Document ofThe World Bank

FOR OFFICIAL USE ONLY

Report No: 20538-IND

IMPLEMENTATION COMPLETION REPORT(CPL-37320; SCL-3732A; SCPD-3732S)

ON A

LOAN

IN THE AMOUNT OF US$101.5 MILLION EQUIVALENT

TO THE

REPUBLIC OF INDONESIA

FORA

FIFTH KABUPATEN ROADS PROJECT

June 29, 2000

Transport Sector UnitEast Asia and Pacific Regional Office

This document has a restricted distribution and may be used by recipients only in the performance of theirI official duties. Its contents may not otherwise be disclosed without World Bank authorization.

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CURRENCY EQUIVALENTS

(Exchange Rate Effective As of April 1994)

Currency Unit = Rupiah (Rp)Rp 1 million = US$ 475

US$ 1.00 = Rp2,105

FISCAL YEARApril 1- March 31

ABBREVIATIONS AND ACRONYMSBappenas National Development Planning AgencyBangda Provincial, Kabupaten Regional Development AgencyCTC Central Technical ConsultantsDati II Block Grant on Per Capita BasisDGH Directorate General of HighwaysDGRID Directorate General of Regional Infrastructure DevelopmentDPUK Kabupaten Office of Public WorksFCI Field Consultants for ImplementationICR Implementation Completion ReportingGOI Government of IndonesiaEM Environmental AssessementEMS Equipment Management SystemERR Economic Rate of RetunInpres Central Government Grant to Local GovernmentsISEM Institutional Strengthening in Environmental ManagementKEWMI Kabupaten Equipment and Workshop Management ImprovementKRMTP Kabupaten Roads Master Training PlanKR3,KREI, KR5 Bank-fnanced Kabupatern Roads Development ProjectsLIWP Labor Intensive Works ProgramMEIIP Monitoring and Evaluating Impacts of Kabupaten Roads on Isolated PeopleREPELITA Indonesian Five Year Development PlanSAR Staff Appraisal ReportSPEMPC Strengthening Provincial Environmental and Management and Planning

Capability

Vice President: Jemal-ud-din Kassum, EAPVPCountry Manager/Director: Mark Baird, EACID

Sector Manager/Director: Jitendra N. Bajpai, EASTRTask Team Leader/Task Manager: Hatim M. Hajj, EASTR

FOR OFFICIAL USE ONLY

CONTENTS

Page No.1. Project Data 12. Principal Performance Ratings 23. Assessment of Development Objective and Design, and of Quality at Entry 24. Achievement of Objective and Outputs 55. Major Factors Affecting Implementation and Outcome 126. Sustainability 137. Bank and Borrower Performance 158. Lessons Learned 169. Partner Comments 1910. Additional Information 19Annex 1. Key Performance Indicators/Log Frame Matrix 20Annex 2. Project Costs and Financing 22Annex 3. Economic Costs and Benefits 31Annex 4. Bank Inputs 34Annex 5. Ratings for Achievement of Objectives/Outputs of Components 36Annex 6. Ratings of Bank and Borrower Performance 37Annex 7. List of Supporting Documents 3 8Annex 8.Borrower's Contribution 40

This document has a restricted distribution and may be used by recipients only in theperformance of their official duties. Its contents may not be otherwise disclosed withoutWorld Bank authorization.

Project ID: P004020 Project Name: KABUPATEN ROADS VTeam Leader: Hatim M. Hajj TL Unit. EASTRICR Type: Core ICR Report Date: July 5, 2000

1. Project Data

Name: KABUPATEN ROADS V L/C/TF Number: CPL-37320;SCL-3732A;SCPD-3732S

Country/Department: INDONESIA Region: East Asia and PacificRegion

Sector/subsector: TR - Rural Roads

KEY DATESOriginal Revised/Actual

PCD. 04/01/93 Effective. 08/29/94 08/01/94Appraisal: 07/29/93 MTR: 04/01/96 04/19/96Approval: 05/17/94 Closing: 06/30/99 12/31/99

Borrower/Implementing Agency: Kabupaten Office of Public Works (DPUK), Provincial Office of Public Works(DPUP), Directorate General of Highways (DGH), Ministry of Public Works(MPW), Ministry of Home Affairs (MNHA), Ministry of Finance (MOF), NationalDevelopment Planning Agency (BAPPENAS)/MIMSTRY OF PUBLIC WORKS -DIRECTORATE GENERAL OF HIGHWAYS

Other Partners: International Labor Organization (ILO), USAID

STAFF Current At AppraisalVice President: Jemal-ud-din Kassum Gautam KajiCountry Manager: Mark Baird Marianne HaugSector Manager: Jitendra N. Bajpai Anupam KhannaTeam Leader at ICR: Hatim M. Hajj Emmanuel JarnesICR Primary Author. Ephrem Asebe; Hatim M. Hajj

2. Principal Performance Ratings

(HS=Highly Satisfactory, S=Satisfactory, U=Unsatisfactory, HL=Highly Likely, L=Likely, UN=Unlikely, HUN=HighlyUnlikely, HU=Highly Unsatisfactory, H=High, SU=Substantial, M=Modest, N=Negligible)

Outcome: S

Sustainability: L

Institutional Development Impact: SU

Bank Performance: S

Borrower Performance: S

QAG (if available) ICRQuality at Entry: S

Project at Risk at Any Time. No

3. Assessment of Development Objective and Design, and of Quality at Entry

3.1 Original Objective:3.1.1. The main objectives of the project as stated in the SAR (Report No. 12671-IND, April 19,1994) were to: (a) improve access and particularly quality of road to the main economic centersfor the agriculture-dependent rural population in the 27 project Kabupatens, located in Riau,Maluku, and Central, East and South Kalimantan; and (b) enhance the capability of GOI agenciesthat manage the development of Kabupaten roads.

3.1.2. The project was the fifth in a series of rural road projects the Bank financed in Indonesiastarting in the early 1980s. The project objectives were clear and realistic, initially dealing withonly 27 Kabupatens compared to 73 Kabupatens for the Third and to 51 Kabupatens for EasternIndonesia (Fourth) Kabupaten Roads Project. The two main project objectives were alsomutually reinforcing. To improve the quality of the civil work on a sustainable basis, the projectenhanced staff capability, institutional arrangements and capacity for planning and implementationof the Kabupaten road programs. To minimize the risks related to the implementation of theplanning procedures, timely funding of road maintenance, and the quality of works, projectimplementation responsibility was assigned to the Kabupatens whereas the coordination role wasretained by the central agencies. Accordingly, the project was somewhat complex and demandingfor the implementing agencies, involving the coordination of a wide range of institutions,stakeholders, policies, and loan covenants for implementation arrangements in these Kabupatens.The project objectives were important to the country's regional development strategy, whichaimed at promoting economic and social integration of the outlying regions as outlined in theGovernment's five-year development plan (REPELITA VI). The project objectives were also inline with the Bank's objective of poverty alleviation as specified in the country CAS (April 1994).The CAS supported development in the sub-sector with focus on reducing poverty throughimproved access; more efficient use of GOI's budget allocated to Kabupaten roads andstrengthened technical and institutional capacity particularly where subsector was lacking localcapacity.

3.2 Revised Objective:The main objectives of the project are: (i) to improve the quality and capacity of the roadnetworks in selected Kabupatens on a sustainable basis; (ii) to enhance the capabilities of GOIagencies that manage the development of Kabupaten roads, and (iii) help reduce poverty throughimplementation of labor intensive works for routine and periodic maintenance of roads.Implementation of the project would provide improved rural access to the main economic centersin the 27 Kabupatens located in Riau, Maluku, and Central, East and South Kalimantan Provinces.

3.3 Original Components:3.3.1. As stated in the SAR, the two major components were: (a) a road network improvementcomponent comprising: (i) routine and periodic maintenance of the Kabupaten road network aswell as rehabilitation/improvement of selected roads in the 27 project-assisted Kabupatens overthree GOI fiscal years starting in 1994/1995; (ii) construction of, and equipment for, workshopsand laboratories; (iii) provision of equipment, spare parts, and supplies; and (iv) supervision ofworks; and (b) technical assistance and studies for strengthening systems and procedures for

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planning, environmental analysis, implementation of Kabupaten road works, and helping GOIcentral agencies in monitoring project execution.

3.3.2. The Project is the last in the series of Bank financed rural roads projects. What isinteresting about the design of the Kabupaten roads program series with respect to theinstitutional aspect is that the issues raised in each project do not overlap but compliment thenationwide Kabupaten road sub-sector program. For example, the Fifth Kabupaten Roads Project(KR5) focused on: Kabupaten Equipment and Workshop Management Improvement (KEWMI)and Strengthening Provincial Environmental Management and Planning Capability (SPEMPC).On the other hand, the East Indonesia (Fourth) Kabupaten Roads Project (KREI) focused onInstitutional Strengthening of Environmental Management (ISEM) and Monitoring, EvaluatingImpacts of Kabupaten Roads on Isolated People (MEIPP) and in the use of improved technologysuch as bitumen emulsion, natural asphalt and soil stabilization. The Third Kabupaten RoadsProject (KR3) and the previous two Rural Roads Projects, undertook systematic technical studiesin planning, survey, evaluation, prioritization, design, technical audit and monitoring; and use ofnew technologies such as bitumen emulsions, and development of Kabupaten Master TrainingPlan. Loan covenants were designed to reinforce quality assurance and resource allocationaspects where lessons of experience had shown these two to be major areas of concern forsustainability of Indonesian Kabupaten road networks. Building administrative and financialcapacities were given particular attention in the projects as successful implementation required thecoordination of several agencies at central, provincial, and Kabupaten levels of government.

3.4 Revised Components:The major change in project components was the use of savings under the Project for LaborIntensive Works Program (LIWP). The loan was amended after considerable delays on February23, 1999 to fund about 3,000 km of routine maintenance and the rehabilitation of about 1,500 kmof roads using labor intensive methods. The aggregate amount allocated to routine maintenancewas equivalent to US$8,200,000. The change in the method of construction was to increase thelabor content of civil works while striving to maintain as far as possible the quality of the worksand improving access to the main economic centers for the agriculture dependent rural populationin the project Kabupatens.

3.5 Quality at Entry:3.5.1. Quality Assurance Group (QAG) review was not available at the time of preparation ofthis project. The ICR assesses quality at entry as satisfactory. The project objectives wereconsistent with the overall Bank goal of poverty reduction. The CAS (April 24, 1994) supportedinstitutional capacity building and efficient use of resources in the sub-sector, while giving highpriority to road maintenance and sustainable improvement. The Project objective was alsoconsistent with the GOI's REPELITA VI, which gave special attention to regional development.The quality of the project design was sound. The risk assessment, short of foreseeing the financialcrisis, was realistic. The main anticipated risks were related to implementation of the planningprocedures, the funding of the maintenance and the quality of works. To mitigate the risks due toinadequate funds, agreements were reached with Bappenas to play a strong coordinating role andto the use of Inpres funds. Maintenance targets were carefully designed starting with 50% of the

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maintainable roads in the first year of effectiveness, 70% in the second year and 90% in the thirdyear of the program. Lower targets of 35%, 50% and 65% were set for Kabupatens that had tospend more than 30% of their Inpres Dati II and BPJD II funds for road maintenance. Also,adequacy of maintenance by each Kabupaten was made a condition of its participation in theProject's subsequent annual rehabilitation/ improvement programs. The risks related to quality ofworks was to be reduced by extensive technical assistance for implementation support providedunder the project.

