Document of The World Bank · Document of The World Bank ... Program Kompensasi Pengurangan Subsidi Bahan Bakar Minyak ... ICR Implementation Completion Report UPP Urban Poverty Project

Document of The World Bank

Report No: ICR0000903

IMPLEMENTATION COMPLETION AND RESULTS REPORT (IBRD-47610)

ON A

SERIES OF CREDIT AND LOANS

IN THE AMOUNT OF SDR47.4 MILLION (US$ 70 MILLION EQUIVALENT) IN CREDIT

AND

$1.830 BILLION IN LOANS

TO THE

REPUBLIC OF INDONESIA

FOR

DEVELOPMENT POLICY LOANS I-IV

January 30, 2008

Poverty Reduction and Economic Management Unit East Asia and Pacific Region

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CURRENCY EQUIVALENTS

(Exchange Rate Effective January 30, 2008)

Currency Unit = Rupiah (IDR) US$ 1.00 = Rp 11,415

FISCAL YEAR

January 1 – December 31

ABBREVIATIONS AND ACRONYMS

AAA Analytical and Advisory Activities IG Inspector General

ADB Asian Development Bank IMF International Monetary Fund

AG Attorney General JBIC Japan Bank for International Cooperation

ASEAN Association of South East Asian Nations JSX Jakarta Stock Exchange

BAPEPAM LK Badan Pengawas Pasar Modal dan Lembaga Keuangan (Financial Institutions and Capital Markets Supervisory Agency)

KDP KKPPI

Kecamatan Development Program Komite Kebijakan Percepatan Penyediaan Infrastruktur

BAPPENAS Badan Perencanaan Pembangunan Nasional (National Development Planning Agency)

(National Committee on Policy for Accelerating Infrastructure Provision)

BI Bank Indonesia KMK Keputusan Menteri Keuangan (Decree from Minister of Finance)

BKF Badan Kebijakan Fiskal (Fiscal Policy Office) KPK Komisi Pemberantasan Korupsi (Corruption Eradication Commission)

BKPM Badan Koordinasi Penanaman Modal (Indonesia Investment Coordinating Board)

KPPN Kantor Pelayanan Perbendaharaan Negara (State Treasury Services Offices)

BOS Bantuan Operasional Sekolah (School Operational Assistance)

LPKPP Lembaga Pengembangan Kebijakan Pengadaan Pemerintah (National Public Procurement Office)

BOS-KITA BOS- Knowledge Improvement for Transparency and Accountability

MDGs Millennium Development Goals

BPK Badan Pemeriksa Keuangan (Supreme Audit Agency) MoE Ministry of Education

BPS Badan Pusat Statistik (Central Bureau of Statistics) MoF Ministry of Finance

BUMD Badan Usaha Milik Daerah (Regional Government Owned Enterprise)

MoH Ministry of Health

CAS Country Assistance Strategy MoT Ministry of Trade

CBS Central Bureau of Statistics MTEF Medium-Term Expenditure Framework

CCT Conditional Cash Transfer NBFI Non-Bank Financial Institutions

CDD Community Driven Development NPL Non-Performing Loans

CFAA Country Financial Accountability Assessment NPPO National Procurement Policy Office

CG Central Government NSW National Single Window

CGI Consultative Group on Indonesia OECD Organization of Economic Cooperation and Development CPI Consumer Price Index OP Operational Policy

CPS Country Partnership Strategy PEFA Public Expenditure and Financial Accountability

CY Calendar Year PEPI Peningkatan Ekspor dan Peningkatan Investasi (National Team for the Development of Exports and Investment)

DAK Dana Alokasi Khusus (Special Allocation Funds) PER Public Expenditure Review

DB Doing Business PFM Public Financial Management

Dep HukHAM Departemen Hukum dan Hak Asasi Manusia (Ministry of Justice and Human Rights)

PINTAR Project for Indonesia Tax Administration Reform

DGFI Directorate General of Financial Institutions - Ministry of Finance – the NBFI Regulator

PKH Program Keluarga Harapan (Family Hope Program)

DG Director General PKPS-BBM

Program Kompensasi Pengurangan Subsidi Bahan Bakar Minyak (Fuel Subsidy Reduction Compensation Programs)

DIPA Daftar Pelaksanaan Isian Anggaran (Budget Implementation Statement)

PNPM Program Nasional Pemberdayaan Masyarakat (National Program for Community Empowerment)

DPL Development Policy Loan PPP Public-Private Partnership

DPR Development Policy Review PRSP Poverty Reduction Strategy Paper

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EPP Economic Policy Plan RANPK Rencana Aksi Nasional Pemberantasan Korupsi (National Plan for the Eradication of Corruption)

ESW Economic and Sector Work RDA Regional Development Account

FDI Foreign Direct Investment RDI Rekening Dana Investasi (Investment Fund Account)

FPO Fiscal Policy Office RKP Rencana Kerja Pemerintah (Government Work Plan)

FY Fiscal Year RPJM Rencana Pembangunan Jangka Menegah (Medium-Term Development Plan)

GDP Gross Domestic Product Satker Satuan Kerja (Working Unit)

GFMRAP Government Financial Management and Revenue Administration Project

S&P Standard and Poor’s

GFS Government Finance Statistics SDR Special Drawing Rights

GNP Gross National Product SME Small and Medium Enterprise

GoI Government of Indonesia SOE State-owned Enterprise

GoJ Government of Japan TSA Treasury Single Account

IBRA Indonesian Bank Restructuring Agency UCT Unconditional Cash Transfer

IBRD International Bank for Reconstruction and Development UNDP United Nations Development Program

ICR Implementation Completion Report UPP Urban Poverty Project

IDA International Development Association VAT Value-Added Tax

I-DPL Infrastructure Development Policy Loan WBG World Bank Group

IFC International Finance Corporation YoY Year on Year

Vice President: James W. Adams Country Director: Joachim von Amsberg Sector Manager: Vikram Nehru Lead Economist: William Wallace Task Team Leader: Shubham Chaudhuri

iv

INDONESIA

DEVELOPMENT POLICY LOAN I-IV

IMPLEMENTATION COMPLETION REPORT

CONTENTS

Data Sheet A. Basic Information B. Key Dates C. Ratings Summary D. Sector and Theme Codes E. Bank Staff F. Results Framework Analysis G. Ratings of Program Performance in ISRs H. Restructuring

1. Program Context, Development Objectives and Design ............................................ 1 2. Key Factors Affecting Implementation and Outcomes .............................................. 4 3. Assessment of Outcomes ............................................................................................ 8 4. Assessment of Risk to Development Outcome ......................................................... 17 5. Assessment of Bank and Borrower Performance ..................................................... 18 6. Lessons Learned........................................................................................................ 20 7. Comments on Issues Raised by Borrower/Implementing Agencies/Partners ........... 22 Annex 1 Bank Lending and Implementation Support/Supervision Processes .............. 23 Annex 2. Development Outcomes Indicators ............................................................... 27 Annex 3. Stakeholder Worshop Report and Results ..................................................... 31 Annex 4. Summary of Borrower's ICR and/or Comments on Draft ICR ..................... 31 Annex 5. Comments of Cofinanciers and Other Partners/Stakeholders ....................... 31 Annex 6. List of Supporting Documents ...................................................................... 31

MAP

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A. Basic Information

Program 1

Country Indonesia Program Name First Development Policy Loan

Program ID P092663 L/C/TF Number(s) IBRD-47610

ICR Date 10/24/2008 ICR Type Core ICR

Lending Instrument DPL Borrower REPUBLIC OF INDONESIA

Original Total Commitment USD 300.0M Disbursed Amount USD 300.0M

Implementing Agencies Ministry of Finance Coordinating Ministry of the Economy Cofinanciers and Other External Partners Government of Japan

Program 2

Country Indonesia Program Name Second Development Policy Loan



Lending Instrument DPL Borrower GOVERNMENT OF INDONESIA


Implementing Agencies Ministry of Finance Coordinating Ministry of the Economy Cofinanciers and Other External Partners Asian Development Bank (ADB) Government of Japan

Program 3

Country Indonesia Program Name Third Development Policy Loan

Program ID P100327 L/C/TF Number(s) IBRD-74180,IDA-42520


Lending Instrument DPL Borrower MINSITRY OF FINANCE


Implementing Agencies Ministry of Finance Coordinating Ministry of the Economy

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Cofinanciers and Other External Partners Asian Development Bank (ADB) Government of Japan

Program 4

Country Indonesia Program Name Fourth Development Policy Loan



Lending Instrument DPL Borrower REPUBLIC OF INDONESIA


Implementing Agencies Ministry of Finance Coordinating Ministry of the Economy Cofinanciers and Other External Partners Asian Development Bank (ADB) Government of Japan

B. Key Dates

First Development Policy Loan - P092663

Process Date Process Original Date Revised / Actual

Date(s)

Concept Review: 09/30/2004 Effectiveness: 12/22/2004 12/22/2004

Appraisal: 11/10/2004 Restructuring(s):

Approval: 12/21/2004 Mid-term Review:

Closing: 03/31/2005 03/31/2005 Second Development Policy Loan - P096594


Date(s)




Closing: 03/31/2006 03/31/2006 Third Development Policy Loan - P100327


Date(s)



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Closing: 03/31/2007 03/31/2007 Fourth Development Policy Loan - P105637


Date(s)




Closing: 03/31/2008 03/31/2008

C. Ratings Summary C.1 Performance Rating by ICR First Development Policy Loan - P092663

Outcomes Satisfactory

Risk to Development Outcome Moderate

Bank Performance Satisfactory

Borrower Performance Satisfactory

Sustainability Likely

Institutional Development Impact Modest Second Development Policy Loan - P096594




Borrower Performance Satisfactory Third Development Policy Loan - P100327



Bank Performance Moderately Satisfactory

Borrower Performance Satisfactory Fourth Development Policy Loan - P105637




Borrower Performance Satisfactory

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C.2 Detailed Ratings of Bank and Borrower Performance (by ICR) First Development Policy Loan - P092663

Bank Ratings Borrower Ratings Quality at Entry Satisfactory Government: Satisfactory

Quality of Supervision: Satisfactory Implementing Agency/Agencies:

Satisfactory

Overall Bank Performance Satisfactory Overall Borrower Performance

Satisfactory

Second Development Policy Loan - P096594



Moderately Satisfactory


Satisfactory

Third Development Policy Loan - P100327


Quality of Supervision: Moderately Satisfactory Implementing Agency/Agencies:


Overall Bank Performance Moderately Satisfactory Overall Borrower Performance

Satisfactory

Fourth Development Policy Loan - P105637





Satisfactory

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C.3 Quality at Entry and Implementation Performance Indicators First Development Policy Loan - P092663

Implementation Performance

Indicators QAG Assessments (if

any) Rating:

Potential Problem Program at any time (Yes/No):

No Quality at Entry (QEA) None

Problem Program at any time (Yes/No):

No Quality of Supervision (QSA)

None

DO rating before Closing/Inactive status

Second Development Policy Loan - P096594



any) Rating:





None


Third Development Policy Loan - P100327



any) Rating:


No Quality at Entry (QEA) Satisfactory



None


Fourth Development Policy Loan - P105637



any) Rating:





None


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D. Sector and Theme Codes

First Development Policy Loan - P092663 Original Actual

Sector Code (as % of total Bank financing)

Banking 25 25

Central government administration 50 50

General industry and trade sector 25 25

Theme Code (Primary/Secondary)

Debt management and fiscal sustainability Primary Primary

Public expenditure, financial management and procurement Primary Primary

Regulation and competition policy Secondary Secondary

Small and medium enterprise support Secondary Secondary

Tax policy and administration Secondary Secondary Second Development Policy Loan - P096594

Original Actual



General finance sector 40 40

Sub-national government administration 5 5


Debt management and fiscal sustainability Secondary Secondary




Social safety nets Secondary Secondary Third Development Policy Loan - P100327

Original Actual


General finance sector 17 17


General public administration sector 66 66

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Other financial and private sector development Secondary Secondary


