LIDAPs). The PIAs are central to the project design in that local governmentsare committingthemselves to comprehensivesectoral expenditureprograms (includingO&M budgets), specific revenue targets by source, and capacity-buildingmeasures for urban management. These investment and sector plans can and will be amended to reflect changing conditionsand achievementof early targets. However, the process of preparingand arranging the execution and updating of these programs in each local government is the core of the IUIDP approach. This project will be the first urban program to use the PIA concept in Indonesia. GOI presented signed Batcb I and provincial PIAs at negotiations,indicating expected contributionsbv each source for financingeach project sub-component. Other Local PIAs for Batch II and III local governmentswould be signed as a condition of disbursementfor the concerned local government.

C. ImplementationSchedule

4.10 Program implementationin the full sense will commence on April 1, 1991, and would be completed over a five year period ending June 30, 1996. However, a small amount of program expenditurehas been incurred in FY1990/91 in anticipationof project approval,and this will be the subject of retroactivefinancing as explainedin paragraph4.21. The proposed disbursementperiod of six years is shorter than the disbursementprofile for - 28 - the urban sector in Indonesia,and is adopted despite the complexities involved in dealingwith 44 local governmentsand their water enterprises,for the followingreasons. The urban sector profile has been developed on the basis of free-standingurban and water supply projects that typically include large and relativelycomplex subprojects. In contrast, the proposed loan is a programmaticoperation supportingan expenditureprogram that includesno new or complex kinds of subprojectsand which is not appreciablylarger in real terms than programs '.hathave already been implementedin the same provinces. Fund allocationsunder most channels are provided on an annual basis and past records indicate full utilizationdespite some inefficienciesinherent in this method. Land acquisitionrequirements are minor and unlikely to cause delays and there are no identifiedresettlement requirements. All implementing agencies would use consultantassistance for design of major subprojects; small projects are routinelyhandled in-house. An implementationschedule is attached as Annex 4A. Confirmationof these arrangementswas obtained at negotiations.

D. Procurement

4.11 Procurementarrangement are detailed in Table 3. The total value of civil works contracts, includingthose financed by borrowings,is estimated to be $162 million. Contractsexceeding $3 million equivalent (about Rp 6 billion) in value will be procured using internationalcompetitive bidding (ICB) proceduresunder the Bank's procurementguidelines. A 7.5 percent margin of preferencewill be applied for eligible domestic contractorsin bid comparisonswhen ICB proceduresare applied. Most civil works contracts are scatteredin location,not suitable for packaging, and mostly will not exceed $500,000 equivalent (Rp 950 million). For civil works contractscosting less than $3 million local competitivebidding (LCB) procedures acceptableto the Bank would be used for procurement. Civil works contractsvalued less than Rp 20 million (about $11,000 equivalent)would be awarded through local shoppingprocedures followingevaluation of at least three quotations.

4.12 The total value of materials and equipment supply will be about $39 million. The major materials and equipment supply contractscosting $200,000 and more for the cities of Surabaya and Denpasar will be procured through ICB procedures followingthe Bank's procurementguidelines in bid comparisons. A 15 percent margin of preference for domestic supplierswill be applicable for ICB procurement. Contracts for the other 43 local governments and their water enterprisesparticipating in the project will be numerous and not suitable for packaging into larger packages and such equipment supply contractsvalued below $200,000 (Rp 380 million) will be procured using establishedLCB proceduresacceptable to the Bank. It is expected that local supplierswill be competitivefor most of the goods in this category.

4.13 Miscellaneousminor materials and equipment costing less than $50,000 equivalent (about Rp 100 million) per package and up to an aggregate value of $2.0 million equivalentwill be procured through local or internationalshoping by obtainingat least three quotations. - 29 -

Table 3. PROCUREMENTARRANGEMENTS ($ Million)

ProcurementProcedure Total ExpenditureCategory ICB LCB Other Cost

Central Governmentloans to local governmentsand water enterprisesLa 20.1 40.1 - 60.2 (16.3) (33.2) (49.5)

Civil works /b Jc - 121.9 - 121.9 (82.6) (82.6)

Goods lb |d 17.2 19.3 - 36.5 (9.3) (9.6) (18.9)

O&H - - 96.3 96.3

ConsultantServices and Training Le - - 33.5 33.5 (29.3) (29.3)

In-houseImplementation Overhauls - - 6.3 6.3

Land - - 5.8 5.8

Total 37.3 181.3 141.9 360.5 (25.6) (125.4) (29.3) (180.3)

Figures in parenthesesare amounts financed by the Bank.

/a Includes $5.3 million domestic loans to KotamadyaMalang which is not financed under the Bank loan. These loans would mainly finance civil works and goods for water supply subprojects. lb Other than such expenditurefinanced by loans to local governmentsand enterprises. /c Includes $11.0 million expenditurefinanced from water enterprise internal funds and private contributionsagainst which IBRD will not disburse. Id Includes $7.2 million expenditurefinanced from water enterpriseinternal funds and private contributions,and $2.5 million in respect of vehicle purchases againstwhich IBRD will not disburse. Le Includes: engineeringdesign and supervision ($13.1million); program implementationmanagement ($13.4 million); institutionaldevelopment-- municipal management improvement($3.4 million) and sector development ($3.5million). A PPF of $1.5 million has been used to support engineeringdesign ($0.4 million) and program preparation ($1.1 million).

4.14 Procurementof Consultant serviceswould be carried out in accordancewith World BanlrGuidelines for the Use of Consultants. - 30 -

4.15 Prior review of bid documentsand award recommendationswould be required for all civil works contractsvalued over $500,000 equivalentand all materials and equipmentcontracts valued over $200,000 equivalent including those financed by domestic loans under the Project. The prior review requirementsare expected to cover about 50 percent of total procurement,and is consideredacceptable in a program type operationwhich includes a large number of similar contracts for small routinelyexecuted works. Random checking of smaller contractswill be carried out in the field. Lists of tentativecontracts indicatingthe method of procurementfor Batch I local governmentsin each province are given in Annex 5.

E. Disbursement

4.16 Proceeds ox the loan, which would finance about 70 percent of the project costs, would be disbursed as followss

(a) eligible expendituresfinanced through central governmentDomestic Lending Arrangements: 90 percent of the eligible expendituresof local governmentsand their water enterpriseswhich are financed through central governmentloans;1l/

(b) other eligible expenditures:

(i) 70 percent of expenditureon civil works;

(ii) 100 percent of foreign (CIP) costs of directly imported goods (as evidencedby bills of lading);

(iii) for locally-procuredgoods, 100 percent of local ex-factory costs (net of taxes); or 65 percent of the costs of items procured locally;

(iv) 100 percent of expendituresfor consultancyservices and train.ng;

(c) ineligibleexpenditure: No disbursementswould be made in respect of expenditureson land acquisition,project overheads, and operations and maintenance.

4.17 SpecialAccount. Except in the case where contract payments are made thro'gh IBRD Direct Payment procedures,the IBRD loan proceeds would be disbursed through the medium of a SpecialAccount for the EJBUDP loan establishedby MOF (D-G Budget) at Bank Indonesia. This SpecialAccount would be maintained in US Dollars, with an initial deposit from IBRD of $5.5 million, representinganticipated average disbursementsover a two month period. Drawings from the Special Account would be directly meet contract payments under 4.14 (b) above, and would reimburseGOI for contract payments made in respect of onlendingfinanced componentsunder 4.14 (A) above. IBRD would replenish the Special Account in respect of these drawings quarterly or when the balance in the Special Account becomes 50 percent of the initial

11, With the exceptionof a loan already agreed by GOI for PDAM Kotamadya Malang, which is being financed domestically. - 3S deposit,whichever occurs first, on the applicationof D-G Budget (TUA) supportedby documentationas followst

(a) in the case of civil works contractswith a value of $500,000 equivalentand over and goods supply contractswith a value of $200,000 equivalent and overt (i) Payment Orders (SPM) issued by offices of the State Treasury (KPN) or by local project administeringbanks; (ii) Certificatesof Performance(Berita Acara) issued by implementingagencies; and (iii) "No Objection"Letter from IBRD regardingthe award of the contract;

(b) in the case of contractswith values below the foregoinglimits, Statementsof Expenditure(SOE) procedureswill be used. The detailed supportingdocumentation in respect of SOEs would be retained by TUA and implementingagencies, and made availablefor review by IBRD on request.

4.18 The disbursementarrangements are more fully described in Annex 6, which also provides the estimateddisbursement schedule. Two important features are:

(a) payments to local contractorsfrom the State Treasury would be made from KPKN offices in the provincialcapitals of Surabaya and Denpasar, (so that contractorswould not have to go to Jakarta to obtain payment);

(b) KPKN officeswould check that the requisitedomestically-funded counterpartpayments have been authorized (throughthe issue of SPM/SPMU from local or central government sources) before issuing SPM in respect of SpecialAccount funding.

4.19 Direct Payment Arrangements. In appropriatecircumstances contractorsrequiring payment in foreign currency can be paid through IBRD Direct Payment procedures. Such paymentswould be made on the applicationof implementingagencies, and are subject to a minimum of $50,000 equivalentper application.

4.20 Project PreparationFacility. A project preparationfacility (PPF) in the amount of $1.5 million was advanced to GOI to assist project preparationactivities connected with East Java - Bali Urban Development Project. Upon loan signing the total amount of the PPF would be refinanced out of the loan.

4.21 RetroactiveFinancing. Retroactivefinancing in the amount of $2 million (equivalentto about one percent of the Loan) would be provided for financingof expendituresfor works, goods and services from Bank appraisal of the project (March 31, 1990) until loan signing. Completion of the Bank appraisalalso coincidedwith the beginningof GOI's 1990/91 fiscal year. GOI has advised that implementationof only a limitednumber of first year subprojectswas undertaken.

4.22 In order to meet eligibilitycriteria for disbursementunder retroactivefinancing, implementing agencies would be required to conform to the guidelines for procurementand to maintain adequate records and accounts, - 32 - particularlyfor civil works and equipmentcontracts that require prior review of bid documentsand award decisionsby 1BRD.

F. Accounts and Audits

4.23 As indicatedin the financingplan, program expenditureswill be financed from a variety of regional and central sources, each of which follow administrativeand financialprocedures that are to some extent unique. Special arrangementsare thereforerequired: (a) to prepare regular consolidatedstatements of expenditureby financingsource for the whole program (programmemorandum accounts) as a basis for program financial monitoringand for financialaudits; and (b) to collect documentationand prepare reimbursementapplications.

4.24 At the local level, Program FinanceOffices (PFOs)will be set up which will maintain complet¢ and accurate recordsof all project related expendituresfinanced by all sources of funds for all project components includingthose of the water enterprises. At the provincial level, a FinancialManagement Office (PPFO)will be establishedand will be responsible for preparingquarterly consolidated project accounts from the local PFOs serving each actively participatinglocal government. These will be submitted annually for audit by the Audit Board (BPKP) of each province.

4.25 At the central level, the Central Program Finance Office (CPFO)will prepare project accounts of all componentsimplemented directly by the central agencies. CPFO will also be responsiblefor consolidatingquarterly project accounts from the two PPFOs and submittingthem annually for consolidated audit purposes by the BPKP Central Office. CPFO will also coordinate statements-of-expenditure(SOE) audits with the DirectorateGeneral for the Budget, Bank Indonesiaand the State Audit Boards's Central Office. A single consolidatedannual audit report will be submittedto the Bank for review, to include: (a) audit results of consolidatedannual project accounts including SOEs covering all aspects of the project; and (b) the use of the Special Account to be establishedat Bank Indonesiaand the SOE disbursement procedures. These audit reports will be submitted to the Bank for review no later than nine months after the end of GOI's fiscal year. Assurances and confirmationof accountingand auditing arrangementswere obtained at negotiations.

G. Project Reporting,Monitoring and Bank Supervision

4.26 The ProvincialProgcam ManagementOffices (PPMOs)would be responsiblefor preparationof quarterlyprogress reports covering all program components implementedin their respectiveprovince, includingrevenue improvement(under RIAPs), institutionaldevelopment (under LIDAPs), municipal management improvementand institutionaldevelopment. These quarterly reports would include summariesof progress at the local level prepared in collaborationwith the local ProgramManagement Offices (PMOs),and they would be submittedto DGCK/CPMOnot later than one month followingcompletion of the quarter concerned. CPMO would consolidateprovincial reportswithin a month into an overall progress report for submissionto TKPP, IMG, BAPPENAS,MHA, MOF, MPW, and the Bank. These reportswould form the basis for monitoring of progress. Upon completionof the EJBUDP, a Project CompletionReport will the - 33 - prepared by CPMO for submissionto GOI and the Bank. Categoriesof key implementationand reportingindicators and responsibilitiesfor their reportingare summarizedin Annex 7. Overall support to the reportingand monitoringsystem would be provided by the UNDP/UNCHS-executedIUIDP ImplementationSupport Project (INS/89/014). Assurancesand confirmationof reportingand monitoringarrangements were obtained at negotiations.

4.27 Bank SupervisionPlan. In view of the project's broad scope and programmaticnature, both relativelynew for the Bank and Indonesia in the sector, it would be prudent to plan on an intensivelevel of supervisionof about 25 staff weeks per year through the first two years of implementation. Supervisionmissions should be scheduledabout three times annuallywiths (a) a "projectlaunch mission" in May or June 1991 to review and assist in finalizingimplementation arrangements and review of all new program starts and budget documents (DIPs) for the new GOI fiscal year; (b) a mid-year supervisionmission during the September-Octoberperiod in 1991 and subsequent years to review actual starts (new programs,approved DIPs and accumulated implementationissues) and proposalsfor the upcoming budget year (including appraisalof large projects);and (c) an end-of-yearsupervision mission in January-February1991 and subsequentyears to review new starts and budget proposals for the upcoming fiscal years. Revised programs with changes of 20 percent or more and all subprojectsof Rp 4 billion ($2.1million) or more would be appraisedby the supervisionmissions when available. The mid-year FY95 mission (about September1994) would most likely be designatedas a mid- term review of the proposed project that would, in addition to carrying out normal supervisionresponsibilities, have the primary objective of working with GOI to formulatea project completionplan and to confirm sectoral strategy and investmentplans for the provinces during Repelita VI (to begin In April 1994).

H. Land Acquisitionand Resettlement

4.28 The emphasis on rehabilitationand upgradingof existing basic infrastructure,particularly in the roads and drainage subsectors,has minimized land acquisitionand resettlementrequirements. A review of Batch I programs identifiedno consequentialland acquisitionproblems and no need at all for resettlement. Bank guidelineson acquisitionand resettlementare being translatedto Bahasa Indonesiaand incorporatedin the IUIDP preparation guidelinesto be applied for Batches 71 and III and in the program implementationmanuals. Land acquisitionand any possible resettlement requirementswill be monitored by Bank supervisionmissions and the project managementstaff.

I. Operations and Maintenance

4.29 The expenditureprograms for EJBUDP local governmentsinclude componentsfor O&M budgets in every sub-sector,in accordancewith IUIDP guidelinesand the technicalpreparation guidelines. Expendituresare clearly distinguishedbetween current O&M (e.g., level of current expenditurefor O&M of existing facilitiesand services in the subsector)and incrementalO&M defined as the agreed additionalexpenditures to (a) improveO&M of existing facilitiesor services,and (b) initiatenecessary O&M for new and rehabilitatedinfrastructure and services developedduring the implementation period of the proposed project. These additionalO&M expenditures,with the - 34 - associated local capacitiesto execute improvedO&M, representone of the most importantprogram implementationtargets. Assistancewill be provided under the Loan to (a) install in all Batch I local governmentsa simplifiedversion of the Performance-basedOperations and MaintenanceManagement System (POMMS), developed for large cities under Urban V and USL, and (b) provide training and advisory support to local and provincial staff in the programming,budgeting and management of O&M activities,including trainitig of local staff to prepare and manage annual O&M programs consistentwith MHA MinisterialDecree No. 5 of 1990 (promulgatingPOMMS and implementinglocal budgetingprocedures that have been revised to encourageO&M), training DPUP staff to provide O&M technical advisory support to local governments,and strengtheningthe capacity of the existing PMDUs (createdwith USL assistance)to advise and assist local water enterprisesto improve O&M performancein that subsector. O&M expenditures would be monitored by CPMO and the PPMOs, supportedby the DPUPs, for review by semi-annualBank supervisionmissions and detailed physical assessment in the mid-term review. Any local governmentexpenditure program would be subject to re-appraisaland reductionif actual O&M expendituresare found to be less than 90 percent of the amounts programmed. O&M aspects of the proposed project are more fully discussed in Annex 13. Assurances in these regards were obtained at negotiations.

J. EnvironmentalImpact Assessment and Management

4.30 The Bank is committedto assistingGOI develop economically- efficient approachesto urban and industrialpollution abatement. The Third JABOTABEK Project is addressingthe problem of environmentaldegradation at the community level and provides assistance for strengtheningof local governmentscapacity to monitor pollution. A proposed IndustrialEfficiency and PollutionControl (IEPC) project, which would build on efforts to strengtheninstitutional capability for pollution control at the local level through that project, and to establish a PollutionControl Authority at the central level, also with Bank assistance,is under preliminarydiscussion with 00I. The Second East Java Water Supply Project (Loan 2632-IND) supportedthe monitoring and abatement of water pollution for Surabaya. The proposed project would broaden the Bank's support for improvedenvironmental management in East Java and Bali by financingenvironmental assessment studies (PILe and ANDALs) and providing advisory assistance to the provincial commissions (KomisiDaerah) responsiblefor environmentalassessment and monitoring as well as formulationand implementationof mitigatory strategiesat the provincial level. Chairmen of the provincialBAPPEDA I in East Java and Bali serve concurrentlyas Chairmen of the respectiveprovincial commissions and as Secretariesof the respectiveIUIDP Steering Committees.

4.31 A principalobjective of the project is to ensure that preparation and appraisal of investmentprograms by intermediaryorganizations adequately incorporatesenvironmental assessment and managementplans. Incorporationof environmentalassessment and managementplans into the IUIDP preparationand appraisalprocess includes: (a) joint environmentalscreening of investment programs by the national-levelEnvironment Commission of Ministry of Public Works and the EnvironmentCommission of each province; (b) preparationof PILs/ANDALsJRKLsby appraisal; (c) review of PILs/ANDALs/RKLsby the Regional EnvironmentCommissions; and (d) appraisalof mitigation measures recommended in the RKL into project by provincialappraisal teams. Although arrangements for environmentalscreening, preparation of environmentalassessments and - 35 - management plans, review and appraisal of Batch I investmentprograms are agreed with Gevernmentand are being carried out by project preparation consultants,follow-up measures to strengthenlocal environmentalmanagement capabilitiesand to improve coordinationamong Central Regional Environment Commissions,the provincial appraisal teams and local governmentsare required. Proposed technicalassistance to the Regional Commissionsand BAPPEDAs of East Java and Bali wills (a) ensure timely completion of Batch I environmentalassessment; and (b) build institutionalcapabilities of intermediaryorganizations to carry out environmentalassessment of Batch II and III investmentprograms, as well as other investmentsnot financed under this project. The technicalassistance includesan inventory of existing environmentaldata, design of an environmentalmanagement database and monitoring program, and training of provincial and local officials in environmentalassessment and management.

4.32 Environmentalassessment requirementsunder GovernmentRegulation PP29/1986 and Annex A of the Bank's EnvironmentalAssessment Operational Directive 4.00, are being met. Screeningof Batch I investmentprograms during appraisal identified32 subprojectswith limited but possibly negative impact, for which preparationof PILs (preliminary/simplifiedenvironmental studies) is required,and seven subprojectswith potentiallysignificant adverse impact, for which preparationof ANDALs (detailedenvironmental studies) is required. EssentialPILs, ANDALs and accompanyingenvironmental managementand monitoringplans (RKLs) of Batch I subprojectswould be reviewed by the Regional EnvironmentCommissions, as agreed at appraisal, and by Bank supervisionmissions. RKLs would be incorporatedwith subproject designs,where appropriate,and checked by the provincialappraisal teams prior to approval of concerned subprojectsfor implementation(see Annex 15 for summary of this process). Assurancesin these regardswere obtained at negotiations.

K. Local Participation

4.33 The IUIDP approach emphasizesstrengthening of local participation in the project cycle. Beneficiaryhouseholds and communitiesare involved routinely in the identification,participation and implementationof KIP neighborhoodimprovement programs that have been supportedunder Bank loans for more than ten years. Market neighborhoodimprovement (MIIP) programs have a similar participatorybase. GOI's successfulsolid waste management and sanitationprograms also rely on participationof beneficiaryhouseholds and communities,and have received increasing supportunder the Urban III, IV and V projects. On-site sanitationschemes introducedunder the Urban V project, for example, emphasizehousehold financingand the use of NGOs for community management of implementation. Water supply investmentssupported by the Bank now require assessmentof cost recovery potential from the beneficiary households;road investmentsmust be based upon specific road-userneeds; drainage investmentsemphasize needs expressed by communitiessubject to flooding. Most importantly,the overall IUIDP process supportedby GOI and the Bank is designed to upgrade the effective role of local participation: (a) to start planning and decision processes at a level low enough in government so that beneficiariescan participatedirectly; (b) to start early enough in the budget process so that adequate attentioncan be provided to subprojectdesign in meeting beneficiaryneeds; (c) to place increased emphasis on local responsibilityfor O&M, and (d) to take advantageof local human resource and institutionalcapacities through the entire project cycle. - 36 -

V. FINANCIALASPECTS

A. Local Governments

Current Financial Condition

5.1 Central Grant Dependency. Most Indonesianlocal governments, includingmost in East Java and Bali, are dependent on central grants for the bulk of their revenues. Central routineand developmentgrants in recent years representednearly 70 percent of total kabupaten revenues for East Java and nearly 75 percent for Bali kabupatens not counting Badung (Denpasar), which is a special case due to its unique concentrationof local'.ytaxable tourist establishments. Central grants tend to be somewhat less dominant in kotamadyas covered under the proposed project, but still very substantialat about 60 percent of total revenues on average. Grant dependency is high both for developmentexpenditure and for financingroutine administration, operationaland maintenanceneeds with the exception of Sidoarjo in East Java and Badung in Bali. Although there is some evidence that central grant dependencyis beginning to decline primarily in response to reductions in APBN developmentgrants-in-kind, which fell sharply over the period due to central budgetaryconstraints, most local governmentswill continue to receive substantialgrants funding from the central government.

5.2 Non-grant Revenues. Local governments'main non-grant revenue sources fall into three categories*local government taxes; local service charges; and assigned central government revenue, principallythe PBB (propertytax). In most of the Batch I kabupatens,PBB is the largestof these sources, though in four kabupatenstotal revenues from service charges contributethe larger share. Service charges are the largest group of revenues in all of the kotamadyas,with PBB usually second. With the notable exceptionof Badung, local taxes are usually the least significantrevenue source for kabupatens,representing approximately 10 to 20 percent of total non-grant revenues.

5.3 Growth in non-grant revenuehas been fairly good overall in recent years. Analysis for East Java Batch I regions over the 1983/84 to 1987/88 period indicatesan overall average growth rate of about seven percent annually in constant terms in that period. The overall growth rate was rather higher in Bali at around 12 percent, attributablemainly to the hotel and restauranttax revenue of Kabupaten Badung. Within these overall average figures, growth rates for local governments'own revenueswere generally higher, at around 10 percent annually in East Java and 14 percent annually in Bali (again dominatedby the hotels and restaurantstax in Badung). Growth rates for the property tax (which changed radicallyduring the analysis periods) were much lower on average at around four percent annually in each province, primarily because of difficultiesin introducingnew procedures. Within these total figures there were substantialvariations from local government to local government,and improvementswere much higher in Jakarta and other large cities targeted for assistanceunder the USL. Future non- grant revenue forecastsprepared under the RIAP process project a somewhat higher overall average real growth than in the recent past in Bali, and a similar level to that of the past in East Java. Again, much of the Bali growth is expected to come from Badung. - 37 -

5.4 Borrowing. Local governments,apart from their older enterprises, have not on the whole made great use of borrowing in the financingof capital projects. Host have borrowed only for market constructionunder the central government'sheavily subsidizedINPRES Pasar program, which has been disbanded. Exceptions are Badung in Bali and Mojokerto in East Java, which have borrowed substantialsums in recent years. Only Badung, however, borrowed for urban infrastructure(under the Urban IV project, Loan 1972-IND). Until recently local governmentswere required to restrict the levels of their borrowingby referenceto the "debt service ratio" criterionbroadly defined as the ratio of total loan charges payable in a year to total revenues available for developmentin that year. However, the applicationof that criterionhas been unclear and open to varying interpretations. The maximum permitted ratio was prescribedat 15 percent, which, on the stricter interpretationsof how to define the ratio, was very conservative. Confusion about the former criterionmay have been a contributoryfactor in lo:al governmentspast reluctanceto borrow in any substantialway. GOI has now decided to replace it with one based on a more closely defined minimum *debt service coverage ratio" (DSCR). This has been stipulated for any given year as:

(projectednon-grant and local revenues for the year in question less projected routine account expenditureon staff, administration and operationaland everydaymaintenance needs) + (total estimated loan charge obligationsarising in that year from currently outstandingloans and future proposed borrowing).

The minimum value of the DSCR ratio has been set at 1.5 by GOI for borrowing by local governments. Estimatesof maximum borrowing capacity for each of the Bali Batch I local governmentshave been prepared by making forward projectionsof the elements in the above formula for the program period and for a number of years followinEsufficient to establish a clear trend indicatingthat the minimum ratio will be safely achieved. The total capacitiesare small, however, and some local governmentshave indicateda preference to finance their investmentdirectly. Most of the Batch I local governmentshave neverthelessmade commitmentsto borrow at least small amounts in consultationwith central and provincial officials. Given the low use of borrowing in the past, the newness of the debt service coverage ratio criterion, and the likelihoodthat regional governmentswill not be able to borrow in practice for developmentexpenditure in a number of importantnon- urban sectors, the local governmentsproposals can generally be regarded as satisfactory. Assurances and confirmationswere obtained at negotiationsthat local governmentseligible for borrowingunder this project will maintain minimum debt service coverage ratios of 1.5.

Key Issues

5.5 Local RevenueAdministration. Although annual growth in local revenueshas generallybeen steady, studiesundertaken during preparationof the Revenue ImprovementAction Programs (RIAPs)provide persuasiveevidence that current levels of major revenue sources are considerablybelow their real potentials. Deficienciesare often found in local government administration which lead to under assessment and under collectionof tax revenues. The project seeks to address these deficienciesby continuingto support on-going effortswhich were initiatedunder previous Bank loans and to expand the scope of the work as describedbelow. - 38 -

5.6 RIAP/LIDAPProcess. RIAPs and LIDAPs introducedduring the project preparationphase, and to be refined during project implementation,seek to identifypractical steps needed to achieve improvementsin the planning and administrationof local taxes and service charges. Such steps typically include collectionof data on the revenue bases includingproper identifica- tion of tax objects and tax subjects,analyses of revenue potentials,review of tariffs, and establishmentof annual revenue targets representinga progressivenarrowing of the gap between performanceand identified potentials. As specifiedunder the Program ImplementationAgreements, local governmentswill commit themselvesto implementingthe RIAPs with technical assistanceand necessary equipmentprovided under the project. In this connection,GOI is providing (with domestic funds) further support to the reform effort of the local governmentrevenue departments (DISPENDA). The MAPATDA reform program 12/ initiatedunder Urban V project, was first introducedand tested in six cities, then expanded to 100 other cities, and is now in the process of nationwide implementation. Summariesof typical RIAPs and LIDAPs are provided in Annexes 9 and 10.

5.7 Property Tax (PBB). Registration,valuation and assessmentduties for this central tax are performed by local offices of the DirectorateGeneral of Taxation of MOP. However,major parts of the collectionwork relating to rural PBB and part of urban PBB are performed by, or under the supervisionof, the-local governments. (The latter receive 64.8 percent of the gross proc 'is,irrespective of the collectingagency.) PBB administration currently suffers from the same kinds of failuresas local taxes:

(a) incompleteidentification/registration of the tax base;

(b) often severe under-assessmentsdue to incorrectclassifications of property, inaccuratedata on property characteristics,and unrealisticallylow valuationsin relation to market values;

(c) slow progresswith updating tax cadastres,while existing cadastral records are often many years out of date;

(d) deficienciesin collectionperformance by both local governmentand PBB Inspectorates(arrears can be high and records poor); and

(e) absence of good systems for estimatingreal potentialPBB yield, and thus for setting realisticallyambitious targets for the personnel involved in administration.

The PBB Directoratehas made a start at tackling these problems in the JABOTABEK region and in other large cities with assistanceunder the Urban Sector Loan. GOI has proposed to use its own resourcesto provide similar

121 The main highlightsof MAPATDA include a reorganizationof the local governmentrevenue department(DISPENDA) to reorient the focus on taxpayer information,an important stage of this ta.xadministration process (e.g., assessment,billing, collection)in contrast to the existing structurewhere the focus is on the tax type which does not put taxpayer records in one field. The new system will centralizepersonal records for each identifiedtaxpayer and provides a complete assessment of taxpayer'sliabilities from all kinds of taxes. - 39 -

assistance in East Java and Bali. Specifically,such a P8B improvement program would provide technicalexpertise and equipmentnecessary to achieve substantialimprovements in property registration,mapping, property assessment,tax billing, collectionand enforcement,and performance monitoring against targeted improvements,both fog the PBB Inspectoratesand for the relevant local governmentinstitutions.

5.8 FinancialManagement Practices. There are significantweaknesses in local and provincial governments'standardized practices for financialmanage- ment in the areas of strategicplanning and multi-yearprogramming, annual budgeting,bookkeeping and accounting and financialreporting. A Financial Management Improvementcomponent would begin a process of extending to all local and provincial governmentscovered in the proposed project tlh.enew per- sonal-computerbased systems of medium term financialplanning and programming,annual budgeting, expenditureand revenues accounting,and finan- cial reportingand monitoringwhich were initiatedon a pilot bases in three cities under the Urban V project. By the end of the project , it is expected that installationwill be complete in all Batch I local governmentsand at least partially complete in the others.

B. Water Enterprises

5.9 The provincesof East Java and Bali tnder this project have a com- bined total of 44 water enterprises (WEs), incL.uding27 PDAMs and 17 BPAMs (transitionalwater enterprises). The PDAMs ire owned and operated by their respectivelocal governments,while the BPAMs are operated on a temporary arrangementunder DGCK/MPW. There are eight enterprisesincluding five PDAMs in Bali, and 36 enterprisesincluding 22 PDAMs in East Java. All of the enterprisescould benefit from the proposed project, subject to their individualprograms being able to meet appraisalcriteria.

