Document of The World Bank Report No: ICR00002799 IMPLEMENTATION COMPLETION AND RESULTS REPORT (IBRD-47860, IBRD-77600, TF-53555) ON A LOAN IN THE AMOUNT OF US$38.14MILLION AND A GRANT (PHRD) IN THE AMOUNT OF US$5.0 MILLION TO THE REPUBLIC OF INDONESIA FOR AN URBAN SECTOR DEVELOPMENT REFORM PROJECT November 27, 2013 Indonesia Sustainable Development Department East Asia and Pacific Region CURRENCY EQUIVALENTS (Exchange Rate Effective May 31, 2013) Currency Unit = IDR USD 1.00 = IDR 9,795 IDR 10,000 = USD 1.02 FISCAL YEAR January 1 – December 31 ABBREVIATIONS AND ACRONYMS APBD Anggaran Penerimaan dan Belanja Daerah – Provincial/Local Government Budget Bappeda Provincial/Local Development Planning Board Bappenas National Development Planning Board BLUD Local Public Service Agency BUIP Bali Urban Infrastructure Project CAS Country Assistance Strategy CDS City Development Strategy CPFO Central Project Finance Office CPMO Central Project Monitoring Office CPMU Central Project Management Unit CPS Country Partnership Strategy EA Executing Agency FRR Financial Rate of Return FY Fiscal Year GoI Government of Indonesia ILGR Initiatives for Local Governance Reform Project IMSC Inter-Ministerial Steering Committee IUIDP Integrated Urban Infrastructure Development Program Kecamatan A sub-district of a city or district Kelurahan A village of a city KPIs Key Performance Indicators KSPPN Kebijakan dan Strategi Pembangunan Perkotaan Nasional– National Urban Strategy and Policy Development LED Local Economic Development LKPP Lembaga Kebijakan Pengadaan Pemerintah – Government Procurement Policy Agency MoF Ministry of Finance Musrenbang Musyawarah Perencanaan Pembangunan – Development Planning Consultation NUSDP National Urban Strategy and Policy Development P3KT Program Pembangunan Prasarana Kota Terpadu – Integrated Urban Infrastructure Development Program PBME Project Benefit Monitoring & Evaluation Perbup Peraturan Bupati – District Head’s Regulation Perda Peraturan Daerah – Provincial /Local Regulation (passed by provincial/local parliament) Perwal Peraturan Walikota – Mayor’s Regulation PIP2B Pusat Informasi Pengembangan Pemukiman dan Bangunan - Settlements and Buildings Development Information Center PIU Project Implementation Unit PMU Project Management Unit QALP Quality Assessment of Lending Portfolio RPJMD Rencana Pembangunan Jangka Menengah Daerah – Local Mid-term Development Plan RPIJMD Rencana Pembangunan Investasi Jangka Menengah Local Medium-term Investment Development Plan SEJUDP Second East Java Urban Development Project SLA Subsidiary Loan Agreement SOP Standard Operating Procedure TKPP Tim Koordinasi Pembangunan Perkotaan– Urban Development Coordination Team TKPPN Tim Koordinasi Pembangunan Perkotaan Nasional – National Coordinating Team for Urban Development UDP Urban Development Project UIDP Urban Institutional Development Program UKL Upaya Pengelolaan Lingkungan – Environmental Management Plan ULG Urban Local Government UP2HLN Unit Pemantauan Pinjamandan Hibah Luar Negeri – Foreign Grant and Loan Monitoring Unit UPL Upaya Pemantauan Lingkungan – Environmental Monitoring Plan USDRP Urban Sector Development Reform Project Vice President: Axel van Trotsenburg Country Director: Rodrigo A. Chaves Sector Manager: Nathan M. Belete Project Team Leader: Indira Dharmapatni ICR Team Leader: Indira Dharmapatni Indonesia URBAN SECTOR DEVELOPMENT REFORM PROJECT CONTENTS Data Sheet A. Basic Information B. Key Dates C. Ratings Summary D. Sector and Theme Codes E. Bank Staff F. Results Framework Analysis G. Ratings of Project Performance in ISRs H. Restructuring I. Disbursement Graph 1. Project Context, Development Objectives and Design ………………………………………………………… 1 2. Key Factors Affecting Implementation and Outcomes ………………………………………………………. 10 3. Assessment of Outcomes …………………………………………………………………………………….. 24 4. Assessment of Risk to Development Outcome ………………………………………………………………. 34 5. Assessment of Bank and Borrower Performance …………………………………………………………….. 35 6. Lessons Learned ……………………………………………………………………………………………… 39 7. Comments on Issues Raised by Borrower/Implementing Agencies/Partners ………………………………... 40 Annex 1. Project Costs and Financing ………………………………………………………………………….. 41 Annex 2. Outputs by Component ……………………………………………………………………………….. 42 Annex 3. Economic and Financial Analysis …………………………………………………………………….. 53 Annex 4. Bank Lending and Implementation Support/Supervision Processes …………………………………. 57 Annex 5. Beneficiary Survey Results …………………………………………………………………………… 60 Annex 6. Stakeholder Workshop Report and Results …………………………………………………………... 62 Annex 7. Summary of Borrower's ICR and/or Comments on Draft ICR ………………………………………. 65 Annex 8. Comments of Co-financiers and Other Partners/Stakeholders ……………………………………….. 75 Annex 9. List of Supporting Documents ………………………………………………………………………... 76 Additional Annex 10. Eligibility Criteria for ULGs and for Subprojects under Component B ……………….. 77 Additional Annex 11. Changes in Participating ULGs, and Underlying Reasons …………………………….. 78 Additional Annex 12. Dates and Purposes of Amendments to the Loan Agreement …………………………. 81 Additional Annex 13. Websites of Participating ULGs ……………………………………………………….. 82 Additional Annex 14. Changes in National Legislation Relevant to the Project ……………………………… 83 Additional Annex 15. Views Expressed in the Publication “USDRP – Promoting Urban Self-Reliance. Reflection of the USDRP Implementation” …………………………………………… 85 Additional Annex 16. Case Study : Subproject Market Reconstruction in Sawahlunto ………………………. 88 MAP……………………………………………………………………………………………………. 92 A. Basic Information URBAN SECTOR Country: Indonesia Project Name: DEVELOPMENT REFORM PROJECT IBRD-47860,IBRD- Project ID: P071296 L/C/TF Number(s): 77600,TF-53555 ICR Date: 11/27/2013 ICR Type: Core ICR REPUBLIC OF Lending Instrument: SIL Borrower: INDONESIA Original Total USD 45.00M Disbursed Amount: USD 36.51M Commitment: Revised Amount: USD 38.14M Environmental Category: A Implementing Agencies: Ministry of Public Works Cofinanciers and Other External Partners: Japan PHRD Grant B. Key Dates Revised / Actual Process Date Process Original Date Date(s) Concept Review: 03/26/2002 Effectiveness: 01/18/2006 01/18/2006 06/04/2010 02/14/2011 Appraisal: 02/17/2004 Restructuring(s): 05/23/2012 12/27/2012 Approval: 06/07/2005 Mid-term Review: 04/15/2008 03/16/2009 Closing: 06/30/2011 05/31/2013 C. Ratings Summary C.1 Performance Rating by ICR Outcomes: Moderately Satisfactory Risk to Development Outcome: Moderate Bank Performance: Moderately Satisfactory Borrower Performance: Moderately Satisfactory C.2 Detailed Ratings of Bank and Borrower Performance (by ICR) Bank Ratings Borrower Ratings Quality at Entry: Moderately Unsatisfactory Government: Moderately Satisfactory Quality of Supervision: Moderately Satisfactory Implementing Moderately Satisfactory Agency/Agencies: Overall Bank Overall Borrower Moderately Satisfactory Moderately Satisfactory Performance: Performance: C.3 Quality at Entry and Implementation Performance Indicators Implementation QAG Assessments (if Indicators Rating Performance any) Potential Problem Project at No Quality at Entry (QEA): Moderately Satisfactory any time (Yes/No): Problem Project at any time Quality of Supervision Yes None (Yes/No): (QSA): DO rating before Moderately Satisfactory Closing/Inactive status: D. Sector and Theme Codes Original Actual Sector Code (as % of total Bank financing) Central government administration 4 4 General industry and trade sector 69 69 Other social services 3 3 Sub-national government administration 2 2 Urban Transport 22 22 Theme Code (as % of total Bank financing) City-wide Infrastructure and Service Delivery 25 25 Municipal governance and institution building 50 50 Urban Economic Development 25 25 E. Bank Staff Positions At ICR At Approval Vice President: Axel van Trotsenburg Jemal-ud-din Kassum Country Director: Rodrigo A. Chaves Andrew D. Steer Sector Manager: Nathan M. Belete Keshav Varma Hiroaki Suzuki Project Team Leader: Indira Dharmapatni and Aniruddha Dasgupta ICR Team Leader: Indira Dharmapatni ICR Primary Author: Gottfried Roelcke ICR Primary Author: Peter M. Brandriss F. Results Framework Analysis Project Development Objectives (from Project Appraisal Document) 4. To assist the Borrower in improving the provision of urban services by participating urban local governments (ULGs) and additional participating ULGs. 5. Revised Project Development Objectives (as approved by original approving authority) 6. To assist the Borrower to strengthen local governance and improve the provision of selected urban services by participating urban local governments (ULGs) and additional participating ULGs. 7. (a) PDO Indicator(s) Original Target Actual Value Formally Values (from Achieved at Indicator Baseline Value Revised Target approval Completion or Target Values documents) Years Indicator 1 : Increase ULG revenues from urban services financed by the project. 70 percent of participating ULGs that have 40 percent of ULGs (4 completed Value of 10) that have subprojects quantitative or 0 N/A completed subprojects increase their Qualitative) increased their revenue local revenue by at least 10 percent from investments by at least 10 percent Date achieved 01/18/2006 06/30/2011 05/31/2013 05/31/2013 Comments Partially achieved. Although so far only four of ten ULGs have increased revenue by 10 (incl. % percent, all remaining ULGs are projected to meet the target once their completed subprojects achievement) are fully operational. (New indicator, added on 6/4/10) Increase in expenditures for operations and maintenance of infrastructure financed by the Indicator 2 : project. 70 percent of participating ULGs that have 70 percent of ULGs (7 Value completed of 10) have increased quantitative or 0 N/A subprojects O&M expenditures by Qualitative) increase their at least 10 percent. O&M expenditure by at least 10 percent Date achieved 01/18/2006 06/30/2011 05/31/2013 05/31/2013 Comments Fully achieved. The three ULGs that have not yet met the target are also likely to increase their (incl. % O&M, but have not yet allocated specific budgets because the facilities are still not in achievement) operation. (New indicator, added on 6/4/10) Indicator 3 : Increase satisfaction of users for doing business. Value 0 N/A In 70 percent of 60% of ULGs quantitative or participating exceeded satisfaction Qualitative) ULGs with target for the new completed facilities used subprojects, at least 50% of users (vendors/bus drivers) express increased satisfaction. Date achieved 01/18/2006 06/30/2011 05/31/2013 05/31/2013 Comments Partially achieved. Satisfaction target met for all facilities in all ULGs, but outcome value only (incl. % includes facilities that are already occupied and doing business (about half). Satisfaction achievement) ranged from 65% to 100% (avg 82%). See Annex 5 for details. Indicator 4 : Increase satisfaction of customers using facilities built through project investments. In 70 percent of participating ULGs with completed 60% of ULGs Value subprojects, at exceeded satisfaction quantitative or 0 N/A least 50% of target for the new Qualitative) customers facilities used express increased satisfaction with facilities. Date achieved 01/18/2006 06/30/2011 05/31/2013 05/31/2013 Comments Partially achieved. Satisfaction target met for all facilities in all ULGs, but outcome value only (incl. % includes facilities that are already occupied and doing business (about half). Satisfaction achievement) ranged from 53% to 100% (avg 83%). See Annex 5 for details. (b) Intermediate Outcome Indicator(s) Original Target Actual Value Formally Values (from Achieved at Indicator Baseline Value Revised Target approval Completion or Target Values documents) Years ULGs post updates online or in print media on (i) local dev. activities/programs, (ii) Mid-term Indicator 1 : Dev. Plan, (iii) Summary of Local Budget, (iv) audited annual financial rpt, (v) procurement plan for current fiscal year / contracts awarded in past 6 mo. 90 percent of ULGs At least 80% of met all five participating requirements during Value ULGs post the final 18 months of (quantitative N/A N/A specified implementation. Rates or Qualitative) information at for individual six month requirements ranged intervals. from 70 to 100 percent. Date achieved 01/18/2006 06/30/2011 05/31/2013 05/31/2013 Comments Measures improved transparency. Target nearly achieved overall, and exceeded for some (incl. % individual categories. See Annex 2 for details. (new indicator, added 6/4/10) achievement) ULGs have public feedback mechanisms in place including (i) use of at least one type of Indicator 2 : media for public complaints, managed by a complaint handling unit, and (ii) standard operating procedures (SOP) for public complaints handling. 90% met both criteria. At least 80% of One ULG had a Value ULGs have in complaints system and (quantitative N/A N/A place both (i) and complaints handling or Qualitative) (ii) unit, but without defined SOP. Date achieved 01/18/2006 06/30/2011 05/31/2013 05/31/2013 Comments Measures accountability. Exceeded target. 100% of ULGs systematically use media for public (incl. % complaints and have a specific unit to manage the complaints. 90% of the ULGs (all but one) achievement) also had SOP for handling complaints (indicator added 6/4/10). Participatory planning process for either (i) allocation of block grants to kecamatan/kelurahan Indicator 3 : from ULG and/or at least one agency with SOP for use of block grants, OR for (ii) proposing indicative budget for financing development activities. 80% of ULGs have an either a block grant At least 50% of Value mechanism or participating (quantitative N/A N/A indicative budget ULGs achieve (i) or Qualitative) proposed through OR (ii) participatory planning process. Date achieved 01/18/2006 06/30/2011 05/31/2013 05/31/2013 Comments Measures use of participatory planning. Exceeded target. Eight of ten ULGs have at least one (incl. % of the two processes. See Annex 2 for additional detail (indicator added 6/4/10). achievement) ULGs practice sound financial management as reflected by issuance of local regulation Indicator 4 : (Perda/Decree/Perbup/Perwal) on (i) Principles of Regional FM and (ii) Policies, Systems & Procedures for preparation and execution of local govt budget / APBD. At least 80% of Value 100% of ULGs have participating (quantitative N/A N/A issued regulations in ULGs achieve or Qualitative) both areas. both (i) and (ii) Date achieved 01/18/2006 06/30/2011 05/31/2013 05/31/2013 Comments Exceeded target. (New indicator, added 6/4/10.) Annex 2 also includes public disclosure of (incl. % audited annual financial reports as a measure of FM performance (70% achieved against target achievement) of 80%). ULGs practice sound procurement: (i) 75% of bids awarded within validity period and publicly Indicator 5 : reported, (ii) 50% tender committee members have national procurement certification, (iii) contractor performance evaluated and recorded. (i) 90% award bids At least 60% of within valid period & Value participating publish notice; (quantitative N/A N/A ULGs achieve (ii) 100% tender or Qualitative) (i), (ii) & (iii) committees meet certification target; (iii) 40% have criteria & 30% conduct eval. Date achieved 01/18/2006 06/30/2011 05/31/2013 05/31/2013 Comments Targets exceeded for bid award and tender committee, but fell short for contractor (incl. % evaluation/recognition. achievement) Center of Excellence: (i) "Unit Informasi Pembangunan Permukiman dan Bangunan" or Indicator 6 : UIP2B functions as a Provincial Center of Excellence to support reforms in the ULGs in the province, and (ii) Work Plan for the Provincial Center of Excellence or UIP2B. (i)Prov.ctr of excellence(PIPB2) is Value At least one established,with 5year (quantitative 0 N/A province has (i) bus. plan; org.structure or Qualitative) & (ii) & budget are available; (ii) annual work plan is being prepared Date achieved 01/18/2006 06/30/2011 05/31/2013 05/31/2013 Comments Achieved. Center is called PIP2B, for "Pusat Informasi Pengembangan Pemukiman dan (incl. % Bangunan - Settlements and Buildings Development Information Center." Five-year business achievement) plan forms framework for annual work plan, currently under preparation Local Economic Development (LED)–City Development Strategy (CDS): Indicator 7 : (i) LED–CDS developed by participating ULGs (ii) ULGs implemented 10% of activities specified in their CDS. (i) 100% ULGs finalize draft LED plan for Min. 60% of revision & issuance in ULGs have (i), & mayoral decree; Value min. 50% of (ii) 100% ULGs have (quantitative 0 N/A participating allocated budget for or Qualitative) ULGs having the FY13 to implement LED-focused 10% of activities CDS achieve (ii) stipulated in LED Strategy Date achieved 01/18/2006 06/30/2011 05/31/2013 05/31/2013 Comments Nearly achieved. Although ULGs are still finalizing the plans, achievement is expected to be (incl. % 100% (substantially exceeded) as soon as final step of issuance by decree completed. achievement) Participating ULGs implement subprojects: (i) Participating ULGs sign Subproject Loan Agreements (SLAs) with Ministry of Finance for Indicator 8 : urban investment subprojects; (ii) Participating ULGs complete construction of urban investment subprojects. (i) 100% of ULGs signed (i) 100% ULGs have SLAs Value signed SLA (ii) At least 80% (quantitative 0 N/A (ii) 100% ULGs have of ULGs or Qualitative) completed subproject complete construction construction of urban investment subproject Date achieved 01/18/2006 06/30/2011 05/31/2013 05/31/2013 Comments Fully achieved. Measures intermediate step toward subproject implementation and final (incl. % completion of outputs. 10 ULGs completed 15 investment subprojects achievement) G. Ratings of Project Performance in ISRs Date ISR Actual Disbursements No. DO IP Archived (USD millions) 1 03/29/2006 Satisfactory Satisfactory 0.23 2 05/23/2007 Moderately Satisfactory Moderately Satisfactory 2.24 3 11/07/2007 Moderately Satisfactory Moderately Satisfactory 2.24 4 06/23/2008 Moderately Satisfactory Moderately Unsatisfactory 8.50 5 08/26/2008 Moderately Satisfactory Moderately Unsatisfactory 10.95 6 04/15/2009 Moderately Satisfactory Moderately Unsatisfactory 13.03 7 11/09/2009 Moderately Satisfactory Moderately Unsatisfactory 13.38 8 06/29/2010 Moderately Satisfactory Moderately Satisfactory 15.28 9 02/11/2011 Moderately Satisfactory Moderately Satisfactory 26.36 10 04/03/2012 Moderately Satisfactory Moderately Satisfactory 29.21 11 12/03/2012 Moderately Satisfactory Moderately Satisfactory 34.64 12 06/29/2013 Moderately Satisfactory Satisfactory 36.51 H. Restructuring (if any) ISR Ratings at Amount Restructuring Board Approved Restructuring Disbursed at Reason for Restructuring & Key Date(s) PDO Change Restructuring in Changes Made DO IP USD millions The phrasing of PDO and KPIs needed refocusing, and participating ULGs had changed substantially; 06/04/2010 Y MS MU 15.28 (i) PDO and KPIs were redefined, (ii) loan closing date was extended by 12 months to June 30, 2012, (iii) loan funds were reallocated. The reduced number of participating ULGs could not fully absorb the loan 02/14/2011 MS MS 26.36 funds; (i) US$6.57M of loan funds were cancelled. Project implementation was slower than expected; 05/23/2012 N MS MS 29.21 (i) loan closing date was extended by 11 months to May 31, 2013, (ii) one KPI was simplified. ISR Ratings at Amount Restructuring Board Approved Restructuring Disbursed at Reason for Restructuring & Key Date(s) PDO Change Restructuring in Changes Made DO IP USD millions ULGs had residual loan funds after tendering; 12/27/2012 N MS MS 35.99 (i) US$0.29M of loan funds were cancelled If PDO and/or Key Outcome Targets were formally revised (approved by the original approving body) enter ratings below: Outcome Ratings Against Original PDO/Targets Moderately Satisfactory Against Formally Revised PDO/Targets Moderately Satisfactory Overall (weighted) rating Moderately Satisfactory I. Disbursement Profile 1. Project Context, Development Objectives and Design: 1.1 Context at Appraisal: At appraisal in 2005, Indonesia was in the midst of two fundamental changes of historical dimension. Trend to Urbanization. The first was a trend to urbanization, in line with worldwide trends, that was transforming the country’s society from a predominantly rural one to a predominantly urban one. Since 2011, Indonesia’s urban population has exceeded its rural population. The trend towards urbanization had been quite steady for decades and will almost certainly continue for several decades more. It puts an increasing strain on the resources and management capabilities of urban local governments (ULGs) and will continue to do so. All previous investments and capacity buildings efforts for ULGs have not been able to keep pace with the increase in challenges. Governance Reforms. The second change was the wave of governance reform that swept through the country since 1998 and focused on democratization and decentralization. Local governments were given substantially more responsibilities and more authority. At the same time, the transparency of their operations, public participation, and government accountability were to be enhanced significantly. These changes were not as continuous and steady as the urbanization trend. In the initial enthusiasm, legislation on decentralization was passed (i.e.. Laws 22 and 25 of 1999) that turned out to have serious flaws which had to be corrected later (i.e. through Laws 32 and 33 of 2004). These changes, their backgrounds, and their likely implications were discussed extensively in the PAD. Need to improve urban services. The continuous rapid growth of urban populations had put a strain on urban infrastructure and urban services for decades, and ULGs have not been able to clear the backlog, let alone provide for the longer-term future. With the shift from a more autocratic style of governance to democratization, urban populations became more vocal in demanding improvements from their ULGs. Before, during, and after appraisal there was thus a great need to support them in making the necessary investments and increasing their capacities across the whole spectrum of urban services and urban infrastructure. Such support should continue earlier efforts and build upon their results and experiences. Previous Urban Projects. When this Project was appraised, a whole ‘family’ of urban projects had just been phased out, namely the Integrated Urban Infrastructure Development Projects (IUIDP, also known by their Indonesian abbreviation P3KT). These had been conceived by the Department of Public Works (now Ministry of Public Works), particularly its Directorate General for Human Settlements (known by its Indonesian name “CiptaKarya”), and supported by foreign donors including the Bank. Those projects were aimed primarily at physical improvements but also addressed local 1 institutional development and revenue improvement. Many of the projects supported by the Bank included some efforts towards local governance reforms, e. g. the introduction of one-stop service units (Unit Pelayanan Terpadu – UPT) under the Second East Java Urban Development Project (LN 40170), the introduction of procurement reforms under the Bali Urban Infrastructure Project (LN 41550), or the development of innovative approaches for participatory and community driven project planning under the Urban Poverty Projects (CR 32100, LN 46640 and CR 36580). However, these efforts were part of individual projects, lacked a common platform, and lacked a mechanism that would systematically sustain and replicate the achievements made. The Municipal Innovations Project (LN 4440-IND) explored further avenues to improve urban governance in various ways. With the onset of decentralization, GoI and the donor community were exploring new ways to foster urban development. There was a need to address the urban development and management agenda more emphatically, focusing on reforms of regulations, procedures, actual governance practices, related capacity building, improved institutional arrangements, and the creation of a platform for further reforms, besides addressing the persistent bottlenecks in urban infrastructure and service delivery. At appraisal, ULGs were facing a multitude of challenges. One field of challenges was the need to substantially reform their governance practices vis-à-vis the established practices of earlier decades. The other field was the need to continue upgrading and improving a wide spectrum of urban infrastructure and urban services. Bank Engagement. The Bank considered it vital to stay engaged with the Government of Indonesia (GoI) and selected ULGs in addressing both fields of challenges, and it agreed to support the Ministry of Public Works (then named Ministry of Settlements and Regional Infrastructure) in a program that was to address both the reform agenda and the need for improved urban services with a view to pioneering changes in ULGs. Having been involved in Indonesia’s urban sector for around three decades, the Bank had accumulated considerable sector knowledge and developed long-standing institutional relationships with key stakeholders. Also, the Bank had been a strategic partner of GoI during its decentralization program. It was only logical that these prior involvements were continued, intensified, and developed beyond the Development Policy Loans that continued the efforts of the IUIDP projects. The Project was expected to contribute to the three main pillars of the then CAS, namely (a) creating an enabling environment for productive investments, (b) enhancing the provision of services to the public, especially for the benefit of the poor, and (c) supporting further governance reform efforts. 2 1.2 Original Project Development Objectives (PDO) and Key Indicators: Project Development Objective Assist the borrower in improving the provision of urban services by participating urban local governments (ULGs) and additional participating ULGs. There were different but similar versions of the PDO in the PAD and the legal agreements. The version above is from the Loan Agreement, but with the term “ULGs” spelled out for clarity. This is considered the formal PDO for purposes of evaluation, though the project’s early Implementation Status and Results Reports (ISRs) drew the PDO statement from the PAD. The PDO in the PAD differed mainly by (a) stating the objective as being improved services in the ULGs rather than improved provision of services by the ULGs, (b) did not specifically mention “additional participating” ULGs, and (c) included additional information about the context and design of the project that were not intended to be a formal part of the PDO, but did provide more insights into the governance objective. The full PDO statement in the PAD Data Sheet was: The project’s principal development objective is to improve urban services in the participating urban local governments (ULG). This is the first step toward achieving the Government of Indonesia’s (GOI) long-term goal to develop self-reliant cities. To achieve this objective, the project focuses on reforming municipal governance, developing institutional capacity and financing priority urban investments. The appraised project included 13 participating ULGs, but both the PAD and the legal agreements anticipated that additional ULGs would join the project during implementation, and defined procedures for this purpose. Both versions of the PDO, in different ways, incorporated improved governance and capacity as part of the strategy for improving services rather than explicitly defining it as an objective. However, the project design and activities were clearly focused on governance, and at approval “municipal governance and institution building” was the single largest theme (50 percent) for the project financing at approval. While the Loan Agreement’s shorter PDO statement eliminated the reference to governance, it also cited provision of services by the ULGs, suggesting an emphasis on improved capacity to provide services rather than direct improvement in services themselves. An even lengthier version of the PDO in the main body of the PAD went on to state that: More specifically, the project will: (a) improve municipal governance through: (i) enhanced civic participation in key municipal decisions and monitoring/supervision of their implementation; (ii) adoption of extensive public information disclosure policies; and (iii) reform of procurement and financial management practices; 3 (b) strengthen municipal institutional capacity to formulate long-term urban development strategies and plans, including local economic development and urban poverty reduction strategies; (c) build municipal institutional capacity and professionalizing municipal managers and staff; (d) enhance fiscal capacity by rationalizing expenditures and increasing revenues; (e) finance priority urban investments; and (f) implement at the central level, the Urban Institutional Development Program (UIDP)for supporting urban reforms and institutional capacity building. Four of the six specific project activities are related to ULGs’ governance and capacity, and are stated in terms normally associated with outcomes rather than outputs. The only specific activity related to the urban investments, by contrast, only describes the Bank’s input (financing). The Bank’s Quality Assessment Groups (QAG) conducted a Quality at Entry Assessment (QEA7) of the project on July 28, 2005, soon after approval. Considerable attention was devoted to the evolution of and “lack of clarity” about the project objectives prior to approval, as well as disconnects in some parts of the PAD resulting from the late revision of project design and its reappraisal. QAG took the position that the PDO no longer captured the intended objectives of the project and, notwithstanding the PDO in the PAD or Loan Agreement, assessed the project on the basis of two main objectives: (a) institutional development/capacity building and (b) infrastructure development. In some respects, QAG’s interpretation gave greater emphasis to infrastructure investments being a means of helping to achieve the project’s governance/capacity objectives than vice versa. Key Performance Indicators (KPIs) The only PDO-level indicator was “At least 10 ULGs improve priority urban services in areas financed with USDRP support.” This represented roughly three-quarters of the 13 ULGs identified as project participants at the time of appraisal. The baselines and targets for measuring improved services in the ULGs was not quantified in the Results Framework (RF), but rather would be defined in the feasibility study of each subproject. The RF also included an intermediate indicator for investments in services, which basically tracked progress in expenditures for subprojects (and input) rather than outcomes or even outputs, strictly speaking. Since governance was not explicitly captured as a PDO-level objective, the project’s five governance indicators were considered intermediate or component-level indicators in the original RF. Four of them related to urban reforms and institutional development that would be achieved in at least 10 ULGs. The fifth set a goal for overall implementation of the UIDP annual work plan by the national government (at least 75 percent implementation of each year’s plan). The four indicators specific to the ULGs did not 4 define clear standards for their achievement. Details are provided in Annex 2, but in short, they covered:  Public availability of information  Public feedback mechanisms  Participatory planning and public consultation  Sound financial and procurement management practices As with the indicator for service improvement, the targets for governance and capacity were based on the number of participating ULGs (three-quarters) that would achieve the goals, but the specific improvements and results were to be defined in the governance reform action plans of each ULG. 1.3 Revised PDO and Key Indicators, and reasons/justification: Revised PDO Assist the Borrower to strengthen local governance and improve the provision of selected urban services by participating ULGs and additional participating ULGs. The PDO was formally revised in June 2010. The revised PDO mirrored the formulation already used in the original Loan Agreement, but explicitly included strengthening local governance as an objective. This change was made at the government’s request and was in harmony with the Bank’s view as well. While governance was clearly a central element in the project’s approach to improving services, and linkage between the two is a widely understood and accepted principal in development, demonstrating the causal effect, particularly within the lifetime of the project was not considered feasible. Undertaking simultaneous investments in both services and governance was intended to enhance project outcomes and long-term impacts in both these areas, but the project and the RF was not designed to sequence these investments/activities or show that one was achieved as a result of the other. Both the original and revised RF included indicators for both services and governance, but not a way of measuring their interrelationship. Expressly including governance an objective in the PDO better reflected the project design and goals (see description of QAG’s assessment in Section 1.2) as well as the government’s strategy and development priorities. It also made the outcomes more monitorable and the indicators more relevant. Notably, this approach is also consistent with the numerous Bank-financed projects that are part of the government’s ongoing, flagship poverty-alleviation program, the National Program for Community Empowerment (PNPM). Projects in the both PNPM Urban and PNPM Rural series have adopted a common PDO focused on “improved socio-economic and local governance conditions” as the main objectives. 