Regulation and competition policy Primary Primary

Standards and financial reporting Primary Primary

Tax policy and administration Secondary Secondary Fourth Development Policy Loan - P105637

Original Actual


Banking 25 25




Debt management and fiscal sustainability Primary Primary

Other economic management Primary Primary



Tax policy and administration Secondary Secondary

E. Bank Staff

First Development Policy Loan - P092663 Positions At ICR At Approval

Vice President: James W. Adams Jemal-ud-din Kassum Country Director: Joachim von Amsberg Andrew D. Steer Sector Manager: Vikram Nehru Homi Kharas Task Team Leader: Shubham Chaudhuri Wolfgang Fengler ICR Team Leader: Shubham Chaudhuri ICR Primary Author: Elaine A. Tinsley

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Second Development Policy Loan - P096594 Positions At ICR At Approval

Vice President: James W. Adams Jemal-ud-din Kassum Country Director: Joachim von Amsberg Andrew D. Steer Sector Manager: Vikram Nehru Homi Kharas Task Team Leader: Shubham Chaudhuri Subrahmanya Pulle Srinivas ICR Team Leader: Shubham Chaudhuri ICR Primary Author: Elaine A. Tinsley Third Development Policy Loan - P100327

Positions At ICR At Approval Vice President: James W. Adams Jeffrey S. Gutman Country Director: Joachim von Amsberg Andrew D. Steer Sector Manager: Vikram Nehru Homi Kharas Task Team Leader: Shubham Chaudhuri Subrahmanya Pulle Srinivas ICR Team Leader: Shubham Chaudhuri ICR Primary Author: Elaine A. Tinsley Fourth Development Policy Loan - P105637

Positions At ICR At Approval Vice President: James W. Adams James W. Adams Country Director: Joachim von Amsberg Joachim von Amsberg Sector Manager: Vikram Nehru Vikram Nehru Task Team Leader: Shubham Chaudhuri Wolfgang Fengler ICR Team Leader: Shubham Chaudhuri ICR Primary Author: Elaine A. Tinsley

F. Results Framework Analysis

Program Development Objectives (from Program Document) The DPL program supported the government’s reform program under four core policy areas. (i) Support macroeconomic stability and creditworthiness. The DPL program sought to further improve Indonesia's macroeconomic fundamentals, by supporting measures to reduce the debt burden, re-profile debt to free up resources for development expenditures, and continue fiscal discipline supported by the mobilization of additional non-oil and gas revenues. Improvement in its fundamentals was expected to lead to upgrades in the country's credit ratings and provide access to international capital markets. (ii) Improve the investment climate. Under this policy area, the focus was on reforms to make Indonesia a more attractive place to invest and to strengthen its financial sector. This was to be

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accomplished by reducing transaction costs for business, strengthening the financial sector and encouraging investment in infrastructure. Key reform areas were tax and customs reforms, financial sector reforms, rationalizing regional government taxes and fees, public private partnerships to develop infrastructure and to improve policy toward SMEs. (iii) Improve public financial management, governance and anti-corruption. The DPL program was expected to contribute to a more efficient, transparent and accountable management of public resources and to strengthen the institutional framework for addressing corruption (iv) Making services work for the poor. In DPL 3, public service delivery was added as a policy pillar, as the reduction in fuel subsidies led to an increased need to better target the increase in pro-poor expenditures. The objective of the pillar was to improve quality, coverage and utilization of basic services and to make stronger progress toward achieving the MDG goals. As the DPL series evolved, the reform focus shifted in each operation and the reform agenda became broader. DPL1 sought to consolidate macroeconomic stability following Indonesia's exit from its post-crisis IMF program. With macro stability underway, DPL2 focused on creating more fiscal space for more pro-poor expenditure. Following the increase in fiscal space brought on by the reduction in fuel subsidies, the focus of DPL3 shifted to improving service delivery. In DPL4, the focus shifted to deepening institutional reforms. (a) PDO Indicator(s) See Annex 2. Development Outcomes Indicators

(b) Intermediate Outcome Indicator(s) See Annex 2. Development Outcomes Indicators

1

1. Program Context, Development Objectives and Design (this section is descriptive, taken from other documents, e.g., Program Document/ISR, not evaluative):

1.1 Context at Appraisal The DPL series was envisioned at a time when the country was transitioning, politically, administratively and economically. Politically the country was moving from autocratic rule to democracy. In mid-2004, Indonesia held it first directly elected presidential elections in what was the largest voter participation of any presidential election in the world. Universally acknowledged as peaceful, free and fair, the elections did much to consolidate the democratic process in Indonesia. A “big bang” decentralization in 2001 has devolved substantial funds and authority to local governments and new forms of decentralized participation in policymaking have been created. The political stability and the broader embrace of the democratic process that these changes have engendered have been critical to supporting Indonesia’s economic recovery and calming separatist sentiments. Economically, the country’s fundamentals were improving as the impact of the Asian crisis was put behind. The country had successfully graduated from its post-crisis IMF program, growth was picking up, and inflation falling. Therefore at the time of the initial DPL, the timing was right for the government’s economic program to shift from a short-term post-crisis stabilization framework to a longer term strategic growth and poverty reduction agenda. And, among other concerns, investment rates had not yet recovered, exports were not growing like its neighboring countries, and the overall investment climate was weak. These became the areas the government identified as priorities. At the end of 2003, the country was exiting the IMF-supported program and would for the first time be completing its 2004 budget financing needs without the IMF. The Government issued a “White Paper” to signal the continuation of prudent macroeconomic policies and economic reforms. As the Government made significant strides in implementing the White Paper policy actions, particularly in the areas of macroeconomic stabilization and public financial management, it was the Bank’s assessment that a DPL could help serve Indonesia’s financial needs and keep the reform momentum moving forward. The DPL policy actions, though drawn from the government’s reform agenda, also drew on the Bank’s continuous dialogue and engagement with the GoI and the Bank’s extensive analytical work, including annual Development Policy Reviews (Consultative Group for Indonesia), bi-annual Public Expenditure Reviews, flagship reports (decentralization, combating corruption, poverty and trade), policy briefs for the incoming government, and an investment climate assessment. While this ICR looks back at the DPL series as a four-part series in fact it was not intended as such. The original DPL series was a two part operation, DPL1 and DPL2. However, the CAS at the time specified different program lending limits for a base case (where Indonesia was) and a high case. DPL 1 and DPL 2 would have used up the program lending limits under the base case. Thus it was not until the ROC for DPL 2 that there was there was a decision that Indonesia was in the high case and therefore received the go ahead for DPL3. DPL3 then was considered to be the last loan of the series, as it finished off the expected CAS period. However, it was then decided to extend the CAS period by a year and to add another DPL to the series, i.e. DPL 4. As a result, each DPL was planned not knowing if it would be continued beyond the next tranche—this created a level of uncertainty and limited the forward looking ability of the DPL program.

2

1.2 Original Program Development Objectives (PDO) and Key Indicators (as approved) The DPL program supported the government’s reform program under three original core policy areas. (i) Support macroeconomic stability and creditworthiness. The DPL program sought to further improve Indonesia’s macroeconomic fundamentals, by supporting measures to reduce the debt burden, re-profile debt to free up resources for development expenditures, and continue fiscal discipline supported by the mobilization of additional non-oil and gas revenues. Improvement in its fundamentals was expected to lead to upgrades in the country’s credit ratings and give Indonesia access to international capital markets. (ii) Improve the investment climate. Under this policy area, the objective was to focus on reforms to make Indonesia a more attractive place to invest and to strengthen its financial sector by reducing transaction costs for business, strengthening the financial sector and encouraging investment in infrastructure. Key areas of reform focused on tax and customs reforms, financial sector reforms, rationalizing regional government taxes and fees, public private partnerships to develop infrastructure and to improve policy toward SMEs. (iii) Improve public financial management and anti-corruption. The DPL program was expected to contribute to a more efficient, transparent and accountable management of public resources and to strengthen the institutional framework for addressing corruption. Later in the DPL series, civil service reform and improving the decentralization framework became additional objectives.

1.3 Revised PDO (as approved by original approving authority) and Key Indicators, and reasons/justification: In DPL 3, public service delivery became a policy pillar, as the reallocation of the fuel subsidies led to an increased need to better target pro-poor expenditure. (iv) Making services work for the poor. The objective of the pillar was to improve quality, coverage and utilization of basic services and to make stronger progress toward achieving the MDG goals. As the DPL series evolved, the reform focus shifted in each operation and the reform agenda became broader. DPL1 sought to consolidate macroeconomic stability following Indonesia’s exit from its post-crisis IMF program. With broad macro stability underway, DPL2 focused on creating more fiscal space to allow more pro-poor expenditure. Following the successful generation of more fiscal space brought on by the reduction in fuel subsidies, DPL3 shifted focus to improving service delivery. DPL4’s focus remained along the lines of the DPL3, seeking to deepen the process of institutional reform. 1.4 Original Policy Areas Supported by the Program (as approved)

1. Macroeconomic Stability and Creditworthiness. Despite significant progress in post-crisis economic management, Indonesia was the last East Asian country to graduate from the post-Asian crisis IMF program and its credit ratings, despite several upgrades, still trailed neighboring Philippines and Vietnam. With the 2004 budget the first for Indonesia without an IMF program, the country was looking to shore up its creditworthiness and macroeconomic stance to open the doors for external financing. Therefore, and in line with the government’s White Paper measures, the DPL sought reforms to improve debt management and improve fiscal policy. As macroeconomic stability improved -- debt to GDP and the fiscal deficit ratios declined over the DPL period-- emphasis in this pillar shifted to monitoring progress so that more effort could be focused on the service delivery pillar.

3

2. Investment Climate. Investment and exports rates remained relatively low in 2004 and this was attributed to a weak investment climate characterized by high transaction costs for business, tax and regulation complications, a vulnerable financial sector, and deficits in infrastructure investment. In order to improve the investment climate, reforms to the financial sector, tax and customs, and were selected as a key policy areas for the DPL as well as developing a medium term plan for infrastructure development that encouraged public-private partnerships ad reforms aimed at developing SMEs. 3. Public Financial Management & Governance. At the time of DPL1, the then-new government had won the elections on a strong anti-corruption platform and had stated their willingness to make a decisive impact on the extent of corruption in Indonesia. They sought to achieve this through increased accountability and transparency in government financial management and public procurement, and also thorough judicial reforms in the prosecution of corruption. The DPL series supported these objectives by supporting efforts to improve the legal and regulatory frameworks for public financial management, budget management, procurement and auditing. 4. Service Delivery. This pillar, though officially added in DPL3, was identified in DPL2 along with the triggers. The pro-poor orientation of the Government’s annual and medium-term development strategy, and the potential reallocation of public expenditure from untargeted fuel subsidies to high-priority social sectors, provided an opportunity to focus on efforts improving service delivery.

