Project Completion Report

PCR: INO 29206

Sumatra Urban Development (Sector) Project (Loan 1383-INO) in Indonesia September 2005

CURRENCY EQUIVALENTS

Currency Unit – rupiah (Rp)

At Appraisal At Project Completion (August 1995} (December 2003)

Rp1.00 = $0.000439 $0.00125 $1.00 = Rp2,278 Rp8,000

ABBREVIATIONS

ADB – Asian Development Bank BAPPENAS – Badan Perencanaan Pembangunan Nasional (National

Development Planning Agency) BME – benefit monitoring and evaluation DED&CS – detailed engineering design and construction supervision DGURD – Directorate General of Urban and Rural Development DIP Daftar Isian Proyek (central Government grants to local

governments) DPRD – Dewan Perwakilan Rakyat Daerah (local legislative council) EIRR – economic internal rate of return FIRR – financial internal rate of return IDC – interest during construction IUIDP – Integrated Urban Infrastructure Development Program KIP – kampong improvement program LIDAP – local government institutional development action plan MIP – market improvement program MOF – Ministry of Finance MOHA – Ministry of Home Affairs MTR – mid-term review NOL no-objection letter O&M – operation and maintenance PCR – project completion report PCRM Project Completion Review Mission PDAM – Perusahaan Daerah Air Minum

(local government water supply enterprise) PIU – project implementation unit PMU – project management unit REPELITA – Rencana Pembangunan Lima Tahun (5-year development plan) RIAP – revenue improvement action plan RRP – report and recommendation of the President SLA – subsidiary loan agreement SPAR – subproject appraisal report SWM – solid waste management UFW – unaccounted-for-water WTP – water treatment plant

WEIGHTS AND MEASURES

ha – hectare km – kilometer l/s – liter per second m – meter m3 – cubic meter

GLOSSARY Dinas – Service department within a central, provincial, or local

government Kabupaten – the third level of government in Indonesia, a subdivision

(district) of a province Kampong – unplanned, densely populated, low-income urban area Kecamatan – subdistrict Kelurahan – urban subdistrict

NOTES

(i) Before 2000, the fiscal year (FY) of the Government and its agencies ended on 31 March. Since 2000, the fiscal year has ended on 31 December. FY before a calendar year denotes the year in which the fiscal year ends, e.g., FY2000 ends on December 2000.

(ii) In this report, "$" refers to US dollars.

CONTENTS

Page

BASIC DATA i

MAP v

I. PROJECT DESCRIPTION 1

II. EVALUATION OF DESIGN AND IMPLEMENTATION 2 A. Relevance of Design and Formulation 2 B. Project Outputs 4 C. Project Costs 7 D. Disbursements 9 E. Project Schedule 9 F. Implementation Arrangements 9 G. Conditions and Covenants 11 H. Consultant Recruitment and Procurement 11 I. Performance of Consultants, Contractors, and Suppliers 13 J. Performance of the Borrower and the Executing Agency 13 K. Performance of the Asian Development Bank 14

III. EVALUATION OF PERFORMANCE 14 A. Relevance 14 B. Efficacy in Achievement of Purpose 15 C. Efficiency in Achievement of Outputs and Purpose 15 D. Preliminary Assessment of Sustainability 16 E. Environmental, Sociocultural, and Other Impacts 16

IV. OVERALL ASSESSMENT AND RECOMMENDATIONS 17 A. Overall Assessment 17 B. Lessons Learned 17 C. Recommendations 18

APPENDICES 1. Original and Revised List of Participating Cities 21 2. Project Framework 23 3. Project Outputs 27 4. Project Costs 29 5. Project Implementation Schedule 31 6. Project Organization Chart 32 7. Status of Compliance with Loan Covenants 33 8. Consulting Services 45 9. 2002 Loan Suspension 46 10. Project Beneficiaries 54 11. Financial Performance of Selected PDAMs 56 12. Financial and Economic Evaluation 58

SUPPLEMENTARY APPENDIXES (available on request) A. Field Visits of Project Completion Review Mission B. Financial Performance of Selected Local Governments C. Detailed Financial Performance of Selected Local Government Water Supply

Enterprises (Perusahaan Daerah Air Minum, PDAM) D. Lessons Learned

BASIC DATA A. Loan Identification 1. Country 2. Loan Number 3. Project Title 4. Borrower 5. Executing Agency

6. Amount of Loan 7. PCR Number

Indonesia 1383-INO Sumatra Urban Development Sector Project Republic of Indonesia Directorate General of Human Settlements, Ministry of Public Worksa

$130 million (ordinary capital resources) INO 918

B. Loan Data 1. Appraisal – Date Started – Date Completed 2. Loan Negotiations – Date Started – Date Completed 3. Date of Board Approval 4. Date of Loan Agreement 5. Date of Loan Effectiveness – In Loan Agreement – Actual – Number of Extensions 6. Closing Date – In Loan Agreement – Actual – Number of Extensions 7. Terms of Loan – Interest Rate – Maturity (number of years) – Grace Period (number of years) 8. Terms of Relending – Interest Rate – Maturity (number of years) – Grace Period (number of years) – Second-Step Borrower

30 May 1995 23 June 1995 26 August 1995 27 August 1995 26 September 1995 26 January 1996 25 April 1996 8 May 1996 1 30 June 2002 10 September 2004 4 Variable 25 years 6 years 11.5% per annumb

20 years 5 years District governments and local government water supply enterprises (PDAM)

a In August 2000, it became the Directorate General of Urban and Rural Development in the Ministry of Settlements

and Regional Infrastructure. In October 2004, the ministry reverted to its previous name, Ministry of Public Works. b Excluding 0.75% annual commitment charge and 0.25% annual service charge.

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9. Disbursements a. Dates Initial Disbursement

1 July 1997

Final Disbursement

10 September 2004

Time Interval

88 months

Effective Date

8 May 1996

Original Closing Date

31 December 2003

Time Interval

92 months b. Amount ($ million) Category

Original

Allocation

Last Revised

Allocation

Amount

Canceled

Net Amount

Available

Amount

Disbursed

Undisbursed

Balance Part A: Institutional Support, Consulting Services, and Training

16.8

19.8

(3.0)

19.8

16.9

2.8

Part B: Civil Works

57.5

21.6

35.8

21.6

18.5

3.1

Crash Program

0.0 9.0 (0.9) 9.0 8.9 0.1

Bengkulu Emergency Assistance

0.0 4.4 (4.4) 4.4 3.4 1.0

Equipment and Materials (ICB/IS) (LCB/DP)

32.2

0.0

23.0

2.6

9.3

(2.6)

23.0

2.6

20.6

2.4

2.4

0.2

IDC 23.5 23.5 0.0 23.5 17.2 6.3 Total 130.0 103.9 26.1 103.9 87.9 16.0 DP = direct purchase, ICB = international competitive bidding, IDC = interest during construction, IS = international shopping, LCB = local competitive bidding. 10. Local Costs (Financed) - Amount ($ million) 32.2 - Percent of Local Costs 57.5 - Percent of Total Cost 36.6 C. Project Data

1. Project Cost ($ million) Cost Appraisal Estimate Actual

Foreign Exchange Cost 74.0 55.6 Local Currency Cost 143.0 72.0 Total 217.0 127.6

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2. Financing Plan ($ million) Cost Appraisal Estimate Actual Implementation Costs Borrower Financed 87.0 39.7 ADB Financed 106.5 70.7 Other External Financing 0.0 0.0 Total 193.5 110.4 IDC Costs Borrower Financed 0.0 0.0 ADB Financed 23.5 17.2 Other External Financing 0.0 0.0 Total 23.5 17.2 ADB = Asian Development Bank, IDC = interest during construction.

3. Cost Breakdown by Project Component ($ million)

Component Appraisal Estimate Actual Part A: Institutional Support, Consulting Services, and Training 19.5 23.4 Part B: Infrastructure Land 15.0 5.0 Civil Works 114.0 42.7 Civil Works (Crash Program) 0.0 8.9 Bengkulu Emergency Assistance 0.0 3.4 Equipment and Materials (ICB/IS) 45.0 24.6 Equipment and Materials (LCB/DP/Crash Program) 0.0 2.4 Interest during Construction 23.5 17.2 Total 217.0 127.6 DP = direct purchase; ICB = international competitive bidding; IS = international shopping; LCB = local competitive bidding. 4. Project Schedule

Item Appraisal Estimate Actual Date of Contract with Consultants Project Implementation Management Advisory June 1996 25 February 1997 Benefit Monitoring and Completion Report March 1997 30 April 2001 Institutionalization and Financial Monitoring June 1996 6 August 1999 Privatization Advisory June 1996 16 June 1999 Training June 1996 25 March 1999Completion of Engineering Designs January 1997 19 November 1996Civil Works Contract December 1999 June 2003 Date of Award June 1996 12 November 1996 Completion of Work December 2001 31 December 2003Equipment and Supplies Dates First Procurement June 1996 12 November 1996 Last Procurement December 2001 7 November 2003 Completion of Equipment Installation December 2001 31 December 2003Start of Operations Completion of Tests and Commissioning December 1996 December 1997 Beginning of Start-Up January 1997 January 1998

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5. Project Performance Report Ratings

Ratings Implementation Period

Development Objectives

Implementation Progress

From May 1996 to December 1999 Satisfactory Unsatisfactory From January 2000 to August 2002 Satisfactory Satisfactory From September 2002 to November 2002 Unsatisfactory Unsatisfactory From December 2002 to September 2004 Satisfactory Satisfactory D. Data on Asian Development Bank Missions

Name of Mission

Date

No. of Persons

No. of Person-Days

Specialization of Membersa

Appraisal 30 May–23 June 1995 5 120 a,b,c,d,e Project Inception 21–26 October 1996 2 12 h,I Review Mission 1 16–20 March 1998 13–18 April 1998 2 20 l,k

Crash Program Review Mission 24 Aug–4 Sep 1998 1 8 Review Mission 2 19–31 July 1999 2 26 j,k Midterm Review Mission 5–15 June 2000 2 22 l,k Review Mission 3 17 Mar–12 Apr 2003 1 26 Project Completion Reviewb 14 Mar–14 Apr 2005 4 i,m,n,o a a – senior urban development specialist, b – senior programs officer, c –senior counsel, d – project engineer, e –

control officer, g – programs officer, h – senior project engineer, I – project officer, j – project implementation officer, k – senior project officer, l – senior project implementation officer, m – project implementation specialist, n – staff consultant, o – domestic consultant.

b The project completion report was prepared by A. Weitz, Project Implementation Specialist; S. Hasanah, Project Officer; and an international staff consultant.

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I. PROJECT DESCRIPTION

1. The Sumatra Urban Development Sector Project,1 financed by a $130 million loan from the ordinary capital resources of the Asian Development Bank (ADB), was approved on 26 September 1995 and declared effective on 8 May 1996. The Project’s objective was to enhance the quality of life and protect the public health of communities of selected towns in all eight (now nine2) provinces of Sumatra through an investment program combining institutional development and provision of improved and expanded urban infrastructure services. Under the ADB project classification at the time of appraisal and using the strategic development objectives, the Project was included in the poverty intervention classification. 2. At appraisal, the Project was expected to include some 50 cities identified in the Government’s 6th Five-Year National Development Plan (REPELITA VI) of 1994/99 as having high development priority due to rapid population growth and deficiencies in urban infrastructure services. During implementation, this increased to 67 cities under 62 local governments3 (Appendix 1), which was possible because of the steep rupiah devaluation during the 1997 financial and economic crisis leading to surplus loan proceeds, and because of the subdivision of many districts4 before and after the 1999 decentralization.5 In addition, ADB reallocated loan funds for two additional project components: a labor-intensive crash program to reduce unemployment following the 1997 financial and economic crisis, and emergency assistance to Bengkulu province in 2001 following an earthquake in 2000. 3. The Project consisted of two parts:

(i) Part A: Project development, implementation, management, and institutional support, which provided consulting support to central, provincial, and local governments for (a) subproject6 appraisal report (SPAR) preparation, detailed engineering design and construction supervision (DED&CS); (b) project management and implementation, including benefit monitoring and evaluation (BME) and preparation of a project completion report (PCR); and (c) institutional development assistance, including revenue improvement action plans (RIAPs) and local government institutional development action plans (LIDAPs) for local governments, corporate plans for local government water supply enterprises (PDAMs), public information campaigns for low-income urban neighborhood (kampong) improvement, guidance for public-private cooperation in urban service delivery, project implementation training, and masters degree programs.

(ii) Part B: Urban infrastructure investments included physical components in seven

subsectors: (a) water supply—rehabilitation of existing transmission/distribution systems, treatment plants, and source works; construction of new facilities to extend service areas; and reduction of unaccounted-for-water (UFW) losses; (b)

1 ADB. 1995. Report and Recommendation of the President to the Board of Directors on Proposed Loans to the

Republic of Indonesia for the Sumatra and West Java Urban Development (Sector) Projects. Manila. 2 Bangka/Belitung province was created in 2000 with the transfer of three districts from South Sumatra province. 3 The terms local government and district government are used synonymously in this report. Some districts cover

more than one city, as is the case for Bengkalis in Riau, Sarolangun Bangko in Jambi, Muaraenim in South Sumatra, and Central and South Lampung in Lampung province.

4 For example, Lampung province, which consisted of 5 districts in 1996, now comprises 10 districts. 5 Law 22/1999 on Regional Administration (now superseded by Law 32/2004) and Law 25/1999 on the Fiscal

Balance between Central Government and the Regions (now superseded by Law 33/2004). 6 A subproject was defined as a package of urban infrastructure investments in one or more cities, to be

implemented by the district government or local government water supply enterprise.

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drainage—rehabilitation to improve capacity, and construction of new drains in flood-prone areas; (c) sanitation—supply of sludge collection and transport equipment, and construction of low-cost treatment units; (d) solid waste management (SWM)—supply of heavy equipment, vehicles, and facilities; upgrading of existing disposal sites; and construction of new sanitary landfills; (e) kampong improvement programs (KIPs)—road improvements; construction of footpaths, drains, and solid waste transfer and sanitation facilities; and provision of public taps in low-income densely populated areas; (f) market improvement programs (MIPs)—construction of improved access roads, parking areas, drainage, water supply, solid waste transfer and sanitation facilities, and market kiosks; and (g) urban roads and bridges—rehabilitation, widening, and construction of roads, sidewalks, and bridges.

II. EVALUATION OF DESIGN AND IMPLEMENTATION

A. Relevance of Design and Formulation

4. ADB’s country strategy at appraisal was to support the Government’s strategy for urban sector development as stated in REPELITA VI and guided by the 1987 Statement on Policies for Urban Development. The strategy included (i) enabling local governments to provide, operate, and maintain urban services; (ii) improving planning of urban infrastructure investments; (iii) implementing coordinated financing and administration of local services; and (iv) enhancing consultative processes at all government levels. The strategy was made operational in 1985 under the Integrated Urban Infrastructure Development Program (IUIDP) to promote balanced urban infrastructure development. ADB, with the World Bank and bilateral agencies, was active in IUIDP projects at the time of appraisal and continues to be. 5. The Project was based on a sector loan approach. The project framework at appraisal and as implemented is in Appendix 2. Local governments and their PDAMs had to fulfill several criteria to participate; these were incorporated in a SPAR for each city and signed off by the local government head. During appraisal, only two SPARs (for Asahan district in North Sumatra province and Indragiri district in Riau province) were studied as a representative sample of population size, investment requirements, and institutional capacities.7 The decision to focus on two SPARs is questionable, as about 50 cities (eventually 67) on the large island of Sumatra, with a diverse range of populations, topography, cultures, and institutional capabilities, were expected to participate in the Project. Furthermore, the ADB inception mission in October 1996 reported that these two SPARs “needed substantial improvements in both substance and presentation.” 6. Part A contained an allowance for 12 SPARs to be prepared by the Executing Agency, the Directorate General of Human Settlements (DGHS), Ministry of Public Works with the assistance of international and domestic consultants. Domestic consultants under the eight provincial public works agencies were to prepare the remaining SPARs. Subsequently ADB and the Government agreed8 that the first eight SPARs would require ADB approval, and that executive summaries of the other 44 would be sent to ADB for information, after DGHS appraisal. This agreement did not fit with a comment in the same back-to-office report that “the Mission recognized the need for improvement of SPARs to adequately demonstrate compliance 7 Another nine SPARs were reviewed during project preparation, but the content of the review is unclear and how

many of the SPARs were for Sumatra, as the final project document (footnote 1) also covered the West Java Urban Development Sector Project.

8 Back-to-office report of the first-year review mission, 23 June–4 July 1997.

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with agreed subproject design standards and adjustments in proposed financing plans.” ADB later voiced concern9 about the adequacy of English executive summaries, citing “lack of demand assessment, sound engineering justification, valid assessment of beneficiaries, and financial and economic analyses.” A review of SPAR summaries during the Project Completion Review Mission (PCRM) indicates that little, if any, improvement was made, with no further documentation found relating to these concerns until September 1999. This should not be construed as a criticism of SPARs submitted in the Indonesian language—some at least partly met ADB concerns. But it highlights the fact that ADB may not have been fully aware of whether the SPARs were comprehensive enough to meet prudent lending standards. 7. Fifty-two SPARs were completed by March 1998, with 21 subsequently revised as subproject priorities changed. Another 15 SPARs resulted from additional local governments applying to enter the Project. A review of SPAR summaries during the PCRM revealed several major deficiencies, in particular with regard to demand surveys, UFW reduction, and SWM and sanitation subprojects. The Loan Agreement makes no reference to a requirement for real demand surveys as an essential element of SPAR preparation; consequently, no proper demand analyses were presented. This has resulted in some SPARs containing supply-driven components formulated to meet REPELITA VI targets instead of being based on demand. While UFW reduction was identified as a major goal in the water supply subsector, it was not reflected in the SPARs, although ADB advised DGHS of this deficiency.10 The project design also did not include any component that would ensure effective operation and maintenance (O&M) by local governments and PDAMs. This showed a lack of understanding of the noncost recovery nature of the SWM and sanitation subsectors, and threatened their sustainability. In addition, no SPAR effectively demonstrated that existing facilities were being used efficiently, as required in the Loan Agreement.11 8. Project investments were expected to improve living conditions in 50 cities with a total projected 2001 population of 9 million. Direct beneficiaries would include those receiving urban services for the first time as well as those receiving improved services. Indirect benefits from piped water supplies, SWM, and sanitation and drainage components would accrue through reduced morbidity and mortality. This would enhance health and productivity, especially of the low-income poor and women. 9. Project risks identified included (i) implementation delays, (ii) shortcomings in subproject preparation and appraisal that might dilute expected socioeconomic impacts, (iii) lower than forecast revenues for local governments and PDAMs, and (iv) inadequate follow-up on institutional development. The project design was expected to minimize these risks, based on experience gained from previous IUIDP interventions. The Government also provided a series of assurances in the Loan Agreement to limit the potential for adverse effects. While the nature of the risks was correctly identified, their mitigation was not adequate. 10. The deficiencies in project preparation, large number of participating local governments and PDAMs, and inadequacy of measures to ensure effective institutional performance lead to the conclusion that, although addressing its objectives, the project design was flawed.

9 Letter from ADB to DGHS dated 12 August 1997. 10 Letter from ADB to DGHS dated 23 September 1999. 11 Schedule 5, para. 7.

