Loan No INO: POOR FARMERS INCOME IMPROVEMENT THROUGH INNOVATION PROJECT. INCEPTION MISSION May 21 June 5, 2003 MEMORANDUM OF UNDERSTANDING

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1 Loan No INO: POOR FARMERS INCOME IMPROVEMENT THROUGH INNOVATION PROJECT I. INTRODUCTION INCEPTION MISSION May 21 June 5, 2003 MEMORANDUM OF UNDERSTANDING 1. An ADB Inception Mission (the Mission) reviewed the Project from May 21 to June The Mission started with the kick-off meeting held on 22 May in Bappenas with the participation of the Ministry of Agriculture (MOA) and the Ministry of Finance (MOF) to discuss the status of the Project. After several bilateral meetings to discuss how to accelerate fulfillment of the conditions for Loan effectiveness, the Mission, accompanied by officials of MOA Indonesian Agency for Agricultural Research and Development (IAARD), visited Ende district in Nusa Tenggara Timur, one of the five target districts of the Project. In Ende, the Mission discussed the Project with the district government and the Project Implementation Unit, to review the adequacy of the preparatory work done, discuss the program of activities for prompt implementation upon loan effectiveness, and present ADB s provisions for project implementation and reporting. The Mission also visited several priority villages covered by the Project, to disseminate Project awareness and review with local stakeholders the Project design and necessary preparatory implementation arrangements. As part of the Mission, a workshop was held on 2-3 June with representatives from IAARD and all five target districts, focusing on Project implementation and ADB procedures. This Memorandum of Understanding records the Mission findings and understandings with the Government of Indonesia (the Government) on various aspects of the Project and was discussed in the wrap-up meeting held on 5 June 2003 at IAARD, Jakarta. The contents of this Memorandum of Understanding are subject to approval by the higher authorities in the Government and ADB. A list of persons met by the Mission is given in Attachment 1 of the Memorandum of Understanding, and the agenda of the Mission is provided in Attachment 2. II. BACKGROUND 2. The Project aims at increasing innovation in agricultural production and marketing by poor farmers. Its objectives are: (i) improved targeting of village-level public investments to location-specific needs of agricultural and rural development; (ii) increased access of poor farmers to information; and (iii) a reorientation of agricultural research to marginal rainfed areas. The Project has three components: (a) poor farmers empowerment, (b) development of national and local agricultural information resources, (c) support for agricultural innovation development and dissemination. IAARD is the Executing Agency for the Project, responsible for the overall coordination of Project implementation, and for implementing the components (b) and (c) of the Project. The implementing agencies for the poor farmers empowerment (component (a)) are the offices of the district bupatis in the project districts. The Project will be implemented over a period of five years in about 1,000 villages in the five districts of Temanggung and Blora in Central Java, East Lombok in Nusa Tenggara Barat, Ende in Nusa Tenggara Timur, and Donggala in Central Sulawesi. The estimated total cost of the Project is $71 million, of which $56 million are financed by an ADB loan from its Special Funds. 1 The Mission comprised Paolo Spantigati, Mission Leader/Project Economist and Carol Quintos, Asst. Project Analyst, and Thomas Quiko, Disbursement Analyst, IRM. Farzana Ahmed, Financial Management Specialist, IRM and Sandie Hitojo, Senior Control Officer, IRM participated in the discussions with Project management staff and districts representatives on ADB implementation and reporting procedures.

