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, analysis and monitoring (S) Project ID: PO84583 Environmental screening category: Partial Assessment Lending Instrument: Specific Investment Loan Safeguard screening category: Requires framework Project Financing Data [XI Loan [XI Credit [ ] Grant [ ] Guarantee [ ] Other: For LoansiCreditslOthers: Total Bank financing (US$m.): 138.70 Proposed terms: VSL Financing Plan (US$m) Source Local Foreign Total BORROWEWRECIPIENT 40.77 6.63 47.40 INTERNATIONAL BANK FOR 57.40 9.90 67.30 RECONSTRUCTION AND I DEVELOPMENT INTERNATIONAL DEVELOPMENT 61.40 10.00 71.40 AS SOCIATION Financing Gap -0.27 0.27 0.00 Total: 159.30 26.80 186.10

1 7Y 2006 2007 2008 2009 2010 2011 0 0 0 innual 25.5 40.2 32.3 23.0 14.7 3.1 0.0 0.0 0.0 kmulative 25.5 65.7 98.0 121.0 135.7 138.7 138.7 138.7 138.7

Does the project require any exceptions from Bank policies? Re$ PAD D. 7 Have these been approved by Bank management? Is approval for any policy exception sought from the Board? [ ]Yes [XINO Does the project include any critical risks rated “substantial” or “high”? [ ]Yes [XINO Re$ PAD C.4 Does the project meet the Regional criteria for readiness for implementation? [XIYes [ ]No Re$ PAD D. 7 Project development objective Re$ PAD B.2, Technical Annex 3 The project would support: (i)the establishment of, or support to, representative and accountable community organizations that are able to increase the voice of the poor in public decision making; (ii)making local governments more responsive to the needs ofthe poor through increased cooperation with community organizations; and (iii)the provision of funds, transparently, to community based organizations and local governments to provide basic municipal services to the urban poor. The project would also support implementation of various communities’ poverty plans through provision ofblock grants to the wards. Project description [one-sentence stimmary of each component] Re$ PAD B.3.a, Teclzizical Annex 4 Component 1: Community Development and Local Government Capacity Building Component 2: Kelurahan Grants Component 3 : Poverty Alleviation Partnership Grant (PAPG) Component 4: Implementation Support Which safeguard policies are triggered, if any? Re$ PAD D. 6, Technical Annex 10 Environmental Assessment (OP/BP/GP 4.01) Cultural Property (OPN 11.03, being revised as OP4.11) Involuntary Resettlement (OP/BP4.12) Indigenous Peoples (OD4.20, being revised as OP4.10) Significant, non-standard conditions, if any, for: Re$ PAD C. 7 Board presentation: None.

Loadcredit effectiveness: 1, Adoption, by the Borrower ofthe Project Manual, acceptable to IDA.

Covenants applicable to project implementation: None

A. STRATEGIC CONTEXT AND RATIONALE

1. Country and sector issues

The proposed project is the third in a series ofUrban Poverty Projects (UPP) in Indonesia and is essentially an expansion of UPP to 14 additional provinces. The first UPP became effective in 1999, with Phase Icompleted in 2002, and Phase I1is under implementation. Based on the success ofUPP, the government proposed an expansion ofthe project to 13 provinces, and the second project (UPP2) was approved by the Bank in June 2002. Subsequently, the government engaged with the Bank in extensive discussions about the potential impact ofthe UPP approach on poverty alleviation, community development and local govemance in Indonesia. As a result, and in conjunction with the preparation ofthe Poverty Reduction Strategy Paper (PRSP), the government has developed a long-term 10-year program ofurban poverty alleviation, involving the geographic expansion ofUPP, learning, and consolidation. The proposed project, requested by the highest levels of government, would further expand the coverage ofUPP to the rest ofthe country to make it a national program.

Urban poverty alleviation and commtirzity developinent. The concept ofUPP was developed following the 1997 financial crisis, when the problem ofurban poverty in Indonesia was seen primarily as a lack ofincome and employment. There was an urgent need to get financial resources to the poor rapidly. UPP was, therefore, designed to: (i)organize the poor into groups which would receive micro-credit loans for income generation or grants for tertiary level infrastructure; and (ii)promote the development ofcommunity organizations (Badan Keswadayan Masyarakat or BKM) at the ward (kelurahan) level that would receive block grants that the BKM would manage as a revolving fund. In the first two years alone, the project provided loans/grants to over 670,000 households through 1,298 BKMs, primarily for income generation activities (e.g., petty trade; selling cooked/fresh food; services such as electronics repair, tailoring; small scale manufacturing of shoes, clothing, handbags, pottery; etc.). Some tertiary level infrastructure investments were also financed, including road/bridge constmctiodimprovements, drainage, water supply, garbage collection, etc. benefiting more than a million people. Over US$53 million have been disbursed to communities, most ofwhich is still being revolved, generating more capital for additional loans and for infrastructure improvements.

UPP’s original goals were surpassed at the end ofPhase I.However, through the large network offacilitators and field implementers, four observations came to the forefront: (i)income poverty is a limited view ofpoverty-poor people demand improvements in various infrastructure and social services in addition to income generation; (ii)even well-run micro- credit systems are not a very effective way to reach the poorest; (iii)although poor communities value loans, the main strength ofthe project is the opportunity it has given them to create an organization that they elect, with leaders that they trust, and an opportunity to discuss issues of poverty together as a community; and (iv) the relationship between the BKM and local governments needs to be clarified and strengthened.

3 In response to the above, the focus ofUPP2 evolved in the following directions: (i)developing broad-based community organizations by placing more emphasis on the process of electing community representatives to the BKM; (ii)assisting communities to formulate Community Development Plans that address the multi-dimensional nature ofpoverty; (iii)supporting the formation ofcity level federations (BKM Forum) which bring together BKMs from all the kelurahans within the city; and (iv) encouraging a partnership between local governments and BKMs through the introduction of the Poverty Alleviation Partnership Grant (PAPG), which finances activities jointly proposed by local government agencies and BKMs. UPP2 has just started with consultants mobilized and currently being trained.

The proposed project will expand these ideas to new geographical areas. UPP has, in fact, become a key part ofthe government’s emerging national Poverty Reduction Strategy Paper (PRSP). This project takes a longer-term view ofthe role ofthe BKM as an institution of community development and poverty alleviation. The vision ofa successfd and sustainable BKM is an organization that is: (i)trusted by and accountable to the community; (ii)able to address poverty issues and the needs ofthe community beyond the confines ofthe project; (iii) able to carry the aggregated demands of communities to higher levels of government and demand better services from the government; and (iv) a legitimate conduit for government and other agencies for delivering services. This project will support the longer-term consolidation of this vision.

Decentralization and local governance. The decentralization laws in Indonesia place local govemments in charge of providing services to their citizens. With limited resources, however, local governments will inevitably face tradeoffs in terms ofwhat they deliver. They will meet the demands ofthe population only if officials understand community priorities and are accountable to them. This, in tum, will require communities to be organized, to aggregate and prioritize their needs and demands, and to articulate these priorities to government. Thus, for decentralization to work at the local level, two parallel processes need to take place- strengthening community capacity to organize, aggregate and articulate their needs and priorities, and building the capacities of local governments to respond to and work with communities. Based on leaming from UPP 1 & 2, this project explicitly supports both processes (see Section B and Annex 4, Project Description). In addition, the govemment has mandated certain measuresipolicies for a decentralized approach to community development and poverty alleviation that will be supported by the project: (i)the mandated community consultations for kelurahan development (Musbangkel) will be supported under the project through the formulation of Community Development Plans at the kelurahan level; (ii)Poverty Alleviation Committees (KPK) required at the district level will be strengthened, through participation in project activities and through training; and (iii)the development ofRegional Poverty Alleviation Strategies (WAS) newly required at the district level.

Responsibility for service delivery. The UPP concept at its inception called for block grants to communities to enable them to make decisions about their priority needs largely because ofthe general lack oftrust between communities and local governments at that time (1998) and the government’s failure to deliver what communities needed. However, the concept does not advocate that all community level services should be provided and managed by communities. Many urban services have significant network factors and are best managed at a level higher than

4 the community. In UPPl, the local government role in service delivery was left to a future (beyond project) stage, until the BKM would be strong enough to demand better services on its own from the government. For UPP2 and this project, given the passing ofthe decentralization law in 2001, the focus has shifted to strengthening both community and local government capacity for service delivery at the same time. Block grants will still be provided to communities for services at the kelurahan level that communities are willing and able to manage. At the same time, the capacity of local governments to work with communities will be strengthened through: (i)involvement in the development ofthe BKM; (ii)formulation ofWAS with the participation ofBKMs; and (iii)joint implementation of investments in infrastructure and services with the minimum 50% contribution to PAPG funds (see Section B and Annex 4). Other issues of governance reform at the local level which also have a significant impact on service delivery such as: procurement and financial management reforms; local economic development policies; and institutional strengthening will be addressed under a separate Bank-financed project being prepared concurrently, the Urban Sector Development Reform Program (USDRP). As some project cities may participate in both city and community level programs, a structured exercise will be carried out in a selected city to integrate these complimentary interventions.

2. Rationale for Bank involvement

The Bank has gained considerable experience in supporting the government’s goals ofmore participation in development, more effective governance and better poverty alleviation programs. The three Kecamatan Development Projects (KDP), and UPP1 and 2 introduced new ways of working with local institutions. They demonstrated that participatory principles can work in Indonesia on a large scale and that community driven projects can meet Bank standards for quality and accountability. KDP and UPP reflect a paradigm shift in the Bank’s-and the governments-approach to poverty alleviation, from traditional government-implemented infrastructure and service delivery projects towards interventions that are owned and implemented by communities, and supported by government. The Bank has been instrumental in converting what started off as individual projects, into two national programs, which now form a pillar ofthe government’s poverty alleviation program.

Much has been learned from implementation ofthe first two UPP projects. The Bank has proven its ability to help government departments to incorporate this learning. In so doing, the Bank has built a strong relationship with relevant government departments, not only in implementing UPP, but also in encouraging the goveniment to scale the program up to a national level. Continued Bank support for UPP3 will consolidate these gains and enable the important lessons learned to be internalized in the program.

3. Higher level objectives to which the project contributes

The Bank’s latest Country Assistance Strategy (CAS dated October 2003) identifies two primary constraints in further reductions in poverty: (i)inadequate productive employment opportunities resulting from a weak investment climate; and (ii)the lack ofquality service delivery to poor people. Progress in these two areas, in turn, is compromised by the underlying problem ofweak governance. The CAS aims to address these constraints through four delivery platforms. One of these is the Community Driven Development, or CDD platform. Approximately 25% ofBank

5 lending under this CAS period is expected to be directed through the CDD platform (namely KDP and UPP).

B. PROJECT DESCRIPTION

1. Lending instrument

The project is proposed as a Sector Investment Loan, with an IDNIBRD blend of 5 1.4% and 48.6%, respectively. The possibility ofpackaging the project as an Adaptable Program Loan (APL) was considered but rejected because national coverage will be achieved through this third project, and because no major policy reforms are envisaged. The project will be implemented in two phases to achieve the national coverage.

2. Project development objective and key indicators

The objective ofthis project is to provide improved services for the urban poor and strengthen community and government institutions for responsive service delivery. This objective will be achieved through: (i)the establishment or support ofrepresentative and accountable community (kelurahan) organizations that are able to increase the voice ofthe poor in public decision making; (ii)making local governments more responsive to the needs ofthe poor through increased cooperation with community organizations; and (iii)the transparent provision offunds to community organizations and local governments to provide services to the urban poor.

Outcome indicators (i) 50% ofpoor households in the targeted kelurahans receive benefits and improved services from the project (ii) More than 70% ofthe community organizations (BKMs) that have been formed are representative, effective, and operate in a participatory manner (iii) At least 30 local governments implementing the Poverty Alleviation Partnership Grant fund (PAPG) provide their own resources for the implementation of Community Development Plans (CDPs), independently from the PAPG fund.

Annex 3 describes key indicators for each project component.

3. Project components

The first two UPP projects cover the islands ofJava, Kalimantan, Sulawesi and West Nusa Tenggara. UPP3 will mainly cover Sumatera, East Kalimantan, Maluku, North Maluku, Papua, Bali, and East Nusa Tenggara- 15 provinces with about 1,736 wards (kelurahan). The project will also provide additional institutional support and grants to further strengthen about 660 BKMs selected in UPP1 and UPP2 and in new development areas.

Component 1: Coinmuiiity Developnierit aiad Local Government Capacity Building During implementation, the project will aim at: (i)a broader awareness in the kelurahans about the project and its rules; (ii)well functioning community (kelurahan) organizations that are democratically elected and accountable to people; (iii)well functioning community groups

6 (Kelompok Swadaya Masyarakat or KSM) that participate in planning for development and use the kelurahan grants for productive purposes; and (iv) local governments that are able to work with community (kelurahan) organizations to implement poverty alleviation programs. To achieve these, this component will finance consultants and facilitators to carry out the following activities:

(i) an awareness raising process that will encourage communities to discuss the nature ofpoverty in their kelurahan and how it should be addressed; (ii) assistance to the community to carry out a Community Self Survey (CSS) on poverty; (iii) the formatiordconfinnation of an elected body of representatives (BKM) that is accountable to the community at large and which will act on behalf ofthe community for poverty reduction; (iv) the formulation ofa poverty-oriented Community Development Plan (CDP) for the kelurahan using a participatory process; (v) organizing and assisting community groups (KSMs) who will submit proposals to the BKM to utilize project resources and implement the programs identified in the CDP; (vi) assistance to BKMs to form associations (BKM Forums) and work collectively; (vii) building local govenment capacity to work with BKMs and the BKM Forum; and (viii) strengthening the preparation of city level plans for implementation ofRegional Poverty Alleviation Strategy (WAS) programs.

The bulk ofthis component will involve a long and guided socialization process where groups of facilitators will be trained to work directly with communities in the kelurahan (at least 4 facilitators will work with 10 kelurahan). This socialization process is expected to take about 6 months and will begin after the project becomes effective. Socialization and training activities will also target local governments, including particularly, the city level Poverty Alleviation Committees (see below).

Compoizen t 2: Keluralz an Grail ts Each participating kelurahan will be allocated a grant according to the size ofthe population, ranging from Rp.200 million (US$23,550) for kelurahans with less than 3000 people, to Rp.500 million (US$58,800) for kelurahans with greater than 10,000 people. Once the community (kelurahan) organization-BKM has been formalized (notarized with the legal status ofan association) and a CDP has been agreed upon, the BKM will sign a Grant Implementation Agreement with the government which will lay out the respective roles and responsibilities ofthe two parties, the terms ofdisbursement, as well as the expectations regarding the use offunds beyond the project life. The project will also provide additional funds to selected kelurahans from UPP1 and UPP2 where the BKMs are functioning well, to help them provide more services to the poor.

For each participating kelurahan, this component will finance specific sub-projects. Sub-projects have to be in accordance with the CDP, and may cover a range ofpoverty alleviation activities from an open menu (with a short negative list). There will be different rules and regulations

7 regarding the use of funds depending on the type of activity being financed. It is expected that CDPs will generally include the following types of activities:

(i) pre-identified specific investments that are a community priority by consensus (these could be a bridge, a road, school repair, health facility repair or others); (ii) activities that community groups can compete for (any range ofphysical infrastructure to services sub-projects-the CDP should indicate clearly what priority sectors or priority groups for that community are likely to be financed); (iii) micro credit loans for community groups which will form the basis of a revolving fund (with clear rulesiprinciples for implementation-see Annex 16); and (iv) grant assistance to the poorest or most vulnerable individuals (this could include scholarships, home improvements, health care, etc. to specific individuals identified by Communities).

The ceiling for any single sub-project per group or micro credit loan to a community group (KSM) is Rp.30 million (US$3,550 equivalent). The allocation to the kelurahan will be disbursed in three tranches to ensure proper fund use and management, and to encourage better outcomes, Local govemment staff with full support offacilitators at the kelurahan level will provide technical assistance (including socialization and training).

Component 3: Poverty Alleviatiorz Partrzerslziy Grant (PAPG) The Poverty Alleviation Partnership Grant fund (PAPG) will encourage partnerships between local governments and communities and attempt to institutionalize a consultative process between the two for future activities undertaken by local governments using their own funds. It will finance poverty alleviation activities that are too big to be financed by the kelurahan grants, or that require local government involvement (e.g., networked infrastructure or operations and maintenance); or that cover more than one kelurahan.

Initial results from implementing PAPG under UPPl Phase 2 indicate that in order to reap the full benefits ofthis fund, local governments have to be involved in the UPP program as a whole and not just in the implementation ofthe PAPG component, and that the PAPG needs to be affiliated with a specific local government structure. In addition, the implementation ofPAPG should be based on Regional Poverty Alleviation Strategies (RPAS) at the city level, which will be strengthened under Component 1. The responsibility for preparing the RPAS will fall on local level Poverty Alleviation Committees (Komite Pengetasan Kemiskinan or KPK).

To take into account these developments, the following provisions have been incorporated into this component: (i)PAPG will be carried out by established KPKs; (ii)the KPKs will be involved in the process ofBKM formation from the beginning and participate in training programs and socialization activities; and (iii)technical assistance will be provided to help KPKs to develop RPAS. These activities will be undertaken in every participating project city. However, PAPGfunds will be allocated competitively to 40 local governments (see Annex 4). PAPG funds will aim to support the RPAS to the extent possible. The KPKs in cities that are eligible to receive funds will be in charge offorming an independent PAPG Selection Committee who will evaluate proposals and detennine the allocation ofPAPG resources. It is expected that

8 these design features will build greater ownership of the UPP approach-and, therefore, the PAPG component-by local governments.

Forty local governments will be selected to participate in the PAPG. Selected cities will be eligible to receive amounts ranging from a total of Rp.4.5 billion (US$529,400) over three years (for cities with less than 15 BKMS), to a total of Rp.7.5 billion (for cities with more than 25 BKMs). There will be an open menu for activities eligible for financing under the PAPG (with a short negative list). Activities could include basic infrastructure works that go beyond one kelurahan (such as roads or drains, or refurbishment ofexisting schools or clinics that serve more than one kelurahan); skills training that would benefit more than one kelurahan; non-formal education and health activities. The cost for individual sub-projects is expected to range from Rp.30 million (US$3,550) to a maximum ofRp.200 million (US$23,550). PAPG implementation will begin one year after project launch in order to give cities a chance to familiarize themselves with the BKMs and to develop the RPAS.

Component 4: Implenzentation Support The project will be managed by the same Project Management Unit established at the Ministry of Settlements and Regional Infrastructure (Kimpraswil) as for the other UPPs, assisted by an administrative unit (PIMPRO). The PMU will hire consultants and facilitators to assist in project implementation. Technical assistance will be provided through National Management Consultants (NMC) at the central level; Oversight Consultant (OC) Teams at the provincial level, with district offices in the participating cities; and facilitators and community cadres (volunteers) at the kelurahan level. This component will finance the cost ofthe consultants and facilitators. The cost ofgovernment operating expenditures will be covered through counterpart funds. Details ofimplementation arrangements are provided in Annex 6.

4. Lessons learned and reflected in the project design

Many lessons have been learned during the process ofimplementing UPP 1 Phase I,which were incorporated in designing UPP2. Key design changes between the original UPP and UPP2 (and this project) include the following:

(9 The provision of services to communities is a joint responsibility of communities and local governments. Local government therefore has to be one ofthe key players. (ii) It takes time to build a dialogue with communities regarding community issues and to reach a consensus on ways to approach poverty. A longer (four to six month) guided process for awareness raising and socialization is required. This includes a defined set of community development activities; centrally prepared training for consultants and facilitators to ensure consistency ofmessages; and centrally prepared publicity materials. (iii) Revolving funds can be run well by BKMs, but they need to follow standardized principles and best practices and need to be accompanied by a support strategy and training. In this project, if BKMs choose to run revolving funds, a standardized program has been designed to: apply best practices and principles; provide more training for iniproved management ofrevolving funds; and

9 distinguish between levels of investment in revolving funds and more support and skills training to those BKMs that wish to (and prove to be eligible to) operate a larger, more professional micro credit program.

The project continues to take a leaming approach and implementation experiences are continually being incorporated into the implementation processes.

Impact of UPPl and UPP2 UPPl did not have a system to measure the welfare and poverty impact ofthe project. There was no baseline survey, and not enough importance was given to collecting project data systematically and accurately across the 1,300 kelurahan. Learning from this, both UPP2 and UPP3 include a systematic impact evaluation system, with a baseline survey, specific indicators to measure impact, and a combination ofquantitative and qualitative methods ofevaluation (see Annex 3, Results Framework, and Annex 17, Monitoring and Evaluation). The Management and Information System (MIS) for data collection under UPP1 Phase I1has been strengthened, but it is too early in the implementation stage to measure impacts. The Govemment carried out an impact evaluation ofUPP1 Phase 11. The findings ofthis evaluation will be used to further refine the implementation ofthe UPP program. UPP2 has been launched recently, and the consultants and facilitators are just starting their work on the ground, following intensive training. Findings from impact evaluations ofUPP2 will be incorporated into UPP3 implementation as they become available (the implementation trajectories ofthe UPP program-including UPP 1, 2 and 3-are illustrated in Annex 22).

Despite the absence in UPP1 ofdirect indicators measuring impact, implementation ofPhase 1, and now ofPhase I1(using the UPP2 design principles), have yielded strong indirect evidence that the UPP approach is an effective way oforganizing communities, providing improved services, and promoting partnerships between local govemnents and communities:

the number ofhouseholds benefiting from UPP 1 Phase 1 surpassed targets; the majority ofthe BKMs created under Phase 1 remain in operation, even though the project ended in Phase 1 kelurahan over one year ago; BKMs came together on their own (without any intervention from the project) to form BKM Fora at sub-district and district levels to work together and help each other out; local governments are already using BKMs (without any intervention from the project) as a conduit for channeling govemment funds for poverty alleviation activities in some areas; an independent post-audit report indicates that misuse ofproject funds at the community level is insignificant; under Phase 11, improved socialization and facilitation processes have dramatically increased participation in the program, with about 25% of adults in Phase I1kelurahan participating in BKM elections and over 18,000 volunteers signed up to work on behalf ofthe project from all layers ofthe society; and under Phase 11, a demonstrated increase in the capacity ofthe project to recruit and train motivated and high quality facilitators and volunteers locally.

10 5. Alternatives considered and reasons for rejection

During the preparation of UPP2, different project altematives were considered (tuming UPP into a local govemment project, having a micro finance project, or doing an APL), but all were rejected as the UPP approach was considered to be the most appropriate means for achieving the project objectives (see UPP2 PAD for details). In preparing UPP3, the possibility ofusing the existing intergovernmental fiscal framework to channel funds (DAK) was raised. However, since the Government decided to make UPP3 a national program as it is a national priority, the DAK option was not explored further. Nonetheless, the DAK may still be an appropriate instrument to support local government in prioritizing poverty alleviation in the future. Therefore, during the course ofimplementation, a study will be carried out to investigate ways of using DAK to support the UPP approach in the future.

C. IMPLEMENTATION

1. Institutional and implementation arrangements

As in UPP1 and 2, responsibility for coordination, management and monitoring lies with the Ministry ofPublic Works, successor to the Ministry ofSettlement and Regional Infrastructure (Kimpraswil). The planning ministry, Bappenas, will chair the Project Secretariat Steering Committee (an inter-ministerial coordination committee), which will consist ofrepresentatives from Ministries ofPublic Works, Finance, Home Affairs, People’s Welfare, Cooperation and Small Medium Enterprises, and Industry and Trade.

A Project Management Unit (PMU) already exists at the central level that is currently managing UPP1 and 2. The same PMU will manage UPP3, including project monitoring and reporting. In consolidating its vision ofUPP as a national program, the government has broadened the mandate ofthis PMU and has decided to raise the administrative status ofthe PMU so that it will now report directly to the Director General ofHuman Settlements. The PMUwill be assisted by an administrative unit (PIMPRO). The PIMPRO will hire consultants and facilitators to assist in project implementation, particularly since this type of a community driven project will require extensive presence in the field at the kelurahan and district (kotdkabupaten) levels. National Management Consultants (NMC) will be hired at the central level, assisted by Oversight Consultants teams (OCs) at the provincial level to manage and implement the program. Teams of facilitators will also be hired with, on average, 4 facilitators serving every 10 kelurahan, to carry out the day-to-day interaction with communities. Facilitators will be supported by volunteers from the kelurahan (community cadres) who will play a key role in disseminating the project objectives and principles, and ensuring the sustainability ofthe community organization beyond the life ofthe project. Bappenas as UPP Steering Committee (SC) will hire Evaluation Consultants to carry out performance and impact evaluation studies.

The district level Poverty Alleviation Committees (KPK) will be the main interlocutor for the project from the local government side. Coordinating teams will be assigned at different levels to administer the project, with an administrative manager at the sub-district level and at the district level who will respectively sign off on the kelurahan grants and the PAPG sub-projects (see Annex 6).

11 2. Monitoring and evaluation of outcomeshesults

A comprehensive monitoring and evaluation system has been set up for the project similar to the system set up under UPP2. This includes a strengthened Management Information System (MIS) managed by the PMUwith monitoring indicators as set out in Annex 3 and Annex 17. In addition, Evaluation Consultants will be hired to do a baseline survey, and carry out other quantitative and qualitative studies to evaluate specific aspects ofthe project (see Annex 17, Monitoring and Evaluation). The project will also support local governments to actively monitor and evaluate the project. The UPP consultants shall strengthen the MIS and provide sufficient support and training to the local government on the MIS application.

As in UPP1 and 2, in UPP3, supervision reports, MIS reports, and the evaluation surveys will form the basis for continuous learning. The press will be encouraged to report on the project, and NGOs may be hired to evaluate specific aspects. The Mid-Term Review and evaluations at the end of each phase will provide more obvious opportunities to make any design changes necessary. Learning from the concurrent UPP1 (Phase 11) and UPP2 will also provide valuable inputs.

3. Sustainability

Institutional sustainability The institutional sustainability ofthe BKM in delivery of services will be evidenced in the following:

(i) if the BKM is able to address poverty issues and the needs ofthe community beyond the confines ofthe project (e.g., play an advocacy role on behalf ofthe poor, or carry the aggregated demands ofcommunities to higher levels of government and demand better services from government), thereby demonstrating to the community a role beyond implementation ofproject funds; and (ii) if the BKM is able to become a legitimate conduit for government and other agencies to deliver services, thereby providing long-term access to funds beyond the project life.

Through the activities described above, these roles will be strengthened to the extent possible and monitored during the course of implementation.

Institutional sustainability refers also to the sustainability ofthe BKM as a representative of the community. The relationship between the elected community institution established through the project (the BKM) and existing (and planned) government structures in communities is still evolving. The key government structures affecting the project are the LKMDs or LPMs (the planning and implementing body at the kelurahan and village level) and the BPD (an elected legislative body introduced by the new decentralization laws that is intended to replace the LKMD). LKMDs are still present in most kelurahans and, in some cases, are not democratically elected, have little community confidence, and are considered to be an extension ofthe government’s administrative apparatus. In UPP 1 most communities have rejected the existing LKMDs in favor of a new, elected BKM as representative ofthe community. However, there are

12 exceptions. In some kelurahans, widely respected members ofthe community who were part of the LKMD have also been elected to the BKM. BPDs, when instituted under the new decentralization law, will be elected and will be the equivalent oflocal level councils. However, the BPD structure has only been approved for the rural areas (desas) under the new laws, and does not yet exist in the majority of desas. An equivalent structure to the BPD for urban wards (kelurahans) has not yet been agreed upon.

Given the national coverage ofUPP and communities’ overwhelmingly positive response to BKMs, the central government has initiated a discussion on the relationship between BKMs and BPDs. The experience in UPPl has been that where BPDs exist, BKMs have been able to work closely together with them. In the long term, the government envisions that the BPD and the BKM will become one institution with two functions: (i)to oversee the execution oflocal government expenditure by the Kepala Desa (village chief); and (ii)to be coordinator and facilitator to deliver community based services as envisaged in UPP. Similar arrangements are envisaged for the kelurahan with the LKMDs. Central government agencies intend to review experiences and best practices ofhow BPDs/LKMDs and BKMs function under this project, and prepare relevant legislation accordingly during the course ofproject implementation.

Teclanical sustainability of sub-projectsfinanced Proposals for both the kelurahan grants and the PAPG will go through a screening process by project staff and other experts, if required, to ensure their technical feasibility. For micro credit activities, BKMs will receive training on analyzing viability ofproposals for use ofloan funds, and will be supported by micro credit specialists at both the regional level and the central level. In addition, an exit strategy has been developed to ensure financial sustainability ofthe revolving fund function (Annex 16). For infrastructure activities, KDP has developed simple technical manuals for design and supervision of small works, which will be used to guide UPP3 activities. Since sub-projects will be community driven, there will be a high level ofownership, and communities will therefore have an incentive to maintain and sustain whatever activity they have chosen to finance. Under the PAPG, if any public goods such as infrastructure are financed that require operations and maintenance by either government or communities, both would have full ownership ofall such projects as they will have proposed the sub-projects themselves. All sub- project proposals will be required to set out an operations and maintenance plan (implementation as well as financial arrangements), which will be one ofthe criteria for selection ofproposals.

Finan cia1 Sustainability The project aims at creating a foundation for community based poverty alleviation. It does this through developing community capacity for collective action and the development of a credible community-based organization. Once UPP3 is complete, almost half ofthe kelurahans in the country will have such an organization. These communities will not need further support in this respect. However, if the government chooses to expand the program to every kelurahan in the country, a similar program will have to be carried out with a cost about equal to the magnitude of this program. The investments in developing the BKM will provide a long-term benefit for the government’s national poverty alleviation program. For example, many poverty alleviation programs from sectoral departments such health, education, etc., could be targeted more effectively through BKM facilitation. The BKM is, in fact, expected to coordinate these entire programs at the community level through the CDPs.

13 4. Critical risks and possible controversial aspects

Risks Risk Mitigation Measure Risk Rating with Mitigation To project development objectives Government intervention in Large investment in long, guided N establishment ofBKMs and their socialization process at community and operations government level Ability ofBKMs to remain immune to Large investment in long, guided M being co-opted by local elite or socialization process politicians Quality and realism of Community Capacity building and implementation N

Ability ofBKMs to adequately monitor I Capacity building and implementation M use of kelurahan grant funds support; cancel subsequent tranches Ability ofBKMs and local Capacity building and implementation M governments to adequately monitor use support at kelurahan level; cancel future of funds under PAPG allocations under PAPG to city (kota) Adequate use and maintenance of Ensuring that proposals are demand driven N infrastructure/services/activities and communities/LGs contribute to costs; financed under project screening process that ensures O&M To component results Availability ofcapable local Funds available to bring in international M consultants training specialists if required Availability ofqualified kelurahan Training programs M facilitators Availability ofqualified trainers to Funds available to bring in intemational N provide necessary training support if necessary Willingness of local governments and Capacity building at community and local S kelurahan organizations to work govemment level; large investment in long, together guided socialization process; cancel PAPG component Overall Risk Rating M

Risk mitigation for possible community conflicts. The project will operate in urban areas where the risk ofconflict is low. The participatory and inclusive nature ofthe project is such that it will promote unity and resolution ofconflicts. The core training offacilitators and socialization include conflict resolution materials. If adjustments to the guidelines are required to enhance and adapt the specific conflict resolution mechanisms and a strategy to deal with the specific conflict, it will be done with the approval ofPMU and the Bank. In cases where the conflicts interrupts the project processes, or where project staff safety is at risk, Government of Indonesia’s policy is temporarily to suspend the operations until favorable conditions re-emerge. A similar approach was taken by the Government in the Bank-financed Kecamatan Development Project in conflict areas in 2000/1. The phasing ofdisbursement at a kelurahan or a city will also allow temporary suspension, and thus reduce the risk ofinefficient deployment ofresources.

14 have consistently demonstrated their willingness to share the cost ofmaintenance of small works. Revolving funds are expected to provide full cost recovery (plus interest) from borrowers. The fiscal impact on local govemment budgets for the kelurahan grants is therefore expected to be minimal. The only direct expense to local govemment is the overhead costs (BOP) that will be required for the local coordinating teain and PJOK, which will not have a significant impact on local govemment finances.

The PAPG will only be carried out in a limited number oflocal governments selected through a competitive process. The local govemments will be eligible to receive PAPG funds as grants. The fiscal impact on the recurrent budget ofthe local govemment will be operations and maintenance (O&M) costs of any infrastructure and services provided through the PAPG. Since most of these investments will be tertiary in nature and will be carried out with the active participation ofthe communities, communities will be expected to provide some ofthe O&M costs. Thus, the impact on local government finances is expected to be minimal. The concurrent USDRP project, the Regional Public Expenditure Reviews, and other donor-financed projects focusing on local govemment capacity building are separately examining local government fiscal frameworks and revenue generation.

2. Technical

The technical design and approach ofthis project has already been tested in UPP1 and 2, and similar approaches tested under the KDP program. The positive results ofthese experiences thus far attest to the technical soundness ofthe approach. With regard to specific technical issues:

(i) CDD approach: The UPP concept is being observed by the CDD Thematic Group ofthe Bank as a potential “best practice” in CDD approaches in urban areas. (ii) Infrastructure: Lessons from projects with substantial experience in community based infrastructure provision (KDP and VIP) have been taken into account. (iii) Micro credit: In order to have a consistent approach to micro credit across Bank- financed operations in Indonesia and prevent undermining or skewing the micro credit market, the same micro credit expert has been hired to help design the approach to micro credit in UPP, KDP and rural finance projects. (iv) Local government development: The project is being designed concurrently with broad based local govemment development projects and complementarities between these have been taken into account.

3. Fiduciary

The PMU in Kimpraswil has considerable experience in procurement and financial management under UPP1 and 2, and has met the Bank’s procurement and financial management requirements. The same PMU will implement UPP3, but a separate sub-section will be established for UPP3. Training in Bank procedures will be provided for key new project staff in the PMU. The Bank will also carry out extensive supervision to ensure that risks are minimized (a strategy for Bank supervision is described in Annex 11).

16 5. Loadcredit conditions and covenants

There are no significant, non-standard conditions for Board presentation or loadcredit effectiveness, except the adoption by the Borrower, ofthe Project Manual, acceptable to the IDA. There are no significant non-standard legal covenants applicable to the project.

D. APPRAISAL SUMMARY

1. Economic and financial analyses

As sub-projects are not pre-identified, this project is considered a framework-type ofproject, and no specific cost-benefit or cost-effectiveness analysis can be carried out a priori. The most important benefit ofthe project would be non-quantifiable institutional benefit for better governance; the empowerment ofcommunities and establishment ofa partnership between communities and local governments that lays the basis for more participatory development planning; the delivery of local level services that are more responsive to community needs; and greater accountability between communities and local governments. This benefit will trigger positive economic and financial impacts through achieving cost efficiency and better targeting of investments and better maintenance through increased sense ofownership by the participating community organizations,

Keluralzan grants. If kelurahan grants are used to finance economic activities through revolving funds, the mandatory use ofat least the prevailing commercial interest rates (for one year loans) should provide nominal returns at least that high per year and an expected positive economic return in real terms. If funds are used for training, these should have positive returns as the training should enable unemployed persons to access jobs requiring more skills. Kelurahan grants used to finance small infrastructure works or environmental improvements generally have positive economic returns. As proven by UPP1 and KDP works, a community approach for infrastructure provision generally yields lower costs and better quality than the conventional contractor approach. Grant funding isjustified for public goods because of the externalities involved and because ofthe expected higher number ofbeneficiaries than for private economic activities.

