Republic of Indonesia: Improving Access to Finance in Aceh and North Sumatra

Transcription

1 Technical Assistance Report Project Number: Capacity Development Technical Assistance (CDTA) November 2012 Republic of Indonesia: Improving Access to Finance in Aceh and North Sumatra (Financed by the Japan Fund for Poverty Reduction) The views expressed herein are those of the consultant and do not necessarily represent those of ADB s members, Board of Directors, Management, or staff, and may be preliminary in nature.

2 CURRENCY EQUIVALENTS (as of 3 October 2012) Currency unit rupiah (Rp) Rp1.00 = $ $1.00 = Rp9, 590 ABBREVIATIONS ADB Asian Development Bank BAPPENAS Badan Perencanaan dan Pembangunan Nasional (National Development Planning Agency) ETESP Earthquake and Tsunami Emergency Support Project JFPR Japan Fund for Poverty Reduction LGCGC local government credit guarantee corporation LMS livelihood and microfinance support MOHA Ministry of Home Affairs MRF Microfinance Revolving Fund MSMEs micro, small, and medium-sized enterprises RPJMN Rencana Pembangunan Jangka Menengah Nasional (National Medium-Term Development Plan) TA technical assistance TECHNICAL ASSISTANCE CLASSIFICATION Type Capacity development technical assistance (CDTA) Targeting classification Targeted intervention addressing geographical dimensions of poverty and inclusive growth (TI-G) Sector (subsectors) Finance (microfinance, small and medium sized enterprises finance and leasing, and trade finance) Theme (subtheme) Economic growth (widening access to market and economic opportunities) Location (impact) Rural (high), urban (high), national (low) Partnership Japan Fund for Poverty Reduction NOTE In this report, "$" refers to US dollars. Vice-President S. Groff, Operations 2 Director General K. Senga, Southeast Asia Department (SERD) Director J. Lindborg, Indonesia Resident Mission (IRM), SERD Team leader Team members E. Ginting, Senior Country Economist, IRM, SERD P. Aji, Senior Economics Officer, IRM, SERD K. Hattel, Financial Sector Specialist (Rural and Microfinance), SERD E. Sasaki, Senior Financial Sector Specialist, SERD S. Zaidansyah, Senior Counsel, Office of the General Counsel In preparing any country program or strategy, financing any project, or by making any designation of or reference to a particular territory or geographic area in this document, the Asian Development Bank does not intend to make any judgments as to the legal or other status of any territory or area.

3 I. INTRODUCTION 1. The proposed capacity building technical assistance (TA) 1 will support the provincial government of Aceh and the provincial government of North Sumatra in developing integrated support to improve access to finance in Aceh and Nias, North Sumatra. The TA was first included in the pipeline of the Asian Development Bank (ADB) in May The priority areas covered under the TA were formulated based on discussions with the provincial Government of Aceh, the provincial Government of North Sumatra, the Ministry of Home Affairs (MOHA), the National Development Planning Agency (BAPPENAS), and the Ministry of Finance during ADB fact-finding and consultation missions. An agreement was reached with provincial government of Aceh and the provincial government of North Sumatra on the impact, outcome, outputs, implementing arrangements, cost and financing arrangements, and terms of reference of the TA. The design and monitoring framework is in Appendix The TA is fully consistent with the Government of Indonesia s Medium-Term Development Plan, (RPJMN), which explicitly includes the government s aim to lower the poverty rate to 8% 10% by 2014 by implementing a pro-growth, pro-job, and pro-poor development strategy. The TA also supports the National Financial Inclusion Strategy. 3 The strategy recognizes that improving access to financial services is essential in expanding economic opportunities to poor households. Increasing access to finance for poorer segments of the population will not only encourage economic growth but also improve income distribution. The TA is also fully consistent with ADB s country partnership strategy, for Indonesia. 4 It supports the country partnership strategy s key pillar on inclusive growth. II. ISSUES 3. Although commercial banks have expanded their size and branch network significantly over the last 2 decades, close to half of Indonesia s population still does not have access to formal financial services. About one-third of the country s population does not save at all and can be considered financially excluded. Of those who save, about two-thirds use informal or semiformal non-bank institutions. In terms of borrowings, commercial banks, which dominate the country s financial system, serve only about 17% of the population. One-third of the population borrows from the informal sector; the rest (roughly 40%) do not have access to credit The distribution of access to financial services across the country is also uneven, with places like Jakarta being over serviced relative to the rest of the provinces. Aceh, in particular, is significantly underserved. The amount of credit for working capital and investment relative to its gross regional domestic product is low at 7.8%, compared to the national average of about 32.1%. This reflects the early stage of the province s recovery after the tsunami 6 and the return of peace in In general, the financial sector still finds it difficult to properly price risks of financing longer-term investment in Aceh. As a result, the cost of credit has been relatively higher in Aceh than in other provinces. The banking sector tends to focus on financing consumption and avoids the agriculture sector despite the presence of some production clusters 1 The TA first appeared in the business opportunities section of ADB s website on 25 October National Development Planning Agency National Medium-term Development Plan Jakarta. 3 Government of Indonesia National Financial Inclusion Strategy. Jakarta. 4 ADB Country Partnership Strategy: Indonesia, Manila. 5 World Bank Improving Access to Financial Services in Indonesia. Washington, DC. 6 On 26 December, 2004 a 9.0 magnitude earthquake struck off the Indonesian island of Sumatra, triggering a tsunami that killed more than 240,000 people and destroyed most buildings and houses in Banda Aceh.

