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COMMISSION DECISION of […]

on the Annual Action Programme 2008 in favour of Indonesia to be financed under Article 19.100101 of the general budget of the European Communities

THE COMMISSION OF THE EUROPEAN COMMUNITIES,

Having regard to the Treaty establishing the European Community,

Having regard to Regulation (EC) No 1905/2006 of the European Parliament and of the Council of 18 December 2006 establishing a financing instrument for development cooperation1 and in particular Article 22 (1) thereof,

Whereas:

(1) The Commission has adopted the Country Strategy Paper for Indonesia2 and the Multiannual Indicative Programme for the period 2007-20103, in particular point 2 of the latter which indicates the priority of trade and investment.

(2) The objectives pursued by the Annual Action Programme are to promote economic development and facilitate the integration of Indonesia into the international trade system, including efforts to develop the local economy and export opportunities for SMEs.

(3) The present decision constitutes a financing decision within the meaning of Article 75 of Council Regulation (EC, Euratom) No 1605/2002 of 25 June 2002 on the Financial Regulation applicable to the general budget of the European Communities4 and Article 90 of Commission Regulation (EC, Euratom) No 2342/2002 of 23 December 2002 laying down detailed rules for the implementation of the Financial Regulation applicable to the general budget of the European Communities5.

(4) The present decision covers any possible interest due for late payment on the basis of articles 83 of the Council Regulation (EC, Euratom) No 1605/2002 and 106(5) of Commission Regulation (EC, Euratom) No 2342/2002.

(5) The Commission is required to define the term “substantial change” in the meaning of Article 90 (4) of Regulation (EC, Euratom) No 2342/2002 to ensure that any

1 OJ L 378/41, 27.12.2006, p. 41 2 C/2007/1339 3 C/2007/1338 4 OJEU L 248 of 16.09.2002 p. 1. Regulation last amended by Regulation (EC, Euratom) No1995/2006

(OJEU L 390, 30.12.2006, p.1) ) and by Council Regulation (EC) N° 1525/2007 of 17 December 2007 (OJ L 343, 27.12.2007, p.9.).

5 OJEU L 357 of 31.12 2002, p.1. Regulation last amended by Regulation (CE, Euratom) No 478/2007 (OJEU L 111, 28.04.2007, p.13).

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substantial change in this decision shall follow the same procedure as the initial decision.

(6) The measures provided for in this decision are in accordance with the opinion of the DCI Committee set up under Article 35 of Regulation (EC) No 1905/2006,

HAS DECIDED AS FOLLOWS:

Article 1

The Annual Action Programme 2008 in favour of Indonesia, constituted by the actions "EU-Indonesia Trade Support Programme II:(DCI-ASIE/2008/20069)" and "Contribution to Local Development (PNPM Multi-Donor Support Facility):(DCI-ASIE/2008/20070)", the text of which is set out in the attached Annexes, is approved.

Article 2

The maximum contribution of the Community to the Annual Action Programme is set at EUR 20 000 000 to be financed from budget line 19.100101 of the general budget of the European Communities for 2008.

This decision shall also cover any possible interest due for late payment.

Article 3

Within the global indicative budget of all the specific actions, cumulated changes not exceeding 20% of the maximum contribution of the Community, shall not be considered substantial, provided that they do not significantly affect the nature and objectives of the Annual Action Programme.

The authorising officer may introduce non substantial changes to the Annual Action Programme in accordance with the principles of sound financial management.

Done at Brussels, […]

For the Commission […] Member of the Commission

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ACTION FICHE FOR INDONESIA

1. IDENTIFICATION

Title/Number EU-Indonesia Trade Support Programme II

DCI-ASIE/2008/20069

Total cost € 15 000 000

EC contribution: € 15 000 000 Government contribution (in-kind) : € 900 000

Aid method / Method of implementation

Project approach – partly decentralised management Ministry of Trade of Indonesia

DAC-code 33110

33120

Sector Trade Policy and Administrative Management Trade Facilitation

2. RATIONALE

2.1. Sector context

The Government of Indonesia's (GoI) policy direction stated in the Mid-Term Development Strategy (MDTS) 2004-2009, includes within its priorities the improvement of the environment for exports, through export promotion and supporting services, upgrading international trade diplomacy capacity and trade facilitation measures.

Indonesia is a country open to foreign trade, but its 30 % exports-to-GDP ratio of 2007 is still relatively low compared to similar rates for ASEAN as a whole and for regional competitors. A number of issues impede the realisation of Indonesia's trade openness potential: § The lack of a properly defined trade strategy and timeframe for trade policy

adjustments. Moreover, there is little co-ordination between stakeholders (Ministries at central level, local authorities, business sector, donors) in the definition of these strategies/policies

§ Insufficient concentration of efforts in competitive export sectors § Weak export promotion and export supporting services § High costs and delays in the transportation and import/export clearance

process § Difficulties in meeting international requirements in technical and phyto-

sanitary standards § Low technical skills in SMEs in export and marketing matters § Low productivity (lack of capital investment and low labour skills) compared

to competing countries

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The key problems identified which prevent a further integration of Indonesia into the international trade system can be summarised as follows:

a) Trade Policy:

The Government faces challenges in the formulation process of trade policy. There is a need for an effective policy framework and process, in line with new political and economic realities of Indonesia, and the need to support this framework through a coherent trade development strategy (competitiveness, key products / markets / outlook / competitors, relation with the actual situation of the productive sector, etc).