Poverty Alleviation Partnerslzip Grant. Results from the VIP and KDP projects show economic internal rates ofreturn (EIRR) for basic infrastructure (such as small roads, bridges, etc.) similar to that which could be funded under PAPG, to be in the range of35-40%. Since the VIP and KDP projects operate in rural areas, it is possible that the EIRRs for infrastructure developed under this project may be higher as urban areas are denser and generally have higher economic potential. Although EIRRs were not calculated for social infrastructure such as education, health, and sanitation under VIP and KDP, there are significant non-monetized environmental, health and education benefits to this type ofinfrastructure

Financial soundness of tlze project and main institution. The kelurahan grants are provided to BKMs as a grant from the central government. When the grants are used to finance infrastructure or other services that are not micro credit loans, they will be passed on from the BKM to the community as grants. In past projects such as UPP1, KDP and VIP, communities Procurement. The overall procurement risk is rated average. Large contracts to be procured consist only ofconsulting services including the NMC and OCs, which will be procured by the PMU following Bank procurement guidelines. A Procurement Capacity Assessment Report (PCAR) has been produced and is summarized in Annex 8. The majority of funds will be provided for sub-projects at the kelurahan level/local government level. The use ofthese funds will involve numerous purchases ofsmall amounts under community participation. General guidelines for procurement using community participation have been developed and are included in Annex 8 and in the project manuals.

Financial maizagenzeizt. The Project Manager (PIU) will be responsible for financial management and reporting, and will apply FMR-based disbursements. Financial management capacity at the PMU and PrU level, particularly with an improved and consolidated Management Information System (MIS), is considered adequate.

Financial controls at the conzinurzity level. The overall control risk is assessed as moderate (Annex 7). The Bank is financing several projects in Indonesia that directly transfer funds to communities. One of the key issues to reduce fiduciary risks in these types ofprojects is the need to develop measures to ensure accountability and transparency and to build social controls. Various design features will ensure transparency and accountability in financial management: (i) community ownership ofproject funds; (ii)hiring qualified people (UPK) to handle financial management and accounting at the BKM level (on average, each BKM is expected to handle about Rp.250 million or US$29,400); (iii)a systematic training program for the UPK; (iv) for those kelurahan organizations that choose to use a large proportion oftheir funds for micro credit activities, stricter financial management procedures (Annex 16); (v) standardized reporting across BKMs; and (vi) annual audits.

In addition, greater awareness in the community for accountability ofthe BKM and increased transparency ofaccounts will promote stronger social control. Greater transparency will be obtained through the more intensive awareness raising and socialization activities in the beginning and throughout project implementation, more structured guidelines for transparency of accounts, qualified staff to manage funds, as well as through ad-hoc evaluation studies. Annex 18 provides the project’s Strategy to Reduce Fraud and Corruption, including examples ofsocial controls applied when BKM funds were mismanaged in UPP1,

4. Social

Community development and einpoweriizeizt. The project aims at bringing about social change by empowering communities to address poverty issues in their neighborhoods directly. The approach has been tested under UPPl with a positive impact. A longer and more intensive community development process (4-6 months) will try to ensure greater awareness ofpoverty issues within the community, and the inclusion ofpreviously marginalized groups into the election process such that their interests can also be represented in the BKM.

Gender equality. Women’s participation in the community development process is a key factor in establishing organizations that truly represent all people in the community. It is also important for providing services that respond not only to the community at large, but also to specific needs

17 that women may have. The gender strategy developed under UPP2 to more systematically address gender equality will also be applied to UPP3 (Annex 19).

Conflict areas. The project will include areas that have been recently subject to conflict, particularly in Maluku. Peace in many places is still fragile and it is not unlikely that over the course ofthe project conflict may arise in areas where the project operates. Sensitivity to the issues that have led to the conflicts will be critical in the facilitation and socialization process. The training program, particularly for facilitators, will focus on promoting reconciliation and reconstruction within communities. The training components will also address how to operate in possible conflict situations. The training components will benefit from the experience ofKDP in this area.

Stakeholderparticipation. A key goal of the project is to achieve greater community participation in decision-making and to empower communities by providing funds directly to them. Choices about the allocation ofltelurahan grants, the PAPG funds and all implementation and procurement arrangements are up to the communities. Socialization efforts will focus particularly on getting the active participation of the poor, the more vulnerable groups within the kelurahan, women and indigenous people.

Local governments will also participate from the beginning. At the design stage, local governments have: (i)participated in workshops and meetings to discuss the project concept; (ii) committed to the project as a priority activity and agreed to provide operating costs (BOP) and counterpart funds, particularly for the PAPG; and (iii)selected the final list of kelurahan. During implementation: (i)the KPK will receive training, participate in BKM formation and community activities, and develop the WAS; and (ii)local governments will be joint implementers of individual sub-projects under PAPG.

Existing NGOs and other civil society organizations will be involved in a variety ofways: (i) through participation in the regional workshops; (ii)as key resource persons for the development of CDPs where possible; (iii)as members ofthe PAPG Selection Committee; (iv) as evaluators on an ad-hoc basis; and (v) as training providers in particular skill areas.

Monitoring of social impact. Monitoring indicators have been designed to measure social development outcomes. A separate team ofEvaluation Consultants will be hired whose responsibility is to ensure that the project is on the right track regarding achievement ofthese objectives and to provide constructive feedback. NGOs, universities, and other non-government institutions such as independent think tanks, will be hired on an intermittent basis to carry out independent evaluations ofthe social impact ofthe project.

5. Environment

The ceiling for sub-projects under the investment components (kelurahan grants and PAPG) is low (US$3,550 and US$23,550, respectively). This, combined with the nature ofthe investments (mostly tertiary level infrastructure), means that the activities financed are not likely to have any large scale, significant or irreversible impacts. Under UPP Phase I,most ofthe infrastructure investments consisted ofminor roadbridge repairs, footpaths, tertiary drainage,

18 and sanitatiodpublic toilets, which have contributed to improving environmental conditions in most cases. For the PAPG component, comparable investments to be undertaken are those implemented under KDP, which generally have not had adverse environmental impacts. Any adverse environmental impacts under UPP3 are therefore expected to be limited and highly localized, and these can be readily mitigated through the project's negative list or through standard operating procedures and guidelines. Environmental Guidelines have been agreed with the government and included in the Project Implementation Manual (see Annex loa). During implementation, consultants and facilitators will be trained in the understanding and application of these guidelines and will assist the community groups in preparing their sub-project proposals to comply with the guidelines.

6. Safeguard policies

Safeguard Policies Triggered by the Project Yes No Environmental Assessment (OP/BP/GP 4.0 1) [XI [I Natural Habitats (OP/BP 4.04) [I [XI Pest Management (OP 4.09) [I [XI Cultural Property (OPN 1 1.03, being revised as OP 4.11) [XI [I Involuntary Resettlement (OP/BP 4.12) [XI [I Indigenous Peoples (OD 4.20, being revised as OP 4.10) [XI [I Forests (OPIBP 4.36) [I [XI Safety of Dams (OPIBP 4.37) 11 [XI Projects in Disputed Areas (OPIBPIGP 7.60)* [I [XI Projects on Intemational Waterways (OPIBPIGP 7.50) [I [XI

Safeguard Screening Criteria: SF Environmental Screening Criteria: B

Choices about the allocation ofkelurahan grants are up to the communities and BKMs. Communities will participate in the formation ofthe Community Development Plan, and BKMs will evaluate proposals for sub-project from community groups based on the CDP. A committee consisting ofNGOs, government officials and community organizations will determine allocation offunds under the PAPG. Safeguards policies will be addressed in the following manner:

(i) Sub-projects that are a priori known to have an adverse impact on the environment will not be financed and are included in the negative list (e.g., protected areas, logging--see Annex 15, Sample Sub-project Proposal Form). Environmental Guidelines (Annex 1Oa) have also been developed to address minor environmental issues that may arise. (ii) Subprojects are not expected to require involuntary vesettlenzent or acquisition of significant amounts of land. In the event they do, however, a Land Acquisition and Resettlement Policy Framework (Annex 1Ob) has been developed in accordance with OP4.12 to ensure application ofthe appropriate safeguard policies.

* By supporting the proposed project, the Bank does not intend to prejudice the final determination of the parties' claims on the disputed areas

19 (iii) The highly participatory nature ofthe project will ensure that communities would be able to identify if any proposed sub-project will have an impact on cultural property and to ensure that these activities do not adversely affect cultural property. Sub-project proposals will require the identification ofany such activities and require the group proposing the sub-project to specify adequate mitigation measures (see Amex 15, Sample Sub-project Proposal Form). (iv) In areas where Indigenous People may be affected (e.g., Papua), a Framework for the Treatment ofIndigenous People will be applied. This will include a “situational analysis” prior to implementation to determine if any changes would be required in the project approach and design to ensure that Indigenous People are fully included in the project. The TOR will be reviewed and approved by EASES before conducting the study.

The above guidelines and frameworks have been made available to the public through the Bank’s Project Information Centers in Jakarta and Washington, and will be published in the project manuals and be made available to the community organizations/dinases preparing proposals. Kelurahan facilitators and other project staff (OCs) will be trained in the application ofthe guidelines. BKMs and the PAF’G Selection Committee will be trained in how to apply the safeguards in their selection process. Communities will be in charge ofdeciding all implementation and procurement arrangements, and follow-up on guidelines and approved proposals will be monitored by kelurahan facilitators and OCs. On the environment, an experienced environmental consultant will be required to summarize progress, monitor and measure the impact ofthe project on the environment.

7. Policy Exceptions and Readiness

No exceptions are sought to any Bank policies for this project. With regard to readiness, the following measures have been taken to ensure that implementation will begin immediately upon project effectiveness:

The selection of the key consultant team has been initiated during project preparation and the National Management Consultants (NMC) will be in place by the time project becomes effective. The intention is to hire the same NMC to manage the entire UPP program, thereby reducing the long learning curve for new consultants who caused delays in the startup ofboth UPPl and UPP2. The RFPs for the Oversight Consultants (OCs) have been reviewed and agreed upon. Fiduciary arrangements will be in place and PMUstaff familiar with the UPP will be assigned for this project. The training and socialization strategies have been tested under UPP1 and 2. To cope with the workload, the PMU and the Project Administration unit will be strengthened and Annex 22 provides a detailed project implementation schedule. Appropriate safeguards clearances have been obtained and disclosure requirements have been met.

20 Annex 1: Country and Sector Background INDONESIA: Third Urban Poverty Project

1. Similar to UPPl and UPP2, this project does not take a traditional sector approach. Urban development practitioners recognize that urban development is a confluence of many sectors that requires a multi-faceted approach. In aiming to lay the foundation for poverty reduction in urban areas, this project incorporates three basic assumptions: i)to address poverty requires that specific measures be taken at the central level, even under a decentralized regime; ii)to improve resource allocation, communities are sometimes well placed to decide on certain service priorities and should be involved in decision making; and iii)for improved governance and for decentralization to be effective, communities and local governments need to work in partnership.

2. In a time oftransition and scarce budgetary resources, local governments are facing hard decisions as they try to balance their new responsibilities with uncertain budgets. Given the broad range of issues they now have to tackle, local governments' initial priorities may not be targeted to the poor. The central government has identified poverty alleviation as a national priority, and is therefore prepared to provide special grants to local governments for poverty-targeted interventions. In the absence of a functioning targeted grant mechanism for local governments (DAK as envisaged in the new decentralized legislation); the central government has decided to continue to fund selected programs directly. This does not, however, mean that poverty alleviation is primarily a central government responsibility. It is with that in mind that this project has been designed with two distinct components.

3. The point of entry for the project is the community. The project approach is based on the belief that some local level decisions regarding poverty reduction should be taken at the community level, and that community-based organizations are able to address various dimensions ofpoverty. However, community organizations can only do this well if: (i)they are well organized; (ii)they have resources; (iii)they have the capacity to manage and utilize the resources; and (iv) they have the knowledge and confidence to work with and influence local governments to respond to their needs and demands. The project focuses at the ward (kelurahan) level because it is felt that this is the right size ofpopulation within urban areas to work with, and that kelurahan level organizations are sometimes the best placed to tackle issues of poverty at the community level (the experience ofUPPl supports this). Hereafter, the word "community" in this document will refer to residents living within a kelurahan.

4. At the same time, however, it is evident that all issues ofpoverty cannot and should not be solved by communities themselves. Local governments have a responsibility for providing infrastructure and services that cannot be managed independently by communities. These include networked infrastructure, investments that require operations and maintenance by local government, large investments that are too expensive to be financed by communities themselves, and investments that benefit more than one community. To encourage local governments to take on these responsibilities, and to ensure that services are delivered based on community demand, the project has designed a second component, the Poverty Alleviation Partnership Grant (PAPG), which requires a partnership between community organizations and local governments.

5. UPP has become a national program for urban poverty alleviation. The government is developing a long-term strategy for poverty alleviation and sees UPP as a vehicle for implementing this strategy. The government sees the organizations established through UPP (BKMs) as institutions that will grow organically and whose capacity to manage activities will develop over time so that they can increasingly take on more complex poverty alleviation initiatives. In fact, the national government is considering making BKMs the organizational focal point for a wide range of local development programs across sectors (health, education, shelter, etc.), in addition to being the main vehicle for implementing

21 community level poverty alleviation programs. At the city level, the Government sees UPP, through its PAPG component, as an instrument for streamlining the local poverty alleviation activities by supporting development ofRegional Poverty Alleviation Strategy and its implementation.

Specific Issues Regarding Provision of Microcredit Through UPP

6. As part of the community empowerment strategy, UPPl provided an open menu of activities that communities could undertake; with revolving funds for micro credit as one of the options. Partly due to pressure to channel resources immediately to communities in a crisis situation, and partly due to a project manual that emphasized micro credit over other options, the vast majority of community funds under UPPl (over 90%) have been used to provide micro credit. However, the project design did not have a well-articulated system to support micro credit effectively on such a large scale. The result is that, although repayment rates are relatively high (particularly when compared to other govemment run micro credit programs such as JPS) and borrowers are generally running profitable micro-enterprises, the principles and methodologies for revolving fund management differ between BKMs, reporting is difficult to compare across BKMs, and the quality of technical assistance has not been consistent across the provinces.

7. There is no debate in Indonesia about the need to provide greater access to micro credit, particularly for the poor. A decision was, therefore, made to continue to provide revolving fund through UPP3 but with the following added design features: (i)the awareness-raising and socialization process (which will be much longer than under UPP1) will stress that micro credit is only one ofa range of poverty alleviation activities that communities can undertake; and (ii)if the BKM chooses to run a revolving fund, they will have to follow standardized criteria, rules and principles to ensure sustainable, prudential micro credit services, and there will be a defined program of training and technical assistance to support them (see Annex 16).

8. A second issue with regard to providing revolving funds for micro credit relates to the kind of technical assistance that should be provided to micro credit borrowers. Under UPPl, specific Small Scale Enterprise Experts were hired as part ofproject implementation teams to provide business specific advice and skills to borrowers to raise the productivity of their enterprise and the marketability oftheir goods, This component ofUPP 1 has had limited success, primarily because of the diversity and types of enterprises ofthe borrowers. Ofover 500,000 borrowers in UPP1, over 60% borrow for petty trading (primarily cooked-food hawkers, vegetable sellers, rice traders, basic commodity kiosk operators), while less than 15% borrow for service provision (auto/motorcycle repair, appliance repair, tire repair, petty-cab driver), and less than 10% for manufacturing (cottage industries, primarily in the garment, shoe and accessory sectors).

9. A strategic choice was made in this project not to embark on a full scale effort at providing business-specific technical assistance for the following reasons: (i)the difficulties of standardizing support strategies in large projects that have an open menu policy; (ii)the explicit community development objectives of this project rather than the objective of developing micro enterprises; and (iii) the need to keep project design simple and focused. The project will thus focus on providing basic business analysis and management training to all borrowing groups. Under UPP2, the preparation and implementation of a micro enterprise development strategy will be piloted in two cities that will include: (i)an analysis of local markets and products and the comparative advantage of specific types of enterprises, and (ii)development of a program oftailored advice to increase the productivity ofexisting businesses and training in new business ideas. If this is successful in the UPP2 pilot areas, similar strategies may be developed in UPP3 provinces as well.

22 Annex 2: Major Related Projects Financed by the Bank and/or other Agencies INDONESIA: Third Urban Poverty Project

Project Sector Issue Latest Supervision (PSR) Ratings Implementation Development Progress (IP) Objective (DO) Urban Poverty Project Formulation of more representative and UPP 1 : s UPP 1 : s 1 and 2 participatory community organizations; UPP2:S UPP 2 : s direct transfer of funds to communities; community credit management Kecamatan Development Participatory methodologies; KDP1:S KDP 1 : HS Project 1, 2 and 3 competitive allocations; NGO/civil KDP2:S KDP2:HS society monitoring KDP3: - KDP3: - Village Infrastructure Fast financial flows outside of S S Projects (and UPPs) normal fiscal transfer system VIP I1 and KDP Feasibility ofprogrammatic rather than S S pre-defined allocations Urban Sector Development Local govemment capacity building & Reform Program market based instrument for municipal credit Sustaining Micro finance Capacity building of the community’s Program micro finance units (CMFUs) and participating financial institution (PFIs) in rural areas; Micro finance funds for village (CMFUs) Other development agencies Community and Local Capacity building of central government Government Support Sector agencies, districts, and villages; I Development Program empowerment of Community bodies to (CLGSSDP) - ADB (Asian develop public infrastructure Development Bank)

Neighborhood Upgrading and Slum upgrading; local government Shelter Sector Project capacity building; partnership among (NUSSP) - ADB (Asian govemment, private sector and Development Bank) community IP/DO Ratings: HS (Highly Sa $factory), S (Satisfactory), U (Unsatisfactory), HU (Highly Unsatisfactory)

23 Annex 3: Results Framework and Monitoring INDONESIA: Third Urban Poverty Project

Results Framework

Outcome Indicators Use of Outcome Information Urban poor receive improved (i)50 % of poor households in the targeted kelurahan I Year 1-2: determine whether the services and the community receive benefits and improved services from UPP3 project needs design as well as government - 50% of micro credit recipients have increased improvements; provide inputs into institutions have been their income level the preparation of national and infrastructure built is 20% cheaper than those local poverty alleviation strategies strengthened for responsive - built by govcrnment & meet needs of community (in line with CDP) in 80% of participating I Year 3-5: Assess if more technical kelurahan assistance is required for BKMs - the provision of grant assistance continues in 70% of participating kelurahan Yr 5: Feed into broader programs (ii) At least 70% of the BKMs that have been formed and replication for other projects; are representative, effective, and operate in a provide input to formulation of participatory manner DAK for poverty (iii)30 local governments participating in PAPG provide their own resources for the implementation of the CDP, independently from PAPG fund. Intermediate Results Results Indicators Use of Results Monitoring Comuonent One: Component One: Component One: Organized community groups (i) # of Community Development Plans (CDPs) 1 Assess whether the design of BKM increasingly voice demands implemented formation and CDP arrangements (ii) % of adult population voting in BKM elections need adjustment (iii) % of BKM Forums formed in participating local 1 Review whether the poverty governments reflection gathering should be adjusted . Determine whether the socialization and election processes need to be improved Component Two: Component Two: Component Two: BKMs deliver improved (i)% of poor households in the targeted kelurahan . Determine if additional technical services to the poor utilizing project infrastructure assistance is required in specific (ii) % of poor households in the targeted kelurahan areas accessing micro credit Determine whether participatory (iii) Repayment rate for micro-credit process for formulation of CDPs (iv) % of poor households in the targeted kelurahan needs to be adjusted receiving grant assistance (v) % of BKMs receiving funds from other agencies

Component Three: Component Three: Component Three: Local governments deliver (i) # of Regional Poverty Alleviation Strategies . Determine whether the process of improved services to urban completed preparation needs to be adjusted poor through partnership with [ii) % ofpoor households in the targeted kelurahan = Assess whether the process ofjoint BKMs and private sector receiving services through partnership preparation of proposals needs to [iii) % of financing provided by local government and be improved private sector to partnership Assess whether the format and mechanism of partnership needs to be adjusted Component Four: Component Four: Consultants provide technical :i)% of BKMs with completed annual financial audits . Gauge whether technical assistance :ii) % targeted areas receive technical support and implementation support needs assistance and implementation ,... support to the project % of OCs providing timely & accurate data to be improved or increased through MIS . Provide timely & accurate data to inform management decisions

24 6 ..e C ll e C e P e -*c E d L R d 3 c e E P A e: b i 88 cpNyi

Annex 4: Detailed Project Description INDONESIA: Third Urban Poverty Project

1. The proposed project is the third in a series ofUrban Poverty Projects (UPP) and is essentially an expansion ofUPP to additional provinces. The first UPP became effective in 1999, with Phase I completed in 2002, and Phase I1under implementation. Based on the success ofUPP, the govemment proposed an expansion of the project to 13 provinces, and the second project (UPP2) was approved by the Bank in June 2002. Subsequently, the govemment engaged with the Bank in extensive discussions about the potential impact of the UPP approach on poverty alleviation, community development and local governance in Indonesia. As a result and in conjunction with the on-going PRSP exercise, the govemment has developed a long-term 10-year program ofurban poverty alleviation, involving geographic expansion ofUPP, learning, and consolidation. The proposed project would further expand the coverage of UPP to the rest ofthe country to make it a national program.

2. The design features of UPP3 are similar to UPP2. Some changes have been made, however, based on the continuous leaming froin implementation ofthe UPPs. These are mainly in the socialization and training strategies (Component 1), in the design of the Poverty Alleviation Partnership Grant (Component 3), and in the structure of some consulting services that support implementation (Component 4).

Province Districts Sub Districts Wardshillages Population (kotaikabupaten) (kecamatan) (kelurahaddesa) Covered Covered Covered Sumatera Utara 12 41 177 1,034,204 Sumatera Barat 12 26 107 3 53,474 Riau 4 6 35 185,379 Jambi 9 13 95 247,707

Selected keluraha

27 Project Components 4. All local governments (kotaikabupaten) in the project area can participate in the project. However, if they choose to participate in the project they need to meet the following conditions: (i)agree to the rules of the project; (ii)establish project offices as required for project coordination and fund disbursement; (iii)provide required counterpart funds; and (iv) develop a list oftarget kelurahans according to targeting rules. Meeting the above conditions would allow implementation of the Capacity Building Component (Component One) and the Kelurahan Grant Component (Component Two) in that local government jurisdiction. These components essentially provide support for community development, local government capacity building and block grants for community sub-projects. Local governments can also participate in another project component, the Poverty Alleviation Partnership Grant (Component Three). This component allows local governments to access matching grants for city level poverty reduction activities. The provision of the grant is much more competitive, as only 40 local governments can participate. To participate in this component, they would have to meet a few more conditions as described under Component 3,

Project Component 1 - US$11.4 million Community Development and Local Goveriiment Capacity Building

5. During implementation, the project will aim for: (i)an awareness in the wider community about the project and its rules (target awareness 70% ofthe adult population ofthe kelurahan); (ii)well functioning kelurahan organizations that are democratically elected and accountable to people; (iii)well functioning community groups that participate in planning for development and use the kelurahan funds for productive purposes; and (iv) local governments that are able to work with BKMs to implement poverty alleviation programs.

6. The community development and capacity building component will include the following activities:

(i) an extended awareness raising or socialization process that will encourage communities to discuss, through a series of focus group discussions, the nature ofpoverty in their kelurahan, how it should be addressed, and what is required to deal adequately with poverty (in the form of individual commitment, organization, resources, skills, etc); (ii) assistance to the community to carry out a Community Self Survey (CSS) on poverty; (iii) the formationlconfirmation ofan elected body ofrepresentatives (Badan Keswadayan Masyarakat or BKM) that is accountable to the community at large and which will act on behalf of the community for poverty reduction; (iv) the formulation ofa poverty oriented Community Development Plan (CDP) for the kelurahan using a participatory process and based on the results ofthe CSS; (v) organizing and assisting community groups (Kelompok Swadaya Masyarakat or KSM) who will submit proposals to the BKM to utilize project resources and implement the programs identified in the CDP; (vi) assistance to BKMs to form associations (BKM Forums) and work collectively; and (vii) building local government capacity to work with BKMs and the BKM Forum.

1A. Socialization, social interniediation and formalization of the BKM

7, Socialization. Socialization, or awareness raising, will be in two forms-socialization to the community about poverty and the need for a community organization to address poverty issues; and socialization to all stakeholders (community, central & local government) about the project concept, goals, values, and the rules of the game. Easy and dependable access to information regarding the goals and rules of the project is critical to any community based development initiative. There will be a

28 separate budget for socialization and dedicated staff in the consultant teams (NMC and OCs-see Component 4) who will be in charge of socialization. Socialization will take place through a variety of means-the media (radio shows, TV shows, newspaperslmagazines, press conferences), through publications (posters, pamphlets and brochures), and through presentations about the project at workshops, meetings, and focus group discussions at all levels ofthe community and government. A recent study under UPPl Phase 2 has demonstrated that the most effective socialization strategy is face- to-face interactions, and the use of existing community communication mechanisms. Socialization activities will therefore be targeted mainly at the community level, particularly booklets and brochures, and monthly newsletters that will be distributed widely.

8. Facilitation. Facilitators will be the key to socialization and raising awareness in the communities about poverty and the project. With over 1,700 kelurahans targeted, there will be about 700 facilitators hired by the project. Most will be required to have some experience or background in community development, and will also be trained extensively through the project. A key goal of the socialization process will be to create greater accountability. Through socialization activities, facilitators will assist communities, BKMs, and local governments to clearly lay out their respective roles and responsibilities. An important factor in these discussions will be ensuring that each knows the role it plays in ensuring accountability of the BKM to communities

9. Streiigtheiziiig the organizational capacity of the coiiimuiiity. The social intermediation process leading up to the election of members to the BKM is expected to take four to six months. In general, this will include: (i)a national and regional level public campaign, including use of the TV, radio, pamphlets, posters, etc.; (ii)orientation workshops at the provincial level; (iii)workshops at the city level; (iv) a series of “reflections” on the nature ofpoverty, poverty alleviation and leadership at the kelurahan level (see below); (v) Community Self Surveys; and (vi) identification and training of volunteers who would be willing to work with project staff in implementing the project. Facilitators will work in teams (at least four kelurahan facilitator for 10 kelurahan) and with other project staff and government officials at various levels in organizing and facilitating these events.

10. Experience from UPPl Phase 2 has demonstrated the value to the communities ofitem (iv) above-a series of “reflections”, which give communities an opportunity to gather together to discuss issues that are common to all, and alternative ways to address them. In particular, two types of “reflections” will be organized-reflections on poverty and reflections on the structure ofcommunity level institutions that can address the problems.

(i) Reflectioizs on poverty. The project will facilitate a guided process of discussions through which communities will discuss the nature and causes ofpoverty in their kelurahan, identify existing resources in the community, and build consensus on how to strengthen community capacity to overcome poverty. Once these are agreed, groups of volunteers will carry out a Community Self Survey to identify the poor in their community (in UPPl Phase 2, there has been tremendous enthusiasm for this activity with over 18,000 volunteers participating). (ii) Rejections on commuizity institutions. These reflections will focus on assisting communities to decide whether they wish to build a new community organization or work with existing community organizations. Communities will be assisted in assessing the capacity and ownership of existing institutions and their suitability for implementing UPP. In UPPl Phase 2, this exercise has been particularly useful in bringing together different institutions in the community and evaluating each other’s strengths and weaknesses. If Communities choose to create a new organization, facilitators together with trained volunteers, will guide the community on how to elect a kelurahan organization (the BKM) that is democratic, participatory and inclusive. This will be

29 followed by the notarization of the BKM as a formal entity. If communities choose to work through existing organizations, project staff will assist the communities to determine whether that organization was elected democratically and in a participatory manner, and determine if some positions may need to be re-elected or the structure ofthe organization modified or strengthened (hereafter, use of the word BKM will refer to either newly elected organizations or existing ones that have been confirmed by communities). In evaluating the kind of institutions that will be best able to address poverty, communities will be invited to discuss the kind ofqualities they would like to see in these organizations. Under UPPl Phase2, communities across 1,300 kelurahan have invariably chosen the following qualities in the leaders they have elected to BKMs: trustworthy, just, and committed to serving their communities. The importance of ensuring that qualified women are considered for leadership in the BKM will also be emphasized.

1 1. Establishinerat of the coinnaiinity organization (BKM). In order to ensure that BKM members will practice participatory decision-making and be accountable to communities, facilitators will pay particular attention to assisting the community to develop bylaws for the BKM. The bylaws will be developed through focus group discussions at the community level, which will, in tum, raise the awareness of the community about the legal status, rights and responsibility of the BKM. The by-laws will include mechanisms such as publicizing ofaudits, inter-kelurahan monitoring (where one kelurahan organization visits and reports on others), mechanisms for recall and re-election ofnon-performing members, and other forms of reporting and accounting to communities. Each notarized BKM will open a bank account in its name, to which funds will be deposited to finance poverty reduction activities according to a Community Development Plan (see below).

IB. Preparation of n Conznzuizitv Develomient Plan

12. The first task ofthe BKM will be to formulate a poverty-oriented Community Development Plan (CDP) for the kelurahan. The CDP will be a medium temi (three year) plan, and will include a range of poverty alleviation activities, depending on the needs and priorities ofthe community-from revolving funds for micro credit loans to small scale or tertiary level infrastructure to social services or other innovative ideas that the community may have.

13, Based on the results ofCommunity Self Survey, the BKM will embark on a participatory planning process to develop the CDP for the kelurahan. The CDP will take into account other non- govemment, govemment and donor-funded programs that are on-going and planned at the kelurahan level, and identify activities that could be financed with the resources allocated to the kelurahan under the project (in cases where kelurahans already have development plans, the BKM and community members would either re-validate or amend these and present these for funding such that new plans would not have to be developed from scratch in every kelurahan). Ownership of the program by the community is the key to the success ofthe CDP.

14. The CDP is expected to be a general document, outlining the basic goals and general direction that communities want to take in addressing poverty. For example, the participatory planning process and community self-survey may identify different types ofpoor within the community, which would then require a range of solutions. The menu of activities that may be proposed under the CDP would be open, and creative ideas would be encouraged (see Component Two, Kelurahan Grants, for details on activities eligible for financing under the project). For the first year ofimplementation, the CDP will identify a more detailed poverty program.

30 15. When complete, the CDP will be reviewed by senior project staff at the Kota level (Oversight Consultants). The CDP will be reviewed not for the content, but for the process used in its formulation and its focus on poverty. This will be done to ensure that the project staff do not influence the actual decisions made by the community, but ensure that these decisions were made in an inclusive and participatory manner. This will be judged through the types and frequency of meetings held and an assessment ofthe effort placed in including all stakeholders, particularly the poor and vulnerable groups, in the community meetings and focus group discussions. Input from facilitators and volunteers about the CDP process in their kelurahan will also be sought.

1C. Capacitv buildiizx for coiizmuiaities and local ~overiinients

16. Capacity building will focus on three types of activities-training for project staff as well as for communities; assistance for the formation and strengthening of federations ofBKMs at the city level (BKM Forum); and capacity building for local governments.

17. Training. The project is widely dispersed geographically and relies on many implementers. Thus, training will be key to effective implementation. The following lessons have been learned on how to best manage training under UPP: (i)training should be designed to support particular components or project objectives; (ii)training should be provided on a continuous basis (e.g., refresher courses) throughout the life ofthe project; (iii)the training program should have sufficient flexibility to address needs arising during implementation, rather than being pre-identified; (iv) sufficient budget needs to be allocated for training; and (v) training events geared for communities should be organized on location (within the kelurahan) for efficiency and to optimize the coverage ofparticipants. While training for communities under UPPl and UPP2 was placed under the budget ofthe Oversight Consultants, it was found that it is more effective to allocate the majority of the community training budget to the facilitator teams.

18. Based on these lessons, a training strategy and program has been designed for UPP3 in support of each project component. Seven types of training will be carried out as laid out in the table below. Some of these will be offered as a one time training course, some will be repeated, and for some, advanced refresher courses provided. A detailed training matrix, indicating specific training activities, frequency, and target audience is provided in Annex 20.

2. Awareness raising (about poverty NMC, OC, facilitators Community at large and all stakeholders & about the project) (government, consultants, etc.) 3. Training in leadership Special Training Group/ BKM and community cadres outsourcing to experts 4. Project cycle training NMC, OC, facilitators BKM, KSM, UPK, PjOK, Community Cadres 5. Specific skills training Outsourcing to experts BKM, KSM, UPK, PjOK, Community Cadres, I facilitators 6. Reflections on best practices I NMC,OCs I BKM, KSM, UPK, PjOK, Community Cadres, (every 3-4 months) 1 facilitators

19. The majority of the training modules have already been prepared for UPP2 by the Project Preparation Team of the PMU (same team for both UPP2 and UPP3). Many ofthese have been tested,

31 and it is clear these new modules are more effective than those used in UPPl. This team will carry out a Training of Trainers exercise for the National Management Consultant team (NMC) about the project and its implementation. They will also train a Special Training Group (individuals from NGOs, academic institutions, civil society, UPPl and UPP2 best performer) to train communities about leadership. These training sessions will use field experiences from UPPl and UPP2, and will utilize practitioners to the extent possible. The NMC will, in tum, train the Oversight Consultant teams (OCs). The OCs, with assistance of the above-mentioned trainers, will train the facilitators based on standardized training modules prepared by the Preparation Team. Thus, the NMC and OC will directly carry out training regarding project implementation and the project cycle; the Special Training Group will carry out the training on leadership; and the NMC and OC will hire experts from NGOs, academic institutions, and the private sector to implement specific skills training. A series of audio-visual products of best perfonning BKMs have been developed under UPPl and 2, including a documentary video ofthe various steps under the project have been prepared to help improve the quality of training. This is expected to significantly improve the quality of training under UPP3. Of particular importance will be training to support the revolving funds that BKMs may choose to run. As explained in Annex 16, training will be offered to: (i) BKM members and the unit in charge of running the fund in revolving fund management; (ii)community groups who will borrow the funds (KSMs) in group organization and dynamics; and (iii)KSMs in basic business management skills.

20. Streiigtlzerzirzgfederations of BKMs (BKM Forunzs). The project will encourage and support BKMs to form networks or federations at the kecamatan and Kota levels to share ideas, exchange experiences, and where they desire, to take collective action regarding poverty alleviation in their communities. They can also choose to act collectively to influence local govemment planning and investment decisions. Under UPP1, various levels ofBKM Forums were formed organically (at the kecamatan level, at the kota level as well as inter-city gatherings of BKM forums). These have proved to be valuable for strengthening BKMs, improving accountability and giving communities a voice in development issues. UPP3 will support the foimation ofBKM Forums and provide training and technical assistance to them to work collectively. This will include training in leadership, management and networking. Technical assistance through the OCs and NMC will continue to be provided to the BKM Forum until the end ofthe project.