FinancialAppraisal Process

5.10 Of the 44 water enterprises,appraisal for 12 Batch I enterprises has been completed. A summary of the individualinvestment and financing plans is presented in Annex 11. Appraisal of the remainingenterprises is expected to continue as preparationwork proceeds for Batch II enterprisesand as work will begin upon loan effectivenessfor Batch III enterprises. The methodologyapplied for the financialappraisal is embodied in the Financial Analysis and Projectionmodel, widely known as the FINPRO model. FINPRO is a Lotus 1-2-3 integrated financialmodel capable of producing the standard outputs of financialprojections for an enterprise. The financialappraisal requires extensiveuse of this model by the appraisalteam as well as those involved in the preparationand analysis of financialprojections at the enterprise level. - 40 -

Performanceand Current Conditions

5.11 All PDAMs and BPAMs are required to prepare annual financialreports which are audited by BPKP. A summary showing the highlightsof operating results for the past four years is presented in Annex 11. Most of the water enterpriseshave provided their most recent audit reports,which were produced by BPKP. These reportshave been reviewed by the Bank and found to be satisfactory.

5.12 Wihileall of the PDAMs achieved annual operating surpluses,BPAMs were generally required to cover only their O&M expenses. Most recent reports for the BPAMs indicate an increasingtrend toward profitability. After allowing for depreciation,all PDAMs achieved annual before-taxoperating surpluses ranging from one to 35 percent in the period 1985/1987. Buleleng and Jember had operating surplusesin 1985, out incurred losses in the two succeedingyears before they returned to profitabilityin 1988. Banyuwangi, Jember and Badung are the oily water enterpriseswhich have notable experience with long term borrowing. They have been paying interest on previous loans and still managed to remain profitable. Overall, PDAMs in Batch I have remained profitableduring the period and five of them have consistentlymade income tax remittancesannually to the GOI. Most of the PDAMs achieved the national tariff structureobjectives of affordabilityto consumerswhile producing an adequate surplus to cover O&M costs includingdepreciation allowance and debt service. These objectivesare defined in the National Water Rate Structurepromulgated in 1984 under a joint ministerialdecree (KEPHINof MHA and MPW).

5.13 Water EnterprisesManagement. A review of selected East Java and Bali WEs indicatesthat key managerial and skilled/technicalpersonnel are lacking, particularlyin the areas of financialaccounting, billing and collection,inventory control, O&M and constructionmanagement. The prospects of making improvementthrough recruitmentappear to be bleak, as better job opportunitiesand employment incentiveselsewhere make it difficult if not impossiblein most cases for WEs to attract fully qualified individuals.

5.14 Under the East Java Water Supply I and II projects,a Provincial Monitoring and DevelopmentUnit (PMDU)was set up at the provinciallevel to provide technicaland managerial services to the PDAMs to help fill these gaps. The PMDU has experts under the Bank loans and Dutch bilateral aid. Its performancein assistingWEs has so far been impressive. Under the proposed project, technicalassistance will be extended to strengthenthe staffing of the existing PMDU in East Java and to complete the establishmentand staffing of the similar PMDU in Bali. It is expected that properly staffed and organizedPMDUs for the principalpurpose of providing technicaland managerial services to BPAMs and PDAMs will be strengthenedand maintained in East Java and Bali.

Financia.Prodections

5.15 The financialprojections for each of the 12 Batch I water enterpriseshave been prepared based on the basis of several assumptions,of which the key ones include: (a) existing and new water connections; (b) average consumptionper connection;(c) assumedwater tariff rates; (d) increasingsales of water resultingfrom new connectionsand reduced unaccounted-for-water(UFW); (e) decliningUFW, (f) rates of inflationfor - 41 -

local and foreign costs; and (g) a financingplan, investment levels and operatingparameters. The projection exercise involves income statements, sources and applicationsof funds, balance sheets, financingplans, and monitoring indicators. A summary of the assumptionsis provided in Annex 11 along with a concise version of the financialprojections and a summary of proposed investmentsand financingplan for Batch I enterprises. While all PDAMs are expected to borrow, the BPAMs are expected to receive the proceeds of the loan as turnkey grants-in-kindup to the point at which they graduate to PDAM status able to finance expansion through borrowing.

5.16 It is expected that PDAMs will borrow about $47.9 mnillionunder the proposed project, of which about $34.7 million would be financed under the Bank loan. Major borrowingwater enterpriseswill include PDAM Badung (Bali), and PDAM Surabaya (subjectto separate appraisal).

5.17 Assuranceswere obtained at negotiationswith regard to:

(a) all PDAMs will maintain an average debt-equityratio of 70130 and a minimum debt service coverage ratio (DSCR) of 1.3 on average for every three-yearperiod;

(b) to meet the above revenue objective,each participatinglocal government enterprisewill adjust its tariffs, startingwith April 1, 1992 and thereafteron January 1, 1994 and January 1, 1996, after reviewing the adequacy of its tariffs and furnishinga copy of this tariff review to the Bank;

Cc) all water enterprises (includingBPAMs) will maintain revenueswhich cover at least O&M costs during the first three years of project implementationand both O&M costs and depreciationon revalued assets after that;

(d) confirmationthat PDAMs will not be required to pay out any portion of their revenues to their local governmentduring the construction period. All income is, therefore,to be retained by PDAMs for their own financingneeds; and

(e) preparationof an action plan and schedule by April 1, 1992 for tariff adjustmentsand for conversionof BPAMs in the Project Provincesto become PDAMs.

C. Domestic Lending Arrangements

5.18 Under the project Central Government is expected to lend a total of approximatelyRp 105 billion ($55 million equivalent)131 to local governmentsand their water enterprisesunder Domestic Lending Agreements (DLA) between Central Government and the borrower. These loans will be prefinancedfrom domestic funds with reimbursementto GOI from the proceeds of the Bank loan.

13/ Excluding a loan of Rp 10 billion ($5.3 million equivalent)to PDAM Malang which was agreed before appraisal. - 42 -

5.19 The followingsummarizes the agreed method of calculatingthe domestic lending rates and related conditionst

(a) The 6-month average of the 3-month SertifikatBank Indonesia (SBI) rate at the time of appraisalwould be used as proxy for "market rate" in the calculation;hereafter called 'S5I Index".

(b) GOI would apply the agreed discount percentage to the SBI Index to produce an onlending interest rate, but the magnitude of the discount will be reduced over time to move the onlending rate toward market rates in progressivesteps.

(c) The interest rate for any proposed loan to local government or regional enterprisewould be fixed at time of appraisal and remain constant for the life of the loan.

(d) For the EJBUDP on.ending the followingschedules would be used for calculationof onlending interest rates for each 'batch' of local governmentsand enterprisest

Group Appraisal Date Formula

Batch I Periods Prior to April 1, 1990 s 60S of SBI Index - 92 (0.6 x 14.8Z SBI Index for March 1990)

Batch II Period: April 1, 1990 - about March 31, 1992 s 701 of SBI Index

Batch III Period: about April 1, 1992 - about March 31, 1994 s 751 of SBI Index

(e) The minimum of "floor'rate of interest for any lending to local governmentor enterprise,regardless of index/formulareduction, shall be not less than the Bank rate plus 1.75 percent for Batches II and III.

(f) The maximum interest rates of 10.5 percent and 11.5 percent will apply to onlending for Batch II and III respectively,and subproject feasibilitystudies shall be prepared utilizing these maximum values for each Batch.

5.20 The repaymentand grace periods for the DLA loans will be geared to the economic lves of the investments (5-20 years) to be financed,with a maximum grace period of five years.

5.21 Standard procedureshave been developed,with assistanceunder the Urban Sector Loan (2816-ID)and from other donors, for loan applicationsand approvals,mechanisms for disbursementto the borrowers,and central debt management arrangements. All loan proposalswill be the subject of provincial governmentappraisal and central government review from the viewpoint of financialand economic viability of the proposed investments,and of the financialcapacity of the borrowers based on the minimum debt service coverage ratio criteria (paragraphs5.3 and 5.17). Handbooks, applicationforms and educationalmaterial will be provided to all local governmentsand water - 43 -

enterprisesto assure full awarenessof the availabilityof the lending facility and of its terms and conditions. Annex 4-H gives more detail of the mechanics of the proposed DLA lending arrangement.

5.22 The domestic lending arrangements(DLA) mechanism is expected to play a critical role in: (a) facilitatingadministration of subsidiary loans for up to 44 local governmentsand 45 water enterprisesunder the project; (b) streamliningaccess to credit for local governmentsand their enterprises; (c) strengtheningthe financialand economic viability of investmentprojects; (d) enc iraging local governmentsand enterprisesto establish service charges on an increasinglycost-recoverable basis (thereby enablingmore targetingof grant resourceson the most needy regions);and (e) assisting local governmentsand water enterprisesto establishcredit histories that would give them confidence in borrowing and to give commercialcreditors a basis for lending to them on market terms in the future.

VI. PROJECT JUSTIFICATIONAND RISKS

A. Economic Justification

6.1 Since the project covers seven sectors of urban infrastructure services (water supply, drainage,human waste management, solid waste management,road improvement,kampung improvement,marketplace infrastructure improvement)and a large number of urban areas, it was necessary to develop a structuredapprcoch to economic analysis.Subprojects are classifiedaccording to investmentcosts, i.e. small (less than Rp 400 million in constant 1989 prices), medium (Rp 400 million to Rp 4 billion) and large (over Rp 4 bil- lion). A subproject is defined as a logical unit of investmentin one of the subsectorswhich must be implementedas one activity to obtain the planned benefits.Economic viability of small subprojects,provided that these adhere to agreed planning and design criteria,is presumed.Medium size subprojects are subject to a simplifiedeconomic analysis,which, with the exceptionof the Batch I subprojectswill not be reviewed by the Bank. Large subprojects have to go through a more detailed analysis and the applied assumptionsand methodology is subject to a Bank review on a case by case basis.

6.2 Economic rate of return (ERR) or net present value (NPV) calculationsare required for medium and large subprojectsin the water supply, road and drainage sectors. Quantificationof economic benefits is based on (a) consumers'willingness to pay for water supply (the methodology is described in Annex 4E); (b) expected savings in vehi,.ieoperation costs and time savings for road improvements;and (c) either avoided flood damage or increase in land values plus reductionin the expected level of road maintenancecosts for drainage improvements.An ERR of 10 percent is used as the cut-off rate.

6.3 Economic benefit of human and solid waste managementand kampung improvementsubprojects is not quantified.Both the human and solid waste management subprojectsrepresent least cost solutionsto the problem of providing a basic level of service that is adapted to local needs and traditions.Economic viability of similarkampung improvementwas demonstrated under a series of Wirld Bank assisted projects in Indonesia,including Loans 1972-IND in Bali and 2408-IND in East-Java. - 44 -

6.4 During preparation,all identifiedBatch I subprojectswere analyzed according to these criteria.Several water supply subprojectsproved to be non-economicand were substantiallymodified or eliminatedfrom the project. IRRs or NPVs of identifiedroad and drainage improvementswere calculated in each kabupaten and, within the constraintsset by fund availabilityand local governmentimplementation capacity, the most attractiveones were proposed for implementation. A large majority of the subprojectsfell into the 10 to 15 percent ERR range. Due to extremelyhigh traffic densities,several road improvementshad an estimatedERR of 25 percent or more.

6.5 As it is described in more detail in Annex 4C, arrangementswere made to ensure that the same criteria and appraisalprocess will be applied for Batch II and III subprojects. During supervision,Bank staff will monitor the appraisal process closely in order to maintain project quality.

B. Cost Recovery

6.6 Cost recovery is a complex issue in Indonesiawith significant technical,economic, social and policy implications. It is not a primary focus of the proposed project. Nevertheless,four of the seven subsectors covered by the project offer potential for at least partial cost recovery through charges to service users. These potentialshave been considered carefully in process of preparing revenue improvementaction plans (RIAPs) and financingplans for the Batch I local governmentsand water enterprises. Evidence that they have been similarlyconsidered will be among the criteria for review and appraisal of RIAPs and financingplans for Batches II and II. Moreover, evidence that agreed tariff increasesas set out in RIAPs and elsewherewould be reviewedduring the appraisalof subprojects,as followss

(a) Water Supply. Based on preliminaryassessment of a representative selectionof investmentproposals, full cost recovery is expected in most cases following improvementsto existing supply and distributionnetworks. It is recognizedthat cost recoverymay not always be practicablefor new small-scalesystems (IKK). Even though such systems may be well-justifiedin terms of economic benefits, they are subject to thorough analysis of cost recovery prospects in each case. Informationmust be provided for this purpose on the true unit supply costs and comparisonsmust be made with existing and proposed feasible tariff levels to allow for a fully informed discussionof options and prospects. The feasibility of achieving cost recovery in a water enterpriseas a whole through cross-subsidybetween user groups and between existing and new systems must also be examined,with due appreciationof the difficultiesand possible distortionsoften experiencedin such programs. Another major issue is posed by the deterrent effect for potentialnew customers of present high connection charges. These are typically in the region of Rp 150,000 for the official charges, substantiallyhigher than the marginal cost of making a connection to the street main. Supplementaryunofficial levies may increase the final cost to the consumer to a still higher level. Options for promotinghigher numbers of connectionsinclude: (a) charging only the actual marginal connectioncost; (b) deferred payment of connection fee; (c) building connectioncosts into tariffs with only a nominal connectionfee; (d) laying service pipes to plot voundariesat the same of initial constructionof reticulation;and - 45 -

(e) introductionof by-laws requiringconnection of properties locatedwithin a given distance from a water main, or the levy of a charge in lieu of connection.

(b) Human Waste Disposal. Analysis indicatesthat septic tank emptying services can be capable of recoveringcosts in full through an appropriatelevel of service charge, though the net public benefits of effectivehuman waste disposal are such that it is not in general reasonableto insist upon full private cost recovery. Local governmentsshould in any case consider the option of contracting out this service to private operators. Soiad Waste Disposal. Analyses suggest that in relation to the household sector, only partial cost recoverymay be feasible for this service at acceptable tariff levels. However, local governmentsshould be provided with informationon the true unit collectionand disposal costs, includingnational or actual capital charges, as an aid to informed decisionmaking. Analysis of feasible tariff structuresshould be aimed at maximizing the degree of cost recovery,including the prospectsof full recovery form larger industrialand commercial users and regional markets, and a progressivetariff for domestic households,perhaps based on the property value classificationused for the PBB property tax. Market infrastructureImprovement. The feasibilityof recoupingthe costs of this investmentthrough in_reases in market rental charges should be examined in all cases.

C. Poverty Impact

6.7 According to the IndonesiaPoverty Assessment and StrategyReport (ReportNo. 8034-IND),8.8 percent of the urban population in East Java and 12.3 percent in Bali lived in poverty in 1987. Drainage,kampung improvement (KIP) and public water tap constructionunder the proposed project would be especiallybeneficial for this population. Experiencehas shown that it is mainly the urban poor who are affected by frequent flooding,because they must settle in the most marginal, low-lyingareas or along drains and river banks that often overflow. Experience has also shown that the poor generally suffer in terms of overcrowdingand lack of convenientaccess to water, sanitation and other key services. These serviceswould be provided under the proposed project as freestandingdrainage subprojectsand as part of the nation-wide KIP program for upgrading informal,unplanned and unservicedurban settle- ments, particularlywith low-incomeresidents. Public taps provided tnder KIP would provide safe water that is readily accessible to poor familles lacking house connectionsand living in water-stressedareas. Easily accessible,low- cost drinkingwater can substantiallyimprove the life of these people. However, the physical investmentitself does not guarantee results. Institu- tional arrangementsfor the operationof the taps are an equally important aspect of project implementation. Local community groups have participatedin planning of the water supply system and house connection/standpipearrange- ments in East Java and Bali as part of the IUIDP formulationprocess. Continuationof this participationis a prerequisiteto establish a viable, low-cost system of managing and maintainingthe public taps.

D. EnvironmentalImpact

6.8 Screening of Batch I investmentprograms indicatedthat two-thirds of the 117 identifiedsubprojects were expected to have little or no adverse - 46 -

impact. Environmentalassessments of the remaining subprojectsare underway, and environmentalmanagement plans will be approved and incorporatedinto design and implementationof these subprojects(para. 4.32). Benefits of the proposed technicalassistance to the Regional EnvironmentCommissions (Komisi Daerah) and BAPPEDAs of East Java and Bali includes (a) timely completionof required environmentalassessments; and (b) incorporationof environmental assessmentand management mechanisms into preparationand appraisalof future investmentprograms by intermediaryorganizations, whether Bank-financedor not.

E. Local Participation

6.9 The proposed project expands emphasis of past projects on strengtheninglocal participationin the project cycle. Beneficiary householdsand communitiescontinue to be involved in the identification, preparationand implementationof neighborhoodand market improvementprograms (KIP and MIIP). Similar local involvementcontinues for solid waste management and sanitationprograms, which also emphasizehousehold financing and the use of NGOs. Water supply, drainage and road investmentprograms emphasize increas'ngparticipation of communitygroups in program and subprojectplanning. Local government responsibilityfor O&E is also stressed. More generally, the overall IUIDP process responsiblefor preparationand implementationof the proposed project is designed to upgrade local participatien: (a) to start planning and decision process at a level low enough in governmentso that beneficiariescan participatedirectly; (b) to start early enough in the budget process so that adequate attentioncan be provided to subprojectdesign in meeting beneficiaryneeds; (c) to place increasedemphasis on local responsibilityfor O&M, and (d) to take advantage of local human resou:ee and institutionalcapacities through the entire project cycle.

F. Benefits and Risks

6.10 The most importantexpected benefits and risks of the project are inherentwith GOI's gradual .ovementtoward regional autonomy. The chief benefitswould flow from more efficient use of resourcesallocated to the sector through better programmingof urban infrastructureand services by increasinglycapable and responsiblelocal governments. The chief risk is that the pace of required institutionaldevelopment--for decentralized systems of management,finance, manpower development--isdifficult to predict and may not be adequate for full and timely achievementof all project objectives. The quality of subprojectpreparation and implementationmay even decline in the short run as local gorernmentslearn how to play their new roles, though this risk would appear to be minimal in East Java and Bali given their relative sophistication. Moreover, total expenditureprograms for the next five years will not be substantiallygreater in real terms than those actually deliveredduring the last five years, and there will be few if any new or complex kinds of subprojects. Finally, the UNDP/UNCHS-executedIUIDP ImplementationSupport Project and funds provided under the Japanese grant would provide substantialassistance to GOI and the Bank in carrying out effectiveproject supervision. - 47 -

VII. AGRMENTS REACHED AND RECOMMENDATION

7.1 During negotiations,assurances and confirmationswere obtained from GOI on the followingprincipal points:

(a) timely provisionof counterpartfunds and new channeling arrangementsfor some INPRES grants to local governments(para. 3.9);

(b) each local governmentshall establisha Project Finance Office (PFO) and install the standardproject financialaccounting and monitoring system within three months of the initial disbursementof project funds for that local government (para. 4.4);

(c) establishmentand maintenanceof adequate appraisalcapacities at all levels (para.,4.5);

(d) the Bank will review all new programs and sub-projectsas they are prepared and changes of local governmentexpenditure programs of more than 20 percent or revisionof subprojectscosting more than $2.1 (Rp 4 billion) million equivalent,as noted in the PIAs and supervisionplan (paras.4.5 and 4.27);

(e) project implementationresponsibilities of participatingagencies (para. 4.10);

(f) establishmentand maintenanceof arrangementsfor: (i) the implementationschedule and procurementarrangements; (ii) accounts and audits; (iii) reportingand monitoring; (iv) operations and maintenance;and (v) environmentalimpact assessmentand management (paras.4.25, 4.26, 4.29 and 4.32);

(g) eligibilityof local governmentsfor borrowing (para. 5.4);

(h) PDAM debt equity, debt servicecoverage, tariff and income retention,and conversionof BPAMs to PDAMs (para 5.17); and

(i) GOI has defined reviseddomestic lending arrangementswhich include an indexed formula for gradually reducingthe discount/subsidy componentof interest rates charged to local governmentsand enterprises(para. 5.19).

7.2 The followingwill be conditionsof disbursementfor each local governments

(a) signatureof a local PIA acceptabletc the Bank (para. 4.9 and Annex 4) for disbursementof central governmentcontributions; and

(b) signatureof loan agreementsacceptable to the Bank for reimbursementof DLA expenditures(para. 5.19); - 48 -

Recommendation

7.3 Subject to the above agreementsand conditions,the proposed project is suitable for a Bank Loan of $180.3 million to the Republic of Indonesiafor 20 years, includingfive years grace at the Bank's standard variable interest rate. - 49 -

n A- MU - -

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h d4 IA eJ _ 55 ANNEX 3 Page 1

INDONESIA

EAST JAVA - BALI URBANDEVELOPMENT PROJECT

SUMMARYOF TECHNICALASSISTANCE

The following summarizesagreed technicalrequirements to support the executionof the EJBUDP expenditureprograms and related strengtheningof institutionalcapacities. The project includes three kinds of technical assistances (a) engineeringdesign and supervision;(b) program implementation,including (i) program and subprojectpreparation and (ii) program management;an# (c) institutionaldevelopment, including (i) municipalmanagement improvementand (ii) sector development. All proposed contract are summarizedbriefly below. Full terms of reference (TOR), shortliste and procurementschedules would be confirmedwith GOI at negotiation.

A. EngineeringDesign and Supervision

1. EngineeringDesign and SupervisionServices

ExecutingAgency

Ministry of Public Works with respectiveprovincial DPUPs.

Objectives

To supplementand accelerate the in-houseengineering design process of local and provincial public works staff in both provinces. An identified pool of qualified local and (for water supply) foreignengineering consultantswill be retained to provide sub-projectengineering services on a task-orderbasis, to supplementDPU capabilities. It is anticipated that all water supply sub-projectsand approximatelyone-half of other sub-projectswill be designed by the pool of consultants. This procedure should (a) improve design quality, (b) allow for improved supervisionby DPUP staff using normal DIPDA overheads,and (c) acceleratedesign of complex subprojectsto allow an appropriatereview cycle (unlikecurrent INPRES and DIPIDIPDA scheduleswhich require full preparationwithin the fiscal year of implementation).

Duration of Services

April 1990 - March 1994. ANNEX 3 - 56 - Page 2

Costss (includes$0.4 millionof PPF) Months $ Million Internationalconsultants (water supply) 200 3.00 Nationalconsultants 2,280 9.12 Total 12.12

2. ProvincialDinas PU Engineerinaand SupervisionAdvisors ExecutingAgency Ministryof PublicWorks with respectiveprovincial DPUPs

Objectives I To assisteach provincialDPUP to developnecessary procedures and staff skillsfor assistanceto local governmentsin reviewof subproject engineeringaesign and appropriatesupervision programs for all sub- projectsin annualexpenditure programs. Theseforeign advisors would assistduring the early yearsof implementationto establishandlor strengthenDPUP managementand technicalcapacities, personnel requirementsand trainingneeds to assureeffective technical support by DPUP to localgovernments, as well as capacityto executethe provincial subprojectsand O&M responsibilitiesof the program. Durationof Services

January1991 - March 1995 Costs: months $ Million Internationalconsultants 60 0.90 Nationalconsultants 60 0.25 Computer,equipment, etc. 0.10 Total 1.25 B. ProgramManagement 3. ProiectPteparation Facility ExecutingAgency Ministryof PublicWorks (DGCK) Obiectives Completepreparation of Batch I localgovernment programs and EJBUDP documentationin detailsufficient for appraisal. ANNEX 3 Page 3

Duration of Services

August 1989 - April 1990 (alreadycompleted)

Costs (in addition to TA package 1 above, $1.1 Million design services)

4. Batch II/III Program Preparationand Related Start-up Support

ExecutingAgency

Ministry of Public Works (DGCK) and provincialBAPPEDAs

Objectives

To complete revisionsto Batch I programs agreed during appraisaland to extend preparationeffort to Batch II local governments (13 in East Java and the remaining4 in Bali) to be ready for implementationduring GOI FY 1991/92 and a Batch III local governments (13 in East Java) for implementationbeginning in FY 1992/93 to complete coverage of all local governmentsin both provinces.

Duration of Services

April 1990 - April 1992

Costs: Months $ Million

Internationalconsultants 96 1.4 National consultants 564 2.3 Equipment, training,etc. 0.2

Total 3.9

5. ANDAL PreparationAssistance

ExecutingAaency

Ministry of Public Works (DGCK and BALITBANG)

Obiectives

To provide necessary financing for detailed environmentalassessments (ANDAL studies) of the impact of selected sub-projectsidentifi.-d during preliminaryscreening as having potentiallysignificant environmental effects. National consultantswould be employed to conduct ANDAL studies for all but the most complex subprojects.

Duration of Services

June 1990 - December 1991 ANNEX3 -58 - Page 4

Costs: Months S Million

Internationalconsultants 32 0.5 National consultants 150 0.6

Total 1.1

6. Appraisal Support to ProvincialBAPPEDA

ExecutingAgency

Ministry of Public Works (DGCK) and provincialBAPPEDAs

Objectives I

To continue provision of advisory support to both provincialappraisal teams based at the respectiveBAPPEDA I offices through completionof the project focus would be on preparationand appraisalof Batch II and III local expenditureprograms and related subprojectinvestment proposals, and on new subprojectsproposed during the annual budget process. Advisors would continue to refine appraisalcriteria and process documentation,including coordination with the environmentalassessment process (AMDAL),as noted in TA package 5. Training of BAPPEDA counterpartstaff and disseminationof appraisalcriteria and methods to local governmentswill also be key features of the effort.

Duration of Services

April 1990 - April 1992

Costs: Months $ Million

Internationalconsultants 32 0.5 National consultants 125 0.5 Computers,workshops, etc. ^ 0.2

Total 1.2

7. RIAP and LIDAP ImplementationSupport

ExecutingAgency

Ministry of Home Affairs (PUOD and BANGDA) with provinces.

Objectives

To support central and provincialteams in assisting,supporting and monitoring local governmentimplementation of Revenue ImprovementAction Plans (RIAPs)and Local InstitutionalDevelopment Action Plans (LIDAPs) prepared for each local governmentunder the IUIDP process. The central ANNEX 3 _ 59_ Page S

team would focus on needed regulatoryand administrativerevisions to facilitatelocal actions, while provincialteams work directly with active local governmentsand prepare monitoringreports on progress and results to date.

Duration of Services

January 1991 - December 1994

Costs: Months $ Million

Internationalconsultants (3 x 12 mo.) 36 0.5 National consultant (3 x 48 mo.) 144 0.6

Total 1.1

8. Advisors to ProvincialManagement and DevelopmentUnits (PMDUs for Water Supply Enterprises)

ExecutingAgency

Ministry of Public Works with MHA(PUOD) oblectives

To provide long-termadvisory support for continueddevelopment and strengtheningof the PMDUs in each province to assist and guide local water enterprises (PDAMs)to improve operations,maintenance and managementof water supply systems,with special emphasis on assisting the conversion of interim enterprises(DGCK-owned BPAMs) to fully operationalPDAM units of local government. PMDU advisorswould also assist in monitoring O&M and investmentsubprojects of all water enterprisessupported under the project.

Duration of Services

January 1991 - December 1994

Costs: Months $ Million

Internationalconsultants 36 0.5 National consultants 125 0.5

Total 1.0 ANNEX 3 -60- Page 6

9. Support to Provincialand Locai ManaaementOffices (PMOs)

Executing Aaency

Ministry of Public Works (DGCK) and BAPPENAS with provincial BAPPEDAs

Objectives

To provide necessary local and foreign advisory support for the operation of provincial PPMOs to assist overall managermentand coordinationof the IUIDP process for all local governments,including the preparationand updating of multi-year expenditureprograms, RIAP and LIDAP documents, and annual budgets for implementation,as well as EJBUDP operational management includingprogress reporting,physical and financial monitoring,accounting and auditing arrangements,and related administrativesupervision arrangements.

Duration of Services

January1991 - December 1993

Costs: Months $ Million

Internationalconsultants (2 x 36 %uo.) 72 1.0 National consultants 192 0.8 Computers,equipment, etc. 0.1

Total 1.9

10. Support to Central Program Management Office

ExecutingAgency

Ministry of Public Works (DGCK)

Objectives

To continue support for the DGCK operated CPMO establishedunder previous Bank and ADB assistance to serve as the central point for urban project performancemonitoring and reporting. CPMO would continue to have responsibilityfor coordinationof DGCK implementationsupport to regionally-basedprograms includingthe EJBUDP. Local consultants financed by this TA would join others from parallel operations to perform the CPMO functionsnationwide.

Duration of Services

January 1991 - March 1994 ANNEX3 - 61 - Page 7

Costs: Months $ Million

Internationalconsultants 12 0.2 National consultants 80 0.3

Total 0.5

11. Program Accounting

ExecutingAgency

Ministry of Public Works (DGCK)with MHA (PUOD)

Obiectives

To design, installand train local governmentstaff to operate a computerizedmemorandum accounts system covering all expenditureprogram entries for each local governmentin the EJBUDP. Work has been initiated for system design and installationin Batch I local governments. System includes creation of provincialand central program summary accounts for budgetingand monitoringpurposes, and the staffing of Central, Provincialand Local Program Finance Offices (CPFO, PPFOs and PFOs) to oversee financialreporting and auditing arrangementsfor the program. (Necessarycomputers to be purchased and installedalso).

Duration of Services

April 1990 - March 1995

Costs$ Months $ Million

National consultants 400 1.6

12. Operationsand Maintenance (O&M) ManagementSystem Implementation

ExecutingAgency

Ministry of Home Affairs (PUOD)

Obiectives

To installa simplifiedversion of the Performance-basedOperations and MaintenanceManagement System (POMS), developedunder previous Bank assistance,in all 13 Batch I local governments. Staff of targeted Batch I local governmentsand provincialDPUPs would be trained to apply the management,programming and budgeting techniquesof the POMMS approach to eventuallyupgrade O&H activitiesin all local governmentsin both provinces,in accordancewith IUIDP guidelinesand expenditureprogram targets. Emphasiswill be on developmentof local capacity to prepare ANNEX 3 - 62 - Page 8

and execute annual O&M programs consistentwith HRA KEPMIN 5 of 1990 and associatedguidelines.

