INDONESIA GPOBA COMMITMENT DOCUMENT

Transcription

1 Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Indonesia: GPOBA Commitment Document (January 16, 2008) INDONESIA GPOBA COMMITMENT DOCUMENT Project Name: Extending Telecommunications in Rural Indonesia (P102476) January 16, 2008 Objectives: Facilitate access to the Internet and associated telecommunications and data services through community access points in socio-economically disadvantaged areas. Demonstrate the applicability of a private-public partnership (PPP) based approach to cost-effective public communications service financing in economically disadvantaged rural areas. Illustrate how such an approach may be scaled up using the government s own resources and also extended to other sectors 1. The project has been designed to: (a) highlight the issues and challenges that the government will eventually face in facilitating public Internet access throughout the country; and (b) disseminate knowledge and experience about output-based and PPP approaches across sectors and government institutions. By using subsidy funding the program will provide practical experience to the government and the private sector in the proposed service design and competitive bidding methodology. For the endusers or beneficiaries, the project will introduce low-cost and innovative technologies for the private provision of ICT services in rural Indonesia. Scope: The project will facilitate public Internet access for a sample group of 222 Kecamatan (district) centres in Indonesia covering Kabupatens (regencies) with a total population of 10 million (2006 census). This will be achieved through a competitive process where Service Agreements are signed, defining specific outputs. Services will be regulated under the existing telecommunications regulatory regime. No new licensing arrangements are envisaged and the bidding documents will be technologically neutral, to anticipate potential changes in technology. The total project duration for both Groups 1 and 2 (please see below), is two years, but with the intention of completing implementation within 18 months if possible Target areas: [total list of districts and villages to be annexed to bid documents]: Group 1: 92 Community Access Points (CAPs) in Java provinces of W. Java and Banten Group 2: 130 CAPs in Sumatra province of Lampung 1 This pilot project directly follows up on previous World Bank assistance to the Indonesian government in support of its telecommunications and ICT development objectives. The Bank has provided advisory assistance on possible business models/private-public partnerships, and recommended an OBA approach using the least subsidy model. Over the past year, the Bank s ICT Department worked with the Ministry on an initial proposal to support pilot deployment of public access voice telephone centers in remote locations, offering further assistance for program design, and implementation support in the launching of pilot OBA-based rural telecommunications access projects. The Commitment Paper for that project was approved by the GPOBA Panel on March 6, However, upon further discussion of the scope of services, and in light of the accelerating mobile rollout, the government decided in mid-2007 to shift the focus to Internet access.

2 Indonesia: GPOBA Commitment Document (January 16, 2008) Selection Criteria: Geographical targeting, with the following characteristics: (a) district centres (Kecamatan) located within regencies (Kabupaten) listed as disadvantaged by the State Ministry for Disadvantaged Regions, and included in the Government s national community-level poverty reduction program (PNPM) ). Monthly per capita income in such areas is US$30-35; (b) identified by Ministry of Communications and Information Technology, Directorate-General of Applications and Telematics in consultation with national and local government stakeholders and the national planning ministry, BAPPENAS; and (c) areas with fixed or wireless telecommunications networks. The main reason for selecting areas under the PNPM program is to help empower these lowincome populations through information/telecommunications access, opportunities for economic diversification, access to public services. Total Project Cost: US$2,935,465 Total GPOBA funding requested: US$2,443,522 3 Subsidy funding = US$$1,964,972 3 Project administration/support to MCIT = US$329,250, including US$75,000 for the independent verification agent, US$199,250 for management and administration support, US$55,000 for public information/awareness promotion. 3 Bank/GPOBA supervision = US $150,000 GPOBA Funding: [TBC] DFID = US$1.5 million SIDA : US$0.8 million AusAid: US$200,000 Additional funding sources: User payments for services (assuming about US$0.25/hour for computer rental; US$0.40 per hour for basic Internet access; US$0.60 per hour for premium Internet access, plus additional charges for photos, printing, training sessions). Outputs: Public access facility connections to telecommunications networks (fixed or mobile) 3 Coverage: (provision of public access Internet connections to Kecamatens within Group 1 and Group 2 areas) 3 Internet connectivity services (as per service agreement) 3 Quality of service (as per service agreement) Expected beneficiaries: A potential catchment area of 10,000,000 Indonesian citizens in 222 Kecamatan centres, and surrounding village areas, plus local entrepreneurs. The project includes funding for public awareness/promotion in order to attract as many users as possible, particularly among the poorer citizens, since the intention is to help empower them by reducing the digital/information divide. CAP facilities (computers, telephony, Internet, training) will be available to all and actively promoted. Part of the funding will go toward dissemination/training activities which are extremely important especially for the poorer populations who have limited experience with these technologies. Internet is a very powerful communications tool, combining multi-media features: broadcast (radio and prospectively TV), written content (information) as well as telephony, and is accessible to literate and illiterate users. The range of users will include: students, groups of poor women receiving training e.g. on e-commerce opportunities or literacy programmes, farmers seeking price information, health workers, teachers, and poor villagers wanting to receive calls (and potentially remittances) from relatives working overseas. However, the benefits extend far beyond individual users, and are linked to the impact of access to information on the community as a whole. For example, where business development benefits are realized by individual CAP "users", the broader impact includes all those in the community who gain income, ii

3 Indonesia: GPOBA Commitment Document (January 16, 2008) employment, and improved market efficiency as a result. Health workers would pass on the benefits of knowledge to their patients, and so on. GPOBA subsidy efficiency and affordability: The project targets the whole population in the selected areas. In this regard, sustainability is fundamental: requiring a constant revenue stream to keep each CAP working. The project therefore assumes conservatively that at least 7.5 percent of the population will be regular users of the CAPs, in the first instance. For the purposes of calculating the subs efficiency the project uses these regular users which would give an efficiency value of US$ If the number of regular users increases, then this then the subsidy efficiency would also increase (the subsidy efficiency for the total population of 10 million would be US$0.20). The total number of regular users per CAP is assumed to be 3378 (average). Assuming about 40 minutes of usage per month at a cost of US$0.40 per hour, the cost of services would be affordable relative to income levels. Summary of Subsidy Estimates Project Total Total Project Total % Subsidy/ Total Population CAPs Cost Subsidy subsidized CAP Covered Direct Users Subsidy/ Direct Users 1. Java 92 $1,052,125 $841,700 80% $9,149 4,414, ,104 $ Sumatra 130 $1,404,090 $1,123,272 80% $8,641 5,694, ,106 $2.63 All Projects 222 $2,456,215 $1,964,972 80% $8,851 10,109, ,210 $2.59 Grant Recipient: Republic of Indonesia. Grant signatory is the Ministry of Finance; Ministry of Communications and Information Technology is the implementing agency (department of applications and telematics DG Aptel). Financial Management: Annex prepared by FM staff. Clearance pending. Risks are assessed as moderate. Private Operators competitively selected and GPOBA subsidies disbursed to suitably-qualified private operators through direct payment. Disbursement of subsidy: the expected payment schedule will be linked to outputs stipulated in Service Agreements for each procurement package, based on the total contract amount: 3 20% of contract amount upon contract award, in view of the relatively high equipment cost component; 3 20% of contract amount upon successful establishment of designated public access facilities; in 50% of designated locations, as verified by the Technical and Service Auditor; 3 20% of contract amount upon successful establishment of designated public access facilities in the remaining 50% of designated locations, as verified by the Technical and Service Auditor; 3 20% of contract amount upon successful continuous service provision for 6 months in all localities, as per the terms of the Service Agreement; 3 20% of contract amount upon successful service provision for one year in all localities. Procurement: Annex prepared by Procurement staff. Clearance pending. Risk is average. Two types of procurement are envisaged: (a) for the Public Access Telecommunications Service (OBA): International competitive bidding (ICB) to select a Service Provider on the basis of lowest subsidy required, and (b) consultants to support program management, plus Independent Verification Agent: Individual Consultant (IC) selection. The winning Service Providers will in turn identify and select local entrepreneur- resellers 2 This compares favourably to the US$2.74 per capita subsidy efficiency for Group 2 public access telecommunications in the previously-designed Project. iii

4 Indonesia: GPOBA Commitment Document (January 16, 2008) to implement and operate each public access facility. Environmental clearance: Category C. Computer equipment disposal plan prepared by country Environmental Specialist and included as Annex 4. Government endorsement: Yes. Ministry of Communications and Information Technology ERR: The estimated economic rate of return is 15% and the NPV is $ $336,547 at a 12 % discount rate. IRR without subsidy is -70% and with subsidy 18%. See Annex 6. Exchange rate: Rp. 9,200=US$1 as of November 30, 2007 iv

5 Indonesia: GPOBA Commitment Document (January 16, 2008) INDONESIA GPOBA COMMITMENT DOCUMENT A. STRATEGIC CONTEXT AND RATIONALE... 1 A.1 Country and sector issues... 1 A.2 Rationale for GPOBA involvement... 3 A.3 Higher level objectives to which the project contributes... 3 B. PROJECT DESCRIPTION... 4 B.1 Project development objective and key indicators... 4 B.2 Project components... 5 B.3 Economic and financial analysis... 8 B.4 Lessons learned and reflected in the project design B5. Alternatives considered and reasons for rejection C. IMPLEMENTATION C.1 Milestones for project implementation C.2 Institutional and implementation arrangements C.3 Monitoring and evaluation of outcomes/results C.4 Financial Management and Disbursement Arrangements C 5. Sustainability C.6 Critical risks and possible controversial aspects Annex 1. Project Costs Schedule Annex 2: Financial Management and Disbursement Arrangements Annex 3. Procurement Annex 4. Environment (OP/BP 4.01) Annex 5. Indonesia Telecommunications Market Structure, Annex 6. Economic Analysis Annex 8. Documents in the Project File Annex 9. Proposed Project Sites v