2 1, Capacity building for local governiizertts, The central government has embarked on the development of long-term strategy for poverty alleviation (PRSP) and it sees UPP as a vehicle for the implementation ofthe PRSP. In addition, the central government now expects all local governments to prepare Regional Poverty Alleviation Strategies (WAS) at the city level, and had indicated a clear role for UPP in the development of the WAS as well. To coordinate these activities at the city level, govemment policy is to establish multi-sectoral Poverty Alleviation Committees (KPK) at the city level, to be chaired by BupatiNlialikota. The main interlocutor for UPP3 at the local government level will be these KPKs, who will be involved in the project from the beginning.

22, Capacity building activities will focus on: i)raising the awareness ofthe KPK on poverty alleviation through a series of interactions with the community by means ofvisits to BKMs, meetings with community volunteers, and participation in community focus group discussions; ii)providing them with training in participatory planning, community development and budgeting; and iii)enabling local governments to work with BKMs and BKM Forums, particularly in the implementation ofthe Poverty Alleviation Partnership Grant. A special training program will be designed to systematically transfer learning gained during project implementation. It is expected that through the participatory preparation, and through implementation ofthe PAPG in particular, local government agencies will see the value in working with community organizations and build up their capacity to engage in a more efficient working relationship. Because the KPK will be an established government entity, building their capacity to work

32 with communities will ensure that they can continue to support BKMs and BKM forums and work on other poverty issues beyond the life of the project.

Project Component 2 - USS93.8 million Kelurahan Grants

2A. Funding allocations

23. Each participating kelurahan will be allocated a grant, the value of which depends on the size of the population (see table below). This will be used to finance poverty alleviation activities as defined in the Community Development Plans (CDPs). Those BKMs that perform particularly well may receive additional grants of up to Rp. 150 million to carry out additional activities under the CDP once their first allocation has been disbursed. This second allocation will only be provided to those BKM that meet certain “maturity criteria” that have been established in the project manual.

Population Size of allocation <3000 people Rp. 200 million (US$ 23,550) 3000 - 10,000 people Rp. 300 million (US$ 35,300 ) > 10,000 people Rp. 500 million (US$ 58,800)

24. To take into account the fact that there might be variations in the concentration ofpoor within kelurahan, and in order to benefit the poor more, these allocations may be adjusted according to the following: if there are 300-1,000 poor households in kelurahan with less than 3,000 people, the allocation will be Rp.250 million; and ifthere are more than 1,000 poor households in kelurahan with 3000-10,000 people, the allocation will be Rp.500 million. Because of the relatively high cost of living in Maluku and Papua, the minimum allocation for these areas is Rp.300 million. The ceiling amount of Rp.500 million (US$58,800) is slightly higher than in UPP2 mainly due to the higher cost of living in these areas and to accommodate inflation.

25. Once the BKM has been formalized (notarized with the legal status ofan association), and the Community Development Plan has been approved, the BKM will sign a Grant Implementation Agreement with the government (PjOK kecamatan) which will lay out the respective roles and responsibilities ofthe two parties, the terms of disbursement, as well as the expectations regarding the use offunds beyond the project life.

2B. Conziniinitv Developnzerit Plan and eligible activities

26. For each participating kelurahan, this component will finance specific sub-projects. Funds can be used according to the Community Development Plan (CDP), and will cover a range ofpoverty alleviation activities with an open menu. There would be a simple negative list of items that cannot be funded including: (i)expenditures intended for a military or paramilitary purpose; (ii)civil works for government administration or religious purposes; (iii)activities that relate to the manufacture or use of environmentally harmful products (including pesticides, ozone-depleting substances, tobacco or tobacco products, materials containing asbestos, activities producing liquid or gaseous effluents or emissions at harmful levels, arms and drugs); (iv) activities using, producing, storing or transporting hazardous materials and wastes; (v) activities related to logging; (vi) activities in protected areas; (vii) activities related to fisheries that are not in accordance with standards set by the Borrower’s Fishery Service Agency; and (viii) the financing of government salaries.

33 27. The cost ofactivities to be financed under the CDP does not have to be limited to the project allocation for the kelurahan. If communities wish to carry out more activities, they will be encouraged to contribute their own funds to supplement the allocation or leverage additional funds from other community sources or local governments. As part ofthe three-year CDP, the BKM will identify an investment plan for the first year that would be funded partially (or completely) through the BKM allocation from the project. Communities would have freedom to choose whether they want to use their allocation to finance grant activities for the poor or use part ofthe allocation to provide micro credit loans.

28. It is expected that CDPs will generally include the following types of activities:

(i) pre-identified specific investments that are a community priority by consensus (these could be a bridge, a road, school repair, health facility repair or others); (ii) activities that community groups can compete for (any range ofphysical infrastructure to services sub-projects-the CDP should indicate clearly what are the priority sectors or priority groups for that community that are likely to be financed); (iii) micro credit loans for community groups which will form the basis of a revolving fund (with clear rules/principles for implementation); and (iv) grant assistance to the poorest or most vulnerable individuals (this could include scholarships, home improvements, health care, etc., to specific individuals identified by communities as being most needy).

29. The CDP can identify activities from all four categories or just one category, depending on the communities’ circumstances and needs. Category (iv) (grant assistance to individuals), will be limited to 10% of the allocation in order to minimize leakage. Activities under categories (i),(ii), and (iv) are expected to be provided as grants, while activities under (iii)would consist ofmicro credit loans through a revolving fund mechanism. The ceiling for any single subproject per group (KSM) or micro credit loan to a group (KSM) is Rp.30 million (US$3,550 equivalent).

2C. Iinplenientation of kelurahan praizts

30. Specific irzvestnients. If specific sub-projects are identified by communities as a priority for the overall community, the BKM will appoint a team from the community to implement this activity. The following implementation process will be followed: . Team fills out a standard fonn, with the assistance of facilitators, outlining a description of the sub-project, costs, beneficiaries, operations and maintenance arrangements (where applicable), compliance with any applicable safeguards, implementation arrangements, the amount of self financing, etc., (see Annex 15 for sample form). . Review by OC for feasibility, technical soundness, and compliance with safeguards (specifically environmental impacts, land acquisition/resettlement, impact on indigenous people and on cultural property). Signing ofImplementation Agreement between implementing team and BKM. . Disbursement to team for implementation costs. . Sub-project implementation according to procurement guidelines with supervision by BKM and OC/facilitator . . Completion certificate by OC/facilitator. 3 1. Conipetitive grant proposals. The CDP may provide an allocation of funds to finance proposals by community groups. In this case, the CDP will lay out clearly what the priority areas/sectors/groups are for this allocation. Examples ofdifferent types ofactivities that groups could propose for funding include basic infrastructure services; programs for children and youth; family planning education, etc.

34 Community groups will identify sub-projects they want financed, and fill out proposal forms (same as the ones above) with the help offacilitators where necessary. These will be reviewed by OCs for feasibility, technical soundness and compliance. OCs will specifically screen proposals for environmental impacts, land acquisitioniresettlement, impact on indigenous people and on cultural property, and ensure that adequate mitigation measures are taken. The BKM will meet to review the proposals first when at least 5 proposals have been submitted, and at least monthly thereafter. The selection ofproposals by the BKM will be made in a meeting publicized in advance and open to the public. Selection will be based on priorities by clearly ranking proposals and having an open vote. Implementation will follow the same arrangement as above.

32. Revolving fwtds. Ifthe BKM decides to run a revolving fund, specific guidelines have been developed to ensure that funds are used in accordance with best practices, and apply principles such that there is no distortion ofthe micro finance market. Details for revolving fund management, group formation, proposal selection, and terms and conditions for loans are provided in Annex 16.

33. Grant assistance to the poorest or most viiliierable iitdividiials. Direct assistance may be provided to individuals ifidentified during the participatory process and included in the CDP. These will be accounted for clearly in the BKM accounts, and disbursements made in a transparent manner, A maximum of 10% of the allocation to the BKM can be used to finance activities that fall under this category. Facilitators and OCs will verify use ofthese funds.

20. Disbursements

34. Funds will be released to kelurahan organizations in three tranches to ensure proper fund use and management, and encourage better BKM performance. The first tranche (20%) will be paid upon review ofthe CDP by project staff. The next tranche (50%) will be based on proof ofadequate utilization of funds for implementation of sub-projects according to the CDP, and proper fund management, and will be released at least four months after the disbursement of the first tranche. This is to provide enough time to see implementation on the ground prior to disbursement of additional funds (particularly if funds will be used for micro credit loans). The third and final tranche (30%) will be provided also at least four months after the disbursement of the second tranche, and following a review to assess the future ofthe BKM beyond project life (see Annex 7, Chart 1).

Project Component 3 - US$64.9 million Poverty Alleviation Partnership Grant

35. This fund will encourage partnerships between local government and communities and attempt to institutionalize a consultative process between the two for future activities undertaken by local governments using their own funds. It will finance poverty alleviation activities that are too big to be financed by the kelurahan grants, or that require local government involvement (e.g., networked infrastructure or operations and maintenance); and that cover more than one kelurahan.

3A. DesiEii Priiiciples

36. Basic principles guiding the Poverty Alleviation Partnership Grant (PAPG) are the following: (i) local governments (kotaikabupaten) will be required to compete for funds; (ii)funds will be provided for sub-projects on a matching fund principle to complement resources from local government agencies (dinases), from communities and possibly from private sponsors; (iii)subprojects to be financed must be jointly prepared, proposed and implemented by BKMs in collaboration with dinases; (iv) subprojects should be for public goods and services providing direct benefits to a large number ofthe poor

35 community; and (v) there should be transparent competitive selection of subprojects by an independent PAPG Selection Committee.

37. Initial experiences with PAF'G under UPP2 have yielded positive results-BKMs were given accesses to dinas' programs to enable them to propose subprojects; dinases have assigned staff to work with BKMs in preparing subproject proposals; and PAPG Selection Committees comprising representatives from local government, BKMs and the private sectors have been successfully formed. However, most activities identified remain conmunity level activities that do not require significant local government involvement. Therefore, the full benefits of PAPG are not yet being reaped.

38. A number ofdesign changes have been adopted in this component with the following objectives: (i)to involve local governments more in the UPP program as a whole (and not just in the implementation ofthe PAPG component) so that they have a better sense of the larger vision of UPP; and (ii)to affiliate the PAPG component with a specific local government structure. These changes have been possible due to recent developments within govemment. As mentioned under Component 1, the central government sees UPP as a vehicle for the implementation ofits long-term Poverty Reduction Strategy (PRSP). In addition, the central government now expects all local governments to prepare Regional Poverty Alleviation Strategies (RPAS) at the city level, and has indicated a clear role for UPP in the development ofthe WAS as well. To coordinate these activities at the city level, government policy is to establish multi-sectoral Poverty Alleviation Committees (Komite Pengetasan Kemiskinan or KPK) at the city level.

39. Taking into account these developments, the following design changes have been incorporated into this component: (i)PAPG will be affiliated with established KPKs; (ii)the KPK will be involved in the process ofBKM formation from the beginning and will participate in training programs and socialization activities; and (iii)this component will supp.ort KPKs in developing RPAS through technical assistance. To ensure ownership ofUPP in all local governments, the project will provide technical support for the above to all local govemments participating in the project in the first year ofproject implementation. KPK members and other local government staff will be encouraged to attend training and to participate in community level activities for the formation ofthe BKMs, development of CDPs, etc. It is expected that, this systematized learning-by-doing exercise will set the basis for local governments and communities to work together to prepare a participatory Regional Poverty Alleviation Strategy, The WAS will provide the framework for investments that can be: financed under the PAPG.

3B. Selection of Participntina Kota/kabuaaten

40. Although all local governments participating in the project will receive technical assistance to work with KPKs and develop the RPAS, only forty local governments will be selected to receive investment funds under PAPG. These cities will be selected on a competitive basis by the central Project Secretariat (with support from the Project Management Unit and the National Management Consultants) based on the following criteria: (i)the extent of participation of the KPWother local government staff in the first year ofproject activities; (ii)agreement to follow the rules ofthe PAPG; (iii)establishment ofan independent PAPG Committee under the purview ofKPK; (iv) provision of operational costs from city budget; (v) completion of the RPAS; and (vi) the existence of a functioning and active BKM Forum. Initially, 20 local governments will be selected, with 20 additional cities selected in the subsequent year.

3C. Fiiizdina Allocations

4 1, The PAPG will be a three-year program for each participating city with gradual increases in the annual allocations as presented in the table below. Participation in the subsequent years would be determined based on satisfactory performance. The criteria for evaluating performance includes: (i)

36 adherence to PAPG procedures; and (ii)degree ofpartnership between dinases and BKMs. Most local governments will be eligible to receive PAPG funds as grants from the central govemment.

Year 1 Year 2 Year 3 TOTAL Small cities (<15 BKMs) Rp 1 billion Rp 1.5 billion Rp 2 billion Rp 4.5 billion (US$ 529.400) Medium cities (15-25 BKMs) Rp 1.5 billion Rp 2 billion Rp 2.5 billion Rp 6 billion (US$ 705,900) Large cities (>25 BKMs) Rp 2 billion Rp 2.5 billion Rp 3 billion Rp 7.5 billion

30. Elipible Activities

42. There will be an open menu for activities eligible for financing under the PAPG, with a short negative list (the same as the negative list for kelurahan grants). The following criteria have to be met: (i)they are proposed by a sponsoring dinas in collaboration with BKMs; (ii)the impact ofthe activity affects more than just the one kelurahan; and (iii)it benefits a large number of poor. Activities could include basic infrastructure works that go beyond one kelurahan (such as roads or drains, or refurbishment of existing schools or clinics that serve more than one kelurahan); skills training that would benefit more than one kelurahan; non-formal education and health etc. This list is not restrictive and creative ideas from communities and dinases will be encouraged. Many dinases may already be carrying out these programs currently and, by collaborating with communities, they will be able to access PAPG funds to expand the programs. Counterpart funding from private sponsors may also be sought whenever possible.

3E. The PAPG Selection Coninzittee

43, The Local Government will establish a PAPG Selection Committee under the purview ofthe KPK that will be responsible for evaluating PAPG proposals on a competitive basis (the KPK itself is not expected to be directly involved in either the verification ofproposals, disbursement or implementation). The PAPG Selection Committee will be legally established by a decree from the Walikota/Bupati after selection ofits members through a series of city level meetings. In the selection ofproposals, the PAPG Committee will operate as a collective body and no member will have special privileges. The PAPG Committee will consist of representatives from the BKM Forum, from the local govemment; and from NGOs or other prominent citizens who are concerned about poverty. The committee will work on a voluntary basis, but its operational costs will be supported by the local government’s counterpart contributions to the project. A secretariat for facilitating the work ofthe PAPG will be formed at the KPK secretariat.

44. OCs will support the overall process of selection ofthe PAPG Committee and its functions. In order to help the KPK review proposals, the Oversight Consultants will carry out field verifications. However, the OCs will not be allowed to change proposals or decide on winning proposals. Final decisions on funded proposals will be publicized. After completion of the subprojects, the PAPG committee will carry out an evaluation to select the best subprojects for awards ofexcellence. During this process, OCs will ensure that the learning generated is shared with the KPK on regular basis.

3F. Subproject Proposals

45, Selection criteria for sub-project proposals include: (i)the level ofpartnerships as measured by the number of kelurahan organizations and local govemment agencies forming a partnership to propose the subproject; (ii)the level ofcontributions by the kelurahan organizations, private sponsors and local govemment agencies (minimum of50%) towards the subproject cost; and (iii)expected achievements of

37 the subproject towards poverty alleviation. A subproject proposal can only cover one specific activity. BKMs may submit different proposals in collaboration with different dinases. The proposal can be at any cost, with a financing plan of no more than 50% from PAPG funds, and another 50% from the dinas’ development budget, BKMs and private sponsors. Proposals with high levels ofcontributions from these other sources will be considered more favorably as this would be an indication ofhow important the activity is for both the local government and the community. Support from PAPG for individual proposals will range from a minimum of Rp. 30 million (US$3,550) to a maximum ofRp. 200 million (US $2335 0) per sub-proj ect.

46. Because proposals will be made jointly with technical agencies oflocal govemment, the designs and technical specifications will be in accordance with govemment standards. Where necessary, simplified technical manuals for small-scale infrastructure that have been developed and tested under the Kecamatan Development Project may also be used.

3G. Inlpleiiientatioiz and Disbursement Arranrrenzents

47. The PAPG allocation to the local govemment will be made through the regular govemment budgeting process to the planning agency (Bappeda) of the participating Kota. The Bappeda will appoint a PjOK (administrative manager) to administer the allocations. Once approved by the PAPG committee, an implementation agreement will be signed between the PjOK and the representatives of the proposing dinas and BKMs. They would then be required to establish a joint team to implement the subproject (see Annex 7, Chart 3).

48. Disbursements of PAPG funds from the project Special Account will be made at the request of the joint team as approved by the PjOK, and will be provided in two equal tranches. Funds from other sources, either from dinases, BKMs, community members or private sponsors, may be handled separately. In order to ensure that counterpart contributions materialize as proposed, the conditions for the second payment will include evidence that at least an amount equal to the project funds have been spent on implementing the sub-project and this has been verified by the OCs.

49. Procurement and use of PUGfunds will have to follow the procedures set in the manual. All procurement decisions will be taken by the team, which will be held accountable to both the local government and communities through the dinas, BKMs and other contributors. After completion, the joint implementation team will prepare a completion repoi-t, which represents its accountability for implementation. This report will be presented to the PAPG Committee, PjOK and OCs and will also be made available for public scrutiny.

Project Component 4 - US13 million Implementation Support

50. The project will be managed by the Project Management Unit (PMU) assisted by an administrative unit (PIMPRO). Both can be headed by the same Project Manager. The PMU will hire consultants and facilitators to assist in project implementation, particularly since this type of a community driven project will require extensive presence in the field at the kelurahan and kotakabupaten levels. Technical assistance will be provided through National Management Consultants at the central level, Oversight Consultant Teams at the provincial level, with district offices in the participating kotadkabupatens; and facilitators and community cadres at the kelurahan level. This component will finance the cost of the consultants; the cost of govemment operating expenses will be covered through counterpart funds. Details ofimplementation arrangements are provided in Annex 6.

38 Annex 5: Project Costs INDONESIA: Third Urban Poverty Project

GOVERNMENT TOTAL BANKFIYANCING FINANCING COMMUNITY Project Component !3 Million % $Million YOof cost YOof Bank !3 Million YO $ Million Oh A. Community and Local Govt. Cap. Bldg 11.4 6.1% 10.9 5.9% 7.9% 0.5 0.30/0 Salary of Facilitators 8.2 4.3% 8.2 4.4% 5.9% 0.0 0.0% Training 1.8 0.9% 1.8 1.0% 1.3% 0.0 0.0% - Socialization 0.9 0.5% 0.9 0.5% 0.6% 0.0 0.0% Overhead 0.51 0.3%1 0.01 0.0%1 0.0%1 0.51 0.3%1 I B. Kelurahan Grant 93.8 50.5% 81.5 43.9% 58.9% 4.1 2.2% 8.2 4.3%, Allocation to Kelurahan Organization 89.7 48.3% 81.5 43.9% 58.9% 0.0 0.0% 8.2 4.3% Overhead (BOP) 4.1 2.2% 0.0 0.0% 0.0% 4.1 2.2% 0.0 0.0%

C. Poverty Alleviation Partnership Grant (PAPG) 64.9 34.9% 30.9 16.6% 22.3% 18.5 9.89'0 15.4 8.2%) Allocation to Community sub-projects 61.8 33.3% 30.9 16.6% 22.3% 15.4 8.2% 15.4 8.2%- Overhead (BOP) 3.1 1.7% 0.0 0.0% 0.0% 3.1 1.6%

E. Unallocated

0.3 0.2% 0.3 0.16% 0.2%

186.1 100.2% 138.7 74.7% 100.2% 23.8 12.5% 23.6 12.5%)

US$ million

39 Annex 6: Implementation Arrangements INDONESIA: Third Urban Poverty Project

1. The Ministry of Regional Settlements and Infrastructure (Kimpraswil) has developed significant institutional capacity for implementing UPP through its experience with UPPl and UPP2 so far. As mentioned in the main text, the Govemment sees UPP as a national program and has taken measures to ensure consistency of approaches and policies, and to manage UPP as a program, rather than as a series of individual projects with individual PMUs. Key measures include capturing all data into one integrated Management Information System for all three projects; using the same National Management Consultant team; and applying the same socialization and training program. The PMUwill also be restructured from a specific project management unit into a program management unit covering all three projects (see below).

2. Important lessons have been leamed in tenns of how best to structure the consultant teams, facilitators and volunteers supporting project implementation, and how to structure training to maximize the effectiveness ofthe implementers. These have been incorporated in the implementation arrangements. By the time UPP3 becomes effective, UPP1 will be largely completed and experienced staff from UPPl will be available for implementation of UPP3. This will substantially reduce the time required to familiarize and train project staff in the UPP concept, and thereby facilitate implementation of UPP3 *

A. Implementation Structure

3. Project Management Uiait. As mentioned above, UPP will be managed as a program, and, therefore, the same Project Management Unit (PMU) that is in charge ofUPPl and 2, under the Directorate General ofHuman Settlements in the Ministry of Settlement and Regional Infrastructure (Kimpraswil), will be in charge of managing this project. To allow for better program management and coordination, the organizational level ofPMU will be raised a higher administrative level than the existing PMU. In addition to this PMU, the DG for Settlements and Housing ofMSRI, as a coordinator for poverty alleviation for the Ministry, will be also be supported by the project to develop capacity for coordination and integration of the other community based poverty alleviation programs in the Ministry. This is expected to stream line all the community based poverty program ofthe Ministry. The PMUwill be assisted by an administrative unit (PIMPRO). Under the Project Manager, there will be three sub- sections, for UPP1, UPP2 and UPP3, respectively. The PMUwill hire consultants and facilitators to assist in project implementation, particularly since this type of a community driven project will require extensive presence in the field at the kelurahan and kota/kabupaten levels (see Chart 1).

4. Expert Team. Because the government sees UPP as a long-term national poverty alleviation program, it needs to ensure consistency ofapproach among all the UPPs. The govemment is also keen to ensure that the learning taking place on the ground will be systematically captured and fed into policies and the decision making process. Some individuals will, therefore, be recruited under the PMUto form an Expert Team. In addition to the above functions, this team will serve as resource persons for all consultants and facilitators, and they will be expected to continue to enhance the project concept based on experiences on the ground, and to adjust the project manuals and procedures as required.

5. National Manageiiieiit Consultants (NMC). The PMUwill utilize the existing National Management Consultants (NMC) at the central level to assist with project management, monitoring and reporting. There will be thematic teams in the NMC in charge of micro credit activities, grant activities, training/socialization/ capacity building, PAPG activities, project monitoring and reporting, and

40 complaint handling. The NMC will supervise the work of the Oversight Consultants at the provincial and district (kota/kabupaten) levels.

6. Oversight Coizsultarzt Team (OC). There will be one Oversight Consultant team designated for every province 100-150 kelurahans, with technical teams for every participating Kota and kabupaten. At the provincial level, there will be a provincial coordinator and staff in charge of micro credit activities, community development (including socialization and training), project monitoring (including MIS), and Public Relations/complaint handling. Other expertise will be recruitedlcontracted out on an as-needed basis. The provincial OC team will work with a provincial Coordination Team assigned by the government (with the planning agency, Bappeda Province) to coordinate project activities at the provincial level.

7. At the kota/kabupatetz level, there will be one KotaKabupaten Coordinator and a small group of technical staff. For Kota that is selected for the PAPG, there will be at least one staff in the team to manage the PAPG. The OC teams will be in charge of: (i)coordination, support and supervision of kelurahan facilitators; (ii)technical assistance to the BKMs and community groups (KSMs); (iii) consolidation of reports from facilitators into kota reporting; (iv) promoting the PAPG and facilitating the partnerships between BKMs and dinases; (v) facilitating the establishment of the PAPG Selection Committee; and (vi) sub-project verification and oversight. The Kota level OC team will work with a Coordination Team assigned by the local government (with the local level planning agency, Bappeda) to coordinate project activities. The Coordination Team will include an assigned PjOK who will sign off on sub-project proposals under the PAPG. OC teams will be procured by the PMU, with the participation of provincial govemment in the selection process, and will report directly to the NMC.

8. Keluraharz facilitators. Facilitators will be key to the implementation ofthe project since they will be the primary interface between the project and communities. Facilitators will be in charge of promoting the project within the kelurahan, carrying out the community development activities, assisting in the process of election of the kelurahan organization, organizing the community into groups and assisting with proposal preparation, etc. Learning from the experience ofUPP1, instead ofhaving one facilitator for every kelurahan, there will be facilitator teams, with 4 kelurahan facilitators for every 10 kelurahan. Working in teams will enable facilitators to support each other in a more integrated manner, to share experiences between kelurahan, and bring in greater quality control. One facilitator will have higher qualifications and be designated the Senior Facilitator to lead the team. The teams may be larger according to the size ofthe kelurahans and their remoteness. At least 1/3 will be women, and they will be required to reside in the kotas where they work. At the kelurahaddesa level, facilitators will coordinate with the Lurah or the Kepala Desa. Facilitators will be hired by Oversight Consultant teams and report directly to them (the cost ofhiring facilitators is included under Component One, Community Development and Capacity Building, as the cost ofsocial intermediation).

9. Conzrnunity volunteers (cadres). Learning from the UPP 1 Phase2 experience, much more emphasis will be paid to engaging community cadres, or volunteers from the kelurahan, to work closely with the kelurahan facilitator during the course of the project. In UPPl Phase 2, there are over 18,000' cadres who have volunteered to work with the project without any financial incentive. Similar numbers will be encouraged for UPP3 and additional budget (more than in UPP2) will be allocated for training cadres to support the facilitators' work. At the end ofthe project, it is expected that these community cadres will continue to facilitate and promote the interests of the poor with the BKM.

UPPl Phase 2 January 2004 Management Inforniation System.

41 B. Project Staging

10. The project will be implemented in two stages. The first stage will cover community building and kelurahan grant components in all provinces. The second stage covers the PAPG component. OCs will support BKMs in all project areas for four years, gradually decreasing the level ofsupport during the third year and fourth years. For the PAPG, technical support will be provided to all local governments in the first year. In the second year, 20 cities will be competitively selected to receive PAPG funds. An additional 20 cities will be selected in the subsequent year.

C. Monitoring and Evaluation

1 1. A similar approach to UPP2 will be taken for monitoring and evaluation ofUPP3. Evaluation Consultants independent from the NMC will be hired to carry out the evaluation but monitoring will be retained as an essential role of the NMC and OCs. Because there are three UPPs in operation at the same time, a team will be set up within the PMUto integrate and synchronize the Management Information System. The Evaluation Consultants will be hired on a periodic basis, first to carry out a baseline survey, and subsequently to carry out follow up surveys and evaluation studies at least three times over the project period. There will also be an allocation of funds to hire local NGOs, universities or qualified individuals to carry out ad-hoc evaluations or surveys on an as-needed basis. Details on project monitoring and performance evaluation are provided in Annex 3.

42 Chart 1 IMPLEMENTATION STRUCTURE

PROJECT COMMUNITY GOVERNMENT

NATIONAL POVERTY ALLEVIATION COMMITEE

I I I l I ...... UPP SECRETARIAT I I I I

...... I ......

......

...... I I

I I kecamatan level

......

I I I I

keluralzaii level

+ line of control -. -. + line of facilitation

------line of coordination

43 UPP Secretariat Consisting of reps ofBappenas (National Planning Board), Ministry of Home Affairs, Finance and Kimpraswil KIMPRASWIL Ministry of Settlements and Regional Infrastructure as Executing Agency PAPG Poverty Alleviation Partnership Grant allocated to kotaikabupaten PJOK PAPG Administrative Unit for PAPG at KotaiKabupaten (District) PJOK Kelurahan Grant Administrative Unit for Kelurahan Grant stationed at Sub-District PMU Project Management Unit NMC National Management Consultants oc Oversight Consultants BKM Conmunity organization KSM Community group cc Community cadre

44 Annex 7: Financial Management and Disbursement Arrangements INDONESIA: Third Urban Poverty Project

1. Summary of the Financial Management Assessment

This project will use a similar financial management system as the one used in the existing Urban Poverty Projects (UPP1 - Cr.3210 and UPP2 - Cr3658/Ln. 4664). The existing projects have satisfied the Bank’s minimum financial management requirement as stipulated in OP/BP 10.02. The Management Information System (MIS) under UPP 1 has been improved and includes financial reporting aspects and related standards and formats for the project financial statements. The same MIS used for UPP2 will be used for UPP3. During appraisal of UPP2, a review ofthe MIS confirmed that the system would enable the PMUto apply FMR-based disbursement.

Given the current decentralized environment, studies such as the CFAA and Fiduciary Review indicate that the country is a high risk regarding public financial management. The project will mitigate this risk in two ways: (i)greater accountability by and to communities by having participatory planning of subprojects at the community level and implementation by locally elected community organizations (BKMs); and (ii)provision of technical assistance, support and oversight to each BKM. In order to ensure that communities and the public will have control over project implementation, the project will set mechanisms for accountability and transparency, which are included in the manual, and ensure that project rules are adequately enforced. The overall control risk is therefore assessed as moderate.

2. Audit Arrangements

The Project Management Unit (same as the one in charge ofUPPl and UPP2) will prepare and produce consolidated project accounts. Independent auditors acceptable to the Bank will carry out the audit for the project accounts, including the Special Accounts. The annual audit reports will be furnished to the Bank no later than six months after the end ofthe govemment fiscal year. The PMUhas agreed to appoint BPKP to audit the project in accordance with the Terms of Reference for the audit of special purpose financial statements, with a similar TOR to the one for UPPl and UPP2. The auditor will also audit the attainment of objectives according to the agreed performance indicators. There are no outstanding Audit Reports under UPPl or UPP2.

In addition Each BKM will be required to prepare a financial statement and appoint public accountants or eligible institutions (such as the accounting department of a university for kotas or kabupatens that do not have adequate qualified public accounting firms) to audit the BKM’s books. The Terms ofReference for BKM audits that have been agreed upon and used in UPPl and UPP2 will be used in UPP3. During implementation, OCs will assist BKMs to select the firm. The audit fee will be financed by BKM.

3. Disbursement Arrangements

FZow of Funds. The PMU will be responsible for the administration process ofconsultants (NMC, OCs and Evaluation Consultants) that are hired centrally. PjOKs at the sub-district (kecamatan) level will be responsible for the administration process on the kelurahan grants, while PjOKs at the district (kota/kabupaten) will be responsible for the Poverty Alleviation Partnership Grant (PAPG). PMU/PjOKs will submit payment requests (SPP) to the relevant Treasury Office (KPKN) of the Ministry ofFinance (MOF) at the district level. KPKN will issue payment remittance orders (SPM) to their respective bank that will transfer the money to the intended beneficiaries and make the arrangement to debit the project special account (see figure below).

45 Kelurahan Grants. The first withdrawal on the kelurahan grants (20%) will be supported by a Grant Implementation Agreement signed by the PjOK and the BKM, and an approved Community Development Plan as verified by the OC. For the second tranche (50%), withdrawal will be supported by evidence ofadequate financial management by the BKM and implementation progress in accordance with the CDP (as verified by the OC). Withdrawal for the third tranche (30%) will be based on a review ofthe BKM's sustainability and implementation progress.

Poverty Alleviation Partnership Grants. The first withdrawal (50%) will be made upon signing ofthe Implementation Agreement between the PjOK and the BKMs and the Dinas. The second tranche (50%) will be based on a satisfactory progress report and evidence ofthe use of counterpart funds ofat least an equal amount as the project disbursement.

Accounting and reporting. The accounting system and procedures at the central level (PMU) will follow the government accounting system. At the BKM level, expenditures made by the BKM will be accounted for in a simple report. The specific accounting procedures will be included in the project manual. The PMU, PjOK, BKMs and joint BKMIDinas teams will maintain separate accounting records on a cash basis.

At the kelurahan level, the BKM (with the help ofthe facilitator) will prepare and submit a financial report and progress report to the OC (kotaidistrict level) on a monthly basis. The OCs who will submit them electronically to the PMU through the MIS in a timely manner will summarize these reports. Based on these MIS reports, the PMU will consolidate all the information from all project units at the district and kelurahan levels into a Financial Monitoring Report (FMR) consisting ofa financial report, progress report, and procurement report, using similar formats used in UPPl and UPP2. The FMR will be submitted to the Bank within 30 days after the end ofeach quarter, along with a withdrawal application to replenish the project special account through Directorate General ofBudget ofthe MOF.

Special Account. GO1 will establish a Special Account (SA) at Bank Indonesia or other commercial bank denominated in US dollars, under the name of the Directorate General of Budget (DGB), Ministry of Finance. The DGB shall provide copies ofthe weekly bank statements of the SA to the PMU. Disbursement to the Special Account would be for the six months project expenditures, following the FMR-based disbursement procedures.

4. Allocation of Loadcredit Proceeds

The table below shows the allocation of loadcredit proceeds by category and the disbursement percentages for each category. The estimated disbursements per year and cumulative is shown as part of the Project Financing Data elsewhere in the document (in the cover page). It is based on the assumption that the proposed Bank loadcredit would become effective in July 30,2005 and would close on March 31, 2011.

46 Table: Allocation of Loan and Credit Proceeds

Expenditure Category IBRD IDA Financing Percentage US$ Million US$ Million by Bank (1) Kelurahan Grants and Sub-loans 25.1 56.4 100% of Grants and Sub-loans disbursed (2) PAP Grants 30.9 -- 50% of Grants disbursed (3) Consultants ’ Services 8.3 15.0 100% I (4) Unallocated 1 2.66 I -- I I (5) Front-end fee 0.34 -_ Total 67.3 71.4

47 Chart 1 Third Urban Poverty Project Flow of Funds and Reporting Mechanism

I I SA statements ...... Bl/Statebank --- I SA state- I I report Circular Letter I debit note

I SPM

transfer kel.grants

Kelurahan

-Note: -b fund transfer ___------+ reporting ...... b memorandum

DLN Directorate External Fund, MOF PJOK Administration Unit at District and sub-District KPKN Treasury Office, MOF BKM Community Organization PMU Project Mgmt Unit, Kimpraswil Dinas Functional Local Government Unit NMC National Management Consultant 81 Central Bank OC Oversight Consultant WA-FMR Withdrawal Application based on Financial Monitoring Report (FMR)

48 Chart 2 FLOW OF FUNDS MECHANISM FOR KELURAHAN GRANTS

INDIVIDUAL KSM PROPOSAL VERIFIED BY OC &APPROVED F!,r-.;FACILITATOR , BY BKM

PAYMENT REQUEST

OC VERIFICATION 1. 20% DISBUSEMENT CDP FORMULATED BASED ON PARTICIPATORY ASSESSMENT & AGREED BY COMMUNITY 2. 50% DISBURSEMENT - PROGRESS FEPORT SUBMITTED & EVALUATED 3. 30% DISBURSEMENT SUSTAINABILITY CRITERIA FULFILLED

LOCAL BASK 1PJOK (SELECTED

BRANCH OF NAT. OFFICE OF BI / PAYMENT ORDER LOCAL STATE OFFICE BANK

flow of fund flow of payment requestiorder line of coordination line of facilitation DLN Directorate of External Fund, MOF PMU Project Management Unit of UPP project PJOK Administrative Unit BKM Community Institution CDP Community Development Plan (medium term plan / 3 years) BI Bank of Indonesia (Central Bank)

49 Chart 3 FLOW OF FUNDS MECHANISM FOR POVERTY ALLEVIATION PARTNERSHIP GRANT (PAPG)

- - - - -

Implementation agreement JOINT TEAM ACCOUNT

submission of KPK payment request. approved suhnroiect

NAT. TREASURY OFFICE OF BI / payment order LOCAL STATE

Note: -b flow of funds flow of payment requestiorder ------line of coordination _._.- b line of facilitation

DLN Directorate of External Fund, MOF PMU Project Management Unit OC Oversight Consultant at city level (OC kota) PJOK Administrative Unit BKM Community Institution CDP Community Development Plan (mcdium term plan / 3 years) BI Bank of Indonesia (Central Bank) or other commercial Bank

50 Annex 8: Procurement INDONESIA: Third Urban Poverty Project

EXECUTIVE SUMMARY

1. This is a third of a series ofUPP, and UPPl and UPP2 are under implementation. Through this project the govemment intends to scale up this program to a national program with national coverage. The main intent through this project is to add new locations. Thus the time frame of this project will overlap with UPP2 and the existing PMU for UPP2 will also manage this project.

