ASIAN DEVELOPMENT BANK RRP:INO 35143

REPORT AND RECOMMENDATION

OF THE

PRESIDENT

TO THE

BOARD OF DIRECTORS

ON

PROPOSED LOANS

TO THE

REPUBLIC OF INDONESIA

FOR THE

NEIGHBORHOOD UPGRADING AND SHELTER SECTOR PROJECT

November 2003

CURRENCY EQUIVALENT (as of 29 October 2003)

Currency Unit – rupiah (Rp)

Rp1.00 = $.0001172 $1.00 = Rp8,530

ABBREVIATIONS ADB – Asian Development Bank ADF – Asian Development Fund BAPPENAS – Badan Perencanaan Pembangunan Nasional

(National Development Planning Board) BME – benefit monitoring and evaluation BPN – Badan Pertanahan Nasional (National Land Agency) BPR – Bank Perkreditan Rakyat (people's credit bank) BPS – Biro Pusat Statistik (Central Bureau of Statistics) BTN CoBILD

– –

Bank Tabungan Negara (National Savings Bank) Community-Based Initiatives for Housing and Local Development

CBO – community-based organization CFI – central financial institution CSS – city shelter strategy DGHS – Directorate General of Human Settlements DIP – Daftar Isian Proyek (Budget Allocation from Development Project) DTD – Directorate of Technical Development EIRR – economic internal rate of return FIRR – financial internal rate of return FPMU – financial project management unit GTZ – Deutsche Gesellschaft für Technische Zusammenarbeit

(German Agency for Technical Cooperation) HDO IBRA

– –

housing development organization Indonesian Bank Reconstruction Agency

IBRD – International Bank for Reconstruction and Development IDA – International Development Association IEE – initial environmental examination IUIDP – Integrated Urban Infrastructure Development Project KIP – Kampung Improvement Program LAR – land acquisition and resettlement LCB – local competitive bidding LCO – local coordinating office LFI – local financial institution LGU – local government unit LIBOR – London interbank offered rate MIS – management information system MOC – Ministry of Cooperatives MOF – Ministry of Finance MOHA – Ministry of Home Affairs MSMC – micro, small, and medium-sized cooperative NGO – nongovernment organization NUP – neighborhood upgrading plan

OCR – ordinary capital resources OSC – operational support consultant PMU – project management unit PNM – Permodalan Nasional Madani (National Fund for Social Investment) PPTA – project preparatory technical assistance PSC – project steering committee ROW – right of way SOE – statement of expense SPSS – Spatial Planning and Shelter Strategy TA – technical assistance UNCHS – United Nations Centre for Human Settlements UNDP – United Nations Development Programme UPP – Urban Poverty Project USAID – United States Agency for International Development

NOTE

In this report, "$" refers to US dollars.

This report was prepared by M. Lindfield (team leader), R. O’Sullivan, and S. Chatterjee.

CONTENTS

Page

LOAN AND PROJECT SUMMARY iii MAP vii I. THE PROPOSAL 1 II. RATIONALE: SECTOR PERFORMANCE, PROBLEMS, AND OPPORTUNITIES 1

A. Performance Indicators and Analysis 1 B. Analysis of Key Problems and Opportunities 2 III. THE PROPOSED PROJECT 3 A. Objective 3 B. Project Components 3 C. Special Features 6 D. Cost Estimates 6 E. Financing Plan 7 F. Implementation Arrangements 8 IV. PROJECT BENEFITS, IMPACTS, AND RISKS 13 A. Institutional Aspects 13 B. Poverty and Social Aspects 14 C. Environmental Aspects 15 D. Economic and Financial Aspects 16 E. Risks 16 V. ASSURANCES 17

A. Specific Assurances 17 B. Conditions for Loan Effectiveness 17

C. Conditions for Disbursement 18 VI. RECOMMENDATION 18 APPENDIXES 1. Project Logical Framework 19 2. External Assistance to the Sector 23 3. Sector Analysis 24 4. Subproject Descriptions 27 5. Cost Estimates and Financing Plan 32 6. Flow of Funds 33 7. Organizational Chart 34 8. Assessment of Participating Financial Institutions 35 9. Selection Criteria for Participating Financial Institutions 39 10. Implementation Schedule 41

11. Outline Terms of Reference for Decentralized Shelter Delivery – Capacity Building and Implementation Support 42 12 Social and Poverty Issues 46 13. Summary Resettlement Framework 48 14. Summary Initial Environmental Examination 53 15. Economic, Financial, and Poverty Impact Analyses 57 SUPPLEMENTARY APPENDIXES (available on request) A. External Assistance B. Sector Analysis and Policy Program C. Detailed Cost Estimates and Financing Plan D. Social and Gender Impacts and Strategies E. Environmental Impacts of Subprojects F. Economic, Financial, and Poverty Analyses G. Detailed Assessment of Participating Financial Institutions

LOAN AND PROJECT SUMMARY Borrower Republic of Indonesia Classification Poverty classification: Core poverty intervention

Thematic: Human development, good governance Environment Assessment

Category B Initial environmental examinations of representative core subprojects indicated that the Project would have mostly beneficial effects and adverse effects can be mitigated.

Project Description The proposed Neighborhood Upgrading and Shelter Sector

Project (the Project) supports the Government’s urban poverty reduction strategy by creating sustainable mechanisms for (i) providing resources to local governments, in partnership with communities, for site development and distribution of tenure for poor informal settlers; (ii) expanding the access of poor urban informal settlers to microcredit for shelter finance; and (iii) facilitating participatory community-driven planning by strengthening the role and capacity of participating communities, local governments, and the Directorate General of Housing and Settlements (DGHS) to meet their responsibilities. The Project will also contribute to establish a conducive policy, institutional, and regulatory environment to meet the housing needs of urban poor communities in informal settlement areas.

Rationale With the population of Indonesia expected to have reached 209

million inhabitants in 2000, and an urbanization rate of 40%, some 84 million people are living in Indonesian cities. The rate of urbanization continues apace. Some 20% of households are poor or vulnerable to poverty. Housing and housing finance markets have not provided products that are appropriate to their circumstances. As a result, almost all of these people are living in informal areas and are experiencing a deterioration in the level of services and infrastructure provided by local government, itself hard pressed by fiscal stringency.

Objective The objective of the Project is to reduce income poverty and

quality-of-life poverty in urban areas. The purpose of the Project is to put in place mechanisms for provision of affordable housing and serviced land for the poor. In order to do this, it will (i) improve the access of low-income urban families to tenured, serviced plots and to opportunities for house upgrading and new housing; (ii) provide appropriate finance for shelter and other services; and (iii) strengthen low-income communities, local governments, the National Land Agency, financing institutions, and DGHS to participate in a pro-poor shelter provision and finance system.

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Cost Estimates The Project is expected to cost $126.5 million equivalent, comprising $111.9 million (88%) in local currency and $14.6 million (12%) in foreign currency.

Financing Plan ($ million)

Item Foreign Exchange

Local Currency

Total Cost

Percentage (%)

Asian Development Bank 14.6 74.0 88.6 70.0

ADF 3.98 16.02 20.0

OCR 10.62 57.98 68.6

Central Government 0.0 5.6 5.6 4.4

City Governments 0.0 30.1 30.1 23.8

CFIs/LFIs 0.0 0.5 0.50 0.4

Beneficiaries 0.0 1.7 1.70 1.3

Total 14.6 111.9 126.5 100.0 ADF = Asian Development Fund, CFI = central financial institution, LFI = local

financial institution, OCR = ordinary capital resources. Note: Figures may not add up to total because of rounding. Source: Asian Development Bank estimates.

Allocation and Relending Terms

Loan proceeds amounting to about $15 million equivalent will be relent to participating financial institutions at the cost of Asian Development Bank (ADB) funds plus guarantee and administration fees and a foreign exchange risk premium, if applicable.

Loan Amount and Terms A loan of $68.6 million from the ordinary capital resources of ADB

will be provided under its London interbank offered rate (LIBOR)-based lending facility. The loan will have a 25-year term, including a grace period of 6 years, an interest rate determined in accordance with ADB’s LIBOR-based lending facility, a commitment charge of 0.75% per annum, and a front-end fee of 0.50%, and such other terms and conditions set forth in the loan agreement. (In the event that the loan is not approved by ADB’s Board of Directors in 2003, the front-end fee will revert to 1%, or such other percentage to be determined by the Board.) A loan of $20 million will also be provided from ADB’s Special Funds resources, with an interest charge of 1.0% per annum during the grace period and 1.5% per annum thereafter, and a term of 32 years, including a grace period of 8 years.

Period of Utilization Until December 2009 Estimated Project Completion Date

30 June 2009

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Implementation Arrangements

The Project will be implemented over 6 years, from 2004 to 2010. DGHS will form a project steering committee (PSC). The National Development Planning Board (BAPPENAS) will chair the PSC and have prime responsibility for overall coordination. Each participating local government will organize a local coordinating office to ensure efficient project execution and incorporation of priorities of local communities into project design and implementation. The membership of the local coordinating office will include community representatives to ensure proper implementation of community action plans and resettlement guidelines. Involuntary resettlement will be minimal as existing sites will be upgraded or new vacant sites developed.

Executing Agency Directorate General of Housing and Settlements, Ministry of Settlements and Regional Infrastructure

Procurement ADB’s Guidelines for Procurement will be followed.

Consulting Services Consultants will be selected and engaged in accordance with ADB’s Guidelines on the Use of Consultants and other arrangements satisfactory to ADB for the engagement of domestic consultants. A team of international and domestic project management consultants will help the project management unit (PMU) implement, manage, and monitor project activities. The consultants will help review community action plans and contract documents, and provide training for local governments, local financial institutions (LFIs) or their branches, and the PMU in project implementation, monitoring and evaluation, finance, and community participation. Local government counterpart funds will finance local coordinating offices. Where required for these units, domestic consultants will be recruited following procedures acceptable to ADB.

Project Benefits and Beneficiaries

The Project will support the poverty reduction goals of the Government and ADB, and improve the quality of life of urban informal settlers. Under site and service development subprojects, land ownership issues will be resolved and individual titles or other forms of secure tenure distributed, directly benefiting 180,000 poor urban households in a minimum of 30 local governments. Nearby communities will indirectly benefit from the provision of off-site infrastructure, including flood protection facilities, main roads, and main drainage systems. Similar cases of site improvement have been shown to increase the market value of land by 200–700%. Significant gains will accrue to the implementing agencies (as increased revenues from property taxes) as well as end-beneficiaries (as better social, financial, and economic status). Overall, the Project is expected to have a poverty impact ratio of over 0.52.

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Risks and Assumptions The key risk to the Project is the possibility of faltering commitment of local governments to facilitating the provision of shelter for the poor in a sustainable manner. The key assumption is that at the local level the political commitment to low-income housing will continue, independent of politically elected government representatives.

I. THE PROPOSAL

1. I submit for your approval the following report and recommendation on proposed loans to the Republic of Indonesia for the Neighborhood Upgrading and Shelter Sector Project.

2. In June 2002 the Asian Development Bank (ADB) approved a project preparatory technical assistance (PPTA) for the Neighborhood Upgrading and Shelter Sector Project.1 With the help of the PPTA, which was carried out from October 2002, the Directorate General of Human Settlements (DGHS) designed a decentralized investment project in line with the Government’s poverty reduction and shelter strategies, and prepared a feasibility study on shelter improvement for urban informal settlers. The Project was formulated using a sample of six pilot local governments.2 Project design incorporates feedback from consultations with the Government and target beneficiaries. This report is based on the findings of the Appraisal Mission, conducted on 13–31 October 2003; reports of the PPTA consultants; and follow-on discussions with the national and local governments, international assistance agencies, nongovernment organizations (NGOs), and beneficiaries. The proposed executing agencies, Government, and ADB agreed on the project goals, objectives, scope and scale, cost estimates, and financing plan. The project framework is in Appendix 1.

II. RATIONALE: SECTOR PERFORMANCE, PROBLEMS, AND OPPORTUNITIES

A. Performance Indicators and Analysis

3. Demand for urban infrastructure services and housing is increasing. The population was 203.4 million in 2000, compared to 119.2 million in 1971. Although Indonesia has dramatically reduced its population growth rate (from 2.32% in 1971–1980 to 1.61% in 1980–1999), the urban population continues to grow at about 4.6% per year (1990–2000). An estimated 42.5% of the population was living in urban areas in 2000; the figure is estimated to be over 50% by 2010 and 60% by 2025.

4. Despite heavy investments in environmental infrastructure, conditions in poor urban areas continue to deteriorate, aggravated by the impact of the 1997 economic crisis. Only about 36% of the urban population has access to piped water. Land administration leaves much to be desired. The National Land Agency (BPN) is responsible for land administration of only 30% of the national land, and less than 10% of the country is covered by cadastral maps. While housing finance has received considerable attention as the main instrument to increase and improve access to housing, the policy response has often neglected the interests of the poor. Conditions for credit access (requiring land title, 30% down payment, verifiable income) virtually exclude the poor, especially the self- or informally employed. Subsidies routed through the financial system, therefore, do not reach the poor.

5. External assistance has been provided to the sector institutions (Appendix 2), but most recent assistance has supported decentralization by strengthening local governments, focusing on city-wide infrastructure projects, and has not specifically targeted shelter. The Project does not, therefore, duplicate any ongoing assistance. A more detailed sector analysis is in Appendix 3.

1 ADB. 2002. Technical Assistance to the Government of Indonesia for the Neighborhood Upgrading and Shelter

Sector Project. Manila (TA 3895-INO, for $1 million, with $500,000 cofinancing provided by the Government of the United Kingdom’s Department for International Development).

2 Local governments comprise city governments (kota) and districts (kabupaten).

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6. The Project benefits from considerable experience in the sector, in Indonesia and other countries. Indonesia’s Kampung (village) Improvement Program (KIP) achieved considerable progress in providing basic infrastructure to poor neighborhoods. The key lessons of this and other international experience are that (i) community involvement in planning and implementation improves targeting and, in conjunction with these factors, education in basic maintenance increases the chances that provided infrastructure will be well maintained; (ii) poor households need secure tenure if they are to invest in their housing and neighborhood; and (iii) a comprehensive approach, systematically selecting and prioritizing areas for upgrading, is most effective. Under KIP, later and more participatory projects were more sustainable. While tenure in Indonesia is not as dire as in some countries, owing to multiple levels and means of acquiring some claim to title, upgrading of titles is a priority for the urban poor. KIP also demonstrated that in the resource trade-off between large-scale and focused scope versus small-scale and broader scope, such as in the Philippines, the former was more effective when guided by systematic investment planning.

7. Until recently international experience in housing finance was similar to Indonesia’s experience. However, recent developments in Latin America and, on a smaller scale, in Thailand and the Philippines, and in the United Nations Development Programme (UNDP) and United Nations (UN) Habitat Community-Based Initiatives for Housing and Local Development (CoBILD) project in Indonesia have shown that microfinance techniques are more successful in providing shelter finance to the poor. Short-term, small loans successfully finance incremental improvements to housing and sequential purchase of lot and improved shelter.

B. Analysis of Key Problems and Opportunities

8. Laws 22 and 25/1999 give local governments autonomy and a mandate to provide, or facilitate the provision of, a number of urban services, including housing and slum upgrading. However, the organizational structure for pro-poor shelter provision in local governments is not well developed. Few cities (Jakarta, Tangerang, and Surabaya) have dedicated pro-poor housing programs, partly because city governments do not think pro-poor shelter investment is needed to reduce poverty. Upgrading has not been a priority. However, this perception is changing as local governments are being elected, and their capacity in the sector should be strengthened. Based on sector assessments and policy studies, DGHS recommended establishing housing development organizations (HDOs) in each local government and supporting them with technical resources and access to finance for housing and upgrading programs. The HDO should draft a local housing policy, plan housing and site identification, monitor and evaluate implementation, help acquire land (where state land is used or in the case of compulsory purchase), and manage local government housing.

9. As the poor lack access to finance to buy land and upgrade their houses, accessible financing mechanisms should be set up in financial institutions. Some of the poor do have access to microcredit, which is generally unsuitable for housing finance as it is short term and high interest. Long-term finance is needed to build institutions’ capacity to offer long-term, affordable, and low-interest loans. Policy dialogue has focused on the need to develop mechanisms to supply finance through formal financial institutions, which react to local community-based organization (CBO) initiatives, building on experience of the World Bank’s Urban Poverty Project, which supports community and livelihood development in poor communities, and the UNDP and UN-Habitat CoBILD Project, which provides microcredit for house improvement and home and lot purchase through local NGOs. These projects have established local CBOs, which mobilize people to complement project activity.

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10. These issues were key items of policy dialogue during project preparation, focusing on systems to achieve the Government’s housing policy objectives. The Government has included targets for the sector in the national development strategy and established four programs to implement them: (i) development of housing financial institutions, (ii) enhancement of housing supply and renovation (renewal) systems, (iii) enhancement of housing facilities and infrastructure services, and (iv) enhancement of area revitalization and preservation. The draft national housing policy is consistent with the above. The policy objectives are to (i) extend the formal housing market’s ability to address the needs of a wider range of people (with specific interventions in land, infrastructure, finance, and building standards and materials, using a community-focused approach); (ii) build capacity to organize human settlements; and (iii) improve support systems for housing and human settlement development. The Government has also committed to implementing its “Cities without Slums” policy by 2010 and the newly announced “One Million Houses” program. It is focused on one of the Millennium Development Goals and is being undertaken by DGHS through its comprehensive program for participatory slum upgrading in over 150 local governments. The Project will thus address key issues in the sector: supply of serviced, tenured plots; provision of appropriate shelter finance; and strengthening of the capacity of sector institutions. These are the building blocks of the national strategy and fit within, and extend, national investment programs in the sector (Appendix 3).

III. THE PROPOSED PROJECT

A. Objective

11. The project goal is to help improve living conditions of the urban poor, who will participate in, and benefit from, improved shelter development, management, and financing processes that will increase their assets and improve their well-being. The project purpose is to upgrade slums, improve housing, and provide new housing for the urban poor project participants. The Project will improve local shelter planning and provision systems and the national organizations servicing them, and enable financing systems to respond efficiently and in a sustainable manner to the needs of the urban poor. The Project is a sector project and will be available to all qualifying local governments. The Project has been prepared using detailed pilot studies in six local governments3 chosen on a competitive basis, and detailed consultations with 59 more local governments that have formally requested to participate in the Project. Descriptions of pilot subprojects are in Appendix 4.

B. Project Components

1. Component 1: Improved Planning and Management Systems to Upgrade Sites and Establish New Ones for the Urban Poor

12. The objective is to help develop planning systems that cater to the housing needs of the poor by helping (i) upgrade and improve poor housing areas as a primary component of the Government’s stated commitment to “Cities Without Slums,” and (ii) deliver new housing areas to prevent and preempt the creation of new slums and informal settlements as the city grows. The component will also encourage urban development planning and budgetary allocations, and implementation of pro-poor activities.