Duration of Services

January 1991 - DecembeL 1992

Costss Months $ Million

Internationalconsultants 24 0.4 National consultant 250 1.0 Computers, equipment,etc. - 0.2

Total 1.6

C. InstitutionalDevelopment

13. Local GovernmentFinancial Accounting and Management Reform

ExecutingAgency

Ministry of Home Affairs (PUOD)

Obiectives

To establishin the Directoratefor Regional Finance in Directorate- General PUOD a full-timeregional government financialmanagement improvementtechnical unit comprisingdesignated MHA personnel supportedby specialistconsultants. The unit's tasks would be to review, improve and coordinate the design of existing regional governmentfinancial management improvementinitiatives in the fields of computerizedfinancial accounting, revenues administration (MAPATDA),operations and maintenanceadministration (POMM5), annual budgetingsystems and procedures,and medium-termfinancial planning and programming;to develop GOI proprietarysoftware as necessary: to superviseand coordinatethe introdcutionand/or replicationof the initiativesin selected regional governments;to monitor implementationprogress and identify,effect and promulgate necessary improvementsto systems and software. Other IBRD projects would be expected to participatein continuanceof funding for the unit, once established. Batch I local governmentsin EJBUDP would be given first priority for the introdcutionof the improved systems when developed to a satisfactorylevel.

Duration of Services

July 1991 - December 1993 -63 - ANNEXPage 93

Costss Months $ Million

Internationalconsultants (short term inputs)12 0.20 Nationalconsultants (full time) 100 0.40 Computers,equipment, etc. 0.20

Total 0.80

14. AMDAL InstitutionalDevelopment

ExecutingAgency Ministryof PublicWorks (DGCKand BALITBANG) Obiectives To supportinstitutional development of the provincialenvironmental comissions (komisidaerah) and otherkey participantsin the environmentalassessment and managementprocess. Initialfocus would be on a criticalregion of East Java: the inventoryof existingenvironmental data, designof an environmentaldatabase and monitoringsystem, and trainingof concernedofficials in environmentalmanagement and assessment. Durationof Services

January 1991 - December 1993 Costs: Months $ Million Internationalconsultants 12 0.2 Nationalconsultants 24 0.1 Total 0.3 15. IUIDP Training ExecutingAgency Ministryof PublicWorks (DGCK)with ProvincialTraining Agencies (DIKLAT)and ProvincialProgram Management Office Oblective To prepareand carryout a structuredseries of workshopsfor local, provincialand a limitednumber of central001 staff responsiblefor implementationof the EJIUDB. Emphasiswould be on practit.l methods for preparation, and management and monitoring of IlUIDP expenditure programs, financing plans, revenue improvement program ANNEX 3 - 64 - Page 10

and institutionaldevelopment programs. Particularattention would be given to Batch II and III local governmentsand to transfer of training roles to cabable and interestedpermanent training institutionspromptly upon their identification. It is tentatively agreed that facilitiesof the Provincialtraining Agency (DIKLAT Propinsi)will provide physical facilitiesfor the training. Duration of Services

January 1991 - December 1993 CostsJ Months $ Million

Internationalconsultants , 13 0.2 National consultants 130 0.5

Total 0.7

16. IUIDP ImplementationSupgort Proiect

ExecutingAgency

United Nations Center for Housing and Settlement/UNDP(BAPPENAS) Obiectives

To provide $2.0 million in parallel co-financingsupport for the $8.2 million UN¢HSIUNDPexecuted project which is already effective and would provide a broad range of support services in the implementationof the EJBUDP and other IUIDP - based projects.

Duration of Services

April 1990 - March1993 Costs$ Months $ Million

Cost-sharingcontribution 2.0

17. Preparationof Future Projects

Duration of Services

Undecided ANNEX 3 - 65 - Page 11

Costs: Months $ Million

Consultantservices - 1.5

GRAtiDTOTAL

Identifiedinternational 637 9.5 Identifiednational 4,624 18.57 Identifiedworkshops, etc. 1.0 Unidentified 4.6 Total 33.67 aS ^VA - SM 6 1!UW N T

FY 90/91 FY 91/92 FY 92/93 F! 93/94 FY 94/95 FY 95/96 Q4arters 2 a 4 1 2 4 84 1 2 a4 1 2 a 4

Batch 1: ProgramFina- lization Including First Year Project. Batch 11 a III: Program Proepaation Water Supply: Project Preparation EquipmentProcurement Civil WorksConstruct. - - t Other Infrastructure: E- - Project Preparation _ _ EquipmentProcureomet Civil WorksConstruct.

Operations A Mainteance -Current

Operations & Maintenance

T ohicalAssistae For _ _ _ 1 1 1 11 - nti~tutonal -T i eve"lopment - -L - Prga Proearation (Batch II A III) - Prga and Project Aprisal Advisors n~ - RIAP& LIDAPlRple.

- FutureProject Prop. - ANMEX 4B - 67 - Page 1

INDONESIA

EAST JAVA - BALI URBANDEVELOPNENT PROJECT

Summary of Key Atency ResponsibilitiesBy Project Component

Responsibilitiesfor implementationof specific componentsand subcomponentsof the proposed project would be assigned to different agencies and levels of governmentaccording to current GOI policies and practices.

(a) Under ComponentA of the proposed project (InfrastructureDevelop- ment and O&M):

(1) DGCK and DGBM with support of the Central Program Management and Finance Offices (CPMO and CPFO) would be responsiblefor technical supervision of all infrastructureand O&M, and they would implementall such infrastructureand O&E under national responsibility;

(2) Provincial BAPPEDAs with support of the ProvincialProgram Management and Finance Offices (PPMOs and PPFOs) would be responsiblefor program and subprojectappraisal and monitoring;

(3) ProvincialDPUPs would implementall infrastructureand O&M under provincial responsibility;and

(4) Local government BAPPEDAs supportedby higher levels of governmentand by Program Management and Finsnce Offices (PMOs and PFOs) would be responsiblefor coordinationof field-level planning and implementaiton;

(5) Local DPUKs and PDAMs would implementall infrastructureunder local government responsibility.

(b) Under Component B of the proposed project (ProgramManagement)s

(1) MPW, DGCK and DGBM with the concerned provincial agencies, as appropriate,would implementsubcomponents concerned with: (i) further program and subprojectpreparation and (ii) management of program implementation;and

(2) NRA would implementsubcomponents supporting (i) implementation of revenue and institutionaldevelopment action programs; and (ii) O&M management system reform.

(c) Under Component C of the proposed project (InstitutionalDevelop- ment): ANNEX 4B 68 - Page 2

(1) MHA would implement subcomponentsconcerned with revenue administration and financial accounting and management programs and environmental institutional development;

(2) BAPPENASwould implement the UNDP/UNCHSIUIDP Implementation Support Project (INS/88/021);Development;

(3) DOCK would implementpreparation of future projects under sub- component;and

(4) MHA and DGCK would implementtraining in IUIDP processes. * * *

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INDONESIA

EAST JAVA - BALI URBAN DEVELOPMENTPROJECT

Program and SubprojectPreparation and Appraisal Process

The East Java-BaliExpenditure Programs: The expenditureprograms for East Java and Bali for the five year period (90/91 - 94/95) were prepared separately,starting with expenditureprograms prepared for individualBatch I local governments. The two programswere combined and componentsfor program implementatioinstitutional development were added to develop, implementand sustain the overall provinc$alprograms.

ProvincialPrograms: The two provincialprograms cover 44 local governments (Kabupatensand Kotamadyas),with 36 in East Java and 8 in Bali. The East Java local governmentswere divided into three batchest Batch I (9 kabupatens),Batch II (13 kabupatens/kotamadyas)and Batch II (13 Pebupatens/kotamadyas.The Bali local governmentswere divided into two batches containing4 kabupatenseach. The provincialexpenditure programs were based on the study of 9 Batch I East Java kabupatensand 4 Bali Batch I kabupatens. To develop the provincialexpenditure programs, grossing up was done based on Batch I kabupatensfor each province and other factors such as population,per capita urban developmentgrants and expenditures. In the case of Bali, only 3 Kabupatens (excludingBadung) were used for the grossing up exercise,as the size of the Badung program would have distorted the projection. Subprojectswere prepared to preliminaryengineering level, specificallyfor subprojectsvalued over Rp 400 million.

SubsectorCoverages Seven infrastructuresubsectors were included, namely, water supply, drainage, solid waste services, sanitation,urban roads, kampung improvementand market infrastructureimprovement, in accordancewith Cipta Karya guidelines. The programs also include operationsand maintenance (O&H) expendituresdesignated as (a) the existing level of O&M, (b) incrementalO&M required to provide a reasonablelevel of O&M for existing, rehabilitatedand new infrastructure. Subprojectselection and design criteria conform to national IUIDP guidelinesand technicalmemoranda developedduring project preparation. The subsectorcoverage includes all infrastructureirrespective of responsibilityby central, provincialor local governments. Responsibilitieswere formally assigned in 1988 by a GOI directive,PP 14 (1988). Central and provincialsubprojects were required to conform to the IUlDP guidelines.

LIDAPs and RIAPs. Costs for implementinginstitutional and financialimprovements such as addition of new staff (financedunder SDO) are also included for each local government.

Local GovernmentExpenditures Programs. For each of the Batch I local governments,an expenditureprogram has been prepared covering all of the above items. In preparationof the program the followingfactors were AMNEX 4C 71 Page 2

taken into accounts (a) per capita urban expenditure,(b) infrastructure deficienciesespecially rehabilitation and priority infrastructureneeds, (c) demand assessmentsand willingnessto pay, and (d) special needs as in waters stress areas. Overheads for managementof the program has been allowed at 2 percent for all infrastructure(except for water supply), and 7 percent for design and supervisionpart of which will be contractedout. For water supply, overheadsof 14 percent has been allowed in addition to 11 percent for detailed design and supervision,all of which would be done through contract. Price escalationhas been allowed as follows: local 7.0 percent for 1990/91, 6.0 percent for 1991/92 and thereafter,Foreign 5.4 percent for 1990/91 and 4.3 percent for 1991/92 and thereafter. Total program costs in current prices with yearly funds requirementswere developed. Foreign and local splits of expenditureitems were estimated,as were taxes and duties. Financingplans were also developed using known funding channels for each subsector. The borrowingcapacity of each local governmentwas establishedand estimatesof borrowing for water supply (for PDAMs), solid waste services and sanitation were agreed with the local governments.

Appraisal/Approvalat Local GovernmentLevel. The initial appraisallendorsementfor Batch I local governmentsexpenditure program was done by the mayors (Bupatior Walikota),based on proposalsprepared by the program preparationconsultants. The broad parametersused on this initial appraisallapprovalwere: (a) rehabilitationand new infrastructureneeds, (b) correlationof proposed expenditureprogram to past years' programs, (c) anticipatedgrant/equity levels from central and provincialgovernments, (d) implementationcapacity of local government, (e) own source revenues available, (f) extent of borrowing desired, and (g) availabilityof O&M funds as projected in the expendituresprogram. Preliminaryreviews of subprojects relating to water supply, solid waste and sanitationwere done to evaluate their financialand/or economic viability. Based on the above appraisal process, some local governmentshave resolved to provide levels of service less than those prescribedin national guidelines,reduce water supply and solid waste expendituresand displayedcaution in borrowingdespite their evident capacities.

ProvincialLevel Appraisal. Provincialappraisal teams were establishedin both provincesby virtue of the Governor'sinstruction (SK Gubernur). The participatingagencies include the provincialBAPPENDA, KANWIL PU, Dinas PU and IUIDP technical terms. In order to develop the appraisal capacity,a number of steps were taken. Two appraisaladvisors were appointed,one a municipal engineer and the other a financialanalyst. They have been shared between East Java and Bali. To assist in the appraisal process, appraisal formatswere developed in the form of checklists. Three formats were developeds (a) checklist for appraisal of local government expendituresprograms, (b) checklist for appraisalof subprojects,and (c) checklist for appraisalof the provincialexpenditures program. The latter would be used by the central government. The appraisalchecklists are comprehensiveand provide all the necessary informationfor the appraisalteam to carry out its task, although these checklistscontinue to be revised (for such factors as environmentalimpact). The supportingdata sheets have been completed by staff of the local governmentsand water enterprises. Prior to the formal appraisal,a number of trial appraisalswere carried out of subprojectsalready under implementationor previouslyprepared for the ANNEX 4C - 72 - Page 3 provinces by central directorates. Satisfactoryprogress has been made in developing the appraisal capacity in the provinces,assisted by the appraisal advisors.

World Bank Appraisal. It has been agreed that.the Bank would appraise all subprojectsvalued over Rp 4 billion ($2.1 million equivalent) prior to implementation. In addition to the subprojectsappraised during Bank appraisalof East Java-BaliUrban Developmentproject, it is expected that there would be between 5 and 10 subprojectsabove Rp 4 billion value in the subsequentbatches.

The provincialappraisal teams would conduct further appraisalsof large subprojectswhen they are prepared to detailed engineeringlevel, includingprogram and subprojectappraisals that are yet to be prepared. Technical,economic and financialappraisal criteria are described in the followingparts of this Annex.

Expenditureprograms for Kabupaten Badung (Bali) and Kotamadya Probolinggo (East Java) are summarized in Annex 14. ANNEX 4D - 73 - Page 1

GENERALTECHNICAL STANDARDS AND CRITERIA FOR SUBPROJECTSELECTION, PLANNINGAND DESIGN (adaptedto suit local conditionsaccording to MPW guidelines)l/

1) Kabupaten|KotamadyaSelection Criteria for IUIDP

Population s greater than 5,000 for water supply and greater than 20,000 for other infrastructure

Populationgrowth rate : greater than 2 percent for population above 20,000

Exception s Surabaya is included in the Large Cities IUIDP

2) Sector Selection Criteria

Water Supply s Real demand,water stress area

Drainage s Flooding,deferred maintenance,increased runoff, inadequatecapacity

Solid Waste s National guidelines regardingcoverage for high densities,environmental and health considerations

Sanitation s National guidelinesregarding coverage for high densities,environmental and health considerations

Roads : Average daily traffic, congestion,traffic flow constraints,road condition,accidents, new land developments

KIP s National policy for basic services,local government initiatives,poor environmental conditions,community willingness to operate and maintain infrastructure

MIIP : Service deficiencies,local government initiatives,environmental and health consid- erations

3) SubprojectDesign Criteria

11 All standardsand criteria follow MPW guidelineswhich have been reviewed and found acceptableby ttte Bank. Details are provided in the Project File. ANNEX 4D -74 - Page 2

Water Supply

Planningt

- Priority for rehabilitationand optimum use of existing systems - Priority for reductionof water losses and leakages - Ability and willingnessto pay for water supply - Adequate income for piped water supply (taken as Rp 100,000/month) - Per capita demand 120 lpd for urban households - Per capita demand 60 lpd for IKK and rural households - Per capita demand greater than 120 lpd taken for special areas (e.g., tourism needs) - Planning period of 10 years - Optimum system selected on basis of minimum present value of total costs over project life taking a discount rate of 10 percent - Environmental impact assessments, as appropriate.

EngineeringDesign:

- Water quality - Indonesiaand WHO permissible standards

- Maximum pressure - 7.5 bar in the distributionsystem

- Minimum pressure - 1.0 bar in the distributionsystem over a 24 hour period

- Peak day demands - 1.15 x average day demand

- Peak hour demands - 2.00 x peak day demand

Drainage

Planningt

City drainage planning focuses initiallyon primary and secondary drainage, and local flooding.Major flood control works is the responsibilityof central or provincial suthorities.Urban drainage coverage target is 60 percent in Repelita V, with 100 percent coverage by primary and secondarysystems. Optimization of existing drainage systems. Major drainage works to be undertaken on the basis drainage masterplans

Designt

Q - F x C x I x A, where Q - discharge,C-coefficient of rougthness, I - rainfall intensityand A - catchmentarea

Return period of design storm - 5 years

Minimumvelocity of flow in channels - 0.5 meters/second minimum

Hydraulicdesign - Manning's Formula -75 - ANNEX 4D Page 3

Solid Waste Services

Plannings

Based on environmentaland health considerations,real demand and will- ingness to pay. High priority for communitieswith densitiesover 200 person/hectare.

Design standard:

Populationdensity greater than 200 persons/ha,100 percent service; populationdensity between 100 person/ha and 200 person/ha,75 percent service;no service yet for density less than 50 person/ha;and 100 percent service for commercialareas and markets.

Refuse generation: 3.15 liters/capita/dayfo-: medium towns; 1.85 liters/capita/dayfor small towns

Disposal by sanitary landfills environmentalimpact assessments required.

Design:

Modular system as per DG Cipta Karya guidelines Sanitation

Planning:

Eighty percent coverage of urban populationby 1995 (RepelitaV).

- Sewer systemsmay be consideredfor densities in excess of 200 person per hectare. Systems include conventionalsewers, small bore sewers or shallow sewers.

- All other areas to have on-site systems.

Criteria:

1. Areas with ground water table less than 1.5 meters

a. Populationdensity greater than 150 persons/ha- 100 percent service level, using type Al (MK-5 KK + septic tank and anaerobicfilter) or type B1 (WC/JK + septic tank and anaerobic filter)

b. Populationdensity less than 150 person/ha - 80 percent service, type Al or Bl facility.

2. Areas with ground water table between 1.5 m and 5 m ANNEX 4D -76 - Page 4

a. Populationdensity greater than 200 persons/ha- 100 percent service level, type A (MK-5 KK + septic tank and anaerobic filter) or type Bl (WC/JK + septic tank and anaerobic filter)

b. Populationdensity 150 - 200 person/ha - 80 percent service level type B (WC/JK + septic tank and soakaway trench)

c. Populationdensity less than 150 person/ha - 60 percent service level using type B facility

3. Areas with ground water table greater than 5 meters

a. Populationdensity greater than 200 personiha - 100 percent service level using type A and type B2 facility

b. Populationdensity 150-200person/ha - 80 percent service level using type B facility

C. Populationdensity less than 150 person/ha - 60 percent service level using type C facility (soak pit with leaching pit)

4. Water consumptionfor pour flush latrines taken as 5 lpd. Sludge generationin pour flush latrines is 30 led.

All accordingto DG Cipta Karya Guidelines -77 - ANNEX 4E - 7 Page 1

E. ECONOMIC APPRAISAL CRITERIAAND METHODOLOGY

Water Supply

1. In principle,net present value (NPV) and economic rate of return (ERR) have to be estimated for each water supply subproject. In order to cope with the large number of (relativelysmall) subprojectsand to take into account the limited appraisalcapability of provincialgovernments, Bank staff proposed the applicationof a simplifiedmethodology.

2. Economic benefits of water supply projects are equal to the consumers'willingness to pay for water plus external health benefits, i.e. preventionof infectionscaused to others (outsideof someone'sown household). The external health benefits, since are intangible,formally don't enter the economic analysis. If substantiated,however, can be used to justify projects with a negative NPV or an ERR below the cut-off rate of 10 percent (this procedurecan be applied in very special cases only, as an exception). In large cities with well functioningwater supply systems there are usually enough informationto obtain a reasonablygood estimate of the consumers'demand function. The water demand function,in turn, can be used to estimatewillingness to pay.

3. Lack of data and expertiseand the proliferationof intermittent water supply systems generallymade the applicationof this *traditional" method impossiblein East Java and Bali. The proposed simplifiedmethodology divides piped water consumptioninto two partss the first part replaces the previous source (e.g. wells, rivers, vendors) of water use, while the second part is a net increase in water consumption. Benefit of the first part is equal to the cost savings (actualpayments plus own labor) of consumerswho no more need to use other sources of water supply (this is the so-called alternativecost valuationmethod). Benefit of the second part, i.e., of incrementalwater use, is still has to be estimatedusing the concept of willingnessto pay and that way depends on how accurately the demand function was estimated. However, the share of total benefits due to incrementalwater use is usually small and the informationcollected in order to estimate the benefit of the first part can be used to estimate one point on the demand curve. The full demand function is estimatedby providing the coordinatesof a fictitiouslow price - high quantity point on the demand curve and assuming a linear relationshipbetween price and water demand (the method is not very sensitiveto the assumptionregarding the shape of the water demand curve and to small perturbationsin the coordinatesof the low price - high quantity point).

4. Two simple, user friendly programswere developedalong these lines to assist the project preparationteams and the provincial appraisal teams with economic analysis. The programs compare subprojectcosts and benefits and calculateNPV and ERR estimates (the programs use a discount rate of 10 percent for NPV calculations). A more detailed descriptionof the programs (one for small projects and one for larger ones) with the mathematical formulascan be found in the project files. - 78 - ANNEX iE Page 2

5. A further simplificationin the proposedmethodology is given by the possibilityof estimatinga lower bound for the ERR. There are two ways to arrive at such an estimate. One is the so-calledcross-city comparison method. If (i) the average incrementalcost (AIC) of a subproject in city A is less then or equal to the AIC of a subprojectin city B (or, alternatively, the water tariff of a functioningsystem in city B); (ii) the water demand/consumptionsurveys indicatethat the sources and quantity of non-piped (alternative)water use of those householdswho don't have access to piped water are similar in the two towns; (iii) household incomesare also similar and iv) the planned average water consumptionper household in city A is about the same as the planned (or existing)water consumptionin city B, then the ERR of subprojectA is at least as high as subprojectB (or at least 10 percent if system B already exists).

6. The other method relies on the financial internal rate of return (FIRR) to obtain a lower bound estimate for the ERR. In case of a proposed expansion/rehabilitationof an already existing system, if (i) there is no real water price increase forecasted;(ii) changes in water consumptionare fully explainedby projected changes in the (real) income and compositionof connected customers,then the FIRR can be used as a proxy for the lower bound of ERR.

Drainage

7. The overwhelmingmajority of drainage subprojectsare very small, i.e. cost less than Rp 400 million (about $0.2 million). Case by case economic analysis (i.e. calculationof ERR and NPV) is required only for the larger ones which typicallycost Rp 600 - 1500 million. The benefits of these drainage subprojectsare estimatedeither i) on the basis of avoided flood damages or '.i)land value increasesand road maintenancecost reductions. Since estimationof the cost of flood damages requiresvery detailed surveys and the analysis of several type of costs, preparationteams usually prefer the second, less time consumingapproach. The advantageof this approach is obvious: land value increase,if land markets function properly, is an indicatorwhich can reflect the present value of the future benefit stream accruing to the owners of the land in the project area. The projected increasesin land values are based on comparison of land values in the project area to land values in similar, but less frequentlyflooded neighborhoods. Informationon land values for the first batch subprojectswas collected during interviewswith kelurahan (sub-district)staff handling land transactionsand with informal real estate brokers. Reductions in road maintenancecosts were estimatedon the basis of local experience. The same procedureswill be followed for second and third batch projects.

Urban Roads

8. The Urban Road Directorateof the Ministry of Public Works issued an "Urban Road Planning and ProgrammingManual' to guide the preparationof all IUIDP projects. Preparationof the manual was partly financed from the technicalassistance componentsof the Regional Cities Urban TransportProject (Loan No. 2817-IND) and the Urban Sector Loan (Loan No. 2816-IND). Economic - 79- ANNEX 4E Page 3

analysis of all road subprojectsare based on the applicationof this manual. Using informationobtained from site specific traffic and road condition surveys, the manual is easy to use for estimatingthe benefits of urban road rehabilitation,betterment, widening and new urban road projects. Two kinds of benefits are estimated: vehicle operationcost savings and time benefits, which, if compared to the costs, make it possible to calculateERR or NPV of the subprojects. Further simplificationis allowed for subprojectswith a cost below Rp 2 billion (about $1.1 million). For each class of road and type of road improvement,the manual also calculatesthe minimum traffic level which makes the improvementeconomically viable (detaileddescription of the methodology and assumptionsused in the manual is available in the project files). A proposed road improvementis consideredacceptable if the average daily traffic on the road is higher than the cut-off level determinedthat way.

Other Subsectors

9. A high portion of the benefits of human and solid waste management and market infrastructureimprovement subprojects are intangibleand accrue to the local communityas a whole and not only to the direct recipientsof these services. Therefore,there is no requirementto carry out a formal comparison of costs and benefits,however, for subprcjectswith a cost of more than Rp 400 million, it should be demonstratedthat the proposal is the least cost solutionwhich achieves the desired environmentalimpact. Kampung improvement subprojectsdeliver a standardpackage of infrastructureservices which was proven to be economicallyviable in severalBank financedprojects before. Since the economic analysis of that kind of investmentsis very costly and the concentrationof expendituresis low, the economic viabilityof proposed kampung improvements,as long as they follow the agreed standards,is presumed. -80 - ANNEX 4F Page 1

F. PROVINCIALPROGRAMME IMPLEMENTATION AGREEMENT

1. Preamble

1.1 THIS AGREEMENT,dated this ----- day of ------, 1990, is in- tended to confirm and clarifyimplementation arrangements for the urban development programme prepared by the government of ...... Province and its second level governments(Dati II)within the framework of RepetlitaV and the IntegratedUrban InfrastructureDevelopment Program (IUIDP/P3KT).This Agreementcovers all Dati II urban infrastructureprogrammes (for East Java with the exceptionof the city or Surabayaprogramme to be confirmedseparately due to its size and complexity). The signatories hereto acknowledge that urban development programme implementation requires the participation and cooperation of several agencies and approval of this Agreement has been completed with the inter-agency coordination teams at both levels prior to executing this Agreement (PTA Tk. I). The undersigned hereby confirm their mutual understandings and pledge their cooperative efforts for this purpose, as follows:

I:. Le2al and Procedural Framework for Prograse Implementation

2.1 All relevant aspectsof this Agreementare defined and empowered with referenceto the followingexisting laws and regulations,which this Agreement is intended to support and further the realization of their intent:

- Law Number 5 of 1974, determining local government functions. - Ministry of Home Affairs RegulationsNumber 5 and 6 of 1975, regardingthe financialsystems and managementof local government. - Minister of Home Affairs Decree 570-360 of 1981 regardingthe development of local government finance and monitoringof local borrowing. - Government Regulation Number 14 of 1987, regarding the respective functions of infrastructure development. - Government Regulation Number 6 of 1988, regarding the coordination of developmentprogramme among differentGOI levelsof government. - Minister of Home AffairsInstruction Number 18 of 1989 regardingthe implementationof PP. 6/1986.

III. The ProvincialUrban DevelopmentProaraume

3.1 The government of ...... Province and its Dati II Local governments(for East Java excludingSurabaya) with the assistanceand guidanceof appropriatecentral government agencies have undertakento initiatea province-wideurban development programme within the framework of the P3KT processwith the objectivesof:

- Improvementof urban facilitiesand servicesto benefitthe citizens and economicefficiency of all urban settlementsthroughout the Province,specifically covering water supply,sanitation/sewerage, ANNEX4F - 81 - Page 2

urban roads, drainage and urban flood protection,solid waste management,market area infrastructure(excluding the market or terminal buildings), and kampung area infrastructure in low-income neighborhoodst _ Strengtheninglocal capacitiesto operateand maintain such facilitiesand dependablydeliver such services; - Increase local abilitiesto plan, programueand manage systemsof these urban facilitiesand servicesto accommodaterapidly increasingurban populationand economieactivities; and, Support local initiativesto mobilize an increasingproportion of necessaryprogravme resources from local revenues (PAD and PBB).

3.2 The detailedprogramme agreed to be implementedin ...... Province is as descrlbedin part I of attachedProject PreparationReport (AttachmentI), which forms an integralpart of this Agreement. 3.3 More specifically, a summary of the agreed Provincial expenditure programme is in Table 1 below and a summary of the agreed provincial financing plan is in Table 2. - 82 - ANNEX 4F Page 3

Table 1. Summary Provincial Programme expenditure (1990/91 - 1994/95)in billion of Raupiah (current prices) Water Supply Drainage Sanitation Human Waste Management Urban Roads KIP MIIIP Overheads Engineering Service Consulting Service

Total

Table 2. Summary Provincial Financing Plan in billion of Up. (1990191 - 1994195) PrivateSources

PADS/PBS - generalrevenue Dati 11 User chargesDati 11 Internalresources PDAM IMPRES Dati IS INPRES PeningkatanJalan Dati II SDO SDB (from Dati I to Dati SS)

Loans from central government

APBD I INPRES Peningkatan Jalan Dati I APBN-DIP APBN-DIP Daerah

Total - 83 - ANNEX4F Page 4

3.4 Of the total prograsmefinancing an amount of .... s...... will be met out of the proceedsof the proposedIBRD Loan for East Java - Bali Urban DevelopmentProgramme.

IV. Programme Imglementation

4.1 Programmeimplementation will be carriedout in accordancewith the provisionsin part II of the attachedProject Preparation Report (Attachment I) and pertinent Government regulations and procedures and IBRD guidelines.

4.2 More specifically, programme implementation is expected to take five (5) years from FY 1990191onwards and includes all further detailed preparationwork requiredfor each Dati U1 local government, as detailed in part It of attachment X.

4.3 The provincial government undertakes to appraise all multi - year Dati 1I expenditure programmes (Program Jangka Menengah or PJM) and their constituentsubprojects submitted to it by each Dati 1S local government in accordance with agreed criteriaand, upon appraisaland approvalof the same, will enter into a Programm Tmplementation Agreement (PUA Tk. U) with each Dati II local governmentwithin the overill framework of this present Agreement.

4.4 Prior to the conclusion of a PIA Tk. II and while PJM preparationis in progress,a Dati II local governmentmay utilizeprogramme resources for urgently requiredsmall projectsnot exceeding p. 3 billion in aggregate.ThisLaterim facility may be utilized only once by each Tk. %I local government and should not include investments having an implementation period longer than two years.The provincial government undertakes to appraise and approve such projects in accordance with the agreed criteria and to enter into a provisional PIA TK. I with the concerned Dati IT local government with a maximum two year validity, to be subsumed subsequently in the PSA Tk. U1 referred to in para 4.3 above, which will become effectivenot later than 2 years after the effectivenessof this Agreement*.

4.5 Both partiesto this Agreementundertake to carry out necessaryactions on their part with respect to Dati II Revenue Improvement Action Plans (RUAP) and Local InstitutionalDevelopment Action Plans (LIDAP)as included in the concernedPTA Tk. IlI, includingtimely considerationof tariff adjustment proposals, organizational adjustments and staffing proposals as well as monitoringof any other requiredactions to achieve revenue enhancement targets or any performance yardsticks included in RIAP or LIAP.

* Notes This emergencyinterim facility is intendedto be made available only for the so-calledBatch II and Batch III Dati II local governments,which at the time of effectivenessof this Agreementdo not yet have a fully completed,appraised and approvedPJH. -84 - ANEX 4F Page 5

4.6 Prior to effectivenessof this Agreementthe two partieswill have establishedthe functionalimplementation units at centraland provincial levels respectivelyas providedfor in part II of attacbmentI at staffinglevel adequatefor their operation.