4 2 that have high growth potential. Non performing loans increased to 5.2% at the end of 2010 from 2.4% in The increase is partly attributed to the microfinance loans being extended with local government involvement in the aftermath of the tsunami. Some recipients treated the loans as government assistance rather than as a commercial loan. 5. From year after the tsunami, economic recovery in Aceh has been driven by government spending and large reconstruction-related activities. Since 2010, the reconstruction activities have declined significantly. At the same time, the mining sector (oil and gas) has been shrinking gradually and contributing negatively to Aceh s economic growth as output of the existing plants is shrinking. Therefore, the province needs to diversify its economy rapidly and develop other sources of growth. While the manufacturing sector is still struggling to stabilize, agriculture the largest sector in Aceh has good prospects and is recovering strongly. Micro, small, and medium-sized enterprises (MSMEs) dominate the business landscape in Aceh, providing 97.9% of total employment. While their numbers are still relatively small, most of the MSMEs are relatively new and many do not have an established track record with the banking system. They are in need of additional capital for expansion, but their access to capital has been constrained by the lack of collateral. The December 2004 tsunami and March 2005 earthquake also caused severe damage to Nias Island s infrastructure and economy, both of which were already weak prior to the disasters. Economic and social indicators in Nias Island are among the lowest in North Sumatra province and lag behind the national average for most social outcomes because of the island s remoteness and lack of access to services. As in Aceh, economic recovery in Nias Island from year has been driven mostly by government spending and reconstruction activities, which have declined significantly. 6. Providing sustainable access to finance services to support MSME growth and diversification of the province s sources of growth is a key pillar of sustaining poverty reduction in Aceh. While the poverty incidence in Aceh declined to 21.0% in 2010 from 28.4% in 2004, it is still much higher than the national average of 13.2%. In addition, poverty incidence across districts in Aceh varies considerably, from 8.6% in Banda Aceh to 28.0% in Pidie Jaya. 7. ADB provided assistance to support the recovery of the commercial microfinance system in Aceh and Nias Island under the livelihood and microfinance support (LMS) 7 component of the Earthquake and Tsunami Emergency Support Project (ETESP). The LMS focused on rebuilding activities and introducing Grameen-type microfinance to the provincial government-owned rural banks and the private rural banks in Aceh and Nias Island. Under the LMS, ADB supported the merger of Aceh s 12 provincial government-owned rural banks, allocated seed capital in the form of the Microfinance Revolving Fund (MRF), and provided training on the start-up of Grameen-type microfinance operations. Because there were no rural banks in Nias Island, Bank Sumut (the provincial development bank of North Sumatra) participated in the training activities. In addition, ADB provided assistance 8 to pilot commercial microfinance to Bank BPD Aceh (the provincial development bank). 8. ADB s earlier support and subsequent efforts to enhance the rural banking system in Aceh and North Sumatra through LMS and MRF have provided a good base for improving credit expansion in Aceh. However, Aceh is still in the early stages of improving access to finance. Further progress is needed in a number of areas including (i) managing the MRF more 7 ADB Grant Assistance to the Republic of Indonesia for the Earthquake and Tsunami Emergency Support Project. Manila. 8 ADB Grant Assistance to the Republic of Indonesia for the Restoration of Microenterprise and Microfinance in Aceh. Manila.