5 Revised Indicators In the same restructuring that revised the PDO, substantial revisions were also made to the indicators in the project RF. The primary goals were to (a) better reflect and measure the PDO and intended project outcomes, (b) address the lack of specific, measureable, and aggregate standards for improvement in services and governance for the project overall (rather than outputs or results drawn from dozens of individual subproject feasibility studies and ULG governance reform plans), and (c) better target the project’s governance activities and results to reflect new developments in government regulatory requirements and priorities, and sharpen outcome effectiveness based on the project’s implementation experience to that point. Since the number of participating ULGs changed as participants left and entered the project, the numerical targets (10 ULGs) were replaced by percentage targets (70 percent of participating ULGs). This reflected the original intent of the RF design based on the success rate in participating ULGs, without tying the outcome target to a specific number of ULGs. Improved services. The single PDO indicator for improved services was replaced with four new and more measurable indicators, each of which would be achieved by/in at least 70 percent of participating ULGs:  Increased ULG local revenue by at least 10% due to the investment  Increased ULG expenditures for O&M by at least 10%.  At least half of the users of new facilities express increased satisfaction in doing business.  At least half of the consumers express increased satisfaction in using the new facilities. Governance. These revised indicators reflect the impact of the subprojects under Component A. Although the governance indicators were not elevated to PDO level in the RF, this was clearly the intention of the restructuring as reflected in the Restructuring Paper, which explained that the revision was needed because “in their current formulation, the PDO and indicators also fail to capture appropriate measures of improved governance.” The governance indicators are complex and many of the overall governance targets contain multiple subsidiary outputs or requirements. Details are shown in the ICR Data Sheet and in Annex. In summary, they set specific and measureable targets in the areas of:  Transparency, Participation, and Accountability  Financial Management practices  Procurement practices  Establishment of a Provincial Center of Excellence to support governance reforms  Development of Local Economic Development Strategies and City Development Strategies 6 1.4 Main Beneficiaries: The PAD does not explicitly identify primary or secondary target groups but it can be considered implied that the two project components (see below) had two distinctly different target audiences: By strengthening local governance, Component A was to benefit directly the participating ULGs and indirectly other ULGs in the whole country and, through them, their urban populations. This was to be achieved, both during and after Project implementation, through the Urban Institutional Development Program (UIDP). Component B was to benefit the urban population in participating ULGs, especially the users of the new urban service facilities created under the project: market traders, shoppers, fishermen, and users of bus terminals. They were to be the main beneficiaries of the improved urban services provided in/by new facilities that the Project would create, and this was reflected in the rephrasing of the PDO indicators on the occasion of the Project Restructuring. As the intended beneficiaries of Component B could be quite clearly identified, user satisfaction surveys were conducted in the Project Benefit Monitoring & Evaluation (see Section 2.3 and Annex 5). 1.5 Original Components: The project had separate components for Urban Reform and Urban Investments. They were designed to be carried out in parallel so as to complement one another and strengthen their respective outcomes as well as overall project results and the sustainability of outcomes. This approach of carrying out governance and capacity strengthening activities in tandem with tangible civil works activities is widely employed in development projects, in part to strengthen the practical application of reforms during their actual rollout and achievement of reform outcomes themselves. In this case, it also served as part of the national government’s effort to develop and test different approaches in its ambitious, longer-term decentralization strategy aimed at creating more self-reliant cities that would progressively take on greater responsibility for local service delivery. At approval 13 participating ULGs had been identified, with 18 subprojects scheduled for implementation in the first two years of urban investments. To qualify for participation the ULGs had to meet threshold criteria related to fiscal soundness, borrowing capacity, investment needs as reflected in their development plans, and commitment to the proposed governance reforms (see Annex 10). Arrangements were also made governing the exit of participating ULGs that fell out of compliance with the conditions for ongoing participation, as well as for the entry of new participating ULGs (if project resources allowed). Local government commitment and ownership was also reflected in their cost- sharing commitment, particularly for the urban investment component: 7 USDRP financing by component (at appraisal) Government Component Central Local (ULGs) IBRD PHRD Total A. Urban Reform ULG Reform (UIDP) 0.60 0.60 0.69 5.00 6.89 Project Support 0.30 1.81 2.11 B. Urban Investments 11.85 40.27 52.12 Unallocated 2.00 2.00 Front end fee 0.23 Total 0.90 12.45 45.00 5.00 63.35 Component A: Urban Reform and Institutional Support (US$9.0 million). This component included two separate subcomponents:  Urban Institutional Development Program (UIDP) (US$6.9 million) to carry out activities aimed at improving the governance and capacity of the ULGs. This subcomponent was the primary mechanism for achieving the project’s governance improvement and reform goals.  Project Implementation Support (US$2.1 million) to provide the technical assistance, consultants, equipment and training needed to enable the Central Project Management Unit (CPMU) to carry out the UIDP Subcomponent. The urban reform programs supported by the UIDP were aimed and strengthening the ULGs’ governance capacity and performance in several key areas: (a) core governance in terms of civic participation, transparency, procurement, and financial management; (b) long-term urban development strategies and plans, including local economic development and urban poverty reduction strategies; and (c) institutional and capacity development programs identified by the ULGs themselves, including professionalization of municipal managers and staff as well as e-governance. Although the main focus of the project and its resources was direct support to the ULGs, at the central level the UIDP was also designed to help the government of Indonesia formulate national urban policies in key strategic areas related to its overarching decentralization agenda, particularly urban finance, poverty reduction and local economic development. In short, it intended to help strengthening the enabling environment and legal/regulatory framework for decentralization. The inputs and activities through which the UIDP would achieve these outputs and outcomes included financing of technical assistance to the ULGs and other stakeholders, studies of that support the preparation of NUSPD and urban reform in ULGs, training, equipment, workshops, and dissemination of the national and global knowledge and experience on urban and governance reforms. Component B: Urban Investment (US$52.1 million). The IBRD financing for investments in local services was channeled through the Indonesian government to 8 participating ULGs through subsidiary loan agreements (SLAs). When the project was originally appraised, the design concept was for on-grants and on-lend to finance a broad range of possible priority investments in local services, such as roads, bridges, water supply, sewerage, solid waste management, and flood control. But later during project preparation, the GoI decided to proceed with on-lend scheme only, which applied only for direct-revenue generating investment. However, the project design was adjusted and reappraised after the government required that, in the case foreign financing passed on to local governments via a loan to the central government, the local financing had to be in the form of on-lend rather than on-grants. The new regulations also required that the services or investments thus financed be revenue-generating, though not necessarily with full cost recovery. (See Annex 14 for policy/regulatory details.) This effectively narrowed the range of investment options, and by final appraisal the subproject proposals identified for the project mostly involved rehabilitation and construction of public markets along with several transportation (bus) terminals. Since these services involved leasing space to vendors or to private companies or concessionaires, they met the requirement of generating revenues for the ULGs. This is explained in more detail in Section 2.1. 1.6 Revised Components In addition to revising the PDO and indicators, the June 2010 restructuring also simplified and refocused the requirements of the Urban Reform Component in response to changes in regulations, priorities, and needs, as well as the experience in implementation to that point. For example, some requirements developed during project preparation or at the initial stage of project implementation later became incompatible with new regulations, were found to be less efficient or effective in improving governance than alternative activities, or were already achieved by other activities within USDRP or required by central government regulations. These revisions did not change the basic design or substance of the component, but rather fine-tuned the specific reform activities and requirements to give the project a more relevant, narrowly targeted, and better defined set of reform activities to help achieve more tangible and useful governance outcomes. They are reflected in the revised indicators, which defined much more specific outputs and outcomes for the reform component and corresponding governance objectives (see Annex 2). 1.7 Other significant changes: Changes in Participating ULGs. Eight of the 13 ULGs that were expected to participate at appraisal withdrew, for various reasons, e.g. change of leaders, inconsistent commitments, change of local parliament, during the first three years of Project implementation, but the participation of several other ULGs was considered, and five other ULGs eventually came to participate in the Project several years after appraisal (see Additional Annex 11for details).The newly participating ULGs were partly selected from 9 the “queue” of those ULGs not selected during Project preparation, and partly from other ULGs that had newly applied. Extensions of Loan Closing Date. The originally envisaged loan closing date of June 30, 2011, was extended twice, the second time to May 31, 2013, i. e. by 23 months in total. This was necessary for several reasons, including the unexpectedly long time needed for the processing of the SLAs (e. g. because the documents submitted by ULGs did not meet the required standards), and the time needed by the newly participating ULGs to complete their subprojects under Component B. Reallocation of Loan Funds. The Project Restructuring mentioned above (endorsed by the Board) included a reallocation of loan funds. US$0.95million of previously unallocated loan funds were allocated to the category “consultant services, training and workshops” (expanded from the previous category “consultant services”). Partial Loan Cancellations. Two amendments to the Loan Agreement (effective December17, 2010, and December 27, 2012) reduced the loan amount from the original US$45.00 million to approx. US$38.14 million. This was necessary because the number of participating ULGs had decreased, the admission of additional ULGs was not feasible under the time constraints, and the full original loan amount could thus not be absorbed. There was also an internal reallocation of loan funds. A complete list of the seven amendments made to the Loan Agreement is given in Additional Annex 12. 2. Key Factors Affecting Implementation and Outcomes 2.1 Project Preparation, Design, and Quality at Entry Background Analysis. The PAD contained a thorough analysis of the Project’s background and environment as it was during preparation and described the rationale for the Bank’s intervention. Basically, the analysis turned out to be sound and valid during the Project implementation period but details of GoI’s decentralization policy and the underpinning legal framework did change over time. This was one of the reasons for the Project Restructuring described above. Project Environment. The EA and the Bank team prepared the Project under circumstances that had no precedent in Indonesia, namely an emphatic shift towards democratization and decentralization. The scope and scale of this drive towards democratization and decentralization was a novelty not only in Indonesia but almost worldwide, and all stakeholders basically endeavored into uncharted territory. This included the fact that new regulations, however carefully they might have been designed, still had to stand the test of practical application, and nobody could tell in advance what kind of adjustments might turn out to be necessary. Inevitably, government personnel tasked with applying new regulations had no prior experience in handling them which compounded the challenges. Therefore, the Project was designed with a high degree of uncertainty that made it extremely difficult to fall back on earlier experiences or anticipate accurately how the new policies and elements of legislation would be 10 applicable or factually applied. During Project preparation, the uncertainties and risks could not be assessed accurately, let alone mitigated. Experiences from IUIDP Projects. The IUIDP Projects supported by the Bank all had a regional focus, e. g. the Sulawesi Urban Development Project and the Kalimantan Urban Development Project each covered four provinces on those islands, the Second East Java UDP (SEJUDP) and the Bali Urban Infrastructure Project (BUIP) both covered the respective provinces, the Semarang-Surakarta UDP covered two cities in Central Java, and the Surabaya UDP focused entirely on the capital of East Java. This regional focus enhanced the efficiency of project management considerably. The SEJUDP and the BUIP supported the decentralization agenda by placing the main responsibility for project management (including the relevant consultant teams) in the provincial governments, thus enhancing their experience and developing their capacities with a view to bestowing them with more project management authority in the future. Still, Cipta Karya was the official central-level EA for both these projects. The decentralization laws of 1999 (implemented since 2001) stripped provincial governments of much of their erstwhile powers and limited them largely to the role of coordinating the local governments which had been bestowed with much more authority. Provincial governments could therefore not continue playing the prominent and successful roles that had played in the SEJUDP and the BUIP; they had neither the mandate nor the incentive nor the resources. Thus, it could not be expected that they would play a prominent role in the implementation of the USDRP. The IUIDPs did not select participating local governments through a demand-driven or competitive process. For instance, all 35 local governments of East Java Province (except Surabaya city) participated in the SEJUDP practically by default, having to provide nothing more than a feasible subproject proposal. The USDRP set out to design an innovative approach, and it did so by inviting all local governments of Indonesia to compete for participation in the Project (see Additional Annex 10). This approach carried some inherent risks that were evidently underestimated (see below). Some revenue generating subprojects under the IUIDP program were financed through SLAs, at that time mostly limited to the subsectors of water supply and solid waste management. The finalization of those SLAs had always been very difficult and time consuming but this experience was not thoroughly evaluated in the preparation of the USDRP. Implicit hopes that these processes could be substantially shortened under the USDRP turned out to be somewhat unrealistic. Fund Channeling Options. The Project was appraised twice whereby the first appraisal considered a channeling of loan funds to the participating ULGs either through on- granting or through on-lending. By the time of the second appraisal GoI had formulated the policy that all loan funds should be on-lent only, with the argument that all local governments were already receiving considerable amounts of grant funding from central government in the form of “General Allocation Funds” (Dana Alokasi Umum – DAU). However, another local governance reform project implemented simultaneously with the 11 USDRP (the Initiatives for Local Governance Reform Project – ILGR) was not restricted to SLA funding. The QALP-2 Assessment stated that project design was unduly complex as it incorporated compulsory on-lending to ULGs. This requirement of compulsory on- lending was brought into the preparation process by GoI rather emphatically; rejecting it would have jeopardized project preparation and launch. In the PAD, the resulting risks of delays may have been objectively misjudged. Project Objective. The formulation of the Project objective, while highly relevant to the agenda and priorities in the CAS, was not as clear as it could have been in defining the project objectives (as reflected in the lengthy description in Section 1.2 and 1.3). The QEA7 assessment, carried out shortly after approval, noted that the PDO tended “to reflect the ambitious and grander objectives of the original project design rather than the more modest goals of the re-designed project.” The PDO could be interpreted as suggesting that the project would improve urban services broadly in the participating ULGs, and would be a central part of the national government’s decentralization strategy. The QEA7 assessment interpreted the actual objectives as being more narrowly targeted at using selected investments in urban services as one tool in the effort to improve the local governments’ governance and capacity to deliver services. While the project still facilitated the larger decentralization dialogue with the GOI, achieving improved services as a result of decentralization and better local governance was seen as a longer term agenda. This emphasis on selected services and on governance as part of the objective rather than a means toward achieving the higher level impact/outcome of improved urban services broadly, was reflected in the formal revision of the PDO, which better matched the project design and activities. Despite some lack of clarity in the PDO and even in the government’s decentralization strategy, there was strong government commitment to the principles of decentralization and local governance reform, as well as to the project as a method for piloting one mechanism and for achieving the governance outcomes and selected improvements in services planned under the project. The objective clearly responded to the borrower’s circumstances and development priorities, and it appeared realistic at the time of appraisal although it was somewhat demanding especially on the participating ULGs. Components. The two components together were highly suitable for achieving the anticipated outcome especially if the outcome is interpreted as being wider than the indicators that reflect it only to a limited degree. As discussed in more detail in Section 1.5 and other parts of the ICR, the project adopted an approach common to many development projects of combining reform and capacity building activities in parallel with infrastructure investments to enhance outputs and outcomes from both. While the higher level goal is that better governance and capacity will yield improved local services and, ultimately, more self-reliant cities, within the scope and time frame of the project, the selected urban investments are as important as a mechanism to help achieve and consolidate reforms (by giving a practical investment around which to apply the reforms) as they are beneficiaries of those reforms. Or as stated in the PAD, “lending reinforces 12 the reform process.” The Quality at Entry Assessment (QEA7) report echoed this concept clearly as well. It is difficult to capture this relationship between components in the Results Framework, which tends to give the impression that the two components were entirely independent of one another. However, as designed the two components together were highly suitable for achieving the project objectives, notwithstanding the late changes in project design and on-lending requirements. Though not sweeping in the range of services or associated benefits they sought to improve, the investment subprojects addressed real and important local service needs, and at the same time presented local governments with practical applications for their planning, supervision, procurement, financial management, participation, transparency, and accountability (governance reform) efforts. Government Commitment. GoI was and still is very committed to the decentralization and reform agenda, as evidenced by numerous bold steps it took, far beyond the design of this Project. It is also very committed to improve its handling of the challenges of urbanization. The commitment of participating ULGs appeared strong, too: they all had come to participate in the Project on the basis of their own application, in a demand- driven and competitive manner, and after a fairly rigorous selection process with defined entry criteria (listed in Additional Annex 10). Even so, the commitment of ULGs was not always consistent, evidenced by the fact that eight of them withdrew again from the Project within the first three years of the implementation phase. Executing Agency and Institutional Setup. The Directorate General Cipta Karya in the Ministry of Public Works was selected as Executing Agency (EA). This was a logical continuation of the long-standing and successful cooperation during the earlier IUIDP projects (see above). However, the EA had neither the expertise nor the full mandate nor the full range of required resources to guide and oversee comprehensive reforms in local governance. Therefore, the Project limited the scope of such reforms to “core reforms” that were considered relevant for projects within the sectoral interest of the EA, that were related to earlier reform efforts (see Section 1.1). Further, the Project intended to facilitate the creation of a platform for further future governance reforms by ULGs themselves. Still, the EA felt at times over-burdened and overwhelmed by tasks that are, strictly speaking, outside its mandate and responsibility. During project preparation, an Inter-Ministerial Steering Committee (IMSC) was set up that guided and supported the EA. Theoretically, one could have considered (or could consider for future operations of this kind) the establishment of Project Implementation Units (PIUs) in several national ministries. This, however, would increase the complexity of such a Project considerably. - The Project planning documents list the organizational units that were expected to handle Project implementation but in the initial stages of Project implementation there was a considerable degree of ambiguity regarding the exact function of each unit (or type of unit) and the expected interaction. Co-financiers. Component A was co-financed by a PHRD grant from the Government of Japan in the amount of US$5.00million. The PDO statement in the PHRD grant agreement is the same as in the IBRD loan agreement. 13 Risks and Risk Mitigation. The increasingly free and democratic nature of local government elections resulted in a certain degree of unpredictability that had been less pronounced under the more autocratic Soeharto administration. As a result, several ULGs decided to discontinue the participation in the Project during the implementation phase (see Additional Annex 11 for more details). To a certain extent, this is an inevitable risk of democratization (which in turn was a cornerstone of governance reform) and happened despite the very intensive communication and consultation with all interested ULGs during Project preparation and despite the formal agreements that had been made with the ULGs. At appraisal, only one risk was rated as ‘Substantial’, namely: “Political commitment and the limited capacity of participating ULGs to carry out reforms”. The corresponding mitigation measure was, to select participating ULGs on the basis of their strong and well-documented commitment to reform. Implicitly, this mitigation corresponded to a lesson learned from the Kalimantan UDP, i. e. the enormous importance of the commitment of local government leaders for the success of a project. However, this approach turned out to be still insufficient to guarantee that such commitment would continue to prevail throughout the Project implementation period. In some participating ULGs local government priorities changed, e. g. after fresh elections. Two other major conceptual risks are explicitly mentioned in the PAD, namely “political interference in subproject approval process” and “Investment selection may not be optimal”, and mitigation measure were specified. The risks posed by insufficient capacity of ULGs appear to have been seriously underestimated. Capacity limitations concerned not only political reforms (as identified) but likewise, and even more so, preparation of the SLA, the implementation of investment subprojects including the procurement of civil works and consultants and the handling of fiduciary aspects. Professional capacities of staff varied between ULGs but many of the participating ULGs had little, if any, experience or skills in managing Bank funded subprojects, especially with regard to the various procurement, safeguards and the fiduciary requirements. Political commitment alone is insufficient to compensate such capacity limitations. The envisaged participating ULGs were scattered all over the country, from Sumatra to Papua, far from one another and often in remote locations (see map on the last page of this ICR). Provincial governments could no longer be relied on to play a prominent role (see above).The burden of helping the ULGs overcome these limitations thus fell back to the EA at the central level and to the Bank team. The impacts of this were not fully considered in the Project design, and no adequate mitigation strategy was formulated. Further capacity limitations were encountered even at the national level during implementation, as evidenced by the severe delays in the procurement of consultant services. Thus, the mitigation measures for risk reduction appear to have been objectively inadequate; much more emphasis should have been put on pro-active, emphatic efforts to 14 overcome the capacity limitations at all levels, especially in a situation of imminent comprehensive governance reform with the introduction of new procedures. The required political commitment pertained not only to the implementation of governance reforms but also to the willingness to adhere to previously made commitments on borrowing, and in some cases this willingness was less consistent than had been anticipated which resulted in ULGs withdrawing again from the Project (see Additional Annex 11 for more details). Conclusion. It appears the project was not sufficiently ready for implementation at loan effectiveness, even besides the uncertainties mentioned above. The numerous risks inherent in the project design had not been identified and addressed with the necessary completeness. A shortcoming was that the procurement of critical TA was far behind the schedule that would have been advisable (some ToR were extensively re-discussed and revised until well into the third year of implementation). Also, the EA had established the CPMU but had not been able to fully staff it as required. All in all, quality at entry may have been less than satisfactory, as evidenced amongst others by the withdrawal of eight envisaged ULGs (i. e. more than half) in the first three years of Project implementation. The QALP-2 report rated the quality of design as moderately unsatisfactory. The QEA7 assessment rated overall quality at entry as moderately satisfactory and readiness of the first year’s program for implementation as satisfactory. However, it only rated Bank inputs and processes in preparation as moderately unsatisfactory. The higher overall quality rating was due to the rating of satisfactory for most aspect of project design (technical, financial and economic, environmental, fiduciary, policy and institutional, and risk assessment). However, with the benefit of observing the project’s actual implementation experience, both QALP-2 and the ICR identified greater shortcomings in project design, risk assessment, capacity, institutional arrangements, and readiness that were not as apparent at the time of the QEA7. 