2 2 3. The ADB loan for the Project was approved on 15 August 2002, and the Loan Agreement was signed on 17 January The conditions for effectiveness have not been fulfilled by the original deadline for effectiveness, 17 April Following the Government request, the deadline for Loan effectiveness has been extended until 17 July The Project is due for completion by 31 December 2007 and the loan account is scheduled for closing on 30 June III. LOAN EFFECTIVENESS 4. The Loan effectiveness conditions relate to: (i) preparation of a Project Administration Memorandum (PAM) acceptable to ADB; (ii) certification to ADB of the allocation of adequate counterpart funds for the first year of Project implementation; (iii) development of selection procedures acceptable to ADB for the selection of national and local NGOs; (iv) issuing of a decree on Project implementation, including roles and responsibilities of relevant agencies, and the flow of funds. 5. The draft PAM prepared by the Project Coordination and Monitoring Unit (PCMU) was discussed and amended to include the comments from the Mission. The attachments to the PAM were completed, with the inclusion of the revised implementation and procurement schedules prepared by the PCMU; and the sample audit letter, the pro-forma of Project progress reports, and a copy of ADB Anti-Corruption Policy provided by the Mission. To maximize Project awareness and transparency, the PCMU will translate the PAM for distribution to the district Project Implementation Units (PIUs) and other central and local agencies and stakeholders. 6. The Mission was informed that Rps 3.39 billion have been earmarked as counterpart funds for the implementation of the Project in 2003, Rps 1.21 billion under MOA budget (DIP) and Rps billion under the five districts budgets (DIPDAs) for FY This is considered adequate, and in line with the Project workplan for 2003 prepared by the PCMU. IAARD will prepare a letter to ADB, for the signature of IAARD secretary, to confirm the budget allocations, with copies of the relevant budget sections from MOA DIP and districts DIPDAs as the certification of the allocation of adequate counterpart funds. 7. The selection procedures for the selection of national and local NGOs previously submitted, have been revised to include the Mission comments on the need for financial criteria for the use of the QCBS method. 8. IAARD has prepared a draft decree on Project implementation roles and responsibilities, and flow of funds. The draft was discussed with the Mission, and Mission comments have been incorporated. To formalize the decree, IAARD will send the draft to MOF, for possible comments and amendments. Following MOF comments, the Chairman of the Project National Steering Committee, MOA Secretary General, will issue the decree.

3 3 IV. PROJECT INSTITUTIONAL ARRANGEMENTS 9. The National Steering Committee (NSC), chaired by MOA Secretary General, and with participation from Bappenas and MOF, has been established on 18 July The NSC, responsible for overseeing Project implementation and providing policy guidance, has started working and met already twice. 10. The PCMU has been established within IAARD on 18 July 2002 and has been actively working on the preparation of Project implementation for year 1, and ensuring that implementation structures are in place. The PCMU will be responsible for coordinating and monitoring the five PIUs, for the poor farmers empowerment component (a), and for the direct management of component (b) and (c) of the Project. The PCMU is headed by a Project Coordinator, and is composed of seventeen staff. A copy of the PCMU organization chart is provided in Attachment All five districts have established, in accordance to Project design, a PIU to manage, coordinate and monitor the implementation of Project activities at the district level. The District Coordination Committees (DCCs), to be chaired and convened by the bupati in each Project district, have been established with a decree of the bupatis. The DCCs have started prioritizing the target villages on the basis of the list of eligible villages ranked by percentage of poor households. A copy of the letters from the five districts bupatis, confirming the budget allocations for the Project under the 2003 districts budgets and the implementation arrangements completed is provided in Attachment 4. V. PROJECT START-UP ACTIVITIES 12. To expedite the recruitment of the consulting services to assist the preparation of detailed implementation plan and procedures, and support the subsequent implementation phase, while fulfilling the conditions for Loan effectiveness, IAARD has prepared a draft shortlist of consulting firms, together with the draft tender invitation documents. Following discussions with the Mission, the shortlist and the documents have been submitted by the PCMU to ADB for approval on 26 May The meetings in Ende, and the workshop of 2-3 June in IAARD in Jakarta acquainted the PCMU and PIUs staff on ADB procedures for Project implementation, procurement, disbursement and recruitment of consulting services. The Mission provided the PCMU and PIUs with ADB s Guidelines for Procurement and the Guidelines on the Use of Consultants, samples of standard bidding and contract documents, and other relevant ADB publications such as the Handbook for Loan Disbursement, the manual on Management of Project Implementation, and the Guidelines for the Financial Governance and Management of Investment Projects financed by ADB. V. OTHER MATTERS 14. Implications of Kepmen 35 of 22/01/2003: The new Decree of the Ministry of Finance on Planning, Executing/Administering and Monitoring of Channeling of Government Overseas Loans to Regions (Kepmen 35) has come into force on 22 January Some of its provisions may affect Project implementation and financial management, notably the ones relating the signing of texts of grant agreements between MOF and the heads of the regions, and the provisions concerning the withdrawal and channeling of grants which do not foresee disbursements through special (imprest) accounts. Given the readiness of the Project, and the strong desire of the districts to start Project implementation without further delays, the Mission