3.5.2. The original project design focussed on inputs and processes as the main risks in achievingproject objectives and consequently the selected performance indicators were related to:implementation of the planning procedures, the funding of the maintenance and the quality ofworks. Starting, in October 1998, a retrofitting exercise was carried out and the newperformance indicators were aligned more closely with the project objectives in a way thatfacilitates evaluation of final project outcome and impact. The project risk assessment was righton target. It saw the risks to be related to implementation of the planning procedures and thefunding of maintenance. Expectation of the traffic growth during the period of implementationwas realistic until the situation radically changed due to the economic crisis.

4. Achievement of Objective and Outputs

4.1 Outcome/achievement of objective:4.1.1. Overall Assessment. The project outcome/achievement/ is assessed as satisfactory. Theproject has substantially achieved both development objectives within budget and with anextension of only six months. The six month extension was primarily due to undertaking LaborIntensive Works Program (LIWP) financed from project savings. The LIWP had positive impactsthrough employment generation and support to local contractors, thereby, mitigating the impactof the economic crisis on the working poor. Substantial economic benefits have been achievedunder the project from the investment in civil works. Travel time and other traffic costs havesignificantly decreased. The expected economic benefit of the investment in road betterment interms of net present value is positive (Annex 3), even at the lower traffic growth rate of 4% whichis significantly lower than the appraisal estimate of 7.5% per annum. On the institutional front,Kabupaten planning guidelines are now being used in projects not funded by the Bank. Although,staff retention is poor due to weak incentives, staff had formal extensive on-the-job training andexposure to quality works. Equipment management system have been introduced. In the case ofworkshops for equipment maintenance Unit Swadana (self-management unit) and economic hirerates have been pilot tested. Environmental guidelines have been further developed. The project,is therefore, likely to achieve substantial development results, provided, the economy continues torecover from the impact of the economic crisis and the Government allocates adequate funds forroad maintenance and undertakes follow-on activities on the institutional front.

4.2 Outputs by components:A. Physical Component

4.2.1. Overall Assessment. Overall achievement of outputs of the physical components isassessed as satisfactory, as evidenced in Table 1.

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4.2.2. Road Improvement. (Table 1). Although the quality of construction has remainedproblematic, achievement of improved access to main economic centers, measured in terms ofmeeting physical targets, was highly satisfactory. 1,810 km of roads were rehabilitated in the 27Kabupatens between 1994 and 1999. The physical output exceeded the appraisal target of 1620km. The above also include 108 km road rehabilitated in ex-USAID Kabupatens. Further,another 720 km of betterment works were undertaken in Kabupatens in West and Central JavaProvinces. However, the target for LIWP betterment works was less than targeted.

4.2.3. Maintenance (Table 1). With respect to routine and periodic maintenance, the targets forthe first, second and third year were 50%, 70% and 90% of maintainable road networkrespectively. As evidenced from Table 1, in the first two years achievements were below targetsand substantially on target in subsequent years. Also, the "maintenance first policy" of Kabupatenroad program was substantially enforced during implementation. Moreover, under LIWP anadditional 3,232 km of Kabupaten roads received maintenance in Central and West Javaprovinces in line with the maintenance policy. The maintenance result was 8% above the target.

4.2.4. Road Network Improvement (Tables 1 and 2, and Annex 1: Table 1). As a result of thephysical achievements noted above, the overall condition of the road network has significantlychanged in absolute terms. The road in good and fair condition has increased from 237 km perKabupaten in 1991 to 290 km per Kabupaten by 1999, an increase of 22% or 2.5% per annum.The average road length per Kabupaten increased from 643 km in 1991 to 1,071 km in 1999, anoverall increase of 67% or annual average rate of growth of 6.6%. This indicates that the overallroad network improvement under the project was significantly small compared to the totaladdition to the KR5 roads network.

Table 1: Road Network Improvement and Maintenance Targets & Achievement

Year Maintenance Rehabilitation/Betterment

SAR Target Achievement SAR AchievemeTarget nt (km)s (km!i

% of Equivalent Total Periodic RoutinMaintainable to km (km) (km) e (km)

Network 6,400km

1994/95 50 3,200 3.101 794 2.307 5101995/96 70 4,480 4,172 866 3,306 5721996/97 90 5.760 8.037 1.580* 6.457* 705*1997/98 2,227 463 1,764 2211998/99 1.535 .535 0 01994/99** 1 620_ _ 1.810

LIWP 3,000 3,232 - 3,232 1,500 720

(98/99)

*Includes woks in ex-USAID Kabupatens in NTr and South Sulawesi **Total achieved between 1994 and 1999Sources: Final Report April 22,1999, DHV Consultants BV. and GOI.

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4.2.5. Labor Intensive Works Program. (Table 2). The extensive LIWP is the element thatdistinguishes KREI and KR5 from previous rural roads projects financed by the Bank. UnderKR5, the Kabupaten roads benefited from the government policies and actions which supportedworks with a high labor content. The works provided employment opportunities in areas thatwere hit hard by the economic crisis. The guidelines for utilization of the savings from the projectfor financing LIWP were: (a) a minimum labor content of 70% for routine maintenance and 30%for periodic maintenance, and (b) a program comprising at least 3 km under routine maintenancefor every 1 km under rehabilitation/betterTnent. These targets clearly were over optimistic,particularly, given the significant depreciation of the Rupiah which tended to reduce the relativeshare of the domestic input costs to the total construction cost.

Table 2: Labor Intensive Program Achievement

Province Contracts (Rp. Million)(No. ofkabupatens Rout neMainterance Better entIrehabi itationparticipating Cost Labor Km Cost Labor Kmroad share % share %maintenance)

West Java (20) 12,653 29.6% 2.138 13.436 28.4%. 269.5Central Java (29) 10,786 22.1% 1,094 19,840 20.1% 464.1Total 23.439 26.1% 3.232 33,276 23.5% 733.6

4.2.6. Overall, LIWP performance in terms of the physical targets was highly satisfactory.About 4.4 km of roads were maintained for every 1 km of road rehabilitated which exceeds theset minimum of 3.0. However, in terms of the labor content, estimated as percentage of laborcost to the total contract price, achievement was below expectation. The average labor share forroutine maintenance was 26.1%. In none of the 49 Kabupatens did labor share of total subprojectconstruction cost exceeded 70% and in only 5 Kabupatens labor cost share was over 40%. Forrehabilitation subprojects, one Kabupaten attained a labor content of over 70%. The average was23.5% and only 4 Kabupatens attained an average labor content of over 40% of the total contractpnce.

4.2.7. Under LIWP, the cost of routine maintenance averaged about Rp 7.3 million per km whilerehabilitation averaged Rp 46.2 million per km. This average unit cost of routine maintenance isalmost constant in US Dollar terms but is about 33% higher in real terms (with inflation of about120%) than before the crisis (Rp. 3 million/kin) - under LIWP. This was due to the highercontent of expensive tasks such as masonry work and pavement patching which tended to beneglected under previous works. The average cost of gravel road rehabilitation was almostconstant in real terms but decreased by about 40% in US Dollar terms. Such cost reductionsresulted from some reductions in construction standards and materials but these are notrecommended for general Kabupaten use. Under LIWP, kabupatens chose a minimum cover ofgravel which usually consisted of local river gravel (sirtu) that remained at the same nominal costbetween 1997 and 1999. The non-LIWP works generally involved use of two layers of crushedaggregate basecourse which is more expensive than sirtu but has superior performance.

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B. Institutional Component

4.2.8. Overall Assessment. (Annex 1 :Table 1). The institutional components were directedprimarily towards improving the quality of the road networks; and achievements of outputs ofinstitutional component are assessed as substantial as measured by the performance indicatorsnoted below.

4.2.9. Kabupaten Roads Programs Planning. The outputs were measured in terms of aretrofitted composite performance indicator. The final version of this indicator consisted of fivefactors - continuity ofplanning staff, analytical capability, utilization of data in program,planning study coverage, and use of the planning area concept. Retrofitted performancemeasures of GOI agencies, showed that significant progress has been made - from a base of 50%(1994) to 52% (1997) and 80% (1999). Kabupaten roads program planning, engineering,maintenance and environmental guidelines for Kabupaten roads developed under the Kabupatenprogram to improve the technical environment for planning and implementation are now beingextended to cover roads funded from other sources than IBRD. The frequent staff rotation due tolow salaries of the civil servants has impeded the expected improvement in the capability of thestaff which in tun adversely affected the expected improvement in the quality of the roadnetwork. Nevertheless, as objectively reflected by the increase in the composite performanceindicator noted above, the institutional component had made positive impact on the quality of theroad network as a whole.

4.2.10. Kabupaten Roads Economic Evaluation Model (KREEM). Under KR5 the presentationalaspect of KREEM has been further developed. Extensive new data has been gathered onpavement deterioration. The roads cost data and benefits data have been updated for preparationof the 1997/98 planning look-up tables for use throughout the country. Also, the model was usedto re-evaluate the economic benefits for this ICR, using the traffic count done in 1996.

Training

4.2.11. Training. Some progress in building the capability of the staff involved in the Kabupatenroads sub-sector at all levels has been achieved through training consultants, fieldimplementation consultants and the central technical consultants on institutional development.Advance training was provided on Standard Planning Guidelines and Procedures (SK77/90)through formal courses starting in 1991 and through field planning advisors beginning in 1995 byway of on-the-job training of Kabupaten planning teams. Also, training was provided under theKabupaten Roads Master Training Plan (KRMTP) covering construction, maintenance,management and equipment. The KRMTP addressed training for stakeholders, trainers, projectmanagement and supervision staff. In addition, seminars and courses were provided under theRural Roads Maintenance System (RRMS) by the Provincial Regional Development Agency(bangda) in South Sulawesi, DPUK (centrally run) Provincial Training Program implementednationwide, and ILO Training Program in West Java. On-the-job training was available for bothcentral and Kabupaten government staff. Opportunities also existed for government staff to gainexperience, participation in technical studies and supervisions. However, such opportunities were

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not fully utilized, partly due to the heavy executive and administrative burden placed on manygovernment staff.

Improved Technical Environment for Kabupaten Roads program

4.2.12. Quality of Construction and Maintenance. Overall there is no conclusive evidenceregarding improvement in the quality of construction and maintenance, as measured in terms ofthe implementation performance index as a percentage of works completed by 31 December ofthe previous year. Quality of road construction and maintenance showed significant improvementfor some Kabupatens, no improvement for others and even reversal for still others. Suchoutcomes are attributed primarily to the lack of timely availability of budget, late contractadministration, lack of urgency on the need for much better efficiency in the face of the shrinkingbudget situation and low staff salaries.

4.2.13. Throughout project implementation, quality of construction of Kabupaten roads was aserious problem. A technical audit of road quality undertaken in 1997 based on five sub-projectsof KR5 confirmed that quality was indeed a serious problem. Deficiencies were found inthickness, quality of pavement materials, and also in bitumen content. However, while it isevident that progress has been slow in achieving quality in accordance with designs andspecifications, the impact of poor construction quality on pavement life has not been conclusive.It is not clear whether the significant improvement gained in the stable road network under theproject can be attributed to the project requirement for more mechanized construction through theuse of class A contractors and/or to not permitting the use of force account construction exceptfor routine maintenance or the lower-standard LIW betterment works. However, it is known thatClass A contractors, which normally deploy significant equipment, invariably produced betterquality works in certain activities than class C contractors which do not deploy significantequipment. For example, hot mixed asphalt surfacing provided higher quality than penetrationmacadam pavement produced mainly by manual methods.