0 The overall procurement arrangements consist entirely of (i)Selection of consultants; and (ii) Community Participation Procedures for sub-projects and grants. No NCB or ICB is envisaged under the project. The main challenge in the selection of consultants is to select qualified consultants from the current pool, because familiarity with the project is essential, and keep the costs low. Therefore, the selection procedures will follow mostly LCS. The project manual fixes the approach and methodology under the assignment and, thus, the consultants is required only to provide the proper staffing. The cost estimates will be based on the average costs from the previous assignments under UPP 1 and 2.

2. For procurement involving the community, the main challenge is to have a “contract” with the community for the delivery of certain outputs/products based on the agreed ceiling amounts and technical specifications with a control mechanism. The control mechanism from within the community for procurement processes (as currently applied under UPP 1 and 2) will be included in the project manuals.

3. The overall management framework is supported by the main consultants’ contracts. The PMUin Jakarta will assign a National Management Consultants (NMC) to provide assistance for overall project management, monitoring and reporting, including the supervision of the Oversight Consultants (OC). There will be OC at the regional level providing assistance to the community live1in preparing and implementing the project, in addition to assessing the quality and readiness of particular community in carrying out the project. The contracts for the OCs will include the selection and hiring ofkelurahan facilitators and other training and socialization activities that are not included in the NMC contract. Evaluation consultants will also be hired to regularly provide input to the PMUon project implementation and progress towards achieving its objectives. There will also be as many as five individual consultants hired by the PMUas technical advisors. The consultant packages are shown in the table below.

51 No of Estimated Package Contract Amount Selection No Description of Services Packages (US$ m) Method 1 National Management Consultant 1 2.50 LCS

2 lOC - East Kalimantan 1 0.5 LCS 3 lOC - N. Aceh Darussalam 13 4.3 LCS 4 ~OC- N. Sumatra 121 1.5 LCS

--- _____ 12 Main Evaluation Consultant 4 1.801 LCS 13 Other Evaluation Consultant 4 0.40 CQIIndividual 14 Other - Individual Technical Advisors 5 1.oo Individual

PROCUREMENT CAPACITY ASSESSMENT

4. The last Country Procurement Assessment Report for Indonesia was carried out in February 2000, with the final report being issued in February 200 1, after which a new Keppres 8012003 was issued to replace Keppres 1812000. A detailed comparison and update between the two Keppres was provided separately in the Procurement Capacity Assessment Report (PCAR), which was conducted particularly for this project. The PCAR also resulted in the following findings and recommendations:

5. This is the third project in a series ofsimilar projects. The following lessons have been drawn from implementation ofUPP 1 and 2 with regard to procurement and have been taken into consideration in the design ofUPP3:

Communities carry out a considerable amount of simple procurement. Their capacity needs to be improved. Record keeping related to handling ofprocurement and complaints needs to be strengthened. Therefore, it is proposed that under UPP3, a contract with communities be signed and agreed upfront to carry out certain assignments and activities. Unit rates should be agreed upfront, and the community will be responsible for technical delivery ofthe agreed output. For this purpose, assistance should be provided to the communities under the project.

The PMU deals with a relatively small number oflarge value consultant contracts. All the contracts were multiyear and in stages, and the selection process followed QCBS procedures. The result was that high costs were observed in many of the contracts. Effective price competition did not occur since, during the technical evaluation, there was always the possibility of a firm getting significantly higher technical scores than others by proposing over-qualified staff (who also cost significantly more). To remedy this, it is suggested that the selection method be adjusted to give more weight to the financial score, and if possible, follow QCBS procedures with a ceiling. The TOR should be re-written to clearly describe the assignment and expected outcome, and the estimated cost should be more carefully reviewed. In addition, there is a need to expand the shortlist and ensure that only qualified firms are included. Ifnecessary, good,

52 qualified firms from previous assignments should be identified and encouraged to participate. For this purpose, a review ofperformance offirins under UPPl and 2 will be coizducted by the PMU and submitted to the Bank prior to finalization of the shortlist.

e The National Management Consultant (NMC) was critical in getting UPP 1 and 2 moving on the right track. The qualifications and capability ofthe NMC is extremely important to the success of the project. Experience under UPPl and 2 demonstrated that not many firms have the kind of experience and knowledge required for this contract. It is anticipated that it would be difficult to come up with a large pool of qualified shortlist or satisfactory technical proposals for the NMC contract from the existing pool in the country. On the other hand, this package is not attractive to foreign firms since large numbers ofexperts with local knowledge are required (however, foreign individuals with international experience may have added value as part of the NMC team). The NMC selection process will be completed prior to loan effectiveness, using the Least Cost Selection procedures. With this kind of arrangement, it is expected that the package could be procured more efficiently, and result in a better technical proposal and more qualified people at more reasonable costs to implement the project.

e There were significant procurement delays under UPPl and 2, especially at the start up ofthe project. This was mostly due to delays in some administrative process in initiating the preparatory work for the selection process. It is proposed that under UPP3, the procurement plan should be submitted and agreed upfront, and be strictly followed. In addition, there should be staff proficient in procurement hired under the project that have the power to push the procurement process in a timely manner, so that the selection process can be initiated early enough. Delays in the budgeting process are a national issue, not only applicable to Bank financed projects. It would be difficult for the Bank to influence the improvement ofthis process unless the disbursement ofproject funds can be made directly to the Project accounts, which would be unlikely in this case. The only thing that may be possible would be to obtain a commitment from MOF, as part ofthe Minutes of Negotiation, to provide the budget in a timely manner.

6. It is expected that the existing Project Management Unit (PMU) will manage UPP3 for UPPl and 2. Additional staff will be hired to work full time on UPP3 only. The TORSfor staffing will be the same as the ones in previous projects. The PMUwill be fully staffed prior to loan effectiveness.

7. It was also agreed that the existing UPP2 team would be employed for UPP3 to carry out necessary project preparation work prior to the formal establishment of the PMUPIMPRO for UPP3. This includes the selection process for the National Management Consultants and the Oversight Consultants (including preparing the shortlist and issuing the RFP). It is expected that these consultants will be hired prior to loan effectiveness.

8. As National Competitive Bidding will not be applied for this Project, there is no major conflict with national procedures, including ones involving community participation. It was agreed that the selection of consultants would follow the Bank’s Consultant Guidelines. With the effectiveness of Keppres 80/2003, it is expected that the following actions will be more effectively implemented under the project: (i)transparency in the procurement process, including mandatory announcement of award of contracts in the public domain; (ii)sanctions and enforcement against collusive practices, both for consultantshidders and for the government officials; and (iii)sanctions and enforcement against poor performance of consultantshidders. These requirements will be stated in the project manuals. In addition, the implementing agencies have an option to follow the “Pemilihan Langsung” procedures as described in Keppres 8012003 to satisfy the Bank’s shopping procedures, subject to clarifications which will be included in the project manuals.

53 9. The preparation of the General Guidelines and Technical Guidelines has been initiated during project preparation, and will serve as the project manuals. These basically will follow the existing documents, with a few improvements to make them clearer, and include requirements on transparency and enforcing sanctions against irregularities. The General Guidelines have been finalized, and the Technical Guidelines will be finalized prior to effectiveness. These guidelines should include, but not be limited to, all applicable procurement, procedures, and monitoring and reporting requirements.

10. A training program on the project manuals, including on procurement, has been developed and approved by the Bank, and provided to all the project stakeholders. A special training program on selection of consultants will be provided to key project staff at the PMU.

1 1. The Assessment found that the overall procurement risk is average. The prior review thresholds, as indicated in this Annex, are based on this capacity assessment.

A. Guidelines

12. Procurement ofconsultants follow on the Guidelines for Selection and Employment of Consultants by World Bank Borrowers dated May 2004 (the Consultant Guidelines). Procurement of works, goods, and related services funded wholly or partly by the World Bank in this Project shall follow the Guidelines for Procurement under IBRD Loans and IDA Credits dated May 2004 (the Procurement Guidelines).

B. Procurement Plan and Standard Documents

13. The agreed project Procurement Plan (including contracts with community) for the first 18 months ofthe project will be agreed prior to negotiation, and will be included in the PIP (Project Implementation Plan). The procurement plan will be updated annually, and should obtain the Bank’s no objection by the end of September for the following government fiscal year.

14. The standard Request for Quotations (for works and goods), and the Bank’s standard Request for Proposals (RFP) and contracts for the selection ofconsultants (July 1997, Revised April 1998 and July 1999 and March 2002) will be used The WPs required during the first year ofimplementation were agreed during appraisal.

C. Procurement of Subprojects under Kelurahan Grants (US$93.8 million equivalent, including contingencies and overhead) and the Poverty Alleviation Partnership Grants (US$64.9 million equivalent, including contingencies and overhead).

15. About 70% of Bank financing will be for subproject proposals made by communities either independently (for the kelurahan grants) or jointly with local governments (for the Poverty Alleviation Partnership grants). These will consist of contracts between the government and the respective communities to deliver certain outcomes. Therefore, the rates under the contracts shall be justified and agreed at the time of approval of the community proposals. To enhance transparency, the list of vendors and their corresponding committed/paid amount will be disclosed in the public domain, at least on the information board and in the public accountability meetings. After signing the contracts, procurement will be managed and executed by communities using forms and procedures that have been tested and reviewed as adequate by the Bank under UPPl and UPP2. These will be contained in the project manuals. OCs will ensure that regular quality assurance and supervision will be enforced. These procedures will be included in the project manuals and the contracts with each community group.

54 16. Under the kelurahan grants, each community group (BKM) may receive up to a total of Rp.500 million (US$ 58,800 equivalent) per kelurahaddesa to finance subprojects and micro credit sub loans. The ceiling for any single subproject (to KSMgroups) or micro credit sub loans (to KSMgroups) is Rp.30 million (US$ 3,550 equivalent). Individual procurements will be small and widely dispersed. Procurement procedures will therefore consist of special procedures using Community Participation, and the assignment ofIndividual Consultants. These procedures are defined below and will be detailed in the project manual.

17. The PAPG will finance subprojects that are prepared jointly by BKMs and local govemment (through their dinas offices). The amount of PAPG for individual subproject will range from Rp.30 million (US$3,550 equivalent) up to Rp.200 million (US$23,550 equivalent). These funds will constitute up to 50% of the total cost of the subproject, as communities, dinas or other private sponsors will be required to provide the other 50% as matching funds. The subprojects must be in the form of development ofpublic facilities/infrastructure/services that will directly benefit the community and that can be completed within 6 months. Individual procurements will be small and widely dispersed. Procurement and selection procedures will therefore consist of special procedures using Community Participation. These procedures are defined below and will be detailed in the Project Manual.

a) Community Participationfor Works under the sub projects

18. For the development of infrastructure and other small works (less than US$50,000 equivalent), works may be conducted through contributions from communities, which may be in the form oflabor and materials, but may also include land. For contribution oflabor, communities may choose to include full or partial labor cost in the proposals and/or pay salaries for work done on the project. Construction using a labor-intensive arrangement with community members is subject to the following provisions:

The architectural plans and engineering designs for the above very small civil works shall be based on Government-approved plans and designs 0 The implementatiodsubproject agreement covering these works shall include the following: (i) specified lump-sum, fixed price amount based on a written estimate ofwork to be rendered by identified laborers from the community; and (ii)description in reasonable detail, including basic specifications, required completion date, and relevant drawings where applicable. 0 The wage rate for community labor shall follow Government standards for the location and type of labor as established by the Ministry of Settlement and Regional Infrastructure (Kimpraswil)

19. In areas where the community does not have the capacity to construct works themselves, the community may (with GO1 prior agreement as established in the subproject implementation agreement) procure small civil work contracts (for individual contracts less than US$ 50,000 equivalent) following procurement of small works procedures. These contracts will be contracted under lump sum, fixed price contracts awarded on the basis of quotations obtained from three qualified contractors in response to a written invitation. The invitation includes basic specifications, required start and completion dates, an agreement format acceptable to the Bank, and relevant drawings. The quotations will be opened in public accountability meetings and read aloud. The award will be made to the contractor who offers the lowest price quotation for the works. No restriction on participation in the bidding is allowed.

b) Community Participation for Goods under the sub projects

20, Goods procured under the Kelurahan Grants or PAPG include purchase of goodsiequipment as agreed in the subproject implementation agreement. Goods shall be procured through comparison of prices from at least three reputable local suppliers. The request for quotation includes a basic description and quantity of the goods, required date and place of delivery, and an agreement format acceptable to the

55 Bank. The quotations will be opened in public accountability meetings and read aloud. The award will be made to the supplier who offers the lowest price quotation. No restriction on participation in the bidding is allowed. For subprojects located in remote areas where it is not economical to obtain prices from suppliers located far from project sites, less than three quotations is acceptable, as is direct contracting. The group proposing the subproject, however, needs to justify these methods, and verifications by project staff must be placed on record.

2 1. Goods valued at less than Rp. 15 million each (USS1,800 equivalent) may be purchased from local suppliers/stores after conducting a price comparison ‘survey’ by visiting at least three local suppliers. Price comparisons of less than three are acceptable whenever there is a lack of altemative suppliers. The price survey shall be conducted by two members of the community who are trusted by the community as having the required independence and integrity.

22. Subprojects may also include the purchase of goods provided/installedby the community or other community groups (acting as “suppliers”). These shall have reasonable rates as compared to prices of similar goods obtained from other stores nearby. The KSMshall provide acceptable technical specifications to the “suppliers” and allow adequate time for delivery and installation.

23. Subprojects may also include the purchase of goods provided/installed by the community or other community groups (acting as “suppliers”). These shall have reasonable rates as compared to prices of similar goods obtained from other stores nearby. The KSM shall provide acceptable technical specifications to the “suppliers” and allow adequate time for delivery and installation.

c) Community Participation for Selection of Consultants under the sub projects

24. Procurement of consultants under Kelurahan/PAF’ Grants may involve hiring ofindividual experts/engineers or firnis through service delivery contracts. These will be very small contracts (up to US$20,000 equivalent per contract); therefore, competition has no added value. Individuals will be hired following the Selection of Individual Consultants, and Single Source Selection procedures for firms.

D. Consulting Services for Implementation Support and Capacity Building (US$24,4million equivalent, including contingencies, of which Overhead for PMU (USU.2 million) is not Bank financed)

25. The remainder of procurement actions will be for consulting services, which will be managed centrally by the Government (the Project Management Unit). The main consulting contracts are the National Management Consultants (NMC), Oversight Consultants (OCs), and Evaluation Consultants (EC). Overall, there will be 20 main consultant service packages selected at the central level (1 NMC, 15 OCs, and 4 Evaluation Consultant packages) as well as some ad-hoc evaluation studies to be procured on an as-required basis during the implementation period. A few individual consultants (about 5 contracts) will also be hired under the project as the technical advisors.

National Management Consultants (US2.5 millioi? including contingencies).

26. The PMUin Jakarta will assign a National Management Consultants (NMC) to provide assistance for overall project management, monitoring and reporting. This NMC package will be procured based on the LCS procedures with the justification mentioned in the paragraph Executive Summary above. This total contract will be subject to annual performance review, based on which, the Client may have the right to terminate the contract at any time if perfonnance is unsatisfactory.

56 27. The following actions will be taken to minimize risks related to corruption: (i)The TOR for this assignment has been prepared to be quite rigid, such that the consultants will only need to propose qualified individuals and their best estimates of travel and other reimbursable expenses. (ii)Based on the survey of the related costs to this assignment in the previous UPPs (including comparison of costs associated to relevant items as proposed by OC and NMC), the average cost for NMC in executing this assignment can be estimated, such that the cost survey will serve as the reference for negotiating the total contract cost. (iii)The socialization and training activities (both for OC and other skilled training) will be pre- determined in the TOR, and will be regularly modified by the Client based on an annual review.

28. The NMC contract included in this amendment scenario will initially be for a 3 year period, with a provision for a possible extension until project completion subject to satisfactory performance and with prior approval from the Bank. The possibility of such an extension shall be clearly outlined in the TOR and RFP (including in the Special Conditions of Contracts), and shall be factored during the evaluation.

29. The NMC contract amount will consist of the following:

e The feedunit rates for individuals involved to support this assignment; 0 The reasonable fees, with breakdown, to cover the consultant’s efforts in managing and coordinating the socialization and training activities. The estimated costs for these activities will be provided, such that the consultant would be functioning as the “fund manager” only; and e The actual reimbursable to cover travel and other expenses.

30. To enhance their capacity in carrying out the above assignment, the consultants may associate with other consultants/providers in accordance with para 1.12 ofthe Bank Consultant Guidelines. In such cases, the submitted proposal shall be clearly identify and describe this association.

Oversiaht Consultants (US$I 7.6 million)

3 1. There will be 15 Oversight Consultant (OC). As described for the NMC, the TOR for this assignment have been prepared to be quite rigid, such that the consultants will only need to propose qualified individuals and their best estimates for travel and other reimbursable expenses. Based on experiences in UPPl and 2, the average cost for OCs in executing this assignment can be best estimated, such that the OC will be procured following the LCS procedures with a budget ceiling.

32. The estimated cost for each single contract package ranges from US$0.4 million to US$ 1.7 million. OCs will be hired for a 2-year period with a provision ofa possible extension until project completion subject to satisfactory perfomiance and with prior approval from the Bank. The possibility of such an extension shall be clearly outlined in the TOR and RFP (including in the Special Conditions of Contracts), and shall be factored during the evaluation.

33. The contracts for the OCs will include the selection and hiring ofkelurahan facilitators and other training and socialization activities that are not included in the NMC contract. Facilitators will be hired by OCs based on the required qualifications as described in the TOR and agreed contract terms and conditions. The facilitators are key to the supervision ofthe Project at the community level. They consist of local individuals who are familiar with the physical and social conditions of the respective Kelurahan/Community where the Project is being implemented. Their role is mainly to assist the

57 community in preparing and implementing the project, in addition to assessing the quality and readiness ofparticular Community in carrying out the project.

34. Based on previous experience under the Indonesian environment for projects involving communities, the facilitators are normally recruited from a certain pooligroup of people within the 1ocalKelurahan areas. Those facilitators normally maintain their own network such that any project will compete for facilitators from the same pool. In addition, any difference in facilitator salaries (with the same qualifications) may create social problems within the facilitators’ network. Therefore, facilitator salaries will be pre-determined as established by a market survey in local areas by the Government carried out by the Project Preparation Team and acceptable to the Bank. The cost component for the OCs will therefore include the facilitators’ salaries (estimated at US$6.2 million), the cost oftraining conducted by OCs (estimated at US$6 million), and socialization costs (estimated at US$3.1 million). To enhance their capacity in carrying out the above assignment, the consultants may associate with other consultants/providers in the form ofjoint ventures in accordance with para 1.12 of the Bank Consultant Guidelines, in which the expression of interest shall be submitted by this association.

Evaluation Consultants KJSa2.2 nzillion)

35. There will be four main packages for Evaluation Consultants for a total estimated contract amount ofUS$I .88 million. The first package will be to carry out a base line survey shortly after loan effectiveness, and the three consecutive contracts will be for evaluation at three different stages during project implementation. The consultants for each contract package will be procured by the PMU, following QCBS procedures. The consultant who has been hired under the previous contract package may be allowed to participate to compete for the following and subsequent packages subject to meeting the eligibility requirement, and as long as the PMU ensures that para 1.10 of the Consultant Guidelines on “Unfair Competitive Advantage” will be exercised. In addition, there may be evaluation studies required (a total aggregate amount ofUS$0.4 million) which may be assigned to a firm or NGO, or to Individual Consultants. Each contract for a firnV”G0 is expected to be small (less than US$lOO,OOO up to an estimated aggregate amount ofUS$200,000), and, therefore, will be selected following Selection Based on Consultants Qualification (CQ) procedures. Each individual consultant contract is estimated to be small (less than US$25,000 up to an estimated aggregate amount ofUS$lOO,OOO) and the selection will follow the Selection of Individual Consultants.

Technical Advisors (US$l.O nzillioni

36. There will some individual experts hired by PMU. These individuals are expected to assist PMU in monitoring the project on the technical aspects, as well as providing technical and policy advice ofthe necessary actions that will be required to enhance the performance ofthe project. They will also assist the PMUto continue enhance the concept of the UPP. Furthermore they are expected to assist DG Human Settlement to strategize the integration ofall community poverty alleviation programs in Kimpraswil. It is expected that the individuals, who are currently working for the project for UPP 1 and 2 will be part of these technical advisors.

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

Procurement Method Expenditure Category ICB NCB Other2 N.B.F. Total Cost 1. Works 0.00 0.00 0.00 0.00 0.00 2. Goods 0.00 0.00 0.00 0.00 0.00 3. Services: Implementation 0.00 0.00 23.26 1.16 24.42 Support and Capacity Building 0.00 0.00 (23.26) 0.00 (23.26)

4. Kelurahan Grants Subprojects 0.00 0.00 89.73 4.08 93.80 and Sub loans 0.00 0.00 (81.57) 0.00 (81.57) 5. Poverty Alleviation 0.00 0.00 61.76 3.09 64.85 Partnership Grant Subprojects I 0.00 0.00 (30.88) 0.00 (30.88) Unallocated 1 0.00 0.00 2.7 0.0 2.7 0.00 0.00 (2.7) (0.0) (2.7) Front end fee 0.00 0.00 0.3 0.00 0.3

0.00 0.00 (0.3) 0.00 (0.3) , Total 0.00 0.00 177.7 8.4 186.1 0.00 0.00 (138.7) 0.0 138.7

1/ Figures in parentheses are the amounts to be financed by the Bank. All costs include contingencies. 21 Includes civil works and goods to be procured through procurement of small works, community participation: national shopping, consulting services, services ofcontracted staff of the project management office, training, technical assistance services, and incremental operating costs related to: (i)managing the project, and (ii)re- lending project funds to local government units.

59 Consultant Selection Method Services QCBS QBS SFB LCS CQ Other N.B.F. Total Cost1 A. Firms 0.00 0.00 0.00 21.86 0.40 0.00 0.00 22.26 0.00 0.00 0.00 (21.86) (0.40) (0.00) 0.00 (22.26) B. Individuals 0.00 0.00 0.00 0.00 0.00 1.oo 0.00 1.oo 0.00 0.00 0.00 0.00 0.00 (1.OO) 0.00 (1 .OO) Total 0.00 0.00 0.00 21.86 0.40 1.oo 0.00 23.26 I 0.00 I 0.00 I 0.00 I (21.86) I (0.40) I (1.00) 1 0.00 I (23.26) I 1\ Including contingencies

Note: QCBS = Quality- and Cost-Based Selection QBS = Quality-based Selection SFB = Selection under a Fixed Budget LCS = Least-Cost Selection CQ = Selection Based on Consultants’ Qualifications Other = Selection of individual consultants (per Section V of Consultants Guidelines) and SSS under Community Procurement (CP) as defined in this Annex. N.B.F. =Not Bank-financed Figures in parentheses are the amounts to be financed by the Bank .

Prior review thresholds It is expected that about 12% oftotal expenditures would be subject to prior review. The Ministry of Finance has issued a decree to state that the exchange rate to be used for determining the threshold for prior review is IDR 9,50O/US$. This understanding will be updated from time to time with Bank’s prior agreement. The following prior review thresholds have been established: e Works: US$ 50,000 e Goods: US$20,000 0 Consultant Services: US$ 100,000 (firms) and US$ 50,000 (individuals), and TORSfor all contracts.

Contracts which are subject to prior review shall be determined from procurement plans acceptable to the Bank that are updated by end ofSeptember each year for implementation for the following GO1 fiscal year.

The OCs are required to randomly review, prior to countersigning, contracts implemented by community which are NOT subject to the Bank’s prior review.

The following issues should be addressed regularly during supervision: e The capacity ofproject staff in implementing procurement. .The level of enforcement ofthe agreed procedures and documents. e The effectiveness ofprovinces/districts in solving procurement problems, including complaint resolution. An assessment ofthe effectiveness ofthe Borrower’s monitoring and supervision implementation with respect to procurement.

60 Table B: Thresholds for Procurement Methods and Prior Review1

Contract Value Contracts Subject to Threshold Procurement Prior Review Expenditure Category (US$ thousands) Method (US$ millions) 1. Works 50,000 NIA NIA

~ 2. Goods 20,000 NIA NIA

3. Services 100,000 (firm) LCSIQCB SICQ 23.26 50,000 (individual) IC 4. Kelurahan Grants Small works (<50,000) CP, PSW 0.00 (subprojects and sub loans) Goods (<20,000) cpms

5. Poverty Alleviation Small works (<50,000) CP, PSW 0.00 Partnership Grant Goods (<20,000) CPMS Subprojects

Total value of contracts subject to prior review: 23.26 Post review intensity = 3% of total contracts covering 10% of sub projects Overall Procurement Risk Assessment: Average Frequency of procurement supervision missions proposed: One every 12 months (includes special procurement supervision for post- reviewlaudits)

Thresholds generally differ by country and project. Consult "Assessment of Agency's Capacity to Implement Procurenient" and contact the Regional Procurement Adviser for guidance.

61 Annex 9: Economic and Financial Analysis INDONESIA: Third Urban Poverty Project

1, The objectives of the project will be achieved through three components. First, the project will support the development of community organizations in each kelurahan (Community Development and Local Govemment Capacity Building). Second, these community organizations will receive block grants that they will use to provide services to the members of the community according to the community’s preferences (Kelurahan Grants). These preferences will be revealed through the process ofpreparation of the Community Development Plan. Third, these community organizations will partner with local governments to develop and deliver secondary level public services (Poverty Alleviation Partnership Grant). All three steps will be supported by project investments. Traditional, ex ante economic analysis for all three investments is either not possible or their credibility is no more than the assumptions made. However, an analysis of the possible outcomes does provide an opportunity to carry out an indicative analysis regarding the economic benefits of the investments.

Community Development and Local Govemment Capacity Building 2. The first component ofthe project helps build capable and resilient community organizations. The essential goal is to build capacity for collective action in communities that leads them towards collective action and allows them to aggregate and prioritize their demands. Higher community capacity for collective action is a positive outcome in and ofitself. The stream of benefits that flow from collective action goes much beyond project investments. For example, an organized community is able to pressure local government to respond to their needs or be accountable to them or help in conflict resolution. The overall benefits of increasing community capacity for collective action are not possible to capture through a cost-benefit analysis.

3. However, community involvement in design and delivery ofpublic services has two other direct economic benefits. First, public investments that systematically respond to aggregated community demand are more effective. Top-down, supply-driven service provision often over-supplies services that people do not want, and under-supplies services that people really want, causing a waste ofpublic resources, Furthermore, when communities are able to aggregate and articulate their collective priorities, it becomes possible for local governments to develop more efficient and focused plans to address the concerns at a city level. Second, public investment in urban services that involve community involvement in design and delivery are more efficient. Services delivered in this fashion are not only able to stretch every dollar invested by substantial community contribution, but are also more sustainable. This process of service provision and coqunity contribution increases ownership of the services delivered, This in turn creates incentives for communities to manage and maintain infrastructure created for the services appropriately. Such local management of infrastructure allows the services to be available during the true design life of the investment. In the Indonesian context, where operations and maintenance of even primary infrastructure is minimal at best, premature failure ofinfrastructure is widespread. Sustainable infrastructure, in relative terms, is highly effective public investment. Thus, economic benefits accrued through investments using the above process generally have higher economic benefit compared to traditional practices of service provision. The specific investments and their respective economic benefits are discussed below.

Kelurahan Grants 4. The second component ofthe project provides block grants to communities to finance sub- projects for service provision at the community level. The project follows an open-menu policy for decisions regarding use of these grants, meaning that communities will choose how they want to use the funds. Hence, actual investment choices are impossible to predict accurately at this time. However,

62 experiences from UPPl and KDPl suggest that most communities choose a package of services that includes small infrastructure improvements (roads, drains, water, sanitation, etc.) and revolving funds for providing micro-credit services to community members.

5. There is extensive experience in Indonesia regarding investments in small community level infrastructure improvements. The World Bank supported these investments under the Kampung Improvement Programs (KIP). KIP delivered a package ofbasic infrastructure to neighborhoods as required. A simplified approach of measuring land values was used to quantify the economic benefits. Land values in kampungs which were improved, and those of similar kampungs which were not improved, were compared. Appraisal and completion reports of these projects indicated 20% to 70% economic internal rate ofreturn (Implementation Completion Report, Ln.3246-IND). OED’s KIP Impact Evaluation Report (June 1995) confirmed this by re-evaluating the impact ofKIP in various Bank projects. OED found that the EIRRs under these projects ranged from 26% to 3 1% over a useful life of 15 years.

6. If communities choose to invest in a revolving fund, it is expected that these would provide loans for productive economic activities to community members. The assumption is that access to credit with lower transaction costs and no collateral requirement will allow petty traders and small manufacturers to be more productive or encourage the unemployed or underemployed to start profitable small enterprise. The requirement ofrepayment of credit with prevailing commercial interest rate for one-year loans (currently between 24-33%), should provide nominal returns at least that high per year and an expected positive economic returns in real terms. The project returns will be higher the faster the revolving proceeds. The project assumes a one-year loan period, often for small loans, and shorter cycles are common. The assumptions have proven mostly true in UPPl. The project so far has about 550,000 loans out of which 60% are for small trade, 15% for services and about 10% for manufacturing. A survey of sample businesses shows that most borrowers (72%) experienced an increase in income and repaid their loans from income from their enterprise (92%). The repayment rate for UPP1, though relatively good, can be substantially improved. This project will ensure better repayment rate by ensuring: (i)better support to communities to prepare sensible and profitable business proposals; (ii)train UPKs in appraisal ofloan applications so that they make loans to people that they think would be able to pay back; and (iii) make loan information more transparent to community members to enhance social pressure for repayment I

Poverw Alleviation Partnership Grant 7. The third component of the project will allocate funds competitively to finance sub-projects jointly proposed by local government agencies and community groups. The project will follow an open menu for this component as well. The project assumes that most of these investments would be physical infrastructure (e.g. roads, bridges, drains, and water, outside or between kelurahans) or social infrastructure (e.g. school repairs). Experience from VIPI and I1and KDP I,which have similar investments, show relatively high EIRRs. Extensive economic analysis was carried out prior to the appraisal ofboth VIPI and VIPII. The main investments in these projects displayed an EIRR ranging from 22%-90% with the mean of 35%-40%. In KDP Iindividual villages and project proponents chose their own subprojects from an open menu, similar to UPP3. Nevertheless, about 50% villages chose all- weather roads and bridges, and in these cases the technologies and methods were the same as those in VIP projects. These investments had EIRRs ranging from 20%-40%. Similarly, KDP 2, which also follows an open menu at the kecamatan level, assumes an average EIRR of25%. The overall objective of this component is to ensure that local governriients partner with communities in the provision of urban services. The objective is also to encourage local governments to continue this relationship in other investments beyond the project investments. As a result, a growing number ofcity level investments will be more responsive to the needs ofthe community.

63 Annex 10: Safeguard Policy Issues INDONESIA: Third Urban Poverty Project

Introduction

This project is an expansion of UPPl and UPP2 to new provinces in the country. UPPl and UPP2 were Category B projects with regard to environmental issues. They also triggered the Bank policy on Involuntary Resettlement. Therefore, Environmental Guidelines and a Land Acquisition and Resettlement Policy Framework were agreed with the government for both projects, and procedures put in place for their application should the need arise. In UPP2, with the expansion of the project to Kalimantan, a Framework for the Treatment of Indigenous People was also agreed with the government.

Implementation is complete for Phase 1 ofUPP1. Phase I1is under implementation, with sub-projects currently being discussed by BKMs and community groups (but not yet implemented). UPP2 has just started, but BKMs have not yet been formed, and there is no activity on the ground yet. The safeguard measures put in place have so far been adequate to mitigate any safeguards issues. The following summarizes the experience under Phase 1 of UPPl with regard to safeguard policy issues:

EnvironmentalIssues

0 About 5,600 infrastructure sub-projects have been financed, at a total cost ofUS$lO million, indicating an average size of sub-project of US$1,800 (Rp.15 million). These have consisted mainly of tertiary roads and bridges improvement (64%), drainage activities (22%), public toilets (lo%), sanitation activities (9%) and water supply (5%). The table below provides a breakdown of a sample of 63 kelurahan 0 The small size and nature of these activities have meant that there have been no adverse environmental impacts, and standard operating procedures for environmental mitigation (as per the Environmental Guidelines) have proved to be adequate.

Land Acquisition and Involuntary Resettlement

0 No involuntary resettlement has occurred under the UPP Phase 1 or 2 thus far. 0 For infrastructure projects (which constitute less than 10% oftotal disbursements under Phase l), there has been a high level of voluntary contributions from communities in the form cash (towards investment costs), in the forni of labor, and in the form ofland. In these cases,

64 contributions have been recorded in the project proposals, which have been reviewed by the OCs and ratified by the BKM. Since the average cost of sub-projects is so low (US$1,800), voluntary contributions have also been minor, mainly for alignment ofroads. Thus far, there have been no land related complaints or grievances. 0 With the PAPG introducing slightly larger sub-projects (though even PAPG sub-project ceilings are fairly low at US$23,SSO), monitoring of voluntary contributions ofland will need to be enhanced.