Capacity constraints within the Ministry of Trade are a key factor affecting this state of affairs. Apart from a general shortage of staff and a generation gap between senior and junior levels, there is a need for training in formulation of trade policy, knowledge about international trade issues, trade impact analysis and research skills, and general management. This training has to be accompanied by an effort to build institutional capacity within the Ministry to make sustainable the actual training provided (training centres, career and competency development plans, etc). None of these basic elements are sufficiently developed at present.

Problems go beyond the sphere of the Ministry. No less than fifteen Government agencies with responsibilities over trade policy decisions were identified during the identification phase. Most of them have insufficient capability, knowledge and organisational capacity to address the new challenges in the trade agenda. In addition, co-ordination between these government agencies, private sector and civil society in trade policy formulation is not optimal.

b) Export Quality Infrastructure (EQI):

The export quality infrastructure system comprises export quality management and control, standardisation, inspections and certification, rapid alert systems and market surveillance. The Trade Support Programme I (2005-2008) has supported the identification, adaptation and dissemination of EU technical standards to the local industry, together with the improvement of quality control processes and sanitary/phytosanitary compliance of Indonesian exports. Despite progress observed in the capacity of competent authorities, much still needs to be done, as it has been expressed by the agencies interviewed.

The fragmentation of responsibilities of public institutions in charge of export quality issues in Indonesia, the lack of an integrated road map for improvement and the insufficient interaction between these public institutions and the representatives of the business community are all factors hindering the access of Indonesian quality exports to the international markets.

The fisheries sector is a case in point. Activities conducted through the TSP I such as the reinforcement of inspection regulations, training of inspectors and industry, provision of equipment and setting up of quality management process at the competent authority may have had an impact in the reduction of rapid alerts registered at the EU border. This model of support is applicable to other sectors of the Indonesian exporting industry.

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c) Export capacity of business associations and SMEs

Whereas big business groups such as those involved in the production and distribution of energy resources and commodities are well positioned to export their products, Indonesian SMEs still struggle to internationalise its operations due to poor general management and export skills, insufficient knowledge of foreign markets, lack of understanding of international standards and safety requirements and insufficient access to finance. These SMEs are not well supported by their sector associations, which in general lack the level of technical knowledge and organisational capacity to provide relevant services to their members. Moreover, there is insufficient co-ordination between business associations and government agencies when it comes to promoting export development.

2.2. Lessons learnt

The design of the programme draws on the experience and lessons learned of related past projects. In this respect, the evaluation of the EU-Indonesia Trade Support program I (2005-2008) has shown positive results in terms of capacity strengthening for agencies involved, establishing of relationships with international counterparts (particularly quality control laboratories) and interaction with the private sector. In particular the achievements of the TSP I have been:

• Under component 1 WTO Capacity Building, the training of a core group of staff of the MoT and Kadin on international trade topics, resulting on the production and public presentation of research policy papers

• Under Component II Harmonisation of Standards with EU Practices, the setting up of strengthened management, IT and human resources systems within BSN, identification and adaptation of EU standards, and the dissemination of these standards to the local industry

• Under Component III Ministry of Industry Institutes, the improvement to international standards of testing and laboratory management practices in six institutes, establishment of twinning contacts with EU laboratories and the adoption of strategies to approach the local industry

• Under Component IV Ministry of Fisheries, the setting up of quality management structures within the Ministry, strengthening inspection regulations and capacity, deployment and use of new specialised equipment and dissemination of good management practices to the industry, all contributing to a significant reduction in rapid alerts on seafood exports to the EU

The TSP I evaluation confirms the commitment and ownership demonstrated by the implementing agencies involved, but nevertheless concludes that the need for trade-related capacity building in Indonesia is still important. The programme was structured along four different components integrated under the guidance of the MoT, and did not include a strategic view of the issues at stake in the broad context of export development in Indonesia. In order to make further support effective and avoid the risk of channelling EU funding in an uncoordinated manner to the many agencies involved, it is advisable to rely on a clarification of the EQI institutional arrangement and the definition of a road map for improvement in order to prioritise areas and agencies for support.

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Preliminary recommendations also include the separation of trade infrastructure and trade development aspects in the design of future programmes; and the provision of a longer timeframe for implementation.

