Public Disclosure Authorized Document of The World Bank FOR OFFICIAL USE ONLY Report No: RES22379 Public Disclosure Authorized Public Disclosure Authorized RESTRUCTURING PAPER ON A PROPOSED PROJECT RESTRUCTURING OF LOCAL GOVERNMENT AND DECENTRALIZATION PROJECT ADDITIONAL FINANCING LOAN SEPTEMBER, 2014 TO THE GOVERNMENT OF INDONESIA JANUARY 18, 2016 Public Disclosure Authorized East Asia Pacific Region Social, Urban, and Disaster Resilience Management This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.
CURRENCY EQUIVALENTS (Exchange Rate Effective January 18, 2016) Currency Unit = Indonesian Rupiah (IDR) IDR 13,500.00 = US$1.00 FISCAL YEAR January 1 December 31 ABBREVIATIONS AND ACRONYMS AP APBN BPKP DAK DG DGFB FY GoI IFR ISP LG Advance Payment National/State Budget Indonesian National Government Internal Auditor Specific Purpose Grants Directorate General Directorate General of Fiscal Balance Fiscal Year Government of Indonesia Interim Financial Report Institutional Support Program Local Government, comprising Provinces, Kabupaten and Kota LPSE M&E MoF MoHA MPW PDO PIU TA ULP UU WBRS Layanan Pengadaan Secara Elektronik (Electronic Procurement Services) Monitoring and Evaluation Ministry of Finance Ministry of Home Affairs Ministry of Public Works Project Development Objective Project Implementing Unit Technical Assistant Procurement Service Unit Law Web-Based Reporting System Vice President: Country Director: Senior Global Practice Director: Acting Practice Director: Practice Manager: Task Team Leader: Co-Task Team Leader: Axel van Trotsenburg Rodrigo A. Chaves Ede Jorge Ijjasz-Vasquez Anna Wellenstein Abhas K. Jha Thalyta E. Yuwono Marcus J. Lee ii
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DATA SHEET Indonesia Local Government and Decentralization Project (P111577) EAST ASIA AND PACIFIC Social, Urban, Rural and Resilience Global Practice Report No: RES22379 Basic Information Project ID: P111577 Lending Instrument: Specific Investment Loan Regional Vice President: Axel van Trotsenburg Original EA Category: Partial Assessment (B) Country Director: Rodrigo A. Chaves Current EA Category: Partial Assessment (B) Senior Global Practice Director: Practice Manager/Manager: Team Leader(s): Ede Jorge Ijjasz-Vasquez Original Approval Date: 08-Jun-2010 Abhas Kumar Jha Current Closing Date: 31-Dec-2018 Thalyta E. Yuwono Borrower: Responsible Agency: Ministry of Finance Ministry of Public Works and Public Housing, Ministry of Home Affairs, BPKP, Ministry of Finance, Bappenas, Restructuring Type Form Type: Full Restructuring Paper Decision Authority: Country Director Approval Restructuring Level: Level 2 Financing ( as of 26-Jun-2015 ) Key Dates Project Ln/Cr/TF Status Approval Date Signing Date Effectiveness Date Original Closing Date Revised Closing Date P111577 IBRD-79140 Closed 08-Jun-2010 23-Jun-2010 20-Jan-2011 30-Jun-2014 31-Dec-2015 P111577 IBRD-84380 Effective 30-Sep-2014 27-Nov-2014 02-Feb-2015 31-Dec-2018 31-Dec-2018 Disbursements (in Millions) Project Ln/Cr/TF Status Currency Original Revised Cancelle d Disburse d Undisbur sed % Disburse d P111577 IBRD-79140 Closed USD 220.00 220.00 0.00 219.77 0.23 100 P111577 IBRD-84380 Effective USD 500.00 500.00 0.00 46.15 453.85 9 3
Policy Waivers Does the project depart from the CAS/CPF in content or in other significant respects? 4 Yes [ ] No [ X ] Does the project require any policy waiver(s)? Yes [ ] No [ X ] A. Summary of Proposed Changes This request seeks the approval of the Country Director to provide a project restructuring to the Republic of Indonesia for the Local Government and Decentralization Project (LGDP) Additional Financing (P111577, Loan-8438-ID, USD 720 million). The proposed project restructuring is being sought by the Government of Indonesia (GOI) through a letter dated December 30, 2015, to adjust for the changes in DAK Policy for 2016. The operation will continue to finance reimbursements and incentives linked to the core DAK basic infrastructure sectors consisting of roads, irrigation, water and sanitation. The proposed restructuring involves: i) removing the requirement for 10% Local Government (LG) contribution or LG matching funds from the Loan Agreement and Results Framework of the Project and ii) increasing the threshold of contracts up to USD 3 million, applying requirements on the use of electronic procurement submitted through the National Procurement Portal (LPSE) for contracts between USD 2-3 million, in addition to requirements stated in the Loan 8438-ID. Change in Implementing Agency Yes [ ] No [ X ] Change in Project's Development Objectives Yes [ ] No [ X ] Change in Results Framework Yes [ X ] No [ ] Change in Safeguard Policies Triggered Yes [ ] No [ X ] Change of EA category Yes [ ] No [ X ] Other Changes to Safeguards Yes [ ] No [ X ] Change in Legal Covenants Yes [ ] No [ X ] Change in Loan Closing Date(s) Yes [ ] No [ X ] Cancellations Proposed Yes [ ] No [ X ] Change to Financing Plan Yes [ ] No [ X ] Change in Disbursement Arrangements Yes [ ] No [ X ] Reallocation between Disbursement Categories Yes [ ] No [ X ] Change in Disbursement Estimates Yes [ ] No [ X ] Change to Components and Cost Yes [ ] No [ X ] Change in Institutional Arrangements Yes [ ] No [ X ] Change in Financial Management Yes [ ] No [ X ] Change in Procurement Yes [ X ] No [ ] Change in Implementation Schedule Yes [ ] No [ X ] Other Change(s) Yes [ X ] No [ ] Appraisal Summary Change in Economic and Financial Analysis Yes [ ] No [ X ] Appraisal Summary Change in Technical Analysis Yes [ ] No [ X ] Appraisal Summary Change in Social Analysis Yes [ ] No [ X ]
Appraisal Summary Change in Environmental Analysis Yes [ ] No [ X ] Appraisal Summary Change in Risk Assessment Yes [ ] No [ X ] B. Project Status The project has shown good progress on achieving its PDO as indicated by the increased number of LGs submitting financial and technical reports using the Web-Based Reporting System (WBRS) and the expansion in coverage of the WBRS. As of November 2015, the WBRS has been introduced to 12 out of 14 participating Provinces and their respective LGs. To date, 169 of the total 209 participating LGs (approx. 80%) have reported their Specific Purpose Grants (DAK) infrastructure progress through WBRS. The use of WBRS by participating LGs show that this project has encouraged improvement of DAK reporting and accountability, which are the objectives of this project. As of January 8, 2016, the disbursement of Loan 8438-ID is USD 45,758,283 or 9% of the total additional financing of USD 500 million. It is estimated that the next disbursement on June 2016 will be around USD 150 million. This reimbursement will account for reimbursement to the DAK 2015 expenditures and withdrawal of the Advance Payment for DAK 2016. This reimbursement will include the additional sanitation sub-sector that was not part of reimbursement under LGDP Phase 1. To improve LG capacity on the implementation of DAK, the PIU conducted a series of regional trainings for infrastructure planning and management. The objective of this TA is to improve LG s technical capacity on the implementation of DAK infrastructure. In total, 209 participating LGDP AF LGs attended these trainings. The participants received detailed explanations of the DAK Infrastructure Technical Guidelines, plus the Supplemental Technical Guidelines on environmental and social safeguards. In parallel, the PIU also conducted regional WBRS training to introduce the use of reporting system for LGDP AF. In total, 106 LGs have attended the trainings and received user access for DAK report submission. C. Proposed Changes Project Development Objectives Original PDO Development Objectives/Results The objective of the project is to improve the accountability and reporting of the central government s Specific Purpose Grants (DAK) for the infrastructure sub-sectors within pilot local governments (LGs). This will be done through improved financial and technical reporting, and verification of outputs delivered by LGs with the DAK grants. Current PDO The objective of the Project is to improve the accountability and reporting of the central government s Specific Purpose Grants (DAK) for basic infrastructure, consisting of roads, irrigation, water and sanitation, within Selected Local Governments. Change in Project's Development Objectives Change in Results Framework Explanation: The Government of Indonesia (GOI) has initiated reforms to the intergovernmental transfer system, including DAK transfers, and some changes in DAK policy for 2016 have been announced. One key 5
policy shift is the removal of the 10% LG contribution or matching fund requirement. The Ministry of Finance as the Borrower has submitted to the Bank a request for project restructuring to adjust for changes in DAK policy for 2016. This include removing the requirement for 10% LG contribution or the matching funds for DAK transfer. In the current Results Framework, one of the Intermediate Results Indicators are the requirement for LGs to provide a 10% LG contribution or matching funds to the DAK transfers. Following the changes in the GOI's DAK Policy for 2016 stated in the Law of National Budget for 2016 (Undang-Undang APBN) and the Financial Notes for DAK 2016 (Nota Keuangan), results indicators of this project should be adjusted accordingly. The project will remain providing incentives for good performance LGs based on eligibility criteria stated in the Loan Agreement and BPKP Verification Arrangement, including compliance to submission of WBRS, compliance to safeguards, procurement, financial management, and