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B. Project Outputs

1. Part A: Project Development, Implementation, Management, and Institutional Support

11. Consultants were recruited for SPAR preparation, DED&CS, project implementation management advisory, BME and the PCR, institutionalization and financial monitoring (RIAPs and LIDAPs), privatization advisory, and training. Two groups of consultants were recruited to prepare 13 SPARs, and four groups of consultants were recruited for DED&CS in eight regions. The consultants to provide management advice to DGHS and implementation management advice to local governments were mobilized on time, with one group overseeing the northern region of Sumatra from Medan and another group, the southern region from Palembang. 12. However, the BME-PCR consultants were contracted 3 years late. Services were provided for only 13, instead of the planned 36 months, and in a sample of only 13 cities. This did not provide time to make local government BME sustainable, the main goal of the consulting services, so that the output has little residual value. The RIAP-LIDAP consultants were fielded 2 years late and their activities were not completed until late 2001, with no time for implementation. The privatization advisory consultants were mobilized a year after their selection. Because of the subsequent economic crisis, the consultants were not able to generate major results in terms of actual transactions.

2. Part B: Urban Infrastructure

13. An inventory of urban infrastructure proposed and actually provided under the Project is given in Appendix 3. The following comments on quality of physical outputs are based on a report prepared by the BME-PCR consultants12 on 13 towns, and visits by the PCRM to 14 towns (mainly following up on locations surveyed by the BME-PCR consultants) to check on component sustainability more than 3 years later.13 14. In general, outputs under most components show overachievement against the appraisal estimate, with a few exceptions in water supply pipe laying (37% and 0% against the appraisal target for 300 millimeter [mm] PVC [polyvinyl chloride] pipes and 400 mm steel pipes, respectively), tertiary drain improvements (35%) and supply of axial pumps (0%), construction of communal toilets (61%), construction of transfer stations for solid waste (67%), and market improvement programs (77%).

a. Water Supply

15. PDAMs implemented the water supply component, which covered 63 towns and accounted for 58% of the part B cost. Little demand analysis was carried out for this component, which included piped water supply systems based on spring sources (not requiring treatment) 12 Benefit Monitoring and Project Completion Report Consultants. 2002. BME-PCR Final Report. Jakarta. 13 The BME-PCR team and PCRM both visited Kalianda (Lampung province), Curup (Bengkulu province), Painan

(West Sumatra province), Jambi (Jambi province), Pekanbaru (Riau province), Lahat, Lubuklinggau and Tanjungpandan (South Sumatra province) and Tarutung, Tebingtinggi and Kisaran (North Sumatra province). In addition, the BME-PCR team visited Tanjungpinang (Riau province) and Padangpanjang (West Sumatra province), and the PCRM visited Kota Bengkulu and Argamakmur (Bengkulu province), and Padang (West Sumatra province). No visits were made to Aceh province because of civil unrest at the time of the BME-PCR consultancy and tsunami aftereffects at the time of the PCRM. However, an ADB mission to Aceh in April 2004, to check the functionality of works installed, found them to be complete and in satisfactory condition. Details on the PCRM, including photographs of sites visited, are in Supplementary Appendix A.

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and surface water (requiring treatment). Incremental production from new/rehabilitated water treatment plants (WTPs) and groundwater sources of 2,800 liters per second (l/s) was implemented (107% of the appraisal target), 1,850,000 meters (m) of pipes of several dimensions laid (106%), and 120,000 new connections installed (102%). Additional water storage of 20,000 cubic meters (m3) was constructed (103%). 16. Loan covenant objectives of a 20% UFW reduction over the project period, or a level of 30% overall as set out in REPELITA VI, were missed by a wide margin. Only 26 SPARs proposed UFW reduction components, and these were generally not implemented. Some of the workshop equipment supplied under the Project was never used because of lack of skilled personnel. In most PDAMs, bulk water meters do not operate and pipes are leaking, both due to lack of funds and management indifference to take remedial measures. As a result, UFW is only estimated and probably in excess of 40% at present in most project PDAMs. 17. ADB was particularly concerned about the adequacy of WTP O&M, and repeatedly voiced unease as to whether the high-rate package WTPs recommended by DGHS for many locations were suitable to treat the raw surface water quality found in much of Sumatra. The BME survey recorded many consumer complaints about water quality. Deforestation and erosion of topsoil into rivers during the rainy season compounded the problem. 18. The requirement for PDAM cost recovery through regular tariff adjustments was widely ignored by local governments and the local legislative councils (DPRDs). This was partly due to the economic crisis, but the unwillingness to increase tariffs persists. Investment in PDAMs is lower than ever, with proceeds of tariff increases used to finance long-delayed salary adjustments. The financial performance of the water supply component was highly unsatisfactory (para. 72). The overall financial performance of the PDAMs was also highly unsatisfactory and the PDAMs are considered to be no better off than at the beginning of the Project. This is largely due to the tariff issues and inadequate PDAM management, although failure to make inroads into UFW reduction is a contributing factor.

b. Drainage

19. Primary, secondary, and tertiary drainage works, which accounted for 7% of part B cost, were implemented in 60 cities by the local public works agencies. The works included rehabilitation or upgrading of existing drains to provide more capacity, and construction of new ones to reduce flooding. Drains totaling 113 kilometers (km) were upgraded and rehabilitated, and 370 km of new drains were constructed (115% and 110% against the appraisal target, respectively). Only tertiary drain improvements were below the appraisal target at 35%. 20. Design was generally good, although insufficient slope or cross-section led to stagnant flow and overflow in a few cases. Construction quality was good, with only isolated instances of concrete crumbling 5 years after completion. Poor O&M standards are widespread due to lack of adequate budget, with vegetation growth and sedimentation buildup visible in some drains. The lack of O&M budgeting by local governments is quite puzzling, since the main cost component for cleaning drains is unskilled, low-price casual labor. Nevertheless, the drainage works do appear to have achieved some degree of flood reduction.

c. Sanitation

21. The sanitation component, which accounted for 2% of part B cost, was implemented in 34 cities. In most cases, the local cleansing and parks agencies were responsible for

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implementation, in a few cases the PDAM. The component included construction of sludge treatment facilities, communal toilet and washing facilities, and household septic tanks and pit latrines; and supply of sludge collection and transport equipment. Twenty-six sludge treatment facilities were constructed and 37 sludge trucks supplied (104% and 106% of the appraisal target, respectively). 22. Though output targets were generally achieved (with the exception of construction of communal toilets at 61% of the appraisal target), this component was the least successful. A local institutional framework for O&M is rarely in place. Licensing of sludge operators and enforcement of regulations are problematic, with many nonlicensed operators collecting sludge at night and not disposing of it properly at existing treatment facilities. As a result, sludge treatment facilities are overdesigned, generally underutilized, and/or underfunded for O&M, and in some instances, abandoned. Sludge trucks are underutilized and used for watering parks. In some cases, SPARs request sludge trucks but have no disposal facilities and vice versa. The benefit of the sanitation component investment is thus questionable, and the appraisal estimate of 2 million beneficiaries, or 22% of total beneficiaries, overly optimistic.

d. Solid Waste Management

23. The local cleansing and parks agencies were responsible for implementing this component in 64 towns. The component, accounting for 11% of part B cost, included (i) provision of collection equipment and waste transport vehicles; (ii) upgrading of existing disposal collection points and final disposal sites, and construction of new facilities; (iii) supply of heavy equipment to disposal sites; and (iv) provision of composting units. A total of 72 heavy equipment units and 232 trucks were procured (118% and 113% against the appraisal target, respectively), and 982 disposal collection points and 41 final disposal sites upgraded and constructed (both 100%, though construction of transfer stations was only 67% against the appraisal target). 24. Again, the SPARs did not contain real demand analysis; instead investment was formulated against REPELITA VI targets. The PCRM noted that containers appeared to be corroded by leachate from the waste, but most containers had been supplied at least 5 years earlier and deterioration was therefore to be expected. Truck bodies seemed adequately maintained, though the cleansing and parks agencies’ workshops lack electricity and water, and thus truck washing is carried out at streams. 25. Practices at disposal sites are unsatisfactory. Design and operation of final disposal sites have often been inappropriate. The DED&CS consultants did not always use discretion in interpreting national standards in accordance with actual site conditions and topography. Disposal sites designed as sanitary landfills are in practice operated by open dumping and burning practices (with the Pekanbaru disposal site being a notable exception). Leachate piping is thus destroyed, and expensive pumps, where installed, not utilized. Some disposal sites are badly organized with no systematic management approach to unloading waste from trucks. 26. Access roads are in varying stages of deterioration, probably due to construction standards being insufficient to bear heavy truck traffic. Waste is often dumped along the alignment of the access road.

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e. Kampong and Market Improvement Programs

27. These components accounted for 2% of part B cost. The KIP, which was implemented in 41 towns, included improvement of low-income residential and densely populated areas by providing improved roads, footpaths, drainage, water supply, sanitation, and solid waste collection and transfer facilities. A total of 2,100 hectares were improved (90% of the appraisal target). The MIP, which was implemented in 32 towns, included provision of improved footpaths, access roads, parking, drainage, water supply, sanitation, transportation terminals and kiosks in markets. A total of 78 markets were improved (77%). 28. Overall construction quality was satisfactory, although the PCRM observed instances of crumbling concrete works due to insufficient cement in the mix, and of drains filled with solid waste, especially in markets. One market in Kota Bengkulu, with more than 400 stalls constructed under the Project, was completely unoccupied because of poor urban transportation links and lack of demand analysis during SPAR preparation. Overall, however, the KIP and MIP components generally yielded expected benefits to stakeholders. KIP maintenance was mixed, with high O&M standards being applied in some locations and decay visible in others. It is apparent that much depends on the willingness of local community leaders to mobilize stakeholders.

f. Urban Roads

29. The local roads departments were responsible for the implementation, which accounted for 18% of part B cost and covered only 9 towns. Construction and maintenance quality were generally good, with some works executed as early as 1997 observed to be in good operational condition. A total of 154 km of roads were rehabilitated or improved (207% against the appraisal target) and 23 km of new roads were constructed (233%). 30. The Highways Department of West Sumatra province asked for road maintenance equipment to be funded from loan savings. Deliveries were made in late 2003. The PCRM visited the workshop-garage, and found the equipment to be operational and well maintained.

g. Schools

31. A total of 48 schools in Bengkulu province, damaged or destroyed as a result of a severe earthquake in 2001, were rehabilitated or newly constructed under the Bengkulu emergency assistance, which utilized part of loan savings under the Project and accounted for 2% of the part B cost (para. 33). One new school (in Kota Bengkulu) and two rehabilitated ones (in Bengkulu Utara) for pupils in the 6–14 age group were visited by the PCRM. Construction standards were good, as was the condition of school furniture supplied through the program. Maintenance was very good. C. Project Costs

32. Estimated and actual project costs by category are in Appendix 4. At appraisal, the total project cost was estimated at $217.0 million equivalent, including $74.0 million (34%) in foreign exchange and $143.0 million (66%) in local currency equivalent; $19.5 million was allocated to part A, $174.0 million to part B, and $23.5 million for interest during construction (IDC). The ADB loan of $130.0 million (60% of the total project cost) was intended to finance all foreign exchange costs (including IDC), plus $56.0 million equivalent (39%) of local currency costs (excluding land acquisition costs, taxes, and duties).

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33. In September 1998, the total project cost was reduced to $170.8 million ($18.5 million for part A, $128.8 million for part B, and $23.5 million for IDC); about $30.5 million of the loan proceeds were identified as savings due to the very large depreciation of the rupiah during the 1997 financial and economic crisis. Of this amount, $8.0 million was canceled, while the remaining $22.5 million was reallocated to cover the economic crash program, for which ADB financed 100% of eligible expenditures. However, of the $22.5 million allocation for the crash program, only $8.8 million was utilized, leaving an undisbursed balance of $13.7 million.14 A second partial cancellation of $18.1 million was made in October 2003 (savings from the economic crash program and further rupiah depreciation). This resulted in a revised total project cost of $152.7 million, and loan amount of $103.9 million. At project completion, the actual project cost was $127.6 million, comprising $55.6 million in foreign exchange and $72.0 million equivalent in local currency. The actual ADB contribution was $87.9 million (69% of the total project cost), covering $55.6 million of the foreign exchange costs and $32.3 million of the local currency costs. 34. In 2001 ADB approved utilization of $4.4 million of surplus loan proceeds for emergency assistance to Bengkulu province for rehabilitation of infrastructure damaged in a severe earthquake, including water supply systems, drainage, roads, and school buildings. ADB agreed to finance 100% of eligible expenditures. However, in June 2002, due to many procurement issues, the water supply component was canceled. 35. At appraisal, equity contributions of local governments and PDAMs were increased from 20% in previous IUIDP projects to 40%, to promote regional resource mobilization, with the balance to be either provided by the Government as a grant (from loan proceeds and the Government’s own sources) or onlent through subsidiary loan agreements (SLAs) from the regional development account of the Ministry of Finance (MOF). Grants would be provided for all non-revenue-generating components, as well as for revenue-generating ones, that could be considered beneficial to public health and the environment (e.g., solid/human waste disposal sites). Grants would also be allowed for UFW programs and revenue-generating components in areas with limited economic growth potential. Otherwise, revenue-generating components would be financed through SLAs. About 50% of loan proceeds were expected to be passed on as grants, and about 50% onlent. 36. Due to the impact of the 1997 financial and economic crisis on local government and PDAM finances, ADB agreed with the Government to revert to an equity contribution of 20% for the FY1999 program, with a claw-back beginning in FY2000. Financing plans for components with SLA funding also had to be revised, by leaving SLA and local government/PDAM own-source rupiah amounts unchanged and increases resulting from the rupiah depreciation funded by loan proceeds passed on as grants and central Government grants. 37. In 1997, MOF decided not to process further SLAs for local governments and PDAMs in arrears on earlier loans. An increase in nonperforming loans and lack of enforceable provisions

14 The allocation of $22.5 million for the crash program appears to have been too optimistic considering the very

limited time for implementation (FY1998 and FY1999) and the lack of a detailed program framework (locations, scope of works, cost estimates, and implementation schedule). Delays in the start-up of the program, the selection of program locations, and the government internal budgeting process also contributed to the low utilization of the allocated funds. The Government did propose a second batch crash program to use the funds but due to public accusations that the targeted beneficiaries were not served and that the program contributed to corruption, the proposal was not pursued.

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in SLAs were identified at appraisal by ADB consultants,15 but this was not recognized as a project risk. Notwithstanding Schedule 5.13 of the Loan Agreement, ADB does not appear to have reviewed SLA approval procedures and terms and conditions, some of which were contrary to prudent lending practices. 38. Because of the economic crisis and lack of MOF action to formulate a rescheduling policy, the number of nonperforming loans rose significantly from 1998 onward. While defaulting PDAMs were incapable of repaying their loans without rescheduling, local governments could have serviced their debt but simply refused to do so. In the end, only 58 SLAs (27 with local governments and 31 with PDAMs) were issued, compared with 97 (50 with local governments and 47 with PDAMs) proposed in the SPARs. 39. DGHS and ADB responded to this situation by converting SLAs into grant funding by the central Government. This conversion was understandable in the case of PDAMs whose major grant-funded investments in intakes, transmission mains, and WTPs could not be utilized because distribution pipe investments, intended to be funded through SLAs, could not proceed. However, some local governments and PDAMs seemed to be rewarded with grants for default on their outstanding loans. This must have seemed unfair to local governments and PDAMs with regular debt service or no debt at all, which were now required to enter into SLAs with MOF. 40. Many financing plans in the SPARs were inconsistent with the established principles of allocating funds according to whether the subproject was cost recovery or noncost recovery, or whether it was beneficial for health and environmental reasons. Sources of funds were proposed in the SPARs without regard for this principle and without any challenge from either DGHS or ADB. For example, grants were often proposed to fund water supply household connections, even though these components realized an immediate cash flow and should have been financed as a PDAM counterpart contribution. D. Disbursements

41. The ADB loan was expected to be channeled by normal budgetary allocation through grants from the central Government and SLAs. Most loan proceeds were passed on as grants, with only 15% being onlent. Grant channeling through the central Government’s mechanism generally proceeded smoothly, except for 2001, the first year of new fiscal balance arrangements of Law 25/1999. Funds were disbursed based on ADB Guidelines on Imprest Funds and Statement of Expenditure Procedures. Occasional delays in replenishing the special account were due to backups at MOF in processing withdrawal applications. At loan closing (10 September 2004), disbursement totaled $87.9 million, or 85% of the reduced loan amount of $103.9 million (after the two loan cancellations in 1998 and 2003 amounting to $26.1 million). The undisbursed loan balance of $16.0 million, including $6.3 million from the IDC allocation and $6.4 million from ineligible claims (either the claims were not accompanied with required documentation or no claims were submitted) was canceled at loan closing. 42. Despite the 1997 financial and economic crisis, provision of counterpart funding by local governments and PDAMs was generally timely. Some isolated incidents of such provisions not being made were brought to the attention of DGHS and ADB by the regional management

15 ADB. 1996. Technical Assistance to the Government of Indonesia for the Institutional Strengthening of the

Regional Development Account. Manila. (TA 2699-INO, for $600,000)

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advisory consultants in their quarterly reports. DGHS and ADB were quick to intervene directly and positively. E. Project Schedule

43. The appraisal and actual project schedules are in Appendix 5. The midterm review (MTR) of July 2000 reported satisfactory progress, with overall project progress estimated at 64% against the planned 70%. In April 2002, ADB agreed to a 6-month extension of the loan closing date to 31 December 2002 so that ongoing works related to the Bengkulu Emergency Program, water supply, SWM, and urban roads components could be completed. Following loan suspension and agreement on actions needed to remove suspension (para. 54), the extension was amended to 30 June 2003. Another extension to 31 October 2003 and a fourth and final extension to 31 December 2003 were later agreed upon to allow completion of all project activities. While the project completion date was 31 December 2003, the loan account was kept open until 10 September 2004 to facilitate the processing of withdrawal applications. F. Implementation Arrangements

44. The project organization chart in Appendix 6 was generally followed during implementation. DGHS, 16 later Directorate General of Urban and Rural Development (DGURD), was designated as the Executing Agency. In acknowledgement of its lack of legal authority over local governments except in matters relating to technical standards, a national coordinating team for urban development17 was created, although it rarely met and was disbanded in 1998. Thereafter, the Central Project Management Office in DGURD monitored project activities, and the Central Project Finance Office oversaw all project accounting and auditing matters, with the Western Region Office of DGURD in charge of project management and administration. In early 1999, the Central Project Management Office and Central Project Finance Office functions were curtailed in favor of the Western Region Office. With the passage of the decentralization laws in 1999, the tenuous influence of DGHS and subsequently DGURD over local governments was further diminished. 45. As agreed, project management units (PMUs) were established in all eight provinces. While they were staffed with well-qualified personnel, annual budget allowances were generally inadequate. The PMUs were consistent in estimating their annual operational requirements at Rp15 million for each local government, but most got less than half of this. They stated they were satisfied with the quality of communications with DGURD, whose experience acquired implementing many urban development projects helped in quickly resolving most problems. 46. Project implementation units (PIUs) were established in each participating local government, to liaise with DGHS through the PMUs. These too were often underfunded. The BME, PCR, and regional advisory consultants’ quarterly reports cite several instances where the PIUs’ relationships with the PMUs were less than ideal because (i) PIU capacity and staffing was inadequate, (ii) communications with the PMUs were poor due to frequent PIU staff changes after decentralization, and (iii) local governments interfered frequently in PIU matters.