6 A. STRATEGIC CONTEXT AND RATIONALE A.1 Country and sector issues The proposed project entails an innovative mechanism, in the Indonesian context, to financing of rural access to ICT services and infrastructure. If successfully implemented, there are good opportunities for scaling up not only in telecommunications/ict for example to facilitate diffusion of Internet but also in other infrastructure sectors. The challenge of extending access to telecommunications and ICT infrastructure and services in Indonesia looms large, in this country of over 240 million people and 17,000 islands. However, the nature of this challenge, and hence the proposed output-based aid (OBA) approach to addressing it differs in several respects from that in other countries where OBA programs are being implemented. Network infrastructure or coverage is expanding. Although lagging behind its regional neighbours, telecommunications network development has increased significantly in Indonesia. Until the early 2000s, the relative commercial viability and high margins associated with urban markets, and the reliance on fixed-line technologies resulted in the concentration of telecommunications infrastructure and services primarily in major urban areas of Java-Bali, while most rural regions were largely unserved. This picture is changing. Indonesia s telecommunications sector is becoming increasingly dynamic and diversified, spurred by rollout of wireless networks. Following substantial private investment, the years witnessed continued growth in wireless and fixed-wireless telephony 3, the launch of third-generation (3G) wireless services, and increased diffusion of wireless Internet services, in urban areas. Fixed teledensity (including fixed lines and fixed wireless) was around 8 percent, and mobile teledensity was around 29 percent at mid Estimated subscriber numbers as of mid-2007 were: 9.1 million fixed lines, 6 million CDMA fixed wireless, and over 65 million GSM wireless. Internet access remains limited. New access technologies (e.g. broadband wireless access, DSL, cable) are also slowly becoming available, offering potential for voice over IP services, as well as Internet connectivity itself. Wireless operators are deploying 2.5 G basic mobile data services on top of their basic telephony coverage, offering wireless data connections faster than dial-up speeds 4. WiFi, or wireless network hotspots are proliferating in major urban centres. However, broadband access is generally still very constrained by limited network capacity (bandwidth, particularly at the kabupaten level and below) and by policy/regulatory impediments. The latter include: limited competition in the broadband access market; slow rollout of high-speed digital subscriber line (DSL) services by the main fixed-line operator with the largest broadband market share; and a licensing regime that has yet to facilitate wider deployment of alternative broadband wireless access technologies (e.g. using 3G mobile or WiMAX). As a result, overall Internet penetration is relatively low at around 11 percent (2006 estimate), overwhelmingly via dial-up connections. However, there are signs that demand for higher-speed Internet access and functionality, including Web, , chat services, and, in some instances, Internet telephony, is growing steadily across the country where connections are available. 3 The main mobile technology used in Indonesia is GSM (Global System for Mobile Communications). Fixed-wireless uses CDMA (code division multiple access), e.g. CDMA 2000 and CDMA 450 depending on frequency, and offers limited mobility, typically within a single area code, at prices on par with fixed-line services generation technologies offer basic, mainly text-based, mobile Internet access, e.g. to Blackberry services or simplified Web pages. The dominant technology, used by GSM operators, is General Packet Radio Service (GPRS). 1

7 In Western and Central Indonesia in particular, regional and rural-urban disparities in availability of telecommunications infrastructure/networks, or coverage, are gradually being eroded. A key technical/cost consideration is that these Western and Central regions are accessible to terrestrial backhaul networks (microwave, and some fibre-optic links). Eastern Indonesia (Maluku, Papua) relies on satellite backhaul; mobile rollout is correspondingly slower. Public access to basic telephony is still a concern in many villages. However, basic telephony and data (e.g. through short message service or SMS) are becoming more widely available. Mobile operators are now targeting previously less commercially attractive rural areas of Java-Bali, Sumatra and Kalimantan, and extending beyond urban areas of Sulawesi and Nusa Tenggara. Major population centres in the East now have mobile coverage. Public Access remains a problem, particularly for Internet. While the access gap is shrinking rapidly for mobile telephone services, it remains much larger for public Internet access, particularly in the more economically disadvantaged districts at the Kecamatan (sub-regional central village) level. Most Kecamatans do not yet have public Internet access facilities; they are being established in Kapubaten centres, but still on a limited basis. The main challenges that this pilot project seeks to address are therefore how to develop appropriate mechanisms to: 3 facilitate access to Internet connectivity, particularly in smaller areas at the Kecamatan level and below; 3 facilitate public access to Internet capabilities in areas where there is at least a minimum level of telecommunications network connectivity, whether through fixed or wireless networks offering adequate signal quality and data transmission speeds; 3 stimulate rollout of telecommunications infrastructure as well as public access in some of the more remote and poor parts of the country that have not yet been served by higher-end data transmission services, including DSL and/or higher speed mobile data services. Government policy for rural communications. The government is undertaking a number of telecommunications policy and regulatory reforms: licensing, interconnection, tariffs, spectrum management as well as in rural access. The Ministry of Communications and Information Technology (MCIT) s goal is to ensure that all villages have access to basic telephony by 2010 and to Internet by 2015, and is seeking an appropriate mechanism for achieving this goal. In 2003 the government launched its first Universal Service Obligation (USO) program, based on a turnkey approach, with infrastructure and equipment financed directly from the national budget, and remaining under government ownership. However, outcomes fell short of expectations due to several technical operational and administrative difficulties. The government is redesigning its USO program and trying to develop a sustainable business model. Several policy and regulatory elements are in place, in particular Government Regulation No. 28/2005 (amended 2007), under which telecommunications operators are required to contribute 1 percent of their annual gross revenues (minus provision for bad debts and interconnection charges) into a USO fund administered by a semi-autonomous body (BTIP) under the Department of Post and Telecommunications (DG-Postel). The government has collected USO contributions for 2005 and It launched a tender for provision of services to villages lacking fixed lines in mid-2007, but was unable to award contracts. 5 A number of technical specifications and regulatory requirements need to be revisited at this stage before re-tender. The Government has also committed to facilitating public Internet access in rural locations throughout Indonesia. It has set itself an ambitious target of connecting 40,000 villages to the Internet by 2015, but 5 Although over 20 bidders initially expressed interest, many subsequently withdrew because specifications and regulatory requirements in the tender documents were perceived to be overly complex and not cost-effective. Requirements proposed by government included special tariffs (based on fixed line rates) and numbering for USO areas. The government intends to rebid in

8 has fallen far short of this target. It has participated in some telecentre type projects financed by development partners. However, these were largely input-driven and not commercially operated; sustainability has been an issue, as in the case of similar programs in other countries. This project aims to help demonstrate the viability and opportunity for a new wave of community-based ICT access facilities, in areas that up to now have been left out of most of the still-growing ICT revolution, particularly for Internet-based communications. The proposed services are anticipated to have reasonable potential for sustainable, ongoing commercial expansion, with the support of just a modest level of start-up subsidy capital. The market forces underlying the strong worldwide growth of Internet and related ICT services are also quite evident in Indonesia, and demand for and deployment of Internet Cafés, often known as Warnets in Indonesia, is already expanding further at the kabupaten level. Affordable public access to Internet and ICT services would help accelerate consumer awareness and demand, creating a strong market pull for telecommunications operators to expand their network deployments, including for broadband capacity, while demonstrating the viability of a business case for public and private Internet services throughout the country. In this respect, the small demonstration projects contemplated by this program would also form the test bed for the Government s planned largescale rollout of tens of thousands of Community Access Points, for which this planning process is providing critical input to the CAP Master Plan. A.2 Rationale for GPOBA involvement This pilot project directly follows up on previous World Bank assistance to the Indonesian government in support of its telecommunications and ICT development objectives. The Bank has provided advisory assistance on possible business models/private-public partnerships, and recommended an OBA approach using the least subsidy model. Over the past year, the Bank s technical assistance group worked with the Ministry on an initial proposal to support pilot deployment of public access voice telephone centers in remote locations, offering further assistance for program design, and implementation support in the launching of pilot OBA-based rural telecommunications access projects. The Commitment Paper for that project was approved by the GPOBA Panel on March 6, However, upon further discussion of the scope of services, and in light of the accelerating mobile rollout, the government decided in mid-2007 to shift the focus to Internet access. The program will provide practical experience to government and the private sector in the proposed service design and tendering methodology. For the end-users or beneficiaries, the project will introduce affordable access to Internet-based services and applications in areas where such services have not yet penetrated, helping to stimulate further demand and growth in this market segment. In addition, the pilot project is consistent with GPOBA objectives for a number of reasons: 3 targeting of subsidies to poor districts of Indonesia 3 incentives to the private sector for service provision 3 promoting village-level entrepreneurship and transition to sustainable business models 3 transparent selection process and new accountability framework, and 3 transparent monitoring and evaluation framework. A.3 Higher level objectives to which the project contributes The project supports the Indonesia Country Assistance Strategy (FY04-07) objectives of improving the climate for high-quality investment and making service delivery responsive to the needs of the poor. Specific CAS goals this project will support include: fostering a competitive private sector, building Indonesia s infrastructure, and creating income opportunities for poor households and farmers. The project design is also consistent with the objectives of the upcoming Country Partnership Strategy which emphasizes private-public partnership approaches particularly in infrastructure, as well as building the capacity of Indonesia s institutions, through practical, hands-on implementation 3

9 support. Poverty in Indonesia remains largely rural, with over 63 percent of people living under the poverty line residing in rural areas. Moreover, almost half of rural incomes now come from non-farm activities. A key aspect of poverty alleviation therefore is creating an environment that allows both farm and rural nonfarm enterprises to grow. Improving access to telecommunications/ict for rural Indonesians is also expected to contribute to broader social and economic development and achievement of the millennium development goals. Several recent econometric studies suggest that the quantity and quality of telecommunications infrastructure may be connected to growth. 6 At the microeconomic level, ICT provides farmers, workers and entrepreneurs with opportunities to reduce transaction costs, increase market coverage and improve competitiveness. Moreover, people living in rural and remote areas tend to be poor and socially isolated. They lack information relevant to their particular situation and thus have difficulty interacting with other community members or other communities. ICT, such as radio, telephone, and , can be of great value in bringing people together, bridging geographic distances and providing relevant information about and to the poor. The correlation across countries of the human development index (HDI) and the networked economy index (NEI) is above 0.8, suggesting a link between welfare and the use of ICT in developing countries. The proposed community access points need to have a commercially-oriented business model, in the interest of longer-term sustainability. However, the main goal of CAPs is not simply to allow a minority of users to enjoy personal benefits by, for example, sending s or chatting or surfing the Web; rather, it is to bring a variety of Information resources to the community as a whole. The range of users will include: students, groups of poor women receiving training e.g. on e-commerce opportunities or literacy programmes, farmers seeking price information, health workers, teachers, poor villagers wanting to receive calls (and potentially remittances) from relatives working overseas. However, the benefits extend far beyond individual users, and are linked to the impact of access to information on the community as a whole. For example, where business development benefits are realized by individual CAP "users", the broader impact includes all those in the community who gain income, employment, and improved market efficiency as a result. Health workers would pass on the benefits of knowledge to their patients, and so on. CAPs will facilitate access to e-commerce opportunities, e-government services, remittances facilitated by Internet communication, training and awareness of technology, improved efficiency in local agriculture and micro-enterprise, exposure to improved education and health resources, etc. By locating the CAPs in kecamatan targeted under the government s poverty reduction program (PNMP), they will offer a platform for the dissemination of development-oriented content, for example, information on public services such as healthcare, education, agricultural extension, business development services, and for training and awareness of technology. Accordingly, the nature of the "benefits" of community Internet access goes far beyond the potential direct short-term impact on individual users. The socio-economic benefits will likely extend to a significant portion of the populations in the target areas, as opposed to individual users only. In that regard, the "early adopters" who make direct use of the CAPs in the short term become conduits through which much of this enhanced knowledge and opportunity may be filtered to the community at large. B. PROJECT DESCRIPTION B.1 Project development objective and key indicators 6 (Canning 1997, Röller and Waverman 1995, Madden and Savage 1998, Riaz 1997, Easterly and Levine 1997, Jensen, 2007). Based on the increase in ICT investment in industrial countries between 1995 to 2000, Haacker and Morsink (2002) estimate an average increase in growth of total factor productivity of about 0.4% per year. Malaysia s return on ICT capital (44.8%) is about three times higher than that for non-ict capital (15.4%) (Lee and Khatri 2003). 4