V. Guidelinesand Proceduresto be appliedin implementation.

5.1 It is understoodthat, in the absenceof further specificreference, the implementationof this Agreement is governed by the followingguidelines and proceduress

- lUIDP Prograrmme preparation guidelines

- IUVIDPSubsectoral technical memorandums

- IUIDP appraisal guidelines

- IUSDP implementation guidelines and handbook.

- Governmentprocurement guidelines (Xeppres 29 of 1984 Inpres 1 of 1988 and teppres 6 of 1988 and implementing regulations/procedures) - IBRD guidelineson procurement

- IBRD guidelineson the recruitmentof consultants

- Fund channellingprocedures as exist for each source of centraland provincial funds

- AMDAL preparation guidelines and procedures

- Annual Guidelines on preparation of APBD and APBN

(NotesSpecific SKs, Surat Edaran,etc., will be referredto in the final Indonesianlanguage version.)

VI. Resolutionof DisDutes

6.1 Dispute arising from this Agreement or its understanding by any party will be resolved throughconsultation within the frameworkof Tim KoordinasiPembangunan Perkotaan (TKPP). - 85 - AMNEX 4F Page 6

VIZ. Effectiveness

7.1 Subject co the provisionsin clause 4.6 above, this Agreementwill become effectiveupon signingof the Loan Agreemeatbetween IBRD and the Republicof Indonesiafor the East Java-BaliUrban Developmentproject.

for the provincial for the central governmentof GovernmentRI.

...... -.**

(Director-General Cipta Rarya, DPU) (Governor)

Director-General Dina Marga, DPV)

Director-General Bangda, DDN)

Dlrector-General PUOD, DDN AN-8 4G - 86 - Page I

C. LOCAL PROGRAHMEIMPLEMENTASSON AGREMENT

S. Preamble

1.1 TEIS AGREVENT, dated this ------day of ------is to confirm and clarify implementation arrangement for the urban development programs prepared by the local government of ...... within the frameworkof RepelitaV and the TntegratedUrban Infrastructure DevelopmentProgram (ItUDP). The undersignedhereby agree as followss II. Legal and ProceduralFramework for ProgrammeImplementation

2.1 All relevant aspects of this agreemeat are defined and empowered with reference to the following existing laws and regulations, which this Agreementis intendedto supportand furtherthe realisationof their Intent%

- DNCBJ3No...... dated ...... regarding the integrated urban infrastructure development program preparation. - IGUB/No...... dated ...... regarding the Integrated urban infrastructure development program iUplementation. - S_I/PIASo...... dated ...... between central government an4 the provincialgovernment of ...... regardingthe integrated urban infrastructure development program implementation.

1II. The local IUIDP Program

3.1 Expenditure Pro*ram To implementthe UIDP Programprepared by the governmentof with assistance of the provincialgovernmnt of ...... coveringthe period 1990/91 - 1994/95 as described in the Multi-Year IUtDProgram (Program Jangka Menengah or PJM) and as summarized in Attachment I 'Expenditure ProgramO.

3.2 Financins Plan

The program referred to in Article 3.1 will in principle be funded in accordance to the financing plan as provided in the Multi-Year IVtD Program, specifying proposed contributions by level of government and source of finnce and as summarized in Attachment IT "Financing Plan'. Of the total an amount of ...... will met our of the proceeds of the proposed IBRD Loan for the East JavalBaliUrban DevelopmentProject.

IV. Program Implementation

4.1 Fundins Arrangements - 87 - ANNEX4G Page 2

To provide the contributionsas referredto in Article 3.2, the local government of ...... will undertake the necessary revenue improvementmeasurements as describedin the revenueimprovement action plan (RTAP),of which the main targets to be achieved are summar'zed in AttachmentIII RIAP Targets*.

The provincialgovernment will undertakethe necessaryarrangements for the allocationof centralgovernment funds as proposed In the financing plan referredto in Article 3.2 throughand in accordancewith the Rakorbang process.

The local governmentof ...... with assistanceof the provincial governmentwill undertakethe necessaryarrangements for loan financing as proposed in the financingplan referredto in irticle3.2.

4.2 FundingAdministration

The fundingof the programreferred to in Article 3.1 and 3.2, will be administered in accordance with the prevailingG0T regulation.

Funding of the program will furthermore be accounted for by the IUIDP Pinance Units to be established within sagian Keuangan of ...... and Biro Isuangan...... and in accordanceto the program financial accountingand monitoringsystem (PFAMS)issued by .

4.3 ImplementationSchedule

The program referredto in Article 3 1 will in principlebe implemented in accordarceto the implemeuitationschedule provided in the Multi-Year MUID Program and summarized in AttachmentIV lmplementationSchedule'.

The local governmentof ...... and the provincialgovernment will accordinglyundertake the necessaryproject preparationin accordance with the guidelines...... and project appraisalin accordancewith guidelines

4.4 ImplementationArrangements

In accordancowith prevailingregulations, the program referredto in Article 3.1, will be implementedby those agenciesat local provincial and centralgovernment level which by virtue of those regulationsare responsiblefor implementation.

The implementationarrangements are farthermore regulated by SK Gubernur and SR Bupati/lalikotamadya..

By SK ¢ubernurNo...... the programmanagement tasks are entrusted to a ProvincialIUIDP ManagementUnit (PIMU) to be establishedin Bappeda TR. I and the financialmanagement tasks to a ProvincialIUIDP Finance Unit (PIMU)to be establishedin Biro KeuangtnTk. I. ANNEX 4G - - Page 3

By SR Bupati/Walikotamadya...... the programmanagement task are entrustedto an IUZDP M4anagementUnit (I=U) to be establishedin BappedaTk. II and the financialmanagement tasks to an IUIDP Finance Unit (PIFU) to be establishedin Bagian XeuanganTk. 11.

The tenderingand contractingprocedures are regulatedby ......

The procurementof materialand equipmentare regulatedby ......

4.5 Audit Annual auditingwill be executedby BPKP in accordancewith ......

4.6 Institutional

In accordancewith the programreferred to in Article1, the local government of ...... with assistance from the provincial governmentwill undertakeinstitutional strengthening measurementsas describedint he institutionaldevelopment action plan (LIDAP),of which the main targetsare sumlArizedin AttachmentV 'LIDAP.Targets".

4.7 ProaramAdiustment

As requiredthe program referredto in Article 3.1 may be adjusted in accordancewith the guideline;whenever this adjustmentresults in a change of 20 percentor more in the magnitudeand compositionof overall expenditureprogram referredto in Article 3.1 or in the compositionof the financtngplan referredto in Article 3.2, this adjustedprogram will be subjectto approvalby the Bupati/Walikotaand the Governor.

In such case, the local government of ...... with assistance from the provincial government will undertake the preparation of a new PJM. VI. RelatedGuidelines and Procedures

6.1 It is understoodthat, in the absenceof furtherspecific reference, the implementationof this Agreementis governedby the following guidelinesand procedures:

- IUIDP ProjectPreparation Guidelines - IUIDP ProjectAppraisal Guidelines - ZUIDP ImplementationGuidelines - ProcurementGuidelines - AMDAL PreparationGuidelines VII Resolutionof Disputes

7.1 Disputes arisingfrom this Agreementor its understandingby any party will be resolvedthrough consultations within the frameworkof the ProvincialKomisi PembangunanKota/Steering Committee. - 89 - ANMEX40 Page 4

VIII Effectiveness 7.1 Subjectto effectivenessof the 535/IPAreferred to in art 2.1 above and the provisionsin Article4.4 above,this Agreemaent takes cffect upon signingby both parties. Signedon behalfof Signedon behalf of Pemda...... Peont"

Dates ...... Dates

The Bupati/Walikotamadya The Governor - 90 - ANNEX4H Page 1

EAST JAVA AND BALI URBANDEVELOPMENT PROJECT

LENDINGARRANGEMENT TO REGIONALGOVERNMENTS AND REGIONALENTERPM.ISES

1. The Basic Concept

(a) Loans would be p:ovided to second level regional governmentsand regional enterprisesin East Java and Bali provinces through the existing Rekening PembangunanDaerah (RPD) in Bank Indonesia. The basic legal rules followed would be those applying to loans made from domestically-sourced GOI funds (Pinjaman Dalam Negari - PDN). The detailed loan application and approval procedures, method of disbursementto borrowers,and central debt management arrangements,would essentiallyfollow those already developedby GOI for the full Regional DevelopmentAccount (scheme).

(b) With the exceptionof contracts financedthrough direct payments to contractors by IBRD, payments relating to loan-financed ?tlb- projects would be pre-financed from domestically-sourced funds.

(c) IBRD would reimbursethe RPD Account retrospectively in respect of these project payments through the medium of a SpecialAccount establishedin Bank Indonesia (held in US dollars) for EJBUDP lending.

Cd) Different loan disbursementprocedures would apply in the case of such loan monies as are to be directlypaid by IBRD to overseas contractors. The system used in such cases would be that specified in MinisterialDecree No. 48 of 1987. In other respects, procedureswould be the same as those for the loans made through the RPD Account.

2. ApplicationProcedure

(a) Second level regional governmentsand regional enterprisesprepare their borrowingproposals which are then appraisedat provincial and central governmentlevel with respect to technical,economic and financialviability of the relatedprojects and the borrowers' capacities to repay the loans.

(b) For borrowing by second level regional governments,proposals are approved by the regional council (DPRD).

(c) Following successfulevaluation of the proposalsby the central government,loans are agreed in principleby the Ministry of Home Affairs on behalf of the concernedministries (Ministryof Finance, Ministry of Public Works, Bappenas and Ministry of Home Affairs itself). ANNEX 4H - 91 - Page 2

(d) Formal loan agreementsin a standard format are prepared by the Ministry of Finance (DDI) and signed by the Head of the regional government/GeneralDirector of the regional enterpriseas relevant.

3. Loan Disbursementto Regional Level

(a) The Borrower applies to the Ministry of Finance (DDI) for disbursementof loan funds, supportingthe applicationwith planned disbursementschedule (RPDP)where necessary,and copies of relevant contract/requisitiondocuments.

(b) The Director General Moneter orders payment of funds from the RDA in Bank Indonesiato a Project Account opened with an appropriate bank at a local level.

(c) In the course of sub-projectimplementation, the contractor/supplierapplies to the project manager (PINPRO)for payments, in accordancewith the payment schedule set in the contract.

(d) The project manager and Treasurer (Setwilda)/EnterpriseDirector General as relevant orders payment from the project account to the contractor/supplier.

te) The project manager reports the drawing down of the Project Account through the Borrower to the Ministry of Finance (DDI)with supportingpayment vouchers, and requests the next payment of loan funds in accordancewith the RPDP. The Director General Moneter orders the next payment of funds from the RDA to the Project Account. The process continues in this way up to project completion.

4. Book-keeping Arrangements

(a) Ministry of Finance (DDI) records all loan transactionsaccording to borrower and loan agreementusing the bookkeeping/accounting systems devised for the RDA scheme.

(b) Ministry of Finance (DDI) recovers loan repaymentsfrom the borrower in accordancewith the provisionsof the loan agreement followingthe proceduredeveloped for the RDA schemes.

(c) The borrowing regional governmentor regional enterprisemaintains loan records concerningloan funds advanced,repayment liabilities and repaymentsmade in accordancewith relevant GOI regulatious.

5. Reimbursementand ReplenishmentArrangements

(a) The project manager (PIMPRO) sends copies of payment vouchers to the DirectorateGeneral Anggaran (TUA) of t1leMinistry of Finance, -92- ANNEX4H Pege 3

in addition to sending originalpayment evidences to DDI as described in 3e above.

(b) DDI requests TUA to order reimbursementfrom the Special Account for the EJBUDP lending in Bank Indonesiaaccompanied with the relevant evidencesof paymentsmade by the project.

(c) After a reconciliationwith copies of payment vouchers received from the project as describedunder 5a above, TUA orders the reimbursementtransfer (in Rupiah) from the Special Account.

(d) TU'.submits a request to IBRD (RSI) to replenishthe Special Account with the US dollar equivalentof the project payments made, acccxmpaniedby the supportingpayment evidences.

(e) IBRD arranges the replenishmentof the SpecialAccount (the transactionbeing booked by the Bank of Indonesia as a credit/debit transfer through the BUN).

6. Direct Payment Contract

(a) In the event of a contract being awarded to an overseas contractor/supplieron terms stipulatingdirect payment by IBRD, the establishedprocedure under Joint MinisterialDecree No. 48 of 1987 is followed.

(b) IBRD (RSI) informs the Central Project Finance Office for EJBUDP (CPFO) of the direct paymentswhich have been made.

(c) CPFO in turn informs DDI of the direct payments notified by IBRD so that the loan records can be properly maintained.

7. Terms of Lending

(a) Loan repaymentperiods, includinggrace periods, will be set according to the economic life of each investmentand anticipated construction/commissioningschedules (minimum loan period 5 years, maximum 20 years; minimum grace period 1 year, maximum 5 years).

(b) The following summarizesthe agreed method of calculatingthe domestic lending rates and related conditions:

(i) The 6-month average of the 3-month SertifikatBank Indonesia (SBI) rate at the time of appraisalwould be used as proxy for lmarket rate' in the calculation;hereafter called 3SBIIndex".

(ii) GOI would apply the agreed discount percentage to the SBI Index to produce an on-lendinginterest rate, but the magnitudeof the discountwill be reducedover time to move the on-lending rate toward market rates in progressivesteps. -93 -ANNEX 48 Page 4

(iii) The interest rate for any proposed loan to local governmentor regional enterprisewould be fixed at time of appraisal and remain constant for the life of the loan (roundedto the nearest .25 percent).

(iv) For the EJBUDP onlending the following scheduleswould be used for calculationof onlending interest rates for each *batch of local governmentsand enterprisess

Group AppraisalDat" Formula

Batch I Period: Prior to April 1, 1990 : 602 of SBI Index - 92 (.6 x 14.8Z SBI Index for March 1990)

Batch II Periods April 1, 1990 - about March 31, 1992 s 702 of SBI Index

Batch III Periods about April 1, 1992 - about March 31, 1994 : 752 of SBI Index

(v) The minimum of 'floor"rate of interest for any lending to local governmentor enterprise,regardless of indexlformula reduction,shall be not less than the Bank rate plus 1.752 for Batches II and III.

(vi) The maximum interest rates of 10.5Z and 11.52 will apply to onlendingfor Batch II and III respectively,and sub-project feasibilitystudies shall be prepared utilizing these maximum values for each Batch.

(c) A commitment fee of 0.75 percent of the undisbursedamounts from the schedule of loan drawdownwill be charged. However, GOI may wish to reduce this fee to parallel reduced Bank commitmentfees, as applicable.

8. Promulgationof the EJBUDP Loans Facility

(a) The scheme will be promulgatedas a special lending facility for the EJBUDP project by means of a Circular Letter from the Director General Moneter (MOF) to all regionalgovernments and relevant regional enterprisesin the provincesof East Java and Bali.

(b) Further detailed instructionsand guidance on the loans scheme conditionsand procedureswill be provided to the relevant regional governmentsand enterprises,together with the requisite forms and sample documentation,drawing on the materials already developed for the full RDA scheme. - 94- ANNEX 4H Page 5

REGIONALGOVERNMENTS' LOAN APPLICATION PROCEDURES 1. The technicaldepartment of the regionalgovernment (Dinas PU Dati II) preparestheir borrowing proposals including feasibility assessmentsaccording to standardsset by the centralgovernment, and submitsthem to the Head of the RegionalGovernment (KDH Dati IT), throughthe planningboard (Bappeda)and the secretariat (Setwilda)of the regionalgovernment. The borrowingproposals are reviewedby the planningboard of the regionalgovernment (Bappeda Dati II) on theirconsistency with the medium-termprogram (PJM) andlorregional development plan and priorities,and by the finarce officeof the regionalgovernment secretariat (Setwilda Dati II) on the regionalgovernments' capacities to repaythe loans. 2. The Head of the RegionalGovernment (RDH Dati II) requeststhe approvalfrom the regionalparliament (DPRD). 3. The Head of the RegionalGovernment (KDH Dati II) asks the governor of the provincialgovernment to forwardthe loan applicationwith his recommendationto the ministriesconcerned at central governmentlevel. A copy of the requestis forwardeddirectly to the provincialdepartment of publicworks, for technicalappraisal (1').

4. The Governor,Head of the ProvincialGovernment (GUBIKDH Dati I), forwardsthe loan applicationwith his recommendationto the ministriesconcerned at centralgovernment level, i.e. the Ministry of Home Affairs(MHA), the Ministryof NationalDevelopment Planning(Bappenas), the Ministryof Finance(MOF), and the Ministryof PublicWorks (MPW). The provincialdepartment of publicworks will forwardthe resultsof the technical recommendationsdirectly to the Ministryof PublicWorks (4'). 5. Followingsuccessful evaluation of the proposalsby the concerned ministriesat centralgovernment level, loans are agreedin principleby the Ministryof Financeand communicatedto the regionalgovernment through the Ministryof Home Affairs. 6. The Governor,Head of the ProvincialGovernment (GUB/RDH Dati I) informsthe Head of the RegionalGovernment (KDH Dati II) that the loan has bee agreedin principle. 7. Formalloan agreementsin a standardformat are preparedby the Ministryof Finance(DDI) and signedby the Head of the Regional Government(RDH Dati II). A.". EX 4H - 95 - Page 6

REGIONALGOUERIENTS' LOANAPPLICATIONS PROCOURES

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REGIONALGOVERNMENTS' LOAN DISBURSEMENT PROCEDURES

1. Formal contracts in a standard format are prepared by the project manager (PINPRO)and signed by the contractorlsupplier.

2. The project manager (PINPRO)prepares and submits the loan disbursementdocumentation for the Ministry of Finance (DDI) to the Head of the Regional Government (KDH Dati II).

3. The Head of the Regional Government (KDH Dati II) applies for disbursementof loan funds, supportingthe applicationwith copies of relevant contractirequisitiondocuments, and a planned disbursementschedule (RPDP) if applicable.

4. The Direktur-JendralMonetar (MOF) orders payment trom DDI to a project account opened with an appropriatetank at local level.

5. Funds are channelled from DDI to the project account, and the Ministry of Finance (DDI) is informedabout the disbursement(5') and the Secretariatof the regionalgovernment is informed about the transfer made (5').

6. In the course of sub-projectimplemeutation, the contractor/supplierapplies to the project manager (PINPRO)for payments in accordancewith the payment schedule set in the contract.

7. The project manager (PINPRO)prepares and submitspayment applicationto the Treasurer (Setwilda).

8. The Treasurer (SETWILDA)orders payment from the project account to the contractor/supplier.

9. Payment is channelled from the project account to the contractor's/supplier'saccount, and the project manager (PINPRO) and the Treasurer (Setwilda)are informed about payment done (9'). -~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ CZ6

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REGIONAL ENTERPRISES'LOAN APPLICATIONSPROCEDURES

1. The regional enterprise (BUMD) prepares their borrowing proposals includingfeasibility assessments according to standardsset by the central government,and submits them to the Head of the Regional Government (KDH Dati II)IChairmanof the enterprise'sSupervisory Board, through the planning board (Bappeda)of the regional government. The borrowing proposalsare reviewed by the planning board of the regional government (BappedaDati II) on their consistencywith the medium-termprogram (PJM) and/or regional developmentplan and priorities.

2. The Head of the Regional Government (KDH Dati II) asks the governor of the provincialgovernment to forward the loan applicationwith his recommendationto the ministries concerned at central government level. A copy of the request is forwardeddirectly to the provincial departmentof public works, for technicalappraisal (1' ) . 3. The Governor, Head of the ProvincialGovernment (GUB/KDHDati I), forwards the loan applicationwith his recommendationto the ministries concernedat the central government level, i.e. the Ministry of Home Affairs (MRA), the Ministry of National DevelopmentPlanning (Bappenas),the Ministry of Finance (MOP), and the Ministry of Public Works (MPW). The provincialdepartment of public works will forward the results of the technical recommendationsdirectly to the Ministry of Public works (3').

4. Following successfulevaluation of the proposalsby the concerned ministries at central governmentlevel, loans are agreed in principle by the Ministry of Finance and communicatedto the regional government through the Ministry of Home Affairs.

5. The Governor, Head of the ProvincialGovernment (GUB/KDHDati I) informs the Head of the Regional Government (KDH Dati II) that the loan has been agreed in principle.

6. Formal loan agreements in a standard format are prepared by the Ministry of Finance (DDI) and signed by the General Director of the regional enterprise (BUMD). 99 ANN1EX4 cage 10

REGIONALENTERPRISES' LOAN APPLICATIONS PROCEDURES

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REGIONAL ENTERPRISES'LOAN DISBURSEMENTPROCEDURES 1. Formalcontracts in a standardformat are preparedby the project manager(PINPRO) and signedby the contractor/supplier. 2. The projectmanager (PINPRO) prepares and submitsthe loan disbursementdocumentation for the Ministryof Finance(DDI) to the GeneralDirector of the regionalenterprise (BUMD). 3. The GeneralDirector of the regionalenterprise (BULD) and the Head of the regionalgovernment (KDH Dati II) appliesfor disbursement of loan funds,supporting the applicationwith copiesof relevant contract/requisitiondocuments, and a planneddisbursement schedule (RPDP) if applicable. 4. The Direktur-JendralMoneter (MOF) orders payment from the DDI to a projectaccount opened with an appropriatebank at locallevel. 5. Funds are channeledfrom the DDI to the projectaccount, and the Ministryof Finance(DDI) is informedabout the disbursement(5') and the regionalenterprise (BUMD) is informedabout the transfer made (5'). 6. In the courseof sub-projectimplementation, the contractor/supplierapplies to the projectmanager (PINPRO) for payments,in accordancewith the paymentschedule set in the contract. 7. The projectmanager (PINPRO) and GeneralDirector of the regional enterprise(BUMD) orders payment from the projectaccount to the contrac,or/supplier.

8. Paymentis channelledfrom the projectaccount to the contractor's/supplier'saccount, and the projectmanager (Pinpro) and the GeneralDirector of the regionalenterprise (BUMD) are informedabout paymentdone (8'). - 101 - Page 12

REGIONALENTERPRISES LOANDISBISEMENT PROCEDURES

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EAST JAVA - BATCH I LOCAL GOVERNMENTS

TENTATIVELIST OF CONTRACTSAND PROCUREMENTMETHOD

Average value per contract (RD M) Number of contracts Contract Details ICB LCB Other ICB LCB Other

Equipment (Rp 5,062 million) Trucks, pickup trucks, dumptrucks,rollers, tankersworkshop equipment, etc. 1 contract per cate- gory per annum 461 165 1S 2 24 16

Handcarts 1 contract per Tk.II - 16 11 - 9 14 per annum

Laboratory/office - - 4 - - 10

Materials (Rp 9,193 million) Small diameter pipework, etc. - 342 - - 12 -

Large pipework, etc. Grouped into at least twelve contracts - 379 - - 12 _

Service Connections 2 contractsper Tk.II (pipework,meters procured separately) - 96 - - 25 -

Leak detectionibulk meters - 57 15 - 3 2

Mechanical& Electrical Supply/Install(Rp 1,849 million) Pumping Plant 7 contracts, (7 locations) - 89 - - 7

Chlorinators/treatment plant 11 contracts, (11 locations) - 43 - 11

Lamongan - all works at least 2 contracts - 377 - 2 - -

Subtotal Contracts 4 103 42 - 103 -ANNEX 5 Page 2

EAST JAVA - BATCH I LOCAL GOVERNMENTS TENTATIVE LIST OF CONTRACTSAND PROCUREMENTMETHOD (continued)

Average value per contract (Rp.M) Number of contracts Contract ICB LCB Other ICB LCB Other

B/fwd 4 103 42 Civil Works Roads (Rp 22,048 million) Artery: 1 contract for 2 roads per annum - 240 - - 20 - Collectors 1 contract for 3 roads per annum - 245 - - 50 - Localt Small packaged,most small - 80 15 - 10 103 Feasibilitystudys 1 contract per road - 30 - - 5 - Sanitation (Rp 4,120 million) Multiple facilities - 112 - - 10 _ Kuta pilot sewerage - 500 - - 6 - Drainage (Rp 5,402 million) Dred8ing & cleaning (some packaging) - 170 15 - 8 12 Upgrading channels (some packaging) - 250 15 - 13 41 Solid Waste Manaaement (Rp-717 million) - 100 15. - 2 34 Kampung Improvement (Rp 2,062 million) - 130 15 - 5 94 Market Infrastructure (Rp 868 million) Rogojampi - 344 - - 1 -

Others - 156 15 - 1 25 Water Supply (Rp 10,397 million) 4 Water towers - 403 - - 4 - 3 Wells - 155 - - 3 -

Other works - 333 - - 25 - Total Contracts:East Java (Batch 1) 4 266 351 Surbaya Large diameter pipe and pumping plant 4,500 5 - - ANNEX5 - 104 - Page 3

BALI - BATCH I LOCAL GOVERNMENTS

TENTATIVELIST OF CONTRACTSAND PROCUREMENTMETHOD

Average value per contract (Rp M) Number of contracts Contract Details ICB LCB Other ICB LCB Other

Equipment (Rp 1.4 billion) La Trucks - 50 - - 5 - Pickups - 25 15 - 1 2 Dump Trucks - 55 - - 5 - Rollers - 50 - - 3 _ Asphalt Sprayers - 20 - - 1 - Road Maintenance Sets - 50 - - 1 - Sludge Trucks - 30 - - 2 - Rubbish Bins - 50 5 - 5 5 Hand Carts - - 3 - - 13 Other - 30 15 - 5 5

Materials

PDAM Denpasar (Rp 7.6 billion) Large diameter pipes 3,490 - - 1 - - Large diameter pipes 1,029 - - 2 - - Small diameter pipes - 321 - - 5 - Service connections - 150 - - 2 - Flow meters etc - 30 15 - 2 2

Other PDAMs (Rp 2.0 billion) Large diameter pipes - 212 - - 2 - Small diameter pipes - 180 - - 6 - Service connections - 60 - - 12 - Plow meters, etc - 25 4 - 2 2

Mechanicaland Electrical EngineeringWorks

PDAM Denpasar (Rp 3.5 billion) Treatment works 2,053 - - 1 - - Other - 470 - - 3 - Other PDAMs (Rp 0.4 billion) - 60 - - 7 - Subtotal Contracts 4 69 29

la Only vehicles procured under ICB will be eligible for IBRD financing. ANNEX5 - 105 - Page 4

BALI - BATCH I LOCAL GOVERNMENTS

TENTATIVELIST OF CONTRACTSAND PROCUREMENTMETHOD

Average value per contract (RP M) Number of contracts ContractsDetails ICB LCB Other ICB LCB Other

B/fwd 4 69 29

Civil Works

Urban Roads (Rp 10.2 billion) - lSO - - 14 - Named Roads - 150 - - 10 - Named Roads - 150 - - 28 - Local Roads - 150 15 - 6 100

Sanitation (Rp 0.7 billion) Substructures - 100 8 - 1 6 Substructures - 100 15 - 2 10 New facilities - 100 15 - 1 5

Drainage (Rp 5.7 billion) Dredging/cleaning - 20 - - 5 - Dredging/cleaning - 20 15 - 1 4 Upgrading/new works - 130 - - 6 - Upgrading/new works - 100 - - 20 - Upgrading/new works - 150 15 - 1S 30

Solid Waste Disposal (Rp 01. billion) Construction: Transfer Station - 50 - - 1 - Access roads - 35 5 - 1 4

Kampung Improvement (Rp 2.8 billion) General Works - 55 1S - 15 15 General Works - 40 - - 8 - General Works - 50 15 - 20 30

Market Infrastructure Rp 0.2 billion) General Works - - 15 - - 12 General Works

Water Supply (Rp 5.8 billion) Denpasar - 150 - - 25 - Other - 100 15 - 20 10

Total ContractesBali 4 268 255 -106 - ANNEX-6 Page 1

EAST-JAVA-BALIURBAN DEVELOPMENT PROJECT

Disbursement Arrangementsfor the IBRD Loan

Funding Channels for the EJBUDP

The IBRD Loan proceeds would be channeled to the EJBUD Project through the followingfour methods:

1. IBRD-financedportions of Public Works DepartmentDIPs, to be paid from the EJBUDP SpecialAccount ("DIP Rupiah Rekening 1husus", usually abbreviatedto *DIP Rp R1K). These could consist of both amounts to be paid in Rupiah and amounts to be paid in foreign currencies,but DIP documentsdo not distinguishbetween these two categories (the divisionmay not indeed be clear at the time of DIP preparation);

2. IBRD-financedgrant transfersfor direct use by local governments ('SPABPGrants-) also to be paid from the EJBUDP SpecialAccount;

3. IBRD-reimbursementof Central Government Loans to local governments and local governmententerprises, through the EJBUDP Special Account;

4. Direct Payments in foreign currency by IBRD contractors(where deemed appropriate). These could relate both to Public Works Department DIP budgetaryallocations ("DIP PembayaranLangsung', usually abbreviatedto 'DIP PLO) and to on-lending allocations.

The domestically-sourcedcounterpart funding by governmentagencies of developmentexpenditure within the Projectwould be channelled through:

5. domestically-financedportions of Public Works DepartmentDIPs) 'DIP Rp APBN', sometimesalso referred to as "DIP Murni");

6. local governmentand local governmententerprise contributions from:

(a) local governments'own revenues and revenues assigned to local governmentsfrom higher levels ('PADS/PBB');

(b) Inpres Dati II grant from central to local governments;

(c) Inpres Jalan grant from central to local governments;

(d) province government grant to local governments (OSBD');

(e) internal funds of local governmententerprises.

(Therewould also be funding for Project expenditurefrom: - 107 - ANNEX6

- provincial governmentbudgets directly;

- local governmentand local enterpriserevenues for O&M expendituress

- local enterprise internal funds used to wholly finance certain investmentexpenditures; and

- private sector contributions, but the IBRD loan will not be disbursedagainst such expenditures).

PaymentsMade in Rupiah

DIP Channel Financing - Central Government Sub-project Components

In the case of components of sub-projects for which central government agencies have sole implementationresponsibility, procedures would largely follow those establishedfor previous IBRD-financedurban projects. The DIP documentwould specify the IBRD-financedshare of the sub-projectcomponent as Rp RK funding togetherwith the domestically-financedcounterpart share as Rp APBN funding in accordancewith the specified IBRD disbursementpercentages. For example, for a DIP relating to one or more civil works contracts,70 percent of each civil works contract sum would be specifiedas funded from Rp RK funds and the balance of the contract amounts, together with all ineligible expenditure (for overheads,etc.) would be specifiedas financed from Rp APBN funds.

