World Bank Document · DGBM - Directorate General Bina Marga (Roads and Bridges), MPW DGWRD -...

Document of

The World Bank

Report No. 15045-IND

STAFF APPRAISAL REPORT

REPUBLIC OF INDONESIA

SECOND EAST JAVA URBAN DEVELOPMENT PROJECT

APRIL 18, 1996

Infrastructure Operations DivisionCountry Department IIIEast Asia and Pacific Region

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CURRENCY EQUIVALENTS(As of October 1995)

Currency Unit = Indonesian Rupiah (Rp)

$1.00 = Rp. 2,260Rp 1 million = $442

WEIGHTS AND MEASURES

Metric Units

FISCAL YEAR

Government of Indonesia: April 1 - March 31Provincial and Local Governments: April 1 - March 31Water Enterprises: January 1 - December 31

TERMS AND ACRONYMS USED

AMDAIJANDAL - GOI environmen assessment proces/ReportAPBD I/Il - Annual provincial/local government development budgetAPBN - Annual central govemnent development budgetAPIP - Annual Project Implementation Plan for Local Govement and PDAMBANGDA - Directorate General for Regional Development, MHABAPPENAS - National Development Planning AgencyBAPPEDA I/11 - Provincial/Local Developmnent Planning AgencyBPKP - Central Audit BureauBupati - Kabupaten Chief Executive (Regent)CAS - Country Assistance Strategy of the BankCPMO/FO - Central Project Managenment Office/Finance Office in DGCKDATI 1/11 - Provincial/local level govermentDED - Detailed Engineering DesignDGCK - Directorate General Cipta Karya (Human Settlemnents), MPWDGBM - Directorate General Bina Marga (Roads and Bridges), MPWDGWRD - Directorate General for Water Resource Development MPWDPUK - Kabupaten/Kotamadya departrnent of public worksDIP/DIPDA - Central/regional project budgetEJBUDP - East Java/Bali Urban Development Project (Loan No. 3304-IND)GOI - Government of IndonesiaICB - International Comnpetitive BiddingIDC - Interest during constructionIKKab - Kabupaten headquarter townINPRES - Presidential Instruction, including a class of GOI grantsIUDP - Integrated Urban Development ProgramIUIDP - Integrated Urban Infirastricture Development ProgramKabupaten - Local (Level 11) RegencyKampung - Urban neighborhoodKIP - Kampung Improvement ProgramKotamadya - Incorporated municipality/city (Level II)LIDAP - Local Institution Development Action ProgramMCK - Communal lavatory and toilet facilityMIIP - Market Infirastructure Improvement ProgramMHA - Ministry of Home AffairsMOF - Ministry of FinanceMPW - Ministry of Public WorksMumni - "pure", as in Rupiah murni, or money from "purely" domestic sourcesNCB - National Competitive Bidding (formerly LCB or Local Competitive Bidding)NGO - Non-govenmmental organizationO&M - Operations and maintenancePADS - Pendapatan Asli Daerah (local government taxes and charges)PBB - National land and buildings taxPDAM - Local government water enterprisePIMPRO - Project Manager of budget projects (DIP/DIPDA)PJM - Medium-Term Expenditure Program (Program Jangka Menega)POMMS - Performance Oriented Maintenance Management SystemPPIM - Provincial Program Implementation MemorandumPPMO - Provincial Project Management Office within East Java BAPPENAS IPTCU - Provincial Technical Coordination Unit within East Java Dinas of Public WorksPUOD - Directorate General for Public Administration and Regional Autonomy, MHARAKORBANG HI - Provincial/local annual budget coordination processREPELITA - Five-year Development PlanRIAP - Revenue Improvement Action PlanSDO - Routine central GOI grant, primarily for salaries to local governmentsSekwilda lI - Chief Administrative Officer - Secretary of ProvinciaVLocal GovernmentSLA - Subsidiary Loan AgreementSK - Surat Keputusan, decree of a senior officialSOE - Statement of ExpenditureSOP - Standard Operating Procedures Manual for the ProjectSPABP - Funds channeling document for special grants to lower level govenmmentsTKPP - Inter-Ministerial Urban Development Coordination Team, chaired by BAPPENASUKLtUPL - Environmental Management/Monitoring PlansUNDPAUNCHS - United Nations Development Programme/U.N. Center for Human SettlementsUPAP - Urban Policy Action Plan of GOIWalikota Kotamadya chief executive (mayor)

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LOAN AND PROJECT SUMMARY

Borrower. Republic of Indonesia

Implementing The Directorate General of Human Settlements (Cipta Karya) in the Ministry ofAgencies: Public Works is the executing agency. The provincial government of East Java is the

principal implementing agency, with the participation of up to 36 local governments andtheir water enterprises.

Beneficiaries: More than 5 million residents of urban areas in East Java Province (excluding the Cityof Surabaya).

Poverty: N.A.

Amount: US$142.7 million

Terms: Repayable in twenty years including five years of grace, at the Bank's standard variableinterest rate for currency pool loans

Commitment Fee: 0.75% on undisbursed loan balances, beginning 60 days after signing,less any waiver

Onlending Terms: From the loan proceeds, up to 67.5 million equivalent would be onlent by the centralgovernment to the participating local governments and their water enterprises, at anannual interest rate of 11.750/o, for a term of up to 20 years, based on the expectedeconomic life of the assets created including up to five years grace during construction.Local governments and their water enterprises are filly responsible for the interestduring construction. Subsidiary Loans will be denominated and repayable in Rupiah.

Financing Plan: Financial responsibilities for the individual subprojects are assigned in accordance withan agreed system of functional responsibilities among the central, provincial, and localgovernments.

Economic Rate of 12% or more for water supply, roads, drainage and KEP;Return: not quantified for other components

MOP: P-6725-IND

Map: IBRD No. 27476

Project ID No.: ID-PE-39312

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TABLE OF CONTENTS

Page

LOAN AND PROJECT SUMMARY .......................................................... ii

L THEE URBAN SECTOR . .......................................................... 1A. Sector Overview ............................................................ 1B. Government Strategy ........................................................... 4

HI. BANK INVOLVEMENT AND LESSONS OF EXPERIENCE ................ 6

III. URBAN DEVELOPMENT IN EAST JAVA ............................................ 9A. Population and Urban Services ........................................................... 9B. Urban Planning and Financing ............................................... 1........... 1

IV. TIE PROJECT .. 13A. Project Origin and Formulation .......................................................... 13B. Project Objectives .......................................................... 14C. Project Description .......................................................... 16D. Project Costs .......................................................... 21E. Financing Plan .......................................................... 23

V. PROJECT IMPLEMENTATION .......................................................... 25A. Project Implementation Arrangements ....................................................... 25B. Local Implementing Agencies ............................................... ........... 26C. Implementation Schedule ........................................................... 28D. Project Coordination and Monitoring ........................................................ 29E. Procurement and Disbursements .......................................................... 30F. Project Accounts and Audits .................................... ...................... 33G. Project Reporting, Monitoring and Bank Supervision . . 35H. Operations and Maintenance ...................................... 36I. Land Acquisition, Resettlement and Compensation ..................................... 36J. Environmental Impacts .......................................................... 37K. Public Participation ........................................................... 38

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VL FINANCLAL ASPECTS ......................................................... 39A. Local Governments ......................................................... 39B. Water Enterprises (PDAMs) ......................................................... 41

VII PROJECT JUSTIFICATION AND RISKS ........................... ................. 43A. Economici Justification ......................................................... 43B. Risks ......................................................... 49

VIII. AGREEMENTS TO BE SOUGHT AND RECOMMENDATION ...... 50A. Assurances and Agreements To Be Sought During Negotiations ............... 50B. Condition of Board Presentation ......................................................... 51C. Condition of Loan Effectiveness ......................................................... 51D. Conditions of Disbursement ...................................... 52F. Recommendation ......................................................... 52

TABLES IN TEXTTable 4.1: Project Components by Sector ......................................................... 17Table 4.2: Project Cost Summary ............................. ............................ 22Table 4.3: Financing Plan ......................................................... 24Table 5.1: Procurement Arrangements ......................................................... 32Table 5.2: Disbursements ......................................................... 34Table 5.3: Estimated Disbursements by FY ......................................................... 34

ANNEXES1. Previous Urban Infrastructure Projects ......................................................... 552. Summary of Mid-Term Review of East Java-Bali Urban

Development Project ......................................................... 563. List of Eligible Project Cities and Urban Areas ............................. ................ 584. Program Monitoring Systems and Performance Indicators .625. Human Waste/Sanitation Component Description .716. Summary of Technical Assistance .787. Summary Project Cost and Financing Plan Tables .808. Outline of Program Implementation Documents (PPIM and APIPS) .869. Implementation Schedule .9010. Implementation Responsibilities - Organization Charts . . 9211. Estimated Schedule of Disbursements ........................................................ 9612. Supervision Staffing and Schedule ......................................................... 9813. Mitigation of Negative Environmental Impacts ............................................. 9914. Local Government Financial Indicators ........................................................ 10315. Water Enterprise (PDAM) Financial Analysis ............................................... 10416. Technical and Economic Criteria .................................... 10517. Documents in Project File ......................................................... 112

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MAP

Urban Areas of East Java Province (Map No. IBRD 27476).

This report is based on the findings of an appraisal mission which took place from July 10to August 2, 1995 and a post-appraisal review mission which was conducted fromNovember 1-10, 1995. The combined missions included Messrs. Stephen Dice,Sr. Urban/Environmental Specialist and mission leader, Raja Iyer, Pr. ManagementSpecialist, Keiichi Tamaki, Urban Specialist (EA31N); Teresa Genta-Fons, Sr. Counsel(LEGEA); Robert Scouller, Operations Officer, George Soraya, Operations Officer,Suhadi Hadiwinoto, Social Impact Specialist, Thomas Walton, Environmental Specialist(Resident Mission, Jakarta); and Brian Binder, Financial Specialist (consultant). Mr.Anupam Khanna, Division Chief, EA31N, and Ms. Marianne Haug, Director, EA3, haveendorsed the project.




L. URBAN SECTOR

A. SECTOR OVERVIEW

1.1 Demographic Trends. The current urban population of Indonesia exceeds 55million, or nearly 30% of the national total population of 190 million. Indonesia's urban growthrates have accelerated during the past 15 years, averaging nearly 6 percent per year during thepast decade, more than double the overall national population growth rate. About 80 millionpeople, or 40 percent of Indonesians, will be city dwellers by the year 2000. Indonesia's urbansettlements include 15 metropolitan and large cities of at least half a million people, 40 secondarycities of 100,000 to 500,000 residents (provincial capitals and incorporated municipalities), 200smaller towns (mainly regency headquarters) of 20,000 to 100,000 population, and about 3,200service centers and subdistrict headquarters with 3,000 to 20,000 people. Approximately 70% ofIndonesia's urban population reside in the cities and towns on the island of Java.

1.2 Institutional Framework. At the national level, there is no single ministry forurban development. The National Development Planning Agency, BAPPENAS, is responsible foroverall planning and allocation of GOI development resources managed in the framework of Five-Year Development Plans (REPELITA) and Annual National Development Budgets (APBN).Within BAPPENAS, the Bureau for Urban Development, Settlement and Public Housing, underDeputy Chairman V (Regional and Provincial Development), is responsible for oversight andcoordination of urban infrastructure development, in cooperation with other involved Bureaus(e.g. Transport under Deputy I). All key central agencies with responsibilities in the urban sectorare represented in the Inter-agency Coordinating Team for Urban Development (Tim Koordinasi -TKPP) chaired by BAPPENAS.

1.3 The principal central ministries involved in urban issues are the Ministry of HomeAffairs, the Ministry of Public Works, and the Ministry of Finance. The Ministry of Home Affairs(MHA) is responsible for oversight of the regional governments, primarily through its DirectorateGeneral for Public Administration and Regional Autonomy (PUOD) and Directorate General forRegional Development (BANGDA). The Ministry of Public Works (MPW) has technicalresponsibility for oversight of most infrastructure development and resulting services provision.Within MPW, the following directorates-general are responsible for urban infrastructure: theDirectorate General for Human Settlements (Cipta Karya or DGCK) is responsible for oversightof city and regional planning, water supply, urban drainage, sanitation and sewerage, solid wastemanagement, kampung improvement programs (KIP), and market infrastructure improvementprograms (MIIP); the Directorate General for Roads (Bina Marga or DGBM) is responsible foroversight of urban roads and bridges; and the Directorate General for Water Resource

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Development (Pengairan or DGWRD) is responsible for urban flood control and bulk watersupply. The Ministry of Finance (MOF) is responsible for central and local finance; theDirectorate General for Budget (Anggaran or DGA) administers budget transfers.

1.4 At the regional levels, provincial (Level I) and local (Level II) governmentsoperate with increasing responsibilities and delegated authority. In all, there are 27 provinces and304 local governments, including 57 kotamadyas (urban municipalities) and 247 kabupatens(regencies). Legislative powers at both provincial and local levels are held by elected People'sRepresentative Councils (Dewan Perwakilan Rakyat Daerah or DPRD).

1.5 Under Indonesia's unitary system of government, all units of sub-nationalgovernment are within the Ministry of Home Affairs. Provincial governments are headed byappointed governors who represent the President and the central government; the governors alsohead the semi-autonomous provincial administrations. Bupatis (regency heads) and Walikotas(municipal mayors) represent provincial governments, and head their own local governments.Regional Development Planning Agencies (BAPPEDA I and II) report directly to their respectivegovernors, regency heads or mayors, and are responsible for planning and resource allocation,while the senior administrative officer at each level is the Regional Secretary (Sekwilda I and II).Regional government services are provided by separate departments (Dinas I and II) analogous toline ministries of the central government, who have their own deconcentrated regional offices(KANWIL) for implementing central GOI projects.

1.6 Sectoral Coordination and Local Participation. Due to the hierarchicaladministrative system, coordination of the urban sector has been difficult. The large size anddiversity of the country, the rapid pace of urbanization, the number of concerned agencies, poorresource allocation and cultural constraints to effective communication within and amongagencies, have led to a somewhat fragmented approach to urban development. In order toimprove coordination and targeting of resources to local urban services needs, the Government ofIndonesia's (GOI) policy of decentralization needs to be pursued more effectively.

1.7 Increasingly, it is becoming apparent from development experience worldwide thateffective community involvement leads to improved service provision. GOI's desire todecentralize is requiring the adoption of practical means of public participation, with increasedaccountability of local leaders and government staff. By entering into constructive dialogue withthe community, officials are also able to better plan and program needed service improvements.GOI regulations for annual development budget preparation (the RAKORBANG process) call forcommunity consultation and participation at all levels, but implementation of this process isuneven.

1.8 Sector Constraints and Priorities. Average incomes in urban areas have risensubstantially over the past decade; however, income distribution remains relatively skewed and in1990, more than 17 percent of Indonesian urban dwellers were estimated to live in "absolutepoverty" based on their expenditure levels. The problems of low income are exacerbated bydeficiencies in basic services and degraded environmental conditions. Country-wide, only about20-25 percent of urban households have direct access to piped water supply, another 15 percent

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buy drinking water from vendors or standposts, and the rest rely on shallow wells and sometimeson surface water courses. Surface water courses in urban areas are almost universally polluteddue to inadequately treated wastewater. Only about 40 percent of urban households have accessto adequate sanitation facilities. In the larger cities, inadequate industrial water supply, and liquidand solid waste disposal are serious problems. To meet GOI's service and equity objectives, moreinvestment is needed in local or tertiary systems in poorly served urban areas. The Bank's 1993Urban Public Infrastructure Services Report (No. 12154-IND) estimated that the 1990infrastructure investment backlog was at least some US$5 billion for the main five subsectors(piped water, sanitation, solid waste, urban roads, and drainage). Further, a substantial backlogprevails in the maintenance of facilities, which has resulted in decreased productivity of previousinfrastructure investments.

1.9 Sector Finances. Finances of provincial and local governments have long beendominated by central government transfers and are characterized by weak local resourcemobilization, low per-capita budgets and limited use of credit for capital investment. Thetraditionally dominant role played by GOI central government financing of local governmentinfrastructure is partly due to the GOI unitary system which limits local authority for levyingtaxes. Grants and other revenue sharing mechanisms used by GOI are intended to resolve thedisparity between increasingly decentralized service responsibilities and local resourcemobilization. Although grant allocation criteria have been modified to respond better to localneeds and shortfalls (compared to minimum standards), there is a need to more closely relategrant allocations to local performance and economic productivity requirements.

1.10 Local governments are required by MHIA to prepare and implement RevenueImprovement Action Plans (RIAPs) to improve revenues under their own administration. Whilethis has improved the situation in many local governments including those in East Java, there isstill much room for further local revenue growth. Restructuring of central-local governmentfinancial relationships and improved fiscal capacities for local governments in Indonesia are topicsof on-going policy dialogue which are gaining increased urgency as growth in urban servicesrequirements outpaces local capacities to respond. The larger infrastructure projects are stilloften financed directly from the national budget (APBN/DIP) and are executed by the regionaloffices of central government agencies (Kanwil) for subsequent transfer to the local government.However, these projects frequently lead to land acquisition and/or operations and maintenance(O&M) obligations which the local governments are not fully capable of undertaking orsustaining. Local government borrowing capacities are generally quite limited and incentives toborrow are weak in the current financing pattern, although some capable local government arewilling to accelerate their development program by borrowing.

1.11 Urban Infrastructure Issues. The main problems and issues faced by allIndonesian urban areas are: (a) serious infrastructure deficiencies and O&M backlogs; (b) lack ofcoordination in integrating infrastructure investments with land management and transportobjectives; (c) no administrative status for urban areas, other than the largest cities (Kotamadya);(d) weak management of water enterprises; (e) poor financial management system includingdeficient accounting practices, the lack of adequate cost recovery, weak revenue generation, andlittle use of credit, as well as poor information systems; (f) inefficient programming of the design

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and construction cycles, often compressed into single fiscal years; (g) complex relationshipsamong local, provincial and central agencies with respect to responsibilities for project andprogram preparation, appraisal, financing, implementation, and O&M; and (h) shortage of trainedand experienced managerial and technical personnel at all levels.

B. GOVERNMENT STRATEGY

1.12 UIUDP Approach. With large deficiencies in urban infrastructure and a fast-growing urban population, GOI's strategy in the past has emphasized physical infrastructuretargets: length of roads to be built, percentage of population to be supplied with piped water,sanitation services, etc. These targets have a prominent place in the five year nationaldevelopment plans (REPELITAs). In 1987, GOI issued a statement of urban policies,representing a consolidated view of development in the sector. This Policy Statement for UrbanDevelopment, incorporated in REPELITA V (for the period 1989-94) includes: (a) strengtheninglocal governments to build, operate and maintain local services; (b) improving the planning andprogramming of urban infrastructure investments; (c) mobilization of local revenues and theoptimization of their use; and (d) strengthening consultative processes at various levels ofgovernment, particularly the participation of municipalities and regencies.

1.13 GOI's Policy Statement called for Integrated Urban Infrastructure DevelopmentPrograms (IUMDP) as the operational approach for achieving the above objectives. The policywas translated into action plans for local institutional strengthening (Local InstitutionalDevelopment Action Plan or LIDAP) and improvements in local resource mobilization (RIAP),sector programming, and financing arrangements. GOI has also provided (with domestic funds)further support to the reform effort of the local government revenue departments (DISPENDA),initiated under .the Fifth Urban Project (Loan 2408-IND). In the current five-year plan(REPELITA VI), GOI has continued to develop the LUIDP process to emphasize the followingpriorities: (a) expanding the scope of the IUMDP process to include additional subsectors whichare important in promoting the economic development of cities; (b) strengthening localgovernment institutional capabilities; (c) improving O&M of urban infrastructure; (d) improvingcost recovery and implementation of a more fully integrated system for the financing of urbaninfrastructure services; and (e) increasing attention to urban land and environmental management.GOI is also encouraging experimentation by local governments with various mechanisms forprivate sector participation in urban services delivery.

1.14 GOI also issued regulations and policy clarifications to operationalize urban sectorpolicy and the IUIDP approach; with World Bank, Asian Development Bank (ADB) and bilateralassistance, GOI created a nation-wide program for IUIDP preparation and implementationbeginning in 1987; and UNDP/UNCHS and the Bank supported a central assistance team to theIUIDP process led by TKPP at BAPPENAS. To date more than 75 percent of local governmentshave completed IUIDP program preparation and initiated implementation.

1.15 Local Borrowing. Under REPELITA V, GOI also gave priority to the expansionof borrowing by local governments and their water enterprises (PDAMs). To induce a higherlevel of credit financing, GOI adopted less conservative financial criteria for borrowing by local

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entities (debt service coverage ratio of not less than 1.5 for local government general fuindoperations and not less than 1.3 for local enterprises such as PDAMs). This has brought the legalborrowing capacity of local governments, particularly the larger municipalities, more in line withtheir considerably underutilized financial capacity. There is, nevertheless, a natural preference forgrant financing on the part of local governments, especially for investments that do not directlygenerate revenues through service charges. GOI's intent is to fix medium and long-term interestrates for local governments and their enterprises at a level approximating market rates fordevelopment borrowings, but suitable reference rates reflecting market conditions for long-termborrowing are only now emerging from recent public sector bond sales. The Ministry of Financesets fixed rates for local government borrowings each year for loans initiated during that year; forthe past two years the rate has been 11.75% which has been positive in real terms and generallyapproximates market borrowing costs.

1.16 REPELITA VI. REPELITA VI and the second 25 Year National DevelopmentPlan, both of which started in April 1994, emphasize sustainable urban development throughimprovement in the quality of the living environment, support for economic growth, reduction inregional development disparities, and povertyalleviation. Perhaps the most significant changereflected in REPELITA VI is to shift the focus of GOI urban programs from overcoming currentservice deficits to a more forward-looking emphasis on the investments needed to realize theeconomic potential of urban areas, including their functions as service centers for regionaldevelopment. While continuing the basic premises of REPELITA V and the National PolicyStatement for Urban Development mentioned above, REPELITA VI takes a more strategicapproach by expanding the IUIDP into an Integrated Urban Development Program (IUDP) thatincludes: (a) a larger number of smaller cities and towns; (b) broader spatial planning and urbanplanning in addition to public works infrastructure development plans; (c) expanding the scope ofthe Kampung Improvement Program (KIP) to cover low income and rental housing, infrastructureprovision for low-income areas, and urban renewal; (d) involving the private sector andcommunities to a greater extent; and (e) strengthening environmental sustainability. To acceleratedecentralization and implementation of plans, emphasis is being placed on better use of resources,mobilization of local revenues, developing financing mechanisms, and increasing cost recovery bymunicipalities and their agencies. Better coordination and strengthening of local agencies is alsobeing sought. Financing policies for urban services emphasize local government revenueimprovement as well as greater efficiency in the deployment of the revenues, and increased use ofthe central government lending and special urban grant mechanisms as the means of financingurban development under local management.

1.17 Environment and Resettlement. In 1993, GOI enacted Government Regulation51/93 on environmental impact assessment, mitigation and monitoring measures, and PresidentialDecree (KEPRES) 55/93 on land acquisition for the development of public facilities, to improveon earlier decrees and their application. Government Regulation 51/93 makes refinements toGOI's environmental assessment procedures, which are now substantially consistent with Bankpolicies and best practices under Bank-financed projects. Implementing regulations for KEPRES55/95 (Operational Directive 1/94 by the National Land Agency - BPN ) were issued in June 1994and implementation of these improved procedures is currently underway. KEPRES 55/93 andBPN-OD 1/94 seek to ensure persons affected by project land acquisition have adequate access to

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information, fair negotiations, compensation packages based on market values, and grievanceprocedures. However, there are still some policy matters, primarily in the areas of entitlementeligibility, compensation calculations and funding sources, where there is some divergence fromBank's Operational Directive regarding involuntary resettlement (OD 4.30). One of theinstitutional capacity building tasks of the project will be to assist East Java province and the localgovernments to fully comply with GOI and related Bank requirements for environment andresettlement issues (see paras. 5.30-5.35).

II. BANK INVOLVEMENT AND LESSONS OF EXPERIENCE

2.1 Overall Sector Experience. The Bank has been involved in the urban watersupply sector since the 1960s, with relatively little change in approach. While many projects haveprovided substantial economic and health benefits, the experience indicates: (a) supply of waterhas lagged behind increasing demand; (b) delays in project implementation are common; (c)improving institutions and achieving cost-recovery have been slow, difficult and neglected; (d)water quality is a persistent problem; and (e) disposal of waste water in densely populated areashas been difficult.

2.2 Bank involvement in the urban sector started in the early 1970s with low costinvestment projects in shelter, water supply, sanitation, and urban transport, aimed at alleviatingurban poverty. Sites and services and slum upgrading projects were to demonstrate replicableapproaches benefiting the poor, while recovering costs and reducing the financial burden on thepublic sector. Many of these projects succeeded in physical terms, but had little impact on thepolicies of national and local governments and on urban management. The Bank had not paidadequate attention to the policy and institutional requirements for improving the productivity ofthe urban economy and reducing urban poverty, and improving management of the urbanenvironment. Further, as many of the urban programs did not achieve sustainable policy reformand institutional development, project approaches were generally not replicable outside theframework of Bank financial support.

2.3 By the mid-1980s the experience of donor-assisted projects had led to shifts inapproaches to the urban sector. It was recognized that central governments alone were unable tomeet the increasing needs for infrastructure services of rapidly growing urban populations andgreater efforts had to be devoted to: (a) improving the management capability of urbaninstitutions and inter-governmental fiscal relations; (b) improving local resource mobilization; (c)enhancing the management and quality of urban infrastructure, particularly with regard tomaintenance; (d) establishing enabling rather than constraining regulatory frameworks; (e)expanding financial services for urban development; and (f) promoting private sector participationin urban service delivery. Recent initiatives by governments and donors in these areas reflect agrowing appreciation of the importance of policies, institutions, and regulations in formulatingeffective strategies to manage urban growth.

2.4 Experience in Indonesia. The Bank has financed 13 completed and eightongoing urban and water supply projects in Indonesia since 1974, for more than sixty local

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governments and many of their water enterprises (see Annex 1). Urban lending operations inIndonesia have progressed from demonstration projects in Jakarta through more programmaticinvestments in selected other large cities, to sector lending within an agreed policy andinstitutional framework (although still limited in terms of area and subsectoral scope). Watersupply projects initially covered only a few cities at a time, but later, like Bank projects in othercountries, assisted a large number of urban settlements under one operation. Details concermingBank-funded water and urban infrastructure projects are available from a study carried out by theOperations Evaluation Department (OED) in September 1995 entitled, 'Indonesia: ImpactEvaluation Report, Enhancing the Quality of Life in Urban Indonesia - The Legacy of KampungImprovement Program" (Report no. 14747-IND). In urban transport projects, or the transportcomponents of urban development projects, attention has focused on road construction and trafficmanagement and maintenance. Even so, implementation of road schemes has been slower thanexpected, and quality of construction has frequently been the cause of reduced facility lifespan.Inadequate attention was given to improvement of public transport services and facilities for non-motorized vehicles or pedestrians.

2.5 Bank experience confirms that: (a) limited planning and implementation capacitiesat the central government level, and the difficulties inherent in providing essentially local servicesby central government departments, reduce the efficiency of mass delivery programs; (b) capacitybuilding at the local level is a long-term process that needs to be accompanied by structural andinstitutional strengthening to achieve an increase in local responsibility and accountability; and (c)to develop such responsibility and accountability, central-local financial relations need to providemore local government autonomy and enable private sector involvement. Furthermore, the OEDstudy cited above concluded that under conditions of rapid economic development, targeted urbansector improvement programs can have a very positive impact on low-income areas, and thatthose impacts can be achieved at a low cost of investment that reaps high economic rates ofreturn. The mid-term review of the East Java-Bali Urban Development Project (EJBUDP - Loan3304-IND) carried out in February 1994 supports this conclusion (see Annex 2). The proposedproject design takes into account these lessons. Significant responsibility in subproject selectionand implementation will be handled by the local governments and their water enterprises withprovincial support in the proposed programmatic approach to this project; suitable assistance inproject management, local revenue administration, and improvements in operations andmaintenance will be provided; and management advisory services will be provided to the waterenterprises.

2.6 Bank Sector Strategy. The Bank has oriented its overall sector lending to assistthe Government to deliver adequate urban infrastructure services in cost-effective ways. GOI andthe Bank emphasize improvements in: (a) service levels, particularly for lower income groups; (b)urban productivity and the effectiveness of investments through better infrastructure planning andprogramming, especially at the city level, (c) enhanced local government capacity for fiscalmanagement, revenue mobilization, project implementation and O&M; (d) the urban environmentby enhancing local government capacity to plan, build and operate infrastructure in anenvironmentally sound fashion; and (e) by enhanced community participation.

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2.7 In promoting efficient urban development, the Bank's strategy supports theexpanded IUDP approach; however, implementation should include both sectoral and integratedapproaches as appropriate. While all plans should be integrated, in some cases, implementationcould be handled through separate sectoral projects. For example, in smaller municipalitiesmultisectoral projects are generally of manageable size and complexity; an integrated investmentapproach would, therefore, be more appropriate. In other cases, where the requirements of aparticular sector are sufficiently large and complex, both in technical terms as well as on policy,institutional and financial matters, sectoral projects within the framework of an integrated planmay be better suited to implementation capacities.

2.8 The Bank's urban development financing strategy in Indonesia emphasizesincreased local resource mobilization through the improvement and efficient deployment of localgovernment and water enterprise own-source revenues, including appropriate use of the enhancedborrowing capacities which will arise as a consequence of the improvements in revenue. Evenwith such improvements, however, the capacities of the local institutions to contribute to thefinancing of the extensive urban infrastructure deficiencies will in most cases remain limited forthe foreseeable future, occasioning a continuing need for supplementary special assistance fromthe central government in the form of non-repayable financing contributions. Recognizing theneed for such special assistance to be structured so as to provide an incentive for the mobilizationof improved local revenues into the urban infrastructure sectors, as well as to promote theobjective of decentralization of responsibilities to the local level, the Bank supports the provisionof assistance in the form of financial investment grants which complement local revenues andborrowing contributions on a matching principle, with the implementation of the grants beingmanaged by the local institutions. In all these respects the Bank's strategy is fully in accord withthe policies enunciated in REPELITA VI.

2.9 The Bank's strategy also promotes establishing an enabling regulatory and planningframework for urban land management. A key focus of the Bank's strategy will be to supportG0I efforts to establish an effective land management system and simplify other regulations tofacilitate more efficient and environmentally sound urban land use and strengthen land tenure.The Bank is also assisting the Government to develop improved implementation frameworks foraddressing environmental and social impacts of urban projects.

2.10 Rationale for Bank Involvement. The Bank's 1995 Country Assistance Strategy(CAS) for Indonesia discussed in March 1995 highlights the need for improving public servicedelivery in the economy and to the poor in particular, greater decentralization of responsibilities,and improved environmental management. In the urban sector, the Bank therefore supports theintegrated urban development concept and enhancing coordination of planning, implementationand supervision among all levels of government, in order to improve the delivery of urban servicesand enable local governments to assume greater responsibility for urban management. Theproposed project would help GOI meet these needs in the second most populous province ofIndonesia by emphasizing: the decentralization of responsibility for project management andimplementation; the integration of environmental considerations in urban developmentmanagement; the strengthening of local government institutions and human resources for urbanmanagement; the improved access to services, priced at an affordable level to lower income

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groups and under-serviced areas, as well as new development areas; community participation inurban investment programs; and the generation of resources for infrastructure investment. Thethrust of the project is also consistent with the poverty alleviation and environmental improvementobjectives of the CAS as the project includes targeted interventions designed to improve thestandard of living and the quality of the environment in the poorer kampung areas of the city ofMalang and smaller urban areas throughout the province.