10 In light of the above, the objective of this project is to pilot an output-based approach to facilitate access to Internet services telecommunications to a total of 222 villages at the Kecamatan or district level in Indonesia with a total population of some 10-million within the surrounding areas (2005 census). The project will demonstrate the applicability of a private-public partnership-based approach to rural microenterprise and public communications service financing. It has been designed to: (a) highlight the issues and challenges that the government will eventually face in expanding Community Access Points (CAPs) throughout the country; (b) disseminate knowledge and experience about PPP approaches across sectors and government institutions; (c) demonstrate a mechanism that can be scaled up using the government s own resources within the ICT and other sectors. By using subsidy funding the program will provide practical experience to government and the private sector in the proposed service design and competitive bidding methodology. For the end-users or beneficiaries, the project will introduce low-cost and innovative technologies for the private provision of ICT services in rural Indonesia. With regard to development objectives, extending access to the Internet for rural Indonesians is expected to have wide-ranging social and economic benefits, for example through: 3 Stimulating local business development: directly by promoting new economic opportunities in the CAP business and in related business, employment, and e-commerce activities, and indirectly by creating new marketing and information channels; 3 reducing business transaction costs and increasing productivity by expanding market reach and sales prospects; 3 improving access to markets and market information, facilitate local trade, and promote direct communication along the supply chain; 3 facilitating the adoption of value-added technologies or ICT applications such as local Internetbased commercial activities, financial services, etc.; and 3 improving the efficiency of (local) government communications and thereby reducing transaction costs and time. The project seeks to stimulate a market-driven mechanism to enable provision of this public access Internet service, by offering incentives reducing barriers to entry for local entrepreneurs to introduce such service on a commercially viable basis. Achievement of project objectives will be measured in terms of successful operation of public access facilities as specified in the Service Agreements; measured in terms of the number of hours of usage. More detailed performance criteria are stated in the Service Agreements, including specific requirements for: (a) establishment and availability to end-users of public access facilities, including connection to a Internet networks of wireless or fixed operators; (b) operation and maintenance of public access facilities, including power supply; and (c) training and human resources development for local entrepreneurs. B.2 Project components Target Locations The locations to be supported under this project have been divided into two geographic areas, designed to target locations that will be most receptive to the prospective public Internet access services. The primary reason for selecting these areas is that they are relatively economically disadvantaged participating, for example in the government s community-level poverty reduction program. However, other factors likely to affect uptake of Internet services were also considered: the availability of network connectivity, critical mass of populations in the kecamatan centres and nearby villages, and reasonable accessibility to roads and power supply. In sum, there will be 222 towns at the Kecamatan level, which are larger towns serving as the seat of local sub-districts. These Kecamatans are located within 10 Kabupatens, or regencies, on two main Indonesian islands, Java and Sumatra. See the lists in Annex 9 for details. Approach 5

11 For these locations, a competitive tender will be organized to award a Service Contract, based on lowest subsidy bid received (subject to the limitations set out in the SBD and Service Agreement), to provide a stipulated number of either directly administered or franchised Community Access Points across the whole pilot area. Implementing organizations or Contractors are expected to enter into sub-contracting arrangements with local entrepreneurs for operation and maintenance of the Community Access Point facilities. The bidders shall be organizations or companies with broad experience in deploying telecommunications facilities. They will receive a validated list of qualifying locations for each area offered. Given the number of rural centres involved, the impossibility to verify every rural centre and its surrounding villages in the design phase, and the dependency upon local entrepreneurs in each rural centre, it may not be realistic to request a 100 percent coverage result, so bidders will be given the option of connecting at least 80 percent of locations in the area at their discretion, subject to verification. The objective is to realize a program that brings public access to most of the qualifying locations. The winning Contractor must engage local entrepreneurs to operate the Community Access Point facilities, on a commercial basis. There will be an affiliate relationship between the Contractors and the local entrepreneurs, which will require that services be provided to appropriate levels of availability and quality, and will govern the financial relationships between the two. The contractual and pricing arrangements for these relationships must be determined by Contractor, subject to terms and conditions of the OBA Service Agreement. Local entrepreneurs will therefore invest in the set-up of a Community Access Point under an arrangement with the Contractor and will earn a profit on the margin between the cost of providing Internet and ICT services and the revenues generated from Internet access, computer rental, printing, training, and other ICT services. Typically the local entrepreneur will be expected to combine the Community Access Point business with other business, for example in a small shop ( warung ). Experience in other countries has shown that the social standing of the Community Access Point Operator often increases in their community due to the importance of the service. The Economic and Financial Analysis below describes a typical business model for the local entrepreneurs operations. Project Scope. Contractors will be expected to provide the following: (a) Equipment, Facilities and services Single room suitable for 10 users and the CAP supervisor 10 standard desktop computers (PCs) with LCD screens to reduce power consumption 1 central server connecting to the Internet and managing the billing At least 1 scanner/printer At least 2 webcams for video communication and photos Networking equipment to connect all PCs Internet connection of at least 64 kb/s and preferably faster. WiFi access at selected CAPs Software (must be legal versions): o A standard operating system o Office applications (word processing, spreadsheet, presentation) o Chat applications o Software to download data/pictures from typical mobile phones o Billing application Cache for main Internet sites and local content on the server to deliver this content without any (internet access speed) restrictions for local use. Telephony/VoIP capability to offer telephony services 6

12 Fixed broadband access (e.g. Digital Subscriber Line, DSL, or cable) is unlikely to be available in most of the target locations, but basic wireless Internet (e.g. GPRS) and dial-up are available. Therefore, there will be no subsidization of network expansion per se, although potential Contractors will be expected to take into account any network-related costs in estimating their required minimum subsidy proposals. (b) Contractor program management costs, including recruitment and training of entrepreneurs Contractors will be expected to provide basic training in operations and upkeep to the local entrepreneurs, plus marketing training and related materials, and other support services. The Contractor must develop a training program that introduces entrepreneurs to both the technical and business management aspects of operating the public Internet and ICT access facilities, including marketing and promotion, service delivery, pricing, and customer service. This program must be delivered to each entrepreneur at the time that the equipment is installed, and must include sufficient support to ensure that service is adequately launched and sustained. Further technical and operational support must remain available throughout the life of the contract, under the sponsorship of the Contractor. (c) Project administration (MCIT) A further project component is overall project administration, including organization of bids, financial management, monitoring and evaluation, and public awareness/information. Details are discussed in Section C below. Subsidy Payment Disbursements The expected payment schedule will be linked to outputs stipulated in Service Agreements for each procurement package, based on the total contract amount: 3 20% of contract amount upon contract award; 3 20% of contract amount upon successful establishment of designated public access facilities; in 50% of designated locations, as confirmed by the Independent Verification Agent; 3 20% of contract amount upon successful establishment of designated public access facilities in the remaining 50% of designated locations, as confirmed by the Independent Verification Agent; 3 20% of contract amount upon successful continuous service provision for 6 months in all localities; 3 20% of contract amount upon successful service provision for one year in all localities. Technical Considerations. All bidding documents will be technologically neutral, to anticipate potential changes in technology. The equipment specifications for the CAPs are assumed to be compatible with prevalent telecommunications network standards in Indonesia. Certain provisions for hardware and software standards, quality, and compatibility will have to be determined to ensure effective delivery of the services; these will be specified during the procurement process and subject to review based upon bidder responses. Regulatory Considerations. The following regulatory considerations shall apply to the public access telecommunications services and operations to be supported under this project. The intention is to have as few special provisions as possible so that the program does not entail unnecessary costs such as additional license requirements, special tariffs, or complex modifications to telecom operator billing systems for example. Light regulatory treatment will also facilitate the transition of this program into a commercial operation over time. (a) General license conditions. Given that the majority of the target locations are within reach of the 7

13 existing, and still expanding, telecommunications networks there is no need for new licenses to be issued under this program. All Community Access Points shall be offered via connection to the networks of existing licensed operators or through unlicensed WiFi connections. (b) Interconnection. In general, there are no special interconnection regulations or rules required for the Community Access Points that are to be provided over existing networks. These facilities will serve essentially as extended end-user terminals, with the same connection standards and functions as other PCs and phones. (c) Numbering. There is no specific or separate need to allocate distinct numbering assignments to the Community Access Points. These locations can be assigned numbers within the current code groups of the operators whose networks will connect the locations. (d) Customer tariffs. The wholesale tariffs paid by Community Access Point local entrepreneurs will likely be the same as commercial tariffs for other fixed or mobile Internet services offered in the same or comparable locations. However, it may be possible to promote special tariff treatment for public Internet access facilities such as CAPs, to encourage usage and improve sustainability. If such special tariff provisions are introduced, they should apply equally to the wholesale payments by all Internet and Community Access Point entrepreneurs throughout the country. In general, tariffs for Internet connections, especially broadband, are excessively high, and it will be desirable to see a decrease in such tariffs to promote Internet usage in general. Most decreases are anticipated in the business case analysis for this project. The retail tariffs to be charged by the local entrepreneurs to the public for use of CAP services should be specified in the Service Agreements to be established at the outset of the each competitive bidding procedure, based upon market analysis and input from interested Contractors. (e) Radio spectrum issues. There are no specific radio spectrum issues associated with this project, since in both cases existing networks will be utilized to provide connectivity. No new licenses or frequency assignments are required. (f) Ownership of assets. All equipment to be installed under this program shall initially be the property of the Contractors that win the bids to provide services in each region. Ownership of equipment may be transferred permanently to the local entrepreneurs under arrangements between the Contractors and entrepreneurs, as part of their overall business relationship. The Government of Indonesia shall have no equity ownership interest in any equipment or facilities financed under this program. B.3 Economic and financial analysis The estimated economic rate of return is 15% and the NPV is $ $336,547 at a 12 % discount rate. This calculation is based upon estimates of the economic impacts on communities due to establishment of the CAPs, such as e-commerce opportunities, the net career value of ICT training, and multiplier effects from the CAP businesses (employment, ancillary businesses, etc.). The IRR without subsidy is -70% and with subsidy 18%. Value of Improved Communications Poverty in Indonesia remains largely rural, with over 63 percent of people living under the poverty line residing in rural areas. The project targets areas where per capita incomes are in the US$ range. Moreover, almost half of rural incomes now come from non-farm activities. A key aspect of poverty alleviation therefore is creating an environment that allows both farm and rural non-farm enterprises to 8