Payments to local contractorswould be made through the State Treasury offices in the relevant capital (KPKN) - the contractorswould not have to go to Jakarta to be paid.

-SPABP Special Grant" Channel Financing

Sub-project components to be financed by IBRD loan proceeds passed as grants to local level through the SPABP channel will normally also have a counterpart financingamount from the local governments'own revenue sources (PADS, normal Inpres grants, etc.).

Local governmentswill prepare each year a draft EJBUDP budget submissions representingtheir implementationplans for sub-projectsto be financed from SPABP special grant in the forthcomingbudget year of their approi,edmedium- term programs (PJMs). These draft EJBUDP budgets would be submittedthrough the Provinces (with review by the provincial Technical Team) to central government. After central review by Bappenas, Ministry of Finance and Ministry of Home Affairs, D-G Budget of the Ministry of Financewould issue an authority (SKO) to KPKN in the provincial capitals to disburse up to specified sums, to be drawn on the EJBUDP Special Account, for each relevant local government in respect of contract payments properly authorizedunder local governmentDIPDA budgetaryprocedures. ANNEX 6 - 108 - Page 3

Local governmentswould then prepare draft developmentbudget authorizations (DUPDA) for the relevant sub-projects,specifying, as Rp RK, the amount of funding to be provided by IBRD through the EJBUDP SpecialAccount, in accordancewith the specifieddisbursement percentages on eligible expenditure. The DUPDA would also show the counterpartfunding amount(s) and sources(s) to be provided from the local government'sown normal revenue sources. The local governmentswould also make appropriateprovisions in their draft developmentbudgets (APBD Pembangunan)for these expendituresand their funding sources. FollowingAPBD approval by the local Representative Councils (DPRD) and ratificationby provincialgovernors, DUPDAs would be individuallyapproved by Governorswith the advice of the provincialTechnical Teams, and thence by local governmentmayorslregents, thereby becoming DIPDAs authorizingthe implementationof the relevant sub-projects. These procedures are standard in local governments.

Each implementationcontract would be written specifyingone funding source as being from KPKN, representingthe IBRD funding share, and one (or possibly more, although one only is highly desirable)supplementary local funding source.

Exampless

1. A civil works contract could specify funding of 70 percent from KPKN as the IBRD share, plus 30 percent from Bank Rakyat Indonesia re. Inpres Dati II as the local counterpartsharet

2. An equipment supply contract awarded to a domestic contractor could specify funding of 100 percent of the ex-factoryprices from KPKN as the IBRD share, plus the balance of the contract sum, representinglocal transportoverheads and taxes, from Kas Daerah Dati II (PADS/PBB)as the local counterpartsource.

For each stage payment the contractorwould be paid through the issue of two (or, in exceptionalcases, more) payment orders: one (or more) drawn on the appropriatetreasurer for local counterpartfunding source, and one issued by the KPKN in the relevantprovincial capital. Before certifyingthe latter payment order, KPKN would verify that the counterpartpayment order(s) had been drawn for the ccrrect amount in accordancewith the specified IBRD financingproportion. DG Budget of the Ministry of Finance would issue a Circular Letter to KPKN in Surabaya and Denpasar instructingthem to undertake this duty of verifying that the counterpartfunding contributionhas been made. Again, local contractorswould not have to go to Jakarta to be paid.

Central GovernmentDomestic Lending Arrangements

It is agreed that these loans would be made using the Domestic Lending Arrangements(DLA) of the Ministry of Finance Directorateof InvestmentFunds (MOP-DPI)(See Annex 4-H for descriptionof processing). DDI would advance an initial tranche of money for sub-projectPayments and be 90 percent reimbursed from the SpecialAccount on the basis of the requisitepayment evidences and - 109 - ANNEXPage 4 6 supportingdocumentation (see "reimbursementfrom, and replenishmentof, the Special Account' on page 6).

Budgetaryauthorization for the SpecialAccount drawdownewould be provided through the Rencana Anggaran Tahunan (RAT) procedure. DJB would order advances of monies from RDA to a designatedSub-project Account in a local bank, on which payment orders would be drawn in favor of contractorsisuppliers by the sub-projectimplementing agency (Pimpro/BendaharawanProyek). The latter would then submit copies of the payment orders and other supporting documentation to DJB (DDI) for further advances and for DLA reimbursement from the Special Account.

(Notet DJB (DDI) are unwilling to agree to loans for projects which would finance procurement made under bulk purchase contracts covering a number of borrowers in which those borrowers are not directly-contractingprincipals. DDI also has reservations about an arrangement under wnich each borrowing regional governmentor regional enterpriseconcludes a separateprocurement contractwith a single nominated supplier selected on their behalf under open competition).

Further details of the envisagedpossible on-lending arrangementis provided in Annex 4H.

Maintenanceof PFAMS Records

Implementingagencies (Pimpros)would be responsiblefor notifying PFOs in the relevant loca.lgovernments of all payments made - through the provision of copies of certifiedpayment orders (SPM) - so that the payments can be recorded in the Project MemorandumAccounts (PFAMS). These copy payment orders must be provided individuallyat the time the transactionstake place.

Payments Made in Foreign Currencies

Where deemed appropriate,certain technicalassistance, training and ICB procurementcontracts would be paid in foreigncurrency. In certain circumstancesthe paymentswould be made directly by IBRD; in other cases they would be made from the EJBUDP SpecialAccount.

Whe-e the foreign currency payments relate to Department of Public Works DIP budgetary allocations,the DIPs would be drawn up in an analogousway to the procedures describedabove under 'paymentsmade in Rupiah*. In some cases it could happen that a single DIP document specifiedfunding from all modes, namely:

DIP Rp RK (denominatedin Rupiah, but includingthe estimatedRupiah equivalent of possible foreign currency payments made from the EJBUDP Special Account);

DIP Devisa PembayaranLangsung (denominatedin US Dollars, irrespectiveof the actual currency of payment); ANNEX 6 - 110 - Page S

these together representingthe IBRD funding share in accordancewith the specifiedIBRD disbursementpercentages, plus

DIP RP APBN,

representingthe central government domestic counterpartshare.

Where the foreign currency payments relate to sub-projectcomponents financed under the envisaged central governmenton-lending scheme described above, the RAT budgetary authorizationdocuments would be drawn up in a manner analogous to that just described for DIP documents. The RATs would be drafted by project Implementingagencies of the borrowers (Pemda Tk II or BUMD) and submitted in the first instance to DDI.

Direct Payment Arrangements

Establishedstandard procedureswould be followedwhereby IBRD makes the payments to the contractor on the applicationof the relevant EJBUDP implementingagencies through Bank Indonesia. In the case of direct payments relating to contracts financed under on-lendingagreements, implementing agencies would submit the payment applicationsto DirektoratDana Investasi (DDI) in the Ministry of Finance,who would pass them on to Bank Indonesia.

IBRD (RSI) would periodicallynotify CPFO of all direct payments thus made. CPFO would in turn be responsiblefor notifyingPFOs in each local government of the relevant direct payments made in relation to their local government's PJM, so that the payments can be recorded in the Project Memorandum Accounts (PFAMS). In the case of direct payments relating to contracts financed under on-lendingagreements, CPFO would also notify DDI in order that the payments can be recorded in the borrowers' loan accounts.

(Notes ConcerningDirect Payment contractsin relation to on-lending agreements,see the Note under 'CentralGovernment on-lending^ above).

Payments from the SpecialAccount

Payments for elegible expenditureswould, on applicationby the relevant EJBUDP implementingagencies, be ordered by DG Budget (TUA) directly from the EJBUDP SpecialAccount. For such payments relating to contracts financed under on-lending agreements,implementing agencies would submit the payment applications to DDI, who would in turn forward them to TUA. The process normally involves the issue by TUA of two payment orders ($PM): the first SPM specifies the payment amount in the relevant currency,together with the estimatedRupiah equivalent;a later, supplementarySPM is issued to adjust the Rupiah equivalent to the actual figure notified by Bank Indonesia at the time of payment. (This latter SPM shows the Rupiah adjustmentonly, and can, of course, be for a positive or negative amount). In the case of such payments relating to DIP authorizations,the official copies of these two SPM - 111 - ANNEX 6 Page 6 intended for the Ministry of Public Works would be sent by TUA to the CPFO/1, which would be responsiblefor (a) sendingphotocopies to the PFO in the relevant local governmentso that the transactioncan be recorded in the PFAMS, and (b) sending on the official copies to the relevant DG in the Ministry of Public Works. In the case of such payments relating to RAT authorizationsin respect of the envisagedon-lending arrangement, the official copies of the two SPMs would be sent by TUA to DG for Monetary Affairs (DDI)who would record the payment in the appropriateborrower's account and also send photocopiesof the SPMs to the PFO in the relevant local government.

Reimbursementfrom and Replenishmentof, the Special Account

EPIN, through the local branch of Bank Indonesiawould directly draw on the EJBUDP Special Account in respect of payments made under the DIP (Rp RK) channel.

Reimbursementsfrom the Special Account to the RDA in respect of payments made under the envisagedcentral governmenton-lending arrangement would be ordered by DG Budget (TUA) on applicationof DDI supportedby the following documentation:

(i) the payment orders (SPM)-)drawn by implementingagencies (namely,Pemda Tingkat II and PDAM) on the local sub-project on-lendingbank accounts;

5ii) certificatesof Performance (BeritaAcara) issued by implementingagencies;

(iii) copy of IBRD 'No ObjectionLetters in the case of civil works contractswith a value of US$ 500,000equivalent and over, and goods supply contractswith a value of US$ 200,000 and over.

On the applicationof D-G Budget (TWA), IBRD would replenishthe Special Account quarterlyor when the balance in the Special Account becomes 50 percent of the initial deposit, whichever occurs sooner in respect of these drawings. In the case of civil works contractswith a value of US$ 500,000 equivalentand over and goods supply contractswith a value of US$ 200,000 equivalentand over, and all contractsfor consultancyservices and training, the replenishmentapplications would be supportedby the following documentations

(i) the payment orders (SPM or SPMU) issued by KPKN offices, or drawn on local sub-projecton-lending bank accounts,or issued

1l Authority for TUA to do this, and for the role of the CPFO in this respect,will have to be provided by the Ministry of Public Works, either through an SI of the Secretary-General,or through a joint SK of Dir-Jen Cipta Karya, Bina Marga and Pengairan. -112- ANNEX 6 Page 7

by TUA in respect of foreign currency payments from the Special Account;

(ii) certificatesof Performance(Derita Acara) issued by implementingagencies;

(iii) copy of IBRD 'No ObjectionLetter".

In the case of civil works and goods supply contracts/orderswith values below these limits, the replenishmentapplications would be supportedby Statements of Expenditure (SOE). The detailed supportingdocumentation in respect of SOEs would be retained by TUA and implementingagencies, and made available for review by IBRD on request. -113 -P age 8 -113 -

EASTJAV-AlUl URBMNDEVELOPMENT PROJECT

(US ililons) Urbans*ctor prof-ile tor Oiabureeent Cuuletive Indonesle Semesterending In sefmeter Cumultive amount percentage cumulativopercentage

June 80, 1991 8.6 8.6 1.9 0.0 Decmber 81, 1991 6.9 12.4 8.0 0.0 Jun. 80, 9M 19.6 81.9 18.6 2.0 December 81, 1992 19.2 61.5 29.0 7.0 Jun. 80, 1998 19,9 71.4 89.6 14.0 December 81, 1998 20.0 91.4 50.7 26.0 Jun.80, 1994 20.8 111.7 62.0 87.0 December81, 1094 20.0 182.6 78.6 46.0 June 80, 1995 19.7 162.2 84.4 52.0 Decemberal, 1995 16.7 170.9 94. 568.0 June 80, 1996 9.4 160.8 100.0 64.0 December81, 199 - - - 70.0 June80, 1997 - - - 76.0 December 81,1997 - - - 01.0 June80, 19 - - - 865.0 December 81, 1996 - - - 00.0 June80, 1999 - - - 96.0 Decoeber81, 1998 - - - 100.0

* Thedisbursement schedule 1s shorterthen thestandard Dank proftle becwusethe propoWedLoan is a programmaticoperation supporting an expenditar. programthat includesno newor complex subprojeet andwhich la notsignificantly larger In realterm thanprogram aIready loplementedsuccessfully In the sameprovince (me ChapterIV, SectionC). A6m - 114 - Page 9

INDONESIA gASt JAVA- A_LIIJR_N OELOPMET PROJECT CalculatlonofSank Disbursement PorcnteMl

TotalPror Disburegento *jn0 Np bIn m Pore nt Rpbnl a

A. ProgramIntfrstructure DevelopmentA OAM Expendtlurefinnned by RDA loans Melonsminl water supply prograumL 10.0 5.8 0 0.0 0 0Q Otherwater enterprise loans 81.0 42.6 g0 72.9 88.8 Loansto localgoveronmnt 28.6 12.4 s0 21.2 11.1

OtherExpenditures Landacquisition 11.0 5.8 0 0.0 0.0 Civilworks 210.9 120.9 7O 146.0 77.9 IC8 equipment& msterrls 17.6 9.8 0 17.6 9.8 Taxes& duties on I0Coquipment A mterial 6.2 2.7 6a 0.0 0.0 LCDequlpment A material 28.1 14.8 6e 18.2 9.6 Current Om exponditure 180.6 68.7 0 0.0 0.0 Incremntal DAMexpenditure 52.4 27.6 0 0.0 0.0

Contracteddesign A supervision 25.0 18.1 100 26.0 1S.1 In-bousedeeign and supervision 11.9 6.8 0 0.0 0.0

Civilworks andoquipment not eligible for I8RD loan disbursement Watorenterprise Internally funded Investmnts 21.6 11.4 0 0.0 0.0 Expenditurefinanced by private contributions 18.1 6.9 0 0.0 0.0 Non-ICe-purchasedvehiclee 4.8 2.5 0 0.0 0.0 S. ProgramManagement and Institutional Development Amountfinancied by SankLoan 80.6 16.1 100 80.6 16.1 Amountfinanced by Japanesegrant 8.0 4.2 0 0.0 0.0

Total Project Cost /b 666.5 860.5 lesstaxes and duties 47.4 24.9 less current 0W 180.6 68.7 les land cquieltlon 11.0 5.8 Net amounteligible for I8RD 496.4 261.1 69.1 842.6 1800.3L b Malangloan comitedprior to appraisalof projectl not included In I8RDloan. b Exeluding lnterest duringconstruction. cIncludes 84.8million plae d in theunallocated category. - 115 -!UL INDONESIA EASTJAVA - AL URMANSEVELOPUENT PROJECt Kew!oms.mntat10n and PerformanceIndicotors and R.oorClnc Sxstms

Rweorting ifrquency *and Reporting Sndlcators r epon1btility to3

1. Prmg _ mplementatlon Agrement *tnlization sid*lgning hehdule cartrly PPIO 1) CPMO 1iCPMOCPVO (21) TiKPP/IMO~~~~~ndIDNO

2. Expenditure programand subprojct appraisal schedule by provincall torms quarterly (1) PPMO () CPMO (2) CPUO (2) TKPP/!ma *nd 1350 8. Conformity of annual budget allocation with approved expenditure program and financing plans annual (1 PFO (2) PFO (2) PPFO (2 CPfO () CPfO (8) 4npo'G and I=5 4. Conformity of *acul expenditures with budget i loations annual (1) PFO (2) PPfo (2) PPFO (2) CPfO 8) CPF (8) TKPP/ZIM end I=N S. PIL/AAL preparation scedule uarterly (1) PUO (2 PPMO (2) PPWO CP(O0 8) CPO () TKPP/flm and 13R B. RAP/LIDAPtarge and tlim table gureXrly (1) PMO (1) PPMO (2) PPIIO t2) CPM^O (3) CPMO (8) TKFp/ZlU Loan disbursement target. quarerly CPFO TKPP/ZIU and I8RO S. Consulting er"vie implementation schedules, particularly tassgnment strt quarterly CPMO TKPP/IU0 and IN S. Physlcal Prore per local governmnt qrterly PPO

10. Procuremnt schdules quarterly (1) PPMO 1) CPMO (2) CPIIO 2) 1KP/IUQ and 195 - 11j - __ __

E"T JAVA- MU ENDEVIELOPENT MROJECT Loeal o2ernmentPromle" Eust JtAv Loal Governmnt Administrative Total Population Urban Populotion Urbn Popultlon Local Status Population tUWS Proj NUDSProjection @overnmant 1910 1990 190 1990 (R_leit ProJ) (Total) (> 600 inh ) (

1. Mojokorto Kotamadya 96,766 79,600 107,164 107,184 2. Paouruan Kotmadyn 167,627 129,484 160,806 160,808 S. Probollanggo Kotamadys 162,820 119,616 I 144,289 I 144,269 4 Kediri Kotamadys 28,718 222,009 244,728 244,728 1 S. Sumoep Kabupoatn 061,420 67,826 67,26 S18,043 6. Lamongan Kabupaten 1,820,006 186,462 186,482 132,062 7. Bnyuwangi Kabupaten 1,8699,07 564,881 564,861 684,861 S. Sldoarjo Kabupaten ,A1,142,8 274,665 274,86 2568,859 9. Jaber Kabupaten 2,066,879 402,067 402,019 402,019 Sub Tote1 7,576,420 2,015,676 2,141,556 2,114,938 BATCHII 10. Situbondo Kabupeten 676,168 156,686 156o,10 16,610 11. Lumajang Knbupte,n 946,968 127,264 127,2688I 127,268 12. MaIang I Kabupaton 2,866,004 227,00 227,60o 227,800 18. Pasuruan Kabupaton 1,162,146 190,618 190,612 162,649 14 Tulungagung Kabupaten 940,666 205,249 205,249 190,617 |15 Ponorogo Kabupaten 688,758 78,697| 78,6997 77,897 IoJombang Kabupaten 1,049,816 155,584I 15S,584 150,S9 17. Madiun Kotoadys 206,840 168,426 240,066 240,656 16.Bonjonegoro Kabupaten 1,202,190 127,688 127,682 121,82 119.Tuban KabupOten 1,029,760 92,096 92,098 92,098| 20.Oreslk Kabupaten 682,611 159,688 159,886 148,986 121.Bangkalan Kabupaten 759,447 52,918 108,747 95,664I 122.Blitr KoIa dys £80,142 120,147 185,9161 185,918 28. Sa=ng Kabupaten 709,947 50,995| 54,806 s50,009 24. Pamsoan Kabupaten 689,a86 55,179 56,179j C0,277 ISubTota I I | lSub Tot | l$~~~~1,513,8781,990,425 2,109,2883204,7 BATCHIII 125. Oondowoso l Kabupaten 677,266 51,200 1 51,200 551,200 26.Probollnggo Kabupaten 675,796 77,462 I 77,462 1 68,498 27. Mojokerto Kabupaten 918,025 61,111 1 61,110 I 56,6121 I26.KWdiri Ka I ISupaten1,89,16 06,499 I9 99 81,898 129. Blitar l Kabupaten 1,069,626 66,560 I 66,560 66,560 0:. Trongpl.k KCabupaten 662,411 |88,29 86,290 86,296 81 Pecit tn | K*tpeno W506,864 16,622 16,622 186,22 I2.tonjuk l Kabupaten1 97,5886 116,761 116,761 110,6581 88. Madlun I Kabupaten I 686,560 42,561 42,561 42,561 1 a4. Magtan Kabupaten I 699,064 61,665 61,685 59,461 8ss.Ngawi Kabupaten 961,821 30,71410,714 10,714 18. Ialang Kotmadys 662,868 662,866 662,868 662,86e

Sub Tabs I 9nenaaea.a I ana.I l SubTotl I 1 9,661,89 1 1,88,061 | 1,848,166 I 1,809,1665 7TotuaI 80,970,157 5,854,168 5,596,s65 5,465,572 I87. Surabtys Kotamdya 2,867,840 2,867,840 2,867,640 2,867,940 Otber Urban 17,549 17,549 17,549 17,549 1 New Urban 30,000 30,000 80,000 80,000 ITotI II 88,865,546 7,769,652 6,014,244 7,680,961 -117 -N

DV87 JAVA- MUs uIM 2 Mona iiocl Oovernint Prof Il.t East avaL EiLch ? Urban Popul;- Loc;tion _ _ _t _ _ _ _et Urent No. LQ-aL tion Projection in Important Development CIty Probls Governeent 11989-19P) e. Java =conom Prioritlec Function to be (IUIDP) Sector. Solved

1. PrebolIngeo 2 S p.m North Comet 7,6,T .1.4,2 O,D,A,F,O I, 21 2. K edri 2,Se p. Inland 4 (CIrrettee, A(l),i,t,Q.E S, I TrafficManagement sugar) S. MoJokerto 2,211 p.* Inland 8. t, 2 A,D,F,G,E S, SS, III DOrainaeste

4. Paeuruen 2 S p,o North ConOt 4 (Mom.) C,D.,OB.F.E I S. Benjuuangl 1.75 p.m E"t Comet 8. I, 6 A.D.F.B.0,E IV - tcncmr 0,B6 p.a bat Comet 4 (Filh conning) A,D,C,i - Rogoja*#I I t p.n Ebat Coaet S, 6 F Rehebilltetlon of locol mrket. - GOnteng I S p.a Eist Coaet D,C,A,e

6. Suop 1.61 p.o eat Coast e. 4 (melt) A.C.D.9,F I of Madura 7. Lamongan 1.55 p.m North Eset 6 A,0,9.0 I Flooding 8. Jesber 1.75 p.m Mountani)ue 6 A,.D,,C,C S, SS, III 814carjo2,511 P. (In"ad 9. 2,8 p. Inlandl4doerJo 0,4.8 A,V,C,8 I, SI

Econoic Sectore - Clt Function D v.lopment Poritles

1. Traneportation I, Adminietrative Canter A WaterSupply syste 2. CeomunIcation II. Comerelal Centre S. Solid aste Management 8. Trade 1Ut. Educational C. brain*g 4. lIdustry IV, RegionalDevelopment 0D urban fede 5. Public Alinistration Centre E. KIP 6. Agriculture P. mile? asw.Ii ate 118 - Page 8

EM JAV~A-NU LMUM REO=VLPU PROJ! Be I Loc I Oovarnefl Adminletration TotalPopulation Total Urban Urban Population Urban Popuiltln fatlated LocaL Status Populstion t40S Proj NUDSProjection IUIDP iunctional Covornment 1990 1990 1990 19 Urban Population (ResIat Proj) (Total) ( O I0 Projection

1 2 8 4 b' 6 7

BATCHI 1. IADO KAUPATEN 890 200 480,040 872,828 872.28 278.274 2. OUJLO KAIMArN W80963 148,808 184.778 149.902 6u.86 8. JMAq KA5WPAT7N 207,888 838008 82,088 82.08 81.279 4. KUN.O1 iASPATiN 138.89 48,850 290840 29,040 29,08 SUB TOTAL 1,484,888 692,714 8",998 t84,124 406,968

BATCH11 S. TAOANMN KARPATB4 880 200 72 542 81 202 89 796 80oe40 6. IAWAR N AWJPATEN 828,042 181.980 90,648 90,496 88.797 7. BDJ4U (AUUPATBN 174.172 as,710 82,081 48760 to.074 0. KARANOASS4 KALJPATEN 847?976 07,676 76607? 78,07 42,284 SUBTOTAL 1,18,890 ' 8se0.51 278,208 258,667 127,788 T 0 T A L 8,eeo,24s 1,048,280 062,280 089.91 884,721 Notes (4) Bseod on propoaedurban area (8) Coabinatlon figures between 11 regilatred urban population by tLUS and the other propoad urban area (7) Derived from functional urban area In 1980 and In 1994 Criterion functional urban area - Reldential Density > 80 P/h. - Urban Facillties > 8 kinds - Ariculture Employment > 2SX.

EAS JAVA-BALI MOMADE4VELOME ROEC BaliI atch I Loc4Ioverniments Urban Popula- I Location most II I Most Urgen No. I Local tion Projectioni In Important ID.velopmentl City I Problem Government 1999-1i968 alil EconomicG Priorities Function to be I (IUIDP) Sectors Solved ------… --.---

1 i3ndung 1.98 South Coast 7,6,8,1,4,2 A,S,C,D,C I, II, III, IV Traffic, Solid 2. Sul-lon 1.68 NorthCoast 0,8,4,7,2 C1AO I, II, III, N Dranage 8. Jesbrana 1 80 SouthConst 6,2 1A,B,E I, TV 4 IKlungkung 1 88 SouthWest 6,4 8,D,E I, IV

EconomicSectors : City Functions OevclopmentPriorities

1 Transportatlon I. Administrative Center A. Water Supply System 2. Comunication II. COmmerciflCentre S. SolidWast 8. Trade III. Educational C. Drainage 4 Indusery IV. RegionalDevelopment 0. UrbanRoads 5. PublicAdnalnstration Centre E. KIP 6 Agrioculture F. VIIP 7. Tourism 0. HumanWaste -119 - -119-~~~~~~~* AMEX9

INDONSIA g Jva - U ~ -EVELOMSITMOJECT RtApSu_mmry tost Java.

NR Action Purpose

Assessmentof Potential 1. Carryout Identificationand description Availablityof a good (data)bao *_.- of tax objecte/subjectawith *illd *un- sentof coverageratio, collection natio, vey, by D spendaalon buta*luo by tax/foemanagement, and financialplanning. oer acies. Adequatu rsch mns that the eulte are: (1) quantified; (2) accurate; (5) acceseible (computer prints, reports); (4) up-to-date; (5)

2. Application of Mapatda, also for ll 2 proved r*gietration of tax/rate peyer., suitable few and charg". which will automatically tmprovecoverage and collection ratios. Better performanceby the local reven gseerating executive agenies wlththe help ot the b4tter data. S. Collaboration with other agencls In the Improved" uallty of database for revenues form of exchangeof Information. potential. Available of a key to mesure per-

4. Have good records (sufficiently accu- Constant reasooesmnut of potential and serious rate, detalled and up-to-date). D0emnd evaluation of prtormance. adequatedocumentation from tax/rate payers where relovant.

5. Analyse ..- roved dat tn order to Correction of underestimatione of potetlil, as*ess shortcomng in perfone_ and causedby mainly relying on pst per ne strengthe affectivity of menitoring and In stting targes, and lack of reserch. supervison. 3. Easily applicable legl base (tax law, Assessmetof potetial as quick and accurate Pords, #t, ete). as posible.

Increa"of Potential 7. Reviowtariffs tn Perda every 8-5 yers. Developmentof potetialfollows econmic Incraso In linewith Inflation, deelopment. incrasetn paymet ap"acty, etc. Optiml tarifflevls for *ee/harge. S. For ftss and charg, considerthe type of services comrelal:- hould In principle r costsof an effilcentservice, ut shesd he affordable for payersIn a caegory, and should net hinder devlop- sent of th econmiesetor If consilderoddeirble. - socal shouldb ffordabl forthe tnx/re pay*erof the categories. g. Improvequllty ot ""Ice forwhich Relativelyhigh tarifflevls are better charSgd *.. Solid WasteDisposal, acceptedby the public. cleaningof market. 10. Review structure of tariffs. Simplify Easier application, lse mliundewstanding whore posiblo In order to maximize betwee offi cials and tax/rat payore, revenue. Increased IwillInnesof the publicto pay. - 12') - ANNE 9 rose 2

11. AppIlPerds more strictly. Apply Stricterapplication of rulesenables better caution In the " of discounts, mnttoringand controland lmproveoclartfy of the revenuegenerating proce. Ifl.Realization of Potential 12. Strengthenplanalag monitoringfunc- andt letter ""parattonof functions,so that they tions of Ped. U1 (fag n Keuangan), can be better peformed by the agenle aIrea- garticularlyfor potentialassesment. dy ssignedto them. rlintlshplanning function of Olspenda. Is. mWpoveocoverage ratio (automatic If Improved tax mentality, more revenue. good sesUemnntof potential.good regentrationand goodmonitoring of per- formance are all carriod out). 14. mprovecollection retio: Improvedtax mntelity, more revenue. - monitoring (effective control of proper application of the rules); - enforemnt: fterop action In case of uejustifled o-pay"ent, lafge fines of non-paymentafter adequateearning. 16. Derease rrearo, by writinS off arrsrer proved tarx metllty, more revenue. of evr e.g. 5 years old; start juridi- cal Procings aaint seriously d11h- quent tax/rate payers (met likely by baliliff action). 16. Ensure an adequate lgega basis to enable Improvd tax mentality, more revenue. effective enforcements - fines high enough (at l1est 2-S tilm the sum owed) - fast and copiet Juridical procesing of delinquent tax/rate payers. 17. Improve admnistration. In particular, Allobligation of a tax/rate payer can be expend Mapetda me thot all obilgations d qulckly. PlnaScisi audit Is fasillta- of a tax/rt payer are covered, ted. 15. Improve available equlpment (computers, Improved and up-to-date databas. Leoler mon- motrbikes). itorlig. 19. Increase intives, *.g.for Implement- Setter motivation and performnc of all offti- Inm aaptdnd ldentifIcation of tax clsisconernend.

20. Smprovesrvice level where paying mentalityIs suffering frm Imbalance betweenservice provided and payment dfemnded(cleaning markets, POAM etc.) 21. Know the cost of revenue generation for Efficlent us of limited reeoures. aI Important taexs and fees/charge. 22. Concentrateavallable resource In aximizisngrevenue collection from major taxes and fe/charges, and from those wlth good growth potential (itthey yi-ld morethen theycosti). Minimiz resoures spent on unimportnt taxme and fe/chars and on theo with low growth potential. Sut consider both sides: - net revenuegenerated. - effect, on society (busines growth, employmnt). - 121.. ANNEX

INDONESIA EASTJAVA - URANDEVELORMENT PROJECT RIAP Summarys SaduneKabuouten, Bell

Action Targt Concoened Agencies Timetable

Coverae Cnete O date baen (on computer for Boglon 190/91 *1l the major taxes and tees). Kouangapn/Bappedn, This data base consistsof a11 the OispendaSS, OPUK, tax objoct and subjects. Survoys S. Perekononlan, are mde continuouslyto update OLLAJR, local autho- records. rities.