2.11 During the past two decades, the Bank has provided critical support and strategicinput to the evolving GOI urban policy agenda. With its tradition of administrative competenceand its diversity of local conditions, East Java has served as an appropriate venue for Bank-GOIurban collaboration during this entire period, from early urban projects in Surabaya and twoprovincial-scale water supply projects to the integrated program concepts now beingimplemented. The ongoing EJBUDP represents a radical departure from previous urbanoperations in an attempt to operationalize Bank support to implementing the GOI urban policy.The EJBUDP pioneered approaches to decentralized Bank operation in Indonesia, including theutilization of provincial capacities for intermediation and the programmatic application ofenvironmental assessment procedures. As documented by the mid-term review of EJBUDP in1994 (see Annex 2 for summary), the remarkable success of East Java and Bali provincial andlocal governments in preparing and implementing local integrated programs has established thebasis for further development of this decentralized model. The proposed operation provides anopportunity for GOI and the Bank to address some of the remaining local services deficits andissues identified in the mid-term review, while preparing a more strategic regional approach tourban infrastructure and services provision, as called for in the GOI REPELITA VI and Second25-Year Plan. The Bank's continued participation in the refinement of GOI urban strategy is acornerstone of the Bank's CAS and is essential to its success.

Im. URBAN DEVELOPMENT IN EAST JAVA

A. POPULATION AND URBAN SERVICES

3.1 Population. With over 32.5 million people in 1990, East Java province has alarger population than Central Java and Yogyakarta combined, with only West Java provincehaving a larger population. The average population growth rate during the 1980s was 1.1%annually, the lowest among Indonesia's provinces. This low total growth, however, conceals thefact that East Java is a rapidly urbanizing province with the urban population growing at anaverage annual rate of 4.5% during the 1980s. By 1990 East Java's urban population had reachedsome 9 million, about 27.4% of the total population. The capital of East Java, Surabaya, is thesecond largest city in Indonesia, with a population of over 3.5 million in 1990. The province hasthree other large cities (i.e., Malang, Kediri, and Jember) of more than 250,000 inhabitants in1990, as well as five additional incorporated cities and six unincorporated towns with urbanpopulations between 100,000 and 200,000. Perhaps most significantly, there are more than 100unincorporated towns in East Java with populations ranging from 10,000 to more than 100,000(see Annex 3 for list of towns and cities), nearly all of which are growing more rapidly than theprovincial total population. This urban growth is being driven by several factors.

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3.2 First, the composition of East Java's regional economy experienced a structuralshift during the 1970s and 1980s. The share of Gross Regional Products (GRP) contributed byagriculture declined from some 50% in 1971 to less than 30% in 1987, and the industrial sector(mining and quarrying, manufacturing, utilities, and construction) increased from about 14% tonearly 24% over the same period, most of the change occurring after 1983. There was also anincrease in the services sector, mainly in the trade and transport sectors, from 36% to some 47%.Moderate but sustained rates of growth were achieved in all the three sectors, agricultureaveraging 3.5% per year during 1983 to 1987, manufacturing 7.2%, and services 6.4%. Thisbalanced diversification of economic activities is what distinguishes East Java from otherprovinces and is the major stimulant to East Java's development. Incomplete data from morerecent years suggest that these trends are continuing, even accelerating with nearly all growthfocused in urban areas. It is clear that East Java will be a focal point in the transition ofIndonesia's economy during the coming years.

3.3 Second, along with the shift of the regional economy, the central core region of theprovince, bounded by Surabaya, Malang, Kediri, Pasuruan and Probolinggo, which has long beena highly-productive plantation area for sugar cane and an extremely fertile rice-growing region,became a center of manufacturing industry growth. This uniquely productive area contributes anunusually high share of Indonesia's tax revenues. The poorest parts of the province are found onthe island of Madura, in the four southwestern regencies in the remote and relatively isolatedlimestone hills (Pacitan, Ponorogo, Trenggalek, and Tulungagung) and in the northwesterndistricts of Bojonegoro and Tuban along the Solo River valley. There is limited agriculturepotential in these areas due to water shortages or periodic flooding, and there is little prospect ofdeveloping manufacturing industries on any significant scale because of locational disadvantages.People therefore are moving out of these areas to the core urban region in search of employmentopportunities and higher income. Thus, East Java is urbanizing rapidly, and in combination withthe economic transition noted above, must aggressively prepare for faster urban growth whileprotecting its unique natural resources and agricultural productivity.

3.4 Urban Services. Despite the initial efforts made under the EJBUDP and otherprevious projects, the continuing rapid urban growth has exerted heavy pressures upon urbaninfrastructure and there are significant backlogs in the provision of urban infrastructure services.For example, in the water supply subsector, piped water connection coverage is typically low andalmost all existing distribution and connection pipes are cracked and leaking, causing watercontamination and large water losses. In the urban road transport subsector, some 7,000 km ofroads are in a state of serious deterioration. There is no integrated major road network and trafficis congested on major roads and in business centers. In the solid waste management subsector,less than half of the solid waste is being collected. Collection and treatment equipment falls shortof fast growing demand and access roads to waste disposal sites are also inadequate. In thehuman waste/sanitation subsector, facilities and collection equipment are inadequate anddesludging volume is less than 20% of the volume produced. In the drainage/flood controlsubsector, poor maintenance, insufficient capacity, and inappropriate designs lead to floodingproblems in many low lying areas and along river banks.

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3.5 Lack of adequate basic urban infrastructure services hurts the poor most because itis primarily they who do not have access to clean and affordable water and waste disposalfacilities, and who usually live in low-lying areas that are often affected by flooding. Incomedisparities between the richest and the poorest groups in East Java are still wide by Indonesiastandards. The Bank's 1993 analysis of poverty in Indonesia showed that East Java has the largestnumber of residents in poverty of any province. In addition, East Java's urban poor were foundto have the largest 'poverty gap" to overcome among those provinces with significant urbanpopulations.

3.6 Insufficient urban infrastructure services also restrain East Java's industrial sectorfrom fully realizing its potential. East Java has the second largest industrial complex in Indonesiain terms of employment and establishments, and it contributes at least 21.5% of the national valueadded by manufacturing. East Java also produces the highest non-oil gross domestic productamong all the provinces. However, inadequate infrastructure services make the industrialproduction and distribution inefficient and frustrate foreign capital investments. In 1994 severalhundred approved foreign investment applications, which were expected to provide the neededimpetus to the regional economic development, failed to materialize at least in part because of theinfrastructure deficiencies, primarily in water supply, transport and waste disposal.

3.7 Utilizing the data and forecasts of economic activity in East Java presented in therecent Bank report: 'Indonesia: Environment and Development: A World Bank Country Study',Figure 3.1 on the following page graphically displays the potential environmental problems to befaced by East Java provincial and local governments without an aggressive effort to developpublic and private infrastructure and institutional capacities, particularly environmental and naturalresource management capacities. The provincial government has recognized the implications ofeconomic growth for its natural resources and related land and water-dependent activities, and hasinitiated efforts to strengthen regional management and regulatory frameworks, as noted in thefollowing section. The recent rates of conversion of farmland to urban uses, together with recentwater shortages and pollution problems with both water and air attest to the urgency of theseissues in East Java, and the high priority of efforts to articulate a regional development strategy.

B. STRATEGIC PLANNING AND PROGRAMMING

3.8 Both East Java Province and the city of Malang have recently prepared updatedspatial plans and development strategy documents. The City of Malang program focuses on thecity's role as a center of higher education and its potential as a tourism and retirement center.The provincial plan emphasizes the industrial development potential of the north coast area andthe corridor fi am Surabaya to Malang. The potential for utilizing the regional cultural heritage asthe impetus for a strengthened tourism industry is also evaluated, but not developed in detail.Further work is needed to define the policy framework required to realize the regionaldevelopment potential; this will be the focus of the efforts to prepare the proposed East JavaStrategic Regional Development Program (EJUDP 3).

3.9 Further, there is now widespread recognition by provincial and local officials that:(a) the IUIDP process used to date is too focused on alleviating current services deficits, rather

Projected Manufacturing Outputs & Pollution Load, 2015(Lowest and highest figures on each map are the range for that particular projection.)

Per Capita Output ('000 Ropia)~ BOD Load (ug/liter) - uE) 8.9 - 100.0 o 500.1 -1000.0 0.10 - 10.00 s 100.01 - 500.00[3 100.1 - 200.0 U 1000.1 - 6280.6 g 10.01 - 50.00 * 500.01 - 10951.20

2 200.1 - 500.0 No Data 50.01 - 100.00 [ No Data

t | 1 _SIJRABAYA f _ ~~~~~~~~~~~~~~~~SRAAY

Toxic Load (tonnes) Particulate Load (tonnes)[0 13.87 - 100.00f 5000.01 - 10000.00 [3 3.97 - 50.00 500.01 1000.00[3 100.01 - 500.00 10000.01 - 244762.00 [ 50.01 - 100.00 * 1000.01 - 10779.60

500.01 - 5000.00[ No Data E[ 100.01 - 500.00 [ No Data

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than looking toward realizing economic potential; (b) the traditional spatial planning andimplementation tools available to provincial and local governments do not address many of thecritical issues now facing the region, nor are appropriate roles for private sector and publicparticipation provided in current procedures; (c) recent GOI attempts to streamline foreigninvestment approvals have further undermined the provincial-local roles in spatial andenvironmental management, and (d) the responsibilities for financing and managing the provisionof services remains unclear in many aspects, particularly regional-scale facilities serving keyeconomic activities and protecting public health/environmental quality.

3.10 GOI and East Java province have thus requested Bank support to prepare a furtheroperation, an East Java Strategic Regional Development Program which would define anurban/regional investment and management strategy for implementation beginning withREPELITA VII (1999-2004), to include at least the following major components:

- Analysis of Regional Economic Potential and Strategy Development Options- Water Resources Management Strategy for Brantas River and Solo River Basins- Regional Transportation System Development Program- Cultural Assets Protection Program and Tourism Development Strategy- Spatial Structure Plans at Provincial and Local Levels (including programs for

protection of agricultural production capacity)- Development of Simplified Land Use Controls and Spatial Management Tools- Framework for Private Sector and Public Participation- Review and Clarification of Central-Local Financing and Management

Responsibilities for Infrastructure and Public Services- Medium-Term Capital Investment Budgets and O&M Programs for all Units- Urban Policy Action Plan (UPAP) for East Java, related to GOI UPAP with

emphasis on necessary institutional capacity-building.

3.11 The East Java Provincial Development Planning Agency (BAPPEDA I) proposesto lead this ambitious effort to prepare coordinated regional and local development plans, in closecoordination with BAPPENAS and other involved central agencies. In much the same fashion asthe EJBUDP preparation provided a practical forum for Bank-GOI dialogue to operationalize the1987 Urban Policy Statement, the proposed elements of the East Java Strategic RegionalDevelopment Program will provide opportunities to design creative responses to the criticalurban/regional development challenges currently faced by East Java and most other urban areas ofIndonesia. It is GOI's stated intent to seek broad involvement of the donor community indeveloping this strategic approach and building support for its implementation, with the Bankproviding overall guidance and assistance in coordinating this complex process. Arrangementsfor initiating the input studies and coordination mechanisms, including the pending request for aPHRD-Japan Grant to finance design and initiate preparation of the proposed subsequentproject, will be discussed during negotiations.

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IV. THE PROJECT

A. PROJECT ORIGIN AND FORMULATION

4.1 The proposed Second East Java Urban Development Project is requested by GOIand East Java Province as an extension of the current East Java-Bali Urban Development Project(EJBUDP). The Bank completed a mid-term review of the current project in June 1994 (seesummary in Annex 2) and agreed with GOI to a reallocation of loan funds which essentiallycompleted the commitment of the loan ($180.3 million) during the GOI fiscal year 1994-95,ended March 31, 1995. Completion of major civil works and institutional strengtheningassis.ance, with minor additional new works will carry the current project through GOI FY 95-96.The proposed project would provide a continuation of the modest and generally successful effortsof 'Cast Java local governments to overcome current infrastructure and services deficits. Thesignificance of continuing urban project momentum in East Java can, in fact, be understood by: eviewing the strategic nature and results to date of the current project.

4.2 The EJBUDP has been mutually regarded by GOI and the Bank from the outset ofproject identification in 1987 as a 'pilot" or 'hew model" for urban infrastructure and localservices delivery programs, intended to give operational reality to the GOI Urban PolicyStatement adopted in 1987, underpinning the Urban Sector Loan (2616-IND). The EJBUDPprogram reflects the six key priority areas of the GOI Urban Policy Statement and the relatedPolicy Action Plan, which was being implemented in parallel with the preparation of EJBUDP,and which GOI recently reconfirmed and extended as the basis for policy actions in the currentGOI five-year development plan (REPELITA VI). The six policy themes were:

(a) Decentralization of urban services delivery responsibilities to local governments(kabupatens/kotamadyas), as their capacities permit;

(b) Preparation and implementation of local urban improvement programs with theframework of the GOI Integrated Urban Infrastructure Development Program(IUIDP), defined to include physical infrastructure investment and O&M for publicworks sub-sectors and programs;

(c) Development of local government institutional capacities to manage and sustainurban services delivery systems to rapidly growing urban populations:

(d) Strengthening of local government capacities to mobilize resources and optimizethe use of funds under their control;

(e) Improvement in the framework for coordination and consultation among theinvolved agencies (i) new/revised mechanisms for local government borrowing and(ii) improved criteria for allocation of grants; and

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(f) Rationalizing the procedures for coordination and consultation among the involvedagencies and levels of government (central, provincial, and local) to improvecommunication and facilitate implementation efforts.

4.3 The preparation of EJBUDP (1988-1990) was extended and somewhat impaired by theuneven progress achieved toward implementing the Urban Policy Action Plan, and in severalimportant areas it was left to the EJBUDP preparation team to provide an operational definitionor interpretation of the Policy Statement's implications for urban programs. In this context, theEJBUDP incorporates significant departures from previous GOI and Bank urban operations,while attempting to build on the positive features of past experience (e.g. KIP). The mid-termreview focused on the innovative components or major departures from previous projects inattempting to assess the development impact of this 'pilot" effort. It must be noted that many ofthe successful innovations/departures developed during EJBUDP have already been replicated inother Bank urban projects, as well as projects financed by other donors (particularly ADB).

B. PROJECT OBJECTIVES

4.4 The medium-term development objectives of the proposed project are (i) toimprove urban infrastructure service delivery, and (ii) to develop necessary financial andinstitutional capacity in local governments to sustain urban services; more specific operationalobjectives of the project include:

(a) to improve the provision of urban services (roads, water supply, sanitation,drainage and solid waste management) to residential communities and economicactivities throughout East Java in line with the modest service standards targetedby REPELITA VI, which gives priority to poor and underserved neighborhoods(i.e. reduction of current infrastructure/service deficits);

(b) to continue the institutional development assistance provided for local andprovincial government agencies under the EJBUDP, particularly to strengthenlocal capacities for operation and maintenance (O&M) of urban services systems,and increase the effectiveness of local resource mobilization and management; and

(c) to support GOI and East Java efforts to operationally define the REPELITA VIIurban/regional development strategy to include environmental management, landdevelopment controls, and private sector participation in an improved planning andinfrastructure investment framework for realizing regional development potentialsby supporting the preparation of an East Java Strategic Regional DevelopmentProgram (FY99S in the lending program).

4.5 Measuring Progress Toward Project Objectives. The project design furtherrefines the successful EJBUDP model of decentralized project implementation and 'bottom-up"approach to selection of investment and action priorities, which implies that monitoring ofimplementation progress and impact must be focused at the local government level. However, inaccordance with both GOI and Bank requirements, project progress reporting must support a

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procedure to evaluate the performance of the project in aggregate toward achieving developmentobjectives for the province, including all 36 local governments and 7 subsectors. Given the widevariation in current conditions, local capacities and priorities, the project design has beenstructured to support a two-tiered monitoring and evaluation process to include: (a) the continuedoperation and strengthening of comprehensive program management systems in each locality andparticipating PDAM as used in EJBUDP and familiar to local officials (generally measuringimplementation performance in terms of actual input and output quantities and process milestonesversus agreed implementation/action plans), and (b) the selection of a few key measures or'priority targets" within each local program (PJM) to be used as indicators of outcomes orimpacts of highest importance in the local context toward attaining project developmentobjectives. As in EJBUDP, the provincial compilation of all local project data will allowaggregation of project results and provide an overview of total achievements of the project. Bothtiers of this progress measurement approach are presented in Annex 4.

4.6 Although the implementation monitoring will focus on local governmentperformance, the Province will compile and report the following aggregate measures of overallproject performance:

(a) The percentage of urban households in East Java Province receiving theREPELITA VI targeted levels of urban services (baseline data and measurementmethodology to be developed by East Java Provincial Government with DGCKguidance);

(b) Number of participating local governments attaining agreed targets for localrevenue improvement (RIAP), institutional strengthening (LIDAP), andoperations/maintenance expenditure (POMMS);

(c) Percentage attainment of "priority targets" defined in participating localgovernment APIP/MPPT documents (see Annex 4); and

(d) Conformance with agreed schedule for preparation of East Java Strategic RegionalDevelopment Program (schedule to be developed before initial annual review ofproject in October 1996).

4.7 It is proposed that the attainment of the selected 'priority targets" for each localityand PDAM be used as the primary indicator of local government performance. Utilizing the local'priority targets" as indicators to measure the overall progress of the project toward itsdevelopiment objectives, however, requires that during the provincial approval of the AnnualProject Implementation Plan (APIP) for each local jurisdiction (see para. 5.3 and Annex 8),mutual agreement be reached on the 5-7 priority targets which best summarize or capture theproject impacts/outcomes desired in each locality and which will vary widely with the priorities ofthe local PJM and local conditions (e.g. targets may include institutional capacity outcomes,O&M performance results for drainage, or key process steps such as site selection for solid waste,in addition to key physical infrastructure implementation necessary to produce desired impacts).A menu of potential targets, as well as a sample of suggested 'priority targets" for the City of

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Malang, are discussed in Annex 4. Local governments and participating PDAMs attaining prioritytargets will be encouraged to expand/accelerate their programs, while poor performance wouldresult in decreased funding until targets are met. During negotiations, agreement was reachedwith GOI on the inclusion of priority targets in each APIP and the use of these targets asperformance indicators and as evaluation and management tools.

4.8 Ultimately, the perceptions of civil society regarding the extent to which theirindividual and collective needs or demands for infrastructure and urban services are being metmust be the measure of program effectiveness. However, the mechanisms for measuring publicsatisfaction or unmet demands are currently crude at best. Subsectoral technical memoranda forwater supply, sanitation, solid waste, and traffic management, as well as KIP/MIIP programs callfor obtaining direct public input to subproject design, but contain no provision for feedback on theresulting services. Options for expanded surveys and other mechanisms for obtaining inputs fromcivil society will be discussed with GOI and Provincial officials, as well as with local governments,during the project launch workshops and subsequent project supervision.

C. PROJECT DESCRIPTION

4.9 This project is designed to provide programmatic assistance to reduce the backlogof urban infrastructure investment needs in cities and towns which were not addressed under theEJBUDP loan program, and to enable those which were in the EJBUDP to update and extendtheir medium-term (PJM) program. The project will support (a) a three year program of highpriority infrastructure expenditures and subproject investments in the participating localgovernments and their water enterprises, including all the seven cities/kotamadyas and 29regencies/kabupatens in East Java Province serving a total of up to 102 urban areas' (Annex 3lists the eligible urban areas in each kabupaten and the seven incorporated cities.); each localgovernment's PJM defines subproject investments in roads, water supply, drainage and floodcontrol, human waste management, solid waste management, and KIP/MIP as well as providetechnical assistance needed to support the implementation of the proposed program, (b)complementary local institutional development action plans to improve urban management,increase the institutional capacity of the implementing agencies, and financial action plans toimprove local financial management and revenue generation to the local governments, and (c)GOI and provincial initiatives to prepare the policy framework and identify the strategicinvestment program of works for the proposed East Java Strategic Regional DevelopmentProgram (EJUDP-3) addressing the economic development potential of cities and towns in EastJava (See Table 4.1 for project overview).

At the request of GOI, the proposed loan would primarily support investments programmed in 54 "priority" urban areas(including all cities and regency capitals). Other PJM proposals in the 48 non-priority towns would be fmanced entirelyby domestic funds.

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Table 4.1: Second East Java Urban Development ProjectSummary Infrastructure Totals for Identified Subprojects

(Excluding Programmatic Elements)

SUB-SECTOR DESCRlPTION1. Water Supply - Construction of a Well Collection System, Development of 13 New

Sources & Installation of 4 Hydrators- Supply & Installation of 40 Pumps, 24 Gensets and 29 Chlorinators/Dosers- Construction of 20,500 m2 Storage Capacity- Supply & Lay of 287.1 km of Transmission Mains- Supply & Lay of 1016.6 km of Distribution Mains- 102,000 Incremental Connection & 295 Public taps Improved O&M (POMMS)

2. Urban Roads - Widening & Construction of 6.3 km of National 24.7 km of Provincial and4.27 km of Local Government Roads

- Betterment & Rehabilitation of 13.6 km of National, 97.7 km of Provincialand 794.2 km of Local Government Roads

- Widening of 29 Bridges- Improved O&M (POMMS)

3. Solid Waste - Supply of 139 Waste Transport Trucks, 570 Containers & 2,100 Handcarts- Construction of 256 Waste Transfer Depots- Construction of Additional Cells at 40 TPAs- Construction of 76.9 km of TPA Access Roads- Supply of 21 Esethmoving Equipment Units for TPA- 2 Composting Units- Improved O&M for Equipments & TPAs (POMMS)

4. Human Waste/Sanitation - Construction of 12 Modular Pilot Wastewater Systems- 11,250 New Septic Tanks and Refurbishment of 2.350 Existing Units- Construction of 800 MCKs (exc KIP/MIIP) and Reflrbishment of 1,150

Existing Units- Construction of 14 Septic Treatment Plants (IPLT)- Supply of 13 Septage Trucks- Campaigns to Promote Community Hygiene & Sanitation Awareness

5. Urban Drainage - Construction, Widening & Rehabilitation of 79.9 km of Primary,84.1 km of Secondary & 313.1 km of Tertiary Drainage

- Improved O&M (POMMS)

6. KIP/MIIP - Kampung Improvements for 2,682 Hectares- Improvements to 83 Markets

7. Urban Renewal - 10 Hectares Improvement of Riverbank Areas- 10 Hectares Sites & Services- 5 Hectares Sites & Services for Resettlement households

8. Technical Assistance - Detailed Engineering Design & Construction Supervision- Project Management, Engineering & Financial Implementation Assistance- Technical Advisory Services & Training Program- Institutional Capability & Human Resources Development- Community Development & Environmental Monitoring- Policy Studies and Preparation Support for EJUDP-3

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(a) Infrastructure Works (Sub-Proiects)

4.10 The preparation and appraisal of the program proposals and identified sub-projectsin each local jurisdiction have been completed in accordance with a series of agreed TechnicalMemoranda covering the design and appraisal criteria applicable to sub-projects in eachsubsector. These Technical Memoranda were updated (minimally) from similar documents usedduring EJBUDP preparation and appraisal (see Annex 16 for summary of criteria), with theexception of the Human Waste/Sanitation component which the mid-term review found to havebeen ineffective in EJBUDP. Annex 5 provides a summary of the redesigned sanitationcomponent for the proposed project.

4.11 Urban Roads and Traffic Management. The project provides for a program ofroad improvement, and road rehabilitation and maintenance totaling more than 900km, includingresurfacing as needed, drainage, curb, and sidewalks. Traffic management programs will beinitiated in a number of major towns in the program. Routine and periodic maintenance needshave been identified with the help of consultants, and DGBM/Binkot following acceptedstandards in the road administration. Costs have been based on standard material volume and unitrates from previous contracts. Road improvements have been prepared to a preliminary designstage, in some cases, detailed designs are available, in accordance with road function and trafficvolume. Outstanding final design and procurement will be undertaken within the project.

4.12 Water Supply. Local water enterprises (PDAMs) have been required to preparecorporate operating plans (or mini-LIDAPs) to improve efficiency and begin to change the 'bost-plus" culture that has prevailed in management of water services. By negotiations, 19 of the 36PDAMs in East Java had qualified for inclusion in the proposed project by completing drafts ofsuch documents and associated investment proposals; others may be included in the programmaticelement of the project. The appraised water supply investments consist of increasing serviceconnection and reticulation coverage in 32 urban areas in the province, while in at least seven ofthese towns increased water source and treatment quantities will be addressed. In all some102,000 new consumers will be connected to the piped and water system in the 32 towns. A totalof more than 1300km of secondary and tertiary piping will be installed in the cities coveredproviding a more reliable service and better quality water. A program will be undertaken in all thecities to address and reduce water losses. Many cities suffer from poor maintenance of an oldservice systems installed during Dutch rule before World War II. The proposed project willrehabilitate these systems, replacing significant length of pipe where necessary to provide morereliable service to the consumers. Storage reservoirs will be provided in 20 towns to improvesystem capacity and provide better system water pressure. Detailed design and tender packagepreparation has already been completed by the majority of the PDAMs. Outstanding detaileddesign and contract package preparation will be completed during project implementation.

4.13 Solid Waste Management. The solid waste management component will addressat least 44 towns and will provide increased collection coverage and develop a number of newsolid waste disposal sites (TPAs). Procurement of equipment such as bulldozers, dump trucks,container, and special container transports, arm roll trucks, compactor trucks and hand carts areincluded in the programs for each town. Two pilot facilities for waste composting will also be

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developed. Solid waste disposal sites will be developed as sanitary landfill sites, and will bedeveloped together with sludge disposal plants (IAPT) to handle septic tank effluent in a numberof locations. Disposal treatment facilities will be installed at each site to treat leachate and runofffrom the solid waste materials as needed.

4.14 Human Waste Disposal/Sanitation. The component has been redesigned fromEJBUDP (see Annex 5) and is intended to improve urban environmental conditions within allseven cities and 29 kabupatens throughout East Java in some combination of: (i) adequatewastewater and sludge treatment facilities (off-site small bore sewerage/waste water treatmentplants in seven cities servicing 140,000 people); (ii) approximately 75 organized neighborhoodcommunities (kelurahan) participating in the identification, planning, management, and financingof appropriate infrastructure investments and subsequent maintenance (sewerage/drainage, septictanks, and 3,980 MCKs and 23 community toilets for off-site sanitation;2 (iii) institutionalizedmechanisms for financing household/level flush toilet connections; (iv) adequate, targeted,community-based, sanitation education in support of (ii) and (iii) above; (v) improved public andprivate sector capacities at local levels (a) to construct and maintain core sanitation infrastructureat the aggregate kabupaten/kotamadya level (including 13 sludge removal trucks and four sludgedisposal plants, (b) to provide managerial, technical and financial assistance to kelurahan insupport of localized community responsibilities, and (c) to develop and provide appropriatesanitation education; and (vi) local regulatory reform. Detailed designs of physical infrastructurecomponents will need to be completed during implementation, as discussed in Annex 5.

4.15 Drainage/Flood Control. This component includes rehabilitation andimprovement of primary and secondary drainage canals, normalization of river banks and deferredand incremental O&M. Final design will incorporate flood control systems, retention basinswhere appropriate, and will review usefulness of hydraulic flood control gates in low lying areas.

4.16 KIP/MIIP. The project will contribute to improving conditions in poorer qualitykampungs by 1998. A total of more than 200 kampungs (encompassing approximately 2700 ha)will be upgraded through provision of footpaths, drainage, sanitation improvement, water supply,road construction and community participation. Market area improvements (MIIP) will also becarried out in a number of centers under the detail of the project. Design for both KIP and MIIPfacilities will be implemented within the project. For descriptive and financing purposes, thesanitation element of this component is discussed in para. 4.14 above and Annex 5.

4.17 Urban Renewal. The City of Malang has included proposed subprojects toimprove approximately 10 ha. of riverbank floodplain, and to undertake development of a 10 ha.sites and services project, together with a 5 ha. resettlement housing site preparation, in part toprepare for anticipated land acquisition/resettlement requirements for major road improvementwhich have been identified but deferred to EJUDP-3 or later. Approximately 6,000 persons

2 Kelurahan will be eligible to participate by meeting either or both of two criteria: (i) they produce significantenvironmental degradation in other areas of the kabupaten/kotamadya as a result of inadequate sanitation infrastructureand/or (ii) the kelurahan is "poor" according to the criteria established for inclusion in the broader KIP/MIIP component(see para. 4.16).

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(1,200 families) will be affected, but only a small fraction displaced, by the land readjustment andKIP-type infrastructure improvements along the riverbank areas. The proposed sites and servicesproject, as well as the resettlement housing site, will be developed on land now owned by the Cityof Malang. A discussion draft of the proposed Resettlement Action Plan (RAP) for the City ofMalang proposals has been submitted for Bank review and comments will be discussed duringnegotiations. This draft RAP will be revised in accordance with Resettlement Guidelines beingprepared for issuance by the Governor of East Java (see para. 5.30). All work on these renewalschemes are scheduled for the second and third program years, allowing time for RAP refinementand mutual agreement prior to implementation of these subprojects.

4.18 Detailed Engineering Design (DED) and Construction Supervision. For eachsubproject in each local jurisdiction, estimates have been reviewed and agreed to establish theportion of necessary DED and supervision to be performed by local government staff and therequirements for supplementing this in-house capacity with consultant services. Overall,approximately one-half of the DED and supervision of project implementation will be performedby loral government staff, the balance by local consultants. The cost associated with thisengineering and supervision effort are included in the component cost estimates (see Annex 6 foritemization of these estimates). It is anticipated that the DED and supervision consultants wouldbe managed by the provincial Department of Public Works, in similar fashion to the successfularrangements for such support under EJBUDP. These consultants would also assist in assuringthe appropriate incorporation UKLJUPL recommendations from the environmental reviewprocess into the subproject designs and construction specifications, and support monitoring ofimplementation of the UKL/UPL actions.

(b) Institutional Capacity Development

4.19 The proposed project will also provide technical assistance, advisory support andtraining to local governments and participating PDAMs to strengthen institutional capacities forurban management and sustainable services delivery. Advisory teams will be provided to supportboth the Provincial Program Management Office (PPMO) in BAPPEDA I and the ProvincialTechnical Coordination Unit (PTCU) in the Public Works Department, as well as direct technicalassistance and training to local governments and participating PDAMs from teams based in eachof the five sub-regions of the province which will focus on the implementation of revenue andinstitutional action plan components of the PJMs (RIAPs and LIDAPs). Continued operation andrefinement of the program management systems installed in all local governments under EJBUDPis another key feature of the component of the project. These systems include:

the Performance-Oriented Maintenance Management System (POMMS)the Project Financial Accounting and Monitoring System (PFAMS)the water enterprise financial performance model (modified FINPRO)

and the conduct of annual financial and technical audits of project implementation activities.Additional details of this component are discussed in Section V on Implementation Arrangementsand the overall technical assistance plan for the project is summarized in Annex 6.

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(c) Preiaration of Strategic DeveloDment Program

4.20 As summarized in Section III previously, East Java Province intends to prepare arevised development policy framework and regional investment plan to enable the realization ofeconomic development potential throughout the province, consistent with the Second GOI 25-year Development Strategy. The drafting of a spatial management strategy or 'StrategicStructure Plan" with appropriate policy and management tools will be essential to this effort. Aninvestment program may then be defined for Bank support in the form of a proposed EJUDP-3project, for subsequent implementation during the REPELITA VII (1999-2004). GOI hasexpressed its intention domestically finance the preparation of EJUDP-3 and to seek grant fundingfor at least a portion of the preparation expenses.

D. PROJECT COSTS

4.21 Project cost estimates are summarized in Table 4.2, with fiurther details given inAnnex 7. The total project cost for the three year period 1996/97 to 1998/99 is estimated at Rp.552.0 billion, equivalent to US$244.2 million. Base costs, in October 1995 prices, total Rp. 474.4billion (US$209.9 million), the balance of the project cost representing contingencies. (Physicalcontingencies average 7.6 percent of investment base costs. Price contingencies reflect currentBank estimates of domestic and foreign inflation at 6.0 percent and 2.6 percent respectively.) Theprogram for Kotamadya Malang accounts for Rp. 107.3 billion (US$47.5 million) or 19.5 percentof the overall project cost. The non-Kotanadya Malang project cost balance of Rp. 444.7 billion(US$196.7 million) includes an amount of Rp. 133.1 billion (US$58.9 million) - about 26 percentof estimate financing requirements excluding current O&M - for allocation on a programmaticbasis to supplementary investment subprojects which are likely to be proposed by a number oflocal governments and water enterprises primarily for implementation during the third projectyear. These additional subproject proposals would be summarized in project memoranda andpresented for subproject approval by the province, as discussed in para. 5.4.