14 grow 7. This project aims to contribute to that growth potential by providing rural Internet and ICT services to a pilot group of around 200 rural centers and their surrounding villages. The mechanisms by which improved communications can hasten rural economic development and growth are well known. They include better integration of rural producers into the cash economy; improved information about supply, transport and regional market sales; better price discovery 8 and supply response; less waste in unsold fisheries and fresh food products by more accurately targeting best sales markets. They also promote better job search and migrant worker opportunities; easier and less costly access to money transfers from away family members; improved opportunities for alternative micro-business financing sources; better access to emergency response teams and health-care providers; all of which can improve rural productivity and in the long-run lead to improved household earnings. Other intangible or indirect benefits, especially from newer and more advanced ICT capabilities that are continuing to generate enthusiastic market responses are difficult to quantify but undoubtedly significant and growing. 9 The ways in which community-based information centers such as the proposed CAPs are of direct value to the poor and to development goals are myriad. Examples include: * Utilization of the CAP to promote "E-Health" programs, through government or NGO initiatives. These projects allow use of the network by local clinic workers as well as citizens to access important information on hygiene, disease, epidemics, treatment of patients, access to medicines and preventive measures, lifestyle issues, etc. For example, a clinic workers in a target area might be a regular user of the CAP to keep up to date on all of these concerns, as well as to maintain contact with remote hospitals, doctors, and health service officials, especially during emergencies where there are disease outbreaks. Many of the worker s patients may not utilize the CAP, but they will benefit directly because this information is available in real-time, and in a robust, interactive format. * Linking of the CAP to a local school in the kecamatan/surrounding villages, to support both traditional and technology-based learning programs, including literacy, as well as all areas of primary and secondary education. In this regard, the computers in the CAP are available for non-internet uses as well, and these are often a very popular tool for local students as well as teachers, even if the CAP is not directly affiliated with the school (although close proximity may be desireable). * Support for local entrepreneurs and workers through a range of public/private/ngo economic and business development programs that take advantage of the information resources of the CAP. For farmers, this can mean information on weather conditions, crop prices, cultivation techniques, and information exchanges with colleagues in other communities; for craftspersons, it can mean participation in e-commerce portals, on-line training classes, and remote collaboration; for small business entrepreneurs, it can include computer-based accounting support, connection to financial networks, more efficient supply chains, and new market models; for workers, training in the use of computer technology (always very popular at CAPs) can open up a variety of employment opportunities. 7 World Bank, Rural Investment Climate in Indonesia (RICA), Washington, DC, Price discovery is the ability to know prices for inputs and selling outputs in a range of local and national markets, and based on this information make efficient decisions about when to purchase inputs and supply short or long to particular geographic markets. It assists in reducing the wedge traditionally taken by middle-men. 9 In addition to the positive externalities listed in the text, there are also environmental benefits from further use of Internet and ICT services across rural Indonesia. Public Health benefits can arise from improved access to advice from clinics and distant medical practitioners, easier ordering of prescription drugs and prosthetics for rural and remote locations, improved information about public health practices, avoidance of communicable diseases such as TB and HIV-AIDS, and faster emergency health responses. Social benefits from better family and village communications, particularly for socially and topographically ignored household groupings; more equitable access to key information weather and emergency information sources and emergency response teams; and in general more likelihood of alleviating rural poverty and reducing the widening gap between Indonesia s urban rich and rural poor. In terms of positive externalities, social benefits and related gains in non-cash values; the CAP program is also expected to yield a very substantial consumers surplus. A positive social rate of return can be calculated if these economic side-benefits and social externalities are ascribed, given that subsidy levels have already been chosen. 9

15 In all cases, where these business development benefits are realized by individual CAP "users", the broader impact includes all those in the community who gain income, employment, and improved market efficiency as a result. Table 1. Expected Benefits of CAP Facilities BENEFICIARIES Direct financial benefits Direct economic benefits Indirect economic benefits Users Lower-cost communications, available locally Reduced cost of business and other transactions Access to commodity/market information Access to information and technological tools Opportunity costs of alternative communications via more distant location (travel cost and time) New income-generating opportunities Local Entrepreneurs Revenues from Internet usage (retail markup) New business opportunities Potential to develop value-added service e.g. market information intermediation, financial services Service Providers Revenues from call minutes/messages, Internet usage (relatively limited) Development/expansion of distribution/marketing channels; increased market share Value of publicity associated with project responding to needs of disadvantaged areas and low-income users. The approach under this proposed project is to undertake a small-scale, measured deployment of new Community Access Points in locations where people are currently unable to access the Internet and ICT services easily, but where likely demand and market conditions will be sufficient to justify the modest investment. More precisely, it seeks to stimulate a market-driven mechanism to enable provision of this public Internet and ICT service access, by offering incentives reducing barriers to entry for existing local entrepreneurs to introduce and operate such services on a commercially viable basis. This last point is critical: the economic assumptions underlying this project are based upon the premise that Community Access Points in most of the designated rural areas can be conducted on a profitable, sustainable basis either now or in the foreseeable future with the expected decreasing cost of Internet access in particular. The fact that such service is not already being offered in many areas indicates that there are some entry barriers or other market failure which justifies a degree of intervention. The analysis of this section seeks to quantify the scope of those barriers and hence the magnitude of OBA subsidy that should be necessary to overcome them, while supporting the overall case for the financial viability of the Community Access Point concept in the identified areas. Summary of Business Models More details are given in Annex 6. The economics of the Community Access Point projects must be examined from two perspectives: (a) The contracting implementing organization (the Contractor ) that will bid for and receive the subsidy, contract directly with the Government, and be responsible to manage and implement the project as a whole; and 10

16 (b) The individual local entrepreneurs (the Entrepreneurs ) that will operate the CAPs and deliver public Internet and ICT services directly to end-user customers in the rural centers, following some form of affiliation or transaction with the Contractor. Although in principle there can be a direct and seamless relationship between these two, the working assumption is that the most likely market model will be that these entities will remain largely separate and arms-length in most cases, most likely along the lines of a franchise model. (a) Local Entrepreneur Business Model The provision of public access Internet service is in many respects no different from dozens of other retail commercial businesses that are routinely provided by small shop owners (Warungs) ubiquitously throughout Indonesia, including in rural villages. Indeed, where adequate network access is available, there are already an increasing number of established Warnet public Internet cafés throughout the country, particularly in larger towns at the Kabupaten level, similar to the even more ubiquitous Wartel facilities that provide public telephone services. These locations are often associated with local shops that sell everything from food and drink to household supplies and especially mobile telephone service prepaid vouchers. With a relatively small amount of assistance, subsidy, and training, the service can be provided and supported by existing local entrepreneurs, which may already be in the Wartel or mobile phone voucher business, and familiar locations for local inhabitants to obtain a variety of goods and services. The business model assumptions under which the service would operate are illustrated and explained below: Table 2. Community Access Point: Local Entrepreneur Business Model Costs in Rp. Table 2(a) Start-Up Costs Start-up Costs No. Unit Costs Total Comments PC Hardware & monitors 10 4,000,000 40,000,000 Server/billing PC 1 5,000,000 5,000,000 Laptop PC and mobile modem 1 7,250,000 7,250,000 25% of locations with laptop PC Software Printers 2 150, ,000 Furniture ,000 6,000,000 Other equipment 5 500,000 2,500,000 Installation setup 20,000,000 Legal, administrative 5,000,000 TOTAL STARTUP 86,050,000 78,800,000 without laptop Table 2(b) Operating Costs (Rp) Adjustments Operating Costs Costs/Month 8 months 16 months Rent+Security/Insurance 1,000,000 0% 1,000,000 0% 1,000,000 Internet Access 2,000,000-20% 1,600,000-15% 1,360,000 Staff 900,000 5% 945,000 5% 992,250 Electricity 800,000 5% 850,000 5% 882,000 Maintenance 250,000 5% 262,000 5% 275,625 Telephone 475,000 0% 475,000-10% 427,500 11

17 Supplies 200,000 5% 210,000 5% 220,500 Promotion/publicity 200,000 5% 210,000 5% 220,500 Other 0 0% 0 0% 0 TOTAL Opex/month 5,825,000 5,542,500 5,378,375 Table 2 (c) Revenues (Rp) Revenues Unit Revenue/Unit Initial Units/month Total/month Basic PC rental Hour 2, ,000 Internet access Hour 4,000 1,200 4,800,000 (basic) Internet access Hour 6, ,000 (premium) Printing, photos etc % of PC 25,000 10% 590,000 Training class fees Class 50, ,000 Adverts/sponsorship Account 2 100,000 Telephone usage 500,000 Government income 0 GROSS REVENUE/month 7,215,000 Table 2(d) Contractor-Financed Model (US$) Months Start-Up Costs $9,353 Amount Financed (35%) $4,490 Amortization $179 Monthly operating costs $812 $812 $812 $812 $812 $812 $812 $781 Gross monthly revenues $784 $784 $784 $784 $784 $784 $623 $865 Net income/month -$27 -$27 -$27 -$27 -$27 -$27 $12 $25 Net income share retained -$27 -$27 -$27 -$27 -$27 -$27 $4 $25 Cumulative cash flow -$27 -$55 -$82 $-110 $-137 -$165 -$161 -$136 Entrepreneur Cumulative Cash Flow $1,600 $1,400 $1,200 $1,000 $800 $600 $400 $200 $0 -$200 -$ (b) CAP Contractor Business Model 12

