Concept Paper

Project Number: 48134-001 May 2014

Proposed Programmatic Approach and Policy-Based Loan for Subprogram 1 Indonesia: Stepping Up Investments for Growth Acceleration Program This document is being disclosed to the public in accordance with ADB’s Public Communications Policy 2011.

CURRENCY EQUIVALENTS (as of 21 April 2014)

Currency unit – rupiah (Rp)

Rp1.00 = $0.00011 $1.00 = Rp11,430

ABBREVIATIONS ADB – Asian Development Bank CMEA – Coordinating Ministry of Economic Affairs FDI – Foreign direct investment GDP – Gross domestic product MP3EI – Masterplan Percepatan dan Perluasan Pembangunan

Ekonomi Indonesia (Master Plan for Acceleration and Expansion of Indonesia’s Economic Development)

PPP – public–private partnership RPJMN – Rencana Pembangunan Jangka Menengah Nasional

(Medium-Term Development Plan)

NOTE

In this report, "$" refers to US dollars

Vice-President S. Groff, Operations 2 Director General J. Nugent, Southeast Asia Department (SERD) Director S. Hattori, Public Management, Financial Sector and Trade Division,

SERD Team leader R. Hattari, Public Management Economist, SERD Team members P. Aji, Senior Economics Officer, SERD A. Gill, Senior Country Specialist, SERD

A. Haydarov, PPP Specialist SERD R. Lacson, Operations Assistant, SERD N. Mardiniah, Safeguards Officer (Resettlement), SERD A. Musa, Financial Management Specialist, SERD

C. Roos, Operations Assistant, SERD D. Simanjuntak, Project Officer, SERD O. Suyatmo, Procurement Officer, SERD

S. Zaidansyah, Senior Counsel, Office of the General Counsel Peer reviewers R. O’Sullivan, Lead Financial Sector Specialist, South Asia Department

S. Sampath, Principal Urban Development Specialist, Regional and Sustainable Development Department

In preparing any country program or strategy, financing any project, or by making any designation of or reference to a particular territory or geographic area in this document, the Asian Development Bank does not intend to make any judgments as to the legal or other status of any territory or area.

CONTENTS

Page

I. THE PROGRAM 1

A. Rationale 1

B. Impact, Outcome, and Outputs 3

C. Program Costs and Financing 3

D. Indicative Implementation Arrangements 4

II. TECHNICAL ASSISTANCE 4

III. DUE DILIGENCE REQUIRED 4

IV. PROCESSING PLAN 4

A. Risk Categorization 4

B. Processing Schedule 4

V. KEY ISSUES 4 APPENDIXES

1. Basic Project Information 5

2. Problem Tree 6

3. Design and Monitoring Framework 7

4. Project Preparatory Technical Assistance 10

5. Initial Poverty and Social Analysis 14

SUPPLEMENTARY DOCUMENTS (available on request) 1. Sector Assessment (Summary): Investment Climate

2. Sector Assessment (Summary): Public Procurement

3. Assessment of Public–Private Partnership Institutional and Governance Issues in Indonesia (Summary): A Way Forward

I. THE PROGRAM

A. Rationale

1. Indonesia still faces fundamental challenges in achieving sustainable and equitable growth. One key factor is insufficient investment. The proposed Stepping Up Investments for Growth Acceleration Program supports the Government’s General Plan for Direct Investments for 2012–2025 approved by the President of Indonesia in 2012 aimed at accelerating domestic and foreign capital investments. The proposed program’s basic information is in Appendix 1; the problem tree is in Appendix 2; and, the draft design and monitoring framework is in Appendix 3.

2. From 2003 to 2013, Indonesia has been growing growing on average by 5.7%. However, the growth is still below the target required to enable Indonesia to become one of the 10 major economies in the world by 2025. For this to happen, Indonesia must grow annually by 7%–9% in 2011–2025.1 Attaining such growth requires a rise in the investment ratio beyond its average level of 26% gross domestic product in 2002–2012.2 Some estimates suggest that the investment ratio may need to go as high as 47% by 2019 to reach the required economic growth.3 Achieving higher levels of investment will require the government to increase private and public investments.

3. Low and unequal private investment. A stable and maturing political environment, a large domestic market, a growing middle-income class, a young workforce, and abundant natural resources have been the pulling factors in attracting foreign direct investment. As such, FDI inflows grew rapidly from $42 billion in 2005 to $205 billion in 2012. However, FDI inflows relative to GDP are still lower than in many of Indonesia’s regional peers. Further, close to 60% of investments are still concentrated in the main island of Java. The reasons are inadequate infrastructure, unfavorable investment climate, and high cost of doing business. Given the fiscal constraints, the government has tried to bridge the infrastructure gap by promoting public-private partnership (PPPs). However, inefficient institutional PPP setup and lack of bankable PPP projects in the pipeline have held progress back. On the high cost of doing business, the lack of policy coherence between central and local governments, a cumbersome business licensing process, and a restrictive investment regime are impediments to more investment. 4. Low utilization of public investment budget. Indonesia’s budget for public capital outlays is low at about 3% of GDP when compared with Malaysia (9% of GDP) and Thailand (7% of GDP). Even this budget remains underused due to the inability of central and local governments to execute their budgets properly and on time. For example, public capital spending is about 80% of the budgeted amount and about half of that is not disbursed until the last 2 months of the year. The major constraints in budget execution in the infrastructure sector are a convoluted budget preparation process, a lengthy procurement process, weak capacity of public procurement units, and a time-consuming and complex land acquisition process. 5. New administration. The country’s current Medium-Term Development Plan for 2010–2014 views increased investment as a pillar to support a medium-term annual growth target of 6.3%–6.8% in 2010–2014. Fast-tracking resolutions to boost private and public investments have begun. The country’s new Medium-Term Development Plan for 2015–2019 is being formulated and is expected to intensify the reform agenda on increasing investments. The challenge for the new administration will be to consolidate past reform measures and renew

1 Master Plan for Acceleration and Expansion of Indonesia's Economic Development (MP3EI) for 2011–2025.

2 IMF. September 2011. Indonesia Selected Issues. Country report No. 11/310.

3 Japan International Cooperation Agency—study team’s background study for Indonesia’s Medium-Term

Development Plan, 2015–2019.