Indigenous Peoples

0 It has not been necessary to use this framework yet under UPP2 as activities have not yet started on the ground. Because UPP3 focuses on urban areas, it is unlikely that the project will have a significant impact on indigenous peoples. In a few islands like Papua and Kalimantan, Indigenous Peoples (IPS) like native Papuans and Dayaks, may be affected by the project. The nature ofthe project, with its emphasis on community development, empowerment and participation, and its use of local facilitators and volunteers for implementation, is such that there is unlikely to be a negative impact on IPSdue to project activities or that IPSwould be deprived ofbenefits. Therefore, a specific Indigenous People’s Development Plan was not considered necessary for UPP3. 0 However, due to socio-political sensitivity and the history of conflict in these islands, IPSmay need special attention to ensure that their voices are heard and that they are included in decision- making. As a result, the Framework for the Treatment ofIndigenous People developed for UPP2 will also be used in UPP3. Because the dynamics of the sensitivity will be different and specific to local circumstances, a “situational analysis” will be carried out prior to implementation of the project in Papua particularly, to determine whether any design changes may be necessary. Any required changes will be incorporated in the Implementation Manual. Feedback will also be sought from the Kecamatan Development Project operating in the same areas to determine the most effective way of ensuring the full participation ofIps in the project.

The Environmental Guidelines, the Land Acquisition and Resettlement Policy Framework, and the Framework for the Treatment of Indigenous or Isolated Vulnerable People are attached as Annexes 10A, 10B and 1OC.

65 Annex 10A: Environmental Guidelines

Introduction

1. As a highly decentralized project, UPP3 will support a large number of small sub-project investments in urban areas. It is expected to provide micro loans for income generating activities, and finance small-scale infrastructure and other services (the ceiling for individual sub-projects or micro loans per group is Rp.30 million or US$3,550), through the kelurahan grants. Through the Poverty Alleviation Partnership Grant, the project is expected to finance small-scale infrastructure and services (the ceiling for individual activities is Rp. 200 million or US$23,550). The low ceiling for individual activities, combined with the types of activities expected to be financed (roadibridge improvements, tertiary drainage, water supply to individual households, garbage collection through handcarts) indicate that none ofthese investments is expected to have any large scale, significant or irreversible impacts. Environmental impacts would come mostly from poor site management during the project construction activity.

2. The project has been classified as a Bank environmental category B. This annex outlines the environmental screening procedures and guidelines to ensure to identify, review, and “red-flag’’ procedures to ensure that problems are corrected. Indonesia’s environmental review procedures are generally consistent with the Bank’s and will form the framework ofUPP3’s approach to environmental management.

Basic Principles

3. The basic environmental principles are:

(i) proposals should avoid or minimize negative environmental impacts, and they should have explored viable alternative designs to minimize any negative environmental impact; (ii) the proposal should fit into the General Spatial Plan (RUTR) and avoid protected areas so designated by the Ministry ofthe Environment (see below). (iii) Any proposal entailing a negative environmental impact shall be complemented by an environmental plan to mitigate the impact.

Environmental Screening Criteria

4. Subprojects will be checked against Government ofIndonesia (GOI) screening criteria to ensure that no project would necessitate a fdl environmental assessment. In an initial screening, the project type, scale, location, sensitivity, and the nature and magnitude ofpotential impacts, will be identified to classify the proposal in one of4 categories:

(0 Those that require ANDAL (full Environmental Assessments) for which the Ministry of Environment has set criteria (see below). These will be eliminated from consideration for UPP3 financing. (ii) Those that require environmental management and monitoring plans (UKL and UPL) based on limited but site-specific studies. The Ministry of Public Works has set criteria to determine the need for UKL/UPL (see below). It is expected that of the proposals submitted under either the PAPG or kelurahan grants would fall under this. criteria. (iii) Those for which standard operating procedures (SOP) suffice, where generic good practice would protect the environment adequately. The DG Human Settlements and Urban and Rural Development have SOP guidelines for some types ofprojects (including

66 measures to control dust, noise and traffic at construction sites; specifications for backfilling and revegetating disturbed areas to prevent erosion; and procedures to control negative impacts at solid waste transfer stations; etc.). It is expected that some sub- projects may fall under this category. (iv) Those that require no environmental study, where no construction, disturbance of land or water or discharge ofpollutants are involved. It is expected that some sub-projects may fall under this category.

Government Environmental Screening Criteria (by Decree of the Minister of State for the Environment of the Republic ofIndonesia)

Sectors and Proiects Units ANDAL UKL/UPL Water Supply Raw water intake LIS 250 - 250 - 50 Transmission (large towns) km 10 10- 2 Distribution (large towns) ha 500 -500- 100

Medium Towns I more than or equal to 2 Upgrading I ha 15 I more than or equal to 1 Sources: KEP-l7/MENLH/ZOOI for ANDAL (Concerning Types ofBusinesses Activities Required to Complete an Eiiviroriiiieiital Impact Assessment); arid KEPMEN PU- 17/KPTS/M/2003 for UKL/UPL (Concerning Decisioizs on Types of Activities in the Field of Public Works that are Required to Prepare UPL arid UKL).

5. Special screening will be applied on the following cases:

(i) Fisheries. Standards from the Fishery Service Agency (Dinas Perikanan) will be applied to all fishery subproject proposals. (ii) Pesticide, ozone-depleting substances, tobacco or tobacco product. No subprojects using or producing these materials will be financed. (iii) Asbestos. No asbestos-containing materials will be financed. Special mitigation measures to address any issues with existing asbestos in any proposed sub-project (e.g., renovation of school buildings that may have used asbestos) will be applied. (iv) Sub-projects that produce liquid or gaseous ejjflzieizts or emissions. No manufacturing or processing operations will be financed that would produce pollutant-bearing effluents or

67 emissions unless: (i)the operations are small-scale; and (ii)the cognizant Bapedalda reviews the design and certifies that it meets applicable water and air pollution control standards. Hazardous inaterials and wastes. No sub-project will be financed that uses, produces, stores or transports hazardous materials (toxic, corrosive or explosive) or generates "B3" (hazardous) wastes. Logging. Sub-proj ects involving logging operations or procurement oflogging equipment will not be financed. Developinent on protected areas. The Decree or the Minister ofthe State for the Environment ofthe Republic ofIndonesia Number KEP-l7/MENLH/2001, entitled Concerning the Types of Businesses Activities Required to Complete an Environmental Impact Assessment, prescribes that any business or activity that is located in a protected area or that may change the purpose and/or designation ofa protected area shall be required to prepare an ANDAL (see above). This includes: forest protection area; river edges; marinelfreshwater conservation areas; nature tourism park; peat areas; areas surrounding lakes and reservoirs; coastal mangrove areas; water catchment areas; national parks; coastal edges; forest parks; cultural reserves; areas surrounding springs; scientific research areas; nature conservation areas; and areas susceptible to natural hazards. No new settlement or expansion of settlements will be supported in protected areas under theproject. Where settlements already exist, and if it is the policy ofthe local government to allow the settlement to remain, proposals for funding under UPP 3 may be used by the existing residents using standard UPP2 procedures and in compliance with any local regulations on land management which are defined by the protected area management plan. No road construction or rehabilitation of any kind will be allowed inside delimited or proposed protected areas.

6. Design specifications including environment management consideration for water supply, public toilets, urban roads, TPS, markets and bridges will be applied to UPP3 in the form of Standard Operating Procedures. Since these types of activities are most likely to be financed under the PAPG, the SOP used by the participating local government will be applied.

Environmental Screening Process

Kelurahan Grants

7. Community groups (KSMs) will prepare a subproject proposal on a standard fonnat provided by the kelurahan facilitator, signed by the group members. The standard format will include all items identified above that are not eligible for financing as part of the negative list. The proposals will include a description ofthe activities proposed and compliance with any applicable guidelines on environmental impacts (as well as landasset acquisition and impact on indigenous people). Project staff for their feasibility, technical soundness, and compliance with guidelines will review all proposals, before they are considered by the kelurahan organization (BKM). Project staff will specifically screen proposals for any environmental impacts based on the guidelines above, which will be included in the project manuals. These will include special screening for all sub-projects involving land and water use changes (Le., reclamation, irrigation); economic projects with environmental impacts to be sure that alignment, effluent, etc., meet best practice standards. BKMs with the assistance of facilitators will ensure that adequate mitigation measures are taken. The selection ofproposals by the BKM for the kelurahan grant shall be made in a meeting publicized in advance and open to the public.

68 Poverty Alleviation Partnership Grant (PAPG)

8. Proposals for the Poverty Alleviation Partnership Grant will be evaluated by a PAPG Selection Committee established by the local govemment (with the assistance ofproject staff) consisting ofa panel of representatives from the local govemment, the BKM Forum, and NGOs/universities/privateindividuals concerned about poverty issues. Sub-project proposals will be prepared on a standard format that will include the negative list. The Selection Committee can seek the help oftechnical experts from the Oversight Consultant (OC), from other government offices or hire outside experts to carry out technical reviews of proposals if necessary. All proposals will be screened for any environmental impacts based on the guidelines above that will be included in the project manuals, and the OC will be in charge of ensuring that adequate mitigation measures are taken. The process of selection ofproposals by the PAPG Selection Committee will be transparent, with clear criteria for selection.

Reporting

9. Facilitators and OC staff will aggregate and review environmental reports and flag them in their quarterly reports. The project manual will include a matrix of likely environmental impacts and steps with which to address them. An experienced environmental consultant will be hired to summarize progress, monitor and measure the impact ofthe project on the environment as part ofthe performance evaluation of the project.

69 Annex 10B: Land Acquisition and Resettlement Policy Framework

I. Proiect Characteristics

1, As a highly decentralized project, UPP3 will support a large number ofsmall sub-project investments, mainly in urban areas. Through the Kelurahan Grants component, the project is expected to provide micro loans for income generating activities, and to finance small-scale infrastructure and other services (the ceiling for individual sub-projects is US$3,550 or Rp.30 million). Through the Poverty Alleviation Partnership Grant (PAPG) component, the project is expected to finance small-scale infrastructure and services (the ceiling for individual activities is US$23,550 or Rp.200 million). None of the sub-projects is expected have a significant impact due to land acquisition andor resettlement.

2. UPP3 is also a community-based demand-driven project. Sub-projects will not be identified in advance. The identification ofthe number ofpeople affected by a sub-project can thus only be defined once sub-project proposals are evaluated by the community organization (BKM) for the Kelurahan Grants, or by the PAPG Selection Committee for the Poverty Alleviation Partnership Grant.

3. Since participatory planning and decision making form the basis for the project, the entire project approach should guarantee that people affected by the project will be involved in the decision making process.

4. Should any sub-project involve any land acquisition or resettlement, this Policy Framework provides procedures and guidelines for agreeing on compensation for those persons who are affected by the sub-project in order to ensure that they are not unfairly treated by being given low compensation, or benefit unfairly by being given compensation that is significantly higher per square meter than other owners who sell similar nearby land on the free market.

11. Definitions

5. The definitions used in this Policy Framework are:

“Census” means the head count ofthose persons under a proposed Sub-project that qualify as Displaced Persons. The date ofthe Census is the latest cut-off point to record the persons in the Sub-project area that will receive compensation, resettlement and/or removal and rehabilitation assistance. “Compensation” means the compensation at replacement cost as determined in Section V ofthis Framework given in exchange for the taking of land and building, in whole or in part, and all fixed assets on the land and buildings and crops and trees. “Land acquisition” means an activity that requires obtaining land, buildings or other assets from Displaced Persons for purposes ofthe sub-project against provision of compensation and assistance. “Displaced Persons” means persons who, on account ofthe involuntary taking ofland and other assets as part ofthe execution ofthe Sub-project resulting in a direct economic and social adverse impact, whether or not said Displaced Persons must physically relocate, had or would have their: (i)standard ofliving adversely affected; (ii)right, title, interest in any house, land (including premises, agricultural and grazing land) or any other physical asset acquired or possessed, temporarily or permanently, adversely affected; (iii)access to productive assets adversely affected, temporarily or permanently; or (iv) business, occupation, work or place ofresidence or habitat adversely affected; and “Displaced Person” means any ofthe Displaced Persons;

70 “Physically Displaced Persons” means persons who are forced to move from their previous location because (i)all or a significant portion (50% or more) oftheir land or buildings are affected by the sub-project; or (ii)less than 50% oftheir land or buildings are affected by the sub-project if the remaining portion is not economically viable or habitable. “Rehabilitation Assistance” means the provision of cash or assets or other forms of support to enable Displaced Persons without legal rights to the assets taken by the Project to at least equal or improve their standard of living, income levels and production capacity to the level prior to the project. “Resettlement” means an effort /activity to relocate the Displaced Persons into a good new settlement as mentioned in section Vb so that they can develop a better life. “Involuntary Displacement’’ means any of the following actions, when they occur without the Displaced Person’s informed consent or power of choice; (a) the taking ofland resulting in: (i)relocation or loss of shelter; (ii)lost assets or access to assets; or (iii)loss of income sources or means of livelihood, whether or not the Displaced Person must move to another location; or (b) the involuntary restriction of access to legally designated parks and protected areas resulting in adverse impacts on the livelihoods of the displaced. “Sub-project” means a specific infrastructure investment project carried out with funds from Kelurahan Grant or PAPG components of the project.

111. Basic Principles

6. Involuntary resettlement may cause severe long-term hardship, impoverishment, and environmental damage unless appropriate measures are carefully planned and carried out. For these reasons, the overall principles for this Framework are the following:

Sub-project proposals should minimize land and asset acquisition and involuntary displacement. Groups proposing sub-projects should have explored viable alternative designs to minimize displacement. The group proposing the sub-project will use a transparent and participatory process to ensure that all Displaced persons agree on any proposed sub-project that involves land acquisition or resettlement. The group proposing the sub-project will have to agree to incorporate the costs for land acquisition andor any involuntary resettlement in their sub-project proposals as part of sub-project costs. The compensation costs will be covered through the communities’ own funds or government funds (World Bank Loan proceeds shall not be used to finance compensation). In accordance with traditional practice, community members may elect to voluntarily contribute land or assets and/or relocate temporarily or permanently from their land without compensation. Voluntary in this context will mean the donation or granting of land and other assets with the full knowledge ofthe purposes for which the asset is being made available and the economic, social and legal consequences that such an act would have on the person providing the asset and which act is exercised freely and voluntarily, without any type ofcohesion. Displaced Persons should be assisted in their efforts to improve their livelihoods and standards ofthe living or at least to restore them, in real terms, to pre-displacement levels or to the levels prevailing prior to the beginning ofthe project implementation, whichever is higher.

71 IV. Framework

7. In the event that a sub-project proposal requires any land acquisition, buildings, crops, trees, and/or resettlement, the sub-project proposals have to indicate the need for land acquisition, the number and names of persons affected, and the estimated budget required for compensation.

8. Proposals that would affect 200 persons or more would normally entail long lead times, and are expected to be beyond the scope of the project. In the highly unlikely event that more than 200 persons will be affected and require compensation, the Oversight Consultant will ensure that the proposal is complemented with a full Land Acquisition and Resettlement Action Plan (LARAP). The LARAP will include: (i)a survey to identify the socio-economic characteristics ofthe Displaced Persons including a census; (ii)a comprehensive plan for the acquisition of land and/or resettlement; and (iii)a compensation package in accordance with the compensation guidelines set out in Section V and acceptable to the Displaced Persons and the groups proposing the sub-project (under the PAPG component, this would be the BKMs and a district level local government agency). The sub-project proposal will also indicate the budget source for the required compensation (Bank funds cannot be used for compensation). The OC/NMC shall seek the Bank’s approval of the LARAP and budget, and seek modifications in case the Bank finds they are needed. Further details on the LARAP are provided in the attachment to this annex.

9. For any sub-project that requires resettlement of less than 200 persons, the BKM, supported by the OC staff assisting with proposal preparation, will ensure that the following steps are followed:

The group proposing the sub-project carries out a Census of the persons that would be affected by the proposed sub-project and that would qualify as Displaced Persons. The Displaced Persons agree on the sub-project proposal, and have negotiated agreement on either voluntary or compensated contribution with the group proposing the sub- project. The agreement is made through a participatory and transparent process. Displaced Persons are made aware that they have the right to compensation and/or other assistance according to the compensation guidelines provided in Section V. In cases where voluntary contributions of land or assets are indicated, these are clearly agreed with all Displaced Persons; the name(s) of the contributor(s) and details ofthe contribution(s) are included in the agreement; and these are verified by the Oversight Consultants. A simple format on the agreement is incorporated in the sub-project proposal. This agreement should clearly indicate individual land plots needed for land acquisition and/or resettlement, the number and names ofthe affected persons, scheme ofcompensation and/or resettlement, and estimated cost for land acquisition and/or resettlement compensation. In the case ofvoluntary contribution, the agreement should state the rationale for it and the fact that the person had the choice ofnot providing the asset, and in the case of involuntary contribution, the manner followed for valuation ofthe assets which must be in compliance with Section V below. The agreement should indicate that any compensation would come from the community or government’s contribution to the sub-project. It would be possible to use World Bank Loan proceeds to construct small works and initiate employment opportunities for the group members who are to be resettled. This has to be agreed by the group proposing the sub-project and put in the agreement (see assistance guidelines in Section V). However World Bank Loan proceeds cannot be used to finance payment of cash compensation or land acquisition.

72 The details ofthe agreement will be verified by the OC/facilitator in charge of the affected communities prior to consideration by the BKM or the PAPG Selection Committee for financing. In the event that no consensus has been reached on the form and amount ofcompensation, the sub-project will not be considered for financing. No Displaced Persons shall have their land or other assets taken before they have received the compensation and the resettlement site, if that is the case, as agreed upon and detailed in the sub-project proposal. Payment of compensation, displacement ofpeople, or preparation ofa resettlement site as agreed upon should be completed before the construction of the respective sub-project is started. A monitoring and evaluation system for compensation will be introduced to ensure that Displaced Persons have received their compensation as agreed upon. The monitoring will be undertaken by the Oversight Consultant and will be a full survey or sample survey depending on the number of households affected. A report on the results and recommendations will be published by the OC and disseminated to the community and the NMC.

V. Guidelines for Compensation, Resettlement and Other Assistance

10. Based on agreements reached during the negotiation, Displaced Persons can choose to receive cash compensation, resettlement, or other options. Other options include serviced sites, land [swap] of equal size or equal productive capacity, low cost housing, apartments, real estate housing with credit facilities, or other schemes. Among those options, Displaced Persons will be provided the opportunity of having a resettlement site where they do not have to pay more than their present routine expenditure. In all cases, the amount of compensation, resettlement or other options must be sufficient to achieve the objectives of improving or at least maintaining the pre-project level of standard of living, income generation and production capacity ofthe Displaced Person.

a. Compensation

11. Displaced Persons have the right to receive real replacement cost compensation. Real replacement cost means :

(i> for land in urban areas, the pre-displacement market value ofland of equal size and use, with similar or improved public infrastructure facilities and services and located in the vicinity ofthe affected land, plus the cost of any registration and transfer taxes;

(ii) for agricultural land, the pre-sub-project or pre-displacement, whichever is higher, market value of land ofequal productive potential or use located in the vicinity ofthe affected land, plus the cost of land preparation to levels similar to those of affected land, plus the cost of any registration and transfer taxes; and

(iii) for houses and other structures, the market cost ofthe materials to build a replacement structure, or to repair a partially affected structure, plus the cost oftransporting building materials to the construction site, plus the cost ofany labor and contractors’ fees, plus the cost ofany registration and transfer taxes. In determining the replacement cost, depreciation ofthe asset and the value of salvage materials are not taken into account, nor the value ofbenefits to be derived from the sub-project deducted from the valuation of an affected asset. Compensation for trees, crops and other assets will be based on the replacement value using existing market prices per tree prepared by relevant agencies.

73 12, The extent of the compensation will depend on the tenure situation ofthe Displaced Person as set out in Section VI.

13, Displaced Persons whose: (i)remaining land and building cannot be used for housing or workplace; or (ii)whose remaining land is less than 60 sq meters; or (iii)whose remaining agricultural land is less than 50% of its initial size or is not economically viable; or (iv) whose remaining building IS less than 2 1 sq meters; have the option ofbeing included as Physically Displaced Persons and compensated for the taking of the affected asset. Displaced Persons whose remaining land is less than 60 sq meters and remaining building is less than 2 1 sq meters, will have an option to move to a new lot of 60 sq meters and building of 21 sq meters. They will be provided with compensation for the difference in area between what they lost and what is being provided to them.

b. Resettlement Sites

14. The resettlement site provided for the Displaced Persons will include infrastructure and public facilities so that it is good for living and enables the development ofa good social and economic life, including: (i)road or footpath as necessary; (ii)drainage system; (iii)water supply (if a piped water distribution network is not available, there should be shallow wells that comply with health standards); (iv) electricity; (v) health facility, education facility, work places, religious services, and sport facilities, in accordance with the size ofthe new community; and (vi) public transport facility to perform a good life.

15. The Displaced Persons will move to the new site after the infrastructure and facilities at the resettlement site are completed and feasible to live in as confirmed by the OC and the BKM. The Displaced Persons will be informed ofthe completion ofthe resettlement site at least one month before displacement, and they will be invited to survey the new site. The resettlement site would be available prior to the start-up ofworks under the relevant sub-project.

16. The location reserved for resettlement will be widely publicized so that the general public will be informed.

c. Other Assistance

17. Displaced Persons who lose their income sources or means of livelihood as a result ofthe sub- project will receive assistance to restore it. The types of assistance will be defined by the BKM and local government (in case of the PUG) and confirmed by the OC. Training and assistance that can be provided include: motivation development; skill and vocational training; assistance to start and develop small businesses; small scale credit; marketing development; assistance during transition period; and strengthening ofcommunity based organization and services. In implementing the assistance, care should be taken to harmonize the newly resettled people and the host community in the resettlement area through assistance and integration efforts. The assistance can be linked to existing programs and resources.

VI. Eligibility Criteria of Displaced Persons

18. Displaced Persons can be grouped into the following categories: (i)those who have legal land certificate, girik, or adat title; (ii)those who, under domestic law, have a right to occupy land in a residential, commercial, or industrial zone in the Project area, or occupy land on infrastructure or public facility sites such as rivers, roads, parks or other public facilities in the Project area, but do not hold a certificate or legal title; (iii)those who have no right to occupy land in a residential, commercial or industrial zone in the project area or publicly owned land and publicly owned facility sites but who were occupying such land at the time ofthe Census undertaken or at the time ofthe pre-feasibility study ofthe

74 sub-project; (iv) those who are renters; (v) those whose jobs are lost because ofthe taking of land; and (vi) those who have no right to occupy land in a residential, commercial or industrial zone in the project area, or publicly owned land and publicly owned facility sites and whose occupancy ofsuch land begins after the Census. Compensation will differ according to these groupings.

(i) Persons with Land Certificate, Girik or Adat Title 0 Displaced Persons who have land certificate, girik, or adat title will receive compensation for the land, building, and fixed assets. 0 Displaced Persons who are displaced by the Project can choose to receive cash compensation or the other options as described in paragraph 10. 0 The lots at the resettlement site will have land title ofthe same level or higher than they previously had, and the certificate will be issued within 1 year after displacement ofthe Displaced Persons. Displaced Persons will receive transport allowance to move their belongings. 0 Displaced Persons will also receive assistance and training as provided in paragraph 17

(ii) Persons who under domestic law have recognized rights to occupy land in a residential, commercial or industrial zone in the Project area but who do not hold a Land Certificate or legal documents, as well as those who occupy publicly owned land and publicly owned facility sites under customary rights at the time ofthe Census: 0 Displaced Persons will receive compensation for their land, building and fixed assets, as well as for crops and trees at market value. Displaced Persons can choose to receive cash compensation or the other options as described in paragraph 10. The lots at the new site will have Hak Paltai or a higher land title, and the certificate will be issued within 1 year after the displacement. 0 Displaced Persons will receive transport allowance to move their belongings. Displaced Persons will also receive assistance and training as provided in paragraph 17.

(iii) Persons who have no right to occupy land in a residential, commercial or industrial zone in the project area or publicly owned land and publicly owned facility sites in the project area, but who were occupying such land at the time ofthe Census undertaken or at the time ofthe pre-feasibility study of the sub-project: Displaced Persons will receive rehabilitation assistance in any of the forms provided for in paragraph 10 instead ofcompensation for the land occupied in an amount sufficient to achieve the objectives ofthis Framework, and compensation at real replacement cost for the building, and fixed assets as well as for crops and trees at market value Displaced Persons can choose to receive cash compensation or the other options as described in paragraph 10 The lots at the new site will have Hak Paltai or a higher land title, and the certificate will be issued within 1 year after the displacement. Displaced Persons will receive transport allowance to move their belongings. Displaced Persons will also receive assistance and training as provided in paragraph 17

75 Persons who are renters:

Displaced Persons who are renters will be assisted with an allowance of six months rent calculated on the basis of average rent levels for similar houses or agricultural land within the same area. Displaced Persons who are renters will also receive assistance and training and transport allowance to move their belongings

Persons whose jobs are lost because of the taking of land where they work and gained their income will be assisted with the forms ofassistance described in paragraph 17.

Persons who have no right to occupy land in a residential, commercial or industrial zone in the project area or publicly owned land and publicly owned facility sites and whose occupancy of such land begins after the Census will receive no compensation or rehabilitation assistance for the land or for the structures built and crops planted therein.

VII. Consultation and Complaint Resolution

19. This general framework will be included in the Project manuals and guidelines, and OC staff and facilitators trained in its implementation. The overall project approach in enabling transparency and consultation should allow solutions to local problems locally, quickly, and effectively. If any Displaced Persons or other community members have a complaint regarding the framework or its application in practice, the project has an established system ofcomplaint handling at the kelurahan and kota/kabupaten as well as provincial and national levels, with dedicated staff in charge of handling and following up on complaints. Complaints which cannot be solved locally through the BKM complaint system will be referred to the OC, and, ifnecessary to the NMC and the PMU. However, in the event that the deliberations have been repeatedly conducted over a long period of time, but not exceeding one year, to reach a consensus but no consensus has been reached on the form and amount ofcompensation, dispute resolution will follow Presidential Decree No. 55 of 1993. The Decree stipulates that after failure to reach agreement with sub-project group, the owner has the right to object to the Governor (see clause 20(1)), who may conduct further negotiations (see clause 20(2)). If the owner is still not satisfied, the governor must refer the case to the Minister ofHome Affairs and Minister ofJustice (see clause 21 (1) and (2)), for consideration and referral to the President ofthe Republic of Indonesia for a final decision (see clause 21 (3) and (4)).

20. The progress ofimplementation ofany required land acquisition, resettlement, and assistance will be reported to the Bank regularly by the OCBMC. If required, an independent reviewer may be retained to carry out extemal monitoring and evaluation ofthe implementation of specific LARAPs. Such an agency or agencies will have qualified and experienced staff and terms ofreference acceptable to the Bank.

76 Annex 10B: Attachment 1

Requirements for a Land Acquisition and Resettlement Action Plan (LARAP) for sub-projects under the Poverty Alleviation Partnership Grant affecting more than 200 persons

1. If a sub-project proposal indicates that more than 200 persons will be affected by the sub-project, the groups proposing the sub-project (BKMs and district level local government agency), assisted by the Oversight Consultant, will be required to conduct a Census and socio-economic survey to: (i)determine the number ofpersons involved; (ii)to collect data about the social and economic condition of the people, and the physical condition of the Project area; and (iii)to determine the potential impact ofthe sub- project.

2. The date ofthis SurveyKensus will be the latest cut-off point to record the persons in the sub- project area that will receive compensation, resettlement and/or removal and rehabilitation assistance.

3. The detailed census and socio-economic survey (hereafter referred to as the socio-economic survey) will cover among others:

(i) the size, condition, legal status of land and buildings (listed in impact groups of 0-25%1, 25-50%, 50-75%, 75-100% affected); (ii) the number of Displaced Persons and households; (iii) relevant social characteristics ofthe Displaced Persons (age, gender, education, etc) (iv) relevant economic Characteristics of the Displaced Persons such as livelihoods (including, as relevant, production levels and income derived from both formal and informal economic activities); standards of living (including health status) (v) the magnitude ofthe expected loss - total or partial - of assets, and the extent of displacement, physical or economic; and (vi) information on vulnerable groups or persons for whom special provisions may have to be made

4. Based on the results of this socio-economic survey, the Oversight Consultant will assist the groups proposing the sub-project to prepare a comprehensive plan on the taking ofassets for purposes of the sub-project, and the provision of compensation, resettlement, and rehabilitation assistance for the Displaced Persons in accordance with the principles of this Policy Framework. This will be described in a Land Acquisition and Resettlement Action Plan (LARAP) to be furnished to the Bank for approval.

5. The scope and level ofdetail of the LARAP will vary with the magnitude and complexity of the resettlement, The plan will be based on up-to-date and reliable information about: (i)the proposed resettlement and its impacts on the Displaced Persons and other adversely affected groups; and (ii)the legal issues involved in resettlement. The following list defines the matters that should normally be included LARAP and it should be regarded as general guidance in the preparation ofa LARAP. When any matter listed is not relevant to Project circumstances, it should be noted in the resettlement plan:

(i) Description of Sub-Proiect Impact and Analyses Description of the sub-project and identification ofthe sub-project area. 0 Identification of (i)the sub-project coniponent or activities that give rise to resettlement; (ii)the zone of impact of such component or activities; (iii)the alternatives considered to avoid or minimize resettlement; and (iv) the mechanisms established to minimize resettlement, to the extent possible, during implementation.

77 The main objectives ofthe resettlement program. The findings ofthe socioeconomic studies. The findings of an analysis of the legal framework. The findings of an analysis of the institutional framework. The definition ofDisplaced Persons and criteria for determining their eligibility for compensation and other resettlement assistance, including relevant cut-off dates.

(ii) Methodologies and Procedures 0 The methodology to be used in valuing losses to detennine their replacement cost; a description ofthe proposed types and levels ofcompensation under local law and such supplementary measures as are necessary to achieve the real replacement cost for lost assets A description ofthe strategy for consultation and participation ofresettlers and hosts in the design and implementation of the resettlement activities including; a summary ofthe views expressed and how these views were taken into account in preparing the resettlement plan; 0 a review of the resettlement alternatives presented and the choices made by Displaced Persons regarding options available to them, including choices related to forms of compensation and resettlement assistance, to relocating as individuals families or as parts ofpreexisting communities or kinship groups, to sustaining existing patterns ofgroup organization, and to retaining access to cultural property; institutionalized arrangements by which displaced people can communicate their concerns to Project authorities throughout planning and implementation, and 0 measures to ensure that groups such as isolated vulnerable people, the landless, and women are adequately represented.

(iii) Compensation Package 0 Description ofthe packages ofcompensation and other resettlement measures that will assist each category of eligible Displaced Persons to achieve the objectives ofthe Policy Framework. Compensation will be calculated based on Section V ofthe Policy Framework.

(iv) Alternative Relocation Institutional and technical arrangements for identifying and preparing relocation sites, whether rural or urban, for which a combination ofproductive potential, locational advantages, and other factors is at least comparable to the advantages ofthe old sites. Estimated time needed to acquire and transfer land and ancillary resources; Any measures necessary to prevent land speculation or influx of ineligible persons at the selected sites. Procedures for physical relocation under the sub-project, including timetables for site preparation and transfer. Legal arrangements for regularizing tenure and transferring titles to resettlers; Plans to provide, or to finance resettlers’ provision ofhousing, infrastructure and social services (which ensure comparable services to host populations); and any necessary site development, engineering, and architectural designs for these facilities.

78 A description ofthe boundaries ofthe relocation area; and assessment of the environmental impacts ofthe proposed resettlement and measures to mitigate and manage these impacts (coordinated as appropriate with the environmental assessment ofthe main investment requiring the resettlement). Measures to mitigate the impact ofresettlement on any host communities.

Implementation ofresettlement The organizational framework for implementing resettlement, including identification ofagencies responsible for delivery ofresettlement measures and provision of services. An implementation schedule covering all resettlement activities from preparation through implementation, including target dates for the achievement ofexpected benefits to resettlers and hosts and terminating the various forms ofassistance. Costs Detailed cost ofthe full compensation package, resettlement costs and all associated implementation costs. Identification of sources of financing (Bank funds cannot be used to finance cash compensation or land acquisition.).

Monitoring and grievance procedures Arrangements for monitoring ofresettlement activities by the implementing agency, supplemented by independent monitors as considered appropriate by the Bank. Description ofgrievance procedures.

6. There will be regular consultations with all Displaced Persons, and all other stakeholders including non-governmental organizations throughout the design and implementation ofthe LARAP

7. The LARAP described above will be prepared jointly by the BKM(s) and local government agencies proposing the sub-project, with the assistance ofthe Oversight Consultants and will thereafter be provided to the Bank through the OCNMC for approval. Once Bank approval is obtained, it will be issued as a Decree ofthe head ofthe district level local government (the Bupati or Walikota). Once the Decree has been issued, the OC and relevant government offices to the Project Affect Persons will disseminate it.

8. Issuance ofapproval for contract signing for a sub-project that requires a LAI2AP will be considered by the Bank after receipt of a progress report from the OC/NMC that indicates substantial implementation ofthe LARAP, including acquisition of all land in critical locations.

9. The LARAP, including all its maps and annexes, will be publicly displayed at the NMC and relevant OC office, the office ofthe relevant kelurahan(s), and the office ofthe relevant BKM(s).

79 Annex 1OC: Framework for Treatment of Indigenous or Isolated Vulnerable Peoples

Objectives

1. ’ The design ofthis project is structured to ensure the participation and inclusion ofvarious groups within communities in local level decision making over resource allocation. However, the project recognizes that Indigenous People form a particular group that merits a different approach and specific support. Therefore, in accordance with OD4.20, the following framework for addressing indigenous people will be adopted for the project.

2. The objectives of this framework are to: (i) Ensure that indigenous people participate in and benefit from the project; and (ii) Avoid or minimize potentially adverse effects of the project on indigenous people.

Definition

3. “Isolated vulnerable peoples” is the term used officially by the Indonesian Government to describe groups that have the characteristics of “indigenous peoples” as used in OD 4.20. This document will hereafter use the term “isolated vulnerable peoples”.

4. For the purposes of this project, isolated vulnerable peoples are defined as those that present varying degrees ofthe following characteristics: (i) a close attachment to ancestral territories and to the natural resources in these areas; (ii) self-identification and identification by others as members of a distinct cultural group; (iii) an indigenous language, different from the common regional language (e.g. Javanese); (iv) the presence of customary social and political institutions; and (v) primarily subsistence-oriented production

Framework

5. Isolated vulnerable people are not prevalent in all the project sites-they are likely to be found in particular kotakabupaten of particular provinces. The following steps will be taken to ensure that, where isolated vulnerable groups exist, the project caters to their specific needs.

(1) During the facilitator training, facilitators will be trained in the identification of isolated vulnerable people. Through the Community Self Survey exercise and poverty reflections, facilitators will identify the presence and numbers of isolated vulnerable groups in the community and report this to the OCs. (ii) For the areas where isolated vulnerable groups are identified, OCs will organize an orientation training for relevant facilitators in how to work with isolated vulnerable groups in a useful way to identify mechanisms for effective participation, and address specific challenges in workmg with such groups, for example, how to deal with groups that may be in conflict with the larger community, etc. (iii) Since facilitators will be hired locally to the extent possible, they are expected to be familiar with such groups. They will also be rotated as necessary to ensure that those that have been trained in working with isolated vulnerable groups, or have specific skills that would be beneficial in working with such groups, are made available in the right places. Management of facilitators will be handled by the OCs.