The evaluation also suggested reconsideration of the decentralised management approach in view of the challenges encountered on its implementation. The GoI, however, has indicated its preference for a continuation of this approach, arguing that it better ensures Beneficiary's ownership and an alignment with the Paris Declaration on Aid Effectiveness.

2.3. Complementary actions

At a regional level, the APRIS II Programme aims to further the process of ASEAN integration, with specific focus on supporting the realisation of the ASEAN Economic Community (AEC). APRIS II is divided into five Components, one of them covering regional standards and conformance. Besides institutional support to harmonization and coordination in the field of standards, APRIS has thematic entry points on cosmetics, electronics/electrical appliances and food security (development of testing methods, training on GMP and HACCP principles). Even though the two projects differ in objectives and scope, it is necessary to ensure that the activities in support of the improvement of Indonesian EQI are in line with the priorities defined for this field at the ASEAN level.

Initiated by DG SANCO in cooperation with Thailand MoA ACSF national bureau, the ASEAN Rapid Alert System for Food and Feed aims at developing an information network between competent authorities (CA) in the region. Both TSP II and ASRAFF programmes show synergies and it is advisable to consider activities to support the development of such a rapid alert system in Indonesia as that would increase the level of confidence of EU countries about Indonesia agro-food products, and contribute to the clarification of institutional arrangements governing EQI.

It will be necessary to ensure a link between the support to trade policy envisaged in the programme, directed primarily to the improvement of the export quality infrastructure, with other elements of an integrated trade policy to be covered by the recently established multi-donor trust fund in trade and investment policy, administered by the World Bank. The Dutch Government has already contributed to the Fund and DFID is considering its participation. The EC notes its interest to contribute in the future to the multi-donor trust fund, in full cooperation with other participating donors.

2.4. Donor coordination

Donor co-ordination in the trade area has been affected by the dismantling of the Investment Climate Working Group of the Consultative Group of Indonesia at the end of 2005. Ad-hoc donor co-ordination fora, meeting on a quarterly or semi-annual basis, were organised by the Ministry of Trade during 2006-7 to discuss capacity building needs, but no formal arrangement has been established.

The co-ordination of the Programme with other donors' activities will be pursued by the Delegation's future contribution and participation in the Steering Committee of

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the trust fund on Trade and Investment Climate. The Indonesian planning agency Bappenas will take an active role in ensuring this co-ordination.

3. DESCRIPTION

3.1. Objectives

The objectives of the Programme support the achievement of the Millennium Development Goals (MDGs), particularly the objective to "develop further an open trading and financial system that is rule-based, predictable and non-discriminatory", through the focus on the facilitation of the Indonesian insertion into the international trade system.

The Overall Objective of the EU-Indonesia Trade Support Programme II is to facilitate a further integration of Indonesia into the international trade system.

The Specific Objectives of the Programme are: § Improve co-ordination and transparency in the process for formulation and

implementation of trade policy related to export development § Upgrade the quality infrastructure that supports Indonesia's access to

international markets

3.2. Expected results and main activities

The Expected Results are: § Improved GoI capacity to formulate and implement trade policy related to EQI § Integrated and transparent trade policy processes for EQI § Defined strategic road map for EQI enhancement § Clarified institutional arrangements for EQI § Strengthened standardisation and accreditation agencies, recognised

internationally § Upgraded export quality control and testing institutions, collaborating with

international counterparts § Better understanding and knowledge about international standards and quality

requirements by Indonesian SMEs § Improved export capabilities of SMEs, leading to increased exports in selected

sectors The main components and activities of the programme are as follows:

a) Component I: Policy Development: will pursue a cohesive legal, regulatory and institutional framework for the strengthening of the overall EQI system. It will support a MoT-led process to further strengthen export development and the specific role of EQI. Specific activities within this Component are:

§ Technical assistance to analyse the constraints to export development for priority sectors, with a particular emphasis on EQI issues

§ Provision of expertise to review trade policy processes across Ministries § Provision of expertise to map the current institutional framework supporting the

EQI system and to advise on its revision and clarification

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§ Provision of expertise to support the design of a strategic roadmap for EQI improvement

§ Capacity building to identify and prioritise EQI areas and agencies for support, and define action plans for their improvement

§ Training to strengthen the capacity of the Ministry of Trade (MoT) and relevant stakeholders to formulate trade policy for improvement of export development and quality infrastructure

b) Component II: Institutional strengthening: the Component will provide technical assistance to the range of government institutions engaged on EQI and related activities. The support provided will be based on the strategic definition and prioritisation concluded in Component I. The assistance will focus on the following EQI activities and functions: § Technical assistance to upgrade accreditation capability, leading to international

recognition § Training to improve quality and management systems for competent authorities,

laboratories and certifying bodies § Capacity building to strengthen certification bodies § Technical assistance and provision of equipment to enhance quality of testing

laboratories to reach international benchmarks § Technical assistance and provision of equipment to improve metrology and

calibration services § Capacity building to strengthen competent authorities in areas such as SPS,

monitoring of residues, market surveillance, inspection services, rapid alert systems