1.5 Revised Policy Areas (if applicable): The following policy areas were added on in the subsequent DPLs. DPL 3: Civil service reform, and social protection. DPL 4: Education, and community driven development Given the stability and resilience of the economy, the government and Bank agreed to drop the macroeconomic stability pillar --there were no triggers for this pillar in DPL4—and instead focus on the service delivery pillar. 1.6 Other significant changes As mentioned, there has continuously been uncertainty around each subsequent DPL in the program. Originally, the DPL series was envisioned as a two part operation, DPL1 and DPL2. Although triggers were identified and met for DPL2, it was not until the November 2006 Regional Operations Committee meeting that Indonesia met the high case and DPL2 could then take place. DPL3 in turn was considered the last loan of the series, but then the CAS was extended for an additional year and the CAS Progress Report extended the DPL program to a fourth tranche. Therefore, the program has continued to have a shifting program horizon and never really focused beyond the next year’s triggers. DPLs’ after the first DPL tended to be characterized by more detailed specific prior actions. This fit with the interaction with Government counterparts who used the DPL process to provide discrete concrete steps (and focal points) for further reforms, with or without the DPL. It also reflects the size and technical depth of the Bank team in Indonesia and the range of areas where they were engaged with the Government and in turn their depth of understanding of the policy or institutional reforms needed. Aside from specificity of triggers the DPLs grew broader in scope. This trend was reflected in the goal of government counterparts choice to raise the profile of their reforms by including them in the DPL policy matrix and to extend the DPL into new areas, including as a precursor to possible stand alone sector

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DPLs. The broader policy coverage saw the number of prior actions increase from 10 in DPL1 to 18 in DPL4, reflecting more government buy in. For example, the DPL served as an effective incubator for the infrastructure DPL reform and a parallel Infrastructure DPL (I-DPL) was established to address the needs of the infrastructure sector. The DPL lending commitments were also higher than originally envisioned either in the CAS and CAS update. Generally this reflected the government’s request for additional amounts, and the Bank’s recognition of the government’s sustained economic and reform. 2. Key Factors Affecting Implementation and Outcomes 2.1 Program Performance

Reflecting the momentum of the reform process, the DPL series was delivered annually and on a timely basis with no delays. As the DPL series progressed, the scope broadened and the number of prior actions increased. Overall there was also little variation between the triggers identified and the prior actions required to have the next DPL approved. Only in DPL3 were there some changes between DPL2 identified triggers and the prior actions identified. In the case of DPL3, one trigger was fully replaced, others were kept as triggers but not made into prior actions, and some triggers were split to give credit for actions taken. To compensate, additional sub-measures were added to investment climate and PFM.

First Development Policy LoanList prior actions from Legal Agreement/ Program Document StatusPillar 1: Macroeconomic Stability and Creditworthiness

Reduction of government debt to GDP to below 60%. Fulfilled Issuance of international bond. Fulfilled Divestment of majority shares in all IBRA banks. Fulfilled

Pillar 2: Investment Climate Progress in establishing a financial sector safety net. Fulfilled Effective functioning of the Investment team. Fulfilled Progress in tax administration and customs reforms. Fulfilled

Pillar 3: Financial Management and Anti-corruption Issuance of implementing regulations for State Finance Law. Fulfilled Organizational reform at the Ministry of Finance, including first steps to establish

a Treasury Single Account. Fulfilled

Presidential Decree on Government Procurement. Fulfilled Continuation of special audit program for SOEs. Fulfilled

Second Development Policy Loan

List prior actions from Legal Agreement/ Program Document StatusPillar 1: Macroeconomic Stability and Creditworthiness

Develop and implement a debt management strategy. Fulfilled Progress in reducing subsidies to the non-poor. Fulfilled Make tax revenue administration more efficient through expansion of modern tax

offices. Fulfilled

Pillar 2: Investment Climate Continue establishing a financial sector safety net including implementing the first

phase of the removal of the deposit guarantee and clarifying roles with respect to bank closure and emergency operations.

Fulfilled

Develop strategy to strengthen non-bank financial institutions. Fulfilled Develop a medium-term action plan and effective framework to coordinate the Fulfilled

5

development of SMEs. Complete draft amendment of Law No. 34 to move from negative to positive list

for regional tax items to restrict the creation of nuisance and/or economically harmful charges and levies.

Fulfilled

Develop a medium-term plan for infrastructure development that encourages public-private partnerships.

Fulfilled

Pillar 3: Financial Management and Anti-corruption Issue additional implementing regulations for State Finance Law, Treasury Law

and State Audit Law. Fulfilled

Treasury Single Account timetable and activity plan adopted for the consolidation of bank accounts.

Fulfilled

Implement Law No.33/2004 by drafting government regulations. This includes the redesign of KMK35 and re-allocation of deconcentrated central government spending to the DAK mechanism.

Fulfilled

Investigation unit is established and fully operational in the IG MoF, vested with the necessary legal powers to investigate all MoF employees.

Fulfilled

Third Development Policy Loan

List prior actions from Legal Agreement/ Program Document StatusPillar 1: Macroeconomic Stability and Creditworthiness

Create an operational Fiscal Policy Office by 2007 with capability and access to information sufficient to provide analysis of proposed tax, tariff and financial market policies.

Fulfilled

Pillar 2: Investment Climate Continue implementation of the financial sector safety net including implementing

the lowering of the coverage of the deposit guarantee to Rp 1 billion. Fulfilled

Complete the reorganization of Bapepam/DGFI. Fulfilled Submit to Parliament the Warehouse Receipts Law that establishes a system of

designated warehouses providing official, centrally registered receipts for commodities stored by farmers and SMEs.

Fulfilled

Propose revisions to Tax Law to allow taxpayers to delay the payment of tax assessments from disputed audits.

Fulfilled

Risk management function and PPP framework is operational and legally empowered.

Fulfilled

Pillar 3: Financial Management and Anti-corruption Extend the pilot for zero-balance non-salary accounts to at least 50 KPPNs. Fulfilled Improved fiscal reporting by timely presentation of aggregate Central Government

financial statements for fiscal year 2005. Fulfilled

Develop a separate unit that handles the modernization program on a full-time basis.

Fulfilled

Issue ministerial decrees for blue-book and on-granting procedures. Fulfilled Pilot civil service reform through the design of a new job classification and

remuneration policy for high-ranking state officials. Fulfilled

Pillar 4: Service Delivery Monitor effectiveness and undertake independent operational assessment

including fiduciary aspects of the new compensation programs funded by reallocated fuel subsidy funds.

Fulfilled

Fourth Development Policy Loan

List prior actions from Legal Agreement/ Program Document StatusPillar 1: Macroeconomic Stability and Creditworthiness Pillar 2: Investment Climate

Issue a comprehensive SME policy package that increases access to finance and implements the Warehouse Receipts Law.

Fulfilled

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Implement good corporate governance and risk management standards, particularly in state-owned banks and continue implementation of financial sector safety net.

Fulfilled

Implement the Investment Law, its supporting regulations, and new operating procedures.

Fulfilled

Simplify or eliminate unnecessary/redundant business licenses, procedures, and multiple registration requirements.

Fulfilled

Improve VAT by reducing time for VAT refunds through the implementation of the DG tax regulation No. 122/2006.

Fulfilled

Issue DoF Decree on tax audit procedures that allow taxpayers to request details of audit finding and a review in case of disputes after closing conference but before completion of audit.

Fulfilled

Roll out a National Single Window with on-line clearance of merchandise. Fulfilled Enhance tariff-setting through improved governance procedures, better

information technology, and research capability. Fulfilled

Pillar 3: Financial Management and Anti-corruption Implement Medium-Term Expenditure Framework with a system of clear forward

estimates for the 2008 budget. Fulfilled

Continue to consolidate core government (revenue and expenditure) bank accounts.

Fulfilled

Implement transparent accountability arrangements for RDI and RDA accounts. Fulfilled Fully operationalize NPPO and issue draft procurement law. Fulfilled Complete the regulatory framework for issuance of sub-national government

bonds. Fulfilled

Establish a Remuneration Commission or interdepartmental team to recommend pay policy and pay levels for high-level state officials.

Fulfilled

Develop a comprehensive civil service reform plan on a larger scale. Fulfilled Pillar 4: Service Delivery

Develop an enhanced assessment framework for selected service delivery programs.

Fulfilled

Establish competency standards for teacher certification and the instruments for measuring compliance with those standards.

Fulfilled

Permit community spending over multi-year periods and clarify procurement procedures for national budget-funded CDD programs.

Fulfilled

2.2 Major Factors Affecting Implementation: As the overall performance of the DPL program has been timely and satisfactory, the major factors affecting implementation have been positive and conducive to the continued success of the program. Even with the devastating impact of the 2004 tsunami, progress on the identified triggers was met. Strong government partnership. Key to the DPL’s success is the partnership the teams have sustained with the government. There was government buy-in of many specific elements of the reform agenda that emerged from the analytic and advisory activities of the WB. However, in many instances, the DPL process, and the discipline and attention to detail it implied, came to be viewed as an important tool for key champions of reform within the economic ministries. This was particularly important to bringing about the high-level policy focus and bureaucratic consensus needed to advance and implement the reform agenda within what was and is a highly complex institutional environment. This was particularly evident in DPL reforms that called for multi-agency coordination. To implement the DPL, the Government created a coordinating committee under the leadership of first the MoF and later the Coordinating Ministry for the Economy and including the Planning Ministry (BAPPENAS), which was comprised of the implementing agencies responsible for carrying out the program. This committee worked with the Bank on an on-going basis. Implementation was aided by the fact that there were a

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number of key government counterparts—both top and mid-level officials—who were committed to enacting the reforms and to engaging with the task team on monitoring progress. The result has been a DPL program in Indonesia driven by the government’s own reform agenda. Stable economic and political environment. During this DPL period, the government faced a generally favorable economic environment, both externally and domestically. There has also been political stability with the same government in place. At both an economic and political level, this kept the reform agenda reasonably consistent throughout the DPL, and as the DPL prior actions were based on the government’s reform program, this meant that commitment and ownership was consistent from the beginning. Decentralization of task team management. The task team leaders of the different DPL loans have been based in the field. In addition, most of the team members were also based in the field office and therefore were able to cultivate close working relationships with government counterparts. This facilitated dialogue, especially as the breadth and depth of the engagement grew. The engagement on the DPL also had positive synergies with the Bank’s active work programs in the respective pillars of the DPL, including trust funded work on trade and investment, the public financial management work done under GFMRAP and more recently PINTAR and the poverty team and public expenditure teams work. Coordination with development partners. Keeping with the Bank’s agenda of strong harmonization and coordination between development partners, the DPL series was prepared in collaboration with the Government of Japan (DPL1-4) and the Asian Development Bank (DPL2-4). The GoJ contributed $400 million for the series and the ADB provided parallel financing of $600 million. The leveraging of resources also provided a stronger incentive to achieve the triggers, in addition to sending a consistent signal on priority reforms and reducing transaction costs for the government. This said, increased leverage from donor coordination also came at a price, namely in the form of additional triggers. The pressure for each donor to leave their imprint meant less control over some of the triggers identified, however, it also helped delegate out some of the monitoring and dialogue. 2.3 Monitoring and Evaluation (M&E) Design, Implementation and Utilization: Monitoring of the DPL program was based on continuous dialogue with government counterparts to assess progress and bottlenecks. With team members in the field, monitoring was done on a relatively continuous basis and supported by complementary investment projects, TA and/or AAA activities that aided in the design or implementation of the reform. The DPL program also benefited from several bilateral donor-funded trust funds, which helped underpin the policy dialogue on the DPL program. Starting in DPL2, a series of indicators were identified to provide a baseline data to measure progress, and additional indicators added as the policy areas broadened in the sequential DPLs. 2.4 Expected Next Phase/Follow-up Operation (if any):

DPL 5 will begin a new series of programmatic loans under the 2008 Country Partnership Strategy (CPS). This loan builds upon the triggers identified in the DPL4. It is anticipated that the new series will span another three operations, covering the period of the CPS FY09-12. The new series will seek to consolidate and deepen reforms along the same objectives and pillars of DPL1-4, namely investment climate, public financial management and governance, and service delivery, though there will likely be differences in the sub-focus areas.