3 Makassar, Mataram, Medan, Pekanbaru, Pontianak, and Tangerang were chosen after considering the proportion

of their populations in informal settlements, and willingness to contribute resources to the Project.

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13. Project activities are to (i) develop systems for pro-poor shelter within the housing component of the local Spatial Planning and Shelter Strategy (SPSS),4 (ii) encourage political commitment to these systems, (iii) provide outreach to undertake participatory planning with poor communities, and (iv) strengthen coordination with BPN and other agencies relevant to shelter provision for the poor. In particular, the Project will help develop an urban land development program, especially for housing for the poor. These activities will take place in at least 30 local governments. Local civil-society representatives, constituting an “urban forum,” will participate in planning.

14. The SPSS and the programming of parallel BPN titling activity will be the key elements of this component. Through a series of consultations, the SPSS will consolidate the information on land availability; priorities for development; strategies for meeting needs, especially of the poor; and likely sources of finance. The SPSS will prioritize site upgrading, new site development, and a time-bound action plan indicating land to be developed for various purposes. Cooperation of BPN, defined under its memorandum of agreement with DGHS as providing title documentation for priority projects, is crucial. The HDO will play a coordinating role, bringing together concerned stakeholders, in particular BPN and local governments’ spatial planning sections, and help them while allowing efficient and effective city development, especially to acquire land for housing for the poor. Component 1, therefore, will contribute much to orderly ready-to-build areas (KASIBA), stand-alone ready-to-build environments (LISIBA), land consolidation,5 and housing development.

2. Component 2: Improved Access to Shelter Finance by the Poor through Central Financial Institutions and Local Financial Institutions or their Branches

15. The objective is to put in place a financing system that can be accessed by the target groups for physical improvements—from adding additional rooms and repairing and replacing roofs and floors, to providing and improving infrastructure and services available, to improving title security, including plot purchase. Loans will be at market rates with no interest rate subsidies. Some 30,000 loans will be made under this component.

16. ADB loan proceeds will be relent to central financial institutions (CFIs) to establish a housing finance system accessible to low-income households. CFIs may channel these funds through local financial institutions (LFIs) to reach target beneficiaries. CFIs have been chosen on the basis of capacity to deliver lending products to the envisaged beneficiaries. Bank Tabungan Negara (BTN) and Permodalan Nasional Madani (PNM) are initially proposed to be the CFIs. BTN will use its extensive local branch network and/or LFIs and build on its experience from related programs to on-lend to beneficiaries. PNM will channel funds mainly through its network of people’s credit banks, widely regarded as microbanks and a key player in microfinance. CFIs will establish housing microfinance systems, and LFIs will bear a share of the loans to beneficiaries. Selected LFIs will undertake a program of activities: (i) raise awareness and, with DGHS support, mobilize communities and households to participate in the Project—initially in the low-income areas designated by the SCSS, and later in the rest of the city; (ii) form community savings-and-loan groups linked to LFIs, which will mobilize savings and channel the loans to beneficiaries; and (iii) provide, administer, and monitor loans, from Rp2 million to Rs10 million, which can be guaranteed through group solidarity mechanisms, which were effective in the CoBILD project, or by land titles secured under the Project. The group solidarity guaranty mechanisms operate through individual loans to group members, guaranteed 4 Rencana Pembangunan dan Pengembangan Perumahan dan Permukiman di Daerah (RP4D) in the Indonesian

language. 5 To enable technically and financially viable development.

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among group members, while the group provides an assurance to the lender. The mechanism is a departure from the Grameen group-lending experience and traditional individual loans. If beneficiaries can afford them, the loans can be sequential, used for incremental purchase of plots and then construction.

17. Because funds are provided at market rates, a sustainable shelter finance system is expected to develop around CFIs, which can be expected to supplement the program by providing additional funds and resources to low-income households based on an enhanced perception of their credibility as borrowers. The capacity-building component will also ensure that the documentation and reporting infrastructure to develop an asset-based securities market is in place. In particular, loan documentation will be standardized.

3. Component 3: Upgrading of Poor Neighborhoods and Development of New Sites for the Poor

18. The activities of component 1 will help identify, prioritize, and program the activities to upgrade shelter and neighborhoods of the poor. Component 3 will identify, design, and undertake the investments required to implement component 1. The two major subcomponents are the upgrading of existing areas and development of new areas for housing for the poor. Appendix 4 describes each pilot subproject.

19. The component targets over 100 poor communities in at least 30 local governments, and aims to develop at least 10 new housing areas to preempt the formation or extension of slums. Component 1 will identify locations and criteria to select communities and component 2 will set up the mechanisms for households and communities to finance house improvements, including improved land tenure and on-plot infrastructure. Investments under component 3 will include street lighting, storm drainage, public toilets and communal sanitation facilities such as group septic tanks, water mains and public taps, secondary solid waste management, and community facilities. Investments will be identified through a participatory neighborhood upgrading plan (NUP) in poor communities. Savings groups involved in component 2 will be included in CBOs, which will be the community counterpart of the local government for NUPs.

20. Proposed upgrading activities include (i) fostering of NUPs in priority poor areas by local governments, supported by DGHS; (ii) DGHS agreements with local governments and communities on cost sharing for investments identified under the SPSS and NUP, and on operation and maintenance of investments; (iii) provision of funding for investments; and (iv) monitoring of investments and maintenance by DGHS. Activities for the new sites will be similar, except that a prequalification process for beneficiaries will ensure affordability. Over 25,000 new housing lots are expected to be created.

21. The Project will also fund investments to provide links to city-wide networks of urban services such as feeder roads. As with neighborhood upgrading, which primarily serves the needs of the poor, these investments will be funded through cost sharing by national and local governments. The scale and speed of provision will be determined by SPSS criteria and provisions. Component 3 could include, for example, provision of new rental public housing to meet demand from the large numbers of itinerant workers, financed through matching grants.

4. Component 4: Strengthened Sector Institutions to Deliver the Program

22. To support project implementation and sector strengthening, DGHS will undertake a range of capacity-building activities to (i) strengthen local government systems for, and train local government officers and representatives, civil-society representatives, and DGHS to undertake pro-poor SPSSs; (ii) strengthen central and local financial institutions, local

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government, and DGHS systems, and train officers and civil-society representatives to finance shelter for the poor and low-income groups; (iii) strengthen local government systems, and train local government officers and representatives, civil-society representatives, and DGHS to facilitate, upgrade, and develop sites for the poor and low-income groups; and (iv) enable local communities to help upgrade shelter and to establish self-help groups. These activities will complement ongoing related ADB capacity building for urban infrastructure management and decentralization projects.

C. Special Features

23. The Project addresses the key constraints on provision of affordable shelter to low-income groups and provides mechanisms to enhance security of tenure where previous initiatives have had limited success. Component 1 facilitates planning of these initiatives. Component 2 provides incremental financing for lot purchase on affordable terms for the poor and through financing mechanisms linked to the formal financial system, thus bridging the gap between these institutions and the poor. The Project avoids subsidizing interest rates, relying instead on targeted capital subsidies. Component 3 will physically improve slums and develop new, affordable sites for the poor where supply-side policies have failed to keep pace with need.

D. Cost Estimates

24. Demand for project activities has been investigated in the six pilot cities, which were selected for their regional representation; size (metropolitan, large, and medium); and large concentrations of urban poor. The investigation results formed the basis for costing investments in housing microfinance, neighborhood upgrading, and new site development; and capacity-building and project implementation support components. Investment size was determined from the 42 participating cities’ cost-sharing proposals.

25. The Project is estimated to cost $126.5 million equivalent, comprising $14.6 million in foreign exchange costs (including about $5.9 million in financial charges during implementation), and $111.9 million equivalent in local currency costs (Table 1 and Appendix 5).

Table 1: Project Cost Estimates ($ million)

Foreign Local Total Component Exchange Currency Cost A. Improved Shelter Planning and Management 1. City Shelter Strategies 0.9 3.7 4.6

Subtotal (A) 0.9 3.7 4.6 B. Improved Access to Shelter Microfinance 1. Microfinance for Shelter Development 0.0 17.1 17.1

Subtotal (B) 0.0 17.1 17.1 C. Upgraded Poor Neighborhoods and New Sites 1. Neighborhood Upgrading 5.2 62.0 67.2 2. New Sites 0.9 21.6 22.5

Subtotal (C) 6.1 83.6 89.7 D. Strengthened Sector Institutions 1. Capacity Building for Site Development 0.2 3.4 3.6 2. Capacity Building for Shelter Microfinance 0.4 2.2 2.6 3. Project Implementation Support 1.1 1.9 3.0

Subtotal (D) 1.7 7.5 9.2 Total 8.7 111.9 120.6 E. Financial Charges during Implementation 5.9 0.0 5.9 Total Project Cost 14.6 111.9 126.5

Note: Figures may not add up to total because of rounding. Source: Asian Development Bank estimates.

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E. Financing Plan

26. The Government has requested a loan of $68.6 million equivalent from ADB’s ordinary capital resources (OCR) and $20 million from the Asian Development Fund (ADF). The OCR loan will have a 25-year term, including grace period of 6 years; an interest rate determined in accordance with ADB’s London interbank offered rate (LIBOR)-based lending facility; a commitment charge of 0.75% per annum; and a front-end fee of 0.50%, to be capitalized in the loan, provided it is approved by ADB’s Board of Directors in 2003. If the loan is not approved in 2003, the front-end fee will revert to 1%, or such other rate to be determined by ADB’s Board. The ADF loan will have an interest charge of 1.0% per annum during the grace period and 1.5% per annum thereafter, and a term of 32 years, including a grace period of 8 years. The project financing plan is shown in Table 2.

Table 2: Financing Plan ($ million)

Source Foreign Exchange

Local Currency

Total Cost Percent

Asian Development Bank 14.60 74.00 88.6 70.0

ADF 3.98 16.02 20.0 OCR 10.62 57.98 68.6

Central Government 0.00 5.60 5.6 4.4 City Governments 0.00 30.10 30.1 23.8 Central Government 0.00 0.60 0.6 0.5 City Governments 0.00 35.10 35.1 27.8 CFIs/LFIs 0.00 0.50 0.5 0.4 Beneficiaries 0.00 1.70 1.7 1.3

Total 14.60 111.90 126.5 100.0 ADF = Asian Development Fund, CFI = central financial institution, LFI = local financial institution, OCR = ordinary capital resources. Note: Figures may not add up to total because of rounding. Source: Asian Development Bank estimates.

1. Financing Mix

27. The financing mix for component 2 is based on the use of (i) OCR loan proceeds, (ii) CFI and LFI contributions, and (iii) beneficiaries’ equity contributions. About 90% of component 2 will be funded through ADB’s OCR loan. ADF funds will finance all capacity-building activities under components 1 and 4. DGHS will contribute the incremental project administration and supervision costs of these components. Component 3 is based on the blended use of ADB loans and central government’s and participating cities’ counterpart contributions for the cost of the subprojects. The Government will partly subsidize land acquisition costs for eligible beneficiaries. Once a grant for site development is approved, the participating local government will first mobilize its own counterpart contributions for activities such as land titling, detailed engineering design, and matching funds required to implement subprojects. Appendix 6 presents the project financing arrangements and fund flow.

2. Relending and On-Lending6

28. Under component 2, OCR loan proceeds will be relent by the Government, through the Ministry of Finance (MOF), to qualified CFIs through subloans. Loans to CFIs will be on parallel terms to the ADB loan. CFI subloans will have a term of up to 15 years, including a maximum grace period of 3 years, an interest rate that will at least cover the cost of ADB borrowing, an 6 Relending is defined as lending from CFIs to LFIs, and on-lending as lending from LFIs to end-beneficiaries.

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administrative fee for the Government, and foreign exchange risk cover, if applicable. CFIs will disburse funds to beneficiaries through LFIs at market interest rates. The cost of CFI funds to LFIs will be at market rates. LFIs will, in turn, on-lend to beneficiaries at the market-lending rate. Depending on the region, borrower, collateral cover, and period of loan, interest rates may vary from 14% to 25% per annum. These rates are lower than the annualized interest rates paid by the beneficiaries, ranging from 35% to as high as 120%, due to limited, or lack of, access to formal shelter finance. LFI on-lending to beneficiaries will vary from 2 to 10 years.

F. Implementation Arrangements

1. Project Management

29. DGHS will be the project Executing Agency. It will form the project steering committee (PSC), chaired by the National Development Planning Board (BAPPENAS), with members from the National Board for Policy and Supervision of Housing and Human Settlements and other stakeholders, and permanent director-level representatives of BAPPENAS, BPN, MOF, Ministry of Home Affairs (MOHA), and Ministry of Settlements and Regional Infrastructure. The PSC will also include representatives from CFIs and civil society. To ensure committee members’ active participation, meetings of the director-level PSC will be held at least quarterly, focused on discussions of project progress, with up-to-date reports from participating cities. These meetings will approve annual budgets and semiannual progress reports.

30. DGHS directorates will serve as the PSC technical secretariat, and its services to the Project will be consistent with the central Government’s role (i.e., coordinating, monitoring, and providing technical assistance resources to participating local governments). The central implementing agencies will be as follows: (i) component 1—DGHS Directorate of Technical Development (DTD), with support from other DGHS technical directorates; (ii) component 2—CFIs, with support of the DGHS Directorate of Housing Finance; (iii) component 3—participating local governments, with support from regional directorates of DGHS and DTD; (iv) component 4—DTD. Representatives of these agencies will constitute the project management unit (PMU), to be headed by, and located within DTD. The PMU will be led by a project director with a full-time project manager, at the level of section head, who will be in place for at least 2 years. The PMU will also be staffed with specialists in urban planning, housing finance, community development, and project management.

31. The PMU will manage the Project’s operational support consultants (OSC). The PMU will coordinate project services, but a specialist consultant supervised by PMU and OSC will manage national bidding and contracts. OSC services will include government staff counterparts, and specialists in project coordination support, public information, quality assurance and municipal engineering, program performance monitoring and evaluation (PPME), and project accountancy support. The results of this output will be efficient project management and enhanced shelter management capacity of national agencies.

32. In each local government, project implementation will be coordinated by the local coordinating office (LCO). Local governments will be flexible as to the LCOs’ location and will nominate an LCO full-time staff to manage the subprojects. LCOs will liaise with CFIs and coordinate activities of LFIs or their branches, and community groups. Existing CBOs will form the basis of the NUP process, articulate community needs and aspirations, and ensure that the community is adequately represented in decision making. Civil society will be represented in the LCOs’ procurement activities.

9

33. Finally, lending under component 2 will be supervised by a financial project management unit (FPMU) in each CFI. FPMUs will coordinate with LCOs to ensure that LFIs channel loans efficiently and effectively to qualified project beneficiaries. Appendix 7 presents the project organizational chart.

2. Central Financial Institutions

34. BTN is proposed to be a CFI for component 2.7 A wholly government-owned development finance institution established in 1950, and focused on housing and property finance, BTN has built up relevant capacity for shelter finance while implementing government-sponsored housing finance projects, including housing microfinance. BTN was recapitalized after the 1997 financial crisis and now maintains a relatively good financial standing.

35. While BTN’s lending portfolio has remained constrained by a number of economic factors, its deposit mobilization results are encouraging. The bank’s capital adequacy, asset quality, management, earnings, and liquidity ratios are satisfactory. To ensure financial viability of BTN lending, and sound financial management, BTN will maintain a risk-weighted capital adequacy ratio of at least 8%, in keeping with the minimum requirement of Bank Indonesia.

36. PNM, a specialized financial institution to develop micro, small, and medium-sized cooperatives (MSMCs), will be the other CFI. PNM runs various financial activities such as credit programs, financial institutions, and venture-capital institutions. PNM operates credit schemes through a network of executing banks, provides capital shares to selected microbanks, and provides advice and training to MSMCs.

37. PNM has grown rapidly, meeting a clear need to support MSMCs. Its capital adequacy, asset quality, earnings, and liquidity ratios are satisfactory. Financial projections conducted for PNM over 2003–2009, using conservative growth assumptions, indicate a doubling of total assets from Rp1,720 billion in 2002 to Rp3,463 billion in 2009. PNM has agreed to maintain return-on-asset and return-on-equity ratios of at least 1.5% and 10.0%, respectively, to ensure its financial viability during the Project. BTN and PNM are assessed as project CFIs in Appendix 8.

3. Selection and Preparation of Subprojects

38. Eligibility criteria, selection mechanisms, and subproject preparation and appraisal procedures have been agreed on with the Government and CFIs. The first three subprojects under component 3, and first three subloans appraised by CFIs for component 2, will be submitted to ADB for review and approval. Subsequent subprojects or subloans will not require ADB review and approval, unless the subproject or subloan equals or exceeds $2 million.

a. Eligibility and Selection Criteria for Local Governments

39. The PMU will determine if a local government is eligible for inclusion in the Project, based on the following criteria: (i) significant slum areas suitable for upgrading; (ii) classification as a provincial capital, metropolitan city, or large or medium-sized urban area; (iii) financial capacity to provide matching grants required for the Project; (iv) ability to generate surplus income for the next 3 years; (v) documentary evidence of endorsement of the Local Government Assembly and chief executive; (vi) absence of adverse findings from banks and suppliers; and (vii) existence of, or commitment to establishing, a housing unit (to be the basis

7 BTN has not yet completed its due diligence review of the project financing procedures.

10

of an HDO) or an HDO. A preliminary selection will be made from the long-list of 42 local governments.

40. An area will be eligible for a subproject if it has (i) inadequate housing and services, as evidenced by the endorsement of the regional development planning agency; (ii) nationally or locally owned government land with potential for inclusion in the subproject; (iii) interest in and commitment to the Project, expressed by the legal formation of a project CBO or, if already established under World Bank’s UPP, the CBO provides a document expressing interest and willingness to participate, endorsed by representatives of all households in the area concerned; (iv) a local government that can technically and administratively build institutional capacity and manage subprojects; and (v) confirmation from the local government that it has the capacity and willingness to contribute matching grants to the subproject.

b. Qualification and Selection of Central Financial Institutions and Local Financial Institutions

41. The PMU will monitor CFIs’ financial position based on criteria in Appendix 9. CFI FPMUs will determine the eligibility of participating LFIs and other lending intermediaries. LFIs must satisfy institutional, financial, and lending performance criteria. LFIs able to implement microcredit programs for the informal sector, conforming to ADB’s microfinance development strategy, will be preferred. CFI project loan officers will assess compliance with accreditation requirements (Appendix 9) based on information provided, including audited financial statements.

4. Implementation Period

42. Project implementation is assumed to start in the first quarter of 2004 and continue for 6 years. The emphasis in the first 6 months will be on (i) finalizing preliminary shelter strategies for the six pilot cities, (ii) implementing NUPs in the cities, and (iii) contacting other project cities and preparing SPSS.

