Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized OFFICIAL DOCUMENTS 1 Amendment to Verification Arrangement (Local Government and Decentralization Project) between BADAN PENGAWASAN KEUANGAN DAN PEMBANGUNAN and INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT Public Disclosure Authorized Dated February 13, 2013
AMENDMENT TO THE VERIFICATION ARRANGEMENT With reference to the Arrangement dated December 20, 2010 ("Arrangement"), entered into between BADAN PENGAWASAN KEUANGAN DAN PEMBANGUNAN, the Financial and Development Supervisory Board of the Republic of Indonesia ("BPKP") and INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT ("Bank"), related to the Loan Agreement, dated June 23, 2010, as amended on December 2, 2011 (Loan No. 7914-ID) for the Local Government Decentralization Project ("Project") between the Republic of Indonesia and the Bank, the BPKP and the Bank hereby agree to amend such Arrangement as set out below ("Amended Arrangement"). 1. Definitions. Unless the context requires otherwise, the capitalized terms used in this Arrangement have the meanings ascribed to them in the Loan Agreement. 2. Verification Terms of Reference. BPKP will carry out the activities set out in the Verification of Outputs (VO) Terms of Reference, as amended and set forth in the Attachment to this Amended Arrangement. 3. Term of Arrangement. This Amended Arrangement shall enter into effect as of the date first written above upon countersignature by the Bank and BPKP. Except as may be otherwise notified by either Party in writing, this Arrangement will terminate on the Closing Date of the Loan, as extended in accordance with the terms of the Loan Agreement. Should any disputes arise under this Arrangement, they will be resolved in accordance with the dispute resolution provisions applicable to the Loan Agreement. 4. Contact Information. The Bank's address is: International Bank for Reconstruction and Development, ISEB Tower 2, Jl. Jend. Sudirman Kay. 52-53, Jakarta 12190, Telephone: (62-21) 52993000, Facsimile: (62-21) 52993111. The Bank's representative for the purposes of this Arrangement is the Indonesia Country Director. BPKP's address is: Jl. Pramuka No. 33, Jakarta Timur 13120 Telp 72-21-859-10031 Fax: 62-21-859-10030. BPKP's representative for the purposes of this Arrangement is the Head of BPKP. 5. Except as specifically amended by this Amended Arrangement, all terms of the Arrangement remain in effect. AGREED at Jakarta, Indonesia, as of the day and year first above written. BADAN PENGAWASAN KEUANGAN DAN PEMBANGUNAN INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT Mardiasmo Authorized Representative Stefan G. Koeberle Authorized Representative
ATTACHMENT Local Government (LG) & Decentralization (DAK Reimbursement) Project the Financial and Development Supervisory Board (BPKP) Verification of Outputs: Terms of Reference I. Project Background 1. Project Development Objective. The objective of the LG & Decentralization (DAK Reimbursement) Project (the Project) is to improve the financial and technical accountability and reporting of the central government's Specific Purpose Grants (DAK). This will be achieved through the application of an Output-Based Disbursement (OBD) financing approach, whereby the Project will reimburse a slice of the existing DAK for Infrastructure (roads, irrigation, water and sanitation) based on reported and verified physical outputs delivered by participating local governments (LGs). Components. The Project consists of three components: Component 1: Reimbursement of the Specific Purpose Grants (DAK); Component 2: Institutional Strengthening of Central and Local Governments, and Project Management; and Component 3: Verification of Outputs (VO). The Project will be piloted in five provinces, namely Jambi, East Java, Central Kalimantan, West Sulawesi, and North Maluku, and all of their corresponding districts (81 LGs). 2. Eligible Outputs. For the purposes of the Project's Component 1, eligible outputs are single sub-projects (Paket Pekerjaan) to be carried out by participating LGs and financed by DAK grants. The eligible outputs are defined by Ministry of Public Works (MPW) through the Technical Guidelines and the additional Circular Letter for Safeguards requirements, and may include: i. Road Sub-Sector: The scope of this activity includes periodic maintenance, improvement, and rehabilitation of provincial, district, or city roads and bridges. ii. iii. Irrigation Sub-Sector: The scope of this activity includes improvement, rehabilitation, and development of irrigation networks, including swamp reclamation networks, and village irrigation networks. Water Sub-Sector: The scope of this activity covers the development of water intake from surface water, water intake from wells, small water treatment plants (SPAM), water pipe networks, housing connections, and development of public water hydrants. The sub-projects must be outside the Perusahaan Daerah Air Minum (PDAM) network. 