Document of The World Bank Group FOR OFFICIAL USE ONLY Public Disclosure Authorized Public Disclosure Authorized Report No. 99172 INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT INTERNATIONAL FINANCE CORPORATION MULTILATERAL INVESTMENT GUARANTEE AGENCY Public Disclosure Authorized Public Disclosure Authorized COUNTRY PARTNERSHIP FRAMEWORK FOR THE REPUBLIC OF INDONESIA FOR THE PERIOD FY16 – FY20 Public Disclosure Authorized Public Disclosure Authorized November 3, 2015 Indonesia Country Management Unit East Asia Pacific Region The International Finance Corporation The Multilateral Investment Guarantee Agency Public Disclosure Authorized Public Disclosure Authorized 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 Group authorization. The last Country Partnership Strategy was discussed by the Board on December 13, 2012 (Report No. 72906-IND) CURRENCY EQUIVALENTS Currency Unit = Indonesian Rupiah (IDR) IDR 13,491 /US$1.00 (as of 23 October 2015) FISCAL YEAR January 1 to December 31 ABBREVIATIONS AND ACRONYMS ADB Asia Development Bank AFD Agence Française de Développement ASA Advisory Services Analytics ASEAN Association of Southeast Asian Nations APBN National Budget/Anggaran Pendapatan dan Belanja Negara Bappenas Ministry of National Development Planning BI Indonesia’s Central Bank BPS National Statistics Agency CGAP Country Gender Action Plan CLR Completion and Learning Review COSO Committee of Sponsoring Organizations CSO Civil Society Organization CTF Climate Technology Funding DAK Specific Purpose Grants DPD Regional Representatives' Council DPL Development Policy Lending DPR House of People's Representatives FAO Food and Agriculture Organization FCS Fragile and Conflict-Affected Situations FDI Foreign Direct Investment FHH Female-headed Households GDP Gross Domestic Product GEF Global Environment Facility GHG Green House Gas GoI Government of Indonesia GP Global Practice GW Gigawatts IDR Indonesia Rupiah IGF Investment Guarantee Fund IIF Indonesia Infrastructure Fund IPF Investment Project Financing (IPF) IPP Independent Power Producers IsDB Islamic Development Bank IUU Illegal, Unreported, and Unregulated (fishing) i JICA Japan International Cooperation Agency Kabupaten Regencies, cities KfW German Government-Owned Development Bank Kota Municipality LUCF Land-use Change and Forestry MCA Marine Conservation Area MDF Multi Donor Fund MFI Multilateral Financial Institutions MoF Ministry of Finance MPR People’s Consultative Assembly MPW Ministry of Public Works MSMEs Micro, Small and Medium Enterprises NAWA CITA GoI’s nine priorities agenda NPL Nonperforming Loan NUSP National Slum Upgrading Program NUWSP National Urban Water Supply Program OSS One-Stop-Shop P2B The Umbrella of Graduation Programs PAMSIMAS Community-Led Water and Sanitation Program PELINDO Indonesia Port Corporation PERISAI Program for Economic Resilience, Investment and Social Assistance PFM Public Financial Management PforR or P4R Program for Results PLN State Owned Power Utility PMO Project Management Office PMU Performance Management Unit PNPM National Program for Communities Empowerment PPP Public-Private Partnership PUSKESMAS Public Primary Health Facility RAS Reimbursable Advisory Services R&D Research and Development REDD+ Program to Reduce Emissions from Deforestation and Degradation REKOMPAK A Community-driven Disaster Reconstruction and Resettlement program RER Real Exchange Rate RPJMN Mid-term Development Plan SCD Systematic Country Diagnostic SJSN Health Insurance-National Social Security System SME Small Medium Enterprise SOE State-Owned Enterprises UHC Universal Health Coverage VAT Value-Added Tax YOY Year-On-Year IBRD IFC MIGA Vice President: Axel van Trotsenburg Dimitri Tsitsiragos Keiko Honda Director: Rodrigo A Chaves Vivek Pathak Ravi Vish Task Team Leader: Josephine M. Bassinette Sarvesh Suri Timothy James Histed ii TABLE OF CONTENTS I. Introduction and key messages ..................................................................................... 5 II. COUNTRY CONTEXT AND DEVELOPMENT AGENDA .................................... 8 II.1. Political and Social Context ................................................................................... 8 II.2. Growth, Poverty and Shared Prosperity ................................................................. 8 II.3. Recent Economic Developments ........................................................................ 12 II.4. Lessons from CPS Completion Report ................................................................ 15 III. PROPOSED WBG PARTNERSHIP FRAMEWORK ............................................... 16 III.1. Building the Partnership Strategy ...................................................................... 