4.22 Operations and Maintenance Expenditure. Estimated O&M expenditureaccounts for Rp. 200.2 billion (US$88.4 million) or 24.7 percent of the estimated total programexpenditures, comprising current level O&M of Rp. 140.6 billion (US$62.2 million) which areincluded for monitoring total expenditures but not included in defined 'project costs" andincremental O&M of Rp. 59.3 billion (US$26.2 million). The incremental O&M includes Rp.44.0 billion (US$19.5 million) relating to existing infrastructure, representing a 31.3 percentincrease over the current level. This significant increase reflects the need to remedy presentdeficiencies in services quality and address backlogs in physical infrastructure maintenance in thewater supply, urban roads, drainage and solid waste sectors which have been identified withspecialist assistance under the performance-orientated maintenance management system(POMMS) initiative which was developed under earlier Bank urban projects and introduced intoEast Java local governments and water enterprises under the EJBUDP institutional strengtheningprogram.

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Table 42: PROJECI COST SUMMARY

Rp billion USS million % of TotalLocal Foreign Total Local Foreign Total Project

Cost

A. Infrastructure Investment1. Water Supply 71.2 65.2 136.4 31.5 28.9 60.4 252. Urban Roads 93.3 37.9 131.2 41.3 16.7 58.0 243. Drainage 60.8 25.5 86.3 26.9 11.3 38.2 164. Solid Waste Management 15.8 12.2 28.0 7.0 5.4 12.4 55. Sanitation and Sewerage 18.4 8.8 27.2 8.1 3.9 12.0 56. KIP and MIIP 15.8 6.5 22.3 7.0 2.9 9.9 47. Urban Renewal 3.7 1.3 -5.0 1.7 0.5 2.2 1

Subtotal /a 279.0 157.4 436.4 123.5 69.6 193.1 79

B. O&M1. Incremental O&M on existing 41.9 2.1 44.0 18.6 0.9 19.5 8

infrastructure2. Incremental O&M on new 14.6 0.7 15.3 6.4 0.3 6.7 3

infrastructureSubtotal 56.5 2.8 59.3 25.0 1.2 26.2 11

C. Implementation Support1. Local management & 28.4 2.8 31.2 12.5 1.3 13.8 6

administration2. Technical assistance 18.5 6.6 25.1 8.2 2.9 11.1 5

Subtotal 46.9 9.4 56.3 20.7 4.2 24.9 10

Total Proiect Cost /b 382.4 169.6 552.0 169.2 75.0 244.2 100

Other urban investment 52.4 29.2 81.6 23.3 12.9 36.2Current level O&M 134.1 6.5 140.6 59.3 2.9 62.2Interest During Construction - 8.6 8.6 3.8 3.8IBRD Loan LcInterest During Construction -Domestic /c 24.7 24.7 10.9 10.9

Total Financing Requirement 602.2 205.3 807.5 266.5 90.8 357.3

/a Includes Rp 19.7 billion/US$ 8.7 million for contracted engineering designand supervision.

/b Includes land acquisition Rp 11.1 billion/US$ 4.9 million; taxes and duties Rp 41.9billion/US$ 18.5 million

/c Includes commitment fees

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E. FINANCING PLAN

4.23 The Project financing plan is summarized in Table 4.3, with further detail given inAnnex 7. The proposed Bank Loan of US$142.7 million will provide 39.9 percent of the totalestimated financing requirement of US$357.3 million (which includes interest and commitmentfees during construction of an estimated US$14.7 million). This includes an amount of US$30.0million reserved for the programmatic subprojects of the project. GOI agencies will finance anestimated US$214.1 million, made up of US$132.5 million from local government normal revenuesources (locally derived revenues and normal grant entitlements), US$56.5 million from waterenterprise internal funds, US$11.2 million from the provincial government, and US$13.9 millionfrom the central government domestic budget. Community financial contributions, primarily inthe sanitation subsector, will provide an estimated US$0.5 million. However, as requested byGOI, no loan financing of KIP/IMIIP subprojects is proposed, although these subprojects areincluded in the project cost. Subprojects in the non-priority towns are included in the totalfinancing requirement for PJM implementation as "other urban investment".

4.24 Onlending. An estimated US$67.6 million (47 percent) of the total Bank Loanwill be onlent by the central government to local governments (US$31.9 million) and waterenterprises (US$35.7 million) under subsidiary loan agreements (SLA). The sub-loans,denominated and repayable in Rupiah, will carry a fixed interest rate of 11.75 percent (the currentrate fixed by MOF for all borrowings by local government and their enterprises); and acommitment fee nominally of 0.75 percent, which will be reduced to the same concessionairy levelas applies from time to time to the Bank Loan (currently 0.25 percent). The loan periods will beconsistent with the average economic life of the investments being financed, subject to amaximum of 20 years. Grace periods will be allowed equal to the procurement/commissioningperiods for the investments, subject to a maximum of five years. Local governments will in allcases be required to pay interest during the grace periods. The foreign exchange and interest ratevariation risks will be bome by GOI. For water enterprises, deferment of payment of interestduring the grace period will be allowed in cases where the financial capacity analysis shows thatan enterprise cannot afford such interest payment; deferred interest will be compounded andadded to the loan principal. The Ministry of Fir.ance has established a minimum sub-loan size ofRp. 250 million. Agreements on revised standard SLA documents for local governments andparticipating water enterprises were reached during the Loan negotiations.

4.25 Central Government Budgetary Contributions. The central government willbudget an estimated Rp. 46.7 billion (US$20.7 million) for the total investment and incrementalmaintenance on infrastructure which is classified as its own responsibility; an estimated Rp. 32.3billion (US$14.3 million) of this amount will be financed by the Bank. It will further budget anestimated total Rp. 145.9 billion (US$64.6 million) as non-repayable (grant) contributions for thefinance of Project responsibilities of lower level government institutions. This amount can bedivided into three elements. The first element, estimated at Rp. 26.6 billion (US$11.8 million)represents investments, contract engineering and technical assistance contracts planned to beimplemented directly by the central government agencies under central sectoral budget allocations(DIP); of this amount the Bank would finance an estimated Rp. 18.3 billion (US$8.1 million).The second element, estimated at Rp. 36.7 billion (US$16.2 million) represents special grants,

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Table 4.3: FINANCING PLAN(USS million)

Own IBRD Loan Total % of TotalSources Project Cost

Local Governments 51.2 /a 31.9 83.1 34

Water Enterprses (PDAMs) 28.5 /b 35.7 64.2 26Provincial Govemments 11.2 /c 0.0 11.2 5Central Government 10.1 /d 75.1 85.2 35Community Contribution 0.5 /e 0.0 0.5 <1Total Proiect Costs 101.5 142.7 244.2 100

% of Total Project Cost 41.6 58.4 100.0Other urban investment 36.2 0.0 36.2

Current Level O&M, local govemments 38.4 0.0 38.4Current Level O&M, PDAMs 23.8 0.0 23.8IDC and commitment fees, local governments 6.7 0.0 6.7IDC and commitment fees, PDAMs 4.2 0.0 4.2IDC and commitment fees, central government 3.8 If 0.0 3.8Total Financina Recuirement 214.6 142.7 357.3

% of Total Financing 60.1 39.9 100.0

/a Includes incremental O&M of US$6.6 millionh Includes incremental 0&M of US$16.4 million/c Includes incremental O&M of US$3.7 millionId Includes Incremental O&M of US$0.3 millionLe Includes incremental O&M of US$0.3 millionLf On IBRD Loan, net of local govemmentUPDAM shares

wholly financed by the Bank, for engineering design and supervision services and technicalassistance which will be contracted and managed by the provincial government and KotamadyaMalang. The third element, estimated at Rp. 82.6 billion (US$36.6 million), representssupplementary special investment grants to the provincial and local governments for infrastructurecomponents which these governments will themselves plan and implement, with counterpartfinancing from their own normal revenues. All these supplementary special grants will be financedby the Bank and transferred to lower level agencies by funds channeling letters (known asSPABP). However, GOI has expressed a preference for concentrating Bank finance of thesesupplementary special grants on investments in 54 'ttrategic towns", while other urbaninvestments will be financed from the domestic budget, subject to affordability to be annuallydetermined by BAPPENAS and East Java Province during the national consultation(RAKORNAS).

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4.26 Finance of Urgent First Year Implementation Preparation. Contractengineering services and selected other technical assistance to a total of US$900,000 needs to becommitted urgently in order to allow a prompt start to be made on implementing this project in1996/97, as outlined in Annex 6. It has been agreed that this will be financed from the provisionfor future project preparation assistance which is included in the Surabaya Urban DevelopmentProject (Ln. 3726-IND) subject to GOI submission of proposed terms of reference (TOR) andprocurement documents acceptable to the Bank.

V. PROJECT IMPLEMENTATION

A. PROJECT IMPLEMENTATION ARRANGEMENTS

5.1 The proposed project design is based on substantial further decentralization ofimplementation management responsibilities to East Java Province, as compared to the EJBUDPapproach. While the MPW Directorate General of Human Settlements will retain the overallproject oversight role, as the designated central GOI "executing agency", East Java Province willhave the primary implementation responsibility for the proposed project. This will be the firstproject by the Bank for which a GOI provincial government assumes the implementationleadership role. The following paragraphs summarize these arrangements.

5.2 Provincial Program Implementation Memorandum (PPIM). The Province ofEast Java has been designated by GOI as the principal implementing agency for the proposedproject. For central GOI operational and technical coordination and oversight, the DirectorateGeneral for Human Settlements (Cipta Karya) of MPW has been assigned the role of executingagency, with the inter-ministerial coordination team for urban development (TKPP) chaired byBAPPENAS providing policy guidance and sectoral oversight. As such local leadershiparrangements have not been previously attempted, except in the metropolitan cities, all partiesinvolved have agreed to prepare a "Provincial Program Implementation Memorandum (PPIM)"which will document the respective roles, responsibilities and procedures for projectimplementation, in the form of a memorandum of understanding to be signed by the Chairman ofTKPP, the Director General of Cipta Karya and the Governor of East Java. Annex 11 (a) displaysa draft outline for the PPIM memorandum. Agreements on a draft of the PPIM and proceduresfor revision or updating during the annual review process were reached during negotiations.The final PPIM, acceptable to the Bank, signed by all relevant authorities will be a condition ofLoan effectiveness.

5.3 Annual Program Implementation Plan (APIP). Annual ProgramImplementation Plan (APIPs) will be drawn up between East Java Province, the localgovernrnnts participating in the project and their PDAMs to confirm the essential understandingsand commitments based upon the medium-term expenditure programs (PJMs), financing plans,Revenue Improvement Action Plans (RIAPs), Local Institutional Development Action Plans(LIDAPs), and sound criteria for land acquisition and resettlement. These will be expressed aspriority targets and performance indicators for each implementing unit (See Annex 4). Through

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the APIPs, the local governments and their PDAMs would commit themselves to comprehensivesectoral investment programs (including O&M budgets), specific revenue targets, and measures tostrengthen the institutional capabilities for urban management. The investment and sector planswill be amnended/updated annually, and a draft presented during the GOlI/Bank Annual Reviewmeetings by October of each year to reflect changing conditions during project implementation, asprovided under the IUDP approach. The local governments (except the City of Malang) will alsoprepare subprojects for financing in the third year of the project and present these as additions totheir PJMs. All subproject proposals should include an environmental assessment, a managementand monitoring plan and, if necessary, a resettlement plan prepared in accordance with theResettlement Guidelines. An outline of the APIP is presented in Annex 1 (b). A draft of themodel APIP, between the provincial government of East Java and participating localgovernments and PDAMs was reviewed at negotiations. Submission of the first APIP,acceptable to the Bank, will be a condition of Loan disbursement for subproject civil works andgoods for each participating local government and PDAM

5.4 Subproject Approval. The subproject definition, budgeting and supervisionarrangements for the implementation of the Project will be summarized for provincial review andapproval in a set of annual 'Project Memoranda" prepared by each participating local governmentand PDAM. These Project Memoranda (drafts for first year program reviewed at appraisal)provide detailed budget proposals for every subproject, covering all concerned institutions atevery government level (including the water enterprises), showing each contract package,necessary O&M provisions, etc., with the proposed financing sources. The draft projectmemoranda will form the inputs into the annual budget preparation cycle which commences withthe local and provincial level consultation meetings known as 'RAKORBANG" through whichthe necessary funding allocations will be secured. Each subproject memorandum will require thecertification of the provincial government that it conforms with the relevant local governmentappraised program (PJM). Newly identified subprojects for financing under the programmaticprovisions of the Loan or changes in subproject proposals must be notified to the provincialgovernment which will conduct a program reappraisal according to the agreed Project criteria,and report approved changes to the Bank. Supporting documentation, including environmentalimpact screening results and RAP documents, where needed, must be attached to each subprojectmemorandum. For those subprojects involving resettlement, the RAP must be submitted for Bankapproval prior to the start of subproject implementation.

B. LOCAL IMPLEMENTING AGENCIES

5.5 During project preparation, each local government was requested to identifysubprojects, O&M activities and other project actions which could be implemented by the privatesector. Each PJM now contains provisions for private sector participation, generally limited tocontracted O&M for solid waste and sanitation, in program implementation. This feature of thepreparation process has had the intended effects of increasing local government awareness ofpotential private sector roles in urban service provision and initiating a vigorous dialogue at theprovincial and local levels regarding the policy framework for private sector infrastructureprovision to be addressed in preparing EJUDP3. This introduces some variation in localimplementation arrangements. The MHA regulations authorizing somewhat different

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organization and staffing arrangements in local governments based on their population, total areaand type (city or regency) also introduces some variation in local arrangements; however, eachPJM contains an implementation plan specific to that local governments, in all cases utilizing theexisting agencies' structure. In general, these arrangement may be summarized as follows:

(a) Operations and Maintenance. A technical team for a Performance-OrientedMaintenance Management System (POMMS) has already been established in eachloeal government to provide technical support (planning, programming, budgeting,controlling, evaluating and reporting) to strengthen the O&M program for roads,water supply, drainage and solid waste. The project provides for continuingconsulting support to the POMMS technical team to help identify the needs foradditional O&M staff, additional equipment and training;

(b) Urban Roads and Traffic Management. The Roads and Bridges section of theMunicipal Public Works Agency (DPUK) is responsible for the construction,maintenance and supervision of local roads and bridges. Provincial and nationalroads are the responsibility of the provincial and national governmentsrespectively. A separate section will be established in the DPU to implement thetraffic management program in Malang. Consulting support is being providedunder the project to design in detail, evaluate and implement individual schemes inthe traffic management program;

(c) Water Supply. The PDAMs will be responsible for construction, operations andmaintenance the water supply assets generated by the project. Corporateoperations plans to improve efficiency and coverages of sewerage are also requiredof each PDAM. Special attention will be given to control unaccounted for water.PDAMs are being required to reduce leakage, and maximize utilization of theircurrent system, before proposing to increase treatment capacity further.Consultant support for implementation of PDAM corporate plans and physicalimprovements is provided in the project design;

(d) Drainage and Flood Control. At the municipal level, the drainage sub-section ofeach DPUK has specific responsibility for storm drainage and flood control withinthe municipal area. Designated major waterways are the responsibility ofprovincial or central Pengairan offices, but all local drainage works must beexecuted by DPUK. O&M performance will be strengthened through POMMSand consulting support;

(e) Human Waste Disposal. Construction of 'pilot" sewerage schemes in Malangand other towns will be carried out with a staff member from the provincialEnvironmental Sanitation Division (Sub-Dinas TPL, Dinas PU Cipta Karya) asproject Manager on behalf of central DGCK (funding agency). For the longerterm, consideration will be given to proposals to establish separate sewerageenterprises or the addition of sewerage responsibilities to the PDAM charter. Theon-site sanitation program in all cities will be implemented by the local government

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with the community using municipal staff (BANGDES) as project mangers.Sludge collection and disposal services will be provided as much as possible byprivate operators under the supervision of the Cleansing Department (DinasKebersihan) in each local government (see Annex 5);

(f) Solid Waste Management. Dinas Kebersihan in all the municipalities will beresponsible for all solid waste management activities (Note. In those Kabupatenswhere the cleansing function is a section of DPUK, the local governments will beencouraged to establish separate Dinas Kebersihan units.);

(g) Infrastructure for Low-income Communities and KIP. DPUK in each localgovernment also will be responsible for implementing KIP and other proposedpoverty components. Consultant services, where needed, providing technicalassistance on the financial, economic, institutional and environmental aspects, willbe located in the Dinas; and

(h) MIIP. Where available, the market agency in each city (Dinas Pengelola Pasar)will be responsible for implementing the MIIEP component of the project. In allother cases, implementation will fall directly on the local Dinas PUK.

C. IMPLEMENTATION SCHEDULE

5.6 The proposed project will be implemented over a period of three years,commencing with the start of GOI FY1996/97, and will be completed during FY1998/99,although the proposed loan documents will provide a brief additional period for completion of anydelayed work and disbursement up to September 30, 1999. The program of works has beendesigned to commence implementation immediately upon loan effectiveness. Design for the firstyear of all components is virtually completed and the design for the second and third years will becompleted quickly for timely implementation.

5.7 Standard tender and contract documents for the various types of packages will beprepared prior to Loan effectiveness and discussed with all local implementing agencies duringproject launch workshops, so that implementation can commence during the GOI fiscal yearbeginning April 1, 1996. The PJM for Malang has been prepared as a five-year program of whichthe proposed loan will finance the initial three years of implementation, while other local programshave all based preparation initially on a two-year implementation period which has now beenexpanded to the full three years with an allowance for subprojects yet to be identified (primarilyfor implementation in the third program year).

5.8 Because numerous subprojects will be expected to start immediately after the loanis approved, appropriate technical assistance consultant supervision contracts will need to be putin place quickly. Terms of Reference for these high priority technical assistance packages havealready been prepared, and tendering for these services will be commenced immediately. Theimplementation schedule and annual program cycle are graphically summarized in Annex 9.

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D. PROJECT COORDINATION AND MONITORING

5.9 Provincial Government Responsibilities. The East Java province will play a keyrole in the overall coordination and monitoring of the project, including the management oftechnical assistance. Based on experience in the ongoing EJBUDP, the somewhat complexinstitutional arrangements at the provincial level under that project will be simplified by having asingle functional organization, the Provincial Project Management Organization (PPMO), in theprovincial planning agency (BAPPEDA I) for the overall management of the project, includingprogramming, coordination and reporting. A key responsibility of the PPMO will be to issueguidelines for the preparation of APIPs, to ensure that they are prepared on time, and to finalizethe APIPs in coordination with the Kanwil/Dinas PU. PPMO will also develop and issue standardoperating procedures for program implementation. The updated functions and organization of thePPMO were defined by a decree of the provincial Governor in September 1995 and furtheroperational details will be provided at negotiations. The PPMO will have strong leadership,through a full-time Unit manager (Kepala PPMO) and an adequate budget. Technical assistanceunder the project will provide advisory support to the PPMO. Annex 10 displays the revisedorganization structure of the PPMO within the provincial BAPPEDA, as established by aGovernor's Decree in September 1995 to improve PPMO capacities as compared to that forEJBUDP implementation.

5.10 Technical coordination will be carried out by Dinas PU Cipta Karya, East Java andDinas PU Bina Marga, East Java in their respective areas of responsibility; however, the KanwilPU will coordinate centrally funded sectoral programs. The Secretary to Governor (Sekwilda I)will be responsible for overall coordination of implementation. The PPMO will work closely withDinas PU Cipta Karya, Bina Marga, the Sekwilda I, and the Kanwil PU, and these technicalagencies will designate staff to function as a Program Technical Coordination Unit (PTCU) asshown in Annex 10.

5.11 Local Government Responsibilities. Local governments participating in theproject will have primary responsibility for project implementation and monitoring of all project-related activities in their jurisdiction. A Coordination Team (Tim Koordinasi) will be maintainedfrom EJBUDP or established in each participating local government, with the Bupati/Walikota asthe chair and the heads of all departments involved as members. Programming and planningfunctions will be under the overall charge of the local planning agency (BAPPEDA II), in thesection for physical infrastructure (Bidang Prasarana Fisik). A local project coordinator, typicallyin the Sekwilda II office, will be appointed for day-to-day activities, and will be provided with anadequate budget; the appointment of a project coordinator will be confirmed in the APIP. Lineagencies (both local and deconcentrated units of central agencies, as appropriate) will beresponsible for implementing their designated subproject components. Consistent with Indonesiangovernment practice, each implementing agency will appoint subproject managers (PIMPROs)with an appropriate supervision budgets.

5.12 The Secretary to the Bupati/Walikota (Sekwilda II) will have overall responsibilityfor coordinating and reporting on all project-related activities (whether handled by the localgovernment agencies or by the deconcentrated units of GOI central agencies.) The Development

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Assistant to the Secretary (Assisten Pembangunan) will appoint the local project coordinator, andprovide him with an adequate budget. The project coordinator will compile and distributeperiodic consolidated progress reports, covering all sectors, with information on both physical andfinancial progress, based on data provided by the subproject managers. The Finance Section ofthe Secretary's Department will maintain up-to-day accounting information on the projectutilizing the Project Accounting and Monitoring System (PFAMS) installed in all localgovernments under EJBUDP. Issuance of a local government instruction letter (SKWalikota/Bupati) clearly establishing the above roles and functions in the appropriate localunits will be included in the APIP actions for each local government.

5.13 Central Government Responsibilities. DGCK in MPW, as the central executingagency, will be responsible for the overall technical supervision and management of the project onbehalf of GOI. DGCK will delegate responsibility for the day-to-day management and monitoringof this project to the East Java Province through the establishment of the agreed standardoperating procedures; the Kanwil PU, which is the regional office of the central MPW in theprovince, will work closely with the provincial agencies on behalf of DGCK. The TKPP, whichhas already been established under BAPPENAS leadership, will be responsible for policy guidanceand coordination, and in this role will actively participate in the preparation process for the EastJava Strategic Regional Development Program (EJUDP 3).

5.14 The Directorate General for Budget in the Ministry of Finance will be responsiblefor managing the project's special account. Lead responsibility for the conclusion of theSubsidiary Lending Agreements (SLAs) will be assumed by the Directorate General for FinancialIi-stitutions in the Ministry of Finance. At Loan negotiations, agreement was reached on revisedstandard SLAs documents for local government, and participating water enterprises. Approvalby the Bank of the first SLA for each participating local government and/or PDAM withborrowing included in their agreedfinancing plans will be a condition of loan disbursement forcivil works or goods in that localjurisdiction.

E. PROCUREMENT AND DISBURSEMENT

5.15 Procurement of works and goods will follow the "Guidelines for Procurementunder IBRD Loans and IDA Credits" dated January 1995 and revised in January 1996. Largecivil works contracts costing US$3 million or more and goods contracts costing US$200,000 ormore would be procured following International Competitive Bidding (ICB) procedures, using theBank's standard bidding documents. A general procurement notice would be issued in advance toencourage participation of eligible parties. However, with the exceptions of approximately eightsewerage and water supply subprojects involving treatment plant equipment and large pipeprocurement, essentially all procurement anticipated for project implementation in each of theseven subsectors described in the preceding Section IV will be relatively small civil workscontracts under National Competitive Bidding (NCB) procedures agreed between GOI and theBank. Smaller civil works contracts, valued at less than US$3 million up to an aggregate amountof US$106.7 million, and goods contracts valued less than US$200,000 up to an aggregateamount of US$27.5 million would be procured by the designated subproject implementing agencyunder national competitive bidding (NCB) procedures acceptable to the Bank, Although within

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these totals goods and civil works contracts for less than US$50,000 each up to an aggregatetotal of US$1.0 million in each category, may be procured through national shopping andsimplified procurement procedures similar to national shopping, respectively. Domesticpreference may be provided during bid evaluation at a rate of 15% (of the CIF price or theapplicable customs duty, whichever is lower) for local goods manufacturers participating in theICB procurement of goods. The invitation to prequalify or bid for each contract estimated to cost$10,000,000 equivalent or more shall be advertised in accordance with the procedures applicableto large contracts under paragraph 2.8 of the Guidelines, although no such contracts have beenidentified for this project.

5.16 As more fully described in Annex 6, project implementation will be supported bytwo types of consultants' services: (i) detailed engineering design and construction supervision(see para. 4.18) to assist local implementing agencies (totaling US$8.7 million), and (ii) advisoryand program management technical assistance and training for institutional capacity building (seepara. 4.19) in all facets of program implementation (totalling US$10.3 million). Consultingservices under the Bank loan would be procured in accordance with the "Guidelines for the Useof Consultants by World Bank Borrowers and by the World Bank as Executing Agency" datedAugust 1981 and resulting consultants' contracts would utilize the Bank's Standard Form ofContract for Consultant Services of June 1995, to be executed by the responsible agency for eachcontract as designated in Annex 6.

5.17 Procurement Review. Contracts for (a) Civil works valued at more than US$1million, (b) goods valued at or more than US$200,000, and (c) consultants' services by individualconsultants valued at more than US$50,000, and by consulting firms valued at or more thanUS$100,000, would be subject to prior review by the Bank. The first contract for civil works andgoods for each local implementing unit would also be subject to prior review by the Bank, toassure use of standard procedures and contract formats. The balance of contracts for goods andcivil works, including those reimbursed under statement of expenditures (SOE), would be subjectto selective post-review by the Bank. Contractors for civil works exceeding US$1 million invalue would be pre-qualified in accordance with procedures satisfactory to the Bank. Terms ofreference for all consultants' services, including detailed engineering design and supervision,studies and other technical assistance, as well as all sole source selections, regardless of the valueof the contract, would also be subject to prior Bank review. Prior review by the Bank is expectedto cover approximately 30% of the total value of contracts financed by the project. This relativelylow review coverage is justified by the generally good record of these local implementing agenciesduring EJBUDP, and will be compensated for by (a) use of standardized bidding documents; (b)prior review of each different type of contract (road works, drainage) since there are numerouscontracts of similar nature, and (c) systematic post-review by Bank staff during supervision.

5.18 Procurement Design. Where technically feasible and administratively practical,sub-projects have been combined to form larger contracts for tendering. Procurement of physicalcomponents has been kept separate for each agency (central and local governments, PDAMs) toavoid administrative delays and complex payment procedures. Similarly, procurement has beenkept separate for each sector (roads, drainage, etc.) as each contract would be administered by adifferent agency. However, consultants' services have been combined wherever feasible (e.g.,

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support packages for studies, institutional strengthening, etc.). Table 5.1 summarizes theprocurement arrangements; details of procurement process design will be available in the projectfiles as appeared in the subproject memoranda.

Table 5.1: PROCUREMENT ARRANGEMENTS(US$ million)

Element Procurement Procedures TotalICB NCB Other /a NBF /b

Civil works 105.7 1.0 10.6 117.3(86.3) (0.8) (0.0) (87.1)

Goods 15.0 26.5 1.0 2.8 45.3(13.8) (22.5) (0.8) (0.0) (37.1)

Contracted engineering design and supervision 8.7 8.7(8.6) (8.6)

Technical assistance 10.3 10.3(9.9) (9.9)

Incremental O&M 25.4 25.4(0.0) (0.0)

Land, taxes, duties 23.4 23.4(0.0) (0.0)

Local management and administration 13.8 13.8(0.0) (0.0)

Total Project Cost 15.0 132.2 21.0 76.0 244.2(13.8) (108.8) (20.1) (0.0) (142.7)

Other urban investment 36.2 36.2(0.0) (0.0)

Current O&M 62.2 62.2

(0.0) (0.0)

IDC 14.7 14.7(0.0) (0.0)

Total Financina Reautrement 15.0 132.2 21.0 189.1 357.3(13.8) (108.8) (20.1) (0.0) (142.7)

Figures in parentheses are amounts financed by IBRD/a Includes national shopping, simplified procurement procedures for smallworks and selection of consultants following IBRD guidelines/b Not Bank-financed

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5.19 Disbursements. IBRD loan disbursements will be made at the following rates forthe various main expenditure categories as detailed in Table 5.2 below: (a) civil works and goodsunder the SLAs - 90% of costs; (b) other civil works - 70% of costs; (c) other goods - 100% offoreign expenditures, 100% of local expenditures (ex-factory cost), and 65% of other itemsprocured locally; (d) consultants' services - 100% for consultants contracted by East JavaProvince and participating local governments and PDAMs, and 8O0%/ for consultants contracted bycentral GOI agencies. The estimated Bank disbursement by Bank fiscal year are given in Table5.3.

5.20 In order to facilitate disbursements, GOI would establish a Special Account withan amount up to US$14.0 million in Bank Indonesia. This account should be maintained by theDirector General of Budget in the Ministry of Finance. The Special Account would be used forall eligible foreign and local expenditures. Replenishment of the Special Account will be made ona monthly basis, or when 20 percent of the Special Account balance has been used, whichevercomes first. Assurances were obtained during negotiations that the Director Generalfor Budgetwill authorize all payments to contractors from the Special Account to be made through theKPKN Treasury offices at the sub-provincial level (with the exception of any technical assistancecontracts procured by central GOI agencies).

5.21 Disbursements from the Loan for the following types of contracts require fulldocumentation: (a) civil works contracts valued at more than US$1 million; (b) goods contractsvalued at or more than US$200,000; and (c) consultants' services contracts with individualconsultants valued at more than US$50,000 and consulting firm contracts valued at or more thanUS$100,000. All other disbursements would be made against statements of expenditure (SOE)for which relevant documents would be retained by the MOF Directorate General for BudgetAdministration (DG TUA) and the implementing agencies and made available to the Bank forreview upon request.

5.22 The proposed disbursement period of three-and-one-half years is somewhat lessthan the disbursement profile to date of IUMDP projects in Indonesia. However, as this projecthas been prepared taking into account the start-up problems encountered in earlier projects, andbecause of the steps taken to expedite disbursements, it is considered achievable. The projectcompletion date is September 30, 1999, and the loan closing date is March 31, 2000. Theestimated schedule of quarterly disbursements in shown in Annex 11.

F. PROJECT ACCOUNTS AND AUDIT

5.23 Prime responsibility for the maintenance of consolidated accounts of expendituresand financing sources for all project components at every government level and concernedinstitution (including the water enterprises) will be delegated to the provincial and localgovernments, which will employ for this purpose an improved version of the Program FinancialAccounting and Monitoring System (PFAMS) used in the EJBUDP. Development of the

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Table 5.2: DISBURSEMENTS(USS million)

Category Loan DisbursementAmount Percentages

(1) Civil works for Sub-projects:a. financed under SLAs 41.4 90%b. other 45.7 70%

(2) Goods for Sub-projects:a. financed under SLAs 26.1 90%b. other 11.0 100% of foreign

expenditures, 100% oflocal expenditures(ex-factory), and 65% ofother items procuredlocally

(3) Consultants' services:a. contracted by central 2.3 80%

GOI agenciesb. contracted by East Java

Province and theparticipating local 16.2 100%governments and PDAMs

Total 142.7

Table 5.3: ESTIMATED IBRD DISBURSEMENTS BY FY(US$ million)

1996 1997 1998 1999 22000

Annual 14.0 20.9 59.1 43.1 5.6Cumulative 14.0 34.9 94.0 137.1 142.7

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improved PFAMS will be addressed at the start of the Project under a component of the urgenttechnical assistance program to be financed from the Surabaya Urban Development Project (Loan3726-IND) (see para. 4.26). For each local government program (including that of its waterenterprise) the Project accounting will be the responsibility of the structural finance agency withinthe local government secretariate (Bagian Keuangan). Responsibility for maintaining theconsolidated Project account and the production of consolidated financial reports will beundertaken by the structural finance bureau within the provincial government secretariat.

5.24 Assurances were given by GOI at negotiations that the consolidated projectaccounts, including the Special Account and SOEs, as well as the overall accounts of theparticipating PDAMs, will be audited annually by independent auditors in a manner satisfactoryto the Bank and that the audited accounts would be submitted to the Bank no later than sixmonths after the end of eachfiscal year, commencing GOI FY96/9 7. Assurances were also givenby GOI during negotiations that the East Java Provincial Inspectorate (Ir Wil Prop) will carryout annual technical audits during project implementation by October 31 of each year.Technical assistance will be provided to enhance the capabilities of the Provincial Inspectorateunder the project, and staff of the MPW Inspectorate General will assist as appropriate for MPW-financed subprojects; the technical audit will also review attainment status of the selected 'prioritytargets" as described in each APIP.