80 (iv) Where isolated vulnerable groups are identified, efforts will be made to ensure that at least one Community Cadre is from the group and able to communicate easily with the group. (v) Where the isolated vulnerable group speaks a language different from Bahasa Indonesia, relevant brochures and documents will be translated in the appropriate language. Provision has been made in the project budget to allow for additional translations of relevant project documents.

6. These steps will be aimed at ensuring that isolated vulnerable people participate fully in the project, are aware of their rights and responsibilities, and are able to voice their needs during the Community Self Survey exercise and in the foimulation of the Community Development Plan. In addition, they will be encouraged to submit sub-project proposals that cater to their group’s needs.

Monitoring and Grievance Procedures

7. The Terms ofReferences for the OC and NMC include the responsibility for monitoring the treatment ofisolated vulnerable people in the project. Where isolated vulnerable people are identified, the OCs will be required to report on their participation in the project. Provisions will be made in the MIS system to monitor the involvement of isolated vulnerable people. This will be followed by the NMC as well as monitored during supervision missions.

8. The project has a complaint system that allows community members to raise issues or complaints at various levels-at the kelurahan level, at the OC level (either at kota/kabupaten or province level), and at the national level. There are designated staffs at the OC and NMCresponsible for following up on complaints and ensuring that they are handled adequately. Where isolated vulnerable people are concerned, the facilitatoriOC will ensure that grievance redress mechanisms are developed in culturally appropriate ways in close collaboration with the relevant group.

9. Project evaluation studies will include monitoring and evaluation ofthe impact ofthe project on isolated vulnerable people.

81 Annex 11: Project Preparation and Supervision INDONESIA: Third Urban Poverty Project

~ ~~~ ~ Planned Actual PCN review September 2003 September 4,2003 Initial PID to PIC October 6, 2003 Initial ISDS to PIC October 6, 2003 Appraisal March 7, 2004 March 10, 2004 Negotiations April 1, 2005 Board/RVP approval May 25,2005 Planned date of effectiveness July 30, 2005 Planned date of mid-term review February 25,2008 Planned closing date March 3 1, 20 1 1

Key institutions responsible for preparation of the project: Ministry ofHuman Settlements and Regional Infrastructure.

Bank staff and consultants who worked on the project included:

Name Title Unit George Soraya TTL, Sr. Municipal Engineer EASUR

, Aniruddha Dasgupta Senior Poverty Specialist, Infrastructure EASUR Sector Coordinator. Rumana Huque Sr. Urban Specialist Yogana Prasta Disbursement, Institutional Development osu Specialist Parwoto Sugianto Comniunity Development Specialists Consultants, EASUR Evi Hermirasari Jana H. Uno R. Kumala Farida Zaituni Environment Specialist osu Isono Sadoko Social Specialist Unggul Suprayitno Financial Management Specialist osu Joanne S. Nickerson Operations Analyst ISU, EAP Rizal Rivai Procurement Specialist osu Vivi Alatas EconomistsiPoverty Specialists Menno Pradhan Vijayendra Rao Peer Reviewers DEC Christine Kessides TUDUR Thomas Jeffrey Ramin SDV

Bank funds expended to date on project preparation: 1, Bank resources: $2 15,000 2. Trust funds: $0 3. Total: $215,000

Estimated Approval and Supervision costs: 1. Remaining costs to approval: $100,000 2. Estimated annual supervision cost: $90,000

82 Supervision Strategy

1. The large number ofkelurahan covered under the project and their geographically dispersed locations require an innovative approach to supervision. The presence of the Bank team in the field office in Jakarta is critical, and this team will be in charge of supervision. Since three similar projects are in operation, a programmatic supervision approach will be used using the same team members to ensure consistency of strategy and policies amongst the projects.

2. The first two years of implementation are the most critical. During this period, the Task Team will field at least two full supervision missions for the entire UPP program. In between, the Task Team in the field office will carry out two brief supervision follow up visits to various areas ofthe project. Key issues that supervision missions will focus on will be consultant management and performance), and activities at the kelurahan level. The strategy will be to visit as many kelurahan and OCs as possible during the critical part of the project implementation. It is expected that annually, the team will carry out a thorough review of all OCs, at least 30 local governments, and 120 BKMs, and interview about 1,100 poor households. At least 3% of the total participating kelurahan will be visited annually, and over 15% ofkelurahan by the end ofthe project.

3. This approach has been tested during UPP 1 Phase 2 and has been found to be effective. The Bank is proposing to open new field offices in the regions. A member ofthe Task Team could potentially be located in the proposed Maltasar office to supervise the eastern regions under the project. This will be further assessed during implementation. The Task Team intends to collaborate with other Bank supervision teams such as KDP to carry out joint supervision missions.

4. At the central management level, a monthly meeting will be carried out between the Task Team with the PMU and the NMC to review the status of the agreed action plan as well as progress of the program based on the monthly update of the MIS.

5. The Task Team will also establish a network with NGOs at the central and local level. Under UPP1, the Task Team hired an NGO with a large network in the regions, to carry out random supervision in about 100 ltelurahans. The outcome was extremely useful, particularly in re-orienting the direction of UPP and giving rise to the new approaches applied under UPP2. This strategy will continue under UPP3.

Human Resources Required

6. The Task Team will consist mainly of Bank staff located in WBOJ and one HQ staff that will provide strategic assistance on technical matters and evaluation. In addition, at least five short-term national consultants will be hired annually to carry out various specific activities ofthe project. They will include a community development specialist, poverty expert, data analysis expert and micro credit expert. On an annual basis, an expert from ESSD will be invited to provide a technical review ofthe project. This will be carried out within the context of Bank funded CDD projects across Indonesia. For the impact evaluation, an expert from the Development Research Group (DEC) will be included as part of Task Team.

83 Annex 12: Documents in the Project File INDONESIA: Third Urban Poverty Project

1. PROJECT IMPLEMENTATION PLAN

Draft October 2003

2. BANK STAFF ASSESSMENTS

Procurement Capacity Assessment Report, April 2002 Financial Assessment Report, March 2002 Mid-Term Review ofUPPl, April 200 1 Aide Memoire ofUPP 1, October 16-30, 2001 Aide Memoire of UPP 1, May 30-June 12,2002 Aide Memoire of UPP 1, September 19-October 24,2002 Aide Memoire of UPP 1, February 24-March 18,2003 Aide Memoire of UPP 1, May 20-June 17,2003 Aide Memoire ofUPP 1, August 1 l-September 8,2003 Aide Memoire ofUPP 2, November 19-26, 2001 Aide Memoire ofUPP 2, May 24-June 5,2002 Aide Memoire of UPP 2, March 17-Apr 4,2003 Aide Memoire ofUPP 2, September 23-October 1, 2003 Aide-Memoire ofUPP3 preparation mission, October 2 1-November 6, 2003 Aide-memoire ofUPP3, appraisal mission, February 27, March 15, 2004. Back to Office Report: Mission to Indonesia to review Urban Poverty Program, September 29-October 9, 2003, C. Fallert Kessides. Draft Paper “A Leaming-Implementation Model for Scaling Up Poverty Alleviation: The Indonesia Urban Poverty Projects”, September 2003. Back to Office Report - Thomas Jeffrey Ramin, Senior Social Development Specialist, CDDiSDV February 24,2004

3. OTHER

Draft Project Manual (General Guidelines and Technical Guidelines) Draft Handbooks for Project Implementers Terms of References for NMC, OC, kelurahan facilitators, and community cadres Evaluation Reports for UPP 1 (carried out by Monitoring and Evaluation Consultants) Final Report of UPP 1 Phase 1 Draft Report of Study on ‘Capacity for Collective Action and Poverty Alleviation’ (Qualitative Evaluation of UPP 1 Phase 1 in Java, Sulawesi, and Kalimantan)

84 Annex 13: Statement of Loans and Credits INDONESIA: Third Urban Poverty Project

Difference between expected and actual Origiiial Amount in USS Millions disbursements

Pioject ID FY Purpose IBRD IDA SF GEF Cancel Undisb Orig Fim Rev'd PO59931 2003 Water Resources & In Sector Mgt Pgm 45.00 25.00 0.00 0.00 0.00 70.09 0.00 0.00 PO63913 2003 ID-Java-Ball PwSector & Strength 141.00 0.00 0.00 0.00 0.00 141 .OO 0.00 0.00 PO73772 2003 ID-Health Workforce & Services 31.10 74.50 0.00 0.00 0.00 106.80 0.00 0.00 PO79156 2003 Third Kecamatan Development Project 204.30 45.50 0.00 0.00 0.00 249.38 0.00 0.00 PO76271 2003 ID-PPITA 17.10 0.00 0.00 0.00 0.00 17.10 0.00 0.00 PO40578 2002 ID-Eastem Indonesia Region Transport 200.00 0.00 0.00 0.00 0.00 135.62 16.62 0.00 PO72852 2002 ID-URBAN POVERTY I1 29.50 70.50 0.00 0.00 0.00 102.33 2.94 0.00 PO73970 2002 ID-GLOBAL DEV LEARNrNG (LIL) 2.66 0.00 0.00 0.00 0.00 2.13 0.85 0.00 PO40528 2001 ID-W JAVA ENVMT MGMT 11.70 5.75 0.00 0.00 0.00 16.35 7.26 0.00 PO49539 2001 ID-PROVINCIAL HEALTH I1 63.20 40.00 0.00 0.00 0.00 102.40 40.46 0.00 PO73025 2001 ID-KDP2 208.90 1 11.30 0.00 0.00 0.00 312.46 -17.88 0.00 PO68949 2001 ID-LIBRARY DEV PROJECT - LIL 0.00 4.15 0.00 0.00 0.00 3.1 1 I.46 0.00 PO68051 2001 ID-GEF-W JAVA ENVT MGMT 0.00 0.00 0.00 2.54 0.00 2.63 3.61 0.00 PO49545 2000 ID-PROVINCIAL HEALTH I 0.00 38.00 0.00 0.00 0.00 24.28 7.90 0.00 PO59477 2000 ID-WSSLIC I1 0.00 77.40 0.00 0.00 0.00 70.62 -9.28 0.00 PO59930 2000 DECNT AGRJC/FOREST EXTENSION 13.00 5.00 0.00 0.00 0.00 9.29 3.30 0.00 PO03967 I999 ID-FIFTH HEALTH PROJECT 44.70 0.00 0.00 0.00 5.01 15.56 19.51 0.00 PO40196 1999 ID-SUMATRA BASIC EDUCUATION 54.50 20.10 0.00 0.00 0.00 28.49 19.91 0.00 PO63732 1999 ID-CORPORATE RESTRUCTRG 3 1 SO 0.00 0.00 0.00 24.50 1.11 25.61 0.57 PO64118 1999 WATSAL 300.00 0.00 0.00 0.00 0.00 150.00 150.00 150.00 PO36049 1999 ID-EARLY CHILD DEVELOPMEKT 2 ISO 0.00 0.00 0.00 10.65 3.89 14.37 14.37 PO55821 1999 ID-URBAN POVERTY 0.00 100.00 0.00 0.00 0.00 22.03 23.05 8.44 PO41895 1999 ID-SULAWESI BASIC EDUC 47.90 15.93 0.00 0.00 0.00 32.81 29.54 0.00 PO36048 I998 CORAL REEF MGM REHAB 6.90 0.00 0.00 4.10 0.00 2.46 2.46 1.78 PO48715 1998 Indonesia - IIDP 34.50 0.00 0.00 0.00 8.50 4.19 12.69 4.19 PO36956 1998 ID-SAFE MOTHERHOOD 42.50 0.00 0.00 0.00 9.15 8.43 17.58 11.58 PO39644 1998 ID-W JAVA BASIC EDUCATION 103.50 0.00 0.00 0.00 3.76 17.23 -8.51 0.00 PO40061 1998 BENGKULU REGIONAL DEV 20.50 0.00 0.00 0.00 5.00 10.48 13.75 8.48 P0 4 0 0 62 I998 CORAL REEF MGMT REHA 0.00 0.00 0.00 4.10 0.00 0.55 0.47 1.41 PO03993 1998 ID-SUMATRA REG'L RDS 234.00 0.00 0.00 0.00 50.00 44.70 75.45 -0.90 PO03987 I997 ID-CENTRAL INDONESIA SEC EDU 104.00 0.00 0.00 0.00 0.00 17.59 17.59 0.00 PO36047 1997 ID-BAL1 URBAN INFRA 110.00 0.00 0.00 0.00 36.03 15.81 51.84 1.33 PO04026 1997 ID-Railway Efficiency 105.00 0.00 0.00 0.00 47.33 32.02 79.35 9.37 PO49051 1997 BEPEKA AUDIT MOD PROJECT 16.40 0.00 0.00 0.00 0.90 6.45 7.35 6.45 PO42540 1997 ID-IODINE DEF CONTROL 28.50 0.00 0.00 0.00 9.70 3.27 12.97 10.47 PO401 95 1997 ID-QUALITY OF UNDERGRAD EDUC 7 1.20 0.00 0.00 0.00 9.89 10.95 20.04 10.29 PO41894 1997 ID-SUMATRA SEC EDUCATION 98.00 0.00 0.00 0.00 0.23 9.16 9.39 0.00 PO03700 1997 ID-Solar Home Systems 0.00 0.00 0.00 24.30 16.82 0.90 19.99 0.33 PO04008 1996 NUSA TENGGARA DEV 27.00 0.00 0.00 0.00 4.90 0.04 4.94 0.04 PO37097 1996 ID-E JAVA SEC EDUC 99.00 0.00 0.00 0.00 3.63 12.01 15.65 0.00 Total: 2,568.56 633.13 0.00 35.04 246.00 1,815.72 692.23 238.20 INDONESIA STATEMENT OF IFC’s Held and Disbursed Portfolio In Millions ofUS Dollars

Committed Disbursed IFC IFC FY Approval Company Loan Equity Quasi Partic. Loan Equity Quasi Partic. 2003 Buana Bank 0 00 15.00 0.00 0.00 0.00 15.00 0.00 0.00 1994 KDLC Bali 0 00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0 LYON-MLF-Ibis 2 01 0.00 0.00 2.01 2.01 0.00 0.00 2.01 1985 Man u1 i fe 0 00 0.32 0.00 0.00 0.00 0.32 0.00 0.00 2002 P.T. Gawi 11 50 0.00 0.00 10.00 5.35 0.00 0.00 4.65 1997 PT AdeS Alfindo 0 00 6.98 0.00 0.00 0.00 6.98 0.00 0.00 I989 PT Agro Multo 0 00 2.20 0.00 0.00 0.00 2.20 0.00 0.00 1997 PT Aliimindo IO61 0.00 0.00 6.00 10.61 0.00 0.00 6.00 I989191194103 PT Astra 0 00 2.98 0.00 0.00 0.00 2.98 0.00 0.00 0 PT Astra Graphia 0 00 2.00 0.00 0.00 0.00 2.00 0.00 0.00 0 PT Astra Otopart 0 00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 1993196 PT BBL Dliarmala II 29 0.00 0.00 21.34 11.29 0.00 0.00 21.34 I995 PT Baltrie Pipe 33 24 0.00 0.00 0.00 33.24 0.00 0.00 0.00 1997/00/02 PT Bank NISP 0 00 3.59 0.00 0.00 0.00 3.59 0.00 0.00 I997 PT Berlian 6 77 20.00 0.00 15.48 6.77 16.65 0.00 15.48 0195 PT Grahawita 0 00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 ol9019 1195199 PT Indo-Rama 0 00 3.09 0.00 0.00 0.00 3.09 0.00 0.00 1992194196 PT KIA Keramik 16 51 0.00 0.00 53.49 16.51 0.00 0.00 53.49 1995 PT KIA Seipih 15 00 0.00 0.00 49.50 15.00 0.00 0.00 49.50 1997 PT Kalimantan 20 00 15.00 0.00 3.13 20.00 15.00 0.00 3.13 0100 PT Makro 0 00 1.35 0.00 0.00 0.00 0.79 0.00 0.00 1998 PT Megaplast 5 25 2.50 0.00 0.00 5.25 2.50 0.00 0.00 0193 PT Nusantara 763 0.00 0.00 5.93 7.63 0.00 0.00 5.93 1996 PT Pramindo Ikat 0 00 2.54 0.00 0.00 0.00 2.54 0.00 0.00 1993 PT Samudera 0 00 5.00 0.00 0.00 0.00 5.00 0.00 0.00 1997 PT Sayap 5 83 0.00 0.00 2.00 5.83 0.00 0.00 2.00 2001 PT Sigma 0 00 3.00 0.00 0.00 0.00 3.00 0.00 0.00 1992195 PT Viscose 17 19 0.00 0.00 17.50 17.19 0.00 0.00 17.50 1997 PT Wings 5 06 0.00 0.00 2.13 5.06 0.00 0.00 2.13 2003 SMM 12 00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 2001 Sunson 12 41 0.00 0.00 7.85 12.41 0.00 0.00 7.85 2003 Verdaine I400 0.00 0.00 0.00 0.00 0.00 0.00 0.00 Total portfolio: 206.30 85.55 0.00 196.36 174.15 81.64 0.00 191.01

Approvals Pending Commitment FY Approval Company Loan Equity Quasi Partic. 2003 PT SPA 8.00 0.00 0.00 0.00 Total pending commitment: 8.00 0.00 0.00 0.00 Annex 14: Country at a Glance INDONESIA: Third Urban Poverty Project Technical notes East POVERTY and SOCIAL Asia & Low- indonesia Pacific income IeveloDment diamond’ 2002 P o pulatio n, m id-year (millions) 26.7 1,826 2,511 Life expectancy GNI per capita (Atlas method, US$) 690 900 430 GNI (Atlasmethod, US$ billions) 149.9 1,649 1069 - Average annual growth, 1996.02 Population (%) 16 11 19 Labor force (%j 2.5 13 23 ;N I Gross er +- 4 primary Most recent estimate (latest year available, 1996-02) apita enrollment Poverty (%of population beiow national poverty line) 6 Urban population (%of totalpOpUlatiOn) 43 37 31 Life expectancyat birth (years) 66 69 59 1 Infant mortality (per lo00 live births) 39 36 76 Child malnutrition (%ofchildren unUer5) 34 12 Access to imoroved watersource Access to an improved water source (%ofpopulation) 76 74 76 Illiteracy(%ofpopulatlon age 151) P 14 37 Gross primaryenroilment (%Of SChOOl-agepOpUlatlOn) 08 67 96 .-L-(- Indonesia Male 16 06 63 __ Low-income group Female 06 60 88

KEY ECONOMIC RATIOS and LONG-TERM TRENDS 1982 1992 2001 2002 Economic ratios‘ GDP (US$ billions) 94.7 139.1 1413 i72.9 Gross domestic investmentlGDP 27.8 30.5 218 20.2 Trade Exports of goods and serviceslGDP 25.3 27.9 42 3 35.4 Gross domestic savingsiGDP 29.0 33.4 29 2 27.1 Gross national savingsiGDP . 29.4 26 9 23.4 Current acco unt balanceiGDP -5.6 -2.0 49 4.2 Interest paynentsiGDP 16 2.7 42 2.7 Total debtiGDP 26.5 63.3 94 7 75.1 Total debt servicelexports 43 8 49.7 Present value of debtlGDP Present value of debtiexports Indebtedness 1982-92 1992.02 2001 2002 2002-06 (average annualgrovdhj GDP 6.9 2.5 3.4 37 4.1 e- - Indonesia GDP percapita 5.0 0.9 19 2.2 29 Low-income group Exports of goods and sewices 6.9 3.1 19 -1.2 5.5

STRUCTURE of the ECONOMY 1982 1992 2001 2002 Growth of investment and GDP (Oh) (%of GDP) Agriculture 23.9 17.5 i7 .O 75 20 Industry 37.9 36.3 45.6 44 5 0 Manufacturing 119 8.1 25.0 25 0 Services 38.2 46.3 37.5 38 1 -20 Private consumption 59.5 57.8 63.0 64 7 General government consumption 115 8.8 7.0 82 Imports of goods and services 24 1 25.0 34.9 28 5

______1982-92 1992.02 2001 2002 Growth of exports and imports (%) (average annualgrovdh) , Agriculture 3.8 16 1.0 17 1 40 - industry 9.2 3.2 3.3 37 Manufacturing P.6 4.7 4.1 40 Services 6.5 2.3 4.6 44 Private consumption 4.6 5.0 4.4 47 General government consumption 4.9 0.4 9 .o 728 -60

87 Annex 15: Sample of Sub-project Proposal Format INDONESIA: Third Urban Poverty Project

~~ Format 7-c KSM Proposal for Infrastructure Development -

A. LISTOFKSM

1 No I Name ] MIF I Age I Household size 1 Address

21 I I I I I

B. PROPOSED SUB-PROJECT

1. Description of the sub-project Type ...... Volume ...... Reason ...... Location ...... Construction : [ ] mutual help [ ] partial help [ ] Land ......

3. equipment 4. technical assistance 5. other costs

Implementation schedule Starting date ...... Completion date ......

Implementation arrangements Team responsible for implementation : Name : 1...... n

Procurement plan

No 1 Items to be procured (goods, works or skilled labor) I Procedure I I I

(note: see procurement section in the Technical Guidelines)

88 6. Operations and maintenance

No. I Activities 1 Frequency I Incharge I cost I Source of funds I I I I I

C. SCREENING AGAINST NEGATIVE LIST

Does the proposed activity or sub-project involve, in one way or another, any activities listed below as prohibited to be financed by the UPP3 funds?

No 1 Item I Yes I No I I I 2 I I 3

4 Government administr,,,,,, Dulol I I 5 Environmentally harmful products such as pesticides, ozone - depleting I substances; tobacco or tobacco products; materials containing asbestos; activities producing liquid or gaseous effluents or emissions at harmful levels; activities using, producing, storing or transporting hazardous materials and wastes; logging activities in protected areas; or fisheries sub-projects that are not in accordance with standards set by Dinas I Perikanan 6 1 Illegal activities such as arms, harmful drugs or others

D. SAFEGUARDS

1, Is it possible that the sub-project will have any adverse environmental impact? [ 1 Yes [ 1 No

......

(Note :see environniental guidelines described in Aiinex 2 of General Guidelines)

2. Is there any land acquisition involved? I. I Yes I 1 No

If yes, please describe the following: - Whose land ? ...... - Have the owners been consulted? ...... - What are the compensation arrangements? .... - Who will finance the compensation cost? ......

Is there any resettlement or eviction involved? [ 1 Yes [ 1 No

If yes, please describe the following: - How many people will be affected? ...... (please provide names and addresses as attachment) - Have they been consulted? ...... - What are the compensation arrangements? - Who will finance the compensation cost? ...... (Note: see land acquisition and resettlement policy franieworlc described in Annex 3 of General Guidelines)

89 Is there any voluntary land contribution? [ 1 Yes [ 1 No Ifyes, please describe the following: - How much land will be contributed? ...... - How many people will be affected? ...... (please provide names and addresses as attachment) - Have they all agreed to contribute this land voluntarily? ......

3. Does the proposed activityisub-project have any adverse impact on any cultural property? [ 1 Yes [ 1 No

If yes, please describe the impact: ......

What measures are proposed to mitigate the impact? ......

...... , ...... , 200 ......

I No I Name I Position I Signature 21 I Member 31 I Member

Endorsement bv

Facilitator Coordinator Community Cadre

90 Annex 16: Revolving Funds for Microcredit INDONESIA: Third Urban Poverty Project

Increasing the outreach of prudential micro credit services for low-income groups through community organizations

1. How to Approach BKM Microcredit in UPP3

Like in the Second Urban Poverty Project (UPP2), the entry point and focus ofthe UPP3 approach is the BKM. Aiming at contributing to improving the welfare of the urban poor, UPP3 focuses on enabling BKM and communities to deliver and utilize services that are responsive to the needs and demand of the poor. Based on the identification of beneficiaries and their needs, BKMs may choose to provide micro credit to low-income groups and a revolving fund for this purpose.

Ifthis choice were made, UPP3 success would hinge on the capacity of BKM to manage credit and revolving funds, and on the capacity of credit groups and their members to plan and manage loan use. Whether or not the BKM can sustain its revolving fund will depend on credit quality and financial management capacity. UPP3 gives BKM and community groups the opportunity choices among various poverty reducing activities. Zf BKM and community groups opt for micro credit, however, UPP3 will require them to observe project rules and prudential micro credit standards. The UPP3 micro credit approach will focus on ensuring the quality of both the lender and the borrower side. On both sides the approach has two entry points: (i)clearly defined eligibility criteria for BKM, the manager ofany revolving fund operation (an UPK designated by the BKM), and Community groups to start credit activities; and (ii)project support to strengthen BKM, UPK and community groups in their function to manage credit activities.

UPP3 rules and support services will reflect different organization and management needs depending on the size of revolving funds. The approach makes a pragmatic distinction between BKM with revolving funds smaller than IDK 100 million (=BKM A) and BKM with revolving funds larger than IDR 100 million (=BKM B).

2. Objectives and Support Strategy

BKM should aim at decreasing the demand-supply gap of institutional micro finance. This requires that low-income groups without access to institutional micro finance are well targeted and provided with services that reflect their real demand. Therefore, the development objective ofthe UPP3 micro credit support strategy will be: BKM have increased outreach to low-income groups with prudential credit sewices and revolving fund nzanagenzent.

The direct target group ofthe micro credit support strategy is the BKWUPK. The indirect target group are low-income groups to which BKMAJPK provide credit services. The target group definition of the micro credit strategy is: Low-income groups with profitable business opportunities and adequate repayment capacities who have no current access to institutional credit providers or other prograin credit.

To ensure that the micro credit development objective will be achieved, project implementation will focus on producing five micro credit support outputs:

0 Project support for BKM revolving fund management is prepared.

91 BKM are eligible and prepared to use kelurahan grants for revolving fund activities. 0 Credit groups and members are eligible and prepared to use credit effectively. BKM/UPK capacity to manage credit and revolving funds is strengthened. BKM/UPK information and supervision system is well functioning.

3. Approach for Targeting Low-income Groups in UPP3

While UPP3 targets poorer kelurahan, it provides room for flexible community “self-targeting” of project beneficiaries. This approach will be generally maintained, but credit targeting requires unmistakable information, guidelines and eligibility criteria to ensure increasing outreach to and preventing negative effects for low-income borrowers.

The definition of “low-income borrowers” must be pragmatic and easy enough to serve as a guideline for “self-screening” by community members, and it must be broad enough to include access poor with business opportunities who do not fall under the poverty line of the extremely poor. The definition proposed here is: Borrowers from households with ala aizizual per capita income plus savings lower than the value of 1,000 kg rice per capita calculated at localprices.

The UPP3 credit targeting approach will consist of credit eligibility criteria and three indirect targeting steps:

(i) Identifying community members for new credit group formation: information disseminated about credit functions, target group and eligibility criteria; potential credit group members identified through community self-screening process; eligible candidates select their peers to start with the credit group formation process. (ii) Screening credit eligibility through credit group formation. Credit group formation (both new and existing groups) will be about supplying evidence for credit eligibility. This includes a) becoming capable of analyzing and planning household economy, businesses and credit, and b) ensuring that groups and members are eligible for submitting loan proposals. (iii)Indirect targeting through lending policies. Discourage borrowers outside ofthe target group by lending policies: loan approval dependent on compliance with credit eligibility criteria; maximum loan ceiling for first time borrowers to IDR 500,000 and for subsequent loans to IDR 2 million; maximum loan term of 12 months but in line with loan use; at least monthly installment frequency and interest payments; interest rates that reflect current rates of local banks, operating and loan loss costs, and the need to sustain the net value of capital.

4. Principles of the UPP3 Microcredit Approach

4.1 Revolving Fund Governance and Management

0 Clear ownership: revolving funds as institutional capital 0 Bylaws determine objectives and regulations of this institutional capital. 0 Objective: increasing outreach to low-income groups without access to institutional credit through prudential micro credit services. Revolving fund management separated from other BKM activities; operational autonomy for UPIC. 0 Credit procedures in one hand and credit decisions subject to prudential micro credit standards, not participative deliberation and voting in public meetings. Direct lender-borrower relationships in all credit procedures.

92 0 UPK managers are capable persons and graduated from training courses. 0 UPKs have standard accounting and financial reporting system. UPKs are supervised, internally by supervisory body, externally by capable consultancy & supervision institution.

4.2 Credit Access, Services and Management Potential borrowers are aware of credit functions, procedures and eligibility criteria. 0 Credit groups meet eligibility criteria and are capable of analyzing and planning of the businesses and household economy of their members. 0 Credit access only for borrowers with profitable business opportunities and repayment capacity, but without access to institutional or program micro credit. 0 Borrowers pledge guarantees, i.e., measurable efforts ofjoint responsibility and collateral savings, to get access to credit. 0 Gradual access to credit based on track records. Low maximum loan ceiling for first time borrowers, higher maximum ceilings for well performing borrowers. 0 Well performing borrowers have sustained access to credit. 0 Loan amount and terms reflect real credit demand and repayment capacity. 0 No loan for purposes other than business development. 0 Interest rates reflect local market rates; cover operating and loan loss costs, and sustain the net value ofrevolving fund capital. 0 Incentive for timely repayment as part of the interest rate composition. 0 Discourage UPK from mobilizing savings from the public. Encourage credit group members to develop regular savings habits.

4.3 Microcredit Support System and Exit Strategy Micro credit support strategy based on logical framework. 0 Project M&E separated from UPK M&E and supervision. 0 Standardized accounting system of UPK as basis ofUPK M&E and supervision. 0 Improved quality ofUPK information system as part of supervision function. 0 All project activities related to the micro credit support strategy management by central micro credit team and regional micro credit experts. 0 Each project region cooperates with extemal consultancy & supervision providers. 0 UPK and credit groups graduated from training before starting credit operations. 0 Focus on improving the quality of credit and revolving fund management. 0 Discourage BKM without adequate management capacity to establish large loan funds. 0 Assist sound and potential UPK to prepare institutional development plans and sustain access to consultancy & supervision services. Ensure that profitable BKMLJPK with large and growing revolving funds gradually take over the costs for technical assistance and supervision.

5. Eligibility Criteria

5.1 BKM The decision to set up a revolving fund is democratically legitimated, based on real credit demand, and reflected in the Community Development Plan.

93 Separated revolving fund management from other operations section for BKM A (Selcsi Kredit Micro or SKM); organizationally separated unit for BKM B (Unit Kredit Micro or UKM). Agreed upon bylaws for revolving fund operations: as part of BKM (A) bylaws; separate UKM bylaws for BKM (B). Bylaws define revolving fund allocations as institutional capital to be used for serving low-income borrowers with profitable business opportunities but without access to institutional credit providers. SKMAJKM has personnel with adequate experience and background, graduated from the basic and, for UKM, the advanced revolving fund training course. SKM/UKM has standard UPP3 accounting and financial reporting systems, separated from other BKM transactions. BKM (A) has assigned a member of its management board to supervise its SKM, or (B) has established a separate supervisory board for its UKM. Qualified external SKM/UKM supervisor is available and accepted by the BKM.

5.2 Credit Groups Credit group menibers: trust each other and are able to work together; regularly deposit savings; participate in-group meetings to analyze and plan household economy, business opportunities and credit demand. come from low-income households; have profitable business opportunities; and have no access to institutional credit or to credit programs. Credit groups: have a legitimate and active management committee; have agreed upon group objectives, activities and rules; carry out regular group meetings to plan and monitor activities; have a basic group and financial administration; have loan passbooks for each member; and submitted joint responsibility agreement signed by all members.

6. UPP3 Microcredit Support Services

6.1 BKM (i) Inception training course for BKM leaders, including: (i)UPP3 micro credit approach; (ii)substance of eligibility criteria; (iii)identification of credit demand for preparing the community development plan; and (iv) revolving fund organization and management. The one-day course will be carried out by OC staff, especially the micro credit expert. (ii)Technical assistance will be provided by the OC and extemal consultancy service provider for setting up an adequate revolving fund organization and management. (iii)Supervision/M&E refers to inspecting whether the BKM has met all eligibility criteria for setting up a revolving fund. This inspection will be carried out by the OC and will be documented in the BKM revolving fund eligibility form.

94 6.2 SWUKM (i) Basic training course on: UPP3 micro credit approach; basic accounting system; credit groups functions; loan proposal planning; credit group supervision; credit analysis and procedures; financial reporting; consultancy and supervision services. The 5-days course will be carried out by the OC micro credit expert and outside training providers based on modules prepared at the central level. Both SKM and UKM staff have to graduate successfully (certificate) from this course prior to credit operations. (ii)Advanced UKM training course on: organization management; advanced accounting system; financial management; product development; UKM development planning. The 5-days course will be carried out by the OC micro credit expert and outside training providers based on modules prepared at the central level. The UKM manager and loan officers have to graduate successfully (certificate) from this course within 3 months after the volume of the revolving fund exceeded IDR 80 million. (iii)Technical assistance to SKMAJKM will be provided by external consultancyhpervision (CS) providers. It will comprise the initial setup and monthly routine visits to solve current problems. Results will be documented in monthly CS reports that focus on problem analysis and follow-up recommendations. The report will be made available to BKM and OC. (iv) Supervision of SKM/UKM will be carried out by external CS providers on the basis of standard instruments through monthly off-site supervision based on financial reports submitted by SKM/UKM. Supervision results and advice will be documented in monthly CS reports, quarterly on-site supervision, and a comprehensive inspection of SKM/UKM management, accounting, and credit services. The supervision report will include a rating ofthe SKMAJPK soundness. The report will be made available to BKM and OC. (v) Phasing-out support will be provided during the last six months prior to project termination. Based on an evaluation of SKMAJKM soundness and development potentials, sound and potential UKM will be assisted to prepare basic conditions for becoming sustainable micro credit institutions. Sound and potential SKM will be assisted to sustain revolving fund operations. Sound and potential SKMAJKM will be assisted to buildhtrengthensecondary structures (association) for proving support services to their members and to gradually take over costs ofconsultancy and supervision services.

6.3 Credit Groups (i) Inception training course on: credit functions and eligibility criteria; business and household economy planning; loan proposal procedures; credit management functions ofthe group. The training course will take 2 days (effective) and is carried out by ltelurahan facilitators, community cadres and outside resource persons. (ii)Practical training in-group meetings as part of the group formation process or as part ofpreparing existing groups: transforming inception training into practice. This will take at least three group meetings and will result in a business and household economy plan for each group member. The training will be carried out by community cadres and will be attended by SKMAJKM staff. (iii)Technical assistance will be provided, i.e., for loan proposals preparation by Community cadres and SKM/UKM staff who will participate in all group meetings prior to loan disbursement. Community cadres and SKMAJKM staff may seek external resource persons, if needed for solving special problems.

95 (iv) Supervision/M&E comprises two approaches: participation in group meetings and credit supervision. Community cadres and SKM/UKM staff will evaluate whether group members supply evidence for their credit eligibility. Results will be documented in one credit group eligibility form. Credit supervision by SKMLJKM includes on-site inspection of loan use and off-site monitoring of loan repayment.

