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Document of The World Bank Public Disclosure Authorized FOR OFFICIAL USE ONLY Report No: 27628-IND PROJECT APPRAISAL DOCUMENT ON A PROPOSED LOAN Public Disclosure Authorized IN THE AMOUNT OF US$67.3 MILLION AND A PROPOSED CREDIT IN THE AMOUNT OF SDR 47.4 MILLION (US$71.4 MILLION EQUIVALENT) TO THE REPUBLIC OF INDONESIA Public Disclosure Authorized FOR A THIRD URBAN POVERTY PROJECT April 18, 2005 Urban Development Sector Unit East Asia and Pacific Region This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. Public Disclosure Authorized CURRENCY EQUIVALENTS Exchange Rate Currency Unit = Indonesian Rupiah (Rp) US$1 = Rp8,500 US$0.668879 = SDR 1 FISCAL YEAR January 1 - December 31 ADB Asian Development Bank ANDAL Environmental Impact Statement APBD Annual District Development Budget APBN Annual Central Government Development Budget BANGDA Directorate General for Regional Development, MoHA Bappenas National Development Planning Agency Bappeda I/II ProvincialiDistrict Planning Agency BI Bank Indonesia BKKBN National Family Planning Board BKM Badan Keswadayan Masyarakat, ward level community organization BOP Overhead Costs BPD Elected body of representatives BRI Bank Rakyat Indonesia Bupatimalikota DistricUCity Head CAS Country Assistance Strategy CDP Community Development Plan css Community Self Survey DAK Targeted grant mechanism for local government DLN Directorate ofExternal Fund, MoF FGD Focused Discussion Group GO1 Government of Indonesia KabupatenKota DistrictlMunicipality KDP Kecamatan Development Project Kecamatan Sub-di s trict KelurahadLurah Urban sectiodward, comprising on average of 10 RWs/Head of kelurahan KPK Poverty alleviation committee, Komite Pengetasan Kemiskinan KPKN Local Office of National Treasury KSM Community Group, Kelompok Swadaya Masyarakat LKMD Village/kelurahan management group LPM Village/kelurahan management group (new form ofLKMD) MoF Ministry ofFinance MoHA Ministry ofHome Affairs MPW Ministry ofPublic Works NEC National Evaluation Consultant NGO Non Government Organization NMC National Management Consultant oc Oversight Consultant PAPG Poverty alleviation partnership grant PJOK Administrative unit at local level FOR OFFICIAL USE ONLY PMU Project Management Unit PRSP Poverty Reduction Strategy Paper RPAS Regional Poverty Alleviation Strategy RT Neighborhood unit RW Association of neighborhood unit (with some 500 families), Rukun Warga SUSENAS National Household Expenditure Survey UKL/UPL Environmental managementimonitoring procedures UPK Financial management unit of BKM UPP Urban Poverty Project VIP Village Infrastructure Project Vice President: Mr. Jenial-ud-din Kassum, EAPVP Country ManageriDirector: Mr. Andrew Steer, EACIF Sector Manager: Mr. Keshav Varma, EASUR Task Team Leader: Mr. George Soraya, EASUR This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not be otherwise disclosed without World Bank authorization. INDONESIA Third Urban Poverty Project CONTENTS Page A . STRATEGIC CONTEXT AND RATIONALE............................................................................ 3 1. Country and sector issues ....................................................................................................... 3 2 . Rationale for Bank involvement ............................................................................................. 5 3 . Higher level objectives to which the project contributes ........................................................... 5 B . PROJECT DESCRIPTION ........................................................................................................ 6 1. Lending instrument ................................................................................................................ 6 2 . Project development objective and key indicators .................................................................... 6 3 . Project components ............................................................................................................... 6 4 . Lessons learned and reflected in the project design .................................................................. 9 5 . Alternatives considered and reasons for rejection................................................................... 11 C . IMPLEMENTATION.............................................................................................................. 11 1. Institutional and implementation arrangements ...................................................................... 11 2 . Monitoring and evaluation of outcomes/results ...................................................................... 12 3 . Sustainability ...................................................................................................................... 12 4 . Critical risks and possible controversial aspects ..................................................................... 14 5 . Loan/credit conditions and covenants .................................................................................... 15 D. APPRAISAL SUMMARY....................................................................................................... 15 1. Economic and financial analyses .......................................................................................... 15 2 . Technical ............................................................................................................................ 16 3 . Fiduciary ............................................................................................................................ 16 4 . Social ................................................................................................................................. 17 5 . Environment ....................................................................................................................... 18 6 . Safeguard policies ............................................................................................................... 19 7 . Policy Exceptions and Readiness .......................................................................................... 20 Annex 1: Country and Sector Background ................................................................................ 21 Annex 2: Major Related Projects Financed by the Bank and/or other Agencies ....................... 23 Annex 3: Results Framework and Monitoring........................................................................... 24 Annex 4: Detailed Project Description ...................................................................................... 27 Annex 5: Project Costs ............................................................................................................... 39 Annex 6: Imp1ement at ion Arrangements ................................................................................... 40 Annex 7: Financial Management and Disbursement Arrangements ......................................... 45 Annex 8: Procurement ............................................................................................................... 51 Annex 9: Economic and Financial Analysis .............................................................................. 62 Annex 10: Safeguard Policy Issues............................................................................................. 64 Annex 11: Project Preparation and Supervision ......................................................................... 82 Annex 12: Documents in the Project File ................................................................................... 84 Annex 3: Statement of Loans and Credits ................................................................................ 85 Annex 4 Country at a Glance ................................................................................................... 87 Annex 5: Sample of Sub-project Proposal Format ................................................................... 88 Annex 16: Revolving Funds for Microcredit .............................................................................. 91 Annex 17: Monitoring and Evaluation ..................................................................................... 102 Annex 18: Strategy to Reduce Fraud and Corruption ............................................................... 109 Annex 19: Strategy to Ensure Gender Mainstreaming and Equality ........................................ 116 Annex 20: Socialization and Training Program........................................................................ 118 Annex 21: Targeting Strategy ................................................................................................... 126 Annex 22: Implementation ofWP program ............................................................................ 132 Map: IBRD 33987 INDONESIA THIRD URBAN POVERTY PROJECT PROJECT APPRAISAL DOCUMENT EAST ASIA AND PACIFIC EASUR Date: April 18, 2005 Team Leader: George Soraya Country Director: Andrew D. Steer Sectors: Micro- and SME finance (50%); Sector ManagedDirector: Keshav Varma General water, sanitation and flood protection sector (20%); Other social services (1S%);General transportation sector (1O%);Sub-national govemment administration (5%) Themes: Access to urban services and housing (P);Participation and civic engagement (P);Other urban development (S);Poverty strategy,