G. PROJECT REPORTING, MONITORING AND BANK SUPERVISION

5.25 Quarterly progress reports will be prepared and submitted to the Bank by PPMOwith assistance from DGCK on the basis of inputs from the various central, provincial, kabupaten,kotamadya implementing agencies. The reports will focus on the targets and performanceindicators established in the PPIP and APIP for each local government (see Annex 4) and willinclude an overall program summary, covering progress on:

(a) physical progress of each component(b) institutional development (LIDAP) and revenue improvement (RIAP) actions(c) consulting services(d) compliance with loan covenants(e) administration and finance, including project costs commitment and disbursement

schedule, and(f) a list of action to be taken by the various parties.

5.26 The progress report's substance, including indicators and the format will bediscussed at the workshop for the project launch, scheduled for May/June 1996.

5.27 Quarterly progress reports will be submitted within 30 days from the end of eachquarter, starting with the quarter ending in September 1996. On completion of the EJUDP 2program, the DGCK together with PPMO and the participating kabupatens and kotamadyas willprepare an Implementation Completion Report within six months after the loan closing date forreview by GOI and the Bank.

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5.28 The project will require approximately 30 staff weeks of Bank supervision duringthe first year of the project, and 20-25 staff weeks for the following years of the project.Supervision missions will include engineering, institutional, financial, environmental andresettlement expertise. Typically, two Bank supervision missions per year are planned to conductthe annual review (October) and to check GOI fiscal year program status (March/April). Theseproposed arrangements and schedulesfor project launch workshops, as well asfor projectsupervision and annual reviews (by October 31 of each year) were confirmed with GOI atnegotiations (see Annex 12).

H. OPERATIONS AND MAINTENANCE

5.29 Expenditure programs for the municipalities and PDAMs include O&M budgets inevery subsector in accordance with IUIDP guidelines. MHA Ministerial Decree No. 5 of 1990promulgated Performance-oriented Operations and Maintenance Management Systems (POMMS)and revised local budgeting procedures to encourage O&M. Current O&M expenditures andincremental O&M expenditures (to reach necessary levels and expand coverage) are clearlyseparated. Adequate budgeting for current and incremental O&M is an important objective ofEJUDP2 and detailed O&M expenditure plans have been included in the PJM for each localgovernment and participating PDAM to continue current O&M and incrementally strengthenO&M to meet levels estimated by POMMS as needed to adequately operate and maintain theexisting systems and proposed infrastructure. Domestic budget sources will fully fund O&M toensure sustainability of the increased O&M level under the project. Advisory and trainingassistance would be provided under the project to continue improvements in maintenancepractices. During negotiations agreement was reached that GOI will monitor the operation andmaintenance (O&M) expenditures of the local governments and participating PDAMsfor eachyear as well as the proposed O&M budgetfor the followingyear and discuss them with the Bankas a part of the annual program review.

1. LAND ACQUISITION, RESETTLEMENT AND COMPENSATION

5.30 East Java Province has agreed to serve as the 'pilot" area for another criticallyimportant subject in the current Bank-GOI program dialogue: resolving the differences and gapsbetween GOI Presidential Decree No. 55/1993 and Bank Operational Directive 4.30, both dealingwith land acquisition and resettlement practices. The preparation process for the proposedproject has included efforts both to avoid or minimize land and resettlement needed for thesubprojects and to develop a 'hnodel" provincial policy framework to provide operationalguidance to local governments on land acquisition, resettlement and compensation needed forproject implementation. The appraised PJMs propose very limited land acquisition and noresettlement other than the urban renewal proposals by the City of Malang (see para. 4.17). AGovernor's Decree issuing Resettlement Guidelines and implementation instructions form theoverall framework for resettlement under the project. A local government(kotamadya/kabupaten) decree for preparation of subproject Resettlement Action Plans (RAPs)in accordance with the Guidelines will be issuedfor each sub-project involving resettlement, andincluded in the APIP as a condition of disbursement. During negotiations, a draft Governor'sdecree was reviewed and agreed upon. On April 16, 1996 the decree was issued..

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J. ENVIRONMENTAL ASPECTS

5.31 Impacts. The proposed project has been classified as environmental category "B"under the Bank's procedures, as the negative impacts are expected to be minor. The project willlikely produce an overall net positive environmental impact. Works under the urban roadssubcomponent should relieve congestion, resulting in reductions in air and noise pollution. Thewater supply component will improve the availability of clean drinking water. Under the solidwaste management subcomponent, solid waste dumping and accumulation will be reduced andsites will be developed as sanitary landfill sites; treatment facilities will minimize leachate andrunoff as needed. The sanitation component will improve the urban environment with adequatewastewater and sludge treatment facilities resulting in reduced health risks from contamninatedwater. Improvements of drainage canals will help control flooding and lessen the potential forunsanitary pools of water where mosquitoes might breed.

5.32 Environmental Procedures. The environmental procedures for this project weredesigned to avoid the implementation issues that were identified in the mid-term review ofEJBUDP (see Annex 13 for details). Briefly, that review showed that considerable effort hadbeen expended in meeting GOI requirements for production of environmental documents, butmeasured by the extent of implementation in the field, the process fell short of its objectives.Using the new GOI regulations for environmental assessment (AMDAL) promulgated in 1993and 1994 to the project's advantage, a modified procedure was developed during preparation ofthe proposed project.

5.33 Prior to negotiations, the following measures had been taken: (a) thestandardization of a process to screen PJMs, designed and overseen by provincial staff andconducted by local government personnel to identify environmental issues and ensure that eachsubproject receives the appropriate level of environmental analysis; (b) the establishment ofguidelines for the preparation of environmental management plans (UKL) and monitoring plans(UPL), in the form of model UKL/UPL available on diskette and provided to all localgovernments along with appropriate training; and (c) review of UKL/UPL for PJMs conducted byDinas PU, BAPPEDA-I and provincial environmental officers.

5.34 The UKL/UPL for PJMs were used as the basis for subproject screening and toidentify environmental management training incorporated into the institutional capacitydevelopment component of the project. Although there has been a substantial improvement incapacity to prepare and review UKL/UPL reports, the following three observations are relevant:

(a) UKL/UPL technical guidelines for infrastructure projects currently underpreparation by GOI's Ministry of Public Works are urgently needed;

(b) Further training in UKL/UPL preparation and review needs to be provided toprovincial and local government staff, and

(c) There has not been a formal assignment of responsibility for UKL/UPL preparationto local government staff.

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Annex 13 includes an outline of an environmental management training program to be carried outas a priority element of the technical assistance program.

5.35 UKL/UPL Preparation and Review. UKL/UPL for subprojects are to beprepared and reviewed as part of subproject approval (Project Memoranda), with particularattention paid to whether the management and monitoring measures are included in subprojectdesign and tender documents. During project implementation, UKL/UPL review will be theresponsibility of technical agencies in the provincial government, coordinated by PTCU. Thereview should include screening of any proposed project sites not already screened when thePJMs were originally prepared, especially for final solid waste disposal sites (TPAs) to ascertainthat they are not located in protected or sensitive areas and are generally suitable for the intendedpurpose. Approval of the UKL/UPL by PTCU would be a prerequisite for subproject approval.However, the Bank will also review UKL/UPL during the first year of the project and providecomments to PPMO. This step will be phased out as results show it unnecessary except in thecase of TPAs. Because of demonstrated problems in implementing TPA subprojects in EJBUDP,PPMO will submit copies of designs, operating plans and UKL/UPLs to the Bank's residentmission throughout the life of the project. The PPMO will not approve these subprojects until theBank has given its concurrence. The standard operating procedures for the project to be issuedby PPMO will require that no subprojects be implemented until the required UKL/UPL (or in afew cases RKL/RPL) have been approved by PPMO.

K. PUBLIC PARTICIPATION

5.36 GOI's commitment to decentralize the planning and provision of urbaninfrastructure and services reflects the intention to make the development process moreresponsive to the needs of civil society in Indonesia. The current IUDP guidelines for localgovernment and the subsectoral technical memoranda describing subproject preparation andimplementation methodologies call for local governments to obtain inputs from targetedbeneficiaries in a proactive process. For the past 20 years, the KIP programs have effectivelymobilized community inputs to design and implementation (Op. Cit. of OED Report 14747) and,reflecting that the IUDP process was conceived as "citywide KIP" by many key GOI officials, thelocal governments have been encouraged to follow participatory approaches to formulating theirPJM proposals.

5.37 Specifically, the KIP/MIIP subprojects must be based on community surveys andinterviews, with public involvement in implementation as well as operations and maintenances ofresulting facilities strongly encouraged. Water supply and sanitation subprojects are required tobe justified in part on the basis of "real demand surveys" which include willingness to payresponses from the community. In both the solid waste and traffic management subsectors inputsfrom potential beneficiaries are strongly encouraged. Local governments' response to theseguidelines and requirements has generally been quite positive and most PJM proposals can bepresented as results of a participatory process of consultation with the representatives of variousurban communities of interest and potential beneficiaries. However, the Bank and GOI continueto discuss improved procedures to broaden the scope of participatory inputs and generally

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improve public information and feedback mechanisms employed by local governments. The termsof reference for program implementation advisory support specify the strengthening of such publicaccess to decision-making as one of the focal points of advisory services.

L. Standard Operating Procedures

5.38 East Java PPMO staff and consultants have compiled a draft of the StandardOperating Procedures (SOP) manual for the proposed project covering all of the implementationaspects noted in the preceeding sections, primarily based on updating (as needed) the operationalmanuals from EJBUDP and recently issued IUDP and REPELITA VI guidance from central GOI,as well as incorporating the reporting and documentation requirements of the Bank. The draftSOP manual was reviewed during project negotiations and found to be generally adequate andcomprehensive, but with some further clarification needed to assure local governments coulddirectly use the manual. It was agreed that the PPMO would complete preparation and publicationof the SOP manual in time for distribution and discussion with local officials during the projectlaunch workshops (tentatively scheduled for May/June 1996).

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VI. FINANCIAL ASPECTS

A. LOCAL GOVERNMENTS

6.1 Structure of Local Government Revenues. Local government normal annualrevenues consist essentially of a) locally-derived taxes, fees, service charges and miscellaneousrevenues (PADs); (b) the local share (approximately 85%) of the national land and buildings tax(PBB) collected in the locality; c) a central government routine grant (the SDO), almost the wholeof which is provided to pay the remuneration costs of permanently established staff (which havethe status of state civil servants); and d) central government development grants (Inpres grants),the bulk of which are accounted for by a general-use development expenditure grant and a blockgrant for roads improvement. Excluding the SDO, the ratio of locally-derived revenues to theInpres grants has in recent years been in the order of 30/70 in typical East Java kabupatens, andabout 45/55 in most of the kotamadyas. Only Kotamadya Malang and Kabupaten Sidoarjo(which includes substantial suburbs of Surabaya) had substantially higher locally-derived revenuesproportions, in both cases around 65/35. The special investment expenditure grants (known asSPABP-RK, an acronym for the funds channeling mechanism) which the Bank will be financingunder the Project are required to be counterparted from the normal local revenues and centralgrant entitlements, so that, inter alia they will stimulate local governments to allocate more ofthese discretionary-use revenues to their urban infrastructure sector responsibilities, after meetingO&M requirements for existing infrastructure. The counterpart financing requirement imposedthe primary constraint on total program size in each local government.

6.2 Local Revenues Improvement. Local governments' administration of their ownlocal revenue sources has suffered from the familiar problems of incomplete registration ofpotential tax and license fee assets, under-assessment and under-reporting of amounts properlypayable, under-collection of due amounts, and a reluctance to make timely adjustments to tariffsto maintain their levels in real terms. Under the East Java-Bali Urban Development Project alllocal governments prepared and implemented a first round of Revenue Improvement Action Plans(RIAPs). The great majority of local governments have achieved, and in many cases substantiallyexceeded their RIAP targets (although many of these were admittedly conservative). Manyachieved impressive average real terms growths in the revenues under their own administrationover the RIAP periods, the average being 8 percent annually. Nevertheless, there is believed to beconsiderable scope for further improvement particularly in tariffs and charges for cost recovery ofsolid waste and sanitation services. This is reflected in the second round of RIAPs which havebeen prepared in support of the current Project, which embody targets representing an overallaverage real terms growth in the revenues under the local governments' own administration ofsome 10 percent annually over the period 1995/96 to 1998/99. Annex 14 presents pastperformance and future targeted growth in each revenue sources category per local government,as appraised and agreed in RIAP documents for each local government. The following Table 6.1displays the summary totals for local revenue realization during EJBUDP implementation andagreed RIAP target totals for the proposed project period.

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Table 6.1: Local Government Own-Source Revenues (PADs)RIAP Results from EJBUDP and New Project Agreed Targets

(See Annex 14 for details)

Number of Local Governments: (At Constant 1991 Rp.)During EJBUDP Implementation Realizing Average Annual Growth Proposed Project Targets forGOI FY91-92 through FY94-95 Rates of: GOI FY95-96 through FY98-99

12 5% or less 1 (City of Malang)13 50/o-10% 167 100/o-20% 164 more than 20% 3

Average of 36 = 8.1% per year Average of 36 = 10.6% per year

6.3 Local Government Borrowing. Twenty-two of the 35 participating localgovernments borrowed generally small amounts under the East Java-Bali Urban DevelopmentProject. In general, GOI policy regarding the current Project is that local governments shouldmake greater use of their borrowing capacities, which are enhanced as a result of past and futuretargeted local revenues improvements under the RIAPs, by taking appropriate amounts of theBank finance in the form of subloans rather than grants. However, resistance to the principle ofborrowing, especially to finance investments which do not directly generate revenues throughservice charges, is common by the local governments and their legislative council members(DPRD) who must approve all borrowings. The proposed project financing plan recognizes theneed to introduce incentives for local borrowing including a minimum level of special grantfinancing, even where capacity to borrow is substantial. Borrowing capacity has been estimatedfor each local government by making long term projections of amounts potentially available forservicing debt. Local revenues were projected from the RIAP targets, and deductions made forcurrent and incremental O&M, existing debt service and other routine expenditure obligationstogether with allowances for priority future development expenditure in non-urban sectors whichwould have to be financed therefrom. Two-thirds of the resultant net amount was assumed as asafe limit for debt service obligations (implying a minimum Debt Service Coverage Ratio of 1.5).The resultant borrowing capacity estimates vary from small to very substantial. Subject tosufficient capacity after taking into account any proposed borrowing outside the Project sectors(there are a number of proposals to borrow domestically for revenue generating projects such asmarkets and transport terminals), all local governments were requested by MOF and PPMO tocommit themselves to borrowing in proportion to their limited capacities to reduce special grantfinance and to initiate the concept of borrowing as a source of funding for their local responsibilityinvestment programs. Confirmation of the participating local government and PDAMsborrowing commitments and that such proposed borrowings meet the agreedfinancial criteria ofthe Bank and GOIMinistry of Finance, was obtained at Loan negotiations.

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B. WATER ENTERPRISES (PDAMs)

6.4 PDAM Financial Condition. The majority of the 19 PDAMs currently includedin the Project3 are in a relatively weak financial condition. Only in three cases (KotamadyasMadium and Malang, and Kabupaten Sidoarjo) do water tariff revenues cover operational costsand depreciation, and in half the PDAMs revenues are currently insufficient to support O&Mexpenditure needs as identified by the POMMS. These problems arise mainly from a combinationof a) inherited sub-optimally designed and located systems serving extended areas with lowconnections demand and/or coverage causing high unit operating costs; b) often highstaff7connections ratios and administration costs; and c) infrequent tariff adjustments.

6.5 Water Tariffs. Five of the total 19 PDAMs which will participate in the proposedProject were also included in the East Java-Bali Urban Development Project. All have now raisedtariffs to levels at or above those planned under the EJBUDP. All 19 PDAMs included in theproposed Project have made tariff increases in 1995 or plan increases early in 1996; the increasesrange between 32-60 percent, and action programs to improve efficiency of PDAM operationshave been drafted for each PDAM, either as a 'borporate plan" or draft LIDAP. Furthersubstantial real terms tariff increases will be made at not more than two-yearly intervals so as toapproach, or reach and maintain, full coverage of O&M costs and depreciation charges. Annex15 summarizes the current tariff status and estimated further necessary tariff increases over theProject period which are linked to improved service efficiency in each PDAM. As in EJBUDP,the adequacy of tariff levels in each participating PDAM will be annually reviewed by PPMO withassistance from DGCK as needed, and realistic forecasts prepared detailing required tariffadjustments. Results of the process would be an important component of the annual review of theproject. Assurances were obtained during Loan negotiations that tariff adjustments necessary tomeet the agreedfinancial viability criteria (as under EJBUDP) will be completed on or beforeOctober 31, 1996, and again January 1, 1999.

6.6 Provincial Government O&M Financing Contributions. The financial capacityanalyses suggest that nine of the total 20 participating PDAMs will have difficulty in financingadequate levels of O&M (incorporating the POMMS recommendations) in the near future untilthe tariff increase plans have been fully implemented. The provincial government has limited tariffincreases to 40% in each of two steps (1996 and 1998) during the project period, but in order tocompensate PDAMs for the imposed public service obligation, the province has agreed to providefor the interim O&M financing shortfalls through contributions of operating capital from theprovincial budget, estimated at a total of Rp. 7.5 billion (US$3.3 million) during the three-yearprogram. Such payments must be regarded as transitional only, with financial performancecriteria agreed in the APIP for each PDAM to be achieved as a condition for obtaining thefollowing year contribution and an established target date for financial viability. As noted in Table6.2 below, all PDAMs are projected to eliminate the need for the operating grants by 1998.

6.7 Water Supply Investment Finance. PDAM investment programs will befinanced by SLA borrowing to the extent feasible on the basis of PDAM financial capacity

3 More PDAMs may participate under the programmatic component of the project.

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projections. Summaries of these projections are provided in Annex 15. The balance of theneeded investments for which borrowing is not feasible will be financed through Ministry ofPublic Works sectoral DIP allocations from the central government budget, partly-funded by theBank. These subprojects are generally to complete system development or rehabilitate systemswhich were prematurally converted to enterprise status by GOI. Table 6.2 displays a summary

Table 6.2: PDAM Financing Plans Summary (with 40% Maximum Tariff Increase)(See Annex 15 for details by PDAM)

EJ2 Loan Invedment (Current Rp Opeational Deficit AverageM) Proposed (Rp. M) Tariff (95

Rp/M3)

No. of No. of SLA InvesL Total POMMS Eatimales Year 1995 2000PDAMs Sub LoAn Grant (including Deprec.

Projedl TA and 96-97 98.02 CovaredPDAM byFunds) Revenue

PDAMsAbleto 13 20 33,529 0 46,479 1,900 0 1996* 399 643Finance 100%with SLAs

PDAMs Ableto 2 4 3,748 6,874 13,004 0 0 1996 356 610Finance SomeLoa

PDAMs 4 11 0 7,543 S,585 704 0 2004 355 610Requiring AllGrant

City of Malang I 1 33,242 1,531 48,922 0 0 1995 484 529

GrandTotal 19 32 70,519 15,948 116,990 2,604 0

% xcept PDAM Bondowoso by 2002; ** except City of Blitar PDAM by 1996

of the proposed loan and grant totals for all PDAMs. Economic justification and/or borrowingfeasibility remains to be established for a number of the subproject proposals. The requisiteeconomic analyses and revised PDAM financial capacity projections will be prepared andforwarded for Bank approval before any Bank Loan funds can be disbursed for the relevantPDAM programs. DGCK is also assisting PDAMs in East Java to identify and prepare additionalwater supply investments to meet REPELITA VI targets. The programmatic element of theproposed project will provide financing for these additional schemes which meet the agreedfeasibility criteria.

6.8 PDAM Institutional Development Plans. Each participating PDAM is requiredto produce an Institutional Development Action Plan (LIDAP) or corporate plan setting out theactions to be taken to enable it to improve current operational performance, reduce administrativecosts where these are high, and develop its capacity to cope with the progressive expansions of itsoperations, often very substantial, which will arise as its investment program is implemented.PPMO review of PDAM APIPs will confirm that each PDAM has prepared such a LIDAP orcorporate plan, or expects to have done so before the planned date of SLA or grant effectiveness.

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Provincial approval for a PDAM's program will be conditional on the prior appraisal of eachPDAM LIDAP or corporate plan, and confirmation that no payment of PDAM revenue to thelocal government will be made during the project period.

VII. PROJECT JUSTIFCATION AND RISKS

A. ECONOMIC JUSTIFICATION

7.1 Linkage to Country Assistance Strategy and Sector Strategy. As discussedearlier in Sections II and IV, the EJBUDP represented a significant turning point in the Bank'sCAS in general, and its urban sector strategy in particular. Establishing the operational feasibilityof working with a large number of local governments, while utilizing the provincial government asan intermediary program manager, has given new practical scope to several of the themesemphasized in the CAS, including the need to improve public services and productivity, toenhance local government responsibility and capacity, and to strengthen environmentmanagement. The proposed project design continues and broadens the EJBUDP decentralizationsuccesses and reflects the current CAS emphasis through provision of resources for urbaninfrastructure investments, supporting both sectoral and integrated implementation approaches asappropriate, strengthening local government institutions for urban management, promotingdecentralization of responsibility for project planning and implementation, and incorporatingenvironmental considerations in urban development. The project also incorporates the pilotdevelopment of a provincial framework for land acquisition and resettlement guidelines whichaddresses an identified problem area in project implementation.

7.2 Analysis of Alternatives. Consideration of alternatives, including location offacilities, technology to be employed, and prioritization of identified subprojects within a localgovernment jurisdiction, are all required by the sub-sectoral Technical Memoranda issued by GOIfor preparation of IUIDP proposals by local governments (see Annex 16 for summary of sub-sectoral criteria.) In accordance with these agreed procedures, alternatives were identified andanalyzed with varying techniques depending on the sub-sector and the size of the proposedinvestment (e.g. through standard cost-benefits analysis for large subprojects in water supply,urban roads and drainage subsectors as well as for new solid waste disposal sites; least-costalternative analysis for subprojects in solid waste collection, human waste/sanitation, kampungimprovement programs and market infrastructure improvement programs; and simpleprioritization of extensions to service coverage from existing systems have been based onpopulation served, poverty conditions, and related criteria for smaller subprojects). Whilegovernment involvement in urban infrastructure development is broadly justified because of thestrong environmental, health and social externalities present in the provision of basic urbaninfrastructure services, identification of opportunities for participation by the private sector aswell as local community in project design and implementation was specifically included in eachlocal government PJM and encouraged wherever appropriate. More detailed discussions areprovided in the following section, "Cost-Benefit and Cost-Effectiveness Analysis".

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7.3 Fiscal Analysis and Cost Recovery. The financial situation of local governmentsas well as PDAMs has been examined and action plans for revenue improvement have beenprepared. The project design limits the total project investment to that which the localgovernments can afford to counterpart with their own-source revenues and INPRES grantentitlements after meeting operations and maintenance (O&M) requirements. PDAM financialprojections are summarized for each participating PDAM in Annex 15, including forecasts ofinternal cash generation by each PDAMs. In accordance with GOI policies, the project at thesame time enhances and encourages use of local government and PDAM borrowing capacities, asthey have improved during the implementation of EJBUDP and the further improvementsscheduled in the RIAPs for the proposed project (see Table 6.1). In the roads subsector, indirectand direct cost recovery has been established, under previous Bank projects and sector work, tobe functioning reasonably well. Direct cost recovery in other subsectors remains problematic.See Section VI for further discussion.

7.4 Cost-Benefit and Cost-Effectiveness Analysis. Since the proposed projectprovides investments in seven sub-sectors of urban infrastructure services in all seven cities and 29districts covering a total of more than 102 urban areas, it was necessary to develop a structuredapproach to economic analysis. Subprojects are classified according to investment costs, i.e.,small (less than Rp 500 million in constant 1994 prices), medium (between Rp 500 million and Rp2 billion) and large (over Rp 2 billion). Small subprojects must comply with the agreed planningand design criteria (Annex 16) and their economic viability is presumed based on evaluation ofsimilar subprojects implemented under previous operations and the demonstrated affordability ofthe technical standards adopted. Medium size subprojects are subject to a simplified economicanalysis, utilizing thresholds to select investment options, a sampling of which will be checkedduring Bank supervision and annual program reviews (e.g. traffic counts on existing roadsproposed for upgrading, drainage serving densely populated areas, etc.). Large subprojects mustgo through a more rigorous economic feasibility analysis with all assumptions and methodologysubject to Bank review on a case-by-case basis.

7.5 Water Supply. The current water supply systems suffer many problems. Pipedwater connection ratios are generally low. Due to poor maintenance and deterioration of oldersystems, almost all distribution and connection pipes are leaking, causing water contamination andlarge water losses -- unaccounted-for-water of many systems is over 40%. Reservoir capacity isalso inadequate. To address these problems, the water supply component of the proposed projectwill continue the system rehabilitation efforts begun under EJBUDP and provide some 120,000new connections. The program will improve water quality and reliability by installing newsecondary and tertiary piping systems and replacing old piping systems, as needed. Water lossreduction programns will be undertaken in all the towns to progressively reduce the rate ofunaccounted-for-water losses from their current averages of 35-40% to about 25%. Storagereservoirs will be constructed to increase system capacity so that new source development willgenerally be deferred, per DGCK guidance.

7.6 The main benefits are increased availability of clean, piped water at reduced costs.Demand surveys of current and potential users of the water supply systems were conducted in allservice areas proposed for substantial investment under the proposed project. In light of current

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water shortages in many service areas, and the poor quality and high cost of alternative sources ofwater, the demand surveys conducted for each PDAM demonstrate that the proposed tariffincreases (32% to 60%) would not compromise affordability. Net present values (NPV) andfinancial internal rate of returns (FIRR) are calculated for medium and large water subprojects.FIRR is used as a lower bound estimate of economic rate of return and a detailed description ofthe methodology is presented in Annex 16. A summary of these results for each of the initial 20participating PDAMs is presented in Annex 15. A 12% rate of return is used as the minimumfeasible rate, in part keyed to the proposed 11.75% on-lending rate for subsidiary loan agreementsunder the project. The FIRRs of selected water supply subprojects typically fall between 13% to18%. Several subprojects reviewed at appraisal proved to be non-economic and were eithereliminated from the project or modified substantially.

7.7 Urban Roads. Urban road transport is frustrated by the lack of an integratedmajor road network. Some 7,000 km of roads in East Java, most of which are district roads, arein a state of serious deterioration due to heavy traffic, poor maintenance and inadequate drainagesystems. Traffic is congested on major urban roads and in business centers, particularly duringpeak hours, as a result of inadequate traffic management and insufficient junction capacity. Theurban road component of the proposed project will provide a program of widening of major roadsand bridges, rehabilitation and maintenance of mostly district roads, including improvement ofdrainage, curb and sidewalks. Traffic management programs will also be initiated in a number oftowns. Routine and periodic maintenance needs have been identified, and the road agencies willhave maintenance budgets increases and undertake improved road maintenance.

7.8 The draft report of the recent Roads Sector Study clearly documents the highpriority and significant rates of return for investments in urban areas in improved accessibility,savings in vehicle operating costs and in road construction and maintenance expenditures, as wellas increased land and other property values. Economic analysis, including calculation of NPV andEIRR, of all road subprojects followed the 'Urban Road Planning and Programming Manual",which was issued by the Ministry of Public Works and prepared with the technical assistance oftwo Bank projects, the Regional Cities Urban Transport Project (Loan 2817-IND) and the UrbanSector Loan (Loan 2816-IND) (see Annex 16). The selected subprojects all passed the test ofeconomic analysis that requires the minimum rate of return of 12%.

7.9 Solid Waste Management. Currently less than half of the solid waste generatedin East Java's urban areas is being collected. Collection and disposal equipment capacities fallshort of fast growing demand. Much of the existing equipment is non-operational at any point intime due to inappropriate operation and lack of maintenance. Access roads to waste disposal sitesare also inadequate. The solid waste management component will increase collection coverage tonearly 80% and additional waste transfer depots will be constructed; capacities of existing wastedisposal sites (TPAs) will also be expanded and new sites developed. Collection and disposal siteequipment will be purchased, and programs to improve operation and maintenance of equipmentand TPAs will be implemented. In addition, appropriate access roads to TPAs will beconstructed.

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7.10 The benefits of the solid waste management component arise from cleaner air andwater as a result of reduced burning and dumping of solid waste into rivers and drains, andimproved public health by reduction of disease-bearing pests, as well as from more efficientcollection and treatment. As the benefits are mainly health and environment related, they aredifficult to quantify. The planning was based on real demand and willingness to pay, whilepriority is placed on communities with densities over 200 persons per hectare. The design wasbased on least cost alternatives. The cost recovery will gradually improve under the project inaccordance with the agreed Revenue Improvement Action Plan (RIAP) which specificallyaddresses the solid waste tariff issue in each jurisdiction.

7.11 Human Waste/Sanitation. Sludge treatment facilities and collection equipmentare inadequate and wastewater treatment facilities simply do not exist in East Java's urban areas.Desludging volume from septic tanks is less than 20% of the estimated volume produced. Publicawareness of the health benefits of sludge and wastewater treatment is also lacking. Thewastewater/sanitation component (see Annex 5 for summary) will provide wastewater and sludgetreatment facilities and transportation equipment in Malang and six other cities. It will also installor rehabilitate sanitation facilities with community participation and household loan programs.There will also be a community-based sanitation education program.

7.12 The wastewater treatment facilities will serve an estimated 210,000 people. Thebenefits are improved health and avoided ground water contamination. These benefits are noteasily quantified, and therefore, no NPV and EIRR has been calculated. The planning and designwere based on population density, ground water table level, and least cost alternatives.Desludging has been operated as a private sector business since 1986 in a few localities and itsfurther development will be supported by the project through the construction of sludge treatmentfacilities and strengthened regulation of sludge dumping.

7.13 Drainage/Flood Control. Low lying areas in the Province are subject to floodingdue to poor maintenance of old systems, insufficient capacity, and inappropriate designs ofirrigation channels functioning as drainage canals. The proposed project will provide programs toimprove O&M, rehabilitate drainage canals, and normalize river banks.

7.14 The benefits are reduced flood-caused damage, reduced traffic disruption,increased land values, and improved health, especially of poor people residing in low lying andflood prone areas. The benefits are not easily quantifiable and no NPV and EIRR has beencalculated. However, the cost has been verified to be less than that of relocating residents and abenefit-cost (B/C) ratio has been calculated by dividing the expected increases in land values,which are used as proxy for economic benefits, by investments and O&M costs of the proposedschemes. The estimated B/C ratios are all greater than 1.8. The minimum increases in land valuesrequired for the investments to be economically justified are around 3% to 6%. The expectedincrease in land values as a result of the investments are around 5% to 10%.

7.15 KIP/MIIP. The KIP component, at about 3% of the total project cost, willprovide basic infrastructure services including public toilets, solid waste collection, foot path,water supply, and drainage and cover some 200 kampungs (2,700 hectares). Market

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infrastructure improvements, including improvements to superstructures, will also be providedunder the project for some 80 market areas. As several recent project audits and reviews by OEDshow, KIP has immediate and very positive impacts on the living conditions (i.e., access to motorroads, water facilities, drainage, garbage collection, sanitation, lighting, education and healthfacilities) of kanpung residents using low cost technologies. It is further shown that the areassurrounding the KIP sites also benefit from KIPs as the physical and economic impacts of KIPsripple to neighboring communities. Moreover, the KIP scheme has been replicated through outIndonesia, without the Bank financing. (OED Report no. 14747-IND documents these findings;see previous reference in para. 2.4.) MIIP investments are also very much needed and are morethan covered from municipal fees on the vendors, who participate in deciding the improvements.Formal economic analysis was not carried out for KIP and MIIP because of the difficulty inquantifying benefits, but improvements are subject to least cost analysis according to agreedstandards.

7.16 Quantitative Sensitivity Analysis. Quantitative sensitivity analysis was carriedout as an integral part of the quantitative economic analysis for the subprojects in water supply,urban roads and drainage subsectors. Typical scenarios include demand reductions, costincreases, and project implementation delays. The extent of the increases or decreases assumedfor the sensitivity analysis was based on the implementation experiences of similar type of urbaninfrastructure investment projects. Special attention was given to designs for those subprojectswhose rates of return were close to the cut-off rate of 12%. Final project design and selectiontook into account the results of the sensitivity analysis. For nearly all subprojects, the benefitsremained robust within normal sensitivity parameters. Summary results for water supply areincluded on the subproject tables in Annex 15, while other results are available in project files.