4.2.14. Quality of civil works is likely to be a central problem in Kabupaten roads. UnderKeppres 16/94, the government allowed class C, small contractors, to carry out much of theKabupaten works until then reserved under the Kabupaten road program Class A contractors.Also, for various reasons, Kabupatens prefer class C contractors. Small contractors are assumedto enhance the planning and implementation capacity of GOI agencies in charge of Kabupatenroads. The use of small contractor is likely to grow particularly with the decentralization of anddevelopment of regional autonomy at Kabupaten level. Also, small contractors are preferred fortheir impact on poverty due to the potential increase in the labor content of construction works.It is also argued that class C contractors actually end-up doing most of the Kabupaten road worksbecause class A contractors often end-up subcontracting to class C contractors. Both classes ofcontractors should be able to produce the required quality of works for which they are qualified ifthe works are well supervised. Class C contractors generally lack equipment for asphalt worksand should not be used on such works. Class A contractors should be capable to do the work forwhich Class C contractors are qualified. But the opposite may not be true. However, where bothclasses of contractors are qualified and have the resources (including access to equipment) tocarry out the works, technical audits can be carried out to compare the quality of outputs at a

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given point in time and at various points in time. It should be pointed out that in the Indonesiacontext, labor content is more a function of the type of work than class of contractor, beinggenerally higher for routine maintenance and lower for asphalt concrete works.

4.2.15. Overall, progress in this area has not been established conclusively. Post-constructionmonitoring (PCM) methodology was used to compare the long-term trends in Kabupaten roadsurface condition with and without the improved technologies, and to develop an indicator ofperformance from the trends. The evaluation was done by re-surveying links which had beenconstructed in the early years of the Project, and comparing their condition with links from thePCM series which had been constructed with traditional technologies. Under the project suchsurveys were conducted during 1993-1997, but dropped off since the partial demobilization of theField Implementation Consultants in 1998. Analysis of the records of maintenance andconstruction works during the intervening period showed that the observations were not sufficientto enable definitive conclusions to be drawn as to whether the improved technologies wereeffective. Since the survey is of a simple engineering nature, it can be carried out by provincialstaff following the standard guideline provided. It is therefore recommended that the surveys berepeated in 2000, 2001, and 2002 (full impact year) to reach a definitive conclusion.

Equipment

4.2.16. Workshops and Laboratories. Investment in workshop and laboratory equipment wereeffectively made centrally by the Director General of Highways (DGH); and equipment weretransferred to the Kabupatens as per loan covenant for KR3. The process of transfer ofownership of road equipment from the Bina Marga to the provinces and finally to the Kabupatenswas completed in 1998, following a Joint Decree issued by the Ministry of Public Works and theMinistry of Home Affairs, authorized by the Ministry of Finance. The project providedmechanical engineering services in the field to train and mitigate the shortage of experiencedmechanics and operators in the Kabupatens. In addition to the transfer of ownership and technicalassistance, initiatives (as noted in para.4.2.17 and 4.2.18) were taken to assure the long-termsustainability of the equipment which was managed by DGH/Directorate General of RegionalDevelopment (DGRD) funded from the project.

4.2.17. Kabupaten Equipment and Workshops Management Improvement (KEWMI). This was atwo-phased pilot study designed to assure long-terTn sustainability of workshop management. InPhase one an improved institutional framework for managing equipment and workshops wasdeveloped. This included: (a) a simplified and an improved equipment management system(EMS) manual; (b) a management information system especially for the Kabupaten equipmentsector; and (c) the selection and preparation of viable plant hire units (Unit Swadana workshops).Phase II focused on maximum utilization of existing KEW by way of upgrading the managementsystem in the regions through (a) EMS evaluation and upgrading by direct application inworkshops; and (b) recommendations on how to maximize the effective utilization of Kabupatenequipment and workshops' assets through appropriate forms of organization (regional technicalimplementation units; Unit Swadana; and cooperation with the private sector) and theintroduction of economic hire rates.

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4.2.18. Unit Swadana. Unit swadana is a form of self-management unit of government ownedassets short of privatization. Unit swadana was applied to Kabupaten equipment and workshops.Although the underlying concept of unit swadana was logically acceptable, it had not receivedwide support. Progress in establishing unit swadana had been slow. A total of 18 Kabupatensparticipated in the experiment of which 10 opted to establish unit swadana. By June 1999, therewere only two Kabupatens which established unit swadana. The introduction of equipment hirerates did not find much support by Kabupatens for various reasons including anticipated increaseof equipment hire rates on 'economically weak local contractors'. As a result, the expectedrevenue from equipment hire remained inadequate to cover equipment maintenance. At projectclosing, the issue of efficient and effective management of Kabupaten equipment and workshopshas not been fully addressed. But the issue has assumed even greater importance in light of thenew responsibilities and powers given to Kabupatens under the Regional Autonomy Act 22/1999,and the general shortage of GOI funds for acquisition or replacements of aged equipment.

Environment

4.2.19. Environmental Aspects. Adequate attention was paid to environmental impacts in theimplementation of kabupaten roads works. All roads in KR5 areas were first level screened andthe road inventory database updated accordingly. Under the project, earlier guidelines werefuirther developed and re-issued with recommendation for future updating once every five years.Roads selected for IBRD assistance were second level screened with field visits where necessary.The planning and engineering guidelines provided systematic guidelines for environmentalscreening and protection respectively. Both SPEMPC and ISEM, the later funded under KREI,provided further guidance particularly for strengthening of management and environmentalprocedures.

4.2.20. Strengthening Provincial Environmental Management and Planning Capability/SPEMPC.The focus of SPEMPC was to provide an environmentally oriented management system throughcoordination and participation. Specifically, the sub-project produced draft guidelines tostrengthen and empower the provincial institutions, organizations and government humanresources and the communities in the management of the Kabupaten roads, river basin, regionaland spatial development projects. Due to time constraints, the draft guidelines developed underSPEMPC were not tested in the pilot provinces. Seminars held in Aceh, South East Sulawesi(Kendari) and West Java not only stimulated interest in environmental management but also raisedenthusiasm for implementation of SPEMPC outputs. The importance of SPEMPC is enhanced bythe new government proclamation which transfers tasks and duties including managing publicworks, health, education and culture, agriculture, communications, industry and trade, capitalinvestment, environment, land use, cooperatives and manpower development, from the sectoralministries to the districts/municipal technical agencies, most of which have not been well preparedto carry out the new responsibilities.

4.3 Net Present Value/Economic rate of return:4.3.1. Overall, the economic benefit of the project is positive (Annex 3). The weightedaggregate net present value, at 10% discount rate, was estimated to be Rp 353.3 million per km.The economic rate of return for the civil works is estimated to average 30%. The result wasbased on a sample of 27 rehabilitated roads using the Kabupaten Roads Economic Evaluation

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Model (KREEM). On link by link basis, the evaluation results indicate that road links in 16Kabupatens have positive net present values, while the remaining 11 Kabupatens have negativeNPV/km. In re-estimating the benefits, the 7.5% annual rate of growth of traffic assumed atappraisal was considered unattainable because of the impact of the economic crisis. Instead anannual traffic growth rate of 4% was assumed as reasonable. No systematic annual traffic datahas been collected since 1996. The re-estimated NPV/km figures also include the benefits due tomotorcycle traffic on the road links. The road roughness was assumed to have improved fromIRI=30 without to IRI=10 with the project.

4.3.2. The KREEM model at its present stage of development has some significant limitation.It does not allow changes in the traffic growth rate except at ten year interval. This makessensitivity analysis difficult for traffic growth rates at smaller interval than ten-year. Sensitivityanalysis would have required extensive revision of the model. It is safe to conclude however, thatas the economy recovers, traffic is likely to show growth and the expected benefits would bemuch higher than indicated above.

4.4 Financial rate of return:Not applicable

4.5 Institutional development impact:4.5.1. As documented above, the project has positively impacted institutional development.Through the carefully monitored supervision of civil works by field consultants forimplementation, projected related staff and contractors had the opportunity to experienceinstances of quality works. Formal and on-the-job training have been provided under the Projectalthough not adequately. The labor intensive works helped sustain the existing infrastructureduring the economic crisis while supporting poverty alleviation. More Kabupaten staff have beenexposed to planning and engineering guidelines and procedures than before. Private sectorparticipation in the provision of infrastructure services has started taking roots in rural Indonesia.The principle of operating Kabupaten owned equipment on hire basis has been demonstrated inthe unit swadana. Foundations are laid under KEWMI pilot programn for duplication in eachKabupaten workshop. However, much effort would be needed to sell the idea of the newequipment management system to the district heads (Bupatis). The study for StrengtheningProvincial Environmental Management and Planning Capabilities has been prepared and receivedwide acceptance. It is recommended that SPEMPC be further extended and applied throughfollow-on regional projects.

5. Major Factors Affecting Implementation and Outcome

5.1 Factors outside the control of government or implementing agency:5.1.1. The Economic Crisis. The economic crisis of East Asia was the major factor affectingproject implementation. In the last two years of project implementation (1998 andl999), thecrisis led to agreements between the Bank and GOI to utilize the project savings for financinglabor intensive works program (LIWP) to enhance sustainability of the roads and generateemployment as well as preserve small and medium contractors.

5.2 Factors generally subject to government control:5.2.1. Timing of Release of Funds. The government was not generally able to submit annual

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work programs to the Bank for approval by December 31 of the preceding Fiscal Year. Often,the annual programs and budgets were not finalized until June/July, when the budgets were fullyapproved by Kabupaten authorities. This made impossible the early start of civil works.Attempts to establish multi-year contracts or to relax the cutoff of funds at the end of the fiscalyear, by say 3 months, were sought but no systemic progress was achieved in these areas, either.The lack of progress here has adversely affected the quality of the civil works done during therainy season.

5.3 Factors generally subject to implementing agency control:5.3.1 Poor Management of Equipment. Over the years each Kabupaten had constructed its ownworkshops and also procured the necessary heavy equipment for road works, usually throughforeign aid and loans. KEWMI was launched, but the goal of establishing viable EMS andespecially, plant hire units within Unit Swadana has not progressed as anticipated. The principalfactor was that the necessary support from most kabupatens chiefs had not been forthcoming.Meanwhile, poor management of the equipment and workshops contributed to delays inimplementation of the civil works program and to non-sustainable use of existing equipment.

5.3.2. Mobility of Trained Staff. Transfer of key staff within the government has deprived someKabupatens of their critical personnel. This has adversely affected the Kabupatens which lostsuch trained and experienced staff.

