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Document of The World Bank FOR OFFICIAL USE ONLY Report No: 38860-ID PROJECT APPRAISAL DOCUMENT ON A PROPOSED L O A N IN THE AMOUNT OF US$23.56 MILLION TO THE REPUBLIC OF INDONESIA FOR AN URBAN WATER SUPPLY AND SANITATION PROJECT June 24,2009 Urban Development Sector Unit East Asia and Pacific Region This document has a restricted distribution and may be used by recipients only in the performance o f their official duties. Its contents may not otherwise be disclosed without World Bank authorization. Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized

World Bank Document...Surat Perintah Pencairan Dana (Subsidiary Remittance Order) Surat Perintah Membayar (Payment Order) Surat Permintaan Pembayaran (Payment Request) Terms of Reference

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Page 1: World Bank Document...Surat Perintah Pencairan Dana (Subsidiary Remittance Order) Surat Perintah Membayar (Payment Order) Surat Permintaan Pembayaran (Payment Request) Terms of Reference

Document o f The World Bank

FOR OFFICIAL USE ONLY

Report No: 38860-ID

PROJECT APPRAISAL DOCUMENT

ON A

PROPOSED LOAN

IN THE AMOUNT OF US$23.56 MILLION

TO THE

REPUBLIC OF INDONESIA

FOR AN

URBAN WATER SUPPLY AND SANITATION PROJECT

June 24,2009

Urban Development Sector Unit East Asia and Pacific Region

This document has a restricted distribution and may be used by recipients only in the performance o f their official duties. I t s contents may not otherwise be disclosed without World Bank authorization.

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Page 2: World Bank Document...Surat Perintah Pencairan Dana (Subsidiary Remittance Order) Surat Perintah Membayar (Payment Order) Surat Permintaan Pembayaran (Payment Request) Terms of Reference

CURRENCY EQUIVALENTS

(Exchange Rate Effective November 17,2008)

ADB APBD APBN ASEM AusAID BAPPENAS

Bawasda Botabek BP BPKP CPS

CQS DA DAK

DAU

DG DGCK

DPRD DSCR EIRR EMP ENPV FM FNPV FRAP FY GDP Go1

Currency Unit = Indonesian Rupiah (IDR) IDR 1 = US$0.0001063 US$l = IDR9,400

FISCAL YEAR January 1 - December 31

ABBREVIATIONS AND ACRONYMS

Asian Development Bank Anggaran Pendapatan dan Belanja Daerah (local budget and revenue) Anggaran Pereacanaan Belanja Negara (central government budget) Asia-Europe Meeting Funds Australian Aid Agency Badan Perencanaan Pem bangunan Nasional (Agency for National Development Planninghlinistry o f Planning) Badan Pengawasan Daerah (local audit) Bogor Tangerang Bekasi Best Practices Badan Pengawasan Keuangan dan Pembangunan (state audit) Country Partnership Strategy (also referred to as Country Assistance Strategy

Consultant’s Qualification Selection Designated (Special) Account D a n a Alokusi Khusus (Special Allocation Funds - block grant from central government to local governments for special purposes) D a n a Alokasi Umum (General Allocation Funds - block grant from central government to local governments for general purposes) Directorate General Directorate General o f Cipta Karya (Directorate General o f Human Settlements o f the Ministry o f Public Works) Dewan Perwakilan Rakyat Daerah (local parliament) Debt Service Coverage Ratio Economic Internal Rate o f Return Environmental Management Plan Economic N e t Present Value Financial Management I

Financial Net Present Value Financial Recovery Action Plan Fiscal Year Gross Domestic Product Government o f Indonesia

(CAS))

.. 11

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FOR OFFICIAL USE ONLY

IBRD ICB IDR IuFR IG Keppres KPA KPPN L A M P MAK MDG MoE MoF M o H MoHA MoPW NCB NRW O&M PAMSIMAS

PCU PDAM PEMDA PIU P M M PP PPIAF RPJM SATKER SBD SIDA SIL SLA SP2D SPM SPP TOR UDP UKL UPL USAID UWSSP WASAP

International Bank for Reconstruction and Development International Competitive Bidding Indonesian Rupiah Interim un-audited Financial Report Inspectorate General Keputusan Presiden (presidential decree) Kuasa Pengguna Anggaran (authorized use o f budget) Kantor Pelayanan Perbendaharaan Negara (government treasury office) Land Acquisition and Resettlement Action Plan Mata Anggaran Kegiatan (budget o f activity) Millennium Development Goal Ministry o f Environment Ministry o f Finance Ministry o f Health Ministry o f Home Affairs Ministry o f Public Works National Competitive Bidding Non Revenue Water Operation and Maintenance Proyek Air Minum dun Sanitasi berbasis Masyarakut (Indonesian term for

Project Coordinating Unit Perusahaan Daerah Air Minum (local water utility) Pemerintah Daerah (local government) Project Implementation Unit Project Management Manual Peraturan Pemerintah (government regulation) Public Private Infrastructure Advisory Facility Rencana Pembangunan Jangka Menengah (Medium Term Development Plan) Satuan Kerja (working unit) Standard Bidding Document Swedish International Aid Agency Specific Investment Loan Subsidiary Loan Agreement Surat Perintah Pencairan Dana (Subsidiary Remittance Order) Surat Perintah Membayar (Payment Order) Surat Permintaan Pembayaran (Payment Request) Terms o f Reference Urban Development Project Upaya Kelola Lingkungan (Environmental Management Plan) Upaya Pemantauan Lingkungan (Environmental Monitoring Plan) United States Aid Agency Urban Water Supply and Sanitation Project Indonesia-Water and Sanitation Program (Dutch-funded Technical Assistance Program)

WSSLIC)

This document has a restricted distribution and may be used by recipients only in the performance o f their off icial duties. I t s contents may not be otherwise disclosed without Wor ld Bank authorization.

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WBI World Bank Institute WSSLIC WTP Water Treatment Plant

Water Supply and Sanitation for Low Income Communities

Vice President: Country Director:

Sector Director: Sector Manager:

Task Team Leader:

Mr. James W. Adams, EAPVP Mr. Joachim von Amsberg, EACIF Mr. John Roome, EASSD Ms. Sonia Hammam, EASIS Mr. Suhail Jme’an, EASUR

iv

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INDONESIA Urban Water Supply and Sanitation Project

CONTENTS Page

STRATEGIC CONTEXT AND RATIONALE .................................................................. 3 Country and Sector Issues ................................................................................................... 3 Rationale for Bank involvement ......................................................................................... -6 Higher level objectives to which the project contributes .................................................... 6

I 1 . PROJECT DESCRIPTION .................................................................................................. 7

I . A . B . C .

A . B . C . D . E .

I11 . A . B . C . D . E .

I V . A . B . C . D . E . F . G . H . I .

Lending instrument ............................................................................................................. -7

Project components ............................................................................................................. -7 Project development objective and key indicators .............................................................. 7

Lessons learned and reflected in the project design ............................................................ 9 Alternatives considered and reasons for rejection. ............................................................ 10

IMPLEMENTATION ..................................................................................................... 10 Partnership arrangements .................................................................................................. 10

Institutional and implementation arrangements ............................................................... -10 Monitoring and evaluation o f outcomeshesults ............................................................... -11 Sustainability ..................................................................................................................... 12

Critical risks and possible controversial aspects ............................................................... 12

APPRAISAL SUMMARY .............................................................................................. 14 Economic and financial analyses. ...................................................................................... 14

Technical ........................................................................................................................... 17

Fiduciary ............................................................................................................................ 18 Social ................................................................................................................................. 19

Environment ...................................................................................................................... 20

Safeguard policies., ............................................................................................................ 21

Land Acquisition and Resettlement Framework ............................................................... 21 Policy Exception and Readiness ........................................................................................ 21

Readiness criteria., ............................................................................................................. 21

. .

. .

V

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Annex 1: Country and Sector Background ........................................................................... 2 3

Annex 2: Major Related Projects Financed by the Bank and/or other Agencies .................. 29

Annex 3: Results Framework and Monitoring ...................................................................... 30

Annex 4: Detailed Project Description .................................................................................. 39

Annex 5: Project Costs .......................................................................................................... 49

Annex 6: Implementation Arrangements ............................................................................. -50

Annex 7: Financial Management and Disbursement Arrangements ..................................... 53

Annex 8: Procurement Arrangements ................................................................................... 68

Annex 9: Anti-Corruption Action Plan ................................................................................. 78

Annex 10: Economic and Financial Analysis ........................................................................ 84

Annex 1 1 : Safeguard Policy Issues ...................................................................................... -92

Annex 12: Project Preparation and Supervision .................................................................... 95

Annex 13: Documents in the Project File .............................................................................. 97

Annex 14: Statement o f Loans and Credits .......................................................................... -98

Annex 15: Country at a Glance ........................................................................................... 101

Annex 16: Map IBRD 33420 ............................................................................................... 102

v i

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INDONESIA

Development Total:

ID-URBAN WATER SUPPLY AND SANITATION

26.19 7.35 33.54

PROJECT APPRAISAL DOCUMENT

EAST ASIA AND PACIFIC

EASUR

Date: June 24, 2009 Country Director: Joachim von Amsberg (EACIF) protection sector (1 00%) Sector Manager: Sonia Hammam (EASIS) Project ID: PO90991

Team Leader: Suhail Jme’an (EASUR) Sectors: General water, sanitation and flood

Themes: Other urban development (P) Environmental screening category: Partial Assessment

Lending Instrument: Specific Investment Loan Project Financing Data

[XI Loan [ 3 Credit [ ]Grant [ ] Guarantee [ ]Other:

For Loans/Credits/Others: Total Bank financing (US$m.): 23.56 Proposed terms: US$ Variable Spread Loan, 24.5 years with 9 years grace, commitment linked

Responsible Agency: Ministry o f Public Works J1. Pattimura No. 20 Ke#ayoran Baru Jakarta Selatan, Indonesia Tel: 6221 72796155/58 Fax: 6221 72796155

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I I I

Zumulativel 1.00 1 5.00 I 10.00 I 15.00 1 20.00 I 23.56 I Project implementation period: Start September 1,2009 End: June 30,2014 Expected effectiveness date: September 30,2009 Expected closing date: December 3 1,201 4 Does the project depart f rom the CAS in content or other significant respects? ReJ PAD I.A Does the project require any exceptions from Bank policies? Re$ PAD I K H

I s approval for any policy exception sought from the Board? Does the project include any critical r isks rated “substantial” or “high”? ReJ PAD III.E Does the project meet the Regional criteria for readiness for implementation? ReJ PAD I K I Project development objective ReJ PAD II.B and Technical Annex 3 The objective o f the Project i s to improve and expand water supply services in the Project areas by strengthening local water utilities to become operationally efficient and financially sustainable. Project description [one-sentence summary of each component] ReJ PAD II. C and Technical Annex 4 The project comprises o f water supply system improvements for the participating municipal

[ ]Yes [XINO

[ ]Yes [XINO

[ ]Yes [XINO

[XIYes [ ] N o

[XIYes [ ] N o

Have these been approved by Bank management? ]Yes [ IN0

water supply utilities (PDAMs). Which safeguard policies are triggered, if any? Re$ PAD I K F and TechnicalAnnex 11 Environmental Assessment and Involuntary Resettlement. Significant, non-standard conditions, if any, for: ReJ PADIKI Board presentation: None. Loan effectiveness: The Ministry o f Public Works and each participating P D A M shall have adopted the Project Management Manual, satisfactory to the Borrower and the Bank. Disbursement Condition: N o disbursement shall be made for each PDAM until such PDAM shall have entered into a satisfactory P D A M Performance Agreement.

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I. STRATEGIC CONTEXT AND RATIONALE

A. Country and Sector Issues

1. Over the past few years, Indonesia achieved impressive economic growth and reduced poverty. The country has re-emerged as a middle-income country from the financial crisis o f the last decade. I t s investment rate has increased, and foreign direct investment flows have improved. Gross Domestic Product (GDP) growth was 6.3% in 2007 - the highest in ten years. National poverty head-count decreased to 16.5 % in 2007, as compared to 17.8% in 2006.

2. Despite this impressive performance o f the economy, the performance o f the water and sanitation sector remains stagnant with historically low investment levels o f about 0.5% o f GDP. Economic losses due to lack o f access to water and sanitation are estimated at 2.4% o f GDP in 2002. Furthermore, rapid urbanization poses another challenge to the water and sanitation sector. Currently, nearly half o f the population lives in urban areas. With the current rate o f growth estimated at 3.5%, the urban population will reach 167 million or 60% o f the total population by 2025. It i s no question that urbanization i s a key determinant o f the future o f water and sanitation policy and investment. The delivery o f safe, adequate and reliable water and sanitation services to the growing urban population, most o f which i s poor, must be given a higher priority, and the declining coverage trend needs to be reversed.

3. In the water sector, Indonesia has fallen behind other countries in the region in service provision. In 1996, Indonesia outranked Thailand, Taiwan and Sr i Lanka in the overall infrastructure index (Global Competitiveness Report), but lost i t s position by 2002. Only about 18% o f an estimated population o f 220 million has access to piped water. In urban areas, only 28% o f the population has access to piped water. A majority o f the population relies on wells and surface water, which in urban areas can cause environmental problems. The high urbanization rate, combined with slow investment, requires additional efforts to overcome the decline in the connection rates o f urban water supply. Given the current trends o f urbanization, population growth and the challenges facing the water and sanitation sector, urban coverage will decline beyond rural rates.

4. In the sanitation sector, Indonesia has one o f the lowest rates o f urban sewerage coverage in Asia. A survey by the Ministry o f Health (MoH) in 2000 indicated that human waste generated by over 96% o f all households i s not appropriately treated. Current access to private sanitation i s 62% for the country (53% rural, with a quarter connected to septic tanks; and 73% urban, with two thirds connected to septic tanks). The Millennium Development Goal (MDG) target i s to reach 73% for the country by 2015. An estimated 70 million o f people currently use and share public or other non-private forms o f sanitation facilities. The risk o f contamination o f ground and surface water i s high and has a negative effect on the health and well-being o f the people. On-site sanitation systems have not been accompanied by investment in collection, treatment and disposal infrastructure. The costs o f inadequate sanitation are substantial, and the health and environmental costs in cities are especially high. It i s estimated that the cost o f poor sanitation equates to US$56 per person per year, amounting to 2.6% o f the GDP.

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5. The decentralization process that started in 2001 has brought greater autonomy and challenges to the water and sanitation sector, but few investments. Provision o f water and sanitation services are now functions o f local authorities, in line with modern practices that encourage moving services closer to consumers, and promises efficiency and accountability in service delivery, particularly in countries as large and diverse as Indonesia. Decentralization has transferred the responsibility o f water supply in urban areas to over 300 semi-autonomous water enterprises (Perusahaan Daerah Air Minum or PDAMs) under the ownership and jurisdiction o f local governments (Pemerintah Daerah or PEMDAs). However, the autonomy o f PDAMs remains questionable in most cases. The objective o f the policy o f bringing services closer to the people and away from the old system o f central planning and implementation i s sound, but it requires a different approach for the formation and implementation o f national strategies. The incentives for sub-national governments to address the sector issues in a comprehensive manner are not aligned with their new responsibilities. Central government resource transfers are currently based on the needs o f sub-national governments, irrespective o f their performance or compliance with national requirements and targets. Decentralization offers challenges and opportunities for innovative approaches to efficient service delivery with local accountability.

6. Prior to decentralization, the Ministry o f Finance (MoF) used to provide financing to PDAMs by means o f subsidiary loan agreements (SLA) bearing much o f the default risk and the burden o f any unpaid loans. Today, some 220 PDAMs hold more than 400 outstanding loans with the MoF, with about 63% o f these in arrears or in default, i.e., $500 mi l l ion o f debt has accrued to the MoF. Many PDAMs struggle to cover their operating costs and few can generate funds to cover debt payments or new capital expenditures. In 2003, the M o F issued Decree No. 35, which was further elaborated and strengthened in 2006. The decree has the objective o f laying out the procedures for channeling loans and grants to PEMDAs. PEMDAs should settle past arrears or agree on an orderly debt rescheduling with the MoF, before applying for a new loan or grant. In case o f default, the M o F can collect overdue debt services by intercepting the transfer o f the general allocation funds (DAU) to the PEMDA in default. Modalities and a clear cut strategy in rescheduling arrears are under discussion, even though a clear action plan to shepherd this process in a concerted manner will require much work in the coming years. With practically no access to affordable long term finance, PDAMs resort to expensive short term financing from commercial banks or suppliers, putting the utilities in a more dif f icult financial situation.

7. The Ministry o f Home Affairs (MoHA) decree 23/2006 sets out the guidelines for setting PDAM tar i f fs with a focus on affordability, cost recovery and efficient use o f water. It also suggests simplification o f the tariff structure from the current multi-category, multi-block system. Some PEMDAs are adopting the M o H A guidelines to varying degrees. In rare cases, the PEMDA has delegated tari f f setting to the PDAMs; in others, the Mayor can set tar i f fs without the approval o f the local parliament. However, in general, the process i s long and cumbersome and tariff increases are resisted or blocked. Tar i f f schedules aim to ensure that poor households are subsidized from better o f f and commercial customers. However, it i s not clear that such a pol icy i s addressing the poor. Lower tar i f fs are a disincentive for PDAMs to connect poorer households. Currently, 25% o f households pay for water, from piped and un-piped sources. The average price o f water piped from plant varies from one area to the next, ranging from IDR340/m3 in Lombok to a high o f IDR4,367/m3 in Jakarta. The price variation i s similar for the cost o f household connections

Local governments are responsible for setting water tariffs.

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which ranges from IDR300,OOO per connection to IDRl ,000,000 in Jakarta. The average level o f operation and mainstream cost recovery i s 80%. PEMDAs are usually reluctant to increase tar i f fs on social grounds. Such policy combined with interference in the management o f PDAMs, delays PDAM transformation into commercially viable enterprises. Where local governments do not allow tar i f fs to cover costs, and use public ut i l i t ies to provide employment opportunities in the locality, uti l i t ies will continue to face financial and operational difficulties. Utilities then resort to cutting operation and maintenance expenditures, delaying needed repairs, thus increasing the deterioration o f the existing capital assets and hastening the need for more capital needs.

8. The Government Strategy for the sector comprises o f the following:

(i) The National Medium Term Development Plan, issued by the Ministry o f Planning (BAPPENAS) in 2004, covers planning period 2005-2009. In the water sector, the plan aims to provide 40% o f population with access to piped water (66% urban and 30% rural) up from 28% in 2003.

(ii) The National Action Plans on Clean Water and Sanitation, issued by the Ministry o f Public Works (MoPW) in 2004, addresses MDG target No. 7: “Ensuring Environmental Sustainability”. Indonesia committed to halve the proportion o f people without sustainable access to safe drinking water and basic sanitation by 201 5. In the water sector, the plan includes investment plans to increase access to safe drinking water to 88% by 2015, up from 75%.

(iii) Government Regulation No. 16 o f 2005 supports the implementation o f Law 7/2004 on Water Resources to comply with the Ministry o f Health (MoH) and the Ministry o f Environment (MoE) standards by January 2008. In the water sector, drinking water should meet health standards that set quantitative limits on levels o f bacteriological and chemical substances in drinking water. The M o H departments in the provinces and cities are responsible for testing.

(iv) Government Regulation No. 120/PMK 05/2008, regarding ‘Resolution o f State Debts originating from Continuous o f Foreign Loans, Investment Fund Accounts and Regional Development Accounts o f Drinking Water Regional Company,’ was implemented in August 2008.

(v) Government Strategy for PDAMs. The Government o f Indonesia (GoI) aims to transform the PDAMs into efficient and financially viable service enterprises that are responsive to consumer demands. Given the varied conditions, capacity and needs o f PDAMs, the Go1 has adopted a phased approach for their development and reform. During the f i rs t phase, the Go1 will support 50 PDAMs that have improved their financial condition through the P D A M debt restructuring program. This program uses a simplified model developed by the Rescue Program which was funded by the Asia- Europe Meeting Fund (ASEM) and supported by the Bank. The essence o f the rescue program i s for PDAMs to undertake a Financial Recovery Action Plan (FRAP). The FRAP consists o f an analysis o f al l the existing problems o f the PDAM, whether they are technical, financial, institutional, legal, commercial or managerial. Their causes are determined, so that appropriate actions can be implemented. The required actions are contained in the FRAP details, and supported by financial projections that show

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the results o f these combined actions on the P D A M operations. It i s estimated 30 PDAMs have gone through the program so far. Whi le the FRAP includes technical solutions to increase revenues through improved efficiency measures, the program does not secure funding for the recommended technical investments for the much needed efficiency and expansion programs.

B. Rationale f o r Bank involvement 9. The project f i t s within the agreed Country Partnership Strategy (CPS) for Indonesia 2009-2012, Report No. 44845-INDY which was discussed by the Executive Directors on September 11, 2008. This project addresses outcomes that are related to Pillars 1 and 2, ‘Improving the Climate for high Quality Investment and growth’ and ‘Making Service Delivery Responsive to the Poor’. The CPS also highlights the importance o f investing in Indonesia’s water institutions by improving services to the poor and addressing the deteriorating conditions o f PDAMs in order to facilitate delivery o f water services and to help Indonesia achieve the MDGs. In addition, the project will strength oversight and regulatory role o f local and national governments and thus contributes to improved governance and accountability in the water and sanitation sector.

10. The Bank has been supporting the water sector in Indonesia over many years. In addition to water supply improvement components in integrated urban development projects, and in rural areas, recent support has focused on institutional issues. FRAP (see Attachment 1 to Annex 10) was developed under the PDAM rescue program, and it i s now a national program used to resolve the financial problems o f interested PDAMs. Several analytical work prepared with government cooperation deepened the Bank’s knowledge o f the sector. The Bank also engages directly with PDAMs and PEMDAs to strengthen water and utility governance through the Dutch-funded Technical Assistance Water and Sanitation Program (WASAP).

11. This project combines institutional, technical, financial and operational steps to be undertaken by the PDAMs and PEMDAs, while ensuring that they improve their financial situations.

C. Higher level objectives to which the project contributes 12. The ultimate objective o f the project i s to improve the health and well-being o f the population. Several studies and surveys have rated access to water and sanitation as the most important medical advance in the past 150 years, and led to fewer outbreaks o f diseases such as cholera, diarrhea, and others. The size o f investment o f this project is small, compared to Indonesia’s needs in the water supply sector. Despite its small size and focus on expansion and improvements in specific areas, the project also aims to work with al l levels o f government to remove institutional barriers to larger reform and impact. This includes removing barriers to on- lending to local governments and PDAMs, a goal in the government’s strategy to facilitate the f low o f international finance to the sector. The project also aims to remove barriers to internal generation o f funds through improved efficiencies and corporate management o f PDAMs including improved knowledge and responsibility o f their PEMDA owners. The lessons learnt f rom this project can be applied in scaling up to other PDAMs throughout Indonesia.

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11. PROJECT DESCRIPTION

A. Lending instrument 13. The project i s proposed as a Specific Investment Loan (SIL) for US$23.56 mi l l ion from the International Bank for Reconstruction and Development (IBRD). The borrower has selected a Variable Spread Loan in U S Dollars with 24.5 years repayment, including a 9-year grace period with annuity payments. The loan will be provided to the Republic o f Indonesia through i t s Ministry o f Finance.

14. The Bank Loan will be on-lent to PEMDAs in local currency (IDR), plus a foreign exchange risk premium (5.02%) as stipulated by law. For the purposes o f this project, the PEMDA will in turn enter into a Performance Agreement with i t s PDAM. In the case o f Bogor the funds will be on lent to the PDAM, while for Kapuas and Muara Enim, the funds will be provide as equity contributions fkom their respective PEMDAs.