§ Technical assistance to enhance capacities in areas related to Technical Barriers to Trade (TBT) such as New Approach, Global Approach to conformity assessment, REACH regulation, ISO 28000 standards and UN-ECE standards in the automotive sector

§ Workshops and seminars to increase access of Indonesian SMEs to up-to-date technical conformity assessment and recognised testing and certification bodies, through dissemination and marketing activities

§ Pilot programmes led by MoT and including relevant government agencies, business associations and their members, to strengthen export capacity in priority sectors

3.3. Risks and assumptions

Assumptions:

§ Continuous commitment of the present and future GoI to the economic reform process leading to a further integration into the world economy

Risks and suggested mitigation actions: § Risk: lack of integration and unclear roles and responsibilities in the Indonesian

EQI system. Mitigation actions: (1) The SC includes all relevant parties involved in this system; (2) the programme includes as initial activities the definition of a road map for improvement of export quality infrastructure and the clarification of the institutional arrangements which would support the prioritisation of support activities at agency level

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§ Risk: insufficient capacity within the MoT to undertake necessary leadership in the programme. Mitigation actions: (1) the application of the decentralised management approach ensures a firm commitment from the MoT to drive the programme; (2) technical assistance will be available for MoT to support implementation

§ Risk: application of decentralised management approach could mean delays and work overload for Beneficiary. Mitigation actions: (1) as above, technical assistance in financial and administrative management will be made available.

3.4. Crosscutting Issues

The programme will indirectly yield a positive environmental impact, through specific measures such as the national monitoring system for residues and control of dangerous substances, and benefits for the environment derived from a better adaptation of Indonesian products to international standards (CE marking, REACH, etc)

Good governance will also be indirectly impacted, as many of the activities foreseen will improve the management and quality systems of public institutions.

3.5. Stakeholders

The programme will operate in a fragmented context in terms of number of stakeholders and their responsibilities. Several agencies are considered as target groups: § MoT: Main co-ordinator of trade policy: its Directorate of Standards and Quality

Control (DSQC) is responsible for providing product certification and of legal metrology

§ Ministry of Industry, Agency for Research and Development of Industry (ARDI), with centres providing testing and quality control facilities for products in different sectors

§ Ministry of Marine Affairs and Fisheries (MMAF): good practices in fisheries production and distribution, testing on quality standards in fisheries exports

§ Ministry of Agriculture (MoA): guidelines for good agricultural and food production & distribution practices, quality standards for fresh food, health certification for food exports

§ Indonesian Standardisation Agency (BSN): setting of national standards and identification and dissemination of international standards

§ National Accreditation Committee (KAN): responsible for accreditation and conformity assessment of local quality control and testing establishments

§ National Agency for Drug & Food Control: food safety legislation, control & inspection

§ The business community, represented by relevant Indonesian business associations (primarily Indonesian Chamber of Commerce KADIN) and their members will gain a better access to information about export quality standards

Direct Beneficiaries will be the Indonesian competent authorities who will increase their capacity to conduct trade policy and to upgrade the export quality infrastructure

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and also the companies who will increase their opportunities to access the international market.

Final Beneficiaries will be the Indonesian population in general, through an increase in foreign trade, which should have a positive effect in employment creation and poverty alleviation.

4. IMPLEMENTATION ISSUES

4.1. Method of implementation

Partly decentralised management through the signature of a Financing Agreement with the Government of Indonesia.

Partly decentralised activities to the Ministry of Trade of Indonesia (see budget table). The Commission controls ex ante the contracting procedures for procurement contracts > 50 000 EUR and ex post for procurement contracts • 50 000 EUR. The Commission controls ex ante the contracting procedures for all grant contracts.

Through the programme estimates, payments are decentralised for operating costs and contracts up to the ceilings indicated in the table below.

The Authorising Officer ensures that, by using the model of Financing Agreement for decentralised management, the segregation of duties between the authorising officer and the accounting officer or of the equivalent functions within the delegated entity will be effective, so that the decentralisation of the payments can be carried out for contracts up to the ceilings specified below.

Works Supplies Services Grants

< 300 000 EUR < 150 000 EUR

< 200 000 EUR • 100 000 EUR

The Programme will be governed by a Steering Committee chaired by the MoT and including the main GoI government agencies involved in trade policy/export quality infrastructure issues, representatives of the business community and the EC Delegation. The Steering Committee will co-ordinate all programme activities, approve work plans, review progress and identify and resolve implementation issues. Other donors participating in related cooperation programmes will also be invited to participate as observers.

4.2. Procurement and grant award procedures / programme estimates

Contracts All contracts implementing the action must be awarded and implemented in accordance with the procedures and standard documents laid down and published by the Commission for the implementation of external operations, in force at the time of the launch of the procedure in question.