2

commitment to higher levels of investment, mapping the way forward that would be credible both within and outside Indonesia.4

6. Value-added of SIGAP. ADB has supported government efforts in regulatory reform of investment climate, infrastructure, and public procurement through a series of program loans and sector development loans.5 However, despite the reforms made under past ADB programs, significant gaps still remain, particularly in regards to the implementation of the regulation at local level. On this background, SIGAP is designed to be distinct from past ADB programs because it incorporates a bottom-up approach. SIGAP promotes evidenced-based policy dialogue approach to be done through piloting the implementation of certain policy actions at local levels. Further, SIGAP adopts a new approach to an effective dialogue between national and local governments and the business community to address policy incoherence between different tiers of government. The interplay of evidence-based approach and effective public-private dialogue aims to achieve better buy-in from all stakeholders to improve coordination and ease implementation difficulties, where the largest set back has been experienced in the past.

7. The program design is based on the following:

(i) Programmatic approach. This will allow the new administration—building on thrusts, achievements, and lessons of past reforms—to chart the next phase of investment-enabling reforms and raise the credibility of government actions. The program will have two subprograms. Subprogram 1 is expected to be submitted to the ADB Board of Directors for consideration on or before 31 September 2014. Subprogram 2 is expected to be submitted to the ADB Board in September 2016.

(ii) Lessons from ADB’s past support. Past programs have been affected by the challenges in coordinating major national government agencies, change of staff critical to reform implementation, which resulted in delays or deviation from the planned reform trajectory, delays in decision making due to additional care to avoid corruption allegations, and the decentralization process, compounded by weak capacity of local governments and inadequate synchronization of reforms between the national and local government levels. Overcoming these problems would require strong government ownership and committed counterparts, constant collaboration and dialogue between the government and ADB, decentralized assistance at local levels, and a degree of flexibility, needed especially to ensure sustained government ownership.

(iii) Development partner coordination. The program reflects the discussions with multilateral and bilateral development partners and their ongoing and programmed support to the reform areas covered by the program.

8. The program supports pillar 1 of ADB’s Country Partnership Strategy, 2012–2014 for Indonesia.6 The program is included in ADB’s Country Operation Business Plan, 2013–2014 as a firm delivery in 2014.7

4 Indonesia’s Presidential election will be on July 9, 2014 and the new President will be sworn in on September

2014. 5 Infrastructure Reform Sector Development Program in 2006–2010, Local Government Finance and Governance

Reform Program in 2006–2011, Development Policy Support Program in 2008–2010, and Inclusive Growth through Improved Connectivity Program programmatic approach in 2012–2013, and associated grant and TA projects.

6 ADB. 2012. Country Partnership Strategy: Indonesia, 2012–2014. Manila.

7 ADB. 2013. Country Operation Business Plan: Indonesia, 2013-2014. Manila. In the COBP, the program was listed

as Second Inclusive Growth through Improved Connectivity Program, Subprogram 1. The change in title and the increase in amount are in response to the government’s request

3

B. Impact, Outcome, and Outputs

9. The program’s impact will be increased investment as share of GDP. The outcome will be an improved enabling environment for more private and public sector investments. This outcome will be achieved through the supporting reforms highlighted below:8

Output 1: More predictable and open business environment. Subprogram 1 will support the easing of restrictions on FDI, including in infrastructure, by (i) revising the negative list of sectors in which FDI is closed or restricted, (ii) providing tax allowances for investments outside Java, (iii) improving the processing time for business registration and licensing, and (iv) pilot-testing electronic invoicing for business-to-business value-added-tax transactions. Subprogram 2 will focus on (i) evaluating the effectiveness of the new negative investment list; (ii) establishing a more sector-focused public–private dialogue on investment, with participation of national and local governments; (iii) expanding online tax to include business registration; and (iv) assisting one large local government in reforming their investment license procedure.

Output 2: Diversification of modalities for infrastructure investments. Subprogram 1 will (i) pilot new public sector modalities for infrastructure financing by facilitating local governments’ access to capital markets via municipal bonds; (ii) encourage more infrastructure spending from local governments’ available budget resources via cofinancing from a regional infrastructure development fund set up by the national government; and (iii) use of sukuk9 by the national government to finance national infrastructure projects. Secondly, subprogram 1 will be about supporting bankability and proper preparation of PPP projects via (i) implementation of viability gap funding, (ii) removal of regulatory and land acquisition constraints, and (iii) streamlining of functions and responsibilities of different government bodies—National Development Planning Agency (Bappenas), Coordinating Ministry of Economic Affairs (CMEA), and Ministry of Finance (MOF)—in identifying, preparing, appraising, approving, and tendering PPP projects under the country’s PPP framework. Subprogram 2 will continue the directions of subprogram 1 and will focus on (i) building the capacity of local governments for debt management, (ii) developing a framework for project based sukuk issuance by local governments, (iii) strengthening systems for land acquisition, and (iv) establishing an anchor PPP unit.