B. Project development objective and key indicators 15. The primary development objective o f the project i s to improve and expand water supply services in the project areas by strengthening local water utilities to become operationally efficient and financially sustainable. The outcome o f the project would be: (i) technical improvements to and expansion o f production and distribution facilities, reduction of non- revenue water, improvements in water quality and greater operating efficiency; and (ii) commercial improvements in PDAM corporate management.

16.

(4 1.

11.

111.

..

...

(b)

1.

ii.

The project objectives will be monitored through the following key indicators: Improved access to water services Increment in capacity o f production system.

Increment in number o f connections.

Improvements in customer satisfaction in quality, service hours, and reliability o f water services.

Moreover the project will also track the following indicators for each P D A M as proxy to improvements in commercial and financial operations Operating Ratio.

Debt Service Coverage Ratio (for Bogor only).

C. Project components 17. The project will be implemented over a 5-year period o f 2009-2014. The estimated total project cost i s IDR315.2 bi l l ion or US$33.54 million, which includes physical and price contingencies, as well as taxes. The Bank Loan would finance US$23.56 mi l l ion o f the capital investments (goods and works) based on 85% financing o f c iv i l work and equipment in Bogor and 100% o f certain identified c iv i l works and equipment packages in Kapusa and Muara Enim. The respective PEMDAs and PDAMs will provide the remaining financing for c iv i l works and equipment through their own budgets. The MoPW will finance 100% o f the cost o f construction supervision consultants and support for the Project Coordinating Unit (PCU) and Project Implementation Units (PIUs) through i t s budget. PDAMsREMDAs will also finance land

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acquisition costs as well as activities complementary to the project. The listing o f packages funded by the Bank Loan and non-Bank funded i s given in Annex 5 and also in the Procurement Plan in Annex 8.

18. The project comprises o f water supply system improvements (US$ 31.18 million) for the participating PDAMs that are diversely located on the islands o f Java (Kota Bogor), Kalimantan (Kabupaten Kapuas), and Sumatra (Kabupaten Muara Enim).

19. These PDAMs were self-selected after about 20 PDAMs expressed interests in the project. Many o f the 20 PDAMs dropped out later on, while these three PDAMs showed the necessary commitments and prepared the documents required to remain in the project. All, except Bogor, satisfy the M o F requirements, and have no arrears. Bogor and the M o F have agreed to resolve Bogor’s arrears in order for Bogor to participate in the project. To ensure that the institutional aspects o f this component are implemented, the performance agreement between each PEMDA and P D A M will include in addition to the financial on-lending terms, assurances that both parties undertake their obligations responsibly, including financial indicators, cost recovery tariffs, management efficiencies, and PEMDA contributions. Performance agreements and indicators are selected from monitoring indicators in the Government’s restructuring program and the guidelines o f the Ministry o f Home Affairs.

20. The planned works will result in increased production and sales o f water, thus increasing revenue. The effective cost per unit volume o f water sold will decrease due to improved delivery efficiency afforded by the reduction in water loss from the distribution system. The following is a summary o f investments. Detailed description i s in Annex 4.

(a) Part 1. Bogor (West Java): Investments in Bogor comprise o f constructing: (i) a new water treatment plant adjacent to the existing Dekeng WTP; (ii) two additional units o f rapid sand filters with new filter back washing facilities for the existing Dekeng WTP; (iii) a new water reservoir; (iv) new water distribution pipelines including new household connections; and (v) and implementing a non-revenue water (NRW) reduction program. The Bank Loan will finance 85% o f all works and goods contracts for the above investments. The estimated cost for the investment in Bogor (including contingencies) i s IDR 102.9 bi l l ion (US$10.95 million).

(b) Part 2. Kapuas (Central Kalimantan): Investments in Kapuas funded 100% by the Bank Loan comprise o f constructing: (i) a new water reservoir; and (ii) new water distribution pipelines. Other complementary non-Bank funded investments (funded by local government budget) include implementing a non-revenue water reduction program and installing household water connections. The estimated cost for the investment in Kapuas (including contingencies) i s IDR 53,102 mi l l ion (US$ 5.65 million).

(c) Part 3. Muara Enim (South Sumatra): Investments in Muara Enim funded 100% by the Bank Loan comprise of: (i) constructing river intakes and raw water transmission pipelines for three different existing WTPs; (ii) constructing new water treatment facilities; and (iii) improving the water distribution network in Muara Enim and Tanjung Enim. Other complementary non-Bank funded investments (funded by local government budget) include: (i) constructing three new water reservoirs; (ii) implementing a non- revenue water reduction program and installing household water connections to meet the

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growing demand for water in both urban areas of Muara Enim and Tanjung Enim, and (iii) constructing an office building. The estimated cost for the investment in Muara Enim (including contingencies) i s IDR 137 bi l l ion (US$ 14.58 million).

21. The Go1 using their own procedures will engage consultants, who will be fully funded by counterpart funds (APBN, APBD, and PEMDA), to enhance project performance and augment institutional and management capacity. The consultant services cover:

Technical support for project implementation and supervision at the central and P D A M levels, which aims to ensure that project implementation i s in line with and satisfies requirements o f the World Bank and the GoI;

(i)

(ii) Construction supervision activities;

(iii) (iv)

Preparation o f detailed engineering designs for the various packages; and Capacity building activities to provide specialized consultant services and training to PEMDAs and PDAMs.

22. There i s also a separate and parallel activity for sanitation technical assistance to be funded by other donors. I t aims to initiate sanitation technical assistance program, focusing on mapping o f sanitation, public information, capacity building, small pi lot projects and feasibility studies to expand sanitation systems in the project areas. This program builds on the experience gained from similar pilots under WASAP. The cost o f this component is not included in the project, as it will rely on existing and forthcoming donor assistance. I t is l ikely that an estimated grant o f US$3.5 mi l l ion will be allocated for this activity by AusAid.

D. Lessons learned and reflected in the project design 23. L ike many countries, Indonesia has recognized that central planning for local services, such as water and wastewater, i s inefficient and not responsive to customer demand. Experience has shown that public investments not accompanied by utility reforms are not sustainable in the long-run, and can lead to the accumulation o f debt and worsening o f the financial situation o f utilities. O n the other hand, demanding local governments and utility reforms which are not accompanied by investment support that lead to service improvements is also not sustainable either, and it will lead to disappointment on some customers and to the rejection o f further reform. A careful approach combining reform with investments can lead to success. A close partnership among the central and local governments, water uti l i t ies and the local community i s essential to achieve progress.

24. Bank studies in Indonesia and elsewhere have shown that tariffs below cost recovery that are originally conceived to assist the poor do not serve their intended purpose. First, they serve as a disincentive for utilities to extend their services to poorer areas as they see such an extension as a losing proposition. Second, the poor often end up paying more in time, money, and quality for the water services when they do not have water connections and buy water from vendors. Third, l o w tariffs that do not cover costs, often exact a heavy tol l on the water supply system through the lack o f funds for routine operations and maintenance, let alone replacement or capital expenditures. In attempts to improve the situation, water ut i l i t ies often resort to increasing tar i f fs for other customers, particularly industry. W h i l e this tactic may be acceptable and could work up to a limit, experience has shown that with unjustifiable tariff increases,

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industries tend to look for other sources for water and avoid water ut i l i t ies particularly those with deteriorating service. Thus, water utilities lose their best paying customers and their sources o f revenues.

25. The project design incorporates the above lessons by supporting PDAMS that have demonstrated willingness to engage in reform and that have also demonstrated better financial management. The project calls for a stronger partnership between central and local government towards achieving the reform goal by transforming PDAMs into efficient and finally viable serving citizens. Finally, the project i s closely linked to the governance and decentralization agenda through the strengthening linkage between local governments and water utilities as well as through the necessary and required oversight by central government.

E. Alternatives considered and reasons for rejection 26. Investments in water system improvements and expansions without undertaking reform steps were rejected as they can lead to unsustainable operations and further the financial distress o f utilities. Direct on-lending to PEMDAs or PDAMs (with a sovereign guarantee) were considered with the advantage o f reaching PDAMs more directly and assisting them in project preparation. Indonesian legislation and practice, however, do not allow such an approach at this time. Similarly, the options o f on-lending through commercial banks were also considered, but it was felt that the focus o f the preparation activities would shift away from the water sector to the financial sector, with different stakeholders. Moreover, the risk premium charged to PDAMs would be higher making financial sustainability beyond the reach o f the PDAMs.

111. IMPLEMENTATION

A. Partnership arrangements 27. The preparation o f this project benefited from discussions, studies and experience o f other partners, including Dutch trust funded WASAP, US AID, AusAID, Japanese aid agencies and others. These partnerships will continue during the project for the exchange o f information and knowledge. In particular, the project will benefit from collaboration with WASAP and AusAID, as wel l as financing o f the sanitation activities targeting the participating cities.

B. Institutional and implementation arrangements 28. The institutional and implementation arrangements proposed for the project a im to reflect the new decentralized nature o f the Go1 and will mirror the responsibilities o f the various layers o f governments and stakeholders. This arrangement i s expected to increase efficiency, avoid duplication and increased costs, and improve local knowledge and responsibility for local project implementation, while retaining policy making and monitoring at higher government levels.

29. Project Coordination: the MoPW, which has a long track record in the formulation and execution o f water and sanitation programs, will be the executing agency for the project. It has been the lead agency for integrated urban infrastructure projects, where water supply i s a large component, and it has knowledge o f Bank procedures and the Go1 requirements. A Project Coordinating Unit (PCU) will be established in the M o P W to coordinate the input o f the local Project Implementation Units (PIUs). The P C U will have access to specialized advice to ensure quality control in procurement and financial management, to integrate project activities for

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reporting and monitoring activities, and will participate in project training activities. The PCU will report to other agencies, particularly BAPPENAS and the M o F in their role o f monitoring foreign loans. The PCU, through the MoPW, will draw on expertise at the M o F in the review and monitoring o f the financial conditions o f PDAMs. The PCU will also communicate with other national government stakeholders as necessary. The PCU will be the main contact point for liaison with the Bank regarding project progress and implementation. The MoPW’s role will focus on monitoring and facilitating implementation, while detailed project implementation will be at the local level.

30. Project Implementation: The water supply component in each P D A M will be implemented at the local level in line with the decentralization principles. Each o f the participating PDAMs will form a P IU within i t s planning division, consisting o f current staff who will be responsible for the project implementation. The PIUs will include the directors o f the technical and financial departments supported by their existing staff for the purposes o f procurement and financial management and overall project implementation in accordance with Indonesian law and practice, and would therefore liaise with the relevant local and central governments agencies in terms o f planning, implementation and monitoring. PIUs will be responsible for the daily implementation o f the project including the procurement process, disbursement applications, the financial management system, the monitoring and evaluation o f the performance indicators, and coordination with local and central government officials. Staff will receive extensive training in Bank fiduciary responsibilities in procurement, disbursement and financial management to augment their current skills. A draft Project Management Manual (PMM) has been prepared detailing the roles, responsibilities and procedures for project implementation.

C. Monitoring and evaluation of outcomedresults

31. The first lines o f responsibility to monitor project performance are with the PIUs, PDAMs and their respective PEMDA management. PIUs will be responsible for routine monitoring o f progress of investments. They will prepare periodic reports comparing physical progress o f the project investments against the annual plans for review by P D A M and PEMDA management, along with reports on financial expenditures (financial management reports). Semi-annual reports will be submitted to the PCU, which will review them for aggregation, consistency and evaluation o f project progress against annual plans. The P C U will collate and summarize the reports for submission to the Bank. Semi-annual reports will form the basis for review and supervision by the Bank. In addition, the end-of year report will be submitted to the external auditor to be taken into account in the preparation o f the annual project and entity audits. Annual reviews will take place to evaluate progress o f the previous year, assess reasons for delays and agree on corrective actions as necessary. Annual reviews and evaluations will take place with the participation o f PDAM and PEMDA management, the M o P W and the Bank by February o f each calendar year. A mid-term review will take place in the third year o f the project to assess progress towards achieving objectives.

32. Monitoring indicators are selected from Decree No. 47/99 f rom the MoHA, which sets guidelines to assess PDAM performance. These monitoring indicators will be part o f semi- annual and other reviews by the M o P W and the Bank. The monitoring indicators are part o f each Performance Agreement. Arrangements for results monitoring are in Annex 3,

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33. Baseline data are available for some o f the above indicators. For those indicators that do not have baseline data, the PDAMs will carry out f ield surveys shortly after project implementation starts to establish the required information. PIUs will be responsible for compiling project data during implementation. PEMDAs and the MoPW (through the PCU) will verify and spot check the data and ensure quality. Local departments o f the M o H and the M o E within each district will be responsible for the monitoring quality indicators as per Regulation 16/2005, (for e.g. bacteriological and chemical substances in drinking water).

R i s k s

D. Sustainability 34. A key feature o f this project i s to establish a flexible framework where PDAMs with various degrees o f technical, managerial and financial strength - with the support o f the local and central governments - can become sustainable entities capable o f improving and expanding service delivery. This would require cooperation among communities, the PDAM, and the local governments on a set o f principles that have to be adhered to. The actions that had previously undermined service delivery whether they were improper investments, technical standards, lack o f accountability, wastage, l o w tariffs, or undermining P D A M finances and corporate autonomy are addressed between the PEMDA and P D A M in the Performance Agreement and progress reports. Customer orientation and responsiveness along with staff training will be a key to improving P D A M performance. The project aims to improve the financial position o f the participating PDAMs by implementing a set o f reforms and targeted actions to make these PDAMs efficient and financially sustainable. These actions are in line with the FR4P recommended by the government, and include among others: (i) maintaining the principle o f financial and administrative autonomy from the PEMDAs; (ii) adhering to cost recovery principles by controlling costs and increasing revenues; (iii) reducing the rate o f NRW to an acceptable level; (iv) expanding coverage; and (v) managing staffing costs.

E. Critical r isks and possible controversial aspects

Risk Mitigation Measures

T o project development objectik

High connection fees and tariffs lead to lack o f interest to connect

Corrupt practices delay project and diminish objectives

Lack o f commitment to reform by the PDAMs and PEMDAs.

i

P D A M business plans were prepared based o n waiting lists o f customers willing to connect. Several surveys indicate that the poor are willing and in many cases already pay higher tariffs than for piped water.

High level o f attention to corruption in Indonesia and the Bank. Procurement, financial management, and anti- corruption action plans are in place and agreed to by negotiations. Bank intensive supervision f rom the field.

PDAMs selected have shown interest in reform. Subsidiary and Performance

Risk Rating with Mitigation

M

S

M

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PEMDAs avoid tariff increases 01 staff salary controls

PDAMs sanction illegal connections, billing, or other corrupt practices

To component results

Insufficient counterpart funds

Delays in implementation by contractors due to slow payment procedures that prevent PDAMs to implement the project in a timely manner

Lack o f knowledge o f Bank procurement, financial management and disbursement xocedures

Agreements will itemize responsibilities o f PEMDAs and PDAMs to achieve benchmarks. The Bank will regularly review achievements

Discussions with PEMDAs and PDAMs indicate awareness o f problems and solutions. Intensive training and capacity building programs are provided through the WASAP-By Water Supply Services and Capacity Building on subjects o f NRW, SOP, corporatization, financial and asset management. Surveys o f staff and customers are included in the project to monitor progress and solicit change based on experience.

Thorough financial projections include local funding. The M o F also requires budget commitments from local governments.

Disbursement o f a majority o f Bank funds through direct payment to contractors or reimbursements.

A l low PDAMs to implement their components and initiate procurement and disbursement actions, while maintaining oversight and review, including spot checks, internal and external audit, and reporting and monitoring with PEMDAs and the central government.

The Bank introduced participating PDAMs to Bank’s procedures during preparation. Procurement and financial management consultants at the PCU to ensure quality control. Training at the project launch, and thereafter.

S

M

M

M

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Lack o f available water sources due to increased demand and expansion

Public information and participation. Provide opportunity to legalize

month. Staff training. Community and staff surveys

connection without penalty within a Resistance by staff and consumers to dealing with illegal connections

M

Lack o f financing for the sanitation technical assistance

Sanitation technical assistance not tied to core project. Bank will assist the M o P W

during project implementation. Donors have expressed interest in funding sanitation TA.

Cooperation with WASAP and other donors, including fol low up activities on pilot projects requiring 50% government h d i n g