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Participation in the award of contracts for the present action shall be open to all natural and legal persons covered by the DCI Regulation.

Specific rules on programme estimates All programme estimates must respect the procedures and standard documents laid down by the Commission, in force at the time of the adoption of the programme estimates in question.

4.3. Budget and calendar

The total cost of the project is 15 000 000 EURO entirely funded by the European Commission.

Category Breakdown EC Contribution

(in EUR)

Other expected donors

contribution

(in EUR)

Total funds required

(in EUR)

Contracting / Paying Authority

1.Services 12 150 000

12 150 000

EC/Executing Authority

1.1 Technical assistance 10 000 000 EC

1.2 Organisation of training events in Indonesia

900 000 EC/ Executing Authority

1.3 Organisation of international training events and study tours

650 000 EC/ Executing Authority

1.4 Studies and Publications 300 000 EC/ Executing Authority

1.5 Monitoring and evaluation 150 000 EC

1.6 Auditing 150 000 EC

2. Supplies 1 800 000 1 800 000 EC/Executing Authority

2.1 Equipment 1 800 000 EC/Executing Authority

3. Operating Costs 350 000 350 000 Executing Authority

3.1 Local support staff and related operational expenditures (secretarial, logistics, financial and administrative management, etc)

350 000

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4. Information 200 000 200 000 Executing Authority

5. Contingencies 500 000 500 000 EC

TOTAL 15 000 000 15 000 000

The Government of Indonesia will provide in-kind contribution to cover salaries of participating staff, office space, communication, working facilities, local travel costs for participating staff, and in general any programme-related operating costs not included in the EC contribution. This in-kind contribution is estimated at € 900 000.

The programme will have an operational duration of 60 months as from the signature of the Financing Agreement.

Procurement

Services will be managed by the EC Delegation in Indonesia through the signature of service contracts following a call for tenders and frameworks contracts, which are planned to be launched in 2009.

Supplies will be managed by the Executing Authority following calls for tenders, which are planned to be launched between the second half of 2009 and first half of 2010.

4.4. Performance monitoring

Regular monitoring will be a continuous process as part of the Commission's responsibilities. External impact monitoring might be also carried out by independent consultants recruited directly by the Commission in accordance with EC rules and procedures on specifically established terms of reference.

The main indicators for measuring achievement of results will be:

§ Improved assessment of Indonesian trade policy process as per WTO Trade reviews

§ Improved compliance of Indonesian exports to international quality standards as per reports of Ministry of Trade

4.5. Evaluation and audit

Evaluations (mid-term, final, ex post) and audit arrangements are integral part of the contractual arrangements with the selected contractors.

External evaluations and audits will be carried out by independent consultants recruited directly by the Commission trough Framework contracts.

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4.6. Communication and visibility

The Programme will include dissemination and communication plans with activities describing objectives and accomplishments. The Guidelines for EU visibility actions will apply to the Programme.

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ACTION FICHE FOR INDONESIA

1. IDENTIFICATION

Title/Number Contribution to Local Development (PNPM Multi-Donor Support Facility) – DCI-ASIE/2008/20070

Total cost € 30 650 000 EC contribution: € 5 000 000 Other donors contribution approx (joint co-financing): • Dutch Government: € 9 650 000 • Danish Government: € 12 000 000 • Australia Government: € 4 000 000

Aid method / Method of implementation

Project approach - Centralised management and Joint management with the World Bank

DAC-code 15110 Sector Economic & Development Policy/Planning

2. RATIONALE

2.1. Sector context

Indonesia achieved substantial poverty reduction results during the period from late 1970s to mid 1990s, reducing the poverty rate from 40.1 % in 1976 to 17.7 % of the population in 1996. However, while economic growth has picked up since the 1997 financial crisis, there has been a less marked impact on poverty, which reached a level of 16.6 % in 2007. Furthermore, a large percentage of the population is still highly vulnerable to shocks of all kinds, as around 42 % of the Indonesian population, not officially counted as poor, still live with between one and two US$ a day.

Poverty distribution in Indonesia shows marked regional disparities. The pockets of poverty concentrate in densely populated regions, but the highest poverty incidence prevails in the rural world, where most of the poor work in the agriculture sector, and particularly in Eastern Indonesia.

Poor infrastructure and low agricultural productivity are the main root causes for the weak economic activity and high poverty concentration in rural areas. Low quality roads hinder local economic activities while high transport costs burden the competitiveness of rural producers. Low public investment in health, education and sanitary infrastructure are a constraint for the provision of these services to the rural poor. Stagnant productivity in agriculture depresses local incomes and often forces the unskilled peasants to move to urban areas.

The overall policy objectives related to poverty reduction are laid down in the Poverty Reduction Strategy Paper (PRSP) and the National Mid-term Development Plan 2004 – 2009 (RPJMN). Both documents outlines foreseen policy actions,

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directly linked to ten defined basic rights, but provides limited direct policy guidance, as these policies are neither measurable nor time-bound, and also lack cost estimates and budget prioritisation.