Output 3: Faster and more transparent public procurement. The objective is to enhance the utilization of government public investment budgets by expediting the public procurement process while maintaining the requisite governance standards. Subprogram 1 will focus on increasing e-procurement and e-catalogues at national and local levels. Subprogram 2 will focus on (i) improving public procurement regulations; (ii) assessing the capacity of line ministries, related agencies, and local entities in conducting public procurement; (iii) increasing the budgetary amount for the information technology requirements of the National Public Procurement Agency; and (iv) assisting one large local government in reforming their procurement process.

C. Program Costs and Financing

10. The program comprise subprograms 1 and 2, and are envisaged as single-tranche policy-based loans. The loan amounts reflect the investment needs and indicative costs of reform. The government’s financing needs for 2014 are budgeted at $13 billion, of which programmed official external borrowing amounts to $3.6 billion. The government has requested a loan of $300 million from ADB’s ordinary capital resources to help finance subprogram 1.10

8 Summary sector assessments on investment climate and public procurement are in supplementary documents 1

and 2. Supplementary document 3 summarizes ADB’s review of Indonesia’s institutional PPP setup. 9 Sukuk is Islamic bond.

10 KfW has expressed strong interest in providing cofinancing for 350 million euro for subprogram 1 and 2.

4

Subprogram 2 is expected to require the same amount of ADB financing, subject to confirmation by the government.

D. Indicative Implementation Arrangements

11. The CMEA will be the executing agency; the Ministry of Finance, Indonesia Investment Coordinating Board, National Land Agency, and National Public Procurement Agency will be the implementing agencies. The implementation of program policy actions will be monitored through (i) a steering committee to be established by the government and (ii) regular meetings of technical working groups set up for each output to discuss interim progress in the reform agenda. The implementation period is January 2013–September 2014 for subprogram 1, and October 2014–September 2016 for subprogram 2. The policy-based loans will be disbursed upon accomplishment of agreed policy triggers.

II. TECHNICAL ASSISTANCE

12. The project preparatory technical assistance of $1.5 million to be funded from the Technical Assistance Special Fund-other sources is proposed to assist with designing and implementing reforms under subprogram 2 of SIGAP. The CMEA will be the executing agency. Consultants will be selected by ADB in accordance with its Guidelines on the Use of Consultants (2013, as amended from time to time). Disbursement will follow ADB’s Technical Assistance Disbursement Handbook (2010, as amended from time to time).

III. DUE DILIGENCE REQUIRED

13. ADB will undertake sector assessments of investment climate, PPPs, and public procurement; macroeconomic and debt sustainability analysis; poverty and social analysis; and fiduciary risk and program impact assessments. The program is expected to be classified as category C for all safeguard aspects. The initial poverty and social analysis is in Appendix 5.

IV. PROCESSING PLAN

A. Risk Categorization

14. As the loan amount for each subprogram exceeds $50 million and the reform program is comprehensive, the program is proposed to be categorized as complex.

B. Processing Schedule

15. The proposed processing schedule is in the Table below.

Table: Proposed Processing Schedule

Milestone Expected Completion Date

Loan fact-finding mission 8–9 May 2014 Management review meeting 27 May 2014 Loan negotiations 23–24 June 2014 Board circulation 4 September 2014 Board consideration 25 September 2014

Source: Asian Development Bank.

V. KEY ISSUES

16. Coordinating the review of the investment policies will entail intense work among national government agencies, local government representatives, and the private sector.

Appendix 1 5

BASIC PROJECT INFORMATION

Aspects Arrangements

Modality The Stepping Up Investments for Growth Acceleration Program is a policy-based program loan consisting of two subprograms.

Financing OCR $300 million loan for subprogram 1; OCR $300 million loan for subprogram 2.

COBP/RCOBP The program is (i) fully in line with pillar 1 of ADB’s 2012–2014 CPS for Indonesia (inclusive growth) and one of its focus areas for support (PPPs); (ii) included in ADB’s 2013–2014 COBP (for delivery in 2014) as Second Inclusive Growth through Improved Connectivity Program, Subprogram 1 (the change in focus, and hence of the title, and the increase in amount are in response to the government’s request); and (iii) based on the government’s request for ADB to remain engaged beyond the end of the 2012-2014 country partnership strategy for Indonesia.

Classification Sector (subsectors): Finance and public sector management Themes (subthemes): Economic growth (economic efficiency and enabling

business environment); private sector development (policy reforms, public–private partnerships); capacity development (institutional development))

Targeting classification: General intervention Gender mainstreaming category: No gender elements Location (impact): Regional (medium), urban (medium), national (high) Safeguards: C (environment), C (involuntary resettlement), C (indigenous peoples)

Risk categorization

Complex

Partnership(s)

While no cofinancing is anticipated at this time, KfW has expressed strong interest in providing cofinancing of $100 million-$200 million.

Use of a PBA Yes

Parallel PIU No

Department and division

Southeast Asia Department (SERD), Public Management, Financial Sector and Trade Division (SEPF)

Mission leader and members

R. Hattari, Public Management Economist, SEPF, SERD P. Aji, Senior Economics Officer, Indonesia Resident Mission (IRM), SERD A. Gill, Senior Country Specialist, IRM, SERD A. Haydarov, PPP Specialist, SEPF, SERD R. Lacson, Operations Assistant, SEPF, SERD N. Mardiniah, Safeguards Officer (Resettlement), IRM, SERD A. Musa, Financial Management Specialist, Office of the Director General , SERD C. Roos, Operations Assistant, IRM, SERD D. Simanjuntak, Project Officer, IRM, SERD O. Suyatmo, Procurement Officer, IRM, SERD S. Zaidansyah, Senior Counsel, Office of the General Counsel

ADB = Asian Development Bank, COBP = country operations business plan, CPS = country partnership strategy, PBA = program-based approach, PIU = project implementation unit, RCOBP = regional operations business plan. Source: Asian Development Bank.