4 4 was informed of Government intention to exempt the Project from the application of Kepmen 35. Loan proceeds will be channeled to the districts as grants, without waiting for the finalization of the format for the subsidiary grant agreement. While Kepmen 35 foresees only pre-financing and direct payment, for the disbursement of funds, the Government confirmed the Mission of the intention to maintain the original design of the Project, which foresees the use of special accounts. The decree on Project implementation prepared by IAARD and to be issued by MOA Secretary General (para. 8) will provide for the specific fund flow mechanisms. 15. Project Design for Village Investments Implementation: IAARD through its PCMU will make particular efforts to ensure that adequate information about the Project and its implementation and reporting procedures is disseminated among all PIUs, Project Inter-Village Forums (PIVFs), Village Project Investment Commissions (VPICs), and the candidate villages. PIUs will be reminded that, as provided by the Project design, no village investment should start, without appropriate previous mobilization of farmer groups and village planning, and institutional development, to be supported by the national and local NGOs and the village facilitators. All village development plans will be prepared in a participatory manner, validated by the VPICs, and approved by the PIVFs. Village development plans and investments, which will not have followed the Project design for preparation, approval and implementation, will not be financed or reimbursed under Loan proceeds. 16. Early Start of Village Investment Activities in Limited Pilot Villages: To ensure prompt start-up of activities, the Government requested the Mission that until the end of 2003, and for a maximum of 10 pilot villages per district where Project groundwork is most advanced, preparation and implementation of village investment plans may start in the meantime that the recruitment of the national NGO and the following selection of local NGOs by the national NGO is finalized. The Mission agreed in principle provided that the plans are prepared and implemented following the Project design, with the help of the village facilitators, finalized and managed by the VPIC and approved by the PIVF. Until the Project local NGOs are recruited and fielded, the PIUs, other district agencies, and existing community organizations will assist the village facilitators and VPICs to ensure appropriate mobilization of farmers groups and village planning, and adequate understanding of Project objectives and procedures. 17. Loan Proceeds Disbursement Conditions: The Mission reminded the Government that following Loan effectiveness, in accordance with the Loan agreement no disbursement of Loan proceeds shall be made: (i) from the imprest account to a Project district for expenditures under component (a) of the Project until the bupati has established the DCC and the PIU, the government of the Project district has submitted to ADB its rehabilitation program for prioritized roads, and a satisfactory implementation agreement has been executed between the PCMU and the PIU in that Project district; (ii) from the imprest account for expenditures for research programs or equipment under component (c) of the Project until IAARD has undertaken assessments of research at all participating National Agriculture Research Institutes, identified technology gaps, and formulated research programs for marginal rainfed agriculture; and (iii) to a VPIC account until a VPIC and village facilitators have been elected in the Project village, and a satisfactory implementation agreement has been concluded between that VPIC and the PIU. 18. ADB plans to field the first review mission for the Project no later than December 2003.

5 5 VI. MISSION FOLLOW-UP 19. The issuance of the decree on Project implementation roles and responsibilities, and flow of funds is the only pending condition for Loan effectiveness. The Government confirmed its commitment to complete the decree as early as possible, and no later than the extended deadline for effectiveness, 17 July 2003, to ensure timely start up of the Project, also considering the districts eagerness to begin implementation. Upon issuing the decree, the Government will send it to ADB, together with a copy of the finalized PAM, the certification of the counterpart funds, and the finalized selection procedures for the selection of national and local NGOs, for ADB final review and declaration of Loan effectiveness. 20. The Mission acknowledges with thanks the excellent cooperation and assistance extended to it by IAARD, MOF and Bappenas, the district officials and stakeholders visited in Ende, and the officials of the five districts met in Jakarta. Signed in Jakarta on 5 June 2003 For the Ministry of Agriculture For BAPPENAS Dr. Djoko Said Damardjati Secretary of Indonesian Agency for Agricultural Research and Development Dr. Ir. Endah Murniningtyas, MSc Director for Food and Agriculture For the Ministry of Finance For the Asian Development Bank Mr. Edi Karsanto Director External Funds Directorate General of Budget Paolo Spantigati Project Economist Mission Leader