and PEMDAs to develop proposals

TA not sufficient to stimulate investments in sanitation

M

S

~~~

Overall Risk Rating

Risk Rating - H (High Risk), S (SL

Risk Rating with Mitigation Risk Mitigation Measures

Improve plant and equipment efficiency before considering expansion. Feasibility studies investigated water availability.

N

M

stantial Risk), M (Modest Risk), N (Negligible or L o w Risk)

IV. APPRAISAL SUMMARY

A. Economic and financial analyses Project Economic Cost-Benefit Analysis 35. The impact o f the project on the economy is estimated based on the incremental economic costs and benefits o f the project. External additional benefits such as those o f improved health and environment are not included. Incremental costs with the project include investment and operational costs excluding inflation and taxes. Quantifiable benefits that accrue with the project include the estimated value of: (i) increased consumption due to improved services and accessibility by existing and new customers; (ii) saved water due to improved efficiencies; (iii) amount o f water consumed with the new connections valued at the difference between the price charged and cost o f water without connections; and (iv) time saved from collecting water at the minimum income prevailing in the area.

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Project Area ENPV (Billion IDR) EIRR f%)

Project Financial Cost-Benefit Analysis 36. The financial costs and benefits are projected for 20 years. Incremental power and chemical costs are based on increases in production. Power and chemical costs are projected to increase 5% and 3% respectively in real terms. Salary costs will only increase with inflation (projected at 7% annually). Other costs vary with the increase in the asset base. The benefits are based on additional water sales over the 20 year period and the connection fees collected during the project period. The results o f net present value and financial rate o f return o f the proposed investments are summarized below:

Bogor Kapuas Muara Enim 752.5 42.0 147.6

48 19 32

Project Area FNPV (Billion IDR) FIRR (%)

Affordability Analysis 37. Based on assumptions o f average tar i f fs applicable for 2006, and average and quintile incomes in each o f the project areas, the average P D A M tariff i s affordable to households based o n the projected consumptions. O n average, however, the monthly bill will reach around 3% o f monthly income. Households in the lowest quintiles will pay tariffs that are lower than average and consume less water.

Bogor Kapuas Muara Enim 229.3 54.8 61.3

22 19 26

Financial Andysis of PDAMs 38. Impact of project activities on PDAMJinancial situation. Project investments aim at (i) increasing coverage which would improve revenues; and (ii) efficiency improvements to decrease costs. Salary costs and overall administrative expenditures are within the PEMDA and P D A M control. They represent a high proportion o f operational expenses and are increasing at a higher rate than inflation and productivity. In order to reach positive project rates o f return, Bogor needs a 10% increase in tariffs, while the others need a 20% increase. The table below shows the projected impact o f the project o n the PDAMs’ operating efficiency (measured as the Operating Ratio (OR)) and their debt sustainability (measured as Debt Service Coverage Ratio (DSCR)), where applicable.

Operating Ratio DSCR

1 Project Area I2009 12010 12011 I2012 12013 12014

0.97 0.89 0.89 0.89 -0.86 0.82 10.6 5.2 4.8 4.5 4.7 5.9

Operating Ratio DSCR

0.98 1.09 0.82 0.95 0.86 0.90 na na na na na na

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I Proiect Area I2009 I2010 I2011 I2012 I2013 I2014

Operating Ratio DSCR

I MuaraEnim: I 1.67 1.48 1.43 0.89 0.89 0.67 No t na na na na na applicable (na)

39. Operating Ratio. The profi t making enterprise, Bogor i s expected to sustain i t s current performance and maintain an operating ratio (operating expenditures including depreciation, interest and taxes) below 1. Kapuas and Muara Enim, which smaller and financially weaker, are l ikely to cover their operating costs by the end o f the third year o f the project. According to the projections, this is possible provided salary and administrative costs do not increase beyond inflation. To ensure PDAMs reach and maintain this ratio, tariffs should be regularly adjusted.

40. Debt Service Coverage Ratio. In the case o f Bogor the funds will be on lent to the PDAM. So in order to ensure that the Bogor P D A M can sustain the project’s capital expenditures, the debt service coverage ratio should be monitored through the following. For Kapuas and Muara Enim PDAMs, the funds will be passed on as equity contributions and the DSCR will not be tracked.

the Bank/MoF shall be notified o f and provide no objection to additional long term debt (beyond one year) to be contracted by the participating PDAMs;

to ensure that debt for investments is not financed with short-term borrowing, current liabilities target rate should not exceed 35% o f total liabilities; and financial statements o f the participating PDAMs shall be audited annually. The audit shall be conducted by an audit firm acceptable to the Bank. The Bank shall review the audit reports with the participating PDAMs, PEMDAs, the MoPW and the M o F each year to agree on next steps.

41. Finally, training in financial and corporate management o f water utilities shall be provided to PDAM general director, the director o f financial department, and to the senior management and financial staff o f PDAMs and PEMDAs

(i)

(ii)

(iii)

Fiscal Implications 42. Law no. 55 sets the limits on PEMDA’s borrowing. The loan will be on-lent from the M o F to PEMDA and will be considered as part o f PEMDA debt. The debt service coverage ratio cannot be less than 2.5 o f PEMDA revenues less obligations, and total debt cannot exceed 75% o f PEMDA revenues less debt obligations. For the participating PEMDAs these l imits will be maintained throughout the loan period, and it i s expected that with rising incomes and the leveling o f f o f the debt service, these ratios will remain well below the legal upper limits. Based o n current PEMDA budget projected with inflation, below are the lowest DSCRs and highest loan limits during the project period including the years where the interest payments peak and reflect the due principal payments. Based on the information provided, al l PEMDAs can take the proposed loan.

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DSCR Debt outstanding as % o f debt allowed

Sensitivity and Risk Analysis 43. Sensitivity analysis was undertaken on the most l ikely risk factors (i) tariff increases; (ii) salary costs; and (iii) investments costs. The financial rate o f return o f the project i s highly sensitive to changes in tar i f f increases. Assuming tariff increases are 5% less than assumptions, only Bogor can maintain a financial rate o f return above the 12% discount rate. Bogor can maintain acceptable financial ratios (Operating ratio and DSCR), if investments increase costs are 10% higher than estimated. However, Bogor would approach the lower limit o f both ratios, if salary costs increase by the historical levels o f 35%. Both Kapuas and Muara Enim will delay reaching appropriate financial ratios if investment costs or salary costs approach the aforementioned rates. Expansion o f coverage is a key factor to improved financial and economic performance and should be pursued wherever existing capacities allow.

Bogor Kapuas Muara Enim 7.8 33.0 36.1 48 20 26

44. Two variables within the control o f PDAMsPEMDAs are important in determining the sustainability and viability o f the project. Cost recovery tariffs ensure robust revenues; cost '

efficiency measures ensure the fairness o f tariffs and their sustainability. Together these variables influence the sustainability and viability o f the project. PDAMs and PEMDAs must control salary costs, review the financial health o f the PDAM, and increase tariffs following annual reviews o f the financial situation. Financial projections are based on the assumption that salary costs and administrative expenditures will increase only in line with inflation. Increases in salary expenditures on historical basis will wipe out any improvements in the financial situation o f the enterprises. The financial covenants below aimed to ensure the move o f enterprises to commercially based operations and less reliance on PEMDAs.

B. Technical 45. The project will finance c iv i l works and equipment for improved water supply facilities. The technical design will be based on the standard practices o f PDAMs to implement rehabilitation and expansion works. During the preparation o f the project, consultants assisting PDAMs paid particular attention to the following:

(i) (ii)

(iii)

(iv)

availability o f sufficient water sources and finding alternatives;

avoiding excess capacity 'design and allowing for modular additions as demand increases so as to avoid high capital and operating costs;

estimating reasonable demandconsumption to avoid overdesign, higher costs, and lower than expected revenues; and

efficiency o f operations o f equipment, such as generators and pipes.

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46. During implementation, engineering consultants will assist the PIUs in the design and final supervision o f construction. The PCU will have access to technical advisory services on as needed basis to verify issues that cannot be resolved by the PIUs. This will ensure that the quality o f engineering design, supervision and physical construction i s maintained.

C. Fiduciary Financial management issues 47. Countw Issues: Assessments o f financial management (FM) systems in Indonesia highlight the risks in the control environment despite the commitment o f the political leadership for improvement. Responsibilities are unclear, legislative and regulatory instruments need further clarity and consistency. The MoF (White Paper, May 2002) recommended the establishment o f the Financial Management Reform Committee to lead the preparation o f the government regulations on i t s treasury and accounting system. Decentralization has further highlighted the need for better financial management in the public sector to include reform in the local governments and public sector utilities. Many o f the details o f the decentralization process are s t i l l to be defined (See details in Annex 7).

48. A financial management assessment was undertaken o f individual PDAMs and the Ministry o f Public Works, where the PIUs and a PCU will be established to implement the project. PDAMs were found to have good financial staff capable o f undertaking financial management o f the project, but where knowledge o f Bank requirements and procedures are non-existent. On the other hand, the MoPW has been involved and i s knowledgeable in Bank operations, but lacks staff with appropriate accounting and financial management skil ls. The highlights o f the actions to mitigate the high financial risk assessment are as follows: (i) intensive training for PDAMs and the MoPW staff on Bank requirements; (ii) agreement on the Project Management Manual, disbursement procedures, flow o f funds, and formats o f financial management reports prior to negotiations; and (iii) hiring o f financial management consultant at the MoPW to be responsible for (a) financial management o f the consultant services and training component being implemented by the MoPW, (b) review o f PDAM project accounts and financial management reports; (c) quality control o f accounting and disbursement o f all project transactions, and (d) compilation o f overall project financial management reports. In addition, the internal audit functions o f the implementing agencies (PDAMs and PEMDAs) will be strengthened through training on Bank requirements, and agreement were reached on the audit terms o f reference for audit o f project accounts. The details o f the assessment and action plan are described in Annex 7. The FM risk assessment i s rated “Substantial.”

Project Issues:

49. Procurement issues: Procurement o f goods and works funded by the Bank loan for this Project will be carried out in accordance with the World Bank’s Guidelines: Procurement under IBRD and IDA Credits, May 2004, as revised October 2006 (the Procurement Guidelines) and the provisions stipulated in the Legal Agreement. A procurement capacity assessment o f the PIUs and the PCU was conducted during project appraisal. The overall project procurement risk assessment i s rated “Substantial.” To minimize the risk, a qualified procurement Consultant will be hired (within the project management consultancy) at the PCU to ensure quality control and to provide advice. To improve understanding o f Bank procedures, procurement requirements were discussed during preparation as a form o f increasing knowledge. The procurement plan was also developed in a collaborative manner and requirements for updates discussed. Training will

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continue to be provided, with a formal training session for project participants from PDAMs, PEMDAs and the MoPW, as soon as the project becomes effective. The main risks are:

the main procurement activities will be in the participating PDAMs, and there i s l imited experience among P D A M staff in conducting competitive bidding and selection o f consultants in accordance with the Bank Guidelines;

P D A M staff are unfamiliar with the newly issued Keputusan Presiden (Presidential Decrees or Keppres) 80/2003 and there are uncertainties o n how to implement this regulation;

the general procurement environment i s weak and collusive practices have been found in past projects;

decentralization laws and the rising power o f districts will place added pressure on project staff to favor local firms and individuals, which is not allowed under Bank procedures; and engagement o f consultants for project management and implementation supervision by the Go1 and outside o f the Bank procurement procedures.

(i)

(ii)

(iii)

(iv)

(v)

50. The proposed actions to mitigate the risks include:

appointment o f a procurement specialist at each PIU. The PCU will benefit from specialized advice from a consultant who will undertake the procurement o f the MoPW related component, and will provide quality control and review o f P I U procurement document prior to their submission for World Bank review;

establishment o f a Procurement Plan (PP) for the project for the f i rs t year o f implementation with subsequent annual updates;

use o f standard bidding and evaluation documents to minimize risk o f mistakes and unacceptable changes;

provision o f procurement training during project preparation, project launch, and annual procurement training workshops;

inclusion o f clarification on NCB procedure in the legal documents and P M M respectively; establishment o f an anti-corruption action plan for the Project; and

terms o f reference and team composition and timing o f the P C U Management consultancy and construction supervision consultants, procured using the GoI’s own resources, were agreed with the Bank during negotiations.

D. Social 5 1. The project i s expected to generate a positive impact from the provision o f wider access to water services through better access to efficient, equitable and sustainable water services. Several studies have confirmed the importance o f providing piped clean water to the poor, and indicated their willingness to pay for the service, rather than receive intermittent poor quality water. Some studies suggest that the poor pay up to 7 times more for water provided through vendors compared to the cost o f dependable piped water. This is in addition to the cost o f time

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and quality. Women and children usually bear the responsibility o f fetching water and having quality piped water in the house i s especially beneficial to women, who are responsible for cooking and cleaning. Attempts to assist the poor through subsidies or lower tariffs often backfire mainly because PDAMs are reluctant to extend coverage to poor areas and receive lower revenue than what is required to cover costs and what can be charged in other areas.

52. participating cities.

I t is confirmed that no indigenous people will be affected in the project sites o f al l three

E. Environment

53. The project is classified as Category B in term o f the environmental assessment screening category o f the Bank as it involves routine investments in water supply that are likely to improve the environment. The project design emphasizes the rehabilitation and upgrading o f the existing water supply infrastructure, therefore it would not entail any major significant, complex or irreversible impacts. No works would be undertaken that could affect protected or vulnerable ecosystems.

54. In order to comply with the Indonesian and Bank environmental review procedures, environmental reviews for each o f the P D A M water sub-projects were prepared. An Environmental Management Plan (EMP or UKL and UPL) to mitigate the identified risks i s the output o f the reviews. The proposed investments are expected to have minor and routine environmental impact, and will bring about positive health and environmental benefits to the proposed areas through'the supply o f clean water. Construction o f water supply pipelines i s l ikely to have negative impacts on noise and air quality in the short-term during the construction period. Details o f mitigation measures, their location, time frame and the responsible agencies for their implementation and supervision are provided in the EMP.

55. P I U staff will ensure that the details o f the EMP will be provided in the requests for proposal and bidding documents to interested consultants and contractors in order to include these plans in their work program. The supervisory engineers will include the supervision o f the E M P in their work programs. P I U staff will be trained on environmental regulations and their application, environmental management in urban services improvements, urban vegetation management, mitigation measures and their implementation, public consultation, monitoring, and progress reporting. The engineer/environmental specialist from the supervision consultant team will ensure that construction i s done in an environmentally sound manner. Muara Enim does not require an EMP, since investments there fal l within the Go1 requirements as acceptable to the Bank. EMPs for Bogor, and Kapuas have been prepared, provided to the Bank, and disclosed in the Public Information Center.

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F. Safeguard policies ~~ ~

Safeguard Policies Triggered by the Project Yes N o Environmental Assessment (OP/BP/GP 4.0 1) [XI [I Natural Habitats (OP/BP 4.04) Pest Management (OP 4.09) Cultural Property (OPN 1 1.03, being revised as OP 4.1 1) Involuntary Resettlement (OP/BP 4.12) Indigenous Peoples (OD 4.20, being revised as OP 4.10) Forests (OP/BP 4.36) Safety o f Dams (OP/BP 4.37) Projects in Disputed Areas (OP/BP/GP 7.60)

[I [I [I

[XI

[XI

Projects on International Waterways (OP/BP/GP 7.50) [XI

G. Land Acquisition and Resettlement Framework 56. Land acquisition occurs in a number o f activities in 2 (two) participating cities: Kapuas and Muara Enim. For Kota Bogor, the lands for all activities are already available. Given the nature and the scale o f the project, land acquisition wi l l be in a small-scale with minor socio- economic risks.

57. In Kapuas and Muara Enim, limited land acquisition i s required for the construction o f reservoirs and water treatment plants. For transmission pipe provision, some trees and crops acquisitiodcompensation will be required, without land acquisition. To ensure that the affected people are fairly compensated, a Land Acquisition and Resettlement Action Plan ( L A M P ) has been prepared by each participating local government for each activity that may require land and other asset acquisition from the community. Due to the relative small scale o f the impact, abbreviated L A W s are acceptable. Land i s acquired through direct negotiation and transaction between the PEMDARDAM and the land owners. All L A W s from Kapuas and Muara Enim have been provided to the Bank and disclosed in the Public Information Center. Bogor does not require a L A M P .

H. Policy Exception and Readiness 58. No exceptions are sought to any Bank policies for this project.

I. Readiness criteria

Conditions for Negotiation 59. The following conditions/issues were completed before/during negotiations:

(i) (ii)

(iii)

The MoF to confirm in writing the choice o f the type o f loan. The MoF and PEMDAs to confirm funds to be on-lent to Bogor PDAM and on- granted (as equity contribution) to Kapuas and Muara Enim PDAMs.

Form o f Subsidiary Loan Agreements (between the MoF and each PEMDA) and Performance Agreements (between each PEMDA and i ts PDAM) satisfactory to the Bank and the Borrower to be submitted.

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The MoPW to establish the PCU, to be measured by assignment o f the head o f the PCU, satisfactory to the Bank and the Borrower.

Each PEMDA to establish the PIU, to be measured by assignment o f the head o f the PIU, satisfactory to the Bank and the Borrower.

The MoPW to submit the draft Project Management Manual, satisfactory to the Bank and the Borrower.

The MoPW to finalize terms o f reference for PCU advisory consultancy and to provide evidence o f the start o f the selection process satisfactory to the Bank and the Borrower.

The MoPW to finalize arrangements for internal and external audits including Terms o f Reference for auditor satisfactory to the Bank and the Borrower.

The MoPW with PEMDAsPDAMs to finalize draft model terms o f reference for procurement staff at the PIUs and to provide evidence o f the start o f the selection process satisfactory to the Bank and the Borrower.

Effectiveness Conditions 60. been adopted by the MoPW and the participating PDAMs.

Disbursement Condition 61. satisfactory PDAM Performance Agreement.

The Project Management Manual, satisfactory to the Bank and the Borrower, shall have

N o disbursement shall be made for each PDAM until such PDAM has entered into

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Annex 1: Country and Sector Background INDONESIA: ID-Urban Water Supply and Sanitation

1. Over the past few years, Indonesia has succeeded in achieving impressive economic growth and reducing poverty rates. The macro economy continues to be strong and Indonesia has now re-emerged as a middle-income country (MIC). The investment rate has increased and foreign direct investment flows have improved. GDP growth was 6.3% in 2007 - the highest in ten years, and thereafter revised downward to 6.0% in 2007. National poverty head-count decreased to 16.5% in 2007 as compared to 17.8% in 2006; more than 14 mi l l ion people have been lifted out o f poverty since 1999.

2. Despite this impressive performance o f the economy, the performance o f the water and sanitation sector has remained stagnant at a historically l o w investment leve l o f about 0.5% o f GDP. According to recent studies, and based on data f rom the Central Statistics Board, the annual social and economic costs o f health problems related to water and sanitation are estimated at US$4.7 bi l l ion or IDR 10,000 per household per month. The overall estimates o f economic losses due to lack o f access to water and sanitation are estimated at 2.4% o f GDP in 2002. Urban activity is at the heart o f economic growth in Indonesia, and urbanization is a leading determinant o f the future structure o f water and sanitation policy and investment. In addition to the environmental and health benefits o f access to clean water, the sector contributes to improved labor productivity, a better investment climate and ultimately improved economic growth. The delivery o f safe and adequate water and sanitation services to the growing urban population, most o f which is poor, must be given a higher priority, and the declining coverage trend must be reversed.

3. The decentralization process that started in 2001 has brought greater autonomy and challenges to the water and sanitation sector, but practically few investments and little progress in clarifying the f low o f funds have taken place. Water and sanitation are now functions o f local authorities, in l ine with modern practices that encourage subsidiarity - i.e. move services closer to consumers - and promises efficiency and accountability in service delivery, particularly in countries as large and diverse as Indonesia. Central government resource transfers to local governments are based on the needs o f sub-national governments, and do not provide incentives to promote investments to achieve national objectives such as the Mil lennium Development Goals.

4. Despite the lack o f progress, the fbture i s promising. Indonesia’s positive economic performance presents a golden opportunity to increase efforts to improve basic services for citizens. The recent decentralization offers challenges and opportunities for innovative approaches to efficient service delivery with local accountability. Improvements in delivering water services will contribute to improving the business and natural environments and would enable the country to take advantage o f i t s strategic position in a competitive and dynamic region.

5. Sectoral policies are showing signs o f improvements. The Ministry o f Finance (MoF) recently implemented three new regulations that offer water utilities to re-examine their financial health and provide options to graduate into stronger water institutions. The regulation P M K

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No. 1 2 0 P M K 05/2008, regarding ‘Resolution of State Debts Originating from Continuation o f Foreign Loans, Investment Fund Accounts and Regional Development Accounts o f Drinking Water Regional Company’, provides options to partially write-off PDAMs existing debt with certain conditionality. Likewise, the DG fiscal balance DAU intercept decree P M K 129/2008 and the regulation o f the Minister o f Finance PMK 168/07/2008 concerning Regional Grants promote further conductive environment for fiscal decentralization.

Sector Realities

6. Water: Indonesia has fallen behind other countries in the region in the supply o f water services. In 1996, Indonesia outranked Thailand, Taiwan and Sr i Lanka in the overall infrastructure index (Global Competitiveness Report), but lost i t s position by 2002. The inadequacy o f service delivery in the sector in recent years has had significant impact on human development outcomes. The most potent indicator o f the problems in the sector is the high incidence o f water-borne disease, disproportionately affecting the poorer sections o f society. N o other countries with a similar per capita GDP in the region exhibit such l i t t l e progress in relation to water and sanitation service delivery.

7. Only 17% o f an estimated population o f 220 mi l l ion has access to piped water. In urban areas, where nearly hal f o f the population lives, access to piped water i s critical, only 28% o f the urban population has access, and that percentage is declining. Only 8 percent o f the rural population has access to piped water. A majority o f the population rely on wells and surface water, which in urban water are causing environmental problems such as the lowering o f the water table and increasing costs o f extraction. Combined with weak sanitation, the quality o f wel l water in the urban areas is dangerous. The high urbanization rate, combined with slow investment, requires additional efforts to overcome the decline in the connection rates o f urban water supply. At the current rate o f growth estimated at 3.5%, urban population will reach 167 mi l l ion by 2025 and will represent 60% o f the total population. According to the preliminary analysis o f 2007 National Social Economic Survey data, during the period 1994-2006 of the households that have access to safe water, 52% have individual privately owned sources of drinking water (pump or well), and 25% have a jointly owned source (communal tap). Access to water and sanitation infrastructure services in Indonesia i s currently highly regressive. Given the current trends o f urbanization, population growth and the challenges facing the water and sanitation sector, urban coverage rate will decline beyond rural coverage rate.

8. Sanitation: Even more critical is the state o f sanitation: Indonesia has one o f the lowest rates o f urban sewerage coverage in Asia. A survey by the Ministry o f Health in 2000 indicated that human waste generated by over 96% o f al l households i s not treated. Current access to private sanitation i s 62% for the country (53% rural with a quarter connected to septic tanks; and 73% urban o f which 2/3rd connected to septic tanks). However, these figures mask a large problem o f the adequacy and conditions o f these systems as well as the condition o f treatment thereafter. The MDG target i s to reach 73% coverage for the country by 2015. Urban sanitation is the least wel l addressed o f major policy issues in Indonesia. Less than 10 cities have some form o f network sewerage reaching about 1.3% o f the urban population. An estimated 70 mi l l ion people currently use and share public and or other non-private forms o f sanitation facilities. The risk o f contamination o f ground and surface water is high and has a negative effect o n the health and well-being o f the people. On-site sanitation systems have not been accompanied by investments, in collection, treatment and disposal infrastructure. In 2002, the government spent a

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small fraction (0.1%) as much on sanitation as it did on water supply. The cost o f inadequate sanitation i s substantial and the health and environment costs in cities are especially high. It i s estimated that the cost o f poor sanitation equates to US$ 56 per person per year amounting to 2.6% o f the GDP.