5 3 productively, while ensuring its sustainability; (ii) enhancing the capacity in Bank BPD Aceh to develop additional microfinance products to suit new borrowers from qualified community clusters in agriculture, fishery, and other sectors; (iii) addressing the local risks affecting access to finance; and (iv) developing a more integrated approach by supporting the capacity of selected producers through community clusters for products such as tuna, patchouli, soft-shell crabs, and prawns. The project completion memorandum of the ADB-provided grant assistance (footnote 8) suggests that capacity building needs to be sustained. The Government of Aceh and Bank Sumut have also requested further capacity building assistance from ADB. III. THE TECHNICAL ASSISTANCE A. Impact and Outcome 9. The impact will be improved access to finance in Aceh and North Sumatra to widen economic opportunities for poor households. The TA will enhance the capacity of key stakeholders by improving the environment for the expansion of sustainable and commercially viable microfinance programs in Aceh and North Sumatra. B. Methodology and Key Activities 10. The TA will support the provincial Government of Aceh and the provincial Government of North Sumatra in developing integrated support to improve access to finance in Aceh and Nias Island. On the supply side, the TA will (i) provide support to enhance the capacity of the provincial governments to manage the MRF, (ii) assist local banks in developing new microfinance products to meet the needs of selected community clusters supported under the LMS and to expand the market for Gremeen-type products and their suitable follow-on products, and (iii) support the Government of Aceh to develop a sustainable credit guarantee facility to lower lending risks and improve access to financing for credit-worthy borrowers. On the demand side, the TA will provide capacity building and assistance, on a pilot basis, to the communitybased cluster of producers to make them more bankable as a group or individually for more financial products. To encourage and sustain knowledge development in this area in both provinces, the TA will involve local universities in survey and training activities. 11. Improved capacity of local governments in managing the MRF. The ADB-supported ETESP included a grant of $8 million allocated to support microfinance expansion in Aceh and Nias Island through the MRF. Initially, the MRF was managed by the central government through one of its state-owned enterprises (Penanaman Modal Mandani) to be used as a revolving fund for microcredit extension in Aceh and Nias Island. So far, the MRF has not provided optimal support for sustainable microfinance expansion in Aceh. While, the fund has been managed prudently to ensure its sustainability, the expansion of bankable borrowers has been rather slow due to constraints to extending microcredit beyond MSMEs operating in the trade and service sectors. Recently, at the request of the two provincial governments, the Ministry of Finance decided to transfer the MRF to the two provincial governments. The capacity of the provincial governments to manage the MRF will need significant upgrading to ensure its sustainability. The consultant working under the TA will assist the two provincial governments to improve their capacity to manage the MRF and identify sustainable microfinance extension programs. 12. Enhanced stakeholders product development capacity. Under the ADB grant assistance for the restoration of microenterprise and microfinance (footnote 8), ADB and Bank BPD Aceh developed a pilot product known as Kredit Kemandirian Usaha (KKU) that focused