Tariff Ane m- Tarift*soesement (PP I Entertain- Otopendat, OPUK, W9/90on- Tait Amt Tax, PU) are consideringin- KOH, OPRO Bagien going creaed, based on research Perekenosian, Olnas (survey*) and proper recording ot Keshatan Costs of eolllectin major taxee and go/go on- oess have to be estimated. govin Tariffe are set to maximiz revenue U9/9S on- oonsidering the following criteria: going - atfordability by the tax/rate paer; - tariff In lIne with quality of the servicesupplied; - need not to hinderor slow down desirable economic dev.- lopment. Tariffs take account of the dove- Rpel te V lopsent In conomic parameters like Inflation, growth ot tax base (pop- ulation, weath, etc.). Adjustment of the Perda should be done on a regular basis. Collection The collection system tor Individ- Diependa U and to Rpl Ita V uai taxes and tes dopwndo on: Sgglan Kuansgn, r- - the percntag, share of It In wilkab the total rvenue and the op- portunities for monitoring the colleted *tountu. - the lpertance of the tax/te as compard to cost ot ol0lc- tion. Elemnta of collectionsystem: tre- qvnqc, place ot collection, type Ot recipt, specitfietion In admin- Istration, ine ntivetor perform- one. Creationot an up-to-dateand com- plete registration ot arra"r, aN eaglan Koeangan, 1909/90 a realisticplan to deal with bad DispendaU debtor. and chasing up their debt. - 122 - <

Administration Adminietrativ forms and procedures O pend.t 1, MA 89/9 an- Monitoring nd wl II be deigned to feoelitate of- going Control fective control. Mapatdahas ben Introduced. There 1 effoetive control of per- Olopends1, Bagion 89/90 on- formanceby mans ot: ovangan Going - knowledg of real potenttel of taxes andfees, not only by Olependamanagores but oleo by sEgianKounngan and IGDH; - a *yst of surve" *nd other filldwork for keping records actual; - structurecooperation betwese agenciosylelds lmproveddata- baseand moreopportunity to find faulty or outdatedby cross-checking. Legl Bosos Local Regulatione aro regularly up- Dispnd U, Bsaton 09/90 o- det..(reco_ ondod to at laost Ortala,1KO, Sire PIng every5 yers). Spocial attention orlas DOM egivon eachtime to adequate tarit levlo and simpletariff stucre. Supporting doaument should be prpaer In time to blb epeey approvel. Tariffs are madeknown publicly for monitoring by tw public. Ftbnetol Plan- Low revenuetaxes and fee are Ot_pendeU, IOL 11, Repl Its V ning andTax opersted with a intimmof resour- Dlopends, Oepsgri Managemnta". Initiatives are taken, postible to- gether with other da II, to pr-e poe the abolishment of ones that provide negative Incoe._ Targets are set realisticallye tn sg n, 0/90 on- basedon adequate re_earch. They Dipd 2 otn are verified and onto by otho agencie. A mediumer nancietl planning should be mae and adjus- te eah year. - 123 -

EAS JAVA- A U0 VOP UDIAPIu&Mr 5 Ega Java

Action Purpo

Explainf/Ois.inatoSUKDP to aIlagencies Establish effective MOP managmnt and coor- and staff _ember oncerned. Givetioely dinbtlon. brefIngs about IUZOP functions to staff concerned. provo Organizationtmake cloer distribu- Avoidoverlap (work Is don twice)or the con- tionof taoksbetwen (Sub-) Sections and trary(nobody dos anyting). between agncieos. E.g.OPUD/Kebersiban, Dispenda/S. Eeuangan. Informaton/Plannin: - freqent poriodical checking of tho cond- Settwerplanning, appraisal, mnitorinet velua- tionof uran infrastructure, tie of dev lopmentWprooe_. - ue for database on urban infratructure. BSeter plannino, pprasal,l onItoring/evalu- tiesof delopnnt process. - better standards for reporting quantified, Setter plan"ing, appraisal, enitoring/evaluo- curate, coplete. ties of delop nt procs. - moredotailod 61- and 10- year development Setter planning, appraisal, meaitoring/evelua- plane for VUIOPsector having priority tionof devlop proess for thse sectors. during Repelita V (Urban Master Plans not spelfic enough) More ffective control of land uso - more active planning and control of lond Moe r nuoefrom building Pormit Fee. use by lnstitutionollaing effective eco-pe- rat on between Sapped (theory) and OPUD (practices). Operation and Maintonane:s - mere bett e maintennce, nicluding intro- Avoids capital lose becauso of preventable duction of planned maintenance,based on the dmage to Infr atructuro. lnfratructure condition databseoand improved Inspection. - expenditurs requiredto mantainthe conditionof existinginfrastructure and thatwhich will b btulitduring Repe Ita V. - arrangementswith higher jovoenmnt levele for the maintenanceof lnrostructureowned by the localgovernment but t;th rgional function. Strnthen HumanRosources - mre tft In Sections with only a Head. Inese_ productivlty and ceetinuity of work. - all (Sub-) Sections Important for tUtop Increase productivity an continuity of work. shouldhave a Head. - strenothndepartments an soctionsof btterqulity of workend management. import nc for tUtop with perennel having the right backgroundand levl of education, prticularlys planoloy, civil eginering, project appraisal, ldoon,elronic dataproessing and stre. assign peronnel specificallyto mintenance Setterskills of personnel; beter maintan- of eachtype of infrastrucure. ane; es"er personnol planning. - 124 - ANNEX10 Page 2

Strengthen Monitoring of Prfeorence: er.ngthenn rol- of gnclo nlreody In Snerao e officieney eharge. motnitoring. oOmplter-*dSd edminiatretion of project. ore ctve evluation of perforncmmeof Dlspendauepectively OPUD. oevlop Manpowet lanree pertlolpation of managementend ImproveclviI service performance. staff In trainingcourree, esp. I manngamsnt and project appraisal I2) CoMpu- teriseddats proceslng, analysisand ate- rago; (3)Plsnology; (4) Official g.nersl' couren (formiddle_-lovel management); (5) On-the-job training In operation and (planned) mintenencs. IncreeasReocurcar computer ayo"" with prlnter end operational Revenue geerati on. bwudge for key IUlOP egeclees sapped., OPUD, 0. Keberslkon, Olsponde, S. Penbongunen, S. Koeuangen. _manof transportfor more activewnd fre- quent monitoringof physicalpreoroe of de- w lopm464 projec$t. Motrbikes are suffl- cleat for Kodye. -125 ANNEXIO rose 8_

EASTJAVA - SA? MM OVJ0MEN PROECT LISDAPSumerys hI?

Problem Clarifleatlen Neces"sry Actlon.

Di_ssination There t not ye goodcoordinatlon ao4ng Dieminato VDDP Of IDP the variouspartioe. Tooks of the materlo/informatlon to all toehnical teams are not clear enough. ZUXDPteo membersand agencies. Makework pro4raues and Improve proedures. Progrm Evalua- Clarlficationto neededfor appralial Strengthenthe provincialand tionand criteria andguidelines. locl government's t ehnleal Appraisal teams. Structural There arestill vacant positions rsult- Improvementof skillod and Positions Ing from lack of adequately trained reruitment to nncessary. candidates. Personnel/Staff ThereIs a lack of well Iquallfld staff Inease staff for 8a=a, for progrm VWndproject preparatlon, OPWU,Dispanda and tSowiIda for monitorlag andevaluation, management planniag, enginering, monlto- andAecountaney ring end mnagement. Training Strengtheningof staff'scapability io Prpare and lmplementsraining necessa-yfor all aenelesto fulfill programeeand project propara- thelr NtUP functions. monitoring nd evalutionItn, for Sappeda,t ehnicalplnanng and manageme"ntfor DPUD,accoun- tancy *nd'financial management for S ispandaand Sekwirda Equipment Thereis not adequateequipment to Make*avaiable new and addition- d ticointlyprepare progaerse, monitor a equipmentsuch as computers project. and implementproposed revenue andmotorbikes, ftiing cabinet., increasing action. etc. Oparation and PoorPlnanng and implementation of ope- mprove planning and management Maitenanne ration and maintenanceis amongothers for 08Mfuncetions; incerse caused by a lack of funde and staf. staff andbudgets for DAM. - 126 -

3*2 JAV.3L 1l*N4^98E A0= Ram. Ia.

() ( . (8) 6) (7) (6) (9) (10)

}u OT 0 as1 19 NA 19.9 0. 19.9 80. 1 0 196 67s I.0 M'A 1.0 0.0' 2. 0.0' 1.0 In 2. idt1 6 26.7 16.0 96.7 0.0 1s.7 0.0 16.7 8.0 18.2 a1 1966 81.4 1l.6t 19 64. 46.8 0.0 46.8 14.1 82 1 16 2"6.7 12. 4 77:.6 70.9 6.4 0.0 6.4 2.4 4.0 21 167 29.8 212.6 62.7 78,. 9.4 0.0a .4 2.8 6.9 61 S. L8...S. 4 tj.8 97.8 1.0 16.6 1. 0.0 10.6 0.0 11.6 18

1668 16.8 16.0 S0.8 82.4. 12.2 0.0 (0.2 0.0 11M9 -6 1967/0SOU tS.164.1 111.918 a (11.9)(25.2)6. 188.8A (.2*4. 0.0 (o..11.0 0.00.0o (.X48.0 -181.11 4. PSaleiJ<4 19"4 111. 100. 1 1 1.4 NA 12.4 0.0 11.4 0.0 11.4 101 1966 230.9 6:62 41.7 27. 1. 0 1 0. 14.9 2 11 196 178 1262 6. I4 1 2. 0.0 I16.2 16.2 96 16 W07.6 119.6 6S7 8 4. $6.1 0 .0 18.1 0.0 83.1 2 6. J-ardi. 1964 60.9 409.6 891.1 91.4 299.7 0.0 19.7 600.4 110.63 67 196 681.4 660. O01.. 146.1 186. 0.0 18.$ 46.6 107.9 16N I19 119.8 691 449.8 0.4 296.9 0.0 6 .6 1.1 196 1366.2 2. 816.8 129.2 20.1 0.0 6.1 06. 1: .9 SIN a 4: Ui~~~~~9a 0 'o JV M 1 1P 'IF g43 1961966 476.146. 121611.0 1".780.9 69.996.9 106.610..0 41.04 80 162.o14 .0 81.447.9 111.4114.1 ISs1 7. J.rb 1964 242.6 7.8 10.8 14.1 139. 0.0 10.0 06.6 114.4 87S ioe4 tCO. fO. a000.8 N1 o8 . . 1966 440.8 210.8 2680.1 186.:7 91.4 1,94.9 (10.8 0.:0 (100.6 -18 1" 9~~~~~~~~~~~~~~71S.8 290.98. e 2,04.9441.9 1.$91 a 16.n.o s.4502S2.6 061.6.00. 2N.0.0 S40 61.0 .0v as S. SUnaw 196 330 1906 111.M 108. 6. NlA 6.1 10.0 4.11 0.10 6.U6 1966 100.1 99.8 0.6 NA 0.6 0.0 0.8 0.0 0.0 11 1967 1128 112.0 0.8 NA 0.0 0.0 0.8 0.0 0.6 fl 9. btduo 1966 2,014.0 1,871.0 646.0 417.0 216.0 0.0 216.0 84.0 16.0 u1s Xts06~~~Ig 196t 2,897.0an. 3@. 2. 1,46.0 981.0 08.0 410.03. 0.0 410.0 189.00. 0. 14.0 0.-00i.0n0 17S 196 19671,944.0886.8 ~~~,666.0140.6 1,0.196.8 1,119.011.2 187.081.8 18.60.0 187.(8.8) 0.0 S"6.190(8.8) -18a1 146n , 77t.0 ..0186.0 122.00 869.0 0.0 86S.0 1.0 246.04 la2 10. 60Ieloe 1968 410. 149.8 161.8 112.4 89. 0.0 89.1 8.8 86. 10s 1966 418. 811. 100.7 126.9 (26.2) 0.0 (16.1) 14.1 (87.6 6 1967 6M.1 61.1 161.0 164. 0.1.8 (86) 24 (8.9 -,11 166 646.4 440.4 206.0 1784 . 0.0 326 a. 86.1 a 11. JP..w 19646 78.9 76. (.) 00 .0 .0 .0 0.0 0.0 Os (VC ) 1658 97.1 96:,0 01.1 0.0' 0.0 0.0 0.0 0.0 0.0 01 1667 119.9 140.7 (10.1 00 .0 .0 .0 .0 0.0 01 16/6 166.9 161.1 4.7 0.0 0.10 0.0' 0.0 0.0 0.0 ox 196/9 0.2 M0.7 1.8 0.0 0.0 0 .0 0.0 0.0 0 .0 08 12. MIugk.a* 96/66 46.0 27. 18.6 0.0 0.0 0.0 0.0 0.0 0.0 01 (F1) 196/0 66. 0.0 6800 0.0 0.0 0.0 0.:0 0.:0 0 1907/0 186.9 16 12. 0.0 0.0 0.0 0.0 0.0 0.0 196/9 0.0 194.0 18.0 60.0 (48.0) 0 .0 (46,.0) 0 ,0 (48,0) -116

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______.410 ANNEX11 -128 - Page 3

8ELECTEOFINANCIAL DATA

1. MOJOKERTO 1969 10 191 192 1998 1s" 1995 lose

Population- 000 97.97 100.08 102.21 104.58 106.99 109.69 112.86 114.6 Pop. served- ooo 14.99 16.24 16.8 16.8 17.81 17.96 17.?9 17.96 X Pop. *erved 16.83 16.23 15.01 14.61 16.23 16.4X 10.03 16.?1 Waterconnections - 000 2.85 2.67 2.76 2.77 8.16 8.20 8.26 8.20 Employses/1000connection 17 16 16 16 14 18 18 18 Waterconsupt. (MS/mt/"on) 19.0 19.2 16.9 21.6 22.6 22.6 22.6 22.6 Volume produced(thousand .8) 646.4 678.7 904.2 1008.6 1199.1 1209.7 1191.9 1191.9 Volum Sold (thousand M8) 566.1 898.7 628.6 717.0 669.5 669.5 689.6 $89.6 X Unaccountedfor water 623 48X 461 403 86x 803 843 84X Averagetariff (Rp/M8) 184 287 284 286 857 864 6s6o se Total operating revenue 90.60 168.05 161.77 191.68 882.11 889.42 617.66 618.96 Totaloperating expene s 1.59 94.09 110.89 182.46 284.88 2s.86 274.01 266.cs Depreciation 85.64 83.80 40.59 42.82 79.69 114.94 182.06 188.82 tncom afterdeprciatlon -86.78 20.66 10.79 0.66 17.64 -s8.66 110.79 6s.66

Interestcharges 0 0 0 80 60 6o 92.7 92.7 tnternalcash generoation 0.86 40.49 41.61 48.8 64.02 116.1 244.81 228.88 3rants 0 0 160 150 60 182.66 0 0 Loans 0 66.01 290 $00 800 140 0 0 Debt aervice 0 0 0 80 50 60 92.7 92.7 Debt service ratio NA NA 0.00 1.44 1.66 1.94 2.64 2.47 ------_------Inveseents 0.00 41.00 590.60 415.00 224.10 0.00 0.00 0.00 Operating fix d assets 1112.14 1189.69 1249.49 1811.90 2569.84 8266.61 848.9.6 a811,68 3 Debt to debt + equity 0.0M 6.1X 27.93 49.7x 61.03 49.6X 40.6X 47.6x # Day accountereceivable 178 11 108 6s 78 72 so 66

2. KEDSRI

Population- 000 272.69 276.19 287.19 266.08 804.66 814.08 822.68 881.04 Pop. served - 000 12.82 18.12 18.42 18.72 14.02 14.82 14.62 14.62 X Pop. served 4.73 4.73 4.?% 4.6x 4.6X 4.6S 4.5X 4.4X Water eonnectlons - 000 2.64 2.80 2.0s 2.7 2.78 2.64 2.90 2.90 Etployec/J1000 connection 21 24 24 28 28 22 22 22 Wte*r consu.pt.(08/mt/con) 86.5 86.1 85.7 s6.8 85.0 84.e 84.8 84.8 Volume produced (thousand e8) 16s6.1 160S.s 1622.6 1568.6 1607.7 1590.8 1599.7 1699.7 Volume Sold (thousand .8) 1118.1 1126.8 1189.4 1152.6 1105.7 1178.8 1192.0 1192.0 X UnaccountOdfor water 423 42X 42X 87 8sox s8x 84x 843 Average tariff (Rp/Sd) 827 428 416 420 S81 629 644 644 Total operatingrevenue 868.7 461.05 461.46 490.29 627.86 682.91 776.92 778.62 Totaloperating xpenses 276.865 801.61 811.9 828.67 88. 19 864.99 862.99 898.96 Dpreclatlon 67.69 72.74 77.08 76.48 78.61 61.18 91.89 66.61 Income afterdepreclatlon 19.62 106.6 92.42 68.19 214.66 196.79 804.64 268.86

Interestcharges 0 0 0 40 1oo 160 206.10 206.10 Internal cash ganeration n.66 96.86 96.90 s7.48 117.17 121.80 820.47 824.76 Granta 0 0 200 200 16O 0 0 0 Loanm 0 167.42 460 61o 750 460 0 0 Debtservice 0 0 0 40 1oo 160 206.1 206.1 Debt serviceratio NA NA ERR 2.44 1.17 0.76 1.69 1.66

Intaement 0.00 144.40 450.00 650.00 800.00 680.00 0.00 0.00 Operating fixedastbe 667.06 927.74 974.18 1062.66 2127.67 2986.96 8069.66 s228.0e X Debt to debt + equity 0.0% 16.4X 80.63 66.4 656.93 66.OX 2.6x 49.13 Days accounts receivabl 289 151 106 90 68 0s 79 79 ANNEX 11 -128 - Page 3

SELECTEDFINANCIAL DATA

1.*OJOKERTO 1689 1990 81 1992 1998 1S94 1996 19o

Population- 000 97.97 100.08 102.21 104.58 100.9" 109.99 112.86 114.5 Pop. served- 000 14.99 16.24 16.8 15.8 17.81 17.96 17.16 17.90 X Pop. served 15.81 15.2X 16.01 14.61 16.21 10.41 16.01 19.71 Water connections- 000 2.85 2.57 2.75 2.77 8.16 8.26 8.26 8.26 Eiploymn/1000connection 17 1s 15 16 14 18 18 18 Water consumpt.(.8/mt/con) 19.6 19.2 16.9 21.6 22.6 22.0 22.6 22.9 Volumeproduced (thousand ma) 946.4 676.7 904.2 100l.8 1168.1 1209.7 1191.9 1191.9 VolumeSold (thousndm8) 560.1 598.7 628.6 717.0 689.6 68.65 89.5 669.6 X Unaccountedfor water 62X 481 46% 401 8so 86x 841 84X Averagetariff (Rp/m8) 184 287 284 286 867 854 560 S51 Total operatingrevenue 60.50 168.05 161.77 161.68 882.11 J88.42 517.66 518.95 Totaloperating expense 81.59 94.09 110.89 182.40 284.88 208.86 274.01 260.50 Depreciation 86.64 88.80 40.69 42.62 79.69 114.94 182.06 180.62 Incomeafter depreciation -86.78 20.66 10.79 6.55 17.84 -89.68 110.79 66.5S

Interestcharges 0 0 0 80 50 60 92.7 92.7 Internalcash gennrtlon 0.8, 40.49 41.61 48.8 94.02 116.1 244.81 226.68 Orants 0 0 150 150 5O 162.80 0 0 Loans 0 S9.01 290 800 800 140 0 0 Debt oervlc 0 0 0 80 S0 s0 92.7 92.7 Debt serviceratio NA NA 0.00 1.44 1.08 1.94 2.84 2.47

Invesmento 0.00 41.00 690.60 415.00 224.10 0.00 0.00 C.00 Operatingfixod .s...t 1112.14 1199.99 1249.49 1811.96 2609.64 8260.61 8489.e8 8611.98 1 Debt to debt + equity 0.0 S.11 27.91 49.71 51.01 49.61 49.61 47.01 * Days accountsreceivable 178 111 108 88 T7 72 s8 8

2. KEDIRt

population- 000 272.69 278.19 287.19 298.08 804.80 814.08 822.68 881.04 Pop. served- 000 12.62 18.12 18.42 18.72 14.02 14.82 14.02 14.62 X Pop. served 4.71 4.71 4.71 4.61 4.0X 4.61 4.51 4.41 Water connections- 000 2.64 2.60 2.60 2.72 2.76 2.94 2.90 2.90 Employee/1000 connection 25 24 24 28 28 22 22 22 Water con.u.pt.(M8/mt/con) 86.5 86.1 85.7 85.8 85.0 84.6 84.8 84.8 Volume produced (thousand .$) 16S.1 1008.9 1622.5 1508.0 1607.7 1590.8 1596.7 1598.7 Volume Sold (tho_and m8) 1118.1 1128.8 1189.4 1152.6 1105.7 1176.6 1192.0 1192.0 # Unaccountedfor water 42X 42X 42X 871 801 8611 841 4X Average tarlff (Rp/m8) 827 428 418 420 681 529 644 644 Total operatingrevenuo 865.76 461.06 401.46 490.29 627.86 682.91 776.02 776.62 Total operatingexpenes 276.85 801.51 811.96 828.67 J89.19 854.99 862.69 $89.96 Oepreciation 67.69 72.74 77.08 78.48 78.51 61.18 91.89 66.51 Incomeafter depreciation 19.52 100.6 92.42 60.19 214.66 196.79 804.54 268.85

Interest charges 0 0 0 40 100 160 206.10 206.10 Internal eash generation 72.6e 9.86 96.90 97.48 117.17 121.80 820.47 824.76 Grants 0 0 200 200 16O 0 0 0 Loan 0 167.42 450 010 760 460 0 0 DObt service 0 0 0 40 100 to0 206.1 206.1 Debt serviceratio NA NA ERR 2.44 1.17 0.76 1.69 1.58

Invesment 0.00 144.40 460.00 650.00 600.00 600.00 0.00 0.00 Operatingfixed 8sete 067.05 9k7.74 974.18 1082.68 2127.67 2688.9s 8000.58 8228.00 % Debt to debt + quity 0.0 16.41 8$.0X 55.41 55.9X 56.01 52.61 49.91 Days accountsrecelvable 289 161 105 00 88 88 79 79 At1NEX11 - 130 - Page 5

5. SIDOO.10

Population - 000 J25.64 884.79 848.6 858.08 862.55 872.81 82.8 892.06 Pop. "rved - 000 81.82 122.IS 122.75 122.7 106.05 197.68 190.76 205.56 X Pop. served 90. 86.7TX 8.7X 84.60 54.15 68.15 62.25 62.45 Waterconnctlon - 000 6.81 16.62 10.02 16.62 27.22 27.58 27.64 26.68 Employeye/1000connection 19 1S 1s 18 10 10 10 10 Water consuapt.(u8/mt/con) 86.4 29.2 29.2 29.2 27.2 27.2 27.2 27.1 Volme produced(thousand d$) 877.9 7428.6 7428.6 7428.6 11215.6 11826.6 11445.7 11855.0 Volum Sold (thousand ma) 2907.6 5622.6 5622.6 522.6 6 .8 6975.0 9070.2 9an.7 X Unaccountedfor water s0o 27X 27X 27X 265 265 26 265 Average tariff (Rp/uS) 807 862 862 486 468 462 745 746 Totaloperating revenu 1868. 268.65 2688.2e 8211.70 5186.89 4924.65 7288.60 7591.87 Totaloperating expe nses70.86 1440.80 1516.52 1620.67 8744.05 807S81 485.82 4177.66 Oeprelation 201.70 895.87501.71 68.29 766.12 1188.16 1272.66 1257.t8 Income fter depreciation 281.47 646.60 426.08 966.66 626.22 -162.12 1609.62 1660.11

Interest charge 0.00 0.00 0.00 100.00 210.00 840.00 466.80 466.80 lnternal coh generation 247.01 550.48 640.07 011.77 e40.55 957.48 2619.21 2745.40 rant. 0.00 6841.75 200.00 250.00 0.00 0.00 0.00 0.00 Loans 222.90 468.68 1180.00 1250.00 1s86.00 1410.00 0.00 0.00 Debt service 0 0 0 100 210 840 466.8 465.8 Debt service ratio MA NA NA 0.12 4.06 2.62 6.06 6.90

Invesments 222.90 206.40 1500.00 1700.00 1500.00 1270.00 0.00 0.00 Operating fixed ssets 8275.22 10066.20 10671.61 11100.19 24760.64 80620.56 82151.50 88611.78 X Debt to debt + equity 0.01 6.65 5.ex 86.45 54.65 52.85 54.15 51.75 # Days account rceivable 116 75 76 so 6o 60 6o so

6. SANYUWANGI

Population - 000 162.4 164.41 166.79 i690.1 171.66 178.05 176.85 170.69 Pop. served- 000 51.05 51.05 51.06 51.05 51.06 61.06 61.06 61.06 S Pop. served 81.45 81.15 80.65 80.25 20.65 86.15 84.65 84.1X Water connection - 000 6.48 6.48 6.48 6.48 6.48 9.60 9.80 9.60 Euploye/1000 connection 12 12 12 12 12 11 11 11 Water _onstmpt.(n8/mt/co) 27.4 27.4 27.4 27.4 27.4 26.6 26.6 26.6 Volume produced (thouesnd *s) 846o.4 8466.4 8466.4 8486.4 8486.4 018.1 8S01.1 8918.1 VolumeSold (tbousand al) 2701.0 2701.0 2701.0 2701.0 2701.0 8180.5 8180.5 8180.5 X Unaceountedfor water 255 25o 25 255 25X 265 2SX 25x Averagetariff (Rp/eS) 1sJ 1i8 1ts 226 220 7 208 298 Total operting revenue 672.06 572.66 572.68 670.47 e64.66 776.76 068.46 988.48 Totaloperating expense 842.06 862."6 876.97 408.44 422.67 568.98 579.61 606.18 Depoeciation 109.s 99.71 1o0.66 lo.n 116.8 210.75 260.16 294.16 Inco afterdeprction 121.2' 100.00 88.06 166.81 115.49 27.08 128.51 64.19

Interest charge 8$6.52 88.90 61.04 71.04 121.04 161.04 212.64 212.64 Internal coah genration 155.45 142.85 108.71 267.08 281.05 287.76 408.67 $76.86 Grants 487.02 0.00 8000.00 2200.00 1810.00 1800.00 0.00 0.00 Lons 0.00 16.92 460.00 510.00 520.00 540.00 0.00 0.00 Debt service 86.62 88.9 81.04 71.04 121.04 161.04 212.84 212.64 Debt serviceratio 8.2 2.0 6.24 8.76 1.92 1.48 1.90 1.70

In vesmnmt 0.00 0.00 8600.00 2000.00 2200.00 1210.00 0.00 0.00 Operating fixed assets 2602.28 2677.89 2611.26 2060.02 8109.06 5784.67 0021.61 6822.69 S Debt to debt equity 19.21 17.55 20.1X 40.75 58.65 61.05 50.6% 49.4X boys acconft receivable 106 60 75 7 60 6o so s0 ANNEX11 - 131 - Page 6 7. JEMBER

Population- 000 245.48 246.57 251.61 2f6.46 201.41 20O.S7 271.82 277.11 Pop. served - 000 58.o0 56s.08 5.08 68.08 02.99 92.99 62.99 64.90 X Pop. served 21.63 21.65 21.1X 20.73 81.7T 81.23 80.63 80.73 Waterconnections - 000 9.20 10.20 10.60 10.60 10.95 12.80 12.o0 12.80 Employ*es/1000connection 10 10 10 tO 10 10 tO 10 water consuapt(.8/mt/con) 20.4 20.4 20.4 20.8 19.8 19.6 19.6 19.6 Volumeproducd (thousand a8) 8878.1 4016.0 8ss8.6 8a66.8 40965.8 m870.6 as9.9 8s9.s VolumeSold (thousand m 2602.1 2569.7 2689.7 2666.8 2926.6 226S.5 2625.5 2926.5 X Unaccountedfor water s55 55% aso 45X 40X se8 s8x s88 Averag tariff (Rp/os) 824 822 a?2 416 89 897 610o 0tO Total operating revenue 926.72 962.54 588.66 1141.16 1186.02 1101.42 1764.60 1764.56 Total operating expenses 498.14 581.06 549.88 596.44 741.16 770.58 860.42 666.61 Oepreciation 468.66 467.61 400.61 871.40 181.95 119.66 180.05 180.65 Itcom after depreciation -21.21 -96.82-116.256 171.8864 264.90985 271.2185 604.0865 72.195

Interet charge 286.15 220.97 224.40 264.40 2U4.40 8S4.40 801.80 891.80 Internal cashgeneration 445.47 445.26 426.70 605.82 866.99 U46.52 616.86 566.42 Grants 0.00 0.00 700.00 700.00 1100.00 1160.00 0.00 0.00 Loans 0.00 16.76 410.00 450.00 550.00 460.00 0.00 0.00 Debt service 285.15 229.9? 224.4 264.4 264.4 854.4 891.6 891.6 Debt service ratio 1.9 1.9 1.9 2.8 1.8 1.0 1.6 1.5

Inv*Gments 0.00 0.00 1600.00 1600.00 1600.00 570.00 0.00 0.00 Operating fixed *asse 4059.90 4996.09 604.56 7876.84 7744.11 6785.86 9172.14 9980.75 X Debt to debt + euity 74.03 74.43 761.901 7.6x 2.611 69.9 64.83 69.031 # Days accounts recevable 107 68 60 so 60 60 60 so

0. SUMENP

Population - 000 62.89 68.49 64.40 65.80 66.21 07.12 6e.02 69.08 Pop. served - 000 18.67 18.67 18.07 18.67 18.07 22.26 22.26 22.71 3 Pop. served 21.913 21.53 21.231 20.91 20.613 88.23 82.63 82.6X Water connections - 000 8.80 8.80 8.80 8.80 8.80 4.46 4.46 4.69 Empl@yee/1M0 connection 19 19 19 19 19 17 17 17 Water consumpt.(mS/mt/con) 26.6 25.6 26.3 25.6 25.6 87.5 87.5 87.8 Volum produced (thousand m8) 1626.0 1026.0 1626.0 I4.0 1651.0 2747.0 2707.0 2728.6 Volum Sold (thousand M8) 1020.7 1020.7 1020.7 1020.7 1020.7 2004.6 2005.8 2052.1 X Unaccountedfor water 50 503 503 553 t2X 873 863 8S3 Average tariff (Rp/n8) 206 240 270 820 4S0 450 460 450 Total operating revenue 212.81 244.97 276.69 826.62 459.82 602.07 902.89 928.45 Total operating expense 108.70 199.06 216.05 240.01 266.99 454.08 471.98 520.61 Depreciation 89.62 52.08 55.98 59.10 62.20 126.56 196.70 208.46 Income after deprecletion 6." 2.98 2.96 28.91 108.28 820.86 286.67 199.45