6

Ap

pe

ndix

2

PROBLEM TREE

Low economic growth impedes achievement of development objectives

Poor coordination among central government agencies

Ineffective coordination between central/local government and

private sector

Unclear responsibility on infrastructure investment by

local governments

Unfavorable investment climate and high cost of

doing business

Low private investment in infrastructure due to lack of credible Public-

Private Partnership (PPP) project pipeline

Lack of capacity and weak institutional set-up in public procurement at central and local levels

Complex public procurement process

due to:

Low infrastructure investment by local governments due to:

Lack of central government’s cofinancing mechanisms to catalyze local government infrastructure investments

Inadequate alignment with budget execution policies

Source: Asian Development Bank

Complex regulatory

framework for direct

investments

Restrictive foreign

investment regime

Inadequate coordination on infrastructure planning and

spending between central and local governments

Weak capacity of local governments to access capital

markets for infrastructure funding

Inadequate infrastructure

Low public sector investments

Low private sector investments

Inefficient institutional PPP setup

(e.g., lack of anchor PPP center, weak PPP

capacity/systems in Government

Contracting Agencies, fragmented legislation)

One-year appointment of project management staff

Low utilization of budgeted resources for infrastructure

due to:

Complex land acquisition process

Conditional appropriations due to insufficient information on projects at budget approval stage Conducive to abuse of

objection-and-appeal process

Complex and rigid budget adjustment process

Complex regulatory

environment for doing business

Inadequate policy and operational coordination between central and

local governments

Strong role of state-owned enterprises in

infrastructure provision

Land acquisition delays

Low infrastructure investment by central government due to:

Large social transfers budget Lack of project-related debt instruments

Appendix 3 7

DESIGN AND MONITORING FRAMEWORK

Design Summary

Performance Targets and Indicators with Baselines

Data Sources and Reporting Mechanisms

Assumptions and Risks

Impact Increased investment as share of GDP

By 2019:

Gross capital formation is at least 38% of GDP (2013 baseline: 35.6%)

Central Bureau of Statistics

Assumption Macroeconomic stability maintained Risk Politically motivated actions affect reform implementation

Outcome Improved enabling environment for more private and public sector investments

By 2016: Ratio of net flows of foreign direct investment to GDP increased to at least 3% of GDP (2012 baseline: 2.2%). Public sector infrastructure investments increased to at least 3.3% of GDP (baseline: annual average in 2008–2011 was 2.4%) Private sector infrastructure investment increased to at least 1% of GDP (2011 baseline = 0.4% of GDP)

Bank of Indonesia Central Bureau of Statistics and development partner reports Central Bureau of Statistics and development partner reports

Assumption Government staying on course with key investment facilitation reforms Risks Weak coordination between government agencies Reform slowed by vested interest

Outputs 1. More predictable and open business environment

By 2016: Foreign ownership in the management and operation of transportation facilities and regular vehicle inspection increased to 49% for (2010 baseline = 0) and for seaports to 95% (2010 baseline = 49%)

Number of licenses issued by one-stop shops increased to at least 50% of all required investment licenses (2012 baseline: 20%)

Framework on private credit information bureaus established (2013 baseline: 0)

Taxpayer registration and VAT invoice processing done online (2013 baseline: 0)

Frameworks adopted for income tax allowance to promote investments (2013 baseline: 0)

At least three sector- or region-specific public–private working groups established (2013 baseline: 0)

BKPM

BKPM

BKPM

BKPM

BKPM

BKPM

Assumption Reforms implemented on time Risks Weak capacity of government agencies to implement reforms Government reorganization or reallocation of functions

8 Appendix 3

2. Diversifica-tion of modalities for infrastructure financing

By 2016: Adoption of Presidential Regulation on acceleration of delivery of priority infrastructure projects

MOF’s PPP unit and project development fund set up and adequately funded

Office for land acquisition established and operational at National Land Agency (2013 baseline: 0)

At least two PPP projects received final approval for viability gap funding

Sovereign project based sukuk issued to finance at least four infrastructure projects (2010 baseline: 0)

Frameworks adopted on project based sukuk issuance by local governments (2013 baseline: 0)

Regional infrastructure development fund operational (2012 baseline: 0)

CMEA MOF

National Land Agency

MOF

MOF MOF

MOF

Assumptions Sustained interest and ability of investors and lenders to engage in PPPs Continued political commitment to private investments in public infrastructure Risks GCAs continue using own legal frameworks for PPPs. Inadequate budget for PPP unit; PDF staff turnover at PPP unit. Weak capacity of local governments

3. Faster and more transparent public procurement

By 2016: Government Regulation on Public Procurement amended to strengthen role of procurement units and mainstream e-procurement

Absorption of state budget for public investment increased by 15% (2012 baseline: 76.5%)

All government agencies have public procurement units (2013 baseline: 230)

Number of appeal and objection cases reduced by at least 30% from 422 in 2012

Number of e-catalogued public investment commodities increased by at least 100% (2011 baseline: 2).