6 4 on providing micro loans to enterprises. Bank BPD Aceh has adopted it as its permanent product line and has used its own internal funds to expand KKU. Likewise, the Grameen-type pilot has shown good growth and ownership by both Bank BPD Aceh and Bank BPD North Sumatra. In fact, the progress has been very rapid with very small non performing loans in Nias Island and other parts of North Sumatra. The TA will provide trainings to assist in developing suitable follow-on products for Bank Sumut s proven Grameen-type clients. In addition, the TA will provide capacity building to Bank BPD Aceh and Bank BPD North Sumatra to support further product development efforts to better suit the needs of a selected cluster of producers involved in the production of tuna, patchouli, soft-shell crabs, and prawns. The initial analysis suggests that these commodities have high export potential. In addition, the TA will also develop a follow-on product for borrowers who have graduated from the Grameen-type and other Islamic microfinance products. 13. Improved capacity and readiness of local government to establish commercially viable local government credit guarantee corporation (LGCGC). The lack of qualified collateral and local risks have been perceived as key constraints for credit extension in Aceh. As part of the tools addressing these constraints, the Government of Aceh is in the process of establishing a LGCGC. The TA will facilitate the assessment and adoption of the best domestic and international practices, including the Japanese experience in providing a sustainable and commercially-viable credit guarantee system. With assistance from the Japan International Cooperation Agency, two LGCGCs are now running in East Java and Bali. Bank Indonesia is planning to replicate the two successful experiences in all provinces in Indonesia. The consultant working under the TA will also support the Aceh government to establish a LGCGC in Aceh. 14. Enhanced capacity of pilot producer clusters for better access to financial services. Under two other ADB grants financed by JFPR, 9 ADB provided support to pilot clusters of producers by linking them to better practices to improve their productivity, introducing them to a new market with more efficient marketing channels, and accelerating the sharing of good practices by developing a cluster information system for its members. The TA will maintain the key support provided for selected community-based clusters such as producers of tuna, shrimp, soft-shell crab, cocoa, and patchouli. In addition, the TA will (i) improve production practices further to reduce the risks of default after receiving loans and (ii) make the cluster members more bankable for a wider range of financial products, including trade finance for exporters. With additional support to improve their access to finance, the clusters can be expanded more rapidly and replicated in other districts in Aceh. C. Cost and Financing 15. The TA is estimated to cost $941,000, of which $800,000 will be financed on a grant basis by JFPR and administered by ADB. The government will provide counterpart support in the form of counterpart staff, office space, office communications, remuneration and per diem for counterpart staff, and other in-kind contribution. The cost estimates and financing plan are in Appendix 2. 9 ADB Grant Assistance to the Republic of Indonesia for the Sustainable Livelihoods Development for Coastal Communities in the Special Province of Nanggroe Aceh Darussalam Project. Manila; ADB Grant Assistance to the Republic of Indonesia for the Rehabilitation of Coral Reef and Mangrove Resources in the Special Province of Nanggroe Aceh Darussalam. Manila.

7 5 D. Implementation Arrangements 16. The TA will be implemented over 24 months, from November 2012 to October MOHA, Director General of Regional Development, will be the executing agency. MOHA will transfer TA to the provincial governments of Aceh and North Sumatra as the implementing agencies through a direct grant mechanism. A steering committee comprising of officials from MOHA, Bank Indonesia, BAPPENAS, and the provincial Government of Aceh and the provincial Government of North Sumatra will be formed to oversee the implementation of the TA. The steering committee will facilitate efforts to share valuable national experience from other regions, which can be incorporated in the implementation of the TA. It will convene as needed and be regularly consulted on the implementation of TA activities. The provincial governments of Aceh and North Sumatra will ensure that key stakeholders participate in surveys and stakeholder consultations. The TA consultants will administer workshops, training, seminars, conferences, and surveys. 17. In consultation with MOHA and the provincial governments of Aceh and North Sumatra, ADB will recruit consultants as required under the TA (52 person-months of consulting services, consisting of two international consultants for 12 person-months and two national consultants for 40 person-months). The team of consultants, led by the international consultant, will be responsible for producing the TA outputs and deliverables in a timely and effective manner, and for organizing and carrying out all TA activities. The terms of reference for consultants are in Appendix 3. The consultants will be selected and engaged on an individual basis by ADB in accordance with ADB s Guidelines on the Use of Consultants (2010, as amended from time to time). 10 With a small number of consultants involved in the TA, it will be more efficient to engage consultants on an individual basis. The proceeds of the TA will be disbursed in accordance with ADB s Technical Assistance Disbursement Handbook (2010, as amended from time to time). All procurement under the TA will be carried out in accordance with ADB s Procurement Guidelines (2010, as amended from time to time). IV. THE PRESIDENT'S DECISION 18. The President, acting under the authority delegated by the Board, has approved ADB administering technical assistance not exceeding the equivalent of $800,000 to the Government of Indonesia to be financed on a grant basis by the Japan Fund for Poverty Reduction for Improving Access to Finance in Aceh and North Sumatra, and hereby reports this action to the Board. 10 Given the nature of the expertise required, it is deemed more appropriate to engage consultants individually rather than hiring them through a firm.