16 In August 2000, DGHS became the Directorate General of Urban and Rural Development (DGURD) in the Ministry

of Settlements and Regional Infrastructure; in October 2004, the ministry reverted to its previous name, Ministry of Public Works. All references to the Executing Agency after August 2000 refer to DGURD.

17 Chaired by the National Development Planning Agency (BAPPENAS) and including senior representatives from MOF, Ministry of Home Affairs, Ministry of Public Works, and State Ministry of Environment.

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47. After decentralization and the weakened status of the provinces, the PIUs developed a tendency to bypass the PMUs and communicate directly with DGHS/DGURD, breaching DGHS/DGURD procedures; assignment of the DED&CS consultants as PIU heads, instead of under the more centralized control of PMUs, only served to facilitate this maneuver. In some cases, PIU heads sent submissions directly to ADB, causing problems with design and procurement issues. Many of these could have been filtered out earlier at the PMU level if correct administrative procedures had been followed. As a result, the workload of DGURD and ADB increased, especially in 2000 and 2001, leading to a concentration on details of the Project instead of on problem solutions. In December 2001, ADB reacted with a letter to DGURD, stating that in future it would not review or take action on any correspondence from the PIUs that had not been formally transmitted through the PMUs. 48. Implementation arrangements were, with minor modifications for provincial and local government SPAR screening, essentially unchanged from those adopted in earlier urban development projects when only one or two cities had been involved. Expecting that arrangements, which had been satisfactory for one or two large cities, would also work in 67 widely dispersed smaller towns with far lower local government institutional capabilities was unreasonable. The capacity of remote local governments to plan and implement their own investments was overestimated. The postdecentralization period of the Project exacerbated this issue, which originated as a fault in project design. G. Conditions and Covenants

49. The extent of compliance with loan covenants is given in Appendix 7. Central Government agencies generally complied with covenants specific to their responsibilities. Local governments, however, were largely noncompliant. While external reasons such as the 1997 financial and economic crisis and decentralization were important, many local governments themselves were responsible for the covenants not being met, principally by (i) providing inadequate funding for implementing agencies, (ii) bypassing PMUs, (iii) providing inadequate O&M funding, (iv) not making adequate adjustments for user services provided by the Project, (v) denying cost recovery tariffs to PDAMs, (vi) not promoting community participation, (vii) having unsatisfactory contract administration, and (viii) inefficiently using existing assets. Apart from sanctions for specific procurement irregularities, no remedies were available to enforce compliance, an enduring problem that continues to hamper urban development projects. 50. Part of the problem with loan covenant compliance also lies with the large number of covenants, with some lacking relevance. Schedule 5 of the Loan Agreement shows some repetition and redundancy, for example with regard to SPAR preparation, O&M, UFW, and RIAPs/LIDAPs. Covenants for cost recovery from the SWM and sanitation subsectors replicated misunderstandings in the project document (footnote 1); while a requirement for water tariff cross-subsidy was not relevant for most PDAMs. Covenants for RIAP consulting services were not reflected in the terms of reference. Drafting of project documents and loan agreements for future projects needs to be more focused so that covenants are realistic, comprehensible, and achievable. H. Consultant Recruitment and Procurement

51. Consulting service packages are in Appendix 8. Consultant recruitment was carried out in accordance with ADB Guidelines on the Use of Consultants. The process was generally satisfactory for engaging consultants for project management and implementation, but not for

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contracting institutional support consultants. Long delays by DGHS in recruiting these consultants resulted in much of the work having little residual value. 52. Procurement of civil works, materials, and equipment was carried out in accordance with ADB Guidelines for Procurement. All civil works were awarded through local competitive bidding. As for the procurement of goods, most of the contracts were awarded through the international shopping procedure, with only one awarded through international competitive bidding. In the first 3 years of implementation, DGHS supervised central Government grant-funded components, and procurement proceeded relatively smoothly. However, in April 2000, supervision was transferred to local governments as part of the decentralization process. At the same time, the Government produced its own set of procurement regulations in Presidential Decree No. 18/2000 to accommodate decentralization. Procurement problems—irregularities and more basic administrative issues—increased significantly, especially as ADB began requesting more bid and contract documentation for review. 53. The presidential decree and ADB’s procurement guidelines were generally compatible. In any case, the Loan Agreement gave precedence to the latter. Some local governments were not fully aware of ADB procurement guidelines, while others sought to equivocate on compliance. Still more found it incomprehensible that government regulations could be superseded by ADB guidelines and were afraid of the consequences from state auditors if they contravened the presidential decree. 54. In June 2002, ADB suspended withdrawals from the loan account, citing many procurement irregularities, declaring that DGURD lacked adequate internal controls to prevent such irregularities, and concluding that DGURD was in breach of schedules 4.01 and 4.04 of the Loan Agreement (Appendix 9). ADB gave no written warning prior to suspension, although the move followed several meetings involving ADB, DGURD, and Ministry of Public Works senior officials to discuss procurement irregularities, albeit without a positive outcome. 55. DGURD accepted the existence of irregularities, but noted difficulties of managing a project with so many participating local governments and associated contracts, as well as its lack of authority to control procurement in the newly decentralized environment. DGURD offered to work closely with ADB resolve these problems and enable project implementation to resume. 56. In October 2002, ADB and DGURD signed an MOU18 whereby the Government agreed to an external assessment of internal management controls and oversight systems within DGURD, the establishment of local government procurement committees with independent members, a joint procurement review team in the Ministry of Public Works, and consolidation of all remaining equipment to be procured under the Project into two international competitive bidding packages. Shortly afterward, ADB removed the suspension of withdrawals. 57. The results of the agreed special procurement measures were summarized in a note prepared by the DGURD advisory consultants. The major findings were (i) the number of bidders did not increase; (ii) on the whole, evidence was found of increased price competition, although collusion on civil works bids continued; (iii) the presence of independent members on procurement committees did not have any noticeable impact because they lacked experience, and (iv) the use of international competitive bidding procedures for equipment procurement caused confusion among local suppliers. 18 Special Measures to Avoid Fraud and Corruption, 29 October 2002.

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58. While DGURD‘s claim of lack of authority was correct even before decentralization, DGURD did review all submissions of procurement documents before passing them on to ADB under DGURD’s signature. The number of irregularities detected by ADB suggests at least that the rigor of DGURD’s review procedures was unsatisfactory. Although DGURD may not have been aware of specific procurement irregularities by local governments after decentralization, it was likely aware of the general problems. I. Performance of Consultants, Contractors, and Suppliers

59. The performance of the consultants was generally satisfactory. DGURD and PMUs expressed their satisfaction with the performance of the central and regional advisory consultants. Outputs of the DED&CS consultants were adequate, although the lack of discretion over applying national technical standards led to some inappropriate designs (para. 25). 60. The RIAP consultants produced plans according to standard guidelines of the Ministry of Home Affairs and conducted training for local and provincial secretariats, while the LIDAP consultants did in-house training for line agencies. Local governments have shown significant improvement in own-source revenue generation since then, although this may be coincidental. The BME-PCR consultants produced good reports based on sound survey work, but their products were not sustainable at the local government level because of the sharply reduced contract period. The concession bid and award process for PDAM Pekanbaru was a significant achievement by the privatization advisory consultants and should not be downgraded because of subsequent difficulties in meeting conditions required for the contract to become effective, and the ultimate failure for the concession to materialize because of these. 61. Construction work was of acceptable quality overall; suppliers provided equipment to required specifications. However, ADB files do contain letters to DGURD complaining of poor quality of works implemented. J. Performance of the Borrower and the Executing Agency

62. External events such as the 1997 financial and economic crisis and the decentralization in 1999 had a major impact on the Government’s activities. The crisis provoked issues far larger than the Project. Efforts by the Government to contain and rectify its social impact, stabilize the macroeconomic situation, and restore insolvent financial institutions reduced urban infrastructure problems to a low priority. Rating the Government’s performance is therefore difficult under the circumstances. 63. ADB’s assumption that DGHS would be able to ensure that project implementing agencies would adequately perform their roles19 was problematic as DGHS had no enforcement control over such agencies. The National Coordinating Team for Urban Development was created for this and other projects to overcome this lack of control. In the past, the lack of legal authority was never an issue and DGHS performance was invariably rated as satisfactory. This reflected the small number of participating local governments, over which DGHS was able to exercise its moral authority as representative of a centralized government. Both these factors were changed by the nature of this Project and the decentralizing laws of 1999, which were

19 Schedule 5.02 of the Loan Agreement.

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cited by DGURD in its reply to ADB’s letter of suspension. ADB did not seem to fully recognize these issues, nor did the World Bank when it suspended another urban development project.20

64. DGHS raised no objection to either the project design, or the steady increase in the number of participating local governments. Its approach to SPAR evaluation was generally uncritical, notwithstanding the many deficiencies. While DGHS/DGURD did try to persuade local governments to comply with their responsibilities under the Loan Agreement, it took no initiative to change the project design or implementation arrangements. In summary, the performance of DGHS/DGURD is considered to have been partly satisfactory. K. Performance of the Asian Development Bank

65. ADB project preparation was inadequate, and no attempt was made, including at the MTR, to change the flawed design. During and after the MTR, ADB seemed to focus more on the effects than the causes of implementation problems. Aide memoires and back-to-office reports concentrated mainly on disbursement and counterpart funding issues, while field visits tended to deal with specific procurement matters and poor implementation. There is little record of any review to ascertain whether implementation arrangements were effective, required revision, or indeed were even being observed by local governments. 66. Although SPAR deficiencies were noted early in the Project, the files indicate that ADB made no further criticism until September 1999; 18 months after the first 52 SPARs had been submitted and approved (para. 6). This shortcoming may have had impacts on the Project’s efficacy, efficiency, and sustainability.

67. The transfer of full responsibility for the Project to ADB’s Indonesia Resident Mission in mid-1999 resulted in more effective administration. However, the overall performance of ADB is rated as partly satisfactory, mainly because of the flawed design and lack of effective strategic management for remedial measures during implementation, such as during the MTR (para. 69).

III. EVALUATION OF PERFORMANCE

A. Relevance

68. The Project’s goal and purpose remain relevant in terms of both the Government’s stated priorities and ADB’s development strategy. Increased access and improvement of urban infrastructure service delivery, and enhancement of local government capability to efficiently and affordably deliver these services are still required to improve community health and social welfare. The project design addressed these issues, but was overambitious in terms of the number of participants, did not appreciate the low institutional capacities of many local governments, and failed to provide an implementation process to achieve the Project’s purpose. Measures proposed to mitigate potential risks at appraisal proved to be inadequate. 69. These shortcomings would probably have become evident anyway in the normal course of events, but were exacerbated by the 1997 financial and economic crisis and the decentralization of 1999. By the time of the MTR in May 2000, needed revisions for project design and implementation arrangements should have been evident, but no changes were made as the mission team consisted of procurement specialists and did not include an urban

20 International Bank for Reconstruction and Development Loan 4178-INO: 2nd Sulawesi Urban Development

Project, suspended in early 2002.

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project specialist, who could have taken strategic decisions on these issues. Overall, the Project is assessed as relevant. B. Efficacy in Achievement of Purpose

70. The Project met or exceeded most of its planned physical outputs, thus increasing community access to urban services in quantitative terms, but it achieved very little in terms of improving their quality. The degree of achievement was highest for drainage, followed by the SWM, KIP-MIP, and water supply components.21 Achievement of outputs was hampered by the various design deficiencies (paras. 5–10) and implementation flaws (paras. 44–48). At slightly over 4 million, the number of project beneficiaries is much lower than the appraisal forecast of 9 million (Appendix 10). 71. Broader objectives such as institutional development, extension of the role of credit finance for urban infrastructure, and increase in private sector participation in urban services were not achieved. Institutional support measures were not effective, partly because of the lengthy delay by DGHS in mobilizing the relevant consulting services and more so because of unwillingness of local governments, PDAMs, and DPRD to accept recommendations in relation to tariff increases or changes to working practices. The objective of extending the role of credit finance for implementing urban infrastructure investments failed due to the collapse of the regional development account and the absence of a policy to resolve its problems or create an alternative credit institution. Expanding the role of the private sector in urban services did not succeed, but the 1997 financial and economic crisis made a positive outcome from this activity very unlikely. Overall, the Project is assessed as less efficacious in achieving its purpose. C. Efficiency in Achievement of Outputs and Purpose 72. Although BME lasted only 1 year, it produced useful results from surveys in 13 project towns. A major conclusion was that most people noted no change in the quality of urban services since the beginning of the Project, but in the case of those who did notice change, positive sentiment outweighed the negative. Opinions were most positive for the SWM service and reduced flooding, and least favorable for water supply. The most favored investment was for more KIP-style road improvements—the first or second choice in most towns surveyed. 73. Postproject financial analysis of water supply components was conducted for 10 PDAMs (Appendix 11 and Supplementary Appendix C). Only PDAM Padang had a positive financial internal rate of return at 13.8%, above the financial opportunity cost of capital. The remainder had negative rates, ranging from minus 4.5% to minus 27.5%, compared with optimistic SPAR forecasts. Low tariffs and management deficiencies underlie this extreme level of financial inefficiency, as well as dubious SPAR financial analysis methodology. Financial evaluations were not carried out for the SWM and sanitation components (Appendix 12). 74. Economic internal rates of return were recalculated for several water supply, drainage, urban roads, and KIP components (Appendix 12). Although it was difficult to return to the basis of the SPAR calculations, all recalculated drainage, urban roads, and KIP components were economically viable. For water supply, SPARs did not contain economic analyses, and only 4 out of 10 PDAMs exceeded the 12% economic opportunity cost of capital benchmark based on PCRM calculations. Overall, the Project is assessed as partly efficient in achieving its purpose and outputs.

21 Achievement of the sanitation component was negligible and urban roads were not estimated at appraisal.

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D. Preliminary Assessment of Sustainability

75. The key to project sustainability is good urban management and efficient resource mobilization by local governments. These attributes have yet to emerge from decentralization. As a result, the assessment of sustainability is not encouraging and the project outputs’ sustainability is assessed as less likely. 76. In the water supply subsector, the major technical constraints to sustainability are inadequate measures to ensure significant reductions in UFW (UFW is higher now than at appraisal), concerns about package WTPs in terms of ease of maintenance and operational cost, and general inadequacy of O&M. The major financial constraints are DPRD’s reluctance to increase tariffs (the ratio of tariffs to cost is worse than at appraisal), and inefficient management. Many PDAMs barely cover cash flows. These issues are unlikely to be solved in the near future, despite evidence of an aging and deteriorating service. 77. In the SWM subsector, the major technical constraints to sustainability are inappropriate choice of disposal site locations, lack of interest by SWM agencies in environment-friendly waste disposal technologies, inadequate O&M budgets for transport and disposal equipment, and poor maintenance practices. In terms of financial constraints, local governments regard SWM as a public, limited-cost recovery service. The essential issue is how local governments in the future will adequately subsidize the operation. 78. Investment in public sanitation services (sludge treatment facilities and sludge trucks) is unsustainable. Component selection was supply driven, with little community interest, and no institutional framework. The central Government has to promulgate an appropriate subsector policy, and local governments will need to issue legally enforceable decrees on sanitation procedures for their communities before investments in this subsector can become sustainable. 79. KIP installations require minimal formal O&M inputs. Since their functions are oriented to local community needs and financial inputs are small, chances of sustainability are good. Much depends on the commitment of local community leaders. Some MIP investments exhibited unsatisfactory maintenance by local government market departments, and oversupply in the absence of rigorous demand analysis as in the case of Bengkulu, but generally this component is sustainable. 80. Drainage and urban road investments are relatively sustainable, but limited O&M allocations for regular clearance of vegetation and sedimentation, patching of potholes, and trimming road edges threaten operational conditions and longer term sustainability. E. Environmental, Sociocultural, and Other Impacts

81. Environment assessments in the SPARs generally complied with requirements, although the proposed screening criteria, especially for disposal sites, were not always adequate. SWM investments yielded environmental improvements in urban areas, but in many cases negative impacts were simply transferred to the disposal site. Water supply, SWM collection and transportation components, and drainage investments are likely to have brought some health benefits to communities, and public campaigns on the use of sanitation and SWM facilities have improved the communities’ behavior in this respect. In summary, the environmental, sociocultural, and other impacts are rated moderate.

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IV. OVERALL ASSESSMENT AND RECOMMENDATIONS

A. Overall Assessment

82. Based on the review of its relevance, efficacy, efficiency, sustainability, and environmental, sociocultural, and other impacts, the Project is rated as partly successful.22 Reasons for the low rating go back to the project design, which included too many local governments, used an unrepresentative sector loan approach, did not modify previous implementation arrangements to accommodate the large number of participants, overrated local government institutional capabilities, and incorporated insufficient measures to offset correctly identified risks. The decentralization process initiated in 2001 had an additional unforeseen negative impact on the outcome of the Project. B. Lessons Learned23

83. Project Coverage and Complexity. Geographic and subsector coverage should be limited, depending on the number of SPARs that can realistically be prepared as part of project preparation, and the level of representativeness of conditions in these SPARs vis-à-vis other towns. This is particularly important for areas with large cultural diversity such as Sumatra. The subsectors covered should ideally have similar institutional setups and functioning to reduce project complexity during project preparation—which results in exponentially larger preparation time—and administration. The integration of diverse urban development subsectors requires a project team with distinct subsector expertise to allow for better understanding and differentiated treatment of these. 84. Subproject Appraisal and Review. SPAR preparation and review should be rigorous. It should rely on thorough demand analysis based on community consultations, and include a description of the condition and service coverage of existing assets. Technical solutions offered by SPARs should be specific for each situation. Requirements for financial and economic evaluation should be prepared carefully. Expertise in relevant disciplines should be made available during the preparation and review process. SPARs should be produced in the local language and English; and the English translations should extend to the main text and not be confined to executive summaries, to allow proper evaluation of the proposal. 85. Institutional Capabilities. Institutional capabilities—both managerial and technical—of local governments and PDAMs to manage, operate, and maintain their investments and provide decent public services require a realistic assessment during project and SPAR preparation, coupled with adequately tailored training and capacity building to tackle deficiencies encountered. The sustainability of investments depends on understanding the function of and demand for subsector services in the eyes of local government and the community. Sufficient time is necessary during preparation and implementation to involve these parties in the development of investments and to ensure that technical and institutional capabilities are adequate for their use and sustainability. 86. Implementation Arrangements. Successful implementation arrangements of previous projects, including the degree of authority and enforcement control of the executing agency, should be thoroughly assessed before transferring them to new projects. What has worked

22 This PCR is part of a sample of PCRs independently reviewed by the Operations Evaluation Department. The

review has validated the methodology used and the rating given. 23 In addition to this summary refer to Appendix 2 and Supplementary Appendix D.