LKPP

MOF

LKPP

LKPP

LKPP

Assumptions Continued political commitment to public procurement reform. Fiscal sustainability Risks Vested interests undermine policy reform Government reorganization or reallocation of functions

Activities with Milestones Inputs

Item Amount

($ million)

1. More predictable and open business environment 1.1. Issue new regulation on revised negative investment list (Q2 2014) 1.2. Issue new regulation on licensing and nonlicensing of domestic and

foreign capital investments (Q4 2013) 1.3. Set up a joint inter-agency group to monitor implementation of reforms on

ease of doing business (Q1 2014) 1.4. Issue regulation on simultaneous issuance of permanent business trading

license and company registration certificate within 3 days (Q1 2014) 1.5. Issue regulation on credit information bureau establishment (Q4 2013) 1.6. Pilot online taxpayer registration and online business-to-business VAT

transactions (Q3 2013) 1.7. Expand scope of income tax allowance as investment incentive

(Q2 2014)

Subprogram 1 $300 Subprogram 2 $300 Technical assistance $1.5

Appendix 3 9

1.8. Issue evaluation report on status of implementation of the General Plan for Direct Investments, 2012–2015 (Q2 2016)

1.9. Establish sector- or region-focused public–private working groups (Q3 2015)

1.10. Issue implementing regulations and standard operating procedures for one-stop shop in a major local government (Q4 2015)

1.11. Expand online facilities for tax registration and VAT invoicing (Q4 2015) 1.12. Develop guidelines for income tax incentive to promote investments

(Q4 2015) 2. Diversification of modalities for infrastructure financing 2.1. Provide expert advice to local governments on municipal bond issuance

(Q2 2014) 2.2. Adopt plan on capacity building of local governments in debt and risk

management for municipal bond issuance (Q2 2015) 2.3. Review applications for municipal bond issuance (starting Q4 2015) 2.4. Develop RIDF concept (Q1 2014) 2.5. Approve RIDF regulation and operating guidelines (Q2 2015) 2.6. Issue national project based sukuk for two infrastructure projects (Q2

2014) 2.7. Develop framework for issuance of project based sukuk by local

governments (Q4 2015) 2.8. Complete approval of viability gap funding for two PPP projects (Q2 2014) 2.9. Issue decree on ownership of assets in geothermal PPPs (Q1 2014) 2.10. Establish office at National Land Agency for land acquisition in the public

interest (Q1 2014) 2.11. Develop manual on land acquisition in the public interest (Q2 2015) 2.12. Submit draft Presidential Decree on KPPIP for approval (Q1 2014). 2.13. Allocate funds and resources for KPPIP coordination work (Q1 2014). 2.14. Establish PPP unit at MOF and adopt operating guidelines (Q1 2015). 2.15. Conduct capacity building for PPP unit’s staff (Q2 2015). 3. Faster and more transparent public procurement 3.1. Strengthen ULPs as formal government structure to conduct public

procurement and inform budget and procurement planning (Q1 2014). 3.2. Draft amendments to public procurement regulation to strengthen ULPs,

expand use of e-procurement, and streamline appeal and objection process (Q2 2015)

3.3. Issue instruction on usage of e-procurement and e-catalogue in central government public investments (Q1 2014).

3.4. Issue regulation on introduction of e-catalogue for public investments at local government level (Q2 2014)

3.5. Pilot e-catalogue in local government for a selected number of commodities (Q4 2014)

3.6. Submit budget requests to adequately cover information technology costs related to rollout of e-procurement and e-purchasing systems (Q3 2014 and onward)

3.7. Develop for approval a proposal on professionalization of public procurement work in the government (Q2 2016)

3.8 Assess capacity of line ministries, agencies, and local governments, and benchmark their performance in public procurement (Q4 2015).

CMEA = Coordinating Ministry of Economic Affairs, GCA = Government Contracting Agencies, GDP = gross domestic product, KKPPI = Policy Committee for Acceleration of Infrastructure Delivery, LKPP = National Public Procurement Agency, MOF = Ministry of Finance, PDF = Project Development Facility, PPP = public–private partnership, Q = quarter, RIDF = Regional Infrastructure Development Fund, ULP = procurement service unit, VAT = value-added tax. Source: Asian Development Bank.

10 Appendix 4

PROJECT PREPARATORY TECHNICAL ASSISTANCE A. Justification

1. The objectives of the project preparatory technical assistance (TA) are to support the Government of Indonesia in designing and implementing reforms under subprogram 2 of the proposed Stepping Up Investments for Growth Acceleration Program, and to boost the capacity of implementing agencies to undertake the proposed reforms. The scope of the TA parallels the components of the program as presented in the preliminary design and monitoring framework (Appendix 3), i.e., activities to (i) reform the investment climate and public procurement, and (ii) diversify infrastructure financing. B. Major Outputs and Activities

2. The final outcome of the TA will be a well-designed, successfully implemented subprogram 2. The PPTA will help the Investment Coordinating Board (BKPM) implement policy actions that will further improve ease of doing business, and to conduct a diagnostic and technical review of the government’s supply-side tax policies. 3. Under output 2, the TA will introduce different infrastructure financing modalities via state budget and capital market to provide financing for local infrastructure projects. The TA will assist the Ministry of Finance in developing the Regional Infrastructure Development Fund (RIDF) and will also assist the government and other relevant stakeholders Indonesia Financial Services Authority (OJK) and Indonesia Stock Exchange (BEI) in introducing a project bond. 4. Under output 3, the TA will assist the government in improving the e-government procurement system by ensuring that its components are integrated under one entity. Second, it will help build procurement capacities and competencies of National Public Procurement Agency (LKPP) staff. Third, the TA will assist the government in improving the regulatory and legal framework of procurement by developing regulatory and legal instruments and implementing guidelines. C. Cost Estimate and Proposed Financing Arrangement

5. The total TA cost is estimated at $1,650,000 equivalent, of which $1,500,000 will be financed on a grant basis by the Asian Development Bank (ADB) Technical Assistance Special Fund (TASF-other sources). The government will contribute office space, transport, national staff per diem, and communications as allowed by the executing agency’s budget. Assets required for TA implementation will be procured under ADB’s Procurement Guidelines (2013, as amended from time to time). The detailed cost estimate is presented in Table A4.1.