3. Disbursement Modalities and Conditions. The Project will disburse funds using two modalities: (i) Advance Payment (AP) and (ii) Value of Final Reimbursement (VFR). The AP will be equal to the sum of the values of Government of Indonesia (GOI's) first DAK payment to each LG that has received its first DAK payment By March 31 of that year. The VFR will be equal to the sum of the values resulting from the verification of compliance with the conditions of eligibility of reported outputs by LGs (Figure 1 provides an illustration of the disbursement flow). The Project will reimburse both the AP and the VFR values on the basis of the report and recommendation of Page 1 of 11
Indonesia's Financial and Development State Auditor (Badan Pengawasan Keuangan dan Pembangunan, BPKP) to be submitted to the Ministry of Finance (MOF) by April 30 of each year. Figure 1. Advance Payment (AP) and Value of Final Reimbursement (VFR) GOI BPKP devi-iai Id~c w4~ I Reimbursemenit WB II. Scope of the Assignment Objective. BPKP is expected to undertake two tasks: Task 1: conduct the verification of reported output eligibility; and Task 2: based on verified output eligibility, provide the assessment and recommendation of the disbursement amounts. BPKP will issue and submit to MOF and the Bank verification reports, which should include: (i) recommendation on the amount of reimbursement and incentive to LGs; and (ii) qualitative report based on results from the verification check list. 1. Task 1: Verification of Reported Outputs. This task will require the following: 1.1 Capacity Building. In the beginning of each year, BPKP will provide sufficient capacity building to the BPKP representatives in each Province on the Verification Check List and its Manual. This capacity building should be provided to all the verificators that will go to the field. During the capacity building, the BPKP will involve MPW, Inspectorate General (IG) MPW, and Social Safeguards specialists to be the resource person for providing description on technical and safeguards requirements, respectively. 1.2 Certification of Reference Unit Costs (RUC). By February 15 of each year, BPKP will submit to the MOF and the Bank a certification that the RUCs (as provided by in the MPW Guidelines for the list of agreed upon outputs): (i) were timely issued; and (ii) represent a reasonable estimate of the cost by province for each output category (See, Annex 1 for 2012 RUCs). 1.3 Advance Payment Verification Report (APVR). By April 30 of each year, BPKP will submit to the MOF and the Bank a certification on (i) the number of LGs that have received the DAK payment I from the MOF by March 31 of that year, and (ii) the estimated value of the AP. 1.4 Output verification. BPKP will create a uniform working paper for the verification agent at the Provincial level and the result of their verification of outputs should be recorded to the database of Page 2 of 11
BPKP at the central level. BPKP will randomly sample 20 percent of reported outputs in each Kabupaten/Kota. Assessing compliance with eligibility criteria. BPKP will verify, for each reported output in the sample, compliance with the output eligibility criteria as follows: Eligibility Criteria for Reimbursement of DAK Expenditures i. Reference Unit Costs (RUCs) for defined Outputs completed by February 15. ii. Physical Realization of Outputs: Construction Completion Certificates, and Compliance with Technical Specifications (Form P-4, column 3, of Technical Guidelines). iii. Compliance with national procurement guidelines Perpres 54/2010, through competitive procedures, i.e Pelelangan Umum dan Pemilihan Langsung only with post qualification in hiring of contractors. iv. Compliance with Environment and Social Safeguards (Reference to supplement of the MPW Technical Guidelines). 1.4.1 Review on DAK Allocation, Requirements for Reimbursements, Financial, and Technical Reporting. BPKP will certify, for each reported output in the sample, the following: * The DAK allocation has been made to the given LG being reviewed. * Conformity of reported output with MPW's Technical Guidelines and its revision (Source: Approval of RK by MPW at Consultation Agenda between LGs and MPW); * Provision Hand Over (PHO) certificate with published date December 31 (Source: Modified Form P-2) * For 2012 Outputs, the Paket Pekerjaan (source: Form P-2, Col. 6) has been documented in the form of contracts and has a total ceiling price (i.e. DAK + matching fund) of less than USD 400,000; and for outputs between USD 400,001 and USD500,000 (Source: Form RK, Col. 12), with