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reasonably well before in smaller, centralized projects may not work for large-scale sector projects under decentralization. Adequate provision for monitoring and ensuring compliance with loan covenants by local governments and PDAMs should be incorporated in the project design and implementation arrangements. 87. Consulting Services. Substantial delays in consultant recruitment seriously undermine the effectiveness and sustainability of services provided. Adequate attention should be paid to this during project implementation to ensure that consultant recruitment is timely, and if it is not, that appropriate adjustments are made to the packages and the related terms of reference. 88. ADB Project Administration. ADB project administration needs to more rigorously deal with design and implementation arrangements when they turn out to be problematic. This requires a mission team of diverse expertise, in particular for the MTR to undertake significant redesign where necessary, or following any other event—in the case of Indonesia, the sudden decentralization—that significantly impacts project structures and outcomes. 89. Procurement Administration. The substantial increase in local procurement irregularities after decentralization was due to inadequate contract administration procedures in most PIUs; this included lack of proper archiving procedures, and no records of as-built drawings of civil works and contract variations. A combination of additional training, frequent monitoring, increased quality control by the executing agency, and rigorous enforcement of sanctions is necessary to address the PIUs’ lack of capacity—and willingness—to strictly enforce procurement regulations.

C. Recommendations

1. Project Related

90. Further Action. The project cities and PDAMs, in collaboration with and guided by DGURD, should develop a detailed plan to enhance the value and sustainability of investments undertaken. A first step could be categorization of outputs into (i) those with reasonable sustainability as encountered during the PCRM, (ii) those with potential for rehabilitation, and (iii) those without such potential. Developing and implementing the rehabilitation plan for outputs in the second category should be undertaken over the next 2 years to restore a maximum of unused or underused capacity of investments. The rehabilitation plan should consider potential sources of funding for plan implementation that should not be confined to follow-up ADB projects but assess the potential for other support (including the Government, private sector, and communities themselves) to undertake rehabilitation. 91. Financial Sustainability. The lack of appropriate O&M budgets in many subsectors is evident, although the reasons for this are not always comprehensible because many activities require only unskilled labor (e.g., drainage maintenance). Improvements in revenue collection for solid waste management and water services should be partly addressed by more rigorous local management of these services, while at the same time adjusting tariff levels and service charges. Within the next 2 years, the PDAMs should actively pursue financial restructuring of their existing debts to improve their financial sustainability. 92. Timing of the Project Performance Audit Report. The postevaluation should be conducted in 2008 when data for an additional 3 years of project operation will be available.

19

2. General

93. Urban Development Project Design. The project preparation work was insufficient for a project of $217 million and a loan of $130 million. Such large projects may prove to be unmanageable both for the executing agency and ADB. Urban development projects for secondary towns need to be clustered, preferably by province, and in a single province or contiguous provinces, with the central Government providing the necessary technical backstopping and priority setting for cross-border investment of national interest. For future projects, ADB should develop a standard SPAR format for Indonesia with requirements for preparation (real demand, technical analysis, financial and economic analysis, and beneficiary identification) clearly spelled out. Institutional capacities of local governments to manage, operate, and maintain the investment should be analyzed and built into higher quality SPARs that provide thorough demand analysis and solutions tailored to the specific local circumstances. Relevance of components to project objectives should be clearly defined. The review process should include a formal reporting system on why SPARs are accepted or rejected for each subsector. Further, consideration should be given to separating water supply from other local government services because of the complexity of issues in this subsector, which needs particular attention during project preparation and implementation. 94. Project Implementation. A two-stage approach to urban development project implementation should be tested. The first year of future urban development project implementation would be dedicated to firming up preparation work so that physical implementation can begin in the second year. As with SPAR tasks and initial engineering design work, relevant consultancies for RIAP-LIDAP-type assignments and UFW reduction would be mounted during the first year. Commitments by local governments and PDAMs on issues such as staffing and proper budgeting for PMUs/PIUs, other institutional improvements, user charges, and O&M budgeting would be put in place and closely monitored for compliance before proceeding with physical investment components using loan proceeds. There is little point in lending for physical investment if the local government agencies are unable—or unwilling—to operate and maintain new facilities. ADB and the Government need to ensure that implementation processes are properly defined and described at the project design stage, and that the limits of authority of government agencies are formally established and in accordance with the requirements of the defined implementation process. Physical investments using loan proceeds would not be allowed to proceed without broad overall completion of commitments. The principle is that local governments should fulfill their obligations before receiving physical investment. 95. Community Commitment. In the case of KIP components (and possibly tertiary drainage), community participation should be firmed up for their proper maintenance before physical works are implemented. This may require formal agreements between community leaders and local governments, with responsibilities of each party clearly defined. Involvement of the community in other services (for example, urban road maintenance) on an outsourcing basis is a possibility that needs to be explored. 96. Contract Administration. Since contract administration in a decentralized environment will be carried out to a substantial degree by the local government, additional efforts will be needed in future projects so that (i) local procurement staff is adequately trained, and (ii) oversight or executing agency staff enforce strict quality compliance in reviewing documents from local governments. In this context, the introduction of a contract administration manual for local contract management, as a counterpart to ADB Guidelines for Procurement, should be considered. The manual would describe all the procedures of contract management from

20

bidding advertisement, prequalification, bidding process, and contract award; through construction supervision; quality control; measurement and payment procedures; to commissioning and handover. It would also stipulate a contract records filing system and procedures for secure maintenance. Use of the manual would be stipulated in loan agreements. In the event of the transfer of personnel, outgoing staff would ensure that incoming replacements are properly instructed in contract administration and records management. 97. Independent Monitoring. Third-party monitoring of procurement and contract management procedures, including random quality checks throughout project implementation and postcompletion audits of subprojects, should be considered for all urban development projects. Ideally, funding for this should not be included in the loan but pursued from separate, bilateral funds to ensure independence of the services provided.

Appendix 1 21

ORIGINAL AND REVISED LIST OF PARTICIPATING CITIES No. Province/

Local Government City/Town Date of SPAR

Preparation Remark

I. Nangroe Aceh Darussalam 1. Kota Banda Aceh Banda Aceh Dec 1997 Revised 2000 2. Kab Aceh Utara Lhokseumawe Jan 1999 Revised 2000 3. Kab Aceh Timur Langsa Jan 1998 Revised 1999 4. Kab Pidie Sigli Jan 1999 Revised 2000 5. Kab Aceh Tengah Takengon Jan 1998 Revised 1999 6. Kab Aceh Selatan Tapaktuan Dec 1996 Revised 1999 7. Kab Aceh Barat Meulaboh Dec 1997 Revised 1999 8. Kota Sabang Sabang 2000 New SPAR II North Sumatra 1. Kab Asahan Kisaran Sep 1997 Original SPAR 2. Kab Nias Gunung Sitoli Dec 1996 Revised 1998 3. Kota Tebingtinggi Tebingtinggi Dec 1997 4. Kab Dairi Sidikalang Dec 1997 5. Kota Pematangsiantar Pematangsiantar Jun 1996 Revised 1998 6. Kota Tanjungbalai Tanjungbalai Jun 1996 Revised 1997 7. Kab Tapanuli Selatan Padangsidempuan Sep 1997 8. Kab Tapanuli Utara Tarutung Sep 1997 9. Kota Sibolga Sibolga Jan 1997 10. Kab Labuhan Batu Rantauprapat Dec 1996 11. Kab Toba Samosir Balige Mar 1999 New SPAR 12. Kab Natal Mandailing Penyabungan Jan 2001 New SPAR III West Sumatra 1. Kota Padang Padang Dec 1997 2. Kota Payakumbuh Payakumbuh Dec 1996 3. Kab Tanah Datar Batusangkar Dec 1996 4. Kab Padang Pariaman Pariaman Dec 1996 5. Kota Padangpanjang Padangpanjang Dec 1997 6. Kota Sawahlunto Sawahlunto Dec 1996 7. Kota Bukittinggi Bukittinggi Mar 1998 8. Kota Solok Solok Dec 1996 9. Kab Pasaman Lubuksikaping Dec 1997 10. Kab Pesisir Selatan Painan Mar 2000 New SPAR IV Riau 1. Kab Indragiri Hulu Rengat Aug 1997 Original SPAR 2. Kota Pekanbaru Pekanbaru Dec 1997 3. Kab Riau Kepalauan Tanjungpinang Jan 1998 4. Kab Indragiri Hilir Tembilahan Jan 1998 Revised 2000 5. Kab Kampar Bangkinang Jan 1998 6. Kab Bengkalis Bengkalis Jan 1998 7. Kab Bengkalis Dumai Dec 1997 Revised 2000 V Jambi 1. Kota Jambi Jambi Jun 1995 Revised 1997 2. Kab Tanjung Jabung Kualatungkai Mar 1998 Revised 2000 3. Kab Batanghari Muarabulian Feb 1998 4. Kab Bungo Tebo Muarabungo Dec 1996 Revised 1998 5. Kab Sarolangun Bangko Bangko Mar 2000 New SPAR 6. Kab. Sarolangun Bangko Sarolangun Mar 2000 New SPAR 7. Kab Karinci Sungaipenuh Feb 2000 New SPAR

22

No. Pro

Appendix 1

vince/ Local Government

City/Town Date of SPAR Preparation

Remark

VI South Sumatra 1. Kab Musi Rawas Lubuklinggau Aug 1997 2. Kab Lahat Lahat Mar 1998 3. Kab Bangka Sungailiat Mar 1998 4. Kab Belitung Tanjungpandan Jun 1996 Revised 1998 5. Kota Pangkalpinang Pangkalpinang Dec 1998 6. Kab Muara Enim Prabumulih Jan 1998 Revised 2001 7. Kab. Muaraenim Muaraenim Jan 1998 Revised 2000 8. Kab Oga Komering Ulu Baturaja Feb 2000 New SPAR 9. Kab Oga Komering Ilir Kayuagung Dec 1999 New SPAR 10. Kab Musi Banyu Asin Sekayu Feb 2000 New SPAR VII Bengkulu 1. Kab Bengkulu Selatan Manna Dec 1997 Revised 2000 2. Kota Bengkulu Bengkulu Dec 1997 3. Kab Rejang Lebong Curup Dec 1997 4. Kab Bengkulu Utara Argamakmur Nov 1996 VIII Lampung 1. Kab Lampung Tengah Metro Dec 1997 Revised 2000 2. Kab Lampung Tengah Bandar Jaya Feb 2000 New SPAR 3. Kab Lampung Utara Kotabumi Jun 1996 4. Kab Tulang Bawang Menggala Apr 1998 5. Kab Lampung Barat Liwa Apr 1998 6. Kab Lampung Selatan Kalianda Sep 1997 Revised 2000 7. Kab Lampung Selatan Bakauheni Jan 2000 New SPAR 8. Kab Tanggamus Pringsewu Jan 2000 New SPAR 9. Kab Tanggamus Kota Agung Jan 2000 New SPAR Total: 62 local governments, 67 cities Kota = city, Kab (kabupaten) = district, SPAR = subproject appraisal report. Source: Asian Development Bank SPAR files.

PROJECT FRAMEWORK

Design Summary Performance Targets Project Achievement Key Issues and

Recommendations Goals 1. Improve living conditions, public health standards, urban environment, and economic opportunities of urban residents

2. Improve institutional capacity and capability of water supply enterprises and of provincial and local governments to implement the Project and to operate and manage the new facilities in a proper technical and financially viable manner. Improved O&M and related budget allocations to be stressed.

3. Assist the Government to achieve urban policies for REPELITA VI, aimed at improving urban environments to national standards through the IUIDP investments.

1. The Project is estimated to benefit directly the following populations by component: water supply, 2.7 million; sanitation, 2.0 million; solid waste, 2.6 million; drainage, 1.0 million; and KIP and MIP, 0.7 million. An estimated 0.2 million urban poor will also receive direct benefits.

2. Some residents will benefit from several of the components, while others will benefit from only one. The remainder of the urban residents, including urban poor, will also benefit from the Project, through improved environmental drainage and road conditions, and less competition for scarce water resources.

1. The Project is estimated to have yielded the following number of beneficiaries: water supply, 940,000; solid waste, 2,020,000; sanitation, negligible number of beneficiaries; drainage, 850,000; KIP, 360,000.

2. The RRP did not explain how the number of beneficiaries was estimated at appraisal.

3. Some residents probably did benefit from more than one component.

4. REPELITA VI targets not met.

5. Improved O&M objectives not met.

1. Basing a sector loan with 50 participants and forecasting beneficiaries on two sample SPARs is not a sound approach.

2. The number of water supply beneficiaries in the RRP was overestimated. SPAR estimates and actual beneficiaries are not far apart.

3. Many SPAR water supply components did not include UFW reduction, thus reducing potential beneficiaries.

4. No demand analysis was conducted for any sector.

5. The sanitation subsector not understood at appraisal.

6. No further investment in the sanitation subsector is recommended until new Government policy is articulated.

7. SPAR review needs to be more focused.

8. A standard SPAR module needs to be produced for future urban development projects.

9. First year O&M budgets need to be fixed before disbursements are made

Purpose 1. Increase the capacity and capability of provincial and local government agencies to implement the Project,

1. Strengthen existing project management units (PMUs); and establish, staff, and fund new project

1. PMUs and PIUs were usually underfunded.

1. Decentralization issues detracted from regional government performance.

Appendix 2 23

24 A

ppendix 2

Design Summary Performance Targets Project Achievement Key Issues and Recommendations

and eventually to operate and manage the new project facilities.

2. Improve the level of service of existing IUIDP components in the subproject areas, comprising about 50 cities with a population of 6.7 million in 2001.

implementation units (PIUs) as scheduled.

2. Recruit consultants for subproject preparation, management, and institutional development support.

3. Procure and install required equipment and materials, and construct civil works scheduled for completion by 2001.

2. Frequent staff transfers.

3. Improved regional government management and operation capabilities were not achieved.

4. Management and DED consultants were recruited promptly; late recruitment of other consultants severely degraded the sustainability of outputs.

5. The Project was implemented in 67 towns.

6. Service levels are improved but not to forecast levels.

2. PMU/PIU arrangements to be established before making disbursements in future urban development project

3. Remove consultancy support components from loan if late recruitment threatens to compromise quality and sustainability of outputs

4. Some service level forecasts optimistic

5. Decentralization issues raised DGHS/DGURDa management procurement problems causing delays until the end of 2003

Components and Outputs 1. Project development, implementation, management, and institutional development support, through several consultancies, of central and provincial government agencies, kabupaten, and kota in (i) subproject preparation, design, and supervision; (ii) financial management, planning, and budgeting; (iii) urban planning, land use, and demographics; (iv) project management and planning; (v) water supply enterprises management; (vi) O&M of infrastructure components; (vii) reduction of UFW; (viii) preventive maintenance of equipment and civil works; (x) revenue base expansion, cost recovery, and tariff/user fee reform; (xi) public participation and information campaign; (xii) environmental management;

1. Staff of DGHS, MOHA, the Urban Roads Directorate of the Directorate General of Highways, MOF, BAPPENAS and their provincial counterparts, PMUs, PIUs, kabupaten, and kota responsible for or directly involved in the Project.

2. Reduce UFW by a minimum of 20%.

3. Increase water supply operational efficiency to 100 connections per staff member.

4. Increase tariffs, user fees, and taxes for urban services as projected and agreed.

5. Community organizations construct and operate the KIP and MIP.

1. Following decentralization, DGHS was never able to exercise the same influence over local government actions. This eventually led to a suspension of the loan. DGHS reviews of SPAR and procurement documents were not always rigorous.

2. The target was not met. Only one PDAM out of 10 sampled recorded any improvement for UFW reduction. SPAR content on UFW reduction was minimal.

3. PDAMs meeting this indicator at appraisal continued to do so throughout the Project. Those not meeting this indicator at appraisal continued not doing so.

4. Widespread noncompliance with this target, initially due to the 1997 financial and economic crisis, but DPRD is still unwilling to increase tariffs and user charges to cost-recovery levels. Taxes can only be

1. The performance of DGHS was severely compromised by the large number of participating towns and local governments and by decentralization. The real authority of DGHS/DGURD and all implementation arrangements should be carefully investigated in future project preparation.

2. The RRP target was highly unrealistic. The issue was not researched properly. Delays in the BME contract award hindered monitoring.

3. The target was poorly focused because of the many types of PDAMs. Secondary city PDAMs had already met this target well before the Project. The project design did not include any means to ensure compliance with this target.

4. Future projects must ensure that tariffs and user charges are

Design Summary Performance Targets Project Achievement Key Issues and Recommendations

(xiii) benefit monitoring and reporting, and (xiv) training program improvement and specific training. 2. IUIDP infrastructure facilities construction and operational improvements: (i) water supply, (ii) sanitation, (iii) solid waste, (iv) drainage, (v) urban roads, (vi) KIP and MIP, and (vii) water meter testing and repair shop.

1. Upon project completion in 2001, the following levels of service will have been achieved: 40–50% of urban population; 30–35% of urban population; 50–60% of urban population; —elimination of localized recurring flooding; improved traffic flow, reduced travel time, reduced pollution, and vehicle damage; provision of improved public water, laundry and sanitation facilities; solid waste and wastewater disposal facilities, drainage, and access for low-income kampong

2. Higher quality water and longer duration of water supplies

3. Improved levels of operating capacity of solid waste, drainage, roads, and KIP-MIP facilities, resulting in more hygienic conditions.

increased by the central Government. PDAM revenues barely covered O&M by the end of the Project. However, for most local governments, the yield of own-source revenues increased in real terms.

5. KIP constriction was carried out by contractors. O&M adequacy was patchy and depended on the quality of community leadership. MIP is the responsibility of the local markets department, not the community.

1. Determining service levels at project completion was not possible. However, based on beneficiary estimates, probably none of the targets were achieved, especially those forecast for the sanitation component. Localized flooding was not eliminated but was reduced. Other unquantified improvements were attained to some degree.

2. The BME survey reports that only 16% of pre-project connected households noticed an improvement in the quality of service. Most households reported availability of water for less than 2 hours per day.

3. O&M of existing and new infrastructure assets has been widely unsatisfactory due to local government failure to budget adequate O&M funds.

increased before any related disbursements are made.

5. Written agreements for adequacy of KIP O&M should be obtained by local governments from community leaders prior to component disbursement. 1. The representative sample of two SPARs was far too small. TA funds were insufficient for satisfactory preparation. Lack of demand analysis and proper understanding of subsectors produced some unrealistic performance targets.

Public services in many local governments, especially in districts, are badly managed. Future urban development projects should consider incorporating an urban service delivery expertise component within the implementation package.

2. Notwithstanding the 1997 financial and economic crisis and its prolonged impact, the unwillingness of DPRD to increase tariffs and poor PDAM management have left most PDAMs in worse condition than pre-Project.

3. In future projects, annual disbursement of funds should be linked to adequate O&M funding in budgets.

Appendix 2 25

Design Summary Performance Targets Project Achievement Key Issues and Recommendations

Activities 1. Consulting services and training (i) Prepare subproject appraisals for inclusion in the Project. (ii) Prepare detailed engineering designs and contract documents. (iii) Conduct contract bidding and procurement. (iv) Implement construction. (v) Supervise construction and procurement. (vi) Improve O&M capability. (vii) Provide related training investments. (viii) Monitor and follow-up. 2. Infrastructure

3. Land Acquisition

4. Interest during Construction

5. Total Cost

6. Loan

$19.5 million 178 international person-months 3,356 domestic person-months $159.0 million

$15.0 million

$23.5 million

$217.0 million

$130.0 million

$23.4 million Not availableb

Not availableb

$82.0 million

$5.0 million

$17.2 million

$127.6 million

$87.9 million

1. Performance of the consultants was generally satisfactory. Outputs of the DED&CS consultants were adequate, although the lack of discretion over applying national technical standards led to some inappropriate designs.