technical specifications as mentioned in the MPWPH Technical Guidelines. Change in Procurement Explanation: Other Change(s) In the new DAK Policy for 2016, there is a new DAK category for Public Infrastructure (DAK IPD), which allow for bigger infrastructure contracts. The GOI requested for an increase of procurement contract threshold up to USD 3 million with requirement for the LGs to submit their publication of the award of contract in the National Procurement Portal (INAPROC) through the e-procurement Services (LPSE) for a contract value of more than USD 2 million equivalent and up to USD 3 million equivalent, in addition to the current requirements stated in the Loan 8438-ID. This will promote more accountability and transparency in procurement process. Other Change(s) Explanation: Removing the requirement of 10% LG contribution from the Results Framework and in the Verification Arrangement between the Bank and BPKP, which was part of the document that was negotiated in addition to the Loan Agreement. 6
I. Summary 1. This Project Paper seeks the approval of the Country Director to provide a project restructuring to the Republic of Indonesia for the Local Government and Decentralization Project (LGDP) Additional Financing (P111577, Loan-8438-ID, USD 720 million). The proposed project restructuring is being sought by the Government of Indonesia (GOI) through a letter dated December 30, 2015, to remove the attribution of project incentive provision to the requirement of 10% Local Government (LG) contribution or the matching funds on DAK allocation. This proposal is to adjust with the change in Government DAK Policy for 2016 that mandates the removal of 10% matching fund requirement for Local Government. 2. The proposed project restructuring is requested to commence on January 2016, covering reimbursements for the DAK Allocation in 2016 onwards. The operation will continue to finance reimbursements and incentives linked to the core DAK basic infrastructure sectors consisting of roads, irrigation, water and sanitation. In Law APBN for 2016, the GOI introduced a new DAK category for Public Infrastructure. This new category will allow for LGs to propose big contracts on public infrastructure such as roads and irrigation. As part of the proposed restructuring, the GOI requested for the project to increase its procurement threshold of contracts up to USD 3 million, applying requirements on publication of award of contract in the National Public Procurement Portal (INAPROC) through the e-procurement Services (LPSE) for a contract value of more than USD 2 million equivalent and up to USD 3 million equivalent. This is to allow for big contracts on road and irrigation sectors mostly proposed by Provincial governments, to be included as eligible outputs, while improving the accountability and transparency in the implementation of DAK. II. Project Status 3. Achievement towards PDO. The project has shown good progress on achieving its PDO as indicated by the increased number of LGs submitting financial and technical reports using the Web-Based Reporting System (WBRS) and the expansion in coverage of the WBRS. As of November 2015, the WBRS has been introduced to 12 out of 14 participating Provinces and their respective LGs. To date, 169 of the total 209 participating LGs (approx. 80%) have reported their Specific Purpose Grants (DAK) infrastructure progress through WBRS. The use of WBRS by participating LGs show that this project has encouraged improvement of DAK reporting and accountability, which are the objectives of this project. 4. Institutional Support Program (ISP). To improve LG capacity on the implementation of DAK, the PIU conducted a series of regional trainings for infrastructure planning and management. The objective of this TA is to improve LG s technical capacity on the implementation of DAK infrastructure. In total, 209 participating LGDP AF LGs attended these trainings. The participants received detailed explanations of the DAK Infrastructure Technical Guidelines, plus the Supplemental Technical Guidelines on environmental and social safeguards. In parallel, the PIU also conducted regional WBRS training to introduce the use of reporting system for LGDP AF. In total, 106 LGs have attended the trainings and received user access for DAK report submission. 7