8 6 Appendix 1 DESIGN AND MONITORING FRAMEWORK Design Summary Impact Improved access to finance in Aceh and North Sumatra Performance Targets and Indicators with Baselines Increased ratio of credit for capital investment to GRDP (15% of GRDP in 2015; baseline: 8.2% in 2010) Data Sources and Reporting Mechanisms Bank Indonesia regional economic reports Assumptions and Risks Assumptions The governments of Aceh and North Sumatra are willing to undertake the necessary policy reforms required Local capacity can be improved for the timely implementation of the support A good collaborative partnership between the governments and the stakeholders Risk Possible delay in instituting reforms because of the government s consultative process Outcome Enhanced capacity of key stakeholders by improving the environment for the expansion of sustainable and commercially viable microfinance programs in Aceh and North Sumatra Issuance of policies supportive of sustainable and commercially viable microfinance programs Increased credit growth to sectors (agriculture, trade, and fishery) in pilot activities (baseline: 8.9% June 2011) Government policy papers Assumptions There is a concerted support at the local level for sustainable financial inclusion Coordination between the governments and other partners is effective Reduced NPLs for commercial banks and other microfinance financial institutions (agriculture) (baseline: 26.8% June 2011) Risk Lack of concerted effort to implement the recommended policy reforms Outputs 1. Improved capacity of local governments in managing the MRF Better performance of the MRF (Rate of return: baseline: 5.5% in 2010 credit extended to MSMEs: Government and audit reports Assumptions Consultant recruitment will be completed on time

9 Appendix 1 7 Design Summary Performance Targets and Indicators with Baselines baseline: Rp52.4 billion in 2010) Data Sources and/or Reporting Mechanisms Assumptions and Risks Partners involved in implementing the TA provide timely and productive contributions 2. Enhanced stakeholders product development capacity 3. Improved capacity and readiness of local government to establish commercially viable LGCGC New pilot product started (baseline: 1 in 2010) The design of sustainable and commercially viable LGCGC completed Bank Indonesia statistics Bank Indonesia regional reports Reports from implementing banks Government reports Risk Delay in the transferring the TA to provincial governments 4. Enhanced capacity of pilot producer clusters for better access to financial services 75% of cluster members in the piloted projects has access to financial services (baseline: 20% in 2011) Survey of cluster members Activities with Milestones 1. Improve capacity of local governments in managing the MRF 1.1 Identify MRF capacity building needs (March 2013) 1.2 Deliver trainings to MRF management (May 2013) 1.3 Identify sustainable microfinance extension programs for MRF (July 2013) 2. Enhanced stakeholders product development capacity 2.1 Conduct survey on access to finance constraints (April 2013) 2.2 Stakeholder consultations on survey findings (July 2013) 2.3 Facilitate partnership for service providers (BPD Aceh, BPD North Sumatra, BPRs, and others) and develop more suitable products and innovations (September 2013) 2.4 Conduct trainings for key stakeholders (BPD Aceh, BPD North Sumatra, and selected BPRs) (May 2014) 3. Improved capacity and readiness of local government to establish commercially viable LGCGC 3.1 Conduct review international and national Inputs JFPR: $800,000 Item Amount ($ 000) Consultant Survey works Mission travel Equipment Trainings Report preparation and publication Contingencies Government The government will provide about 15% of total cost as counterpart support in the form of counterpart staff, provision of office space, communications, remuneration and per diem for counterpart staff, and other in-kind contributions.