18 The role of the CAP franchise contractor that will receive the subsidy contract for the Community Access Point projects differs significantly from traditional Universal Access arrangements, given the nature of the proposed service delivery model. In effect the contractor will mainly be expected to facilitate the establishment of the local entrepreneur CAP services, but will likely not maintain direct, long-term involvement with service delivery, other than in the role of supporting services. As discussed above, the model on which this analysis is based follows existing relationships within the established Internet market in Indonesia. This experience, such as that of the AWARI (Asosiasi Warung Internet Indonesia), involves a kind of franchise relationship between the contracting organization and the local Warnet or CAP operator. Under the terms of the subsidy arrangement, the contractor will be responsible to recruit and ensure establishment of a minimum number of CAPs, and to support their operation for at least a two-year period. Other details of the Contractor-Entrepreneur relationship may follow the standard franchising model or some alternative approach, depending upon market conditions and contractual matters. The key requirements will be placed upon the Contractor to guarantee that the required levels of Output, i.e., functioning CAP services, are achieved and maintained as mandated in the contract. For purposes of this analysis, we have assumed a relationship that is consistent with the established trends, while incorporating the administrative and other requirements associated with the OBA subsidy contract. The Business Model for this assumed relationship is illustrated and described in the following sections: Table 3 (a). Community Access Point Franchiser/Contractor: Costs (US$) Start-Up/Investment Costs US$ Project-Wide Administration, management 75,000 Marketing, promotion, recruitment 50,000 Equipment procurement, testing 25,000 Training program 50,000 Per Kecamatan Recruitment, training 400 Marketing, promotion 100 Revenue-sharing Per Kecamatan % of net CAP revenues 70% Operating expenses (average monthly) Project-wide Customer support system 2,500 Compliance monitoring, reporting 500 Per Kecamatan Customer support system 50 Compliance monitoring, reporting 20 Table 3 (b). Community Access Point Franchiser/Contractor Business Model Contractor-financed US$ Months % 20% 20% 20% 20% 10% Deployment roll-out (%) Start-up Costs $274,809 $148,196 $148,196 $148,196 $148,196 $74,098 Monthly operating $3,560 $4,680 $5,800 $6,920 $8,040 $8,600 $8,600 $8,750 13

19 costs Monthly revenues $1,428 $4,284 $7,140 $9,996 $12,852 $14,280 $14,941 $18,966 Net income/month -$2,132 -$396 $1,340 $3,076 $4,812 $5,680 $6,341 $10,216 Subsidy 20% $150,557 20% $150,557 20% $150,557 Cumulative cash flow -$125,673 -$274,265 -$421,120 -$566,240 -$559,067 $-627,484 -$621,143 -$460,371 Contractor Cumulative Cash Flow $300,000 $200,000 $100,000 $0 -$100,000 -$200,000 -$300,000 -$400,000 -$500,000 -$600,000 -$700, Project Subsidy Budgets Based upon the analysis described in the previous sections, it is possible to estimate the total OBA subsidy amounts required. These estimates utilize the average cost and revenue assumptions associated with the proposed CAPs, recognizing that individual performance will vary. Total CAPS Total Project Cost Table 4. Project Subsidy Budgets Total Subsidy % Subsidized Total Population Covered Direct Users Subsidy/Direct Useridy/ Project Subsidy/CAP 1. Java 92 $1,052,125 $841,700 80% $9,149 4,414, ,104 $ Sumatra 130 $1,404,090 $1,123,272 80% $8,641 5,694, ,106 $2.63 Total 222 $2,456,215 $1,964,972 80% $8,851 10,109, ,210 $2.59 B.4 Lessons learned and reflected in the project design Lessons learned from previous Universal Access projects. The project draws on lessons learned from previous and ongoing projects, including those financed by the Bank, for example in Latin America, 10 South Asia and Africa, and more recently in Mongolia. Those particularly relevant to this project include the following: (a) penetration, coverage and access to telecommunications has dramatically improved in many countries due to privatization and competition (especially in the mobile/wireless sector), although in some countries there continue to exist significant portions of rural populations lacking coverage of voice telephone service; (b) universal access programs that have been implemented and that use universal 10 Telecommunications Universal Access Programs in Latin America:Lessons from the Past and Recommendations for a New Generation of Universal Access Programs for the 21st Century (PPIAF-World Bank, 2007) 14

20 access funds to increase community access to telephones and to leverage private investment have been highly successful; (c) universal access programs have demonstrated that rural areas can be provided service on a commercially-sustainable basis; (d) the most successful universal access programs are largely self-financing and provide sufficient funding given current goals; (e) simplification and streamlining allocation of universal access funds is highly desirable; and (f) establishment of mechanisms that stimulate smaller operators and venture-oriented companies is strongly recommended. Lessons learned from the previous USO program in Indonesia. As noted in section A.1 above, Indonesia s previous, , USO program experienced a number of difficulties and could not be sustained. Under this earlier program, the government contracted operators to install physical connections in around 5,600 target villages, mostly using expensive satellite technology. The program experienced difficulties associated with high equipment installation and maintenance costs, non-accessibility of telephones, and high costs to consumers, resulting in limited utilization. Moreover, the earlier program did not anticipate the parallel rollout of wireless networks to many of the target areas. Lessons for this project design are: (a) support an entirely private-sector based business model; (b) anticipate technological change: technology neutrality in Service Agreements; (c) ensure adequate power supply, to take account of power outages as well as lack of electricity in some areas (d) use a performance-based approach: use of Service Agreements requiring not only installation of facilities, but also evidence of operation and quality of service. The government s more recent experience of the 2007 USO tender, underscores the need for relatively simple technical requirements and light regulatory treatment, in particular not to introduce any special tariff or licensing requirements. With regard to Internet access, experiences elsewhere including under the ongoing Mongolia GPOBA project highlight the importance of taking into account issues of population/demand aggregation, power supply and adequate training/public awareness of entrepreneurs and users. B5. Alternatives considered and reasons for rejection The alternatives considered and not pursued were: (a) Subsidize network rollout. A key design decision taken was that the project would not finance rollout of network infrastructure, but focus primarily on public access in areas where network connectivity is already available. The reason for this is that major fixed and wireless operators are investing heavily in network rollout including in areas previously thought to be commercially marginal, and even upgrading to higher-speed data services. However, there is a potentially large unmet need for public access to Internet capabilities even in areas where network connectivity is becoming more available, due to lack of public access facilities, unfamiliarity with Internet services, and lack of exposure for local entrepreneurs to the business models contemplated by this project. (b) Support for backbone communications infrastructure. Although rollout of terrestrial backbone will address a key bottleneck to reducing access costs in remote areas, this alternative was rejected. The resources available under GPOBA are insufficient to ensure the rollout of a comprehensive backbone which is estimated to cost several hundred million US$. A detailed backbone feasibility study and privatepublic financing options is currently being prepared with support from PPIAF, and the government is working on the development of public-private partnerships to finance deployment. (c) Subsidize selected USO public Village Phone deployments. This was the aim of the previous project proposal, which would have contributed to the implementation of the Ministry s USO rollout plans, while providing many of the same benefits in terms of demonstration of entrepreneurship and business case models, and experience with the competitive procurement process. Given the increasing mobile network rollout, access to basic telephony is improving rapidly. (d) Technical assistance support only. This alternative was rejected because the incentives required to 15

21 facilitate public access are real, and an appropriate model needs to be demonstrated using real locations. The project is above all a learning opportunity. It will demonstrate the applicability of a private-public partnership-based approach to rural infrastructure financing in Indonesia. Moreover, the project is also designed to benefit end-users in disadvantaged areas. C. IMPLEMENTATION C.1 Milestones for project implementation The total timeline allowed for the project is two years, with the following proposed implementation schedule (see Table 5). The timing of Grant Agreement signature, and all subsequent steps, is subject to the Government of Indonesia s internal approvals timetable. Table 5: Key Milestones Activities Indicative Schedule* GPOBA provides subsidy commitment January 2008 Project design and documentation finalized, including Grant Agreement January 2008 Documentation to government for review January 2008 Signature of GPOBA Grant Agreement March 2008 Recruitment of project admin. Support to Ministry April 2008 Launch of Tender 1 (Group 1-Java) June 2008 Service Agreement for Tender 1 August 2008 Launch of Tender 2 (Group 2-Sumatra) September 2008 Service Agreement for Tender 2 November 2008 Recruitment of Independent Verification Agent July 2008 Project Implementation begins Tender 1 August 2008 Subsidy Disbursement begins Tender 1 September 2008 Mid-Term Review January 2009 GPOBA Subsidy disbursement (all tenders) ends December 2009 C.2 Institutional and implementation arrangements GPOBA/World Bank will sign the Grant Agreement with the Ministry of Finance, representing the Government, as per standard procedures for processing of World Bank grants in Indonesia. The Project Implementing Agency is MCIT. MCIT will establish and maintain a Project Management Team responsible for overseeing all procedures related to development and implementation of the project, including procurement, financial management, monitoring and evaluation. MCIT will engage consultants funded by the project, to assist with project management and administration, monitoring and evaluation (independent verification agent), and public awareness. Detailed contractual arrangements are described in the project Operational Manual and Service Agreements, and summarized in Figure 1. Figure 1. Overview of Contractual Arrangements and Funds Flow Government: MCIT Service Agreement Subsidy Payment Contractor Different forms of Commercial Agreement s 16