2.2 Implementation(including any project changes/restructuring, mid-term review, Project at Risk status, and actions taken, as applicable): Dynamic Project Environment. The Project was implemented in a rather dynamic environment. On the one hand, ULGs were not always able to implement the reform and enhancement agenda they had set out for themselves with the speed and completeness that had been intended. In fact, as mentioned above, some ULGs were not consistent in their commitment to the Project. On the other hand, national-level entities (both parliament and government) issued more and more new legislation pertaining to the reform agenda. Additional Annex 14 lists some of the major elements that had an impact on the Project. Institutional Arrangements. Prior to Project implementation, a Central Project Management Unit (CPMU) was formed within the EA, and Project Management Units 15 (PMUs) as well as Project Implementation Units (PIUs) within participating ULGs. The PMUs were typically units in the local development planning boards (Bappeda) but the PIUs were mostly in the local public works offices (Dinas PU). The Loan Agreement stipulated the formation of Provincial Project Management Units (PPMU) in five provinces but it was agreed in 2007 that a PPMU would be formed only in South Sulawesi Province. Initially, there was insufficient clarity regarding the exact roles of these units and the exact modalities of their interaction. However, during Project implementation, the EA clarified these ambiguities through a Decision of the Director General issued in June 2009 which achieved a marked improvement in the effectiveness of these institutional arrangements. In addition, the EA strengthened the CPMU considerably by deploying several full-time staff members including a full-time executive officer (pelaksana harian). Processing of SLAs and Release of SLA Funds. One main problem during implementation was that the processing of the SLAs turned out to be a very protracted process, much more so than had been expected. Reasons for this included:  participating ULGs first had to either repay or reschedule their outstanding debts to central government,  feasibility studies and other documents submitted by ULGs often failed to meet the required standards and had to be improved repeatedly (ULGs had no prior experience in preparing such documents and took some time to fully comprehend the procedures and related documents),  the government changed the modality for processing the SLA requests by replacing a crucial piece of legislation (code-named KMK35/2003) by another one (code-named PMK53/2006) that came into force right after the start of the Project and tightened the requirements. Another factor of substantial impact and beyond the control of GoI was that national parliament (DPR) demanded, unexpectedly towards the end of the implementation phase, that each individual SLA should be subject to parliament’s endorsement and the respective allocations in GoI’s annual budget (“DIPA”) be vetted by parliament. This affected specifically the ULGs Banda Aceh, Sawahlunto, and Morowali that had joined the Project in 2010 only. To optimize the relative timing of applying for funding and initiating procurement was a major challenge for the implementing agencies, i. e. the participating ULGs, particularly Banda Aceh, Sawahlunto, and Morowali. To the extent possible, these issues were mitigated by intensified communication with parliament. Delays in the processing of SLAs were not limited to this Project but were a generic problem of several other, similar projects as well which prompted the Bank to seek a dialogue with GoI on this issue. Capacity Limitations. Capacity limitations at local governments hampered implementation, and the disbursement speed anticipated in the PAD was unattainable. This problem comprised three facets: (i) professional capacities had chronically been 16 weak, and staff were almost totally inexperienced in handling foreign-funded projects, especially in local governments; (ii) already being weak, local governments faced a comprehensive set of new regulations they were very unfamiliar with; substantial time had to be devoted to just studying new regulations and gauging what degree of authority and discretion they gave to local governments; (iii) the governance reform efforts from 1999 onward included an emphatic drive against corruption and malfeasance, sometimes to the extent that even minor administrative errors were construed as deliberate mismanagement; this instilled a feeling of insecurity and fear among civil servants and discouraged them from being pro-active and taking bold action. This phenomenon became very relevant in the field of procurement. Initially, subproject managers strictly followed the regulation that procurement must not be initiated before the required funds have been approved and are available. In other words, the instruments available under ‘advance action’ were not used. It was a breakthrough when the EA decided that such ‘advance action’ would be permissible whereby procurement could be initiated and implemented to the point that draft contracts had been negotiated and were ready for signing by the time the required budget documents became available. Considerable efforts in hands-on training were required to equip ULG staff with the necessary skills. Project implementation was also slowed down considerably by the severe delay in the procurement of technical assistance packages. Even more than three years after loan effectiveness, the EA had not procured all required consultant services. A main reason for this slow progress was the insufficient staff time initially available in the CPMU which was corrected by the EA as describe above. Implementation Progress. As a result of the difficulties mentioned above, the speed and effectiveness of project implementation was much less than had been anticipated. Implementation progress was rated as satisfactory in 2006, moderately satisfactory in 2007, and moderately unsatisfactory throughout 2008 and 2009. The Project was classified as a Problem Project in FY2010. From 2010 onward, however, implementation progress was rated as moderately satisfactory again. Mitigation Efforts. The EA, with support from the Bank team, made substantial efforts to address the various hindrances to the smooth implementation of the Project, especially by refocusing and intensifying its own supervision efforts very substantially. In more or less monthly intervals, all participating ULGs were visited, guided, supported and supervised as needed, with particular emphasis on the monitoring of implementation progress (both of governance reform measures and investment subprojects) and adherence to safeguards (environmental, social, and fiduciary). Additional inputs from the Bank team were also made available to address the multitude of challenges. Mid Term Review. A Mid-Term Review of the Project, simultaneously Supervision Mission #7,was conducted from March to June 2009. It came to the conclusion that the Project was making acceptable progress towards achieving the PDO and that implementation progress could be rated as moderately satisfactory again, because (a) the 17 EA had managed to speed up the procurement of technical assistance and (b) the participating ULGs were making good progress with the governance reform efforts (Component A) and had speeded up the implementation of their physical subprojects (Component B), all with emphatic guidance and support from both the EA and the Bank team. The EA, with the support of the MoF and the National Development Planning Board (Bappenas), had committed to accelerate project processing by shortening subproject review procedures and SLA processing and by assisting the participating ULGs in expediting the procurement process. Still, an extension of the loan closing date was deemed indispensable. Project Restructurings. Thereupon, a first formal Project Restructuring was requested by the EA in August 2009; it became effective in June 2010 (see also section 1.3). This restructuring had a very positive effect on Project implementation because it gave the participating ULGs a better sense of the direction and intended results of the Project which enhanced political commitment and made relevant Project staff work in a more focused manner. Three more formal Project restructurings were effected in 2011 and 2012 with the following adjustments:  February 2011: partial cancellation of the loan amount (by US$6,565,000);  May 2012: extension of loan closing date from June 30, 2012, to May 31, 2013, and simplification of one of the three performance indicators for procurement reform;  November 2012: partial cancellation of the loan amount (by approx. US$294,000). A complete compilation of all amendments to the Loan Agreement is given in Additional Annex 12. Continued Mitigation Efforts. After the Mid-Term Review and the Loan Restructuring, sectoral national-level ministries (notably those for Home Affairs, for Trade, and for Transport) were involved more intensively, bearing in mind that most subprojects under Component B were markets and a bus terminal. The mitigation efforts mentioned above were continued and intensified, e. g. through the deployment of consultants to directly to participating ULGs and more focused guidance and monitoring. Systematic capacity building and training efforts were initiated, tailored to the critical needs of the ULGs (as identified through M&E, see Section 2.3). Where deemed beneficial, private sector entities were contracted to provide professional training on modern commercial management techniques for markets. Lastly, ULGs were enabled and encouraged to use advance procurement (see above). Implementation Efficiency. Implementation management efficiency for the implementation of the whole Project was reduced by several factors or developments, some of which were outside the control of project management; these were primarily: (i) the unexpected withdrawal of eight ULGs (of 13 listed in the PAD) from the Project; (ii) the unexpected difficulties and delays in getting the SLAs approved and the funds made available to participating ULGs; (iii) the substantial efforts needed to process the admission of additional ULGs to the Project. The high turnover in the participation of ULGs may have been caused by insufficient incentives (or disincentives). In any case, it 18 burdened the Project management entities (including the Bank team) very seriously as the preparations for the possible joining of additional ULGs had to be done in parallel with the implementation of the ongoing subprojects and activities. There was also a trade-off between regional coverage and implementation management efficiency. The Project had been designed to be open to any interested ULG from anywhere within Indonesia, and the eventually participating ULGs were scattered over a huge area several thousand kilometers across, with the result that each supervision mission had to be broken down into several submissions that altogether took several weeks to complete on each occasion. Similarly, support through consultants, as well as meetings of participating ULGs (for coordination, exchange of experiences, training/capacity building, and mutual support) were very time and resource consuming. 2.3 Monitoring and Evaluation (M&E), Design, Implementation and Utilization: Design Planned Institutional Set-up. The Project design, as outlined in the PAD, envisaged that M&E would take place both horizontally and vertically. Horizontally, the progress at the ULGs was to be monitored by the local stakeholders through the local DPRDs and Urban Forums. Vertically, the Provincial Project Management Units (PPMUs) within provincial Bappedas were to monitor implementation progress of ULGs within their domain on the basis of reports prepared by the PMUs (using information received from the PIUs) and report the results to the relevant entities at the national level (CPMU, CPFO and CPMO). It was surmised that most provincial Bappedas had prior experience with Bank projects, especially IUIDP projects, and thus some M&E capacity already existed within those agencies. Where required, additional capacity support was to be provided under the Project. CPMU and CPMO were to constantly monitor and evaluate outcomes and results of all participating ULGs and report their findings to the IMSC (as the national-level coordinating unit for policy matters) and the Bank. The indicators in the original Results Framework (RF) were appropriately linked to the project objectives, but while they included targets for the number of ULGs to meet certain goals, it did not provide specific or quantifiable measures for what constituted achievement of the goal. For example, saying that at least 10 ULGs would have “improved services” or “greater public availability of information,” but without defining how they would be measured, or what constituted satisfactory improvement (this was addressed during implementation through formal revision of the indicators). Implementation Actual Institutional Set-up. During project implementation, there was no CPFO nor CPMO involved. Instead, all M&E related work at the national level was done by the CPMU. A provincial-level PPMU was established only in South Sulawesi Province where it played, to some degree, a coordinating and consolidating role between the local and the national level. Effectively, the main interaction in terms of M&E and pertinent 19 information exchange took place between the PMUs and the CPMU. In the initial stages of Project implementation, the frequency and quality of reporting from the local level was very poor on the grounds of insufficient institutional capacities and the absence of supporting consultants. The situation improved after the deployment of “bridging consultants”. M&E Procedures. Beginning 2009, CPMU tightened and improved the Project implementation monitoring which gathered full momentum in 2010. Participating ULGs were required to report monthly on project implementation progress and raise crucial issues immediately (i. e. independently from the regular reporting schedule). In addition, ULGs had to furnish more comprehensive quarterly and semi-annual M&E reports to CPMU. CPMU also launched a dedicated interactive website through which participating ULGs could upload relevant information/documents. Field visits by project staff, Bank staff, and/or consultants as well as regular meetings of ULG staff were further instruments to improve and expedite the information flow and facilitate rapid responses to issues as they arose. These procedures turned out to be adequate and effective. Revision of Indicators. To address the lack of objective or monitorable standards for achievement of the indicators (mentioned in the previous section), the June 2010 restructuring defined more specific activities, outputs, and outcomes through which the indicators would measure improvement of services and governance reform. In the case of the governance indicators, this included better tailoring the specific reform elements to the needs, priorities, and capacities of the ULGs, as well as to changes in the legal and regulatory framework within Indonesia. Section 1.3 includes additional discussion of the revised indicators. Utilization The CPMU used the information thus gained to report as necessary to the MoF, the special cross-project unit (called the UP2HLN) within the EA for monitoring foreign- funded projects, the IMSC, and the Bank. Apart from reporting, the CPMU also used the information to extend written guidance and advice to the concerned ULGs (copied to the Bank team). Furthermore, the CPMU used the M&E findings to identify capacity weaknesses and design necessary capacity building measures. The M&E was also important in helping assess the relevance, feasibility, and effectiveness of various requirements in the urban reform component (as well as weaknesses in the indicators themselves) so that the June 2010 restructuring would help the project achieve better reform outcomes and also measure them more clearly. The IMSC used the M&E findings not only for its own information but also to help in decision making about the project (for example, the M&E reflecting the slow pace of preparation efforts by the ULG of Solok Selatan was instrumental to the decision to not include it in the project). Project Benefit Monitoring & Evaluation. A Project Benefit Monitoring & Evaluation (PBME) exercise was conducted before the end of the Project (see section 3.6 below). 20 2.4 Safeguard and Fiduciary Compliance: The project design did not include elements with extraordinary safeguards or fiduciary challenges. The handling of safeguards and fiduciary requirements was intensively monitored during all supervision missions and mostly found to be satisfactory or moderately satisfactory. No waivers from standard Bank policies were required. Safeguards compliance was never rated lower than moderately satisfactory and while there were some challenges and delays, the project went to considerable lengths to ensure compliance with Bank and safeguards policies and project-specific requirements. Social Safeguards Compliance. In the subprojects that focused on construction/reconstruction of markets, the main issue was the relocation of market traders, either to new markets at a different site, or to temporary markets and then back in the case of markets that had to be vacated while being rehabilitated or reconstructed on the same site. In all cases the available trading space had to be allocated through a fair, unbiased, and transparent procedure, and traders had to be moved without unduly comprising the interests of others. For all new facilities (including the bus terminal in Parigi Moutong and the fish auction market in Morowali) there was a need to agree with users on applicable tariffs (e.g. shop rents) and other aspects of sustained operation, management, and maintenance. Participating ULGs formed special relocation teams as well as separate monitoring teams, mostly for handling the moving of traders after transparent and participatory planning processes. Most of these teams discharged of their duties very well, which is especially remarkable in Pare-pare where a big market for around 1,800 traders was constructed. All in all, around 8,000 traders were involved in the relocation to the temporary markets and to the newly rebuilt markets. At project closing the process of moving the vendors back into the markets was not completed at many of the sites (as reflected in the Results Framework and in Annex 2). This was mainly due to the later than expected completion of the facilities. However, all negotiations and arrangements for the relocation into the markets had already been finalized and the delay did not in itself involve any compromise in safeguards compliance or performance. Although ensuring proper consultation, relocation arrangements, transparency, and fairness sometimes contributed to the delays, ultimately this helped ensure compliance and equitable outcomes. Environmental Safeguards Compliance. The management and monitoring of environmental issues (Environmental Management Plan-Environmental Monitoring Plan or UKL and UPL by their Indonesian abbreviations) was taken very seriously by the participating ULGs: their implementation had been made an obligation of contractors, and the construction supervision consultants had been tasked with monitoring the contractors’ adherence to these obligations on behalf of the ULGs. Quality and compliance monitoring helped effectively identify and quickly correct shortcomings, such as installing waste water treatment facility in the market in Palangkaraya to address the issue of wastes from the market zone selling pork meat. Apart from the regular advice during supervision missions, relevant ULG staff (mostly from the environmental offices – Bappedalda) were also given formal training through a workshop so that they could 21 competently oversee these processes. Remarkably, ULGs continued to report on the UKL and UPL efforts until well after the completion of their physical subprojects. Fiduciary Compliance. In the early stages of the project there were some moderate shortcomings in financial management performance, and for about a year FM was rated moderately unsatisfactory (May 2007 to August 2008). However, over time, and with external assistance, performance improved and the ULGs managed to meet the required compliance standards. Procurement plans were updated regularly, and contracts were awarded timely. The CPMU was responsive to suggestions from the Bank team during the procurement processes. Financial reports were submitted in a timely fashion and with sufficient quality. Submission of the audit reports was also timely, there were no qualified opinions, and all audit findings were addressed promptly. 2.5 Post-completion Operation/Next Phase: Commitments of ULGs. In the context of designing their exit and follow-up strategies, all participating ULGs have signed formal MoUs with the EA, committing themselves to complete any uncompleted activities (for instance, paving the parking lots and installing electricity) that had been planned to be financed by their local budget (APBD) such as the case of Sawahlunto, and sustain the achievements of the project. Continuous monitoring by the EA and the relevant sector ministries shall support and facilitate this commitment. Urban Reform (Component A). In all participating ULGs it is clear which administrative unit is responsible for continuing the activities and sustaining the achievements of the governance reforms in Component A and its mutually supportive elements of (a) clear and binding regulations, (b) an institutional set-up conducive to good governance, and (c) well-established actual practices. The ULGs have also identified the specific staff in charge of this responsibility. The sustaining and continuation of governance reforms is further facilitated by legislation and supervision from the national government, and by the pressure of increasingly public demand for better governance and transparency. None of the achieved reforms will burden the ULGs with disproportionate additional expenditure, and it can thus be expected that the necessary activities (e. g. the maintenance of the respective websites) will be undertaken and continued. Budget for the implementation of the integrated Local Economic Development / City Development Strategies has also been set aside. Urban Investments (Component B). All participating ULGs have formally tasked an institutional entity with managing, operating, and maintaining the assets created under Component B. In several cases (e.g., Palangkaraya and Morowali) it is a sector agency of the ULG, such as “Dinas Pasar” for markets or “Dinas Perikanan” for the fish auction market. In other cases (e.g., Sawahlunto and Pare-pare) it is a technical service unit of the ULG (Indonesian abbreviation UPTD) or a semi-independent service unit of the ULG (as in Banda Aceh). In Palopo, the management of the market, including O&M, has been outsourced to a private-sector entity. See Annex 2 for more details. All ULGs are expected to gradually provide adequate budget for sustained O&M of their subprojects, and budget allocations are expected to be much higher than previously. 22 Backstopping Support. In each province of Indonesia, the EA has established a Settlements and Buildings Development Information Center (PIP2B) to provide backstopping support for the province’s ULGs particularly as an information center in the province. In addition, several of these provincial PIP2B have been earmarked to function nationwide as “centers of excellence” with a specific focus area in a particular field, e.g. PIP2B in the Bali province is given a role as a “center for cultural building and heritage”; PIP2B in Yogyakarta province as a “center for disaster management”. In this context, the PIP2B in South Sulawesi Province is to function as the Center of Excellence for Urban Management for all ULGs in Indonesia. Incentives. To encourage and support participating ULGs in continuing the efforts they had launched under the project, sustaining governance reforms, preserving and further developing institutional capacity, and operating and maintaining the newly created physical assets, the EA intends to allocate “incentive projects” for 2014 and 2015 to ULGs that show effective efforts. The scope of such projects is to remain limited to the sectors for which the EA is genuinely responsible. Incentive projects will be implemented upon specific proposals from ULGs, provided they are consistent with the Medium Term Investment Development Plan (RPIJM) of the respective ULG. Longer-Term Nationwide Follow-Up. The IMSC has committed to continue the initiatives and activities that have been implemented in USDRP with some strengthening in participating ULGs and, more importantly, in other ULGs. Experiences and lessons learned from the project, particularly from activities implemented at the ULG level, should be used for further strengthening and improvement of the achieved KPIs and also expansion in other ULGs. Ministries represented in the IMSC, such as the Ministries of Finance, Home Affairs, or Trade, as well as the Government Procurement Policy Agency (LKPP), are expected to continue supporting ULGs in reforms pertaining to transparency, participation, and accountability, financial management reform, procurement reforms as well as subproject (especially market) management improvement, as relevant to their mandates. Lessons learned and experiences made in local reforms should be considered in future national regulations. Another project output was support to the preparation of Indonesia’s National Urban Strategy and Policy Development (NUSPD, or KSPPN by its Indonesian abbreviation) by Bappenas. This comprehensive policy document is being specified further in National Urban Development Programs (NUDP) that is meant to lay the groundwork for future urban development projects. The Bank continues to support these efforts. Upscaling. The USDRP was meant to be a first step (as stated in the PAD) in achieving the GoI’s long-term goal to develop self-reliant cities. The project was not immediately replicated or expanded in a similar manner, though, for the following reasons: (a) GoI found it more adequate to articulate the NUSPD mentioned above as the next step, and it intends to formulate plans for follow-on projects on the basis of a widely accepted NUSPD, and (b) the mechanism of channeling funds to ULGs through SLAs has been found to be somewhat impractical, and better alternatives should be explored for future, similar projects with more participating ULGs (see also Chapter 6, “Lesson Learned” #7). 23 3. Assessment of Outcomes 3.1 Relevance of Objectives, Design and Implementation: Relevance to Country Priorities. The Project was considered relevant at appraisal as well as at project completion (and throughout implementation). The QALP-2 Report rated “strategic relevance and appropriateness of objectives” as Satisfactory, but rated overall “strategic relevance and approach” (encompassing design as well as objectives) only as Moderately Satisfactory. The earlier QEA7 report also rated overall strategic relevance and approach as MS, but rated relevance of objectives as MS rather than S, partly due to lack of consistency of the PDO statement relative to the redesigned project, and uncertainties about the government’s evolving consensus on its own strategy. The trend to urbanization and calls for governance reforms (see Section 1.1) continued to challenge the capacities of ULGs, and it continued to be appropriate to support them through the mechanism and implementation arrangements identified during project preparation. Through the Project Restructuring, the KPIs became clearer and more relevant, especially in the context of the national governance agenda, well reconciled and synchronized with national policies. The revision of indicators, along with the revision to the PDO also largely addressed the shortcomings identified in the QEA7 report, in effect correcting the PDO (rather than changing the objectives). As the outputs and outcomes pertain to local governments they also support Indonesia’s longer-term decentralization agenda and help pave the way for self-reliant cities to emerge, as the PAD envisages. Relevance to CAS/CPS. The Project contributed to the implementation of the CAS valid at appraisal by (a) helping improve the investment climate and facilitating further investments, (b) helping improve the provision of services to the poor, and (c) supporting governance reforms.  The Project investments in markets have leveraged additional investments in four ULGs: in Palopo (private sector investment), in Sawahlunto and Pare-pare (local government investment), and in Sidenreng Rappang and Banda Aceh (national government investments);  The Project investments have been designed and implemented so as to provide opportunities for small/poor traders, including women, in numerous markets and to provide service and business opportunities to fishermen (many of whom are poor) in Morowali;  Component A was specifically designed and implemented to help reform local governance. The Project is also highly relevant for the CPS valid at ICR (it supports directly the principles “Pro Growth”, “Pro Jobs”, and “Pro Poor”). The trading sector contributes approx. 