5.4 Costs andfinancing:5.4.1. Cost and Financing. (Annex 2: Tables 2a.1 to 6). In terms of US dollar, the project wascompleted within the baseline cost, that is excluding the contingency costs. The totalactual/estimated/project cost is US$176.7 million compared to appraisal estimate of US$206.8million. In terms of Rupiah, the actual cost of the project was Rp 597,330 million (equivalent toUS$176.7 million) compared to the appraisal estimate of Rp 435,269 million (equivalent toUS$206.8 million). This is mainly due to the depreciation in the value of the Indonesian Rupiahrelative to the US dollar. Between project effectiveness in August 1994 and March 1997, the endof FY 1996/97, the Rupiah has steadily depreciated relative to the US dollar by a total of about15%. This was followed by a sharp depreciation during the financial and economic crises. Othercontributing factors to the significant variations between appraisal and actual costs includeincreased productivity and lower costs in the construction industry because of increasedcompetitive bidding and the lower than market hire rates for Kabupaten owned equipment used bycontractors in the construction and maintenance of roads.

5.4.2. Disbursement. The Bank's contribution was to be $101.5 million but only 93% orUS$94.2 million was disbursed. The remaining amount (about US$7.3 million) of the loan wascancelled. On the other hand the government contributed US$82.6 million or 78% of theappraisal estimate of US$105.3 million. However, in terms of current prices of Rupiah, thegovernment contribution was significantly higher (26%) than estimated at appraisal.

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6. Sustainability

6.1 Rationale for sustainability rating:

6.1.1. The sustainability of the project must be viewed from two aspects, first in the context ofthe stable political and economic environment that prevailed during most of the period ofimplementation, and second in the context of the future in the vastly different environmentfollowing the financial crisis, democratization and pending decentralization. First, in the stableenvironment pertaining during the Project, the sustainability of the outcomes and outputs isassessed, on balance, as likely. The maintenance strategy was clearly established in the centralprocess of resource allocation and the ownership of it by the Kabupatens was generally high,though uneven. Likewise, the planning procedures, monitoring of assets and environmentalscreening of investments were applied effectively during the Project, but the performance of up toa half of Kabupatens had begun to decline over the latter years of the Project when these were notdirectly facilitated and enforced. The provincial-level units intended to provide longer-termsupport on these matters were not formalized. Within a national framework designed to supportthe 1997 plans for decentralization, an appropriate monitoring system was being introduced byDGH which was intended to assure sustainability of the strategy and procedures - however, thisdid not include the incentives which had proved effective. Under that regime, this was certainlylikely to achieve some sustainability, at least in a majority of Kabupatens and significantly superiorcompared with prior to the 5-Kabupaten Roads Project Program, but it would have required overtcommitment by the agencies involved. In regard to quality of implementation, the level ofachievement was modest. The labor-intensive approach piloted under KREI proved a timely basisfor the LIWP when the crisis struck, but had not been embraced by DGH earlier and wasimplemented only in a very modified form. The overall level of resource allocation had not beenraised commensurately to make substantial progress in improving the condition of the network asit was steadily expanded through reclassification of lower roads, but the tools for balancing thesector needs with regional development needs had been accepted by the end of the Project andnow form the basis for on-going dialogue which is helping shape the next 5-year plan. Ultimately,a more self-sustaining mechanism for funding the sector needs to be established to reduce thereliance on central transfers.

6.1.2. The sustainability in the future under the still evolving decentralization and restructuring ofthe economy must be assessed as uncertain since much is unknown. The division andempowerment of Kabupatens in smaller units (from 243 to about 450) and the removal ofconstraints on the block grant transfers may, in the short-term, affect staff performance, furtherreduce efficiencies of scale, and imply greater local responsibilities for planning, resource use andtechnology. The severe real reductions of 20-40% in the national budget since the crisis are likelyto prevail for a few years and, in this scenario, the road assets are likely to deteriorate even whenmaintenance is given priority. Gol have already demonstrated priority for maintenance in theFY2000 budget. Sustainability of the benefit from the institutional component would depend onthe implementation of appropriate civil service reform and related incentives and their impact onretention of trained and experienced staff. The equipment management system introduced underKEWMI has yet to take roots. In the medium-term, however, the procedures and systemsestablished under the Project and the Fifth Kabupaten Roads Project Program will form a basiswhich can be adapted and applied to whatever new structure evolves. Under this external shock,

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therefore, the sustainability can only be partial because many parts will need to be adapted to thenew context. This second context is thus not an appropriate basis for assessing sustainability.The Project rating is therefore based on the medium- to long-term context, and assessed as"Likely".

6.2 Transition arrangement to regular operations:6.2.1. The loan period was extended by six months to generate employment and sustain thesmall-and-medium-sized contractors through the labor-intensive program, which also served toenhance sustainability of the road network and spread use of a moderately labor-intensiveapproach (See Table 2). The integration of road infrastructure and regional development withinone department under the new government is supportive of the approach and proceduresdeveloped by the Project. It is expected that this integrated focus will also be reflected in thetechnical and administrative arrangements to be made for the Kabupatens under decentralization.Attention to the technical support (equivalent to the PBPJK unit) and incentives for keepingsurvey information current and following the planning and programming procedures will becrucial to making this transition effective.

7. Bank and Borrower Performance

Bank7.1 Lending:7.1.1. The identification, preparation and appraisal phases of the project are assessed assatisfactory. In fact, the Project SAR was cited by management for concise and good articulationof the issues. The Project was modeled after the Third Kabupaten Roads Project. Most of themethodological issues were resolved during that period. The main differences between KR3 andthe present Kabupaten project were geographic coverage and the related institutional issues theyaddress. The Bank's assistance focused on assuring that conditions for successful implementationare incorporated in the project design. Like the preceding Kabupaten roads projects, the designof KR5 focused on the main risks facing project implementation: implementation ofplanningprocedures, the funding of maintenance and the quality of the works. To reduce these risks,agreement was reached with Bappenas, GOI's National Development Planning Agency, tocommit itself to play a stronger coordinating role in project planning and implementation and touse the Inpres funds for maintenance. Also, adequacy of maintenance for each Kabupaten wasmade a condition of participation in the project's subsequent annual rehabilitation/improvementprograms. The risks due to poor quality works were to be reduced by extensive technicalassistance for implementation support.

7.2 Supervision:7.2.1. The project was declared effective on August 1, 1994. During supervision, detailedperformance of Kabupatens related to project activities were reviewed by Bank staff andappropriate feedback was provided to the government and the implementing agencies. In additionto regular Bank staff, the supervision team included specialists in the areas of particular concernsuch as equipment management and environmental specialists. During the mid-term review in1996, a thorough review of the Kabupaten performance was undertaken focusing on the quality ofthe civil works and establishing sustainable institutional and technical environment. Banksupervision provided the government and the implementing agencies timely feedback on theenforcement of planning guidelines. Bank missions were relentless in highlighting the impact of

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delays in the preparation of the annual work program and timely release of the program andbudget on the quality of the works. During the economic crisis, supervision staff was at theforefront in identifying the impact of the crisis on sustainability of Kabupaten road network anddevising appropriate measures in terms of LIWP. Bank supervision was highly satisfactory.

7.3 Overall Bank performance:Overall, Bank perforrance is assessed as satisfactory.

Borrower7.4 Preparation:7.4.1. GOI performance in preparation was satisfactory as evidenced by the documentationprepared for the project. Many government agencies played their respective roles in thepreparation phase. At Kabupaten level, the DPUK together with representatives of Bangda andBappeda worked with the Bupati. The government representatives were supported in theiractivities by consultants at the center. Project preparation consisted of a large variety ofactivities-planning studies i.e. economic feasibility, inventory of road conditions, surveys andengineering designs for both road rehabilitation and new construction works.

7.5 Government implementation performance:

7.5.1. Overall, Government implementation performance was satisfactory. A key matter relatedto the quality of the civil works was the timely release of program and budget to Kabupatens sothat substantial works could be done before the rainy season. On this matter the government hasnot been able to make substantial progress. On the other hand in terms of enhancing thesustainability of the Kabupaten programs the government was responsive to the projectsupervision and project implementation unit action plans aimed at tackling the range of strategicissues which had hindered efficient program management; DGH had initiated the sustainabilityaction plan for smooth taking over critical tasks of the core team consultants.

7.6 ImplementingAgency:7.6.1. Several implementing agencies were involved; most played supporting roles. Theperformance of the Kabupatens was key to successful project outcome. Most have performedwell. Some will need further coaching.

7.7 Overall Borrower performance:

7.7.1. Overall Borrower performance is assessed as satisfactory. The adoption of LIWP tomitigate the impact of the economic crisis on maintenance budget was a positive stance.

8. Lessons Learned

8.1. The main questions are whether the project has met its stated objectives and are theproject outcomes sustainable. As discussed in the previous sections of this report the objective toimprove access to the main economic centers for the agriculture-dependent rural population in theproject Kabapatens was largely met. Despite significant improvements in some Kabapatens thequality of civil works has been uneven. The economic re-evaluation of the project suggests thatthe ERR for road betterment and maintenance is about 30%. The returns could have been higherif the predicted traffic level and quality had been attained. The economic crisis had hamperedtraffic levels and the road maintenance budget, thus affecting the sustainability in the next 2-3years of the improvements to the road network made under the project.

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8.2 The project improved the capacity of GOI agencies that are responsible for Kabapatenroads. But, the sustainability of these efforts will depend on the progress to be made in the civilservice reforms and in retaining the project trained staff.

8.3 A number of relevant lessons from review of the implementation experience under theFifth Kabupaten Road Project warrant special attention:

8.4 Strengthening Local Capacity. Technical assistance alone has limited impact on localcapacity building unless it is accompanied with proper civil service reforms. Without adequateincentives, losses were seen in productivity and output of officials, field consultants andcontractors. Further, the project did not provide enough resources to practical training. FutureBank-financed highway projects should consider allocating adequate resources forhands-on-training. Moreover, the efforts to provide provincial level support were not fullyrealized and were frequently resisted by local officials. Local Governments have to be morecommitted to the project and associated training and technical support. The role of monitoringand the linkage between diligent performance and access to central allocations of resources arecrucial to establishing the importance of strong local capacity.

8.5 Sustainability. On the whole the policy of maintenance first is taking root. However,some Kabupatens gave priority to network expansion over betterment/rehabilitation and to thelatter over routine maintenance. If such practices persist and road maintenance remainsunderfunded in the near future, there is a clear danger that Indonesians and particularly the ruralpoor may lose the benefits of improved Kabupaten road networks. The need for establishing asustainable maintenance funding has become the top sector priority in Indonesia. Moreover, amore efficient and equitable basis for allocation of funding to the Kabupatens needs to be formallyestablished using the allocation tools developed (KREEM and the Strategic Expenditure PlanningModule - SEPM) and sharing central and local responsibility. Further, the need for a timelyallocation and disbursement of funds for the planned works warrants special attention.

8.6 Labor Intensive Works. This component was added to the project during the economiccrisis to create employment opportunities for the rural poor and the small and medium sized localcontractors. Though overall LIWP performance in terms of physical targets was highlysatisfactory, it did not create as many jobs as expected. The targets set for labor as a percent ofthe total cost of the sub-project were high (70% for routine maintenance and 30% for periodicmaintenance).

8.7 Construction Quality. This has a great effect on the lifetime of the works andconsequently on their ERR. Some of the sub-projects suffered from poor quality of constructiondue to poor quality control and related institutional arrangements. The implementation agencieswere not accountable to the executing agencies and the field consultants did not have theauthority to enforce contracts. Procurement of qualified and experienced contractors andsupervision engineers is a major determinant of quality of construction. Again, the incentivesprovided to staff directly affect these issues.