43. Work in the remaining cities will start with SPSS development and will continue for 2 years, allowing different cities to start at different times, although the identification and planning process should not last more than 3 months. Similarly, project upgrading in local governments other than the pilots will be spread over 3 years, from early 2005 to early 2008. New sites will be developed in all project cities during the last 3 years of the Project. The implementation schedule is in Appendix 10.

5. Procurement

44. Participating agencies under all components will follow ADB’s Guidelines for Procurement. In particular, under component 2, CFIs and LFIs or branches will follow the guidelines applicable to development finance institution loans, which include obligations to (i) demonstrate that subborrowers’ procurement procedures are appropriate; and (ii) ensure that goods and services to be financed by loans to end-borrowers are purchased at a reasonable price, delivered on time, efficient, reliable, suitable for the subproject, have maintenance arrangements, and, in the case of services, rendered by quality and competent parties. To comply with ADB’s Guidelines for Procurement, DGHS and CFI project managers and staff of other agencies engaged in procurement will be trained and briefed in procurement. International competitive bidding will be used for all civil works contracts of over $2 million, and for supply contracts of over $500,000. International shopping will be used in cases of supply contracts of over $100,000 and less than $500,000. In other cases, local competitive bidding procedures will

11

be used, except as specified below. To promote compliance with ADB’s Guidelines for Procurement, staff of the PMU, FPMUs, LCOs, and other agencies involved in procurement will be briefed and trained in procurement procedures.

45. For small areas, typically 2 hectares or less and without technical complications, the possibility of using community contracting under ADB’s A Guide on Community Participation in Procurement may be considered if the local community is organized and committed to contracting. Where necessary, works should be divided into smaller packages to ensure that they (i) meet the eligibility criteria for community-contracted works and (ii) pertain to a clearly defined community. The finance for these works may be allocated directly to the neighborhood administration as a block grant or be administered by the LCO, depending on local preferences and procedures. The PMU will clearly define procurement processes and supervision procedures.

6. Consulting Services

46. Specialist services will be of two groups: (i) capacity building for shelter strategy formulation, finance management, and site development; and (ii) operational support. The capacity-building group will be recruited centrally and deployed to participating local governments. Facilitators will also be recruited from, and deployed to, them. Operational support consultants will be recruited centrally and deployed to support the PMU.

47. International and domestic consultants will be selected and engaged in accordance with ADB’s Guidelines on the Use of Consultants, using the quality- and cost-based selection method or other arrangements satisfactory to ADB. Around 60 person-months of international consulting, 492 person-months of domestic consulting, and 1,631 person-months of facilitator services will be needed. Consultants will be experts in architecture, planning, engineering, community development, environmental services, economic and financial analysis, and microfinance. An international procurement services consultant retained by the PMU on a separate contract will recruit all specialist services. The consultant will process all progress payment claims. Use of “period” or “framework” consulting services contracts will make available the specified pool of specialist services to the local governments upon request.

48. ADB will finance consulting services for OSC—about 45 person-months international and 363 person-months domestic, in shelter planning and financing, microlending systems, and community mobilization. Outline terms of reference for consulting services are in Appendix 11.

7. Advance Action on Recruitment

49. ADB has approved advance consultant recruitment for project, engineering design, and contract document management, starting with pilot subprojects. The Government has been advised that such advance action does not commit ADB to finance the Project.

8. Disbursement Arrangements

50. To expedite disbursements and improve governance in project implementation, the PMU will consolidate statement-of-expense (SOE) accounts, both from consultant expenditures under components 1 and 4, and of the local coordinating offices (LCOs) under component 3. The PMU will review and certify all direct payment claims to ADB, which, in turn, will make the payments to the relevant consultants and LCOs. These arrangements will be detailed, reviewed, refined, and documented prior to any disbursement for these components.

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51. Under component 2, each CFI will establish an imprest account. The initial deposit will cover the estimated ADB financing required by each CFI for the first 6 months. Replenishment of these accounts will be based on disbursement to LFIs operating in the target communities. The ceiling of the combined imprest accounts of the CFIs will be $1.5 million. All imprest accounts will be established, managed, replenished, and liquidated in accordance with ADB’s Loan Disbursement Handbook and detailed arrangements agreed on by the Government and ADB. ADB’s SOE procedures will be followed in liquidating the imprest accounts and reimbursing individual SOE payments up to $200,000 equivalent. The involved agencies’ internal control systems have been reviewed and found to be capable of administering payments at this level.

9. Accounting, Auditing, and Reporting

52. The PMU, FPMUs, and LCOs will maintain separate project accounts. The PMU will consolidate CFI and LCO accounts quarterly. Independent auditors acceptable to ADB will audit the consolidated project accounts every year. Certified copies of the audited accounts in English will be submitted to ADB not later than 9 months after the end of the financial year to which they relate. The independent auditors funded by the Government will also provide a separate audit opinion for all imprest accounts and SOEs. If the audited project account is not received within 6 months after the due date, ADB may stop replenishing the imprest account and processing reimbursement requests, commitment letters, and contract awards. If the project account is not received within 12 months after the due date, ADB may suspend the loan. The PMU will submit to ADB quarterly reports on implementation of project-funded activities. The reports will be in a format acceptable to ADB, and include reconciliation of project expenditures against ADB disbursements, progress made against established targets, problems encountered during the quarter, steps taken and proposed, compliance with loan covenants, and project activities to be undertaken during the next quarter. A project completion report will be prepared within 8 months of project completion. All reports will be in English.

10. Project Supervision and Reporting Requirements

53. DGHS and the CFIs will separately submit to ADB semiannual progress reports on project implementation. The reports will cover physical performance, summary profiles of feasibility studies, summary appraisals of applicant CBOs and NUPs, progress made in component 2, and progress made in the capacity-building program. Within 6 months after subproject completion, DGHS will prepare and submit to ADB a subproject completion report, summarizing the status of subproject implementation and operational performance and an overview of project progress. Within 8 months after the Project, DGHS and the CFIs will prepare and submit to ADB a project completion report summarizing the overall status of project implementation, operational performance, project performance monitoring system, and targets achieved.

11. Anticorruption Policy

54. The Project will comply with ADB’s anticorruption policy and guidelines. DGHS will ensure the timely submission of project accounts. Subprojects will be selected, components approved, and goods and services procured according to agreed-on guidelines and criteria. During project processing, ADB’s anticorruption policy was explained to the central and local governments, CFIs, and participating LFIs. The anticorruption provisions added to ADB’s

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Guidelines on the Use of Consultants were also discussed, and the section on fraud and corruption in ADB’s Guidelines for Procurement was emphasized.8

12. Project Performance Monitoring and Evaluation

55. The Government will ensure that a comprehensive program for PPME, acceptable to ADB, is carried out to (i) examine and assess the project technical and disbursement performance; (ii) evaluate the delivery of the planned infrastructure, facilities, activities, and programs; (iii) assess the achievement of project objectives; and (iv) measure the Project’s social and economic benefits. The PPME will be integrated into city management information systems to monitor social and economic benefits even after project implementation. Annual PPME reports will be prepared by each LCO, and then consolidated by the PMU and submitted to ADB, with a copy for the implementing agencies. The integrated system for management, monitoring, and evaluation of project benefits, social impact, and physical improvements will be in accordance with ADB’s guidelines for the project performance management system.

56. The PMU will also implement a structured learning program that will inform project preparation for subsequent shelter projects. Structured learning involves setting review topics relating to policy and implementation issues at the start of the Project, and then monitoring project implementation specifically on those topics. ADB and the Government will undertake a comprehensive learning exercise at the end of the second year when the first batch of investment proposals is completed.

13. Project Review

57. A midterm review will take place about 4 years after loan effectivity to enable the Government, CFIs, and DGHS to adjust project design and implementation arrangements, if needed. The review will cover subproject preparation and implementation, consultants’ performance, subprojects in the pipeline, assistance to local governments and their poor urban communities, microfinance, institutional capacity building, and possible reallocation of loan proceeds.

IV. PROJECT BENEFITS, IMPACTS, AND RISKS

A. Institutional Aspects

1. National Institutions

58. The inclusion of all key national-level shelter stakeholders on the steering committee will ensure that lessons from the sector will guide project activities. DGHS’s role as key national government implementing agency for pro-poor shelter programs will be reinforced, as will the role of DGHS, with BAPPENAS, in facilitating decentralization of shelter planning and provision. MOHA’s roles in overseeing decentralization and promoting community development are reinforced by the ministry’s membership in the steering committee.

59. Project support for coordination and implementation will increase the capacity of national agencies to manage fund flow and specialist services to city governments. Support will include (i) consolidating the role of DGHS in project coordination, public information campaigns, project accounting and financial management, and preliminary evaluation of shelter investment proposals from local governments; (ii) strengthening BPN’s ability to issue land titles in urban 8 For example, in the case of inappropriate practice, only specific parties, rather than the whole Project, should be

penalized. In such cases ADB will review the practice, a bid for example, and determine appropriate redress.

14

poor areas; and (iii) helping new “good governance” systems of procurement coordinate other specialist services and, especially, give advice on procurement through out-sourced agencies and management of framework contracts.

2. Local Government and Civil Society

60. The Project’s success in adding pro-poor shelter dimensions to local government planning and budgeting will rely on enhanced shelter-related institutional arrangements. The Project encourages the addition of shelter as a central activity of local government. The Project also reinforces the role of local urban forums that will work with the LCO, enhancing accountability and transparency at the local level. If the local government does not establish an urban forum, the Project will facilitate its formation under component 4. A stronger local government shelter institution is required, and component 4 promotes the establishment of HDOs to institutionalize a comprehensive approach to shelter planning and a pro-poor orientation for it.

61. The Project will help consolidate the roles of the various stakeholders by providing hands-on training and specialist service advice as shelter strategies are prepared and implemented in the local government annual planning and budgeting system. The Project promotes coordination among key local stakeholders, in particular the city planning office and local BPN office, by supporting the local government housing and settlements board. The Project will encourage the establishment and consolidation of neighborhood and community organizations, and provide recommended participatory processes and training and specialist service support. The Project’s inclusive shelter-planning intervention will result in short-term plans and budgets reflecting priorities of the poor, and of city governments with competent personnel, technology, facilities, and programs to ensure that shelter planning and budgeting remain inclusive.

3. Local Participating Financial Institutions

62. The introduction of small revolving loans for housing through LFIs will not only extend the range of services available to low-income people, but capacity building for these institutions will also enhance their understanding of financial mechanisms and operations, and, through community involvement, of communities’ social needs. The establishment of community savings groups will encourage more households to save beyond project-related loans. With good management and support, a financial institution will be able to establish a virtuous cycle to expand financial services, starting with the poor and then gradually among middle-income groups.

B. Poverty and Social Aspects

63. In general, better access to urban infrastructure and services improves living conditions. Specifically, road improvement provides safer, faster, and better accessibility to and from people’s homes. Better street lighting can deter petty crime, violence, and clandestine activities, directly benefiting women and children. Better drainage reduces flooding and, therefore, waterborne diseases, destruction of property, and accidents; and prevents groundwater contamination. The central issue for the Project is that each community will have different priorities, and the NUP is designed to enable the community to plan investments.

64. An important project impact is job creation for residents of project communities and those living nearby, increasing income, although temporarily, particularly of the unemployed or underemployed, and thus increasing capability to spend for basic needs such as food,

15

education, and health. Increased income will especially benefit the poorest. Indirectly, women may benefit from jobs through the increase in demand for goods and services, which women can provide through microenterprises such as food stalls, barber shops, and room rentals.

65. Housing improvement will involve setting up a credit facility for target beneficiaries. Physical improvements can include adding rooms, including toilets and baths; repairing and replacing components; improving facilities (toilet, kitchen, garden); and even purchasing the house and/or lot. Extra space may be rented out.

66. Involving women in house design will lessen their domestic work. Home-based enterprises and income-generating activities particularly empower women. Indirectly, housing improvement creates jobs for local people and outsiders. The pilot or subsequent subprojects, which target cities, will not affect indigenous peoples. In the remote eventuality that an affected community may have a significant indigenous population, community-driven planning will ensure that ADB’s policy is applied, also minimizing, if not eliminating, the need to acquire land and, thus, to employ ADB’s involuntary resettlement policy safeguards. Social and poverty issues are in Appendix 12, and the summary resettlement framework in Appendix 13.

67. The community organizations and/or associations will greatly benefit from the Project, which will improve CBOs’ skills, knowledge, and tools to manage and maintain community development interventions. These will establish a sense of ownership and responsibility, which will reinforce the sustainability of project interventions. Meeting community organizations’/ associations’ organizational, management, and advocacy needs will strengthen social cohesion, increasing community cooperation and coordination. Component 4 will also emphasize involving the poor and women’s groups.

C. Environmental Aspects

68. The Project will have mostly beneficial environmental effects, and adverse effects can be mitigated. Initial environmental examinations were prepared for the six pilot sites. All pilot subprojects, and the Project as a whole, will have a minor environmental impact during construction. Civil works are not substantial in scale or cost, and mostly involve on-site improvement of drainage, roads, footpath networks, and water distribution systems. Mitigation measures will include ensuring that construction workers are briefed on how to minimize nuisance, and carefully planning excavations and other construction activities to avoid damaging utilities. At most, negative environmental impact will be interference with other utilities or temporary increase of solid waste, sewage, dust, or noise during construction. Mitigation measures will include documentation of works and utilities undertaken, which will be done by the CBO to inform future construction activities; careful design of septic tanks and drainage to avoid flooding and standing water; and community education on site cleaning and maintenance of infrastructure provided, including septic tanks. Recommended mitigation measures are simple and easy to integrate into the project feasibility study and detailed engineering phases of subproject development. The Project will improve access, proper handling, and disposal of domestic wastewater; prevent flood damage; and provide potable water.

69. As the Project is a sector project, site selection criteria will include residential safety, which will have to be supported by adequate environmental assessment. DGHS, assisted by project capacity-building components, will ensure that assessment and monitoring arrangements are in place. Protection and mitigation measures must be recommended and the conditions met for their implementation before ADB approves any site development subproject.

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70. As the Project involves only small-scale works, none of the pilot subprojects required full environmental impact assessment under Indonesian regulations, or are classified by ADB under category A. Almost all subprojects will only require basic-level assessment under the Indonesian environmental regulations and fall under ADB category B. The Project’s environmental impacts are summarized in Appendix 14.

D. Economic and Financial Aspects

71. The major indicators of the subprojects’ economic viability are summarized in Appendix 15. Base-case subproject economic internal rates of return (EIRRs) were 15.0–44.8%, exceeding the 12.0% economic opportunity cost of capital, and confirming the subprojects’ economic robustness. Sensitivity analysis conducted on parameters—10% increase in costs, 10% decrease in benefits, or both, and delayed benefits—showed that EIRRs are vulnerable to changes in anticipated subproject benefits, a risk that needs to be managed by capacity building under component 4.

72. The Project’s poverty impact ratio, based on direct economic benefits from representative suprojects, is 52%, which is significantly higher than the income share of the urban poor as estimated by ADB and confirms the Project’s pro-poor impact. The poverty impact analysis is also summarized in Appendix 15.

73. The financial capability of the local governments, which will serve as the implementing agencies for the Project’s site development component, were evaluated on the basis of their financial statements and revenue and expenditure forecasts. Cash-flow projections indicate that all six local governments have the capacity to borrow for project investments. Financial soundness is a criteria to select participating local governments. The financial analysis of representative LFIs ascertained their ability to relend to project beneficiaries and repay their proposed subloans under component 2.

74. Financial internal rates of return (FIRRs) and financial sustainability projections were prepared for the housing loans. FIRRs were not calculated for the site development subprojects because they have significant subsidy elements. The local governments will eventually recover project subsidies through property taxes.

75. Project sustainability is underpinned by ensuring that all institutional stakeholders can recover costs and that beneficiaries are the recipients of targeted subsidies. Thus, local governments will recover infrastructure costs through land taxes, and financial institutions will charge an appropriate spread linked to their risk and costs. Subsidies are one-time capital subsidies for land costs.

E. Risks

76. The project design assumes that the Government will remain fully committed to decentralization and poverty reduction, which is highly likely. Government advice on the development priorities of the next medium-term national development plan confirms that decentralization and poverty reduction through economic recovery will be core features of national development policy. However, progress and stability in macroeconomic management during the 6-year Project is necessary to ensure access to long-term investment funds and the ability to implement national development policy imperatives.

77. The Project assumes that enough city governments will be attracted to participate in the Project by the grants and subsidized specialist service mix provided by the central Government

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under component 4. Other cities’ readiness to participate will also be assessed if alternatives are necessary.

V. ASSURANCES

A. Specific Assurances

78. Indonesia and DGHS have given the following specific assurances, in addition to the standard assurances, which are incorporated in the legal documents:

(i) Indonesia will make all administrative arrangements for implementation and ensure that counterpart resources are provided on time. The Government, including CFIs, will thus do everything to promptly disburse funds to qualified borrowers.

(ii) Indonesia will ensure that DGHS administers the capacity-building assistance with due diligence and transparently.

(iii) Indonesia will not consider any subproject that requires significant resettlement. In any event, the PMU will, before approving subprojects, screen them for involuntary resettlement effects, to ensure that no loss of land, income, housing, community facilities, and resources occurs that will require compensation to be paid in accordance with ADB’s policy on involuntary resettlement. Any involuntary resettlement arising from project land acquisition should conform to ADB policy and procedures and to the neighborhood upgrading plan and resettlement framework.

(iv) Indonesia will ensure that the Project follows the country’s environmental rules and regulations and ADB’s environmental assessment guidelines.

(v) Indonesia will ensure that all land required for a subproject has title suitable for upgrading the land or developing new sites.

(vi) DGHS will ensure that, before a subproject is approved, (a) a local CBO is established and staffed, (b) an adequate neighborhood upgrading plan is prepared, (c) all beneficiaries voluntarily agree on the plan, and (d) the participating local government agrees in writing that a specified CBO will represent the subproject community.

B. Conditions for Loan Effectiveness

79. The Loan Agreements will take effect subject to the following conditions:

(i) The execution and delivery of the Subsidiary Loan Agreement and the Implementation Agreement, on behalf of PNM, will have been duly authorized or ratified by all necessary corporate, administrative, and governmental action.

(ii) Pilot-city LCOs are established and staffed.

(iii) The PSC is established.

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C. Conditions for Disbursement

80. Withdrawals from the Loan Account will commence subject to the following condition:

(i) Administrative arrangements for disbursement of components 1, 3, and 4, in accordance with ADB’s Loan Disbursement Handbook (January 2001), as amended from time to time, will have been agreed between the Borrower and ADB.