15% to the GDP. 24 3.2 Achievement of Project Development Objectives Achievement of PDO Definition of Objectives As reflected in the revised PDO, the project’s two principal objectives are to (a) strengthen local governance and (b) improve provision of selected urban services by the participating ULGs. While this seems straightforward, to better frame the discussion of achievement of the project objectives, it is worth providing further clarification or their origins, as reflected in the lengthy explanation in Sections 1.2, 1.3, and other parts of the ICR. The original definition of objectives was complicated by the change in project design in the late stages of appraisal, inconsistent versions of the PDO statement between the Loan Agreement and the PAD as well as within the PAD itself, and the failure of the original PDO to properly capture the project’s intended objectives after the redesign (as highlighted in the QEA7 report conducted shortly after approval). In short, the ICR adopts the conclusion of the QEA7 report, which determined that the project’s two objectives, even prior to formal revision of the PDO, were institutional development/capacity building and infrastructure development. These were selected from a set list of QEA options, and in the more open formulation of the project they would correspond to governance/urban reform and improvement in selected services financed by the project. In some respects, the QEA7 analysis tended to emphasize the role of the infrastructure investments in helping to facilitate the governance reforms more than the role of the reforms in improving services (within the context and timeframe of the project). Though not based directly on the QEA7 report, the June 2010 restructuring that formally revised the PDO essentially came to the same conclusion, explicitly restoring governance as an objective in the PDO, and qualifying improvement in services to be limited to “selected” services (i.e. those financing by the project). This is also consistent with the project’s theme codes, which counted municipal governance and institutional capacity as accounting for 50 percent of the project thematic focus. In the revised PDO formulation, while the improved services are an objective in themselves, they are also a reflection of the ULGs’ capacity to provide services since achieving or documenting broad improvement in local services is beyond the scope of the project. In this sense, the revised PDO should be considered more a correction of the PDO rather than a change in the project’s objectives. Also, while the revised governance indicators were not “promoted” to PDO-level in the results framework, it was clearly the intention of the restructuring that these indicators be used to assess achievement of the governance objective. This simple oversight does not change the proper role of the indicators in assessing achievement of the governance objectives. 25 Furthermore, by focusing more specifically on the project’s local outcomes, the revised PDO defined objectives that were more attributable, monitorable, and consistent with the actual project design. As stated in the QEA7, the approved PDO tended to “reflect the grander objectives of the original project design rather than the more modest goals of the re-designed project.” The passages in the lengthier version of the PDO from the PAD had implicitly linked the project objectives to the higher level impacts of broad improvements in local services, implementation of the overall decentralization goals, and long-term self-reliance of cities that were not achievable or attributable to a short-term investment, including demonstration of the causal linkage between better governance and improved services. Although this relationship was an underlying assumption of the project design, and indeed of Indonesia’s decentralization and service improvement strategy, the project’s objective was to achieve the more immediate first step of improving capacity to deliver services. Governance Achievement of the project’s governance objective was very strong, as measured by the indicators for Component A (Urban Reform and Institutional Support). Although the results varied between ULGs, overall the ULGs met or exceeded the clear and detailed targets in all the indicators for improving performance in the areas of:  Transparency, Participation, and Accountability  Financial Management practices  Procurement practices  Establishment of a Provincial Center of Excellence to support governance reforms  Development of Local Economic Development Strategies and City Development Strategies These results have had positive impacts in terms of public service delivery beyond the specific infrastructure investments financed by the project. They have also contributed to the national program on strengthening local governance and capacity by demonstrating the ULGs ability to implement such reforms and modeling one approach for doing so (see explanation below bullets #3 and 4). The project also supported the broader national agenda by establishing a regional Center of Excellence (PIP2B) to assist ULGs in their reform efforts, and by supporting preparation of Indonesia’s National Urban Strategy and Policy Development (NUSPD/KSPPN) by Bappenas. Following are some specific examples of the results for selected indicators (full details are in the results framework in the Data Sheet and in Annex 2):  Transparency and disclosure of planning documents and procurement plans through websites (on average 90% of the ULGs have achieved this indicator as compared to the target of 80%) has led to better program implementation and promote a more timely and competitive procurement. 26  Public feedback mechanisms (almost 100% of ULGs achieved this indicator as compared to the target of 80%) have speeded up the response to complaints and promoted better performance of local agencies in service delivery.  Adoption of various local regulations on financial management (100% of the ULGs have achieved the results indicators of the target 80%) has contributed better financial management and reporting which are part of the National Public Financial Management Reform.  Establishment of a procurement service unit and adoption of electronic procurement system (ULP and LPSE, respectively, —this is beyond the KPIs) in all ULGs has led to improved budget and staff efficiency and increased budget management and saving; the Project has promoted the establishment of ULP in advance of the requirements of the national regulation on procurement.  Creation of Local Economic Development (LED) plans and/or City Development Strategies (CDS) by the ULGs (100% ULGs have prepared LED Strategy as compared to the target of 60%) has increased dialogues between ULGs and the private sector and improved the synergy among local agencies in budgeting to achieve the shared objectives. Provision of Selected Urban Services Achievement of this objective is captured by the four formally designated PDO indicators in the results framework. While these outcomes are most directly linked to the infrastructure investments financed under Component B, their significance is not only the benefits and services they provide directly, but also the performance and capacity of the ULGs that is reflected in satisfactory completion of the investments, and can be expected to be applied to provision of other services in the longer term. At project closing (May 2013) all of the investment subprojects had been successfully completed, without significant shortcomings in construction quality, and in full compliance with environmental and social safeguards. However, due to the continuing process of relocating all the vendors into the new facilities, at ICR only five were considered fully operational (i.e., fully occupied), another five were partially occupied, and five were still unoccupied. In addition, since some facilities were completed only shortly before closing and most were not fully operational yet, indicators for revenue are obtained from subprojects that are used or in operation, and for operations and maintenance (O&M) are measured directly based on actual costs spent to maintain the markets (for those that have not been used, some ULGs still allocate and spend some budget to maintain the buildings and utilities). Satisfaction rates include results for both fully and partially occupied facilities. Though not yet reflecting the full outcomes of the project, one of the four indicators had been fully achieved at closing, while the other three had been partially achieved, and all are expected to be achieved once they are fully occupied again. For each indicator, the target is for 70 percent of participating ULGs with completed subprojects to meet the performance threshold for that indicator. So far: 27  Revenues — 40 percent of participating ULGs have increased or have vendor leases already in place that will increase their revenue from the facility by at least 10% due to the investment. Of those that have met the target already, such as in Sidenreng Rappang the revenues have increased by between 5 to 6 times higher than those of the old markets.  Operations and maintenance — 70 percent of participating ULGs have already increased their expenditures or have committed to increase in their budgets of at least 10 percent for O&M. The actual increase of the O&M in Palangkaraya is 1.5 times. The O&M in Sidenreng Rappang has increased two times on average in the last three years of operations, but this is still seen as insufficient given that the markets are now overcapacity.  User (vendor) satisfaction — In 60 percent of participating ULGs at least half of the vendors in the new facilities express increased satisfaction in doing business. This counts only the completed subprojects in which vendors have been moved back into the site and are conducting business. Vendors who plan to occupy the markets but have not yet begun conducting business were also surveyed and expressed satisfaction rates very similar to those for sites that are already used or operational. If these vendors were included, 100 percent of ULGs and 100 percent of facilities would meet the satisfaction target. In most cases, satisfaction substantially exceeded the target (refer to Annex 5), which ranges from 65% to 100%.  Consumer satisfaction — In 60% of participating ULGs at least half of the consumers express increased satisfaction in using the new facilities. This counts only the completed subprojects in which facilities are operational and already in use by consumers. Customers who plan to shop at the markets that have not yet been opened for business were also surveyed and expressed satisfaction rates very similar to those for sites that are already used or operational. If these results were included, 100 percent of ULGs and 100 percent of facilities would meet the satisfaction target. As with the vendors, substantially more than half the consumers surveyed (ranges from 53%-100%) in the sample were satisfied with the new facilities (refer to Annex 5). However, these figures do not fully reflect the projected outcomes from the completed works, because measurement of results does not yet capture all the benefits of completed subprojects that were not yet in operation (occupied by vendors) at the time the project closed. Based on these preliminary results, the targets for increased revenues, O&M expenditures, and vendor and consumer satisfaction are expected to be achieved in all or nearly all the of the 10 participating ULGs (which would exceed the 70 percent target, and equal the original quantitative target prior to the formal revision of indicators). Linkages between Outputs and Outcomes For both the governance and services objectives, there is an obvious linkage between the project outputs and achievement of outcomes. 28 In the case of the governance objectives, the mechanisms, financial and procurement practices/reporting, disclosure requirements and procedures, and development plans and strategies supported by the project are directly related to the outcomes (indeed, for this objective the outputs are themselves part of the outcome). Further indirect evidence of the governance and capacity objective is the performance of the ULGs in implementing and completing the infrastructure investments in a transparent, consultative, and accountable way, with good quality and in compliance with environmental and social safeguards requirements. For the selected urban services objective, the outputs (markets and terminals rehabilitated or reconstructed), are a prerequisite to achievement of the objective in terms of benefits provided by the facilities to both vendors and customers, as well as revenues to be collected by the ULGs. The O&M expenditures or budgets are both a measure of the sustainability of the investments, as well as a reflection of the ULGs capacity to manage the facilities and provide improved services on an ongoing basis. The project does not definitively establish or demonstrate a causal link between the outputs/outcomes of Component A and Component B. However, as discussed in previous sections, this is both an underlying assumption of, and longer-term, higher-level impact related to the project objectives, but was not intended to be attributable to or monitorable within the limited scope of the investment project itself. Outputs In the ULGs that participated until the end of the Project, local governance has indeed been strengthened (Component A), and provision of selected urban services has indeed been improved (Component B). Details on outputs are shown in Annex 2.  Nearly all the numerous indicators and sub-indicators pertaining to Component A have been met or exceeded. The sole indicator that was only partially achieved is the indicator pertaining to performance assessment of contractors, and the limiting factor here is the absence of a sound legal basis for such an assessment.  All investment subprojects under Component B have been completed, but in some ULGs there are delays in their utilization towards sustainable operation. Causal Relationships with Bank Intervention/Inputs There are clear causal relationships between Bank intervention/inputs and output achievement, and between output achievement and outcome achievement. Hence there is also a causal relationship throughout the entire results chain from Bank intervention/inputs through achievement of project objectives/outcomes. 29 3.3 Efficiency The Project’s overall efficiency assessment covers three aspects: (i) the efficiency in initiating local governance reforms, (ii) the average cost effectiveness of investment subprojects, and in addition (iii) the management efficiency of the implementation of both components (see also Section 2.1).  Component A. The efficiency in the implementation of Component A cannot sensibly be rated to the standards of an investment loan. The Project pioneered governance reforms for which there had been no precedent. This cannot be tangibly reflected in economic or financial figures, or in cost comparisons. The efficiency of the participating ULGs’ efforts in implementing governance reforms was enhanced by templates the project preparation team had drafted for the various decrees and regulations that the heads of ULGs or local parliaments were expected to pass as part of Project implementation. The efficiency was further enhanced by synergies between the USDRP and another local governance reform project, the ILGR, in the form of exchange of experiences and reconciliation of the reform efforts. On the other hand, serious delays in procuring consultants reduced the efficiency.  Component B. Efficiency in the implementation of Component B is considered moderately satisfactory, on the basis of the available data. As a precondition for the acceptance into the Project, all subprojects had to be directly revenue- generating with anticipated FRR estimated. Sufficient field data to recalculate the FRR at project completion is unfortunately not available in a quality that is comparable between ULGs. In some ULGs, net revenue obtained (i. e. gross revenue minus incremental expenditure for O&M) will probably suffice to cover the repayment of the SLA. In other ULGs there are signs that this may not be the case. This would imply that the expected FRR (as stated in the PAD) has not been achieved. This may be outside the control of Project management (e. g. PMU and even CPMU) because a major factor in the cost recovery are the user charges (e. g. shop rents) and these are often fixed by local parliaments on the grounds of political considerations. In any case, all projects were tendered competitively, with many safeguards against mismanagement deployed, and the costs were consistent with the cost norms of the construction industry in Indonesia.  Implementation Management. The efficiency of implementation management is not rated. Efficiency was certainly curtailed by the very low capacities of participating ULGs in combination with their extremely wide geographical spread. The low capacities required intensive support and tight supervision; at the same time, such support (e. g. through deployment of consultants or meetings of ULGs) and supervision (through regular and ad-hoc missions) was very time and resource consuming. However, the geographical spread was part of the Project design and beyond the control of the implementation managers. A regional clustering of subproject locations would have enhanced the implementation efficiency considerably but this would have been against the spirit of a demand- driven project open to all interested ULGs. 30 3.4 Justification of Overall Outcome Rating Rating: Moderately Satisfactory The overall outcome is rated as moderately satisfactory on the basis of the assessments presented above including their justifications:  Project was highly relevant for Indonesia’s political agenda as well as the CAS/CPS.  Achievement of the governance objective was very strong, with almost all ULGs meeting or exceeding the detailed targets for a range of improvement in different aspects of governance and capacity as a result of the reforms they adopted.  Achievement of the selected urban services objective was also good, though not as clear-cut as the governance objectives. Although all of the infrastructure/facilities were completed with good quality, transparent and consultative procedures, and sound procurement and financial management, only five of the facilities has been fully reoccupied by the returning vendors (except Palopo), five were partially occupied, and five were still unoccupied. However since the resettlement arrangements for temporarily relocated vendors were fully compliant with safeguard policies, and no problems or significant delays are expected in completing the relocation into the new facilities, the very positive preliminary results from the fully operational markets are expected in the remaining ones as well.  The efficiency of project implementation and achievement of outcomes, to the extent that the various aspects were amenable to such analysis, was moderately satisfactory. The objectives were not explicitly weighted in the PAD, and their relationship and importance is subject differing interpretations as reflected in some sections of the ICR (especially Sections 1.2 and 1.3). For purposes of the ICR they are given equal weight. Outcomes for both objectives are considered to be in the Satisfactory to Moderately Satisfactory range, though the case for governance being Satisfactory is stronger than for selected services. Given the incomplete data for performance of the completed markets that have not been occupied by vendors yet, selected urban services is only considered Moderately Satisfactory despite confidence that the targets will be met once the facilities are fully occupied and operational. Therefore, the overall rating is based on the lower of the two objectives. Outcome Rating against Original and Revised PDO The outcome is rated Moderately Satisfactory against both the original and revised PDO, with the comments/observations listed below.  As discussed in earlier sections, the formal revision of the PDO in effect was a correction to a poorly articulated PDO (rather than a change in the project’s actual 31 objectives) so that it would better capture the objectives logically implied by the project design, activities, and indicators. This view is validated by the QEA7 report completed shortly after approval, which noted the shortcomings in the formal PDO statement, and unambiguously identified two primary objectives corresponding closely to those eventually formalized via the Board-approved revision of the PDO in June 2010. In short, while technically the original and revised PDOs were different, the actual intended and recognized objectives were fundamentally the same.  Even absent this argument, the original PDO conceptually incorporated elements of capacity in its formulation by specifying provision of services by ULGs rather than the service themselves. Furthermore, the provision of selected services was determined to be MS in the final project, which logically means that the services- only formulation in the original PDO would also be MS even if interpreted literally.  The Project’s relevance is equally high for either PDO.  Although the number or ULGs in the original indicator targets was replaced by a percentage to reflect the changing number of participating ULGs, ultimately the targets for governance were met in all ten of the participating ULGs, and while targets for urban services are substantially short of ten ULGs, they are fairly close to the new target of 70 percent, and are expected to be close to 100 percent once the completed markets are fully occupied and operational.  The Project implementation efficiency rating would be the same for either PDO. Combined IBRD and PHRD disbursements at the time of the revision were about $18.1 million, which equals 36 percent of appraised costs and 44 percent of the final disbursed amount. However, since the rating is MS against both the original and revised objectives, the overall rating is also MS regardless of the percent disbursed at the time of revision. 3.5 Overarching Themes, Other Outcomes and Impacts: (a) Poverty Impacts, Gender Aspects, and Social Development The Project was not to address primarily issues of poverty, gender equality, or social development, and it has not significantly altered pre-existing conditions in these fields. There were no negative side effects in any of these fields, and pro-active efforts were made to incorporate poverty, gender, and other social development aspects to the extent feasible. Poverty Orientation. As mentioned in Section 3.1, Project investments were carefully designed and implemented so as to provide opportunities for small-scale/poor traders (many of whom are women) in markets and to provide service and business opportunity to the fishermen (many of whom are poor) in Morowali. In market subprojects, a fixed quota of the total trading space was set aside for small-scale/poor traders who operate on 32 very small plots of floor space rather than in kiosks or shops. This low-cost variety of trading also benefits low-income shoppers. Gender Aspects. Data collection on existing traders in markets was disaggregated by gender to help ensure women would not be disadvantaged during the reallocation of trading space in the new markets. The participation of women in capacity building events was typically 9-25%. Other Social Development Aspects. A number of subprojects were carefully designed to provide access to mobility impaired people, e. g. by providing access ramps (see Additional Annex 16). (b) Institutional Change/Strengthening: Improved Procedures and Practices. Institutional changes including the establishment of improved procedures and the introduction of improved practices were the very focus of Component A. This was very successfully implemented, as is documented in the achievement of the relevant KPIs. Urban Institutional Development Program. The original concept of an Urban Institutional Development Program (UIDP) as a national-level entity/facility was modified during the Project restructuring. The revised output achieved is the establishment of a provincial-level PIP2B in South Sulawesi Province as a Center of Excellence for Urban Management, complete with a viable work plan, as described in Section 2.5. Local Economic Development / City Development Strategies. Under Component A, the Project supported the ULGs in preparing integrated Local Economic Development/ City Development Strategies. Guidelines to this effect were compiled by Project consultants. The finalization of these works by ULGs and the allocation of budget to start their implementation is a success in institutional strengthening with a potential long-term benefit. Pare-pare city passed its Local Economic Development / City Development Strategy in the form of a Regional Regulation (“Peraturan Daerah – Perda”). Urban Development Coordination Team. An Urban Development Coordination Team (“Tim Koordinasi Pembangunan Perkotaan” – TKPP) was formed at the national level in 1987 in connection with the IUIDP projects (see Section 1.1). With the phasing-out of the IUIDP projects, that team became defunct. Under the USDRP, the idea was revived and the coordinating team re-established in 2010, as “Tim Koordinasi Pembangunan Perkotaan Nasional (TKPPN)”, led by Bappenas. (c) Other Unintended Outcomes and Impacts (positive and negative): Withdrawal and Addition of ULGs. An unintended negative development was the withdrawal of eight ULGs during the first few years of Project implementation. This had a negative impact on the Project as it diverted resources that had been meant for implementation management, and it had a negative impact on the ULGs themselves 33 because the resources they had expended on preparing their participation in the Project had thus been wasted, and they missed out on the benefits that the continued participation in the Project would have given them. Leveraging of Additional Investments. A positive outcome that had not necessarily been expected at appraisal was the successful leveraging of additional investments, as mentioned in Section 3.1. 3.6 Summary of Findings of Beneficiary Survey and/or Stakeholder Workshops: Beneficiary Surveys. The Project included a Project Benefit Monitoring & Evaluation (PBME) exercise, and a comprehensive PBME report was completed in May 2013, based on enquiries made and surveys conducted in each participating ULG and at the location of each subproject. The PBME report concludes that Component A has been implemented quite successfully and that the aimed-at satisfaction levels of users of assets created under Component B had been achieved or would be achieved once these assets had been put into operation and could be utilized. The findings of the PBME surveys, interpreted very conservatively, were used to document the achievement of the PDO indicators. See also Annex 5. Local Stakeholder Workshops. Besides numerous stakeholder workshops during Project implementation, each participating ULGs conducted an exit strategy workshop, with representatives of the EA and the Bank in attendance (refer to Annex 6). ULGs signed MoUs with the EA and committed themselves to:  continuing to work towards the achievement of any as-yet-unattained target even beyond the loan closing date,  improve further the governance reform results achieved so far, and  sustain/maintain the successes achieved in either Project component. National Stakeholder Workshop. In addition, a final national-level project stakeholder workshop was implemented in May 2013, co-chaired by the Director of Program Development in the EA and the Director of Urban and Rural Affairs in Bappenas. In this workshop, the EA committed itself to providing the incentives projects mentioned above (see Section 2.5), and Bappenas confirmed its commitment to articulating a national urban development policy document. 4. Assessment of Risk to Development Outcome Rating: Moderate Risks to the Development Outcome. Most kinds of potential risk to the development outcome can be considered low to moderate, and it can be expected that they will even decrease further over time. Investment Subprojects. Where investment subprojects were markets, their social and political acceptance as well as their technical and economic feasibility are not in doubt. All investment subprojects have been technically completed to the point that there is no 34 significant hindrance to their operation. Some participating ULGs have yet to make arrangements that will fully guarantee the long-term optimum management and the sustained financial viability (from the ULG’s perspective) of the newly created assets. Even so, it can reasonably be expected that pressure from civil society / intended beneficiaries would not allow ULGs to leave these assets idle for too long, as their potential benefit for the public is so high and so obvious. The need to raise funds for the repayment of the SLA will increase the pressure on ULGs even further. On the other hand, there is indeed a risk that ULGs may not provide sufficient budget for adequate O&M on a sustained long-term basis and/or that the management of the facility may be less than optimum. This is an endemic problem in Indonesia, and this risk to the sustainability of the subprojects cannot be denied. Governance Reform. In this field, the Project outcome is mainly the introduction of improved practices by/in participating ULGs. The overall political climate of Indonesia will most probably remain favorable for sustaining these reforms and developing them even further. 5. Assessment of Bank and Borrower Performance 5.1 Bank (a) Bank Performance in Ensuring Quality at Entry: Rating: Moderately Unsatisfactory. Correct Assessment of Context. The Bank team identified and assessed some of the trends and challenges as well as opportunities and threats for the project fairly correctly during preparation stage. Acceptable Handling of Most Other Aspects. Most of the aspects that need to be covered for project appraisal were handled adequately (e. g. country context analysis and conformation of government commitment). In hindsight, several of the FRRs derived from the feasibility studies that applying ULGs had submitted appear to have been rather optimistic estimates, but this was probably not obvious at the time of appraisal. Project Design Flaws. However, there were some significant design flaws that could possibly have been avoided. The PAD mentions only briefly the possibility of the withdrawal of some ULGs and/or the later participation in the Project by other ULGs, apparently without realizing how resource consuming the handling of these processes would be. Because of this misjudgment, rather insufficient resources were allocated to the handling of these processes by both the government and the Bank team. The QALP-2 report already mentioned the undue complexity of the Project (i. e. its reliance on on-lending for the implementation of the investment subprojects) as a design flaw. However, GoI had insisted on this modality which was beyond the Bank team’s influence. The risk management during preparation phase can be regarded as inadequate, especially with regard to (1) correctly assessing the capacity limitations at all levels of 35 government and designing sufficient mitigation measures to address these, and (2) anticipating further changes in the legal framework for fiscal decentralization. Besides the design flaws mentioned in the QALP-2 report, and with the benefit of hindsight, numerous other risks and potential pitfalls can now be identified (see Section 2.1). The stakeholders designing the Project may not have been at fault but they objectively misjudged the Project environment in several aspects and objectively underrated a number of significant risks which is why the project design contains insufficient risk mitigation efforts. Several risks became evident only during implementation and had to be addressed in an ad-hoc manner which put a serious strain on Project management. (b) Quality of Supervision(including of fiduciary and safeguards policies): Rating: Moderately Satisfactory Challenges. During implementation, the Bank team had to deal with several major challenges the seriousness of which far exceeded the challenges of routine supervision:  There was a high degree of uncertainty and fluctuation in the interest and ability of ULGs to participate in the Project. The factors that led to the withdrawal of eight ULGs (see Additional Annex 11) were beyond the control of the Bank team. Vice versa, five ULGs joined the Project during implementation stage, and the processes of admitting them (verifying that they met the entry criteria and assisting them in preparing their subprojects) were very resource consuming.  