7. Implementation Process of the UPP3 Microcredit Support Strategy

7.1 Preparation Phase Central level UPP3 micro credit support strategy is agreed upon; UPP3 general and technical manual prepared in line with strategy; 0 Central micro credit team active; Revolving fund management instruments prepared; Handbooks for SKM/UKM and credit groups prepared; Handbooks for BKM and project staff in line with micro credit strategy; 0 Training system, modules and training implementation plan prepared; Consultancyisupervision system and implementation plan prepared; and SKM/UKM monitoring and evaluation system computerized. Relsional level 0 Regional stakeholders informed about micro credit strategy; OC micro credit expert active; Implementation ofmicro credit support system planned; Extemal consultancy/supervision providers identified and assigned; Project staff trained; and SKM/UKM monitoring and evaluation system computerized. Kelurahan level Community informed about micro credit strategy and eligibility criteria; BKM inception training carried out; Credit demand identified for community development planning; BKM decided upon: revolving fund allocation, SKM/UKM organization and staff; SKMKJKM staff graduated from UPP3 training courses; SKM/UKM organization and administration set up; and SKM/UKM prepared cash flow and activity plans; and BKM eligibility evaluated. Credit group level Members informed about micro credit strategy and eligibility criteria; Credit group training carried out; Members assisted to analyze and plan businesses and household economy; 0 Groups assisted to meet credit eligibility criteria; Loan proposals prepared; and Credit group eligibility evaluated.

7.2 SWUKM Operation and Support Phase SKM/UKM Receive loan proposals, re-check credit eligibility, analyze proposal feasibility; Loan decision and agreement;

96 0 Loan disbursement; Loan supervision and group monitoring; 0 Financial administration, analysis and reporting; and 0 Monthly reports submitted to consultancy and supervision institution. Consultancy and supervision provider

0 Monthly consultancy visits to SKMAJKM; 0 Monthly off-site supervision and data inspection; 0 Quarterly on-site supervision and ranking of SKMAJKM soundness; 0 Monthly consultancy and supervision reports to SKMLJKM; and 0 Monthly consultancy and supervision reports to OC micro credit expert. OC: micro credit expert and database operators

0 Analysis of consultancy and supervision reports; 0 Monthly meetings with consultancy and supervision provider; Data inspection and entry; 0 M&E ofmicro credit support based on logical framework & implementation plan; 0 Recommendations for follow-up actions to regional project management; 0 Monthly monitoring reports and data submitted to central micro credit team; and 0 Quarterly analytical report submitted to central micro credit team. Central micro credit team and database operators

0 Analysis of OC reports and evaluation of SKMAJKM soundness; Data inspection and entry; M&E of support activities based on logical framework & implementation plan; 0 Quarterly meetings with OC micro credit experts; 0 Recommendations for follow-up actions to central project management; 0 Monthly monitoring reports submitted to central project management; and Quarterly analytical report submitted to central project management. Central and regional project management

0 Policy decisions and enforcement of compliance with project rules.

7.3 Microcredit Support Termination Phase Central proiect management / micro credit team 0 Policy and implementation plan for phasing out project support prepared; and 0 Support services for revolving fund sustainability on request. OC / micro credit team 0 Evaluation of SKMAJKM soundness and development potentials; Classification of SKMAJKM according to soundness, development potentials; 0 Identification of additional technical assistance needs of potential SKMAJKM; and Implementation plan for phasing out project support prepared. Consultancy and supervision provider Technical assistance for sound and potential UKM to prepare future as sustainable micro credit providers; 0 Technical assistance for sound and potential SKMto sustain revolving fund operations;

97 Technical assistance for less sound but potential UKM to improve performance; and 0 Final evaluation of soundness and development potential. Sound and potential SKMLJKM

0 SKMLJKM gradually take over costs of consultancy and supervision; and 0 SKMiUKM builds secondary structures (association) to sustain support services for their members after project termination and to network with third parties. Central and regional proiect management Liquidate SI

8. Organization and Management of UPP3 Microcredit Support Strategy

8.1 Actors and Roles Community cadres together with kelurahan facilitators are the key persons for ensuring quality on the borrower side. They will be involved in carrying out credit group training, assisting the groups in planning and monitoring activities, and monitoring credit eligibility. Kelurahan facilitators manage UPP3 field implementation. For the micro credit support system, they have to manage credit group support and to assist the community cadres. They are responsible for ensuring and evaluating credit group eligibility. OC and regional micro credit expert. The OC micro credit expert will be managing all inputs of the micro credit support system. He/she will cooperate with and supervise the SKM/UKM CS provider. He/she will cooperate with the central micro credit team, especially in monitoring, evaluating and improving the UPP3 micro credit system. Two database operators will assist the OC micro credit expert. External SKM/UKM consultancy and supervision provider will ensure that: (i)services provided to SKMAJKM improve revolving fund management, and (ii)UPP3 management gets reliable and complete credit and revolving fund information. Central micro credit team. The team will consist ofat least three micro credit experts and will be steering all activities (design, planning, training, technical assistance, monitoring and evaluation) of the micro credit support system. For this purpose, the team will closely cooperate with the OC micro credit expert and the regional SKMLJKM consultancy and supervision institutions. Two database operators will assist the team.

8.2 Monitoring & Evaluation of Microcredit Support Performance Project monitoring and evaluation aims at measuring project performance based on planned objectives, outputs, activities and inputs. The monitoring and evaluation ofmicro credit support performance will be based on the logical framework presented below. It includes 29 performance indicators that will be used to assess whether or not the objective and five outputs ofthe support strategy are achieved. The regional and the national consultants will cany out M&E ofmicro credit support performance. The central and OC micro credit experts will provide major inputs.

8.3 Monitoring & Evaluation (Supervision) of SKMKJKMPerformance Revolving fund monitoring and evaluation aims at improving the quality of SKMLJKM services and management. The monitoring and evaluation of SKMLJKM performance will be based on a

98 standardized accounting and financial reporting system. Information that can be derived from the system includes information about credit transactions and quality, loan portfolio quality, and SKM/UKM soundness with regard to management and financial aspects.

To ensure reliable and complete credit information as well as reliable assessments of SKM/UKM soundness, monitoring and evaluation of SKMIUKM performance will be made an element of SKMKJKM supervision. The project will hire capable extemal CS providers, who will work on the basis ofstandard terms ofreference and instruments prepared by the project. The CS providers are responsible for delivering good quality data and carefully prepared reports on SKMAJKM performance to the project. The OC micro credit expert and the central micro credit team for project management and reporting purposes will process this information.

A note on micro enterprise development approaches and the heterogeneity of the micro enterprise sector Micro enterprise support may comprise approaches such as capacity building for micro entrepreneurs, production and marketing support, micro credit services, and institution building ofboth micro credit providers and micro entrepreneur organizations. Micro enterprise development projects differ with regard to the emphasis given to one of these approaches and, depending on the approach, with regard to outreach scope. Direct micro enterprise developnieiit approaches support the expansion ofmicro enterprises and their graduation to the small enterprise sector. They may provide the whole range ofassistance required and are able to facilitate sustainable enterprise growth, but they reach only a small number of micro entrepreneurs because they must focus on the development ofindividual businesses. Poverty-oriented approaclres aim to integrate low-income people into the micro enterprise sector and are more concerned with the formation of family-based micro businesses. Either outreach is limited by the complex and direct support needed for enterprise formation, or the aim ofreaching as many of the poor as possible reduces the quality of direct support services. Group-oriented approaches try to cope with this challenge by delivering services and strengthening micro entrepreneurs indirectly through their groups and associations. While this approach allows for increasing outreach, it requires considerable investment in the institutional development ofmicro entrepreneur organizations. Minimalist micro credit approaches focus on providing credit and often use group lending to channel credit. They have the advantage ofreaching a large number oflow-income people by focusing on one service, but they must neglect the multi-faceted needs of micro entrepreneurs. Micro pitarice imtitutiori developinelat approaclies focus on the development ofinstitutions that are able to sustain financial services to a growing number of low-income people. These approaches can meet demand with good quality services, but they also lack attention to the complex development needs ofmicro businesses. All mentioned approaches have their advantages and disadvantages. The preference for one of the approaches or a combination ofapproaches depends on development objectives and expected outreach to the heterogeneous micro enterprise universe. The micro enterprise sector covers a great diversity of businesses, technology, and organization of production, market linkages, entrepreneurial attitude, and local economic conditions. The heterogeneity ofthe micro enterprise sector results in a high variance ofneeds, which require different types of assistance. This makes it impossible to standardize support strategies and difficult for large projects that are not specialized in micro

99 enterprise development to effectively support the development ofmany individual micro entrepreneurs. Options for UPP3 UPP3 is a large project in terms of area covered and beneficiaries targeted. Project implementers at the local level are burdened with many tasks other than micro credit and micro enterprise development, and usually lack the skills required for supporting micro enterprise development. This situation limits the choices for the UPP3 micro enterprise development approach. It is not realistic to envisage a direct approach for assisting individual micro entrepreneurs. The UPP3 micro credit strategy takes an indirect approach and includes the minimalist micro credit and the group-oriented approaches mentioned above:

0 if they opt for micro credit, BKM-UPK will be assisted to provide credit services that meet the real demand oflow-income borrowers and their micro businesses; 0 credit eligibility criteria try to ensure that borrowers with profitable businesses are reached; and 0 the credit group formation process will be directed at ensuring that loan proposals are prepared on the basis ofthe real business opportunities ofborrowers, and will include capacity building for borrowers to analyze and plan their businesses. Beyond this micro credit and group approach, UPP3 will apply the following approaches to support the development ofmicro enterprises:

0 Local consultants, kelurahan facilitators, and BKM will be trained to identify micro-enterprise development needs, and to assist micro-entrepreneur groups through facilitating access to governmental and non-govemmental service providers. 0 In selected cities, UPP3 may start pilot programs by sub-contracting capable micro-enterprise development organizations that focus on providing services to the project’s target groups. This requires that such organizations exist, and have intimate and local knowledge ofthe micro-enterprise sector. 0 A major constraint for micro-entrepreneurs is the lack ofinformation. A possible pilot would be to support BKM in developing information centers where the kelurahan community can exchange information and has access to product and marketing information. Also such a pilot would have to be out-sourced to capable micro-enterprise development organizations. UPPl has had little knowledge on the micro-enterprise activities ofits target group. An asset for UPP3 in developing adequate approaches such as the ones mentioned above would be to conduct a series of studies on the business constraints and opportunities ofcredit group members.

100 LOGICAL FRAMEWORK FOR THE UPP3 MICROCREDIT SUPPORT STRATEGY

NARRATIVE SUhlMARY PERFORMANCE INDICATORS SOURCE OF IMPORTANT ISFORMATION ASSUMPTIOKS HIGHER-LEVEL GOAL 1, Increase in business sales, income and capital for Impact studies The econonzic situation of different incomeiborrower classes. low-income groups is 2. Increase in household income, expenditures and assets Impact studies imnproved. for different incomeiborrower classes. MICRO-CREDIT 1, All borrowers are not indebted to institutional credit Loan proposal Borrowers use loans in SUPPORT STRATEGY: providers or credit programs, and 80% of first-time line with loan purpose, OBJECTIVE borrowers had no access to institutional credit in last 3 for improving their BKM lzave increased years. economy. outreach to low-inconze 2. All tirst-time boi-roM,ers are from households with an Loan proposal groups with prudential credit annual per capita income plus savings lower than the value Sustained access to services and revolving fund of 1,000 kg rice calculated at local prices. credit. nzanagenient. 3. Retums from loan use are higher than loan principal Credit studies plus interest. Favorable ec 4. Average repayment rate after final due date higher than CS reports conditi ons. 90%. 5. Loan amount overdue > 1 installment is less than 10% CS reports of the total loan portfolio in 80% of the BKMIUPK. OUTPUT 1 1. National micro credit team and OC micro credit expert MIS reports Project support for BKM active. MIS reports revolvingjrnd manngeinent 2. BKMIUPK training, consultancy and information is prepared. systems ready. MIS reports 3. All project staff informed about the micro credit strategy and trained in accordance with their functions. MIS reports 4. MC implementation plans at national, provincial and district level available. MIS reports 5. External BKMIUPK consultancy and supervision institutions mobilized OUTPUT 2 1. Community and BKM are informed about the micro MIS reports BKM start credit BKM are eligible and credit strategy. disbursement after all prepared to use project 2. BKM meets all eligibility criteria for revolving fund MIS reports eligibility criteria are grants for revolving fund management. Eligibility form met. activities. 3. BKM agrees to comply with project rules and accept MIS reports supervision by external instihition. Agreement OUTPUT 3 1. Group members are informed about the micro credit MIS reports Continued group Credit groups and their strategy. activities and members are eligible and 2. Groups and potential borrowers meet all eligibility MIS reports coherence. prepared to use credit criteria for getting access to credit. Eligibility form eflectively. 3. Credit group (raining finalized before loan MIS reports disbursement. OUTPUT 4 1. Credit products designed to meet demand of and to CS reports SKMIUKM complies SKM/UKM copacity to deepen outreach to loa-income groups. with project provisions inanage credit and revolving 2. Loan approval aiid conditions retlect loan use and CS reports and consultancy I funds is strengthened. repayment capacity. supervision 3. Borrowers with good track records have sustained CS reports recommendations. access to credit. 4. SKMIUKM staff has intimate knowledge of borrowers CS reports and loan use. 5. Loan portfolio quality is improved or good quality is CS reports maintained. 6. Interest income increasingly covers financial CS reports intermediation costs. OUTPUT 5 1. SKMIUKM advised how to improve performance MIS reports SKM/UKM inforinntion ond through monthly consulting visits and reports. supervision systern is 2. SKMIUKM submits on time monthly financial reports MIS reports functioning. to the external supcrvisor. 3. SKMiUKM soundness rated based on financial reports MIS reports and quarterly on-site inspections. 4. SKMIUKM supervisors submit on time inspected credit MIS reports data and supervision results to the OC. 5. Credit data and supervision results are analyzed by MIS reports UPP3 micro credit experts, and are reported to project stakeholders in monthly briefs and quarterly reports.

101 Annex 17: Monitoring and Evaluation INDONESIA: Third Urban Poverty Project

1. Monitoring and evaluation is a key feature ofprojects that are community driven and widely dispersed. A number of important lessons have been learned through the experience with monitoring and evaluation in UPP1. The two main issues in UPPl were the following:

(i) Independent monitoring and evaluation consultants (M&E consultants) were hired for the duration of the project. The National Management Consultant (NMC), which was in charge of project management, was also assigned monitoring tasks. This created some confusion on who was responsible for project monitoring. The NMC relied on the M&E consultants to monitor performance, and since there was little ownership by NMC ofthe results, monitoring reports were not consistently used by the NMC to make management decisions. (ii) The NMC was in charge of setting up a computerized Management Information System (MIS). The Oversight Consultants (OCs),who came on board prior to the NMC, had already developed their own monitoring systems by the time the MIS was set up, with the result that some OCs had dual monitoring systems. This sometimes made it difficult to obtain consistent data for project monitoring.

2. These lessons have been incorporated into a revised M&E system for UPP3. Like in UPP2, in UPP3 the monitoring and evaluation tasks will be separated, with monitoring made the responsibility of NMC, while evaluation tasks will be contracted out to separate consultants on a task-by-task basis.

Implementation Monitoring

3. In UPP3, project monitoring will be the full responsibility of the NMC. The NMC will be hired prior to the OCs, and the OCs trained by the NMC, including training in the use of the MIS. Monitoring will be done with a view to analyzing and improving project management and the results used to make management decisions.

4. The MIS system has been redesigned for UPP2 to streamline data collection and the method of collection ofthe UPP1. Because there will three projects operating at the same time, the MIS for all these projects will have to be integrated and standardize. A team under PMU will be established to integrate the MIS under UPP1, UPP2, and UPP3. Currently, the team is developing the integrated MIS. Monitoring infonnation will be entered into the system using web-based data entry screens (a paper-based system will also exist as a backup and for areas that do not have easy access to Computerized systems). Facilitators will enter kelurahan specific information into the system, for which they will receive training. Community cadres and BKMs will also be assisted in using the monitoring systems, which they will be able to continue to use once the project has concluded. The information will be transferred electronically to the OC and NMC. OCs will provide assistance to facilitatorsiBKMs to operate the system and, where technical resources are insufficient, enter the information provided by the facilitators/BKM into the system. OCs will also enter their process implementation monitoring data into the system. Monitoring data will be available at all levels, allowing for BKMs to benchmark their performance with those of their neighbors. The system will be set up so that it can generate reports for local governments at each level.

5. The monitoring system will take account ofthe open menu nature ofthe project while, at the same time, generating comparable information for investments which are frequently chosen by BKMs. For instance, if the BKM chooses to allocate part of their funds as a revolving fund for micro credit, they

102 will be required to fumish monitoring information for this component using the centrally designed system. The thematic teams in the hTMC in charge of the project components (community development, micro credit activities, the PAPG, and socialization and training) will utilize the information generated through this system.

Project Evaluation

6. Project evaluation will consist of a series of impact evaluation studies and a number of studies to be determined over the course of the project. Evaluation Consultants will be hired on a periodic basis, first to carry out a baseline survey, and subsequently to carry out follow-up surveys and evaluation studies at least three times over the project period. The surveys will investigate the project-govemance-poverty link in addition to the project-investment-povertylink. A control group ofurban kecamatans which are not included in UPP3 will be included in the surveys. The objective ofthe studies is to determine the effectiveness ofthe intervention and the underlying causes. A combination of data from the Management Information System and the above- described surveys will be used to provide an analysis of the impact of the project. The studies are scheduled such that they can feed back into the project design.

7. The studies will aim at measuring the impact ofthe UPP intervention on local level governance and poverty. A control group ofurban sub-districts will be included in the survey to obtain the counterfactual. The 2003 village census data will be used to find similar control sub-districts. Although the excluded sub-districts are excluded because they score the highest on a welfare indicator (also constructed from the village census) it is expected that it will be possible to find matches which are similar to the treatment group. The reason is that the exclusion ofthe richest sub-districts was done by district. So also in poor districts, some sub-districts have been excluded increasing the likelihood that we are able to find appropriate control group sub-districts for poor treatment sub-districts. Any remaining selection bias will be dealt with by applying differences in differences and possibly instrumental variables. The advantage of having a baseline survey is that one is able to apply difference in differences and, in addition, test for the validity ofinstrumental variables to be used in later impact studies.

8. The instruments and methodology to be applied will be developed in close cooperation with the PMUand the World Bank. The Evaluation consultant will need to obtain approval from these institutions before fielding the surveys.

9. There will be a separate allocation of funds to hire local NGOs, universities or qualified individuals to carry out ad-hoc evaluations or surveys on an as-needed basis. An example could be case studies to study the reasons for success of the best performing BKMs. The project will also seek to establish independent “watchdogs” for the project, for example, newspapers which could be contracted to write articles about how UPP3 operates on a regular basis. This has been done successfully in KDP. The project will provide full access to monitoring, financial and evaluation data to these “watchdogs”.

103 Annex 17: Attachment 1

Draft Terms of References for Evaluation Consultants

1, National Evaluation Consultants (NEC) will be charged with carrying out a baseline survey at the beginning ofthe project, and 3 impact evaluations, before the mid-term review, after the mid-term review, and just before project completion. Evaluations will focus on measuring project impact on the ground. Consultants will be hired initially for the baseline survey with a provision for sole sourcing for the subsequent contracts depending on their Performance.

2. The responsibilities ofNEC are to: (i) Conduct a baseline survey and study (early 2005). (ii) Conduct subsequent follow-up impact evaluation survey and studies (3 over a 5 year project cycle)

NEC will be independent and hire its own staff. It will not rely on project staff for implementation.

3. The objective ofthe UPP project is to increase the capacity for collective action in urban communities and to increase the level ofurban services. The studies will investigate the success ofthe three components ofthe UPP project, that is: (i)community development; (2) the kelurahan grant program; and (3) the PAPG program. The success is evaluated by: (i)the targeting ofthe program (did the program reach the poor?); (ii)the impact ofthe program (did the beneficiaries benefit from the program?); and (iii)expected sustainability ofthe component. Sustainability will be measured by investigating whether the UPP interventions has an impact on local level governance and community empowerment (outside ofthe UPP project).

4. Besides measuring the impact, the studies will also:

(i) describe the level ofthe performance indicators. A set ofeasily quantifiable performance indicators is listed at the end ofthis TOR. In addition, a second set is provided ofindicators which are more subjective for which the consultant will need to develop an appropriate measure: (ii) collect and analyze the factors which may effect the impact ofthe UPP interventions; (iii) collect and analyze data regarding the implementation ofthe UPP project (for pre-mid temi review and project completion impact evaluation); (iv) analyze the causal factors ofthe impact results; and (v) provide recommendations for improvements in project design and implementation.

5. The studies will be based on data from the project management information system and surveys to be designed and fielded by NEC. NEC may use existing statistical data sources collected by the bureau of statistics.

6. The surveys will also collect information from a control group ofurban kecamatans from the same provinces as where the UPP3 operated but which did not enter into the project. The control group kelurahans should be selected on the basis ofsimilarity pre-intervention characteristics with the kecamatans which will participate in UPP.

104 7. NEC will make all reports, completed questionnaires, survey design, training documents, documented data files and programs used for the study available to the PMU upon completion ofthe assignment.

Baseline survey

8. The objective of the baseline study is to document the levels ofpoverty at the start ofthe project as measured by the performance indicators. The consultant is expected to develop questionnaires to measure the indicators in close cooperation with the PMU and the World Bank. Before each survey, the NEC will submit the instruments and a methodology document to the PMU and the World Bank. The NEC will need to obtain approval from these institutions before fielding the surveys.

9. It is expected that the survey will apply both structured questionnaires as well as participatory methods. In addition to the performance indicators, the survey will collect information on background characteristics which could also influence the performance indicators, historic ability to obtain credit and grants from other programs and presence and participation in existing community programs. Households and key informants will be interviewed to assess the voice that the poor and community organizations have in local decision-malting.

10. The baseline survey will also sample from households in non-UPP3 (and non-KDP) urban kecamatans in the provinces where UPP3 operates, This sample will form the control group.

11. The baseline survey will collect information from 3,300 households living in 110 kelurahans. The sample will be drawn according to the following stratification rules. 22 strata are defined by the kotas and other urban areas in each ofthe provinces where UPP3 will be active. From each of the strata 2 kecamatans in which UPP is active will be selected. In each of the kecamatans 2 kelurahans will be randomly selected. In addition, from each of the strata 1 control group kelurahan will be selected. In each kelurahan 30 randomly selected respondents will be interviewed. The survey will also survey 2 key informants in each kelurahan. This will add about 220 people to the sample size.

Impact Evaluation Studies

12. Subsequent impact evaluation studies (approximately every 1.5 years) will collect the same information as the baseline survey. In addition, the survey will collect information on the implementation ofUPP and the beneficiaries of the kelurahan grant activities. It will also collect infonnation on the success ofthe PAF activities to that date. The consultant will work from the questionnaires which were developed for the baseline survey with additions for the new coniponents. New components will be developed to interview grant and credit beneficiaries. The questionnaires will also be adjusted to measure the success of the implementation of the UPP components. The surveys will be developed in close cooperation with the PMU and World Bank and approval needs to be obtained from these institutions before fielding the survey.

13. The surveys will be fielded in the same kelurahans as the baseline survey. The survey will interview the key informants which were also included in the baseline. In addition, one UPP facilitators a BKM member will be included a key informant. As in the baseline, the survey will sample 30 households in each kelurahan. The sampling will be adjusted to the broadened scope by selecting household as follows: (i) 10 households drawn at random from the kelurahan population; (ii) 10 households drawn at random from those who have obtained micro credit; and (iii) 10 households drawn at random from those who directly benefited from demand driven grant activities.

105 14. For the final survey, prior to project completion, households will be re-sampled (possibly also beneficiaries). The design ofthe questionnaire will be adjusted by the consultant to collect information on expected sustainability ofthe project.

Specialist Required

15, To successfully conduct the above tasks, the MEC requires the following:

a. Team Leader (4 mm x 4 studies) Minimum S-1 with experience in leading a consultant team, and at least 5 years relevant work experience in socio-economic surveys and analyses 0 Fluency in the English and Indonesian languages, both oral and written 0 Must have the capability to lead experts team, and able to cooperate with other team, either with government, consultants, community in doing the obligation. 0 Able to demonstrate intellectual leadership in analyzing local institutional development in relation to a governance issues and impact evaluation studies. 0 Demonstrated ability to plan and to implement surveys that focus governance issues.

b. Evaluation experts (3 x 4mm x 4 studies) 0 Reputable social scientists with extensive experience in evaluating and researching either poverty alleviating or community development programs; evaluation experts will each focus on: 0 baseline and impact evaluation; 0 indicators and in-depth studies; 0 random sample surveying for verification; 0 minimum S-1 in relevant field and had at least 5 years in relevant work experience; and experienced in evaluating community development and poverty alleviation programs

c. Statistician and Data Management Specialist; ( 4mm x 4 studies) Minimum S-1 from Information System, Statistics, Economy, or Technical Bacltground. 0 At least 5 years in relevant work experience Skilled in various computer applications such as SPSS, Access, SQL, generic database, and spreadsheet Possess expertise and experience in statistical analyses of surveyidata 0 Capable to develop an information system support, easy and friendly to access, and up-to-date

d. Several Assistants 0 Minimal S-1 with relevant background 0 At least 2 years in relevant work experience, especially in research

e. Various outsourcing sub-contracts as needed with local universities, NGO’s, and/or individuals for specific locations, studies, and/or surveys.

106 Schedule

16. NEC's initial contract for baseline survey should begin pre-project implementation in early 2005, and will continue for 6 months. First impact evaluation study will take place prior to the mid-term review, also for 4 months. The second impact evaluation study will take place 8-12 months after the completion ofthe mid-term review, also for 4 months. Finally, 4 months before the project completion date, a final impact evaluation study will be undertaken, also for 4 months.

Presentations, briefings

17. NEC will present finding and results of each studyisurvey to the PMUand other UPP3 stakeholders in a 1-day briefing, presenting findings, as well as possible solutions to any problems identified.

Repor ts

18. For each separate survey/study, the NEC is responsible to prepare and submit an inception report, mid-term study/survey progress report, and a final report of work completed to the client.

a. Survey/study Inception Reports (40 exp. At each survey round) 0 This report explains the NEC survey instruments and study methodology and consultant team work planning. The report needs to be approved by the client and the World Bank before field activity proceeds.

b. Report on field test (40 exp., at each survey rounds) 0 Report on the field-testing of the survey, problems encountered and adjustments made.

c. Final Report (40 exp., at each survey rounds) 0 This report contains a detailed summary ofthe execution ofthe NEC studyisurvey, including all tasks and final results. This report will should be submitted to the client to longer than 60 days after the execution ofthe survey. The final report will also contain the levels of the performance indicators.

d. Executive Summary (50 exp., at each survey round) This report is a summary ofthe Final Report, submitted in two languages, Indonesian and English.

Performance to be measured and evaluated

19. Easily quantifiable performance indicators: (i) Percentage of poor kelurahan population that attended at least one socialization meeting. (ii) Percentage of kelurahan population aware of UPP3 and its objectives. (iii) Percent of kelurahan population aware ofCommunity Development Plan. (iv) Percentage increase in credit at market interest rates to householdsimicro enterprises. (v) Percent ofhouseholds whose income increased after having received UPP credit.

107 (vi) Percentage poor among direct beneficiaries of other services provided under kelurahan grant mechanismi percentage poor in kelurahan population. (vii) Percentage of kelurahan population aware of PAPG in PAG participating cities. (viii) Percentage of poor among direct beneficiaries of other services provided under PAPG/ percentage poor in city population.

20. More subjective performance indicators: Established mechanism for the poor to express their needs and aspirations in local decision-making, measured through. % households able to articulate problems & discuss nature ofpoverty in their neighborhoods. % households living in ward (lteluralian) with a community organization that is effective; representative; participatory; accountable; and trusted by communities, and which is able to influence local decision making. Improved efficiency ofkelurahan investments through increased accountability and increased community participation. Increase in the number of community organizations that are represented by federations at the city level that are capable ofincreasing local government responsiveness. Established mechanism for the poor to access services, measured through: % households that received skills training or advice which increased their earning ability % households that directly benefited from infrastructure improvements. % households that experienced improvement in access to basic services All measured according to welfare levels. Continued involvement of community organizations in local government decision-malting measured through. amount oflocal government’s own funds allocated through similar processes during the course ofproject and after. Amount oflocal govemment funds channeled to ltelurahan organizations in addition to project funds. % households aware ofPAPG allocation decisions. % households that directly benefited from infrastructure improvements. % households that experienced improvement in access to basic services Measured according to welfare levels.

108 Annex 18: Strategy to Reduce Fraud and Corruption INDONESIA: Third Urban Poverty Project

I. Executive Siininzavy

1. The objective of the UPP 3 Anti-Corruption Action Plan is to identify corruption risks and mitigation measures beyond the standard control systems employed by the Bank. While more detailed, program specific control systems are outlined in Annex 7: Financial Management & Disbursement Arrangements and Annex 8: Procurement Arrangements, this Action Plan: (i)maps potential risks of corruption; and (ii)presents program activities to address these risks in the form of an Action Plan.

2. The project follows a learning approach and implementation experiences will be continually incorporated into the implementation processes. The Anti-Corruption Action Plan should therefore be seen as a starting point and not an all-inclusive list ofmitigation measures.

3. Corruption Mapping. The matrix included in this action plan identifies some potential risks of corruption and specifies some appropriate mitigation measures that have been agreed to by Kimpraswil (see table below: Corruption Mapping Matrix). The mapping exercise is repeated during the lifetime of the project to incorporate innovations and lessons learned.

4. The Action Plan. The strategy of anti corruption has been developed for two separate entities, i.e., one at the central level (involving Kimpraswil as the Executing Agency), and one at the community level (as the beneficiaries of the Project as well as the implementing units of the sub projects). Community level participation and empowerment are crucial to the success ofthe project. Together, these factors will inspire greater accountability and better governance. This Project empowers the community (the beneficiary of this Project) to officially manage the sub projects and be responsible for the technical quality of deliveries and output at the Kelurahan level. The design of the project incorporates careful socialization and transparent management techniques that enable the necessary participation and empowerment. Active participation from within the members of the community is required in planning and developing sub projects. In addition, the Program provides funds channeled directly to the community, i.e., to the BKM account in the case of Kelurahan Grants and to the Dinas/BKM joint account in the case of the Poverty Alleviation Partnership Grant. Once the beneficiaries fulfill the draw down conditions, the fLnds are remitted from the Special Account within a few days. Simple, standard formats are used for recording and reporting the use of funds. This simplification reduces the need for special skills whilst malting the system more transparent and accountable. Through active participation, there is a greater likelihood of communities to demand services ofthe urban local governments and ensure that resources earmarked for effective management and to iniprove their livelihoods are transparently accounted for.

5. Some ofthe most important aspects of the anti corruption action plan can be summarized into the five key elements that follow. Undeqinning each of these elements is the careful consultative process that ensures participation and empowerment.

A) Enhanced Disclosure Provisions and Transparency. The program will take the Bank’s new disclosure provisions one step further by simplifying disclosed material and making them readily available through public information centers. Salient information will be made readily available to communities by a range of other means, including public meetings and notice boards. Specific disclosure measures will include, but not be limited to:

109 Public disclosure of annual procurement plans and schedules (and their updates), bidding documents and requests for proposals. Disclosure to all bidders ofthe summary ofthe evaluation and comparison ofbids, proposals, offers, and quotations, after the successful bidder is notified. 0 Disclosure of audit reports.

B) Civil Society Oversight. The program recognizes that greater oversight by civil society is likely to reduce the risk of corruption and misuse of power. The program involves a high degree of formal participation by community groups within the areas of beneficiaries, the private sector, and traditionalladat and religious leaders, through the monitoring ofthe projectdend results, memberships of the tender committee, and the evaluation of the quality of delivery procured services/products.

0 Existing NGOs and other civil society organizations will be involved in a variety of ways, inter alia: (i)through participation in the regional workshops; (ii)as key resource persons for the development ofCDPs where possible; (iii)as members of the PAPG Selection Committee; (iv) as evaluators on an ad-hoc basis; and (v) as training providers in particular skill areas.

C) Mitigating Collusion, Fraud & Nepotism, Opportunity for collusion and fraud exist in any project. However, since the central theme of this project is improved and more responsive governance, many ofthe possible risks are mitigated as a result of the design. Transparent and well-advertised procurement under the program with appropriate oversight will reduce this form ofcorruption. Additional auditing and procurement procedures are proposed, such as oversight by technical assistance and capacity building TA procurement and financial management specialists mapped to each region. At the central level, there will be a committee to be formed to regularly evaluate the performance of the consultants who are hired under the Project, and make the results circulated to the relevant technical parties. Cases of collusion, fraud and nepotism will be reported directly to the authorized agency mandated under the Indonesian law, which is the attorney general office. In the case of collusion, fraud and nepotism within the community, the cases will first be reported, discussed, and decided at the community meeting (Rembug Warga) prior to their submission to the attorney general office. Experience in other CDD projects indicates that many risks can be mitigated by the threat and use of community-based sanctions such as those used under UPP Iand 11.

D) Complaints Handling Mechanism. Complaint handling procedures as currently defined in the Keppres 80/2003 will be strictly followed by also assigning authorized officials to be responsible for maintaining a database ofcomplaints and the follow up actions. While the program is designed to encourage local complaint resolution through formal channel, as well as the pressure from public, in some cases local elites might misuse power and program activities. For these cases, an altemative system has been established through a feedback mechanism at the national level. A special unit designated for handling of complaints will be made available in the NMC and OCs. The complaint-handling unit will investigate and facilitate the resolution ofcomplaints and problems. The database of complaints, follow-up actions being taken, and sanctions applied will be publicized to increase participants' involvement and to increase the likelihood oftheir lodging protests, thereby raising the social costs ofmisuse of funds. This mechanism handles complaints brought to their attention. These complaints will be acted upon in a professional and timely fashion, and without risk ofreprisal to 'whistleblowers' in the public. The complaint handling mechanism developed under the Project also provides wider access

110 for the community for raising and monitoring the complaint through the establishment of an address to mail complaints, which will be posted in the kelurahan’s signboards.

6. Sanctions & Remedies. Clear sanctions and remedies are important final steps in the effort to fight corruption. As already exercised in UPP 1 and 2, this program has a low tolerance for corruption. Communities are encouraged to impose reasonable sanctions on citizens who abuse the power that has been entrusted to them. There is an increasing wealth of anecdotal evidence suggesting that such sanctions can be more easily applied and more effective than protracted legal proceedings, especially in smaller cases ofcorruption. The project does not endorse vigilantism or extreme community sanctions, but in many cases the communities can reach amicable resolutions without resorting to the slow and over- burdened legal system (see box for example). That said, fomial sanctions might also be applied. For example, any official (government, non-government, etc.), community members, or private sector entity participating in the project can be prosecuted if sufficient evidence is available. In all procurement contracts, evidence of corruption, collusion or nepotism will result in termination ofthe relevant contract, possibly with additional penalties imposed (such as fines, blacklisting, etc.) in accordance with Bank and Government regulations. Draw down of funds from the project Special Account to BKMs will be suspended in cases where significant misuse of funds is suspected. At a larger scale, entire Kota (s) may be excluded from participation in the subsequent phase if misuse of funds is suspected to occur widely in the respective Kota (s). Information regarding successful cases, where lessons are learned and funds are retrieved, will be widely disseminated.