2. Contracting institutional support consultants (BME-/PCR consultants) was delayed substantially, resulting in their work having little residual value.

3. Adequate attention has to be paid in future project administration to ensure that consultant recruitment is timely, and appropriate adjustments to the packages and terms of reference are made in case of substantial delays.

26 A

ppendix 2

BAPPENAS = Badan Perencanaan Pembangunan Nasional (National Development Planning Agency); BME = benefit monitoring and evaluation; DED&CS = detailed engineering design and construction supervision; DGHS = Directorate General of Human Settlements; DPRD = dewan perwakilan rakyat daerah (local legislative council); IUIDP = Integrated Urban Infrastructure Development Project; KIP = kampong improvement project; MIP = market improvement project; MOF = Ministry of Finance; MOHA = Ministry of Home Affairs; PDAM = Perusahaan Daerah Air Minum (local government water supply enterprise); PIU = project implementation unit; PMU = project management unit; REPELITA = Rencana Pembangunan Lima Tahun (5-year national development plan); RRP = report and recommendation of the President; SPAR = subproject appraisal report; UFW = unaccounted-for water; TA = technical assistance. a In August 2000, DGHS became the Directorate General of Urban and Rural Development (DGURD) in the Ministry of Settlements and Regional Infrastructure; in

October 2004, the ministry reverted to its previous name, Ministry of Public Works. All references to the Executing Agency after August 2000 refer to DGURD. b Actual person-months input for international and domestic consultants could not be verified by the Project Completion Review Mission because of incomplete

files at the Asian Development Bank and DGURD offices.

Appendix 3 27

PROJECT OUTPUTS Project Component

Unit

Appraisal Estimate

Actual Quantity

Percent of Appraisal

Water Supply Supply and Lay 50 mm PVC Pipe m 583,581 606,034 104 Supply and Lay 75 mm PVC Pipe m 333,373 342,078 103 Supply and Lay 100 mm PVC Pipe m 338,421 342,504 101 Supply and Lay 150 mm PVC Pipe m 199,537 233,574 117 Supply and Lay 200 mm PVC Pipe m 85,279 133,163 156 Supply and Lay 250 mm PVC Pipe m 85,717 83,496 97 Supply and Lay 300 mm PVC Pipe m 64,692 23,730 37 Supply and Lay 350 mm PVC Pipe m 2,816 2,623 93 Supply and Lay 400 mm PVC Pipe m 8,750 12,950 148 Supply and Lay 200 mm Steel Pipe m 8,277 10,777 130 Supply and Lay 250 mm Steel Pipe m 3,279 4,418 135 Supply and Lay 300 mm Steel Pipe m 1,115 5,115 459 Supply and Lay 350 mm Steel Pipe m 521 521 100 Supply and Lay 400 mm Steel Pipe m 4,200 0 0 Supply and Lay 500 mm Steel Pipe m 6,000 6,000 100 Supply and Lay 700 mm Steel Pipe m 1,200 4,500 375 Supply and Lay 50 mm GIP Pipe m 90 126 140 Supply and Lay 75 mm GIP Pipe m 144 6,249 4,340 Supply and Lay 100 mm GIP Pipe m 262 5,981 2,283 Supply and Lay 150 mm GIP Pipe m 11,610 13,395 115 Supply and Lay 200 mm GIP Pipe m 4,744 4,118 87 Supply and Lay 250 mm GIP Pipe m 5,070 5,070 100 Supply and Lay 300 mm GIP Pipe m 2,000 2,000 100 House Connection Replacement no 4,900 19,233 481 Supply and Install House Connections no 119,927 122,115 102 Supply and Install Public Taps no 234 234 100 Supply and Install Bulk Water Meter no 25 45 180 Increase Groundwater Supply Capacity l/s 560 615 110 WTP Rehabilitation/Upgrading l/s 1,275 1,350 106 Supply and Install WTP l/s 790 835 106 Construct Reservoir m3 20,160 20,700 103 Supply Leak Detector no 3 5 166

Drainage Primary Drain Improvement m 42,235 37,030 88 Primary Drain Construction m 143,907 154,813 108 Secondary Drain Improvement m 29,802 67,545 227 Secondary Drain Construction m 147,667 150,000 102 Tertiary Drain Improvement m 26,269 9,082 35 Tertiary Drain Construction m 45,854 65,542 143 Supply and Installation of Axial Pumps no-l/s 3 0 0 Construction of Retention Pond no 4 4 100 Rehabilitation of Retention Pond no 2 2 100 Supply Dump Truck no 4 5 125

28 Appendix 3

Project Component

Unit

Appraisal Estimate

Actual Quantity

Percent of Appraisal

Sanitation Construct MCK no 142 195 137 Construct Communal Toilet no 31 19 61 Construct Communal Septic Tanks no 201 201 100 Construct Triple S Septic Tanks no 300 300 100 Construct Pit Latrines no 331 337 102 Supply Septage Truck no 35 37 106 Construct IPLT no 25 26 104

Solid Waste Supply Handcarts no 1,696 1,681 99 Supply Waste Bins no 17,389 17,272 99 Supply Containers no 489 502 103 TPS Construction no 982 982 100 Construct Transfer Station no 15 10 67 Supply Dump Truck no 116 132 114 Supply Arm Roll Truck no 89 100 112 TPA Facilities Construction no 41 41 100 Composting Facilities no 6 6 100 Supply Excavator no 10 18 180 Supply Bulldozer no 40 40 100 Supply Loader no 11 14 127

Urban Roads Road Betterment m 154,018 318,766 207 New Construction m 22,750 52,936 233

KIP Improved Areas ha 2,325 2,105 91

MIP Markets Improved no 101 78 77

GIP = galvanized iron pipe, MCK = mandi cuci kakus (communal bath, washing, and toilet), IPLT = instalasi pengolahan lumpur tinja (sewage treatment plant), KIP = kampong improvement project, MIP = market improvement project, PVC = polyvinyl chloride, TPA = tempat pembuangan akhir (final disposal site), TPS = tempat pembuangan sementara (temporary disposal site), WTP = water treatment plant. Note: Implementation reports to the Directorate General of Human Settlements and the Asian Development Bank only listed components where loan proceeds were used. In the case of components funded entirely by the Government’s own funds, such components as listed in the subproject appraisal reports are assumed to have been implemented in their entirely. Source: Project management advisory consultant reports.

PROJECT COSTS

Table A4.1: Comparison of Appraisal Estimate, Revised Estimate, and Actual Cost ($ million)

Appraisal, June 2005 Last Revised (2003) Actual (PCRM, 2005) Foreign Local Foreign Local Foreign Local Component

Exchange Currency Total Exchange Currency Total Exchange Currency Total

A: Institutional Support,Consulting Services and 2.5 17.0

19.5 3.0 15.9 18.9 4.0 19.4 23.4Training Subtotal (A) 2.5 17.0 19.5 3.0 15.9 18.9 4.0 19.4 23.4

B: InfrastructureLand 0.0 15.0 15.0 0.0 5.0 5.0 0.0 5.0 5.0Civil Works 23.0 91.0 114.0 8.6 50.6 59.2 8.1 34.6 42.7Civil Works (Crash Program) 0.0 0.0 0.0 2.1 6.8 8.9 2.1 6.8 8.9Bengkulu Emergency Assistance 0.0 0.0 0.0 3.3 4.3 7.6 1.5 1.9 3.4Equipment and Materials (ICB/IS) 25.0 20.0 45.0 23.0 2.6 25.6 20.6 4.0 24.6Equipment and Materials (LCB, DP, CP) 0.0 0.0 0.0 1.8 2.2 4.0 2.1 0.3 2.4 Subtotal (B) 48.0 126.0 174.0 38.8 71.5 110.3 34.4 52.6 87.0

Interest During Construction 23.5 0.0 23.5 23.5 0.0 23.5 17.2 0.0 17.2

Total 74.0 143.0 217.0 65.3 87.4 152.7 55.6 72.0 127.6

CP = crash program, DP = direct purchase, ICB = international competitive bidding, IS = international shopping, LCB = local competitive bidding. The crash program was added in 1998 to support the Government's social safety network to mitigate the impact of the 1997 financial and economic crisis. The Bengkulu emergency assistance component was added in 2001 following the Government's request to rehabilitate damaged infrastructure in Bengkulu destroyed by the 2000 earthquake. Source: Asian Development Bank estimates.

Appendix 4 29

30

Appendix 4

Table A4.2: Part B, Actual Cost by Infrastructure Investment Component

Component $ million Percent

Water Supply 50.1 58Sanitation

1.7 2Drainage 6.1 7Solid Waste 9.6 11Urban Roads 15.3 18KIP and MIP 2.1 2Schools (under the BEA) 2.1 2

Total 87.0 100BEA = Bengkulu emergency assistance, KIP = kampong improvement program, MIP = market improvement program Source: Asian Development Bank estimates.

31 A

ppendix 5

PROJECT IMPLEMENTATION SCHEDULE

32 Appendix 6

PROJECT ORGANIZATION CHART

Appendix 7 33

STATUS OF COMPLIANCE WITH LOAN COVENANTS Covenant

Ref in

LA

Status of Compliance

The Borrower will make available and cause the Project’s Executing Agency and implementing agencies concerned to make available the funds, facilities, services, land, and other resources required, in addition to the loan proceeds, for carrying out the Project and O&M of the project facilities. In carrying out the Project, the Borrower will cause competent and qualified consultants and contractors, acceptable to the Borrower and ADB, to be employed to an extent and upon terms and conditions satisfactory to ADB. The Borrower will cause the Project to be carried out in accordance with plans, design standards, specifications, work schedules, and construction methods acceptable to ADB. The Borrower will furnish, or cause to be furnished, to ADB, promptly after their preparation, such plans, design standards, specifications, and work schedules, and any material modifications subsequently made therein, in such detail as ADB may reasonably request. The Borrower will ensure that the activities of its departments and agencies with respect to the Project, and its operation, are conducted and coordinated in accordance with sound administrative policies and procedures. The Borrower will maintain, or cause to be

4.02 4.03 (a) 4.03 (b) 4.04 4.06 (a)

Generally complied with, although with some exceptions to compliance for each of the items listed in the covenant. However, the degree of seriousness and frequency of occurrence of such problems were not significantly different from those encountered in similar urban development projects in Indonesia and are not considered to have impacted negatively on project implementation. The late issue of the 2001 DAU and DIP was a one-off occurrence and an exception. See also comments on Section 5.15 re land acquisition. Generally complied with, but difficulties in the later stages of the Project were caused by (i) decentralization of supervision of DIP-funded components, and (ii) introduction of KEPPRES 18/2000 dealing with government procurement, which abolished the previous system of prequalification. Generally complied with, but national design standards were applied without due reference to actual conditions and without real demand surveys. DGURD’s PCR states that (i) design drawings were found with all contract documents, but only about 10% of as-built civil works drawings; (ii) quality control reports were not available in PIU offices; and (iii) specifications found with contract documents were sometimes illegible. Little evidence is available indicating that specifications were being enforced. Generally complied with. Partially complied with. Several examples of

34 Appendix 7

Covenant

Ref in

LA

Status of Compliance

maintained, records and accounts adequate to identify the goods and services and other items of expenditure financed out of the loan proceeds, to disclose the use thereof in the Project, to record project progress (including the cost thereof) and to reflect, in accordance with consistently maintained sound accounting principles, the operations and financial condition of the agencies of the Borrower responsible for carrying out the Project and operation of project facilities, or any part thereof. The Borrower will: (i) cause each project implementing agency to maintain separate accounts for its respective component under the Project; (ii) have the consolidated project accounts and related financial statements audited annually, in accordance with appropriate accounting standards consistently applied, by independent auditors whose qualifications, experience and terms of reference are acceptable to ADB; (iii) furnish to ADB, through DGHS, as soon as available but in any event not later than 9 months after the end of each related fiscal year, certified copies of audited accounts and financial statements and the report of the auditors (including the auditors’ opinion on the use of loan proceeds and compliance with the loan covenants, all in English; and (iv) furnish to ADB such other information concerning such accounts and financial statements and the audit as ADB will from time to time reasonably request. The Borrower will enable ADB, upon ADB’s request, to discuss the Borrower’s financial statements for the Project and its financial affairs related to the Project from time to time with the Borrower’s auditors, and will authorize and require any representative of such auditors to participate in such discussions requested by ADB, provided that such discussion will be conducted only in the presence of an authorized officer of the Borrower unless the Borrower will otherwise agree. The Borrower will furnish, or cause to be furnished, to ADB all such reports and information as ADB will reasonably request concerning (i) the loan, expenditure of loan

4.06 (b) 4.06 (c) 4.07 (a)

poor record keeping hinder the establishment of transparency, accountability, and good governance, especially noticeable at local governments, and partly due to the frequent transfer of personnel and offices, including annual changes of project managers. (i) See comments on Section 4.06 (a). (ii) The auditors sometimes were obliged to qualify their reports because of the absence of supporting documentation. (iii) Not complied with in the early years of the Project, but observance of this requirement was much more satisfactory in later years. (iv) Generally complied with. Discussion was limited, because of the limited number of requests by ADB. However, the Borrower was willing to comply when requested. Items (i) through (v) complied with through the monthly and quarterly reports provided by DGHS and regional management advisory consultants. Item (vi) complied with through

Appendix 7 35

Covenant

Ref in

LA

Status of Compliance

proceeds, and maintenance of services; (ii) the goods and services and other items of expenditure financed by the loan proceeds; (iii) the Project; (iv) any subproject; (v) the administration, operations, and financial condition of the agencies of the Borrower responsible for the carrying out the Project and operation of project facilities; (vi) financial and economic conditions in the territory of the Borrower; and (vii) any other matters relating to the purposes of the loan. Without limiting the generality of the foregoing, the Borrower will cause DGHS to furnish to ADB consolidated quarterly reports on the carrying out of the Project and on the operation and management of project facilities. The reports will be submitted in form and detail and within a period as ADB will reasonably request, and will indicate, among other things, progress made and problems encountered during the quarter under review, steps taken or proposed to be taken to remedy these problems, and the proposed program of activities and expected progress during the following quarter. Promptly after physical completion of the Project, and not later than 3 months thereafter, DGHS will prepare and furnish to ADB a report on the execution and initial operation of the Project, including its cost, performance by the Borrower of its obligations under the Loan Agreement and the accomplishment of the loan purposes. The Borrower will enable ADB representatives to inspect the Project, the goods financed by the loan proceeds, and any relevant record and documents. The Borrower will ensure that the Project facilities are operated, maintained, and repaired in accordance with sound administrative, financial, engineering, environmental, urban development, public utilities, and maintenance and operational practices. At the central government level, the National Coordinating Team for Urban Development consisting of senior representatives from the

4.07 (b) 4.07 (c) 4.08 4.09 5.01

periodic reports provided by BAPPENAS. Generally complied with. The regional management advisory consultants north (located in Medan) and south (in Palembang) obtained data from each of their provincial offices, which were analyzed and consolidated in progressively updated quarterly reports by the DGHS management advisory consultants. These were submitted to DGHS, which in turn forwarded them to ADB. However, the forwarding of such reports to ADB did not take place until late in the Project. The contents of the reports, supplemented by the monthly progress reports prepared by the regional management advisory consultants, complied with the requirements of this loan covenant. Complied with and submitted in June 2002, prior to the second extension of the loan closing date. Complied with. ADB made periodic inspection visits arranged and coordinated by the EA. Based on observations of sample visits by the PCRM, ADB site visits during project implementation, and BME reports, poor O&M at TPA and IPLT was widespread. Maintenance of drainage was unsatisfactory. Other sectors were generally satisfactory. The National Coordinating Team for Urban Development was disbanded in 1998; no replacement agency was established.

36 Appendix 7

Covenant

Ref in

LA

Status of Compliance

State Ministry of National Development Planning, Ministry of Public Works, MOHA, MOF, State Ministry of the Environment, and other agencies will provide policy coordination. DGHS will be the Executing Agency responsible for overall technical supervision and project management, and will ensure that the implementing agencies perform their respective roles in an adequate manner. DGHS will be responsible for (i) monitoring project implementation, including consultant services and training, coordination with BAPPENAS; (ii) coordination and approval, jointly with relevant central Government agencies and BAPPEDA I, of subproject appraisal reports; (iii) overseeing and preparing all project-related accounting and auditing activities and monitor disbursements of the loan proceeds. Provincial Government

PUCFs will be established within 1 month of the effective date or such later date as will be agreed by the Borrower and ADB, in each province participating in the Project to provide overall coordination for appraisal of subprojects. The PUCF will be chaired by the head of the relevant BAPPEDA I. The relevant BAPPEDA I will provide guidance, assistance, and coordination to level II governments concerned with subproject planning, programming, and budgeting. The level I SETWILDA will be responsible for monitoring RIAPs/LIDAPs under the Project. The DPUP in each province participating in the Project will be responsible for overall technical supervision and management of the subprojects in the province concerned. Each level I government concerned will maintain or, as the case may be, establish and maintain a PMU within the DPUP with an adequate number of suitably qualified

5.02 5.03 5.04 (a) 5.04 (b) 5.04 (c) 5.04 (d)

ADB suspended the Project in June 2002 on the grounds that DGURDa did not comply with this requirement. However, DGURD’s capacity to comply was compromised by Law 22/1999, which decentralized regional administration. Following the midterm review of June 2000, ADB rated the Project as satisfactory. (i) Complied with. (ii) Complied with. (iii) Complied with. Complied with in terms of duties stipulated in the covenant. PUCFs were particularly active in 1996/97, but less so thereafter because of a lack of appropriate budgetary provisions. PMUs increasingly assumed PUCF duties after 1997. Complied with. The activities of BAPPEDA I in respect of the Project have effectively shadowed those of the PUCFs. State of compliance unknown. New RIAPs and LIDAPs not completed until September 2001 and BME activities ended in June 2002. Generally not complied with. PMUs were established in all provinces soon after loan effectiveness. However, budgets from level I governments for operational requirements were for the most part insufficient to enable PMUs to carry out their duties effectively. No PPFO or PFO was established for the

Appendix 7 37

Covenant

Ref in

LA

Status of Compliance

staff to carry out supervision and management of subproject implementation. Local Government

LUCFs will be established, within 1 month of the effective date or such later date as will be agreed by the Borrower and ADB, in each level II government participating in the Project. The LUCFs will be chaired by the head of the respective BAPPEDA II. LUCFs will be responsible for overall coordination of the preparation and implementation of the subprojects in their respective areas. Each level II government will establish and maintain a PIU with adequate qualified staff. Each BAPPEDA II concerned will be responsible for subproject planning, programming, and budgeting. The level II SETWILDA will be responsible for implementation of RIAPs/LIDAPs under the Project. DGHS will, in coordination with relevant central Government authorities, maintain a list of priority cities and subprojects, based upon consultation with the level I and level II governments concerned, and will send an updated list to ADB for information at least once a year until all subprojects have been selected. To be eligible for financing under the Project, subprojects will meet the following criteria: (i) the subproject area includes one or more priority cities as identified in national, provincial, and local development plans; (ii) the level II government and/or, if applicable, the PDAM concerned wishes to participate in the Project and is committed to make the necessary financial contributions to the subproject and to implement an appropriate RIAP/LIDAP and/or corporate plan; (iii) the subproject area exhibits (a) a significant population growth rate, (b)