The changing of general rules for on-lending to sub-national governments by MoF and the slow processing of SLAs were beyond the control of the Bank team. Pursuing a reform agenda in implementing agencies inevitably implies a discontinuation of established and familiar practices which tends to generate a feeling of disorientation. This cannot be held against the Bank team per se, but the likelihood of this happening and the resulting consequences should have been considered better during preparation, and a more realistic implementation and disbursement projection should have been made. This aspect touches upon the quality at entry. Performance. Full-blown, comprehensive supervision missions were conducted twice a year. Besides these, smaller thematic missions were conducted as needed. Supervision increasingly focused on development impact and achievement of the PDO, besides assessing the implementation progress. In assessing the latter, supervision missions did not limit their work to simply registering the production of sub-outputs (e. g. a Mayor’s Decision required) but ventured into checking carefully the completeness, adequacy, and quality of such sub-outputs. Monitoring of participating ULGs’ adherence to fiduciary and safeguards policies and related guiding /corrective action were fully adequate. In those few cases where corrective action was required it was initiated without undue delay. The Bank team made very intensive efforts to facilitate the transition to post- completion operation and utilization/application of the outputs and/or sub-outputs achieved under either component in every local government. Candor and quality of 36 performance reporting were of high standard which is evident from the comprehensive and very detailed aide memoires and Implementation Status Reports prepared after each mission. Despite intensive supervisions, the Bank team and the other stakeholders overlooked the need to formulate suitable PDO-level indicators reflecting the outcome of the governance reforms. However, the primary fault was not in actually formulating the indicators, but failing to designate some of them as PDO-level rather than intermediate indicators. As reflected in other sections, and in accordance with the guidance of OPCS and IEG in the OPCS Guidelines and other ICR preparation clinics and training materials, rather than mechanically following the letter of the Results Framework, the ICR in fact uses these as indicators to assess achievement of the governance objective in the PDO, as was likely intended in the Restructuring Paper and project design. Other shortcomings in supervision were only minor. Inputs were comparatively high because the participating ULGs were very scattered which was an inevitable implication of the Project design. (c) Justification of Rating for Overall Bank Performance: Rating: Moderately Satisfactory. This aggregate rating of 5.1(a) and 5.1(b) takes into consideration that the outcome rating is in the satisfactory range. 5.2 Borrower Performance (a) Government Performance: Rating: Moderately Satisfactory Justification of Rating. The overall rating takes into account that government performance showed significant shortcomings during the preparation stage and early implementation stage but improved markedly during implementation and showed only minor shortcomings after that. Hereby, government institutions involved in the project were not only the EA but also other national-level entities including the IMSC and the MoF. Government ownership was strong throughout, evidenced by several instances of emphatic corrective action in response to problems, and stakeholder consultations before appraisal were adequate. Executing Agency. The EA performed well during the preparation stage but was not sufficiently ready when Project implementation began. This is evidenced e. g. by the insufficient staffing of the CPMU which resulted in serious delays to the recruitment of consultants. The QALP-2 report mentioned this deficiency already. Over time, however, the EA provided the CPMU with more/better staff resources who were deployed full- time, and the CPMU’s performance improved markedly. It goes to the EA’s credit that it worked with high dedication on issues that are, strictly speaking, not its mandate (governance reforms and local economic development) and achieved a remarkable degree of success. In addition, the EA communicated intensively with parliament to expedite the release of SLA funds (see Section 2.2), supported ULGs intensively in their procurement (e. g. by deploying staff to a local tender committee), promoted the modality of advance 37 procurement, and provided substantial budget for capacity building. Also, the EA published “USDRP – Promoting Urban Self-Reliance: Reflection of the USDRP Implementation” (see Additional Annex 15 for more details). Although the EA’s performance towards the end of Project implementation could be rated as satisfactory, overall during Project implementation its performance is rated moderately satisfactory. Other National-Level Entities. Project preparation was hampered when GoI changed the rules for the funding of prospective subprojects (see Additional Annex for more details 14). This undermined the interest and commitment of ULGs to participate in the Project (see also QALP-2 report). The processing of the required SLAs took an unexpectedly long time, not the least because ULGs found it difficult to meet the required quality standards of documentation. Both shortcomings put additional stress on the EA’s resources during preparation and implementation. The IMSC provided very useful oversight and guidance to the Project although one might argue that a smaller size would have made it more agile and able to reach necessary decisions more quickly. (b) Implementing Agency or Agencies Performance: Rating: Moderately Satisfactory Background. The ULGs as implementing agencies showed mixed performance. Of the thirteen ULGs considered participating at appraisal, eight withdrew during Project implementation before commencing their physical subprojects and disbursing any loan funds for these. More details are given in Additional Annex 11. The performance of those ULGs can thus not be assessed. In most of these cases, newly elected political leaders discontinued the commitment shown by earlier ULG leaders but this cannot necessarily be classified as poor performance because this discontinuation was sometimes a reaction to developments beyond the control of the ULGs (e. g. shifts in the political stance of local parliament following local elections). On the other hand, five additional ULGs joined the Project after loan effectiveness, i. e. during implementation stage. None of these dropped back out again. Justification for Rating. General commitment was high among the ULGs that participated in the Project until completion. However, they were not sufficiently ready for implementation by loan effectiveness. This was mainly a problem of low awareness of the requirements and low capacity of available staff. In mitigation, participating ULGs made very substantial efforts to gain the necessary knowledge and overcome the capacity bottleneck with help from the EA and the Bank team. Participatory processes (especially with regard to moving traders) and fiduciary requirements were handled well, and there was substantial willingness to address arising issues in a timely manner which is documented in the sequence of aide memoires from the supervision missions. Component A. All ULGs have achieved – in most cases even over-achieved – the agreed-upon target indicators for reforms of local governance (Component A). Component B. All 15 investment subprojects (Component B) have been physically completed as planned, and more than half have been put into operation, although often 38 not with the desirable speed and effectiveness. Some participating ULGs have yet to make fully sufficient institutional arrangements for their potentially sustainable operation and management but these efforts are continuing and demonstrate an unbroken commitment to the Project. Capacity Deficiencies. The objective performance of Project management staff of participating ULGs particularly the PMU, PIU and the Tender Committees, was often affected by a lack of experience in handling World Bank rules for procurement and safeguards management. These deficiencies appear to have been underrated, and mitigating measures appear to have been under-designed during Project preparation. The efforts of the CPMU during project implementation to directly assist the ULGs and provide series of procurement training were instrumental to overcome the deficiencies. (c) Justification of Rating for Overall Borrower Performance: Rating: Moderately Satisfactory This is the aggregate rating of 5.2(a) and 5.2(b) above, based on the aspects and arguments listed there. 6. Lessons Learned (both project-specific and of wide general application) The most prominent lessons learned are: 1. Project implementation was successful owing to the high commitment of the EA, especially the CPMU, ULGs, and the key role of the IMSC. On the other hand, the involvement of sectoral ministries could have been stronger. 2. The creation of a platform for local governance reforms works best through a combination of (a) legally binding regulations, (b) adequate institutional arrangements, (c) actual practices, and (d) strengthening the capacity of “champions”, supported by (e) a system of incentives and disincentives. 3. Lessons learned and experiences of local governments should have been considered as inputs to the relevant national legislations, so that the reform agenda is tailored to local situation and realistic. 4. Peer-to-peer learning and on-the-job training are two capacity building schemes that can be more effective than traditional, formal training. Training with outputs that are to be implemented by the ULGs under the Project was quite effective to achieve the KPIs. 5. Implementation of subprojects will be more successful if aspects of eventual long- term operation (especially management set-up and funding) are considered from the preparation. 39 6. Capacity building activities should be given more attention; this includes the participation of agency leaders (Kepala Dinas) and local parliament members. 7. Funding of local subprojects through SLAs tends be convoluted and protracted; future projects should consider alternative funding mechanisms, i.e. among others, a financial intermediary facility when numerous local governments are involved. 8. When determining the readiness for implementation during the appraisal process, one key aspect to expedite the start-up of project implementation is to promote the advance procurement prior to loan effectiveness. 9. The trade-off of benefits between a project being open to all ULGs and regional clustering should be considered very carefully at appraisal, bearing in mind the inefficiencies that could result from regional scattering of project locations. 10. In a situation of great political flux and administrative restructuring, and in the midst of an emphatic reform drive aimed at democratization and decentralization, prudent project design will anticipate a slower-than-usual implementation and disbursement. Project design should also (a) design a mechanism and (b) assign resources for dealing with unforeseen developments, e. g. (1) changes in commitment of ULGs or (2) requests from further ULGs to join the project. The views of a number of important stakeholders, as expressed in a publication issued during Project implementation, are quoted in Additional Annex 15. 7. Comments on Issues Raised by Borrower/Implementing Agencies/Partners (a) Borrower/implementing agencies: The Executing Agency provided its Project Completion Report, which is summarized in Annex 7, as well as comments on the Bank's ICR. The Bank appreciates the Borrower's inputs and feedback in preparation of the ICR, and that we generally agree with the findings and conclusions reflected in Annex 7, and have no specific response to the issues raised. (b) Cofinanciers: N/A (c) Other partners and stakeholders (e.g. NGOs/private sector/civil society): N/A 40 ANNEXES Annex 1. Project Costs and Financing (a) Project Cost by Component (in US$ million equivalent) Appraisal Actual /Latest Percentage of Components Estimate Estimate Appraisal (US$ million) (US$ million) A. Urban Reform and Institutional 9.00 10.33 115 Support B. Urban Investment 52.12 42.17 81 Unallocated 2.00 0.00 0 Total Baseline Cost 63.12 52.50 83 Physical Contingencies Price Contingencies Total Project Costs 63.12 52.50 83 Project Preparation Facility (PPF) 1.30 1.20 92 Front-end fee (IBRD only) 0.23 0.23 100 Total Financing Required 64.65 53.93 83 Note: Annex 5 of the PAD included allowances for physical and price contingencies (and taxes and duties). However, all other costing of components in the PAD rolled these contingencies into the component costs, except for $2 million in unallocated funds. Therefore they are not included here so that there is greater consistency with the baseline costs in the component descriptions in the PAD, and to give a clearer picture of appraised and actual costs for the components. (b) Financing Appraisal Actual/Latest Percentage of Source of Funds Type of Financing Estimate Estimate Appraisal (US$ million) (US$ million) Government of Indonesia Joint 0.90 1.90 211 Local governments (ULGs) Joint 12.45 9.95 80 IBRD 45.00 36.38 81 Japan PHRD WB-administered 5.00 4.50 90 TF (joint) Project Preparation 1.30 1.20 92 Facility (PPF) Total Financing 64.65 53.93 83 Note: Actual/latest IBRD financing does not include $0.13 million in unused funds that were disbursed to the project Special Account and were still in the process of being returned to the Bank at the time of the ICR (may cause discrepancy with disbursed amount in ICR Data Sheet). 41 Annex 2. Outputs by Component Component A — Urban Reform and Institutional Development: Attainment of Outputs Reflected in Indicators As mentioned in Section 3.2, the outputs/outcomes related to the governance reform objectives were quite strong, in most cases exceeding both overall goals and individual subparts of the main indicators. Originally the targets were to be achieved in 10 ULGs. This was later revised to a percentage of participating ULGs with completed subprojects. Except for systematic evaluation of contractor performance and public recognition of the best performers, the overall targets were achieved for all main targets, and in a number of cases 100% (10 ULGs) met the requirement. The first table below summarizes the results for each participating ULG in the three main dimensions of governance reform. The second table shows the aggregate results for all ULGs broken out by each of the detailed goals or requirements within each indicator. Many of the ULG outputs/outcomes listed (and rated in general terms) below can be verified in the ULGs’ website, where much of the underlying information is published. The URL addresses for the websites of all participating ULGs are list in Annex 13. The ULGs rated Satisfactory (++) significantly exceeded the individual targets in the respective indicators. Those rated Moderately Satisfactory (+) came close to the targets, in some cases exceeding them and in others falling slightly short. The ULGs rated Moderately Unsatisfactory (-) achieved meaningful improvements, but were still significantly short of the individual targets. Governance Reform Indicators (results by ULG) No. Transparency, Participation, ULG Financial Management Procurement Accountability Target 1 Target 2 Target 3 Target 1 Target 2 Target 3 Target 1 Target 2 Target 3 1 Cimahi ++ ++ ++ + ++ ++ ++ ++ - 2 Palopo ++ ++ ++ ++ ++ + ++ ++ + 3 Pare-Pare ++ ++ ++ ++ ++ + ++ ++ ++ 4 SidenrengRappang ++ ++ ++ + ++ + ++ ++ ++ 5 ParigiMoutong + ++ - ++ ++ + ++ ++ - 6 Palangkaraya ++ ++ - + + - ++ ++ + 7 Barru ++ ++ ++ + + - ++ ++ + 8 Sawahlunto ++ ++ ++ + + + ++ ++ ++ 9 Morowali + ++ - ++ + + - ++ + 10 Banda Aceh ++ ++ ++ ++ ++ - ++ ++ - Target 3 in “Financial Management” was not included in formal KPIs. Values: ++ Satisfactory + Moderately satisfactory -Moderately unsatisfactory 42 Governance Reform Indicators (results by requirement) Result   Indicator  (% of ULGs)  Comment  Transparency, Participation and Accountability  Target 1 ‐ Transparency      At least 80% of ULGs post semi‐annual updates on websites or in printed media on:  Local development activities/programs   100  Exceeded  Mid‐term Development Plan (RPJMD)  90  Exceeded  Summary of Local Budget ( APBD)  70  Nearly achieved  Audited Annual Financial Report   70  Nearly achieved  Procurement plan for the on‐going fiscal year   100  Exceeded  Contracts awarded in the past six months  80  Exceeded  Target 2 ‐ Accountability      At least 80% of ULGs have public feedback mechanisms in place including:  At least one type of media(s) used for public complaints   100  Exceeded  Specific unit responsible for complaint management  100  Exceeded  Standard Operating Procedures (SOP) for public complaints handling  90  Exceeded  Target 3 ‐ Participation      At least 50% of participating ULGs achieve either:  (i) Allocation of block grants to kecamatan and/or kelurahan from the  ULG and/or from at least one agency with Standard Operating  Procedure for the use of block grants through participatory planning  80  Exceeded  (ii) Indicative budget for financing development activities proposed  through participatory development planning process or musrenbang  Financial Management  Target 1 – At least 80% of Participating ULGs Issue local regulation (PERDA or Decree  100  Exceeded  or Perbup/Perwal) on Principle of Regional Financial Management  Target 2 – At least 80% of Participating ULGs Issue of local regulation (PERDA or  Decree or Perbup/Perwal) on Policies, Systems, and Procedures for the  100  Exceeded  Preparation and Execution of APBD  Target 3 – At least 80% of Participating ULGs post audited annual financial reports in  70  Nearly achieved   public media every six months  Procurement  Target 1 – In at least 60% of Participating ULGs, at least 75% of bids awarded within  Exceeded   90  bid validity period and publicized in public domain, e.g. website, local bulletin  (for both targets)  Target 2 – In at least 60% of Participating ULGs, at least 50% of tendering committee  100  Exceeded  members have national procurement certification  Not achieved   Target 3 – At least 60% of Participating ULGs announce in public domain and award  (40% have criteria;  the contractors/suppliers with best performance at least once a year in at least  30  30% conducted  one local agency using the agreed criteria  evaluations)  All participating ULGs also prepared integrated Local Economic Development / City Development Strategies, which was another of the formal outcome indicators for Component A. 43 At the provincial and national level, the Project’s outputs included (only the Center of Excellence was included in the formal Results Framework):  a provincial-level “Center of Excellence” for Urban Management has been established and operationalized in South Sulawesi,  the National Urban Development Coordination Team, previously defunct, has been re-launched,  the preparation of a national urban development policy document has been initiated. Other Outputs In addition to the formally approved output / outcome indicators, the project monitored a number of other aspects of ULG performance that further support the conclusion that the implementation of governance reforms was successful. Other Project outputs attained under Component A include the following:  intensive and successful capacity building efforts have enabled relevant ULG staff to deal with o the requirements for achieving the core governance reforms under the Project, o improved construction design (including earthquake resistance), construction planning and construction management, o procurement procedures under World Bank rules and procurement reforms which were implemented and achieved prior to the requirements of the national regulation on procurement, o sound financial management in general and compliance with World Bank requirements for reforms and in line with the existing government regulation, o social safeguards requirements for World Bank funded projects (mainly pertaining to temporary and permanent resettlement), o environmental safeguards requirements for World Bank funded projects (mainly pertaining to environmental mitigation and monitoring for small projects), o improved sustainable management of assets, especially markets, o preparation of Local Economic Development /City Development Strategies. Further achievements in local governance reforms that can be associated with the Project include the following:  all participating ULGs have established Procurement Anchor Units,  all participating ULGs have centralized procurement in one dedicated unit,  all participating ULGs have adopted standard bidding documents,  all participating ULGs have improved procurement related information and services, 44  all participating ULGs have issued a local regulation on improved transparency,  most participating ULGs have issued a local regulation on sound financial management procedures and practices,  most participating ULGs have issued a local regulation on public participation in decision-making,  most participating ULGs have strengthened the roles of their respective urban forums or other platforms for participatory planning. Component B — Urban Investments: The table below lists the 15 investment subprojects completed by the 10 participating ULGs. At approval, 13 ULGs were included in the project, but due to the changes in local governments, challenges to finalizing subsidiary loan agreements and other factors, 8 of the original ULGs eventually withdrew, and 3 new ULGs entered the project. As with the governance indictors, originally the investment targets were based on 10 participating ULGs achieving the targets (75% of the participating ULGs), but due to the changing number of participants, the quantitative targets were changed to percentages, though in the end many some of the indicators met both the percentage target and the original numerical target. Some markets of the completed markets are in high demand, resulting in oversubscribed or overused. This situation is obvious for the three markets in Sidenreng Rappang which was already overcrowded. It was reported that number of traders has continued to increase since the markets were opened. Local Government has to expand the market by its own budget, and the Ministry of Trade also built a new market next to USDRP’s market. In addition, the market in Pare-pare also generated high-demand as the number of traders that subscribed for kiosks/lots have been higher than planned. Information on the capacity of each market or number of traders in each market is presented in the Table below. For the markets that have been used (in operation) such as in Sidenreng Rappang, Palangkaraya, and Palopo, the numbers are actual, while for the yet to be used markets, the number indicates the plans. It is clear that markets in Sidenreng Rappang were overcrowded indicating high demand, and if number of traders continues to increase, this could reduce the service quality of the facilities. In the case of Parepare, the new market’s capacity is higher than the plan, showing that there was expansion during construction to accommodate the growing number of traders. The facilities that are listed as partially used, or not yet used in the table below, reflect completed markets where the final stage of moving the vendors back into the markets has not been completed (however, all agreements and terms related to the final relocation are finalized and the delay does not reflect shortcomings in safeguard compliance or performance). Almost all the markets are fully equipped and functional, but in a few cases utilities not financed or implemented under the project are still being connected. In some of them, vendors have begun moving their goods into the kiosks while utility connections are still pending. 45 In addition, in some cases local governments are still finalizing details of the tariff (rent) structure for the new facilities, or election of a new mayor or municipal government has delayed the final administrative steps in the process of occupying the buildings. Status and Capacity of Each Subproject Investment No. ULG Subproject Actual Investment Operational Number of Traders/Kiosks in mio US$ Status as at Data as of May 31, 2013 (subproject loan + ICR Old Rebuilt/New local budget) 1 Kota Cimahi Pasar Atas Baru 1.88 Partially used - 468 Market*) 2 Kota Palopo Pasar Besar Market*) 7.52 Fully used - 379 3 Kota Parepare Pasar Lakessi Market 7.57 Partially used 1,761 (FS) 2,038 4 Pasar Pangkajene 1.18 Fully used 2,040 (FS) 2,181 Market Kab. 5 Pasar Rappang Market 2.05 Fully used 1,564 (FS) 2,110 SidenrengRappang 6 Pasar Tanrutedong 1.02 Fully used 1,690 (FS) 1,794 Market 7 Pasar Parigi Market*) 2.34 Not yet used 175 (FS) 463 Kab. ParigiMoutong 8 Toboli Terminal 0.71 Fully used n.a n.a 9 Kota Palangkaraya Pasar Kahayan Market 2.54 Partially used - 279 10 Pasar Pekkae Market*) 2.70 Not yet used - 97 11 Pasar Mangkoso 1.22 Not yet used - 50 Kab. Barru Market*) 12 Pasar Palanro Market*) 1.59 Not yet used - 56 13 Kota Sawahlunto Pasar Sawahlunto 2.19 Partially used 608 (FS) 836 Market 14 Kab. Morowali Fish Auction Market 2.22 Not yet used n.a n.a (TPI)*) 15 Kota Banda Aceh Pasar Aceh II Market 4.90 Partially used 261 (total Phase 2 with connected buildings 1,312) Notes: FS (based on the Feasibility Study); *) New facilities/markets; Source: Aide Memoire #13, and other sources. One case study (Market Reconstruction in Sawahlunto) is described in more detail in Additional Annex 16. The subproject in Banda Aceh is part of a bigger, integrated market development project that became necessary because the old market had been completely destroyed by the tsunami of December 2004. The first phase was constructed with assistance from the Government of Japan, the second phase was constructed by USDRP, and the third phase is being implemented with funds from GoI. All three phases are physically integrated, and the new market as a whole will be managed by a dedicated, semi-independent entity, namely a Local Government Public Service Board (Badan Layanan Umum Daerah - 46 BLUD). This is the first time in Indonesia that a BLUD has been tasked with managing a market. Specifically in Palopo, the management of the new market including O&M has been outsourced for 25 years to a private sector entity after a transparent and competitive procurement procedure. With this, the risk has been transferred away from the ULG, and the ULG will have a more predictable cash flow as the basis for repaying its SLA. Original and Revised Indicators The project indicators were formally revised through a Board-approved restructuring in June 2010. This mainly involved dropping original indicators and replacing them with ones that the Bank and Borrower agreed were more monitorable and would better focus the project activities and better reflect its outcomes. In most cases, targets without clearly defined or measurable goals, or which were based on secondary plans and feasibility studies unique to each ULGs or subprojects, were replaced with more universal but still specific and quantifiable ones. Since the indicators themselves were changed rather than the targets, reflecting the revisions in the Data Sheet is not practical. Therefore the comparative matrix from the project Restructuring Paper is reproduced below in order to give a full accounting of the indicator and demonstrate the relationship of the revised indicators to the original ones. 47 Key Performance Indicators Prior and After Project Restructuring in 2010 Original Outcome Indicators   Original Targets   Revised Outcome Indicators  Revised Targets  Status at Restructuring  At least ten (10) ULGs improve   Year 3 : 5 ULGs   (i) Increase in ULG revenues from urban  At least 70 % of participating ULGs that  (information to be collected  priority urban services in areas   Closing (Year 5) : 10  services financed by the project   have completed the subproject:  during the PBME survey that  financed with USDRP support  ULGs   (ii) Increase in  expenditures for O and M of  (i) Increase their local revenue by at least  will be carried out at the loan  infrastructure financed by the project)  10% that due to the investment.  