7.17 Analysis of Institutional Capacity. The Local Institutional Development ActionPlans (LIDAPs) prepared for each local government and PDAM document the currentinstitutional capacities and propose specific action needed to assure project implementationcapacity and establish the foundations for sustainable capacities to deliver urban services. SectionV of this report summarizes the basic institutional roles, capacities and requirements. EJBUDPhas established that most local governments have the necessary capacities to successfullyimplement the proposed project.

7.18 Poverty Analysis. As previously noted in Section III, urban poverty in East Javais a serious problem, both in terms of total numbers of urban poor and the magnitude of the'poverty gap"between the poor and basic measures of adequate income. The project design has,in accordance with GOI guidelines for IUIDP programming, given priority to facilities andservices improvements for poor neighborhoods in each project locality. Most local governmentsin East Java clearly recognize that it is the poor who do not have access to clean and affordablewater, waste disposal facilities, and other basic services, and who usually reside in low-lying areasor along drains and river banks that are often affected by frequent flooding. This project isexpected to alleviate such impacts as many components are especially targeted at improving thequality of life and the environment in the such areas. However, no explicit poverty alleviationcomponent, per se, is proposed.

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7.19 The water supply component would increase the poor's access to clean waterwhile reducing the costs. An installment payment plan would be provided for piped water houseconnections who would otherwise not be able to afford them. Water bills would be less than 5%of the expenditures of low-income households. The drainage/flood control component wouldreduce the frequency and duration of floods in the poor, low-lying areas. It would reduce povertydamage and improve health conditions caused by stagnant polluted water in the neighborhoods,and also reduce access disruptions. The human and solid waste disposal/treatment componentswould reduce morbidity and improve health conditions of the poor. The road and trafficmanagement program, which would improve conditions for non-motorized vehicles andpedestrians, would also benefit the poor. The KIP/MIIP component, which is targeted to denselypopulated poor neighborhoods, would substantially improve the living conditions of the very poorby providing basic infrastructure services at very low costs.

7.20 Environmental Improvements. Environmental management and mitigationmeasures have been built into the design and cost of subprojects, and institutional arrangementshave been made for monitoring impacts on the environment, taking into account theimplementation experiences of previous subprojects implemented under EJBUDP (para 5.29-5.33and Annex 13). The project will have a positive impact on the environment through water supply,urban road improvement, solid and human waste disposal, drainage and flood control andkampung improvement program. For instance, the water supply subprojects will provide cleanwater and reduce ground water depletion. The urban road maintenance and upgrading and sidedrains improvement will reduce air pollution and fuel consumption per kilometer throughimproved road capacities, surfaces and traffic management. Improvement of solid and humanwaste disposal will reduce soil and water contamination. Drainage and flood control will reduceflooding and flood-related problems (frequent flooding brings water highly contaminated by solidand human waste into direct contact with households and causes severe health hazards). KIP will,to a varying extent, incorporate all of these improvements.

7.21 Economic Performance Indicators. The monitoring of the economicperformance of the project will essentially be included in the system of monitoring andperformance indicators described for the whole program in Annex 4. Particularly as the key datafor benefit calculation is included in the routine project monitoring system, it will be relativelysimple to estimate the economic benefit/performance of subprojects or larger aggregations asrequired.

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B. RISKS

7.22 The proposed project design acknowledges that substantial risks are involved forboth the physical implementation of infrastructure improvements and the intended institutionaldevelopment of provincial and local governments. For the physical development supported by theproject, the most significant risks include inappropriate investment choices by local governments,inadequate inspection and/or financial controls resulting in poor quality or incomplete works, andfailure to implement proposed works due to budget shortages, land acquisition problems, or otherobstacles.

7.23 There is also a serious risk involving the pace of required institutionaldevelopment, for decentralized systems of management, finance, manpower, and relatedprocesses, as it is difficult to predict and may not be adequate for full and timely achievement ofall project activities in all local governments and these PDAMs. The ability of the East Javaprovincial government to further strengthen its capacities to perform its assigned programmanagement and intermediation functions is also a substantial general risk factor for theeffectiveness of the whole program. This is reflected through many specific risks associated withproject implementation: limited institutional capacity to manage implementation, delays incounterpart funds for the project due to budget constraints, inability of local governments to meettheir revenue targets, and delays caused by protracted procurement procedures for works,material/equipment and consultants. Communication and coordination of project implementationis made more difficult by the large size of the Province and number of involved local agencies.

7.24 In response to such risks, the project will focus on building decentralizedimplementation capacity. The physical implementation of the project will be greatly assisted byimproved transparency and accountability provided by the PPIM and APIPs clarifying the rolesand responsibility for each implementing unit. Project managers would be trained and consultantswould be appointed to help with design, implementation and supervision of the variouscomponents of the project, and program management support will be provided to the keyprovincial units, as well as to the local governments by support teams in each AssistantGovernor's sub-regional office. The financing plans have been endorsed by the agencies that willprovide the domestic funding. Standard bidding documents and procedures have been discussedwith the local agencies and to the extent possible subprojects have been packaged together fortendering, so as to attract larger contractors who normally deliver better quality works with lesstechnical supervision. The Bank has planned sufficient supervision resources, especially in theearly years, for early detection and solution of problems.

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VIII. AGREEMENTS REACHED AND RECOMMENDATION

A. ASSURANCES AND AGREEMENTS CONCLUDED DURING NEGOTIATIONS

8.1 During negotiations, agreements were reached with the GOI and East JavaProvince on the following matters:

(a) The outline for the Annual Project Implementation Plans (APIP) between theprovincial government of East Java and participating local governments and

PDAMs, and the inclusion of "priority targets" in the APIPs as well as the use ofthese targets as performance indicators and as evaluation and management tools(see paras. 4.6, 5.3 and 5.12);

(b) Standard SLA documents for local govemnments and participating PDAMs (seeparas. 4.24 and 5.14);

(c) Contents of the Provincial Program Implementation Memorandum (PPIM),including procedures for the annual review process (see para. 5.2);

(d) Director General for Budget will authorize all payments to contractors from theSpecial Account to be made through the KPKN Treasury offices at the sub-provincial level (with the exception of any technical assistance contracts procuredby central GOI agencies) (see para. 5.19);

(e) The consolidated project accounts, including the Special Account and SOEs, aswell as the overall accounts of the participating PDAMs, will be audited annuallyby independent auditors in a manner satisfactory to the Bank and that the auditedaccounts would be submitted to the Bank no later than six months after the end ofeach fiscal year, commencing with GOI FY96/97 (see para. 5.23);

(f) The East Java Provincial Inspectorate (Ir Wil Prop) will carry out annual technicalaudits during project implementation with the support of the MPW InspectorateGeneral (see para. 5.23);

(g) Proposed arrangements and schedules for project supervision and annualimplementation reviews (by October 31 of each year commencing with 1996) (seepara. 5.27);

(h) GOI will monitor the operations and maintenance (O&M) expenditures of the localgovernments and participating PDAMs for each year as well as the proposedO&M budget for the following year and discuss them with the Bank as a part ofthe annual review (see para. 5.28);

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(i) Tariff adjustments necessary to meet the agreed financial viability criteria will becompleted on or before October 31, 1996, and again by January 1, 1999 (see para.6.5); and

B. CONDITION OF BOARD PRESENTATION

8.2 Approval and issuance of the East Java Governor's decree (SK) on project landacquisition and establishing Resettlement Guidelines for the project, taking into accountagreements reached during negotiations has been completed (see para. 5.30).

C. CONDITION OF LOAN EFFECTIVENESS

8.3 The Provincial Program Implementation Memorandum, acceptable to the Bank,signed by all relevant authorities, would be furnished to the Bank (see para. 5.2).

D. CONDITIONS OF DISBURSEMENT

8.4 Disbursements for each participating local government and PDAM would beauthorized upon approval by the Bank of:

(a) The first Annual Project Implementation Plan (APIP) for each participating localgovernment and PDAM (see para. 5.3); and

(b) The first Subsidiary Loan Agreement (SLA) for each participating localgovernment and/or PDAM (see para. 5.14).

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E. RECOMMENDATION

8.5 With the above agreements and assurances, the project would be suitable for aBank loan of $142.7 million equivalent, with a twenty-year maturity including a five-year graceperiod, at the standard Bank variable interest rate.

- 55 - Annex 1



Urban Infrastructure Projects

LY Closing Project Name:- O -igi PPAR YearEffect- Dte Loan: PCBICR

-::---- Amount -- -: Report:: - - :: : - -: - : : : - - -: - - --:(USSM ),: 4. o -- ---

1040 1975 1981 Jakarta Urban Development 25.00 4620 19831049 1975 1982 Five Cities Water Supply 14.50 6256 19861336 1977 1984 Second Urban Development 52.50 6329 19861653 1979 1987 Third Urban Development 54.00 8583 19901709 1981 1987 Second Water Supply 36.00 8622 19901972 1982 1988 Fourth Urban Development 43.00 8583 19902236 1983 1991 Jakarta Sewerage/Sanitation 22.40 12150 19932275 1983 1990 East Java Water Supply 30.0 10853 19922408 1984 1991 Fifth Urban Development 39.25 11501 19922632 1986 1993 E. Java Water Supply II 43.30 13637 19942725 1986 1992 Housing Sector Loan 200.00 13296 19942816 1987 1991 Urban Sector Loan 270.00 10388 19922817 1987 Oct. 94 Reg. Cities Urban Transport 51.00 15245 19952932 1988 Mar 96 Jabotabek Urban Developmt 150.003219 1990 Dec 96 Jabotabek Urban Dev. II 190.003246 1991 Dec 96 Jabotabek Urban Dev. III 61.003304 1991 Dec 96 East Java/Bali UDP 180.303340 1991 Dec 96 Sulawesi/Irian Jaya UDP 100.003726 1995 Sept 99 Surabaya UDP 175.003749 1995 Sept 99 Semarang/Surakarta UDP 174.003854 1996 June 01 Kalimantan UDP 136.00TOTAL 2047.25

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EAST JAVA-BALI URBAN DEVELOPMENT PROJECTEXECUTIVE OVERVIEW OF

MID-TERM REVIEW SUMMARY REPORT

1. The Bank mission to conduct supervision and mid-term review of the East Java-BaliUrban Development Project (EJBUDP) visited Indonesia from January 29 through February 16,1994. The mission produced seperate supervision and mid-term review reports. The supervisionAide Memoire with immediate action recommendations has been circulated seperately. The mid-term review summary report focused on the major new features or innovations incorporated inthe program design for EJBUDP and the overall performance of the program to date as a "pilot"of the Integrated Urban Infrastructure Development Program (IUIDP) approach to urban servicesprovision by local governments.

2. SIGNIFICANT SUCCESSES of the project to date include the local and provincialgovernments strong support for the decentralization of infrastructure programming andimplementation processes, which are at the heart of the IUIDP concept. The new procedures forlocal governments to have direct access to Bank Special Account funds (the channeling viaSPABP-RK) in support of their approved medium- term investment programs (PJMs) has beenparticularly popular with local officials, as the mechanism provides Bank financing of the localdevelopment budget (APBD) for the first time in Indonesia. The Revenue Improvement ActionPlans (RIAPs) for each local government have generally been shown to be conservative estimatesof potential revenue mobilization from local sources, and many local jurisdictions are nowpursuing much more agressive revenue collection policies. It appears that similar positive resultshave generally been achieved for the Local Institutional Development Action Plans (LIDAPs)in most local governments, but the systematic documentation of the LIDAP results has not yetbeen compiled by GOI. Many of the successful features of the EJBUDP design have alreadybeen replicated in subsequent urban projects of the Bank and other donors, particularly ADB.

3. SIGNIFICANT ISSUES/PROBLEMS remain with some of the project elements,including the technical assistance, the sub-loan mechanism, and reporting systems, most notably.The technical assistance to support the process at provincial and local levels was delayed inalmost all cases by at least 18 months from the mobilization schedule agreed at projectnegotiation, which has impaired progress and capacity-building efforts of the project in manyimportant areas. The project on-lending arrangements (Subsidiary Loans Agreements withPrefinancing - SLAP) were designed by MoF, who encountered difficulty in initiating the sub-loans; subsequent operations have already modified the prefinancing and disbursementarrangements of this mechanism, while retaining the the basic policy elements agreed (e.g.interest rates, terms, etc.). The Program Financial Accounting and Management System(PFAMS) and the Performance-Oriented Maintenance Management System (POMMS), whichwere intended to improve local capacities to manage and report on the progress of program

(i)

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implementation, were seriously delayed in mobilizing the needed technical assistance, but arenow approaching full installation and operation. However, these delays have made completereporting on project implementation nearly impossible to date. The mission noted substantialimprovements in available project documentation as compared to previous supervision missions.

4. In reviewing the "pilot" role of the project for the IUIDP approach. the mission notedat least six areas requiring further development of the process for use in the longer-term. AsGOI begins the Sixth National 5-Year Development Plan (Repelita VI), it is critical that theurban sectoral program structure be clearly specified for all sub-sectors, including appropriatestandards, service/performance criteria, grant/loan support, and O/M targets. Attention is stillneeded in IUIDP institutionalization, with particular regard to building process managementcapacities and understanding at the local and provincial levels, which remain very uneven todate, as well as improved coordination of central government activities and policies affectinglocal services provision. Central-local financial relationships must also recieve additionalattention to appropriately balance local service provision responsibilities with the resourcesnecessary, within a clear and consistent program framework of central support to local efforts.The planning basis for IUIDP is also in need of basic strengthening with the definition of spatialnlanning/land management guidance in the future preparation of investment programs whichaccurately reflects the economic development potential and environmentally sustainable intensityof future growth in each urban area. The mission also noted that revision in local budgetingpractices, particularly in the capital budgeting function, were essential to achieving IUIDPobjectives of improved local decision-making and service delivery. Lastly, the definition of anappropriate framework for private sector participation remains a high priority for the entireurban infrastructure sector in Indonesia, as discussed on several previous occaisions with GOI.

5. The mission endorsed the immediate initiation of preparation activities for the next Banklending operations in East Java and Bali to sustain the momentum achieved by local governmentswhich participated in the current program. as well as to initiate full implementation of the thirdbatch of local investment programs which includes the major city of Malang in East Java.However, the new operations should address the policy framework improvements noted above.as well as explicitly addressing environmental management issues for urban areas, which havenot recieved adequate attention in previous Bank-GOI urban programs to date.

(ii)

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Second East-Java Urban Development ProjectList of Eligible Cities and Towns in East Java Province

(Excluding City of Surabaya, covered by the Surabaya Urban Development Project,Loan No. 37264IND)

DGCKCities/Kotamadya (7) 1995 Urban Population 2000 Urban Population Priority (X)

Malang 712,292 779,896 XMojokerto 105,306 113,277 XPasuruan 148,815 157,337 XProbolinggo 192,368 209,182 XMadiun 187,290 197,920 XKediri 255,550 269,119 XBlitar 124,615 127,953 X

Regencies/Kabupaten (29), containing 95 Urban Areas

1995 Urban Population 2000 Urban Population

1 Mojokertoa. Mojosari 47,048 52,123 Xb. Soako 39,640 44,261c. Gedek 44,435 54,166d. Pacet 11,023 11,886

2 Sidoarjoa. Sidoarjo 103,197 116,872 Xb. Porong 39,588 42,774 Xc. Krian 64,444 72,204 Xd. Taman 96,838 114,404 Xe. Waru 160,390 193,270 X

3 Pasuruana. Gempol 30,110 32,887 Xb. Pandaan 45,725 50,757 Xc. Prigen 38,198 43,619 Xd. Bangil 74,580 82,342 X

4 Probolinggoa. Leces 21,694 23,730 Xb. Dringu 33,115 35,850c. Sukapura 13,452 14,577d. Kraksaan 41,020 43,540

5 Bojonegoroa. Bojonegoro 78,213 83,513 Xb. Baurejo 18,275 19,010c. Sumberejo 13,070 13,780

Page 1 of 4

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RegenclesnKabupaten (29), containing 95 Urban Areas DGCK

1995 Urban Population 2000 Urban Population Priority (X)

8 Malanga. Satu 84,960 94,310 Xb. Bululawang 28,497 30,368c. Dampit 39,325 41,330d. Dau 26.884 29,769e. Karangploso 21,710 24,088f. Kepanjen 47,450 52.388 Xg. Lawang 60,810 68,384 Xh. Singosarl 57,717 66,392 XI. Tumpang 28,590 28,914J. Turen 41,050 42,418k. Gondanglegi 35,865 37,182I. Pakis 21,680 25,752m. Pakisaji 37,533 40,734n. Sumberpucung 27,350 28,250

7 Tubana. Tuban 94,013 99,988 Xb. Tuban Barat 8.810 9,290

8 Lamongana. Lamongan 32,852 39,423 Xb. Babat 19,670 20,490 Xc. Paciran 21,867 23,910d. Brondong 35,586 38,810e. Tikung 14,490 14,982

9 Gresika. Gresik 71,750 76,649 Xb. Driyorejo 22,490 23,824

10 Jombanga. Jombang 139,075 143,622 Xb. Mojoagung 23,345 24,491

11 Situbondoa. Silubondo 86,109 90,638 Xb. Besuki 37,070 39,173 Xc. Panarukan 24,130 24,742 Xd. Assembagus 23,783 24,192

Page 2 of 4

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Regencies/Kabupatbn (29), containing 95 Urban Areas DGCK


12 Bondowosoa. Bondowoso 74,255 81,886 Xb. Prajekan 14,076 14,561c. Tamanan 10,140 10,683d. Wonosari 13,332 13,526

13 Banyuwangia. Banyuwangi 155,528 171,713 Xb. Genteng 78,622 80,049 Xc. Muncar 68,668 73,501 Xd. Rogojampi 22,400 23,543

14 Jembera. Jember 276,338 290,866 Xb. Ambulu 97,430 99,240c. Balung 69,527 73,220d. Tanggul 50,600 51,620

15 Lumajanga. Lumajang 67,211 77,541 X

16 Ngawia. Ngawi 47,997 49,651 X

17 Madiuna. Caruban 41,300 42,765 Xb. Dolopo 30,720 33,235

18 Magetana. Magetan 46,290 50,880 Xb. Karangrejo 48,420 50,890c. Maospati 33,223 34,918

19 Ponorogoa. Ponorogo 114,160 122,983 X

20 Pacitana. Pacitan 43,940 47,218 Xb. Donorojo 35,905 36,812c. Pringkuku 31,953 38,951d. Punung 34,070 34,940

Page 3 of 4

- 61 -ANNEX 3

Regencies/Kabupaten (29), containing 95 Urban Areas DGCK


21 Nganjuka. Nganjuk 68,216 71,922 Xb. Kertosono 34,585 35,653 Xc. Tanjunganom 54,867 57,069

22 Kediria. Pare 85,986 91,497 Xb. Gampengrejo 53,602 60,468 Xc. Ngurah 20,755 21,492d. Ngadiluwih 25,328 26,436

23 Trenggaleka. Trenggalek 52,901 57,232 Xb. Watulimo 24,355 25,345

24 Tulungagunga. Tulungagung 149,510 152,904 Xb. Ngunut 20,605 22,121c. Kauman 25,438 26,669

25 Blitara. Wlingi 34,400 37,683 Xb. Sutojayan 20,525 21,102c. Srengat 17,177 17,940

26 Bangkalana. Bangkalan 50,001 60,951 X

27 Sampanga. Sampang 39,162 43,174 Xb. Ketapang 21,826 22,067

28 Pamekasana. Pamekasan 93,104 99,905 Xb. Pademawu 19,105 20,550

29 Sumenepa. Sumenep 59,507 64,963 Xb. Kalianget 20,230 20,740 X

(Total = 54)

Page 4 of 4

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ANNEX 4Page 1 of 6


Project Implementation Monitoring and Performance Indicators

A. Background and Approach

The Bank and GOI have mutually undertaken the development of projectimplementation monitoring systems and attempted to define infrastructure performanceevaluation methodologies within the framework of several previous urban and watersupply projects, including four previous operations in East Java. These efforts began in1985-86 with initial attempts to develop a "Performance-Oriented MaintenanceManagement System" (POMMS) which would operate from an inventory of localinfrastructure and periodic conditions surveys to prioritize maintenance expenditure needs,with the City of Surabaya being one of the pilot cases. In the water supply sector, aparallel effort was mounted through the establishment of a water supply "ProgramMonitoring and Development Unit" (PMDU) to monitor the implementation of twosuccessive province-wide projects and evaluate the progress of PDAMs toward financialand institutional sustainability. The East Java-Bali Urban Development Project (EJBUDP)initiated in 1991 combined the previous efforts and expanded the scope of these systems,by adding water supply to the POIMS, as well as financial and institutional developmentaction plans (RIAPs and LIDAPs) for all local governments in the province. EJBUDPalso developed and installed a comprehensive computerized "Project Financial Accountingand Monitoring System" (PFAMS) in all local governments. The proposed project willcontinue to rely on these systems and assist provincial and local officials to improve them.

During the implementation of EJBUDP the Bank also sponsored research intodefining appropriate performance measurement techniques for infrastructure and urbanservices delivery. The results of this research' suggest that infrastructure service shouldbe measured in terms of five types of parameters:

1. Quantity2. Quality3 Coverage4 Reliability5. Sustainability

Findings of the East Java Bali Urban Development

Project Case Study, Performance Measures for Infrastructure and Environmental Resources

by Jonathan Stevens and Peter Cook, December 19, 1994

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ANNEX 4Page 2 of 6

For all parameters emphasis must be placed on measuring levels of services delivered tousers, rather than intermediate measures of implementation or "supply" of infrastructure.

Recent Bank guidance documents on formulating project monitoring andevaluation systems establish five stages of the project implementation cycle to beconsidered:

1. inputs2. process steps3. outputs4. results/outcomes5. impacts

Defining project performance expectations or targets in terms of the above stages ofproject implementation must be done in the context of (i) existing conditions and levels ofservice currently provided, (ii) current service deficits measured against effective demandsor demonstrable needs for services, and (iii) established medium-term standards or goalsfor service provision (e.g. REPELITA or even PJP goals).

The following figure graphically combines these factors to form a matrix whichwill be discussed with each local implementing agency in establishing their annualperformance targets and operating their monitoring and evaluation systems. The"context" data and standards are described in the PJM document for each localgovernment and subsector technical memoranda (although some sub-sector measures ofneeds/demands need further work and will be redefined for the proposed EJUDP3 conceptof realizing economic potential).

The project design further refines the successful EJBUDP model of decentralizedproject implementation and "bottom-up" approach to selection of investment and actionpriorities, which implies that monitoring of implementation progress and impact must befocused at the local government level. However, in accordance with both GOI and Bankrequirements, project progress reporting must support a procedure to evaluate theperformance of the project in aggregate toward achieving development objectives for theprovince, including all 36 local governments and 7 subsectors. Given the wide variation incurrent conditions, local capacities and priorities, the project design has been structured tosupport a two-tiered monitoring and evaluation process to include: (a) the continuedoperation and strengthening of comprehensive program management systems in eachlocality and participating PDAM as used in EJBUTDP and familiar to local officials(generally measuring implementation performance in terms of actual input and outputquantities and process milestones versus agreed implementation/action plans), and (b) theselection of a few key measures or "priority targets" within each local program (PJM) to

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Page 3 of 6

Second East Java Urban Development ProjectImplementation Monitoring and Evaluation Process

(by sub-sector)

Quantity |Quality- |Coverage |Reliability |Sustainability

Current CommunityConditions Survey Results

Needs/Demands*

CONTEXT

ProjectTarget

~~Slce Prort TagtI) Pors

Stnad for asesn ned/ead_il__ywdl usctr u hudrflc tnad ngol esalse PJP REEIT n Tcnia emrnumdcuet, sweladmn

suiRv_eys_

- 65 -

ANNEX 4Page 4 of 6

be used as indicators of outcomes or impacts of highest importance in the local contexttoward attaining project development objectives. As in EJBUDP, the provincialcompilation of all local project data will allow aggregation of project results and providean overview of total achievements of the project. However, such aggregations can bemisleading or give an inaccurate picture of actual outcomes or impacts of most importancein particular urban areas. It is proposed that the attainment of the selected "prioritytargets" for each locality and PDAM be used as the primary indicator of projectperformance, as an adjunct to the basic monitoring systems in place.

In the proposed two-tiered monitoring and evaluation process, the establishedmonitoring systems correlates to the "implementation monitoring" portion of the attachedmatrix, while the proposed selection of "priority targets" should include selectedmeasures of development objectives attainment focused on expected outcomes andimpacts, preferably toward the reliability and sustainability side (bottom-right) of thematrix. This two-tiered system is further described in the following paragraphs.

B. Implementation Monitoring

The systems and procedures installed in East Java provincial offices and theparticipating local governments under EJBUDP and utilized in the preparation of theproposed project enable the detailed monitoring and measurement of progress to be arelatively straight-forward task. A Performance-Oriented Maintenance ManagementSystem (POMMS), now installed in all local governments, establishes current baselinestatus of infrastructure systems and delivery of services, as well as O&M expenditurerequirements. The medium-term program (PJM) documents for each local governmentpresent subproject investments in terms of overcoming specific infrastructure/servicedeficits in each urban area. Each local jurisdiction has prepared local government actionplans to improve own-source revenue (RIAP), O&M implementation (POMMS), andinstitutional capacities (LIDAP). Progress toward each of the stated intermediate projectobjectives at local government level can thus be measured by:

(i) monitoring the attainment of improvements in infrastructure/servicecoverage, quantity, quality and reliability versus the PJM targeted levels(Note: The targeted levels vary greatly among localities as currentbaselines, needs, and financial capacities to respond are quite different ineach area; project targets and progress will always be presented in contextof needs and baseline conditions in the standard reporting formats).

(ii) monitoring the implementation of action plans for institutional development(LIDAP) together with realization of programmed (PJM) expenditurelevels for O&M and physical quantities of maintenance performed versus

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ANNEX 4Page 5 of 6

POMMS targets, as well as monitoring the realization of local governmentand PDAM revenue enhancement action plans (in terms of the percentageof potential revenue realized); and

(iii) monitoring the preparation of all needed components for each localgovernment in designing the REPELITA VII strategic developmentprogram, per the agreed work plan for this comprehensive effort (mainlyagainst agreed time schedule of preparation steps, to be defined with aPHRD grant for initial design and development of preparation process).

A Project Financial Accounting and Monitoring System (PFAMS) has been installed ineach local government during EJBUDP which together with the established monitoringprocedures will produce complete information for quarterly progress reporting and tosupport the regular review of the program by GOI and Bank supervision missions.

C. Selection of Priority Targets

Utilizing the local "priority targets" as indicators to measure the overall progressof the project toward its development objectives, requires that during the provincialapproval of the Annual Project Implementation Plan (APIP) for each local jurisdiction (seepara. 5.3 and Annex 8), mutual agreement be reached on the 5-7 priority targets whichbest summarize or capture the project impacts/outcomes desired in each locality. In alllocal governments and participating PDAMs, the total revenue targets and agreedoperations and maintenance (O&M) expenditure levels will be among those targetsselected, but other targets will vary widely with the priorities of the local PJM and localconditions (e.g. targets may include institutional capacity outcomes, O&M performanceresults for drainage, or key process steps such as site selection for solid waste, in additionto key physical infrastructure implementation necessary to produce desired impacts). Amenu of potential targets is suggested by sub-sector in the following Table 1, and a sampleof suggested "priority targets" for the City of Malang are displayed below (finalquantified target to be established in APIP). During the annual review, local governmentsand participating PDAMs meeting priority targets will be encouraged to expand/acceleratetheir programs, while poor performance would result in decreased funding until targets aremet.

D. Project Performance Indicators and Rating

The proposed project would utilize the attainment of the local priority targets asthe primary performance indicator of attainment of project objectives. The priority targetswould be classified as either "implementation progress" or "development objectives"targets when established each year. Reporting would be done on a simple attained or not

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ANNEX 4Page 6 of 6

attained basis (pass/fail) and the project performance would be classified for bothmeasures on the basis of the percentage of annual priority targets attained, as follows:

Highly Satisfactory: 80% or more attainedSatisfactory: 60%-80%Unsatisfactory: 30%-60%Highly Unsatisfactory: less than 30% attained

Confirmation of reported results in attaining the priority targets will be included in thescope of the Technical Audits. Further details of this approach will be discussed with theprovincial and local officials involved during project launch workshops, and assessedduring the initial Annual Review in October 1996.

E. City of Malang Suggested Priority Targets - 1 st Year(I = Implementation Progress Indicators; D = Development Objectives Indicators)

Kotamadya Malang

- RIAP Target Met (I)- O&M Expenditure Target Met (I)- RAP Prepared for All Resettlement Subprojects (I)- Meters of Road Resurfaced (I)- ha. of KIP completed (D)

Malang PDAM

- Total Revenue Target Met (D)- O&M Expenditure Target Met (I)- No. of Meters of Pipe Replaced (I)- Detailed Engineering Completed for Program (I)- M3 of Water Sold at or above Production Cost (D)

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ANNEX 4

Table 1: Menu of Possible Performance Indicators/Priority Targets

Development Objectives' Implementation Progress

Water Supply

- PDAM cost recovery of O&M and debt - Billings and collection performance of PDAMservice

- 24 hour per day availability - Tariff adjustment per appraised schedule

- Percent of local population receiving adequate - Number of new connections sold (vs. PJMdrinking water supply and quality target)

- Average cost M3 of drinking water (as % of - Length of old pipe replaced or new pipe laidaverage low-income household)- M3 of water sold at or above cost of - Unaccounted for water in the municipalproduction delivery system

Transportation

- Percent of population within 300 meters of a - Meters of new roads constructed orpaved road or 50 meter of paved footpath rehabilitated

- Provision made to incorporate non-motorized - Meters of bridges or culverts constructed ortransport rehabilitated

- Frequency and severity of traffic congestion - Kilometers of roads maintained

Quality of construction and maintenance level - Completion of detailed design documents forof local roads based on annual condition new road segmentsassessment of local roads

- Approval of RAP, when needed- Time and expense to make a standard trip to - % paved vs unpaved local urban roadsmarket

ITargets and measurement techniques to be agreed and defined annually at the APIP discussions.

- 69 -

Drainage

- Incidence of malaria and dengue fever - Kilometers of new drains built and properly(stagnant water) integrated to final outfall

- Incidence of water-borne disease - Kilometers of drains maintained

- Quality of construction based on annual - Percent of population whose houses orcondition assessment of local drains businesses were under 10 cm or more of water

for at least 6 hours per year

- Incidence of flooding and flood damagesavoided (vs. pre-project condition)- Level of community participation in local - Quantity of material removed from existingdrain maintenance (including proper solid waste drainage network during maintenancedisposal)- Percent of community served by tertiary drains

Human Waste/Sanitation

- Ambient water quality in drains, water - Number of new individual and communitycourses, and near shore septic tanks installed (number of additional

people served)- Quality of shallow ground water aquifer - Volume of septage collected and properly

treated from septic tanks- Percent of population that understands the - Number of households visited by communityramifications of poor sanitation practices (based health workerson community survey)

- Percent of population with access to properly - Number of households upgrading sanitationoperating waste water facilities system

- Percent of local industries who providetreatment (at least primary level) to process andemployee waste water

- 70 -

Solid Waste

- Percent of waste recycled or composted - Volume of waste collected and properlydisposed (versus estimated waste generated)

- Percent of waste "fly-tipped" - Acquisition of new TPA if required (usingacceptable site selection process)

- Cleanliness of public areas (waste not placed -Number of new waste containers establishedin drains) with proper collection

- Properly located waste disposal site: existence - Number of transfer stations installed (MPS)and adherence to an operating plan

- Percent of community served by reliable waste - % of households served by collection systemcollection (minimum weekly)

- Percent of waste diverted through recycling - Market waste collectionand composting

- Percent of waste delivered to final disposal site

Municipal Management

- RIAP Targets

- Percent of staff with professional accreditation

- Percent of staff with known job description

- Percent of operating and capital budget generated through local funds

- Existence and adherence to a locally generated and valid land-use plan

- Existence and adherence to 5 year (minimum) "Umaster plans" in water supply, waste water, solidwaste, and transportation

- LIDAP targets for staffing and training

- Level of cost recovery by subsector (direct and indirect)

- Effective use of private sector

- Construction quality of works

- POMMS expenditure targets met

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INDONESIA

EAST JAVA URBAN DEVELOPMENT PROJECT-2

HUMAN WASTE/SANITATION COMPONENT

This component will improve urban environmental conditions within seven citiesand 29 kabupatens throughout Eastern Java by appropriate combination of:

* Adequate kabupatenlkotamadya-level wastewater and septic tank sludgetreatment facilities;

* Neighborhood community (kelurahan) infrastructure;* Mechanisms for sustainable financing of household-level flush toilet

connections;* Adequate, targeted, community-based, sanitation education;* Improved public and private sector capacities at DAT7 III levels; and* DAH7I/JI-level regulatory reform.