5.05 (a) 5.05 (b) 5.05 (c) 5.05 (d) 5.06 5.07

Project. Their absence created persistent problems of accounting for payment approvals and preparation of SOEs, which in turn threatened to delay replenishment of the special account. Complied with in terms of duties stipulated in the covenant. LUCFs were particularly active in 1996/97, but less so thereafter because of a lack of appropriate budgetary provisions. Not complied with in terms of SPAR coordination. Based on a survey of 13 local governments, DGURD’s PCR states that the requirement to establish PIUs was complied with, but that they were not adequately funded. Generally complied with. State of compliance unknown. New RIAPs and LIDAPs not completed until September 2001 and BME activities ended in June 2002. Complied with through the DGHS management advisory consultants quarterly reports. (i) Complied with. (ii) Generally complied with in respect of financial contributions. Little compliance observed in respect of implementation of RIAPs and LIDAPs and PDAM corporate plans. (iii) (a) “Significant” growth not defined; some

SPARs show very low population

38 Appendix 7

Covenant

Ref in

LA

Status of Compliance

economic growth potential and (c) infrastructure deficiency; and (iv) in respect of subprojects for increased capacity, the service provider will demonstrate that the existing facilities are being used efficiently. The level II governments will, with the assistance of the PMUs if necessary, prepare subprojects that meet the selection criteria (para. 7 of this schedule). Each subproject will be prepared in accordance with subproject selection, appraisal, and design criteria agreed between the Borrower and ADB. After preparation, subprojects will be appraised by the PUCFs. The size and scope of each subproject will be determined by the demonstrated needs of the subproject area and the affordability of the subproject, taking into account the institutional and financial capabilities of the level II government and/or PDAM concerned. Subprojects will be designed in accordance with standards agreed upon for each component between the Borrower and ADB. Such standards will include (i) technical design standards, according to which the design of each component under a subprojects will be technically viable and employ appropriate technology; (ii) financial standards, according to which revenue-generating components of a subproject will be financially viable; and (iii) economic standards, according to which nonrevenue generating components of a subproject will be economically viable. As part of subproject preparation, the Borrower will require the level II governments and PDAMs concerned to prepare and adopt, or as the case may be, to update RIAPs/LIDAPs or corporate plans, including plans to reduce UFW and improve O&M. In the preparation of subprojects, the Borrower’s environmental impact assessment procedures will be followed, including a preliminary screening of subprojects and an initial environmental examination. For subprojects with adverse

5.08 5.09 5.10 5.11

growth rates but generally the criterion was complied with.

(b) Generally complied with. (c) Complied with.

(iv) Not complied with. The SPARs do not refer to this requirement. See comments in Section 5.07 for extent of compliance with selection criteria. See comments in Section 5.09 (i), for extent of compliance with design criteria. No evidence SPARs were appraised and approved by both PUCFs and LUCFs. Financial capability statements for local governments and Finpros for PDAMs, together with LIDAPs, were produced in all SPARs (ref. Sections 5.07 (ii) and 5.09 (ii)). (i) Complied with. However, problems with the indiscriminate application of “technical design standards” are discussed in the comments regarding Section 4.03 (b) (ii) Standards set and complied with, but methodology often obscure; (iii) as in (ii). Not complied with. No evidence the Borrower attempted to do this. Partially complied with in terms of SPAR preparation, with SPARs for all towns surveyed containing coverage of environmental issues and the need for an initial environmental examination, environmental impact assessment, ,mitigating measures for design

Appendix 7 39

Covenant

Ref in

LA

Status of Compliance

environmental impact, such as solid waste and septic tank disposal sites and new roads, an environmental impact assessment will be carried out. Any recommendations made as part of the assessment regarding mitigating measures and design changes and/or monitoring systems will be incorporated in the design of the subprojects concerned. For subprojects subject to ADB approval, the initial environmental examination or, where applicable, the environmental impact assessment including, as the case may be, design changes and/or monitoring sytems, will be submitted to ADB for review prior to any disbursement for the affected component of the subproject. Subprojects that meet the selection criteria (para. 7 of this schedule) and the design standards (para. 9) will be approved for inclusion under the Project by DGHS. If the estimated costs of the subproject concerned is more than $10 million equivalent and, in the case of the first subproject in any province, the subproject will subsequently be submitted to ADB for approval. DGHS will, in the case of subprojects for which ADB’s prior approval is required, submit to ADB a copy of the subproject appraisal report in English. In the case of subprojects for which ADB’s prior approval is not required, DGHS will submit to ADB for information a summary of the subproject appraisal report in English. The report or summary will demonstrate compliance with the subproject selection criteria and design standards. The subproject appraisal reports will include an assessment of the potential for partnerships between the public and private sectors in providing the facilities and services to be financed. Without limiting the generality of Section 4.02 of this Loan Agreement, the Borrower will ensure that all necessary budget requests are submitted and all necessary budget approvals are issued in sufficient time to avoid delays in subproject implementation. The subsidiary loan agreements will carry standard terms and conditions satisfactory to ADB, including the prevailing terms for

5.12 5.13 5.14

changes and monitoring systems, as the case may be. However, the screening criteria proposed were not always adequate, especially for TPAs. Complied with. ADB set this benchmark unrealistically high. The high benchmark may have been set to reduce ADB administration workload but it also reduced ADB’s control mechanism. Complied with. By agreement with ADB, these SPARs were later submitted in summary form and failed to convey the information required. See comments against 5.07, 5.08, and 5.09 Not complied with. No assessments given. Generally complied with. Lack of compliance in 2001 was due to introduction of the DAU which was unforeseen at time of LA signing, and late placement of DIP. Nominally complied with, since SLA terms and conditions remained unchanged during SUDSP. However, the Government’s

40 Appendix 7

Covenant

Ref in

LA

Status of Compliance

MOF terms for urban sector projects. The Borrower will bear the foreign exchange risks. Without limiting the generality of Section 4.02 of this Loan Agreement, the Borrower will ensure that all land or rights to land required for the Project will be acquired or made available in a timely manner to ensure that the Project is implemented on schedule. The Borrower will cause the PDAMs concerned to undertake responsibility for O&M of water supply facilities provided or improved under the Project. The Borrower will cause the level II governments concerned to undertake responsibility for O&M of the project facilities for drainage, sewage and sanitation, solid waste management, market improvement, and roads. The Borrower will cause the level II governments concerned to encourage the respective communities to undertake responsibility for O&M of the project facilities provided under the kampong improvement components. To the extent necessary, the level II governments will participate in carrying out the O&M of such facilities. Each level II government concerned, with the assistance of the PIU, will develop and implement a public information and education campaign to encourage proper use of the project facilities and active participation of community-based organizations and informal groups in achieving urban development sector goals, including assistance in O&M of public facilities.

5.15 5.16 (a) 5.16 (b) 5.16 (c) 5.17

procedures and terms and conditions for SLAs have been contrary to prudent banking practice and ADB seems to never have queried them. The number of nonperforming SLA is high and must be resolved if ADB urban sector project funding is to continue. All Project SLA have been denominated in rupiah, with MOF assuming the foreign exchange risk. This aspect of the covenant has therefore been complied with. Generally complied with. Land acquisition issues were not an issue in the Project. Implementation has not been adequate because of low tariffs (ref Section 5.21 (i). In many PDAMs, maintenance costs have declined significantly in real terms. However, also in some cases PDAMs have neglected preventive maintenance that could have been carried out at the cost of labor only. Mixed compliance. See Section 4.09. In general, communities have not been sufficiently encouraged to assume ownership responsibilities. See sections 5.17 and 5.18. Complied with, but campaigns were developed through local governments, so that the interface between NGOs and community was limited and not effective.

Appendix 7 41

Covenant

Ref in

LA

Status of Compliance

In the course of preparation of all subprojects, including kampong and market improvement components, the relevant level II government, with the assistance of the PIU concerned, will consult with community leaders concerned and will ensure that community-based organizations and informal groups are encouraged to participate in the planning, construction, and O&M of the project facilities. Within 3 months after the effective date, the Borrower will submit to ADB for its approval a proposal for a training program under the Project to include (i) number of staff from the respective agencies and community-based organizations to be trained, (ii) criteria for candidate selection, (iii) institutions proposed for training, (iv) courses to be followed, (v) estimated training cost, (vi) duration of the training, and (vii) terms and conditions to be imposed on the trainees. The Borrower will make arrangements for the trainees to serve in a project-related agency for a reasonable time after completion of the training. The RIAPs/LIDAPs to be developed or updated by Tk II, referred (para. 10 of this schedule), will set tariffs for the sanitation and solid waste management services at levels high enough to cover the aggregate of estimated operating costs and debt service.

5.18 5.19 5.20 (i)

Generally not complied with. Survey evidence to date indicates that the planning and implementation of KIP components did not involve the community significantly. However, KIPs seem to have been properly targeted. Understanding of why the community should be involved in market O&M has not been accomplished. Stallholders pay a fee to Dinas Pasar, which should include O&M. Not complied with. The proposal was submitted nearly 3 years after the effective date of the Loan Agreement. No report or information has been found on this matter. This covenant is generally impossible to fulfill. In respect of solid waste, the covenant is imperfect because the nature of the service in Indonesia has not been understood. Nevertheless, the retribution rate remained at very low levels throughout the project period. Collection efficiencies were dismal. For sanitation, the covenant cannot be complied with. Tariff setting is irrelevant until appropriate institutional measures concerning usage of and payment for the septage service and disposal have been prepared, approved, and implemented. No further investment in this activity should be made until such measures have become effective. The covenant does not mention the need to cover incremental O&M on SUDSP assets or to maintain an adequate debt service capacity ratio. However, the majority of local governments have not complied with this covenant even as it stands, with respect to regular reviews, etc.

42 Appendix 7

Covenant

Ref in

LA

Status of Compliance

The RIAPs/LIDAPs to be developed or updated by Tk II (para. 10 of this schedule), will provide for revenue increases from tariffs, property taxes, and local taxes through regular property revaluations, tariff reviews, and improved collections. The RIAPs/LIDAPs to be developed or updated by Tk II (para. 10 of this schedule) will provide for improvement of financial management information systems and recording procedures. PDAM corporate plans (para. 10 of this schedule) to include regular reviews and adjustments of tariffs to cover higher operating costs and either interest and depreciation or debt service; the tariff structure is to be affordable to low-income customers. The corporate plans for PDAMs (para. 10 in this schedule) to include improvement of bill collection efficiency, including bad debts write-offs, to not more than 90 days accounts receivable outstanding. The corporate plans for PDAMs (para. 10 of this schedule) to include implementation of a program to reduce UFW, with measurable performance indicators, to be determined by the circumstances of each PDAM, but including as a minimum either a 20% reduction in UFW over 5 years from subproject appraisal or the accomplishment of the overall 30% target set in REPELITA VI. Where UFW exceeds 30% at the time of subproject appraisal, PDAM corporate plans will include the establishment of a properly staffed and financed leakage control division within the relevant PDAM to implement a program of leakage reduction, meter re-

5.20 (ii) 5.20 (iii) 5.21 (i) 5.21 (ii) 5.21 (iii) 5.21 (iv)

Not complied with by the Borrower, who did not include property taxes in the TOR of the RIAP/LIDAP consultancy. The approach to RIAPs and LIDAPs should be changed, with the activities being carried out during project preparation. Disbursements, especially of grants, during project implementation should be linked to performance, with targets agreed to and endorsed after completion of the RIAPs as a condition of participation in future IUIDPs. Not complied with. RIAP/LIDAP reports contain no reference to this requirement, because it was not required by the TOR provided by the Borrower. “Regular” is not defined; however, this covenant was widely ignored by local governments and their DPRD. Even now, 7 years after the economic crisis, water tariffs are being held at unrealistically low levels for political purposes. The tariff has been easily affordable to low-income customers by default. Based on the PDAMs reviewed in DGURD’s PCR, many of which were revisited by the PCRM, most PDAMs did not comply. Not complied with by the Borrower, who did not include this requirement in the TOR for follow-up of PDAM corporate plans to reduce UFW. This covenant might have been integrated within Section 5.21 (iii). In more than 50% of PDAM SPARs, investment in UFW-reduction equipment was not included. Furthermore, PDAMs were not compliant through their own efforts. Most bulk water meters do not work.

Appendix 7 43

Covenant

Ref in

LA

Status of Compliance

calibration repairs, and detection and reduction of illegal connections. The Borrower will cause all participating PDAMs to introduce and maintain tariff systems that ensure full cost recovery at or above the economic cost of water from high-income households, industrial, and commercial users. The Borrower will cause all participating PDAMs to encourage low-income households to seek water connections by taking account of the capacity to pay when setting connection fees and establishing an installment system for payment of such fees. The Borrower will ensure that a comprehensive program acceptable to ADB is implemented to monitor and evaluate the technical performance and social and economic benefits of the Project, especially to the poor and women. The BME indicators and procedures will first be tested with respect to data availability and other constraints, revised if necessary, and institutionalized as part of the management information systems of the agencies involved. The program will be developed and coordinated by DGHS with input from level I and II governments and their agencies. The Borrower will cause the implementing agencies concerned to undertake future maintenance of the system and collection and analysis of data. The implementing agencies will assemble relevant baseline data and monitor subsequent changes as a basis for evaluating the project success. Annual reports, including recommendations for improvement where appropriate, will be furnished to ADB through DGHS throughout project implementation and for 1 year after the submission of the PCR. In addition to periodic reviews of the Project,

5.22 (i) 5.22 (ii) 5.23 5.24 5.25

The DGURD’s PCR states that only 5 of 18 PDAMs visited were compliant. Of these, only one was compliant as a result of SUDSP. PDAMs visited during the PCRM were unaware of this covenant, perhaps because of personnel changes. Not complied with. Generally, tariffs are set below the economic cost of water in most towns; this includes tariffs for high-income households and industries as much as for low-income households. Generally not complied with. Not complied with. The BME consultant was appointed 3 years late in April 2001. The BME indicators and procedures were produced and tested by the consultancy, but not institutionalized because the consultancy lasted only 15 instead of 36 months. The system has not been maintained since termination of the consultancy. Not complied with. No project implementing agency was identified with responsibility for this task. In fact, compliance with this part of Section 5.24 is a condition precedent to capability of complying with most of the requirements of Section 5.23. No BME annual reports were submitted. Complied with. The first year review was

44 Appendix 7

Covenant

Ref in

LA

Status of Compliance

a review will be carried out by the Borrower and ADB at the end of the first year of project implementation and during the third year after the effective date. The reviews will include a comprehensive evaluation of project implementation arrangements, the progress of the Project as compared with targets set, feedback from BME activities incorporating the recommendations included in the reports referred to in Section 5.24, and consultations with community groups. The Borrower and ADB will actively consult with each other on a regular basis regarding the progress of REPELITA VI in the urban sector, including issues and strategies concerning the sector. The Borrower will keep ADB informed about finalization and implementation of the proposed urban policy action plans for REPELITA VI and REPELITA VII. The Borrower will review the opportunities and proposed arrangements for private sector participation in the provision of urban services in the project area, and to the extent feasible, facilitate partnerships between public and private sectors in providing such services. The Borrower will keep ADB informed of progress in accomplishing such partnerships.

5.26 5.27

carried out between 16 and 20 March and 13 and 18 April 1998. The midterm review was carried out between 5 and 15 June 2000. Complied with. Policy dialogue was held in appropriate forums at regular intervals. Complied with.

ADB = Asian Development Bank; BAPPENAS = Badan Perencanaan Pembangunan Nasional (National Development Planning Agency); BAPPEDA = Badan Perencanaan Pembangunan Daerah (Regional Development Planning Agency); BME = benefit monitoring and evaluation; BPKP = Badan Pemeriksa Keuangan and Pembangunan (state audit agency); DAU = dana alokasi umum (general allocation grant); DGHS = Directorate General of Human Settlements; DGURD = Directorate General of Urban and Rural Development; DIP = daftar isian proyek (central Government grants to local governments); DPUP = Dinas Pekerjaan Umum Propinsi (provincial public work agency); DPRD = dewan perwakilan rakyat daerah (local legislative council); EA = executing agency; IPLT = instalasi pengolahan lumpur tinja (sewage treatment plant); LA = loan agreement; LIDAP = local government institutional development action plan; LUCF = local urban development coordination forum; MOF = Ministry of Finance; MOHA = Ministry of Home Affairs; O&M = operation and maintenance; PCR = project completion report; PCRM = project complention review mission; PDAM = Perusahaan Daerah Air Minum (local government water supply enterprise); PIU = project implementation unit; PMU = project management unit; PFO = project finance office; PPFO = provincial project finance office; PUCF = provincial urban development coordination forum; RIAP = revenue improvement action plan; REPELITA = Rencana Pembangunan Lima Tahun (5-year development plan); SLA = subloan agreement; SPAR = subproject appraisal report; SOE = statement of expenditures; SUDSP = Sumatra Urban Development Sector Project; TOR = terms of reference; TPA = tempat pembuangan akhir (final disposal site); UFW = unaccounted-for water. a In August 2000, DGHS became the Directorate General of Urban and Rural Development (DGURD) in the Ministry

of Settlements and Regional Infrastructure; in October 2004, the ministry reverted to its previous name, Ministry of Public Works. All references to the Executing Agency after August 2000 refer to DGURD.

Source: Asian Development Bank.

Appendix 8 45

CONSULTING SERVICES

Cost Task

Number of Contracts

Rupiaha

(million) $b

(‘000) A. Project Development Implementation DED&CS—Aceh Province DED&CS—North Sumatra Province DED&CS—West Sumatra Province DED&CS—Riau Province DED&CS—Jambi Province DED&CS—Bengkulu Province DED&CS—South Sumatra Province DED&CS—Lampung Province Bandar Lampung & Surrounding Areas UDP Preparation 2nd Palembang UDP Preparation Subtotal (A) B. Project Management and Implementation Consultant Start-Up Services DGHS Advisory Provincial Advisory—Northern Region Provincial Advisory—Southern Region Advisory to CPMO Subtotal (B) C. Institutional Support IUIDP Training Masters Degree Program Project Implementation Training Public Campaign Private Sector Participation RIAP/LIDAP BME and PCR Subtotal (C) Total (A+B+C)

3

15 9 3 4 5 3 6 1

2

51

1 1 1 1 1

5

1 1 2 1 1 1 1

8

64

2,018.9 2,083.6 2,259.4 1,570.0 1,279.2

992.2 964.1

2,895.4 3,943.7

6,427.1

24,433.6

451.3 23,576.6 27,592.5 18,633.4

4,699.6

74,953.4

1,223.2 3,571.1 1,549.2 3,640.3 9,647.3 6,117.9 3,904.4

30,176.4

129,563.4

216.0 224.7 358.9 238.9 137.1

52.8 127.5 308.9 700.3

716.7

3,081.8

150.7 3,698.2 3,702.6 2,485.8

491.0

10,528.3

229.8 300.7 151.5 391.9 865.8 652.2 662.5

3,305.9

16,916.0c

BME = benefit monitoring and evaluation; CPMO = central project management office; DED&CS = detailed engineering design and construction supervision; DGHS = Directorate General of Human Settlements; IUIDP = Integrated Urban Infrastructure Development Project; LIDAP = local government institutional development action plan; PCR = project completion report; RIAP = revenue improvement action plan; UDP = urban development project. a Rupiah equivalent. b As disbursed. c The total amount is based on loan financial information system data covering Asian Development Bank (ADB)

financed consulting services only. The total amount is thus lower than the $18.8 million recorded under project achievements in Appendix 2, which includes government financing for consulting services, also for expenditures ineligible under ADB financing.