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3. Assessment of Outcomes1

3.1 Relevance of Objectives, Design and Implementation Rating: Highly Satisfactory DPL1: Highly Satisfactory DPL2: Highly Satisfactory DPL3: Highly Satisfactory DPL4: Highly Satisfactory The DPL series was built around the 2003 CAS pillars (Investment Climate and Growth, Service Delivery, and Governance and Anti-Corruption). The focus of the CAS was in turn based on the Indonesian Government’s exit strategy from the IMF program published as Whitepaper in 2003, their medium term plan (RPJM), subsequent annual government work programs and periodic investment climate reform packages. The Government focus on improving the investment climate and improving Governance were a natural outgrowth of the conditions at the start of the DPL program. Investment had been slow to recover since the crisis in the late 90s and growth was well below historical levels, moreover there was underinvestment in public services and the quality of services was generally poor. Thus the Government plan (and Bank CAS) reflected the broad consensus that measures were needed to continue to improve the macroeconomic situation, directly address investment climate and improve spending. Cross cutting the problems with the investment climate and service delivery were governance concerns, and there was an active public financial management reform agenda in the making, building on a suite of laws on Finance, Treasury and Accounting. Over time the focus and weight of the DPL series shifted in two significant ways. First, the focus on macroeconomic stability was reduced and service delivery increased as the macroeconomic situation improved, especially as fiscal constraints fell and service delivery naturally increased as a priority. Second, infrastructure which was initially included in the umbrella DPL as an element of the investment climate, outgrew this role to become an important government agenda on its own, and this is subsequently occurring for education. As noted the DPL has drawn its focus from the Government’s reform programs in various areas. The Bank also has in place large decentralized teams with engagements with the Government in almost all areas of the DPL (investment climate, PFM and service delivery). In fact, in part due to the DPL, these engagements have deepened and become increasingly institutional in focus and are agendas that feature prominently in the new 2008 Country Partnership Strategy. However, the depth of these engagements also results in relatively detailed policy actions. The breadth and knowledge of the Government’s reform agenda has been a strength in the design and implementation of the DPL program as it has allowed the teams to understand constraints and better deliver a relatively high percentage of agreed on actions while pushing faster in some areas and slower in others as opportunities and obstacles appear. In summary the focus of the DPL series has been on reform agendas central to Indonesia’s development and supported by the engagement of the Bank team in these areas. This has had implications for the design and implementation of the policy actions chosen, with more and more detailed actions than generally considered best practice and more of an institutional focus.

1 For programmatic DPL, sections 3 through 5 will include and justify individual ratings for each operation in a

programmatic series.

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3.2 Achievement of Program Development Objectives Overall Achievement of Objectives Rating: Satisfactory DPL1: Satisfactory DPL2: Satisfactory DPL3: Satisfactory DPL4: Satisfactory The DPL series contributed to more transparent and efficient government operations. Among other things the DPL supported macroeconomic objectives including continued debt reduction (in early years), the widening of the tax base, and improved financial stability. To support growth and attract investment, obstacles to investment were addressed, including such long time issues as time to start a business, VAT refunds, and a National Single Window for trade. To improve governance and transparency of public spending, involved improvements to and modernization of the public financial management and revenue administration systems, including the synergy of the DPL and GFMRAP (budget and treasury) and PINTAR (tax) projects. Even the more recently added DPL agenda on public service delivery has already begun to bear fruit with steps to support increased spending on the poor, improved evaluation of poverty programs and better targeting of those in need as well as improvements to education focused on teaching. Progress on the individual pillar objectives and Bank contribution during the DPL process is detailed below. Macroeconomic Stability and Creditworthiness Rating: Highly Satisfactory Over the period of these DPLs, economic growth averaged 5.6 percent (2004-07), budget deficits were conservative (always less than 2 percent of GDP) and foreign reserves rose to record levels. By 2007 the GOI had reduced its debt to GDP to less than 35 percent and was already closing on its 2010 debt-to-GDP ratio target of 30 percent, a striking reduction from 60 percent in 2003. In a reflection of the country’s improved economic footing, the three major credit agencies raised their credit ratings by three notches or more since 2003. Additional macroeconomic contributions under the DPL were focused on improving the Government’s debt management capacity (in the aftermath of the creation of a domestic bond market for Government Bonds) and the development of a fiscal policy office to improve economic management capacity, and both of these institutions have been developing satisfactorily. Over the DPL period the Government took measures to expand the tax base and improve tax efficiency and taxpayer service. The Government introduced and has extended modern tax services to virtually all medium and large taxpayers. More recently they developed, submitted to Parliament and passed the first two of three transformative tax laws (tax administration, income tax and VAT tax [pending]). The tax administration law restored the balance between taxpayers and tax officers, while the income tax law reduced rates on individuals and corporations while at the same time broadening the base to improve compliance. Also put in place have been measures, to modernize registration and payment systems (including the introduction of electronic systems), improve incentives to encourage investment and introduce procedural changes to improve compliance. Owing, in large part, to the measures adopted by the Government, the number of tax payers increased and taxes were growing rapidly, reaching close to 50 percent more in nominal terms in 2008 than 2007. The DPL 2 agenda to reduce untargeted subsidies to the non-poor was successful after the fuel price increases in 2005. Expenditures were shifted from un-targeted fuel subsidies to regional government transfers and social spending (poverty programs, education and health). In 2005, picking up on the DPL agenda the government raised fuel prices by more than 150 percent (cumulative), resulting in the decline of fuel subsidies from 4 percent of GDP in 2004 to 2.7 percent in 2007, before they rose

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rapidly again in early 2008. This increase in fuel prices (reduction in subsidies) is estimated to have directly freed up $10 billion a year. Some of these additional resources were used for a cash-transfer program targeting 19.1 million poor households in 2006 and to increased central government education (and to a lesser extent health) expenditures as well as a scaled up Community Driven Development program based on the Bank’s KDP and UPP programs (called PNPM) and a pilot Conditional Cash Transfer program. However, in 2008 as oil prices rose to record highs, fuel subsidies again rose sharply. In response in May 2008, despite pre-election concerns the government again increased fuel prices by almost 30 percent and again provided an improved cash transfer program designed to protect the poor from the fuel increase as well as rapid food price increases. Rating agencies responded favorably to Indonesia’s lower debt ratio and reform packages. Standard and Poor’s upgraded Indonesia’s credit rating from CCC+ in 2003 to BB- by 2008, Moody’s raised its ratings from B2 to Ba3, and Fitch raised theirs from B to BB. In supporting their ratings upgrade, the agencies cited debt reduction as the primary cause, but also cited the government’s commitment to broad based reform, including changes to investment laws, customs and taxes, and also to explicitly fiscal reforms, specifically in treasury and budget-- all supported by the DPL program. Investment Climate Rating: Satisfactory In the Investment Climate pillar, the DPL series performed Satisfactory in achieving its outcomes and objectives of creating a more attractive place to invest and investment rates have risen, though the full impact of some of the reforms has yet to fully feed through. The DPL’s performance in the broad array of areas indentified as critical to improving the investment climate, is summarized as: regulatory reform (moderately satisfactory, due to delays), taxes (highly satisfactory), customs trade reform (satisfactory), the financial sector (satisfactory) and strengthening small businesses (satisfactory, though still early). Over the course of the DPL series the Government made strides on improving the investment climate, though much remains to be done. Following up on the 2003 White Paper starting in 2006, the government began to issue economic policy packages covering investment climate, infrastructure and financial reform. These packages were designed to indicate priorities and improve coordination by laying out actions, timelines and responsibilities which then became the basis of the DPL engagement, with key measures in the packages chosen as DPL actions. The actions in these investment packages have timelines that include agendas well into 2009, nevertheless, there has been some progress on observable outcomes as investment rates rose significantly from below 20 percent of GDP in 2003 to 25 percent in 2007. Business perception also continues to improve. A study of Indonesian firms (commissioned as part of the Banks engagement in this area) indicated that by mid-2007 (latest available) improvements in VAT refunds, tax filing processes, informal payments and import and custom clearance were all being cited positively. Surveys of foreign investors (JBIC) also confirm this. Finally Fitch’s credit ratings upgrade in February 2008 directly attributed the pick-up in investment to the government’s efforts to improve the investment climate. Indonesia’s overall investment climate has improved as also measured by the Doing Business rankings. In Doing Business (DB) 2008, Indonesia ranked 123 out of 178 countries. Between the 2007 rankings and the 2008 rankings, its overall rank rose ten places and Indonesia made double-digit jumps in the categories of 1) dealing with licenses, 2) paying taxes, and 3) trading across borders. Between the DB 2006 and DB 2008 rankings, on comparable data, Indonesia showed significant strides in the following areas. In starting a business-- where Indonesia ranks near the bottom globally -- it has made big improvements. Starting costs declined from 102 percent of GNI per capita to 80 percent, and the time taken declined from 151 days to 76 days. The cost of dealing with licenses also fell from 370 percent of income per capita to 287 percent. On access to credit, within a short time span of two years, credit

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information from a public registry rose from 0.0 percent of adults to 20.5 percent, much higher than the OECD average level of 8.6 percent. This was achieved through a new regulation that requires all loans to be registered, including credit cards. On paying taxes, although the number of tax payments remained the same, the time taken to prepare and pay for taxes was halved from 576 hours to 266 hours as electronic registration and filing were implemented. Improvements on the trade indicators resulted in fewer procedures taking less time and were enough to jump Indonesia several notches in the rankings. However, while there were no major negative shifts in the indicators, little to no improvements were made in ease of employing workers, registering property, protecting investors, enforcing contracts or closing a business.

Regulatory reform has streamlined procedures and there is an improved legal framework for investment. A consistent focus of the DPL has been on issues related to Investment including the Investment Law and its follow-on. The Law (passed in March 2007) was very well received and featured among other things, (a) a unified framework for investment, (b) equal treatment of domestic and foreign investors, (c) a clear and well defined negative list, (d) removal of forced divestment and (e) an extension of the duration of foreign investment, (f) reaffirms the principle of no expropriation without compensation and free repatriation of capital, and (g) allows for internationally recognized arbitration. However, the development of the negative list has been more problematical. Increased transparency and clarity desirable in their own right, however, revealed many previously unknown measures designed to restrict foreign investment. Further, Government agencies sometimes added other protectionist measures. In addition, these changes to the negative list introduced legal uncertainties around grandfathering, divestment and the status of public companies and began an extended dialogue between investors and the Government around these complex matters. The National Team for Accelerating Investments and Exports (PEPI) is charged with formulating investment policies and resolving key constraints faced by the private sector. Thus the DPL agenda moved to providing policy and institutional support for PEPI, including on issues around the negative list. Despite the ups and downs the Bank engagement in this area has been highly appreciated by the business community (domestic and foreign). Another focus in the regulatory area has been on the reduction in the time to set up a business. The World Bank and IFC teams have worked with the Government to improve this measure which was among the worst in the region at 168 days in the DB report published in 2004. Doing Business in 2007showed a reduction in this indicator to 97 days but there was a setback in Doing Business 2008when the number rose to 105 days. Despite the adoption of a number of measures designed to reduce the amount of time to establish a company, one measure -- delegating authority to legalize companies to the local offices of the Ministry of Justice-- ended up adding more to start-up time than the other measures cut. The Bank team alerted the Government to this problem and it was fixed in September 2007. With the elimination of this measure and a number of additional reforms, Doing Business 2009 showed a reduction in time to start a business to 76 days. Though technically (on paper) the government has streamlined procedures even further down to 16 days—on par with the OECD average of 15 days— implementation obstacles still need to be overcome. The focus on SME policies, especially on strengthening their access to finance, was put in place in July 2007 and the impact is too early to assess. Reforms in tax administration have reduced the time for VAT refunds. More than Rp 10 trillion (roughly US$1 billion) in outstanding VAT refunds (some outstanding since 2002) were settled and new procedures put in place to expedite the issuance of VAT refunds to export companies. Standards (which had been up to a year) were set at 7 days for “golden” taxpayers, 2 months for low risk exporters, and 4 months for medium risk exporters. Standard operating procedures for a complaint management system were developed and issued. The DPL team (including Japanese partners) identified tax audit procedures as an especially critical area for reform. There were concerns that tax auditors increased assessments and forced taxpayers to pay the full amount upfront. This created costs and governance concerns. The recent tax administration law allows taxpayers to self-asses amount from disputed audits until they are resolved