22 GPOBA/World Bank Local Entrepreneur Local Entrepreneur Local Entrepreneur C.3 Monitoring and evaluation of outcomes/results VILLAGERS Following contract award and execution, MCIT s project management team will monitor and enforce the compliance of the selected Contractors for each procurement package in implementing their obligations under the Service Agreement, and also to authorize disbursement of the subsidy payments in accordance with the agreed milestones. The proposed monitoring and evaluation framework is as follows: Compliance reports The Contractors will be expected to provide regular written reports to the Ministry within 60 days of the Effective Date of their Service Agreements and within 45 days of the end of each calendar quarter (i.e. a period of three months), detailing the status of fulfillment of the contract obligations. These reports shall include the following information: 3 a detailed description of facility installation plans and progress for the current period, including details on the installation and operation of Public Access Facilities in the required locations, according to the milestones set out in the Service Agreement; 3 identification of all Local Entrepreneur operators of Public Access Facility services in the designated locations, and details on the contractual relationships, training support, business plans, and operating status of each; 3 a report on the extent of service demand, usage, revenues, and other customer utilization of the services and facilities, for each location where service has been established; 3 a report on the achievement of the quality of service obligations set forth in the Service Agreement; 3 complete explanation of any difficulties encountered or anticipated in the implementation of the contract services; and 3 other such information as determined by the Ministry. Independent Verification The Ministry will appoint a qualified person to serve as an Independent Verification Agent for the projects to be implemented under this program. This agent shall: 3 Review the compliance reports submitted by Contractors, and advise MCIT on their completeness and appropriateness; 3 Conduct site visits to selected service installations to evaluate the status and quality of the Public Access Facility and Local Entrepreneur operations, including both technical functionality and service delivery to end users; 3 Obtain and review usage and financial reports from Contractors in relation to the required service installations, and validate results against the progress reports and contract obligations; 3 Provide certification to MCIT of Contractors compliance with their contract obligations, to authorize payment milestones; alternatively, withhold such certification, explaining reasons for noncompliance, and measures necessary to mitigate any problems encountered; 3 Evaluate the impact and extent of any extenuating circumstances, including force majeure that may affect operator compliance, and advise MCIT on such circumstances and the appropriate response. Reports by the independent verification shall be provided simultaneously to MCIT and to GPOBA/World Bank for a maximum of 5 working days review before authorization of disbursement. 17

23 C.4 Financial Management and Disbursement Arrangements Flow of Funds The amounts payable will be determined based on the monthly reports prepared by each Contractor and against a unit cost agreed as a result of the bidding process. The reports will include the number of new Community Access Points installed. The report will be verified by MCIT with the assistance of the Independent Verification Agent. Two types of payments re envisaged: 3 Requests for payments will be made by the Contractor to be sent jointly to the ministry and to GPOBA together with the certification by the IVA. 3 Program support for technical assistance will include (a) payments to be made to consultants employed by MCIT; and (b) payment for the IVA. Proposed Disbursement Method. MCIT will prepare withdrawal applications for submissions to GPOBA/World Bank. Disbursement will be made under direct payment procedures. Disbursements from the Grant will be based on the submission of full documentation/ copies of accounting evidence (including reports, TSA certification with photo status, and third party receipts for the output based disbursement and consultant contracts for auditor contract reimbursement) along with the Withdrawal Applications. C 5. Sustainability Sustainability has been factored into the project design in several ways. As noted in the overview of regulatory issues, in general no special provisions are expected for the target locations, with the possible exception that CAP-specific reduced Internet service tariffs might be recommended.. The project design and implementation are not intended to create or offer any distortions that stimulate rent-seeking behaviour which might be unfavorable to the stability of competitive market conditions and the continuing growth of commercial Internet services across Indonesia. For the Local Entrepreneurs, it is anticipated that, with the increased demand for Internet applications, their business proposition will become increasingly favorable over time, and new local e-commerce and other services might increase profitability even beyond the estimates made for this project. It is intended that the CAPs to be developed under this project blend seamlessly into the market-driven business environment of Indonesian telecommunications and ICT over time. The CAP subsidies are a short-term solution, which counts upon further roll-out and increased accessibility of commercial Internet services and access centers before the end of this decade. C.6 Critical risks and possible controversial aspects 11 Risk Mitigation Rating with Mitigation Lack of interested bidders Dissemination of project information by MCIT, Modest (Contractors) GPOBA/World Bank; stakeholder consultations. Failure of the smart subsidy bidding process to produce bids for all target areas Consultations with winning bidders on other sites to recognize their reasons for not offering to bid on the ignored sites, and what is required to stimulate their participation in a re-bidding. Modest Selection of non-acceptable or technically unreachable site and public access facility locations. Discussion with Contractors on technical feasibility, cost of access; use of sophisticated planning and marketing tools. Affordability and willingness to The project is expected to allow low-cost usage of basic Low Low 11 Risk ratings: High (>75%), Substantial (50-75%), Modest (25-50%), Low/Negligible (<25%) 18

24 Risk Mitigation Rating with Mitigation pay for new Internet services by the poor and very poor. Internet access that has been successfully used, for example by other Internet facilities (warnets) throughout the country. Measurement and monitoring of service quantity and access availability. Contractors and Local Entrepreneurs (where appropriate) will be required each month to record hours of use from each new network access site and public access facility installation and to ensure through market mechanisms that usage achieves certain pre-set norms. Verification will be the responsibility of the MCIT, as per the terms of contract. Audit function to be preformed by external auditor. Low Difficulties in selection of qualified local entrepreneurs to operate, secure, maintain equipment and sell Internet usage on public access facilities. Selection of retail outlets will be the responsibility of the Contractors and based upon the usual market criteria of performance. Low Sustainability Corruption Procurement: Financial Management M&E Equipment delivered to more commercially attractive locations instead of villages The economic analysis indicates a high chance of sustainability for most locations. However, there may be some, especially in the most remote areas, that will have difficulty remaining sustainable. -Use of Standard Bidding Documents (SBDs), prior review -Direct payment of subsidy to Contractors -Technical/Service Audit; in-built customer dialling record (CDR) verification process. -Independent verification Low Low 19

25 Annex 1. Project Costs Schedule Component Local US$ million Foreign US$ million Total US$ million Subsidy 1,964,972 1,964,272 Group 1 841, ,700 Java Group 2 1,123,272 1,123,272 Sumatra Consulting Services 329, ,250 Management and 199, ,250* Administration support to Implementating Agency Independent 75,000 75,000 Verification Agent Public Information and 55,000 55,000 Tender Promotion Bank/GPOBA Supervision 150, ,000 Total 2,443,522 2,443,522 Note: Government will contribute to the costs of program management and public information/tender promotion, including through provision of office space, logistical support, telecommunications, and audit. In addition, the Government will evaluate the results of the pilot with a view to scaling up implementation through the National Budget and/or USO fund. Budget for Management and Administration Support to the Implementing Agency: Procurement Specialist Finance Specialist/Accountant Admin. Support Project Management Local travel 8750 Misc Total 199,250 20

26 Annex 2: Financial Management and Disbursement Arrangements **CLEARANCE PENDING 1. Summary of the Financial Management Assessment Overall, the project financial management risk assessed is moderate. The main risk of the project is related to the weak overall country environmental control, especially related to the process for selection of the Contractor. The design of the project whereby Contractors will only receive payment (from the grant fund) after the output of the project is delivered and verified (by independent auditor and random check by MCIT) contributes to lessening the project risk. Only a 20% advance payment will be made through the grant. In addition to that the MOU with the national audit body, BPKP, contributes to mitigating the project risk. 2. Risk Analysis The Ministry of Communications and Information Technology (MCIT) will be the implementing agency for the project. MCIT has no recent experience in implementing donor funded projects. The latest experience was through implementation of Loan 4244-IND (Information Infrastructure Development Project) which was closed on June 30, The auditor provided an adverse opinion on the latest audit report due to the limited auditor understanding of WB financed procurement process. The audit findings were completely followed up, as noted in the IIDP Project files.. As part of the audit on FY 2005 Government of Indonesia financial statement by BPK, MCIT was taken as sample. BPKP issued a report on the findings of the audit. However, no opinion was provided on the financial statement. The FY 2005 audit report of MCIT noted mostly findings related to limited implementation of government accounting system and impact of reorganization of the Ministry. No misuse of funds was reported. In March 2006 MCIT entered into an agreement (MOU) with BPKP. The MOU intended to strengthen governance within MCIT, including accountability on implementation of APBN to improve the ministry s performance and service to the public. The MOU will last for 3 years from the signing, starting March 29, The amounts payable will be determined based on the monthly report prepared by each operator. The report will include number of new CAPs installed. The report will be verified by MCIT with the assistance of technical auditor assigned in the project. Verification will be conducted through random check on the telephone connection. Overall, the project financial management risk assessed is moderate. The main risk of the project is related to the weak overall country environmental control especially related to the process selection of operators. The design of the project whereby operators will only receive payment (from the grant fund) only after the output of the project delivered and verified (by independent auditor and randomly check by MCIT) contributes to lessening the project risk. Therefore no advance payment made through the grant. In addition to that the MOU with BPKP contributes to mitigating the project risk. Based on the above risk, below is the proposed financial management action plan for the project, to mitigate the project risks, Action Plan Expected Output Due Date 21

27 1. Term of Reference (TOR) for the independent verification agent who will verify the project outputs and trigger disbursement. Audit Arrangement No objection on the TOR by the Bank Grant disbursement condition The annual financial audit for the project financial reports will be carried out by BPK. The annual financial audit report will be furnished to the Bank no later than six months after the end of the government s fiscal year (June 30 of the following year). The audit assignment will be in accordance with the agreed Terms of Reference. The TOR will basically include an assertion on the reliability of the project financial reports. The annual audited financial reports will include a review and reconciliation of Designated Account transactions. Type of Audit Report Executing Agency Due Date MCIT Project Financial Statement (a single audit opinion comprising project account). Funds Flow and Disbursement Arrangement Six months after the end of the government fiscal year Under the GPOBA grant, the payment will be made towards output-based disbursement. Therefore, there is no requirement for the government to open a Designated (Special) Account (DA) for the project. Disbursement will be made under direct payment procedures. Disbursements from the Grant will be based on the submission of full documentation/ copies of accounting evidence (including reports, auditor certification with photo status, and third party receipts for the output based disbursement and auditor contracts for auditor contract reimbursement) along with the Withdrawal Applications. MCIT will be responsible to prepare the application for withdrawal for advances and reporting the use of the DA, for submissions to the Bank. All documentation for expenditures submitted for disbursement will be retained at the implementing government unit and shall be made available to the auditors for the annual audit and to the Bank and its representatives if requested. The amounts payable will be determined based on the monthly report prepared by each implementing organization. The report will include number of new Community Access Points installed and the reported usage. The report will be verified by MCIT with the assistance of technical auditor assigned in the project. Verification will be conducted through random check on the Community Access Points. 22