Thus, implementation will focus on benefits to, and the active involvement of, public andprivate sector entities at 4 levels of aggregation: (i) provincial; (ii) kabupaten/kotamadya;(iii) kelurahans within kabuipaienlkotamadya; and (iv) individual households.

A. Background

Infection and Morbidity Above Regional Average

In recent years, GOI investment in sanitation has lagged far behind investments inrelated urban water supply. Although the infant mortality rate had declined during the1980s, by 1988 it still remained among the highest in Southeast Asia at 60-70 infantdeaths per 1,000 live births. Even more alarming are the health statistics which show thatthe incidence of diarrhea diseases and helminth infections in children has not declined at allin recent years. Thus, water and sanitation facilities, combined with hygiene education,remain essential for the prevention of infection and reduction of currently high levels ofmorbidity.

Foundation for Improvement Established

Sludge Treatment. The need for adequate sludge treatment and disposal has beenidentified as a significant environmental concern throughout East Java. That concern isevidenced by the fact that 14 local governments included IPLTs and 13 have includedsludge collection trucks in their proposed programs. It will be necessary, however, toprepare specific communities prior to commencement of operations; especially with

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ANNEX 5Page 2 of 7

respect to their responsibility for emptying septic tanks periodically and paying for thatservice.

Community/Household Level Sanitation. With respect to community-levelsanitation sub-components, EJUDP-2 will benefit particularly from lessons learned fromthe pilot (UNDP-financed) Community Water & Sanitation Project (CWSP)limplemented, in support of EJBUDP, during the period 1989-1994. In particular, testedmethodologies and instructional materials are now available with respect to: (i)appropriate technologies and standards; (ii) community organization and financing; (iii)approaches to both kabupateni/kotamadya and kelurahan-level orientation and training;and (iv) sanitation education and social marketing. Thus, the relatively successfulexperience of CWSP will be "scaled-up" (with appropriate modifications) in EJUDP-2.

Regulatory Reforms Identified. As part of the CWSP, a total of 74 separatelaws were identified at DA TI I/l-levels in East Java which directly affected community-based water and sanitation activities and options and specific recommendations for reformhave been proffered. Although none of those recommendations have been implemented todate, they provide a policy foundation for action under the terms of the proposed project.

B. Project Components: Summary Description

This component of the proposed EJUDP-2 consists of 6 sub-components: (i)wastewater treatment; (ii) kelurahan-level infrastructure; (iii) household sanitation finance;(iv) sanitation education; (v) capacity-building at Dati 14I levels; and (vi) Dati II-levelregulatory reform. Each of these sub-components is briefly described below.

Wastewater and Sludge Treatment

Malang. The major works proposed for Malang include 6 small packagedwastewater treatment plants to provide secondary treatment of effluent into the Brantasriver. Designs have been completed for the treatment plants, and associated small borecollection systems.

Other sanitation components are a sludge treatment facility with truck; a city-widesanitation management study; private toilets; and public toilets (MCK). It has beenproposed that the sludge treatment plant should be installed at the solid waste disposal siteat Supit Urang. Although the plant has been designed, the site currently lacks water andelectricity. Therefore, costs have been included for the connection of these facilities in thetotal package estimate.

I LTNDP Project INS/88/005 was financed by UNDP and The Govermnent of the Netherlands in parallel with,and in direct support of, the World Bank-financed East Java-Bali Urban Development Project. Joint ExecutingAgencies were the Regional Water & Sanitation Group for East Asia & Pacific (RWSGEAP) of the UNDP/WorldBank Water & Sanitation Program and the Ministries of Public Works, Home Affairs, and Health of The Govemmentof Indonesia. It should, however, be noted that communities within only three kabupaten were included in CWSP(i.e., Sidoarjo in East Java and Badung and Denpasar in Bali).

- 73 -ANNEX S

Page 3 of 7

Other Kabupatens/Kotamadyas. The Project intends to provide adequatewastewater treatment facilities to serve 140 thousand people in 6 cities outside of Malangand Surabaya. These facilities will consist of off-site small bore sewerage/waste watertreatment plants. Proposed locations include Sidoarjo, Tuban, Lamongan, Pasuruan,Bojonegoro, and Gresik kabupatens. In addition, 13 local governments will receivesludge treatment facilities and trucks; 27 will build new MCKs and 5 will refurbish existingMCKs.

Kelurahan-Level Infrastructure

The project will include a kelurahan sanitation infrastructure sub-componentwhich will stress community ownership and responsibility. The Project will contribute toimproving sanitation conditions approximate 100 kelurahan by installing or rehabilitatingsanitation facilities; the specific design of which will be based on consultation with theaffected households and community leaders. More specifically, kelurahan will have theopportunity to participate in the identification, planning, management, and financing ofappropriate infrastructure investments and subsequent maintenance of sewerage/drainagesystems, septic tanks, MCKs, and community toilets within their own communities.Almost 11,000 septic tanks will be built in 14 kabupatens/kotamadyas and 2,300 will berefurbished in 7 others.

The community participation approach outlined above was the essence of theCWSP. That experience has shown to be successful with regards to:

o Needs identification for water and sanitation facilities;o Technology selection;* Community contribution to the construction of facilities; and* Knowledge related to appropriate technologies and low-cost O&M.

Kelurahan will be eligible to participate in the proposed Project by meeting eitheror both of two criteria: (i) they produce significant environmental degradation in otherareas of the KabupatenlKotamadya as a result of inadequate sanitation infrastructureand/or (ii) the kelurahan is "poor" according to the criteria established for inclusion in thebroader KIP/MIP Component of the proposed EJUDP-2.2

The "community resilience body" (LKMD), and the Family Welfare Movement(PKK) will both have active responsibilities for promoting community water and sanitationprogram at this level. Most important of these responsibilities will be proposingappropriate financial mechanisms and corresponding institutional arrangements within thecommnunity.

2 Agreement with GOI will be sought that kelurahan eligible for the sanitation sub-component of theKIPvMIP project component will be permitted to use Inpress Desa Tertinggal (IDT) funds in whole or part for thefnancing of Kelurahan sanitation infrastructure available under the terms of the Project.

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Page 4 of 7

The project planning and implementation process at the community level willinclude:

* Preparation of a Sanitation Action Plan in the context of EJUDP-2 or otheracceptable kabupaten/kotamadya development plan;

* Establishment of community organizational arrangements;* Detailed planning and design of investments with mutual cooperation among

community leaders and other public and private sector technical support staff;and

* Identification of financing arrangements.

Household Sanitation Finance

The need for proper toilets throughout urban and semi-urban Eastern Java is notknown, but it can be assumed that a substantial number of homes will need to improveexisting, or provide new, facilities if 100% connection to sewers is to be realized.However, in principle, GOI should not incur expenses at the household level for capitalimprovements (i.e., toilets and connections). Thus, a sustainable low-cost sanitationprogram needs to have access to finance for low-income communities. It is also desirablethat it be operated on the basis of full cost recovery of capital, operation and maintenance.So, it is desirable to establish a local level for low-revolving fund.

Therefore, the primary objective here is to institutionalize mechanisms forfinancing household-level pour-flush toilets and connecting them to septic tanks and, on alimited basis, to community sewers. For that purpose, the Project will support extensionof the "Revolving Fund Scheme" established by CWSP on a pilot basis in six communitiesin Sidoarjo Kabupaten, East Java. During implementation of the CWSP, seed capital forthe revolving fund was initially drawn from GOI's budget.3 Households which receivedprivate latrine facilities were required to repay in monthly installments according to agreedterms; typically interest of I % per month over five years. Moneys repaid into the Fundbecame available for further lending to other community households. Under the terms ofthe proposed EJUDP-2, LKMDs will be responsible for monitoring repayments andresolving and problems or disputes.

Using essentially that methodology,4 the CWSP stimulated the construction of 135latrines in Sidoarjo kabupaten, East Java. Of those, 208 households were on schedulewith repayments as of September 1993, 43 were deferred for "good reason" and 25 were

3 During the trial period, initial "seed" capital was provided by Central Govermment. However, the systemis quite flexible in that it could be financed from a variety of sources. Thus, other sources of fmnance could beidentified for capitalization purposes. The most appropriate type of govermment funding would be from the localgovernment budget, since the local "house of representatives" (DPRD TK II) could approve it.4 Manuals which provided guidelines for implementing the Revolving Fund were prepared for, andused in, the pilot communities. Thesc manuals are still available for use during implementation of EJUDP-2 andshould require, at most, only minor refinement.

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Page 5 of 7

in default.5 In aggregate, the number of persons in both East Java and Bali who haddefaulted was less than ten percent of the total number of loans.6

Sanitation Education and Social Marketing

This component is directed toward increasing community awareness of, and desirefor, clean water and sanitation (although this specific project component focuses onsanitation services, the education campaign will need to combine attention to therelationship between it and water use). Thus, the project will provide targeted,community-based, sanitation education in support of sewerage/drainage systems in 7cities, 2,000 MCKs, and a projected 13,000 household-level flush toilet connections toseptic tanks or sewers.

If the construction of such facilities is to have the desired effect, it will need to becomplemented by an effective community-based sanitation education program.Community involvement is particularly important for effective utilization of sanitationfacilities because hygiene practices are so intimiately involved with both personal andcommunity behavior and preferences.

Past Experiences and Lessons Learned. Many useful lessons from experiencewith community-based adult health education programs in Indonesia7 suggest that themost effective methods are distribution of posters and door-to-door (or "cadre")campaigns." However, for the cadre-based, door-to-door method to work, at least threethings are necessary: (i) household attitude surveys; (ii) materials based on those surveys;and (iii) training of field workers.9

Pre-Existing Materials. A large inventory of materials prepared, under theauspices of CWSP, to specifically address (water and) sanitation issues in East Java orBali are available. These include: TV spots (8), dramas (3), and "Dialogues (6);" radiospots (20), local dramas (12), and features (6). In addition, 2700 posters (4 types), 300leaflets, and one survey guidelines manual was produced. Finally, 'flip charts" on water

5 Financial records were very well kept in all demonstration villages.6 In those instances where repayments were not in schedule, confidence that full payment will be made overtime remains high among village fund managers. Peer pressure plays a significant part in this. The highest defaultoccurred in Badung (25 households), but that was caused partly by erroneous infonnation passed by a contractoesworinan that the latrines were free (despite agreements being signed).7 Particular success in Indonesia has been achieved with respect to community-based education programsregarding family planning and oral dehydration therapy.

An evaluation of CWSP's pilot demonstration of a conmmunity-based water and sanitation educationprogram in 12 demonstration villages of East Java and Bali concluded that the best result were achieved by door-to-door campaigns and posters (both 98-100%); followed by radio (50-80%) and Television (50-72%).9 For example, in support of CWSP, Lembaga Bina Swadaya, a national NGO, prepared survey materials andmanuals during July - December 1991. In addition. Bina Swadaya (another Indonesian NGO) carried-out test surveysand prepared drafts of additional manuals. That was followed by training for 58 local counterpart team members, 225GOI officials involved in IUMDP East Java and Bali, and 120 cadres. Finally, during the period from August 1992 toOctober 1993, these same two NGOs conducted actual field trials.

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Page 6 of 7

and sanitation technology, community participation, health and sanitation, and revolvingfund schemes were developed for education purposes within the communities.

Capacity-Building at DA TI I/II Levels

Over the years, large numbers of DATI I/H officials in East Java have receivedtraining to enhance technical, managerial, and financial skills across a broad range ofspecialties. CWSP alone provided 225 GOI officials involved in EJBUDP with trainingrelated to community-based water and sanitation infrastructure and services.Nevertheless, it is generally agreed that further improvement is needed to:

* Construct and maintain core infrastructure at the aggregateKabupaten/Kotamadya level (e.g., operator training to ensure operationalefficiency of wastewater and sludge treatment plants);

* Plan, program, and budget sanitation investments;* Provide managerial, technical, and financial assistance support to kelurahan;

and* Provide appropriate sanitation education.

A complete set of manuals, guidelines and other materials in support of training forofficials and NGO staff at Provincial, kotamadya/kabupaten, and kelurahan levels hasbeen prepared'0 and is available for use in EJUDP-2.

The Project will provide a "real world' context for capacity-building byemphasizing the preparation of mutually consistent Sanitation Action Plans (SAPs) atprovincial, kotamadya/kabupaten, and kelurahan levels. SAP preparation supported bythe Project will emphasize a bottom-up approach which encourages and accommodatescommunity proposals (including contributory financing) for inclusion in DA7T II-levelmedium term plans (Program Jangka Menengah - PJM). CWSP has successfullydeveloped and tested SAPs in Sijoardo Kabupaten, 2 other kabupaten in Bali, and hasassisted JLTDP to prepare SAPs in 45 Kelurahans in DKI Jakarta. Thus, the preparationof SAPs has demonstrated that the process does increase community participation foreffective implementation of water and sanitation investments."I

10 The various manuals produced include the following: (i) Monitoring and Evaluation Design and Operating

Manual, (ii) Revolving Fund Design and Operating Manual, (iii) Private Sector Participation Guidelines, (iv)Training Manual for SAP Preparation, (v) Social Marketing Survey Manual, (vi) Social Marketing CampaignManual, (vii) Market Survey Materials, (viii) Campaign Training Materials, (ix) Adult Training Manual, (x)Standard Formats and Summary Fornats for SAP, (xi) SAP Preparation Manual, (xii) SAP Technology SelectonManual, (xiii) Monitoring and Evaluation Guidelines, (xiv) Community Participation Guidelines, (xv) CadreDevelopment Manual, (xvi) Cadre flandbook, and (xvii) Community Development Manual. In addition,approximnately 50 local government officials in Sidoarjo (East Java), Badung and Denpasar (Bali) were trained inSanitation Action Planning, Social Survey and Carnpaign Techniques, Adult Learning Methods, CommunityParticipation Techniques, and Revolving Fund Scheme.I I Nevertheless, additional work will need to be undertaken to test the replicability of low-costtechnologies (e.g., pour flush twin leaching pit latrine) promoted by CWSP. Various types of waste technologies(conventional sewerage, combined sewerage, small bore sewerage, public toilets, individual/shared toilets), and theirappropriate application relative to environmental conditions (e.g., slope, soil, ground water), service levels (watersupply, drainage, existing facilities), and social conditions (population density, land use, land ownership) also need tobe further investigated. On-site sanitation technologies need to be made more simple.

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Finally, the Project will support GOI's on-going effort to clarify the respective rolesand responsibilities of various government entities at different levels with respect tosanitation provision, maintenance, and improvement. Successful completion of that task isneeded if significant benefits are to result from training provided by the Project.

DATIIIII-Level Regulatory Reform

A comprehensive review of existing regulations affecting financial mechanisms(cost recovery, credit assistance and revolving funds) and other aspects of communitywater and sanitation development was undertaken under the terms of the CWSP. Severalambiguities concerning the legal responsibilities of DATl IIl1-level officials werediscovered to be ambiguous. Therefore, specific recommendations were presented forregulatory reforn; with a particular focus on kapupaten Sidoarjo in East Java. A total of74 separate laws were identified at DA TI i/I-levels in East Java which directly affectedcommunity-based water and sanitation activities and options.'2 Recommendations forregulatory reform included:

* Amendment (or replacement) of Act. No. 11/1974 as the main basis formaintaining clean water and sanitation at the community level within urbanenvironments; and

* Application of Government Regulation No. 6/1988 concerning the improvedcoordination of vertical institutions with overlapping responsibilities withinkapupatens in East Java. 13

In addition, a recommendation was submitted to the Directorate of EnvironmentalSanitation (September 1992) that Presidential Decree No. 29/1984 should be amended tofacilitate the establishment of more effective revolving funds for community water andsanitation. In any event, none of these recommendations have been implemented.

12 See Airlangga University (Surabaya) "Report on Legal Issues (East Java)," mimeo (September 1992) and

Udayana University (Bali) "Report on Legal Issues (East Java),' mimeo (September 1992), (Jakarta. CWSP files,RWSGEAP). In addition to the 74 local regulations identified in East Java, 48 other water/sanitation-relatedordinances were identified in Bali. Specific recommendations based on these reports were submitted to the relevantgovernments through formal letters from the Director of Environmental Sanitation on September 12, 1992 and April27, 1993.13 For Bali, it was recommended that local govermnents should be empowered to issue and cancel permits fordischarge of wastes and to enable civil service investigators to enforce violations against those not having permits orcontravening the terms of those pernits.

ANNEX 6: SUMMARY OF TECHNICAL ASSISTANCE

DESCR1PTIONLOCAL COST FOREIG COST TOTAL TOTAL COST IMPLEMENTING AGENCYMM USS ('000) MM USS ('000) MM USS (000)

I. EJUDP n IMPLEMENTATION TECHNICAL ASSISTANCE PRIOR TO LOAN EFFECTIVENESSPROPOSED CONSULTANCY IN CURRENT US DOLLARS ('000)UTIZING SUDP FUNDS (LOAN 3726-IND)

A. PROVINCIAL PROGRAM SUPPORT (including Kodya Malang)

I Project Preperation Completion and Urgent DED Total ISO 900 0 0 180 900

Supplementary Project Preparation 30 150 0 0 30 150 Dinas Cipta Kaya Tk IUrgent First Year Programme DED (Water Supply and Other) 120 600 0 0 120 600 Dinas Cipta Karya Tk IPFAMS 10 50 0 0 10 50 BiroKeuanganTk IUKLAUPLMonitoring&ReportingGuidelinesPreparation 10 50 0 0 10 50 BiroKLHTkILlDAP-Reiew of Pemda & PDAM Documents, Monitoring & Reporting Gui 10 50 0 0 10 50 BAPPEDA Tk I

11. EJUDP nI IMPLEMENTATON TECHNICAL ASSISTANCEPROPOSED CONSULTANCY IN CURRENT US DOLLARS ('000)IBRD EJUDP L LOAN COMPONENT ONLY °°

A. PROVINCIAL PROGRAM SUPPORT (excluding Kodya Malang)

I DED & Supervision 1412 7060 0 0 1412 7060

Non-Urban Roads Sectoral Projects (APBN) 364 1820 0 0 364 1820 Dinas Cipta Kazya Tk 1Urban Roads Sectoral Projects (APBN) 70 350 0 0 70 350 Dinas Bina Marga Tk IPemda and Water Supply (Local Government) 978 4890 0 0 978 4890 Dinas Cipta Karya Tk 1

2 Project Management Advisory Services 784 3920 84 1640 868 5560

PPMO Advisory Services 72 360 30 600 102 960 BAPPEDA Tk PTCU Advisory (including Solid & Human Waste Advisory) 72 360 30 600 102 960 Dinas Cipta Karya Tk IUDP Project & Financial Management Assistance to Tk 11 432 2160 0 0 432 2160 BAPPEDA Tk I(including Land Acquisition, UKLAUPL Monitoring & Reporting)

DGCK Implementation Advisory Services 40 200 12 240 52 440 DGCK/BinlakPDAM Performance Monitoring & Evaluation 24 120 0 0 24 120 Biro PerekonomienPBME (Project Benefit Monitoring and Evaluation) and D

Project Completion Report 144 720 0 0 144 720 DGCK/BPPSP (Private Sector Participatbn) Advior 0 0 12 200 12 200 DGCKIDir Tkl o e

1h

DESCREPTlONLOCAL COST FOREIG COST TOTAL TOTAL COST IMPLEMENTING AGENCYMM USS ('000) MM USS ('000) MM USS (000)

3 Institutional Development 498 2490 12 240 510 2730

Training (PDAM and Pemda Tech. including WS Corp Plan, 100 500 0 0 100 500 Dinklat TkhIUKLUPL Proj. Management)

LIDAP 30 150 0 0 30 150 BAPPEDATk IRIAP 60 300 0 0 60 300 DinasPendapatanTk IPFAMS 40 200 0 0 40 200 Biro Xeuangan Tk IPOMMS 108 540 12 240 120 780 BiroXeuangan Tk IProvincial & Central Technical Audit 80 400 0 0 80 400 llWIL Tk l/BPKPEnvironmental Sanitation Module Dev. & Training 80 400 0 0 80 400

4 Others (not directly related to EAUDP II) 72 360 10 200 82 560

Greater Malang Urban Transportation Study 36 180 10 200 46 380 DLLAGR Tk ISidoarjo Local Government Autonomy Study 36 180 0 0 36 180 Biro Otonomi Tk I

Sub-total A 2766 13830 106 2080 2872 15910

B. KOTAMADYA MALANG UDP PROGRAMME SUPPORT

I ProjectPreparation.DED&Supervision 438 2190 12 240 450 2430

Contract DED & Supervision (including TPA Supiit Urang) 330 1650 0 0 330 1650 Dinas PU Tk IISocial & Environmental Studies (Kutobedah Resettlement & Urban Renewal) 60 200 0 0 60 300 Dinas Tanah/Perumahan Tk nPDAM Unaccounted-for-Water Survey & Rehabilitation Study 30 150 12 240 42 390 PDAM Kodya MalangSupplementary Off-Site Sanitation Study 18 90 0 0 18 90 TKP TkU

2 Project Management Advisory Services 96 480 10 200 106 680

UDP Project & Financial Management Assistance to Tk U 72 360 0 0 72 360 BAPPEDA Tk 11Solid Waste Advisory 24 120 0 0 24 120 DinasKebersihanTk11Sewerage Advisory 0 0 10 200 10 200 DinasKebersihanTkll

Sub-total B 534 2670 22 440 556 3110

PART II Total (A + B) for Proposed EJUDP 2 3300 16500 128 2520 3428 19020 t X

0o1-h

ANNEX 7(a)INDONESIA Page 1 of 3


DETAILS OF PROJECT COST ESTIMATES - OVERALL PROGRAM(Base Cost at October 1995 prices; 1 USS = Rp 2,260)

Rp bimion USS mMlion % oa Total % ForeignLocal Foreign Total Local Foreign Total Base Cost Exchange

A. Infrastructure Investment - Base Cost1. Water Supply 44.2 54.1 98.3 19.6 23.9 43.5 20.7% 55.0%2. Urban Roads 63.0 34.6 97.6 27.9 15.3 43.2 20.6% 35.4%3. Drainage 41.2 22.9 64.1 18.2 10.1 28.3 13.5% 35.7%4. Solid Waste Management 10.1 10.9 21.0 4.5 4.8 9.3 4.4% 51.9%5. Sanitation and Sewerage 12.1 7.9 20.0 5.4 3.5 8.9 4.2% 39.5%6. KIP and MIIP 10.7 5.9 16.6 4.7 2.6 7.3 3.5% 35.6%7. Urban Renewal 2.6 1.1 3.8 1.2 0.5 1.7 0.8% 30.4%8. Contracted Engineering Design and Supervision 13.1 3.4 16.5 5.8 1.5 7.3 3.5% 20.8%9. Taxes 32.9 0.0 32.9 14.6 0.0 14.6 6.9% 0.0%

Subtotal 229.9 140.9 370.8 101.7 62.3 164.1 78.1% 38.0%

B. O&M - Base Cost I1. Incremental O&M on existing infrastructure 35.7 1.9 37.6 15.8 0.8 16.6 7.9% 5.1% 002. Incrementl O&M on new infrastructure 12.3 0.7 13.0 5.4 0.3 5.7 2.7% 5.3% 03. Taxes 1.7 0.0 1.7 0.7 0.0 0.7 0.4% 0.0% ISubtotal 49.7 2.6 62.3 22.0 1.2 23.1 11.0% 5.0%

C. Implementation Support - Base Cost1. Local management and administration 25.8 2.7 28.6 11.4 1.2 12.6 6.0% 9.6%2. Technical Assistance 15.0 6.3 21.2 6.6 2.8 9.4 4.5% 29.6%3. Taxes 1.6 0.0 1.6 0.7 0.0 0.7 0.3% 0.0%

Subtotal 42.4 9.0 51.4 18.8 4.0 22.8 10.8% 17.5%

Total Base Cost 321.9 152.5 474.4 142.5 67.5 209.9 100.0% 32.1%

Physical Contingencies 17.3 10.6 28.0 7.7 4.7 12.4 5.9% 38.0%Price Contingencies 43.1 6.5 49.6 19.1 2.8 21.9 10.4% 13.1%

Total Prolect Cost 382.4 169.6 552.0 169.2 75.0 244.2 116.3% 30.7%

Oter urban investment 52.4 29.2 81.7 23.3 12.9 36.2 35.8%Current level O&M 134.1 6.5 140.6 59.3 2.9 62.2 4.6%Interest During Construction on IBRD Loan /a 8.6 0.0 8.6 3.8 3.8 0.0%Interest During Constrution on Domestic Loans /a 24.7 24.7 10.9 10.9 0.0%

Total Flnancina Requlrement 602.2 205.3 807.5 266.5 90.8 357.3 25.4%

/a Includes commitment fees



DETAILS OF PROJECT COST ESTIMATES - KOTAMADYA MALANG PROGRAM(Base Cost at October 1995 prices; 1 USS = Rp 2,260)

Rp billion USS million % of Total % ForeignLocal Foreign Total Local Foreign Total Base Cost Exchange


Subtotal 44.5 31.8 76.3 19.7 14.1 33.8 U3.0% 41.7%

B. O&M - Base Cost1. Incremental O&M on edsting infstructure 2.9 0.2 3.1 1.3 0.1 1.4 3.3% 5.1% 002. Incremental O&M on new infrastructure 4.7 0.3 5.0 2.1 0.1 2.2 5.4% 5.3% H3. Taxes 0.3 0.0 0.3 0.1 0.0 0.1 0.3% 0.0%

Subtotal 7.9 0.5 8.4 3.5 0.2 3.7 9.0% 5.0%

C. Implementatlon Support- Base Cost1. Local management and administration 3.8 0.4 4.2 1.7 0.2 1.9 4.6% 9.6%2. Technical Assistance 2.0 0.8 2.8 0.9 0.3 1.2 3.1% 30.1%3. Taxes 0.3 0.0 0.3 0.1 0.0 0.1 0.3% 0.0%

Subtotal 6.1 1.2 7.3 2.7 0.5 3.2 8.0% 17.1%

Total Base Cost 68.5 33.5 92.0 25.9 14.8 40.7 100.0% 36.5%


Total Prolect Cost 69.7 37.6 107.3 30.8 16.7 47.S 116.6% 35.1%

Other urban investment 4.6 2.2 6.8 2.0 1.0 3.0 32.4%Currenit level O&M 8.6 0.4 9.0 3.8 0.2 4.0 4.6%Interest During Consbrction on IBRD Loan /a -1.4 0.0 -1.4 -0.6 -0.6 0.0%Interest During Construction on Domestic Loans /a 8.2 8.2 3.8 3.6 0.0%

Total Flnancin Requirement 89.7 40.3 130.0 39.7 17.5 57.5 31.0%




DETAILS OF PROJECT COST ESTIMATES - EAST JAVA EXCLUDING KOTAMADYA MALANG PROGRAM(Base Cost at October 1995 prices; 1 USS = Rp 2,260)

Rp billion USS million % of Total % ForeignLocal Foreign Total Local Foreign Total Base Cost Exchange


Subtotal 185.4 109.0 294.4 82.1 48.2 130.3 77.0% 37.0%

B. O&M - Base Cost1. lncrementl O&M on existing infrastructure 32.8 1.7 34.5 14.5 0.8 15.3 9.0% 5.1% X2. Incremental O&M on new infrastructure 7.6 0.4 8.0 3.3 0.2 3.5 2.1% 5.3%3. Taxes 1.4 0.0 1.4 0.6 0.0 0.6 0.4% 0.0% I

Subtotal 41.8 2.1 43.9 18.4 1.0 19.4 11.6% 5.0%

C. Implementation Support - Base Cost1. Local management and administration 22.0 2.3 24.3 9.8 1.0 10.8 6.4% 9.6%2. Technical Assistance 13.0 5.4 18.4 5.7 2.4 8.1 4.8% 29.5%3. Taxes 1.3 0.0 1.3 0.6 0.0 0.6 0.4% 0.0%

Subtotal 36.3 7.8 44.1 16.1 3.4 19.5 11.5% 17.6%

Total Base Cost 263.5 118.9 382.4 116.6 52.6 169.2 100.0% 31.1%


Total Prolect Cost 312.8 132.0 444.7 138.4 58.3 196.7 11f.3% 29.7%

Other urban investment 47.8 27.0 74.8 21.2 12.0 33.2 36.1%Current level O&M 125.5 6.1 131.6 55.5 2.7 58.2 4.6%Interest During Constructon on IBRD Loan /a 9.9 9.9 4.4 4.4 0.0%Interest During Construction on Domestic Loans /a 16.5 16.5 7.3 7.3 0.0%

Total Financina Requlrement 512.5 165.0 677.5 226.8 73.0 299 24.4%


ANNEX 7(bIINDONESLA Page 1 of 3

SECOND EAST JAVA URBAN DEVELOP.ENT PROJECT

SUMMARY PROJECT FINANCING PLAN -OVERALL PROGRAM

_______ ~FUNDING SOUl RCES (ft blloWn of Currert Prioe.)____SECTOR LOCAL GOVERNMSITS 8 1 PROVINCIAL CENTRAL GOVERNME NT CoR- TOTAL FINANCING

Normal Total GOVERNMENT SoIal Grints to N AT I n ctsalDIPD Total UlNITY Rp bllion USl milon2Revanutss 8LA RDA Normal R*venues BLN Tk II Dom I IN BN Tk I LN Domstic

WATER SUPPLYkwesnwd 27.6 s06 00 106.2 00 00 0.0 0.0 145 8.4 21 00 129.2 57.1Cordct Engineering 0.2 0.0 0.0 0 2 0 a 20 0 0 5.5 0 3 01 7. 0.0 I.6 3.06* 90.7 0.0 0.0 90.7 5.4 00 00 0.0 00 0.0 0. 0.0 96.1 42.

Subtotal 116.6 60.6 a.0 199.1 *.0 2.0 0.0 6.6 14.8 6.5 28. 0. 2. 106.

URAN ROADSbrnw 64.8 417 0.0 106.4 5 5 35 6 00 6.6 4 4 19 515 0.0 163.4 72.Ccrrcd Engrnewmt 01 0.0 0.0 01 0 4 0 6 0 0 4 3 0 2 01 51 0. 5 206* 410 00 0.0 41.0 03 00 00 00 00 01 0.1 00 41.3 18.

Subtotal 106.8 41.7 0.0 147A 6.2 39.1 0.0 10.0 4.6 2.0 66.7 0.0 210.3 06.1

DRAMIGEkreelmtw 24 2 10 7 0 0 34.8 10 0 17 7 0 0 112 10 4 7 0 52 2 0 0 97.0 42.Corkd Engnesdng 0.0 0 0 0 0 0 0 0 3 0 2 0.0 2 7 01 0 0 3 1 0.0 3.4 1.O& 121 0.0 0.0 121 04 00 00 00 00 05 05 0.0 130 5..

Subtotal 36.3 10.7 0.0 47.0 10.6 17.9 0.0 13.9 16.5 7.6 61.6 0.0 113.6 60.

SCID WASTE MANAGEMENTbnw.utn 24.5 10.9 0.0 35.3 0 4 3 2 a 0 0 2 3 2 1 7 8 3 0 0 44 0 19.

CcrdrEngnierdng 0.0 0.0 0.0 0. 0.1 01 00 1.1 00 00 1.2 0.0 1.3 0.08M 46.7 0.0 0.0 45.7 0.0 00 0 0 0 0 0.0 0.0 0.0 0.2 46.0 20.

Subtotal 70.2 10.6 0.0 81.1 0.5 3.3 0.0 1.3 3.2 1.7 6.6 02 51.6 40

SAWTATION AND SEWERAGEkawebnent 13.4- 5.4 0.0 18.8 00 5.2 0.0 0.0 7 1 3.8 16.1 0. 34.9 15.OConed ErngiWering 0.1 0.0 0.0 0.1 0.1 0.7 0.0 0.7 0.0 0.0 1.4 0. 1.6 0.OUS 3.0 0.0 0.0 3.0 00 0.0 0.0 0.0 0.0 0.0 0. 0. 3.0 1.