9. Sub-national government’s share o f infrastructure development budget increased from 35% to 55% between 2000 and 2004, with loca1,governments’ share up to 35%. Most o f spending in the sector i s on operations and maintenance (O&M) which i s about 8 times capital spending. This reflects lack o f resources, and potentially deterioration in the capital stock requiring emergency capital repairs rather than expansion. Additionally, with their new responsibilities, PEMDAs have found it difficult to effectively manage their investment expenditures. PEMDA budgets are not always spent, leading to lack o f investments, and deteriorating services while cash i s accumulated in banks. Improving PEMDA capacity i s needed to affect improvements in the operational and financial conditions o f PDAMs and o f the water sector in general.

10. Government Strategy: Until 2001, Indonesia, despite i ts diversity and size, was governed and managed through a highly centralized political, administrative and fiscal system. This system resulted in discontinuity between user demand and decision-making on local public services, undermining accountability. The decentralization policy o f 200 1 and the accompanying Fiscal Balance Law, which provides for the financing o f decentralized tasks, aimed to eliminate these shortcomings and to bring about a fundamental change in governance. Included in the functions transferred to local government i s the delivery o f urban water services. The National Development Goals for Water and Sanitation are addressed in three main documents:

11. The National Medium Term Development Plan (RPJM) issued by BAPPENAS in 2004 covers planning period o f 2005-2009. In the water sector, the plan aims to provide 40% o f population with access to piped water (66% urban and 30% rural). The RPJM does not deal with targets for provision o f water from alternative sources or with quality o f water. In the sanitation sector, the plan indicates that Indonesia should be “open defecation free” by end o f 2009 - which means effectively that all households in the country should have access to private or communal sanitation facilities. The plan focuses on increasing the capacity utilization o f sewage and sludge treatment plants to 60% and to halve by end o f 2009 the volume o f untreated domestic wastewater. The plan indicates that large and metro cities should start development o f piped sewerage systems by 2009.

12. The National Action Plan on Clean Water and Sanitation, issued by the Ministry o f Public Works (MoPW) in 2004, addresses MDG target No. 7: “Ensuring Environmental Sustainability.” Indonesia committed to halve the proportion o f people without sustainable access to safe drinking water and basic sanitation by 2015. In the water sector, investment plans aim to increase access to safe drinking water to 88% by 2015, up from 75%. The plan aims to reduce dependency on unprotected water sources such as rivers, lakes and wells. In the sanitation sector, the plan i s to increase access to improved sanitation to 75% by 2015 (80% urban and 70% rural), up from approximately 63% in 2002. Uti l i t ies in large metropolitan areas are expected to provide off-site sanitation to about 7% o f the population an eight fold increase from service level in 2000.

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13. Government Regulation 16 o f 2005 supports the implementation o f L a w 7/2004 on Water Resources to comply with the Ministry o f Health (MoH) and the Ministry o f Environment (MoE) standards by January 2008. In the water sector, drinking water should meet health standards that set quantitative limits on levels o f bacteriological and chemical substances in drinking water. The M o H departments in the provinces and cities are responsible for testing. In the sanitation sector, wastewater from households and larger institutions must be treated individually or in a centralized treatment plant. The residual waste must meet verifiable standards (e.g. pH level from 6-9; B O D not to exceed 100mg/l, etc.)

Urban Water Supply

14. Institutional Framework: In urban areas, water supply is the responsibility o f over 300 semi-autonomous water enterprises (Perusahaan daerah air minum or PDAMs) under the ownership and jurisdiction o f local governments. People living in the service areas o f the PDAMs receive water through 5.25 mi l l ion connections to piped systems. While PDAMs constitute the key institutions in the provision o f water services, they are just one part o f a spectrum o f urban water provision. In addition to the 35% o f the urban population formally served by PDAMs, it i s estimated that an additional 15% obtain P D A M water through on-selling by intermediaries. The remaining 50% o f the population relies on self-provision at the household level. The l o w coverage and quality o f the water services provided by PDAMs in urban areas is generally agreed to be the key issue to be addressed if the water sector in Indonesia i s to become functioning and healthy and able to contribute to improved productivity and human development outcomes.

15. The current plight o f PDAMs can be attributed as much to the lack o f institutional clarity and effective structuring that characterized their emergence in the late eighties as to the financial difficulties they have faced since 1997. Autonomy from local governments has been limited, so PDAMs could not be held accountable for their l o w operating efficiency evidenced by high staffing ratios and high non-revenue water (NRW). Their revenues were also limited because o f inadequate commercial policies and practices. Prior to the economic crisis that swept the region in 1997, most PDAMs were already struggling with their operations and had accumulated massive debt. The financial crisis exacerbated their weak institutional and financial position sending most o f them into virtual bankruptcy.

16. Local governments now have the main responsibility for the supply o f water and sanitation services in their areas o f responsibility. PEMDAs are owners o f PDAMs, and control much o f 'their activities, determine tariffs, withdraw dividends and contribute to investments. PEMDA policies affect P D A M performance. PEMDAs can play a leading role in improving the wel l being o f their citizens and the overall natural, business and health environment o f the area under their authority. PEMDAs can use their newly acquired authorities, financial capacity and responsibilities for delivery clean water to their citizens. The scope for improving the current weak corporate governance arrangements between the PEMDAs and the PDAMs i s large and present an opportunity for greater improvements in the sector.

17. The objective o f the decentralization policy for the water sector to bring the services closer to the people is sound. Decentralization, however, makes the formation and implementation o f national strategies more difficult and requires consultation and innovation to devise incentives to achieve objectives. The national government now issues decrees and guidelines to local governments and PDAMs on the water sector, but the latter are sometimes

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slow or reluctant to adopt them. A new approach combining incentives with resource transfers dedicated to achieving national objectives in the water sector is needed.

18. Sector Financing. Prior to decentralization, the M o F used to provide financing to PDAMs by means o f subsidiary loan agreements bearing much o f the default risk and the burden o f any unpaid loans. Today, some 220 PDAMs hold more than 400 outstanding loans with the MoF, with about 63% o f these in arrears or in default, i.e. $500 mi l l ion o f debt has accrued to the MoF. In the present environment, few PDAMs have enough resource generation capacity to meet their operational costs and debt service obligations.

19. In 2003, the M o F issued Decree No. 35, which was further elaborated and strengthened in 2006 (Decree No. 53). The decree has the objective o f laying out the procedures for channeling loans and grants to PEMDAs. Local governments have to settle past arrears or agree on an orderly debt rescheduling with the MoF, before applying for a new loan or grant. In case o f default, M o F can collect overdue debt services by intercepting the transfer o f the general allocation funds (DAU) to PEMDAs in default. In practice Decree No. 53 and the accompanying regulations are not providing PDAMs with the necessary relief or incentives to come forward at the necessary pace to resolve the problems in the sector. Other decrees prevent “good” PDAMs from rescheduling their debts, and are therefore required to pay al l arrears before discussion o f new loans. PDAMs without arrears can borrow with less attention to their current financial situation. The intercept clause - common in many countries - i s not used for fear o f political backlash. PDAMs often receive bad advice not to repay their arrears in hopes o f being “forgiven”. The Government’s strategy to achieve the MDG No. 7 requires substantial investment financing, 60% o f which is planned to be from international financial institutions, and up to 11% from private lenders. Private sector financing i s a priority and the government has been making substantial efforts to attract the private sector to infrastructure investments.

20. Tariff Policy. Decree No. 23/2006, issued by the Ministry o f Home Affairs, sets the guidelines for setting P D A M tar i f fs with an eye on affordability, cost recovery and efficient use o f water. It also suggests simplification o f the tariff structure from the current multi-category, multi-block system. Some PEMDAs are adopting the M o H A guidelines to varying degrees. In rare cases, those PEMDAs delegated tariff setting to the PDAMs. In others, the local parliament delegated tariff responsibility to the mayor. However, these are rare cases, and the majority o f PDAMs face considerable interferences that hinder their efficient operations. Where PEMDA interference in the management o f PDAMs continues, delays in PDAM transformation into commercially viable enterprises persist. Where local governments do not allow tariffs to cover costs, utilities will continue to face financial and operational difficulties, as they resort to cutting on operation and maintenance expenditures, delay needed repairs thus increasing the deterioration o f the existing capital assets and hastening the need for more capital needs. Overall the tariff structure remains complex with many categories and multiple block tariffs. Only few PDAMs who have improved their information systems can analyze the impact o f tariff changes o n customers and operations.

21. A misguided concept is that lower tar i f fs are designed to assist the poor. Evidence suggest that PDAMs are reluctant to expand their services to the poor because they know it i s a losing propositions as they are doomed to receive lower revenues for investment. The poor end up without proper connections, and the subsidy and benefits accrue to those who can afford higher tariffs. The poor continue to obtain their water from more difficult and lower quality sources. They end up paying more for clean and drinking water. Some studies suggest that poor

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households may pay up to 7 times more than more affluent households for their clean water. Finally, cross subsidizing from industries to households i s a method used by many utilities in many countries, and this can work up to a point. With deteriorating services and increased tariffs, industries often resort to obtaining water from their own sources and disconnecting from water utilities, thus depriving the latter from their best customers and sources o f revenues. Thus improving water services is needed to maintain current customers as well. Finally, charging tar i f fs that do not cover costs, increase the financial difficulties o f water utilities as they resort to cutting on operation and maintenance expenditures, delay needed repairs thus increasing the deterioration o f the existing capital assets and hastening the need for more capital needs. PDAM operations and management should be separated from the daily political concerns o f local governments who should retain the vision and oversight functions o f the local utilities.

22. Financing. The lack o f access to sustainable financing from internal cash generation or f rom long-term sources is forcing PDAMs to resort to short-term expensive solutions from commercial banks or suppliers. However, few PDAMs can afford such sources for their growing investment needs. The central government also has a large role to play to facilitate improvements in the sector. The role o f the central government should be as a policy maker and a facilitator. The lack o f progress on the settlement o f debts and arrears o f PEMDAs and PDAMs currently present a real obstacle to the development o f the sector, as the MoF does not allow borrowing in case there are arrears. In reality, sub-national debt accounts for only 0.3% o f the consolidated government debt, o f which the PDAMs account for 0.2%. The central government should retain the position o f hard budget constraint and avoid bailing out non- performing PDAMs and PEMDAs. However the central government can facilitate sector development by developing realistic expectations and targets for the resolution o f the arrears problems by using the existing or a modified system o f conditional cash transfer (DAK) to provide incentives to improve sector performance by (i) using the intercept procedure o f fiscal transfers to recoup part o f the arrears in agreement with PEMDAs; (ii) rewarding PEMDAs with transfers; and (iii) targeting DAK or other transfers to the water and sanitation sector. Only a partnership among the central and local governments, the PDAMs and the community can deliver on the development o f the water sector.

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Annex 2: Major Related Projects Financed by the Bank and/or other Agencies INDONESIA: ID-Urban Water Supply and Sanitation

Sector Issue

Bank-financed Participatory, poverty alleviation, community-driven

Sector reforms, demand-responsive, crisis relieve

Sector reforms, policy formulation.

Utility benchmarking

Participatory, poverty alleviation, integration o f planning of urban infrastructure development

Other Development Agencies

USAID Sector reforms, operation and management improvement

ADB Governance, financing reforms, private sector participation

ADB Participatory, poverty alleviation, integration o f planning of urban infrastructure development

JBIC (formerly OECF) Sector development

Project

Water Supply and Sanitation for Low Income. Communities I and 11. PAMSIMAS.

PDAM Rescue Program (ASEM- funded TA).

Water Sector Adjustment Loan

PDAM Benchmarking (PPIAF-funded TA)

Bali Urban Infrastructure Project Kalimantan UDP Semarang-Surakarta UDP Second Sulawesi UDP Second East Java UDP Surabaya UDP

Water Efficiency Team I, 11, 111; Local Governance Water Services Environmental Services Program.

Support for Local Government Financing System; Regulatory Framework for Private and Public Water Supply and Wastewater Enterprises.

Metro Botabek UDP Sumatera Urban Sector Development Project

Ujungpandang (formerly Makassar) Water Supply Project

Latest Supervision (PSR) Ratings (Ban k-financed

Implementation Progress (IP)

S

S

U

S S S

HU S

HU

rojects only) Development

Objective (DO)

S

S

S

S S S

HU S

HU

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Annex 3: Results Framework and Monitoring INDONESIA: ID-Urban Water Supply and Sanitation

Improve and expand water supply services in the Project areas by strengthening local water utilities to become operationally efficient and financially sustainable.

I Reduction in non-revenue water

Improvements in P D A M corporate management

Project Outcome Indicators

Increment in capacity o f production system

Increment in number o f connections

Improvements in customer satisfaction (a) Quality (b) Service Hours (c) Reliability

Operating ratio <1

Debt Service Coverage Ratio (DSCR) >1.3 (for Bogor only)

Intermediate Outcome Indicators

Additional volume o f water produced

No. o f bulk meters replaced, repaired on installed

No. o f individual meters replaced or repaired

No. o f employees per connection

Water tariffs collection period

Tariff increases to maintain target operating ratio

Use of Project Outcome Information

Assess coverage rates against planned investments to monitor project progress.

Coverage against service area

Coverage against N A P (National Action Plan) and MDG ,

Assess outreach to the poor

Assess user satisfaction with water access and improvements to take corrective action, where needed.

Assess progress against agreements, review for needed action from PEMDAs. PDAMs

Use of Intermediate Outcome Monitoring

Assess whether program i s on target and effective in reaching service reliability. Identify reasons for deviatiodshortfall and take corrective action.

Assess N R W reduction plan.

Assess adherence to performance agreement.

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Arrangements for Results Monitoring

1. Institutional Issues. The monitoring indicators are selected from indicators included in the decree from the M o H A which aim to regulate and monitor P D A M operations. These indicators are based on analytical work and technical support between the Bank and the Go1 as part o f the P D A M rescue program. PDAMs will be responsible for the collection o f the data based on their own information. A full description o f the Monitoring and Evaluation system for the project, with procedures, will be included in the Project Management Manual.

2. Data Collection, Analysis and Monitoring. Baseline data are available for the above indicators and are (or will be) collected by PDAMs in their normal line o f duty. Where baseline data are not available the PDAMs will carry out necessary field surveys to collect the data soon after project implementation commences. Other information will be monitored for progress. Information on project specific data will be compiled in the project progress reports (procurement and financial management monitoring). Data will be aggregated at the PCU for further analysis, comparison and to draw lessons. Project targets in terms o f number o f planned connections, timing, unit and total costs o f other investments will be monitored against plans. NRW baseline data is weak and unreliable due to lack o f necessary measuring equipment. Bulk meters at the production site will be installed in the earliest stages o f the project while individual meters will be installed, replaced or repaired soon thereafter to allow for better measurement. The training program will include the design o f measures to reduce physical and administrative NRW to feed into the design o f the investment program with P D A M participation, with the objective o f reducing measured NRW by 5% at the end o f the project.

3. In addition to the routine data monitoring and evaluation, annual in depth monitoring and evaluation based on the annual report will take place during project supervision. A further in depth review o f the project will take place during the mid-term review. Finally, to assess user satisfaction with the services and the social impact o f the project, at least two surveys o f user satisfaction will be undertaken during the project, which will also feed into decision on any corrections o f project implementation. Surveys o f P D A M staff will assess their views o f progress and solicit input for improvements. Bank supervision from the field will ensure quick action i s taken to continue progress o f the project. The Bank will be able to respond quickly, discuss with al l stakeholders, provide feedback on activities and initiate corrective action when needed.

4. Capacity. The PDAMs have the required capacity to collect the data, monitor and analyze progress. Staff o f the PIUs and PCUs will have direct access to the necessary data. Engineers and consultants will be in place to monitor physical progress against plans. The PCU will be responsible for aggregating the project data and make project analysis. A consultant i s hired for this purpose. The indicators are available from P D A M data, and would be monitored by PEMDAs and the PCU. The training program envisaged by the project to be delivered through WASAP-B program i s designed to increase capacities at a l l levels, but particularly to PDAMs on specific technical, institutional and financial matters, and to PEMDAs on corporate management issues and relation between them and PDAMs. The training provided through this

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program i s based on diagnostics and analysis o f the utility’s performance and operational efficiency.

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c? V A 3 3

c? V A 3 -

c? V A 3 3

I m 3

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d 3

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Annex 4: Detailed Project Description INDONESIA: ID-Urban Water Supply and Sanitation

1. The project comprises o f capital investment. It includes investments in PDAM operations including construction and rehabilitation o f water sources and water treatment plant, as well as expansion and rehabilitation o f distribution networks and house connections. In addition to service expansion, the component aims to reduce water losses and improve sales through a program o f detection and reduction. This component also includes expansion o f coverage, a key source o f improved and sustainable revenue generation for the PDAMs. Besides the capital investment, the GO1 wi l l engage consultants who will be fully funded by the counterpart funds, and part o f i t will directly target improvements in operational and managerial ski l ls o f PDAM and PEMDA officials through training. The main part o f the training component for PEMDAs and PDAMs wi l l be covered under the WASAP-B program implemented by the World Bank and WBI. Capacity building programs are targeted based on PDAM diagnostic analysis. A complete program will be developed by end o f 2009. Additionally, a parallel component to initiate work on sanitation strategies in the participating PDAMs i s included in the project. WSP wi l l explore possibilities of program expansion by following the current adopted methodology and approach on environmental sanitation in these sites.

2. The project wi l l be implemented over a 5-year period 2009-2014. The estimated total project cost i s IDR 315.2 billion or US$ 33.54 million, which includes physical and price contingencies as well as taxes. The Bank would finance US$23.56 million based on (a) 85% financing o f civil work and equipment for Kota Bogor, and Bogor PDAM will provide the remaining financing for civil works and equipment; (b) 100% financing o f civil works and equipment o f a clean water reservoir and distribution networks for Kabupatens Kapuas, and Kapuas PEMDA and PDAM will provide 100% financing o f civil works and equipment for construction o f 100 l/s WTP, household connections, NRW water network replacement and DED; and (c) 100% financing o f civil works and equipment for water intakes and WTPs, and distribution systems o f Kapupaten Muara Enim, and Muara Enim PEMDA and PDAM wi l l provide the 100% financing for civil works and equipment o f three clean water reservoirs, household connections and NRW water network replacement. PDAMsBEMDAs will also finance land acquisition costs as well as activities complimentary to the project.

3. described below:

The existing water supply systems o f Kota Bogor, Kabupatens Kapuas and Muara Enim are

(a) Kota Bogor - PDAM Tirta Pakuan Kota Bogor supplies safe and clean water toward water supply Zones 1,2,3,4 and 6 in the urban areas. The current service coverage i s o f about 47% o f the total urban populations. The water supply services are provided with different pressure heads and are o f 24 hours continuous services. There are five urban water supply systems (WSSs) o f total design capacity o f 1,710 L/s in Bogor City, namely (a) Kota Batu Water Supply System o f 70 L/s which has supplied potable water to Zone 6 o f the urban area since 1918, (b) Tangkil Water Supply System o f 170 L /s which has supplied potable water to Zones 1 and 4 o f the urban area since 1974, (c) Bantar Kambing Water Supply System o f 170 L /s which has supplied potable water to Zones 2 and 3 o f the urban area since 1969, (d) Cipaku Water Supply System o f 300 L/s which has supplied potable water to Zone 3 o f the urban area since 1988, and (e) Dekeng Water

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Supply System o f 1,000 L/s which has supplied potable water to Zone 4 o f the urban area since 1997.

70L/S uota B a u w# (1918)

E E 0 0 cn I

z 0

1

Zone 6

170L/s Tangkll W S (1974)

I

E E 0 0 Q I In hl

3

170L/S Bats Kambing wss

300L/S

wss Clpdd

d

l,OOOL/S Dekeng wss

+ Zone 4 +

Zone 1 Zone 2 Zone 3

Figure 1 Existing Water Supply Systems o f Kota Bogor

(b) Kabupaten Kapuas - PDAM Kapuas supplies water toward about 50% o f the total urban populations o f Kota Kapuas. However, the water supply services sometimes fail to meet the stipulated drinking water supply standards and also are not able to meet 24 hours continuous services. Portable water i s also delivered to consumers by five existing trucks in particular during the dry season which usually takes place from April to September. The existing water supply services also suffer from seawater intrusion during the dry '

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season (The P D A M is constructing a new intake and raw water transmi'sison l ine o f about 30 km upstream o f the existing WTPs).

The remaining 50% o f the urban population who do not have access to the piped water supply services provided by the PDAM, obtain unsafe water from rivers and wells. I t was reported that suffering from diarrhea and water related diseases o f the unserved populations by the P D A M was very common

There i s one existing water supply system (WSS) which consists o f six packaged WTPs (see below) and two service reservoirs o f 200 m3 and 500 m3 that supply clean water to the urban populations o f Kapuas.

(a) 20 L/s WTP has commissioned since 1982 (b) 30 L/s WTP has commissioned since 1992 (c) 10 L/s WTP has commissioned since 1995 (d) 25 L/s WTP has commissioned since 1996. (e) 40 L/s WTP has commissioned since 1998 (f) 25 L/s WTP has commissioned since 2004.

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WSS

2 0 L j S + 30L/S + 1 O L D + 25LB + 4 O L / s + 2 5 L F

K o t a K a p u a s Figure 2 - Existing Water Supply System o f Kapuas.

(c) Kabupaten Muara Enim - PDAM Muara Enim supplies water toward about 50% o f the total urban populations o f Tanjung Enim and Muara Enim. However, the water supply services sometimes fail to meet the stipulated drinking water supply standards and also are not able to meet 24 hours continuous services. The remaining 50% o f the urban populations, who do not have access to the piped water supply services provided by the PDAM, obtain unsafe water from River Enim and wells. During the dry season which usually starts from May to September, the unserved populations besides facing water shortage, they have to drink unsafe water. It was also reported that the number o f diarrhea and other water related sickness during the dry season had increased by at least 5% with compare to the wet season in the past.

There are two existing water supply systems (WSSs) which supply clean water to the urban populations o f Tanjung Enim, namely, Karang Asam WSS and Talang Gabus wss.

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40L/S K a r a n g A m WSS

40LB WTPS

500m’ Re se rvolr

KoSaTanjung Enim

Figure 3

40L/S Tdang Gabus wss

2OLB + 20L/s WTPS

Existing Water Supply Systems o f Tanjung Enim

The two existing water supply systems (WSSs) which supply clean water to the urban populations o f Muara Enim, namely, Talang Jawa WSS and Pelitasari WSS.

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60LjS Tdang Java

SOW Pclitasari

20Lh + 20LjS + 20Lh

360m’ Reservoir

Kota Muara Enirn

Figure 4 - Existing Water Supply Systems o f Muara Enim

4. The project comprises o f water supply system improvements (US$ 31.18 million) for the participating PDAMs that are diversely located on the islands o f Java (Kota Bogor), Kalimantan (Kabupaten Kapuas), and Sumatra (Kabupaten Muara Enim).

5. These PDAMs are self-selected after about 20 PDAMs expressed interest in the project. Many o f the 20 PDAMs dropped out later on, while these three PDAMs showed the necessary commitments and prepared the documents required to remain in the project. All, except Bogor, satisfy the requirements o f the MoF, and have no arrears. Bogor and the M o F have agreed to resolve Bogor’s arrears in order for Bogor to participate in the project. To ensure that the institutional aspects o f this component are implemented, the performance agreement between each PEMDA and P D A M will include in addition to the financial on-lending terms, assurances that both parties undertake their obligations responsibly, including financial indicators, cost recovery tariffs, management efficiencies, and PEMDA contributions. Performance agreements and indicators are selected from monitoring indicators in the Government’s restructuring program and the guidelines o f the Ministry o f Home Affairs.

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6. The planned works will result in increased production and sales, thus increasing revenue. The effective cost per unit volume sold will decrease due to improved delivery efficiency afforded by the reduction in water loss from the distribution system. The PDAM-specific investments and outcomes are estimated as follows:

Part 1. Bogor (West Java): Investments in Bogor comprise: constructing o f a new water treatment plant with capacity 400 l/s adjacent to the existing Dekeng WTP, constructing two additional units o f rapid sand fi lters with new filter back washing facilities o f the existing Dekeng WTP which will be upgraded from 1,000 l/s to 1,200 l/s in capacity, constructing a 2,000 m3 water reservoir, constructing 100 km o f water distribution pipelines with 40,000 new household connections serving about 200,000 additional people in Kota Bogor, and implementing a NRW reduction program by installation o f new water meters and replacement o f 8 km o f o ld pipelines. NRW is expected to be reduced by 5% as a result o f project investments (from 38 to 33%). The Bank Loan will finance 85% o f al l works and goods for the above investments.