10 8 Appendix 1 I Activities with Milestones practices in the provision of sustainable credit guarantee (April 201 3) 3.2 Conduct stakeholder consultations on initial design of the LGCGC (August 201 3) 3.3 Corr~plete techr~ical design of the LGCGC in Aceh (December 2013). 4. Enhanced capacity of pilot producer clusters for better access to financial services 4.1 Complete stocktaking exercise and identify priority capacity building needs of the pilot producer clusters (April 201 3) 4.2 Deliver capacity building programs to improve production practice for pilot producer clusters (July 201 3) 4.3 Deliver hand-holding training programs for pilot cluster of producers, (August August 2014). 4.4 Conduct workshops to sliare lessons learned involving wider stakeholders and selected relevant government institutions (September 2014) Inputs GRDP = gross regional domestic product; JFPR = Japan Fund for Poverty Reduction; LGCGC = local government credit guarantee corporation; MRF = microfinance rollover fund; MSMEs = Micro, small, and medium-sized enterprises; NPL = non performing loan; TA = technical assistance. Source: Asian Development Bank. I Endorsed by, Approved by, 3 Jon D. Lindborg Co~~ntry Director, IRM Kunio Senga Director General, SERD

11 Appendix 2 9 COST ESTIMATES AND FINANCING PLAN ($'000) Total Item Cost A. Japan Fund for Poverty Reduction a 1. Consultants a. Remuneration and per diem i. International consultants ii. National consultants b. International and local travel c. Reports and communications Equipment b Training, seminars, conferences, and workshops Surveys Contingencies Total Note: The technical assistance (TA) is estimated to cost $941,000, of which contributions from the Japan Fund for Poverty Reduction are presented in the table above. The government will provide counterpart support in the form of counterpart staff, provision of office space, office communications, remuneration and per diem for counterpart staff, and other in-kind contributions. The value of government contribution is estimated to account for 15% of the total TA cost. a Administered by the Asian Development Bank. b Limited to computer software required for product development and training. This equipment will be transferred to the government at the end of the TA. Source: Asian Development Bank estimates.

12 10 Appendix 3 OUTLINE TERMS OF REFERENCE FOR CONSULTANTS 1. The proposed technical assistance (TA) will require four consultants: two international consultants (12 person-months), one financial sector specialist as a team leader and one credit guarantee specialist; and two national consultants (40 person-months), one financial sector specialist and one cluster development specialist. The consultant team will work together to facilitate the development of access to finance in the Aceh and North Sumatra provinces. All consultants should have at least 10 years experience in their field. Extensive knowledge and experience in the following areas are required: access to finance, cluster developments, and small and medium-sized enterprises (SMEs) development. A. Team Leader and Financial Sector Specialist (international, 9 person-months) 2. The international financial sector specialist will have extensive experience in an integrated microfinance development program in Indonesia or comparable experience in another country with similar characteristics. As team leader, the specialist should have demonstrated experience in running multi disciplinary teams and developing case studies based on surveys and primary data collection. Knowledge of the Indonesian language will be an advantage. The team leader will carry out the following activities: (i) review recent developments in access to finance in Aceh and North Sumatra, including an updated evaluation of the policy, legal, and institutional aspects; and review previous and existing projects to assess the successes and determine the lessons learned; (ii) identify key constraints in the provision of sustainable access to finance, with particular attention to micro, small, and medium-sized enterprises (MSMEs) and key economic sectors such as agriculture and fishery; (iii) assess the capacity of key financial institutions involved in providing the services, with particular attention to determining their training and capacity building needs; (iv) develop integrated financial products that are suitable for SMEs and key economic sectors; this will include microfinance products to facilitate improvements in production processes, trade financing, and other products for MSMEs borrowers that have graduated from Grameen-type of microfinance products; (v) together with the national financial sector and cluster development specialists, develop and execute pilots of integrated approach to improve access to finance for selected produce clusters; (vi) work with the local university to develop surveys and training programs for key stakeholders; (vii) together with the national financial sector and cluster development specialists, develop and deliver training to faculty members of the local university that will be involved in executing the pilots; (viii) recommend ways to manage the Microfinance Rollover Fund (MRF) to the local government to ensure its sustainability and effectiveness; these will include drafting the terms and conditions of MRF uses, operational procedures, and monitoring systems; (ix) (x) coordinate, review, and give input to team members; manage the overall planning and implementation of the TA with the Asian Development Bank (ADB) project officers; and