Source: DGHS management advisory consultant annual reports.

46 Appendix 9

2002 LOAN SUSPENSION

1. This Project required more administrative resources on the part of the Asian Development Bank (ADB) than many other ADB-financed projects in Indonesia. Procurement was a contentious issue in the later years, leading to the June 2002 decision to suspend the loan.

A. Procurement Prior to Decentralization

2. In the first 3 years of project implementation, subprojects financed by the central Government’s targeted grant channel to the regions (daftar isian proyek [DIP] consisting of loan proceeds ongranted to the regions, with central Government own-source counterpart funding) continued to be supervised by the Directorate General of Human Settlements (DGHS), the Executing Agency through its project managers. The regional management advisory consultants also organized procurement workshops in each region at the beginning of the Project. Since DGHS had acquired many years of experience with integrated urban infrastructure development projects, procurement and implementation of such subprojects proceeded relatively smoothly. This was especially true of procurement, because DIP-funded subprojects often had estimated contract values requiring approval of ADB through the no-objection letter (NOL) procedure prior to contract. Requests for approval were generally prepared and presented properly. B. Decentralization of Supervision of DIP-Funded Subprojects 3. In April 2000, supervision of DIP-funded subprojects was transferred to local governments as part of the decentralization process, with each project manager now appointed by the head of the local government. Although the regional management advisory consultants held a second round of workshops to explain ADB procurement guidelines to the local project managers and tender committees in April 2000 (in the Southern Region, a third round was held in September 2000 in conjunction with a workshop on implementation and supervision of the Project), little knowledge was transferred when the annual changes of project managers were made. In addition, workshop attendees rarely took notes. Consequently, theoretical knowledge from workshops was not translated into practical experience. DGHS, project management units (PMUs), and the regional management advisory consultants continued to be asked to repeat explanations already given in workshops in order to resolve issues on actual procurement case problems. 4. After April 2000, the number of procurement issues significantly increased. For example, local governments began sending signed contracts, instead of draft contract documents, to DGHS for onward transmission to ADB for NOL approval and issue. Local governments increasingly used the customary practice of splitting contract packages into many smaller components in order to spread patronage and evade the need for ADB procurement review procedures. Inevitably, when not detected, this practice led to a reduction of quality of construction. In some cases, local governments were not fully aware of ADB procurement guidelines before the workshops were held; while those that were cognizant often sought to equivocate on compliance. Others considered that ADB insistence on adherence to the procurement guidelines was an unwarranted interference in local government affairs and contrary to regional decentralization—by any standards, an exceptionally generous interpretation of Law 22/1999 in their favor.

5. In several cases, lowest bidders were improperly disqualified and works were completed before NOLs were received. Copies of tender advertisements sent to DGHS and ADB were

Appendix 9 47

sometimes found to be false and to have never been placed in local newspapers. As a result of the increase in irregularities, ADB began requesting complete files before issuing NOLs, instead of only the bid evaluation report and contract documents. C. Presidential Decree No. 18/2000 6. If the borrower country has a standard prequalification system acceptable to ADB, then ADB’s procurement guideline requirement for individual contractor or consultant prequalification can be waived. Prior to Presidential Decree No. 18/2000 (KEPPRES 18/2000), this was the case in Indonesia, with three national contractor qualification categories (A, B, and C) in terms of contract value ceilings for a series of infrastructure construction activities, and contractor prequalifications being managed by technical ministries (notably, Ministry of Public Works). Once issued, the procedure for prequalification did not have to be repeated and was simply renewed by payment of an annual fee, unless the contractor wanted it amended to include another sector of activity or to bid for contracts with higher values. This prequalification was acceptable to ADB, and meant that only one ADB NOL was required (bid evaluation report and contract documents in a single submission).

7. KEPPRES 18/2000, produced by the State Secretariat with the assistance of central Government executing agencies, was the product of Law No. 18/1999, which, as part of the decentralization process, devolved control of contractors and consultants from the technical ministries to a regulatory agency for contractors and related services (Lembaga Pengawasan Jasa Konstruksi). Consequently, the national lists of prequalified contractors and consultants were no longer valid. KEPPRES 18/2000 required prequalification for every tender, with the objective to safeguard the quality of contractor work and encourage competition. 8. In theory, an unlimited number of contractors could apply for prequalification, provided they had an office in the province where the works were to be executed. In fact, some local governments tried to restrict the number of applications, e.g., by sending ADB copies of prequalification advertisements that never appeared in newspapers or by arbitrarily rejecting prequalification documents on some pretext. 9. Eventually, ADB decided that three separate NOLs were required (instead of one previously) to conform to its procurement guidelines as a consequence of KEPPRES 18/2000: (i) prequalification, (ii) bid evaluation, and (iii) contract documents. This, together with the procurement irregularities, greatly extended the workload and time needed for ADB approvals, as demonstrated clearly in Table A9.

48 Appendix 9

Table A9: Time Needed for Asian Development Bank Approval of Tenders

Year Quarter Number of Days for NOL Approval

1997 Q1 5.6 Q2 10.9 Q3 11.7 Q4 5.2 1998 Q1 4.0 Q2 12.1 Q3 9.8 Q4 5.7 1999 Q1 2.9 Q2 2.8 Q3 6.9 Q4 5.9 2000 Q1 9.7 Q2 14.1

Q3 37.9 Q4 33.8

NOL = no objection letter, Q = quarter. Source: Management advisory consultant quarterly reports.

10. A similar situation prevailed in 2001, but the delays in that year became less important to project implementation because of the Ministry of Finance’s very late placement of the DIP with local governments.

11. KEPPRES 18/2000 and ADB procurement guidelines had only minor incompatibilities; and in any case, the KEPPRES states that, in the event of any conflict, ADB guidelines will prevail. However, many local governments found it incomprehensible that government regulations could be superseded by ADB guidelines and were afraid of the consequences from government auditors if they contravened the KEPPRES. What was originally a well-intentioned attempt to improve quality of construction and encourage competition turned into a severe administrative problem. ADB subsequently worked with the Government to streamline procurement procedures, resulting in a new document—KEPPRES 80/2003. D. ADB Suspension of the Loan 12. Throughout 2001 and early 2002, procurement irregularities increased, creating a difficult relationship between ADB and DGURD,1 because of DGURD’s apparent inability to control the problem. Meetings are reported to have been held at the inspectorate-general level in Ministry of Public Works to try to resolve the issue. No minutes of meetings or notes-to-file in this regard have been found in the ADB files. However, apparently no progress was made so that ADB, at some point in the first half of 2002, decided to refer procurement irregularities directly to the Anticorruption Unit within ADB’s Office of the Auditor General, without prior reference to DGURD. These irregularities extended to false bid bonds issued as a result of

1 In August 2000, DGHS became the Directorate General of Urban and Rural Development (DGURD) in the Ministry

of Settlements and Regional Infrastructure; in October 2004, the ministry reverted to its previous name, Ministry of Public Works. All references to the Executing Agency after August 2000 refer to DGURD.

Appendix 9 49

collusion between local banks and bidders in their submissions to local government tender committees. Extensive correspondence to banks requesting confirmation of validity of bid bonds is available in ADB files. 13. In June 2002, ADB wrote to the Government advising of its decision to suspend all withdrawals from the loan.2 Noting that ADB was investigating 21 cases of irregularities in relation to 8 loans being managed by the Ministry of Public Works, of which more than half concerned this particular Project, ADB concluded that its findings, including “fictitious bid securities and nonexistent bidders,” indicated “a lack of adequate internal controls within the operations” of DGURD, “…making it improbable that the Executing Agency [DGURD] would be able to perform its obligations under the Loan Agreement.” This suspension occurred only 2 months after ADB agreed to extend the Loan Agreement to 31 December 2002. 14. The Minister for Settlements and Regional Infrastructure replied to the above letter, citing the size and complexity of the Project and the number of participating local governments, as well as the impact of decentralization and DGURD’s lack of authority to control local government procurement actions, as reasons for the irregularities; and offering the willingness of the ministry to work with ADB to improve loan implementation in a decentralized environment.3 E. Memorandum of Understanding between ADB and the Government 15. ADB and DGURD produced a memorandum of understanding (MOU) on (i) special extraordinary measures to be put in place for the remaining implementation period, (ii) outstanding priority works to be undertaken; and (iii) extension of the loan closing date to 30 June 2003, to enable such works to be completed.4 It included an agreement to an independent assessment of project management internal controls and oversight systems within the ministry, using DGURD as a pilot, to be conducted by ADB-funded consultants. The final output, to be agreed by ADB, World Bank, and the ministry, would be applied to all future multilateral-funded projects within the DGURD initially and perhaps later within other directorate generals. 16. The improved procurement procedures proposed in the MOU included (i) local government procurement committees, established by the local government head and comprising five members, three nominated by the local government and two independent members with some evidence of procurement experience; (ii) central Government procurement committees to consolidate central procurement by DGURD of all remaining equipment into two international competitive bidding (ICB) packages (one for water supply equipment and the other for vehicles/plant, and each consisting of two members sourced from DGURD, one from elsewhere in Ministry for Settlements and Regional Infrastructure, and two independent members; and (iii) a supplemental letter to be issued by ADB to establish precedence of its procurement guidelines over KEPPRES 18/2000 in the event of inconsistencies, as well as open tenders, together with the abandonment of prequalification in favor of postqualification, for all remaining civil works contracts. 17. The procurement process itself was modified by (i) a requirement for an independent review of all procurement documents by the central and regional government advisory

2 Letter of ADB to the Minister of Finance, 12 June 2002. 3 Letter of the Minister for Settlements and Regional Infrastructure to ADB, dated 31 July 2002. 4 MOU on Special Measures to Avoid Fraud and Corruption, signed by the Government and ADB on 29 October

2002.

50 Appendix 9

consultants; and (ii) formation of a joint procurement review team in the ministry. A procurement procedure and review mechanism, incorporating all elements of the procurement process was defined in the MOU and DGURD included a clear commitment to establish a policy of sanctions for failures of the various procurement committees to follow the procurement process agreed in the MOU. 18. The parties agreed to extend the Project to 30 June 2003. Shortly afterward, ADB removed the suspension, to allow for completion of outstanding works and to enable all parties to the MOU to evaluate whether measures proposed to combat procurement irregularities had been successful.5 F. Review of Procurement Process Established by the MOU 19. In July 2003, the central Government management advisory consultant issued a review paper, which was accepted by both ADB and DGURD. It is reproduced here without comment:

“By the end of June 2003, sufficient procurement activities had been conducted to allow an evaluation of the main aspects of the MOU and the open tender process. Open Tender—Increased Competition The generally held opinion before implementation of the open tender process was that it would lead to increased competition. There were fears initially that the number of bids per packet would reach 50-100, resulting in an evaluation back-log. In the tenders procured to date under the MOU provisions no such significant increase in bidder interest has been evident. The total number of bids received has not significantly varied from pre-MOU procurements under KEPPRES 18/2000 which involved pre-qualification. At this stage there is only anecdotal evidence about why the number of bidders has not substantially increased. The main reasons given relate to the financial requirements for post-qualification which are set at 10% of the value of the bid. Under the MOU, this means that the bidder must show evidence of funds in the company accounts over three consecutive months prior to tender submission with an average balance not less than 10% of the bid value. This appears to be the single most limiting criteria for bidders to meet, and may be responsible for the limitation in the number of bids received. Evidence of Competition

The tenders that have been executed so far under the MOU clearly fall into two categories; those with evidence of competition, and those without. Even with a limited number of bids, some tenders show clear evidence of competition. This is a significant improvement over the bids received under KEPPRES 18/2000. In other cases, prices are tightly grouped around the owner’s estimate. Among those bids associated with cases of tight price grouping, there are tenders where there is evidence of collusion and cases where no such evidence is apparent other than the bid price. In those cases where there was evidence of collusion the bids have been rejected by the DGURD procurement evaluation team, on the recommendations of the advisory consultant.

5 Letter from ADB to the Minister of Finance dated 25 November 2002.

Appendix 9 51

Independent Members in Bid Committees

The MOU requires two independent members to be appointed in each local government tender committee. The two members include one from DGURD, and one from a nongovernment organization, university, or professional association. In the case if the two ICB tenders, the independent members were from professional associations.. The selection of these was essentially done by the advisory consultant and approved by ADB. The advisory consultant also administered and paid for the services of the individual independent members under an addendum to the contract. Each member submits a report on completion of assignment. The advisory consultant has been able to review the performance of the independent members to date. The evidence suggests that the presence of independent members within the procurement committee has had little discernible effect on its performance. The advisory consultant debriefed the independent members in cases where there was evidence of collusion or evidence of manipulation of the tender process and invariably the members did not have any appreciation of the significance of the indicators of such activity. Independent members overall showed little appreciation of the fundamental aspects of a “public tender” despite the previous briefings and seminars on the subject. Review by PMU and Regional Advisory Consultants

The MOU also provides for review of the procurement process by the PMU supported by the regional advisory consultants. The evaluation of performance to date indicates that such review did not identify many of the indicators of breaches of the tender process. The conclusion is that the forensic analysis of bid evaluation reports requires the development of a level of skills based on experience in this kind of evaluation. While independent members were exposed to only one procurement activity, the PMUs and regional consultants reviewed all procurements in their respective regions. In retrospect, although the independent members had a plausible reason for failing to detect breaches of the tender process, the PMUs and regional consultants should have demonstrated a more perceptive examination of the bid evaluation reports. Review by DGURD Procurement Evaluation Team

The procurement evaluation team (PET) was established at director-level under an instruction from the Secretary General of the Ministry for Settlement and Regional Infrastructure, supported by a secretariat and the advisory consultant. The procedure has been for the advisory consultant to review the bid evaluation reports from the local procurement committees and submit these to the PET for evaluation. The record of 12 submissions to date is as follows:

Tenders Evaluated 12 Tenders Accepted 6 pending (1) Returned for retender 5 pending Returned for reevaluation 1 pending

52 Appendix 9

This includes the two ICB tenders which are the subject of separate comments. Of the two ICB tenders, one is still subject to review of complaints lodged by one or more bidders. One other is subject to clarification of signatories on the registration and pre-bid conference attendance sheets. Sanctions

There have been several cases of apparent collusion by bidders. These have resulted in cancellation of the tender by the PET. To date there have been no referrals to the inspector general for sanctions as a result of the procurement process. Procurement of Equipment under ICB

The remaining equipment under the Project was consolidated into two ICB packages for supply and delivery of (i) solid waste and road maintenance equipment, and (ii) water supply equipment. Both packages were tendered by the same procurement committee, supported by Project advisory staff. The committee also included two independent observers from NGOs who had registered with DGURD for this assignment. Both packages showed strong evidence of competition. The solid waste equipment package took 7 weeks to be evaluated by the committee and a further 3 weeks to be reviewed and approved by the PET. The water supply package also took 7 weeks to be evaluated by the procurement committee and a further 4 weeks to be reviewed and approved by the PET. Problems with the ICB Tender

The use of the ICB process was a requirement of the MOU. Problems encountered included: (i) a general lack of understanding of the ICB process by local bidders; (ii) use of English in the procurement documents resulted in unclear understanding of the ICB requirements and technical specifications by (local) bidders; (iii) the requirement for non–overlapping manufacturer’s authorizations for a tender with multiple lots proved to be overly restrictive, and was the basis of many complaints by bidders who sought to use infractions of the manufacturer’s authorization requirement as a means of invalidating competing bids; (iv) although bid documents were checked by the consultant and approved by ADB, some restrictive provisions found their way into the specifications; and (v) only bids from local bidders were received although there were enquiries from two international bidders. Multiple Lots and Manufacturer’s Authorizations

The two ICB tenders consisted of multiple lots, each lot consisting of equipment and material from more than one supplier. Bidders were required to submit a bid for all lots. The current practice for procurement of equipment and material is to restrict any supplier to only one bid. Where the procurement consists of a few items originating from one or two suppliers, this restriction can be applied and has some justification. The restriction of each manufacturer issuing only one manufacturer’s authorization prevents one manufacturer or supplier from dominating the tender. In the case of the two ICB tenders, the multiplicity of equipment and material to be supplied made this restriction difficult to achieve. A practical solution to this problem is still to be found. The compromise arrangement was to identify equipment items or material with limited availability, and

Appendix 9 53

waive ‘the one manufacturer’s authorization—one bid’ constraint. The items so identified included galvanized steel pipe, dissolved air flotation processors and crawler loaders. Although this restriction was waived for selected categories, the bidders reported that manufacturers continued to issue only one manufacturer’s authorization. The impact of this was to reduce the overall number of bids.”

G. Conclusions of the Project Completion Review Mission 20. ADB’s assumption that DGHS would be able to ensure that the project implementing agencies perform their respective roles in an adequate manner6 was problematic as DGHS had no enforcement control. The National Coordinating Team for Urban Development was created for this and other projects as the coordinating agency to overcome this lack of control. In the past, the lack of legal authority had never been an issue and DGHS performance had invariably been rated as satisfactory, because of the small number of participating local governments, over which DGHS was able to exercise its moral authority as representative of a centralized government. Both these factors were changed by the nature of this Project and the decentralization laws of 1999, which were cited by DGURD in its reply to ADB’s 2002 letter of suspension. ADB did not seem to fully recognize these issues, nor did the World Bank when it also suspended another urban development project in 2002. 21. The citing of “fictitious bid securities” as evidence of DGURD’s lack of management controls seems specious. One would not normally expect the executing agency to be responsible for systematically checking the validity of bid bonds without prior occurrence of such an irregularity; neither would one have expected the ADB team to have done so. Furthermore, ADB did not discover this falsification; rather a disgruntled, unsuccessful contractor complained simultaneously to both ADB and DGURD. Unfortunately, there is no record on the file of communication between ADB and DGURD on the subject prior to it being one of the irregularities referred to ADB’s Office of the Auditor General. 22. ADB gave no written warning prior to suspension, although the move followed several meetings between ADB, DGURD, and ministry senior officials to discuss procurement irregularities, albeit without positive outcome. Unfortunately there are no minutes or notes available of these meetings prior to the suspension. While DGURD‘s claim of lack of authority was correct even before decentralization, DGURD did review all submissions of procurement documents before passing them on to ADB under DGURD’s signature. The number of irregularities detected by ADB suggests at least that the rigor of DGURD’s review procedures was unsatisfactory. Although DGURD may not have been aware of specific procurement irregularities at local governments after decentralization, it was likely aware of general problems.