VI. RECOMMENDATION

81. I am satisfied that the proposed loans would comply with the Articles of Agreement of the ADB and recommend that the Board approve

(i) the loan of $68,600,000 to the Republic of Indonesia for the Neighborhood Upgrading and Shelter Sector Project from ADB’s ordinary capital resources with interest to be determined in accordance with ADB’s LIBOR-based lending facility; a term of 25 years, including a grace period of 6 years; and such other terms and conditions as are substantially in accordance with those set forth in the draft Loan Agreement presented to the Board; and

(ii) the loan in various currencies equivalent to Special Drawing Rights 13,890,000 to the Republic of Indonesia for the Neighborhood Upgrading and Shelter Sector Project from ADB’s Special Funds resources with an interest charge at the rate of 1% per annum during the grace period and 1.5% per annum thereafter; a term of 32 years, including a grace period of 8 years; and such other terms and conditions as are substantially in accordance with those set forth in the draft Loan Agreement presented to the Board.

Tadao Chino President

26 November 2003

Appendix 1 19

PROJECT LOGICAL FRAMEWORK

Design Summary

Performance Indicators/Targets

Monitoring Mechanisms

Assumptions and Risks

Goal Increase the

assets, well-being, and income opportunities for the urban poor throughout Indonesia

Upward trend in housing

finance to the poor as percentage of mortgage finance

Increased percentage of

households with land or building-use permit titles

Decreased area covered

by “heavy slums” in participating local governments

CFI consolidated

records and Bank Indonesia statistics

DGHS consolidated

records of local coordinating office (LCO)

BPS statistics

Purpose Increased

provision of shelter for the urban poor

Over 150,000 urban

poor households with improved shelter, and 40,000 by midterm review

DGHS records of

LCO implementation and project monitoring and evaluation reports

The central

Government is committed to housing for the poor.

Components Improved planning

and management systems for upgrading and new site projects for the urban poor

Improved access

to shelter finance by the poor through CFIs and LFIs or branches

Upgraded poor

neighborhoods and new site development for the poor, with a sustainable maintenance regime

Strengthened

sector institutions responsible for delivering the program

Shelter development

strategies prepared in standard format in 30 local governments, including 20 prioritized upgrading and new site subprojects by midterm review

At least 30,000

households request finance

At least 800 savings

groups formed, 300 by midterm review

Up to 30 participating

LFIs Proportion of loans in

arrears Proportion of loan

applications approved Proportion of

applications from, and approvals to, households below the 35th percentile

As above

CFI and LCO

records consolidated by DGHS

DGHS records of

LCO implementation and project monitoring and evaluation reports

Interviews with key

stakeholders DGHS records and

project monitoring and evaluation reports

Local

governments are committed to housing for the poor.

LCOs are

established and function effectively.

Enough land is

available for new site development.

No systemic

problems affect CFIs and LFIs.

20 Appendix 1

Design Summary

Performance Indicators/Targets

Monitoring Mechanisms

Assumptions and Risks

At least 300 neighborhood upgrading plans completed, including arrangements for maintenance; 150 by midterm review

At least 100 upgrading

subproject investment proposals received; 50 by midterm review

At least 500 upgrading

civil works contracts let; 200 by midterm review

At least 100,000 housing

lots improved; 30,000 by midterm review

At least 10 new site

subproject investment proposals received; 3 by midterm review

At least 10 new site civil

works contracts let; 2 by midterm review

Poor people express

satisfaction with new structures and procedures

DGHS project

management systems established in year 1

20 LCOs established in

year 1, and 10 established in year 2

Specialist lending unit

with required capacity established in CFIs

At least 40 people attend

diploma courses; 7,200 receive other training; 500 attend national workshops; 3,000 attend local workshops in housing finance, shelter planning, and

Appendix 1 21

Design Summary

Performance Indicators/Targets

Monitoring Mechanisms

Assumptions and Risks

implementation of community-based housing projects

At least 20 housing

development organizations established by project completion

Activities To be developed

by the project management unit, with assistance of operational support consultants

Inputs Component 1:

Consulting services, facilitators, and training for shelter planning and management

Component 2:

Funding for shelter microfinance program

Component 3:

Infrastructure works

Component 4:

Consulting services facilitators, and training for site development

Consulting services facilitators, and training for shelter microfinance Consulting services facilitators, and training for project implementation

35 person-months

(international), 244 person-months (local), 601 person-months (local facilitators) Total: $2.5 million

Diploma courses and other training Total: $1.9 million

CFI loans for on-lending

through LFIs Total: $14.9 million

Upgrading Total: $67.2 million

New site development Total: $22.5 million

10 person-months

(international), 114 person-months (local), 238 person-months (local facilitators) Total: $.9 million

Diploma courses and

other training Total: $2.6 million

15 person-months

As above

The Borrower

does not comply with rigorous procurement practice.

CFIs and LFIs

operate effectively.

Good community

support from community development center

Deteriorating

economic situation and lack of secure employment affect finance take-up.

Cities are willing

to deputize and commit competent staff.

Trainees

proposed are acceptable to courses.

22 Appendix 1

Design Summary

Performance Indicators/Targets

Monitoring Mechanisms

Assumptions and Risks

(international), 134 person-months (local), 792 person-months (local facilitators) Total: $1.5 million

Diploma courses and other training Total: $1.0 million

45 person-months

(international), 363 person-months (local) with office equipment and other related expenses Total: $2.9 million

BPS = Central Bureau of Statistics, CFI = central financial institution, DGHS = Directorate General of Human Settlements, LCO = local coordinating office, LFI = local financial institution.

Appendix 2 23

EXTERNAL ASSISTANCE TO THE SECTOR

1. The Integrated Urban Infrastructure Development Program (IUIDP), which included the Kampung (village) Improvement Program as a core component, attracted the bulk of urban and shelter sector support for some 15 years from 1985, with $1 billion invested through externally supported projects. The World Bank and Asian Development Bank (ADB) cofinanced the first IUIDP in 1987. After this, they funded geographically separate IUIDPs. The last of the these will finish in 2003. 2. IUIDP, while providing needed urban infrastructure in its time, is generally considered to be an inappropriate vehicle for urban investment in the new era of economic recovery and reform (including decentralization) as the program was centrally driven and funded with often minimal support from local governments. Initially, the Government and funding agencies focused on immediate poverty reduction projects and programs to meet the challenge of the economic crisis. Government and donors have reviewed sector programs and focused on economic recovery and consolidation of governance reforms, including decentralization. Rethinking approaches to the urban and shelter sectors continue as evidenced in the recent publication of the World Bank’s Indonesia Urban Sector Review—World Bank’s Urban Sector Operational Strategy in an Era of Decentralization, and the continuing refinement of sector approaches1 in ADB’s country strategies and programs. 3. Bilateral support typically focuses on supporting decentralization, including the United States Agency for International Development (USAID)-assisted regional management and urban development activities. The Government of the Netherlands finances community-based initiatives of the United Nations Development Programme (UNDP) and the United Nations Centre for Human Settlement (UNCHS), which also target the urban poor. The Government of the Netherlands also substantially funds ongoing decentralization. The Department for International Development (DFID) of the Government of the United Kingdom also contributes to poverty reduction projects and, in particular, has substantially funded ADB’s poverty-focused technical assistance projects. 4. The financial crisis and decentralization have combined to create problems for delivery of donor support to the sectors, as well as the need to deliver different kinds of support. In the course of the project preparatory technical assistance, a substantial step forward was taken with the issuance of a Ministry of Finance decree, which clarifies procedures and rules for local government borrowing from foreign sources. To be operational, however, the decree needs (and is receiving) government and donor attention.2 5. The lists of relevant, externally supported projects, including recent and proposed non-ADB and ADB projects, are in Supplementary Appendix A.

1 See, for example, Culpin Planning Ltd. 2003. Urban Development, Water Supply and Shelter Sector, Sector

Roadmap Update, and Sector Brief Update. Jakarta. 2 See Supplementary Appendix A for a detailed description.

24 Appendix 3

SECTOR ANALYSIS 1. Demand for urban infrastructure services and housing is increasing. The population of Indonesia reached 203.4 million in 2000, compared to 119.2 million in 1971. Although Indonesia has dramatically reduced overall population growth rate (from 2.32% in 1971–1980 to 1.61% in 1980–1999), the urban population continues to grow at about 4.6% per year (1990–2000). The percentage of the population living in urban areas was estimated at 42.5% in 2000, and is projected to surpass 50.0% by 2010 and 60.0% by 2025. Urban population growth in 1990–2000 has been predominantly outside city boundaries. Average annual urban population growth rate in 1990–2000 inside city boundaries has been 2.11%, and outside city boundaries (but classified as urban), 7.07%. To support the Government’s efforts to achieve “Cities Without Slums” commitments, the project design has focused on the needs of the urban population within city boundaries. As experience with the Project is consolidated, however, greater attention will need to be placed on the peri-urban areas outside city boundaries. 2. Despite heavy investments in environmental infrastructure, conditions in poor urban areas continue to deteriorate and are aggravated by the impact of the 1997 economic crisis. About 36% of the urban population is estimated to have access to piped water. Although a significant improvement since 1980, it is far below requirements when compared to the increase in the urban population without piped water—from 24 million to 42 million during the last decade. Only seven cities have installed sewerage systems, and less than 10% of these cities’ population is connected to a system. Although access to toilet facilities is increasing, frequently these facilities do not provide for safe treatment of human waste. Septic tanks are often poorly designed, built, and maintained, and drainage systems are often blocked or nonexistent. Key issues in solid waste collection and disposal include the weak capacity of local agencies. In urban areas, on average only about 50–60% of waste produced is collected by a municipal service. 3. Land administration leaves much to be desired. The National Land Agency is responsible for land administration of only 30% of the national land surface, and less than 10% of the country is covered by cadastral maps. The number of informal (unregistered) land transactions is huge. Over two thirds of land registrations are improperly documented. The sharing of data between institutions dealing with land issues is fragmented and limited. Horizontal and vertical communication is poor and a clear law and policy on land information are lacking. 4. Few initiatives have been undertaken to increase supply of affordable housing lots. The most promising in many respects are the ready-to-build area (KASIBA); stand-alone, ready-to-build environment (LISIBA); and land consolidation. Typically, the regional development planning agency (BAPPEDA) leads the task force. The local government designates part of the city as a KASIBA project area, and passes this designation as local law, including in it a KASIBA management board, which is, in principle, a local public enterprise. It assumes the responsibility to plan, implement, and manage KASIBA development, and to acquire the land within the project area but not to exercise any special powers of compulsory acquisition (eminent domain). The management board can then “tender” process to small-site LISIBA developers, and is responsible building infrastructure in cooperation with local public enterprises and governments. The general schema for infrastructure finance is assumed to be that of primary infrastructure (e.g., national, provincial roads, water supply, etc.) and will be financed by central and local governments. All infrastructure within LISIBAs will be financed by their developers. Normal principles of cost recovery apply to the management authority. However, few KASIBA management boards exist. The KASIBA-LISIBA boards that have been formed are not yet

Appendix 3 25

capable of managing the program, especially in land acquisition, marketing, and property management. They are also not yet professional in financing property management (e.g., Driyorejo of Medan and Surabaya) as most managers and staff do not have enough experience in real-estate development. 5. While housing finance has received considerable attention as the main instrument to increase and improve access to housing, the policy response has often neglected the interests of the poor. Subsidies will not reach the poor if the conditions (land title, 30% down payment, verifiable income) for access exclude the poor, especially the self- and informally employed. Not surprisingly, 80% of housing has not used any formal housing finance. Even the directives on housing finance with subsidized interest and down payment are unlikely to reach many households below the 50th percentile. Nevertheless, the poor manage their housing with unsubsidized credit at rates above 40% (and double that in 2001–2002) from materials’ suppliers and microfinance lenders from the formal and informal sectors. The only scheme to provide appropriate housing finance for the poor has been Community-Based Initiatives for Housing and Local Development (CoBILD), although other microfinance programs allow loans to be used for housing. By and large, demand for housing finance for the poor goes unmet, at least by the formal sector. 6. From experience with the pilot cities, information on slum areas seriously underestimates the extent of the problem. The sizes of slum, squatter, and village areas (and their estimated populations) often err by a factor of 2–4, and many such areas are completely missing from city development plans’ official inventories. Maps are out of date and inaccurate, and important physical features are missing. This information deficiency makes a comprehensive and prioritized approach to urban upgrading and shelter strategies (including identification of sites with good potential for new affordable housing developments) very difficult. 7. Areas that require upgrading have been inventoried, and while these inventories conservatively estimate demand, they have been used to estimate overall demand. Some 14,000 hectares (ha) require upgrading now; 17,000 ha will need upgrading in 2010, which will cost about $273 million and benefit some 7 million residents. A similar estimate has been made for urban areas outside city boundaries (predominantly in peri-urban areas), but with different growth-rate and density assumptions. The resulting estimate of demand is that 18,714 ha require upgrading now; over 37,069 ha will need upgrading in 2010, which will cost about $575 million and benefit some 14 million residents. Also based on pilot-city experience, demand for new site development has been estimated, and some 10,000 ha are required over 10 years, which will cost some $310 million and directly benefit some 14 million people. 8. Demand for housing finance has been derived on the basis of observations in the pilot cities and, particularly, the pilot areas. Some 70–80% of the poor households own their housing, even though their title to the land is often difficult to substantiate. If the overall conditions of their settlements, particularly in terms of access, infrastructure, and most importantly, the right to settlement were upgraded and improved, as is the intention of the Project through the system of matching grants, the preference of most households would be to improve and build upon their current housing investment and social capital rather than to build a new house or to move to a new location and build there. The demand for new housing is likely to come from a small proportion of existing tenants, and from the 1.6% or so new households formed annually as a result of natural rate of population growth, plus the pent-up demand among existing households. All in all, though, from experience on the CoBILD project and in the subproject sites, demand for new housing is likely to be less than 10%, and the rest is more likely to be for housing upgrading and improvement of living conditions. Sample surveys suggest that as many as 80% of the

26 Appendix 3

houses need some repair, addition, or modification—including infrastructure connections—and that some 30% have carried out some repair or modification recently. CoBILD and subproject experience suggests that at least 10% of these households will borrow, implying about 4,000 loans a year for a city of 1 million people. Loan size, based on observed conditions and typical costs of repairs and modifications, would range from Rp1 million to Rp3 million. Loans to improve land title may be as big as Rp5 million. These loans, at the market rate of interest, could be affordable to the poor over 2 and 5 years, respectively. 9. The Government has included specific sector targets in the national development strategy and established four programs to implement these strategies: (i) development of housing financial institutions, (ii) enhancement of the housing supply and renovation (renewal) systems, (iii) enhancement of the housing facilities and infrastructure services, and (iv) enhancement of the area revitalization and preservation. The Government’s draft national housing policy is consistent with the above. The policy has clear objectives: (i) extend the ability of the formal housing market to address the needs of a wider range of people, with interventions in land, infrastructure, finance, and building standards and materials within a community-focused approach; (ii) build capacity of human settlement organizations; and (iii) improve support systems for housing and human settlement development. The Government has also committed to implement “Cities without Slums” by 2010. This program is focused on a Millennium Development Goal and is being implemented by the Directorate General of Human Settlements through its comprehensive program for slum upgrading being implemented in over 60 communities. The Project will thus address key issues in the sector: supply of serviced, tenured plots; provision of appropriate shelter finance; and strengthening the capacity of sector institutions. Supplementary Appendix B presents an analysis of the sector institutions, as well as a policy action plan discussed and agreed on with the Government.

Appendix 4 27

SUBPROJECT DESCRIPTIONS A. Makassar

1. Makassar (South Sulawesi, eastern Indonesia; population, 1.1 million) is generally low-lying and flat, and most of it water table is within 2 meters of the surface. The largest slum areas are north, east, and south of the city center, and can be categorized into (i) coastal and riverside communities—houses on stilts above the water, with the area beneath gradually filling in, partly by natural accretion and accumulation of solid waste; (ii) urban slums and villages, which, in some areas, merge into the coastal and riverside communities; and (iii) new informal developments in formerly rural areas, most small. Field surveys suggest that the informal slums in Makassar cover over 500 hectares (ha). The Project’s first phase will focus on upgrading 192 ha of slums, and 206 ha more in the following phase, with priority areas identified through the shelter planning system enhanced by the Project’s capacity building. Some 150,000 slum dwellers will participate and benefit. Beneficiaries will include those living on around 65% of the city’s land area that is low-lying and/or has been reclaimed from either the sea or marshes. Slopes rarely exceed 1% and many areas are subject to flooding during heavy and/or continuous rain, particularly at high tide. Around 50,000 people, many of whom live in low-income areas, suffer from flooding. Many houses are built on stilts.

2. Improvements will benefit 60% of the population of priority areas that do not have access to sanitary disposal of toilet wastes. In seafront communities, some people use crude toilets consisting of nothing more than a partly enclosed bamboo frame projecting out over the sea. Some higher-income households on-site pour-flush latrines connected to leach pits. In Cambaya, people, if they have any sanitation at all, use crude latrines overhanging the sea. Further inland, some households have individual sanitation facilities, which discharge to leach pits, although residents report that these systems can overflow, partly due to the high water table, although failure to empty full pits may be a bigger factor. Solid waste management will be improved, reversing recent changes in collection arrangements that have drastically reduced the funding available for local solid waste collection services. In parts of Marisso and Cambaya built over the sea, garbage is routinely dumped in the water below and around houses, producing a stagnant and unhealthy mix of waste, mud, and polluted water. Away from the sea, waste from both these settlements is deposited in open land, whether vacant lots or, as in one area in Cambaya, a length of drain that is no longer used.

3. Complementing and reinforcing the impact of upgrading investments, a 27.1 ha new site will be developed, benefiting 5,000 poor households; 4,000 shelter improvement loans and 3,000 starter home loans will be made available to them.

B. Tangerang

4. Tangerang (West Java; population, 1.35 million) is about 27 kilometers (km) west of Jakarta and immediately south of Jakarta’s international airport. Some 79,000 poor households live in Tangerang, 5,300 of which are very poor. Poor households are found throughout the city, typically comprising 20–40% of the total number of households in any given neighborhood. Many of the poor live in informal or slum settlements, 74 of which have been identified in Tangerang. About 102 ha of priority upgrading areas have been identified, and 401 ha will be upgraded through the Project’s support, with some 160,000 beneficiaries. The settlements to be upgraded do not necessarily share the same characteristics. Some slum areas house high numbers of migrants or temporary settlers, who have come to the city to seek work as laborers or factory workers in nearby industrial areas. In such areas, erstwhile agricultural land has been

28 Appendix 4

developed by landowners to provide high-density rental accommodation, which is sometimes in bad condition, lacks basic infrastructure and facilities, and is poorly maintained by the owners and occupiers.