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8.8 Equipment Management. Past initiatives to encourage equipment ownership bycontractors were not successful, since the banks did not provide lending for this purpose. Effortswere made to enhance the use of Kabupaten-owned equipment by improving the availability ofthese equipment (through improvement of workshops) and applying economic equipment hirerates. In this regard, the swadana model (para 4.2.18) was envisioned as an interim step towardsultimate privatization of equipment workshops. But it was not attractive enough to theKabupatens, as only 4 Kabupatens (by the end of 1999) have taken concrete steps to introduce it(unit swadana). Currently, all income has to be returned to Kabupaten revenue, with the resultthat unit swadana may not guarantee adequate equipment funding. Also, the Kabupatens and thecontractors have not accepted the use of rational equipment rental rates, which includedepreciation of equipment. But piloting of the program for Kabupaten Equipment and WorkshopManagement Improvement (KEWMI) was slow and had to be cut short due to the late start onthis component compared to the closing date of the loan. Consequently, there was not enoughtime to fully test in practice the effectiveness of the recommendations of the program. Therefore,there is a need to extend this work under future highway projects. This is important in view ofthe ongoing decentralization of many activities to Kabupatens under Act 22/1999 and theprojected shortage of government funds for replacement of aged equipment. However, thelong-term solution to this problem lies in encouraging banks to lend to contractors for equipmentpurchases and privatizing the equipment workshops. Meanwhile, other practical options shouldbe developed through discussions with concerned government agencies at various levels.

8.9 Summary. The Kabupaten Roads Program (including KR5) was designed to strengthenthe planning and implementation of road management under the complex devolved institutionalstructure which then existed, in which the allocation of resources was largely centralized, and theimplementation was technically deconcentrated within Public Works but administrativelydecentralized to the Kabupaten government. Some of the lessons have been applied in the newprogram of region-based road projects (Sumatra Region Road Project, Ln. 4307-IND), e.g. inregard to coordinating the planning process between jurisdictions, networks and sectors, and toimproving technical standards. For the fully decentralized structure currently being legislated, theexperience of the Project suggests that Kabupatens are likely to be capable of sustaining soundroad management only if the supporting environment includes four key elements:(a) An adequate technical support system, including on-going practical training, technicaladvisory services (which could be province-based and delivered by government or a professionalgroup), and further improved asset management tools;(b) Performnance monitoring, which provides an independent tracking of asset condition,quality of implementation, and the efficiency and effectiveness of the use of resources;(c) An incentive-based resource allocation system, which would link any central or provincialmonetary transfers to performance and needs; and(d) A sustainable financing mechanism providing adequate and timely funds for preservationof the road assets (in the future, preferably derived on a fee-for-service basis from road users).Since these key elements extend beyond a regional context, they will need to be developed for usenationwide.

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9. Partner Comments

(a) Borrower/implementing agency:The borrower's assessment of the Project is given in Annex 8. Following review of the draft ICR,the Borrower responded on June 20, 2000 that, given its continued commitment to giving priorityto maintenance in its Kabupaten roads sector management policy and its demonstrated increase inits FY 2000 budget allocations for Kabupaten road maintenance, the project sustainability shouldbe rated as Likely. The Bank having gotten this assurance, agreed to upgrade its sustainabilityrating to Likely from Unlikely in the final ICR. This has been reflected in this ICR. The Bankrecognizes that the Government still faces significant challenges to provide adequate resources toassure sustainability of Kabupaten roads due to significant macro-economic constraints during theperiod of economic recovery.

(b) Cofinanciers:

(c) Other partners (NGOs/private sector):

10. Additional Information

None.

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Annex 1. Key Performance Indicators/Log Frame Matrix

Outcome I Impact Indicators:

A. Improve access to main economiccenters for the rural population of 27Kabupatens in 5 provinces.

1.Average length of roads per Kabupaten 1228 km (2002) 1071 km (1999)

2. Length of roads in good or fair condition 321 km (2002) 290 km (1999)per Kabupaten

3. Length of paved/all-weather roads per 500 km (2002) 475 km (1999)Kabupaten

B. Enhance the capability of GOI agencies 80% (2002) 79.9% (1999)that manage Kabupaten roads.

1. Improve planning performance 40% (2002) 43.4% (1999)

2. Construction progress (% of each year's 63% (2002) 43.4% (1999)work completed by December 31)

3. Maintenance progress, (% of each year'swork completed by 31 December

Output Indicators:

A. Length of road improved (km):1. Rehabilitation/betterment 1,620 1,8102. Maintenance 5,760 8,0373. Labor-intensive rehabilitation 1,500 7204. Labor-intensive maintenance 3,000 3,232

D. Improve asset performance:1. Construction monitoring sites 14 15

surveyed per year.

End of project

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Annex 2. Project Costs and Financing

Proect Cost by Com onent (in US$ million e uivalent)

A. Road Network Improvement

1. Road Works 149.20 141.20 95

2. Workshops, Laboratories 2.50 0.40 16

3. Equipment 17.40 13.90 80

B. Institutional and Technical Development 7.00 21.30 310

Total Baseline Cost 176.10 176.80Physical Contingencies 17.60Price Contingencies 13.10

Total Project Costs 206.80 176.80Total Financing Required 206.80 176.80

Table 2b: Project Cost by Component(million Rupiah)

Project Cost by Component Appraisal Actual/latest Percentage ofEstimate Estimates Appraisal

A. Civil Works 286.808.0 478,631.4 167Road Betterment 194,400.0 254,897.1 131Periodic Maintenance 61,815.0 172.007.5 278Routine Maintenance 29,160.0 50,249.0 172Workshop & Laboratory Construction 1,433.0 1,477.7 103

B. Equipment 38.296.0 46,854.5 122C. Construction Services 42,500.0 71,844.1 169

Total Baseline Costs 367,604.0 597,330.0 162Physical Contingencies 34,889.6Price contingencies 29,758.8

Total Project Costs 432,252.3 597,330.0 138

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Project Costs by Procurement Arrangements (Appraisal Estimate) (US$ million equivalent)Procurement Uethod

ExpndituV Cat9ory IfE N_ F. Total Cost

1. Works 0.00 151.40 8.20 0.00 159.60(0.00) (56.00) (3.00) (0.00) (59.00)

2. Goods 20.80 1.60 0.40 0.00 22.80(18.90) (1.00) (0.40) (0.00) (20.30)

3. Services 0.00 0.00 8.30 0.00 8.30(0.00) (0.00) (7.60) (0.00) (7.60)

4. Miscellaneous 0.00 0.00 16.00 0.00 16.00(0.00) (0.00) (14.50) (0.00) (14.50)

5. Miscellaneous 0.00 0.00 0.00 0.00 0.00(0.00) (0.00) (0.00) (0.00) (0.00)

6. Miscellaneous 0.00 0.00 0.00 0.00 0.00(0.00) (0.00) (0.00) (0.00) (0.00)

Total 20.80 153.00 32.90 0.00 206.70(18.90) (57.00) (25.50) (0.00) (101.40)

Project Costs by Procurement Arrangements (Actual/Latest Estimate) (US$ million equivalent)

Prou rmnt Mtor N.B.F. Totat Cost

1. Works 0.00 141.60 0.00 0.00 141.60(0.00) (60.38) (0.00) (0.00) (60.38)

2. Goods 13.90 0.00 0.00 0.00 13.90(13.15) (0.00) (0.00) (0.00) (13.15)

3. Services 0.00 0.00 21.30 0.00 21.30(0.00) (0.00) (20.71) (0.00) (20.71)

4. Miscellaneous 0.00 0.00 0.00 0.00 0.00(0.00) (0.00) (0.00) (0.00) (0.00)

5. Miscellaneous 0.00 0.00 0.00 0.00 0.00(0.00) (0.00) (0.00) (0.00) (0.00)

6. Miscellaneous 0.00 0.00 0.00 0.00 0.00(0.00) (0.00) (0.00) (0.00) (0.00)

Total 13.90 141.60 21.30 0.00 176.80(13.15) (60.38) (20.71) (0.00) (94.24)

"Figures in parenthesis are the amounts to be financed by the Bank Loan. All costs include contingencies.

2' Includes civil works and goods to be procured through national shopping, consulting services, services of contracted

staff of the project management office, training, technical assistance services, and incremental operating costs related to

(i) managing the project, and (ii) re-lending project funds to local govermnent units.