closing date)  (iii) increase satisfaction of the users for  (ii) Increase their O&M expenditure by at  doing business  least 10%  (iv) increase satisfaction of consumers in   (iii)  at least 50% users express increased  using the facilities built through project  satisfaction of doing business  investments  (iv)  at least 50% consumers express    increased satisfaction of using the  facilities    Part A: Urban Reform   Greater public availability of   Year 3 : 5 ULGs   Transparency, Participation and  At least 80% of Participating ULGs post the  Percentage of Participating  information, especially related to   Year 5 : 10 ULGs   Accountability  specified information at six month intervals  ULGs post the specified  plans, strategies, budgets,      information at six month  financial and procurement  Percent of ULGs that post semi‐annual updates  intervals:  information audits, service fees in  on websites or in printed media providing  (i) 40%  at least  10 (ten) ULGs   information on:  (ii) 10%  (i) Local development activities/programs   (iii) 40%  (ii)  Mid‐term Development Plan (RPJMD)   (iv) 40%  (iii)  Summary of Local Budget ( APBD)   (v) 10%  (iv)  Audited Annual Financial Report     (v)  Procurement plan for the on‐going fiscal  year and  contracts awarded in the past  six months  48 Original Outcome Indicators   Original Targets   Revised Outcome Indicators  Revised Targets  Status at Restructuring  Participating ULGs have public   Year 3 : 5 ULGs   Participating ULGs have public feedback  At least 80% of Participating ULGs have in  100% of seven ULGs have  feedback mechanisms in place   Year 5: 10 ULGs   mechanisms in place including:  place (i) and (ii)  achieved (i);  and, none has  (consultation, grievance  (i) The use of at least one type of media(s)    achieved (ii)  resolution, etc)  for public complaints which is managed by  complaint handling unit  (ii) Availability of Standard Operating  Procedures (SOP) for public complaints  handling    Participating ULGs have   Year 3 : 5 ULGs   (i) allocation of block grants to kecamatan At least 50% of Participating ULGs achieve  10% of seven ULGs have  participatory planning processes   Year 5: 10 ULGs   and/or kelurahan from the ULG and/or  (i) OR (ii)  achieved (i) or (ii)  and public consultations/hearings    from at least one agency with Standard    held re: strategies, plans and    Operating Procedure for the use of block  budget  grants through participatory planning, OR  (ii) indicative budget for financing  development activities proposed through  participatory development planning  process or musrenbang  Number of ULGs practicing sound   Year 3 : 5 ULGs   Participating ULGs practicing sound Financial  At least 80% of Participating ULGs achieve  50% of seven ULGs have  financial and procurement   Year 5 : 10 ULGs   Management  (i) and (ii)  achieved (i); 30% of seven  management practices     ULGs have achieved (ii)   (i) Issuance of local regulation (PERDA or    Decree or Perbup/Perwal) on Principle of  Regional Financial Management   (ii) Issuance of local regulation (PERDA or  Decree or Perbup/Perwal) on Policies,  Systems, and Procedures for the  Preparation and Execution of APBD   49 Original Outcome Indicators   Original Targets   Revised Outcome Indicators  Revised Targets  Status at Restructuring      Participating ULGs practicing sound  At least 60 % of Participating ULGs achieve  60% of the seven ULGs have  Procurement  (i), (ii) and (iii)  achieved (i) and (ii) and no      ULG has achieved (iii)  (i) min. 75% of the bids be awarded within       the bid validity period, and publicized in  the public domain, e.g. website, local  bulletin  (ii) min 50% of tendering committee  members have national procurement  certification  (iii) announce in public domain and award  the contractors/suppliers with best  performance at least once a year in at  least one local agency using the agreed  criteria  The Borrower implements UIDP.  75% in each year of  Center of Excellence At least 1 Province has (i)  and  (ii)  No province has (i) and (ii)   Percentage of  UIDP’s annual  implementation        Business Plan undertaken  (i) “Unit Informasi Pembangunan  Permukiman dan Bangunan” or UIP2B  functioned as a Provincial Center of  Excellence to support reforms in the ULGs  in the province   (ii) Work Plan for the Provincial Center of  Excellence or‐ UIP2B  Local Economic Development and City  At least 60% of Participating ULGs have (i)  No Participating ULG has (i)  Development Strategy  and at least 50% of Participating ULGs  and (ii)    having the LED‐focused City Development    (i) Local Economic Development (LED)‐City  Strategy  achieve (ii)  Development Strategy developed by    participating ULGs  (ii) ULGs implemented 10% of activities  specified in the City Development  Strategy of ULGs   50 Original Outcome Indicators   Original Targets   Revised Outcome Indicators  Revised Targets  Status at Restructuring  Part B: Urban Investments  ULGs prepare and implement  Year 1 : USD 10.4 M  Participating ULGs implemented subprojects:  100% of Participating ULGs signed SLAs  Seven Participating ULGs have  subprojects in infrastructure  Year 2 : USD 31.3 M      signed SLAs,   services worth a minimum of  Year 3 : USD 46.9 M  (i)  Participating ULGs sign Sub‐ project Loan  At least 80% of Participating ULGs    US$52.1 total during the project  Year 4 : USD 52.1 M  Agreements (SLAs) with Ministry of  completed construction of urban  Three Participating ULGs  period  Finance for urban investment  investment subproject  completed subprojects.  subprojects;    (ii)  Participating ULGs complete construction  of urban investment subprojects  51 Annex 3. Economic and Financial Analysis The Project has 15 subprojects, 13 of which are markets. This ICR present an example of Economic and Financial Analysis for a rebuilt market in Sawahlunto. A. Project Objectives As part of the Urban Sector Development Reform (USDRP), the objective of this project is to revitalize Sawahlunto traditional market. Further, it is also aimed at increasing the competitiveness of traders in the traditional markets as well as creating more jobs for those living in Sawahlunto area. This is expected that the project to have a positive impact beyond the construction of the market, since the market is located in the middle of the city it will generate more economic activity. The integrated financial and economic analysis of the project starts with a description of project cost and revenue forecasting over 20 years period and then conducts cost-benefit analysis. The financial analysis assesses the financial sustainability of the proposed project under different cost and revenue assumptions. B. Project Costs Total investment loan agreed and disbursed for this project is 17.5 billion Rupiah or equal to US$152 million1 or equal to 94.09% from the whole investment intended for construction. The loan will be used for constructing new stores, kiosks, stalls, cafeteria and other supporting facilities. Table 1: Proposed Investment and Installment Loan Ceiling 17,500.00* Loan Life (year) 20 Grace Period (year) 5 Interest Rate 7.00% Commitment Fee 0.75% Disbursement Schedule : - Year 1 40% - Year 2 60% *Note: Rupiah, Million In order to analyze the full costs of the project, annual operating and maintenance (O&M) costs for the Sawahlunto traditional market investments under this Project were included in the analysis. Operational and maintenance costs for the market include waste management, cleaning service, building maintenance, personnel costs, and the cost for electricity and water. Project investments would have a service life of at least 15 years. Table XX below summarize the estimated project costs. 1 Assumption US$1=Rp11,500 52 Table 2: Estimated project costs (Rupiah, Million) year 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 Investment 7000 10500 O&M 400.2 403.2 409.2 412.83 416.82 599.31 429.14 434.45 443.84 537.77 544.85 731.7 565.26 574.67 589.71 601.11 876.14 632.82 632.82 Total 7,000.00 10,900.20 403.20 409.20 412.83 416.82 599.31 429.14 434.45 443.84 537.77 544.85 731.70 565.26 574.67 589.71 601.11 876.14 632.82 632.82 C. Overview of Financial Revenue Projection The benefit or revenue of the project was based fairly on conservative assumptions with respect to tariffs and occupancy rate. The analysis does not include benefits that are complex to quantify such as economic spill-over to formal and informal sectors and multiplier effect to the surrounding economy. Revenue streams from this project are assumed coming from several elements such as:  Store rental: the rent varies from 5.5 million rupiah/year (3x3 Meters) to 7.5 million rupiah/year (3x4 Meters). The market management predicts that 213 old vendors will occupy the 308 new stores. 50 traders outside the market will be relocated inside the market and it is estimated that the market could attract as many as 45 new traders.  Cafeteria: The area is around 160 m2 and estimated to be able to accommodate approximately 16 food vendors with an annual rent/unit of 8 million rupiah.  Parking: Parking inside the market provides spaces to around 25 trucks, 40 cars, and 150 motorcycles per day. Tariff imposed by the operator varied from 1000 rupiah to 5000 rupiah depends on size of the cars.  Stalls location: Stalls and street vendors will have to pay for an extra rent amounting to 2 million Rupiah per year; although, local government will be responsible for this costs.  Waste & Sanitation plus MCK (Restroom) levy  Billboard advertising: Advertising tariff is flat at 45000 Rupiah/meter/year. It is estimated that revenue generating from advertising will reach 15 million Rupiah/year.  Terminal: Tariff varies depending on the service provided by the operators. Table 3: Estimated Project Revenues (Rupiah, Million) Rent from USDRP Kiosk, stalls, Parking Waste & Advertising Year loan stores Levy Sanitation Levy MCK Levy Tax Total 2010 7000 7000 2011 10500 1790.6 53.9 70.44 79.2 15 12509.14 2012 2046.4 88.24 112.7 134.64 15 2396.98 2013 2303.2 86.24 112.7 134.64 15 2651.78 2014 2430.1 111.33 143.7 161.57 21.6 2868.3 2015 3069.6 111.33 143.7 161.57 21.6 3507.8 2016 3069.6 117.88 152.15 171.07 21.6 3532.3 2017 3069.6 144.09 182.58 205.29 31.1 3632.66 2018 3069.6 153.04 192.72 216.69 31.1 3663.15 53 2019 3683.52 153.04 192.72 216.69 31.1 4277.07 2020 3683.52 188.24 231.27 260.03 44.79 4407.85 2021 3683.52 188.24 231.27 260.03 44.79 4407.85 2022 3683.52 188.24 231.27 260.03 44.79 4407.85 2023 4420.22 231.54 277.52 312.04 64.5 5305.82 2024 4420.22 231.54 277.52 312.04 64.5 5305.82 2025 4420.22 231.54 277.52 312.04 64.5 5305.82 2026 4420.22 284.79 333.03 374.44 92.88 5505.36 2027 5304.27 284.79 333.03 374.44 92.88 6389.41 2028 5304.27 284.79 333.03 374.44 92.88 6389.41 2029 5304.27 284.79 333.03 768.59 185.75 6876.43 D. Cost-Benefit Analysis The Net present value (NPV) is a monetary estimate, in today’s term, of the generation of net benefits over the life of a project. Typically projects with positive NPV are seen as favorable. The NPV of this Project investments were then calculated or the Project as a whole, over a period of 20 years (2011-2029). The discount rate used was 11.45 percent based on the sum of interest rate and commitment fee. For illustrative purposes, the internal rate of return (based on net financial benefits) was also calculated, to show the discount rate at which net present value would be zero. The results of the cost-benefit analysis are summarized in Table XX below. The Project NPV over above mentioned period of time, at a discount rate of 11.45 percent, is estimated at 8,060 Million Rupiah, with an internal rate of return (IRR) of 18 percent. Table 4: Benefits, costs and net present value for Project investments (Rupiah, Million) NCF Base no year revenue O&M Case 1 2010 7000 -7000 2 2011 2,076.64 10,900.20 -8823.56 3 2012 2,396.98 2651.78 2868.3 4 2013 2,721.18 409.2 2311.98 5 2014 2,961.50 412.83 2548.67 6 2015 3,601.00 416.82 3184.18 7 2016 3,625.50 599.31 3026.19 8 2017 3,761.69 429.14 3332.55 9 2018 3,791.29 434.45 3356.84 10 2019 4,405.21 443.84 3961.37 11 2020 4,565.45 537.77 4027.68 12 2021 4,565.45 544.85 4020.6 13 2022 4,565.45 731.7 3833.75 14 2023 5,499.66 565.26 4934.4 15 2024 5,499.66 574.67 4924.99 16 2025 5,499.66 589.71 4909.95 54 17 2026 5,743.79 601.11 5142.68 18 2027 6,627.83 876.14 5751.69 19 2028 6,627.83 632.82 5995.01 20 2029 7,114.86 632.82 6482.04 NPV 11.45% 8,060.01 IRR 18% Absolute Number 58,789 Recommendation Feasible E. Sensitivity Analysis The sensitivity of the project’s net financial benefits was analyzed with respect to two financial variables and divided into three different scenarios. The first analysis is if there is an increase in operational and maintenance costs by 10 percent. Second and third scenarios are if there is a decline in revenue stream of 10 and 20 percent, respectively. The results of this sensitivity analysis are presented in Table XX below in terms of three cases. The results of the sensitivity analysis reveal that the overall net benefits of the project are relatively insensitive to an increase of cost as well as considerable decreases in income. The main conclusion to be drawn from this analysis, therefore, is that the project is financially feasible given the three scenarios. The internal rates of returns for the three cases are between 13.89 to 17.51 percent. Table 5: Benefits, costs and net present value for The Three (Rupiah, Million) Sensitivity Analysis of Net Cash flow Case 1 Cost Case 2 Revenue- Case 3 Revenue- no year +10% 10% 20% 1 2010 -7000 -7000 -7000 2 2011 -8823.56 -8823.56 -8823.56 3 2012 2013.94 1808.514 1562.768 4 2013 2271.06 2039.862 1767.744 5 2014 2507.387 2252.52 1956.37 6 2015 3142.498 2824.08 2463.98 7 2016 2966.259 2663.64 2301.09 8 2017 3289.636 2956.381 2580.212 9 2018 3313.395 2977.711 2598.582 10 2019 3916.986 3520.849 3080.328 11 2020 3973.903 3571.135 3114.59 12 2021 3966.115 3564.055 3107.51 13 2022 3760.58 3377.205 2920.66 14 2023 4877.874 4384.434 3834.468 15 2024 4867.523 4375.024 3825.058 55 16 2025 4850.979 4359.984 3810.018 17 2026 5082.569 4568.301 3993.922 18 2027 5664.076 5088.907 4426.124 19 2028 5931.728 5332.227 4669.444 20 2029 6418.758 5770.554 5059.068 NPV 7,172.7 5,087.0 2,702.1 IRR 17.51% 15.88% 13.89% Amount Number 56,991.7 49,611.8 41,248.4 Comment Feasible Feasible Feasible 56 Annex 4. Bank Lending and Implementation Support/Supervision Processes (a) Task Team members Names Title Unit Responsibility/ Specialty Lending Aniruddha Dasgupta Infrastructure Sector Coordinator EASUR Task Team Leader Hiroaki Suzuki Lead Operations Officer EASUR Task Team Leader Balakrishna Menon Senior Urban Specialist TUDUR Urban Specialist Indira Dharmapatni Senior Operations Officer EASUR Operations Rizal H. Rivai Senior Procurement Specialist EAPCO Procurement Novira K. Asra Financial Management Specialist EAPCO Financial Management Yogana Prasta Senior Disbursement Specialist EAPCO Disbursement Naoya Tsukamoto Senior Environmental Specialist EASES Environmental Farida Zaituni Environmental Specialist EASES Environmental Anthony G. Toft Chief Counsel LEGEA Legal Renganaden Soopramanien Senior Counsel LEGEA Legal Isono Sadoko Social Development Expert EASES Social Development Janet I. Hohnen Sector Coordinator for HD EAHD Sector Coordinator Jerry G. Strudwick Senior Education Specialist EAHD Education Susiana Iskandar Education Specialist EAHD Education Mary C. Dutch Senior Program Assistant EASUR Assistant Kaori Ikeda Financial and Institutional Analyst EASUR Financial Isna Marifa Environmental Consultant Environmental Gottfried Roelcke Urban Planning Consultant Urban Planning John Buyers Municipal Engineering Consultant Municipal Engineering Henry Cooke Municipal Engineering Consultant Municipal Engineering Inneke Herawati Program Assistant EASUR Assistant Names Title Unit Responsibility/ Specialty Supervision Hiroaki Suzuki Lead Operations Officer EASUR Task team Leader Dean A. Cira Lead Urban Specialist EASUR Task Team Leader Rajagopal S. Iyer Urban EASUR Task Team Leader 57 Indira Dharmapatni Senior Operations Officer EASIS Task Team Leader Dea Widyastuty Operations Analyst EASIS Urban Governance Specialist Sulistiowati Ms. Consultant EASIS Resettlement Specialist Novira Kusdarti Asra Sr Financial Management Specialist EASFM Financial Management Specialist Evilia Nusi Team Assistant EACIF Team Assistant Purnomo Sutantyo Consultant EASIS Urban Specialist/Engineer Rizal H. Rivai Procurement Analyst EAPPR Procurement Analyst Melinda Good Chief Councel LEGES Legal Yogana Prasta Operations Adviser EACIF Operations Adviser Andrew Daniel Sembel Environmental Specialist EASIS Environmental Specialist Enggar Prasetyaningsih Procurement Analyst EASR1 Procurement Analyst Dayu Nirma Amurwanti Consultant EACIF Better Governance and Anti- Corruption Specialist I Gusti Ngurah Wijaya Kusuma Financial Management Analyst EASFM Financial Management Specialist Isono Sadoko Consultant EASID Social Safeguards Specialist Nita Sarwani Consultant EASIS Procurement Reform Specialist Achmad Affandi Nasution Consultant EACIF Anti-Corruption Specialist Iswandi Imran Consultant EASIS Building Construction Krisnan Pitradjaja Isomartana Environmental Specialist EASIS Environmental Specialist Aswin Hidayat Consultant EASFM Financial Management Specialist Krisnan Isomartana Environmental Specialist EASIS Environmental Specialist Virza S. Sasmitawidjaja Consultant, Environmental EASIS Environmental Specialist Specialist Edward Lubis Consultant EASIS Financial and Asset Management Specialist Eiji Oyamada Consultant Kaori Nagai Consultant Vivianti Rambe Consultant EASIS Environmental Specialist Teuku Radja Sjahnan Consultant EASFM Financial Management Specialist 58 Staff Time and Cost Stage of Project Cycle Staff Time and Cost (Bank Budget Only) No. of Staff Weeks US$ Thousands (including travel and consultant costs) Lending FY 2001 17.08 149,426.80 FY 2002 27.02 132,660.42 FY 2003 32.67 117,937.28 FY 2004 90.99 442,057.73 FY 2005 41.87 147,937.92 TOTAL: 209.63 990,020.15 Supervision/ICR FY 2006 25.45 101,166.46 FY 2007 23.41 77,524.98 FY 2008 21.66 68,906.05 FY 2009 16.42 87,977.54 FY 2010 16.90 85,690.64 FY 2011 19.87 58,796.12 FY 2012 11.48 57,038.28 FY 2013 26.69 71,318.92 TOTAL: 161.88 608,418.99 59 Annex 5. Beneficiary Survey Results The Project included a Project Benefit Monitoring & Evaluation (PBME) exercise, and a comprehensive PBME report was completed in May 2013. Beneficiaries’ surveys were carried out for traders and consumers for markets, as well as drivers and passengers for a terminal, both are facilities under Component B (urban investment). Its findings are summarized below. To assess the benefit (or, more accurately, the user satisfaction and perception of usefulness) of the markets and the terminal constructed under the project, between 60 and over 200 persons were interviewed in each subproject location. In the case where assets had not yet been used or put into operation, only a smaller number of respondents were interviewed (30 traders and 30 shoppers) but where facilities were already used (in operation) 103 traders and 103 shoppers per location were interviewed. At the Toboli Terminal in Parigi Moutong, 30 drivers and 30 passengers were interviewed. The responses were positive to very positive, with very high degrees of user satisfaction. No interviews were conducted at the fish auction market in Morowali because it was still under construction when the PBME field surveys were implemented. In those locations where subprojects had not yet been put into operation, interviewees were asked whether they would consider the assets useful and would feel more satisfied (compared to the old subprojects) when the rebuilt subprojects were in operation. Although it was rather a perception, the responses were generally positive but are still of speculative nature. Prima facie, the results of the PBME surveys, with the provisions mentioned above, showed the aimed-at satisfaction level of more than 50% (as specified in the KPIs but in fact, in most cases very much higher) in all subproject locations and for all groups of respondents. Even so, the Project team has excluded from its assessments responses that pertained to facilities that were not yet in use or in operation. Furthermore, the Project team also excluded the survey results of the markets in Sawahlunto and Banda Aceh in the calculation in the Results Framework, as they have been only in partial operation at the ICR, and therefore the survey results of satisfaction done prior to the Project closing were only reflecting the perceptions of the beneficiaries/users prior to the use of the markets. The same treatment applied for other ULGs whose facilities were not in operation/used by Project closing. At the time of Project closing presented in the Table below, six ULGs had 7 markets and one terminal that were fully used or partially used. The survey suggested that in these eight subprojects, 65% to 100% of users (traders/drivers) have increased their satisfaction by using the new facilities, and 53% to 100% of consumers/passengers have increased their satisfaction with the new facilities. On average, 82 % of traders/drivers and 82% of consumers/passengers have increased their satisfaction in using the new facilities. Overall, for all subprojects if they were all in use/operations, it is expected that the average increased satisfaction is 80.5% and 82.2%, for users and consumers, respectively. 60 Beneficiaries Satisfaction Survey Results % Satisfaction (more satisfied with new or rehabilitated facilities vs original) Kota/ Traders/ Consumers/ Kabupaten Sub Project***) Status** Drivers Passengers Kota Cimahi Pasar Atas Baru Partially used 100 100 Kota Palopo Pasar Besar Palopo Fully used 95 100 Kota Pare-pare Pasar Lakessi Partially used 90 65 Kab Sidrap Pasar Pangkajene Fully used 65 53 Pasar Rappang Fully used 67 82 Pasar Tanrutedong Fully used 71 80 Kab Parimo Pasar Parigi* Not used 65 73 Terminal Toboli Fully used 91 83 Kota Palangkaraya Pasar Kahayan Partially used 80 97 Kab Barru Pasar Pekkae* Not yet used 75 81 Pasar Mangkoso* Not yet used 63 67 Pasar Palanro* Not yet used 52 61 Kota Sawahlunto Pasar Kota Sawahlunto* Partially used 100 100 Kab Morowali TPI Bungku* Not yet used 93 91 Kota Banda Aceh Pasar Aceh II tahap 2* Partially used 100 100 AVG 80.5 82.2 Source: EA’s Project Completion Report, page 151-152 based on the PBME Study, 2013. Notes: (*) Beneficiaries’ anticipated satisfaction levels (or perception of satisfaction levels) when the subprojects were in operation. (**) At the time of ICR / Project closing, markets in Sawahlunto and Banda Aceh were partially in use. Satisfaction survey was done at Project closing, therefore the beneficiaries satisfaction results for these two markets are considered anticipated or perception of satisfaction levels (as the case of all other ULGs with (*)) and therefore are not counted in the Results Framework. (***) Construction of all subprojects financed under the Project was completed at the Project closing of May 31, 2013. 61 Annex 6. Stakeholder Workshop Reports and Results Local Stakeholders Workshops. Besides numerous stakeholder workshops during Project implementation, each participating ULG conducted an exit strategy workshop which was carried out simultaneously with the project completion mission in April 2013, with PMU, PIU and other stakeholders as well as representatives of the EA and the Bank in attendance. The objectives of the Exit Strategy Workshop were to: (a) discuss and agree positive results that needs to be implemented continuously; (b) discuss and share lessons learned from failures or shortcomings experienced during project implementation; (c) agree to complete all remaining activities to achieve the KPIs prior to project closing date; (d) discuss and agree with ULGs on the continuation and/or expansion of the governance reform activities beyond the project closing by their own. The workshops revealed that (a) All ULGs were happy and useful with the activities supported by the project and the results as of to date despite some difficulties they had been facing during implementation. For instance, reform activities have strengthened the directions and milestone to be achieved as specified in the KPIs, have established a platform to carry out reform activities further, and have established same perception on governance reform amongst all stakeholders in the executive (and to a certain extent in the legislative). Some ULGs have experienced positive impacts of the reform in other sector. For instance, the implementation of procurement by an ULP (Procurement Unit—all procurement below certain threshold is centralized in this unit) in Sawahlunto with intensive and regular monitoring has improved the budget evaluation and planning due to better information of savings from the tenders. Other examples are: Banda Aceh has established a Public Service Unit (BLUD—Badan layanan Umum Daerah), the first of its kind in the country for market management; Cimahi will continue to improve the web/SMS-based complaint handling (Pesduk— Pesan Penduduk); and, Sidenreng Rappang is preparing a Local regulation for Public Information Disclosure. (b) All ULGs agreed to achieve the KPIs prior to project closing date and voluntarily agreed to continue implementing and improving reform quality (and expansion as needed), as well as improving management of the urban investments beyond the project closing date on their own. (c) All ULGs agreed to fully make the subproject investments used by the trades (functioning) and provide sufficient operation and maintenance budget to ensure that the facilities are functioning well and therefore give good service for the users. (d) Executing Agency will regularly monitor the ULGs through its provincial unit for planning and monitoring (“Satker Randal Provinsi”) and will provide incentive program for those who managed the subproject investment properly. The ULGs have to submit proposals to the EA (DG-Cipta Karya) to get this support based on their priority infrastructure development specified in the RPIJMD. The summary of the commitment explain above was specified in the Memorandum of Understanding signed between the ULG and CPMU. Number of participants in each of the Exit Strategy Workshop is presented in the Table below. 62 During the LG stakeholders workshops, LGs also shared their views on the capacity building (CB) activities provided by the project, which included training, on-the-job training, workshop and direct technical assistance. In general, the capacity building activities have generated positive impacts, among others: PARTICIPANTS OF THE LOCAL EXIT STRATEGY AND AT THE NATIONAL EXIT STRATEGY WORKSHOPS No. City & Kabupaten (Municipality) Number of Participants 1 Banda Aceh 35 2 Barru 24 3 Cimahi 41 4 Morowali 24 5 Palangkaraya 23 6 Palopo 35 7 Parepare 39 8 Parigi Moutong 32 9 Sawahlunto 27 10 Sidrap 26 11 Workshop Exit Strategy at the central level 50 Total 356 (i) CB activities have contributed to the acceleration and strengthening of the achievement of the reforms particularly the KPIs. Various regulations, standard procedures were established and new practices were implemented. CB activities have increased ULGs staffs’ confidence in implementing reforms, as in some cases, they were not fully supported by their colleagues in the first place prior to the facilitation. Some training were directed to help the ULGs to implement reform beyond those that in the KPIs. Various procurement reform training, for instance, have accelerated and improved the establishment and functioning of Procurement Service Unit (ULP) and the function of Procurement Anchor Unit (PAU), which were not included as KPIs but important indicators in their reform agenda; (ii) CB activities have helped the ULGs in shaping their ongoing reform agenda into a better framework with measurable achievement indicators; some participants admitted that before the project, they had implemented some reforms in line with the core urban reforms, but there had been no clear direction or outputs/results that should be achieved; (iii) CB activities helped the ULGs in understanding their position compare with USDRP and non-USDRP participating ULGs in terms of achievement of reforms; this competition has encouraged them to do better than their counterpart ULGs; (iv) CB activities have facilitated ULGs in learning from peer-to-peer on new initiatives and innovations in reforms; and obtaining information on “how to”, inspiring and triggering the willingness to implement reforms; and (v) CB activities have facilitated the networking platform with other ULGs. Participants from many ULGs made their own visits to other ULGs including those that are not USDRP participating ULGs, to learn and get more complete information and to find more suitable but better reform implementation. Access of ULGs to the resource persons who presented their experiences has increased and this has opened new working relationships. However, most participants shared their concerns that CB activities could have been done in the earlier of project implementation, particularly those related to the management of subprojects (market, terminal and fish auction facility) and subproject preparation to help 63 them in preparing preparation documents such as workable subproject management scheme, feasibility study, detailed engineering design, Resettlement Action Plan, etc. National Stakeholders Workshop. The EA organized a National Exit Strategy workshop in May 2013, co-chaired by the Director of Program Development in the EA and the Director of Urban and Rural Affairs in BAPPENAS (IMSC). In this workshop, the IMSC and EA suggested that USDRP was conceptually a good project that combined governance reform and urban investment based on the ULGs’ priority needs. However, there were concerns that should be improved in the future programs related to, among others: delays of project implementation due to SLA processing and DIPA-SLA issuance, adoption of on-lending scheme as the only option for ULGs for financing which limits types of subprojects that could be financed under the project, delays in procurement for consultants, the task of the EA that covered the reform component which was beyond its domain which therefore in the future program there should be other PIUs established to manage governance reform; and limited coverage of participating ULGs to only small and medium cities. The BAPPENAS as a chair of the IMSC and also the TKPPN (National Coordinating Team for Urban Development) committed to finalize the National Urban Strategy and Policy Development (NUSPD) with a legal basis. As an award, the EA committed itself to facilitate participating ULGs in the program for infrastructure development under Cipta Karya for two years (2014-2015), with the following conditions:  ULGs show their proven commitment to operate and maintain the subproject investment,  the proposed project has to be listed in the Medium Term Investment Development Plan (RPIJM) of the respective ULG,  the proposed project has to be within the sector/s for which the EA (Cipta Karya) has a genuine mandate, and  the proposed infrastructure project fulfills the readiness criteria set by Cipta Karya. 64 Annex 7 Summary of Borrower’s ICR and Comments on the Draft ICR (a) Borrower’s Completion Report The Borrower provided the Bank with a 161-page Project Completion Report in Bahasa, which is archived in the project files. As there was no 10-page executive summary suitable for reproduction in the ICR, the Bank team prepared the following summary translation of key evaluative findings of the report. Assessment of the achievement of Project objectives and outputs 1. The Project Completion Report (PCR— Final Report was received on November 15, 2013) suggested that the Project has satisfactorily achieved its objective in reference to the KPIs for both governance reform and urban investment components. However, although it cannot be done at this point, the EA argued that the Project’s objective should have been also measured in the context of a broader national urban development agenda where decentralization is at work for achieving the “urban service standards” that is now being developed by the Central Government. 2. Based on the PBME Study, the EA is encouraged to note that all participating ULGs are voluntarily committing themselves to continue implementing the reform agenda with or without assistance from any parties which indicate sustainability of reform implementation that will lead to stronger outcomes for public service delivery. Furthermore, although at Project closing only part of the KPIs reflecting the outcomes of urban investment was achieved, the Study showed that the used subprojects have already benefitted the public and public perceived similar benefit for subprojects that will be used in the future. The EA believed that monitoring in the next 1-2 years is needed to have information on the sustainability of both reform implementation and the benefits of subprojects. Assessment of Project implementation and main factors affecting project implementation 3. The Report suggested that Project implementation was a success due to the high commitment of the IMSC, EA (particularly CPMU) and all participating ULGs, as well as continuous strengthening of the Project management organizational structure, capacity, and staff allocation. Achievements of most KPIs was attributed to the better functioning of the IMSC in taking strategic decisions (i.e. ULG selection, Project restructuring, loan proceed allocation, supporting the achievement of KPIs, coordination with the line ministries, etc.) and to the improved capacity of CPMU in managing the Project along the course of implementation, particularly after its restructuring, with the assignment of senior staff as the head of CPMU, recruitment of full-timer and young staff (except the head of CPMU who also hold structural position) with good technical capacity, and improved recruitments for its Advisory and Management Consultant as well as for Consultant assigned to assist the ULGs. The EA’s commitment was also shown by timely and sufficient budget provided to cover operational costs, intensive supervisions and for capacity building activities as GOI’s contributions to the loan and grants. 