Interet charges 0.00 0.00 0.00 60.00 140.00 210.00 261.70 281.70 Internalcash gene-ation 48.01 58.28 56.94 60.01 170.43 447.44 480.46 402.94 Gran"" 0.00 0.00 600.00 560.00 680.00 600.00 0.00 0.00 Lons 0.00 60.18 t20.00 010.00 610.00 790.00 0.00 0.00 Debt service 0 0 0 60 140 210 291.7 261.7 Debt service ratio NA MA NA 1.4 1.2 2.1 1.5 1.4

Invesamnt 0.00 0.00 750.00 600.00 700.00 650.00 0.00 0.00 Operating fixed assets 1646.19 1666.60 17865.2 1684.12 1976.8 5688.67 6126.85 6e41.62 X Debt to debt eq uity 0.03X 8.7 14.9% 51.23 65.73 61.63 59.03 66.9X ODysOnyccounts receivable 109 84 64 84 76 67 67 65 AN!XEX11 - 132 - Page 7 9. BAOUNG

Population- 000 8s9.16 8".11 878.18 88o.0s8 87. 72 896.20 402.08 410.60 Pop. served- 000 186.41 148.18 156.68 162.26 177.99 18S.87 188.47 168.47 X Pop. served 86.O0 40.71 42.01 42.71 46.91 47.01 40.61 46.91 Waterconnectlons - 000 19.88 19.67 20.68 21.70 28.98 25.11 26.60 26.60 Employees/1000 connection 19 19 18 17 16 16 14 14 Water con*umpt.(m8/mt/con) 44.4 46.8 49.1 14.6 81.6 64.1 66.0 66.0 Volumeproduced (thousand a8) 18402.4 14960.9 15882.8 18486.0 22660.2 24868 24884.7 24684.7 VolumeSold (thousandes) 10809.5 1128.8 12178.7 14226.9 17708.8 10927.7 19907.6 19907.6 % Unaccountedfor water 8o0 8ox 8ox 8ox 29X 26 2251 21a Average tariff (Rp/aS) 861 875 80o 861 406 516 686 677 Totel operatingrevenue 8711.60 4429.07 4778.66 6832.98 8669.8010807.68 10990.44 18006.78 Total operating *xpenses 2202.88 2494.61 2677.21 2669.66 8612.47 4656.14 4866.76 5268.81 oepreciation 1200.87 1266.89 1466.88 1844.68 1206.67 1689.16 2161.65 2269.78 Incomeafter depreciation 809.8 666.67 689.61 1118.65 8459.96 891S.68 8972.08 6252.69

Interest charge 0.00 0.00 1268.46 1649.46 1969.46 2449.46 2682.16 2682.16 Internal cash generotion 1246.70 1881.61 2096.84 2408.07 2646.67 8165.68 6966.89 6148.86 Grant. 0.00 0.00 4650.00 4100.00 2260.00 0 0.00 0.00 Loans 4.66 664.24 2680.00 4060.00 6240.00 42M0.00 0.00 0.00 Debt service 0 0 1299.48 1549.4 1989.46 2449.48 2682.16 2682.18 Debt serviceratio NA NA 1.6 1.6 1.8 1.8 2.1 2.2 ------Invesments 0.00 268.90 7600.00 11110.00 6800.00 6110.00 0.00 0.00 Operatingfixed asset. 19986.6121882.17 22966.69 26176.02 48761.78 60182.48 68189.11 66296.06 X Debtte debt+ equity 62.81 60.6% 60.61 71.8 72.81 71.2X 67.81 62.05 # ODys account.receivable 78 71 71 0o so 0o 6o 6o

10. DULELENO

PopulOtion - 000 127.26 129.27 182.61 186.00 187.61 140.89 148.26 145.75 Pop. served - 000 62.86 68.2 64.06 64.94 68.60 75.06 76.42 80.11 X Pop. sorved 41.1X 41.2X 40.8X 40.7X 49.6x 68.61 64.71 66.01 W.ter connections - 000 6.19 6.24 8.86 6.47 10.06 10.74 11.12 11.82 Employee/1000 cornnection 16 14 14 14 12 18 18 12 Wter consumpt.(m/mb/con) 86.6 86.7 86.6 85.6 $8.6 88.6 8.6 88.6 Volumeproduced (thousand e8) 4627.6 4967.0 4926.6 4967.1 6470.7 6678.4 5656.1 660o.8 Volum Sold (thousande8) 6497.1 8626.6 8668.2 8612.0 4079.8 4866.8 4609.1 4597.1 S Unaccountedfor water s8o s86 881 881 841 8s0 2ex 261 Averageterift (Rp/m&) 176 228 285 240 890 w88 8s8 669 Total operating revenue 647.07 607.61 8a9.58 s666e. 1690.98 1694.60 1749.68 2616.76 Total operatlng *xp me 409.12 968.72 565.81 616.4 724.68 e62.92 86.46 992.01 Depreclasion 220.40 282.79 241.90 287.16 262.90 284.40 260.61 274.09 Income after depreclation -41.65 16.1 10 t.7 18.88 618.647 607.0162 698.6608 1849.049

Interest charges 0.00 0.00 0.00 70.00 170 'W 210.00 272.70 272.70 Internel cash genration 176.65 284.76 282.82 215.09 a44.6e 628.72 954.67 1087.17 Grants 0.00 0.00 200.00 180.oo 0.00 0.00 0.00 0.00 Loans 1424.66 1740.46 620.00 1060.00 460.00 700.00 0.00 0.00 Debt service 0 0 0 70 170 210 272.7 272.7 Debt service ratio NA NA NA 8.1 2.0 2.5 8.5 8.6

Invesments 1424.96 1740.45 760.00 600.00 600.00 860 !J 0.00 0.00 Operating fixed as et. 8165.66 6056.14 5819.44 5697.61 6422.57 9680.06 10470.42 10968.94 X Debt to debt * equity 0.05 8.1X 28.11 40.01 50691 71.91 09.11 61.OX Day accounte receivable 90 90 90 76 76 6o 60 60 ANNEX11 - 133 - Page 8 11. KLUNWKUNG

Population- 000 182.24 183.36 186.49 187.14 10U.82 140.61 142.22 148.90 Pop. served- 000 80.41 80.41 80.41 80.41 81.8O 81.94 82.86 82.18 % Pop. served 28.01 22.7X 22.43 22.21 22.53 22.73 22.8X 22.63 Waterconnections - 000 4.47 4.47 4.41 4.47 4.60 4.09 4.77 4.77 Employe/1000 connection 12 12 12 12 12 11 11 11 Woter consumpt.(m8/mt/con) 20.0 20.0 20.0 20.8 21.0 28.8 24.6 24.0 Volumeproduced (thousnd e8) 1609.6 1689.6 1600.6 1720.4 1728.4 1745.0 1704.9 1704.9 VolumeSold (thousandw8) 1072.4 1072.4 1072.4 1117.1 1205.2 1812.0 1411.9 1411.9 X Unaccountedfor water sex sox 58% U43 48X 881 253 26S Average tariff (Rp/m8) 208 268 206 261 490 50e 618 676 Totaloperating revenue 201.66 847.16 847.15 857.38 077.85 670.42 788.47 068.04 Totaloperating expense 246.77 266.42 299.62 819.22 800.44 400.2 425.20 462.00 Depreciation 71.20 75.79 79.68 81.66 91.09 109.76 116.09 122.06 Incom after depreciation -86.49 -16.06 -82 -48.4 225.22 160.46 191.5 871.00

Interet charges 0.00 0.00 0.00 20.00 60.00 70.00 00.20 00.20 Internalcash generation 84.62 60.76 47.67 86.50 244.75 221.28 240.07 876.98 Orants 0.00 0.00 450.00 000.00 470.00 400.00 242.00 0.00 Loans 0.00 0.00 270.00 270.00 290.00 140.00 0.00 0.00 Debt service 0.00 0.00 0.00 20.00 50.00 70.00 00.20 00.20 Debt service ratio ERR 1.9 4.9 8.2 2.6 4.8

Inve_ nta 0.00 22.60 050.00 000.00 100.00 460.00 0.00 0.00 Operatingfixed assets 1821.10 1428.49 1510.01 1592.22 2286.10 2408.15 2641.00 2860.96 X Debtto debt oequity O.OX O.OX 0.03 0.03 0.03 O.OX O.3 0.03 - Days accountsreceivble 75 75 76 75 75 so so 6o

12. JEMBRANA

Populatlon - 000 77.48 70.82 79.21 60.09 60.00 02.05 02.76 84.12 Pop. nerved- 000 86.10 86.18 86.18 86.10U 0.10 00.10 06.10 00.10 X Pop. served 45.41 44.93 44.41 4.901 44.6l 44.03 48.61 42.90 Water connect1on - 000 6.28 5.28 5.28 6.28 6.89 6.89 5.89 5.89 Employees/1000connection 18 18 18 18 18 18 18 18 Water coneumpt.(m8/st/con) 15.4 18.4 16.4 15.4 17.6 20.4 28.0 28.0 Volumeproduced (theosnd a8) 1609.2 1609.4 1009.4 1609.4 1726.5 1000.0 1986.7 198U.7 VolumeSold (thoueand*8) 909.4 969.5 9069.5 969. 1161.2 1820.6 1406.? 1400.7 X Un#acountedfor water 61 661 6o6 on1 sox 403 8ox 8o0 Averag tariff (Rp/m8) 254 259 426 460 460 480 450 460 total operating revnu 281.56 207.44 412.04 436.26 610.04 684.00 69.92 e69.92 Totaloperating expense 244.66 267.40 261.07 299.02 871.64 406.41 449.2 469.09 Depreciation 114.80 116.75 127.16 182.56 184.78 170.66 170.40 167.40 Income after depreciation -7t.8? -00.77 8.6076 4.669 11.7" 10.87 42.286 18.425

Interest charge 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 Internal cenh geration 87.10 20.18 6.00 52.06 26.87 42.28 216.51 206.15 Grants 0.00 0.00 870.00 1000.00 0.00 0.00 0.00 0.00 L._ 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 Debt service 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 Dbt servicer tlo NA NA NA NA NA NA MA NA

Inves_ents 0.00 0.00 870.00 100.00 0.00 0.00 0.00 0.00 Operating fIxod assets 20s.01 2197.90 2840.70 2457.60 896.04 4178.79 4004.50 4608.01 1 Debt to debt + oqulty O.OX 0.03 O.OX 0.03 0.03 0.03 0.03 0.03 bay account receivable 190 1S 18O 97 76 60 60 so ANNEX11 -134 - Page 9

INDONESIA

EAST JAVA/BALIURBAN DEVELOPMENTPROJECT

Water EnterpriseFinancial Projections

Key AssumptionsUsed

Operating Income

1. It is assumed that all water enterpriseswill maintain their accounting records on a consistentbasis and report accrual principles at least annually.

2. These assumptionsrefer to the financialprojections consisting of (a) income statement, (b) sources and applicationsof funds, (c) balance sheet, and (d)financingplans for each water enterprise in the first batch of the project. They have been applied in a standard format to afford a cross referenceof comparativefinancial analyses among PDAMs.

3. Water Production. The output of water in N4 from the existing systems combined with the new capacity to be added under the project.

4. Service Area Population. The population served is determinedby multiplyingan estimatednumber of persons served per each house connection and standpiperespectively by the total connectionsin the system. It is assumed that 6.5 persons per house connection and 100 persons per standpipe are served.

5. Number of Connections. The project is expected to increase the total number of house connectionsas well as standpipesin the 12 water enterprisesduring the constructionperiod 1990/1994.

6. Water Consumption. This is an indicatorwhich measures average consumptionper month in N4 for every connected customer. TypicallyBali customers consume more water per connection than customers in East Java. Average consumptionin Dempasar is expected to increase from current level of about 65 MP/connectionto 65MP by 1995 at most connectionsare expected to be for touristhotels and relatedestablishments. For Buleleng the consumption is expected to remain in the range of 33-35 H'/connection,which is in line with consumptionrates in East Java in general.

7. Volume (MP)Sold. This is the volume of water billed, which is lower than or equal to the maximum volume of water availablefor sale in a given year.

8. Unaccountedfor Water (UFW). The UFW varies widely among the water enterprises,ranging currently from as high as 76? of production (Lamongan) and as low as 252 (Banyuwangi). The forecastsassume that the UFW will be reduced over time for each water enterprise,and for most of them, levels of about 25-30? should be achieved. ANNEX 11 - 135 - Page 10

9. Tariffs. All water enterprisesare expectedto adoptthe NWRS, and effective1990, the followingrates for each PDAM based on the firsttariff block of residentialcustomers will be applied.

The Valueof "A' Factor(RP/Lf* (CurrentPrices)

1989 1990 1993 1996

1. Mojokerto 80 135 221 351 2. Kediri 125 157 2A, 298 3. Lamongan 150 200 389 450 4. Probolinggo 90 169 286 425 5. Sidoardjo 160 201 234 379 6. Banyuwangi 75 90 106 137 7. Jember 150 316 482 581 8. Sumenep 120 115 171 225 9. Badung 120 120 164 172 10. Buleleng 125 129 158 208 11. Jembrana 156 156 166 181 12. KlungKung 125 129 244 322

* A rate increasehas been assumedevery three years to maintainfinancial soundnessof the enterprises.This is in linewith the localgovernments practicefor authorizingperiodic tariff increases.

10. Water Revenues. The main sourceof revenuewill be water salesas determinedby meter readingsas well as assessments,including sales through standpipes.No specificcharge is assumedfor meterrental or maintenance charges,administration charges or penaltiesfor late paymentswhich are adoptedby some of the existingenterprises. 11. The connectionfees vary, but are generallywithin the followingranges Rp. 65,000for residential,government and socialcustomers, and Rp. 120,000 for commercialand industrialcustomers. This will be collectedthrough the billingsystem in equalmonthly installments over five yearswithout interest. OperatingExpenses

12. Personnel.Personnel expenses are based on detailedanalysis of the numberof employeesrequired to operateeach PDAM. The numberof employees requiredto serveone thousandconnections is expectedto range from 10 to 17 for the 12 WEs in the firstbatch. Over all it is expectedto average13. 13. Chemicals. Cost of chemicalsconsist mainly of expenditureson calciumhypochlorite for chlorinatingwater. They are base don the volumeof water produced,(and are assumedto followthe inflationrates given below?) ANNEX 11 - 136 - Page 11

14. Power. This representsexpenditures on purchased electric power or estimated cost of generatedpower with standby units. Power expense estimates are based on the volume of water produced and are assumed to follow the inflationrates.

15. Repairs and Maintenance. These are expressedas a percentage of capital costs or on a lump sum basis for each kind of asset to be maintained. These are shown under the account 'Materials"in the ItncomeStatement.

16. TransportationCosts. These representthe costs of operating and maintaining transportationequipment includingfuel, servicing,annual registratiorand insurance. Various rates are assumed for each kind of transportationand are assumed to follow the inflation rates?

17. Administrationand General. These representoffice running expenses such as the cost of office supplies,and other general administrationcosts and are based on the number of total personnel. Annual cost estimates are assumed to follow the inflationrates.

18. Bad Debts. These are the portion of billed water sales which are assumed to the noncollectible. They are estimated to be 8 percent of water salc-. Given relatively small size of most of the PDAMs, it should be possib- to control the bad debts within the assumed rate.

19. DepreciationExpenses. Depreciationexpense is calculatedusing a straight line method based on the economic lives of the assets as booked in the balance sheet. The rates used vary broadly between civil works and equipment: 30-50 years (2-3.3 percent per annum) of economic life for civil works and 10-30 years (3.3-10percent per annum) for equipment.

20. Interest Charges. Interest on the loan during constructionwill be accrued and become payable to MOF-DDI.

21. Income Tax. The financialprojections are prepared using tariff revenues to recover operatingcosts includingdepreciation and interest on loans. Income from operationsafter these deductionsis subject to GI taxation.Income tax due to GI is computed on the basis of the following marginal tax rate structure:

Net Income Tax Rate

First Rp 10 Million 15Z Next Rp 40 Million 252 In Excess Rp 50 Million 35Z

22. Local Government Share of Income. PDAMs routinelycontribute 55 percent of their after tax income to local governments. The projections assume that no such contributionswould be made during the construction period. ANNEX11 - 137 - Page 12

23. InflationRates. The assumed rates of inflationfor local costs are 7.0 percent for 1990 and 5 percent thereafter. The estimated foreign inflationis 7.2 percent for 1990 and 4.4 percent thereafter. These assumptionsagreed with Bank preparationmission during 1989 and have been used as a consistentbasis for analysis since that time.

Funds Flow and Balance Sheet

24. Fixed Assets. The value of fixed assets is based on the capital costs expected to be incurred during the constructionperiod and the existing facilities. They include capital expenditureson the equipment,civil works, engineeringand supervisionservice, land, etc. The values of fixed assets of existingwater works were furnishedby each water enterprise. Fixed assets are revalued using the local inflationrates to determinecurrent values.

25. Work in Progress. This includes all ongoing constructionprojects whose assets have not been transferredto the assets have not been transferred to the assets in operationcategory.

26. Accounts Receivable. These are projected at about two months of total water sales. Accounts receivable in existingwater enterprisesrange from 4 to 5 months.

27. Inventories. These are computee on the basis of 6 months requirementfor chemical materials and sl *pliesfor maintenance.

28. Accounts Payable. This was projected to be equal to 2 months operatingexpenses (excludingpersonnel cost and bad debts).

29. Loan Funding. This account representsthe foreign component of the project fundingwhich is assumed to be channelledto a WE through the DLAs by MOF. The terms and conditions of DLA loans are explained in para.5.liofthe main report.

30. Equity. The equity account representsthe local Government counterpartfunds in the project costs, OperatingSubsidies, if any, revaluationsurplus arising from revaluationof assets, and accumulatedincome or loss from operations. - 138 - ANNEX12 INDONESIA

EAST JAVA-BALIURBAN DEVELOPMENT PROJECT

Local Government Financial Proiections: Sumuarv of Past Performance and Future Targets Annual Average Growth Rates at Constant Prices

East Java Batch I Local Governments

Performance1983/84 to 1987188 Targets1989190 to 1994195 Local Property Total Local Property Total Revenues Tax Revenues Tax Z p.a. 2 p.a. 2 g.a. Z p.a. j Z .a. Z*.a.

Kabuoatens

Banyuwangi 2.7 -1.3 0.2 3.1 3.9 3.5 Jember 2.5 8.0 5.8 11.7 1.5 7.7 Lamongan 8.5 3.2 6.3 5.3 16.9 9.4 Sumenep 1.5 14.1 7.3 4.6 17.2 14.2 Sidoarjo 17.0 -2.1 9.8 3.3 7.4 5.2 Sub-total 8.0 3.4 5.6 6.2 8.5 7.3

Kotamadyas

Kediri 18.6 0.8 10.6 11.7 1.5 7.7 Wojokerto 4.2 14.4 5S9 3.7 10.4 5.5 Pasuruan 22.0 10.7 20.4 2.8 7.8 3.5 Probolinggo 29.8 15.0 26.9 4.9 21.3 7.8 Sub-total 17.5 5.9 14.4 8.2 4.5 7.0

Total Batch I 10.4 3.6 7.2 6.9 7.6 7.2

Bali Batch I Local Governments

Performance1983/84 to 1988189 Tarnets 1989190 to 1994/95 Local Local Other Property Total Local Local Other PropertyTotal Taxes Charges Fees Tax Taxes Charges Fees Tax Zo.a. Z 0.a. Zp.a. 2 p.a. 2L.a. gz.a. 2 v.a. &,.a. 2. a. PD.a. Badung 15.1 -3.6 171.3 1.9 13.0 12.0 23.9 14.4 17.4 14.2 Wulileng 32.5 8.0 6.6 4.4 7.9 18.6 17.3 0.2 17.4 16.8 Jembrana 3.4 9.5 18.8 -6.6 0.7 6.2 6.1 5.4 5.2 5.5 Klungkung 31.6 17.8 38.7 1.4 14.1 19.7 7.6 9.9 15.6 11.0

Total Batch I 15.4 0.7 73.7 4.8 .12.0 12.2 20.4 11.9 16.3 14.1 ANNEX 13 - 139 Page 1

INDONESIA

EAST JAVA-BALI URBAN DEVELOPMENTPROJECT

Operationsand Maintenanceof Urban Infrastructureand Services

1. Key facets of the agreed approach to strengtheningoperations and maintenance (O&M) activitiesfor infrastructureand services covered by the EJBUDP expenditureprograms in each local governmentinclude: (a) Estiwetes of requiredO&M expenditures(by subsector);(b) Analysis of current capabilitiesfor O&M; (c) Installationof PO!MS in Batch I local governmentst (d) PMDU strengtheningfor water enterpriseO&M improvement;(e) Development of provincialpublic works capacity to assist O&M; (f) Developmentof annual O&M programs (with appropriotelinks to LIDAP and RIAP documents (g) Revision of Local O&M budgets and financing (MHA-KEPMINNo. ./1990); and (h) Recommendedmonitoring and supervisionindicators.

Estimatesof Required O&M Expenditures(by sub-sector)

2. Project preparationefforts for O&M elements in each subsectorbegan with the developmentof technicalmemoranda describingunit costs for O&M activitiesfor existing and new infrastructure. Preliminaryinventories of existing infrastructure,the functionalclassification of these systems to assign O&M responsibilitiesamong central, provincialand local government units, and estimationof current conditionsand deferredmaintenance needs were all undertakenin the initialpreparation stages. Four subsectors (of the seven covered by IUIDP guidelines)emerged as the focal points of O&M efforts: water supply, roads, drainage and solid waste. Within the sanitationsubsector, the pumping of septic tanks and disposal of sludge (by public or private operators)is the principalO&M issue. On-site sanitation is the preferred approach in almost all localities (exceptfor Badung Kabupaten in Bali, where detailed studies for sewerage systems includingO&M requirementsare now underway). For KIP/MIIP subsectorsO&M is generally presumed to be a "community"responsibility, though care must be taken to ensure that provision is made for operatingwater taps, public toilets (MCK) and other KIP/MIIP facilities,and to confirm that local governmentswill assist in establishing"merchants' associations' or provide other specific arrangementsfor MIIP O&M.

Analysis of Current Capabilitiesfor O&M

3. The estimated requirementsfor O&M (from paragraph1 above) were then compared to current O&M practicesand capacitiesin four basic respects: (a) manpower availablewith the responsibleagency (as part of LIDAP discussions);(b) budget le,velsprovided for O&M activitiesduring past five- year period; (c) equipmentand facilitiesavailable versus needs; and (d) preliminaryidentification of the potential for contractingO&M activitiesin each subsector.

4. For the Batch I local governmentsthis analysis may be summarizedas follows: ANNEX 13 - 140 - Page 2

(a) for subsectorsother than water supply, the local governmentswere generallyproviding between 20S and 402 of the estimated O&0 requirements,and had substantiallyimpaired capabilitiesdue to shortage of trainedmanpower, adequate equipmentand spare parts, etc.;

(b) water supply enterpriseswere highly variable in their O&M performance,but generallyprovided 502 to 80S of needed O&M for their systems,with inabilityto raise tariffs levels and shortage of trained manpower cited as the key obstacles;and

(c) most local governmentshad not seriouslyexplored the option of contractingfor O&M, as GOl regulationsprohibit contractingfrom the "routine"component of GOI budgets (as opposed to the "development'component from which contractsare normally financed). However, a few local governmentswere contractingroad maintenance and some were wiliing to consider solid waste collectionon a "franchise'basis covering designatedurban communities(typically upper income areas), followingthe success experiencedby the City of Surabayawith this approach. Drainage channel cleaning was another area of O&M discussed for potential contracting,with a mixed response by Batch I local governments.

S. The analysis resulted in the definitionof current levels of 0&K expenditurefor each Batch I local government ('currentO0M1 in the expenditureprogram), and two types of proposed additionsor Oincremental: 001 expendituress (a) a graduated increaseof O&M budget to reach estimated requirementsfor current infrastructuresystems and (b) O&M expenses necessary for newly constructedand rehabilitatedfacilities. Responsibilityfor budgeting the requiredO& expenditurewas assigned based on the functional classificationof facilities (particularlyfor roads and drainage)between central, provincial and local governments. However, both central (especially DGBM) and provincial agencies frequentlyarrange for lower levz. units to execute O& budgets, and execution responsibilitiesfor budget allocationsin these cases must be agreed annually.

Installationof PONMS in Batch I Local Governments

6. The Performance-OrientedMaintenance Management System (PONMS)was originally developedwith Bank assistancefor the Urban V project cities; USL assistancewas used to refine and extend POMMS to additionalcities (eight are now covered) and develop improved local governmentbudgeting procedures associatedwith PONMS implementation. Denpasar,Bali, is the only EJBUDP local government included among the initial POMNS cities, although Surabaya (an Urban V city) may also serve as an instructiveexample for the smaller East Java local governments.

Further progress in fully developingthe POMMS approach as an O&0 programmingand management techniquefor all non-water supply infrastructure has recently taken two major steps forward:

(a) The USL and Urban V project supporteda 'simplified"version of PONMS for applicationin medium-to-smallurban areas, simplifying ANNEX 13 -141- Page 3

inventoryprocedures and applying uniform performancestandards, rather than the case-by-casemethods used in the large cities.

(b) The Minister of Home Affairs in January, 1990, issued a Decree (KEPMINNo. 5/1990) instructingthe full implementationof POMS in the eight pilot cities and the preparationof budget documents in revised formats which explicitly identifyO&M expendituresfor the first time in Indonesia. The KEPMIN also commends the POMMS approach for considerationby other local governmentsand provides guidelines for its implementationand associatedbudgeting procedures.

7. The proposed project would install the simplifiedversion of POMHS in all 13 Batch I local governments (extendingthe Denpasar system to include all areas of KabupatenBadung), and utilize these local governmentsystems as training opportunitiesfor officials of Batch II and III local governmentsand provincialofficials.

4. PMDU Strengtheningfor Water Enterprise 0&M Improvement

Within the water supply subsector,not covered by POMKS, the focal point of GOI-Bank efforts to improve water enterpriseO&H has been the ProvincialMonitoring and DevelopmentUnit (PMDU) establishedwith assistance under the Second East Java Water Supply Project, USL and Dutch bilateral aid in East Java and was only recently initiatedon a part-time basis in Bali. The PMDUs are establishedwithin the provincialpublic works departments (DPUPs)with responsibilityto monitor the full range of water supply service provisionby all local enterprises,with particularattention to those in transitionfrom the status of BPAM. The PMDU will assist each enterprise in evaluating staffing,training and other strengtheningrequirements (e.g., budgeting procedures,chemical and suppliesmanagement, etc.) to improve operationaleffectiveness and efficiency. The PMDU is also charged with assisting PDAM units with calculationand justificationof appropriateuser tariffs to assure adequate financingof system operations and orderly expansion, and to assist in making appropriatearrangements for operationof public water taps in low-incomeareas (e.g., under the KIP program) which has been typically troublesomefor many enterprises. PMDU also serves to coordinate local staff participationin training programs for operationaland management personnelof the water enterprises. The proposed project includes consultant assistanceto strengthenthe capacity of both PMDU units to perform these central activitiesduring the EJBUDP implementationperiods with special attention to assistingthe conversionof the final group of BPAM units to PDAM status.

Developmentof Provincial Public Works Capacity to Assist O&M Programs

8. The DPUPs in both provinceshave relativelycomplete staffs and in branch offices (cabangdinas) in each local government. The increasingrole of local governmentsin implementinginfrastructure programs, and the announced intentionof the Ministry of Public Works to second substantial numbers of their current staff for provincial service, creates an opportunity to revise and strengthenthe role of the DPUP in assisting local government OWM program development. The heads of both DPUP units have agreed to assign - 142 - Pageage 413 membersof the branch-officestaff to receivetraining in POMNSand PMDU O&M procedures,to createthe capacityto support localgovernments in preparing and executingO&H activities.As DGBM has alreadyestablished a provincial roadsmaintenance advisory unit in both provinces(functionally analogous to the PMDU for water supply),the primaryneed in both provlncesis to strengthenthe O&M managementassistance capacity for the PLP sub-sectors (i.e.,drainage, solid waste management and sanitation).DGCK has agreedto assistboth provincesin the creationof this capacity. Specificationof futureO&M requirementsis also integralcomponent of all sub-projectdesigns preparedunder the IUIDPguidelines; thus, the DPUP AdvisoryTeam (described in ANNEX 3) will have the additionalresponsibility to advisethe DPUPs regardingthe developmentof appropriateO&M enterprisewith the assistanceof the training providedby the PONMS installationteam. Developmentof AnnualO&M Programsfor Each LocalGovernment 9. The precedingactivities are necessarypreparatcry steps to provide localgovernments with the backgroundand resourcesto developannual O&M programscovering all infrastructuresubsectors, within the constraintsof currentmanpower and budgetresources. The provincialDPUPs and PMDUswould assistthe localgovernments to prepareannual O&M programs,and to monitor and supporttheir execution.The POMMS consultantswould reviewand assist DPUP to establishthe formatand proceduresfor preparationand monitoringof the annualprograms. One of the most significantaspects of this initiative would be the opportunityto discussthe manpowerand financialplanning for O&M ii each subsectorwith everyactive local government in the program. 10. Shortagesof trainedmanpower will createopportunities to discuss contractO&M schemeswith the localgovernments. The recentrevision of INPRESDati II (blockgrant) regulations to allow up to 25 percentof these transfersto be used for maintenanceand rehabilitationcontracts should also provideflexibility in constructingthe annualprograms. The linkageswith LIDAPand RIAP plansto increaselocal manpower and revenuewill also be specificallydiscussed in this annualreview to assureconsistency and improve localgovernment management of the O&M agenda. Revisionof Local GovernmentO&M BudgetProcedures 11. Withinthe contextof the above-notedMHA XEPMINNo. 511990(see para. No. 3) the frameworkhas been proposedfor a revisedformat and classificationof localgovernment annual budgets. The instructionrequires the eightpilot localgovernments (and encourages other) to prepare"parallel' budgetsin additionto 'basic"(traditional)local budget. This new parallel budgethas threemajor categoriess(a) administrativeoverhead (salaries, administration,etc.); (b) O&M of publicfacilities and servicesystems; and (c) developmentprojects (including design and supervisionoverheads). 12. This structurerepresents a major step in makingO&H budgeting transparentand monitorable,as opposedto the currentgeneral 'routine" category(combining la' and lb" above)in which line itemscontain a mixture of fundsand functions.MHA/PUOD staff indicate that it is the intentionof GOI to convertthe entirelocal government budget system to this new format after a periodof paralleloperation. The EJBUDPassistance for municipal ANNEX 13 -143 - Page S

financialmanagcment would assist in this parallel budgetingand accountingin at least the Batch I local governmentsand provide appropriateformats and instructionsfor use by other local governmentswith the guidance of provincialSEKWILDA.