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Project Financing by Component (in US$ million equivalent)

~~~~~ :<

1. Road network 93.80 104.60 73.50 82.00 78.4 78.4 00improvement andmaintenance component2. Technical assistance and 7.70 0.70 20.70 0.60 268.8 85.7 0.0studies & etc.Total 101.50 105.30 94.20 82.60 92.8 78.4 0.0

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Annex 3: Economic Costs and Benefits

Analysis and Results

A sample of sub-projects constructed in 1994 under KRS were re-evaluated in 1999 usingKabupaten Roads Economic Evaluation Model (KREEM) based on traffic counts made in 1996.The analysis was based on "with" and "without" project case. The sample in the current analysisincludes the same subprojects used in similar analysis in the 1997. However, the estimated costsand benefits are expressed in 1999 prices. Exchange rate adopted was Rp. 6,700 per US dollarwhich prevailed during the last quarter of 1999 and early 2000. It was considered to berepresentative for the near future. The traffic growth rate was reduced from 7.5% per annum (inthe SAR) to 4% per annum. Both four-wheeled and motorcycle traffic are used in the analysis.

The KREEM was adapted to undertake the analysis of specific individual links inNovember 1999 using 1999 costs and benefits based on government statistics, current vehiclecosts and Kabupaten construction costs. KREEM models individual preset situations in relationto road condition, traffic level and Kabupaten costs as defined in the 'analysis set'. A 'newanalysis set' was defined to present the sampled sub-project links. A separate 'traffic set' wasalso defined to obtain the required traffic levels associated with each link. Basic information onvehicle operating costs was derived from vehicle and fuel costs using an HDM type model andthis was input into KREEM. The KREEM program uses this data to determine estimated VOCfor normal and generated traffic flows on any road link having the estimated road roughness for"with" and "without" betterment project. Road construction costs were also revised in theNovember version taking account of the 1999 road construction cost data obtained from theKabupatens. Periodic maintenance every six year and annual routine maintenance costs wereincluded in the analysis. Expected life of the Project was 15 years with no residual value.

Details of the assumptions used in KREEM models are in the project files.

Results of the Analysis

Table 1 summarizes the individual net present value per kilometer for each of the 27 linksthat were analyzed. The result shows a wide range in NPV/km between links. The VOC ofmotorcycles is generally about one-tenth of the average VOC for 4 wheel vehicles. As a result forlinks with large motor cycle traffic significant amount of benefits could result. The weighted netpresent value per km at 10% discount rate for the 27 sample Kabupaten links was Rp 353.3million per km in 1999 compared to Rp 23.0 million in 1997, both in terms of 1999 prices.

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Table 1: Economic Re-evaluation Results of Sample Subprojects

1997 1999

Link No. Length NPV/km Length NPV/km(km) (RD. Million) (km) (RI. Million)

20 10.5 496 10.5 2255.5

6 19.1 -40 19.1 -260.1

5 4.0 -7 4.0 -275.7

I 37.5 68 37.5 -3.0

5 74.9 104 74.9 283.5

3 51.2 281 51.2 1830.6

19 7.8 116 7.8 1584.1

12 14.0 -14 14.0 -99.8

20 13.6 -131 13.6 -218.7

13 6.4 -26 6.4 107.8

29 6.6 -9 6.6 180.074 3.1 91 3.1 637.632 10.1 -83 10.1 -60.930 16.7 62 16.7 194.951 4.1 -40 4.1 -61.082 4.1 -19 4.1 -65.2

37 9.6 -73 9.6 165.6

98 3.0 151 3.0 385.816 14.0 -27 14.0 -18.6

602 (108 3.4 -3 3.4 52.951 34.7 -60 34.7 513.626 3.6 -107 3.6 -180.3

901 36 -62 36 49.4

8 44.6 -215 44.6 -79.0

12 42.2 -55 42.2 76.4

Total 474.8 23 474.8 353.3

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Table 2: Comparison of viability between 1997 and 1999 Analysis

Range: No. of cases in 1997 No of cases in 1999NPV/km Rp. Millions analysis analysis

@10%-<=100 3 5

-100 to -50 5 5

-50toO 9 1

Oto50 0 1

50 to 100 4 2

100 to 200 3 4

200 to 500 3 2

>500 0 7

Total 27 27

Table 2 classifies the results shown in Table lby range of NPV/km values. In the sampleof 27 links 16 had positive NPV in 1999 compared to 10 in 1997.

Conclusion

Overall, the economic benefit of the project is positive. The weighted NPV/km includingthe motorcycle traffic is estimated at Rp 353.3 million per km in the 1999 evaluation. Thiscorresponds to an average economic rate of return of about 30%. The KREEM model at itspresent stage of development has some significant limitation. It does not allow changes in thetraffic growth rate except at ten year interval. This makes sensitivity analysis difficult for trafficgrowth rates at smaller interval than ten-year. Sensitivity analysis would have required extensiverevision of the model. It is safe to conclude however, that as the economy recovers, traffic islikely to show growth and the expected benefits would be much higher than indicated above.

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Annex 4. Bank Inputs

(a) Missions:Stage ofj Cet i i No. of Persons and Specialty P roranceatin

( 2 hL .Econmists, MEI E S,% etc.) 0 Im etation (0DevelopmenitMont:::e r Countdi Specialty Progress Objective

Identification/Preparation05/1993 5 Economist (2), Highway S S

Engineer, Operation Officer,Environmental Specialist

Appraisal/Negotiation10/1993 3 Economist, Highway S S

Engineer, Operation Officer

Supervision11/1993 3 Financial Analyst, S S

Highway EngineerOperations Officer

02/1994 3 Financial Analyst, S SHighway EngineerOperations Officer

06/1994 5 Financial Analyst, S SHighway EngineerOperations Officer

11/1994 4 Highway Engineer (2), S SEconomist, Operation Officer

02/1994 5 Highway Engineer (2), S SOperation Officer, SocialScientist Training Specialist

11/1995 3 Highway Engineer (2), S SOperation Officer, SocialScientist

02/1996 6 Highway Engineer (2), S SOperation Officer, SocialScientist

04/1996 3 Highway Engineer (2), S SOperation Officer

07/1996 3 Highway Engineer (2), S SOperation Officer

10/1996 3 Highway Engineer, Operation S SOfficer, Equipment ManagementSpecialist

03/1997 2 Highway Engineer, Operation S SOfficer,Economist

07/1997 3 Highway Engineer, Operation S SOfficer,Economist

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03/1998 4 Highway Engineer (2), S SOperation Officer, TrainingSpecialist

07/1998 3 Highway Engineer, Economist, S SOperation Officer

10/1998 5 Highway Engineer (3), S SEconomist,

03/1999 5 Highway Engineer (2), Transport S SSpecialist, Operation Officer,Transport Economist

07/1999 4 Highway Engineer (2), S SProcurement Specialist,Transport Specialist

11/1999 5 Highway Engineer (2), S SProcurement Specialist,Transport EngineerTransport Specialist

ICR11/99 3 Economist, Highway S S

Engineer, TransportSpecialist

(b) Staff

Stage of Project Cycle Actualatest Estimate

..._==_._...._._.._...._... No. Staff weeks USS (.000)Identification/Preparation 39.9 100.7Appraisal/Negotiation 28.1 84.5

Supervision 91.7 256.8

ICR 10.6 31.4Total 170.3 473.4

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Annex 5. Ratings for Achievement of Objectives/Outputs of Components

(H=High, SU=Substantial, M=Modest, N=Negligible, NA=Not Applicable)Rating

Z Macro policies O H OSUOM O N * NAI Sector Policies O H OSUOM O N O NA

M Physical * H OSUOM O N O NAZ Financial O H OSUOM O N * NAZ Institutional Development 0 H * SU O M 0 N 0 NA3 Environmental O H * SU O M O N O NA

SocialF Poverty Reduction O H *SUOM O N O NAZ Gender O H OSUOM O N * NAZ Other (Please specify) O H *SUOM ON O NA

• Private sector development O H OSUOM O N O NA• Public sector management 0 H O SU *M 0 N 0 NA• Other (Please specify) O H *SUOM ON O NA

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Annex 6. Ratings of Bank and Borrower Performance

(I-IS=Highly Satisfactory, S=Satisfactory, U=Unsatisfactory, HU=Highly Unsatisfactory)

6.1 Bank performance Rating

• Lending OHS OS OU OHUO Supervision * HS OS OU OHUO Overall OHS OS O U O HU

6.2 Borrower performance Rating

O Preparation OHS Os OU OHUO Government implementation performance O HS O S O U 0 HUE Implementation agency performance O HS O S 0 U 0 HUEl Overall OHS OS OU OHU

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Annex 7. List of Supporting Documents

KR5 Project

World Bank, Staff Appraisal Report, Fifth Kabupaten Roads Project, April 10, 1994.

World Bank, Loan Agreement: Fifth Kabupaten Roads Project, June 6, 1994.

World Bank, Bank Mission Supervision Report, (various, see for list of mission).

Agribusiness International Pty Ltd, Strengthening Provincial Environmental Management & PlanningCapability, Activity Progress Report, February-March 1999.

Agribusiness International Pty Ltd. Strengthening Provincial Environmental Management & PlanningCapability, December 1999.

CTS for Kabupaten Roads, KR5 Project, Materialfor Mid-term Review, April, 1996.

CTC, KR5 Projects-Materialsfor Mid-term Review, April, 1996.

CTC, Re-evaluation of Sample Projects under KR5 project, March 13, 2000.

CTC, Summary of Civil works Program, Contracts, Works Done and Disbursement, April 4, 2000.

Hoff & Overgaard and als, Final Report on Bridging Services for Planning and Monitoring of KabupatenRoad Projects, March, 1997.

Hoff & Overgaard, Performance Indicators for KR5, November 1999.

DHV Consultants BN, FINAL Report, Consultancy Services for Implementation, KR5, Volume: I, III,Annex 1-6 to Vol. I, April 22, 1999.

DHV Consultants BV, KR5, Project Completion Report North Sumatra Province, (not dated).

DHV Consultants BV, and Grabowsky & Poort BV, Various monthly Implementation Reports.

Lyon Associates, Inc, Kabupaten Equipment and Workshop Management Improvement II Project PhaseII, Final Report & Summary Final Report, June 1999.

Renardet S.A, Consultant Services for Kabupaten Roads for Labor Intensive Core Team, Oct. 1999.

Renardet S.A. in Association with Pt. Arteri Cipta Rencana, Final Report: Consulting Services forKabupaten Roads for Labor Intensive Works, Volumes: 1 & 2. February 21, 2000.

Social Monitoring & Early Response Unit, ASEM Social and Economic Development Recovery FundLabor Intensive Works (LIW) Programs, World Bank Kabupaten Roads, Technical Assistance forImplementation Study and Strengthening, Oct. 1999.

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Other Related Documents

World Bank, Project Appraisal Document, Sumatra Regional Project, January 20, 1998.

Republic of Indonesia, Act of the Republic of Indonesia, Number 22 of 1999, RE: RegionalAdministration, May 7, 1999.

Republic of Indonesia, Act of the Republic of Indonesia, No. 25 of 1999: Financial Proportion betweenthe Central Government and the Regional Administration, May 19, 1999.

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Annex 8. Borrower's Contribution

ICR-KR5 May 4, 2000

FIFTH KABUPATEN ROADS PROJECT

(Loan 3732-IND)

IMPLEMENTATION COMPLETION REPORT (ICR)

PROJECT REVIEW FROM BORROWER'S PERSPECTIVE

1. BACKGROUND

This paper has been prepared as part of the Borrower's contribution to the Implementation Completion Report(ICR) for the Fifth Kabupaten Roads Project (KR5) in line with the standard requirements of World Bankloans. The report has been prepared on behalf of the Directorate General of Highways (DGH) of the Ministryof Public Works as the Government's Project Executing Agency.

2. PROJECT OBJECTIVES AND COVENANTS

2.1 Objectives and Description

The Project had two general objectives:

1. To improve access to the main economic centres for the rural population in 27 Kabupaten (districts) in5 provinces.2. To enhance the planning and implementation capacity of GOI agencies in charge of Kabupaten roads.The specific objectives were to (a) improve systems and procedures for road maintenance and ensure that the

maintainable network of the 27 Kabupaten (about 6,000 km) is satisfactorily maintained; (b)rehabilitating/improving about 1,620 km of existing roads; (c) improving the capability of staff involved in thesub-sector nation-wide at all levels and (d) strengthening institutional arrangements and improving thetechnical environment for planning and implementing Kabupaten roadwork programmes, including theadaptation and dissemination of more appropriate road technologies (Staff Appraisal Report = SAR, April1994, par. 4.1).

The objectives were intended to be achieved through (A) Road Network Improvement and Maintenance; and(B) Technical Assistance and Training (refer Project Description, Schedule 2 of Loan Agreement).

The physical objectives (a) and (b) were undertaken in parallel with the institutional objectives (c) and (d),although it was evident that institutional factors would determine the physical outcome. This situation meantthat the expectations of the Bank for good performance under (a) and (b) were often tempered by theimplementing agencies' progress under (c) and (d); in fact previous Completion Reports show that both theBank and the Government had difficulty at the start in determining institutional arrangements for the Project,

how to improve Kabupaten staff capability, and how to disseminate and enforce technical standards. See PCR

for RRI (June 1989), ICR for RR2 (December 1994), KR3 (December 1997). This difficulty was mainly

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because the sub-sector was already highly decentralised, with Kabupaten already fully responsible for planningand implementing their own roadwork since the 1980's. The lack of direct control by central and provinciallevel agencies created considerable tension between the Bank and the Government over the pace ofachievement of objectives.

The Government feels that its own objective of strengthening decentralisation, to make Kabupaten moreresponsible while at the same time helping provincial and central government to play a more effective role, wasnot expressed clearly enough in the Loan documents, which focused on the central and provincial roles.

2.2 Loan Covenants