.

(b) Part 2. Kapuas (Central Kalimantan): Investment in Kapuas, capital o f Kabupaten Kapuas will comprise constructing o f new water reservoirs, increasing distribution system, and rehabilitating pipelines to reduce water losses and improve service levels to meet the growing demand for water in Kapuas. The Bank Loant will finance: (i) the construction o f a 1,500 m3 water reservoir; and (ii) the construction o f about 25 km o f water distribution pipelines. Local Funds by GoI/PEMDAs/PDAMs will finance: (i) 8,000 new household connections serving about 40,000 additional people in Palinkau, Kapuas Timor, Selat Huh and Desa Pulotelo, Kapuas; and (ii) the implementation o f a NRW program by installation o f new water meters and replacement o f o ld pipelines. NRW i s expected to be reduced by 5% as a result o f project investments (from 35 to 30%).

(c) Part 3. Muara Enim (South Sumatra): Investments in Muara Enim cover activities to increase the supply o f treated water and improve the efficiency o f water distribution. The Bank Loan will finance 100% o f some investments, which are outlined below, while the remaining complementary investments will be funded at 100% by the GoIPEMDAsPDAMs.

Urban Area o f Muara Enim:

(i) For the Pelita Sari WTP. The Bank Loan will finance: (i) the upgrading of existing river intake from 90 Vs to 100 l/s including construction o f 1 km o f 355 mm diameter raw water transmission pipeline, (ii) the construction o f new 100 11s primary sedimentation tank o f the existing Pelita Sari WTP, and (iii) the construction o f 50 l/s new WTP. Local funds by GoI/PEMDAs/PDAMs will finance construction o f a new water reservoir.

The Bank Loan will finance: (i) the upgrading o f existing river intake from 60 Vs to 75 l/s including,construction o f 0.90 km o f 250 mm diameter raw water transmission pipeline, (ii) the construction o f new 75 l/s primary sedimentation tank o f the existing Talang Jawa WTP, and (iii) the

(ii) For Talanrr Jawa WTP.

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provision o f 70 l /s booster pumping station. Local funds by GoI/PEMDAsPDAMs will finance construction o f a new water reservoir.

The Bank Loan will finance: (i) the construction o f about 120 km o f water distribution pipelines o f diameters varying from 110 - 355 mm. Local funds by GoVPEMDAsPDAMs will finance: (i) 8,400 new household water connections serving about 42,000 additional people in urban areas o f Muara Enim; and (ii) the implementation o f a non-revenue water reduction program by installation o f new water meters and replacement o f 62 km o f old pipelines. NRW is expected to be reduced by 5% as a result o f project investments (from 40 to 35%).

(iii)For the Water Distribution Network in Muara Enim Urban Area.

Urban Area o f Taniuna Enim:

(iv)For Karang Asam WTP. The Bank Loan will finance: (i) the construction o f a new river intake o f 100 l/s including construction o f 0.60 km o f 355 mm diameter raw water transmission pipeline, (ii) the construction o f new 150 l /s primary sedimentation tank o f the existing Tanjung Asam WTP, and (iii) the construction o f a new 100 l/s new WTP. Local funds by G o W E M D A s P D A M s will finance construction o f a new water reservoir.

The Bank Loan will finance the construction o f about 80 km o f water distribution pipelines o f diameters varying from 110 - 355 mm. Local funds by GoI/PEMDAs/PDAMs will finance: (i) 5,600 (no. to be conjrmed during negotiations) new household connections serving about 28,000 (no. to be conjkmed during negotiations) additional people in urban areas o f Tanjung Enim; and (ii) the implementation o f a non-revenue water reduction program by installation o f new water meters and replacement o f 58 km o f old pipelines. NRW i s expected to be reduced by 5% as a result o f project investments (from 40 to 35%).

7. The Go1 will engage consultants, who will be fully funded by counterpart funds, to enhance project performance to augment institutional and management capacity. The success o f the project and i t s long-term viability depend not only on the technical merits, but also on the institutional and management ski l ls o f the executing agencies. The consultant services are divided into three parts: (1) technical support for project implementation, which aims to ensure that project implementation i s in line with and satisfies World Bank and Go1 requirements; (2) project enhancement support which aims to ensure that the project achieves i t s objectives efficiently by providing specialized consultant services and training to PEMDAs and PDAMs; and (iii) the project will initiate technical assistance in sanitation (costs not included) to be financed through grant funding from additional donors. These anticipated activities are separate from the project, but aims to initiate information dissemination, mapping, pi lot projects and feasibility studies for sanitation investments in the project area.

(v) For the Water Distribution Network in Taniuna Enim Urban Area.

8. PCUPIUs for:

Project Implementation Support, would include consulting services and equipment for the

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(i) Technical support for project implementation and supervision at the central and PDAM levels, which aims to ensure that project implementation is in l ine with and satisfies requirements o f the World Bank and the GoI;

(ii) Construction supervision activities;

(iii) (iv)

Preparation o f detailed engineering designs for the various packages; and

Capacity building activities to provide specialized consultant services and training to PEMDAs and PDAMs.

The above will be contracted as a management advisory firm so that activities could be coordinated. In addition, this sub-component will finance costs for the conduct o f project audits.

9. Project Enhancement Support. These activities are designed in order to facilitate and ensure that the project achieves i t s wider development objectives through consultant services and training to enhance P D A M and PEMDA managerial and technical skills. Additionally, surveys will be conducted to gauge the attitude o f stakeholders, beneficiaries, staff and managers of PDAMs to ensure that lessons learned are incorporated into investments and project progress as needed. Public information and participation will be conducted to inform the population about the project and to engage them to participate and provide their views on current and desired services. Customer surveys will determine strengths and weaknesses o f current services and to design new approaches for better services. Similarly, P D A M staff surveys will solicit views o f staff for improvements. The results o f the surveys will be used by P D A M and PEMDA management to improve performance and services. The surveys will also be designed to solicit views from staff and users to reduce NRW.

10. Assessment of the nature and structure of NRW A water loss mitigation program will be conducted in al l participating PDAMs. Water losses reported by PDAMs are not sufficiently reliable, and it is important to verify the problem more accurately. Many water meters are old or broken and do not correctly measure water flows. The reduction program will a im to determine the proportion o f illegal connections, physical leakage and administrative errors due to inaccurate meters, meter readings, and erroneous billing. The assessment will ascertain the most effective means o f loss reduction and will lead to investments in physical loss reduction programs (leak detection equipment, metering, replacement o f deficient pipes); and administrative investments (bill payment systems). The assessment will identify steps to avoid illegal connections through a mix o f incentives and penalties for P D A M staff and consumers. These consultant services and training to the PDAMs and PEMDAs will be provided in an ongoing WASAP-B ‘Water Supply Services and Capacity Building’ program implemented by the World Bank and WBI, focused on the participating PDAMs, the costs o f which are not included herein.

11. Sanitation Technical Assistance; This i s a separate and parallel activity to be funded by other donors and will provide support to the project by initiating sanitation technical assistance program in the project areas focusing on mapping o f sanitation hotspots, public information and capacity building campaigns targeting the poor, and studies to devise appropriate methodologies for addressing severe sanitation issues that would be appropriate for the areas under the project.

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12. The Bank will conduct workshops in Jakarta for a l l participating PDAMs, other officials and staff involved in the project on Bank procurement and financial management guidelines and procedures within the context o f the project.

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Annex 5: Project Costs

INDONESIA: ID-Urban Water Supply and Sanitation

J S (nillkn) canpnents Partl. ForKotaBoaor 1.NwWTP 2. N w Reservoir 3. Badtwash R q d e Plart at Dekerg WTP 4. Filter Units at Dekerg WTP 5. Extendng the Mer Dstnbttion Nebwrk 6. lmprrerting NRW Program

SUM&

Part2. For Kabuwten 1. N w Reservoir 2. Water Dst i tu tm Network

2a. Sebt HUIU -1 2b. Slat HUIU -2

a. k b T & - 2 2. PuloTeb-1

3. NwWTP 4. NwHouseCcnneclicns 5. Imprenting NRW Program 6. DED

SUM&

Part 3. For Kabupaten M w a Enlm 1.PdBsariWTP 12. P~IB an Reservcir 13. KarmgAsmwrP ~4. KxmgAsgn Reselvcir ~ 5 . CcnstuJtion d office BuMing 6. Tdarg Jam WTP 7. Tdarg jam Reservoir 8. Water Distitutm Netwok @baa Erim -1) 9. Water Dstitutm Netwok @baa Erim -2) 10.. Water Distribltim N&ok (Tmjmg Edm) 11. NewHwseComedions 12 Inplementirg N R W F n g m

Subto$

US$ (million)

Consultant Services and Tralnhg 1. Supp~rt fa the PCU a d RUs 2. Constxiion Supervision for Bogor 3. Carstxiion Supervision for & p a s 4. Constxiion Supervision for W a a h i m

S U M d bas4 TOTAL COSl

5.05 0.58 0.71 0.86 215

NU=: 1, Exchange rde (hcbmsian RupNh per US)

0.35 0.04 0.05 0.06 0.15

Bas' IDR (nillicn)

47,xJr 5,45: 6,62 8,05!

20,Pr 8,34:

=207

- -

- 7,024

17,649 2,848 6,244 2,484 6,Ow) 4,800 2,025

252 @,6Z - 11,746 2,880

17,481 3,310 4,365 8,134 5260

16,799 16,799 19,993 19,504 1,798

128p69 - 9,923 3,525 3,080 4.180

20,7w 294,613 - -

9,400

0.75

1.90 0.30 0.66 0.26 0.65 0.51 0.22 0.03 128

1.25 0.31 1.86 0.35 0.46 0.87 0.56 1.79 1.79 213 207 0.19

13.62

0.05

0.13 0.02 0.05 0. m 0.05 0.04 0.02 0. M) a n

0.09 0. a? 0.13 0.02 0.a 0.06 0.04 0.13 0.13 0.15 0.15 0.01 ass

I

1 ;: 0.44

31.34 I 219

50,823

7,093 8,619 0.92 0.76

21,640 1.93 8,927 I 0.79 I

102942 I 1695 I 9.06 I

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Annex 6: Implementation Arrangements INDONESIA: ID-Urban Water Supply and Sanitation

1. Following decentralization, which assigned the provision o f water and sanitation services to local governments, the old methods o f doing business in the water sector, that were based on central government directions had to be changed. N e w partnerships within the government framework had to be designed based on the new realities. In a decentralized environment, the role o f central government changes to be a policy maker setting visions and targets for the sector, while monitoring i t s performance and designing an incentive structure for improvements by other stakeholders. Partnership between the MoPW, the MoH, the MoHA, and the M o F i s necessary to resolve many o f the current issues o f PEMDAs and P D A M including debt arrears, improvement in operational efficiencies and designing incentives for improved performance. At the same time standards and targets set by central government need to be adhered to and monitored. Local governments have a new role as owners o f the PDAMs and are responsible for ensuring their appropriate management and viability while ensuring that central government policy i s being implemented and goals achieved. PDAMs are responsible to their owners and customers. The project aims to forge a partnership arrangement amongst these stakeholders to ensure sustainability o f the sector.

2. The institutional and implementation arrangements proposed for the project aim to reflect the new decentralized nature o f the Go1 and will mirror the responsibilities o f the various layers o f governments and stakeholders. The arrangement is expected to increase efficiency, avoid duplication and increased costs, and improve local knowledge and responsibility for local project implementation, while retaining policy making and monitoring at the central level.

Project Coordination 3. The MoPW has a long track record in the formulation and execution o f water and sanitation programs. It i s the lead agency for integrated urban infrastructure projects, where water supply was a large component. The M o P W has good knowledge o f Bank procedures and Go1 requirements. I t participated in developing the project along with other central and local agencies. A Project Coordinating Unit (PCU) will be established at the M o P W to coordinate the input o f the local Project Implementation Units (PIUs) and inform stakeholders in the national government and to liaise with the Bank on project progress and alert them to needed action. The P C U will have access to specialized advice and will participate in project training activities. The P C U will include a procurement consultant who will be responsible for reviewing the procurement documents prepared by PIUs before they are forwarded for the Bank to review. The consultant will be responsible for the quality control o f the documents and ensuring Bank standard documents are being used. The consultant will provide advice to PIUs upon request, and will consolidate their submissions o f the updated procurement plans for the progress report. The PCU will also have a financial management consultancy team who will be responsible for the review o f financial management reports, disbursements applications and other financial documents prior to their final submission to the Bank. The consultant will ensure Bank procedures are adhered to. The consultant will also consolidate the submissions o f the PIUs into the progress report o f the project for review by government stakeholders and the Bank. The P C U will have access to technical advisory services to prepare terms o f reference for specialized assignments and training.

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Project Implementation

4. The P D A M components will be implemented at the local level in line with the decentralization principles. Each o f the participating PDAMs will establish a project implementation unit within i t s planning division consisting o f current staff who will be responsible for the project implementation. These PIUs will be responsible for conducting the procurement process, preparing payment requests and disbursement applications, managing the financial management system, the monitoring and evaluation o f the performance indicators, and daily implementation o f the project. The PIUs will submit their quarterly reports to the PCU who will share them in a summarized form with the Bank in a format agreeable to the Bank and included in the PMM. The PIUs will also include technical expertdengineers from PDAMs who will be responsible for monitoring o f contracts and the implementation o f the investments. Monitoring will ensure that technical and environmental standards are adhered to. The engineers, procurement and financial management staff will work together to ensure the project i s implemented according to agreed procedures, in a timely manner and with quality standards.

Supervision plan

5. Intensive supervision by the Bank, especially in the f i rst year o f project implementation i s recommended, and more time is planned to be committed to the project to ensure smooth implementation in the subsequent years. The Bank’s supervision will be coordinated with the PCU’s own supervision. The supervision plan including its strategy (skill mix. etc) will be covered in the PMM.

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Annex 7: Financial Management and Disbursement Arrangements INDONESIA: ID-Urban Water Supply and Sanitation

A. Executive Summary and Conclusion

1. The Urban Water Supply and Sanitation Project (UWSSP) will be financed as a Specific Investment Loan, with a total project size USD 33.54 million, o f which U S D 23.56 will be funded from this loan. Three PDAMs (Bogor, Kapuas, and Muara Enim, under the coordination o f Directorate General (DG) Cipta Karya, the MoPW), will be the implementing agencies for this project, with an estimated 91% o f the project expenditure to be executed through the PDAMs. The project will be implemented over a period o f 5 years.

2. The purpose o f the financial management assessment is to determine whether the financial management systems o f the respected PDAMs and the M o P W have the capacity to produce timely, relevant and reliable financial information on project activities, and if the accounting systems for project expenditures and underlying internal controls are adequate to meet fiduciary objectives and allow the Bank to monitor compliance with agreed implementation procedures and to appraise progress towards i t s objectives.

3. The financial management assessment for the Urban Water Supply and Sanitation Project (UWSSP) was carried out in accordance with guidelines issued by the Financial Management Sector Board in November 3, 2005l. The Bank Team reviewed the operations o f the following un i t s within DG Cipta Karya, the MoPW, as the coordinating agency, including its finance unit and Inspectorate General. The MoPW will be responsible for the implementation o f the Consultant Services and Training Component. FMS also assessed the financial management capacities o f P D A M Bogor (in West Java) and Kapuas (in Central Kalimantan) and the respective finance uni ts o f both local governments.

4. DG Cipta Karya, the MoPW with its prior experience in managing Bank financed projects was noted to have a limited number o f staff with sufficient capacity to coordinate the project implementation and be financially accountable for it. However, it was observed during the assessment that such capacity is in place at PDAMs level and 91% o f the cost o f the project will be spent at P D A M level. Furthermore, there is also additional risk due to the weak overall country environmental control. Taking al l these factors into consideration, the overall Financial Management risk o f the project i s rated as “Substantial”.

5. A financial management action plan has been developed and has been discussed with the M o P W to help mitigate the identified financial management risks. This action plan includes strengthening internal controls through regular internal audit o f project activities, strengthening payment validation procedures to reduce risks o f fraud, segregating financial functions from the rest o f project management maintaining checks and balances, documenting project and financial management procedures in a manual to guide project staff and training o f project staff in financial management procedures.

’ “Financial Management Practices in World Bank- Financed Investment Operation ”, November 2005.

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6. proposed “Financial Management Action Plan” below, the project would satisfy the Bank’s financial management requirements as stipulated in O P B P 10.02.

The Bank’s assessment concluded that upon implementation o f the actions stated in the

B. Summary of Country Issues

7. Recently concluded PEFA2 assessment indicates that in recent years Indonesia has made significant changes in the way i t s public finances are managed and in increasing transparency and independent oversight. In almost al l areas o f public financial management, a sound regulatory framework i s in place. Advances have been made in budget preparation, and in instituting a State budget that combines the previously separated recurrent and development budgets.

8. However, internal controls in the execution o f the budget by spending agencies have not scored wel l overall. Internal audits exist in al l ministries but generally lack capacity to use modern systems and carry out risk-based auditing. There is no government-wide Government Financial Management Information System (GFMIS) that provides information on budget management at a l l levels o f national government. While the external audit function i s under- resourced and lacks capacity, it has nonetheless made significant progress in recent years.

9. The Bank and several other development partners are engaged with the Go1 in providing assistance in several o f these areas o f weaknesses. The Government Financial Management and Revenue Administration Project (GFMRAP) i s the Bank’s primary channel for assisting the Go1 on these issues. The Bank is also working with internal auditors o f four line ministries including the MoPW to strengthen their ~ a p a c i t y . ~ The Bank i s also engaged with the external auditor to strengthen i t s capacity in several areasS4

10. Implementation experience with the MoPW suggests that even though most o f these country issues apply, the M o P W is a relatively better performing ministry in terms o f compliance with the finance and treasury laws.

1 1. extent that this project relies on Government financial management and project implementation systems.

This situation impacts the financial management arrangements for this project to the

PEFA (Public Expenditures Financial Accountability) 2008. The Bank has engaged with Ministr ies o f Public Works, Finance, Health and Education in strengthening the

There are two ongoing Trust Funded TA supporting BPK, i.e. on the strengthening forensic audit capacity and on respective Inspectorate General in the internal audit o f the Bank‘s financed projects.

the strengthening accountability for and audit o f disaster - related aid.

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Issues

I n h e r e n t Risk

Public Financial Management

Countrv level

Overall Country Risk

Entity Level

DGCK Implementing Entity/ Organization Status of entity

MOP W-

Risk Risk Mit igat ing Measures Incorporated Residual Condition o f Rat ing into Project Design Risk Negotiations or

Effectiveness (Y/N?)

S N Government recognizes existing weaknesses in public financial management and has several programs to improve PFM, including through the Bank financed project (GFMRAP). However, making substantial progress on the country issues has been challenging and i s likely to remain so.

S S

PDAMs Muara Enim, Bogor, and Kapuas

Overall Entity Risk Proiect Level 1. Project Complexity

S

M

S

S

Overall Proiect I S Risk

To anticipate poor reliability o f entity’s financial management capacity, the project coordinating unit w i l l be supported by financial management consultant.

- In al l FY 2007 PDAMs audit reports, the auditors provided unqualified opinion.

- All PDAMs implementing accounting system based on Decree o f Ministry o f Regional Autonomy no 8 FY 2000 since FY 2001.

Finance and accounting staff o f PDAMs noted to have accounting background and sufficient capacity to produce reliable financial statement

-

The project aims to reflect the new decentralized nature o f the Go1 and wi l l mirror the responsibilities o f the various layers o f governments and stakeholders. There w i l l be on-lending arrangement from central government to Bogor, Kapuas and Muara Enim local governments and specific arrangement for each local government to i t s PDAM. All arrangement expected to be final before negotiation.

M

M

M

M

M

Y, TOR by negotiation and selected after effectiveness (refer to Action Plan to Mitigate Risk- Project organization & Staffing

Y, Final draft on- lending agreement (the MoF and local govt) and agreement between each local govt with i t s P D A M by negotiation

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Control Risk Budgeting Risk o f project activities not being included in the local government budgets

Accounting Reliability of accounting system Internal Control Inadequate vayment verification

Funds Flow

Financial Reporting

S

M

H

S

S

There i s risk that there wi l l be delay in inclusion o f project activities in the local government budget.

Following are action plan to mitigate: a) Annual budget and work plan wi l l be required for submission to the Bank. b) D G Cipta Karya, MPW wi l l coordinate with Bangda, the MoHA to monitor budgeting process within the local governments o f participating PDAMs. c) P M M wi l l detail budgeting process to ensure all proposed activities sufficiently and timely budgeted. Use o f PDAM chart o f account and government chart o f Account to be used for accounting; simplified loan categories for Bank reporting. Despite the fact that PDAM’staff have accounting background and sufficient capacity to produce reliable financial statement, the project wi l l s t i l l faced the risk that payments wi l l be made without properly verifying that work paid for i s completed and i s eligible for funding.

P M M wi l l detail the following: a) Sufficient segregation o f duties among payment authorization and “commitment maker”. b) Stronger payment validation procedures at all levels. c) Criteria for eligible project expenditures in accordance with the Financing Agreement to be followed by the relevant KPPN. ) There wi l l be dedicated bank account at the central bank to channel credit disbursements. b) The mechanism for fund flows to the PDAM was described in the flow o f f h d below and wi l l be agreed and reflected in PMM. Formats for special purpose financial statements for annual reporting and quarterly interim un-audited financial report (IFR) wi l l be agreed and included in the PMM.

Special purpose financial statements wil l include aggregation o f expenditures at PDAMs level. In addition, expenditures at PDAMs wi l l also be included in their financial statement with disclosures o f foreign funded parts.

Mechanism on how to comrde PDAMs’ IFR

M

M

M

M

M

Y, acceptable draft P M M by negotiation and full adoption before effectiveness (refer to Action Plan to Mitigate Risk - PMM)

Y, acceptable draft P M M by negotiation and full adoption before effectiveness (refer to Action Plan to Mitigate Risk - PMM)

Y, acceptable draft P M M by negotiation and full adoption before effectiveness (refer to Action Plan to Mitigate

Y, acceptable draft P M M by negotiation and full adoption before effectiveness (refer to Action Plan to Mitigate

Risk - PMM)

Risk - PMM)

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6. Internal Audit

Auditing

Risk o f poor audit quality and poor oversight o f projects.

Overall Control Risk Overall Risk S

and produce project’s IFR wi l l be agreed and reflected in both PAD and PMM.

The on-lending agreement (from central to local governments) w i l l cover requirement o f P D A M to DreDare IFR on auarterlv basis. Arrangement for both Inspector General o f the MoPW and Bawasda to conduct internal audits.

Letter to be issued authorizing Inspectorate General (IG) o f the MoPW to undertake internal audits at the central level wi th TOR agreed by the Bank.

Letter o f PDAM’s director to be issued authorizing i ts internal audit unit (if any) or Bawasda (under BPKP - Deputy for Supervising government Agencies in Economic Sector supervision) o f the respective local government (where P D A M participants are located) to undertake internal audits o f the project with TOR agreed by the Bank,

There w i l l be two types o f audit: 1. DGCK Letter appointment o f BPKP

(Deputy State Accountant) to conduct audit o f agaegate Special Purpose Financial Statements o f the project with TOR acceptable to the Bank.

2. P D A M Director Letter on appointment o f BPKP to conduct audit o f P D A M Financial Statements with TOR acceptable to the Bank.

3. Project Audit reports and audited financial statements w i l l be made available to the public.

D. Implementing Arrangements

M

M

M

M

Y, letter to IG by negotiations (refer to Action Plan to Mitigate Risk - Internal audit)

Y, finalize arrangement draft letter by negotiation and Letter o f PDAM’s director confirming the arrangement by effectiveness.

Y, by negotiations (refer to Action Plan to Mitigate Risk - Auditing)

12. DG Cipta Karya, Ministry o f Public Works (DGCK, MPW) i s the lead agency for integrated urban infrastructure projects, including water supply and sanitation. DGCK, MPW will be the coordinator for this project. MPW has extensive experience in implementing Bank- financed projects. The most recent Bank project implemented by DGCK includes The Third Urban Poverty Project (UPP IIII IBRD 4779-IND and IDA 4063-IND): this received a unqualified audit opinion for fiscal 2007, with follow up action findings related to requirement to

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improve the control system in the area o f project planning, monitoring and management, performance o f consultants in providing assistance to the community, procurement at the community level, payment verification, etc.

13. A Project Coordinating Unit (PCU) will be established in DG Cipta Karya, the MoPW to coordinate the input o f the local Project Implementation Units (PIUs) and communicate with other national government stakeholders and with the Bank regarding project progress, and alert them to needed action. The PCU will have access to specialized advice and will participate in project training activities.

14. The project in each local government will be implemented at the local level in line with decentralization principles. In PDAMs, the Director o f PDAM will be the ultimate responsible person on the implementation o f the project. P D A M will be treated as the Pemegang Komitmenu Commitment maker. Each o f the participating PDAMs will form a project implementation unit (PIU) within i t s planning division consisting o f current staff to take care o f the daily project implementation in PDAMs. The PIUs will include the directors o f the technical and financial department supported by their existing staff for the purposes o f procurement and financial management and overall project design and implementation in accordance with Indonesian law and practice, and would therefore liaise with the relevant local and central governments agencies in terms o f planning, implementation and monitoring standards.