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in tax court (although interest and fees may be added if they lose). This provision becomes effective on disputes from 2008 onward. Progress on trade and customs reform was advanced through the development of Indonesia’s National Single Window (NSW) and paperless import clearance. The implementation of the Indonesian NSW, as supported by the DPL and our trade/investment engagement, is the country’s most important trade facilitation initiative. Under the single window, exporters and importers are no longer required to apply individually to multiple agencies, significantly reducing the 26 days (DB2008) currently required, and reducing associated governance problems and costs. A pilot is underway in the Jakarta port (where the bulk of Indonesia’s imports and exports occur). The resulting NSW will be expanded to include all other ports as part of the Government’s commitment to the establishment of an ASEAN Single Window. Establishing the NSW is a major institutional and coordination challenge involving 32 ministries and agencies in all. The Coordinating Ministry has used the Bank’s engagement to support this agenda and the DPL to reinforce the commitment. Other trade activities in the DPL included improving the technical capacity and administrative procedures of Team Tariff as they have gradually introduced a tariff harmonization program. The DPL has supported improvements to the stability of the financial sector. The initial focus of the DPL series was on the need to reduce the potential moral hazard created by the blanket guarantee of deposits, introduced during the Asian crisis. This involved a focus on the establishment of a deposit insurance scheme and the phasing out the blanket guarantee, By DPL4, coverage on deposits was reduced from a blanket guarantee (where it was in 2003) to Rp.100 million (roughly $10,000), and this was done without disruption. This was a notable achievement as Indonesia stands as one of the few countries in the world that has removed its blanket guarantee on schedule. Unfortunately, the current global financial turmoil has resulted in a number of countries around the World, including Indonesia’s neighbors Singapore and Malaysia, now instituting blanket guarantees. In response Indonesia raised the guarantee to 2 billion Rupiah (roughly $200,000) which is estimated to cover more than 99 percent of accounts. Most recently the DPL support in the financial area has included support for the Government initiative to clarify Bank Indonesia’s role as lender of last resort, the establishment of the institutional processes and mechanisms for resolving troubled banks and to support the development of a financial sector safety net (and the institutions needed to operate it). Across the board, financial sector indicators strengthened over the period of the DPL series. The original objectives included strengthening the financial sector by reducing the role of state owned banks and increasing the share of financial assets at non-bank financial institutions (NBFI). The share of state-owned banks in the banking system is now around 36% – a significant 10 percentage point decrease since 2003, indicating the increasing role of private banks in the sector. There was less than expected progress on NBFIs, as their share in 2007 at 22.3% of total financial sector assets, is not much different than in 2003 (20.3%), reflecting the continued dominance of the Banking sector. However, generally Indonesia’s banking indicators, in mid 2008, point to a healthy financial system. Ratios such as net interest margin, return on assets and return on equity have been strong. And, after peaking in 2005, non-performing loans, particularly in state-owned banks are down sharply. In terms of diversification, SME lending has been rising rapidly and now accounts for a major share of the lending portfolio. The DPL agenda on public private partnership in infrastructure was shifted to the infrastructure DPL where it continues to be a key focus although progress is slow. Labor reform and privatization are two aspects of investment climate that have consistently been raised as obstacles to investment and growth that were not addressed in the DPL. Given their importance for labor absorption and infrastructure this issue remains relevant. In fact the DPL teams have raised the issue of how best to approach these areas with the Government and if there were reforms in

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these areas that might be considered for support under the DPL. The Government feedback has been consistent that these areas were highly politicized and that World Bank support, in particular, would be counterproductive, and could hurt support for reform in other areas. As the DPL is not the only way the Bank engages with the Government, there is an ongoing effort to better assess the issues and stakeholder attitudes on labor, including on key issues such as severance through an upcoming ESW. Key policy issues related to SOEs, especially in energy, are included in the infrastructure DPL agenda.

Public Financial Management and Anti-Corruption Rating: Satisfactory With respect to this pillar, the DPL series has overall performed Satisfactory—with some areas performing strongly counterbalanced by those that have lagged. To improve the efficiency, transparency and accountability of public finances, the DPL series focused on three key areas of reform: i) modernizing public financial management systems –including treasury single account (highly satisfactory), budgeting (moderately satisfactory), and procurement (moderately satisfactory) and to a lesser extent ii) strengthening anti-corruption institutions (highly satisfactory) and later, iii) civil service reform (satisfactory). The progress achieved in these areas has relied heavily on the Bank’s Government Financial Management and Revenue Administration Project (GFMRAP). Changes in the legal and regulatory architecture are now largely complete and the focus is on implementing a modern PFM system. Historically, Indonesia’s government financial operations were based on outdated laws (from 1925) that had been updated through a series of inadequate decrees. The old PFM system was characterized by (a) systematic and pervasive corruption, (b) collusion and nepotism in part as assignments were unclear, (c) low transparency and poor enforcement, (d) opaque and inefficient budget formulation (making it difficult to quantify basic concepts of the budget), (e) delayed budget execution, (f) weak monitoring arrangements, (g) corruption and collusion prone procurement processes, (h) fragmented and unreliable accounting and reporting, and (i) unclear mandates of government audit bodies. The DPL series supported various regulatory and implementing measures needed to create and operate a modern PFM system, including laws on State Finance, State Treasury and State Audit laws, a presidential decree on procurement and follow on institutional and operational measures. A key achievement under the DPL has been the implementation of the Treasury Single Account (TSA) to improve cash management of public finances. At the start of the DPL series, more than 18,000 separate commercial bank accounts—and other accounts unknown to the Treasury-- handled government funds. As an initial step, DPL1 supported addressing the regulatory deficiencies in the PFM system, including the passage of several laws defining the regulatory framework. This was accompanied by the reorganization of the MOF, splitting Treasury and Budget functions, in part designed to address governance weaknesses including in budget execution and cash management. DPL2 then supported the implementing regulations underlining these laws and adopted an implementation plan. DPL3 piloted the TSA on the expenditure side to zero-balance accounts in over 50 KPPNs. DPL4 extended the TSA coverage to all government expenditure accounts. The push to meet the DPL commitments has almost certainly accelerated implementation of the TSA. Progress on revenue accounts is expected to be completed under DPL5. Budgeting procedures have improved but execution remains problematic. The DPL program in combination with GFMRAP has helped reinforce reforms designed to re-engineer business processes across the budget cycle. The Government budget is now compatible with the international standard GFS classification. Fiscal reporting is quite comprehensive and timely. Elements of a Medium-Term Expenditure Framework and Performance Based Budgeting have been introduced but progress is uneven

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with the planning and reporting side of the budget process definitely improved, but budget execution weak, with about 50 percent of capital expenditures still spent in the last quarter. Procurement reform has been slow, but did progress toward the end of the DPL. The original goal had been to strengthen the National Procurement Office, located within the Planning Ministry. Now the government has decided that the National Procurement Office should be an independent office responsible directly to the President. As an independent agency with adequate resources, authority and strong political backing, this change in direction will place it in a stronger position to drive public procurement reform. The establishment of this office was achieved in 2007 (DPL 4) and is now being staffed out (2008). However, because of delays due to the shift in strategy on the NPPO, there has been less progress on other procurement reforms, especially on developing a comprehensive national public sector procurement law. This law is needed to address inconsistencies resulting from decentralization, whereby different levels of Government are issuing procurement procedures. Progress on regulations and the development of standard tools, such as bidding documents and user manuals, also need to be accelerated. To address anti-corruption, institutions now exist to investigate and prosecute corruption cases. Since 2003, anticorruption institutions have been established and given considerable autonomy and authority, and existing institutions are increasingly active. The number of cases prosecuted has gone up dramatically and high profile corruption investigations have been launched at every level of government and SOEs--including mayors, governors and ministerial level officials. Since 2004, more than 114 former and public officials-- have been legally processed under corruption investigations. Newspapers have daily accounts of new cases and the latest prosecutions. This agenda was working well and given the engagement with key economic agencies, the focus of the DPL was shifted to addressing anti-corruption through civil service reforms (after DPL 2). Over time a focus on civil service reform was added. While reforms advanced in both the investment climate and public finance, it was clear that civil service incentives were a key constraint to policy implementation as well as delivery of public services. Thus as opportunities arose to support the civil service reforms they were taken. The first entry opportunity was to support the development of a comprehensive reform of the structure and remuneration framework for high-ranking state officials (Ministers, Judges, Parliamentarians, etc). To provide some comparability a task force was set up (and supported) that was tasked with examining the total compensation package of these high level officials with the goal of creating a more transparent, systematic, and coherent framework for pay and allowances. Subsequently the DPL has begun to focus on the need for civil service reforms in support of PFM reforms at the MoF. MOF has now implemented a number of important reforms within the Ministry to improve its efficiency and staff performance. New, improved job descriptions have been introduced and a new grading scheme has been added and is linked to responsibility, complexity and work load of each graded position. Due to the additional allowance determined under the new grading scheme, take home pay for MOF officials has considerably improved. Performance based management has been introduced and key performance indicators have been established at the level of Echelon 1 units and is being introduced downstream. An Assessment Center is being established and vacancies are being filled after competitive selections based on merit. Making Public Service Delivery Work Rating: Satisfactory

With DPL 3 (end 2005), the macroeconomic emphasis of the DPL program was replaced with an emphasis on public service delivery and especially on improved poverty programming (reflecting this pillar in the CAS). As noted above Indonesia’s macroeconomic situation changed dramatically in

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2005. That year saw the initial very rapid run up in international oil prices and domestic fuel prices were also raised. Initially fuel prices were increased by 30% in March, in July subsidies were eliminated for all fuels except residential kerosene, transportation diesel and low octane gasoline and by October another increase in administered fuel prices of over 115% was enacted. The total increase for the year was in excess of 150%. The higher international oil prices accompanied by reduced subsidies created significantly greater fiscal space (an estimated $10 billion annually) and social spending was increased, although initially in rather ad hoc ways. In particular the first round of fuel price increases in March of 2005 was accompanied by poverty programs aimed at providing rice to the poor, grants to schools, health care to the poor and village infrastructure. The second round of fuel increases was accompanied by a cash transfer program that ultimately reached 19.1 million households. With these fuel price increases being put in place over the course of 2005 (as DPL 3 was being developed) the focus shifted to assessing existing and potential poverty programming as an objective for 2006. The results of these assessments proved to be illuminating, demonstrating that some of the programs were far more effective than others. For example, the results on the village infrastructure indicated that this program was not at all effective and that the Bank programs such as KDP and UPP were far stronger in terms of governance, poverty reduction and income generation. This then set the stage for what ultimately became a national scale up in these programs. The education grant program BOS received relatively positive reviews and has now also been scaled up including through the support of the recently agreed BOS-KITA loan. Another, byproduct of this focus on evaluation and poverty programming was a consultancy for a conditional cash transfer program. The consultancy for this program in 2005 led directly to the establishment of the unconditional cash transfer program above, and the current conditional cash transfer pilot. Starting with DPL 4 , the aim has been to push ahead with the institutionalization of poverty programming assessments for Government (and not just loan funded programs). In addition measures designed to make the operation of PNPM (by then a national program) more effective and an attempt to extend the DPL engagement beyond the core agenda into education reform, especially teacher certification were added. The assessment of the initial cash transfer (2005) assessing targeting and performance was used when the cash transfer program was reinstated to accompany the May 2008 fuel price increase. Progress has continued and comprehensive monitoring and evaluation function was created with the establishment of a high level unit responsible for improved performance evaluation at the Planning Ministry. The DPL 4 agenda on Education was achieved and a measure proposed for DPL 5, to address teacher remuneration. However, the need for the DPL support for Education reform has been reduced as the Bank Education Team agenda with the Ministry has deepened around programmatic initiatives including BOS-KITA. 3.3 Justification of Overall Outcome Rating

Rating: Satisfactory DPL 1: Satisfactory DPL2: Satisfactory DPL3: Satisfactory DPL4: Satisfactory Success has been not always been linear and it has been greater in some areas than others, but overall the DPL program has delivered highly relevant reform progress in the areas chosen. When the DPL began the macro situation was uncertain, investment and PFM reforms were in their infancy (or not even underway) and not much attention was being provided to improving service delivery (particularly in the area of poverty). Looking back, the DPL has satisfactorily supported macro, investment, PFM and service reforms and served as an incubator for other bank efforts, most notably the scale up of PNPM, and the infrastructure DPL. In part this is attributable to a consistent economic environment maintained by

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consistency among key counterparts. At the end of the DPL 4, while there remains much to do, the institutional and policy foundations for future reforms look to be stronger in each of the pillars.