additional requirement for showing availability on procurement plan; and for outputs between USD 500,001 and USD 1 million, with additional requirement for showing availability on Procurement Plan and Procurement Service Unit (ULP) decree. * For 2013 outputs, everything has to comply with the procurement covenants as mentioned in the Loan Agreement. This include: (i) availability of procurement plan by the end of the year; (ii) ULP decree; and (iii) ULP staffed and budgeted. * LG has sent to MOF the financial reports related to the usage of DAK from MOF (Source: Directorate General of Fiscal Balance (DGFB), MOF). * All reports as mandated by the MPW Technical Guidelines have been submitted and accepted by MPW. 1.4.2 Verification on Procurement and Safeguards compliance conditions. BPKP will certify, for each reported output in the sample, the following: * Compliance with competitive procedures as stated in Perpres 54/2010, through competitive procedures, i.e Pelelangan Umum dan Pemilihan Langsung, only with post qualification in hiring of contractors. MPW will verify that the tenders and award processes under which the given output has been executed have followed the procurement conditions established in Page 3 of 11
Perpres 54/2010, through competitive procedures, i.e Pelelangan Umum dan Pemilihan Langsung only with post qualification in hiring of contractors. This will include review of the complete procurement cycle, starting from bid advertisement, preparation of bidding documents, bid evaluation process until contract award. In this regard, the BPKP will validate from the LG that the contract packages required to produce the outputs were awarded following principles with respect to transparency and fair competition. Further, BPKP verification should include also confirmation of eligibility for reimbursement based on the existing criteria as well as on fulfillment of the legal covenants by the concerned agency. * BPKP's report should indicate the level of compliance with procurement procedures at the contract level. * The final report should include information about each individual contract included in the sample reviewed by BPKP as well as an assessment of their level of compliance with the Government's procedures, which will be beneficial for the Government to be informed for the purpose of monitoring procurement performance under the overall DAK project. * BPKP and MOF will discuss and decide on appropriate remedies if the review finds contracts that failed to comply with local rules and procedures. The same will apply if physical verification find contracts without the corresponding deliverables or when deliverables could not be made available for inspection by the auditors. * Compliance with Environment and Social Safeguards; evidenced by Supplement of Technical Guidelines. The implementing LG agencies will be responsible to ensure that all aspects related to safeguards such as environmental, indigenous peoples, and involuntary resettlements have been complied with. Depending on the project the BPKP will verify if these safeguards are in compliance. 1.4.3 Verification on Physical Conditions and Site Visit. BPKP will certify, for a sample of reported outputs, the following: * Involve IG MPW and/or technical experts on roads, water, irrigation, and safeguards specialist during the verification to all five Provinces. BPKP should confirm the involvement of IG MPW in the beginning of each year through an agreement such as an MOU or signed minutes of meeting or assignment letter from IG MPW that they will provide technical experts for the verification of outputs to 5 Provinces. * Conduct site visits to selected sub-projects to evaluate the status and certify both technical functionality and service delivery to end users. * Review the standard compliance reports submitted by contractors to LGs and assessment of their completeness and appropriateness vis-a-vis scheduled payments, and compliance with other contract obligations. * Obtain visual photographic evidence of the status of reported outputs. * Verification Check List well documented in all BPKP representatives at the Provinces and send to BPKP at the central level. 1.5 Output Verification Report (OVR). Based on the verification activities undertaken under section 1.4, BPKP will prepare the OVR. Prior to the submission of final OVR to the MOF, BPKP should invite the Bank and the Project Implementation Unit (PIU) for a technical meeting to present the draft of OVR and to agree on the structure of the report. By April 30 of each year, BPKP will submit to MOF an OVR certifying: (i) compliance with the eligibility criteria of the outputs delivered by each LG; (ii) recommending the reimbursement amount from the Project; and (iii) a report on the qualitative information based on the results from the verification check list and sampling to the field. Page 4 of 11