Subtotal 16.6 5A 0.0 21.6 0.1 6.0 0.0 0.7 7.1 6.6 17.6 0. U.S 17.

KIP AND MIPInesehlmen 25.9 0.0 0.0 25. 0.1 0.0 0.0 0.0 00 0.0 0.0 0. 26.0 11.Corked Engireering 0.0 0.0 0.0 0. 0.1 0.0 0.0 0.8 0.0 0.0 0.8 0. 0.8 0.o0M 0.0 0.0 0.0 0.0 0 0 0.0 0.0 0.0 0.0 0.0 0.0 0.1 0.1 0.1

Subtotl 25.9 0.0 0.0 26.6 0.1 0.0 0.0 0.8 0.0 0.0 0.8 0.1 23.9 11.

URUA RENEWAL&M4eb1iwil 1.6 3.5 0.0 5. 0.0 0.0 00 0.0 0.0 0.0 0. 0. 5.0 2.Cored En qwern 0.0 0.0 0.0 0. 0.0 0.2 0.0 0.0 0.0 0.0 0.2 0. 0.2 0.108M 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0. 0. 0.3 0.1

Subtoota 1.6 3.6 0.0 6. 0.0 0.2 0.0 0.0 0.0 0.0 0 0.o L

PROGRAM UPPORTLooca Mbnalg_ andwtn Adnydrion 27.5 0.0 0.0 27.5 0.2 0.0 0.0 0.0 0.0 0.0 0. 0. 28.2 12.Tachnl Assielnc 0.3 0.0 0.0 0.3 15 3.1 0.0 14.7 4.4 1.1 23.3 0. 25.1 11.1

Subal 27.6 0.0 0.0 272 1.7 1.1 0.0 14.7 4.4 1.1 23S 0.a 3 25.

IMALkuwalment 161.9 152.7 0.0 334.5 15.9 64.6 0.0 18.0 46.5 20.9 149. 0 4t9.5 221Csd Engineearl; 0.4 0.0 0.0 0.4 1.5 3.7 0.0 152 0.6 0.2 19.7 0 216 9.08M 192.5 0.0 0.0 192.5 6.1 0.0 0.0 0.0 00 0.6 0.6 0.7 1699 0.Lo mlwueme and mainln lon 27.5 0.0 0.0 27.5 0.2 0.0 0.0 0.0 0.0 0.0 0. 0 28.2 12.TcdmllA _mslenc 0.3 0.0 0.0 0.3 1.5 3.1 0.0 14.7 4.4 1.1 23.3 0 25.1 11.1Total Praoect Cost mu1 112. u au ZIA li HAl Sun m 12. 11

Inltee during onaldn 24.7 0.0 0.0 24.7 0.0 0.0 00 0.0 0.0 6.6 8.6 0. 33.2 14.

Total Finanig Required 4272 0 S au 7 t4 A uLl US 1 tUZ L M7AGOt Flnandng Rp 484.8 billon (60.1 % INMD FInancing Rp 32.8 bhilon (65.6%)

Includes fibnning from nwcmal cental oernmen g rnd efliwm s.US$ I - Rp 2,200

ANNEX 7(b)INDONESiA Page 2 of 3


SUMMARY PROJECT FINANCING PLAN - KOTAMADYA MALANG PROGRAM

FUNDING SOURCES (Rp billion at Current Price.SEtCTOR LOCAL GOVEtNMENTSIPDAMS PROVINCIAL CENTRAL GOVERNMET COMM- TOTAL FINANCiNO

Normal Total GOVERNMENT Soeclal Grants to Tk S Tk I ctoral DIP Total UNITY Rp billion USE mIIlon2Revenuusi SLA RDA Normal Revenuesi BLN Tk 11 Dom Tk iI BLN Tk I ELN Domstlc

WATER SUPPLYInvetm n 11.5 31.1 42.6 00 42.6 18.Contrat Engineering 0.2 0.2 2 0 2.0 22 1.O88 3.4 3.4 0.0 3.4 1.

Subtotal 15.1 31.1 0.0 46.2 0.0 2.0 0.0 0.0 0.0 0.0 l0 0.0 48.2 21.3

URBAN ROADSInvestmnt 11.7 4.3 16.0 4 3 0 0 0.0 4 4 20.4 9.0Contact Engineering 0.1 0.1 0 6 0.6 0.6 0.3O&ht 3.9 3.9 0.0 0.0 3.9 1.

Subtotal 15.7 4.3 0.0 19.9 0.0 4.9 0.0 0.0 0.0 0.0 6.0 0.0 24.9 11.0

DRAINAGEInvetment 1.5 1.5 0.8 0 9 1.5 0 9 0 4 3 7 6.0 2.6Contrdc Enginering 0.0 0.0 0.2 0.2 0 2 01oat o.6 0.5 0 1 0.0 0 0 0.6 0

Subtotal 2.0 0.0 0.0 2.0 0.9 1.1 0.0 1.5 0.9 OA Lb 0.0 6.8 3.

SOUD WATE MANAGEMENTInv4neelnt 3.6 5.7 9.3 0.0 0.0 0.0 9.3 4.1Contad EngIneering 0.0 0.0 0.1 0.1 0.1 0.0O0M 9.2 9.2 0.0 0.2 9.4 4.2

Subtotal 12.9 6.7 0.0 18.6 0.0 0.1 0.0 0.0 0.0 0.0 0.1 0.2 18.8 8.

SANITATION AND SEWERAGEInvetment 0.4 0.6 1.1 00 6.3 3.4 9.6 10.7 4.Contrad Enginering 0.1 0.1 0.7 0.7 0.7 0° 0OSM 0.7 0.7 0.0 0.0 0.7 0.

Sutot l 1.2 0.6 0.0 1.9 0.0 0.7 0.0 0.0 6.3 24 10.3 0. 122 6.

K,IP AND MAIPinrsnt 1.6 1.6 0.0 0.0 1.6 0.Contract Engineering 0.0 0.0 0.0 0.O&M 0.0 0 0 0.1 0.1 0.1

SubttaUl 1.6 0.0 0.0 1.6 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.1 1.8 0.

URBAN RENEWALvatinent 1.6 3.5 5.0 0.0 5.0 2.2

Conretd Engineering 0.0 0.0 0.2 0.2 0.2 0.1088 0.0 0.0 0.3 0.3 0.1

Subtotal 1.6 3.6 0.0 t.0 0.0 0.2 0.0 0.0 0.0 0.0 0.2 0.9 6.6 2.

PROGRAM SUPPORTLorl Managemnt and Adminlrtion 0.9 0.9 0.2 0.0 0.5 1.6 0.7Technical Asaance 0.3 0.3 3.1 3.1 3.4 1.

Subtotal 12 0.0 0.0 1.2 0.2 3.1 0.0 0.0 0.0 0.0 .1 0.5 6.0 2L

TOTALInvewment 31.9 45.2 0.0 77.0 08 5.2 0.0 1.5 72 3.6 17.7 0.0 95.6 42.Contract Engineering 0.4 0.0 0.0 0.4 0.0 3.7 0.0 0.0 0.0 0.0 3.7 0. 4.1 1.O088 17.7 0.0 0.0 17.7 0.1 0.0 0.0 0.0 0.0 0.0 0.0 0.7 18.5 8.2Local Management and Administration 0.9 0.9 0.2 0.0 0.5 1.6 0.Technical Assistance 0.3 0.3 3.1 3.1 3.4 1.5Total ProJctCost tI 4. R "A is It ZR U 1.2 IA mI 13.M

Intert dunng conruclion 8.2 8.2 -1.4 .1.4 6.8 3.

Total FPnancing Required Hi 4,2 001 IMA0 12 Il 0 ii 12 u Ju |i inS

Ot Financing Rtp 84.0 blillon (48.2 %l; ltRD FlnancIng Rp U8.0 billon (60.8%)

'Includes financng frorn normal central government grant entitlements.2 US$ 1 - Rp 2.260

ANNEX 7(b)INDONESIA Page 3 of 3

SECOND EAST JAVA URBAN DEVELOP19NT PROJECT

SUMMARY PROJECT FINANCING PLAN - EAST JAVA EXCLUDING KOTAMADYA MALANG PROGRAM

FUNDING SOUR ES (Rp billion at Currnt Prices) _SECTOR LOCAL OOVERNMENTS3PDAMS PROVINCIAL CENTRAL GOVERNMENT COMM- TOTAL FINANCING

Normal orgew1na Total GOVERNMENT Secial Grants to Tk 11 & Tk I ect.oral DPl Total UNITY Rp billion USS million2Revanueal SLA RDA Normal Revenuesi 8LN Tk11 Dom Tk1 ET LN Tk I ELN Domestic

WATER SUPPLYInvyamnt 16.2 49.5 0.0 6e6 0 0 00 00 00 14 5 6.4 210 00 Be 6 38.Conlrad Engineering 0.0 00 0.0 0 0 06 0 0 00 5.5 0.3 01 5.8 0 0 6.4 2.OVM 87 3 00 0.0 87.3 64 0 0 00 00 00 00 0.0 0.0 92.7 41

Subtotal 1034 48.6 0.0 182.9 6.0 0.0 0.0 8.8 14.8 6.8 23.8 0.0 186.7 82.

URBAN ROADSlormwarre 530 37.4 0.0 904 55 342 00 86 43 19 47.1 00 1430 63.Contracl Engineering 00 0.0 0 0 0 0 04 00 00 43 0.2 01 4 6 0.0 s0 2.2OVA 37.1 0.0 0.0 37.1 03 00 00 00 00 0.1 01 0.0 37.4 16.

Subtotal 90.1 374 0.0 127.8 6.2 34.2 0.0 10.9 4.8 2.0 E1.7 0.0 186.4 82.1

DRAINAGEInmesnmnt 22.7 107 00 33.3 92 168 00 9.7 154 66 485 0.0 911 40Conract Enginrenng 0.0 0.0 0 0 0.0 0 3 00 0.0 2 7 01 00 2.9 0.0 3 2 1.OVM 11.6 00 0.0 11.8 03 0.0 0.0 00 00 05 0.5 0. 124 5.

Subtotal 34.3 10.7 0.0 46.0 8.8 16.8 0.0 12.4 16.6 7.1 81.9 0.0 106.7 47.

SOLID WASTE MANAGEMENTkwesme 20.9 5.2 0.0 26.1 0.4 3.2 0.0 02 3.2 17 8.3 00 34.7 15CorractEnrgenng 0.0 0.0 0.0 0.0 0.1 0.0 00 1.1 0.0 0.0 1.1 0.0 1.2 0.OVA 36.6 0.0 0.0 36.8 0.0 0.0 0.0 0.0 00 0.0 0.0 0.0 36.6 16.2

Subtotal 874 8.2 0.0 62.6 0.8 2.2 0.0 1.3 3.2 1.7 14 0.0 72.8 22.1

SANITATION AND SEWERAGEb_d.nont 13.0 4.7 0.0 17.8 0.0 8.2 0.0 00 0.8 0.4 6.5 0. 24.2 10. 00Cantrtd Engineerin 0.0 0.0 0.0 0.0 0.1 0.0 0.0 0.7 0.0 0.0 0.8 0.0 0.8 0. LnIOVA 2.3 0.0 0.0 2.3 0.0 0.0 0.0 0.0 0.0 00 0.0 0. 2.3 1.

Subtota 18.3 4.7 0.0 20.1 0.1 6.2 0.0 0.7 0.8 04 7.2 0 27.4 12.1

KIP AND HIIPbhOestment 24.3 0.0 0.0 24.3 0.1 00 0.0 0.0 0.0 00 0.0 0.0 24.3 10.ContlrdEnpneenng 0.0 0.0 0.0 0.0 0.1 00 0.0 0.8 0.0 00 0.8 0. 0.8 0.OVA 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0. 0.0 0.

Subtota 24.3 0.0 0.0 24.3 0.1 0.0 0.0 0.8 0.0 0.0 0.8 0.0 23.2 11.1

URBAN RENEWALIrwe0nIeit 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.Conbsu EngIneing 0.0 0.0 0.0 0.0 00 0.0 0.0 0.0 00 0.0 0.0 0. 0.0 0.OVA 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0. 0.0 0.

Subtotal 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0. 0.0 0.

PROGRM SUPPORTLocalM nMgesnenl and Adminialrtion 26.6 0.0 0.0 26.1 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 26.6 11.Technical Aisrano 0.0 0.0 0.0 0.0 15 0.0 0.0 14.7 4.4 1.1 20.2 0.0 21.7 9.

Subtotal 28J. 0.0 0.0 26.6 1.6 0.0 0.0 14.7 4.4 1.1 20.2 0.1 48.3 21.

TOTALInsmedt 150.0 1075 0.0 257.5 15.1 59.4 0.0 16.5 383 17.1 131.3 0.0 403.9 178.7Contracl Engineenng 0.0 0.0 0.0 0.0 1.5 00 0.0 15.2 08 0.2 16.0 0.0 17.5 7.OVA 174.8 0.0 0.0 174.8 8.0 0.0 0.0 0.0 0.0 0.6 0.6 0.0 181.4 80.Local Managarmenr nd Adminiration 266 0.0 0.0 26.6 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 26.6 11.Technical Aaance 0.0 0.0 0.0 0.0 1.5 0.0 0.0 14.7 44 1.1 20.2 0.0 21.7 9.Total Proect Cost MA l. 0. 4HU 24.1 OA 0. 0 44 41 a M11 28

Intretl during consdrdoni 165 0.0 0.0 16.5 0.0 0.0 0.0 0.0 0.0 9.9 9.9 0.0 26.4 11.

Total Flnancing Raqutrd mu. 107J L 414 4.1 MA LA 4O4 "a au M0 8r mO4 Financing pft 420.8 billIon (62.1 %1; l D Flnancing ftp 2W.A t6llon (3T.*%)

Includn finanringfrnm normal cenrdl governmani grant etlement.2 USS 1. Rp 2.280

- 86 -

ANNEX 8(a)Page 1 of 1


Outline of Provincial Program Implementation Memorandum (PPIM)

The Provincial Program Implementation Memorandum (PPIM would be preparedin the form of a GOI inter-departmental Memorandum of Understanding to be signed bythe Chairperson of TKPP on behalf of the sector policy agencies, the Director General ofHuman Settlements (Cipta Karya) as project executing agency and the Governor of EastJava Province as the lead implementing agency. The PPIM content should, at minimum,include:

a. A clear definition of respective roles and responsibilities for eachparticipant in the project implementation process;

b. Confirmation of processes and schedules for project implementation,including inter alia:

- updating of Technical Memorandum and other program guidance- preparation and appraisal of PJM and related documents- review and approval of APIPs for local programs (see Annex 11(b))- budget consultations and approvals- procedures for SLA approvals- schedules for promt issuance of annual SPABP allocations- procurement processing and standard documents used- project accounting and auditing arrangements- progress reporting and monitoring, including priority targets- conduct of the formal annual review of project status- performance incentives/disincentives for local government- PDAM tariff adjustments (see loan covenants)

c. Staffing and support arrangements in key units (PPMO, Kanwil, et al)d. Employment of advisors or consultantse. Arrangement for Preparation of EJ3 (Strategic Regional Project)f. Preparation of Project Completion Report for EJ2 in 1999g. Other matters the parties wish to clarify or define.h. All other general provisions described in Part A of Schedule 5 of the Loan

Agreement.

- 87 -

ANNEX8)Page 1 of 3

ANNUAL PROJECT lMPLEMENTATION PLAN

Background references Include references to the (a) Integmted Urban nfrastructure DevelopmentProgram, and (b) the Bank Loan for the Second East Java Urban Development Project (EJ2).

Objectives of the APIP (a) Provides framework and guidelines for the implementation of Sub-projectsunder the EJ2; (b) defines institutional responsibilities of Province of East Java (EJ), Participating LocalGoverments (PLGs) and Participating PDAMs;(c) details performance indicators and monitorable targets whichwould be used to monitor progress in unplementation during the annual Project reviews; (d) is meant to be aflexible working document to be adjusted, if necessary, every year; and (e) would be made available to all PLGsand PDAMs to inform them of their obligations and responsibilities for the implementation of the Sub-projects.

The Province of East Java and the Participating Local Government of and its ParticipatingPDAM [if applicable] shall take al necessary measures to implement the Sub-projects detailed below as folows:

Section 1. Sub-projects

Description of all Sub-projects to be carxied out during the upcoming fiscal year in a given region. AnAnnex to the APIP wiDl provide a clear identification of these Sub-projects indicating the PLG/PDAMresxpisible for implementation. Reference should also be made to the approval procedure/date for such Sub-projects (Cross-reference to Schedule 5 to LA: Sub project approval)

Section 2. Technical criteria and guidelines

Supplemental documentation pertaining to the feasibility of the Sub-project to be attached, as well asother evidence of technical criteria/guidelines followed during the design and preparation of the Sub-project.

Section 3. Timetable for the implementation of Sub-projects

Implementation timetable including monitorable dates to be reviewed periodicaDly.

Section 4. Procurement

Procurement procedures (including institutional responsibilities for clearances and monitoring andsupervision) to be followed (Cross-reference to Schedule 4 to the Loan Agreement and PPIM)

Preparation and processing of bidding documents.

Section 5. Financing of Sub-proiects

Financing sources and timing (Agreements reached at negotiations) for the provision of such fundsReerences to PJM.

- 88 -

ANNEX 8(bPage 2 of 3

Section 6. Disbursement

Detailed procedures to ensure timely disbursement of funds to finance the Sub-projects, including BankLoan, SLAs, Grants (Cross-reference to Special Account Schedule 6 to the Loan Agreement)

Section 7. Financial data

Fiancial reporfing, mintaining appropriate documentation, accounting and auditing procures (drureference to Schedule 5 to the Loan Agreement detailing the technical audits)

Section 8. O&M

Operations and Maintenance Targets.(Cross-reference to Schedule 5 to the, Loan Agment dctilin2O&M under PPIP)

Section 9. Environmental Guidelines and Resettlement

Implementation of Sub-projects to follow UKIJUPL Guidelines and Resettlement Guidelines. RAPs tobe prepared, if necessary, pursuant to Resetflement Guidelines ( SK Walikota. Surat Edaran). Define PLG's rolein the consultation process and gnievance procedures. Community participation in all resettlement/compensationaspects. (Cross -reference to Schedule 5 to the Loan Agreement.)

Section 10. Remedial actions

EJ to suspend/cancel financing of Sub-projects if use of funds is diverted from the agreed purposes.

Section 11. Technical assistance

Management and coordination of technical assistance financed under the Sub-projects.Institutionalresponsibilities.

Section 12. Training for PLG and PDAM staff

Describe training and staff to receive training.

Section 13. Annual Reviews

Assistance to EJ/Participation of PLGs and PDAMs in the annual reviews (Cross-reference to Schedule5 to the Loan Agreement).

- 89 -

ANNEX 8(bPage 3 of 3

ANNEXES:

PJM Sunmary, including RIAP/LIDAP actions

Sub-Project Memoranda

Summary of UKL/UPL Sub-project environmental screening

RAP (if required)

Priority targets for PLGs and PDAMs

Schedule of IUIDP Annual Activities on Programming, Implementation & Reporting InterrelationshipI st Finoncing Year 2nd Financing Year 3rd Year

Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar AprP'RO6RAAUN6/WI lN G

R ~ ~ ~ ~ ~ IkL

S ~~~~~~~~~~~~~~~~~~~~~~~~~~~on rmtorlrn onfi fIo ofiW RokorbangPra.Ratek Ratek Rakorbang Ua PE-Ratek PJMRapek

RakorbangD ~ ~ ~ ~ ~ ~ ~ L dustment Rve eiwC ~ O

SPA BP DIPDa Adustmrent

_~~~~~~~~(M I (PO I D ~;. 0fa0 0

PPMO and FKU KB ~~~~~~~~~~~~~~~~PPAMO and PICU

Doamimis~~~~~~~~~~~~~~~~~~OCMO

NO NOL Not OL NK N 0 MK6 T ' - fog T ir for " f a fr for T for T O la Dt for foruF u (*ad (n0 Dwx En kortrod Oonom Ds

REPORTING (meti;fl f9etral Central Central C(entral C entral CIentralI Gov't II o Gov't G

Provincial OR-i Provincial OR-2 Provinidal QR-3 Provincial OR-4 Provincial OR-1 Provincial OR-2 Provincial -3 Provincial OR 4

Local Gov't OR-I Local Govt QR-2 Local Gov't QR-3 Local Gav't QR-4 Locl Gov't OR-i Local Gov't OR-2 Local Gov't OR-3 Local Gov't

QR = Quarerly Report 1

- (H -ANNEX 9Page 2 of 2

EAST JAVA II URBAN DEVELOPMENT PROJECT I MPLEMNENTATION SCHEDULE

NAME BUDGET 1996 i 1997 1998 1999Ql Q2 Q3 Q4 101 Q2 1Q3 Q4 Q1 Q2 103 04 lQi Q2

TECH ASSISTANCE _ _I _ _ _ _ _ _ _ _ _ _ I _.__ _ _ _

WATER SUPPLY _ | i_j_jDed Design and Supervn __,_. -Land Acquisition __ |_ __ __ i

Procurement of Goods = _ _= =Civil W orks/Constructn 1___M______ __ _ _ __ _ _ __ _ _ __i___ _ _ _ ___________ __I_____ _!_

DRAINAGE & FLOOD CONTROL . i I *Ded Design and SupervnLand Acquisition _ _i

Procurement of GoodsCivil WorkslConstructn _ _ _ _ _ _ _

HUMAN WASTE/SANITATION _-

Ded Design and SupervnLand Acquisition _ | _ i i

Procurement of GoodsCivil W orks/Constructn ___l_____lll____lll____ _ _ _ ___________

SOLID WASTE DISPOSAL L I _ __iDed Design and Supervn__ _ _ _ __ _ _ _ - _ _ _ _ - - _ _ _ _ _ _ _ _ _ _ _ _-_ _ _ _ _

Land Acquisition _ | _._ _ j I _

Procurement of Goods -LCivil W orks/Constructn | _ _ _ | _ _ _ _ _ _ _ [l l ________ ! _ _ _ _ _ _ _ _ ______ll_

KIP _ Ded Design and SupervnandLand Acquisition T I m f _ I

Procurement of GoodsCivil Works/Constructn - [ ________ llifll JBIi11 li_11_|

URBAN ROADSi iii

Ded Design and SupervnLand Acquisition 1Procurement of Goods _II Civil \NorkslConstructnI 'll!llllIIlIII g

TECH ASSISTANCE - PREPN |iIOFEJ 3UDP!

Pagel1

Endlosure: Decree of the Minister of Home Affairs Annex 10Number 185Yeor 1995 Organization Strudure Page 1

Provincial Development Planning Agency (BAPPEDA)

Sub-Sedion of Psia D p tdPlan Preparation a

Site Chairman Sub-section ofo Documentation of Inform ation|

Sub-Setmion of

Sub-Se(tion ofGeneralAfi

tretS~~~~~~~~~~~~~~~~~~~~~y 06 rl l | ~~~~~~~~~~~~Edu( fion, Spirntual |

_ Economy Sedion Agriculture Sedion ._ Mentolity l rrigation Sedion BolDaa Collecnion Sedionl ~~~~~~~~and GovenelSno

Social Culture Secnion Mining, Industry and | CommunityWealth | Communications and | Analysis and Evaluation|Energy Seclion Sedfion - Tourism Sedion 1Secfion

|Physical Devel pment Commer(e and | In6omation and | Planning and Land |2 R ri e and lnfastrucnure 1 Cooperation Sedion | Communicalions Seclion | 1 Use Section Respo ig Sefon

WorddDevelopment | Population Sedion Naiumi Resource and | Public InfDrmation |I Sedfion - Environment Sedion Settion

EA31N/Org Chart S

Endosure: Decree of the Govemor, Head of the Level I Region of East Java Annex 10Date: September 1995 Page 2Number Year 1995

Organization StructureProvincial Program Management Office (PPMO)

Province of the Level I Region of East Java

GOVERNOR

Vice GovemorSector 11

ChairmanVice airman o appe a

Unit ChiefPPMU

| PIA PIMER p F F PAA

SubProj d | l ~~~~~~~~~~Regioni1Offite 7 Management Offi( |

| PJ6/M hIMER PIMER LG s Offi(e Mal nagementJustification Officer F Region 11 Offier 1 Region III Officer I 1 cFinancial Officer 1

Explanation: PIA = Programme Investment Appraisal AssistontPJM/MP = Program Jangka Menengah/Memormndum ProyokPIMER = Programme Investment Monitoring, Evaluation & Reporting AssistantPFM = Programme Financial Management AssistantLGs = Local GovernmentsPAA = Progromme Administration Assistant

Note: Bappeda = Badan Perencoon Pembongunan Doerah (Agency for Regional Development Planning) EA31N/Org Chart 1

Enclosure: Decree of the Govemor, Head of the Level I Region of East Java Annex 10Date: September 1995 Page 3Number Year 1995

Organization StructureProvincial Technical Coordinating Unit (PTCU)Province of the Level I Region of East Java

| GOVERNOR I

I \/t oemor I| Sector 11 |

Public Works Office for Public Works Office I Chairman, Head of Public |Highways for Irigation WorLs Office of Cipla Karya I

I-I~~~~~~~~ -zzIzI| ViceChaimnann Hhau 2

|of Pmrogrm Development

Planning Asitnl t Impigmeniolion Assisant Reporling and Evoluation Generol AssislonlAdministrmfive Sedion Head of Administrmhve Sedion Head Assislani, Administrolive Sedion St(ff Section

Gnem@rl Planmning of B UI (Foreign Assistan te) Hsead of Praogmm Composition Program Comp ositio n _

Regional Coordinator Loa Brnc . fi . o __ ] ~~~~~~~~~~~~~Povincial Cilah Karya _

EA31N/Org Chad 2

Annex 10Page 4

Enclosure: Decree of the Govemor, Head of the Level I Region of East JavaDate: September 1995 Explanation: Kab. = Kabupalen/Aota Madya (Local Govemment Level 11)Number Year 1995 POAM = Perusahaan Daerah Air Minum - Local Water Supply Public Company

PBB = Pajak Bumi don Bangunan (Property Tax)Organization Structure

The Integrated Urban Infrastru(ture Development ProgramProvince of the Level I Region of East Java

|GOVERNOR

---- ----- ------ ------ r--------Vlice Govmor

Sector 11 _i -~~~~~~~~lI

SECRETARY BAPPEDA

Assisant Assistant Assistant Assistant Monhofng and| Secretry I Secetary 11 Secretory Ill Secretary IV Evaluation Program

l . l l _ l _ l I xo~~~~~~~~ '-

Regional Economic AFfairs Environment & PersonnelAubnomy Bureau Bureau Gommunity Affairs Bureau | Inspe(t raR e of Center Regional Oce of Regional Office of

utonorny Bureau Bureau Community AffairR Bureau Inspector Traiing ublic WorksService Property2Tax § pProgram Composition | | | [ Organization F Bra||S Macagement || Bureau [| I lat ueu1r - - - *

….1 ____ffi_____W___ | __W___ g__ __] I Operation I TmainingPlNotProgram en Local ||Guidauce & Monitoringof Guidance& | Guidane& | Guidooe&| Auditors Office ImplementationAutonomyKabupolen Finonce Business Aspect Moniong of Monitroing of tire MonitoringPMAS(Loaevel ) Sidoaqo of PDAM Envimnmont isirict Govommeni

Guidance S t~~~~~~~~~~~nstifutionaolI I Guidonwe& I | I |Capacities (IDAP) |

Monioing POM I fI IiI---- L -- -__ II -

| IPoblic Woits Officel |Public Works uc W sOffice Local Revenue | II j | far Highways CforCi to Ka forIrri ation Colledion Office I j

I | I I I I ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~Establishm5niand i---I F- - -I | L I Teshnisal | I | ~~~~~~~~~~~~~~~~~~ ~ ~ ~~~~~~Monitofing of RI]AP|

Coordination…I_ _ __ _ _ __ _ _ JJ

Non-Technical Guidance Technical Guidance

Level 11 Local Govemments (Katamadya/Aabupaten) and TheirWafer Enterprises (PDAM)

- °6 -

ANNEX 11Page 1 of 2

INDONESIA


ESTIMATED SCHEDULE OF DISBURSEMENTS

Fiscal Year Quarter Quarterly Cumulative Disbursement ProfileEnding /a Disbursement Disbursement Standard lb Estimated /c

1996 Jun 30, 1996 14.0 14.0

1997 Sep 30, 1996 0.0 14.0 0% 10%Dec 31, 1996 4.9 18.9Mar 30, 1997 7.0 25.9 6% 18%Jun 30, 1997 9.0 34.9

1998 Sep 30, 1997 11.7 46.6 10% 33%Dec 31, 1997 14.4 61.0Mar30, 1998 17.4 78.4 22% 55%Jun 30, 1998 15.6 94.0

1999 Sep 30, 1998 14.7 108.7 34% 76%Dec31, 1998 12.0 120.7Mar 30, 1999 9.3 130.0 46% 91%Jun 30, 1999 7.1 137.1

2000 Sep 30, 1999 5.6 142.7 58% 100%

/a Loan effectiveness date assumed as June 15, 1996; project completion is scheduledSeptember 30, 1999; loan closing date is March 31, 2000.

Lb Standard disbursement profile for Asia urban projects, from Board Approval/c Disbursements expected to be faster than the standard profile, given the three year project period,

and based on the experience of the East Java-Bali Urban Development Project

- 97 -

Comparison of Disbursement Profiles ANNEX 11Page 2 of 2

Quarters EJBUDP EJUDP2 Urban Development1 3 10 02 3 10 03 4 13 34 4 18 65 6 25 86 8 33 107 9 43 168 14 55 229 23 66 2810 25 76 3411 29 85 4012 35 91 4613 44 97 5214 47 100 5815 53 6416 59 7017 64 7418 67 7819 71 8220 74 8621 8822 9023 9424 9825 9826 9827 9928 1 1 1 100

Comparison of Disbursement Profiles

100 of 0 O go va aol80 .. -.70 - .!

. 60

50 :0,: : O / --- xZ--EJBUDP50

o 40 : : C - EJUDP2J . ,, V . .<: - .0' ° - Urban Development

30 30

20 -

10 0l1

1 3 5 7 9 11 13 15 17 19 21 23 25 27

Quarters Since Board

m:\ejudp2\grtables\disb2.xis\4/11/96

- 98 - ANNEX 12


STRATEGIC URBAN ROAD INFRASTRUCTURE PROJECT (SURIP'

Supervision Staffing and Schedule

:.;-0..~~~~~~~ ~~ ~~~ ... .. . . . . . . .. . . . . . . . ..... '..- . . . . . . .. .......... ..... . . .. . .. .. . .. ..... .....- . .' :' .: ..::' . .. .. ..' .. .. 7-T F!: T!iA j':';ff::

May 1996 Project Launch Workshop Urban Enviromnental Specialist (2 sw)Institutional Mgmt Specialist (2 sw)Operations Officers (4 sw)Financial Analyst (2 sw)Lawyer (1 sw)

____________________ _______________ ______Disbursement Officer (I sw)October 1996 Supervision Mission - Annual Review Urban Enviromnental Specialist (3 sw)

Institutional Mgmt Specialist (2 sw)Operations Officers (4 sw)Financial Analyst (3 sw)

April 1997 Supervision Mission Urban Envirownental Specialist (3 sw)Institutional Mgmt Specialist (2 sw)Operations Officers (4 sw)Financial Analyst (3 sw)

October 1997 Supervision Mission - Annual Review Urban Environmental Specialist (3 sw)Institutional Mgmt Specialist (2 sw)Operations Officers (4 sw)Financial Analyst (3 sw)

April 1998 Supervision Mission Urban Environmental Specialist (2 sw)Institutional Mgmt Specialist (I sw)Operations Officers (3 sw)Financial Analyst (2 sw)

October 1998 Supervision Mission - Annual Review Urban Environmental Specialist (2 sw)Institutional Mgmt Specialist (1 sw)Operations Officers (3 sw)Financial Analyst (2 sw)

April 1999 Supervision Mission Urban Enviromnental Specialist (2 sw)Institutional Mgmt Specialist (1 sw)Operations Officers (2 sw)Financial Analyst (2 sw)

October 1999 Supervision/Completion Mission Urban Enviromnental Specialist (2 sw)Institutional Mgmt Specialist (2 sw)Operations Officers (4 sw)Financial Analyst (2 sw)

Total number of staff weeks by Bank FY for supervision is as follows: 20 (FY96), 30 (FY97), 25 (FY98), 20 (FY99),12 (FY00).