Steady increase of expenditure, from 5.5 % of total budget in 2004 to 6.7 % in 2007, shows the Government's commitment to strengthen pro-poor development programmes. The 2008 budget allocation for poverty reduction amounts to US $ 6.07 billion, and represents an increase of 13.3 % over the previous year.

With the "big bang" decentralisation process started in 2001, responsibility for local economic development and provision of basic services was fully transferred to the district level1. The central government is currently transferring about one third of its fiscal resources to the regions. Decentralisation offers considerable opportunities for better governance, however regional and local authorities often lack capacity to efficiently plan, execute and monitor its resources. In addition, with poverty alleviation being a key national development objective, a number of programmes that have an impact in local communities have been funded from the central budget. This has led to poor coordination among agencies and lack of clarity regarding responsibilities of different governmental levels.

In September 2006, the GoI decided to give a new impetus to its local development efforts through the establishment of the National Programme for Self-reliant Community Empowerment (PNPM). Under the responsibility of the Coordinating Minister for People's Welfare, the objective of the Programme is to streamline and accelerate local community development, employment opportunities and poverty alleviation and to increase effectiveness and efficiency by means of better coordination. The programme will integrate the roughly 60 to 70 currently implemented community development projects, with a budget of approximately $1.96 billion and aims at achieving the targets of the Millennium Development Goals (MDGs) by 2015.

The PNPM has the following specific objectives: 1. increase income and employment for the poor; 2. increase public participation of the poor, women, and other marginalised

groups; 3. improve access of the poor to productive economic activities and access to

associations, capital, markets, information and innovation 4. improve public institutions' capacity to provide public services especially for the

poor

The PNPM grants have mainly been used to fund local development and productive investments such as irrigation, roads, bridges, etc but have also been directed towards improving social infrastructure.

The PNPM is a very ambitious programme, both in regard to the GoI aiming at scaling existing programmes up to a fully nationwide coverage and the aim of having a large number of individual donor and government programmes brought together under a

1 Below the national level, Indonesia has political and administrative structure at provincial and district

level. District administrations are in the rural areas divided into sub-districts (kecamatan) which again are comprised of villages with elected village heads.

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unified framework. In that context there is a substantial need for additional assistance to strengthen the capacity of national and local governmental levels to implement and manage local development initiatives and programmes in an effective manner.

In order to provide this support and to facilitate the involvement of foreign donors, the (GoI) established in early 2008 the PNPM Support Facility Trust Fund (SFTF), a multi-donor trust fund administered by the World Bank (WB). Approximately 30 million euro have been committed to the SFTF and the first set of actions have already been launched. Apart from technical advice and monitoring, substantial funds have been committed towards promoting environmental investments in the PNPM approach.

2.2. Lessons learnt

The decentralisation process initiated in Indonesia is an attempt to improve the efficiency in the provision of public services to the population. This mainly top-down approach has, however, not reached the most disadvantaged rural communities in the desired short timeframe. This effort should be complemented by a bottom up approach which directly empowers the village level operationally and financially and generates a momentum which could be sustained by the involvement of the local authorities.

When it comes in particular to local community development initiatives, programmes now integrating PNPM (KDP, UPP, SPADA, PKS, Generasi) have covered issues such as rural infrastructure, health, education, microfinance, support to particularly disadvantage regions and management of direct cash transfers to poor families. PNPM will build on the experience gained by these programmes over the past ten years, and extend their coverage to 70,000 rural and urban communities by 2009.

Evaluations conducted on these local development and poverty alleviation programmes show mixed results. In the positive side, basic infrastructures including transport, water and sanitation have been completed and show adequate technical quality. Moreover, local community groups have been involved in the implementation of the programmes, leading to an overall acceptable satisfaction rate within beneficiaries (60 %). However, important shortcomings have been identified in (i) programme evaluation and quality control systems, (ii) targeting of local economic development efforts to the most disadvantaged, (iii) socialisation of project objectives and results, (iv) capacity building of local authorities and community groups involved and (v) sustainability of the results obtained.

Past co-ordination between the multitude of projects and programmes for local economic development and poverty alleviation implemented by executing agencies has been weak, with sometimes overlapping and duplication of interventions at regional and local level. This assessment was one of the very reasons for the establishment of PNPM.

2.3. Complementary actions

The Multi-Donor Trust Fund for Aceh and Nias is an important reference for the proposed project as it uses a similar implementation mechanism, and has channelled

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a significant amount of resources to local community development through the KDP, UPP and SPADA programmes in these regions. The EC is the main contributor to this Trust Fund and acts also as co-chair of its Steering Committee.

The KDP and UPP programmes in Aceh have supported (i) small-scale rural infrastructure works such as roads, bridges, clean water supply and sanitation, (ii) economic activities and socially vulnerable groups, and (iii) urban neighbourhoods to rehabilitate and develop community infrastructure. Total funding managed under the MDTF totalled US $ 64.7 million for KDP and US $ 20 million for UPP.