16 III.1.a. Government’s Development Agenda: Selectivity Filter One .............................. 17 III.1.b. Development Challenges and Approaches Identified in the SCD: Selectivity Filter Two ...................................................................................................................... 19 III.1.c. Impact and WBG Comparative Advantage: Selectivity Filter Three ................. 21 III.2. Proposed Partnership Strategy ........................................................................... 21 III.2.a. Engagement Area 1: Infrastructure Platforms at the National Level .................. 22 III.2.E. Engagement Area : 6 X V W D L Q D E O H ( Q H U J \ D Q G 8 Q L Y H U V D O $ FFHVV.................. 2 III.2.c. Engagement Area 3: Maritime Economy and Connectivity ................................. 28 III.2.d. Engagement Area 4: Delivery of Local Services and Infrastructure ................... 30 III.2.e. Engagement Area 5: Sustainable Landscape Management ................................... 34 III.2.f. Engagement Area 6: Collecting More and Spending Better ................................. 37 III.2.g. Supporting Beam I: Leveraging the Private Sector: Investment, Business Climate and Functioning of Markets ......................................................................... 40 III.2.h. Supporting Beam II: Shared Prosperity, Equality and Inclusion ......................... 44 IV. Implementing the CPF ................................................................................................ 47 IV.1. Focus and selectivity within the CPF Strategy ................................................... 47 IV.2. Implementing the WBG Program ....................................................................... 48 V. MANAGING RISKS TO THE CPF PROGRAM ....................................................... 53 V.1. Political Economy and Governance Risks ........................................................... 53 V.2. Macroeconomic Uncertainty ................................................................................ 53 V.3. Implementation and Capacity Constraints .......................................................... 54 ANNEXES .............................................................................................................................. 56 Annex 1. CPF Result Framework ................................................................................ 56 annex 2: key macroeconomic indicators...................................................................... 78 Annex 3. Completion and Learning Report ................................................................. 79 Annex 4. Selected Indicators of Bank Portfolio Performance and Management ..... 160 Annex 5. Operations Portfolio (IBRD/IDA and Grants) ........................................... 161 Annex 6 Statement of IFC’s Held and Disbursed Portfolio Committed and Outstanding Portfolio ................................................................................ 162 Annex 7. Consultations of the Draft CPF .................................................................. 163 Map of Indonesia ....................................................................................................... 165 iii LIST OF FIGURES Figure 2.1: Evolution of official poverty rate, 1996-2013 ........................................................................ 10 Figure 2.2: Change in poverty rates 2000-12*, Indonesia versus EAP countries .................................. 10 Figure 2.3: Close to 40 percent of the population was poor and vulnerable in 2012 ............................. 11 Figure 2.4: 75 percent of poor households fail to move out of poverty or vulnerability over a three- year period ............................................................................................................................................ 11 Figure 3. 1: CPF Strategy Emerges from the Intersection of Three Selectivity Filters......................... 16 Figure 3. 2: Government of Indonesia’s RPJM Development Strategy ................................................ 17 Figure 3. 3: The Three Pathways Identified in Indonesia SCD ........................................................... 19 Figure 3. 4: CPF Strategy Emerges from Applying Selectivity Filters ................................................. 22 Figure 3. 5: In-year variance of capital from original budget .............................................................. 38 Figure 3. 6: Indonesian firms are lagging in size, technical prowess, training, and formality............ 42 LIST OF TABLES Table 3. 1: Indonesia ranks low in key aspects of tourism competitiveness ......................................