6 Schedule 5.02 of the Loan Agreement.

54 Appendix 10

PROJECT BENEFICIARIES 1. The number of project beneficiaries was estimated at appraisal1 and by the Project Completion Review Mission (PCRM) (Table A10).

Table A10: Estimated and Actual Project Beneficiaries Component Appraisal Estimate

(50 Towns) PCRM Estimate

(67 towns) Achievement Rate

(%) Water Supply 2,700,000a 940,000 34.8 Solid Waste 2,600,000b 2,020,000 77.7 Sanitation 2,000,000c Negligible Drainage 1,000,000 855,000 85.5 KIP/MIP 700,000 360,000 51.4 Urban Roads No estimate No estimate Total 9,000,000 4,175,000 46.4

KIP = kampong improvement program, MIP = market improvement program, PCRM = Project Completion Review Mission. a ADB. 1995. Report and Recommendation of the President to the Board of Directors on Proposed Loans to the

Republic of Indonesia for the Sumatra and West Java Urban Development (Sector) Projects. Manila, para. 85. b Comprising 1.6 million existing and 1.1 million new beneficiaries. c Comprising 1.4 million existing and 1.1 million new beneficiaries. d Comprising 0.8 million existing and 0.8 million new beneficiaries. Source: ADB estimates. 2. Estimating beneficiaries during project preparation using a sector loan approach is very difficult, and the report and recommendation of the President (RRP) (footnote 1) for the Project does not state how the number of beneficiaries was calculated, apart from the components provided in the footnotes, which do not always add up to the totals in the table. 3. Different problems of estimation arose at project completion, in this case because of the large number of participating urban centers. The project completion report (PCR) methodology for each subsector is described here. A. Water Supply 4. The average household size at the last census was 4.3. The benefits monitoring and evaluation (BME) survey found that other families accessed connected households for their piped water supplies rather than using public taps or vendors. Therefore the average number of users per connection is assumed to be 5. The estimate for public tap usage is 50 persons per unit, although the BME survey reports limited usage. Appendix 3 estimates the number of new connections at 122,115, replacement connections at 19,233, and public taps at 234. The total number of additional beneficiaries is therefore estimated at720,000. 5. The RRP estimated that some 1.6 million people with existing connections would benefit from the Project. The nature of the benefits is not explained, but presumably the major benefit is unaccounted-for-water (UFW) reduction which would result in improved water flows and greater availability. Only PDAM Pesisir Selatan out of 10 PDAMs sampled had improved its UFW rate

1 ADB. 1995. Report and Recommendation of the President to the Board of Directors on Proposed Loans to the

Republic of Indonesia for the Sumatra and West Java Urban Development (Sector) Projects. Manila, para. 85.

Appendix 10 55

by the end of the Project, and even this result must be considered dubious because the PDAM has no operational bulk water flow meters. 6. The BME survey was used to quantify the number of beneficiaries among households with a connection at the beginning of the Project. A total of 16.8% of households noticed improved water supply against total surveyed households with connections. Assuming that 35% of the population in participating urban centers had a piped water supply by the end of the Project and deducting the number of those with a connection made during the Project, the number of beneficiaries is approximately 220,000. The total (crudely) estimated number of project beneficiaries in the water supply subsector is therefore 940,000. The SPARs targeted a total of 635,000 incremental beneficiaries, close to the actual outcome. This suggests that the appraisal forecast was very optimistic. B. Solid Waste 7. A similar approach was used to estimate beneficiaries from the solid waste subsector. The percentage of households interviewed by the BME survey claiming improvement in the service since the beginning of the Project (35.1%) was taken as a proxy for the total urban area populations of participating towns at the end of the Project, as estimated in the SPARs. The result is 2,020,000. C. Sanitation 8. The BME/PCR technical survey and PCRM found that sludge treatment plants constructed under the Project were greatly underused, or not used at all and abandoned. The exception was in Padang, where the plant was well maintained but underused, and was also not supplied through the Project. Sludge trucks were also greatly underused and were deployed for watering parks. Again, some were not used at all but left in the garage. As regards public toilet facilities, less than 0.2% of respondents stated that they had started using these facilities. The number of beneficiaries from this subsector cannot be estimated, but likely to be negligible. D. Drainage 10. Areas of benefit were estimated at 0.5 square kilometers (km2) for primary drainage, 0.3 km2 for secondary drainage, and 0.1 km2 for tertiary drainage per linear kilometer of construction, as recorded for each town in the management advisory consultant’s annual reports. The number of beneficiaries was based on the urban density at the end of the Project, as per SPAR estimates. The number of beneficiaries is therefore approximately 855,000. E. Kampong Improvement Program 12. Beneficiaries were estimated for each town by taking the area improved from the management advisory consultant’s annual reports and assuming that population densities in these low-income areas were four times the average urban density forecast in the SPAR by the end of the Project. The result is 360,000 beneficiaries. F. Urban Roads 13. Nearly 320 kilometers of urban roads were improved and more than 50 kilometers of new roads were constructed through the Project. The number of beneficiaries cannot be estimated, although the number is likely considerable. None were estimated in the RRP.

56 Appendix 11

FINANCIAL PERFORMANCE OF SELECTED PDAMS 1. This appendix examines the actual financial performance of selected local government water supply enterprises (Perusahaan Daerah Air Minum, PDAMs) during the course of the Project. Section 1 provides an analysis1 of related compliance with loan covenant requirements (paras. 11, 16(a), 21 and 22 of Schedule 5 of the Loan Agreement). Section 2 is a status report at loan closure of the long-term debt service position2 of all participating PDAMs. A. Financial Performance during Project Implementation 2. The financial performance between 1996 and 2003 of most PDAMs sampled was consistently dreadful. All were in worse financial condition at the end of the Project than at its commencement, mainly for reasons beyond the project scope. All produced an accumulation of losses (with depreciation calculated against assets not revalued) on the operating statement, with the exception of PDAM Jambi, which produced a profit in four of eight years analyzed, and PDAM Padang, which showed a profit in 2003. Balance sheets demonstrate that most sampled PDAMs have current ratios indicating insolvency because of nonperforming loans. Even the solvency of those with current ratios above par is questionable because of the dubious quality of their current assets. For some, accumulated losses have eliminated their entire equity. 3. The apparent problem has been the inadequacy of the tariff. The cumulative inflator during the Project was 2.75. Some PDAMs succeeded in having a tariff covering this multiple by the end of the Project. However, tariffs were usually adjusted at three-year intervals, while recurrent costs (especially electricity) increased at rates at least in line with (and usually above) inflation. Tariff increases were invariably accompanied by immediate salary increases together with a relaxation of controls over administrative expenditure. Salaries were constrained because of liquidity problems. The margin between unit tariff income and recurrent costs indicates that many PDAMs have relied on other income such as connection fees to meet the monthly payroll. Not surprisingly, the PDAMs are unable to discharge their debt service obligations. Local governments and their legislative councils regard PDAMs as a cash business, with no concern for allowing them to pay down debt and recover depreciation. 4. The underlying problem has been poor management. PDAM Jambi produced by far the best financial performance with only a 50% nominal price tariff increase during the Project. Other PDAMs exhibit, to varying degrees, (i) overstaffing, (ii) large administrative water losses caused by failure to replace broken meters, (iii) out-of-control accounts receivable, (iv) inefficient collection procedures, (v) poor control of administrative expenditures, and (vi) lack of liaison between technical and administrative departments. 5. As regards unaccounted-for-water (UFW), only the reported losses of PDAM Jambi, which practices meter zoning, installs bulk water meters at water treatment plants, and has a meter replacement program, can be regarded as correct. The others are estimates, usually favorable to the PDAM; some reported UFW results are patently incorrect. Most PDAMs likely have UFW (physical and administrative) well in excess of 40%. Some PDAMs visited by the Project Completion Review Mission reported significantly increasing losses during 2004 and 2005 because of leakages from rapidly deteriorating distribution systems. For the most part, the PDAMs have no liquidity to try and resolve the problem.

1 Based on data provided by sampled PDAMs, including audited annual reports. 2 Source: Ministry of Finance, 31 December 2003.

Appendix 11 57

6. Another issue is the impossibility of district PDAMs being able to function commercially because of the many small rural water supply systems under their control. These units have no economy of scale and require covering tariffs that are unaffordable to their communities. Operating subsidies are required, but local governments and their legislative councils are impervious to this need. As a result, some small rural water supply systems are not or are only partially functional. A PDAM involved in a recent local government subdivision commented that the transfer of small rural water supply systems to newly created local governments had an immediate beneficial effect on their operation (Tables, Supplementary Appendix C). B. Debt Position at Loan Closure 7. The problems of loans made to PDAMs through the Ministry of Finance’s regional development account, including subsidiary loan agreements in connection with this Project, are well known. Supplementary Appendix C provides a summary of the debt position of participating PDAMs at project completion (31 December 2003, data provided by the Ministry of Finance). The list does not include PDAMs without loans or whose debt is not yet due (Tables, Supplementary Appendix C).

58 Appendix 12

FINANCIAL AND ECONOMIC EVALUATION 1. The Project Completion Review Mission recalculated financial internal rates of return (FIRRs) and economic internal rates of return (EIRRs) for several subprojects (based on data availability). FIRRs were calculated for water supply; and EIRRs for water supply, drainage, urban roads, and kampong improvement programs. A. Financial Analysis

1. Financial Analysis of Sampled Water Supply Subprojects 2. Subproject revenues and operating costs for each year from entry into operation were taken from annual local government water supply enterprise (Perusahaan Daerah Air Minum, PDAM) audit reports and discounted by the gross domestic product (GDP) deflator to the initial year of subproject implementation to yield constant prices. Unit tariff yields and recurrent operating costs per cubic meter (m3) of water sold were then derived in constant prices. These were multiplied by average domestic annual consumption and incremental connections from the subproject to derive constant price incremental costs and revenues. 3. Capital costs were discounted to the initial year of subproject implementation. FIRRs were then recalculated to compare with subproject appraisal report (SPAR) projections. The SPAR and project completion report FIRRs for 10 sampled PDAMs are provided in Table A12.1.

Table A12.1: Financial Internal Rates of Return for 10 PDAMs

PDAM

SPAR (%)

PCR (%)

Lampung Selatan District 11.7 (4.9) Belitung District 19.1 (17.8) Bengkulu Utara District No FIRR (24.5) Rejong Lebong District 45.2 (7.5) Pesisir Selatan District No FIRR (19.1) Padang City 17.2 13.8 Jambi City 13.0 (4.3) Pekanbaru City 19.1 (4.5) Tebing Tinggi City 61.0 (11.4) Asahan City 30.9 (19.7)

PCR = project completion report; PDAM = Perusahaan Daerah Air Minum (local government water supply enterprise); SPAR = subproject appraisal report. Source: ADB, Project Completion Review Mission estimates.

4. Only one subproject (Padang) achieved a result comparable with the SPAR forecast, with the FIRR above the financial opportunity cost of capital. The remaining nine sampled PDAMs all registered negative FIRRs, thus demonstrating severe lack of efficiency. The main reason was the failure of local governments to increase tariffs in accordance with loan agreement provisions. Most PDAMs are managed on a cash basis rather than on sound business principles, a situation for which local governments and their legislative councils are responsible. In some cases, new connection targets were not achieved. 5. Other possible factors for almost total subproject failure to reach financial objectives are poor PDAM management and inadequate SPAR technical preparation. There may have also

Appendix 12 59

been problems with the initial financial analysis methodology. Some FIRR forecasts seem high and should have been queried by the Directorate General of Human Settlements (DGHS) and the Asian Development Bank (ADB) at SPAR review. Most SPARs contain little or no analysis of previous PDAM performance and no mention of assumptions made in financial evaluations, except the tariff increase required.

2. Financial Analysis of Solid Waste Management Subprojects 6. No financial analysis recalculations were carried out because revenue yields were far below recurrent costs for all years of operation. For example, the 2002 solid waste management (SWM) retribution yield for all local governments participating in the Project was Rp9.84 billion for a service area population of 5.76 million, thus an annual per capita yield of Rp1,700 or Rp8,000 per household. FIRRs calculated in the SPARs were based on the assumption that SWM is a cost-recovery subsector. The local cleansing and parks department in charge of SWM is a service organization, not a cost-recovery center. Although SWM revenues are clearly identified as such in local government accounts, they are not specifically earmarked for financing the department but are deposited with the general local government exchequer. The department budgets for and manages its own direct costs, but is frequently unaware of the revenue side. Any tariff changes are therefore dictated by the overall local government need for additional revenues, and not by the specific requirements of the department. 7. Most of the expenditure for the department’s services is for collection, transportation, and disposal of solid waste from the various domestic and commercial sectors. Other items of expenditure are for street cleaning and park maintenance. Market solid waste collection, transportation, and disposal is also the responsibility of the department (although in some local governments, the markets department has its own trucks to collect and transport such waste), but the fee paid by market stallholders is included as an element in the market fee and not credited to the department revenues. Accountability for retributions actually collected is the responsibility of the local government revenue collection agency. 8. Some services are directed at the private sector (households, commercial premises, and industry) and paid for in the form of a user charge. Other public waste (such as street cleaning and parks) is not directly remunerated by a user charge. 9. Some private waste is serviced directly, with trucks collecting waste directly from the premises (markets, commercial premises, and industry). However, almost all domestic waste is serviced indirectly: waste is collected in handcarts and delivered to temporary storage or transfer depots, for later collection by trucks and transportation to the final disposal site. Each of these collection methods has its own cost structure and payment system. In effect, once domestic waste reaches the depot, it is considered public waste (like street cleaning and park waste). Households usually pay the neighborhood organization only for collection and transportation to the transfer depot. Costs of transportation to the final disposal site and disposal of domestic waste are often not covered by the tariff, but regarded as a municipal service whose costs are notionally paid for from local government general funds. 10. Many attempts have been made in the past to impose a rational tariff system for solid waste cost recovery, but without success. Various classes of beneficiaries pay different fees for what are, in effect, different levels of service. The actual costs of the service to a specific user are almost impossible to calculate.

60 Appendix 12

3. Financial Analysis of Sanitation Subprojects 11. FIRRs were not recalculated for sanitation subprojects as all revenue streams were negative. The major problem is lack of community interest in utilizing the service. Full cost recovery for septage collection and at least the operating costs of the sludge disposal facilities is estimated to require a demand volume of at least 9 m3 of septage per day per truck at present tariff levels. This level of demand has not been approached anywhere in Indonesia. 12. Use of the service has always been voluntary. None of the septage transportation and disposal subprojects were supported by commissioning of real demand surveys. As a result, the SPARs reflected the project documentation1 in grossly overestimating demand and included oversize sludge disposal facilities. Households with septic tanks do not recognize the need to have them cleaned periodically, and little or no evidence is available of any public education on this issue. B. Economic Analysis 1. Economic Analysis of Sampled Water Supply Subprojects 13. The SPARs contained no economic analysis for water supply. EIRRs were calculated for all sampled PDAMs. Financial prices have been converted to economic prices. Subprojects yielded benefits in the form of increased supplies for those customers with existing connections and economic cost savings to those switching to piped water supplies from non-piped sources. The resulting EIRRs are in table A12.2.

Table A12.2: Economic Internal Rates of Return for 10 PDAMs

PDAM SPAR PCR Lampung Selatan District No EIRR 8.8% Belitung District No EIRR (4.2%) Bengkulu Utara District No EIRR (7.5%) Rejong Lebong District No EIRR 5.4% Pesisir Selatan District No EIRR (10.4%) Padang City No EIRR 35.1% Jambi City No EIRR 18.9% Pekanbaru City No EIRR 28.7% Tebing Tinggi City No EIRR 14.1% Asahan City No EIRR 5.5%

EIRR = economic internal rate of return; PCR = project completion report; PDAM = Perusahaan Daerah Air Minum (local government water supply enterprise); SPAR = subproject appraisal report. Source: ADB, Project Completion Review Mission estimates.

14. Only four subprojects exceeded the 12% economic opportunity cost of capital benchmark, while three subprojects yielded negative EIRRs. EIRR variances between subprojects are caused by the incidence of non-piped water source typologies substituted by piped systems. For example, expensive vendor supplies are the most common source of non-piped supply in cities, while in less densely populated district towns less expensive unit costs from deep and shallow wells prevail over vendor supplies. Consequently, economic prices are significantly higher in cities than they are in district towns. 1 ADB. 1995. Report and Recommendation of the President on the Proposed Loans to the Republic of Indonesia for

the Sumatra and West Java Urban Development (Sector) Projects. Manila.

Appendix 12 61

2. Economic Analysis of Non-Revenue Generating Subprojects 15. EIRRs were computed in SPARs for drainage, urban roads, and KIP subsectors, with benefits assessed on imputed land value increases. Investment costs were based on the sum of all components in each SPAR subsector, rather than single components, possibly because no single component was of sufficient value to require individual analysis. However, the unit land price was assumed to be the same for all components. 16. Although benefits represented by real land value increases are subject to many nonproject influences, the SPAR methodology for identified components is used here for reasons of comparability. However, the SPARs did not indicate the methodology used for calculating areas of benefit nor indeed specify the actual area covered. For the purposes of the project completion report, the area of benefit for a component is assumed to be (i) 0.5 km2 for each linear kilometer of primary drainage, 0.3 km2 for each linear kilometer of secondary drainage, and 0.1 km2 for linear kilometer of tertiary drainage constructed; (ii) 0.4 km2 for each linear kilometer of road improved, and (iii) the actual size of the KIP area. 17. Land values are based on the ratable values used for property tax assessments. Where necessary, preproject values were increased by the GDP inflator to the year of component construction, and postproject values reduced by the GDP deflator. O&M costs are estimated at 5% per annum of capital costs. The economic life of components is taken to be 10 years. The resulting EIRRs are in table A12.3.

Table A12.3: Economic Internal Rates of Return for Non-Revenue Generating Components

City/Town and Local Government

Subsector Component EIRR

Painan Pesisir Selatan District

Drainage Kampung Luar Secondary 89.6%

Painan Pesisir Selatan District

Drainage Laban Tertiary 60.6%

Lubuklinggau City

Drainage Jl Kemanangan Tertiary 46.7%

Tanjungpandan Belitung District

Drainage Jl Sibarik Primary 50.8%

Tanjungpandan Belitung District

Drainage Jl Barutak Primary 65.2%

Tarutung Tapanuli Utara District

Drainage Aek Roskop Primary 48.8%

Tarutung Tapanuli Utara District

Drainage Jl Tobing Secondary 51.9%

Pekanbaru City

Urban Roads Jl Mukhajirin 206.9%

Pekanbaru City

Urban Roads Jl Guru Hasan 169.0%

Kalianda Lampung Sel. District

KIP Kelurahan Way Agung 36.0%

Kisaran Asahan District

KIP Kelurahan, Mutiara 32.0%

EIRR = economic internal rate of return, Jl = jalan (street), KIP = kampong improvement program. Source: ADB, Project Completion Review Mission estimates.

62 Appendix 12

18. Some land values rose significantly, with Pekanbaru a notable example, where land prices have risen spectacularly since decentralization. These have obviously been impacted by improvements other than those induced by the Project components and were clearly visible in Pekanbaru (shopping mall, new government offices). However, the fact that only minor increases in land values were needed for most components to achieve a 12% EIRR suggests that a reasonable degree of economic efficiency has been achieved by the components themselves.