5. The other type of slum area to be upgraded is owner occupied, with most residents employed in the informal sector as street vendors, mobile food sellers, or pedicab and/or tricycle drivers. The neighborhood may be crowded and lacking basic infrastructure and facilities, although some fringe settlements are less dense. Low, unreliable incomes mean that community members have limited capacity to finance neighborhood infrastructure improvements. They will be recipients of the 4,000 improvement loans.

6. Two areas in Tangerang have sewers: the central area east of the Cisadane River and Karawaci area in the south. Most low-income areas are served by on-plot sanitation systems, which discharge toilet wastes into leach pits. Only about 72% of the solid waste generated in the city is collected. The situation is worse in the priority areas, where secondary collection services are at best irregular and at worst nonexistent. Tangerang is generally low-lying, with elevations in the range of 0–30 meters above sea level, but generally at the lower end. This, together with annual rainfall of 1,500–2,000 millimeters per year, creates a need for a strategic approach to flood management. Areas close to the Cisadane River have special problems caused by flood flows from the inland, and the sea tides. In 1996 the drainage system covered about 7,300 ha (88% of the developed area). Areas subject to flooding amounted to 180.5 ha (3% of the developed area). These were spread throughout Tangerang, but mostly close to the river.

7. Complementing and reinforcing the impact of the upgrading investments, a 27.3 ha new site will be developed, benefiting some 5,400 poor households. Besides the shelter improvement loans, 3,000 starter home loans will be made available to poor households.

C. Pekanbaru

8. Pekanbaru is the capital of Riau Province, central Sumatra (population, 610,000). The main built-up area continues to be on the south bank of the Siak River. In 2001 almost 19% of the total population were below the official poverty line, with about 40% vulnerable to poverty. Poor households are spread throughout Pekanbaru, with the highest concentrations along the banks of the Siak and around the city center. The population could become even denser. Some 61 ha have been prioritized for upgrading, with 200 ha more to be upgraded in the second phase and identified through the enhanced shelter planning process, benefiting 26,000 poor households. High demand for affordable housing is also likely to lead to the extension of informal development along the banks of the Siak unless housing schemes are developed for the poor. Some 17.7 ha of new site development will be encouraged, benefiting 3,500 poor households.

9. In areas without sewerage, wastewater from toilets is normally discharged into either a household septic tank or latrine. In priority areas, about 70% of households have access to private toilets while about 30%, many of whom are renters, use a public facility. In some cases, household latrines discharged into drains, which discharged directly into drainage canals. Complementing and reinforcing the impact of the upgrading and new site investments, approximately 2,600 shelter improvement loans and 2,000 starter home loans will be made available to poor households.

Appendix 4 29

D. Mataram

10. Mataram is the capital of Nusa Tenggara Barat Province (population, 310,000). Some 36% of poor households fall into the poorest categories and live in informal areas, including villages, unregulated housing developments, and squatter settlements. Indeed, all three subdistricts (kecamatan) in the city contain slum and squatter areas. About 16% of houses are classified as being in poor condition. Poor housing is found in all areas in Mataram; 59% of households have access to their own toilet facilities, most disposing waste into individual septic tanks, many of which are close to wells. The only sewerage is a pilot project in Ampenan Utara, which will eventually serve 4,000 houses. Factory wastes, particularly those from bean curd production in residential areas, are also a problem.

11. Mataram Kota has introduced a shared approach to solid waste management, involving peoples’ representatives and nongovernment organizations, in deciding the type of system to be adopted. Around 60% of total solid waste is delivered to the designated disposal site. Each household has waste disposal bags, which are collected by carts and dumped at a temporary storage point. The primary drainage system is provided by the four rivers. Secondary drainage is provided by a total of 31.8 km of lined channels. The system also includes 37.7 km more of unlined secondary and tertiary channels. The city has 17 areas of standing water covering 22.25 ha. Flooding occurs mainly on the banks of the Ancar, Brenyoi, Jangkok, and Medang, which are affected by sea tides and high flood flows from the river. Regular flooding occurs on 150 ha and affects around 18,000 people, including many poor.

12. To address these problems, about 80 ha have been identified for high-priority upgrading. A total of almost 130 ha will be covered by the Project. About 14,000 poor households will participate and benefit. Complementing and reinforcing the impact of the upgrading investments, 9 ha of new site will be developed, and some 1,300 shelter improvement loans and 1,000 starter home loans made available to poor households.

E. Pontianak

13. Pontianak (population, 460,000), the capital of West Kalimantan Province, lies across the equator at the confluence of the Kapuas Kecil and Kapuas Landak rivers, some 5 km inland. The city is low-lying, with elevations of 0.1–1.5 meters above mean sea level. Most of the water table is within a meter of the surface. The city is also surrounded and divided by about 33 smaller rivers and channels, creating the impression that Pontianak is built on water. Periodic flooding is caused by tidal surges and flood flows from the two rivers. Throughout the city, many houses, particularly those of the poor, are built on stilts on land that is periodically or perennially under water.

14. The highest concentration of poor people is in the west, with 38% of the total. Many live in informal areas, including kampungs, unregulated housing developments, and squatter settlements. All four kecamatan in the city contain slum and squatter areas. Most priority areas in Pontianak are built over swampland. Many houses are constructed on stilts above the water, and the area beneath is gradually filled in, partly by natural accretion and accumulation of solid waste. The neighborhoods are connected by wooden walkways. In the older settlements, most walkways have been replaced by solid causeways surfaced with concrete, but wooden walkways often remain alongside access routes. Most houses are constructed with timber clapboard walls, fixed to timber posts with corrugated iron roofing. Most of the housing development is along straight paths laid at right angles to the main road. Usually, the main access is raised and filled in, with the paths leading off it being timber planks on a framework

30 Appendix 4

raised on stilts. Some 175 ha of upgrading is recommended, with 23 ha in the first phase. A total of 21,000 poor households will participate and benefit.

15. The upgrading work and associated shelter improvement loans (of which some 1,700 will be required) will enhance incremental improvement, already in evidence. Many housing plots will also be gradually filled in with earth, and a whole neighborhood may thus eventually be raised above water level. Water may be confined to channels on either side of the road rather than left to find its own course as in poorer, less consolidated areas. In new settlements, the tide creates flows under and around houses. As a result of building, road construction, and land-filling, flows are constricted and the water stagnates in pools. Residents, however, treat the water as if it were flowing and assume that natural flushing will remove litter and debris. In practice, such deposits merely clog up the river and further restrict its flow, and what might have been relatively clean river water is no longer so, although people continue to wash and bathe in it. Pontianak has no sewerage. Facilities consist of communal sanitary facilities and on-plot latrines discharging to septic tanks. About 65% of solid waste is collected. The system’s geographical coverage is 80% of the city, but only 65% of households enjoy regular collection services. Pontianak is flat and low-lying and the water table is seldom more than a meter below the surface. The town is where the two main rivers come together, and the tide causes major flooding. Most low-income housing is on swamps and permanent standing water. Some drainage channels are lined with wooden boards but few with permanent materials.

16. Most low-income settlements are first connected by wooden walkways, then access routes are filled and paved. Many areas have been upgraded under various kampung (village) improvement programs (KIPs) but many concrete pavements provided in the 1980s have started to deteriorate and need repair and rehabilitation. In other areas, concrete paving slabs have settled unevenly, perhaps because the land was poorly consolidated before they were laid, and, ideally, should be replaced. Complementing the upgrading investments, some 12 ha of new site development is proposed along with some 1,300 new site loans.

F. Medan

17. Medan (population, 1.9 million) is the capital of North Sumatra Province. In 2000 around 11.7% of the total population was classified as poor, and 46 slum areas were identified. Main problems are insufficient drainage, lack of sanitation, and lack of water. Most housing provided for and by the poor is informal. Priority sites in Medan are generally in inner city slums and fringe and coastal areas:

(i) Unregulated subdivisions on dry land. These are found mainly but not exclusively around the city center and are characterized by rectangular grid layouts, with fairly generous rights of way. Most houses appeared to be owned by their occupiers, although some smaller units for rent have been built.

(ii) Village-type developments on dry land. These are widely scattered. Some are fairly close to rivers on land that is subject to occasional flooding but not directly on the riverbanks.

(iii) Unregulated subdivisions over swamps and tidal flats. These are mainly around the Belawan port. All started as houses on stilts over water, with access via wooden walkways. Over time, fill may be used to consolidate the land below the houses, and wooden walkways are replaced by solid causeways. However, this process can take many years and is mainly confined to areas on the edges of

Appendix 4 31

settlements close to the shore. The priority sites occupy an estimated 220 ha, and will involve about 26,000 households and 2,400 complementary shelter improvement loans.

18. Some inner city villages and unregulated land subdivisions could be connected to the central sewer system, but most people rely on some form of on-site disposal, usually a septic tank discharging effluent into a latrine. Most sanitation facilities are likely to involve on-plot disposal, which needs tank and/or pit de-sludging. Settlements built over tidal mud flats have no proper sanitation facilities, relying on the tide to remove fecal material from below the houses. Those built on consolidated fill or on dry land usually have basic facilities, but need considerable rationalization and improvement.

19. Only about 65% of the solid waste is collected and delivered to the local government sanitation service, partly because service coverage is only about 35% of the kota area, and many low-income areas have no regular collection service. Flooding occurs along the riverbanks but also elsewhere, especially in low-income areas, which are often on low-lying land or close to rivers. Flooding problems are exacerbated by the limited capacity and extent of the city network system, inadequate drainage channel maintenance, and lack of community concern with keeping drainage channels clear.

20. Medan has general problems with road infrastructure but these have a limited impact on low-income areas. Many roads and paths in low-income settlements have been upgraded under various KIPs but could be improved. In particular, some sea and riverside settlements rely on wooden walkways for access. Some of these are in poor condition. Complementing and reinforcing the impact of the upgrading investments, some 17 ha of new sites will be developed, and 1,800 starter home loans made available to poor households.

32

Appendix 5

COST ESTIMATES AND FINANCING PLAN

Table A5.1: Cost Estimates, by Expenditure Account

(Rp million) ($ million) Expenditure Account Foreign

Exchange Local

Currency Total Foreign

Exchange Local

Currency Total

Investment Costs 1. Land Acquisition 0

88,400 88,400 0.0 10.4 10.42. Infrastructure Works 51,850 600,100 651,950 6.1 70.6 76.73. House Improvement Loans 0 59,500 59,500 0.0 7.0 7.0 4. Starter House Loans 0 81,600 81,600 0.0 9.6 9.65. Consulting Services 22,100 44,200 66,300 2.6 5.2 7.86. Training and Workshops 0 47,600 47,600 0.0 5.6 5.67. Project Administration and Supervision 0 25,500 25,500 0.0 3.0 3.08. Loans Administration 0 4,250 4,250 0.0 0.5 0.5

Subtotal 73,950 1,025,100951,150 8.7 111.9 120.6Interest During Implementation 37,398 0 37,398 4.4 0.0 4.4Commitment Charges 6,595 0 6,595 0.8 0.0 0.8 Front-End Fees 5,830 0 5,830 0.7 0.0 0.7

Total 123,773 1,074,923951,150 14.6 111.9 126.5Source: Asian Development Bank estimates.

Table A5.2: Financing Plan, by Expenditure Account

($ million)

Central Government

ADB-OCR Loan

ADB-ADF Loan

City Governments

CFIs/LFIs Beneficiaries Total Expenditure Account

Amount

%

Amount

% Amount

% Amount

% Amount

% Amount

% Amount

% Investment Costs

1. Land Acquisition 0.0

― ― ― ― ― 10.4 100.0 ― ― ― ― 10.4 8.22. Infrastructure Works 5.0 6.6 48.5 63.2 5.9 7.7 17.3 22.6 ― ― ― ― 76.8 60.73. House Improvement Loans ― ― 6.3 90.0 ― ― ― ― ― ― 0.7 10.0 7.0 5.54. Starter House Loans 0.0 ― 8.6 90.0 ― ― ― ― ― ― 1.0 10.0 9.6 7.65. Consulting Services ― ― ― ― 7.8 100.0 ― ― ― ― ― ― 7.8 6.26. Training and Workshops 0.0 ― ― ― 5.6 100.0 ― ― ― ― ― ― 5.6 4.47. Project Administration and Supervision 0.6 20.0 ― ― ― ― 2.4 80.0 ― ― ― ― 3.0 2.48. Loans Administration

0.0 ― ― ― ― ― ― – 0.5 100.0 ― ― 0.5 0.4

Subtotal 5.6 4.7 63.4 52.5 19.3 16.0 30.1 25.0 0.5 0.4 1.7 1.4 120.7 95.4Interest During Implementation ― ― 3.7 0.7 15.2 ― ― ― ― ― ― 4.4 3.5Commitment Charges ― ― 0.8 ― ― ― ― ― ― ― ― 0.8 0.6Front-end Fees ― ― 0.7 ― ― ― ― ― ― ― ― 0.7 0.5

Total 5.6 4.4 68.6 54.2 20.0 15.8 30.1 23.8 0.5 0.4 1.7 1.3 126.5 100.0― = not available. ADB = Asian Development Bank, ADF = Asian Development Fund, CFI = central financing institution, LFI = local financing institution, OCR = ordinary capital resources. Note: Figures may not add up to total because of rounding. Source: Asian Development Bank estimates.

Appendix 6 33

FLOW OF FUNDS

matching grants from local governments

(

Targeted Urban Poor Beneficia

Participating Local Governments

Local Coordinating Offices

Directorate General of Human Settlements

Statement-of-Expense Account

BContribution

from the central Government funded from ADB loan proceeds

N s

Site Upgrading and New-Site Infrastructure

Works

ADF = Asian Development Fund, BI = Bank Incapital resources, p.a. = per annum, PNM = Pe

Asian Development Bank mix of ADF and OCR Loans)

Subsidiary Loan

Agreements

Interest rate

margin = 4% p.a.

Central Financial Institutions BTN and PNM

Co s

ries in Upgrading Neighborho

Ministry of Finance

Local Financial Institutions

Interest rate margin =

4–13% p.a.

A

Consultants and Training

Services

donesia, BTN = Bank Tabunrmodalan Nasional Madani, S

Microloans for House Improvements and Starter Homes

ods and New Sites

Loan

gan Negara, i = interest, OCRBI = Sertifikat Bank Indonesi

i1 = OCR rate + front- end fee + commitment fee

Imprest Accounts unterpart Contribution

i2 = SBI + 1% p.a. or i1 + 0.5% p.a.

Component 2: ShelterMicrofinance

Components 1 and 4: Capacity uilding and Project Implementation

Support

h Component 3: Upgraded eighborhoods and New Site

Subloan greements

Subproject Loan Accounts Counterpart Contributions

i ≈ market rate ≈14–25% p.a.

repayment

= ordinarya.

34 Appendix 7

ORGANIZATIONAL CHART

Beneficiaries

Project Steering Committee

Executing Agency

Directorate General of Human Settlements (MSRI)

Project Management Unit

Implementing Agencies

LFIs or Branches

Local Governments Local Coordinating

Offices

Capacity Building Consultants Components

1 and 4

Local Savings-and-Loan Groups

Component 2: Shelter Microfinance

CFIs (BTN, PNM) Financial Project

Management Units

Community-Based Organizations Component 3: Upgrading and

New Sites

Interministerial Committee on

Housing and Settlements

Ministry of Finance

ADB = Asian Development Bank, BTN = Bank Tabungan Negara, CFIs = central financial institutions, HDO = housingdevelopment organization, LCG = local coordinating office, LFIs = local financial institutions, MSRI = Ministry ofSettlements and Regional Infrastructure, NGO = nongovernment organization, PNM = Permodalan Nasional Madani.

Appendix 8 35

ASSESSMENT OF PARTICIPATING FINANCIAL INSTITUTIONS

A. Central Financial Institutions

1. Bank Tabungan Negara

1. The state-owned Bank Tabungan Negara (BTN), established in 1950, has become Indonesia’s leading bank in housing finance. In 1974 BTN was appointed as the housing credit financing institution to cater to the needs of low- and medium-income families. Today BTN still focuses on housing finance, lending to medium- and low-income groups, and real estate and housing-related construction. As of December 2002 BTN had 42 branches, 39 auxiliary branch offices, and 93 cashier offices, a number of which are in the Project’s pilot cities.

2. As of December 2001 BTN’s total assets stood at Rp26,509 billion. Its total liabilities were Rp25,678 billion while its net income was Rp124 billion. Indicators of BTN’s performance confirm its financial soundness and viability. In 2001 BTN’s return on assets and return on equity were 0.5% and 15.0%, respectively. The bank’s capital adequacy ratio was 10.85%, exceeding Bank Indonesia’s requirement of at least 8.00%. The percentage of its nonperforming loans was 4.75%, better than Bank Indonesia’s limit of 5.00%. BTN’s improved financial performance can largely be attributed to better management and shift away from subsidized to market-based housing loans. 3. BTN plans to continue to operate viably and profitably in the next 6 years by (i) generating more low-cost deposits as its primary source of funds for lending and investments; (ii) maintaining sufficient liquid assets to meet withdrawals; (iii) preserving its profitability by applying good corporate governance practices, adopting advances in information technology, and engaging in more market-based lending operations; and (iv) practicing prudential banking by ensuring, among others, that its capital adequacy and nonperforming loans ratios comply with Bank Indonesia requirements. All these will be undertaken by BTN within the context of a generally improving economy, stimulated by lower interest rates and higher levels of investment. BTN’s total assets are estimated to exceed Rp100,000 billion by 2009. The proposed ADB subsidiary loan will account for at most 0.1% of BTN’s current assets and will thus have minimal impact on the bank’s overall financial condition. BTN’s comparative financial statements and projections in 2000–2009 are in Table A8.1. The bank’s financial ratios are in Table A8.2

2. Permodalan Nasional Madani 5. Permodalan Nasional Madani (PNM) was established in June 1999 as a specialized financial institution to develop micro, small, and medium-sized cooperatives (MSMCs). PNM runs various financial activities such as credit programs, financial institutions, and venture capital. PNM holds minority capital subscriptions in several microfinance institutions, including PNM Baitul Maal wa-Tamwil, Prime Save and Loan Cooperative, and Bank Perkredita in Rakyat/Syariah. To efficiently serve the MSMC sector, PNM is organized into the credit program, micro-syariah financial institution, and management services divisions. They operate credit schemes through a network of executing banks, provide capital shares to selected microbanks, and provide advice and training to MSMCs. 6. PNM’s total assets reached Rp1,719 billion in December 2002. The biggest component of these is accounts receivable from various credit schemes, comprising almost 60% of the company’s total assets. Total liabilities of PNM were registered at Rp1,349, constituting 78% of

36 Appendix 8

its total assets base, with Bank Indonesia as its biggest creditor. Total revenues generated by PNM from its various financing programs amounted to Rp104 billion. Its net income of Rp37 billion in 2002 represents more than a doubling of the net income in 2000 during the bank’s first year of operation. PNM’s return on assets and return on equity ratios in 2002 were 2.2% and 9.9%, respectively, indicating the bank’s financial robustness and adherence to sound financial management practices. 7. Financial projections conducted for PNM over 2003–2009, using conservative growth assumptions, will result in doubling of its total assets from Rp1,719 billion in 2002 to Rp3,463 billion in 2009. These projections confirm that PNM is committed to generating internal funds through effective credit programs that translate into a steady increase in net profits, from Rp37.76 billion in 2002 to an estimated Rp149.49 billion in 2009. PNM is also dedicated to practicing good governance, which will enable the bank to consistently improve its earnings before tax margins of 43% in 2002 in the coming years. 8. The proposed ADB subsidiary loan will generate incremental net cash inflows and positive financial internal rates of return that will enable PNM to effectively service its debt under the Project through timely repayments of local financing institutions (LFIs) (Supplementary Appendix F). Table A8.3 presents the comparative financial statements of PNM for 2000–2009. Table A8.4 summarizes the historical and projected financial ratios of the company. B. Local Financial Institutions

9. BTN and PNM will channel their funds for on-lending to project beneficiaries through LFIs. BTN proposes to use its extensive branch network all over the country, whenever appropriate, for its on-lending activities. PNM and BTN, however, recognize that people’s credit banks (BPRs) generally have the credentials and experience to serve as effective conduits of housing microfinance at the local level, particularly for the Project’s targeted urban poor households. 10. BPRs are widely regarded as microbanks. In 2002 an estimated 2,153 BPRs had aggregate assets valued at Rp6.7 trillion. BPRs are supervised by Bank Indonesia using regulations that have been modified over the years to reflect standards suitable to microbanks. More than 70% of BPRs have been rated sound or fairly sound by Bank Indonesia. PNM has established working and financial relationships with over 300 BPRs. 11. Assessments of representative BPRs—Bank Pasar Kabupaten Pantul in Semarang, and Karya Bakti Ugahari in Medan—confirm that they are financially viable and adhere to systems that can effectively on-lend to the Project’s targeted urban poor beneficiaries. Both BPRs have financial performance indicators that (i) comply with capital adequacy and nonperforming ratios mandated by Bank Indonesia, (ii) exhibit profitability, (iii) indicate healthy levels of liquidity, and (iv) demonstrate the ability to preserve asset quality. Supplementary Appendix G presents a comparative summary of the financial performance and projections of the LFIs.