3.4 Overarching Themes, Other Outcomes and Impacts (a) Poverty Impacts, Gender Aspects, and Social Development The poverty rate rose in 2006 when cash transfers were not sufficient to compensate for rising fuel and rice prices. However, by 2008 it had resumed its decline and was 15.4 percent (mid-2008) as compared to 17.4 percent (2003). This decline in poverty is not commensurate with the economic growth over this period – when as noted growth averaged approximately 5.5% and per capita income in USD almost doubled from $930 (2003) to $1650 (2007).) The failure to deliver improved economic outcomes despite the recovery in growth is not entirely understood, but has served as a motivation to the Government. The DPL series has attempted to address poverty outcomes in two ways. First the DPL 2 agenda directly suggested shifting resources away from non-targeted subsidies to pro-poor spending including on health and education. Second, once spending on various pro-poor programs was undertaken, in the aftermath of the series of fuel price increases, the DPL supported an increasingly rich program designed to institutionalize the evaluation and implementation of poverty programs to improve poverty targeting. (b) Institutional Change/Strengthening (particularly with reference to impacts on longer-term capacity and institutional development): The DPL supported numerous reforms aimed at institutional strengthening across the pillars and in fact recent DPLs have increased the focus on institutional reform as the constraint to reform progress. Institutional reforms have focused on improving analytical capacity, on using technology to enhance efficiency, and better and more transparent reporting. These reforms were also supported through other Bank instruments, including technical assistance, investment loans and trust funds. On the macroeconomic front, the DPL supported the institutional arrangement and capacity building around debt management and the development of a fiscal policy office to provide analysis of proposed, tax, tariff and financial market policies. In the investment climate area institutional strengthening has focused on the National Team on Accelerating Investments and Exports (PEPI), which serves as a liaison between the government and private sector, to coordinate and follow-up on investment and export issues; Team Tariff (an inter-ministerial team); the Financial Stability Forum and modern tax offices. On public financial management, the DPL has largely reinforced GFMRAP organizational reforms designed to implement a Treasury Single Account; improved budgeting; a the National Procurement Office and in the civil service area a remuneration task force and reforms at the Ministry of Finance. On service delivery, an achievement of the DPL was to improve the efficiency of resources being spent on poverty programs by conducting evaluative assessments of the poverty programs. An assessment of more than 14 poverty programs was made to identify which programs were not effective—such as the village infrastructure—and shift those resources into programs that were stronger---such as the PNPM, BOS and cash transfers. The assessment also highlighted the duplication of programs and poor targeting. In part, due to these results the government has created a high level monitoring and evaluation unit.

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(c) Other Unintended Outcomes and Impacts (positive and negative): On the positive side it appears that over the course of the DPL series, there has been a gradual improvement in the perception of Government counterparts about the Bank, lending and program loans. Initially there was skepticism concerning the DPL as a Bank/externally driven agenda not well matched to Indonesia’s needs. However, the Bank’s consistent support for a strong Indonesian led reform program (as well as the reliable financing) has reduced this skepticism at least among counterparts and may have contributed to an environment where the Bank can be more effective in areas not directly linked to the DPL. Initially the DPL was considered a temporary phenomenon, something needed while regular lending recovered but over time all sides seem to have come to an appreciation that it can play a role as one among a number of Bank tools needed to support policy reform. 3.5 Summary of Findings of Beneficiary Survey and/or Stakeholder Workshops NA

4. Assessment of Risk to Development Outcome

Rating: Moderate DPL 1: Moderate DPL2: Moderate DPL3: Moderate DPL4: Moderate

The DPL program has been strong, with solid government ownership and triggers reflecting the government’s reform agenda. The reforms in later DPLs generally build on previous reforms leaving the risks lower for the older DPL reforms. However, the current global upheaval in financial markets provides an instructive example on how reversals on even earlier reforms can happen. With financial panic erupting in many countries, including developed ones, regional neighbors Australia, Singapore and Malaysia have moved to provide blanket banking system guarantees, assessing the risk of moral hazard to be less than systemic failure. In response the Indonesian Government has also moved to reverse the earlier process and raise the limit on the guarantee, while watching to see if a blanket guarantee will be needed in Indonesia as well. Across the board risks have risen and risen dramatically for a range of development outcomes. Still some areas seem more at risk than others and in some areas there are signs that reforms may even benefit from the current turmoil Macroeconomic (Moderate): Almost certainly macroeconomic outcomes are at moderate or higher risk. Indonesia has some advantages due to its efforts to put its fiscal situation in order (low debt/GDP), its relatively large domestically dominated economy, a banking system that does have much exposure to the sophisticated financial instruments that caused the problems in developed countries. However, Indonesia also has some risks, as significant foreign investment in bond and equity markets create risks and puts pressure on bond yields, and the exchange rate, while confidence in Banks, especially international ones has jeopardized credit flows. A deep global slowdown, especially a protracted one would reduce Indonesian growth to the point where recent poverty and unemployment gains would be jeopardized. Investment Climate (Moderate): Global financial turmoil can push risks in different directions. On the one hand there are pressures to attract foreign direct investment to make up for the falling portfolio investment, as FDI is less volatile. On the other hand, Indonesia like many countries is seeing a rise in protectionist sentiment which might involve a roll-back in investment climate reforms, especially those that facilitate trade and foreign investment.

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Nevertheless most reforms have the strong support from the business community and are likely to continue moving in the right direction. For example, the President of Indonesia has committed to the ASEAN Single Window creating momentum in this area. Financial sector reforms especially strengthening the financial sector safety net are an increased priority and a Government regulation in place of a Law to create a Financial Sector Safety Net was enacted. Public Financial Management/Governance (Low): This is an area where one might expect lower risks of reversal due directly to the financial turmoil. However, this agenda is vulnerable to the choice of Finance Minister and 2009 is an election year. The TSA and the government accounting statements now seem to be reasonably in place and are unlikely to be reversed, but budget and civil service reforms continue to need high level attention and are more at risk. Service Delivery (Low): This agenda is less well developed and therefore not well reinforced as yet, nevertheless the Government is well aware of the need to protect social spending in the year ahead- and this agenda is being given a higher priority.

5. Assessment of Bank and Borrower Performance 5.1 Bank Performance (a) Bank Performance in Ensuring Quality at Entry Rating: Satisfactory DPL 1: Satisfactory DPL2: Satisfactory DPL3: Satisfactory DPL4: Satisfactory The Bank worked closely with the government to identify reforms and to follow-up on the progress. Quality at entry was ensured by a strong program of support outside of the DPL to help facilitate technical assistance and guidance in the trigger selection and execution. As a result, despite the numerous triggers, almost all were made into prior actions with less changes than normally associated with programmatic DPLs. This demonstrated the strategic relevance and the buy-in of government commitment. Moreover, throughout the annual process, the Bank met a tight delivery schedule, especially considering the breadth of the engagement involved across numerous government agencies and personnel. While the Bank was responsive to the client’s need to obtain financing each year it did place limits on the choice of policy actions. . The DPLs were also prepared in close collaboration with the Government of Japan and the Asian Development Bank. This provided a harmonized approach to policy-based lending and also reduced the government’s transactional costs. A Quality at Entry Review (QAE) conducted for DPL 3 rated it as “Satisfactory”. The QAE review supported the operation as “Highly Satisfactory” in terms of “strategic relevance and approach”, “fiduciary aspects”, and “implementation arrangements”. DPL3 was rated as “Satisfactory” in “structural, financial and macroeconomic aspects”, “poverty, gender and social development”, “environmental aspects”, “policy and institutional aspects” and “bank inputs and processes”. Only in “risk assessment” was the DPL rated “Moderately Satisfactory”. In particular, the QAE highlighted the DPL’s strong alignment with the government’s program, the Bank’s team strong inter-sectoral coordination, the Bank’s flexibility to adjust to economic and political developments, and the DPL’s grounding in sound AA and other forms of policy dialogue and technical support. Of concern was weakness in risk identification and prioritization and the need for a more relevant results framework

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given the shifting focus in policy areas—and these issues were corrected in the DPL4 program document. The QAE for DPL3 also noted that some of the triggers “allowed an elasticity of interpretation beyond that justified for the flexibility needed for programmatic lending triggers”. On the other hand, flexibility in the trigger definition has meant that throughout the DPL series, the Bank was able to translate almost all triggers into prior actions and thereby maintain the vested interests of a wide range of policy reformers in the DPL process. This kept the reform momentum going, even when in some years less progress was being made in certain areas, but then picked up in later years. (b) Quality of Supervision Rating: Satisfactory DPL 1: Satisfactory DPL2: Satisfactory DPL3: Moderately Satisfactory DPL4: Satisfactory

As the prior actions were completed before the loan went to the board, supervision was technically not needed. Instead, in preparation for the next DPL loan, continuous dialogue with the government and follow-up on the trigger status served as a de facto form of supervision. Dialogue was also supported through on-going technical assistance and project lending. Although overall supervision was satisfactory, in DPL3, monitoring progress of the triggers was more problematic than in the other DPLs. This was partly the results of a socialization problem, whereby agencies new to the DPL process felt the DPL triggers were being imposed by the central economic agencies. As a result, DPL3 saw a greater variance between original triggers and final prior actions. Results indicators were not identified in DPL1, but were identified in DPL2 and their progress tracked in subsequent DPLs. Not surprising, as the DPL moved into different areas, new indicators were added, but some of the older results outcome identified became less relevant to assessing the DPL impact. (c) Justification of Rating for Overall Bank Performance: Rating: Satisfactory DPL 1: Satisfactory DPL2: Satisfactory DPL3: Moderately Satisfactory DPL4: Satisfactory Overall rating for Bank Performance is Satisfactory. The Bank worked closely with the government and development partners to develop a relevant reform agenda that strategically addressed several core constraints in the country while delivering the program on time.

5.2 Borrower Performance NOTE: When the government and implementing agency are indistinguishable, provide rating and justification only for Overall Borrower Performance. Click here if the Government and the Implementation Agency is the same or indistinguishable

(a) Government Performance: Rating: Highly Satisfactory DPL 1: Satisfactory DPL2: Highly Satisfactory DPL3: Satisfactory DPL4: Highly Satisfactory

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Borrower’s performance is rated as Highly Satisfactory. Part of the success of the DPL program can be attributed to the government’s high level commitment to see it succeed in full form, rather than opt for passing fewer prior actions of the given set of triggers. During the DPL process, the government designated a key counterpart government official for the overall program and also for each related set of triggers. This greatly facilitated communication and monitoring of progress by the task team, as well as identifying possible bottlenecks. Moreover, the lead government counterpart would follow up with the respective units to ensure that the triggers were being met and bring in pressure from the Finance Minister as warranted. Over the years, as the DPL expanded into different subtopics, the government took greater control of the socialization process of engaging new government agencies and players into the DPL process.

(b) Implementing Agency or Agencies Performance: While the Coordinating Ministry of the Economy played a consistent and effective role in pushing through progress on the triggers, the performance of the implementing line agencies was mixed. This ICR does not go into detail about the various line agencies as each pillar involved working with several different implementing agencies across four years. Hence, while some agencies were more responsive, for example education, others were more resistant and sometimes resented the imposition of DPL triggers, particularly when their unit would not directly benefit from the DPL tranches. In part this was a socialization problem, but , over time, performance of such agencies did improve as working relationships with the agencies evolved in the DPL and unit heads realized they could count on higher level support from the Ministry of Finance to enact the reforms. This said, there was sometimes a clash between the unit’s timetable for reforms and the DPL/Ministry of Finance desire to meet the DPL timeline.