Another important complementary initiative is the Decentralisation Support Facility (DSF), a multi-donor trust fund set up in early 2005 to support the decentralisation agenda of the Government of Indonesia (see www.dsfIndonesia.org). The DSF includes DFID, the World Bank, ADB, the Netherlands, AusAID, CIDA, GTZ, USAID and UNDP as partners. The EC, in cooperation with other donors, will seek to ensure that the support to the PNPM and bottom-up community planning/development is supportive of the overall decentralisation process and builds on activities already implemented under DSF.

2.4. Donor coordination

The GoI has indicated that it regards PNPM as the umbrella for co-ordination of local development and poverty alleviation initiatives and its SFTF as the main vehicle for channelling foreign aid funds. The aim is to establish one common framework for community level programmes through the PNPM and its Support Facility.

A number of donors, mainly EU Member States, have already contributed funds to the Support Facility, or are planning to do so in the near future (they are also participating in the Steering Committee): § Dutch Government: €9 650 000 contributed (and prospective additional

funds of approx. €15 000 000) § Danish Government (DANIDA): € 12 000 000 contributes § Australian Government (AusAid): € 4 000 000 contributed § British Government (DFID): prospective €4 000 000

3. DESCRIPTION

3.1. Objectives

The aim of the PNPM is to reduce poverty and improve local level governance in rural areas of Indonesia through the provision of investment resources to support productive proposals developed by communities, using a participatory planning process.

The Overall Objective of the proposed Action is to support the efforts of the Government of Indonesia to develop the local economy through the PNPM programme.

The Specific Objectives of the project are: § to strengthen the capacity of local authorities to plan and implement pro-poor economic policies with adequate resources and monitoring

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§ to empower local communities to plan and implement social and economic initiatives

3.2. Expected results and main activities The expected results are: § Increased capacity to selected local authorities trained in pro-poor economic

development planning

§ Increased transparency of selected local authorities reporting on progress in implementation of local development programmes

§ Increased accountability and efficiency in pro-poor service delivery, with adequate monitoring and evaluations systems of PNPM programmes in place which involve central and local authorities

The main activities supported by the trust fund are as follows:

a) Provision of support for small infrastructure works, social services projects and other community-led poverty reduction initiatives

b) Provision of support to intermediary NGOs and other civil society groups which engage in poverty reduction activities at grassroots level to be on-granted to groups which provide special services to poor communities, or to develop the capacity of such intermediary NGOs or groups to engage in such on-granting activities

c) Provision of technical advisory services an other material assistance to agencies of the Republic of Indonesia to support their long term capacity to engage in the long-term management of the PNPM

d) Provision of technical advisory services to support PNPM-related special studies and programmes, including establishment and operation of partnership office for harmonisation and co-ordination of PNPM-related programmes and technical advisory services, monitoring and evaluation activities, special activities, workshops and facilitated comparative studies, as well as activities in support of national and local government poverty reduction programmes or to develop the capacity of universities, think tanks and other organisations likely to contribute to the achievement of the purposes of the PNPM

Through the participation on the Steering Committee of the Support Facility, the EC will ensure particular attention is given to the following activities:

§ Technical assistance for local authorities (district, sub-district and village level) to develop and implement pro-poor economic policies

§ Technical assistance for the definition and implementation of monitoring and evaluation systems which involve central and local authorities

The Steering Committee (SC) of the Support Facility, where donors participate, has already been established to oversee and validate the overall direction and policy objectives pursued by the fund, approve projects to be funded and to act as a forum

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for discussion between GoI and donors in this area. The SC is chaired by the Indonesian Planning Agency Bappenas, and shall meet at least twice a year. 2 The Dutch, Danish, British and Australian Governments are participating, amongst others, in the Steering Committee.

3.3. Risks and assumptions Assumptions: § Continuous commitment of the present and future GoI to the poverty alleviation

and local economic development efforts through the PNPM. Risks and mitigation actions:

§ Risk: a programme of the scale and complexity of PNPM will be difficult to

manage by the GoI, and the success will depend on the level of co-ordination among central and local government institutions. Mitigation Action: the SFTF will provide technical assistance for the long-term management of the PNPM, and so support the GoI in its integration and coordination effort.

§ Risk: the scope of activities of the SFTF tends to continuously expand and thus could loose the original focus. Mitigation Action: through the participation in the Steering Committee the EC should ensure that the initial objectives of the Trust Fund are pursued, and that those are regularly monitored.

3.4. Crosscutting Issues

Gender equality is an important stated objective of the PNPM, and efforts are being made to ensure an increased public participation of women and other marginalised social groups.

Specific initiatives under PNPM have an important environmental angle. The project "Green KDP" covers watershed management, renewable resource energy and environmental education, and is supported by Denmark and in future the Netherlands.