The KR5 loan covenants (refer SAR chapter 6, as well as Schedule 5 of the Loan Agreement), included (a)maintenance of the Project Secretariat (PS) established under KR3 to assist the Co-ordinating Committee of theProject; (b) maintenance of the Project Implementation Unit in Directorate General of Highways (DGH)established under KR3 to monitor progress in Project implementation; (c) preparation of annual roadmaintenance and rehabilitation! improvement programmes in accordance with agreed criteria including timeschedule and methodology including environmental assessments and "baseline data of the social structure andincome sources of the concerned Indigenous Peoples, if any". Other loan covenants included (e) taking intoaccount the interests of Indigenous Peoples in planning sub-projects and prepare a team of professionals tomonitor adverse impacts of the Project on these People, submitting an annual report on such monitoring eachyear beginning in 1994, (f) allocate funds for procurement of vehicles; (g) transfer ownership of workshops tothe kabupatens with an action plan for establishment of the workshops as autonomous plant-hire units bySeptember 1994, and provide for operation and maintenance costs and charge hire-out rates by January 1995;and (h) carry out technical audits of completed works. Almost as a footnote in par. 6.2 of the SAR, fundingeligibility of improvement programmes in any one Kabupaten were to be contingent on its maintenanceperformance.

Discussions on the loan covenants tended to dominate communications between the Bank and the Governmentthroughout the early years of the Project, to the point that the original purpose of the covenants was obscured.The covenants tended to appear as substitutes for the Project objectives. When the Project was explained tolower level officials, it was often the restricting elements in the loan covenants that were emphasised.Short-term objectives expressed in loan covenants and programmes should not be over-emphasised and thusobscure long term objectives.

The Government considers that the timing aspects of the maintenance covenant were deficient, and the PS/PIUcovenant led to misunderstandings about control of the programme, as discussed below under sections 3.2 and3.4 of Project Achievements. The covenants relating to the impact of the Project on Indigenous Peoples werenot very relevant to the majority of roadworks constructed under the Project.

3. PROJECT ACHIEVEMENTS

3.1 Physical Targets

Compared with the physical target of 1,620 km of rehabilitation/improvement, 1,665 km was constructed in the27 Kabupaten in three years. The scope of the Project was enlarged in 1996/97 to include civil works in 9Kabupaten in 2 provinces (NTT and South Sulawesi). Another 108 km of rehabilitation/improvement wasconstructed in 5 of these Kabupaten in 1996/97.

There was slight confusion over the maintenance target under KR5. While Schedule 2 of the Loan Agreementcalled for "maintenance of approximately 6,000 km of roads in 27 Kabupaten" and the SAR (par. 4.1)mentioned "ensuring the maintainable network of about 6,000 km is satisfactorily maintained", however in par.4.5: "The target to be reached by the third year of the project is that 90% of the maintainable network, i.e.,about 6,000 km, should be maintained. This target will be met gradually, by 50 percent for the first year and70 percent for the second year." Tables 2.5 and 2.6 in the SAR showed a maintainable network (good and fair,sealed and gravel) in 27 Kabupaten was 6,400 km in 1991. These physical targets were essentially achieved in

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the planned three years, as can be seen in the following table:

Maintenance Targets and Achievements

SAR Targets Achievement

Year % of Maintainable Equivalent to Km Total Periodic RoutineNetwork 6.400 Km

I = 1994/95 50 3,200 3.100 794 2,307

2= 1995/96 70 4.480 4.172 866 3,306

3 = 1996/97 90 5,760 5.727 1,013 4,714

Network Achievements

In network terms, the road conditions in the 27 Kabupaten have apparently worsened during the Project period,

judging from the Percentage in Good or Fair condition, as seen in the following table:

Road Type & Condition 1991 1996 Percentage Increase

Good & Fair Sealed 2,858 4,846 + 70 %

Good & Fair Gravel 3 542 1,542 - 57 %

Subtotal Good & Fair 6,400 6,388 -0%

Other Paved 2,040 3,172 + 55 %

Earth, of which 8,916 15 442 + 73 %

Impassable Earth Not available 7,670 n.a.

Total Network 17,356 25,002 + 44%

% Good & Fair 37 % 26 % - 11%

The increase in the length of good/fair sealed roads represents a significant improvement in the quality of those roads, due primarily to

the KR5 Project. However the national target of 60% good or fair roads (SAR par. 2.24) has receded further into the future. The

Government recognises the need to sharpen the definition of Kabupaten roads and to focus on the most important links, however the

Kabupaten are not yet convinced of this priority. In future the Executing Agency should be made responsible and accountable for the

specific set of road links which are targeted.The main reason for the six months loan extension arranged in 1999 was to take advantage of the funds in the Unallocated Category to

carry out Labour Intensive Works, not to achieve physical targets.

The main reason for the six months loan extension arranged in 1999 was to take advantage of the funds in the

Unallocated Category to carry out Labour Intensive Works, not to achieve physical targets.

3.2 Maintenance Policy Reform

This was the fifth loan for Kabupaten roads and, starting with KR3, changed the focus from improvement to

preservation of the existing good and fair roads as a precondition for network improvement. The main purpose

was to reform the Kabupaten habit of allocating funds to low cost (low quality, short life) stopgap repairs on

roads in bad condition which was apparent in the 1980's. It was identified that this habit was the main reasonfor lack of improvement in the condition of the Kabupaten road network. For this reason, the strategy was that

all roads (and only those roads) in good and fair condition would receive maintenance funds. The Bankstrongly supported this strategy by introducing certification of maintenance works by consultants, requiringdetails of programmes in advance, setting targets of the percentage of maintainable roads which should receivemaintenance, and linking approval of major works funding to satisfactory maintenance performance in theprevious year.

The maintenance conditionality had a poor start due to poor scheduling of the conditionality. At the time themaintenance performance was assessed, the betterment programme for the next year had already been

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determined. This meant that all Kabupaten would be considered in default if the covenant was strictlyenforced, hence the implementation of the covenant was not very practical. In the end, most Kabupaten havegreatly increased their maintenance programmes compared with those before the KR5 Project, so the target hasbeen achieved.

This policy was supported by the KREEM model's conclusion that with likely funds available, the optimalallocation is that all funds should be devoted to maintenance. This will be difficult for the Govermment toenforce as the Kabupaten officials believe strongly in network extension. Future Bank assistance shouldtherefore continue to concentrate on maintenance as it is highly economic but is a difficult concept, whileKabupaten should finance their own betterment and network extension.

A related achievement was the very simple set of tender documents produced for routine maintenance by CTCin 1994 which were based on the procurement procedures contained in Keppres 16/1994. The Bank's initiativein sponsoring these guidelines is appreciated.

3.3 Institutional Development: Government Staff

The "Lesson Learned" from the First Rural Road Development Project (page iv, PCR, June 1989) thatstrengthening local capacity ... cannot be achieved through technical assistance alone, without properincentives to the civil service ... " was repeatedly observed in this Project, but the lesson could not be applieddue to Government salaries policy, as in the earlier RR2, KR3 and KREI Projects. If anything, the financialsituation of civil servants is relatively worse now than at any time during the Project, and is a major threat to itssustainability, due to lack of productivity and efficiency. The costs of inadequate incentives were seen not onlyin the loss of productivity and output of Kabupaten officials, and also of field consultants and contractors. It isnot possible to measure it, but given that field consultants and contractors accounted for 87.8% of the TotalProject Cost of US$ 176.74 million (Appendix 1), the impact of say a 30% loss of output would amount to US$53 million in value.

The objective of "strengthening institutional arrangements and improving the technical environment forplanning and implementing Kabupaten roadwork programmes, including the adaptation and dissemination ofmore appropriate road technologies' was considered to be one of the functions of the technical assistance (TA)consultants employed under the Project. The consultants all contributed to these objectives, but the Governmentnow realises that TA was mainly used to achieve the physical objectives of the KR5 Project, and institutionaldevelopment was extremely limited.

One of the main problems was that the method of achieving institutional development was poorly articulateddue to the complexity of the decentralised arrangements and the multiple agencies involved at each level, alsodue to the necessity to treat all Kabupaten with a single approach.

3.4 Institutional Development: Organisational Aspects

The organisational aspects of institutional development of Kabupaten had been partially addressed in a pilotstudy on Kabupaten DPUK organisations in 1990 during preparation of KRMTP, where it was found that the16 sample DPUKs had 16 different organisation structures, none of which followed the Ministry of HomeAffairs' guideline on standard structure. The Ministry of Home Affairs was aware of this, but considered thatlack of standardisation was offset by the unspecified benefits of autonomy.

Kabupaten autonomy already existed at the start of the Project, not only in organisation structure but inauthority; Kabupaten were not line agencies of Provinces, and certainly not of the Central Government. Thestatement in par. 2.8 of the SAR that "These second level units in theory have autonomous budgets and taxationpowers but in practice function as extensions of the central or provincial governments" wrongly implied thatKabupaten follow central or provincial instructions. In fact central and provincial governments only hadpowers of persuasion, and consultants were relied on to enforce guidelines.

The establishment and maintenance of the PS and PIU for project co-ordination and monitoring was at the topof the list of loan covenants for KR3, KREI and then KR5. However the Project Secretariat and ProjectImplementation Unit were not formally able to exercise any decision-making power. Hence the Government

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communicated through a structural agency rather than through the "co-ordinating" unit.

As implementation was already in the hands of the Kabupaten, and provincial and central levels could only

provide guidance, there were built-in limits to "co-ordination" and "monitoring" by govermnent agencies which

not even a PS nor a PIU could overcome; secondly the structure of the PS was unbalanced, with only one

technical Director out of seven, who represented six Directorate-level agencies in DGH.

The main advantage of the PS and PIU was to act as a forum for meetings since no single agency had full

control of the programme. DGH was Executing Agency, but in fact DGH only had full control over a few

components (management of TA consultants, and procurement of equipment). The assumption in project

design (SAR par 4.18) that "the detailed responsibilities of these agencies (MPW for technical aspects, MHA

for institutional aspects, Bappenas for development planning aspects, and MOF for financial aspects) and

corresponding offices at Kabupaten, provincial and central levels have been defined" (SAR par 2.5 - 2.8)

overlooked the lack of authority by the technical agency, and the overlap between technical, institutional,

development planning and fmancial aspects. It was recognised in "Lessons Learned from Previous Project" that

"preparation of detailed implementation arrangements" was a key factor in improvement of an institutional or

technical nature (SAR par. 3.5).

The role of DGH was a source of some misunderstanding. As Executing Agency, DGH could be considered

responsible for meeting the loan covenants. On the one hand this included a set of technical objectives which

DGH supported for professional reasons, but for which it could not be held responsible because of the

above-mentioned division of powers. In DGH's view, an opportunity was lost by not assigning DGH authority

commensurate with its expected responsibility and with the capability of its strong central staffing. Because of

its lack of direct authority, DGH had to rely on its Consultants to exert influence over Kabupaten agencies and

contractors, but the Consultants in turn did not have such authority. This led to tensions between Consultants

and local agencies. There was no direct system of accountability for poor quality work, as the implementingagencies were not accountable to the Executing Agency. Indirect channels through Consultants should not be

relied upon in future.

The legal environment changed in the final year of the Project, with the promulgation of Laws No. 18, 22 and

25 of 1999 on Construction Services, Regional Government and Revenue Sharing, but this was too late to

influence Project implementation. Significant changes will be needed, in particular (a) not to expect central

agencies or their consultants to keep up with detailed developments without adequate staffing and contact with

Kabupatens; and (b) local control of local programmes needs to be developed, based on a strong monitoring