28 Annex 3. Procurement **CLEARANCE PENDING General Procurement for the proposed project would be carried out in accordance with the World Bank s Guidelines: Procurement under IBRD Loans and IDA Credits dated May 2004, revised October 2006; and Guidelines: Selection and Employment of Consultants by World Bank Borrowers dated May 2004, revised October 2006 and the provisions stipulated in the Legal Agreement. The various items under different expenditure categories are described in general below. For each contract to be financed by the Credit, the different procurement methods or consultant selection methods, the need for prequalification, estimated costs, prior review requirements, and time frame are agreed between the Borrower and the Bank in the Procurement Plan. The Procurement Plan will be updated at least every six months or as required to reflect the actual project implementation needs and improvements in institutional capacity. Procurement of Works: N/A. Procurement of Output-Based Schemes: The pilot projects included in this Project are for expansion of Internet access to the rural areas. In general, the goal is to use OBA funds, through a competitive procurement process, to create sufficient economic incentives for operators to set up and operate Community Access Points in the target locations, which will connect to the existing (or planned) ICT infrastructure (fixed/wireless/satellite) to allow public Internet usage at the community level. A total of about US$1,802,000 in subsidy payments will be awarded in accordance with the provisions of paragraphs 3.13(a), 3.14 and 3.15 of the Guidelines for Procurement under IBRD Loans and Credits issued by the WB in May All contracts will be procured through ICB. Since the Bank does not have standard bidding documents for this type of procurement, the Bidding Documents will be prepared by the Borrower in consultation with the Bank and must be satisfactory to the Bank. The Borrower must allow all bidders from eligible countries to bid, and will not grant domestic preferences. The evaluation criteria for the bids will be that the Borrower will award the Project to the Bidder that offers to carry out the Project with the minimum financing (lowest subsidy) from the Government. Procurement of non-consulting services: N/A Selection of Consultants: A total of about US$330,000 of consulting services will be procured under the project to carry out assignments in the following areas of expertise: project management/administration, including procurement support; public awareness; and technical/service audit. Short lists of consultants for services estimated to cost less than US$400,000 equivalent per contract may be composed entirely of national consultants in accordance with the provisions of paragraph 2.7 of the Consultant Guidelines. The Bank s Standard Request for Proposal will be used for selection of consultants. Assessment of the agency s capacity to implement procurement Procurement activities will be carried out by the Directorate General of Applications and Telematics) 12 of the Ministry of Communications and Information Technology. The unit is staffed by less than five procurement officers who have some training in Government Procurement Procedures. Some of these staffs will be members of the Project Management Team (PIU) set up for the project. A Project Operational Manual will be prepared and will include, in addition to the procurement procedures, the Standard Bidding Documents (SBDs) to be used for each procurement method, as well as model contracts for works and goods procured. 12 To be confirmed prior to signing of the Agreement 23

29 An assessment of the capacity of the Implementing Agency to implement procurement actions for the project has been carried out by Bisma Husen, EAPCO, in November The assessment reviewed the organizational structure for implementing the project and the interaction between the project s staff responsible for procurement and the Ministry s relevant central unit for administration and finance. Most of major issues and risks concerning the procurement component for implementation of the project have been identified and corrective measures have been agreed as followed: Main Risks / Issues Corrective Measures Weak capacity in procurement in Bank s Procurement training is provided at general and the World Bank s project s launch. procurement in particular. Support of Procurement Specialist is required as project s effectiveness condition and provided for the entire duration of the project. Independency of procurement decisions Procurement Committee to be headed by a high echelon official (min. echelon 2). Generally weak procurement Anti Corruption Plan to be prepared and environment due to corruption, implemented. collusion, and nepotism. Concerns of speculative inquiries relating to corruption, collusion and nepotism reduces interests of qualified staffs to take on procurement functions. Delays in procurement Procurement Plan is effectively used as procurement progress monitoring tool. Subject that the corrective measures above are implemented, the overall project risk for procurement is AVERAGE. A. Procurement Plan The Recipient, at appraisal, developed a draft Procurement Plan for project implementation which provides the basis for the procurement methods. The Procurement Plan will be finalized and reviewed by the Bank prior to the signing of the Agreement. It will also be available in the Project s database and in the Bank s external website. The Procurement Plan will be updated by the Project Team on a six-monthly basis or as required to reflect the actual project implementation needs and improvements in institutional capacity. B. Frequency of Procurement Supervision It is recommended that the first procurement supervision mission be carried out three (3) months after effectiveness and once every year thereafter. A post procurement review of all contracts not prior reviewed should be included in the ex-post review program, which will be carried out by BPKP for the Bank. C. Details of the Procurement Arrangement involving international competition Goods and Works and non consulting services. 13 The draft Procurement Plan is still under preparation at the time of appraisal. 24

30 (a) List of contract Packages which will be procured following ICB and direct contracting: Ref. No. Contract (Description) Estimated Cost (US$ 000) Procurement Method P-Q Domestic Preference (yes/no) Review by Bank (Prior/Post) Expected Bid- Opening Date (*) 1 CAP-Java 841,700 ICB No No Prior July CAP-Sumatra 1,123,272 ICB No No Prior October 2008 (*) To be confirmed prior to signing of Agreement Comments (b) ICB contracts estimated to cost above $150,000 per contract and all direct contracting will be subject to prior review by the Bank. 2. Consulting Services. (a) List of Consulting Assignments with short-list of international firms. N/A. (b) Consultancy services estimated to cost above $50,000 per contract for individual, $100,000 per contract for firms and single source selection of individual consultants and firms will be subject to prior review by the Bank. (c) Short lists composed entirely of national consultants: Short lists of consultants for services estimated to cost less than $400,000 equivalent per contract may be composed entirely of national consultants in accordance with the provisions of paragraph 2.7 of the Consultant Guidelines Table A: Thresholds for Procurement Methods and Prior Review Expenditure Category Contract Value Threshold (US$) Procurement Method Contracts Subject to Prior Review All ICB All contracts Goods 150,000 NCB (*) First contract 50,000 Shopping (*) First contract Consultant Services Firms All QCBS All contracts 100,000 CQ First contracts Individuals All Competitive Specified in Procurement Plan (*) Although NCB and Shopping are not foreseen in this project, the Agreement will still include these methods for flexibility. 25

31 Annex 4. Environment (OP/BP 4.01) Disposal of Computer Equipment and Peripherals Purpose This guideline specifies the procedure for the proper disposal of computer equipment and peripherals in compliance with all GOI legislations for activities under the GPOBA-financed Project Background The proposed project is aimed to support implementation of a limited number of Community Access points (CAP) in Indonesia. The proposed project will establish CAP in a small number of locations where public access to advanced communications is not currently available or affordable yet telecommunications network access is already in place. CAPs will offer a range of Information and Communication Technology (ICT) services, including voice telephony (VOIP), internet access, computer applications and training. Telecommunications processes do not normally require the use of significant amounts of hazardous materials, however, operations and maintenance activities may result in generating electronic wastes (e.g. printed circuit boards from computer, other electronic equipment). Environmental Impacts In general, the materials-and energy-intense production process, greater adoption of PC, plus the rapid rate at which they are discarded for newer machines, add up to growing mountains of garbage and increasingly serious contributions to resource depletion, environmental pollution. The main risk of exposure is probably from computers that have been dumped in landfills or from environmentally unsafe recycling processes. Desktop computers generally consist of three major units: the main processing machine (CPU consist of power supply, fan, IC boards, DVD drive, CD drive, hard disk, soft disk and shell casing), the monitor and keyboard. These major units are composed of various materials, which, in turn consist of a wide range of chemicals, elements and heavy metals (see table 1). Monitors, and to a lesser extent computer, contain significant quantities of heavy metals such as lead, mercury, cadmium and chromium, which pose potential health risks to water supplies near landfills where they are eventually dumped. Lead is especially an issue in waste disposal because it becomes bio available in soils with increasing ph, and becomes available to animals and humans through the food chain and soil dust inhalation. Table 1: composition of a personal desktop computer Name Recycling Efficiency Plastics 20 % Lead 5% Aluminium 80% Iron 80% Selenium 70% Rhodium 50% Tin 70% Copper 90% Barium 0% 26

32 Name Recycling Efficiency Nickel 80% Zinc 60% Tantalum 0% Indium 60% Gold 99% Ruthenium 80% Cobalt 85% Palladium 95% Silver 98% Platinum 95% Source: Handy and Harman Electronic Materials Corp., 1999, Composition of a Personal Desktop Computer Methods The main principle of disposal method is to optimize the lifespan of computers, and avoiding as much as possible dumping the used (and not fully function) equipments into the landfill. Below is the list of practical methods of disposal for computer equipment and peripherals: 1. Avoid buying new computer when the current one does not work, upgrading machine could serve the same purpose. Promptly selling old machines to the used-product market is also important. 2. Use energy saving practices: use of sleep modes that occur when the computer is idle. While in sleep mode, the computer consumes 15% less power than when in regular mode (USEPA, 2005). The computer or monitor can be woken up simply by touching the keyboard or moving the mouse. 3. Monitors: for extended periods of non-use, such as overnight or weekends, computer monitors which will be not be in use for these periods should be turned off completely. The reason for this is that even in a sleep mode the monitor continues to draw power aggregating energy use. 4. Reduction and Reuse: reducing the amount of computer waste relies heavily upon the reuse of systems that may be out of date, but fully functional. Reusing old computers can manifest itself in two main ways: by the selling or donation of old systems, or by up-grading existing systems. The key concept with respect to reuse is to meet the user s needs with existing machines, while extending that machine s lifespan. 5. Recycling and Reduction: monitors are another components that require careful recycling measures due to their high lead content. 6. Buying products from suppliers which offer a take-back or trade-in program. 7. Encourage efficient reuse, refurbishment or recycling by the purchasing equipment that is easily dismantled. 27