Good governance is also a key crosscutting issue covered by the PNPM, as its main purpose is to improve Government's efficiency in co-ordinating local development initiatives.

3.5. Stakeholders

The organizational structure of PNPM covers all parties involved in achieving the goals of PNPM, including government, local communities, facilitators, technical experts both at central and at local levels. The Inter-ministerial Committee for Poverty Reduction (TKPK) chaired by the Coordinating Minister of People's Welfare acts as the Steering Committee, and integrates 12 Ministers, 6 State Ministers, the Cabinet Secretary and 3 Heads of State Agencies. The Support Facility is chaired by the Indonesian Planning Agency Bappenas, and has the World Bank as Trustee.

Target groups of the proposed action will be the local authorities (Kabupaten, Kota, Kecamatan) and locally-based community institutions (Inter-village Co-ordination Forum BKAD, Inter-village Consultative Forum MAD) who will increase their

2 The Steering Committee is composed by the Tim Pengendali (inter-ministerial PNPM oversight

committee) and donors contributing more than $1 million. As trust fund administrator the World Bank co-chairs the Steering Committee.

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capacity to develop and implement pro-poor economic policies. The management structure of the PNPM programme (PNPM Technical Team) will also constitute a target group as it will increase its capacity to monitor and evaluate the performance of the different local economic development activities.

Direct beneficiaries of the project are rural and urban communities, particularly the poor, women's groups, indigenous communities, and other community groups, so far sidestepped and marginalized in the economic development process. They will increase their participation, autonomy and authority in development policy decision making and project implementation.

4. IMPLEMENTATION ISSUES

4.1. Method of implementation

Centralised and Joint management

A Financing Agreement will be signed with the Beneficiary Government covering the entire project.

The project will be implemented by joint management through the signature of an Administration Agreement with the World Bank in support to the PNPM Support Facility Trust Fund.3

Evaluation and monitoring services will be implemented through framework contract in centralised management by the Delegation.

4.2. Procurement and grant award procedures

Centralised management

All contracts implementing the action must be awarded and implemented in accordance with the procedures and standard documents laid down and published by the Commission for the implementation of external operations, in force at the time of the launch of the procedure in question.

Joint management with an international organisation

All contracts implementing the action will be awarded and implemented in accordance with the procedures and standard documents laid down and published by the international organisation concerned.

3 A Memorandum of Understanding between the Government of Indonesia and the World Bank on

support to PNPM was signed in December 2007. According to this agreement, the World Bank will act as the administrator of the SFTF. This agreement is valid until 31st December 2013.

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4.3. Budget and calendar

The total cost of the action is 30 650 000 EURO. The EC will contribute 5 000 000 EURO, of which 4 900 000 EURO as contribution to the PNPM multi-donor Trust Fund, and 100 000 EURO for centralised activities (monitoring and evaluation).

Category Breakdown

EC

Euro

Other contributions 4 (approx. in Euro)

Total

Euro

Contracting/Paying

Authority

1. Services 100 000 100 000 EC

1.1 Monitoring and evaluation

100 000 100 000

2. Joint management

4 900 000 25 650 000 30 550 000 EC

2.1 Administration Agreement with the World Bank (PNPM support facility trust fund)

4 900 000 25 650 000 30 550 000

TOTAL 5 000 000 25 650 000 30 650 000

The operational period of the project will be a maximum of 60 months as of the signature of the Financing Agreement. 5

It is expected that the Administration Agreement will be signed in 2009 immediately after the signature of the FA by the Government.

4.4. Performance monitoring

The PNPM has twelve Key Performance Indicators for measuring progress. This system and corresponding baselines established by PNPM management will be the main basis for measuring the performance of the EC action and the impact on poverty, local economic development and capacity improvement at local level.

4 The Government of Netherlands has contributed € 9 650 000 (and is considering to provide additional

funds of approx. € 15 000 000), the Government of Denmark has contributed € 12 000 000 and the Government of Australia has contributed € 4 000 000. In addition DFID is considering to contribute approx. € 4 000 000.

5 The initial completion date for the trust fund has been set up by the World Bank in agreement with the

GoI to the 31 December 2013.

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Two of these indicators refer to the priority activities to be followed up by the EC:

§ Improved composition of regional budget for poverty alleviation activities § Increased number and quality of local regulations which are pro-poor

The World Bank will in accordance with the EC's administration agreement provide detailed reporting of the activities of the PSFP.

4.5. Evaluation and audit Evaluations and audit arrangements are integral part of the contractual arrangements with the selected international organisation. External evaluations (mid-term, final, ex-post) and audits will also be carried out by independent consultants recruited directly by the Commission in accordance with EC rules and procedures on specifically established terms of reference.

4.6. Communication and visibility The EC will ensure proper donor visibility is provided through the Trust Fund activities and the guidelines for visibility of EC actions are applied.