Table A4.1: Cost Estimates and Financing Plan ($1,500,000)

Item Total Cost

Asian Development Banka

1. Consultants a. Remuneration and per diem

i. International consultants (21 person-months) 650.0 ii. National consultants (30 person-months) 350.0

b International and local travel 90.0 c. Reports and communications 60.0

Appendix 4 11

Item Total Cost

2. Equipment (e.g., computer, printer)b 60.0

3. Workshops, training, seminars, and conferencesc

a. Facilitators 50.0 b. Training program 150.0

4. Miscellaneous administration and support costs 20.0 5. Representative for contract negotiations 20.0 6. Contingencies 50.0

Total 1,500.0 a Financed by the Asian Development Bank's Technical Assistance Special Fund (TASF-other sources).

b Equipment

Type Quantity Cost

Servers 2 $60,000

c Workshops, training, seminars, and conferences

Purpose Venue

Training for project selection for central government and selected local governments

Different locations+ $50,000

Training for local governments’ DMO staff Different locations $50,000 E-learning for International Certification on Procurement

LKPP $10,000

Training for International Certification in Procurement and Supply Operations

Australia $50,000

Workshop on Procurement in Global Market Jakarta $10,000 Workshop on best international experiences on municipal bond

Different locations $20,000

Workshop on credit enhancements for local governments

Different locations $10,000

DMO = Debt Management Office, LKPP = Lembaga Kebijakan Pengadaan Barang/Jasa Pemerintah (National Public Procurement Agency) Source: Asian Development Bank.

D. Consulting Services

6. TA will be provided by a firm recruited through quality- and cost-based selection, indicatively including 21 person-months of international consultant inputs, and 30 person-months of national consultant inputs. ADB will select and engage consultants in accordance with its Guidelines on the Use of Consultants (2013, as amended from time to time). Some of the contingency funds will remain unallocated and can be used for individual consultants to be determined as needed. Upon TA completion, equipment procured under it will be transferred to the executing agency. The consultants’ terms of reference are outlined in paras. 7–18.

Table A4.2: Summary of Consulting Services Requirement Positions Person-Months Required

International 1. Project Manager 3 2. Financial sector specialist—infrastructure and project finance 3 3. Public finance specialist—fiscal decentralization 3 4. Public sector management specialist—public investment 3 5. E-government procurement development specialist 3 6. Public finance specialist—tax policies 3 7. Investment climate specialist 3

12 Appendix 4

National 1. Financial sector specialist—infrastructure and project finance 6 2. Public finance specialist—fiscal decentralization 6 3. Public sector management specialist—public investment 6 4. E-government procurement development specialist 6 5. Investment climate specialist 6

Source: Asian Development Bank.

7. Project manager (international, 3 person-months [pm], intermittent). The consultant will represent the consulting firm in all matters related to contract administration, such as regular reporting per agreed format, technical performance, and consultant travel planning. He/she will have a postgraduate degree in business administration, economics, finance, or another related field and at least 10 years of project management experience. 8. Financial sector specialist—infrastructure and project finance (international, 3 pm, intermittent). The expert will support the development or improvement of regulatory and institutional frameworks to facilitate the participation of the bank and nonbank finance sector in infrastructure finance. He/she will have a Master degree in finance or other relevant field and at least 15 years of relevant experience in the infrastructure project finance. 9. Financial sector specialist—infrastructure and project finance (national, 6 pm, intermittent). The expert will support the development or improvement of regulatory and institutional frameworks to facilitate the participation of the bank and nonbank finance sector in infrastructure finance. He/she will have at least a Bachelor degree in finance, or other relevant field and at least 10 years of relevant experience in infrastructure project finance in Indonesia. Excellent/good knowledge of written and spoken English is a must. 10. Public finance specialist—fiscal decentralization (international, 3 pm, intermittent). The expert will advise the government on the development of funding mechanisms to facilitate an increase of infrastructure investments needs by local governments, taking into account best international practices and Indonesia’s decentralization. He/she will have a Master degree in public administration or other relevant field and at least 15 years of relevant experience in the local government finance and intergovernmental fiscal relations. 11. Public finance specialist—fiscal decentralization (national, 6 pm, intermittent). One national expert will be recruited to support the international public finance specialist in advising the government on the development of funding mechanisms to facilitate an increase needs for infrastructure investments by local governments, taking into account best international practices and Indonesia’s decentralization. He/she will have a Bachelor degree in economics or other relevant field and at least 10 years of relevant experience in the local government finance in Indonesia. Excellent/good knowledge of written and spoken English is a must 12. Public sector management specialist—public investment (international, 3 pm, intermittent). One international expert will be recruited to advise central and selected local governments on the development or improvement of regulatory frameworks for public infrastructure investment. He/she will have a Master degree in economics or other relevant field and at least 15 years of relevant experience in public investment planning in a government agency or multinational institutions supporting public investments. 13. Public sector management specialist—public investment (national, 6 pm, intermittent). One national expert will be recruited to support the international public sector