5. Interim Financial Report (IFR) and External Audit. The project has significantly improved in terms of its IFRs submission. Q2 and Q3 FY 2015 IFRs, submitted in timely manner. All IFRs were in good shape. Nevertheless, although disbursement of the DAK reimbursement component (Component 1) is well progressing, limited disbursement noted for the Component 2: Institutional Strengthening for Central and Local Governments and Project Management Support in the amount of IDR 36 billion or USD 2.7 million (approximately 15 % of the total committed amount) and Component 3: Verification of Outputs in the amount of IDR 6 billion or est. USD 450,000 (approximately 3% of the total committed amount). In addition to the FY 2014 BPK audit report of financial statement for Local Government Transfers (Bagian Anggaran Transfer ke Daerah/BA 999.05) which received timely on June 30, 2015, BPK will also submit to the Bank a report which compiled BPK audit opinion from participating local governments of IBRD 7914-ID and 8438-ID based on existing audited LG s Financial Statement (Laporan Keuangan Pemerintah Daerah / LKPD) which had been submitted to the parliament. The report will also inform audit findings (if any) related to the implementation of DAK infrastructure based on the above mentioned audit report of participating local governments. The FY 2014 compiled report is expected to be received by the Bank by January 31, 2016. FY 2015 BPK audit report of financial statement for Local Government Transfers (Bagian Anggaran Transfer ke Daerah/BA 999.05) will be due for submission to the Bank on June 30, 2016. 6. Disbursement status. As of January 8, 2016, the disbursement of Loan 8438-ID is USD 45,758,283 or 9% of the total additional financing of USD 500 million. It is estimated that the next disbursement on June 2016 will be around USD 150 million. This reimbursement will account for reimbursement to the DAK 2015 expenditures and withdrawal of the Advance Payment for DAK 2016. This reimbursement will include the additional sanitation sub-sector that was not part of reimbursement under LGDP Phase 1. 7. Project Performance. Project performance is currently, as reflected in the latest ISR (No. 6 and 7, January and September, 2015). The PDO-level results indicators focus on output verification, and on reporting by LGs. The revisions made to the Reference Unit Costs (RUCs) as the basis for calculating reimbursement and thresholds for contract values, have had a clear positive impact in the most recent verification cycle conducted by BPKP on March 2015 for 2014 outputs. The next verification of outputs will take place on March, 2016. Table 1 shows the project performance based on previous two ISRs. It shows that the implementation progress was downgraded from to, as there was a delay on the implementation of Institutional Support Program or the TA program due to changes in the government officials at the MOF. This changes affected the project implementation, as the MOF had to revise the PIU Decree to adjust for the changes before they could initiate any procurement process for the TA program. Table 1. Implementation Performance Ratings (ISR) March 2015 September 2015 Development Objective Implementation progress Verification of Outputs 8
Financial Management Counterpart funding Procurement Monitoring and Evaluation Safeguards Overall Project Risk Substantial Substantial III. Proposed Changes 8. Change in the Results Framework. The Government of Indonesia (GOI) has initiated reforms to the intergovernmental transfer system, including DAK transfers, and some changes in DAK policy for 2016 have been announced. One key policy shift is the removal of the 10% LG contribution or matching fund requirement. The Ministry of Finance as the Borrower has submitted to the Bank a request for project restructuring to adjust for changes in DAK policy for 2016. This include removing the requirement for 10% LG contribution or the matching funds for DAK transfer. 9. In the current Results Framework, one of the Intermediate Results Indicators are the requirement for LGs to provide a 10% LG contribution or matching funds to the DAK transfers. Following the changes in the GOI's DAK Policy for 2016 stated in the Law of National Budget for 2016 (Undang-Undang APBN) and the Financial Notes for DAK 2016 (Nota Keuangan), results indicators of this project should be adjusted accordingly. The project will remain providing incentives for good performance LGs based on eligibility criteria stated in the Loan Agreement and BPKP Verification Arrangement, including compliance to submission of WBRS, compliance to safeguards, procurement, financial management, and technical specifications as mentioned in the MPWPH Technical Guidelines. 10. Change in Procurement threshold. In the new DAK Policy for 2016, there is a new DAK category for Public Infrastructure (DAK IPD), which allow for bigger infrastructure contracts. The GOI requested for an increase of procurement contract threshold up to USD 3 million with requirement for the LGs to submit their publication of the award of contract in the National Procurement Portal (INAPROC) through the e-procurement Services (LPSE) for a contract value of more than USD 2 million equivalent and up to USD 3 million equivalent, in addition to the current requirements stated in the Loan 8438-ID. This will promote more accountability and transparency in procurement process. 9