Pillar Overall Performance of Implementing Agencies 1. Macroeconomic Satisfactory 2. Investment Climate Moderately Satisfactory 3. Public Financial Management Moderately Satisfactory 4. Service Delivery Moderately Satisfactory

(c) Justification of Rating for Overall Borrower Performance: Rating: Satisfactory DPL 1: Satisfactory DPL2: Satisfactory DPL3: Satisfactory DPL4: Satisfactory Borrower performance is rated Satisfactory. The ratings reflect a combination of the highly satisfactory performance of the coordinating government unit with the moderately satisfactory performance of the line agencies. Beyond government ownership of the reforms, the Government of Indonesia was also proactive during the DPL process and in committing the resources and personnel to facilitate it. As a result, the program was delivered on a timely basis and almost fully intact, there were no serious slippages and no back tracking on the reforms, if anything the government frequently exceeded the requirement. 6. Lessons Learned (both operation-specific and of wide general application) The Indonesia DPL series can be characterized by the numerous prior actions that were highly specific and covered a broad range of policy areas, which is a different model than the standard Bank practice for fewer but key headline reforms. Given the political sensitivities to conditional lending at the time of DPL1, the latter was not really a feasible option. Rather it is likely that if the Bank had instead pursued high profile reforms, the DPL series would not have garnered the support it currently holds. Undoubtedly,

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the Indonesia model makes the loan processing more complicated as it involved numerous key players, both on the Bank and government side. However it was an approach that was supported by the government and did succeed in advancing the reform agenda on several fronts. In this respect, the Indonesia DPL series offers several key lessons for future operations as well as for those countries that are seeking a more collaborative engagement with client countries. A DPL program “driven” by the government. It is a truism that the success of a DPL program depends on government ownership, less clear is how to bring about government ownership in what is often a donor-driven process. On this the Indonesia DPL program offers an important lesson. For a long-term sustained ownership of the DPL program by the government, there needs to be more than just government “buy-in” of a set of policy actions that are suggested by the Bank’s or other development partners’ analytic assessment of what the main priorities are. Rather, the DPL program needs to be “driven” by the government’s own reform agenda and perhaps more importantly, that the pace and scope of reforms be driven by the judgment and tactical sense of key reformers regarding what may or may not be bureaucratically or politically feasible at a particular point in time. Such an approach is not without its tradeoffs. The pace of reforms may, at times, and on certain issues seem more incremental rather than “substantive”. However, this also helps to break down the reforms into deliverable segments that maintain the reform momentum and consolidate implementation until the timing was right for larger breakthroughs (e.g. as happened with the TSA and NSW) On the other hand, the number and span of prior actions may appear ambitious, because government counterparts use the DPL process to leverage their own efforts to push through a broader more detailed agenda. Over the long-term, however, such an approach has the potential to yield, as occurred in Indonesia, genuine government ownership of the DPL program, and a robust foundation from which the DPL process can be continuously improved and refined. Success lies in following up on the implementation details of the reform process, which is critical to the sustainable effectiveness of the reforms. To often the implementation stage of a DPL sponsored reform is overlooked to focus on the next higher level reform—however, the Indonesia DPL specifically focused on numerous detailed implementation triggers to ground the reform, make it operational and transparent, and therefore successfully effective. As a result, having multiple prior actions has been an effective way for the Indonesia DPL to broaden its reform agenda, but more importantly, to make concrete steps forward in the reforms initiated and thereby make the reforms sustainable in the medium term. By emphazing implementation, the triggers chosen have been relatively non-controversial politically, though frequently they have been slowed because of vested interests or lacked the regulatory framework, which the DPL often addressed. Given the nature of the DPL policy actions, constant collaboration and dialogue between the GoI and the Bank was fundamental to its success. In this respect, the Bank’s heavy field presence enabled it to interact frequently with the government, not just on the DPL but in other related engagements that supported the DPL policy areas. This in turn afforded the government the ability to appoint high level counterparts to ensure that the triggers would be met, as their mandate was not just narrowly focused on the DPL reform triggers but also in the broader engagement. As a result, the appointment and socialization of high-ranking motivated counterparts, greatly enabled pushing through the triggers and ensuring the loan could be delivered. Mapping out a reform program would provide meaningful direction, substantive results, and less criticism over trigger selection. In the past DPLs, some reforms, such as the Treasury Single Account, had key reforms implemented annually that resulted in a substantial improvement in government operation from DPL1 to DPL4. These “storybook” reforms are also more sustainable, as the reforms progressed and were deepened, and the parties involved remained engaged in the DPL reform process. Furthermore, their socialization of the DPL cycle and process eased the engagement from both the Bank and the government side. But the fact that the DPL program was not at the outset, because of the

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circumstances at the time, envisioned as a four-year program but instead evolved into one as the progress each year led to confirmation, often late in the process, that the series would continue the next year, meant that the program was continuously a work in progress. The commitment to furthering the various reform objectives was always strong, but there was not always the time to map out in advance a detailed strategy and a multi-year agenda under each of the various reforms aims that the DPL program eventually ended up supporting. As a result, under some of the reform streams, the annual selection of triggers for the subsequent operation was sometimes a rushed exercise in determining what was feasible and consistent with advancing the relevant reform aim rather than a more strategic consideration of what the most critical next step might be. That represents a missed opportunity to realize the full potential of the DPL process. It is important therefore, going forward, that a multi-year DPL program is clearly envisioned, so that a more systematic attempt can be made to adopt a multi-year strategic frame for the program, and to lay out a basic mapping of the reform program that more specifically describes the end posts, though still allowing for flexibility on how to arrive there. The DPL can be an effective vehicle to support inter-government coordination, but not without substantial challenges. One of the benefits cited of having a reform in the DPL, was that it provided the pressure needed to force government agencies to coordinate together to meet the trigger, as in the National Single Window which involved over 30 agencies. This said, reforms involving inter-government coordination were more difficult to achieve, though the payout could be significant. While reforms housed in the Ministry of Finance were generally easier to achieve, however once intergovernmental coordination was needed, this slowed progress on the reforms. Even within ministries, reforms that required the MOF to work with local government levels also saw relatively slow progress. Likewise, whereas the macro and public financial management triggers made satisfactory progress, investment climate triggers, which generally required coordination of numerous agencies, e.g. in reducing time to start a business, made more modest progress. DPL can provide a fruitful means of leveraging limited resources into making changes in the government program. This method of engagement is now reflected in the new Indonesia Country Partnership Strategy, which recognizes that as Indonesia grows and accesses global markets, the Bank’s contribution will play a smaller share in the government’s financing. Therefore the Bank’s ability to focus on specific lynch pin reforms is important to opening the way for spillover reform. The DPL also provides a useful way of starting an engagement in a specific sector to test its readiness for reform—for example, as it did with infrastructure, where once these reforms started building up, it was then spun off into its own DPL. 7. Comments on Issues Raised by Borrower/Implementing Agencies/Partners (a) Borrower/Implementing Agencies: (b) Cofinanciers: (c) Other partners and stakeholders (e.g. NGOs/private sector/civil society):

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ANNEXES Annex 1. Bank Lending and Implementation Support/Supervision Processes2

(a) Task Team members

2 For programmatic DPL, Annex 1 will have multiple entries, as applicable, to include relevant data on each individual

operation in a programmatic series.

Name Unit Name Unit

P092663 First Development Policy Loan

Wolfgang Fengler- Co TTL EASPR James Sheppard EASPR

P.S. Srinivas – Co TTL EASFP Susan Wong EASSD

William Wallace EASPR Robert Saum EAPCO

Bert Hofman EASPR Rajiv Sondhi EAPCO

Yoichiro Ishihara EASPR Yogana Prasta EACIF

Amitabha Mukherjee EASPR Anthony Toft LEGEA

P096594 Second Development Policy Loan

P.S. Srinivas- TTL EASFP Josef Lietmann EASES

William Wallace EASPR Angus Mackay EASES

Yoichiro Ishihara EASPR Meltem Aran EASPR

John Factora OPCCE Hongjoo Hahm BCFBD

Rajiv Sondhi EAPCO Lars Jessen BCFBD

Jehan Arulpragasam EASPR Ravikumar Balasubramanian BCFAL

Menno Pradhan EASPR Aniruddha Dasgupta EASUR

Vivi Alatas EASPR Preeti Ahuja EACIQ

Blane Lewis EASPR Rajashree Paralkar EACIQ

Peter Rosner EASPR Yogana Prasta EAPCO

Greg Elms EASPR Rizal Rivai EAPCO

Raj Soopramanien LEGEA Susan Wong EASSD

Juan Ellis IEF James Sheppard EASPR

Soren Davidsen EASPR David Shand OPCFM

Anne-Lise Klausen EASPR Timothy Irwin IEF

Djauhari Sitorus EASPR

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P100327 Third Development Policy Loan

P.S. Srinivas –TTL EASFP Peter Rosner EASPR

William Wallace EASPR Josef Lietmann EASES

John Factora OPCCE Vivi Alatas EASPR

Yoichiro Ishihara EASPR Neil McCulloch EASPR

Rajiv Sondhi EAPCO Angus Mackay EASES

Jehan Arulpragasam EASPR Timothy Brown EASES

Hongjoo Hahm EASUR Imad Saleh EAPCO

Vic Paqueo EASHD Kathy MacPherson EASPR

Michael Warlters EASUR Jennifer Donohoe EASPR

Rizal Rivai EAPCO Lars Jessen BCFBD

Yogana Prasta EAPCO Rodrigo Bazzano Barfield EASUR

Wolfgang Fengler EASPR James Sheppard EASPR

Blane Lewis EASPR Nina Herawati EACIF

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P105637 Fourth Development Policy Loan

Wolfgang Fengler EASPR Joel Hellman EASPR

William Wallace EASPR Nina Herawati EACIF

Sebastian Eckardt EASPR Vishnu Juwono EASPR

Natalie Tavernier EASPR Lloyd Kenward EASPR

Peter Milne EASPR Luc Lecuit EAPCO

Soekarno Wirokartono EASPR Josef Lietmann EASES

P. S. Srinivas EASPR Blane Lewis EASPR

Peter Rosner EASPR Kathy MacPherson EASPR

Jens Kromann Kristensen EASPR Jock McKeon EASPR

Rajiv Sondhi EAPCO Niltha Mathias EACIF

Vivi Alatas EASPR David Newhouse EASPR

John Factora OPCCE Vic Paqueo EASJD

Giovanna Dore EASES Yogana Prasta EAPCO

Timothy Brown EASES Andrew Ragatz EASHD

Raj Soopramanien LEGEA Sjamsu Rahardja EASFP

Cut Dian Agustina EASPR Imad Saleh EAPCO

Enrique Aldaz EASFP Djauhari Sitorus EASFP

Arsianti EASPR Chairani Triasdewi EACIF

Javier Arze EASPR Susan Wong EASSO

Mae Chu Chang EASHD Elif Yavuz EASPR

Paramita Dewi EACIF Piyush Desai IMF

Jennifer Donohue EASPR

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(b) Staff Time and Cost (from SAP) (the system pulls data available for all fields)

Stage Staff Time and Cost (Bank Budget Only)

No. of staff weeks USD Thousands (including travel

and consultant costs) P092663 - First Development Policy Loan

Lending FY05 159.61 FY06 8.27 FY07 0.29

Total: 168.17 P096594 - Second Development Policy Loan

Lending FY06 63 266.98 FY07 0.99

Total: 63 267.97 Supervision FY06 26.59 FY07 39.87

Total: 66.46 P100327 - Third Development Policy Loan

Lending FY06 15 48.39 FY07 42 197.16 FY08 -2.62

Total: 57 242.93 P105637 - Fourth Development Policy Loan

Lending FY07 15 68.06 FY08 34 181.06

Total: 49 249.12 Supervision FY08 3 17.04

Total: 3 17.04

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Annex 2. Development Outcome Indicators

Objective / Target

Outcome Indicators Comments

Baseline Latest Available

OVERALL GOAL OF THE DPL PROGRAM

Goal: Achieve sustained growth and poverty reduction

Sustain Economic Growth

Achieve growth of at least 5 percent [CAS] GDP growth was 4.9% (2003)

GDP growth: 6.3 in 2007

GDP average growth 2004-2007: 5.6 Exceeded target.