Appendix 4 13

management specialist to advise central and selected local governments on the development or improvement of regulatory frameworks for public infrastructure investment. He/she will have a minimal of Bachelor degree in economics or other relevant field and at least 10 years of relevant experience in public investment planning in a government agency in Indonesia. Excellent/good knowledge of written and spoken English is a must. 14. E-government procurement development specialist (international, 3 pm, intermittent). One international expert will be recruited to assist LKPP in integrating its current web-based procurement process, such as e-procurement and e-purchasing, into a single web application. He/she would need to have a minimal degree of bachelor in IT or related field, at least 10 years hand-on experience on management and IT development supports. 15. E-government procurement development specialist (national, 6 pm, intermittent). One national expert will be recruited to assist LKPP in integrating its current web-based procurement process, such as e-procurement and e-purchasing, into a single web application. He/she would need to have a minimal degree of bachelor in management, business, IT, or related field, at least 10 years hand-on experience on IT development supports. 16. Investment climate specialist (international, 3 pm, intermittent). One international expert will be recruited to provide inputs to the government on how to improve the investment climate. He/she must have a minimal of master degree qualifications in a related discipline such as economics with more than 10 years experience. 17. Investment climate specialist (national, 6 pm, intermittent). One national expert will be recruited to assess country’s current investment climate. He/she must have a minimal of master degree qualifications in a related discipline such as business or public policy or economics with more than 10 years experience. 18. Public finance specialist—tax policies (international, 3 pm, intermittent). One international expert will be recruited to conduct a diagnostic and technical review of the current General Tax Provision and Procedures and Income Tax Laws. He/she must have a minimal of master degree qualifications in a related discipline such as public policy or economics with more than 10 years of experience. E. Implementation Arrangements

19. The executing agency for the TA will be the Coordinating Ministry of Economic Affairs; the BKPM, Directorate General of Fiscal Balance of Ministry of Finance (MOF), Government Investment Agency of the MOF, and National Public Procurement Agency will be the implementing agencies. The TA is expected to start in November 2014 and be completed by November 2016. Disbursements under the TA will be done in accordance with ADB’s Technical Assistance Disbursement Handbook (2010, as amended from time to time). The proposed TA processing and implementation schedule is listed in Table A4.3.

Table A4.3: Technical Assistance Processing and Implementation Schedule Major Milestones Expected Completion Date

Approval June 2014 Inception October 2014 Consultants’ reports October 2014–August 2016 Technical assistance financial closure September 2016

Source: Asian Development Bank.

14 Appendix 5

INITIAL POVERTY AND SOCIAL ANALYSIS

Country: Indonesia Project Title: Stepping Up Investments for Growth Acceleration Program

Lending/Financing Modality:

Policy-Based Program Loan Cluster

Department/ Division:

Southeast Asia Department/Public Management, Financial Sector, and Trade Division

I. POVERTY IMPACT AND SOCIAL DIMENSIONS

A. Links to the National Poverty Reduction Strategy and Country Partnership Strategy: The National

Medium-Term Development Plan, 2010–2014 focuses on ensuring poverty reduction through higher, sustainable, and inclusive economic growth; improving the quality of the public sector; fostering democratic development; and strengthening the rule of law. The plan aims to reduce the incidence of poverty from 14.1% in 2009 to 8%–10% in 2014. For that purpose, three national priorities are defined. First is creating a sustained period of pro-poor growth to provide productive employment for the poor through an improved business environment, budget support for infrastructure, and public investment in agriculture. The plan targets average economic growth of 6.3%–6.8% per annum, which would boost the gross domestic product per capita from $2,555 in 2010 to $3,811 by the end of 2014. Second is empowering the poor to break the cycle of poverty through affirmative action that will (i) strengthen social services and social protection by expanding the national health security program (Jamkesmas), the conditional cash transfer program (Family Hope Program), and scholarships for the children from poor households; (ii) empower communities to escape from poverty by increasing support to the National Community Empowerment Program (PNPM Mandiri); and (iii) upgrade the capacity of micro, small, and medium-sized enterprises and cooperatives through an entrepreneurship and capacity-building program and by expanding the people-based Small Business Loan Program. Third is improving the effectiveness of poverty reduction programs through better coordination and targeting; upgrading local capacity to undertake poverty reduction programs, especially in the provinces and districts with the highest incidence of poverty; and adjusting fiscal policy instruments to support local governments in combating poverty and providing community services. The country poverty assessment and country partnership agreement

a consider macroeconomic stability to be the

fundamental underpinning to poverty reduction and call for expanding and improving such key basic services as health, education, water supply, and sanitation through public–private partnerships. They point to the need to expand the system of social protection. The country diagnostic study

b cites macroeconomic stability as prerequisite to poverty

reduction and defines three critical constraints on inclusive growth: (i) inadequate and poor quality infrastructure, (ii) weaknesses in governance and institutions, and (iii) unequal access to education and its poor quality. The program supports the government’s measures to accelerate the country’s economic growth by improving the business and investment climate, encouraging more infrastructure investment, and improving the governance framework for more public investment.

B. Targeting Classification:

General Intervention Individual or Household (TI-H) Geographic (TI-G) Non-Income MDGs (TI-M1, M2, etc.)

The greatest impact of the proposed program loan will be an increase in private investments through a more open and conducive investment climate and an improvement in public capital spending through a better public procurement process. The program loan will not target any specific population segment or geographic area, although parts of the program may have a positive impact on the rural poor.