- 99 -Annex 13

Page 1 of 4



Environmental Management

1. The mid-term review of EJBUDP had shown that a massive effort had been expended inpreparing various environmental reports required under the GOI environmental assessmentregulations then in force. However, there were serious shortcomings in the extent to which thateffort was translated into environmental management actions -- modifications of sites or designs,and implementation of mitigation or monitoring measures. Preparation of environmentaldocuments and review in Jakarta, both with limited interaction between Dati II staff and either theconsultants or the reviewers, plus an environmental assessment training program that wasimplemented too late in the project and did not adequately address the needs of provincial andlocal officials were the primary reasons for this situation. The environmental managementprocedures for EJUDP2 were designed to avoid similar problems.

GOI Regulations for Environmental Assessment Methodology

2. As a Category B project, EJUDP2 did not require a full environmental assessment (EA)under OD 4.01, since the subprojects likely to be financed would not have significant adverseenvironmental impacts and would be generally well suited to application of standard operatingprocedures and mitigation measures for environmental protection. It was agreed at identificationthat environmental assessment would proceed according to the GOI Environmental ImpactAssessment (AMDAL) regulations promulgated in Government Regulation Number 51 of 1993(PP5 1), which is, with minor exceptions, consistent with the requirements of the Bank. PP5 1 wasamplified in 1994 in a series of decrees (KEPMEN) of the Minister of State for Environment.Two of these are pertinent, since they provided the basis of the assessment methodologyKEPMEN 11 defines the types of activities for which environmental assessments (ANDALs) mustbe prepared. KEPMEN 12 provides general guidelines for environmental management plans(UTKL) and monitoring plans (UPL) necessary for activities which might affect the environmentbut which do not require ANDALs. According to KEPMEN 12, sectoral ministries anddepartments would develop more detailed UKL/UPL guidelines specifically for the sectors forwhich they are responsible.

3. KEPMEN 11 and 12 were promulgated prior to completion of the EJBUDP Batch 3PJM's, but MPW has yet to issue sectoral UKL/UPL guidelines. To assist Dati II inimplementing the new procedures, BAPPEDA and PPMO and PPMU advisors developed ascreening matrix based on KEPMEN 11 and 12. For each IUDP sector, the matrix relates pre-construction, construction, and operating activities that might affect the environment to standardmanagement and monitoring measures.

- 100 -Annex 13

Page 2 of 4

Actions Taken

4. As the initial step in the assessment process, all Dati II were required to fill out the matrixfor their draft PJM's and submit it to BAPPEDA -I for review. BAPPEDA reviewed the draftPJM's and screening matrices and invited all Dati II to discuss their draft matrices in separatemeetings in Surabaya. In addition, eight PJMs were found to include subprojects that could affectprotected areas and hence might require ANDALs. During the discussions with those Dati II, theproposals were examined in detail and, in a number of cases modified by relocating proposedfacilities away from protected areas. It was finally ascertained that UKL/UPL would be sufficientfor all subprojects in the PJM's. The Dati II were directed to use the final, agreed matrices as theblueprints for their UKL/UPL.

5. Appraisal of the environmental management aspects of the project will be carried out onthe basis of the UKL/UPLs for the PJMs. During implementation, more detailed UKL/UPL willbe prepared for each subproject and reviewed by the Provincial Government. Approval of eachsubproject will be contingent on completion of a satisfactory UKLIUPL.

6. UKL/UPL for the PJM's were received from all Dati II. With the exception ofKotamadya Malang, which has preparation consultants under contract, they were preparedprimarily by Dati II staff. They were reviewed by the provincial BAPPEDA and Dinas PU,assisted by a consultant the Bank engaged specifically for this purpose. The consultant's reportwas submitted to the appraisal mission, and mission members also examined a selected number ofUKL/UPL. The review shows that Dati II capacity to produce environmental managementreports has advanced substantially since preparation of this project began, primarily as a result ofthe training administered by BAPPEDA. The results of the individual evaluations have beenreported back to the Dati II concerned.

Arrangements for Subproject UKL/UPL Preparation. Review and Implementation

7. Arrangements for UKL/UPL preparation need to be specified so that Dati II staff areclearly aware of their responsibilities and can commit sufficient resources to the work. The finalengineering design consultant and the Project Management Office of BAPPEDA-I, using theUKL/UPL for PJM's, will assist by preparing standard clauses for environmental management andmonitoring measures to be incorporated in all tender documents and contracts.

8. Arrangements for review of UKL/UPL are needed to ensure that the adequacy ofenvironmental safeguards is considered in subproject appraisal and that the management andmonitoring measures are included in subproject design and implementation. The review will bethe responsibility of structural units in provincial government. It would be coordinated byBAPPEDA, Seksi SLH. BLH would participate in all reviews, and the cognizant technical dinaswould be involved according to the sector of the subproject. The review should include screeningof any proposed project sites not already screened when the PJM's were originally prepared,especially for solid waste disposal sites (TPA's, for which field visits are a necessary part of thereview), to ascertain that they are not located in protected or sensitive areas and are generallysuitable for the intended purpose. Approval of the UKLfUPL by Dati I would be a prerequisite forsubproject approval, except in the case of TPA's. Because of demonstrated problems in

- 101 -Annex 13

Page 3 of 4

implementing environmental mitigation and monitoring for subprojects in EJBUDP (e. g. seesection on solid waste management below), BAPPEDA will submit copies of subproject designs,operating plans and UKL/UPL to the Bank (RSI) for all 1 st year subprojects requiringenvironmental review, and will not approve these subprojects until the Bank has given itsconcurrence. During the first year of implementation, RSI staff or consultants will reviewUKL/UPL for all sectors but will phase out this practice as soon as the quality of the UKL/UPLwork in each sector is found to be satisfactory. It would be made clear by SK from theGovernor's office, as has been done in Bali Province, that no subprojects are to be implementeduntil the required UKL/UPL (or in a few cases RKL/RPL) have been approved by BAPPEDA.

9. Arrangements for UKL/UPL implementation depend heavily on training of PIMPROs (seesection on training below), incorporation of management and monitoring measures as fully aspossible into tender documents and construction contracts, and required reporting from Dati II toDati I. Final engineering design consultants and BAPPEDA-I and II will ensure that thedocuments include these items as general conditions of contract or sub-project specificrequirements, as appropriate. Standard operating procedures being developed by BAPPEDA-Ifor this project will specify Dati-IH reporting requirements for UKL/UPL implementation so that itis explicitly addressed by all PIMPROs, overseen by the Provincial Government, and included inquarterly progress reports.

Training in Environmental Management

10. Training is necessary to overcome the weaknesses in institutional capacity evidenced bythe review of UKL/UPL for this project and the experience with implementation of environmentalmanagement and monitoring recommendations in EJBUDP. Three stages of training will becompleted before any subprojects are approved for implementation:

11. Dati I personnel will require training in UKL/UPL regulations and preparation procedures,as well as in the environmental issues relevant for infrastructure projects, so that they can providean expeditious and informed review of UKL/UPL documents and advise Dati II personnel asneeded. Two days of training will be needed.

12. Dati II personnel need training in relevant environmental issues, environmental regulation,UKL/UPL preparation, incorporation of environmental management and monitoring requirementsin tender documents and contracts, and methods for supervising UKL/UPL implementation. Thistraining will be conducted in the kabupaten or kotamadya offices so that all involved staff can betrained. Two days of training will be needed at each Dati II. The training will include presentationof actual case studies for each type of infrastructure project in the context of East Java.

13. Dati I and II personnel will participate in a one-day workshop after the above training iscompleted, to review the training, share views on how UKL/UPL can best be prepared andimplemented, and agree on working arrangements for preparation, review, implementation,monitoring and reporting.

14. The training program will be developed by Indonesian consultants qualified in UKL/UPLand AMDAL procedures, in consultation with Dati I staff from BAPPEDA Seksi LH and BLH to

- 102 -

Annex 13Page 4 of 4

ensure that the program meets the real training needs. The UPL and BAPPEDA trainingmaterials already used in East Java will serve as the starting point for program development, asthese have proven to be effective. Assuming 20 staff days for program development, and atraining team of two consultants for all three stages, the level of effort to prepare and conduct thetraining is 170 staff days. Assuming consulting fees of US$250/day plus US$60 per diem plustravel costs, the estimated cost of the program will be US$60,000. These costs are eligible to befinanced under the urgent priority technical assistance component of the Surabaya UrbanDevelopment Project (Ln. 3726-IND).

Solid Waste Management

15. At the time of appraisal, Kotamadya Malang-had not been able to rectify the operations atits Supit Urang TPA due to equipment failures. The Project Preparation Report (PPR) forMalang includes a subproject to obtain new equipment, design and develop new sanitary landfillcells at the site, clean up the improperly disposed solid waste in the present cell, widen the accessroad, and formulate an operating procedure. The possible social impacts of access road wideningmust be addressed further during Project Memorandum preparation.

16. Kabupaten Malang has identified three potential TPA projects: expansion and provisionof leachate treatment at the controlled landfill that serves Batu and development of new TPAs atLawang (5 ha) and Kecamatan Kepanjen (2 ha). These sites have yet to be screened in order todetermine what environmental studies may be needed in addition to UKL/UPL. Preparations forEJUDP3 will include a comprehensive Solid Waste Management Plan prepared jointly byKabupaten and Kotamadya Malang to determine whether the proposed number, locations andcapacities of TPAs are sensible.

m:\ejudp2\annexes\envanx.doc

INDONESIA


LOCAL GOVERNMENT PAST AND PROJECTED FUTURE OWN-SOURCE REVENUES

R ! million at constanl 1991, ricesLocal Governmenl 91/92 92193 ~93194 94195 Average Annual 95196 96197 971911 98199 Average Annual__________________ _________ ______ __ .Growlh G row tti

KOTAMADYABlilar 1.100 1, 107 1.290 1.419 8.9% 1.509 1,706 1,949 2.623 20.2%Kedirl 1,B38 1,789 1.904 2,066 8.1A% 2.215 2.333 2.563 3.158 12.5%Madiun . 1.439 1.599 1,715 1.795 7.6% 2.28? 2,393 2,682 2,976 9.2%Malang 7.243 7.340 7,737 8.174 4.1% . ,V., 7,459 7,914 8.402 4.0%Molokerlo 1.140 1.213 1,196 1.264 3.5% 1,351 1,436 1,615 1,860 11.2%Pasuruan 1.230 1,269 1.356 1,278 1.2% 1,532 1,755 1.854 2.028 9.8%Probolinggo 1.395 1.415 1.417 1,679 6.4% 1.889 2,030 2,183 2,397 8.3%

KABUPATENBangkalan 1.287 1.449 1,396 1.618 7.9% 1,402 .1,482 1,578 1,727 7.2%Banyuwangl . 2.451 3.489 2.619 2.858 5.3% 3,489 3,798 4,085 4,864 11.7%Bltar 1.465 1.555 1.772 1.870 8.5% 2,192 2.599 3,021 3.668 18.7% 1Bolonegaro .893 2.124 2.147 1,904 0.2% 2.057 2,175 2.338 2,563 7.6%Bondowoso 1.322 1.294 1,469 1,353 0.8% 1.415 1,530 1,694 1,948 11.2%Gresik . 2.787 . 578 3,487 4.332 15.8% 5,601 5,797 6,120 6.678 6.0%Jember 5,059 5,522 5.567 5.741 4.3% 6,641 6,989 7,489 8,595 9.0%Jombang 1.803 1.932 2,561 3,233 21.5% 3,829 4,346 4,984 5.905 15.5%Kedirl 2,757 2.878 2.728 3,271 5.9% 3.863 3,919 4 116 4,806 7.6%Lamongan 1.758 1.847 2,275 2,273 8.9% 2.367 2.483 2,638 2,888 6.9%Lumalang 2,502 2,544 2,487 2.485 -0.2% 2,941 3.149 3.374 3.923 10.1%Madiun 1,088 1,028 1.523 1.644 14.7% 1.912 2.171 2.673 3.322 20.2%Magelan 1,868 1,454 1,605 1,597 -5.1% 1.715 1.817 1.943 2,125 7.4%Malang 3.862 4,162 4,598 5,232 10.8% 6.168 6,343 6.905 7,684 7.6%Mojoker1o 1.631 2,324 2,534 3,156 24.6% 3,510 3.751 4.167 4,753 10.6%Nganjuk 2,158 2.299 2,884 2,926 10.7% 3,334 3.473 3.781 4.164 7.7%Ngawl 1,271 1,236 1,067 1,250 -0.6% 1.451 1,588 1.780 1,953 10 4%Pacitan 663 1,023 1,002 1,236 23.0% 1,350 1,479 1,844 2.342 20.1%Pamekasan 711 741 1.043 1,416 25.8% 1,633 1,882 2.175 2.442 14.3%Pasuruon 2.842 3,121 3.040 2,854 0.1% 3,186 3,347 3,513 3.873 6.7%Ponorogo 1.484 1,907 1.528 1,559 1.7% 1,911 2,016 2.298 2.680 11.9%Probohnggo 2,016 1,865 1,597 1,993 -0.4% 2,125 2,370 2,586 2.902 11 .0%Sampang B8O 785 994 940 5.2% 990 1 597 1,268 1,536 15.8%Sldoarlo 7,863 7,707 8,199 10,944 11.7% 11.725 12,966 14,837 17,896 15.1% , >Situbondo 1,438 1,849 1,669 1,670 5.1% 1,957 2,086 2,217 2.591 9.8% zSumenep 1,039 1,122 1,435 1,291 7.5% 1,389 1.397 1.433 1,618 5.2% tTrenggalek 751 880 919 1,254 18.6% 1,379 1,587 1.772 1,961 12.5% >4Tuban 1.589 2,403 2.035 2,727 19.7% 2,795 2,973 3,329 3,616 9.0%Tulungagung 1,456 1,489 1,969 1,872 8.7% 2,115 2,265 2,603 3.021 12.6% 0 4

.-TOTAL 74,806 71,116 84,744 14,172 3.0% 104,890 111,190 123,321 141,4168 10.68'

PDAM Financial Results with 40% Maximum Tariff Increase, East Java Loan 2Projects Financed by SLA or Im,estment (BLN) GrantNO SLA on Connections, rariffs to Cover Depreciation

YearPDAM No. of Sub- EJ 2 Loan Investment (Current Rp M) Proposed Operational Deficit (Rp M) Deprec. Annual Tariff Incroases

Projects SLA Invest. Tech. PDAM Total POMMS Estimates Covered 199S 1996 199 2000 Tariff (94 13)Loan Grant Assistance 9647 98-02 by Revenues Done - Proposed 1995 2000

PDAMS ABLE TO FINANCE 100% SLABondowoso Regency 1 874 0 52 256 1182 276 0 2002 43% 0% 0% 40% 324 583Lumajang Regency 1 2810 0 328 541 3679 677 0 1994 0% 43% 40% 0% 428 632Cityof Madiun 1 1260 0 100 882 2242 0 0 1994 0% 40% 40% 5% 352 543Malang Regency 2 2335 0 330 1322 3987 0 0 1995 20% 20% 31% 10% 357 509Mojokerto Regency 2 442 0 329 274 1045 0 0 1995 67% 0% 27% 0% 351 455Ngawi Regency 1 2105 0 112 337 2554 0 0 1995 30% 10% 40% 34% 185 364Pamekasan Regency 2 1775 0 163 612 2550 564 0 1995 90% 0% 40% 17% 369 588City of Probolinggo 1 3221 0 452 829 4502 0 0 1994 52% 0% 40% 40% 314 625Sampang Regency 2 4197 0 446 756 5399 246 0 1995 22% 18% 40% 32% 326 584Sidoarjo Regency 1 5363 0 410 1084 6857 0 0 1994 32% 0% 39% 24% 1141 1470Siubondo Regency 3 955 0 119 745 1819 0 0 1996 0% 40% 36% 16% 327 524Tuban Regency 2 1084 0 60 397 1541 0 0 1996 0% 40% 25% 11% 329 480Tulungagung Regency 1 7108 0 738 1276 9122 137 0 1996 0% 40% 40% 40% 307 63913 Subtotal 20 33529 0 3639 9311 46479 1900 0 399 643

PDAMS ABLE TO FINANCE SOME LOANBanyuwangi Regency 2 842 1492 46 531 2911 0 0 1995 35% 5% 40% 20% 408 660Magetan Regency 2 2906 5382 702 1103 10093 0 0 1996 43% 0% 40% 37% 300 5552 Subtotal 4 3748 6874 748 1634 13004 0 0 336 590

PDAMS REQUIRING ALL GRANTCityof Blitar 1 0 2874 0 602 3476 342 0 1996 47% 0% 40% 11% 398 658Pacitan Regency 4 0 4258 0 362 4620 240 0 2004 43% 0% 40% 40% 323 558Trenggalek Regency 2 0 411 0 78 489 122 0 2004 50% 0% 40% 40% 372 6103 Subtotal 7 0 7543 0 1042 8585 704 0 344 597

City of Malang 1 33242 1531 1898 12251 48922 0 0 1995 60% 0% 34% 0% 484 529

19 Total 32 70519 15948 6285 24238 116990 2604 0

TA for SLA projects arranged by TKI and funded by loan. TA for grant funded projects assumed not funded from loan and included in investment grant. Regencies Banyuwangi, 75;Magetan, 418; Pacitan, 241; Trenggalek, 28; City of Blitar, 200. >

(Do

H U

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ANNEX 16(a)

A. GENERAL TECHNICAL STANDARDS AND CRITERIA FOR SUBPROJECTSELECTION. PLANNING AND DESIGN

(adapted to suit local conditions according to MPW guidelines)

1) Kabupaten/Kotamadya Selection Criteria for LUIDP

Population greater than 5,000 for water supply andgreater than 20,000 for other infrastructures

Population growth rate greater than 1 percent per year for population above20,000

Exception Surabaya is included in the SUDP (Loan 3726-IND)

2) Sector Selection Criteria (Detailed in Agreed Project Technical Memoranda!

Water Supply Real demand, water stress area

Drainage Flooding, deferred maintenance, increased runoff,inadequate capacity

Solid Waste National guidelines regarding coverage for highdensities, environmental and health considerations

Roads Average daily traffic, congestion, traffic flowconstraints, road condition, accidents, new landdevelopments

KIP National policy for basic services, local govemmentinitiatives for basic services, local govemmentinitiatives, poor environmental conditions,community willingness to operate and maintaininfrastructure

MIHP Service deficiencies, local government initiatives,environmental and health considerations

All standards and criteria follow MPW guidelines which have been reviewed and found acceptable by the Bankand summarized by agreed Technical Memoranda by Sub-sector. Details are provided in the Project File.

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3) Subproject Design Criteria

Water Supply

Planning:

- Priority for rehabilitation and optimum use of existing systems- Priority for reduction of water losses and leakages- Ability and willingness to pay for water supply- Adequate income for piped water supply (taken as Rp 100,000/month)- Per capita demand 120 lpd for urban households- Per capita demand 60 lpd for IKK and rural households- Per capita demand greater than 120 lpd taken for special areas

(e.g., tourism needed- Planning period of 10 years- Optimum system selected on basis of minimum present value of total

costs over project life taking a discount rate of 10 percent- Environmental impact assessment, as appropriate.

Engineering Design:

- Water quality - Indonesia and WHO permissible standards

- Maximum pressure - 7.5 bar in the distribution system

- Minimum pressure - 1.0 bar in the distribution system overa 24 hour period

- Peak day demands - 1. 15 x average day demand

- Peak hour demands - 2.00 x peak day demand

Drainage

Planning:

City drainage planning focuses initially on primary and secondary drainage, and localflooding. Major flood control works is the responsibility of central or provincialauthorities. Urban drainage coverage target is 60 percent in Repelita V, with 100 percentcoverage by primary and secondary systems. Optimization of existing drainage systems.Major drainage works to be undertaken on the basis drainage masterplans

- 107 -

Design:

- Q = F x C x I x A, where Q = discharge, C = coefficient of roughness, I = rainfallintensity and A = catchment area

- Return period of design storm - 5 years

- Minimum velocity of flow in channels - 0.5 meters/second minimum

- Hydraulic design - Manning's Formula

Solid Waste Services

Planning:

Based on environmental and health considerations, real demand and willingness to pay.High priority for communities with densities over 200 person/hectare.

Design standard:

Population density greater than 200 persons/ha, 100 percent service: population densitybetween 100 person/ha and 200 person/ha, 75 percent service; no service yet for densityless than 50 person/ha; and 100 percent service for commercial areas and markets.

Refuse generation: 3.15 liters/capita/day for medium towns; 1.85 liters/capita/day forsmall towns

Disposal by sanitary landfill: environmental impact assessments required.

Design:

Modular system as per DG Cipta Karya guidelines

Human Waste/Sanitation (see Annex 5 for other details)

Planning:

Eighty percent coverage of urban population by 1995 (Repelita V)

- Sewer systems may be considered for densities in excess of 200 person per hectare.System include conventional sewers, small bore sewers or shallow sewers.

- All other areas to have on-site system.

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Criteria:

1. Areas with ground water table less than 1.5 meters

a. Population density greater than 150 persons/ha - 100 percent service level, usingtype Al (MK-5 KK + septic tank and anaerobic filter) or type B 1 (WC/JK +septic tank and anaerobic filters)

b. Population density less than 150 persons/ha - 80 percent service, type Al or BIfacility.

2. Areas with ground water table between 1.5 m and 5 m

a. Population density greater than 200 persons/ha - 100 percent service level, type A(MK-5 KK + septic tank and anaerobic filter) or type B I (WC/JK + septic tankand anaerobic filter)

b. Population density 150 - 200 person/ha - 80 percent service level type B (WC/JK+ septic tank and soakaway trench)

c. Population density less than 150 person/ha - 60 percent service level using type Bfacility

3. Areas with ground water table greater than 5 meters

a. Population density greater than 200 person/ha - 100 percent service level usingtype A and type B2 facility

b. Population density 150-200 person/ha - 80 percent service level using type Bfacility

c. Population density less than 150 person/ha - 60 percent service level using type Cfacility (soak pit with leaching pit)

4. Water consumption for pour flush latrines taken as 5 lpd. Sludge generation in pourflush latrines is 30 led.

All according to DG Cipta Karya Guidelines

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ANNEX 16(b)Page 1 of3

B. ECONOMIC APPRAISAL CRITERIA AND METHODOLOGY

Water Supply

1. In principle, net present value (NPV) and economic rate of return (ERR) have to beestimated for each water supply subproject. In order to cope with the large number of(relatively small) subprojects and to take into account the limited appraisal capability ofprovincial govermments, Bank staff proposed the application of a simplified methodology.

2. Economic benefits of water supply projects are equal to the consumers' willingness topay for water plus external health benefits, i.e. prevention of infections caused by others(outside of someone's won household). The external health benefits, since they are intangible,formally don't enter the economic analysis. If substantiated, however, can be used to justifyprojects with a negative NPV or an ERR below the cut-off rate of 12 percent (this procedurecan be applied in very special cases only, as an exception). In large cities with welifunctioning water supply systems there are usually enough information to obtain a reasonablygood estimate of the consumers' demand function. The water demand function, in turn, canbe used to estimate willingness to pay.

3. Lack of data and expertise and the proliferation of intermittent water supply systemsgenerally made the application of this "traditional" method impossible in East Java and Bali.The proposed simplified methodology divides piped water consumption into two parts: thefirst part replaces the previous source (e.g. wells, rivers, vendors) of water use, while thesecond part is a net increase in water consumption. Benefit of the first part is equal to thecost savings (actual payments plus own labor) of consumers who on no more need to useother sources of water supply (this is the so-called alternative cost valuation method).Benefits of the second part, i.e., of incremental water use, is still has to be estimated using theconcept of willingness to pay and that way depends on how accurately the demand functionwas estimated. However, the share of total benefits due to incremental water use is usuallysmall and the informnation collected in order to estimate the benefit of the first part can be usedto estimate one point on the demand curve. The full demand function is estimated byproviding the coordinates of a fictitious low price - high quantity point on the demand curveand assuming a linear relationship between price and water demand (the method is not verysensitive to the assumption regarding the shape of the water demand curve and to smallperturbations in the coordinates of the low price - high quantity point).

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ANNEX 16(b)Page 2 of 3

4. Two simple, user friendly programs were developed along these lines to assist theproject preparation teams and the provincial appraisal teams with economic analysis. Theprograms compare subproject costs and benefits and calculate NPV and ERR estimates (theprograms use a discount rate of 10 percent for NPV calculation). A more detailed descriptionof the programs (one for small projects and one for large ones) with the mathematicalformulas can be found in the project files.

5. A further simplification in the proposed methodology is given by the possibility ofestimating a lower bound for the ERR. There are two ways to arrive at such an estimate.One is the so-called cross-city comparison method. If (i) the average incremental cost (AIC)of a subproject in city A is less then or equal to the AIC of a subproject in city B (or,altematively, the water tariff of a functioning system in city B); (ii) the waterdemand/consumption surveys indicate that the sources and quantity of non-piped (altemative)water use of those households who don't have access to piped water are similar in the twotowns; (iii) household incomes are also similar and (iv) the planned average waterconsumption per household incomes are also similar the same as the planned (or existing)water consumption in city B, then the ERR of subproject A is at least as high as subproject B(or at least 10 percent if system B already exists).

6. The other method relies on the financial internal rate of return (FIRR) to obtain alower bound estimate for the ERR. In case of a proposed expansion/rehabilitation of analready existing system, if (i) there is no real water price increase forecasted; (ii) changes inwater consumption are fully explained by projected changes in the (real) income andcomposition of connected customers, then the FIRR can be used as a proxy for the lowerbound of ERR.

Drainage

7. The overwhelming majority of drainage subprojects are very small, i.e. cost less thanRp 500 million (about $0.2 million). Case by case economic analysis (i.e. calculation of ERRand NPV) is required only for the larger ones which typically cost Rp 500 - 2000 million. Thebenefits of these drainage subprojects are estimated either (i) on the basis of avoided flooddamage or (ii) land value increases and road maintenance cost reductions. Since estimation ofthe cost of flood damages require teams usually prefer the second, less time consumingapproach. The advantage of this approach is obvious: land value increase, if land marketsfunction properly, is an indicator which can reflect the present value of the future benefitstream accruing to the owners of the land in the project area. The projected increases in landvalues are based on comparison of land values in the project area to land values in similar, butless frequently flooded neighborhoods. Information on land values for the subprojects was

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ANNEX 16(b)Page 3 of 3

collected during interviews with kelurahan (sub-district) staff handling land transactions andwith informal real estate brokers. Reductions in road maintenance costs were estimated onthe basis of local experience.

Urban Roads

8. The Urban Road Directorate of the Ministry of Public Works issued an "Urban RoadPlanning and Programming Manual" to guide the preparation of all IUMDP projects.Preparation of the manual was partly financed from the technical assistance components of theRegional Cities Urban Transport Project (Loan No. 281 7-IND) and the Urban Sector Loan(Loan No. 2816-IND). Economic analysis of all road subprojects are based on the applicationof this manual. Using information obtained from site specific traffic and road conditionsurveys, the manual is easy to use for estimating the benefits of urban road rehabilitation,betterment, widening and new urban road projects. Two kinds of benefits are estimated:vehicle operation cost savings and time benefits, which, if compared to the costs, make itpossible to calculate ERR or NPV of the subprojects. Further simplification is allowed forsubprojects with a cost below Rp 2 billion (about $0.9 million). For each class of road andtype of road improvement, the manual also calculates the minimum traffic level which makesthe improvement economically viable (detailed description of the methodology andassumptions used in the manual is available in the project files). A proposed roadimprovement is considered acceptable if the average daily traffic on the road is higher than thecut-off level determined that way.

Other Subsectors

9. A high portion the benefits of human and solid waste management and marketinfrastructure improvement subprojects are intangible and accrue to the local community as awhole and not only to the direct recipients of these services. Therefore, there is norequirement to carry out a formal comparison of costs and benefits, however, for subprojectswith a cost of more than Rp 500 million, it should be demonstrated that the proposal is theleast cost solution which achieves the desired environmental impact. Kampung improvementsubprojects deliver a standard package of infrastructure services which was proven to beeconomically viable in several Bank financed projects before. Since the economic analysis ofthat kind of investment is very costly and the concentration of expenditure is low, theeconomic viability of proposed kampung improvements, as long as they follow the agreedstandards, is presumed.

- 112 -

ANNEX 17Page 1

INDONESIASECOND EAST JAVA URBAN DEVELOPMENT PROJECT

Documents in the Project File

Documents brought by the Indonesian Delegation to Negotiations1. Project Preparation Report (Final) - January 1996

2. Evaluation of Water Supply Projects - February 1996

3. Malang UDP Project Preparation Report - August 1995

4. Final Draft Terms of Reference for Urgent Technical Assistance to be Financed by Loan 3726-IND (SUDP)

5. Project Memoranda (Annual Volumes for 3 project years)

6. PJM Summary for 36 Local Governments (4 Volumes)

7. Draft Terms of Reference for Technical Assistance Proposed for Financing by EJUDP2

B. Draft Provincial Program Implementation Memorandum (PPIM/MPPP)

9. Draft Model Annual Project Implementation Plan (APIP/MPPT)

10. Draft Model SLAs for Local Governments and PDAMs (2 Versions)

11. Preliminary Draft Standard Operating Procedures for Project Implementation

12. Revised Draft East Java Governor's Decree regarding Project Land Acquisition and Resettlement

13. Preparation of Strategic Framework Document for East Java Regional Urban Development Plan

14. Staff Appraisal Report for an Urban Development Project in the Provinces of East Javaand Bali

15. Mid-Term Review Summary for East Java and Bali Urban Development Project

PT. Indulexco Consulting Group in association with C. Lotti & Associati Consulting Engineers16. Project Preparation Report - Malang UDP, August 1995

17. Rencana Investasi P3KT, Pemerintah Kotamadya Daerah Tingkat II Malang - Malang UDP(Urban Infrastructure Investment Plan for the City of Malang)

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ANNEX 17Page 2

18. Project Digest 1996/1997 - Malang UDP, August 1995



21. Privatisation Report, Laporan Peran Swasta - Malang UDP

22. Dokumen LIDAP - Malangu UDP

23. Draft Resettlement Action Plan - Malang UDP, August 1995

PT. Indulexco Consulting Group in association with C. Lotti & Assoc. SpA. DHV Consultants BV. andMott MacDonald Limited24. PPPKT, Jawa Timur, Preparation for East Java UDP II (included Kotamadya Malang); PJM

Summary Documents - 36 Local Governments, September 1995

25. PPPKT, Jawa Timur, Preparation for East Java UDP II (included Kotamadya Malang), ProjectMemoranda 35 Dati II, July 1995

PT. Parama Artha Santika bekerasama dengan Engineering Services, Inc.26. POMMS - EJBUDP, Re-appraisal of 36 Local Governments and PDAMs O&M Requirements

and Capacities in East Java - Addendum 1 - Part 1, June 1995

Rencana Tidakan Peningkatan Pendapatan Daerah (Retikat-Patda)27. Executive Summary, Fiscal Years (Ringkasan Eksekutif, Tahun Anggaran) 1995/1996 -

1998/1999

28. Analyses of Fiscal Capacity, Fiscal Years (Analisa Pad dan Kelembagaan Dipenda, TahunAnggaran) 1995/1996 - 1998/1999

29. Potential and Projections, Fiscal Years (Potensi dan Proyeksi, Tahun Anggaran) 1995/1996 -1998/1999

Program Pembangunan Prasarana Kota Terpadu30. Summary of Evaluation Result Integrated Urban Infrastructure Development Program (IUIDP)

Stage II, Surabaya, 6 - 42, June 1995

Provincial Programme Management Office (PPMO)31. Summary of Appraisal Results (Ringkasan Hasil Penilaian Usulan Program P3KIT) August 1994

and March 1995

(other working documents available from Task Manager)

_-ID 27476

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APRIL 199i

IMAGING

Report No: 15045 INDType: SAR

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