33 Annex 5. Indonesia Telecommunications Market Structure, 2007 Responsibilities Policy Regulatory Body Spectrum Management Agency to enforce Law Owner of main fixed network backbone International Gateway Market Segment Fixed Line (copper) Fixed Wireless (CDMA x. Limited to within one fixed-line area code; no roaming) Mobile (GSM, CDMA 450, CDMA2000-1x, WCDMA) 3 rd - Generation mobile (3G) Internet and Data Institutions Ministry of Communications and Information Technology (Kominfo) BRTI: independent regulatory authority, but chaired by Director-General of Post and Telecommunications under Ministry of Communications and IT DG Post and Telecommunications (Ministry of Communications and IT) Ministry of Communications and Information Technology (Kominfo) PT Telkom PT Indosat, PT Telkom, PT Bakrie Main Players Total lines: about 9.1 million. PT Telkom, PT Indosat, PT Bakrie (limited) Total subscribers: around 6 million (Q4 2006). PT Telkom (90% market share): through Telekom Flexi CDMA X), PT Indosat. StarOne (fixed wireless in Surabaya, Malang, Pasuran, Bogor), PT Bakrie. Esia fixed-wireless in selected cities in Jakarta and W. Java, PT Batam Bintan Telekomunikasi. Fixed wireless, licensed to operate in Batam-Bintan Total subscribers: about 80 million (end-2007 estimate). Three GSM operators with total of 98% market share; also offering GPRS, EDGE data services: PT Telkomsel (about 40 million subscribers), PT Indosat (about 15 million subscribers) PT Excelcomindo (XL) (about 10 million subscribers). Other: GSM: Hutchinson (also 3G), Natrindo (Lippo), CDMA 2000 : Bimantara Citra (Mobile-8); Mandara, Mobisel, Primasel CDMA 450: PT Sampoerna Telekomunikasi (pilot basis) Five licenses awarded, Hutchinson Telecom; PT Natrindo Telepon Selular (Lippo Telecom) (2005); Telkomsel, Indosat and XL awarded licenses in March Telkomsel, Indosat and XL are operational with over 1.5 million subs. About 23 million subscribers. 11 percent penetration rate. 150 licensed Internet Services Providers; about 60 operating. Seven licensed VoIP Operators: Telkom, Indosat, XL, Atlasat, Gaharu, Swaguna Widya Pratama, + unlicensed operators/services 20+ licensed broadband wireless operators using 2.5, 3.3, 3.5, 5 and 10 GHz bands. Broadband; Telkom (ADSL) provider through Speedy service; limited to Jakarta, Bogor and Serang; Kabelvision (cable) in Jakarta, Surabaya and Bali. 28

34 Economic Rate of Return Analysis Annex 6. Economic Analysis Community Access Point Model Economic Rate of Return Analysis Year 1 Year 2 Comments Contractor Financials Project Startup $400,000 $0 Assumes all projects started in Year 1, two separate projects Locations Assumes all locations added in first 12 months Total Investment in locations $2,056,215 $0 Annual Operating Costs $193,860 $258,480 Total Annual Costs for Contractor $2,650,075 $258,480 Annual Revenues to Contractor $641,339 $855,119 Net Annual Cost to Contractor -$2,008,735 $596,639 Subsidy to Contractor $1,571,977 $392,994 Net Annual Cost to Cont. w-subsidy -$436,758 $989,633 IRR w/o-subsidy -70% IRR w-subsidy 18% OBA Financials Year 1 Year 2 Year 3 Subsidy Investment -$1,571,977 -$392,994 $0 Economic Benefits $1,552,296 $442,296 $442,296 Net Economic Benefits -$19,682 $49,301 $442,296 E-NPV $336,547 Net Present Value of Net Economic 12 % discount rate ERR 15% Economic Rate of Return for Subsidy Investment Financial, Economic components Investment, Start-up Amount Unit Comments Administration, management $75,000 $/project area Assumed allocation of salary, overhead costs w/o markup Marketing, promotion, recruitment $50,000 $/project area Assumed out-of-pocket costs Equipment procurement, testing $25,000 $/project area Assumed out-of-pocket costs Training program $50,000 $/project area Assumed cost to establish training program, including personnel Equipment, installation $8,762 $/location Average total cost for equipment, installation, set-up, admin, labor, etc. Contractor recruitment, marketing $500 $/location Per-location cost for personnel, expenses to visit, recruit, train entrepreneurs, m Operating Costs Customer support system $2,500 $/project area/month See Operational Manual discussion of these costs $50 $/location/month Compliance, monitoring, reporting $500 $/project area/month $20 $/location/month Entrepreneur operating costs $602 $/location/month average total monthly operating costs over project life Revenues Gross entrepreneur revenue $1,006 $/location/month Average monthly revenue over project life Net entrepreneur income $62 $/location/month Average retained net income, based on revenue sharing with Contractor Gross Contractor revenue $321 $/location/month Average gross monthly revenue to Contractor per location Net Contractor income $232 $/location/month Average net income from CAP locations, including finance payments Economic Benefits Local e-commerce benefits $500 $/location/year estimated average gains from Internet e-commerce, annual per location NPV Training benefits to users $5,000 $/location estimated net present value of career, employment benefits from ICT training Entrepreneur multiplier 2.0 factor x net Entrepreneur income/month, reflecting impact on business, employment 29

35 Annex 7. Project Preparation and Supervision A. Institutions responsible for project preparation: 1) GPOBA c/o World Bank 2) Ministry of Communications and Information Technology (MCIT) B. GPOBA/World Bank Team: Core Team: Name Title Unit Natasha Beschorner Task Team Leader CITPO Sr. ICT Policy Specialist Juan Navas-Sabater Sr. Telecommunications Specialist CITPO Practice Leader Kashmira Daruwalla Sr. Procurement Specialist CITPO Naomi Halewood Operations Analyst CITPO Andri Wibisono ETC (Infrastructure) EASIS (Country Office) Bisma Husen Procurement Specialist EAPCO (Country Office) Novira Asra Sr. Financial Management EAPCO (Country Office) Specialist Vivianti Rambe Environment Specialist EASSO (Country Office) Sulistiowati Nainggolan Social Safeguards Coordinator EASSO (Country Office) Melinda Good Sr. Counsel LEGEA Jan van Rees Consultant (technical specialist) External David N. Townsend Consultant (transaction specialist, economist) External Advisory team: Name Title Role Unit Patricia Veevers- Program Manager Peer Review/ GPOBA/FEU Carter Advisory Cledan Mandri- Infrastructure Specialist Advisory FEU/GPOBA Perrott Irving Kucynski Panel of Experts Advisory GPOBA Alejandro Jadresic Panel of Experts Advisory GPOBA Hongjoo Hahm Lead Infrastructure Specialist/Coordinator Advisory EASIS (Country Office) C. Project Preparation Costs Expenditures as of December 2007 for project preparation: US$200,000 (including all external consultants). Funds expected for completion of project preparation: US$30,000 30

36 Annex 8. Documents in the Project File Providing Telecommunications for Rural Indonesia, World Bank, March 2007 (financed by Netherlands ICT Trust Fund) Indonesia Telecommunications Sector Update for November 2006 Indonesia Infrastructure Summit 2 Draft Operational Manual, Bidding Documents and Service Agreements Government policies, decrees, regulations on USO and related matters Indonesia: Rural Investment Climate Assessment, 2006 (World Bank) Indonesia: Averting an Infrastructure Crisis, 2005 (World Bank) Income distribution survey (2002, 2005 partial; SUSENAS) Census (village-level), 2005, 2006 (PODES) 31

37 Annex 9. Proposed Project Sites Region Java Province Banten Java Barat Kabupaten Lebak Pandeglang Sukabumi Banjarsari Angsana Bantargadung Kalibunder Bayah Banjar Bojong Genteng Kebonpedes Bojongmanik Bojong Caringin Lengkong Kecamatan Cibadak Cadas sari Cibadak Nagrak Cibeber Cibaliung Cibitung Nayalindung Cijaku Cigeulis Cicantayan Pabuaran Cikulur Cikedal Cicurug Parakan Salak Cileles Cikeusik Cidadap Parung Kuda Cilograng Cimanggu Cidahu Pelabuhan Ratu Cimarga Cimanuk Cidolog Purabaya Cipanas Cipeucang Ciemas Pelabuhan Ratu Curugbitung Cisata Cikakak Sagaranten Gunungkencana Jiput Cikembar Simpenan Leuwidamar Kaduhejo Cikidang Sukalarang Maja Karangtanjung Ciracap Sukaraja Malingping Labuan Cireunghas Surade Muncang Mandalawangi Cisaat Tegal Buleud Panggarangan Menes Cisolok Waluran Sobang Munjul Curugkembar Warung Kiara Sajira Pagelaran Gegerbitung Wanasalam Panimbang Gunung Guruh Warunggunung Patia Jampang Kulon Picung Jampang Tengah Saketi Kabandungan Sumur Kadudampit Kalapa Nunggal Total

38 Figure 9A: Java Project Sites 33

39 Sumatra Lampung Lampung Selatan Lampung Barat Lampung Tengah Lampung Timur Tangamus Lampung Utara Tulung Bawang Pesawaran Candipuro Balik Bukit Anak Tuha Bandar Sribawono Adi Luwuh Abung Barat Banjar Agung Jati Agung Batu Brak Bandar Mataram Batanghari Cukuh Balak Abung Selatan Gedung Aji Gedong Tataan Katibung Belalau Bandar Surabaya Batanghari Nuban Gading Rejo Abung Semuli Gedung Meneng Kedondong Ketapang Bengkunat Bangunrejo Braja Slebah Kelumbayan Abung Surakarta Gunung Terang Negeri Katon Merbau Mataram Karya Penggawa Bekri Bumi Agung Pagelaran Abung Tengah Lambu Kibang Pandang Cermin Natar Lemong Bumi Nabung Gunung Pelindung Pardasuka Abung Timur Menggala Punduh Pidada Palas Pesisir Selatan Bumi Ratu Nuban Jabung Pematang Sawa Abung Tinggi Mesuji Tengineneng Penengahan Pesisir Tengah Gunung Sugih Labuhan Maringgai Pringsewu Bukit Kemuning Penawar Tama Way Lima Rajabasa Pesisir Utara Kalirejo Labuhan Ratu Pugung Bunga Mayang Rawajitu Selatan Sidomulyo Sekincau Kota Gajah Margatiga Palau Panggung Kotabumi Rawajitu Utara Sragi Sukau Pandang Ratu Mataram Baru Semaka Kotabumi Selatan Simpang Pematang Tanjung Bintang Sumber Jaya Pubian Melinting Sukoharjo Kotabumi Utara Tanjung Raya Suoh Punggur Metro Kibang Sumberejo Muara Sungkai Tulung Bawang Tengah Way Tenong Rumbia Pasir Sakti Talang Padang Sungkai Selatan Tulung Bawang Udik Selagai Lingga Pekalongan Ulubelu Sungkai Utara Tumi Jajar Sendang Agung Purbolinggo Wonosobo Tanjung Raja Way Serdang Seputih Agung Raman Utara Seputih Banyak Sekampung Seputih Mataram Sekampung Udik Seputih Raman Sukadana Seputih Surabaya Waway Karya Terbanggi Besar Way Bungur Terusan Nunyai Way Jepara Trimurjo Way Pengubuan Way Seputih Figure 9b. Sumatra Project Sites 34