O&M MonitoringIndicators

13. Monitoringindicators would include the followings

(a) preparationof annual maintenanceprogram and budget per MHA Kepmin No. 5/1990;

(b) actual O&M expendituresper subsectorversus target in expenditure program;

(c) installationof POIMMS(in Batch I only) - Portion of O&M expendituresbased on POMMS;

(d) level of deferred maintenanceand rehabilitationcontracts Expendituresvs Level of Routine O&M Expenditures;

(e) portion of routineO&M performedunder contracts (by subsector);and

(f) increase in O&M expenditures(total) compared to increase in TK II PADS. - 144 - ANNEX 14 Page 1

INDONESIA

EAST JAVA - BALI URBAN DEVELOPMENTPROJECT

Sanmle Infrastructure Exvenditure Programs 1/

1. Programmes for urban infrastructure development emphasize Improvimentof servicelevels, through rehabilitationof existing sysetemsand improvementof operationand maintenance,with new works receivingless priority.

A. ExpenditureProarame for KabuiatenBaduna (Bali)

2. Water SupplY. (a) DonDasarand Kuta. The five-yearexpenditure programe includes:

- 2 intake pumps at Tukad Ayung rated at 165 l/sec at 65 m head; - treatmentworks at Tukad Ayung incorporatingflocculation, sedimentationand filtrationat a capacityof 300 llsec; - rehabilitationof 1 borehole in north Denpasarwellfield; - one borehole in the south Denpasarwellfield including chlorination; - 1500 m3 reservoirat Jimbaran; - 2 boosterpump stations; - distributionpipework; - leakage 5atectionand control;and - approximately3,800 new connections. Part of these works (the treatmentworks). part of the distributionworks, and one of the boosterpump stationsmust be =aplementedearly to meet the estimated1991/92 demands. The projectedwater demandsare based on results of householdsurveys and th-eprojected growth in hotel demand requiringa source capacityof 1,129 1/sec by 1995.

3. The increase in demandwould be met by duplicatingthe existing treatmentworks at the Tukad Ayung (TukadAyung It) by increasingthe supply from the river from 300 liters/sec to 600 liters/sec. Rehabilitationis also proposed for the north Denpasarwellfield so that the total supply from the wellfield is increasedto 404 liters/sec. An additionalborehole in Panjer desa in the South Denpasarwellfield has alreadybeen drilledand this will raise the productioncapacity of this wellfieldto about 142 liters/sec. Thus the total productioncapacity in 1995 will be about 1,146 liters/sec.which would be sufficientto meet the estimatedpeak day demandsto just beyond 1995. Additionalsource works will be requiredto meet peak day demands beyond 1995. The 1995 populationserved at house connectionsis estimatedto be 44 percentand at standpipesabout 3 percent. Non-domesticdemand of small users is estimatedto remain at about 20 percent of domesticdemand.

1/ Abstractsfrom *mini appraisalreports prepared during the appraisal mission. - 145 - ANNEX 14 Page 2

Non-domesticdemand of large consumers,including hotels, is projectedto increasefrom 92 liters/secto about 270 liters/secby 1995 and assumes that all hotels will be suppliedby 1995. Losses are projectedto reduce to 25 percent of demand in 1995. This will be achievedthrough a leakagedetection and repair programme.

(b) Mentwi. Abiansemal, Petana and Sanseh

4. The five year expenditure program for these four towns includes:

- 1 spring capturechamber; - 6 boreholesand pumpingequipment; - 3 chlorinationfacilities (Abiansemal and Sangeh combined) - transmissionand distributionpipework; - 4 ground reservoirs; - 1 forwarding pump station; and - approximately 3600 new connections.

The financial projections for the water enterprisesindicate that these works could be financedby the water enterprises' own funds. The projected water demandsare based on resultsof householdsurveys.

5. Drainage. The proposed prograume mainly consists of rehabilitation works and lining of the existing secondary and tertiary drainage systems. Priority would be given to town areas frequently subject to flooding, often caused by insufficient hydrauliccapacities of some channel sections or culverts. The prograsue for Denpasar is based on the existingdrainage masterplanwhereas for Kuta and Mengwi plans would be prepared. Works of any permanent nature on drainage systems would only be undertaken after a drainage masterplan has been prepared. For Kabupaten Badung the programme comprises

- dredgingand cleaning of 3,100 m of channels; - lining and repairingof 32,400 a open and closed channels; - 6,320 m extension of existing channels; and - purchase of 9 dumptrucks, 3 pickup trucks and 13 handcarts.

6. Urban Roads. The highest priority in the road programme is given to the rehabilitation and the betterment works. Other prioritiesare road widening and sidewalks often in combination with road drainage. Traffic management analyses have been done for all new works. New works consist of a ringroad in Denpasar, a bypass road in Kuta, parking facilities and streetlighting. The programme for Badung comprises:

- improvement (betterment, rehabilitation, and widening) of 170,000m2 artery roads; - improvement(betterment, rehabilitation and widening)of 83,000 m2 of collectorroads; - 35000 m2 of new artery roads, 10,000 m2 parking facilities, 32,000 m2 side walks and 24,000 m streetlighting; - improvementof road surfaceof 369,000m2 local roads and 450,000m2 overlay;and - equipmentfor maintenanceof roads consistsof 1 dumptruck,2 rollersand various other equipment. ~~~~ANNEX14 - 146 - - U6 - Page 3

7. Solid Waste Management. The proposedworks are based on population densitiesfollowing national guidelines and householdsurveys to assess effective(real) demand. They includepublic facilitiesand domesticwaste collectionand consistof the provisionof waste collectiontrucks and the constructionand modificationof new and existingtransfer depots in the towns of Denpasar,Kuta and Mengwi. Also includedare civil works for a final disposalsite such as an access road, fencing,leachate treatment works and sub-soildrainage to serve the town of Denpasarincluding the Sanur tourist area and the town of Kuta. To increaseefficiency of the door-to-door collectionsystem in areas accessiblefor trucks it is proposed to purchase40 liter garbagebins. In areas not accessiblefor trucks,solid waste would be collectedin handcarts. All market areas and businesscentres will be served by containersand armrolltrucks. The programmecomprises the followingfor the three towns in the kabupatenBadung:

- 10 containertrucks and 13 dumptrucks; - 95 containers; - 1 bulldozers - 1 mini excavator; - 185 handcarts; - -workshopsand transferstations; 40 and 120 liter garbagebins; and - a finaldisposal site.

8. Human Waste DisDosal. The programmeconsists of upgradingof on- site sanitatior-systems. In additionto singleon-site facilities,new multi- family facilitiesare proposedin those areas with high ground water tables. These facilitieswill reduce the number of soak pits, especiallyin those areas where shallow wells are used for drinking water. This program consists of providing one septic tank for five households. The programme also includes a public promotioncampaign. Part of the multi-familyfacilities will be constructed under the KIP programme. 'he human waste programmefor the towns of Denpasar, Kuta and Mengwi in the kabupatenBadung comprises:

- 17,500 single family on-site substructures; - 1,400 combined septic tanks for five families; - 3,400 latrines/leachatepit facilities; - 1 desludgingtruck completewith tank and pumping installation; and - one final sludge disposalsite of 4.3 hectares.

9. Kamoung ImDrovementProgarm (KIP). The programw proposals include micro drainage,access roads and footpathsin 594 hectt.es in the five year planning period in the three towns.

10. Market Improvement Prosram (MIIP). The programme covers three markets in Denpasar only, with a total area of 20 hectares and provides for drainage,access roads and handcartsfor garbagecollection. -147- ANNEX 14 Page 4

SPENDITUREPRGAM FORKAOUPAtO POli (Rp SIl11n)

Baee Cost PY90/91 PY91/02 fP92/08 P793/94 FY94/9S Total Jan 800 Coat Coats Co Coot Coats Costs Prise

WATERSUPPLY ENTERPRISE Investment 19.92 2.89 4.48 7.3 4*.65 o.n 19.0 Overheada Engineeringcos 8.90 0.65 0.74 0.58 0.81 1.71 8.94 Sub-totl 28.7 8.4 5.17 7.8 4. 2.42 28.7

06M 11.8? 2.01 2.05 2.14 2.08 8.01 11.67 Sub-total basecost 8.74 6.U5 .22 10.02 7.62 8.48 8.7

PhysicalContingenles 0.00 0.35 0.51 0.78 0.48 0.24 2.88 PriceContingencies 0.00 0.42 0.094 1.$$ 1.34 1.66 6.72 Sub-totaiVater Supply andCiM 85.74 6.82 6.67 12.66 9.04 7.88 44.62

LOCAL VERNENT RASTRUCTURE Dratnage 4.08 0.81 0.61 0.0 0.0 0.04 4.50 Solid Waste lanagment 2.17 0.74 0.18 0.57 0.68 0.42 2.89 Sanltation 5.29 0.86 1.90 1.64 0.6 0.90 5.82 UrbanRoads 16.47 8.76 2.72 2.82 1.86 8.57 16.7 Kamung Impotvement 2.08 0.47 0.58 0.sa 0.60 0.14 2.29 Marke" Infrastrucure Iprovnt 0.07 0.04 0.02 0.02 0.00 0.00 0.06 overhead Englering costs 8.48 0.94 0.76 0.76 0.66 0.78 8.79 Sub-totl 82.04 0.14 6.07 7.84 5.48 6.76 8.64

088 7.82 1.64 1.80 1.54 1.,t 1.70 7.80 Sub-totalbe" cost 40.16 10.0S 8.47 .8. 7.04 .46 48.88

PhysicalContingenle 0.00 0.02 0.60 0.02 0.48 0.60 2.92 PriceContingencies 0.00 0.80 1.11 1.67 1.75 2.68 7.90 Sub-total Local Govt Intf ra 0A8 40.1I 12.10 10.18 11.17 9.27 11.09 64.41

Total Expenditure Pr"rm (RV bh) 78.90 10.42 10.88 28.83 19.11 19.02 99.23 Total Expenditure Proram (8 .) 42.28 10.26 10.80 18.28 10.68 10.40 85.20

11. Cost Estimates. The five year (1990191- 1994/95)expenditure programueis estimatedat Rp 44.8 billion in currentprices. The expenditure programsbroken down by foreignand local coats includingproject overheads, engineeringcosts, physicaland price contingencies.

B. EzvenditureProgramme for KotamadyaProbolinggo (East Java)

12. Water SuSly. The expenditureprogramme comprises the following worksz ANNEX 14 - 148 - Page S

- leakagedetection and control; - Extensionof the distributionsystem; - 1,330 new connections;and - replacementof existingpumps.

?he leakage programme would include repair or replacement of production meters, an improved assessmentof losses,purchase of leak detection equipment, surveys and repairs as necessary.

13. The distribution system will be extended to the western areas of the town, in which there are new housing developments and industry. An extension to a housingestate in the south of the town is also proposedsubject to the developerfunding tertiary distribution network.

14. The existingpumps at the spring sourcewill be 12 years old by 1994, and are estimatedto be nearingthe end of their useful life. One is broken down and one is said to be operatingbelow the rated output. They are also incorrectlyrated for head and consequentlyoperate inefficiently.They would be replacedby units with a lower head rating. The previouslyproposed constructionof the new water tower has been deferreduntil after 1995. The capacityof the system is 150 l/sec and thus the pumps will be able to meet the peak hour demand. Further increasesIn demand after 1995 will necessitate the additionof balancingstorage in the town.

15. The proposalsdeveloped on the basis of the resultsof the real demand survey,have been reduced to give a financingplan affordable to the PDhM with acceptabletariff increases. It concentrateson areas given priority by the local government and with a high percentage of real demand survey respondentsinterested in a supply. 16. Drainage. The proposedprogramme mainly consistsof rehabilitation works and lining of the existing secondary and tertiary drainage systems. Special attention is given to town areas frequently subject to flooding, often caused by insufficient hydraulic capacities of some channel sections or culverts. The programmefor RotamadyaProbolinggo is based on the existing drainage masterplan. The programme comprises oft

- dredgingand cleaningof 19,220m2 of channels; - lining and repairingof 5,727 m2 open and closed channels;and - purchase of 2 dumptrucks, 1 pickup truck and 2 handcarts.

17. Urban Roads. The highestpriority in the programme is rehabilitationand bettermentworks. Other prioritiesare road widening, while new works consistof streetlightingand sidewalksoften in combination with road drainage. The programmefor Probolinggocomprises:

- improvement (betterment, rehabilitation, and widening) of 136,855 m2 artery roads; - improvement (betterment, rehabilitation and widening) of 123,565 m2 of collector roads; - 6,000 m2 sidewalksand 10,750ml streetlighting; - improvementof road surfaceof 27,500 m2 local roads; and - 149- ' ANNEX 14 Page 6

equipmentfor maintenanceof roads consistingof 1 dumptruck,2 rollersand 1 HRS maintenanceset. 18. Solid Waste Management. The proposed servicelevels are based on populationdensities following national guidelines. They includepublic facilities,domestic waste collection,provision of waste collectiontrucks and the constructionof ew transferdepots. Also includedare civilworks for a final disposalsite such as an access road, fencing,leachate treatment works and sub-soildrainage. To increaseefficiency of the door to door collectionsystem in areas accesiblefor trucks it is proposedto purchase40 liter garbagebins. In areas not accessiblefor trucks solid waste would be collectedin handcarts. All market areas and businesscentres will be served by containersand armrolltrucks. The prograimecomprises the following:

- 2 transferdepots and 54 transfer stations (TPSs); - 200 m2 workshop and tools; - 300 m access road of disposalsite; _ 65 refuse bins; _ 19 handcarts; - 6 dump trucks and 1 unit armrolltruck; and - 1 bulldozer.

19. fuman Waste DisposalManaRement. The programmecomprises of upgradingof on-site sanitationsystems. In additionto single on site facilities,new multi-familyfacilities are.proposed in those areas with high ground water tables. These facilitieswill reduce the number of soak pits especially in those areas where shallowwells are used for drinkingwater. The programme consists of providing one septic tank for five households. The programs also includes a public promotion campaign (for 7,370 households).

20. Part of the multi-family facilities and MCK will be constructed under the RIP programme. The human waste programse for Probolinggo comprisess

- 58 combinedseptic tanks for five familieseach; - 525 latrines/leachatepit facilities; - one final sludge disposalsite of 2,500 m2 providedwith 3; centrifugalpumps and 910 metre length of pipelines; - rehabilitationof 2 existing MCXs; and - single family on-site substructure.

21. amWungImrovement Programme (KIP). The programme includes improvement of micro drainage, access roads and footpaths in 25 hectares new RIP areas and rehabilitation of facilities in 75.5 hectares existing RIP areas during the five year planningperiod.

22. Market ImprovementProgramme tMIIP). The programme covers two markets in KotamadyaProbolinggo with a total area of 8 hectaresand provides for cleaningof existingdrains (260 m3), 17 handcartsfor garbage collection, 5 temporarydisposal sites (TPSs)and 2 public standpipes.

23. Cost Estimates. The five year (1990191- 1994/95)expenditure programmeis estimatedat Rp 14.74 billion in currentprices. The -150 - ANNEX 14 Page 7

expendituresbroken down by foreignand local costs, project overheads, engineeringcosts, physicaland price contingencies.

EXPENDITUREPRPGRAM FOR KOTAMAOYA PROSU0NOGO (RD bilion)

ea".cost Jan '90 FY9O/Ol FY91/92 FY92/98 FY93/94 FY94/95 TOt I Prices Costs Coot CoSt Costa Coat Costa

WATERSUPPLY ENTERPRISE Investment 11.59 0.02 0.50 0.44 0.81 0.00 1.27 Overhedand Engineeringcosta 0.16 0.06 0.04 0.08 0.02 0.00 0.17 Sub-total 11.75 0.10 0.64 0.47 0.88 0.00 1.44

0Du 1.13 0.19 0.21 0.21 0.26 0.20 1.17 Sub-totalbase cost 12.93 0.29 0.76 0.66 0.61 0.29 2.61

Physical Conttngnctoe 0.00 0.01 0.06 0.05 0.08 0.00 0.14 Price Contngeneles 0.00 0.02 0.10 0.18 0.15 0.08 0.48 Sub-totalWater Supply 12.93 0.82 0.90 0.66 0.79 0.86 8.28

LOCALGOVERNMT INFRASTRUCTU Drtinage 0.41 0.09 0.06 0.06 0.07 0.18 0.48 SolidWa te Manaement 0.88 0.12 0.07 0.19 0.04 0.00 0.42 Sanitation 0.14 0.01 0.02 0.05 0.08 0.04 0.15 UrbanRadst 4.86 8.09 0.88 0.83 0.48 0.51 5.84 KaapungIprovement 0.86 0.09 0.08 0.06 0.06 0.07 0.88 MarketIntrastructure Improvement 0.01 0.01 0.00 0.00 0.00 0.00 0.01 Sub-total 6.15 8.41 1.11 0.78 0.65 0.77 8.70

Overhoadand EngineeringCosts 0.76 0.42 0.18 0.09 0.09 0.10 0.83 Sub-total 6.91 8.88 1.24 0.86 0.74 0.7 7.68

CAM 1.82 0.38 0.81 0.40 0.42 0.48 1.98 -;------Sub-totalbase cost 7.97 4.16 1.69 1.26 1.186 1.80 9.46

Physical Contingencis 0.00 0.81 0.10 0.06 0.06 0.07 0.60 Price Contingencies 0.00 0.29 0.19 0.22 0.26 0.86 1.84 Sub totalLocal Govt Infra.A 0*M 7.97 4.76 1.68 1.68 1.50 1.78 11.40

Total Expenditure Program(Rp bn) 20.90 6.06 2.76 2.89 2.29 2.09 14.68 TotalExpendture Program (1 a) 11.64 2.83 1.56 1.88 1.26 1.16 6.15 9~~~~~~~~~~~~~~~~~~~~ ANNEX 15 -151 -Pg

INDONESIA

East-Java Bali Urban DevelopmentProject

EnvironmentalAssessment and Management

1. The IndonesianEnvironmental Assessment Regulation (Government Regulation t29/1986),known locally as AMDALidentifies which types of activities require preparationof environmentalassessments (EAs); makes project approvals contingenton approval of an environmentalmanagement plan and environmental monitoring plan that incorporatefindings of the EA; directs Ministers and provincial governors to establish an Environmental Review Commission in their respectiveministry or province; establishesa time limit within which the Minister or Governormust act upon environmentalassessments submitted for Commission review; and requirespublic notificationand participationin review of environmentalassessments.

2. Under the EnvironmentalAssessment Regulation,if a project involves potentiallyadverse environmentalimpacts, the sponsor or proponent for each project must prepares i) a preliminaryenvironmental assessment (ANDAL/Analisis Dampak Lingkungan);ii) an environmental management plan (RKL/Rencana Pengelolaan Lingkungan) and iii) an impact monitoring plan (tRPL/Rencana Pemantauan Lingkungan). In the case of public works projects, the proponent is normally a governmentor parastatalpublic works agency, such as DG Cipta Rarya, a provincialor district public works agency, or a water supply agency (PDAM or BPAM).

3. National-levelreview of EAs for public works projects is the responsibilityof the EnvironmentalReview Commission (RomisiPusat) of Ministry of Public Works (MPW),whose chairman is Head of the Research and DevelopmentAgency (BALITBANG)of MPW. The Commissionholds regularweekly meetings,has recently developedsectoral guidelines for preparationand review of EAs of public works projectswith the assistanceof ADB, and has adopted PY90191work plans. A TechnicalTeam and three DG-level Working Groups provide technicalsupport to the Commission. As of April 1990, the Commissionhad processedEAs for other projects identifiedas involving serious environmentalissues (e.g. Bali Estuary Water Supply Project).

4. Local-levelenvironmental management, includingreview of EAs in all sectors, is the responsibilityof the provincialGovernor. The Governmentsof the Provincesof East Java and Bali have established EnvironmentalReview Commissions (KomisiANDAL), which has began review of local projects in 1989. East Java has also taken a leadershiprole in adopting provincialwater quality standardsand actively undertakingwater pollution abatementunder the GOI-CIDA PROKASI program for industrialwaste and the Bank's Second East Java Water Supply Projectwhich included a pollutioncontrol component. However, neither Regional Commissionhas establishedadequate working arrangements;the Commissionsdo not meet regularly; criteria for determiningwhether projects are to be reviewed at the -152 - ANNEX 15 Page 2

provincial level or the national level are unclear in many sectors; and technicalsupport is not being provided to the commissions,either at the provincial level or by the national-levelEnvironmental Review Commissionsof the line ministries or KLH. As of April 1990, the Regional Commission of East Java had reviewed approximately70 projects,mainly in the industrialsector and the Regional Commission of Bali had reviewed approximately15 projects, mainly involvingexcavation of sand or gravel. Coordinationbetween the Central Commission of MPW and the Regional Commissionsis weak. Although water quality and related issues in coastal areas (e.g. protectingmangrove areas, access to sea by traditionalgroups, etc.) have been identifiedas priority environmentalissues in both provinces, the Regional Commissionshave no environmentaldatabase to support environmentalassessment and management in coastal areas, and provincialand local staff have not received training in environmentalassessment and management.

S. The Government'sAMDAL requirementsunder Government Regulation #2911986 are generallyadequate, and generally consistentwith the Bank's environmentalassessment requirements./I Capabilitiesof project proponents and Commissionsto meet AMDAL preparationand review requirementsare limited, however, and increaseddemand for environmentalassessment and review under East Java-Bali and other IUIDP projects is likely to exceed limited AMDAL capabilities. The project includes agreed measures to meet Government and Bank environmentalassessment requirements, and technicalassistance to ensure that the agreed measures are carried out in a timely manner and build environmentalassessment and management capabilitiesat the provincial level.

6. The following arrangementsto ensure that sub-projectsreceiving supportunder the project meet Governmentand Bank environmentalassessment requirementshave been agreed during project preparations a) environmental screeningof sub-projects by the Regional Commissionsand Central Commission of MPW; b) preparationof initial and detailedEAs (PILs and ANDALs) by local project proponentsor their consultants;c) review of EAs by the Regional Commission;and d) assuranceof incorporationof environmentalmanagement plans (RKLs) into project design by the provincial appraisalteam.

7. Given that these agreed environmentalassessment procedures are new and require substantiallyimproved coordinationamong central (Central EnvironmentalCommission), provincial (RegionalEnvironment Commission, provincial appraisalteam) and local (Level II Government)levels, technical assistancewill be essential to ensure that the procedures are implementedin a timely manner, and to strengthenthe Regional Commissions. The objectives of the proposed technicalassistance are to: a) assist implementationof the arrangementsfor local-levelenvironmental assessment of sub-projectsoutlined in para. 6, to ensure timely implementation;and b) assist the Regional Commissionand Bappeda in each province tot i) inventoryexisting data and government-anddonor-assisted initiatives to address critical coastal water quality issues; ii) design a provincialcoastal zone water resourcemanagement

11 EnvironmentalAssessment OperationalDirective 4.00, Annex A. ANNEX 15 - 153 - Page 3

database, to be maintained by the Regional CommissionJBappeda/Regional Office of Population and Environment (BXLH), for use by planners, preparersand reviewersof environmentalassessments, and those responsiblefor environmentalmonitoring; and iii) provide environmentalassessment and coastal zone management training to provincial and local staff. Draft terms of referenceof the technicalassistance to strengthenenvironmental assessmentand management capabilitiesin each province have been prepared, and the assistance is expected to begin with Japan Grant Funds even prior to effectivenessof the Project. ANNEX16 - 154- Page 1

INDONESIA

EAST JAVA - BALI URBAN DEVELOPMENTPROJECT

Key Documents in the Proiect File

ConsolidatedPreparation Reports

1. East Java - Bali Urban DevelopmentProjects Project PreparationReport, East Java (Draft).November and March, 1990. Task Force EJBUDP, CoordinationTeam for Urban Development (TKPP) Governmentof Indonesia, and Government of East,Java Province.

2. East Java - Bali Urban DevelopmentProject: Project PreparationReport, Bali (Draft).March, 1990. Task Force EJBIDP, CoordinationTeam for Urban Development (TKPP)Government of Indonesia,and Government of Bali Province.

East Java: Official Batch I Local GovernmentPreparation Documents (separatevolumes in Indonesian for each local government and signed by its respective Bupati or Mayor: Banyuwangi, Sidoarjo, Sumenep, Lamongan,Jember, Probolinggo,Kederi, Mojokerto and Pasuruan)

3. Volume Is Rencana Investasi (InvestmentProgram). various dates 1989. East Java Province and DirectorateGeneral Cipta Karya, MPW.

4. Volume II: Keuangan (Finance).various dates, 1989. East Java Province and DirectorateGeneral Cipta Karya, MPW.

5. Volume IlIs Rencana Kerja PeningkatanPendapatan Daerah dan Rencana Kerja PengembanganKelembagaan (RevenueImprovement Action Plan and InstitutionalDevelopment Action Plan). various dates, 1989. East Java Province and DirectorateGeneral Cipta Karya, MPW.

6. Volume IV: Ringkasan (Summary).various dates, 1989. East Java Province and DirectorateGeneral Cipta Karya, MPW.

East Java: Batch I Local GovernmentWorking Papers (separatevolumes for each local government)

7. Dokumen Teknis (TechnicalDocuments). various dates, 1988-89. East Java Province and DirectorateGeneral Cipta Karya, MPW. (all but Pasuruan and Sumenep).

8. Dokumen Keuangan (FinancialDocuments. variours dates, 1988-89. East Java Province and DirectorateGeneral Cipta Karya, MPW. (all but Pasuruan). ANNEX 16 -155 Page 2

Bali: Official Batch I Local Government PreparationDocuments (separatevolumes in Indonesianfor each local governmentand signed by its respectiveBupati or Mayors Badung, Buleleng,Jembrana and Klungkung)

9, Pokok-pokokRancangan Program P3KT (IUIDP Planning Principles).February, 1990. Bali Province and DirectorateGeneral Cipta Karya, MPW.

10. Rencana PembiayaanRIPK (IndicativeUrban InfrastructureFinancing Plan). January, 1990. Bali Province and DirectorateGeneral Cipta Karya, MPW.

11. Analisa Ekonomi dan Keuangan RIPK (IndicativeUrban Infrastructure Economic and FianancialAnalysis). January, 1990. Bali Province and DirectorateGeneral Cipta Karya, MPW.

12. Strategi PengembanganKota & RingkasanProgram RIPK (Urban Development Strategy and IndicativeUrban InfrastructureDevelopment Program Summary).various dates, 1989-90. Bali Province and DirectorateGeneral Cipta Karya, MPW.

Bali Working Papers

13. Tambahan Is RIPK Sector, Non-WaterSupply (SupplementIs Sectoral IndicativeUrban InfrastructureProgram, Non-Water Supply). various dates, 1989-90. Bali Province and DirectorateGeneral Cipta Karya, MPW.

14. Tambahan IIt RIPK Sector Water Supply (SupplementII: Sectoral Indicative Urban InfrastructureProgram, Water Supply). various dates, 1989-90. Bali Province and DirectorateGeneral Cipta Karya, MPW.

15. Tambahan IIIs RIPK Sector Non-Water Supply for IKK and Kawasan Wisata. various dates, 1989-90 (SupplementIII: Sectoral IndicativeUrban InfrastructureProgram for Sub-districtHeadquarters and Tourist Attractions).various dates, 1989-90. Bali Province and Directorate General Cipta Xarya, MPW.

16. Rencana Kegiatan PengembanganKelembagaan dan PeningkatanPendapatan Daerah (InstitutionalDevelopment and Revenue ImprovementAction Plans). January 1990. Bali Province and DirectorateGeneral Cipta Karya, MPW.

17. PenyajianInformasi Lingkungan TPA Jimbaran (JimbaranSolid Waste Disposal Site EnvironmentalAssessment Information). 1990. Bali Province and DirecorateGeneral Cipta Karya. (BadungKabupaten only).

18. Addendum II Urban InfrastructureInvestment Program, Water Supply Sector (in English). 1990. Bali Province and DirectorateGeneral Cipta Karya, MPW. ANNEX16 - 156 - Page 3

Technical Memoranda

19. Technical Memorandum, Water Supply. November, 1989. Directorate General Cipta Karya, MPW.

20. Technical Memorandum, City-wide Drainage. November, 1989. Directorate General Cipta Karya, MPW.

21. Technical Memorandum, Cost Estimating. December, 1988. Directorate General Cipta Karya, MPW.

22. Technical Memorandum, Solid Waste Disposal. November, 1989. Directorate General Cipta Karya, NW.

23. Technical Memorandum, Human Waste Disposal. November, 1989. Directorate General Cipta Karya, MPW.

24. Technical Memorandum, Urban Roads. November, 1989. Directorate General Cipta Karya, MPW.

25. Real Demand Assessment Guidelines. June, 1988. Directorate General Cipta Karya, MPN.

26. East Java IUIDP Appraisal Process. February, 1989. Directorate General Cipta Karya, MPW.

27. Institutional Development Strategy for IUIDP Program Implementation. November, 1987. Directorate General Cipta Karya, MPW.

28. Appraisal Manual. October, 1989. Directorate General Cipta Karya, MPW.

29. ECOWAT 2. July, 1989. World Bank Preparation Mission.

Key Aides-Memoire

30. East Java - Bali Urban Development Project, Preappraisal Aide-Memoire. December 10, 1989. World Bank Mission.

31. East Java - Bali Urban Developmpent Project. Appraisal Aide-Memoire. April 10, 1990. World Bank Mission.

Other

32. National Urban Development Study Final Report, Volumes 1-5. September 1985. Directorate General Cipta Karya, MPW, and United Nations Centre for Human Settlements, UNDP.

33. Unabridged List of Project Documents. May, 1990. World Bank Appraisal Mission. ttl* II 111- 1(1 IBRO22163 MU)INDONESIA EASTJAVA (JAWA TIMUR- BALI URBAN DEVELOPMENT EASJVA(JWATiLOCAL GOVERNMENTS PROJECT

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