The MOF will submit the OVR to the Bank in order to request for reimbursement. The qualitative report will be the basis for Technical Assistance (TA) in the following year, provide information on the challenges and improvement needed at the LGs on delivering the DAK outputs, and provide information on the compliance of covenants in the Loan Agreement i.e. procurement covenants. 2. Task 2: Assessment and Recommendation of Reimbursement Amounts. This task will require the following: 2.1 BPKP will provide a detail description on the result of their calculation for reimbursement, including the incentive for LGs. The BPKP recommendation to the MOF should include the total amount that the MOF should request from the Bank for reimbursement and incentive. 2.2 BPKP will provide feedback to the LGs after conducting the VO. These feedbacks will be useful for the LGs to improve the implementation of DAK activities. Besides providing feedbacks to the LGs, as mentioned in the OVR section, BPKP should provide a qualitative report on findings based on each requirement in the Verification Check List, provide recommendations on possible TA needed for the LGs based on challenges and LG needs, and provide information on qualitative reports of each category in the verification check list. 2.3 Value of Potential Reimbursement. Each participating LG will report to BPKP the outputs that they have completed by December 31. BPKP will check that each LG has a Commitment Letter. BPKP will compile a list of reported outputs by each LG by January 31. BPKP will calculate a Value of Potential Reimbursement (VPR) for each LG by multiplying reported outputs by their reference unit costs. 2.4 Qualifying Percentage. Based on the number of outputs in the LG sample that meet the eligibility criteria, BPKP will then calculate the Qualifying Percentage (QP). For example, if half of the sampled contracts meet the eligibility criteria, the QP will be 50% (or 0.5). 2.5 Value of Qualifying Reimbursement. By multiplying the QP by the VPR for each LG, BPKP will calculate the value qualifying of reimbursement (VQR) for each LG. 2.6 Value of Total Reimbursement. BPKP will calculate the value of total reimbursement (VTR) to be made from the Project to MOF, which is the sum across all LGs for the Value of Qualifying Reimbursement (VQR) by LG. 2.7 Value of Advance Payment. The Advance Payment (AP) will be equal to the sum of the values of GOI's first DAK payment to each LG that has received its first DAK payment by March 31. The AP would be at maximum 30% of total DAK allocated for the year, which equal to the current first DAK payment from MOF to LGs. 2.8 Value of Final Reimbursement. The amount of the Value of Final Reimbursement (VFR) should be the VTR minus AP, provided that the amount disbursed by the project in any year should not exceed the actual amount of DAK allocated plus 10% for the infrastructure sector in that year. In the event that the amount of the AP in a given year exceeds the total amount of DAK that can be reimbursed (i.e. the VTR) for that year based on the verification review by the BPKP, then the Bank will not reimburse anything for the VFR. This will also require that the amount of the AP be reduced in the subsequent year by the amount of overpayment. Page 5 of 11
2.9 Value of Local Government Reimbursement. The amount of the LG Reimbursement will be the VQR times 10% summed for all LGs. This percentage may be revised by the GOI from time to time and any revision may be made applicable to reimbursement under the Project if agreed between GOI and the Bank. The following table provides a summary of steps for Task 2 (Assessment of Reimbursement Amounts) Calculation STEP 1: Calculate for each LG Value of Potential Reimbursement (VPR) Qualifying Percentage (QP) Value of Qualifying Reimbursement (VQR) STEP 2: Sum across LGs Value of Total Reimbursement (VTR) Definition Sum of reported outputs by their reference unit costs. Number of outputs in the sample that meet the eligibility criteria, expressed as a share of sampled outputs. QP multiplied by VPR. Sum of Value of Qualifying Reimbursement I (VQR) across all LGs. STEP 3: Determine World Bank reimbursement: Advance Payment (AP) Sum of the Gol's first DAK payment to each LG that has received its first DAK payment. Value of Final Reimbursement (VFR) VTR - AP LG Reimbursement 10 percent (currently) of VQR III. Organization and Resources 1. The verification of the agreed outputs (VO) under Component 3 is a core condition of disbursement, and a key project assurance from GOI that Project funds have been used for the intended purposes, following principles of economy, efficiency and transparency. BPKP will establish