Poverty Reduction

Reduce the percentage of people living below the national poverty line [RPJM]

17.4% of people live below the national poverty line (2003)

15.4% of people live below the national poverty line (Mar. 2008)


DPL CORE POLICY AREA I: MACROECONOMIC STABILITY AND CREDITWORTHINESS

Objective: Maintain macroeconomic stability as precondition for sustainable growth

Overall Outcome

S&P sovereign rating upgraded to BB S&P sovereign rating at CCC+ and Moody’s rating at B3 (2003)

S&P raised sovereign ratings to BB- and Moody’s ratings to Ba3 (May. 2008)

Satisfactory

Debt Management

Reduce debt-to-GDP ratio to below 38% Debt-to-GDP ratio at 59% (2003) Debt-to-GDP ratio 34.4% (2007) Exceeded target.

Fiscal Policy and Management

Mobilize domestic non-oil and gas tax revenues to 12-13% of GDP

Domestic non-oil and gas tax revenues at 10.4% of GDP (2003)10

Domestic non-oil and gas tax revenues reached 11.3% (2007)

Satisfactory

DPL CORE POLICY AREA II: IMPROVED INVESTMENT CLIMATE

Objective: Attract quality investments through a supportive business environment

Objective: Strengthen, diversify, and increase equitable access to the financial sector

Financial Sector

Stability:

Reduce state bank share of overall banking system [CAS]

State bank share of overall banking system is 46% State bank share of overall banking system is 36% (2007)

Satisfactory

Eliminate economic distortions and moral hazard in the financial sector stemming from unsustainable blanket deposit guarantees [CAS]

Government maintained a policy of providing blanket guarantees on all bank liabilities in response to the 1997 financial crisis (2003)

Coverage on deposits was reduced from Rp 5 billion in March 2006 to Rp 100 million in March 2007 as per schedule (2007). In Oct 2008, it was raised to Rp 250 mln to shore up confidence following the US financial crisis.

Satisfactory

Diversification:

Increase NBFI assets as a share of total financial assets by 5-10 percentage points

NBFI assets estimated to comprise 20.2% of total financial assets (2003)

NBFI assets comprise 22.3% of total financial sector assets (2006)

Moderately

Satisfactory

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Policy Area / Issue and Outcome

Outcome Indicators Assessment


Access :

Create a fair business environment in which SMEs benefit from market based services [CAS]

Loans to SMEs comprised 47% of total loans (2003) Loans to SMEs comprised 50.4% of total loans5 (June 2008)


Regulatory and institutional framework for trade and investment

Increase investment to GDP ratio to 23-25%

Investment-to-GDP ratio at 18.9% (2003) Investment-to-GDP ratio 24.8% (2007) Satisfactory

Reduce start-up time for new businesses to 30 days

Start-up time for new businesses takes 168 days8 (2003) Start-up time for new businesses takes 76 days8 (2008)

Significant progress given ambitious original target.

Satisfactory

Tax services

Improved perception by users [CAS]

57% of respondents identify tax administration as a moderate, severe, or very severe constraint to doing business (2003)1

38% of respondents identify tax administration as a moderate, severe, or very severe constraint to doing business (2007)2

Highly Satisfactory

Reduce time to obtain VAT refunds [CAS]

Average time to obtain VAT refunds is 12-18 months (2003)3

Average time to obtain VAT refund for low-risk taxpayer is 1month (June 2008)2

Highly Satisfactory

Customs services

Improved perception by users [CAS]

51% of respondents identify customs and trade regulations as a moderate, severe and very severe constraints to doing business (2003)4

32% of respondents identify customs and trade regulations as a moderate, severe and very severe constraints to doing business (July 2007)2

Highly Satisfactory

Improve average import clearance time [CAS]

Average import clearance time is 8 days in the red lane (2004)4

Average import clearance time is 6 days in the red lane (preliminary 2007 data)2

Satisfactory

Public-private partnerships in infrastructure

Improve the regulatory and institutional framework for public-private partnerships (PPP) [CAS]

Regulatory initiatives in several infrastructure sectors were adopted but with limited impact given the lack of overall coherent sectoral strategy, central coordination, and follow-through (2003)6

The PPP framework has improved. A decree was issued (Perpres No. 67) requiring open and transparent competitive bidding for PPPs. The National Committee on Policy for Accelerating Infrastructure Provision (KKPPI) and a Risk Management Unit were created within the MoF to determine public funding for PPPs. These initiatives have been successful in stopping non-compliant projects but have so far failed to initiate model PPP transactions.

Shifted to I-DPL

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DPL CORE POLICY AREA III: IMPROVED PUBLIC FINANCIAL MANAGEMENT AND GOVERNANCE

Objective: Improves transparency, accountability, efficiency, and effectiveness in the use of public resources

Objective: Improve the institutional framework for addressing corruption

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Accountability and transparency in public financial management

Increased accountability and transparency in government financial management through availability of complete, reliable and timely budget information and financial statements

Budgets supported with limited fiscal information and incomplete budget documentation. No government accounting standards developed or applied, nor aggregate financial statements prepared.

Comprehensive fiscal information now included in budget documentation. Government accounting standards developed and applied nationally. Aggregate government financial statements prepared in a timely manner and made widely available, although reliability of these statements needs to be improved.

Satisfactory

Improved budget disbursement pattern on capital and material expenditures

Budget authorization documents to line ministries invariably issued around mid-year, resulting in expenditure being skewed during the second half of the fiscal year. 41% of disbursement CG gross capital expenditures was disbursed in the last quarter of the fiscal year (average 2004)

Percentage of CG gross capital expenditures disbursed in the last quarter of 2007: 47%

Unsatisfactory

Improved cash management through a Treasury Single Account regime.[CAS/PEFA]

More than 18,000 commercial bank accounts handled government funds, with no standards for efficient authorization and management of balances (2003)

Pilots for TSA were successfully implemented and the national regulatory framework for efficient management of bank balances has been established. Govt completed the consolidation of all govt expenditure bank balances into a TSA.

Highly Satisfactory

Improved procurement regime that promotes greater transparency, open and fair competition, economy, and efficiency as evidenced by: (i) 100% of government agencies following presidential decree on procurement; (ii) the prices of public procurement are within market prices; and (iii) bidders from outside the districts/provinces of the procuring agencies are free and encouraged to participate.

No national standards in procurement policies and processes exist.

The first major step in public procurement reform was the passing of presidential decree Kepress 2003/8 on public procurement which includes basic principles of good public procurement. Keprss 80/2003 was instrumental in removing barriers to participation for bidders and thus drastically reducing the degree of fragmentation in the market. This instrument is being used by all government agencies. Reform efforts received another major boost end of 2007 with the establishment of the national regulatory body on public procurement: Lembaga Pengembangan Kebijakan Pengadaan Pemerintah (LPKPP) Initial feedback from implementing agencies generally indicate increases in number of participating bidders and receiving bids less then owner’s estimates.


Decentralization Framework

Clarify and improve decentralization framework in respect to fiscal affairs [CAS]

Law No. 33/04 needed to be clarified and extended through the issuance of government regulations before it could be implemented. The design of mechanisms for donor finance was particularly inadequate (unclear, not facilitative), constraining financial flows to the sub-national level. Furthermore, alternative financing mechanisms were insufficiently developed (i.e. no framework for bonds) (2003)

Major regulations based on Law No. 33/04 were issued. KMK 35 was replaced by regulations on blue book, on-lending, and on-granting resulting in a clearer and (slightly) improved system. Regulatory framework for bonds was developed. Insufficient time has elapsed to see any real improvements in terms of sub-national borrowing through on-lending mechanisms and through bonds (Sept. 2007).

Shifted to IDPL

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Institutional framework for addressing corruption

Strengthened institutional framework for addressing corruption as evidenced by continued positive trend in the number of corruption cases investigated and successfully prosecuted.

No special institutions or agencies to investigate and prosecute corruption cases and few corruption prosecutions (2003)

1,367 cases investigated and 617 cases prosecuted (2004)

The following institutions have been established: the Anti-Corruption Commission (KPK), the Anti-Corruption Court, the Judicial Commission, the Police Commission, and the Prosecutorial Commission (2007).

1,892 cases investigated and 586 cases prosecuted (2007)

Highly Satisfactory

DPL CORE POLICY AREA IV: MAKING SERVICES WORK FOR THE POOR

Objective: Improve quality, coverage, and utilization of basic services, especially for the poor

Objective: Make stronger progress toward achieving MDG goals

Pro-Poor Expenditure

Reduce costly, inefficient, and regressive spending and reorient public spending toward pro-poor programs

Spending on non-targeted subsidies accounted for 4% of GDP (2004); combined spending on health and education accounts for 3.5% of GDP (2004)

Spending on non-targeted subsidies accounts for 3.8% of GDP (2007); Spending on health and education accounts for 3.9% of GDP (2007)

Satisfactory

Social Protection

Improved impact of social assistance programs on the welfare of the poor through better targeted, publicized, and managed social protection and human development programs for the poor

System of public social assistance characterized primarily by crisis-era safety net programs and large universal commodity price subsidies, particularly through fuel products that benefited primarily the non-poor (2003)

Social assistance is now delivered in the form of cash transfers systematically targeted to poor households and communities. This represents a more focused approach to identifying and protecting the poor than the series of ad-hoc subsidies instituted in the aftermath of the economic crisis. In addition, evaluation has been given more attention in the design of the current programs.

Satisfactory

Education

Improve the professional competency and performance incentives of teachers through compliance with 2005 Teacher Law

36% of teachers had four-year university (S1) degree (2004)7 42% of teachers had four-year university (S1) degree (2006)7 Satisfactory

Notes: 1. Investment Climate and Productivity Study, Asian Development Bank, 2003 2. Monitoring Investment Climate in Indonesia – Round 3 (draft), The World Bank, 2007 3. Study of Implementing VAT Refunds in Indonesia, LPEM, Faculty of Economics, University of Indonesia, 2003 4. The Study on Trade Related Systems and Procedures in the Republic of Indonesia, Japan International Cooperation Agency (JICA), 2005 5. Total credit realization by SMEs from commercial banks, as measured by Bank Indonesia 6. Averting an Infrastructure Crisis: A Framework for Policy and Action, The World Bank, 2004 7. Ministry of Education statistics. Data reflects end-Indonesian school year and includes all primary, junior, and secondary public schools (religious schools not included). 8. Doing Business Report, The World Bank, 2004 9. Doing Business Report, The World Bank, 2008 10. Spending for Development, Making the Most of Indonesia’s New Opportunities, The World Bank, 2007

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Annex 3. Stakeholder Workshop Report and Results - NA Annex 4. Summary of Borrower’s ICR and/or Comments on Draft ICR Annex 5. Comments of Cofinanciers and Other Partners/Stakeholders - NA Annex 6. List of Supporting Documents

1. Program Documents: Report No 30418-IND, Report No.34439-ID, Report No.38027-ID, Report No.41232-IND 2. Letter of Development Policy 3. Tranche Release Document 4. Standard and Poor’s RatingsDirect Indonesia – October 2007 5. Fitch Ratings Indonesia Sovereign Rating – February 2008 6. Moody’s International Sovereign Indonesia – December 2007 7. Doing Business 2004 8. Doing Business 2008 9. Doing Business 2008 – Indonesia 10. World Bank. Indonesia; Economic and Social Update – April 2008