13 Appendix 3 11 (xi) work with the other consultants and manage the preparation and production of the interim and final TA reports; translate the reports when necessary; circulate the draft reports to ADB and the local government; based on feedback from ADB and the local government, prepare a final project report. B. Credit Guarantee Specialist (international, 3 person-months) 3. The international credit guarantee specialist should be knowledgeable about and have sufficient experience establishing government credit guarantee corporations in Indonesia and/or other countries in a similar development stage. Specifically, the consultant will (i) work with the team leader to assess the key constraints to improving access to financial services in Aceh, including the risks specific to the province; (ii) review the need for the establishment of a local government credit guarantee corporation (LGCGC) to mitigate specific risks and constraints to access to finance in Aceh; (iii) evaluate the existing relevant regulatory and supervisory system, national experience, and progress achieved in other provinces that developed a LGCGC; (iv) provide input on the design of a balanced guarantee system that will not generate future risks to the provincial Government of Aceh (including, in a form of contingent liabilities) and assess the level of funding required; (v) conduct an international comparative study of established government guarantee companies and guarantee schemes of different countries, and identify key (vi) successful factors; design guarantee products and schemes of the LGCGC, including by learning from international best practices, and establish selection criteria to be used for guarantee schemes based on sound banking, commercial, and financial principles; (vii) identify operational modalities of the LGCGC, recommend institutional arrangements, and formulate operational procedures and standard contracts with borrowers; (viii) (ix) identify potential problems that will impact LGCGC s financial sustainability, including policy, institutional, legal, and regulatory framework; and operational, financial, and management constraints facing the guarantee corporation; and support the team leader to manage the preparation and production of interim and final TA reports. C. Financial Sector Specialist (national, 20 person-months) 4. The national financial sector specialist will have extensive experience in the development of access to finance in Indonesia or comparable experience in other areas with similar characteristics. The specialist will (i) work with the team leader to review recent developments in access to finance in Aceh and Sumatra; (ii) work with the team leader to update relevant policy, legal, and institutional aspects; and review the latest issues affecting access to finance in Aceh and Nias Island; (iii) work with the team leader to identify key constraints to the provision of sustainable access to finance, with particular attention to the agriculture sector and SMEs;

14 12 Appendix 3 (iv) (v) (vi) (vii) (viii) (ix) (x) work with the team leader to assess the financial institutions involved in providing the services, with particular attention to determining their training and capacity building needs; work with the team leader to develop integrated financial products that are suitable for the agriculture sector and SMEs; work with the team leader and the national cluster development specialist to develop and execute several pilots of integrated microfinance-cluster development projects, which will also involve local university faculty members; work with the team leader and the national cluster development specialist to develop and deliver training to local university faculty members that will be involved in executing the pilots; supervise the national cluster development specialist to provide financial advisory services to the piloted cluster producers to minimize risks of default; work with the team leader to identify ways to manage the MRF to the local government to ensure its sustainability and effectiveness; and support the team leader to manage the preparation and production of interim and final TA reports. D. Cluster Development Specialist (national, 20 person-months) 5. The national cluster development specialist will have extensive experience in cluster development in Indonesia. The specialist will (i) maintain the existing facilities provided to the selected cluster producers to improve their production practice and facilitate information sharing; (ii) review and update issues relating to the structure and composition of potential and existing clusters, their demand for support services, their access to finance, and the range of support services provided to them by public and private sectors; (iii) assess impediments to the next stage of cluster development, including bad access to markets (including export markets), technology and information, and training; (iv) develop modalities for mitigating constraints identified through strengthened marketing services, business training, links to sources of financing, and other measures as appropriate; (v) work with the team leader and the national financial sector specialist to develop and execute several pilots of integrated microfinance-cluster development projects, which will also involve local university faculty members; (vi) work with the team leader and the national financial sector specialist to develop and deliver training to local university faculty members that will be involved in executing the pilots; (vii) recommend institutional and policy measures to address constraints to improving the cluster s skills and capabilities; (viii) identify measures to strengthen cluster associations and their capabilities to assist their members to improve access to marketing and technology; (ix) evaluate the need for and identify policies to support clustering; (x) assist the government in establishing principles for monitoring and evaluating the cluster support programs and support services; (xi) identify ways of replicating and scaling up of the profitable business models that have been established, including through apprenticeships and study visits; and (xii) support the team leader to manage the preparation and production of interim and final TA reports.