a working unit at the national level to manage and oversee the VO functions. BPKP will determine its needs with regard to additional financial and human resources at both the national and LG levels in order to do the VO functions, and communicate this officially to the MOF. 2. BPKP will maintain adequate staffing arrangements (including in technical, procurement, financial management and environmental and social safeguards capacity) with qualified personnel, technical assistance consultants and/or arrangements with personnel of IG MPW, MPW or other agencies of the Borrower in order to accomplish the verification of Outputs in accordance with the VO Terms of Reference. At the LG level, the technical team should comprise engineers with knowledge and experience on implementation of infrastructure projects (i.e. road, irrigation, and water), procurement specialist, and environment and social safeguards specialists. 3. BPKP will work in close coordination with IG MPW staff in doing the VO task. BPKP and IG of MPW will have an MOU and/or minutes of meeting signed by both BPKP and IG MPW and/or assignment letter of IG MPW for the involvement of IG MPW during the verification of outputs to all LGs. The institutional structure and working relationship between BPKP and MPW will be communicated to MOF and the Bank. Page 6 of 11
4. BPKP will provide to the Bank by no later than October 31 of each year a satisfactory Work Plan for institutional strengthening for verification activities, including technical and environmental and social safeguards capacity, for the upcoming year. Such plan should include the needs assessment, work plan, staffing, procurement plan and budget. In the staffing plan for verification, the BPKP will provide list of qualifications of the verificators and their area of expertise, which should include technical staff from IG MPW or other agencies as well as safeguards specialists. 5. BPKP and the Bank should cooperate in the furtherance of the verification activities. To that end, BPKP and the Bank should from time to time, at the request of any one of them, exchange views on the Project and the VO Terms of Reference, and furnish to the other party all such information related to such matters as it should reasonably request, and promptly inform each other of any condition which interferes with, or threatens to interfere with, such matters. 6. In order to ensure adequate funding is available for BPKP, the following will be conditions for each year's DAK to be eligible for reimbursement: (i) agreed upon funds are allocated by BPKP to do the VO function; and (ii) the work-plan is prepared and agreed upon with the Bank by December 31 of each year. In the event that the BPKP has not provided the budget and work plan for the fiscal year being verified, then the Bank has the right not to make Advance Payment or Reimbursement for that year. 7. BPKP will provide reasonable and sufficient time and budget allocation for BPKP representative to conduct the VO to the field. This will have a significant impact on the quality of verification and outcome of the VO. 8. The Bank extends an offer to BPKP to organize a workshop and training to discuss tools and strategies for exercising procurement oversight and risk management. Page 7 of 11
Annex 1: Reference Unit Costs (RUCs) INDONESIA: Local Government and Decentralization Project The reference outputs for roads, water, and irrigation are as follows: periodic maintenance and improvement; rehabilitation; water covers various investments related to housing connections for drinking water; public sanitation facilities; and drainage systems. The RUC is derived from historical data of DAK contracts. The example of 2012 RUCs per infrastructure sub-sector in each selected province are as follows: RUC JALAN ASPAL 2012 id PENE ~ a tr Prk sld 4. m år_s_7_ P 40 4710375V3 561M-s fmm 5413WM1.PLbe~ks 4 m, MB_» 9063 12921 i ~ r an 6IS52 BUBO7m 833&2W 87T7II 'NTTG b PbrwkW kmm M227 IO5 750431149 5z54 7M MI 7717 i 4Mm LfxTeri-m T im- 1=mM w5-l wme W d LEPaiald7 Öf795 ORE TN793433M.95 MEM ar~~~~ii~~fffwm4 k 1.34~ f ~ fi~t3iito5 8 mi- atkm sid a~ -eær7ir 14 alann T apk n Mlcadmn P~ aan af_- P s4 T5 7972 538 72 74 3 37 U223r ~~~- - --- -OL 4 ------- ------1~f 58 b2.fr Pmi5 km 8d5m e R4168 9»T4 1 075 6 231U2 2 03 61 9A k@ ACW Y.SNkiI953 mo MW 77MZI MSWW Må ct Lbrk~ 5m.. 2110~1 1232 1. 'enu9aac-wc - - b e: a n".nm n L~ nh hlm A. b AC-WC LMO ATN K. 9 ÅS.SWt, et e3 P--- ï 4 ln T m 2s~T4a 49 2. m 3%.07I fi 5-43425375 307 32 7972 37 735 4~ 5 % teinir4n1hx gw2m I35rn W3 7U5M 787m1 57 4 b i v jniw Y.tNh im M W942 912t 1fM 0iýf4 57f4W6 - -- iñn~of 1 T- 4 1iašindW9a 7 RB42 3 8 T.2RW I ZfT _ -W 2 2 EnPmosan?Más2R mimi 1%377 ý"åm? -fé7 ri MW Page 8 of 11I
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