~~ ~ Box 1: typical example of community action against corruption In one recent case the community decided to hold a motorcycle, owned by the local treasurer, as collateral until missing funds (Rp. 3 Million or $375) were accounted for and retumed. The treasurer was given a week to return the funds. This was far faster than entering into a legal battle that might well cost far more than the missing amount and take months to resolve.

II, Corruption Mapping Matrix

7. Limiting the occurrence ofcorruption in this Project starts with identifying potential risk areas - this is called corruption mapping. This corruption incentive mapping and identification ofopportunities for corruption will be repeated at least every six months as the project progresses and lessons are leamed.

Opportunity Mitigation Action CORRUPTION of Risk for Corruption MAPPIKGAREA

PROCUREMENT Capacity of the Pimpro MEDIUM Non-independent judgment of - Independent professionals included as part of the and TenderiEval uat ion (Central) the consultant evaluation consultants’ proposal evaluation team Committee process. The decisions tend to - Capacity building for all actors involved in bias towards consultants as procurement, including certification of staff in “instructed” by the higher-level accordance with Keppres 8012003 officials or other parties. - Development of Project Management Manual to streamline all procedures and sanctionicomplaint handling mechanism

Proposal evaluation MEDIUM -Delay in evaluation process that - The Procurement Plan, with detailed timeline, will would benefit exclusive be binding in the Legal Agreement, and will set as consultants the basis for any procurement actions. - Proposals are rejected due to - The Bank would declare misprocurement for any reasons unrelated to the unjustified extension of validity of proposals capacity of consultants in - QCBS procedures with budget ceiling will be carrying out of the followed

111 Level Opportunity Mitigation Action CORRUPTION of Risk for Corruption MAPPINGAREA

contractsiservices . The estimated budget for each contract package - Significantly high technical will be based on actual experience determined scores allocated to the through the extensive survey of similar packages “preferred” consultants such that are currently underway in UPP 1 and 2 that no other consultants can effectively beat their proposals regardlcss of the prices, which could result to significantly high prices - False infonnation about the infomiation provided by the consultants

Award of Contract MEDIUM - The conimittee may call the - The TOR will be designed to be quite rigid prospective winner and negotiate the contract amount - Mandatory disclosure of contract awards - Collusion and nepotism in awarding the contract Quality of delivered MEDIUM - The delivered services are of -Involvement of civil society oversight and services lower quality than the ones supervisory consultants (for example: NMC in the specified in the TOR, and the case of OC, and EC in the case of NMC) in the officials may take kickback inspection of the delivered services through the difference - Enhanced complaint handling mechanism - Significant changes of key staff - Involvement of community groups in monitoring of consultants at the early stage the quality of the consultants’ deliverables of the assignment - Enforce reward punishment system as defined in - Intentionally low quality of Keppres 8012003 supervision of contracts, and kickback from the consultants

MEDIUM Risk of kickback, and budget Mandatory review by the Bank of Procurement Procurement Planning. markup Planning, and disclosure of Procurement Plan in including the one for public domain, including disclosing the contract the sub projects amount

Overall Procurement MEDIUM Risk of kickback, collusive - Enhanced disclosure, complaint handling, and practices to “award” the contract sanctions as defined in Keppres 8012003 to “preferred” consultants, and - Enhanced capacity for the officials involved in lower quality of services procurement decision, including hiring of consultants - Enhanced the control system (internal and extemal) including involvement of professional members of civil society in the procurement decision actions - Development of Project Manuals - Tighten Bank supervision

The final list of MEDIUM - Risk of un-sufficient caDacitv . The criteria and perforniance indicators of Project CPMU, PMU and PIU of CPMU, PMU and PI’U staff. Manager, Treasurer, planning staff, procurem&t staff with their (I) staff, and financial staff. Staff of CPMU, PMU and rexperiences in PIU agreed by the Bank have been incorporated in handling donor the PMM and will be used as the basis of the financing project and annual performance review of the relevant staff (11) history of project . Requirement of POM as a guideline for project management and or iniplementation. treasury training taken - Requirement of Government Project Management,

112 Level Opportunity Mitigation Action CORRUPTION of Risk for Corruption MAPPINGAREA

Treasury and POM training for CPMU, PMU and PIU staff. Annual Training agreed by the Bank on CPMU, PMU and PIU staff.

Audit Report MEDIUM Risk of unavailability of fie implenienting agency will (and the World Bank Publication information on the progress and :an) make publicly available promptly after receipt result of project implementation if final audit reports prepared in accordance with the (including misuse, collusive and oanicredit agreement, and all formal response of the nepotism practice if any). 3ovemment Local Accountability MEDIUM Lack of local experience may The project design includes oversight and Mechanisms result in communities missing supervision to minimize risks. cases of abuse.

3KMs will meet regularly to make collective jecisions on strategic issues, and to review the UPK’s accounts regarding the use of funds. The BKM will also hold annual meetings with the general :ommunity to account for its activities during the year.

Local accountants will audit BKM finances each year. Audit results will be reported to the community at the end-of-year BKM accountability meeting. Ideally, each BKM should be visited at least twice per annum by the NMC.

In order to enhance the quality of consultants’ supervision under the project, facilitators are required to regularly check the BKM and UPK books. They will also need to sign and file a “representation statement” regularly, confirming that they have checked the books and found them satisfactory. The OCs at higher level would randomly check the facilitators’ statements and will also be required to sign and file similar representation statements. A mechanism for checking and applying sanctions will be developed for those filing false statements (sanctions may include job separation).

Limited dissemination LOW Information IS kept limited to Socialization will be carried out through meetings, of information related certain circulation or group of workshops and focus group discussions at the to the Program people only such that non kelurahan, kecamatan, kota and provincial levels. It qualified proposals could be will also include a campaign through newspaper expected spots and radio programs. The socialization strategy is geared towards making cominunities aware of the project’s goals, and its rules and regulations. These are aimed to ensure that stakeholders know what their respective roles and responsibilities are, and how to hold each other accountable for their actions.

113 I Selection of BKM LOW Non transparent process of BKM The selection process of BKM members will be members members which result to low conducted through a transparent and fair election integrity process, with significant participation from the members of the community Channeling of funds MEDIUM Kick backs for the govemnient UPP3 funds go directly to communities, i.e. to the officials BKM account in the case of Kelurahan Grants and to the DinasiBKM joint account in the case of the Poverty Alleviation Partnership Grant. Once the beneficiaries fulfill the draw down conditions, following a request from the PJOK (after verification by the Oversight Consultants), the funds are remitted from the Special Account within a few days.

The procedures, size and criteria for defining grants, eligibility criteria for beneficiaries, and conditions for draw down are all simplified and defined upfront to ensure that stakeholders can understand them easily. For the Kelurahan Grants, the conditions for draw down of funds to BKM are linked to performance rather than inputs, with the first draw down of 20% based on satisfactory completion of the BKM’s Community Development Plan; the second 50% based on indicators of satisfactory utilization of funds and financial management, and the third 30% based on indicators of BKM sustainability. Since communities know how much they should be receiving, it should be harder for officials to engage in rent seeking.

Implementation of the MEDIUM Misuse of funds by the BKM and KSMs are required to prepare and submit reports on sub project investments KSM progress and their use of project funds to the BKMs.

All financial information is made public and displayed in the kelurahans. Minutes of meetings, BKMs’ monthly financial status, , and names and amounts of funded proposals are posted on signboards that are displayed around the kelurahan. Discretion of actors is limited by setting rules that all financial transactions require at least three signatures, two from the elected BKM members and one from the project’s OC. For purchases above Rp.15 million each, the project requires the BKM to conduct a limited bid whereby quotations must be read out in public. For snialler purchases, local shopping must be carried out by two persons who will seek quotations from local suppliers. Local accountants will audit BKM finances each year. Audit results will be reported to the community at the end-of-year BKM accountability meeting.

114 Examples of how corruption was handled in UPPl

BKM Kota Baru, Bekasi, and West Java: The BKM in this kelurahan was not formed in a democratic manner. The BKM chairman was “elected” by manipulation of the head of the kelurahan (the Lurah). The Chairman ran a business which needed cash, so fake KSMs were formed and the money channeled to the Chairman’s business. A young community resident discovered this malpractice who informed the facilitator. The facilitator tried to set up a community meeting with the BKM but was vetoed by the BKM members. The Oversight Consultant intervened and a community meeting was held. The BKM chairman confessed and the money is being returned. New elections produced a new set of BKM leaders truly elected by the community.

BKM Bintoro, Demak: The identity card of some villagers had been borrowed by the members of BKM. The reason was not explained to the villagers. Some BKM members used the cards to create a fictitious KSM called Amana in order to siphon hnds for themselves. Amana owed a debt of Rp. 56 million to the BKM, almost 60% of all delayed micro-credit repayments in the kelurahan. Members of the board used the money for their own purposes -for instance, the treasurer Zaenuri claimed that he had lent Rp 10 million to some friends to start a business trading in ginger. A group of community members decided to form a team - Tim Penyelamat Dana P2KP or ‘Team to safeguard UPP Funds’ . Their primary objective was to remove the old BKM. One strategy was to socialize the problem to the broader community and gainer their support to this end. A second strategy was pushing for the support ofthe Bappeda, the chair of the Government Coordinatioii Team for UPP. After a series of meetings at the Bappeda, the old chaimian BKM agreed to step down.

BKM Cipadung, Bandung: The treasurer was accused of embezzling around Rp. 100 million of the funds. The money was used to build a private Islamic school. The treasurer created two fictitious KSMs, marking up the amounts requested by the KSMs, and hoarding repayments. The community formed a Tim Penyelamat Dana P2KP (Team to Safeguard UPP Funds). This team with the help of the facilitator, acted as a pressure group to solve this case. However, the problem could not be solved at the community level. Eventually, the case was formally reported to the police and the suspect was detained.

115 Annex 19: Strategy to Ensure Gender Mainstreaming and Equality INDONESIA: Third Urban Poverty Project

Women’s participation in the community development process is a key factor in establishing organizations that truly represent all people in the community. It is also important for providing services that respond not only to the community at large, but also to specific needs that women may have. The following gender strategy has been developed for UPP3 to more systematically address gender mainstreaming and equality.

Activities Measures to Ensure Gender Mainstreaming and Equality 1 Socialization and Explain and discuss how important women’s participation is for dissemination at each poverty reduction level (national, Explain gender goals ofproject within its poverty strategy provincial to kelurahan) The communications strategist is responsible for determining the best ways for ensuring that women at all levels receive the same information as the men, using whatever media and language is appropriate, for example; posters, plays, radio, leaflets Regular rapid evaluations by facilitators should identify the effectiveness ofthe materials used and also identify those that are not receiving information in the villages so that new initiatives can be introduced 2 Consultants and Advertisements for all new project staff should state that facilitators ‘women are strongly encouraged to apply ‘ If there are both male and female eligible candidates for positions, females should get priority It is expected that a minimum of one third of consultants and facilitators per province would be women Maternity leave will be according to the laws in force at the current time. Additional costs ofproviding maternity benefits should be included in the social costs ofthe contracts with consultants and facilitators should clarify the provisions. 3 Training ofconsultants Include gender-related issues (meeting techniques, timing, and facilitators facilitation, specific culture local women identification, etc) 4 Simple gender manual Identify local specific and acceptable ways to i)ensure women can participate in all aspects ofihe program; and ii)to - disseminate information to women. 5 Meeting for selection of At least 30% ofparticipants should be women community cadre Equal opportunity for women in cadres’ selection At least 30% of selected community cadres should be women 6 Community cadre Include gender-related issues (meeting techniques, timing, training facilitation, specific cultural issues, local women identification, - etc.) 7 Focus Group Discussion Hold special focus group discussions for women (separately specially on poverty from men) identification, and local Ensure that gender sensitive approacheslmethods are used that institutions analysis match local conditions (place, timing, facilitation techniques, etc.)

116 Activities Measures to Ensure - Gender Mainstreaming and Equality 8 Participants selection for Try and ensure during socialization that 50% of community self survey (Survey participants are women Swadaya) and participatory At least one third of the Survey Swadaya members - planning training should be women 9 Developing Lembaga Masyarakat Try and ensure that 40% of the meeting participants are (BKM) process from women RTiRWiDusun to kelurahan Ensure through socialization that communities are aware that women have equal oppoitunity to be elected as BKM members. 10 Selecting the UPK If there are both male and female candidates eligible, - females should get priority 11 KSM proposal writing Ensure that women KSM proposals are written by themselves (with assistance from community cadreifacilitator if needed) 12 Defining proposals priority by Ensure women KSM who propose can come to meetings ‘rembuk masyarakat’ meeting (Le. be carehl with place and timing of meetings to allow women to participate given their local conditions) Give priority to women’s proposal if they meet the - criteria according to the verification team 13 Monitoring and evaluation Ensure formats for monitoring and evaluations collect formats information on women’s participation in all aspects of the project, including meetings, women beneficiaries, etc. to improve performance if needed. Disaggregate regular MIS data by gender Strategies for ensuring transparency must ensure that women have easy access to the information and that they understand their responsibilities for monitoring the use of the funds. Use participatory methods for monitoring at village level.

117 Annex 20: Socialization and Training Program INDONESIA: Third Urban Poverty Project

Timing Activities Participants Frequency/ Duration Organizer/ Venue Conducted by A. National Package Prior to Project Launching Related lx Few hours Project actual Ministries Management activities of Unit (PMU) the Project - One day Seminar 5-10 Media IX Fewhours PMU - Press Release 3-5 TVS - Press Conference 25 Journalists - 50 Leaflet disseminated - 50 Booklet disseminated Press release Public Before and after Few hours PMU a strategic event Month 1 Web site online Public Continuous Continuous PMU Month 1 Coordination meeting ,411 echelon I 1 x Few hours DGHS conducted by Coordinating related to at center Minister of Social Welfare poverty alleviation movement - 15 leaflets disseminated

Month 1 Central Orientation Workshop 40 person IX I day PMU (COW) (Kimpraswil at Center staff, Project Staff & NMC

40 Manual project disseminated Month 1 3 DGsiDeputies 5 x Few hours Hosted by Package A related to UPP At Center DGHS, financed per event by PMU (Informal meeting with (Including related echelon 1 or alike on UNDP officers poverty alleviation movement & selected & UPP) parliament members)

Month 1 4 Directors 6x Few hours Hosted by Package B related to UPP At Center DGHS, financed per event. by PMU (Informal meeting with (Including head related echelon 2 or alike on oftraining poverty alleviation movement center/BLK) & UPP)

Month 1 Training for NMC & Project 30 Project Staff 1 x 6 days PMU under staff (Basic+Project Cycle) and NMC staff at Center NMC contract

118 - No Timing Activities Participants Frequency/ Organizer/ - Veniie I Duration Conducted by 10. Month 1 Serial informal gathering with Related echelon 1x1 I 2 weeks PMU under (every year) strategic stakeholder to 1 and 2 daylagency NMC contract discuss UPP, PAPG & ND - 2or3 echelon 1 per event - 3or4 echelon 2 per event _. 11. Month 1 LobbylRoving visit to related Related PMU under agencies for poverty ministries daylagency NMC contract alleviation

100 booklet disseminated - - 100 VCD disseminated 12. Month 1 National Orientation 50 Ix 1 days PMU under Workshop (NOW) (Staff of inter- at Center NMC contract ininisterial agencies, DGHS staff, Governor, Prov. Bappeda & Prov. Parliament) - 1 Banners - 60 Leaflets disseminated - - 60 Manuals Project Disseminated 13. Month 2 Basic Training for OC & its 125 OC staff 1 x 4 days NMC - firm at Center 14. Month 2 Project cycle training for OC I 12 OC staff 1 x 3 days NMC staff (1 25-13) at Center - I25 Leaflets disseminated - 125 Manuals Project Disseminated - 13 VCD each title disseminated 15. Month 2 Workshop with medias to 40pofnews 1 x 1 day NMC introduce UPP paper, TV and at Center radio station, joumalists, etc - 40 leaflets disseminated - 40 booklet disseminated 40 VCD disseminated 16. Package C universities + at Center

(Informal meeting with researchers per university scholars & went (1 0 people /event) 50 leaflets disseminated - 50 booklet disseminated - - 50 VCD disseminated 17. Month 20 participants 1 x Fewhours PMU Package D at Center

(Informal meeting with NGO network for poverty - 20 leaflets disseminated - 20 booklet disseminated - - 20 VCD disseminated

119 Timing I Activities I Participants I Frequency/ I Duration I Organizer/ I Venue Conducted by Month 3 Training of trainer (basic, 60 Trainers Ix 2 weeks PMU under project cycle, training (Special at Center NMC contact methodology) for selected Training Team) members ofproject staff, NMC and OC (Become I special training team) I I - 1 Banners - 60 Manual training disseminated + 40 training kits - 60 Manual Project disseminated Month 9 Field of Gov’t CEO s to UPP Gov’t CEOs & 3 x per project 3 days PMU under (started) project areas parliament period NMC contract members Month 12 Workshop for Sharing 7 NGOs, 5 1 x at center 1 day NMC contract Experience with other Universities and strategic stakeholders 8 GO1 Month 13 Field visit of 5 national 2x 5 days PMU under joumalistsimedia journalists NMC contract Month 14 National TV program 3 selected 2 per project 30 hours PMU under National TV period NMC contract stations Month 19 Workshop for Sharing 7 NGOs, 5 1 x at center I day NMC contract Experience with other Universities and strategic stakeholders 8 GO1 Month 20 Writing best practice of UPP Independent 4 x in project 2 month PMU under by independent researcher researcher period NMC contract Month 22 Orientation workshop on Selected local 1 x at central 2 days PMU under PAPG & Neighborhood government NMC contract Development to selected local (Bappeda,KPK government DiTKPP etc) Month 24 Advance Training for Trainer Team of As needed 1 week NMC I 4. B. PROVINCIAL PACKAGE I I Month 2 Advertise of community Public facilitator recruitment to facilitate community development in 14 provinces Month 3 Provincial orientation 50- 100 workshop (Mayor/ Bupati, Capital of under OC Bappeda, 3 Province contract Local parliament members) - 2 Banners - 125 Leaflets disseminated

120 - No -

- 33. 34. - 35.

- - 36. - 31. - 3s. - 39.

- 40.

- 41.

- 42.

- 43.

- 44.

stakeholders .__ 45. Month Strategic Stakeholders 25 Members of S x 1 dayievent KPKD under 6 (started) gathering to discuss the result KPKD + at various places OC contract of community self survey at Strategic - grass root level stakeholders -46. Month 6 Skill Training for PJOK 60 lx 2 days oc 41. Month 6 - Coaching for Facilitators ( 60 Facilitators 20 x / project 1- 2 oc 24 some issues for problem period at Korkot dayievent - solving - by request ) Office 48. Month 7 Radio talk show on poverty Opinion leaders 1 - 3 x 1 weeks oc (before issues and roles of cadres Local gov’t at local radio training of Public station - Cadres) -49. Month IO Radio talk show on Local Opinion leaders 3 - 5 x 1 weeks oc

121 Activities Participants ~ Freceyeyy/ Duration Organizer/ Conducted by (before Community organization and Local gov’t at local radio election of community leaders Public station formation) Radio talk show on PJM I weeks 3C Pronangkis

Formation of BKM forum at I weeks 3C v city level of BKM Kabupaten ] Training on Participatory 30 KPKD and 1 1 x at Kotai 4 days 3C Poverty Assessment for Volunteers Kabupaten KotdKabupaten’s Volunteers (KVs) Lobbiesiroving visit to related Strategic 2 weeks 3C local institutions and strategic Afinstitutions KotdKabupaten stakeholders to introduce PAPG Month 25 Formation of PAPG KPKD, BKM 1 x at Kota / 1 day KPKD & OC (started) Committee Forum and Kabupaten volunteers Training for PAPG committee 30 KPKD and 1 1 x at Kota / $ days oc for selected KotdKabupaten Volunteers FGD on formulation of PAPG 1 day KPKD & OC 16 Committee in the selected city Forum and Kabupaten Workshop on integration of 2 days KPKD & OC city development plan with PJM Pronangkis DPRD, Caniat, BKM Formation of Partnership BKM, Dinase I 1 x at Kota / 2 weeks BKM & OC Committee (Panitia and volunteers Kabupaten Kemitraan) at keliirahanidesa level Assessment and prioritizing 1 x at Kota/ 3 days oc joint proposals and Committee Kabupaten ip dissemination Meeting to discuss 1 x at Kota / 1 day oc community responses to list Committee Kabupaten of priorities Disseminating of the result of OC, PJOK, 1 x at Kota / 3 days OC & MNC verification on the KPKN Kabupaten performance of Partnership Committee (panitia kemitraan) and implementation of the proposal Disseniinating best practice of KPKD and 1 x at Kota / 3 days OC & MNC PAPG Kabupaten Committee Training for Neighborhood 4 days oc

Development committee for Volunteers ~ Kabupaten selected KotdKabupaten

D. Kecamatan Package Kecamatan Orientation Ix Camat under Workshop (KOW) LurahiKadesI at Capital of day OC contract Strategic Kecamatan I stakeholders I- Icecamatan) 122 - No Timing Actkities I Participants I Frequency1 I Duration Organizer/ - Venue Conducted by Per Kecamatan - 1 Banners - - 40 Leaflet disseniinated 65. Month I1 Basic training" for UPK. UPS I 90 UP members BKM & OC - and UPL 66. Month 12 Skill training for UPK I30UPK BKM & OC (Fund management & book Kecamatan keeping, principle of micro I finance)Skill training for - UPK 67. Month 12 Skill training for UPS 30 UPS 1 x at Capital of 6 days BKM & OC - members Kecamatan 68. Month 12 Skill training for UPL 30 UPL I x at Capital of 6 days BKM & OC - members Kecamatan 69. Month I6 Refresherisharing experiences BKM & PJOK 3 x at Capital 1 day TF (started) for BKMiPJOK in line with of Kecamatan - trenches 70. Month 16 Refresherisharing experiences CVs 3 x at Capital of 1 day TF - (started) for comm. volunteers Kecamatan 71. Month 12 Sltill training for BKM Some of BKM 1 x at Capital of 4 days TF (Team building, non profit members Kecamatan organization, fund raising, - writing proposal) 72. Skill training on project Some of BKM 1 x at Capital of 2 days oc - appraisal for BKM members members Kecamatan - - Assumption one kelurahan consists of 10 RWs and 1 RW consists of 10 RTs 73. Month 5 Social mapping by facilitator I Kelurahan I lx at Kelurahan I 1 month Team Facilitator - community (TF) 74. Month 5 Kelurahani I I month TF UPP to ltelurahanidesa infonnal Desa apparatus & strategic leaders, stakeholder prominent

- 75. Month 6 Community gathering to 150 participants 1 x at kelurahan I dav discuss UPP 3 (accept or (adult people) / desa reject) - 76. Month 6 Registration of community 50 participants 1 x at Kelurahan 2 weeks TF volunteers - 77. Month 7 Basic training for community 50 participants 1 x Kelurahan , 4 days TF volunteers

- 78. Month 7 Coaching on how to facilitate 50 participants I x 1 day TF - FGD and poverty reflection at Kelurahan 79. Month 8 Implementation of poverty 30 p per 1 x RTiRW 1 day CVs & TF reflection smallest unit of community - Community medidnews letter disseminated 80. Month 8 Community gathering to 150 participants I x kelurahan 1 day CVs & TF discuss the result povcrty idesa - reflection

123 Timing Activities Participants Frequency/ Duration Organizer/ Venue Conducted b Community mediahews letter disseminated Month 8 Registration of additional 30 participants 1 x 1 weeks coinmunity volunteers Kelurahan Month 8 Coaching on Community Self 50 participants I x 5 day Survey (CSS). leadership & (CSS team) at Kelurahani institutional arrangements Desa Month 9 Community Self Survey CSS team + IX 2 weeks CVs & TF community Kelurahan members -I I Month 9 Community gathering to 150 participants 1 x 1 day discuss the result of CSS & at Kelurahani formation of implementation CVr&TF

committee (IC) for BKM ~ Desa

Month 9 Coaching to CVs on BKM 50 participants 1 x 1 day formation at Kelurahani Desa Month 10 FGD on BKM formation (by Community continues 2 months IC, CVs, TF law, criteria of leadership, process election of RTRW delegation)

Month 10 Establishment of local 200 participants 1 x 1 day =IIC, CVs, TF community leadership at Kelurahani institution (BKM) and Desa election of community leaders I-7 Month 11 Basic Training for BKM BKM members lx 4 days at Kelurahan Month 12 Coaching on participatory BKM members Ix 1 days planning (PJM Pronangltis) Community at Kelurahani Volunteers Desa (CVS) Month 13 Community reflection on BKM members IX 2 days TF & OC project cycle & lesson leamed Community at Kelurahani volunteers Desa Month 13 Participatory planning on Kelurahan 1 x year, at 2 weeks PJMiRenta Pionangkis I community Kerlurahan 300 pc Summary of CSS z. Month 13 Formation of KSM Kelurahan At Kelurahani Continuous coinmunity Desa activities Coaching for KSMs libadge of at ltelurahan 1 day I

124 Activities Participants Frequency/ Duration Organizer/ I Venue apparatus t PAPG and Neighborhood Dew yment at kelurahs 'desa level FGD on good governance BKM, 1 x per RW RW community & amaratus Community gathering to Kelurahanidesa 1 x per 2 days review ongoing PJM apparatus, kelurahan i year Pronangkis and updating BKM, CVs, community self survey community Community gathering to Kelurahanidesa 1 xper 1 day introduce PAPG in selected apparatus, kelurahan Committee kelurahanidesa BKM, CVs, community Community gathering to Kelurahanidesa 1 x ltelurahan 1 day introduce neighborhood apparatus, development in selected BKM, CVs, kelurahanidesa community FGD to review the result of Kelurahanidesa 1 x kelurahan / 2 days community self survey apparatus, year BKM, CVs, community 102. Skill training for BKM to BKM members 1 x kelurahan 4 days implement neighborhood & cvs development 103. Workshop on neighborhood Kelurahanidesa 1 x ltelurahan / 2 days development planning apparatus, year BKM, CVs, community 104. Dissemination of Public in 1 x kelurahan / 1 week neighborhood development kelurahan level year plan and disbursement fund 105. Dissemination of Public I x kelurahan i 1 week neighborhood development year best practice.

125 Annex 21: Targeting Strategy INDONESIA: Third Urban Poverty Project

1. The initial target group ofpoor people is approximately 1,736 kelurahans in all provinces in Sumatera, East Kalimantan, East Nusa Tenggara, Maluku, Malulcu archipelago, and Papua. UPP3 also targets 660 existing BKMs the district/municipality ofUPPl and UPP2, which are West Java, East Java, Central Java, West Nusa Tenggara, West Kalimantan, South Kalimantan, and Central Sulawesi. Targeting will be carried out using different means:

2. Experiences with various poverty targeted programs across Indonesia show that the particular design ofa program has limited impact on the effectiveness oftargeting. The effectiveness oftargeting was more dependent on the nature of the service/goods being delivered than the project rules. The project uses a two-stage targeting method. The process in the first stage tries to reach poor kelurahan, and in the second stage, it tries to reach the poor within these kelurahan.

I. Targeting of New Locations for Kelurahan grants

First Order Targeting

3. Based on simulation exercises carried out for UPP3 provinces and in the spirit of decentralization, this project chose to operate in all kelurahan in the selected provinces, and used a simple exclusionary strategy. The selection oftargeted location nomination is illustrated in the diagram below.

4. All district/municipalities already participating in UPP 1 and UPP2 were excluded. All kecamatan already participating in KDP were excluded. From the remaining, the kelurahans regarded as the top 20% richest, as ranked by a composite score derived from PODES, and which have less than 35% pre- prosperous (poor) families were excluded. Kelurahans outside the 20% richest kelurahans and have more than 35% pre-prosperous families were eligible to participate. If there are still funds available, kelurahans which fulfill only one prerequisite (whether outside 20% richest kelurahans or have more than 35% pre- prosperous families) were allocated as reserve kelurahans to participate. This reserve list will be sorted based on ascending order on an average composite score and percentage ofthe number of pre-prosperous family. Further, those reserved kelurahans are weighted again based on the criteria ofnon 20% richest kelurahans and more than 35% pre-prosperous family, to get eligible kelurahans.

5. The lists were verified with each local govemment and some adjustments made depending on current infonnation from local govemment. For example, some kelurahans in the final list may have merged with other kelurahans, therefore, some reserve kelurahans are nominated to be targeted kelurahans.

6. The final number of target ltelurahan will depend on funds available. Each participating kelurahan will be allocated a grant, the value ofwhich depends on the size ofthe population, as illustrated in the table below. For Sumatera, NTT, and East Kalimantan, the minimum amount of the ltelurahan grant is Rp.200 million (US$23,550)/kelurahan. For Maluku and Papua, the minimum amount is Rp.300 million/ kelurahan.

126 Population Size of allocation Size of allocation (Sumatera, NTT, E. Kalimantan) (Maluku, Papua) Small Kelurahan: (< 3000 people) Rp. 200 million (US$ 23,550) Rp. 300 nillion (US$ 35,300) Medium Kelurahan: (3000-1 0000 people) Rp. 300 million (US$ 35,300) Large kelurahan: (> 10000 people) Rp. 500 million (US$ 58,800) Rp. 500 nillion (US$ 58,800)

Second Order Targeting

8. Second order targeting to reach the poor within the ltelurahan will be done by the BKM rather than by project staff or a priori selection. The following measures will be taken to ensure that the BKM targets project benefits towards the poor in communities.

Coiiziizunity Developnient Plans. Awareness raising/socialization at the community level will be geared towards identifying poor groups within the kelurahan and planning programs to support them. The CDPs, which will be developed following a Community Self Survey process using participatory planning methods, will be pro- poor and will be evaluated by project staff to ensure that the process used in their formulation included the voices ofthe poor, thus enabling the community to understand the specific nature of poverty in their areas. The CDPs will set the framework for the kinds ofproposals that will be eligible for grants and for revolving funds.

0 Revolving FZ~IZ~S.Revolving funds will not be targeted directly to the poor. They will rather target community groups (KSMs) with profitable business opportunities and adequate repayment capacities, who have no other access to credit. This is based on the fact that credit may increase rather than decrease the indebtedness of very poor households who do not have profitable business opportunities. Indirect means will be used to ensure that the poor benefit more from loans by: (i)requiring potential borrowers to form groups for loans, and providing loans on group eligibility rather than only individual eligibility; and (ii)loan terms and conditions to discourage borrowers who may have other access to credit (e.g., restricting loan size to small amounts ofRp 500,000 or US$ 58 for first time borrowers; loan duration in line with loan use with a maximum ofone year; usually monthly installments; and interest rates that reflect credit interest rates of local banks as well as the cost of operating and maintaining revolving funds).

Grant assistance for poorest and most vulnerable groups. The CDP may identify extremely poor or vulnerable groups (e.g., disabled, widows, elderly) whose needs may not be met through improving infrastructure or micro-credit services. If the CDP identifies specific individuals for special grant assistance (such as

127 medicinesihealth care, scholarships, food supplements, etc.), up to 10% of the BKM allocation may be used for these targeted populations. e Poverty Alleviation Partnership Grant. This grant will target the partnership committee. The committee is comprised ofdistrict'municipality offices and community organization (BKM), which are acceptor ofassistance at targeted locations. Targeted location is districtimunicipality ofimplemented UPP location. However, due to the limitation of funds, only some district/municipality will be targeted by PAPG grant. Since proposals are being jointly prepared with BKMs, who have already identified priority action for alleviating poverty in their community development plans, it is expected that proposals for the PAPG will also be ofa pro- poor nature. A key criterion for evaluating proposals for the poverty Alleviation Grant will be the numbers ofpoor benefiting from each sub-project.

Fiirther streizgtlieizing ojexistiiag BKMs. This grant will be targeted to certain kelurahans, which have fulfilled the qualification of self-sufficient performance for financing activities in more advance poverty activities. This plan is targeted the poor through its principle ofpro-poor good governance. It will assist the BKM to implement few reforms at the Kelurahan level affecting the poor and improve various access to the public discussion process, as well advocacy to the rights ofpoor on settlement.

128 Selection of Targeted Kelurahan

~~~ Kelurahans in non-KDP kecamatan and lion UPPl & UPP2 r districtimunicipality 1

PODES data kelurahans

Yes I I

Outside 20% richest :o/- n.." No kelurahans

Kelurahans >=35% pra Reserve Kelurahans

Draft List of Draft List of Kelurahan 2 sorted based on Kelurahan 1 ascending order of average composite score and lion pra KS

Select the most eligible kelurahans from draft list 2 based on funding available

Targeted Kelurahans

Roadshow (location verification ) i Final List of Targeted Kelurahans 129 11. Targeting of the selected UPPl and UPP2 Kelurahans for the 2”O grants

9. All the UPPl and UPP2 kelurahan were originally selected using a similar method as for the selection ofkelurahans for the initial grants under UPP3 described above. For the 2’ld grants under UPP3, which will be offered to selected UPPl and UPP2 kelurahan, the following methodology will be used. First order targeting will be through the selection of “well performing BKMs” selected using the following criteria; BKM has satisfactory financial performance (regular annual audit) and has undergone second term election (2ndelection) from their own initiative, in line with the UPP guidelines, with a minimum of20% of the adult population in the kelurahan casting their ballots for BKM election.

10. Second order targeting, will try to reach poorest kelurahans among the selected kelurahans of UPPl and UPP2. Any kotaikabupaten selected under the above process with more than five eligible kelurahans will be qualified. It is expected that about 20% ofthe participating kelurahans ofUPPl and UPP2 or about 660 kelurahans will be selected to receive further technical assistance and the 2’ld grants. In case the number of targeted kelurahans resulting from this process is above the available budget, the kelurahans with the highest number ofpoor households will be prioritized.

11. The final number oftarget kelurahan will depend on funds available. Each participating kelurahan will receive additional grants ofRp. 150 million (US$17,650).

Diagram of the Selection of Kelurahans for Community Grants (2nd grants)

Participating Kelurahans of UPP1 and UPP2

No BKM has financial audit satisfactory

elected with at least 20% adult voters

No Kota / Kabupaten 2 5 kelurahans -pq

c Final list of targeted kelurahans for the 2”d stage grants

130 Proposed Location of UPP-3

'-3" Ex-UPPl& UPP2 Kelurahans for the zndgrants Phase-1: Urban area in: Urban area in: Urban area in Northem Urban area in: - Sumatera Island - Java Coast of Java, plus DI - Kalimantan, - Maluku Island - Kalimantan Yogyakarta, and Kota - Sulawesi, - East Kalimantan - Sulawesi Malang - WestNusa - North Maluku - West Nusa Tenggara - East Nusa Tenggara Phase-2: Tenggara New kelurahans in the Phase-2: - Papua same kotaikabupaten Urban area in - Bali plus Banten Province, Southem Coast of without DKI Jakarta Java 13 15 Number of 58 79 103

660 3.3 Million 1.5 Million

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KALIMANT KALIMANTAN Bandjarmasin Palangkaraya S Palangkaraya 19 19 °

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Banda Aceh Simeulue ° ° ° PROVINCES: 1 2 3 4 6 7 8 9 5 10 0 5 5 15 10

APRIL 2005