65 4. There were some constraints identified by the Report, however, that have affected the Project implementation progress, which consequently, required the CPMU to continuously adjust its strategy to maintain implementation momentum at the ULGs. First, a factor that relates to quality of entry and at early stage of Project implementation whereby there were changes in national regulations especially pertaining to on-lending mechanisms and reforms and the limited understanding of the ULGs in the on-lending mechanisms. This factor has reduced the speed of Project implementation at the early stage. Second, the involvement of the line ministries in charge of guiding, overseeing and supervising ULGs in governance reforms were limited due to high turnover of staff who were assigned to be involved in the Project; their involvements in supervisions, meetings and workshops were sporadic; units involved under the line ministries in some cases were not the ones who were responsible for the said reform agenda; and, third, there was no explicit assignment for particular units in the line ministries to be in charge of assisting ULGs in governance reform with technical assistance attached to them. 5. CPMU, have faced several main challenges during Project implementation, namely among others: first, it has been organizationally (including staffing) restructured three times in the effort to strengthen Project management capacity and to decentralize the day-to-day Project management operation to mostly a non-structural staff; second, limited capacity of the PMUs and PIUs in governance reform implementation and procurement particularly in the early stage of Project implementation and limited capacity of PMUs in reporting to the CPMU; third, Advisory and Management Consultant team and Reform Consultant teams for assisting CPMU and ULGs in reform implementation were only mobilized in the second year and the third year of Project implementation, respectively; fourth, limited capacity in managing various Consultant Teams in the beginning of their mobilization; fifth, CPMU had to lead the oversight and manage the implementation of the governance reforms at the ULG level which was beyond its formal tasks; and, lastly, continuous changing of regulations and rules at the national level on reforms and financing procedures, which were beyond the control of CPMU, that have slower implementation pace. Despite this fact, the Report argued that CPMU has satisfactorily carried out its tasks and function, particularly in managing and coordinating the Project with IMSC including line ministries, and with ULGs, has been effectively successful in communicating and maintaining effective diplomacy with the Bank on substance and administrative matters. Project reporting has been improved and timely, fiduciary and safeguards have been successfully managed, and website performance has been in good quality. It was also successful in managing various Consultant teams. 6. ULGs have continuously maintained their PMUs and PIUs with sufficient budget and staff until Project closing despite the fact that there were some turnovers during Project implementation. Some champions of governance reform in the local agency have been established and leaders in PMUs are planning to continue the governance reform implementation (mainly to improve quality) and to better operationalize the subproject investments. The Report suggested that coordination between PMU and PIU in some ULGs was not always good but was improving towards the Project closing; some PMUs faced challenges in leading and coordinating the governance reform implementation as they were carried out by various local agencies with limited capacity in the early stage of Project implementation; some ULGs have faced procurement delays for construction as they were unfamiliar with the World Bank requirements on procurements although they had been 66 receiving various procurement training under the Project and given intensive guidance by the CPMU, but this issues were no longer significant towards the Project closing. 7. The Report suggested that the performance of Consultant Teams in general was satisfactory. Amongst the five main Consultant Teams (contract packages), performance of the Advisory Consultant and LED Consultant Team (central and local level) were satisfactory, while the other three teams, i.e., Local Governance Reform and Individual Consultants, UIDP-management Consultant team, and UIDP-NUSDP were moderately satisfactory. As mentioned above, mobilization of these consultant teams were delayed due to the complicated selection methods (mostly QCBS, even SSS method took a long time) and worst, in one case of the Logistic Service Provider package was cancelled in the end of Project period, and due to revisions of TORs; selection processes were not always in concert with the budgeting process; some of the recruited experts were not adequately competent; and some of the consultants could not work harmoniously and in synergy with their colleagues as well as with CPMU and the Bank, resulting in a waste of time to continuously only discussed the reform concept rather than implementing it with the consultant based in each ULG. There were also some overlapping of tasks among Consultant Teams which led to the inefficiency and difficulty for the CPMU to manage them. 8. The scope of involvement of the World Bank during Project implementation was extensive, and even some stakeholders thought that it sometimes was too far. This is particularly for procurement. The CPMU argued that because there was incomplete understanding on the Bank’s procurement procedures as specified in the Guidelines, several misunderstanding took place between the Bank and CPMU on a particular procurement issue. This is true in the case of Sawahlunto for instance, where information on the need to get a Bank no objection was required if the duration of proposal submission of the bidders were extended more than once during the procurement process. The Report mentioned that various Project Progress Reports suggested that miscommunication in relation to procurement were often occurred and hence, become significant issues that affect the project implementation progress. Assessment of achievements of KPIs, impacts, sustainability and lessons learned 9. Overall assessment on the achievement of the project was considered as moderately satisfactory. The Report suggested that most of the KPIs for reform component have been achieved by the 10 ULGs and it was rated satisfactory, some ULGs have implemented reforms beyond the KPIs. In addition, all of the KPIs on urban investment were fully achieved whereby construction of all subprojects was completed. The TPA reform and procurement reform were rated satisfactory whereas the financial management reform and LED Strategy development were rated highly satisfactory. The rating for the later was because of the high commitment of ULGs in implementing the strategy through budget allocation from various local agencies and the establishment of “partnership forums” where stakeholders discussed and agreed on the in LED Strategy and its implementation which in most cases worked well. 10. Beyond this, the Report also assessed the initial impacts of the reform activities by Project closing, in terms of strengthening the institutional capacity of the ULGs with three categories: first, ULGs (i.e. Parigi Moutong and Morowali) that had not been intervened or 67 exposed to governance reform, and therefore, the Project triggered the implementation of governance reform in these ULGs; second, ULGs (i.e., Barru, Sidenreng Rappang, Pangkaraya, Parepare and Palopo) that to some extent had been exposed to or implemented reforms with reasonable staff capacity. The third category were ULGs (i.e. Banda Aceh, Sawahlunto, and Cimahi) that had been quite advance in reform and had good staff capacity in implementing reform whereby the Project intervention was strengthening the ongoing governance reform. 11. The achievements of the reform in transparency, participation and accountability (TPA) have contributed to the implementation of national regulation at the local government level. For instance, through TPA activities, ULGs has implemented the requirements of the Law 14/2008 on Public Information Disclosure; Ministry of Home Affairs’ No. 33/2011 regulation pertaining Complaint Handling in the Ministry and Local Government, and Law 25/2004 pertaining National Planning System particularly the requirement for public participation in preparing development planning document. In addition, various local regulations and Mayor Decrees were issued to support the implementation of TPA activities, such as the Mayor/Bupati Decree on Standards Operating Procedures for Complaint Handling (e.g. Barru). Another example of the likely outcome and sustainability of the reform implementation activities is attributed to the establishment of financial management regulations at the ULG level. With the legal basis, ULGs will have to implement the reform. 12. The Report argued that KPIs for urban investment were satisfactorily achieved as all of the subprojects construction was completed prior to project closing date with reasonable quality, and optimistic that all of the outcome indicators related to the urban investment will be fully achieved once all subprojects are in operation in the future. Urban investment has changed the living environment of the urban areas. The markets, for instance, have changed the urban landscape with a better building and environment quality. Traders are able to do their businesses in longer hours with better facility. If all markets are fully used in the future, they will accommodate about 8,000 traders. As presented in Annex 5, most users (traders and consumers) of the markets are more satisfied with the new facilities. 13. Furthermore, in relation to sustainability, four areas specifically mentioned:  Institutionalization of the reform, with the establishment of local regulations pertaining financial management reform, complaint handling, LED Strategy for instance, will ensure that local government staff will implement the reform agenda as part of their routine tasks in the bureaucratic system with financing from the local budget. This will ensure the sustainability of reform implementation, hence improve the quality of service delivery in the future  Reform activities that have been supported by the project were only establishing a platform that would allow ULGs to proceed with further reform implementation. Positive practices should be disseminated to other local governments beyond USDRP participating ULGs. The EA should facilitate the achievement of the reform activities to relevant ministries at the central level, so that they could be adopted by the national polices or programs. The Book produced by the EA, i.e. “Promoting Urban Self- Reliance-Reflection of the USDRP Implementation” is one instrument to disseminate experiences including lessons learned from the project to the public.  Bappenas is now finalizing the NUSPD/KSPPN (preparation was initiated by the project) with a plan to establish it as a Presidential Decree, of which policies and strategies for 68 urban development specified in it will be incorporated in the next RPJMN. Lessons learned from the project can be considered as a reference for the RPJMN.  Subproject management including business plan should have been planned at the early stage of project implementation. This is a key for the sustainability for the service provided by the subprojects (i.e. markets, bus terminal and fish auction market) and also to be able to repay the loan. Subproject management has been an issue discussed and addressed by the project since the last three years towards project closing through training and direct assistance to ULGs. This remains the critical challenge for ULGs in the future, although by project closing all subprojects have unit that managed them and budget allocation for operations and maintenance. 14. Overall, the achievements of the project in both governance reform and urban investment were claimed to be in line with and contributed to the relevant missions of specified in the Strategic Plan of the EA 2010-2014, i.e. increase infrastructure in urban and rural areas; and promote self-reliance local government through improved capacity of local government, public and business entities. The project objectives and achievement were also in line with the Bank’s CPS that promote development in Indonesia through strengthening local capacity and improve economic competitiveness of the private sector that targeting pro-growth, pro-job, and pro-poor. 15. One of the lessons learned noted by the EA was that the roles and leaderships of the Mayor or Bupati is one of the key for important factors that contributed to the success of reform implementation. The adoption of the regulation pertaining reform at the operational level within the bureaucracy is depended on the courage and commitment of the Mayor/Bupati. This particularly true for instance, for the publication of the audited financial management report, whereby not all Mayor/Bupati were ready to implement this. 16. Another lessons learned that was noted by the EA was that legal basis such as regulations or technical guidelines issued by both central government and local government are needed by the ULGs to proceed with the reform implementation and ensure the sustainability. Furthermore, using information technology such as websites for disclosures, and complaint handling for instance, should be equipped with sufficient hardware and software, as well as staffing that have good capacity in administering and operating the websites. This is important factor to ensure sustainability of the TPA activities. 17. In reference to the PBME Study, the Report argued that the public is happy with the more information available for the public and the officials working in financial management are more comfortable because of the more transparent situation. Overall, the based on the PBME survey, the ULGs’ staff/officials dealing with planning, financial management and procurement are happy and more comfortable in working in a more transparent situation. 18. For the LED Strategy, it apparently got a strong enthusiasm and support from stakeholders because the implementation of this strategy will increase their income, despite the fact that there is no national or local regulations that govern the LED. Another factor of the strong support for the LED by all stakeholders including private businesses, local government and NGOs was that because it did not involve that much political interest like other reform. The project is in fact published a Guideline for Implementing the LED and also develop a model on the process of preparing an LED Strategy. 69 19. Capacity building (CB). CB consists of training, on-the job training, workshops and direct technical assistance. The project was considered successful in motivating ULGs to establish regulations or policies at the local level. The CB was also successful in facilitating the communication and innovations among ULGs and between USDRP’s ULGs and non USDRP ULGs in governance reform. CPMU has delivered all of the planned CB activities, however, some were beyond the plan, such as on-the-job training to neighboring countries for LED and green cities. Interviews with ULGs’ officials suggested that they found out that CB activities were very useful and they were satisfied. However, some of the trained officials were rotated to other position, which in many cases not relevant to the training. The training method was also tailored to the achievement of the KPIs. The activities of CB during the preparation of LED Strategy (almost in about 9 months) have managed to generate agent of change in each ULG who become a champion for the implementation of the strategy. Performance of the Borrower and the Bank 20. IMSC was expected to have strong roles in supervising the project implementation progress and in preparing the urban development policy. The IMSC members have become part of the National Coordinating team for Urban Development (TKPP) under the leadership of Bappenas. During project implementation, the Report noted that: (i) IMSC has regular coordination meetings with its line ministry members in the last 4 years of project implementation. This has been very effective in improving the knowledge of ministries beyond MPW about USDRP’s activities and progress. (ii) Performance of IMSC was not optimal because not all line ministry members have the same level of “interest”. (iii) As the members of the IMSC were echelon 1 officials, there were difficulties in taking practical and fast decision making. This has influenced the project performance. (iv) It is recommended that for future projects, the IMSC should focus on supervision on the policy implementation with better and effective standard operating procedures. It is suggested that the role of IMSC is given to the existing more established organization for instance the National Agency for Spatial development (BKTRN), MP3EI, TKPKN, etc. 21. Performance of the Executing Agency, was rated “satisfactory” because of its strong commitment to implement the project, continuously improved the project management and implementation strategy, had a solid project monitoring and evaluation through an MIS, had carried out good reporting in a relatively timely manner, and coordinated well internally (MPW-Cipta Karya) and with other line ministries and the Bank. 22. Performance of the Bank at project entry, was rated satisfactory due to (i) continuity of the team members in charge from project preparation to implementation; (ii) project design had been consulted widely with stakeholders; (iii) have good communication and policy in the urban sector and similar experiences in other places; (iv) had shared interest in urban development that accelerate project start. In addition, the World Bank was seen as very helpful and had sufficient resources in assisting the EA prepare project documents; (v) had good cooperation with the GoI in project preparation and in mobilizing the PHRD grants to support governance reform. 23. Performance of Bank in supervision, was rated satisfactory with reasons: (i) satisfactory supervision quality; (ii) supervisions were done in timely manner, regular, and included technical and substance. CPMU appreciated the continuous support of the Bank 70 during the project implementation. (iii) World Bank gave full support to the EA in accelerating project implementation with good identification of main problems and gave solutions to GoI and CPMU. After CPMU was organizationally stable equipped with sufficient technical staff, the World Bank team gave full support focusing on project implementation. The performance of the World Bank was assessed in nine areas: (i) procurement, financial management; (iii) capacity building; (iv) core governance reform; (v) social safeguards; (vi) environmental safeguards; (vii) project restructuring/loan amendments; (viii project management, and (ix implementation of Component B (urban investment). Amongst these nine areas, three, i.e. social safeguards, environmental safeguards and project restructuring, were rated “very good”; while the other six areas were rated “good”. Performance of Consultants and Contractors 24. Performance of Contractors. During project implementation, there were 15 contract packages for civil works and 49 consultant packages. Overall, implementation of all of these packages was in line with the contracts including the deliverables. Performance of contractors, particularly in terms of schedule for physical construction, was influenced by the timely of the DIPA-SLA issuance. Delays in subproject completion in Sawahlunto, Banda Aceh, Morowali, barru and Palangkaraya were due to the late issuance of this budget document. Furthermore, increase in construction costs was inevitable for most subprojects because of the delay in procurement, increase price of some materials during the 2008 economic crisis, adjustment of technical specification, and mistakes in the bill of quantity document. Delays in the completion of subproject construction were also due to the shortcomings of construction materials availability (Morowali, Sawahlunto, Banda Aceh, Parigi Moutong, and Cimahi), geographical constraint (Morowali), the 2008 economic crisis where imported construction materials became more expensive, and social issues whereby the traders wanted to move to temporary market only after the Moslem new year (Sawahlunto). 25. Performance of Consultants. Consultant packages were arranged in response to the need for assisting ULGs in achieving the KPIs and the dynamics of project implementation. Procurement Plan was updated accordingly. Since project restructuring, packaging and method for consultant selection were carefully design not only to respond to the need, but also to accelerate selection process. CPMU faced a challenge to coordinate and manage many consultants from at least three large packages whereby there were many overlapping of tasks. CPMU also had limited capacity in overseeing and supervising the consultants including their outputs due to its limited expertise in governance reform. Performance quality of the consultant in many cases was carried out by the Bank’s team. Quality of the consultant varied and the project suffered from having some of unqualified, hence non-performing experts. The most challenging issues were the performance and quality of the outputs produced by the consultant teams. Individual hiring was proven to be more effective in terms of providing direct technical assistance to ULGs, however, management, sharing information, coordination, and supervision were more difficult for the CPMU. 71 (a) Borrower’s Comments on Draft ICR  Project Design o In concept, the reform and investment components were expected to support each other in underpinning the development of self-reliant and sustainable urban area. However, in the implementation phase, these components seemed to be not directly related. One of the reasons was that the executing agency did not have any authority to conduct assessment on the quality of governance reform implemented by local government. The authority to supervise the quality of reform was only limited to the project implementation, and more to the point, this was not done in sustainable manner by the executing agency. o The USDRP approach was sectoral-based and did not use any regional approach. As the consequence, the achievement of the project could neither be portrayed at city scale nor compared with other regions in Indonesia. For this reason, it is proposed that the future technical assistance package should be in form of an integrated program which is regional based, multi-sector and multi-source of funding in nature.  Project Institutionalization o The designation of Directorate General of Human Settlement, the Ministry of Public Works as the executing agency was carried out based on the directorate general’s experience in implementing IUIDP project management in the 1980s-1990s era. However, the appointment of Directorate General of Human Settlement, the Ministry of Public Works as the sole Executing Agency for the USDRP project was unfortunately less effective due to the fact that the directorate general neither had any authority nor suitable competency in fostering the reform agenda. The over extensive governance reform menu brought some difficulties to the executing agency in assessing the quality of reform achievement as the agency simply relied on its own resources. o In the future similar project, there should be a strengthening role on the existence of the Steering Committee. This is due to the reasoning and understanding that urban development project highly requires proper cross- sector cooperation. It is the truism that urban development is not only involving physical development but also strengthening urban management institution so as to such institution is ready and able to cope with the daunting challenges of decentralization era. The existence of IMSC in the USDRP is very effective in providing cross- sector communication medium to solve problems that cannot be handled alone by the Executing Agency. It should be noted that this role could be more strengthened if there is similar agenda in promoting governance reform agenda among its members.  Participation The resignation of a number of urban local governments from their participants in the USDRP in the first 3 years of its implementation was severely affecting the project performance. From 13 urban local governments that participated in the project at the early stage of its implementation after the signing of Loan 72 Agreement, some 8 of them withdrawn themselves from the participation for various reasons. This brought implication of a very low disbursement performance in the early years of project implementation. Consequently, the executing agency carried out project restructuring in 2010 to adjust the KPIs and project performance to the condition of ULG’s participation.  Project Management o The project’s institutional arrangement at the central level, for IMSC or CPMU, was carried out appropriately and proportionally since the beginning of the project. However, the implementation was not equipped with the SOP and complete organizational governance. In the future, the institutional form, especially related to the participant verification, should be carried out with simple procedure and criteria without sidelining the principles of bureaucracy and prudency in accordance with existing rules and regulations. o The hierarchy and communication approach among project implementers at central and local level need to be rearranged by taking into account the decentralization pattern that is currently on going, especially in Monitoring and Reporting aspect. o Project implementers at central and local level often had different understanding with the World Bank regarding Procurement, Safeguards, project management and others aspects. Such different understanding was also often led to the delay in the issuance of No Objection Letter and this, of course, affected the progress speed of the project. We suggest that this should be well arranged and agreed upon from the beginning of the project.  Financing Mechanism o In the early stage of project preparation, USDRP was designed with the Open menu approach, which means that local governments are given flexibility in proposing the type of infrastructure according to the needs and possible funding schemes. The use of grant scheme is not allowed by the Ministry of Finance due to the existence of General Allocation Fund (DAU) and Special Allocation Fund (DAK) mechanism. The Ministry of Finance has required the financing to be done in accordance with subsidiary loan mechanism based on the Decree of the Minister of Finance No. 35/2003. This policy brings the implication to urban investment financing scheme that is limited to the cost recovery sub-project. The option of infrastructure sectors to be intervened becomes very limited to sectors that generate benefits in the form of local revenue. This has raised the impression that USDRP is a sectoral-based project which simply develop market infrastructure. However, the subsidiary loan scheme can still be developed for other projects. The issuance of Government Regulation No. 30 of 2011 on Regional Loan has provided an opportunity for local governments to make loan for the purposes of infrastructure development that do not have any direct impact in the form of income to local-owned revenue or revenue generating project. With such regulation, local governments are having more flexibility to propose the type of activities/infrastructures to be funded through such regional loan. The 73 Ministry of Finance has also established the Government Investment Center (PIP) to facilitate local governments who want to make loan, but is limited in the form of medium-term loan. o The use of local loan scheme in upcoming projects needs to be preceded by the improvement and rearrangement of the SLA Mechanism. The improvement of such mechanism should primarily focus on accelerating business processes so as to the project will not be preoccupied with the constantly changing administrative process which can slow down the performance of the project.  Project Sustainability o With regard to operational aspect, all of USDRP participating local governments showed their commitment to operate the infrastructures built. Problems faced by local governments related to the operating of the markets were, among others, political commitment, institutional issues and the determination of tariff. This situation brought difficulty to the project in measuring the outcome indicators at the end of loan period, because some of infrastructures were just operated in less than a year at that time. o For the implementation of reform aspect, the local government has prepared the sustainability of governance reform initiative through the formulation of local regulation and institutional establishment. With the local regulation, the USDRP places great expectation to local governments that they will consistently and wholeheartedly implement the governance reform post to the end of the project with their own resources. At the central government level, the executing agency has informed the relevant ministries regarding the performance and challenges encountered during the implementation of each reform agenda at the end of the project. Additionally, the executing agency has also published some publications of hands-on assistance results of governance reform aspect. This is, of course, expected to be the input for the institutions at the central level to replicate or adopt this initiative to the policy and regulation to be drafted. However, the project document does not specify any obligation to Ministries/State Institutions to make replication of governance reform initiatives by USDRP. 