15. PIUs will be responsible for the daily implementation o f the project including the procurement process, disbursement applications, the financial management system, the monitoring and evaluation o f the performance indicators, and coordination with local and central government officials. Staff will receive extensive training in Bank fiduciary responsibilities in procurement, disbursement and financial management to augment their current skil ls. The PIUs will submit their quarterly reports to the PCU who will share them in a summarized form with the Bank.

16. Under the previous arrangement, loans to PDAM were managed through Subsidiary Loan Agreement (SLA) directly from central government. Recently, the Government o f Indonesia issued Government Regulation / PP no. 54 FY 2005 regarding local government loan. Based on the regulations, funds for project implementation in PDAMs will be channeled through local government under on lending terms. The funds will be included in the local government’s budget (APBD).

17. Based o n the Decree o f Ministry o f Regional Autonomy no. 8, August 2000 on the Implementation o f Accounting System Manual for PDAMs, al l PDAMs are obliged to implement the accounting system in FY 2001. In addition to that, the P D A M entity financial statement i s also subject for audit. We have reviewed the financial statement o f the participating PDAMs and found that FY 2005 audited financial statements with unqualified audit opinion are available for a l l o f them.

18. P D A M is owned by local government; therefore it i s subject to audit by Bawasda, the local government internal audit unit (IG). Bawasda mostly conducts operational audits on al l units within the respected local government, included under donor-financed agencies, such as the

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project. In this project, Bawasda will be trained and supervised by BPKP to conduct internal audit o f the project.

E. Strengths & Weaknesses

19. StrenPths

a) Based on the assessment, FMS noted that implementation o f Accounting System Manual for PDAMs has been uniform in al l PDAMs.

b) The finance and accounting staff o f PDAMs visited are noted to have accounting backgrounds and sufficient capacity to produce reliable financial statements.

20. Weaknesses

a) Although prior experience o f the MoPW in implementing Bank-funded projects has given it familiarity with Bank financial management and disbursement procedures and requirements, and the Audit reports in the earlier project were received on time, the previous project was already closed while the audit qualification raised in the reports has just been satisfactorily resolved due to the preparation o f the project.

b) The involvement o f local government to a certain degree provides an additional layer to the project implementation, while at the same time bringing ownership and commitment to the local government to its P D A M intention to promote its performance. Close coordination between both PDAMs and its respective local government is essential in this project.

c) Bawasda o f the respective participated local governments has either limited or no experience in conducting internal audits for World Bank financed projects.

d) The MoPW has its own internal audit unit (IG). We have found that the IG’s activities are limited to cover only 30% o f al l M o P W budget implementation. Currently IG has 70 auditors with economics, management and technical backgrounds, but none o f them are accountants. All o f them have received internal audit training and certification from BPKP. Currently the Bank i s working closely with AusAID in the preparation o f proposal to strengthen IG capacity.

F. Action Plan to Mitigate R i s k s

21. For the project preparation, specifically for the purpose o f financial management assessment, FMS introduced to P D A M candidates the financial management requirements for World Bank financed projects in the project workshop. FMS prepared financial management questionnaires, distributed it to them and received responses to the questionnaires. Based on the questionnaire and discussion with project preparation and task team, PDAM Bogor (in West Java) and Kapuas (in Central Kalimantan) were selected for visit based on the consideration o f the geographic location o f PIU and their responses on the questionnaires. FMS visited PDAM Bogor, West Java and Kapuas, Central Kalimantan as part o f a pre-appraisal mission o f the

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Urban Water Supply Project. During the t i s i t FMS also visited finance units o f both Bogor and Kapuas local government.

Action Plan

22. DG Cipta Karya, the MoPW with i t s prior experience in managing Bank financed projects was noted to have a limited number of staff with sufficient capacity to coordinate the project implementation and be financially accountable for it. However, it was observed during the assessment that such capacity i s in place at PDAMs level and 9 1 % o f the cost o f the project will be spent at PDAM level. Furthermore, there i s also additional risk due to the weak overall country environmental control. Taking al l these factors into consideration, the overall Financial Management risk o f the project i s rated as “Substantial”.

Expected Output Due Rate

23. As part o f the project preparation, DG Cipta Karya, the MoPW is expected to adopt the action plan because, with strict adherence to the action plan, the financial management risk o f the project can be reduced accordingly.

A. Project Organization and Staffing Team o f FM consultant at PCU to be selected to I TOR o f FM consultant agreed by Completed support coordination on project implementation

Training for all project staff who w i l l require the necessary skil ls to carry out respective duties as described in the PMM

the Bank and request forproposal (RFP) has been sent to short listed f m s

PMMtraining

during negotiations

I I B. On -lending arrangement

The project aims to reflect the new decentralized nature o f the Go1 and w i l l mirror the responsibilities o f the various layers o f governments and stakeholders. There wi l l be on- lending arrangement from central government to Bogor, Kapuas and Muara Enim local governments and specific arrangement for each local government to i t s PDAM. C. Project Management Manual (PMM)

- Draft on lending agreement (the MoF and local governments)

- Draft agreement between local government and each P D A M

P M M to include procedures to be followed by al l implementing unit o f the project. This should include, inter alia, (a) al l financial management and disbursement procedures for this project, (b) annual budgets and work plans, (c) stronger payment validation procedures, (d) segregation o f duties among payment authorization and “commitment maker” functions, (e) financial reporting formats, (0 supervision, (g) internal and external audit arrangements, (h) supervision mechanism, (i) community oversight arrangements and (i) anti corruption plan.

Draft PMM acceptable to the Bank

Completed during negotiations

E. Internal Audit

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Completed during negotiations

The first program after loan effectiveness

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Arrangement with I G and Bawasda to conduct internal audit and internal control reviews o f participating PDAMs based on TOR acceptable to the Bank. Copies o f these audit reports to be provided to the Bank.

Copies o f these audit reports to be provided to the Bank.

F. Annual audit Arrangement o f 1. The project annual audit. 2. in accordance with specific TOR acceptable to the Bank.

A l l PDAMs entity annual audit

- DG Cipta Karya letter to I G informing the internal audit arrangement o f the project.

Bawasda informing the internal audit for the project

- PDAM letter to respected

- Copies o f internal audit reports to be sent to the Bank and the external auditor.

1. D G Cipta Karya letter to BPKP (Deputy State Accountant) covering confirming the audit arrangements (on special purpose financial statement o f the project) with audit TOR attached.

2. Letter o f PDAM to BPKP (Deputy State Accountant) confirming the audit arrangements and agreed TOR.

Completed during negotiations

Completed during negotiations

G. Financial Management Arrangements

24. Accounting policies and procedures o f this project will substantially fol low Government financial management procedures, with strengthened procedures where appropriate. These Government procedures include, for instance, Government budgeting procedures, accounting standard (PP no. 24, 2005) and Government accounting systems (PerMenKeu no. 59/PMK.o6/2005), which have been issued following the issuance o f the Finance and Treasury Laws. Below are summarized procedures from budgeting to reporting procedures. All project activities and expenditures will be included in the respective KPA budget and, administrative and accountability procedures for approving expenditures and disbursing funds to beneficiaries will fol low Government procedures. Details o f these procedures will be included in the Project Management Manual.

Budgeting

25. The budget for Bank-financed projects will be integrated into the budget o f the respective government implementing agency viz., DG Cipta Karya, the MoPW and respective local government recipient o f on lending agreement. Under this arrangement, for auditing purposes, the accountability for project budget performance will be combined with that o f the corresponding budget allocation o f the implementing agency.

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Activities and Expenditure programming

a. Supplier/Consultant/Contractor Contracts

26. Most o f the project expenditures will be payments to suppliers, consultants and contractors. Procured process will fol low procurement procedures specified and agreed in the loan agreement. The payment on contract will be transferred directly to the respective vendor or consultant or contractor.

27. To effect payments, the Satker will prepare SPP and send to Finance Unit o f the MoPW for verification o f eligibility, compliance with the approved budget, compliance with the contracts, and acceptability o f supporting documentation which will then issues SPM’ . The finance unit will submit the SPM to the government treasury office (KPPN), which in turn will issue payment remittance order (SP2D) to the central bank/ commercial bank acceptable to the Bank. Payment will be transferred directly to the account o f the respective vendor or consultant or contractor, and KPPN will debit the Bank’s portion o f the project designated account.

b. Self-Managed activities 28. Small part o f the project will finance training. This type o f expenditures will be made based on the assigned budget. PCU will be able to request an advance payment o f a maximum o f a month’s projected cash needs from KPPN. This advance i s maintained on an imprest fund. The advance should be accounted for to KPPN within a month. An SPP6 should be prepared by PCU for eligibility and documentation completeness review by the finance units within MPW, which will consecutively issue the SPM. SPM should be submitted to KPPN for issuance o f SP2D.

29. Although the payment process will fol low government procedures, the following additional payment validation measures (applicable for both se l f managed activities and contract payments) will be prescribed to mitigate fiduciary risks, including stronger accounting evidence, audit trails and procedures to validate contracts and outputs:

Verification o f completeness o f the documentation supporting al l SPP (including ticket and boarding pass for travel, attendance list for meeting & trainings, signed time sheets, and third party invoices and warrant cards); Assurance that al l activities are supported by reports and photographs; Confirmation made to the third parties performing services to the project; Random confirmation made to participant o f the workshop/training; Random confirmation made to the beneficiaries, Le. scholarship recipient; Visits to location (if necessary); Other types o f review (if necessary).

Bank payment transfer instruction to KPPN (Government Treasury Office) issued by the Finance Section at the Ministry. ‘ Payment Request

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Accounting and Record-Keeuinx

30. The MoPW finance bureaus and province sub-units fol low the government accounting standard (Government Regulation no. 24, 2005) and government accounting system (MoF Regulation no. 59/PMK.06/2005). Government accounting software is used to record al l transactions. Manual back-up (general cashbook and its supporting books) i s still maintained in both finance bureaus/sub-units and KPPN. The system i s closed monthly and budget realization reports are submitted to the M o F on a quarterly basis. KPPN also maintains a budget realization records card specifically for the project. This card is supported by advance and contract monitoring cards; one card for each contract.

3 1. At P D A M level, based on Decree o f Ministry o f Regional Autonomy no. 8, August 2000 on the Implementation o f Accounting System Manual for PDAMs, al l PDAMs are obliged to implement the accounting system since FY 2001,

Reuortinq

32. Currently, the government is implementing GFS classification as the government chart o f account (MoF regulation no. 13/PMK.06/2005). The Ministry o f Finance Chart o f Account does not include codes for funding sources (e.g. donors). As a consequence, the government accounting software could not differentiate project expenditures f rom government expenditures. Therefore, to enable differentiation o f project expenditures for the purpose o f budgeting and facilitating report preparation according to component and expenditure categories, the following will need to be included as a part o f the PMM: (i) harmonization between project component and expenditure categories as described in the loan agreement, with the Government o f Indonesia chart o f accounts (Mata Anggaran Keluaran- MAK and Tolok Ukur); (ii) the MoPW Finance Unit should differentiate al l project payment vouchers and payment remittance orders; and (iii) reconcile project records with a project designated account (DA).

33. implementing un i t s in preparing the interim un-audited financial report (IFR), which is important to ensure that loan funds are available when expenditures are due for payment.

The M o P W Finance Unit should work closely with C P M U to coordinate al l

34. The IFR will include (i) sources and uses o f funds by project activity and by disbursement category; (ii) Loan Designated Account activity statements (iii) disbursement and expenditure status; (iv) detailed expenditures for contracts subject to prior review, if any; (v) summary aggregate expenditures for others/contracts not subject to prior review. In addition, to facilitate a check on consistency o f financial information with other project information, in consultation with other members o f the task team, the project will be requested to provide to the Bank a quarterly report on outputs realized for each project activity and a procurement progress management report.

35. All reports received from implementing units will be compiled in an agreed format, o n a quarterly basis, within 45 days o f the end o f the reporting period. The quarterly reports will be accumulated annually for annual financial audit purposes.

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36. Monitoring o f the project budget will be through IFR, progress and procurement reports and project supervision. This mechanism also enables early identification o f problems, especially those related to weak accountability, and due to the shortcomings o f budget execution such as under-spending o f budget allocation.

I 'Procurement I

Sub-project IFR *Finance PDAM

PIU *Physical Progress

H. 37. about 91% o f the project cost).

Funds Flow and Disbursement Arrangement Following i s the flow if funds for the main project for expenditures (at PDAMs level

Contractors

Application for I Withdrawal supported Special Account . V by IFR

Draft Withdrawal Application supported by I Consolidated Financial SE. DG Treasury Monitoring Reports: Financial, Procurement &Physical Progress.

(SA) Statement Central DG Treasury Bank ,

Public Works '

* Operational

4 I I I I I I I I I I---, =fund

PDAM IFR: MoF Treasury Bank Finance, Procurement, Office (WPN) Payment Remittance'

4 Order (SPZD) I Local Govt.

(District/City/)

38. The applicable disbursement methods include: 1) Advance, and 2) Reimbursement. In order to facilitate disbursements, a DA denominated in US dollars will be opened by DG Treasury in the Central Bank (BI) or a commercial bank acceptable to the Bank under the name of the MoF. DG Treasury will authorize i ts KPPNs located nearby the implementation units to authorize payments o f eligible project expenditures by issuance o f SP2D charging the DA. For this purpose, DG Treasury shall issue a circular letter to the relevant KPPN Offices providing guidelines and criteria for eligible project expenditures in accordance with the Loan Agreement

39. The DA will be solely used to finance eligible project expenditures. Although management of the DA will be under the responsibility of DG Treasury under the MoF, the DG Cipta Karya finance unit under the MoPW will be the one responsible to reconcile the DA and to prepare the application for withdrawal for advances and reporting the use o f the DAY duly approved by DG Treasury before their submissions to the Bank. Copies o f the DA's bank statement will be provided to the MPW finance unit by DG Treasury MoF.

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40. The ceiling of the advance to DA will at $2.5 million. Applications for reporting of use of the DA funds would be supported by: (i) list payments for contracts under Bank’s prior-review and records evidencing such expenditures, or (ii) statement of expenditures (SOEs) for al l other expenses and DA reconciliation statement. Reporting of use of DA funds and application for an advance to DA may be submitted in a single application on monthly basis.

Loan Category Description (1) Goods and Works under Part 1 o f the Project (2) Goods and Works under Part 2 o f the Project (3) Goods and Works under Part 3 o f the Project TOTAL

41. will be based on the IFR, which will then also include projected cash flows for the project.

When the CPMU i s capable of producing the quarterly IFR on time, reporting the use of funds

Amount of Loan Allocated (US%) to be financed

YO o f expenditures

9,060,000 85 4,150,000 100

10,350,000 100 23,560,000

Expenditures in PDAM level 42. Based on Government Regulation no. 54 FY 2005 regarding local government loans, funds for project implementation in PDAMs will be channeled through local government under on-lending terms. The fund will be included in the local government’s budget (APBD).

43. P D A M will submit SPP with complete documentation for validation against DASK, including a contract, invoice for the approval process. The local government finance unit will then issue a SPM to KPPN for SP2D issuance to the Central Bank to credit the payee’s (third party or contractor) accounts at its respective bank and debit the Designated Account for the Bank’s portion. Therefore, no physical funds will be received by Kas Daerah.

44. The project accounting will take place in both the P D A M for the A P B D used and the finance unit o f the respective local government for receipt o f central government budget (APBN) funds and use o f APBD funds.

45. All documentation for expenditures submitted for disbursement will be retained at the implementing unit and shall be made available to the auditors for the annual audit and to the Bank and i t s representatives if requested.

I. Internal control: Project Management Manual (PMM)

46. al l the implementing units to ensure that the project has sound financial management practices.

The P M M will document financial management system and procedures to be followed by

47. The P M M will include organization structure, j ob descriptions, budgeting, procurement - with addition o f WB procedures if there are differences, record management for finance units, asset management, f low o f funds, payment verification - with additional verification processes for Bank finance expenditures, accounting (including use o f government chart o f account for the project), reporting (IFR format, IFR preparation and time line), annual (internal and external) audit arrangements, supervision plan, governanceht i corruption and disclosure requirements

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(including acceptable mechanisms for Civ i l Society Organization (CSO) oversight o n procurement, sanction & remedy procedures, audit report publication and complaint handling mechanism); monitoring and evaluation mechanism (including training plan and supervision plan) for project implementation and IG review o f PMM compliance.

TYPE OF AUDIT REPORT

Proiect Financial Statement (a single audit

J. Internal control: Internal Audit

EXECLTINC DUE DATE AGENCY

DGCK, MoPW Six months after the end o f the

48. Internal controls and accountability for project implementation in P D A M will be undertaken by internal audit arrangements by the respective Bawasda under BPKP (Deputy for Supervising Government Agencies in Economic Sector) supervision. An action plan has to be prepared to ensure that: i) Bawasda receipt sufficient training from BPKP; ii) project activities and expenditures in al l participated PDAMs are covered by the respective Bawasda’s work plan and iii) DG Cipta Karya letter to BPKP and Bawasda informing the internal audit arrangement o f the project.

49. Internal audit arrangements with IG o f the M o P W should be in place to cover project internal control at the central level. Project implementation at the central level will be audited. A letter from DG Cipta Karya will be issued by negotiation confirming the IG’s responsibility in conducting internal audit o f the project. Internal audit will be conducted based on terms o f reference for internal audit to be agreed with the Bank. All reports on audit findings will be submitted to external project auditors as wel l as the Bank for information. Verification by the IG should include substantive checks on the reliability o f accounting evidence.

K. Audit Arrangements

Project annual audit 50. The project’s annual special purpose project financial statements will be audited annually. The annual audit reports and audited financial statements shall be furnished to the Bank not later than six months after the end o f the government fiscal year (June 30 o f the following year). The audit will be conducted in accordance with the Terms o f Reference for audit acceptable to the Bank and agreed at negotiations.

. I

opinion comprising project account and DA/SOE account) I Government fiscal year I

51. Knowing the peer review result, the scattered project implementation and the capacities available, it is proposed to accept BPKP (under Deputy State Accountant) as the external auditor for this project.

PDAM Audit 52. The proposed project audit in each P D A M will be part o f the P D A M annual financial statement audit. Specific audits o f the project expenditure in each PDAM will be part o f the

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project audit. PDAM shall prepare the financial statement based on the records (including the project transaction reflected in the IFR) for audit by the Auditors.

53. records, including the project transaction and should include:

PDAM annual financial statement shall be prepared by P D A M based on the PDAM

a) P D A M Balance Sheet; b) Statement o f Income (including reference to the expenditures funded by the Bank); c) Statement o f Changes in Shareholders’ Equity; d) Statement o f Cash Flows; e) Notes to the Financial Statements; and f) The fourth quarter o f the project IFR.

54. The annual audit reports shall be furnished to the Bank not later than six months after the end o f the P D A M fiscal year (June 30 o f the following year). The audit will be conducted by BPKP or private auditor acceptable by the Bank in accordance with the agreed Terms o f Reference for audit. The auditor will also audit due process and due diligence and the attainment o f the objectives according to the agreed performance indicators.

Type of Audit Report I ExecutingAgency I Due Date PDAM Entity Financial Statement I PDAM Muara Enim, I Six months after the end o f the

I Bogor, and Kapuas. I PDAM fiscal year

55. In support o f the transparency effort, the Bank would l ike to have an agreement with DG Cipta Karya, the MoPW on the mechanism for public access to the annual audit report o f the project. The agreement will be reflected in the disclosure requirement as part o f PMM. The mechanism should be agreed by negotiation. After the auditor issues the annual audit report as part o f the reform agenda, the audit report will be made accessible to the public.

L. Supervision plan 56. Intensive supervision, especially in the first year o f project implementation i s recommended, and more time i s planned to be committed to the project to ensure smooth implementation in the subsequent years. The Bank’s supervision will be coordinated with the PCU’s own supervision. The supervision plan including i t s strategy (skill mix. etc) will be covered in the PMM. The supervision will take into account the findings o f both internal and external audit reports.

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Annex 8: Procurement Arrangements INDONESIA: Urban Water $upply and Sanitation Project

A. General

1. Procurement for the proposed project would be carried out in accordance with the World Bank’s Guidelines: “Procurement under IBRD Loans and IDA Credits” dated M a y 2004 and revised in October 2006 and the provisions stipulated in the Loan Agreement. The various items under different expenditure categories are described below:

2. For each contract to be financed by the IBRD Loan, the different procurement or consultant selection methods, estimated costs, prior review requirements, and time frame have been agreed between the Government o f Indonesia (GoI) and the Bank in the Procurement Plan. The Procurement Plan shall be updated at least annually or as required to reflect the actual project implementation needs and improvements in institutional capacity.

3. For al l procurement to be carried out through International Competitive Bidding (ICB), the Bank’s Standard Bidding Documents shall be used. For National Competitive Bidding (NCB) and Shopping, standard documents, acceptable to the Bank shall be used. The N C B standard documents shall incorporate the Bank’s N C B conditions. For selection o f consulting firms, the Bank’s Standard Request for Proposals shall be used. For NCB, the Borrower shall fo l low the procedures outlined in Keppres 80/2003, as supplemented with additional conditions which have been agreed with the Go1 and included as an Attachment to this Annex,

4. Procurement of Works. Works procured under this project would include construction or rehabilitation works in water distribution systems o f three water companies (PDAMs) in (i) Kota Bogor, (ii) Kabupaten Kapuas, and (iii) Kabupaten Muara Enim. Each o f these three PDAMs shall have a Project Implementation Unit (PIU) for the implementation o f their respective components. Each contract estimated to cost US$3 .O mil l ion equivalent or above, procurement will be carried out through ICB. For contracts estimated to cost less than US$3.0 mi l l ion equivalent, procurement may be carried out through NCB, while those estimated to cost less than US$50,000 equivalent, procurement may be carried out through Shopping.

5. Procurement o f Goods. Goods procured under this project would include procurement o f water meters for water companies (PDAMs). These contracts will not include installation o f equipment which will be separately contracted by PDAMs. For contracts estimated to cost US$200,000 equivalent or more, procurement shall be carried out through ICB. However, none are planned as present. For contracts estimated to cost less than US$200,000 equivalent, procurement may be carried out through NCB, while those estimated to cost less than US$50,000 equivalent, procurement may be carried out through Shopping.

6. Consultant Selection. All consultant contracts, including the P C U Management Consulting and each construction supervision consultants, are funded by counterpart funds and would be procured using the GoI’s procedures with terms o f reference and team composition agreed with the Bank.

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B. Assessment o f the Capacity o f Implementing Agency’s to implement procurement

7. PDAMs, which was undertaken by the Bank in December 2006. following key issues and risks concerning procurement for implementation:

Most findings and recommendation below are based on an assessment o f the participating The Bank identified the

a. Corruption and Collusive Practices: This has been a nationwide issue, which has normally involved both bidders/consultants and government officials. The general procurement environment i s weak. Based on this init ial assessment, the corruption mapping areas and the proposed actions to mitigate this risks are included in Annex 9;

b. L o w capacity o f the procuring units: some o f the MoPW’s staff are familiar with Bank’s procurement procedures, however there i s no guarantee that they will be assigned as procurement staff for this project since the decree establishing the team i s yet to be issued. O n the other hand , PDAM’s staff are not familiar with Bank’s procurement procedures and since their experience i s limited to the reginla level the do not have the capacity to carry out and supervise large procurement contracts. There i s also an issue with regard to how the respective procuring units can effectively enforce the agreed procurement procedures as per the loan agreement , especially those that differ from Keppres 80/2003 (for example, N C B procedures that are acceptable to the Bank);