C. Poverty and Social Analysis 1. Key issues and potential beneficiaries. While poverty and unemployment have trended downward, many

Indonesians remain vulnerable to economic shocks. More than 60 million still live just above the poverty line and are at high risk of falling back into poverty. The national rural poverty rate of 15.6% is still much higher than the national urban poverty rate of 9.1%. About 30% of the employed live below the poverty line. Poverty rates in some provinces in eastern Indonesia are much higher than elsewhere in the country (for example, 25.3% in Maluku and Papua). Reducing the country’s multidimensional poverty will require not only accelerated economic growth but also more inclusive growth that provides poor and disadvantaged regions with better economic opportunity and access to social services

2. Impact channels and expected systemic changes. Empirical studies have supported the notion that

improvements to investment climate and infrastructure directly relate to poverty reduction. As for the investment climate, the evidence is clear—there is a positive correlation between improvements in doing business and the

Appendix 5 15

poverty rate. There is also a direct causal relationship between an improved investment climate and poverty reduction. A more conducive investment climate will lead to more investment and thus will have a positive impact on poverty reduction. In a similar vein, a recent International Monetary Fund working paper shows that better infrastructure, both in quantity and quality, improves income distribution. This result, along with the proven role of infrastructure in enhancing productivity and growth, suggests that infrastructure development can have double effects on poverty reduction and inclusive growth.

3. Focus of (and resources allocated in) project preparation or due diligence. Two aims of the proposed project

preparatory technical assistance are to verify the impact of a better investment climate on the participation of small and medium-sized enterprises (SMEs) in the economy, and the impact of diversified infrastructure financing modalities on infrastructure projects and thus on the community.

4. Specific analysis for policy-based lending. The transmission channel through which the program affects poverty

reduction is through providing more opportunity for people to work as more direct investments occur, and also through improved infrastructure. Program impact is high, leading to economic growth that is expected to occur over the medium (4–10 years) to long term. However, more immediate reforms—e.g., the easing of restrictions on foreign investment and on starting businesses, improvement in the organizational structure of public–private partnerships, and introduction of a new financing modality for infrastructure—should have a short-term (1–3 years) impact.

II. GENDER AND DEVELOPMENT

1. What are the key gender issues in the sector/subsector that are likely to be relevant to this project or program? – Not applicable 2. Does the proposed project or program have the potential to make a contribution to the promotion of gender equity and/or empowerment of women by providing women’s access to and use of opportunities, services, resources, assets, and participation in decision making?

Yes No – The policy actions supported under the program may have indirect gender impacts through an increase of business and infrastructure investments, which will benefit women and men equally. Overall, improved infrastructure, especially in rural areas and disadvantaged regions, will likely improve women’s access to better economic opportunities.

3. Could the proposed project have an adverse impact on women and/or girls or widen gender inequality? Yes No

4. Indicate the intended gender mainstreaming category: GEN (gender equity theme) EGM (effective gender mainstreaming) SGE (some gender elements) NGE (no gender elements)

III. PARTICIPATION AND EMPOWERMENT

1. Who are the main stakeholders of the project, including beneficiaries and negatively affected people? Identify how

they will participate in the project design.

Consultations with the government were held before and during program processing by way of missions to conduct policy dialogue with stakeholders. Potential primary beneficiaries are SMEs (investment climate and public procurement reforms) and the general population (infrastructure improvement). The poor will benefit from better employment opportunities and better access to and use of infrastructure services, particularly in rural and disadvantaged areas.

2. How can the project contribute (in a systemic way) to engaging and empowering stakeholders and beneficiaries, particularly, the poor, vulnerable and excluded groups? What issues in the project design require participation of the poor and excluded?

– The program content is based, in part, on some of the empirical findings on the impact of

increased private participation and infrastructure on achievement of inclusive growth.

3. What are the key, active, and relevant civil society organizations in the project area? What is the level of civil

society organization participation in the project design? – Not applicable.

Information generation and sharing Consultation Collaboration Partnership

4. Are there issues during project design for which participation of the poor and excluded is important? What are they and how shall they be addressed?

Yes No

IV. SOCIAL SAFEGUARDS

A. Involuntary Resettlement Category

A B C FI

1. Does the project have the potential to involve involuntary land acquisition resulting in physical and economic displacement? Yes No

2. What action plan is required to address involuntary resettlement as part of the PPTA or due diligence process?

Resettlement plan Resettlement framework Social impact matrix

Environmental and social management system arrangement None

16 Appendix 5

B. Indigenous Peoples Category A B C FI

1. Does the proposed project have the potential to directly or indirectly affect the dignity, human rights, livelihood systems, or culture of indigenous peoples? Yes No 2. Does it affect the territories or natural and cultural resources indigenous peoples own, use, occupy, or claim, as their ancestral domain? Yes No

3. Will the project require broad community support of affected indigenous communities? Yes No 4. What action plan is required to address risks to indigenous peoples as part of the PPTA or due diligence process?

Indigenous peoples plan Indigenous peoples planning framework Social Impact matrix Environmental and social management system arrangement

None

V. OTHER SOCIAL ISSUES AND RISKS

1. What other social issues and risks should be considered in the project design? – Not applicable.

Creating decent jobs and employment Adhering to core labor standards Labor retrenchment

Spread of communicable diseases, including HIV/AIDS Increase in human trafficking Affordability

Increase in unplanned migration Increase in vulnerability to natural disasters Creating political instability Creating internal social conflicts Others, please specify __________________

2. How are these additional social issues and risks going to be addressed in the project design? – Not applicable.

VI. PPTA OR DUE DILIGENCE RESOURCE REQUIREMENT

1. Do the terms of reference for the PPTA (or other due diligence) contain key information needed to be gathered during PPTA or due diligence process to better analyze (i) poverty and social impact; (ii) gender impact, (iii) participation dimensions; (iv) social safeguards; and (v) other social risks. Are the relevant specialists identified?

Yes No

2. What resources (e.g., consultants, survey budget, and workshop) are allocated for conducting poverty, social and/or gender analysis, and participation plan during the PPTA or due diligence? – Not applicable

a ADB. 2012. Country Partnership Strategy: Indonesia, 2012–2014. Manila.

b Hill, H., M.E. Khan, and J. Zhuang 2012. Diagnosing the Indonesian Economy. ADB.