Appendix 8 37

Table A8.1: Comparative Financial Statements of Bank Tabungan Negara (BTN), 2000–2009 (in Rp billion)

Account

2000

2001

Annual Growth

Rate

2002

2003

2004

2005

2006

2007

2008

2009

Actual -----------------------> Projected --------------------------------------------------------------------------------------------------------------------------------------------- > A. Balance Sheet Highlights

Cash and Cash Equivalent 1,135.97 1,332.10 20% 1,598.52 1,918.22 2,685.51 3,759.72 4,511.66 5,414.00 6,496.79 7,796.15Securities and Government Bonds 14,597.01 16,023.39 10% 17,625.73 19,388.31 23,265.97 27,919.16 33,502.99 40,203.59 48,244.31 57,893.17 Loans 7,330.00 8,100.88 20% 9,721.06 11,665.27 13,998.32 16,797.99 20,157.58 24,189.10 29,026.92 34,832.31Other Assets 887.36 1,052.82 12–15% 1,205.70 1,381.46 1,657.76 1,989.31 2,387.17 2,864.60 3,437.52 4,125.03

Subtotal (Assets) 23,950.34 26,509.20 30,151.01 34,353.26 41,607.56 50,466.18 60,559.41 72,671.29 87,205.54 104,646.66Deposits 17,930.83 19,853.57 10% 21,838.93 24,022.82 28,827.39 34,592.86 41,511.44 49,813.72 59,776.47 71,731.76Fund Borrowing 4,110.27 4,654.24 10% 5,119.66 5,631.63 6,757.95 8,109.54 9,731.45 11,677.74 14,013.29 16,815.94

Subtotal (Liabilities) 23,244.57 25,678.74 28,193.99 28,193.99 33,832.79 40,599.35 48,719.22 58,463.06 70,155.67 84,186.81Capital Stocks 1,250.00 1,250.00 0% 1,250.00 1,250.00 1,250.00 1,250.00 1,250.00 1,250.00 1,250.00 1,250.00Additional Paid-In Capital 13,843.54 13,843.54 0% 13,843.54 13,843.54 13,843.54 13,843.54 13,843.54 13,843.54 13,843.54 13,843.54 Retained Earnings (14,387.76) (14,263.08) (13,136.52) (8,934.27) (7,318.77) (5,226.71) (3,253.35) (853.31) 1,956.34 5,366.32

Subtotal (Equity) 705.78 830.46 1,957.02 6,159.27 7,774.77 9,866.83 11,840.19 14,208.23 17,049.88 20,459.86 Subtotal (Liabilities and Equity) 23,950.34 26,509.20 30,151.01 34,353.26 41,607.56 50,466.18 60,559.41 72,671.29 87,205.55 104,646.66

B. Income Statement Highlights Interest Income 1,810.83 2,883.10 20% 3,459.72 4,151.66 4,981.99 5,978.39 7,174.07 3,459.72 10,330.66 12,396.79Other Income (561.42) 203.84 10–50% 234.75 267.46 303.42 344.80 395.46 234.75 531.23 626.86

Subtotal (Income) 1,249.41 3,086.94 3,694.47 4,419.12 5,285.41 6,323.19 7,569.53 3,694.47 10,861.89 13,023.64Interest Expenses 2,294.86 2,659.27 0% 2,393.34 2,154.01 1,938.61 1,744.75 1,570.27 2,393.34 1,271.92 1,144.73General and Administrative 265.23 216.89 20% 216.89 216.89 216.89 216.89 216.89 216.89 216.89 216.89

Subtotal (Expenses) 2,665.17 2,967.75 2,720.06 2,497.13 2,296.50 2,115.92 1,953.41 2,720.06 1,675.51 1,557.04Income/(Loss) from Operations (1,415.76) 119.19 974.41 1,921.99 2,988.91 4,207.27 5,616.12 974.41 9,186.37 11,466.60

Net Income 1,457.56 124.68 1,168.02 2,305.12 3,585.42 5,047.45 6,738.07 8,706.73 11,022.38 13,758.65Notes: Restructuring not fully complete. Figures may not add up to total because of rounding. Source: Asian Development Bank estimates, based on annual reports of Bank Tabungan Negara.

Table A8.2: Financial Performance Indicators of Bank Tabungan Negara (BTN), 2000–2009

Account

2000

2001

Annual Growth

Rate

2002

2003

2004

2005

2006

2007

2008

2009

Actual -----------------------> Projected --------------------------------------------------------------------------------------------------------------------------------------------- > Capital Adequacy

Equity to Risk Assets 8.65% 10.85% ― 10.000 10.000 10.000 10.000 10.000 10.000 10.000 10.000 Asset Quality

Nonperforming Loans 3.27% 4.75% 4.75% 4.75% 4.75% 4.75% 4.75% 4.75% 4.75% 4.75%Managerial Efficiency

Operating Expenses to Income 126.7% 92.2% ― 69.2% 51.9% 38.9% 29.2% 21.9% 16.4% 12.3% 9.2%Earning Performance

Return on Assets -6.1% 0.5% 3.9% 6.7% 8.6% 10.0% 11.1% 12.0% 12.6% 13.1%Return on Equity -206.5% 15.0% 59.7% 37.4% 46.1% 51.2% 56.9% 61.3% 64.6% 67.2%

Liquidity Quick Assets to Total Deposits 6.3% 6.7% ― 7.3% 8.0% 9.3% 10.9% 10.9% 10.9% 10.9% 10.9%Total Loans to Total Deposits 40.9% 40.8% ― 44.5% 48.6% 48.6% 48.6% 48.6% 48.6% 48.6% 48.6%

― = not available. Source: Asian Development Bank estimates, based on annual reports of Bank Tabungan Negara.

38 Appendix 8

Table A8.3: Comparative Financial Statements of Permodalan Nasional Madani (PNM), 2000–2009 (in Rupiah billion)

Account

2000

2001

2002

Annual Growth

Rate

2003

2004

2005

2006

2007

2008

2009

Actual ------------------------------------------> Projected ----------------------------------------------------------------------------------------------------------------- > A. Balance Sheet Highlights

Cash and Cash Equivalent 198.56 201.28 169.78 5% 178.27 187.18 196.54 206.37 216.69 227.52 238.90Current Account with Bank Indonesia 94.28 225.85 298.31 5% 313.23 328.89 345.33 362.60 380.73 399.77 419.75Marketable Securities 29.32 25.92 37.56 20% 45.07 54.08 64.30 77.88 93.46 112.15 134.58Credit Program Financing 451.17 716.55 1,015.31 10% 1,116.84 1,228.53 1,351.38 1,486.52 1,635.17 1,798.69 1,978.55SMEC and Cooperative Financing 47.95 74.42 87.30 25% 109.12 136.40 170.50 213.13 266.41 333.01 416.27Fixed Assets 10.15 10.38 16.28 5% 17.09 17.95 18.85 19.79 20.78 21.82 22.91

Subtotal (Assets) 831.43 1,254.40 1,624.54 1,779.62 1,953.03 2,146.9 2,366.29 2,613.24 2,892.96 3,210.96Due to Bank Indonesia 545.45 946.22 1,319.23 1,446.82 1,581.73 1,738.09 1,914.44 2,113.82 2,339.76 2,596.36Other Current Liabilities 1.58 3.23 16.20 35% 21.87 29.52 39.86 53.80 72.64 98.06 132.38Other Liabilities and Accrued Expenses 1.01 2.76 5.92 5% 6.22 6.53 6.85 7.20 7.56 7.93 8.33

Subtotal (Liabilities) 548.47 952.54 1,341.99 ― 1,475.56 1,618.48 1,785.53 1,976.21 2,194.81 2,446.60 2,737.95Minority Interest in Subsidiaries 1.08 0.62 0.51 0.50 0.50 0.50 0.50 0.50 0.50 0.50Subtotal (Equity) 322.93 356.33 377.47 ― 405.0 450.0 495.00 544.50 598.95 658.85 724.73Subtotal (Liabilities, Interest, and Equity)

872.48 1,309.49 1,719.96 1,881.06 2,068.98 2,281.03 2,521.21 2,794.26 3,105.95 3,463.18

B. Income Statement Highlights Revenues from Credit Program 13.06 56.31 83.68 10% 92.05 101.26 111.38 122.52 134.77 148.25 163.07Revenues from Consulting Services 0.00 5.91 12.44 5% 13.06 13.72 14.40 15.12 15.88 16.67 17.51Revenues from SME and Cooperative Financing

1.17 6.73 7.71 10% 8.48 9.33 10.26 11.29 12.41 13.66 15.02

Subtotal (Revenues) 14.23 68.95 103.83 113.59 124.31 136.04 148.93 163.06 178.58 195.60Operating Expenses 28.19 42.54 68.97 72.42 76.04 79.84 83.84 88.03 92.43 97.05Operating Profit (11.28) 31.57 35.91 42.28 49.42 57.42 66.37 76.38 87.56 100.03Other Income/(Expenses) 25.68 16.07 9.84 11.44 13.21 15.14 17.26 19.58 22.12 24.90

Profit Before Income Tax 14.40 47.64 45.76 ― 103.26 112.26 122.13 132.95 144.83 157.87 172.18Minority Interest in Subsidies 0.17 0.15 0.11 0.11 0.11 0.11 0.11 0.11 0.11 0.11

Net Profit 14.57 47.79 45.87 103.37 112.37 122.24 133.06 144.94 157.98 172.29― = not available, SME = small and medium enterprise, SMEC = small and medium enterprise cooperative. Source: Asian Development Bank estimates, based on annual reports of Permodalan Nasional Madani and financial projections. Note: Figures may not add up to total because of rounding.

Table A8.4: Financial Performance Indicators of Permodalan Nasional Madani (PNM), 2000–2009

Account

2000

2001

2002

Annual Growth

Rate

2003

2004

2005

2006

2007

2008

2009

Actual ---------------------------------------> Projected ---------------------------------------------------------------------------------------------------------------------- > Total Debt to Total Equity 1.70/ 2.67/ 3.56/ ― 3.64/ 3.60/ 3.61/ 3.63/ 3.66/ 3.71/ 3.78/ Total Debt to Total Assets 0.63/ 0.73/ 0.78/ ― 0.78/ 0.78/ 0.78/ 0.78/ 0.79/ 0.79/ 0.79/ Return on Assets 1.7% 3.6% 2.7% ― 5.5% 5.4% 5.4% 5.3% 5.2% 5.1% 5.0%Return on Equity 4.5% 13.4% 12.2% ― 25.5% 25.0% 24.7% 24.4% 24.2% 24.0% 23.8%Earnings Before Tax Margin 85.2% 64.3% 43.6% ― 90.0% 89.5% 89.0% 88.5% 88.1% 87.7% 87.4%Current Ratio 22.8% 15.4% 9.9% ― 9.5% 9.0% 8.6% 8.2% 7.8% 7.3% 6.9%Quick Asset Ratio 36.9% 34.6% 29.4% ― 28.5% 27.6% 26.6% 25.7% 24.7% 23.8% 22.9% ― = not available. Source: Asian Development Bank estimates, based on annual reports of Permodalan Nasional Madani and financial projections.

Appendix 9 39

SELECTION CRITERIA FOR PARTICIPATING FINANCIAL INSTITUTIONS A. Central Financial Institutions

1. Any institution selected as a central financial institution (CFI) must meet the following criteria:

(i) Legality. A CFI must be an independent public financial institution established, organized, and operating in accordance with the regulations of Bank Indonesia and/or the Ministry of Finance (MOF). A CFI should have a nationwide network of branches or established relationships with banks or nonbank microfinance institutions eligible to serve as local financial institutions (LFIs) under the Project.

(ii) Sound management. A CFI should adhere to effective corporate governance

and be a reputable financial institution, respected by international, national, and local banks. A CFI must have an organizational structure and systems that preserve its integrity and independence from outside influence.

(iii) Solvency. A CFI’s performing assets should be sufficient to cover its liabilities to

be considered financially solvent. A CFI’s solvency will be based on its capital adequacy ratio (CAR), which must not be less than 8%, as mandated by Bank Indonesia. CAR is defined as the ratio of the financial institution’s equity to its assets at risk, which are total assets net of loan loss provisioning and risk-free assets, which include cash, interbank loans, government-guaranteed loans, and investments in government securities.

(iv) Asset quality. A CFI must have a nonperforming loan ratio of at most 5%, in

keeping with Bank Indonesia’s minimum requirement. (v) Profitability and efficiency. A CFI’s profitability and efficiency will be measured

by the following financial ratios: (a) return on equity, or net profit after tax over equity; and (b) return on earning assets, or net profit before tax over earning assets. Earning assets are defined as loans plus investments. These ratios must meet the minimum requirements of the regulators concerned.

(vi) Liquidity. A CFI will be considered liquid if it can quickly convert its assets into

cash or its liquid assets are sufficient to cover its short-term liabilities. This is measured as the ratio of total loans to total deposits.

2. A CFI must also possess a proven track record in using branches or LFIs that are able to effectively provide housing microfinance to urban poor households as required under the Project.

B. Local Financial Institutions

3. Any institution selected as an LFI must fulfill several prerequisites:

(i) Legality. An LFI may be a bank or financial institution established, organized, and operating in accordance with the regulations of Bank Indonesia, or the MOF or the Ministry of Cooperatives (MOC), and all other relevant lawmaking bodies.

40 Appendix 9

An LFI should operate at the local level and can be a branch of a CFI or an independently operating financial institution.

(ii) Sound management. An LFI should be a respected financial institution in any

project city, with (a) credible and competent board of directors; (b) a full-time executive director/manager, bookkeeper, and cashier; (c) a full-time loan officer and loan collector/program staff or an equivalent specialized lending group; (d) a minimum of 2 consecutive years’ operating experience in social mobilization and credit and saving discipline; (e) periodic staff development program; (f) competent staff with basic background in credit and financial management, bookkeeping, or accounting; (g) operational management information system and internal control, accounting, documentation, and loan monitoring system or a commitment to install such; (h) no negative/adverse findings based on credit and background check conducted by the appointed auditor; (i) staff with managerial and professional skills in accordance with the regulations stipulated by Bank Indonesia and/or MOF and MOC; and (j) track record in microfinance for the urban poor, and community-based experience in housing microfinance.

(iii) Financial soundness. An LFI should (a) be solvent—i.e, its performing assets

are sufficient to cover its liabilities, or if a bank, has a CAR of at least 8%; (b) be profitable and efficient—as measured by return-on-equity and return-on-earning-asset ratios; (c) have quality assets—a nonperforming loan ratio of at most 5% if the LFI is a bank, or a collection efficiency of at least 95% if the LFI is a nonbank institution; and (d) be liquid—able to quickly convert its assets into cash or its liquid assets are sufficient to cover its short-term liabilities. If the LFI is a bank, its liquidity will be measured by its total loans to total deposits ratio.

(iv) Other minimum standards. These include (a) track record—at least 2

consecutive years in managing and implementing microfinance programs; (b) outreach—commitment to reach at least 100 low-income clients; and (c) an internal control system—written as a manual; an annual external audit that confirms that the internal control policy, system, and procedures are enforced, and that fraud has been absent from management and/or board for the last 2 years; and a regular internal audit; (d) manual of operations—including administrative and credit program system and procedures, and defining the levels of authority and accountability, job descriptions, and microfinance program systems and procedures; (e) management information system (MIS)—including regular and timely reports on the loan portfolio (repayment, outstanding loans, aging of loans, and capital buildup report on number of accounts, amounts outstanding, withdrawal, income statements, balance sheet, cash-flow statement, outreach report, and 1-year operating plan and budget for microfinance programs); and in the absence of an MIS, a written commitment that the LFI will install the system prescribed by the CFI; (f) a policy on write-offs and loan losses.