c. Independency o f procurement decisions: although the DGCK, PDAM, and the members o f the biddindevaluation committee are authorized to make their own independents decisions in accordance with Keppres 80/2003, sometimes they can be influenced by other parties, such as: higher level officials (for example, their superiors) or by external parties(for example, bidders or consultants). This can cause significant delays in the procurement processing, and can result in contracts being given to low-quality consultants/contractors and to the delivery o f low-quality services/works.

d. Procurement delays: l o w capacity in knowledge o f Bank Procurement Guidelines and procedures, late initiation o f the procurement process and long evaluation process (especially in hiring consultants) normally contribute to significant delays in contracts award.

e. Consultant services: Consultants for project management and implementation supervision will be engaged by the Go1 and outside o f the Bank’s procurement procedure.

f. The procurement complaint handling mechanism will fol low the one stated in the Keppres 80/2003, which will be detailed in the PMM. It is agreed that there will be a unit within each implementing agency which will be assigned to record the complaints and the fol low up actions, including referral to the respective procuring uni ts. The procuring uni ts will be responsible for ensuring that the complaint are handled and resolved in a timely manner. All procurement complaints will be addressed to the procuring units, and if not resolved, then the complaint may be send to the direct supervisors o f the procuring units. For complaints related to fraud and corruption, the complaint handling units will have to refer the cases to the respective authorities in accordance with the national l aw and regulations.

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8. mitigate the above mentioned risks.

Table 8.1: Agreed Corrective Measures

Table 8.1 below presents a l i s t o f measures agreed between the Go1 and the Bank to

Agreed at Negotiation

(Completed)

Actions

MoPW

Decree to establish the project’s organizational structure and staffmg, including procurement officer

Negotiation

Decree to appoint PCU and PDAMs procurement officer

MoPW

At least one procurement workshop conducted prior to the project launch, attended by all implementing agencies

Draft P M M developed to streamline all agreed procurement procedures and reporting under this project (Completed)

Negotiation

(Completed)

Negotiation

(Completed)

Procurement Plan for the f i rst 18 months o f implementation available

MoPW, PDAMs

MoPW SBD, and RFP for procurement activities during the f i rst year available

Draft completed at Negotiation

(Completed)

TOR and detailed procedures for including independent members o f civil society as observers for procurement process

MoPW

Agreement on TOR, team composition and timing o f the PCU management consultants and each construction supervision consultant.

Negotiation

(Completed)

September 30,2009 PCU Management Consultant and procurement

MOPW, PDAMs

MoPW specialists at the PIUs appointed

(Completed)

Negotiation

(Completed)

MoPW, PEMDAsPDAMs

9. Considering the extremely weak capacity o f the PIUs, the time required strengthening their capacity with the above mentioned measures (Paragraph B), and above all, the decentralized nature o f the project, the overall procurement risk i s concluded as “substantial”. The thresholds for procurement method and prior review, as wel l as modalities for post review and supervision frequency are based on th i s capacity assessment.

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C. Procurement Plan

10. Each P D A M submitted procurement plans for implementation o f their respective components. These individual procurement plans have been consolidated into one Procurement Plan for the project. This Procurement Plan provides a l i s t o f contracts to be implemented in the initial 18 months period o f the project and the related processing schedule for each contract. This Plan was discussed and an updated version agreed between the Go1 and the Bank. It is available in the project’s file. The Procurement Plan will be updated at least annually or as required to reflect the actual project implementation needs and improvements in institutional capacity. The updated Procurement Plan will be reviewed by the PCU Management Consultant before submission to the Bank. The Procurement Plan, including i t s updates shall also be available in the Bank’s external website.

D. Frequency of Procurement Supervision

1 1. conducted by the Bank on annual basis. The findings o f the post reviews will be considered to improve the procurement processing o f the project

In addition to the Bank’s prior review, post review o f procurement actions will be

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Attachment 1 to Annex 8

Details o f the Procurement arrangements Involving International Competition

1. Goods, Works, and Non Consulting Services

Table below l is ts the contract packages to be procured following ICB:

Domestic Review by Expected Bid Bank Opening Date (Yesmo) (Prior)

Est. Cost Procurement p-Q Preference

million) (US$ Method Contract (Description)

New Water Treatment 5.05 ICB No Yes December 2009 Plant o f 400 LIS at Dekeng (Bogor)

For each PIU, the first two NCBs and first shopping contracts for goods and works, will be prior reviewed by the Bank. In addition, all ICB contracts and direct contracting are also subject to prior review by the Bank.

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Attachment 2 to Annex 8

Clarifications Relating to National Competitive Bidding Procedures

1. General

The procedures to be followed for N C B shall be those set forth in Presidential Decree No. 80/2003 o f the Republic o f Indonesia with the clarifications and modifications described in the following paragraphs required for compliance with the provisions o f the “Guidelines for Procurement under IBRD Loans and IDA Credits” dated May 2004 and revised in October 2006 (the Guidelines).

2. Registration

(a) Bidding shall not be restricted to pre-registered f i r m s and shall not be a condition for participation in the bidding process.

(b) Where registration i s required prior to award o f contract, bidders (i) shall be allowed a reasonable time to complete the registration process, and (ii) shall not be denied registration for reasons unrelated to their capability and resources to successfully perform the contract, which shall be verified through post-qualification.

3. Pre-aualification

(a) Pre-qualification shall not used for simple goods and works. Normally, post-qualification shall be used. Pre-qualification shall be required only for large or complex works with the prior ‘no objection’ o f the Bank. When pre-qualification shall be required:

(b) eligible bidders (both national and foreign) shall not be denied pre-qualification, and

(b) invitations to pre-qualify for bidding shall be advertised in at least one (1) widely circulated national daily newspaper a minimum o f thirty (30) days prior to the deadline for the submission o f pre-qualification applications.

4. Joint Ventures

A bidder declared the lowest evaluated responsive bidder shall not be required to form a joint venture or to sub-contract part o f work or part o f the supply o f goods as a condition o f award o f the contract.

5. Preferences

(a) N o preference o f any kind shall be given to national bidders.

(b) Regulations issued by a sectoral ministry, provincial regulations and local regulations, which restrict national competitive bidding procedures to a class o f contractors or a class o f suppliers shall not be applicable to procurement procedures under the Loan.

6. Advertising

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(a) Invitations to bid shall be advertised in at least one (1) widely circulated national daily newspaper allowing a minimum of thirty (30) days for the preparation and submission of bids and allowing potential bidders to purchase bidding documents up to twenty-four (24) hours prior the deadline for the submission of bids.

(b) Bid documents shall be made available, by mail or in person, to all who are willing to pay the required fee.

(c) Bidders domiciled outside the area/district/province o f the unit responsible for procurement shall be allowed to participate regardless of the estimated value of the contract.

(d) Foreign bidders shall not be precluded from bidding. If a registration process i s required, a foreign firm declared the lowest evaluated bidder shall be given a reasonable opportunity for registering.

7. Bid Security

Bid security, at the bidder’s option, shall be in the form o f a letter o f credit or bank guarantee from a reputable bank.

8. Bid Opening and Bid Evaluation

(a) Bids shall be opened in public, immediately after the deadline for submission of bids, and if bids are invited in two (2) envelopes, both envelopes (technical and price) shall be opened at the same time.

(b) Evaluation of bids shall be made in strict adherence to the criteria declared in the bidding documents and contracts shall be awarded to the lowest evaluated bidder.

(c) Bidders shall not be eliminated from detailed evaluation on the basis of minor, non- substantial deviations.

(d) N o bidder shall be rejected merely on the basis of a comparison with the owner’s estimate and budget ceiling without the Bank’s prior concurrence.

9. Rejection of Bids

(a) All bids shall not be rejected and new bids solicited without the Bank’s prior concurrence.

(b) When the number of responsive bids i s less than three (3), re-bidding shall not be carried out without the Bank’s prior concurrence.

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Annex 9: Anti-Corruption Action Plan INDONESIA: ID-Urban Water Supply and Sanitation

Introduction

1. The objective o f UWSSP’s Anti-Corruption Action Plan i s to identify corruption risks and mitigation measures beyond the standard control systems employed by the Bank. While more detailed program specific control systems are outlined in Annex 8: Procurement Arrangements and Annex 7: Financial Management & Disbursement Arrangements, this Action Plan (i) maps potential r isks o f corruption; and (ii) presents program activities to address these risks in the form o f an Action Plan.

2. Corruption Mapping. The corruption matrix included in this Action Plan identifies potential risks o f corruption and specifies appropriate mitigation measures agreed to by the Executing Agency o f the Government o f Indonesia.

3. Matrix. The following provides a summary:

Action Plan. Specific mitigation actions are presented in the Corruption Mapping

a. Enhanced Disclosure Provisions and Transparency. The Project (PCUPZUs) assisted by technical assitant Consultant will prepare a website regarding this project at least in the existing MoPW website. The website will disseminate information on existing PDAMs services, general plan under the project, and PDAMs services after the project. Progress o f the project in the form o f figures, narative, pictures, reports etc. will be presented on the website. Brochures on certain project information will be disseminated to relvant stakeholders, summary project information will be published through mass media and several press releases will be issued by MoPW, PCU, Local Governments, PDAMs, and PIUS.

b. Civil Society Oversight. The UWSSP’s Enhancement Support component will serve as a catalyst to bring the PDAMs closer to their PEMDAs, communities and interest groups for mutual understanding, day-to-day communication and cooperation. Town meetings, communication to DPRDs, and invitation to stakeholders including universities and NGOs to oversee the project, at least through the project website will increase their participation and encourage them to state their views o n current and desired P D A M services and practices. By providing complete project information on the website, the project will be able to invite much broader c iv i l societies to participate in overseeing the project, at least virtually, from various angles.

c. Mitigating Collusion, Fraud & Nepotism. Opportunity for collusion and fraud exist in any project. Transparent and well-advertised procurement under the program with appropriate oversight will reduce this form o f corruption. Additional auditing and procurement procedures are proposed, such as oversight by consultant services and capacity building training procurement specialists mapped to each PDAM. At the central level, there will be a committee to be formed to regularly evaluate the performance o f the

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consultants, who are hired under the Project, and make the results circulated to the relevant technical parties.

d. Complaints Handling Mechanism. As part o f the reform activities, complaint handling mechanism will be established integrated with transparency mechanism at each participating P D A M and PEMDA as well as PCU. Complaint handling procedures as currently defined in the Keppres 80/2003 will be strictly followed by also assigning authorized officials to be responsible for maintaining the database and the fol low up actions. While there is designed to encourage local complaint resolution through formal channel, as well as the pressure from public, in some cases local elites might misuse power and program activities. For these cases, an alternative system has been established through a feedback mechanism at the national level. This mechanism handles complaints brought to their attention. These complaints will be acted upon in a professional and timely fashion, and without risk o f reprisal to ‘whistleblowers’ in the public.

e. Sanctions 8s Remedies. Clear sanctions and remedies are an important final step in the effort to fight corruption. This Project has a l o w tolerance for corruption. Any official (government, non-government, etc.) can be sanctioned if sufficient evidence i s available. In al l procurement contracts, evidence o f corruption, collusion or nepotism will result in termination o f the relevant contract, possibly with additional penalties imposed (such as fines, blacklisting, etc.) and in accordance with Bank and Government regulations. In addition, some requirements on the contract would provide the PCUPIUs strong power to terminate supervision consulants when not perform in assuring accuracy, quality and quantity o f the goods/works in accordance to the technical requirements.

Corruption Mapping Matrix

4. areas - this i s called corruption mapping. This corruption incentive mapping and identification o f opportunities for corruption will be repeated at least every six months as the project progresses and lessons are learned.

Limiting the occurrence o f corruption in this Project starts with identifying potential risk

Capacity o f the P I U and TenderEvaluation Committee

Substantial (Local GovernmentPEMDA)

Non independent judgment o f the bidding/evaluation process. The decisions tend to bias towards bidders/consultants as “instructed” by the higher level officials or other parties.

society i s included as part o f the committee - Capacity building for al l actors involved in procurement under the World Bank’s Guidelines as well as certification o f staff in accordance with Keppres 8012003 - Development o f Project Management Manual to

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Bid evaluation

Award o f Contract

Procurement Planning, including the one for the sub projects

Overall Procurement

DELIVERY OF GOODS, WORKS AND SERVICES Delivery o f goods, such as water meters, pipelines, leak detection :quipment and

Substantial

Modest

Substantial

Substantial

Substantial (PDAM level)

-Delay in evaluation process that would benefit exclusive bidders - Proposals are rejected due to reasons unrelated to the capacity o f bidders in carrying out o f the contracts - False information about the information provided by the bidders - The committee may call the prospective winner and negotiate the contract amount - Collusion and nepotism in awardine the contract ” Risk o f kickback, and budget markup

Risk o f kickback, collusive practices to “award” the contract to “preferred” bidders, and lower quality o f productslservices

Cormption may happen by lowering the quality and/or quantity o f delivered water meters, pipelines and leak jetection equipment with the

streamline al l procedures and sanctiodcomplaint handling mechanism

- The Procurement Plan w i l l be binding in the Legal agreement, and w i l l set as the basis for any procurement actions. - The Bank would declare misprocurement for any unjustified extension o f bid proposals - Post qualification system

- No negotiation for competitive selectionbidding - Mandatory disclosure o f contract awards

Mandatory review by the Bank o f Procurement Planning, and disclosure o f Procurement Plan in public domain, including disclosing the monitored unit rates as part o f the P D A M reform program

- Enhanced disclosure, complaint handling, and sanctions as defined in Keppres 80/2003, and developed in the PEMDA structure as part o f the reform component as well as those stated on the contracts. In the case for central level, MoPW already developed i t s own mechanism for complaint handling as well as sanction system. - Enhanced control system (internal and external) including involvement o f c iv i l society in the procurement decision actions - Development o f Project Manuals - Tighten Bank supervision

- Technical specifications and pictures o f goods should be delivered disseminated to appropriate stakeholders. Brochures for customers,

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equipments for water treatment plant and spring sources

Determining priority o f the service area to be improved or expanded

Progress and quality o f the construction and rehabilitation works (including works related to water treatment plant and spring sources)

Modest (Local Government &

P D A M levels)

Substantial (PDAM level)

same contract prices

Collusion and corruption may may happen when determining priorities o f the service areas included in the construction and rehabilitation works

Corruption may happen by manipulating progress and quality achievements o f the construction and rehabilitation works by the contractor

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prospective customers and P D A M staff. Publish it on the website for broader stakeholders. Brochures and website should provide address to report or complaint when knowing actual goods delivered i s lower quality and/or quantity than what should be.

- TOR and contract o f the supervision consulant should state legally bold the responsibility o f the supervision consultant to assure the quality and quantity appropriateness according to the technical design. When the supervision consultant fail to do so, the appropriate/ responsible individual o f the supervision consultant (which named on the contract) should be terminated directly.

- Report and recommendation o f the NRW assessment and reduction plan should be made available to public, at least on the website. Summary o f the report should be explained to mass media, at least through a press release.

area, the new service area and rehabilited service area should be disseminated to appropriate stakeholders, at least through the website.

construction and rehabilitation works should be uploaded on the website with considering the size o f the files.

including contract price and the name o f the contractor o f the construction and rehabilitation works should be uploaded on the website.

location, the supervision consultant upload i ts supervision reports, including pictures, technical achievment data and financial data showing progresses o f the

- Maps o f the existing service

- General design o f the

- Each contract summary

- Periodically per each project

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Effectiveness o f the construction and rehabilitation works as well as service expansion and spring sources

Low (Local Government

level)

Corruption, collusion and nepotism could be minimised by assuring that the works are highly effective

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contractors in the construction and rehabilitation works. - For each supervison consultant report published on the website, the PIU should provide i ts comments over the report, and also uploaded on the website.

- TOR and contract o f the supervision consulant should state legally bold the responsibility o f the supervision consultant to assure the accuracy o f the progress and quality o f works supervised. When the supervision consultant fail to do so, the appropriate/ responsible individual o f the supervision consultant (which named on the contract) should be terminated directly. - Data and statistics of existing connections and those after the project should be published, at least on the website. - The statistics of the existing NRW (before project) and NRW after the construction and rehabilitation works (after project) should be published publicly, at least through the website.

mechanism should be developed integratedly with project related information dissemination, at least through website and mails. Appropriate information on complaint and i ts follow up would be published at least through the website.

- Having project information published on the website and other media, the PCU should invite stakeholders as well as interest groups such as universities, NGOs and relevant DPRDs to visit the website.

- Monitoring and evaluation reports produced under the technical assitant should be uploaded on the website.

- Public complaint handling

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FINANCIAL MANAGEMENT The final l i s t o f PCU and P IU staff with their (i) experiences in handling donor financing project and (ii) history o f project management and or treasury training taken

Audit Report Publication

Substantial

Substantial

I - Risk o f un-sufficient capacity I - The criteria and performance o f PCU and P I U staff.

Risk o f unavailability o f information on the progress and result o f project implementation (including misuse, collusive and nepotism practice if any).

indicators o f Project Manager, Treasurer, planning staff, procurement staff, fmancial staff and money. Staff o f PCU and P I U agreed by the Bank have been incorporated in the P M M and w i l l be used as the basis o f the annual performance review o f the relevant staff

- Requirement o f P O M as guidelines for project implementation.

- Requirement o f Government Project Management, Treasury and P O M training for PCU and P I U staff.

- Annual Training agreed by the Bank on PCU and P I U staff.

The implementing agency w i l l (and the World Bank can) make publicly available promptly after receipt o f final audit reports prepared in accordance with the loadcredit agreement, and all formal response o f the government

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Annex 10: Economic and Financial Analysis INDONESIA: ID-Urban Water Supply and Sanitation

Project Area Bogor ENPV (Bi l l ion IDR) 752.5 EIRR (%) 48

Economic andJinancia1 analysis

Kapuas Muara Enim 42.0 147.6 19 32

1. A 2006 pol l conducted by the British Medical Journal rated access to water and sanitation as the most important medical advance in the past 150 years, which led to fewer outbreaks o f diseases such as cholera, diarrhea, roundworm, schistosomiasis among others. Accessible clean water is vital to the survival o f children in their first years. Piped water saves women and children time from fetching water and caring for the sick. In urban areas, problems o f lack o f access to water and sanitation are magnified and economic costs multiply given higher densities. In Indonesia, excessive reliance o f the urban population on individual well water is lowering the water table, making it more difficult and costly to access clean wel l water. The proximity o f wells to home-based sewage disposal facilities increases the risks to the environment and health situation. Health and environmental benefits and the ensuing savings o f medical costs along with the overall improvements to economic productivity are the largest benefits o f water supply and sanitation projects, yet they are the most difficult to quantifl.

2. Economic analysis was conducted to assess the impact o f the project based on the incremental economic costs and benefits. Incremental costs with the project include investment and operational costs excluding inflation and taxes. Quantifiable benefits that accrue with the project include the estimated value of: (i) increased consumption due to improved services and accessibility by new customers; (ii) the value o f the amount o f water consumed with the new connections valued at the difference between the price charged and cost o f water without connections; (iii) saved water; and (iv) time saved from collecting water at the minimum income prevailing in the area.

3. Incremental and non-incremental water consumption. An important economic benefit o f piped water supply projects i s the switch from reliance on unplanned and difficult to monitor household wells to reliance on renewable water sources such as springs and rivers. Part o f the consumption o f piped water will be replacing current consumption from vendors and wells. Water, particularly f rom wells i s undervalued, where in principle households and industries extract i t for free or for very little costs. By agreeing to pay for the piped water instead, households realize the economic value o f water.

Financial analysis

Project Financial Cost-Benefit Analysis.

4. The financial costs and benefits are projected for 20 years. Incremental power and chemical costs are based on increases in production. Salary costs, power and chemical costs are also increases with inflation. Other costs vary with the increase in the asset base. The benefits

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are based on additional water sales over the 20 year period and the connection fees collected during the project period. The results o f net present value and financial rate o f return o f the proposed investments are summarized below.

Project Area FNPV (IDR) FIRR (%)

Bogor Kapuas Muara Enim 142,754 33,807 272,896 22 19 26

Financial Analysis of participating PDAMs.

5. The financial analysis of participating PDAMs i s conducted to ensure that these enterprises and the project are sustainable in the long term and remain financially liquid and capable of producing the associated benefits. The PDAMs participating in the project can be classified into 2 groups:

Group 1: 1 Large PDAM, Bogor, i s located on the island o f Java, and has more than 30,000 connections. This PDAM has recorded profit making with good financial indicators according to their audited financial statements. It i s capable o f covering i ts operational costs, including interest and depreciation.

Group 2: 2 smaller PDAMs, Kapuas and Muara Enim, are located in Kalimantan and Sumatra respectively. These PDAMs are about the same size with average 12,500 connections in 2005. In 2006, Kapuas split into 3 parts and connections decreased to 9000. According to the audit report, both Muara Enim and Kapuas have been making losses since 200 1 , but Muara Enim had made positive income in 2007. Kapuas did not cover their operating costs even before depreciation. At the same time, both PDAMs have almost no debt and rely on the PEMDAs for annual financial support to cover their operational losses. PEMDAs also contribute the capital expenditure o f these two PDAMs.

6. PDAMs share some common features in their financial situation. All improved their revenues substantially over the two years, largely due to expansion through increased connections and water sales as well as increase in weighted average tariffs (14-25%). For Kapuas, operational costs (production and administration) increased in larger proportion (around 20%) surpassing increases in revenues. Only in Bogor, operational cost increases matched revenue increases. The main reason for Kapuas i s cost increases i s salaries, which in all cases, except for Muara Enim accounted for over 40% o f the costs. Indeed, Muara Enim production salaries are very low at 15% o f production. Despite being the largest item, salary costs increased more than the average cost increase. In Kapuas, salary costs increased more than doubled. In Muara Enim, the increase i s from extremely low base as compared to others, and may be justified as a means to improve employee performance and avoid corruption. In Kapuas, it i s clear that the increase in salary costs i s the major contributor for deteriorating financial situation and increased losses.

7. In general, PDAMs manage their accounts receivable well, and report low non-payments o f bills. Kapuas can improve their collection to bring it down from about 60 to 30 days. Bogor appears to rely more heavily on debt (both short and long term) to finance i t s investments and operations (over 50% o f total assets). Bogor i s shifting in that direction due to the accumulation o f arrears to the Ministry o f Finance. On the other hand, the smaller loss making PDAMs have

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practically no debt and their PEMDAs finance investments and operations. At the same time, both smaller PDAMs have a high current ratio indicating need for better management o f current assets, particularly inventories, to improve their cash flow.

8. Impact ofproject activities on PDAMfinanciaZ situation. Project investments aim at (i) increasing coverage which would improve revenues; and (ii) efficiency improvements to decrease costs. In addition to the physical improvements conditions for management efficiencies are included in the project design to ensure improved financial sustainability o f the participating PDAMs. This i s particularly true for the control o f salary costs and overall administrative expenditures which i s within the PEMDA and PDAM control.

9. Provided salary and administrative costs are controlled and necessary tariff increases implemented, all PDAMs wi l l be able to meet the financial conditions o f operating efficiency (Operating Ratio below 1) and debt sustainability (DSCR o f 1.3 or above) within the project period without additional PEMDA support.

Projected financial implications

Project Area 2009 20010 2011 2012 2013 2014 Bogor

Operating Ratio 0.97 0.89 0.89 0.89 0.86 0.82 DSCR 10.6 5.2 4.8 4.5 4.7 . 5.9