74 Annex 8. Comments of Co-financiers and Other Partners/Stakeholders N/A 75 Annex 9. List of Supporting Documents 1. Project Concept Note 2. Project Appraisal Document, May 2005 3. Loan Agreement, October 2005 4. Japan PHRD Project Co-Financing Grant Agreement, October 2005 5. Aide memoires of the supervision missions Nos. 1-13, 2006 to 2013 6. Implementation Status Reports Nos. 1-12 following each supervision mission except #13 7. Explanatory Note by the EA, requesting a Project restructuring and subsequent amendment of the Loan Agreement, February 2010 8. Restructuring Paper, March 2010 9. Second Quality Assessment of the Lending Portfolio (QALP-2) - Draft Report, April 2010 10. Various items of correspondence between GoI and the Bank, amending the Loan Agreement several times, from January 2006 through November2012 11. Guidelines for the preparation of local economic development plans (“Acuan Penerapan Pengembangan Ekonomi Lokal untuk Kota dan Kabupaten”), 2012 12. Implementation Completion Report by CPMU, May 2013 13. Promoting Urban Self-Reliance: Reflection of the USDRP Implementation, Cipta Karya, MPW, 2013 14. Project Completion Report, Cipta Karya, MPW, 2013 13. “Cities in Transition : Urban Sector Review in an Era of Decentralization in Indonesia”, World Bank Dissemination Paper No. 7, June 2003 76 Additional Annex 10: Eligibility Criteria for ULGs and For Subprojects under Component B (from PAD) Eligibility of ULGs Seeking Project Financing Eligibility Criteria for ULGs. The participating ULGs have met the following eligible criteria: (a) meet entry conditions for core governance reforms (issue a mayor’s decree/SK on key governance reforms and their action plans), (b) prepare Urban Development Strategies and 5-year PJMs (Medium-Term Development Plans); (c) possess adequate borrowing capacity; and (d) not have any outstanding arrears. When a ULG has debt exceeding its current repayment capacities, an agreement on debt rescheduling should be finalized between the ULG and MOF. Eligibility Criteria for Subprojects under Component B The following criteria were used to select the subprojects: (a) should be infrastructure projects; (b) should be cost recovery projects (definition of cost recovery project is available in the project file); (c) should not be a national project; (d) should be initiated and undertaken under the authority of the proposing ULG; (e) should result in benefits to public services in the ULG; (f) should be approved by the DPRD of the proposing ULG; (g) should be based on the ULG’s urban development strategy and be identified in the PJM as priority; (h) should adopt proven and cost-effective technology based on approved technical norms and specifications; (i) cost-recovery subprojects should generate a FRR of at least the on-lending rate of subsidiary loan agreement, in principle. Where cost recovery subprojects cannot generate adequate FRR due to externalities or other strategic reasons, the ULG should clearly state the minimum cost recovery target as well as the level of subsidy and provide justification for the subproject’s strategic importance; and (j) additionally, the ULG subproject should also meet the requirements noted under the Safeguard Frameworks (Annex 10 to the PAD). Note: The Project Management Manual further specified point (a) above to the effect that eligible subprojects must be from the sectors for which the EA has the mandate. 77 Additional Annex 11. Changes in Participating ULGs, and Underlying Reasons No. ULG Envisaged Physical Remarks Subproject/s under Component B 1 Kota Cimahi (West Java Construction of new market - - Prov., 612,000 inhab.) 2 Kota Palopo (South Sulawesi Construction of new The subproject “Construction of new terminal” Prov., 175,000 inhab.) market, is listed in the PAD but was dropped early in the Construction of new implementation stage terminal 3 Kota Pare-Pare (South Reconstruction of existing -- Sulawesi market Prov.,182,000inhab.) 4 Kab. SidenrengRappang Rehabilitation of two -- (South Sulawesi Prov., existing markets, 322,000 inhab.) Construction of new market 5 Kab. ParigiMoutong (Central Construction of new -- Sulawesi Prov., market, Reconstruction of 466,000 inhab.) bus terminal 6 Kota Depok (West Java Rehabilitation of two Withdrew because the Prov., 1,589,000 inhab.) existing markets mayor newly elected after Project start changed previous policy. 7 Kota Blitar (East Java Prov., Withdrew because the Revitalization of existing 1,090,000 inhab.) water park local parliament newly General problems: elected after Project start (i) non-conducive disapproved of borrowing. political environment e. 8 Kab. MusiBanyuasin (South Construction of new market Withdrew because the g. due to local elections; Sumatra Prov., mayor newly elected after (ii) failure to secure final 677,000 inhab.) Project start changed approval from local previous policy. parliament; (iii) protracted process 9 Kota Yogyakarta (Yogyakarta Construction of new Withdrew because the to settle arrears from Special Area, Java, 414,000 handicraft market local parliament newly previous loans; inhab.) elected after Project start (iv) protracted proces- did not endorse the sing of subproject subproject. approval and SLA, 10 Kota Semarang (Central Construction of new bus Withdrew because the and/or Java Prov., 1,488,000 inhab.) terminal local parliament newly (v) non-acceptance of elected after Project start the fund flow did not endorse the mechanism subproject. 11 Kab. Manokwari (West Reconstruction of existing Withdrew over dis- Papua Prov., 261,000 inhab.) market agreements with MoF regarding the fund channeling mechanism. 78 No. ULG Envisaged Physical Remarks Subproject/s under Component B 12 Kab. Sleman (Yogyakarta Construction of new cattle Decided to fund its Special Area, Java, market intended subproject 1,103,000 inhab.) under Component B from its own resources (which would be much less time consuming). Requested to participate in Component A only but was not allowed to do so and withdrew. 13 Kota Palu (Central Sulawesi Construction of new bus Withdrew because ULG Prov., 372,000 inhab.) terminal changed priorities 14 Kota Palangkaraya Construction of new market Joined the project in 2010 (Central Kalimantan Prov., 281,000 inhab.) 15 Kab. Barru (South Sulawesi Construction of three new Joined the project in 2009 Prov., 169,000 inhab.) markets 16 Kota Sawahlunto (West Reconstruction of existing Joined the project in 2010 Sumatra Prov., 62,000 market inhab.) 17 Kab. Morowali Reconstruction of existing Joined the project in 2010 (Central Sulawesi Prov., fish auction market 236,000 inhab.) 18 Kota Banda Aceh (Aceh Reconstruction of market Joined the project in 2010 Prov., Sumatra, 255,000 (destroyed by 2004 inhab.) tsunami) 19 Kab. Solok Selatan, (West Intended to join the Project in 2009 but could not Sumatra Prov.) prepare the required documentation with the necessary speed 20 Kab. Sorong (Papua Prov.) Intended to join the Project in 2009 but lost interest again As shown above, there was a range of underlying reasons for the withdrawal from the project of eight ULGs, after the PAD had been written. There were even more ULGs that had shown interest in the project during preparation stage but did not follow through or were not selected. Particularly discouraging were the changes to the eligibility criteria during Project preparation. In the early phases of Project preparation, it was communicated to the ULGs that funding for their proposed subprojects could be either through on-granting or through on-lending (in accordance with the relevant document named KMK35/2003– see Additional Annex 14). Subsequently, it was communicated that subprojects would only be funded through on-lending, and full cost recovery was required. However, ULGs found it very difficult to demonstrate full cost recovery, and so the requirement was softened again to the effect that subprojects had to be only revenue generating. Hereby, 79 the required proportion of investment cost and revenue collected was not specified. This enabled ULGs to design subprojects with realistic financial parameters. Even so, ULGs’ freedom to select subprojects that had high priority from their point of view was severely restricted. In any case, interested ULGs had to submit to the government for examination, and for endorsement by the IMSC, a feasibility study which clearly demonstrated in an accepted methodology that the intended subproject met the selection/approval criteria incl. its financial feasibility. ULGs that prepared their feasibility studies during the Project’s official preparation phase received some support from consultants. On the other hand, ULGs that became interested in the Project during its implementation phase only had no access to such support and found it difficult to meet the quality standards of the government and the Bank. The necessary repeated revisions of application documents were very time and resource consuming. For this reason the ULG of Solok Selatan could eventually not join the Project. The ULG of Sorong lost interest again after it had learned that the loan funds would not be channeled through the local treasury and the option to restrict bidding to contractors from Papua Province, permissible under Indonesian law, was not acceptable under World Bank procurement rules. 80 Additional Annex 12. Dates and Purposes of Amendments to the Loan Agreement No. Date Main Purpose / Content 1 January 18, Accommodate the delay in adopting the Project Management 2006 Manual as loan effectiveness condition in several participating ULGs 2 March 26, 2007 Include least-cost selection as acceptable procurement method for consultants 3 July 14, 2008 Add four new participating ULGs to partially compensate for the eight ULGs that had either withdrawn from the Project or failed to launch Project implementation activities 4 June 4, 2010 Change the phrasing of the PDO and a number of KPIs, extend the Loan Closing Date to June 30, 2012, reallocate loan funds, and admit two more ULGs to the project 5 February 14, Reduce loan amount by US$6.57 million to US$38.43million 2011 6 June 8, 2012 Rephrase one KPI, extend the Loan Closing Date to May 31, 2013 7 December 27, Reduce loan amount by US$0.29 million to US$38.14million 2012 81 Additional Annex 13: Websites of Participating ULGs ULG URL address Kota Cimahi www.cimahikota.go.id Kota Palopo www.palopokota.go.id Kota Parepare www.pareparekota.go.id Kab. SidenrengRappang www.sidrapkab.go.id Kab. ParigiMoutong www.parigimoutongkab.go.id Kota Palangkaraya www.palangkaraya.go.id (NB.: this URL address does indeed not include the term “kota”) Kab. Barru www.barrukab.go.id Kota Sawahlunto www.sawahluntokota.go.id Kab. Morowali www.morowalikab.go.id Kota Banda Aceh www.bandaacehkota.go.id 82 Additional Annex 14: Changes in National Legislation, National Policy, and National Institutions Relevant to the Project When the Project was conceived, the legal groundwork for Indonesia’s decentralization had been laid, especially through Law No. 22 of 1999 and Law No. 25 of 1999. These Acts redefined the roles and responsibilities of local governments as well as the fiscal system that was to enable local governments to fulfill those roles and meet those responsibilities. Subsequently to those Acts, several pertinent Government Regulations were issued (notably Nos. 25, 104, and 107, all of 2000). Finally, and on this basis, the Decision of the Minister of Finance code named KMK35 was issued in January 2003, to regulate the requirements and processes for on-lending or on-granting of foreign loans to local governments. KMK35/2003 was thus already in place when the preparations for the Project began. In the early stages of Project preparation it was envisaged that local governments would be permitted to propose various kinds of subprojects, not limited to an on-lending modality. Later during the preparation, however, national policy was that all subprojects under this Project should be financed through on-lending only. Initially, full cost recovery was expected but this was softened later on, and only “revenue generating” (not necessarily full cost recovery) was expected. During the preparation of the Project, further changes were made to the legal framework: Law No. 32 of 2004 and Law No. 33 of 2004 modified Law No. 22 of 1999 and Law No. 25 of 1999, and Law No. 32 of 2004 itself was modified again through Government Regulation in Lieu of Law No. 3 of 2005. The legal framework was further changed by Government Regulations Nos. 54, 55, and 58, all of 2005, and No. 2 of 2006. On that basis, the Regulation of the Minister of Finance code named PMK53 was issued in July 2006. It supersedes and replaces Decision No. KMK35/2003. Its requirements for borrowing by local governments are significantly stricter than those of KMK35/2003; amongst others, it demands an intensive involvement and written commitment of local parliament. It also demands that all land acquisition and resettlement be done before negotiations on a possible SLA can begin. Obviously, the Regulation of the Minister of Finance PMK53/2006 made it difficult and time consuming for additional interested ULGs to join the Project after 2006. One interested ULG could not complete its documentation with the speed that would have allowed it to join the Project under the given time pressure (see also Additional Annex 12). Those additional interested ULGs that continued to pursue participation in the Project had to expend considerable resources because they did not have the intensive support of consultants as had those ULGs that had prepared their participation in 2004. Given this high threshold of formal/legal requirements for interested ULGs, the practicability of obtaining funding through SLAs has come under critical review, and the feasibility of financing through a new facility established by GoI has been pondered (see also Additional Annex 15). The facility in question is the Pusat Investasi Pemerintah 83 (PIP), or Indonesia Investment Agency, established by GoI in 2007. The feasibility and practicability of financing local government investments from or through this agency and/or other financial intermediaries should be examined in the conception of future urban development projects. Summing up, it can be stated that the Project operated in a legal environment whose volatility and changeability had apparently been underestimated during preparation. The Project design shows no mechanisms for dealing with such changes and adapting the Project as may become necessary. The volatility and changeability of the legal framework was one reason why the signing of SLAs and subsequent subproject implementation became much more time consuming that had been assumed during preparation, and this resulted in the need to extend the loan closing date twice which cannot be held against the EA, the implementing agencies, or the Bank team. 84 Additional Annex 15: Views Expressed in the Publication “USDRP – Promoting Urban Self-Reliance. Reflection of the USDRP Implementation” The above mentioned volume was published by the CPMU in 2012 under the editorial oversight of the EA’s Director of Program Development. It was written by a neutral author, a well-known journalist from a major national newspaper. GoI and the Bank appreciate that the EA has taken this unusual initiative to have reflections on the USDRP compiled, in an effort to reach a wider audience and facilitate a public discussion beyond the usual project reports. Amongst others, this publication contains the views of  the EA’s Director General, Mr. Budi Yuwono P.,  the EA’s Director of Program Development, Mr. Antonius Budiono,  the head of the CPMU, Mr. Dwityo A. Soeranto,  consultant to the Executing Agency for UIDP-Management package, urban development specialist, Mr. Hendropranoto Suselo,  the Director of Urban and Rural Affairs in Bappenas (National Development Planning Board), Ms. Hayu Parasati, and  the Director of Regional Funding and Capacity in the Ministry of Finance, Mr. Adriansyah. Views expressed by these persons include the following: Budi Yuwono P. Subprojects should be selected more carefully; those burdening local government budgets should really be intended for the good of low-income communities. In these cases, a subsidy from the government may indeed be appropriate. Other potentially self-financing projects should preferably be left to the private sector, with financing from the banking sector, which can be more efficient. The processing of SLAs by central government was very time consuming. In the future, there should be a more agile team to make critical decisions quickly. Tendering and procurement processes could also have been faster with a different implementation arrangement. From the perspective of need, USDRP should be continued and we will encourage it, but with a more practical mechanism and possibly not financed from foreign loans. The USDRP is very good and should be continued, provided there is improvement in two issues: reform in central government, and more scrupulous selection of subprojects. There are still heads of local governments whose mindsets are project oriented, sidelining the reform aspects. 85 Dwityo A. Soeranto The processing of SLAs was very time consuming because, besides the central government, the House of Representatives also needed to agree to each SLA. The protracted procedures caused some local governments to lose interest in the project. Lack of capacity on the part of local government personnel and lack of specific experience with World Bank procedures proved to be another obstacle to speedy project implementation. MPW has supported some local governments’ subprojects by implementing supporting projects (e. g. drainage) in parallel. Hendropranoto Suselo The project management team of the MPW as the EA has done a tremendous job that should definitely be appreciated. Supervision is performed on all elements of project management except the Bank itself. The enormous authority and domination of the Bank is dangerous, considering that staff of the management and implementation in the Bank side has modest experiences, especially in the bureaucracy and technical aspect compared to those of the Executing Agency and consultants. Between the institutions that build the physical assets and those responsible for the operation and functioning of those assets there is a gap that should be avoided by better communication and coordination. Governance reforms could be and have been carried out by local governments even without USDRP, e. g. with support from USAID. Governance reform has followed the classical pattern by following guidance that has been prepared in a top-down manner, neglecting the fact that each local government has its own characteristics, and something good for one may not necessarily be good for another. The IMSC has not been utilized optimally for the benefit of the success of the national agenda on local governance reform. The IMSC should also discuss its evaluation of the USDRP and possible next steps. More coordination is needed between the various international institutions that support governance reform. There is need to carry out a comprehensive evaluation of USDRP to define the strategy and follow-up program, and discuss and agree on this in the IMSC forum. 86 Hayu Parasati USDRP can be regarded as a very good role model and should be replicated in other local governments. It should be evaluated and if there is a continuation the new program should make no mistakes in choosing its subprojects. In implementing USDRP, governance reform should have come first, followed by physical implementation. In reality, the implementation pattern was different. Adriansyah Currently, the rule is that subprojects financed from loans should be revenue-generating, even profitable. This may be in conflict with local governments’ obligation to provide services and should thus be changed to accommodate economic and social benefits as well. Since the processing of SLAs was very time consuming, local governments may propose financing by applying to the Indonesia Investment Agency (or Pusat Investasi Pemerintah - PIP) that already exists and tries to cut short the time consuming foreign loan procedures. 87 Additional Annex 16: Case Study: Subproject Market Reconstruction in Sawahlunto Sawahlunto in West Sumatra Province is a small city of rather special nature. Its existence does not go back to a traditional market settlement or town. Instead, it was established in 1888 by the Dutch colonial administration for one specific purpose, namely to be the administrative center for managing the operations at the coal mines in nearby Ombilin. For this reason, a dedicated railway line was built from Padang City (the provincial capital on the coast) and to Sawahlunto. Sawahlunto city played this specific role for more than hundred years and housed the head office of the mining company and its employees as well as the service population needed to sustain them. The city’s population rose to a maximum of approx. 43,000 in 1930 but dropped back to about 15,000 in 1990 as a result of the steady decline of the coal mining operations. The railway line has been defunct since 2000. In 1990, the administrative area of the city was expanded from approx. 8 sq. km to approx. 273 sq.km. Its total population in 2010 was approx. 57,000. About three quarters of these, however, live in rural areas of the city’s territory. There is little room for the physical expansion of the city center as it is located in a narrow valley, the upper reaches of the Lunto River. The economic decline of the city’s economic fortunes compelled the leaders to think of an alternative economic basis for its existence, i. e. a comprehensive economic revival strategy. Especially under the leadership of its mayor from 2003 till 2013, the city administration focused on the development of tourism, including three key projects: (1) a zoo, (2) a water park, and (3) a cable car operation to a hilltop that overlooks the city center. The water park and the cable car projects were presented to Indonesia’s central government with the request for financial support. This included the option that either project would be included in the scope of the USDRP. The IMSC supported the proposal. MoF, however, argued that this kind of projects was more suitable for private sector investment or a public-private partnership as it required a competent operation and management with a view to sustained commercial viability. The city then decided to propose a renovation of its central market as subproject under the USDRP, and this was accepted. The cable car project is still pending but the zoo and the water park projects have meanwhile been implemented with private sector involvement. With this, the city has now become fairly attractive for domestic tourists (especially from the adjacent oil- rich province of Riau), and the further development of this tourism is one element of the city’s economic revival strategy. The market renovation covered two of the three buildings that together make up Sawahlunto’s central market. A key feature of the whole project was the strong involvement of the market traders’ association from the start. This facilitated the temporary relocation of the affected market traders. For this temporary relocation, a piece of idle land was made available by the railway company. As this land is adjacent to the market, separated from it only by a street and the defunct railway track, there were no significant grievances from the market traders. Provision of temporary market stalls by 88 the city was part of the subproject. The market traders’ community was somewhat divided over the question of the optimum timing for the relocation (both to the temporary market and back to the newly renovated market), depending on the nature of their business (some of them are rather seasonal, with e. g. clothing traders doing most of their business during the Islamic fasting month). These divisions were overcome mainly by the competent facilitation of the association’s leaders, and traders were allowed to move at the time that hurt their business least. This flexibility greatly enhanced the acceptance of the inevitable inconveniences associated with the renovation. The architectural design for the new buildings was deliberately chosen to be reminiscent of colonial art deco style, paying heed to the city’s peculiar history. The market is a three- story structure with shops in the bottom two floors and semi-open space for smaller traders and food/drink stalls on the third level (see photographs overleaf). It also has an escalator in the main hall of the bigger building. Such a feature may seem extravagant for a market of a small city but was included upon specific request of the traders during early consultations. This is to make the market modern-looking and attractive for tourists. Access ramps to the second and third level serve mobility impaired users (see photos overleaf). The two new buildings comprise over 140 shop lots, each with an area of approx. 11 sq. m. For the allocation of these shop lots, the PMU temporarily considered a clustering (with shops dealing in similar goods being close to one another). However, it was realized that this would lead to protracted debates among the traders because, inevitably, some parts of the building are more exposed to the flow of shoppers and therefore more attractive for sellers than others. The idea was therefore dropped again. The market traders’ association advocated an allocation of shop lots through ballot-drawing as the virtually only means to forestall protracted discussions and disputes, and this was eventually implemented. An important element of urban management reform was a redefinition of the tenure patterns for shop lots. Previously, like in many other markets in Indonesia, numerous shop lots had been leased from the city by individuals who had been quickest (or most well-connected) to secure the rights although they were not necessarily doing business themselves. Instead, those individuals often sub-let the shops lot to other individuals, and even these were often brokers rather than traders. This tenure pattern led to inflated shop rents for the end users, with unjustified gains for well-connected middlemen and rent seekers at the expense of both traders and shoppers. It has to be borne in mind that this kind of petty corruption and rent seeking was one of the main triggers for the widespread public demands for governance reforms from 1998 onward. Compared to some other ULGs, Sawahlunto appears to be more committed to, and successful in, eradicating rent seeking. Under the emphatic leadership of its mayor from 2003 to 2013 (a businessman himself) the ULG introduced the rule that primary tenants had to be actively involved in trading, and the sub-letting of shop lots was no longer allowed. Shop lots would be handed over to the tenants against a cash deposit of IDR 7 million (approx. USD 700), and violators of 89 the rules would have their tenure revoked and the keys seized without reimbursement of the depositor any investment they had made into the shop lot. It is worth noting that the lease/rental contracts for the shops/kiosks in the market contain the explicit clause that the lease/rental rates will be reviewed regularly. This was done so that the city would be able to fully recover the cost and financially break even over the market’s utilization period (until 2031). The cash flow projection that shows the rental income, including the regular increases that will just suffice to repay the SLA by 2031, was communicated to the traders very transparently which led to fairly universal support. Through the acceptance of regular increases over time, the rental rates could be kept low in the early years of operation. In June 2013 traders began to move from the temporary market into the new market buildings that had visibly been completed to very satisfactory design and construction standards. A technical limitation is that fish, meat, and vegetable traders still occupy a separate facility located beside the new market, that lacks proper wastewater collection/treatment. Those interventions were not included in the USDRP subproject as they would have exceeded the available budget and construction time. The city is now upgrading those facilities as well as the access lanes and parking lots from its own resources. Sawahlunto Market – the bigger of two buildings reconstructed under the Project; on the right, the third market building is visible; this was not part of the project; the second, smaller building of the reconstructed market is located even further to the right, outside the photo (Photographs taken in June 2013, just before the traders started to move in) 90 Access ramps for mobility impaired users This subproject demonstrates the mutual support between an investment project and governance reforms, especially in the field of transparency and participation. The ULGs communication with the traders was exemplary:  before implementation began, there were intensive consultations about the project in general and the buildings’ design in particular,  the ULG communicated very clearly the plans and mechanisms for moving the traders (first to a temporary site and then back to the newly renovated market) including the provision of a temporary site by the ULG as part of the subproject,  the ULG communicated very openly and transparently how rental rates had to be fixed so that the project could recover its cost and the ULD could repay its SLA. The reconstruction of the Sawahlunto market is an important element of a more comprehensive revival strategy for the city’s economy, and substantial improvements to the market’s future management contribute to a governance reform that will directly benefit traders and shoppers, in addition to the wider governance reform objectives reflected in the KPIs. 91 IBRD 32879R 120° INDONESIA CAMBODIA MYANMAR VIETNAM URBAN SECTOR DEVELOPMENT PHILIPPINES REFORM PROGRAM PROJECT CITIES: Andaman DROPPED OUT Gulf of ADDED Sea Thailand Sulu THAILAND CONTINUING Sea MAIN ROADS SELECTED CITIES AND TOWNS PROVINCE HEADQUARTERS NATIONAL CAPITAL Banda PROVINCE BOUNDARIES Aceh A Y L BRUNEI INTERNATIONAL BOUNDARIES A S Celebes Talaud NANGROE ACEH Medan M Natuna I Is. 135° DARUSSALAM Besar Tarakan PALAU Sea Pematangsiantar Anambas SULAWESI A Simeulue UTARA Morotai SUMATERA Manado PA C I F I C UTARA SINGAPORE KALIMANTAN GORONTALO OCEAN Nias RIAU Tanjung Pinang Pekanbaru TIMUR Gorontalo Ternate Halmahera Moutong Kalimantan 0° Sumatera Lingga Pontianak SULAWESI Waigeo 0° KALIMANTAN Samarinda TENGAH Manokwari Padang Sawahlunto BARAT Palu Parigi Moutong Sorong Biak KALIMANTAN MALUKU Siberut SUMATERA Jambi Balikpapan Peleng UTARA JAMBI TENGAH Obi BARAT Sulawesi Misool Yapen Pangkal Pinang Palangkaraya SULAWESI Sula Is. M en Bangka Belitung SELATAN Fakfak Jayapura ta wa Musi BANGKA-BELITUNG KALIMANTAN Palopo Ceram i Banyuasin Palembang SELATAN Amahai Is . SUMATERA Banjarmasin Sidenreng/ Rappang SULAWESI Buru Bengkulu Banjarbaru TENGGARA Kendari Ambon IRIAN JAYA SELATAN Parepare BENGKULU Barru (PAPUA) NEW GUINEA Timika LAMPUNG Java Sea Makassar Muna Bandar Kai PAPUA Enggano D.K.I. JAKARTA (Ujung Pandang) Baubau Is. Lampung Banda JAKARTA Sea MALUKU Aru Serang Bekasi JAWA TENGAH Is. Depok Cimahi Cirebon JAWA TIMUR Bogor Semarang Madura BANTEN Bandung Jawa Solo (Surakarta) Sleman Surabaya NUSA TENGGARA NUSA TENGGARA JAWA Cilacap Kediri BALI Wetar Tanimbar Is. Yogyakarta Blitar Bali BARAT TIMUR Moa Babar BARAT Malang Lombok Flores Alor D.I. YOGYAKARTA Raba Merauke Denpasar Mataram Sumbawa Ende TIMOR-LESTE Waingapu Sumba Timor Arafura Sea Kupang INDONESIA I N D I A N O C E A N 0 100 200 300 400 Kilometers Gulf of 0 100 200 300 400 Miles Carpentaria 15° This map was produced by the Map Design Unit of The World Bank. The boundaries, colors, denominations and any other information shown on this map do not imply, on the part of The World Bank GSDPM Group, any judgment on the legal status of any territory, or any Map Design Unit endorsement or acceptance of such boundaries. A U S T R A L I A 105° 120° NOVEMBER 2013