IMPLEMENTATION SCHEDULE

2004 2005Activity Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 A. Six Pilot Cities

Component 1: Improved Shelter Planning and Management

Component 2: Improved Access to Shelter Microfinance

Component 3: Upgraded Poor Neighborhoods and New Sites

Component 4: Strengthened Sector Institutions

B. Other Cities

Component 1: Improved Shelter Planning and Management

Component 2: Improved Access to Shelter Microfinance

Component 3: Upgraded Poor Neighborhoods and New Sites

Component 4: Strengthened Sector Institutions

Appendix 10

2006 2007 2008 2009Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

41

42 Appendix 11

OUTLINE TERMS OF REFERENCE FOR DECENTRALIZED SHELTER DELIVERY― CAPACITY BUILDING AND IMPLEMENTATION SUPPORT

1. Component 4 of the Project will (i) build capacity of local governments to implement and sustain the Project and fulfill their obligations in the shelter sector; (ii) ensure that project communities are equipped to carry out community planning and are made aware of project benefits and implications; (iii) support participating financial institutions; and (iv) strengthen the Directorate General of Human Settlements (DGHS) (the Executing Agency) and other central agencies to support execution, implementation monitoring, and reporting of the Project. Since the four components outlined below are interlinked, close coordination will be needed between consultants undertaking these activities. This coordination will be the primary responsibility of DGHS.

A. Local Government Capacity Building for Decentralized Shelter Delivery

1. Objectives

2. The component objectives will be to (i) strengthen the capacity of participating local governments in planning and development, (ii) help national government shelter agencies improve support to local governments, and (iii) strengthen the skills of shelter nongovernment organizations (NGOs) in facilitating local shelter programs.

2. Terms of Reference

3. Shelter Project Development and Management Support. The objective of this component is to help participating local governments and, where appropriate, regional offices of national government shelter institutions and NGOs identify, prepare, supervise, coordinate, manage, implement, and monitor shelter subprojects for the urban poor. The tasks included under this component are as follows:

(i) Where necessary, help local governments establish and operationalize local government housing units.

(ii) Provide training in shelter subproject identification and in applying project community selection criteria.

(iii) Enhance the capacity of local government technical staff to work closely with the National Land Agency (BPN), NGOs, and communities in developing shelter subprojects.

(iv) Develop local government capacity to identify, select, and prioritize shelter subprojects as part of the shelter plan preparation exercise.

(v) Prepare guidelines and associated contract documentation for community contracting approaches and train local governments and NGOs to adopt this approach.

(vi) Carry out training in computer literacy and application, staff development, information support, and community involvement and consultation.

4. Comprehensive Land and Shelter Planning. The objective of this component is to help participating local governments prepare or update shelter plans and other municipal development plans. The component aims to do the following:

Appendix 11 43

(i) Enhance the capacities of participating local governments to undertake their mandated responsibility to prepare land management plans and city shelter strategies, and integrate these with city or municipal development plans.

(ii) Help local governments prepare and revise land-use, development, and shelter plans to optimize land use, identify development opportunities, and prepare investment proposals for infrastructure, services, and shelter consistent with urban growth patterns.

(iii) Provide the capacity, in the local government and local BPN office, to plan and undertake project titling activities.

(iv) As part of the preparation of city shelter strategies, provide training and assistance to local governments in resettlement issues and impacts, and estate planning and management.

(v) Develop a system for continuous building local government capability through knowledge transfer to a pool of experts based at regional universities who can provide technical assistance (TA) in an accessible and sustainable manner.

B. Participatory Community-Driven Planning

1. Objective

5. The objective of this TA component is to provide enabling frameworks, technical support, and funds for community action in participatory design/implementation for development and titling of new or upgraded residential areas.

2. Terms of Reference

6. Participatory Planning Assistance and Facilitation. Activities will provide the organizational and technical resources to support beneficiary communities in new or upgraded areas and for land titling. These activities will include the following:

(i) support in base-line information data gathering and processing, and surveys by community members themselves;

(ii) provision of assistance to targeted communities to manage title application and registration processes; and

(iii) participatory planning assistance to provide technical facilitation and support by engineers, urban planners, financial managers, and livelihood development specialists to prepare a neighborhood upgrading plan (NUP) to appraise the subproject.

7. The NUP will (i) detail relocation programs, entitlement guidelines, and schedules; (ii) ensure community endorsement of subproject initiatives; (iii) document agreements on land redistribution connected to re-blocking initiatives and distribution of mortgage plans and titles; (iv) provide maps and detailed design and planning features to develop new or upgraded residential sites; and (v) establish a subproject implementation monitoring plan to be carried out by the communities.

44 Appendix 11

C. Strengthening of Financial Institutions

1. Objectives

8. The objectives are to (i) help CFIs and LFIs establish, install, and provide initial support for shelter microfinance products and systems; (ii) help establish uniform approaches to, and documentation of, housing microfinance and shelter finance for the poor; and (iii) design and establish a benefit monitoring and evaluation (BME) system within CFIs and LFIs.

2. Terms of Reference

9. About 134 person-months of domestically recruited consulting services will be required to do the following tasks:

(i) Examine and analyze financial operations, computerization, and MIS requirements of CFIs and representative LFIs (minimum of 10) and determine their microlending and monitoring system needs under the Project, including minimum requirements for a prudent financial control system. Design a recording and analysis system that (a) can be easily understood and adopted using minimum staff and computer requirements; and (b) will ensure that all financial intermediation is recorded using standard definitions and methodologies to facilitate control and monitoring of funds.

(ii) Evaluate the hardware and software being used and design additional systems, including a BME system, in consultation with these organizations, and integrate these new systems into their financial control systems.

(iii) Undertake, at selected locations, a series of financial training workshops for staff, accountants, and bookkeepers, augmented by training at selected LFIs where staff from surrounding organizations will assemble.

(iv) After developing, testing, and supervising the installation of the financial recording and analysis system, prepare an operations manual to provide step-by-step instructions for other institutions seeking to install a financial control system, and to troubleshoot difficulties in installation. Provide refresher training courses.

(v) Review existing and proposed operational systems and design national guidelines for financial institutions participating shelter finance for the poor and low-income groups in respect of standardized loan maintenance and reporting systems, BME indicators, and standardized loan documentation.

D. Project Implementation Support

1. Objectives

10. The objectives of project implementation support are to (i) help DGHS and project management units (PMUs) coordinate, plan, supervise, and monitor all project activities; (ii) help PMUs establish the mechanism for the demand-led local government low-cost housing program, and evaluate candidate local governments, subproject preparation, and appraisals; (iii) help local governments prepare detailed engineering designs and contract documentation, award contracts, and supervise works; and help CFIs establish project lending offices, which will be responsible for component 2; (iv) help DGHS and BPN establish capacity-building systems to ensure the delivery of titles to upgraded and new plots under the Project; and (v) help PMUs

Appendix 11 45

conduct various training and capability building, and community empowerment interventions addressing the requirements of all the stakeholders in the socialized housing sector.

2. Terms of Reference

11. Key tasks under each element of the project implementation support are as follows: (i) Overall project implementation and management support. This will entail the

following: (a) Establish a secretariat to support the work of the interagency PMU to be established under the steering committee and which will ensure coordination of project activities. (b) Set up procedures for project coordination and management, and for monitoring progress and impact, including benefit monitoring, in project implementation, and help PMUs and local coordinating offices establish annual project work plans, job descriptions, staffing schedules, and budgets. (c) Review and adjust, as necessary, PMUs’ subproject implementation programs from the perspective of overall project management and detailed annual work plans, and help package contracts. (d) Review and, as appropriate, prepare or amend project accounting manuals for PMUs. (e) As appropriate, prepare detailed terms of reference for, and help PMUs engage, consultants for specialist engineering surveys and studies required to establish subproject feasibility. (f) Review the form of contracts and set of contract documents to be used by project implementing agencies in terms of suitability for use for on-site and off-site infrastructure projects and seek approval from the Government and Asian Development Bank. (g) Advise on the pre- and post-qualification criteria for contractors and help implementing agencies pre- and post-qualify contractors. (h) Review eligibility criteria for local governments intending to participate in the Project, and help CFI project lending offices apply such criteria.

(ii) Assistance in local coordination. The consultants will help establish and operationalize coordinating mechanisms at the local level to (a) develop local project-coordinating mechanisms; (b) establish and operationalize coordination systems in project local governments to ensure efficient sequencing of all project activities; and (c) help local governments develop detailed work programs and select consultants for the survey, design, and supervision of subprojects under component 3.

(iii) Project advocacy and awareness building. The consultants will (a) help disseminate the policy action plan reform agenda to national and local program stakeholders; (b) help design, organize, and conduct a series of training events and conference workshops at national and regional levels to launch the Project, and to share experiences through implementation; (c) design, prepare, and disseminate information on the program to all eligible local governments, NGOs, community-based organizations, financial institutions, and communities through brochures, videos, and other media; and (d) manage a continuing program of advocacy and support at local government and community level, which will be implemented through regional offices of DGHS and other implementing agencies.

46 Appendix 12

SOCIAL AND POVERTY ISSUES

Summary Poverty Reduction and Social Strategy Form

A. Linkages to the Country Poverty Analysis Sector identified as a National Priority in Country Poverty Analysis?

Yes/No Yes

Sector identified as a National Priority in Country Poverty Partnership Agreement?

Yes/No Yes

Contribution of the sector/subsector to reduce poverty in Indonesia: The Project will directly reduce the poverty of the beneficiaries. Slum upgrading and community empowerment will lead to safer, healthier, and better organized communities where poverty can be systematically reduced. The provision of land security will foster social responsibility/ownership of project benefits, and eventual land titling will offer the beneficiaries formal lending options. The Project will also involve various community-designed livelihood improvement initiatives, which may include microfinance development, cottage industry/trade development, establishment of community services and construction of light infrastructure. Through these initiatives project beneficiaries will be provided with untapped income sources and with means to maximize their time and existing resources. The Project will also directly address the socioeconomic disruption caused by flooding.

B. Poverty Analysis Proposed Classification What type of poverty analysis is needed? Poverty analysis will be integral to subproject selection/design and based on quantitative and qualitative methodologies. Subproject selection will include the combined analysis of sector poverty data with country, region, and subproject poverty data and involve field-poverty assessments and stakeholder consultation. Subproject planning/design will entail intensive qualitative analysis directly involving project beneficiaries through the extensive use of participatory methods to identify the local poor population and the provisions that may better fit its needs. Poverty Classification Core Poverty Intervention C. Participation Process Stakeholder Analysis Identify consultations needed at project design (Appendix 4): Public consultation/participation will be at the core of project design as subprojects will be selected through stakeholder consultation and will be prepared through community-driven design mechanisms involving beneficiaries and nongovernment organizations’ facilitation. A condition for the approval of each subproject will the preparation of a participatory neighborhood upgrading plan (NUP) endorsed by the beneficiary communities. Participation strategy required: Yes D. Gender and Development

Strategy to Maximize Impacts on Women Women will be fully represented in participatory design to ensure that shelter/upgrading provisions reflect the women’s role in the domestic economy and that health/income generation benefits reflect women’s needs. Women will be given particular attention in distribution of land-tenure rights. A gender plan is being prepared and will be included in a supplementary appendix. Gender plan prepared: Yes E. Social Safeguards and other Social Risksa

Significant/ Not Significant/

Uncertain/ Noneb

Strategy to Address Issues

Plan

Requiredc

Resettlementd

Uncertain Resettlement needs/significance will be determined for each subproject after site selection. Resettlement plan design will be participatory and integrated in NUPs. Resettlement framework formulated.

Short

Appendix 12 47

Indigenous People

Uncertain None encountered in pilot sites, but will be determined in each site selected. Also unlikely on subsequent sites as the Project will target major cities where ethnic minorities may not be vulnerable groups and if encountered the NUP process will ensure their interests are protected.

Not known

Labor

Uncertain NUPs for each subproject will consider the distribution of project-derived jobs to beneficiaries.

Not known

Affordability

Significant When land security schemes involve the purchase of residential plots or in the development of microfinance schemes land prices and repayment rates will be fixed so as to be commensurate to the capacity to pay of the beneficiaries. The project design has explicitly addressed this issue.

Yes

Other Risks/ Vulnerabilities

Possibility of recolonization of cleared areas by new informal settlers. The risk will be dealt with by improving the capacity of local administrations and by empowering local communities to supervise communal areas.

Yes

a Initial poverty and social analysis/summary poverty reduction and social strategy criteria for assessing the significance of social issues are in ADB’s Handbook for Poverty and Social Analysis, the updated version of which is at http://adb.org/Documents/Handbooks/Poverty_Social/default.asp.

b If not known, a contingency should be included in the technical assistance budget to predict the need of a plan. c A plan will be required at design stage if any of the potential issues are found significant. d “Significant” involuntary resettlement requires a full resettlement plan; “not significant” requires a short resettlement

plan.

48 Appendix 13

SUMMARY RESETTLEMENT FRAMEWORK

A. Objectives, Policy Framework, and Eligibility

1. The Project is based on a participatory and community-led approach to development, implying that upgrading interventions—better roads, drains, and water supplies—in the community are conceptualized, designed, planned, and implemented by the urban poor themselves, within the neighborhood upgrading plan (NUP) process, in close collaboration with the local government that governs them, and guided by sound urban planning, social, and environmental principles. It is intended that such an approach will make the Project adaptable and sensitive to local situations and capacities of communities and local governments. The Project will ensure that all the subgroups within a community are involved, particularly the poorest of the poor and women, who are often the most marginalized and least heard. The Project provides for their adequate representation and mechanisms for consulting with them, thereby ensuring that their needs and aspirations are adequately considered. 2. Project features that could call for the application of the resettlement policy are the following:

(i) Due to the Project, beneficiaries may have to suffer house damage or loss, which needs to be documented and compensated.

(ii) Beneficiaries may have to suffer income loss or unplanned relocation expenses, which should be covered by a relocation subsidy.

3. The key elements of the land acquisition and resettlement (LAR) strategy are that (i) subproject selection criteria ensure that site acquisition will not involve the exercise of eminent domain; and (ii) participatory planning guarantees that minor land losses caused by re-blocking within the site are freely contributed by affected informal settlers, if needed, and replaced through voluntary land redistribution. To enable the rehabilitation of those affected by upgrading, serviced plots will be priced at affordable rates, house losses will be compensated at replacement cost, and relocation subsidies provided. If involuntary land losses to formal settlers occur, they will be fully compensated in accordance with the Asian Development Bank’s (ADB) Involuntary Resettlement Policy. 4. The following households/persons will be eligible for compensation for involuntary resettlement:

(i) owners of private properties that will be affected by the Project’s right-of-way (ROW) requirements,

(ii) owners of improvements on private properties that will be affected by the Project’s ROW requirements,

(iii) owners of dwelling units within the project site that will be completely/severely damaged due to the planned site development, and

(iv) households or persons whose sources of livelihood will be adversely affected or permanently dislocated by the proposed developments in the community.

Appendix 13 49

B. Socioeconomic Profile

5. Given the lack of official data at the community level, a participatory approach was used to measure poverty in the pilot communities. Under this, the project preparatory technical assistance used participatory rapid appraisal techniques and household surveys to determine the dimensions of poverty in the pilot communities. The tools and strategies used for the surveys included the following:

(i) participatory rapid appraisal techniques; (ii) community stakeholders workshops to assess poverty and social issues both for

men and women; (iii) socioeconomic surveys of pilot communities; (iv) transect walks; and (v) semi-structured interviews with local community leaders, women, micro-

entrepreneurs, traders, and other personalities from different socioeconomic backgrounds.

5. Table A13.1 sets out the key poverty indicators for the Project’s pilot communities.

Table A13.1: Key Poverty Indicators for Pilot Communities (%)

Item Medan City Pekanbaru Tangerang Pontianak Makassar Mataram

Percentage of Poverty Incidence 71.0 48.0 42.0 58.0 81.0 100.0

Engel’s Coefficient 54.4 49.7 54.0 48.1 60.0 65.8 Percentage of Households with Walls Mainly of Earth and Bamboo

4.6 0.0 0.0 0.0 0.0 8.3

Percentage of Households with Pipe or Pump Source of Drinking Water

26.2 25.0 12.5 3.3 5.1 5.0

Percentage of Households with Own Sanitation Facilities 26.2 34.6 17.5 41.7 18.6 10.0

Source: Asian Development Bank estimates. C. Consultation and Grievance Procedures

7. The NUP is intrinsically a consultative process but, to ensure its proper functioning, civil society and the range of stakeholders will monitor the outcomes and invite submissions. The resettlement framework will be distributed in all communities and disclosed to ADB and in each approved NUP. Eventual grievances will be first lodged at the community level to a community grievances committee. If within 2 weeks the case is not settled, the complainant will lodge the grievance to the neighborhood level. If still unresolved within 1 month, the case can be further elevated to the appropriate court. D. Compensation, Relocation, and Restoration Measures

8. These measures are summarized in Table A13.2.

50 Appendix 13

Table A13.2: Entitlement Matrix

Type of Loss Application Definition of Entitled Person Compensation Policy Implementation

Issues Loss of

residential land

Private residential land located in the right-of-way (ROW) requirements of specific subprojects

Legal owner/claimant of the land

Informal settlers

within the land

Provision of (i) replacement residential land of equivalent value or cash compensation at replacement cost according to affected people’s choices; (ii) cash compensation, at full replacement cost (market value), to the owner, if the owner so wishes, and the portion of the land to be lost represents 20% or less of the total area of the residential land area, and the remaining land is still a viable residential lot; and (iii) acquisition of the entire residential land at full replacement cost, at the request of the affected person, if the affected residential land is insufficient to rebuild the residential structure lost

Provision of replacement

residential land within the project site with payment terms designed based on capacity to pay

Appropriate legal instruments and procedures need to be executed in cases where there are multiple claimants

Valuation of

the land shall be made through joint appraisal by an independent appraiser and a government financing institution

Loss of residential structure

Residential structures located in the ROW requirement of the specific subproject or along the internal road networks within the Project

Structure owner Renters or rent-

free occupants —absentee owners of residential structures within the project site are not entitled to compensation —structures built after the census and tagging operations are not entitled for replacement

Cash compensation reflecting full replacement cost of the house/structure affected, without depreciation

Relocation assistance

Renters for residential

purposes will be provided with a cash grant of 3 months’ rental fee at the prevailing market rate in the area and will be helped to identify alternative accommodation. They will also be given the opportunity to avail themselves of home plots to be generated by the re-blocking, with payment terms based on capacity to pay

Census, tagging, and valuation of all affected structures

Valuation

based on the prevailing cost of construction materials and labor cost

Assistance

determined jointly by community groups, affected household, and local government

To qualify for

rental assistance, the household

Appendix 13 51

Type of Loss Application Definition of Entitled Person Compensation Policy Implementation

Issues should have

separate living/eating areas at the time of census

Loss of

agricultural land or plots

Private agricultural lands located in the ROW requirement of the Project

Vegetable/

root crop plots within the project site

Legal owner/claimant of the agricultural land

Farm-tenants/

lessee of the land

Vegetable/root

crop growers within the project site

(i) Land-for-land arrangements of equal productive capacity, satisfactory to the affected person; however, if the landowner so wishes and the portion of the land to be lost represents 20% or less of the total area of the landholding, and the remaining land is still a viable economic holding, cash compensation, at full replacement cost (market value), may be provided to the owner; (ii) if more than 20% of a person’s agricultural land is acquired and the remaining holding is not viable, then the Project will acquire the entire landholding and provide compensation of the acquired land at direct land replacement

(i) The loss of standing crops

and fruit/industrial trees at market rates equivalent to their average annual net harvest for the last 3 years from the affected plot; and (ii) affected persons whose land is temporarily taken by works under the Project will be compensated for their loss of income, standing crops and for the cost of soil restoration and damaged infrastructure.