Kapuas Operating Ratio 0.98 1.09 0.82 0.95 0.86 0.90

Muara Enim Operating Ratio 1.67 1.48 1.43 0.89 0.89 0.67 DSCR

Fiscal Implications

10. The fiscal impact analysis assesses capacity o f the local governments to afford the potential subsidies needed for the project to reach i t s objective. Following decentralization, water supply services became the responsibilities o f local governments in Indonesia. This principle has been adhered to, particularly in urban areas and in the case o f PDAMs. PEMDAs are now responsible for delivery o f urban water supply services to their constituents, and while PDAMs are legally separate commercial entities, they remain owned by the PEMDAs, who continue to have a major role in their management, not the least in the approval o f tariffs. For the participating 3 PEMDAs, the local government has been a supporter o f water supply services. In all cases, dividends paid by PDAMs to PEMDAs are returned to the PDAM with additional considerable PEMDA funding for capital and sometimes operational expenditures. The law sets the limits on PEMDA borrowing (since the loan will be on-lent from the MoF to PEMDA and wi l l be considered as part o f PEMDA debt). The debt service coverage ratio cannot exceed 2.5 o f PEMDA revenues less obligations, and total debt cannot exceed 75% o f PEMDA revenues less debt obligations as set by the law. For the 3 participating PEMDAs these limits will be maintained throughout the loan period, and it i s expected that with rising incomes and the leveling of f o f the debt service, these ratios will remain well below the legal upper limits allowing PEMDAs to borrow for other purposes as may be allowed by the Ministry o f Finance within the law. Based on available budget data, the table below shows the maximum ratios

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reached during the project period including when debt obligations, interest and principal payments peak.

DSCR Debt outstanding as % o f debt allowed

Projected fiscal implications

Bogor Kapuas Muara Enim 7.8 33.0 36.1 48 20 26

* The DSCR as defined in the law = JPAD+DAU+DBH-DBHDR)-BW

PAD = LG own revenues DAU = General allocation fund DBH = Shared fund DBHDR= Shared fund for forestation B W =

Principal + Interest + other charges

Other obligations, including salaries

11. outstanding, where MoPW.APBD = (APBD) - (DAK +DD+DPL+PLYD)

Total new borrowing allowed i s defined as: (0.75*MoPW.APBD o f previous year)- Debt

MoPW.APBD = Revenue available for financing APBD = Total Local Government Revenue DAK = Special Allocation Fund DD = Emergency Fund DPL = Receipts from old borrowing PLYD = Extraordinary Revenue

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Assumptions:

12. P D A M Revenues: Increases in consumption are based on planned increase in connections, provided water is available. Consumption rate per connection i s based on historical evidence provided by PDAMs. Connection fees will increase based on tariff increases. The planned number o f connections and willingness to pay connection fees and tariffs are largely based on the PDAMs experiences, waiting l i s ts and surveys they have conducted over the years. All PDAMs have prepared a 5-year business plan that was discussed with PEMDAs, in which they develop their investment plans and priorities.

13. P D A M Costs: Salary and administrative costs are based on historical costs and are assumed to increase only at the rate o f inflation. This i s a major assumption given the history o f the PDAMs and is necessary to reach an operating ratio less than 1 which i s 0. Chemical and electric costs are based on historic unit costs and inflation (more chemicals may be needed to reach quality standards). Other operational costs increase from historic costs and in proportion to the planned increase in water production.

14. A physical contingency o f 7% is added to the constant 2007 costs. Inflation rates are based on World Bank projections. Counterpart funding is assumed to be passed on as a grant from the PEMDA, while strong P D A M (Bogor) will pay the interest and debt payments on the loan. Other two PDAMs (Kapuas and Muara Enim) will get on-grant money from their respective PEMDA which receive sub-loan from the M o F (Central Government).

15. Provided these assumptions/conditions are satisfied by the P D A M throughout the implementation o f the project, the PDAMs, with support from the PEMDAs will be able to achieve the financial indicators and to continue their operations in a commercially sustainable fashion.

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2004 - 2005 Historical Financial Ratios

I/ First line 2005 &a, Td line 2004 data.

Indicators Current Ratio

Current Liabilities/

Operating Ratio: Total Operating Costs (including depreciation, interest and taxes)

Working Ratio: Total Operating Costs (excluding depreciation, interest and taxes)

DSCR Net Income + Depreciation + Interest pavments + chanpe in working capital

Total Revenue

Total Revenue

Principal + Interest payments

Bopor Kapuas Muara Enim 0.7 78 3.93 0.85 39 5.7 0.29 0.0 15 0.61

Total Liabilities Other Liabilities/ Total Liabilities Total Liabilities/ Total Assets Equity/ Total Assets

Total Liabilities I 0.24 I 047 I 0.31 LTerm Liabilities/ I 0.5 I 0.0 I 0.13

0.56 0.0 0.57 0.2 1 0.98 0.26 0.20 0.95 0.12 0.58 0.18 0.02 0.62 0.13 0.07 0.42 0.82 0.98 0.38 0.87 0.93

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Attachment 1 to Annex 10

P D A M Financial Recovery Action Plan (FRAP) Background

1. The financial recovery action plan is prepared by a water utility (PDAM), which desires to improve i t s performance to enable it to expand its services to consumers. The FRAP consists o f an analysis o f all the existing problems o f the PDAM, whether they are technical, financial, commercial or managerial. Their causes are determined so that appropriate actions can be implemented. The required actions are contained in the FRAP details, and supported by financial projections that show the results o f these combined actions on the P D A M operations. The FRAP may recommend management, commercial and/or technical improvements requiring only minor investments. However, it may also involve major investments, depending on the technical problems that need to be addressed. If the P D A M has delinquent loans with the Ministry o f Finance, a proposed loan rescheduling scheme is included.

2. The FRAP is developed by the PDAM, and is then discussed and agreed upon with i t s mayor and DPRD. The FRAP becomes a commitment between these three parties with implementation falling to the P D A M and supervision resting with the Mayor and DPRD. The PDAM’s accountability i s thereby improved as the latter’s regulatory and oversight responsibility i s strengthened. The P D A M rescue program shows that by streamlining operations and receiving a boost from loan rescheduling with the MoF, a P D A M can be brought back to operate profitably.

3. The FRAP was piloted in 17 PDAMs, under the P D A M Rescue Program between 2000- 2002. It was funded by a grant from ASEM Trust fund to finance technical assistance to those PDAMs willing to be reformed. During that time, PDAMs were almost on the verge o f bankruptcy as the financial crisis that hit Indonesia in 1997 exacerbated weak management, poor financial discipline, and deteriorated network system. PDAMs could not borrow to properly maintain their network systems much less expand them, because they could not repay their outstanding obligations. 4. The program was intended to help PDAMs survive the crisis, not only in the short run, but also in a more sustainable manner that would enable them to be se l f sufficient in the long run. The program was expected to improve the operational and financial efficiency of the P D A M consistent with the overall direction o f water sector reform. Since there was no financial assistance involved, additional cash had to be earned by the PDAM out o f improved management and tariff increases, provided by local government in the form o f additional equity, or obtained by the deferment o f loan repayment, or a combination o f al l three. The FRAP is a commitment from the following stakeholders

A. The PDAM commits to: a. raise tariffs to required levels b. add new connections depending on available capacity c. shorten the collection period to improve i t s cash position d. reduce non-revenue water rate and turn these into revenues e. improve the staffing ratio by suspending the hiring o f new employees and not filling

up vacated positions

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f. reschedule delinquent loan accounts based on financial capability after considering positive effects from the above

g. implement the required investment based on an agreed program to deal with the technical problems existing in the PDAM.

B. The PEMDA and DPRD commit to a. suspend collection o f dividends fkom the P D A M until its required service coverage

has been attained. b. support the implementation o f the required tariff increase c. allow the P D A M to reschedule i t s delinquent loans; and d. monitor the P D A M performance based on the FRAP and take action, if required.

C. The M o F commits to a. reschedule the PDAM’s delinquent loan accounts based on the PDAM’s financial

capability after considering the results o f the FRAP actions before loan rescheduling.

5. In the FRAP, targets are made for reduction o f non-revenue water, additional connections that can be generated, a shorter collection period, a lower staffing ratio, tariff increases, and debt service that is affordable in relation to the rescheduling o f delinquent loans. It also includes investments that need to be made to improve the system and the PDAM’s equity in the project. Based on these targets, the expected results are increased population served, a net prof i t after tax, an operating ratio o f at most 70% that affords the P D A M to earn a decent profit, and a debt service ratio higher than 1.3 to ensure repayment o f debts as they fal l due, and an average tariff that enables the P D A M to fully recover i t s O & M costs and depreciation.

6. It should be noted here that the covenants in the Loan Agreement with respect to the PDAM’s operating ratios and DSCRs are not intended to monitor compliance with FRAP commitments.

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Annex 11: Safeguard Policy Issues INDONESIA: ID-Urban Water Supply and Sanitation

ENVIRONMENT

A. Background 1. The UWSSP is designed primarily to improve and expand water supply services in the project areas by strengthening local water utilities to become operationally efficient and financially sustainable. The project will finance water supply system improvements for three PDAMs in Kota Bogor, Kabupatens Kapuas, and Muara Enim.

2. The project i s expected to result in environmental benefits from the supply o f safe drinking water. The project i s classified as Category B project: as potential adverse impacts f rom the subprojects are site-specific; and in most cases mitigation measures can be designed more readily. In terms o f environmental safeguard policy compliance, the project triggers Operational Policy (OP) 4.0 1 - Environmental Assessment. The justification for the application o f this policy i s summarized below, and has been reviewed by the Bank’s Safeguards team. Muara Enim does not require an EMP, since investments are relatively small c iv i l works and fal l within the Go1 environmental screening requirements as acceptable to the Bank. All required EMPs (Bogor and Kapuas) have been received and disclosed in the Public Information Center.

B. Institutional Context 3. With the Regional Autonomy L a w (32/2004), local governments now play a crucial role in water supply services; they own the PDAMs and control much o f their activities. With the current capacity, local governments’ environmental entities need to be strengthened.

4. Each participating local government, in close collaboration with the technical section in PDAMs, will be responsible for supervising the implementation o f environmental management and monitoring procedures. The biannual project progress reports will include a summary o f any environmental issues encountered and proposed measures for their mitigation (in accordance with the approved EMP in each PDAM). As part o f the final project evaluation, a summary o f the monitoring and environmental measures, as wel l as impact will be included in the project Implementation Completion Report.

5. include measures to enhance and strengthen the P D A M and PEMDA environmental departments by including training for environmental issues.

C. Environmental Aspects 6. Activities funded under the project are expected in general to have positive environmental effects. The main environmental issues envisaged during project implementation are water extraction and increasing water demand, conflict with irrigation, reduced groundwater and surface water level, and increased amount o f waste water. Mitigation measures are prepared under the EMP. Three PDAMs are involved under this component: Bogor city, Kapuas Regency (Kalimantan) and Muara Enim Regency (South Sumatra). All o f these PDAMs - except Kab Muara Enim - have provided EMP or UKL-UPL in Indonesian terms. Best construction

In order to enhance the project performance and sustainability, the TA component will

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practices will be applied to al l sites including small c iv i l works that not require EMP. Table 1 gives details on project activities that require UKL-UPL.

City Bogor

Kapuas

Table 1 : Proposed activities require UKL-UPL (EMP)

Proposed Activities Size 0 Construction o f new water treatment plant 400 lh

0 Construction o f water reservoir 0 Distribution pipelines to households

0 Water Treatment Plant 150 l/s 0 Construction o f water reservoir 0 Distribution pipelines to households

adjacent to the existing Dekeng WTP

Subprojects Spring intake

Water Treatment Plants

7. Below i s the summary o f the potential environmental impacts as well as mitigation measures proposed for the three main subprojects proposed under this component (Water Treatment Plant, Spring Intake and Construction o f Water Distribution Pipelines)

Potential Adverse Environmental Impacts 1. Disturbance to topsoil created by 1. Storage o f stripped topsoil away firom

earthmoving works and heavy vehicle drainage paths, and no earthmoving traffic at construction phase. works during rains

2. Reduced water flow downstream due to 2. Identification o f water users ahead of water abstraction, potential for conflict sub-project design between upstream and downstream users Consultation with groups o f water users related with this reduction o f flow during sub project design

3. Limited loss o f flora and fauna 1. Disturbance to topsoil created by 1. Prior to disposal, used reagent to be

earthmoving works and heavy vehicle stored safely on site in fenced and traffic at construction phase. covered structures away from third

2. Potential impacts associated with reagent parties potential intrusion and away firom management and disposal drainage paths

3. Potential impacts associated with treatment 2. No discharge o f any reagent in a water sludge management and disposal body

4. Noise, dust and vibration at construction 3. Raw water treatment sludge to be phase, noise and vibration at operation recycled, disposed off in the landfill or phase dried and spread at the vicinity o f the site

Mitigation Measures

3.

Table 2: Potential environmental impacts for the proposed activities

I 5. Loss o f flora and fauna if no alternative exists

distribution pipelines right o f way by dig and fill activities for the practices in order to restore the locations pipelines trench. into i ts original or better condition.

2. Noise, dust, mud and vibration at 2. Limit activities during day time, regular construction phase. watering o f exposed soil, clean the

facilities o f mud.

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D. Land Acquisition and Resettlement

8. Land acquisition occurs in a number o f activities in 2 (two) participating cities: Kapuas and Muara Enim. For Kota Bogor, the lands for al l activities are already available. Activities will not acquire land permanently, but only temporarily during construction. For al l activities, land acquisitions are in a small-scale with no or very minor socioeconomic risks. All required LARAPs have been received and disclosed in the Public Information Center.

9. Land Acquisition and Resettlement Action Plan (LARAP). Where sites are already defined, the Bank requires L A R A P documents to be prepared prior to appraisal. The required LARAPs apply for the acquisition o f land and other assets, such as trees and crops. In this project, some o f the activities only need to acquire trees and crops for the transmission pipes and not the land. Abbreviated LARAP that applies to these small scale land (and assets) acquisitions are prepared by the respective PDAM and are approved by the Bank. 10. The scope and level o f detail o f the LARAP vary depending on the scale o f impacts, but generally the structure is: i) project description; ii) identification o f Projected Affected People, inventory o f assets lost, and valuation o f assets; iii) compensation for both physical and non- physical assets; iv) consultation with PAPS about compensation and mitigation measures; v) institutional responsibility for implementation and procedures for grievance redress; vi) arrangements for monitoring; vii) schedule and funding. The abbreviated L A R A P as applied to al l the activities in this project do not need a survey on socio-economic, a condition required in the comprehensive L A M P . However, detail information on the name o f the affected people and lost assets are required. The table below shows the land requirement for each activity in each city and the status o f LAMP.

City and Activities

Kab. Kapuas Developing WTP 2x50 Vsec. Kab. Muara Enim Expanding transmission and distribution networks

Land requirement LARAP status

936m2 acquired, belong to one land owner. Approved

For land, only temporary affected during the construction and 9' rubber trees are to be acquired.

Approved

11. A new regulation on land acquisition for public purposes, Perpres No. 36 o f 2005 and its revision No. 65/2006 has shown good progress in terms o f compensation, in which market price i s to be used as a basis for compensation amount and requires an independent institution to value the assets. It i s expected that this will ease the process o f negotiation on compensation and will not delay project implementation.

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Annex 12: Project Preparation and Supervision INDONESIA: ID-Urban Water Supply and Sanitation

P 1 ann e d Actual PCN review February 8,2005 February 8,2005 Initial PID to PIC February 23,2005 February 23,2005 Initial ISDS to PIC February 19,2005 February 19,2005 Appraisal January/February 2007 March 20,2007 and

Negotiations April 2009 May 28,2009 BoardRVP approval May 2009 July 28,2009 Planned date o f effectiveness Planned date o f mid-term review Planned closing date

December 2008

September 30,2009 December 20 12 December 3 1,20 14

Bank staff and consultants who worked on the project included: Name Title Unit Suhail Jme’an TTL (from May 2008), Sr. Financial EASUR

Jan Drozdz

Risyana Sukarma Maha Armaly

Mingyuan Fan Amreeta Regmi Irma Magdalena Setiono Widi Astuti Arlan Rahman Melinda Good Paulus Bagus Tj ahj anto Imad Saleh Novira Kusdarti Asra Viviante Rambe Steve Burgess Amien Sunaryadi Andrew Sembel Virza Sasmitawidjaja Eddie Hum Ninin K. Dewi Yogana Prasta Toyoko Kodama Desy Adiati Isabel Mutambe Luis Tavares

Analyst TTL (up to May 2007), Sr. Water and Sanitation Specialist Sanitary Engineer Sr. Urban Finance Specialist (TTL from May 2007 to May 2008) Sr, Municipal Engineer WASAP Coordinator Water and Sanitation Specialist Water Engineer, Consultant Technical Specialist Sr. Counsel Procurement Specialist Procurement Specialist Financial Management Specialist Environmental Specialist Sr. Corruption Specialist Sr. Operations Officer Environmental Specialist Sr. Environmental Policy and Safeguards Environmental Engineer, Consultant Social Operations Officer Sr. Operations Officer Operation Officer, Consultant Team Assistant Program Assistant Peer Reviewer

EASIS

EASIS ECSSD

EASCN EASIS EASIS EASIS EASIS LEGEA EAPCO EAPCO EAPCO EASES EAPCO osu EASIS EASIS

EASES LOAEA EASUR EASIS EASUR AFTUl

Ventura Bengoechea Peer Reviewer AFTU2

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Bank funds expended to date on project preparation: Bank resources: $544,386

Estimated Approval and Supervision costs: 1. Remaining costs to approval: $ 25,000 2. Estimated annual supervision cost: $ 120,000

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3. 4. 5. 6. 7. 8.

9. 10. 11. 12. 13. 14.

Annex 13: Documents in the Project File INDONESIA: ID-Urban Water Supply and Sanitation

Water Supply Feasibility Studies for each PDAM PHRD-financed Feasibility Study for DBL Sumedang PPIAF-financed Review Feasibility Study and Final Report for DBL Sumedang Prequalification Documents for DBL Swnedang Audited Financial Statements for each PDAM (2004,2005,2006) Environmental Management Plans, LARAPs and LARPF for each participating PDAMREMDA Draft Project Implementation Plan (PIP) Procurement Plan for each PDAM Draft Project Management Manual (PMM) Review o f Institutional Framework for On-lending Aide Memoire - Appraisal Mission World Bank “Indonesia - Enabling Water Util i t ies to serve the Urban Poor” (2006)

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Annex 14: Statement of Loans and Credits INDONESIA: ID-Urban Water Supply and Sanitation

Original Amount in US$ Millions

Difference between expected and actual

disbursements

Project ID FY Purpose IBRD IDA SF GEF Cancel. Undisb. Orig. Frm. Rev’d

PO79906 2007 PO89479 PO85375 PO77175

PO78070 PO76 174 PO84583 PO85 133 PO71296 PO920 19 PO85374 PO71316 PO71318 PO84860 PO64728

PO74290 PO791 56 PO76271 PO59931 PO63913 PO73772 PO73970 PO72852 PO73025

PO49539 PO59477 PO49545 PO36049

2006 2006 2006

2005 2005 2005 2005 2005 2005 2005 2004 2004 2004 2004

2004 2003 2003 2003 2003 2003 2002 2002 2001

2001 2000 2000 1999

ID-STRATEGIC ROADS INFRA ID-Early Childhood Education and Dev

ID-Domestic Gas Market Development Proj . Support for Poor and Disadvantaged Areas ID-Initiatives for Local Govern. Reform

ID-WSSLIC I11

ID-UPP3 Govt Fin1 Mgt & Revenue Admin Project ID-USDRP Kecamatan Development Project 3B

ID - Coral Reef Rehab and Mgmt Prog I1 ID - Coral Reef Rehab and Management I1 ID-PCF-Indocement Cement

DEVT PROJECT

ID-HIGHER EDUCATION

ID-LAND MANAGEMENT &POLICY

ID-E. IND REG TRANSPT 2 ID Third Kecamatan Development Project ID-PPITA ID-Water Resources & 1rr.Sector Mgt Prog ID-Java-Bali Pwr Sector & Strength ID-Health Workforce & Services (PHP 3) ID-GLOBAL DEV LEARNING (LIL) ID-UPP2 ID-SECOND KECAMATAN DEVELOPMENT PROJECT ID-PROVINCIAL HEALTH I1 ID-WSSLIC 11 ID-PROVINCIAL HEALTH I

208.00 0.00 0.00

80.00

69.00 14.50 67.30 55.00 45.00 80.00 50.00 33.20 0.00 0.00

32.80

200.00 204.30

17.10 45.00

141.00 31.10 2.66

29.50 208.90

63.20 0.00 0.00

ID-EARLY CHILD DEVELOPMENT 21.50

0.00 67.50

137.50 0.00

35.00 15.00 7 1.40 5.00 0.00

80.00 30.00 23.00 0.00 0.00

32.80

0.00 45.50 0.00

25.00 0.00

74.50 0.00

70.50 111.30

40.00 77.40 38.00 0.00

0.00 0.00 0.00 0.00

0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

0.00 0.00 0.00 0.00

0.00 0.00 0.00 0.00

0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 7.50 0.00 0.00

0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

0.00 0.00 0.00

0.00 208.00 0.00 0.00 0.00 0.00 0.00

0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.17 0.00 0.00 0.16

1 .oo 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

0.00 0.00 3.17

68.74 138.32 79.80

101.51 37.50 93.91 55.04 44.78

120.18 75.63 51.19 7.02

10.73 54.34

169.16 13.46 6.56

64.33 127.55 85.20

1.30 28.18 16.82

66.10 26.08 8.79

0.00 0.00 0.15 0.00 4.80 0.00

4.69 0.00 12.33 0.00

-32.34 0.00 9.64 0.00 1.15 0.00

48.48 0.00 8.15 0.00 9.20 0.00 1.52 0.00 0.00 0.00

10.98 0.00

70.16 0.00 -9.17 0.00 6.36 -0.64

45.75 2.63 102.89 -0.08 50.59 0.00

1.30 0.00 2.73 0.00 2.18 0.00

59.82 0.00 19.69 0.00 9.53 2.67

0.00 10.65 0.31 10.97 10.97

Total: 1,699.06 979.40 0.00 7.50 15.15 1,760.53 451.55 15.55

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INDONESIA STATEMENT OF IFC’s

Held and Disbursed Portfolio In Millions o f U S Dollars

Committed Disbursed

IFC IFC FY Approval Company Loan Equity Quasi Partic. Loan Equity Quasi Partic.

2006 2004 2006 2006 2004 2002 1989 1997 1989 1994 2003

2005 2000 2002 2004 1997 1993 1996 2004 2005

1991 1995 1999 2001 2004 1992 1996 1995 1997

2006

2000 2006 1998 1993 2004 1997

Bank Danamon BonaVista School Buana Bank Centralpertiwi Medan NP School P.T. Gawi PT Agro Muko PT Alumindo PT Astra PT Astra PT Astra PT Astra Otopart PT Astra Otopart PT Bank NISP PT Bank NISP PT Bank NISP PT Berlian PT Bina Danatama PT Bina Danatama PT Ecogreen PT Ecogreen PT Grahawita PT Indo-Rama PT Indo-Rama PT Indo-Rama PT Indo-Rama PT Indo-Rama PT KIA Keramik PT KIA Keramik PT KIA Serpih PT Kalimantan PT Karunia (KAS) PT Karunia (KAS) PT Makro PT Makro PT Makro PT Megaplast PT Nusantara PT Prakars (PAS) PT Sayap

155.00 1.00 5.00 45.00 1.75 11.05 0.00 2.73 0.00 0.00 0.00 0.00 24.00 0.00 0.00 35.00 0.00 0.05 0.00 30.00 25.00 0.00 0.00 0.00 0.00 20.00 48.00 0.23 1.65 4.50 9.38 16.45 20.00 0.00 0.00 0.00 0.00 0.00 15.36 0.83

0.00 0.00 0.00 0.00 0.00 0.00 2.20 0.00 0.20 0.19 0.12 0.70 0.00 2.85 2.04 0.00 3.35 0.00 0.00 0.00 0.00 0.00 3.82 1.57 0.81 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 2.34 1.21 0.66 2.50 0.00 0.00 0.00

0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 2.86 0.00 0.00 0.00 0.00 2.58 0.00 0.00 3.75 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

10.16 0.00 0.00

0.00 0.00 0.00 0.00 0.00 3.49 0.00 0.00 6.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 4.81 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 2.00

53.49 49.50 0.00 3.56 0.00 0.00 0.00 0.00 0.00 7.90 3.20 0.00

0.00 1 .oo 0.00 0.00 0.00 4.90 0.00 2.73 0.00 0.00 0.00 0.00

24.00 0.00 0.00

35.00 0.00 0.05 0.00

30.00 20.00 0.00 0.00 0.00 0.00 0.33

41.00 0.23 1.65 4.50 9.38

16.45 0.00 0.00 0.00 0.00 0.00 0.00

15.36 0.83

0.00 0.00 0.00 0.00 0.00 0.00 2.20 0.00 0.20 0.19 0.12 0.70 0.00 2.85 2.04 0.00 0.00 0.00 0.00 0.00 0.00 0.00 3.82 1.57 0.81 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 2.34 0.71 0.66 2.50 0.00 0.00 0.00

0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 2.83 0.00 0.00 0.00 0.00 2.58 0.00 0.00 3.75 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

10.16 0.00 0.00

0.00 0.00 0.00 0.00 0.00 3.49 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 4.81 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 2.00

53.49 49.50 0.00 3.56 0.00 0.00 0.00 0.00 0.00 7.90 3.20 0.00

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2001 2006 1995 2004 1997 2001 2005 2006 2004

PT Sigma PT TAS PT Viscose PT Viscose PT Wings Sunson WOM WOM Wilmar

0.00 7.00 7.81 8.3 1 0.72 11.62 0.00 20.00 33.33

1.03 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

15.82 0.00 0.00 0.00 0.00 0.00

0.00 0.00 0.00 0.00 0.00 7.35 0.00 0.00 0.00

0.00 1.03 0.00 0.00 0.00 0.00 7.81 0.00 0.00 8.3 1 0.00 0.00 0.72 0.00 0.00

11.62 0.00 0.00 0.00 15.74 0.00 0.00 0.00 0.00

33.33 0.00 0.00

0.00 0.00 0.00 0.00 0.00 7.35 0.00 0.00 0.00

Total portfolio: 560.77 41.41 19.35 135.30 269.20 37.48 19.32 135.30

FY Approval Company

Approvals Pending Commitment

Loan Equity Quasi Partic.

2005 Bank NISP SELF 0.03 0.00 0.00 0.00 2006 BankNISP Swap 0.00 0.00 0.00 0.00 2006 Orix Indonesia 0.08 0.00 0.00 0.00

Total pending commitment: 0.1 1 0.00 0.00 0.00

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Page 107: World Bank Document...Surat Perintah Pencairan Dana (Subsidiary Remittance Order) Surat Perintah Membayar (Payment Order) Surat Permintaan Pembayaran (Payment Request) Terms of Reference

Annex 15: Country at a Glance INDONESIA: ID-Urban Water Supply and Sanitation

POVERTY and SOCIAL Indonesia

4.9 3.4

53.6 37.3

198636 1996-06 bverege wnud growth) GDP 7.9 2.7 GDP per capta 6.1 1.3 ErportsdgcodsarKlsarvices 9.1 3.8

224 1,470

317

1 A 1.5

18 49 67 30 29 77 91

117 118 116

1996 227.4 30.7 25.8 30.1 28.2 -3.4 2.9

56.7 36.6

2005

5 7 4.2

16.4

b t Asia (L Pacific

1.885 1,627 3,067

0.9 1.3

42 70 29 15 79 91

115 116 114

2005 287.0 24.6 33.6 28.9 24.1 0.1 2.6

48.2 15.6

2,475

4.747 1.918 Life

T 1 .o I .4

49 70 33 12 82 89

114 115 113

A c w s to improved water source

-1ndOnesra ~ Lowmiowleinarme grwp

24.6 30.9 Tnde 29.4 25.0

capital formation

2.6 m& 2:: - 16.8

2006 2006-10

5.5 6 6 -1ndoneSa 4.0 5.3 Lowr-fwddleincunm group 9 2 6 9

STRUCTURE of tbe ECONOMY 1986 1996

242 167 (ss of GD9 Aqncullure Idustn, 337 435

Manufamnnq 167 256 S e M c e S 420 399 Hausehold final eonsunpton expenditwe €44 624 General qov? final expencllture 11 0 7 6 IrrportsOfooodsandserviCes 205 264

198636 1996-06

3.3 2.5 9.9 2.4

11.2 3.5 8.1 3.2

Hwsahdd final cmsuybon expendike 7.7 3.1 Ganeral gov't final cQlsuFnpbon . expendturn 4.3 4.9 (;mss capital formation 10.6 -13 Impxis ofgoods and Sarvices 10.3 1.8

2005

13.1 46.8 27.7 40.2 63.0 8.1

29.3

2005

2.7 4.7 4.6 7.9 4.3 6.6 8.4

17.1

x ) 12.9 1, 47.0 10 28.0 8 40.1 0

620 -10 ._ -

-GCF -GDP 8.6 26. I

2o05 I Growtt, ofexportsand imporls (%)

1.4 7.6

Note 2006 data are preliminary estimates Gmcp data are to 2005 * The diamonds dwrv four key indicatws in the cantry (in bdd) ccmpered wth its inmmegroup average. f data are mssing, h e d i a d van

heonpletad

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Page 109: World Bank Document...Surat Perintah Pencairan Dana (Subsidiary Remittance Order) Surat Perintah Membayar (Payment Order) Surat Permintaan Pembayaran (Payment Request) Terms of Reference

MAP SECTION

Page 110: World Bank Document...Surat Perintah Pencairan Dana (Subsidiary Remittance Order) Surat Perintah Membayar (Payment Order) Surat Permintaan Pembayaran (Payment Request) Terms of Reference
Page 111: World Bank Document...Surat Perintah Pencairan Dana (Subsidiary Remittance Order) Surat Perintah Membayar (Payment Order) Surat Permintaan Pembayaran (Payment Request) Terms of Reference

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