Project Name: Team Leader(s) : Product Line: Local Government and Decentralization Project (P111577) Thalyta E. Yuwono, Marcus J. Lee IBRD/IDA Requesting Unit: Responsible Unit: Country: Indonesia Approval FY: 2010 Region: EAST ASIA AND PACIFIC Project Development Objectives Original Project Development Objective: Lending Instrument: Project Stage: Restructuring Status: DRAFT EACIF Created by: Thalyta E. Yuwono on 04-Jan-2016 GSU08 Modified by: Thalyta E. Yuwono on 04-Jan-2016 Specific Investment Loan The objective of the project is to improve the accountability and reporting of the central government s Specific Purpose Grants (DAK) for the infrastructure sub-sectors within pilot local governments (LGs). This will be done through improved financial and technical reporting, and verification of outputs delivered by LGs with the DAK grants. Current Project Development Objective: The objective of the Project is to improve the accountability and reporting of the central government s Specific Purpose Grants (DAK) for basic infrastructure, consisting of roads, irrigation, water and sanitation, within Selected Local Governments. Results Core sector indicators are considered: Yes Project Development Objective Indicators Results reporting level: Project Level Status Indicator Name Core Unit of Measure Baseline Actual(Current) End Target Development and use of an Percentage Value 0.00 95.00 100.00 10
information system to which LGs report information to the MoF and the MPW Physical outputs reported, verified, and meeting eligibility criteria DAK reports submitted online through Web-Based Reporting System Intermediate Results Indicators 11 Date 30-Jun-2010 23-Jun-2015 31-Dec-2015 Percentage Value 0.00 72.00 88.00 Date 30-Jun-2010 27-Apr-2015 31-Dec-2018 Percentage Value 80.00 95.00 80.00 Date 31-Jul-2014 23-Jun-2015 31-Dec-2018 Status Indicator Name Core Unit of Measure Baseline Actual(Current) End Target Percentage of LGs that receive DAK payment 1 from MoF by March 31. The MoF and the MPW Webbased reporting system (WBRS) fully operated Percentage of LGs reporting financial information and outputs through the MoF and MPW web-based systems Supplement of MPW Technical Guidelines on Safeguard issued by MPW Ministerial Circular letter Percentage Value 54.30 66.00 60.00 Date 30-Jun-2010 27-Apr-2015 31-Dec-2018 Percentage Value 0.00 100.00 100.00 Date 30-Jun-2010 23-Jun-2015 31-Dec-2015 Percentage Value 0.00 95.00 100.00 Date 30-Jun-2010 23-Jun-2015 31-Dec-2015 Text Value The original MPW Technical Guidelines do not include Safeguards issues. Issued Issuance of the MPW Supplement Technical Guidelines, include Safeguards.
Marked for Deletion MoF produce annual M&E reports for the project, midterm evaluation report and final evaluation report Number of eligible outputs completed by LGs by December 31 Percentage of LGs that have passed their budgets and allocated contribution for the DAK by February 28 LGs providing minimum 10% matching funds Contracts with quality of outputs delivered according to contract by December 31 Date 30-Jun-2010 27-Jan-2015 30-Jun-2014 Text Value N/A The PIU submitted the 2014 M&E report along with the submission of IFR for Q4 2014 on Feb 5, 2015. The IFR for Q1 2015 was submitted on June 25, 2015 Annual and quarterly project report and IFRs, Annual M&E, Mid-Term Evaluation, and Final Evaluation Reports are submitted on time. Date 30-Jun-2010 26-Jun-2015 31-Dec-2018 Number Value 0.00 96.70 Date 30-Jun-2010 27-Apr-2015 31-Dec-2015 Percentage Value 33.30 66.00 100.00 Date 30-Jun-2010 27-Apr-2015 31-Dec-2015 Percentage Value 90.00 96.00 Date 31-Jul-2014 27-Apr-2015 31-Dec-2018 Percentage Value 87.00 34.00 45.00 Date 31-Jul-2014 27-Apr-2015 31-Dec-2018 12
Maintain an issued Supplement of the MPW's Technical Guidelines on Environmental and Safeguards through MPW Circular Letter applicable to all Selected Local Governments in each FY LGs with functioning procurement unit (ULP) BPKP submits to PIU a quantitative and qualitative Verification Report consistent with the TORs for the same as specified in the Verification Arrangement by May 31 Issuance by BPKP of Verification Manual and socialization of BPKP regional representatives by February 28 of each FY Percentage of contracts with work completed with documented physical handover by Dec 31 Date Value 20-Dec-2010 27-Jan-2015 Date 20-Dec-2010 27-Jan-2015 31-Dec-2018 Percentage Value 73.00 93.00 80.00 Date 31-Jul-2014 26-Jun-2015 31-Dec-2018 Yes/No Value No Yes Yes Date 02-Sep-2014 23-Jun-2015 31-Dec-2018 Yes/No Value No Yes Yes Date 30-Apr-2015 31-Dec-2018 Percentage Value 97.60 96.70 80.00 Date 10-Jun-2014 27-Apr-2015 31-Dec-2018 13