(i) Loss of crops at market

rates equivalent to their average annual net harvest for the last 3 years from the affected plot; (ii) assistance in identifying alternative sites for vegetable farming/root crops within the community that can be leased or bought by the plant grower

Assistance from the local government office is needed in the valuation of crops

It should be

determined if the land has been continuously productive during the past 3 years

Loss of livelihood

Other sources of livelihood that may be discontinued/

Owners of nonresidential/ business-oriented structures

(i) Cash compensation reflecting replacement cost of the affected structure without depreciation, (ii) cash compensation equivalent to 3

It should be determined if the business activity is ongoing during

52 Appendix 13

Type of Loss Application Definition of Entitled Person Compensation Policy Implementation

Issues adversely affected as a result of the re-blocking or proposed development in the community

(independent store, shop, warehouse)

Owners of

livestock cooperatives/ pens

months’ net income from the business activity, and (iii) assistance in identifying alternative sites for continuing business within the community that can be leased or bought by the worker/business owner

the past 2 years

E. Resettlement Budgets

9. Small-scale relocation undertaken within the subproject sites will be a project expense. No relocation was required in the pilot subprojects. Land acquisition, i.e., for ROWs, will be a local government counterpart expense agreed on in writing, to be funded and to follow the conditions of the entitlement matrix before consideration of the subproject by the project management unit (PMU). F. Implementation Arrangements

10. The Directorate General of Human Settlements (supported by PMU staff) has overall responsibility for subproject appraisal and LAR implementation. Liaison with community-based organizations and nongovernment organizations and subproject implementation/financing responsibility, including land management, assets valuation, and entitlements delivery, will be the responsibility of the project proponents. G. Monitoring and Evaluation

11. The PMU will establish a monthly reporting system on implementation of the NUP and LAR. External monitoring will be assigned to an independent agency. The PMU will report quarterly to ADB on land acquisition and resettlement. External monitoring reports will be submitted to ADB twice a year.

Appendix 14 53

SUMMARY INITIAL ENVIRONMENTAL EXAMINATION A. Introduction

1. This section presents the summary of the initial environmental examination (IEE) findings and recommendation conducted on proposed upgrading subprojects: Makassar, Mataram, Medan, Pekan Baru, Pontianak, and Tangerang. The conduct of the IEEs has allowed the Project to identify environmental impacts and to propose mitigation measures. The procedure adopted in identifying all significant environmental impacts follows the Asian Development Bank’s (ADB) Environmental Assessment Guidelines (2003).

B. Description of the Project and Environment

2. All subprojects involve small-scale civil works such as local roads and drains to improve the environment of poor neighborhoods. Common to all subprojects is the generation of small, significant environmental impacts during design and construction. The civil works are not substantial in terms of scale and cost, and are mostly on-site improvement of drainage, road, and water distribution systems. In particular, the proposed infrastructure works in the subprojects, by their very nature, mitigate environmental impacts and reduce the inherent health risks attributable to the unplanned development of these poor urban communities. However, the subprojects’ high population density multiplies small environmental impacts and warrants attention, particularly in the planning stage. 3. The proposed subprojects will upgrade communities with limited available land. Unplanned house construction and haphazard provision of drainage canals and water lines installed by individual settlers cause most significant environmental impacts. Since existing drainage and water lines are in the same trench and usually follow the alignment of alleys and footpaths, any improvement of these services will have negative impact on the local environment, but the effects are short term even within a longer construction stage. A more detailed description of each subproject is in Appendix 4. 4. The environment of the subproject sites is already urban, albeit poorly serviced. No significant species of flora or fauna were found. Topography varies but is generally flat. Soil conditions also vary from sandy soils to clay. C. Potential Environmental Impacts and Mitigation Measures

5. Impacts that are common to the subprojects and recommended mitigation measures are in Table A14. These recommended measures are simple and easy to integrate into the feasibility study and detailed engineering phases of each subproject development. Other impacts, such as silt runoff and relations between workers from other areas and local residents will be managed, if necessary.

54 Appendix 14

Table A14: Subproject Environmental Impacts and Typical Recommended Mitigation Measures

Impacts Recommended Mitigation Measures Environmental problems due to design Interference with other utilities in same trench

With the residents and local water utility, prepare a detailed map of each residential/subdivision block showing the alignment of existing water lines. Prepare an excavation schedule of each section of the proposed drainage system that avoids or minimize interference with water line.

Intensification of water pollution control

With limited available area combined sewer and drainage canal is recommended. Prohibitive cost of centralized sewerage treatment plant does not allow its construction. Ensure that all households have specific tank and are regularly de-sludge to ensure their proper operation. When possible, reuse domestic wash water from bathrooms and sinks for irrigation.

Creation of sewage/sanitation problem

Cover all open drainage canals along the major roads with concrete slabs. Ensure that all households have septic tanks and they are regularly de-sludged. Educate the community in the importance of regular maintenance and educate contractors on proper procedures of removal and disposal. When feasible, convert footpaths and alleys to covered drain to ensure adequate canal capacity, optimize available space, and minimize health risk.

Environmental problems in construction stage Hazards to workers and nearby residents from communicable diseases and emissions of dust, fumes, noise and vibrations

Educate all construction workers on handling sewage. Equip workers with proper protective gear such as rubber gloves and boots. To minimize nuisance, heavy equipment operation should be done during daytime (9:00 a.m.–6:00 p.m.). Inform affected residents before equipment operation.

Accidental damage to utilities in the same trench

Based on the detailed map showing the location of water pipes and excavation map, inform affected residents of possible disturbances in water supply. Drainage canals to be constructed along/as footpaths that will affect access should be done in phases and immediately covered by metal sheets or catwalks to allow access of residents.

D. Institutional Requirements and Environmental Management System

6. As all subprojects envisaged will not have significant environmental impacts, participating local governments will be required to obtain the relevant environmental impact analysis (AMDAL) or environmental impact assessment/environmental impact mitigation (UKL/UPL) clearance. This will require consultant support to the PMU, which the Project’s capacity-building component will provide while institutionalizing capacity within DGHS. 7. The environmental management system is integrated into the subproject approval process and the neighborhood upgrading plan (NUP) process. An environmental assessment and review procedure has been prepared and no subproject will be approved by the PMU without environmental clearance. The steering committee will monitor compliance with this process. The NUP process is a consultative one that designs project interventions, including environment-related interventions with the community concerned, and written approval of proposed activities is required from all members of the community (see below).

E. Public Consultation and Information Disclosure

8. Ample opportunities for the public to participate in the design process of all the subprojects were ensured:

Appendix 14 55

(i) Structured subproject site contacts with the officers of community associations, local government officials, and DGHS regional officers. In addition to standard practice in subproject preparation where environmental impacts are identified and evaluated, these contacts provided an opportunity for the local community to provide feedback on environmental issues. During each study team visit, at least three rounds of these contacts were conducted.

(ii) Workshops were conducted where the subproject initial design was developed and ADB’s environmental guidelines explained in the context of the Project. The consultant primarily informs the community of the environmental impacts of the subproject. This workshop also validates the consultant’s assessment of the impacts. During these workshops, the need to comply with local environmental regulations is also emphasized.

(iii) A discussion with the local environmental agency is conducted to present in summary the findings and initial recommendations of the study team. Issues raised during the walkthroughs and workshops are revalidated. During this discussion any issues raised by the agency are addressed or agreements reached as to how to address them.

(iv) A socioeconomic and perception survey was conducted to provide a baseline for assessment of residents perceptions of, among other things, the environment.

9. The NUP is a product of an intensive consultation process as it is embodied by the principle of participatory planning and community-led approach to development. This implies that interventions in the community are conceptualized, designed, planned, and implemented by the members themselves in close collaboration with the local government that governs them and guided by sound urban planning, social and environmental principles. Thus, the NUP is the result of consensual agreements that could only be achieved through constant interaction among those involved. Aside from including a documentation of the public consultations undertaken, the NUP outlines the subproject proposals and designs that were determined by the community members themselves. F. Findings and Recommendations

1. Beneficial Impacts

10. There will be significant environmental benefits directly and indirectly attributable to the infrastructure proposals within the Project. The main beneficiaries will be all vulnerable groups, including women, children, and old people. The improvements in most neighborhood upgrading areas will include an improved and dependable clean water supply, improved sanitation facilities and off-site treatment and disposal, improved solid waste collection and transportation, and improved access roads and pathways. 11. The provision of new sites with infrastructure will also benefit all incoming residents, especially women, children, old people, and other disadvantaged groups. 12. In most instances it is likely that the overall environmental benefits will outweigh any localized adverse impacts. Nevertheless, the scale of these adverse impacts should be determined, and mitigation and management proposals provided wherever necessary.

56 Appendix 14

2. Adverse Impacts

13. To define adverse impacts of all general infrastructure proposals, an IEE has been carried out to determine the specific environmental requirements necessary: full environmental assessment report, environmental monitoring and management report, or no specific requirement. Generalized proposals have been prepared for site upgrading and new site development and have been used in the IEE. 14. Based on a general understanding of the type of infrastructure projects proposed as part of this Project and on previous experience in the Integrated Urban Development and Poverty Reduction Project, no projects will require full environmental impact assessment (AMDAL) under Indonesian regulations, or fall within category A of ADB classification. The infrastructure projects are small-scale, benign, and do not cause significant adverse environmental impacts. Detailed assessment of the subprojects is set out in Supplementary Appendix E. G. Conclusions and Recommendation

15. The nature of the proposed subprojects, being community upgrading, will fundamentally improve the urban environment through improved access, proper handling and disposal of domestic wastewater, avoidance of flood damage, and provision of potable water. Also inherent in this type of subproject is the dense population living on the construction site; even simple drainage canal excavation, therefore, will have an impact, albeit small and short. 16. The Project emphasizes the importance of conducting an IEE to identify environmental considerations during subproject site identification, design, and feasibility analysis. The findings and recommendations enriched the engineering designs to incorporate simple mitigation measures such as dust suppression, timing of heavy equipment operation to avoid disturbances due to noise, proper handling of domestic wastewater and its re-use for irrigation purposes, and traditional construction practices that overlook these mundane impacts. The IEE also pointed out the need to revise the engineering designs to avoid adverse environmental impacts, reducing potential risk of erosion and groundwater contamination, among others. 17. Local governments will need to ensure that all subprojects secure an AMDAL clearance or UKL/UPL. With minimal reformatting of the IEE, the subproject proponents will be able to comply with government environmental impact statement guidelines.

Appendix 15 57

ECONOMIC, FINANCIAL, AND POVERTY IMPACT ANALYSES

A. General 1. The economic and financial analyses of the six project sites were undertaken in accordance with the following Asian Development Bank (ADB) guidelines: (i) Framework for the Economic and Financial Appraisal of Urban Development Sector Project, (ii) Guidelines for the Economic Analysis of Projects, (iii) Guidelines for the Preparation and Presentation of Financial Analysis of Projects, and (iv) Bank Criteria for Subsidies. This appendix summarizes a supplementary appendix, which provides the detailed calculation of economic internal rates of return (EIRRs) for all subprojects, and the financial internal rates of return (FIRRs), which were computed for the revenue-generating components. B. Economic Analysis 2. The proposed upgraded neighborhoods and new site subprojects will address the land-ownership issue and distribute individualized titles or other forms of secure tenure instruments. The subprojects will also provide basic services such as roads and footpaths and drainage facilities to (i) increase residents’ access to jobs; (ii) reduce damage, losses, and waterborne diseases due to flooding; and (iii) improve community sanitation by increasing the sewage conveyance capacity of drainage canals. Benefits from the housing microfinance components were quantified either by imputing the potential increase in property rental values after subproject completion or by converting into economic benefits the potential stream of net income flows accruing to the borrowers. 3. The major indicators of the economic viability of the proposed upgrading subprojects are summarized in Table A16.1. Base-case EIRRs calculated for the subprojects ranged from 15.0% to 44.8%, exceeding ADB’s 12.0% economic opportunity cost of capital, and confirming the subprojects’ economic robustness. Sensitivity analysis conducted on parameters that include 10% increase in costs, 10% increase in benefits, or both, and delays in benefit realization showed that the EIRRs will be highly vulnerable to changes in the anticipated benefits from the subprojects. Due to the short-term nature, low capital input, and high product turnover of representative activities to be financed, the calculated EIRRs for the housing finance subprojects were robust, at 32.6%. C. Financial Analysis 4. FIRRs and financial sustainability projections were prepared for the housing microfinance component as the only revenue-generating component. FIRRs were not calculated for the upgraded neighborhoods and new sites pilot subprojects because all six will either adopt an on-site upgrading approach and their beneficiaries had limited ability to pay, or due to the spillover benefits of the proposed off-site infrastructure to other communities outside the targeted upgrading sites, some degree of local government subsidy to the Project would be deemed justified. The local governments will eventually recover these subsidies through the appropriate property taxation mechanisms. 5. The major indicators of the financial viability of the proposed subprojects are summarized in Table A15.1. The shelter finance subcomponent is highly viable, with base-case FIRRs of 62.5%, above the computed real weighted average cost of capital of 6.6%.

58 Appendix 15

Table A15.1: Economic and Financial Analyses Summary

1 2 4 5 Subproject Base Capital Benefits Combined Benefits Economic Analysis EIRR Costs + 10% less 10% 1+2 Delayed 1 Year Upgrading Pilot Makassar 40.3% 36.8% 35.6% 32.7% 30.0% Upgrading Pilot Pekanbaru 21.7% 19.8% 19.1% 17.4% 17.5% Upgrading Pilot Tangerang 40.3% 36.8% 35.9% 32.7% 30.0% Upgrading Pilot Pontianak 24.6% 22.4% 21.7% 19.6% 16.5% Upgrading Pilot Mataram 44.8% 40.9% 39.9% 36.4% 32.7% Upgrading Pilot Medan 15.0% 13.6% 11.8% 12.0% 10.2% Microhousing Loans LFI 32.6% 28.8% 28.1% 24.9% 23.9% New Site Tangerang 21.2 % 19.3% 19.0% 17.2% 17.5% Subproject Financial Analysis

Base FIRR

Costs + 5%

Collection Efficiency less 5%

Revenues Delayed 1

Year Microhousing Loans LFI 62.5% 35.2% 24.1% 2.23% EIRR = economic internal rate of return, FIRR = financial internal rate of return, LFI = local financial institution, O&M = operation and maintenance. Source: Asian Development Bank estimates. D. Poverty Impact 6. Poverty impact assumptions applicable to the Project are in Supplementary Appendix F. Pilot project consumer benefits were calculated by deducting the financial payment of beneficiaries from their calculated economic benefit. The poverty impact of benefits accruing to Government and the labor component of the civil works and housing constructed was also calculated. Table A15.2 shows the calculation of the poverty impact ratio derived from the experience in pilot sites. These are representative of the size and type of investments and, broadly, of the project communities. Thus, the benefits and costs associated with the various components have to be increased to calculate the actual poverty impact of the whole Project. These factors are increased in proportion to the relative size of the full project component to the pilot component. The “size” of the component is measured in terms of number of households impacted or loans as appropriate.

Table A15.2: Summary Project Poverty Impact (Rp million)

Impact on Other Stakeholders

Government Labor

Benefit Category

Project

Consumer Impact Capital O&M Capital O&M

Total

Total

Poverty Impact

Total

Benefits

Microfinance 86,952 585 20 12,499 437 13,541 100,493 207,027

Upgrading 837,803 4,267 3,805 80,374 133,348 221,794 1,059,597 1,994,770

New Sites 159,670 411 330 7,351 12,781 20,874 180,544 380,167

Total 1,084,425 5,263 4,155 100,224 146,566 256,209 1,340,634 2,581,964

Poverty Index 0.52O&M = operation and maintenance. Source: Asian Development Bank estimates.

Appendix 15 59

E. Pricing and Affordability to Targeted Beneficiaries

9. Overall, the proposed housing microfinance to undertake home improvements or purchase a serviced plot and build a starter home were designed to be affordable to the bottom 35% of the total urban households (Supplementary Appendix D). Monthly amortization payments for housing microfinance were calculated at an indicative 16% for 36 months, and compared against the income and borrowing capacity of the beneficiaries from a pilot subproject. Based on these calculations, the proposed housing microfinance will, on the average, be affordable at the 20th–30th percentiles of the national urban household income distribution, the targeted project beneficiary groups. Land and basic infrastructure services to be provided under the upgraded neighborhood and new sites component will be financed by matching grants from the central Government and the participating local governments. These will generally not be recovered directly from the beneficiaries but indirectly through taxation. F. Affordability to Participating Local Governments 10. The financial capability of the local governments, which serve as the implementing agencies for the upgraded neighborhoods and new-site component of the Project, were evaluated (Supplementary Appendix F) based on their financial statements and forecasts of future revenues and expenditures. Given the financing requirements of the upgraded neighborhoods and new project sites, all the pilot cities will be able to afford the matching grant requirements of the Project. The projected financial statements of 2001–2010 suggest further that the pilot cities’ financial performance and standing will improve over the medium term. G. Affordability to Participating Financial Institutions 11. For the shelter microfinance component of the Project, the financial capability of central financial institutions (CFIs) and local financial institutions (LFIs) potentially eligible to participate were evaluated (Supplementary Appendix F). Financial projections were also conducted to ascertain their ability to pay the debt-servicing requirements of the subprojects. Representative LFIs were assessed. Projections of their financial statements indicate that LFIs will continue to operate profitably over the long term and benefit from the Project. They also more than adequately meet the minimum standard requirements in six basic areas: (i) legality, (ii) management capability, (iii) financial solvency, (iv) adherence to asset quality, (v) profitability and efficiency, and (vi) liquidity. Given the projected net positive inflows and financial internal rates of return from the proposed on-lending subprojects, the LFIs will be more than able to meet the Project’s debt-servicing requirements. 12. For the CFI role, the financial capability of Bank Tabungan Negara (BTN) and Permodalan Nasional Madani (PNM) were examined. Both have liquidity, profitability, asset quality, and capital adequacy ratios that confirm their financial soundness. Financial projections show that these CFIs will continue to generate significantly positive net incomes. The eligibility criteria for project CFIs have been prepared to attract financially sound, forward looking, and housing microfinance specialized banks and nonbank financial institutions. The Project’s debt-servicing requirements will be more than sufficiently met by BTN and PNM, particularly in light of their demonstrated track record in implementing on-lending programs for the poor through their branches and local executing banks that meet their accreditation policies and criteria.