system, and activation of local Parliaments and other interest groups.

In summary, the project design optimistically accepted the overlap between the four central agencies' roles, and

by maintaining a Project Secretariat and Project Implementation Unit which were non-executive organisation

structures, give a mistaken appearance of single executive control and had the effect of submerging thetechnical agency appointed as executing agency. An unsatisfactory technical result could therefore have

eventuated, and it is to the credit of Kabupaten staff and the Consultants that the technical result was generally

satisfactory.

3.5 Institutional Development: Technical Environment

A key objective of the KR5 Project was to develop the technical environment by supporting the systematictechnical guidelines developed under previous Projects. This was addressed directly through the technicalassistance consultants, and indirectly through the Kabupaten Roads Master Training Plan, which prepared and

implemented training modules based on the technical guidelines. Funding of KRMTP and a Technology

Adaptation and Labour Intensive Method component were addressed under the KREI Project, while the

technical guidelines and training aspects continued RR2 or KR3 initiatives.

Systematic guidelines for planning of Kabupaten road improvements had been initiated with the Director

General of Bina Marga's Decree no. SK 77 of 1990. These were revised and re-issued in November 1995

without revising the decree number. A range of engineering guidelines was prepared from 1990 to 1992, which

DGH issued to all KR5 Provinces in March 1994. Planning guidelines included environmental screening, whileengineering guidelines included basic clauses for environmental protection. Engineering guidelines were also

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re-issued in November 1995. Appendix 2 includes a list of materials for Guidance of Kabupaten RoadDevelopment prepared or updated during the period of the Project, including recommendation for futureupdating once every five years.

An important indicator of sustainability of the technical environment established under the KRP is theacceptance of the technical guidelines for non-Project funded works. Before 1997, GOI guidelines had statedthat planning guidelines SK77 only applied to foreign-assisted works. In 1997/98 SK77 became a pre-requisitefor eligibility of betterment works, regardless of the source of funding.

The CTC were intended to assist a Planning Research Unit within DGH. This was not established, and allplanning research activities were carried out by CTC. In the future, key aspects of decentralised Kabupatenroadworks programmes, such as vehicle operating costs, assumptions on traffic developments, costing andbudget allocation systems and definitions of work types, will still need to be decided at central level.

3.6 Technical Assistance

Technical Assistance (TA) including works supervision amounted to 12% percent of the total Project cost underKR5, compared with an estimated 11.6% at Appraisal (Appendix 1). Supervision alone accounted for 7.9%(including 1.3% for supervision of Labour Intensive Works in 1999 which was disbursed under category 4),compared with an estimate of 7.8%. The Government considers that this is a relatively high figure, but it isinevitably costly to support decentralisation policy. The investment of 4.1% of the Project cost in institutionalassistance appears high, however it ircluded only 1.7% for CTC/Bridging/Management Support. Othercomponents included 1.5% for KEWMI equipment management services, 0.6% for ISEM and SPEMenvironmental management, and 0.4% for the RRTPA study in preparation for the Sumatra Region RoadsProject (Loan 4307-IND).

The largest slice of assistance was for Field Consultants for Implementation (FCI) consisting of two sets ofcontracts, Region I supervising KREI-funded roadworks in Sulawesi and Irian Jaya, and Region III supervisingKR5-funded roadworks in Maluku, Riau and Kalimantan, and for one year in North Sumatra. All fieldconsultants reported improvement of Kabupaten performance over the years, but their advice not to re-employcertain contractors was generally ignored. The Central Government does not have power to pre-qualifyKabupaten contractors, but this greatly influences the quality of work. Future services of a similar type shouldnot expect advisory services to apply more authority than their Client actually possesses.

A series of Labour Intensive Works (LIW) contracts were funded from KR5 from September 1998 to October1999 to supervise KREI- and KR5-funded works in 10 provinces, as described in section 3.7.

The Central Technical Consultant (CTC), had begun under KR3 and was nominated in both SAR to continuethrough KREI and KR5. The CTC contract was modified six times under KREI, terminated in July 1996 after atwo month extension under KR5. Tendering of CTC Phase II had begun early in 1996, but was declaredinvalid in December 1996 due to a difference between the Bank and the Government over technical evaluation.A series of six contracts for Bridging of Planning and Monitoring services was arranged with the originalconsultant from August 1996 until February 1998, followed by a series of four Management Support contractsuntil December 1999. As these were direct appointments, the length of these contracts during KR5 averaged3.4 months, causing considerable uncertainty and loss of efficiency. Total input amounted to 100.3 mm foreignand 660.5 mm Indonesian professional. The Consultant's pre-fmancing to maintain continuity is noted.

CTC services established systematic planning procedures in about 150 Kabupaten in Indonesia (that is, in allKabupaten except those assisted by AsDB in Java); developed an economic model for allocation of budgets toKabupaten roads (KREEM), developed a computerised Kabupaten Roads Management System (KRMS) toenable monitoring of planning, budgeting, contract, progress and payments; developed a performanceevaluation system based on the technical guidelines, and later on, performance indicators for Kabupatenroadworks; a Study of Inter-District Roads in Java; a Study of the Application of High Resolution Maps forKabupaten Roads, and a Study of Legal Aspects in revising Indonesia's Road Law; and gave ad hoc operationalsupport as well as advice in co-ordination of the KR Projects.

The CTC Environmental Task Group established and implemented new environmental guidelines for

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Kabupaten roads parallel with evolving environmental regulations, and developed screening procedures andgeneric environmental studies (sectoral PILs) which will save carrying out enviromnental studies on about 90%of Kabupaten roads in Indonesia (varying between Kabupaten), thereby saving much time and money. The totaleffort in the CTC Environmental Task Group from July 1992 to December 1997 was 38.6 man-months foreignand 197 man-months of Indonesian professional services. Half of this input was fmanced under the KR5Project, covering the period from September1994 until December 1997.

Institutional Strengthening in Environmental Management (ISEM) services were provided from September1996 to October 1999 (3 years) for DGH Directorates of Planning (BIPRAM), Urban (BINKOT) and TechnicalGuidance (BINTEK). Total consultant input was 80.84 man-months foreign and 190.43 man-months ofIndonesian professional services, about 72% under KREI and 28% under KR5. ISEM was focussed on thestrengthening of environmental procedures and operational support, particularly for national and provincialroads. A range of guidelines/working procedures were produced, with useful abstracts.

Monitoring of the Impact of the Project on Isolated Peoples was carried out under two contracts funded fromKREI, one in 1997 with the University of Indonesia covering two Kabupaten in Riau and two Kabupaten inEast Kalimantan (roadworks assisted under KR5) and a second in 1999 with the University of Cendrawasihcovering two Kabupaten in Irian Jaya (roadworks assisted under KREI). The second report is very welldocumented and is a model for future work in monitoring such impacts.

Strengthening Provincial Environmental Management & Planning Capability (SPEMC) services were providedfrom November 1998 to June 1999 to assist BANGDA's Directorate for Environmental Management andDevelopment, BAPPEDA (regional planning offices) and BAPEDALDA (regional environmental offices). Thetotal consultant input was 8.0 man-months foreign and 36 man-months of Indonesian services. The focus ofthe SPEMC services was an environmentally oriented management system through co-ordination andparticipation in the provinces of Aceh, South East Sulawesi, and West Java. SPEMC produced a set of thirteendraft procedural guidelines, and gave an innovative approach to decentralised environmental management.

Phase I Kabupaten Equipment and Workshop Management (KEWMI) services ran from July 1995 to July 1996to establish improved management practices, including equipment rental guidelines and establishment ofself-financing workshop units (Swadana). A second one year Phase was completed in June 1999 which appliedthe systems to 18 Kabupaten in 9 Provinces. The Consultants still reported lack of understanding of mainconcepts by Kabupaten managers at the end of the services, including lending of equipment to favouredcontractors, poor management practices and weak human resources.

The Regional Roads Transport Planning Analysis (RRTPA) study from June to December 1996 prepared amore integrated approach to road network planning for national, provincial and kabupaten roads. A study byCTC in March 1996 had identified Northern Sumatra as the most appropriate area in Indonesia in which toinitiate this approach. This is related to the finding under Section 3.1 that Kabupaten do not concentrateresources on the most important roads, but prefer to extend their networks.

3.7 Civil Works: Physical

Appendix 1 shows that civil works made up 80.1% of Project costs, versus 78% at Appraisal. The Project wasnot seriously affected by the economic downturn which affected Indonesia in the late 1990's. Detailed reportswere produced on the eligibility of every major works sub-project.

The monitoring system recorded actual works, not design data. Although the FCI were required to certify thatdesigns and tender documents were adequate, it was decided to sacrifice design data from the projectmonitoring databases. Only the certification of design was recorded as a basis for eligibility. As a result, muchless is known about design than about planning or implementation. One lesson learnt from KREI and KR5 isthat more effort needs to be put into improving design quality.

A series of Labour Intensive Works (LIW) were funded from KR5 in West Java and Central Java in1998/1999). This work was initiated using "savings" from unsubmitted applications for roadworks in earlieryears of KR5, in response to the economic and unemployment crisis which hit Indonesia in late 1997.

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3.8 Civil Works: Financial

To recover payment data for reimbursement of eligible expenditure, the Field Consultant's duties includedmonitoring of payments, as well as the monitoring of roadwork programmes, contracts and physical progressexpected of a Works Supervisor. However the monitoring of payments turned out to be a greater challenge thanexpected, both for the FCI to obtain the data, for the CTC to reconcile it with contracts and disbursements, andfor the Ministry of Finance to identify payments and prepare Statements of Expenditure (SOE). Appendix 3shows the Actual Disbursement versus Expected Disbursement (from SAR) and Physical Progress (ContractsLet and Work Done). The large effort in monitoring and co-ordination paid off in keeping the Project generallyon schedule.

Contract and SPM (Payment) Data for all of the 986 contracts funded under the main civil works sub-categoriesof the Loan from 1994/95 to 1997/98 were matched and reconciled. The Loan Status Reports adjusted estimatedprogramme values based on actual exchange rates and contract values. A single exchange rate was calculatedand continuously updated for each Civil Works Year and Loan Sub-Category, and for each Non-Civil Workscontract and currency.

Labour Intensive Works of about US$ 8.0 million were funded using "savings" from unsubmitted applicationsfor unrecoverable payments for roadworks in earlier years of KR5. While this has greatly assisted theGovernment to overcome some of the effects of the economic crisis, it actually represents an amount funded infull by the Government due to inadequate administration of payments for Kabupaten roadworks. This isevident as the final gap between Physical Progress and Disbursement. The effect of the disbursement shortfallwas to reduce the average Loan share for all civil works to 41.4% from 46.7% (average of 37% in early yearsand 100% net of tax for the LIW works).

The main lesson from the KR5 financial monitoring experience is that sharing payment data between BankIndonesia and the Ministry of Finance needs to be established, as well as a method for the Ministry of Financeto assemble Statements of Expenditure based on eligible works, preferably with access to the database andonline access to all KPKN's.

3.9 Civil Works: Quality

The RR2 Project had developed technical audit procedures for measuring the quality of traditional penetrationmacadam pavements on Kabupaten roads, and post-construction monitoring of road conditions to monitordeterioration starting in 1988. These efforts were continued under KR3, KREI and KR5. A small sample of 7sub-projects in West Java was audited in 1994, and a further 17 sub-projects in 6 KR3 provinces were auditedin late 1995 and early 1996. A total of 8 sub-projects in 6 KREI provinces were audited in June 1995 (reportpublished May 1996). A total of 5 sub-projects in 5 KR5 Kabupaten were audited in January 1997 (reportpublished July 1997). The conclusion of the technical audit was that construction quality is a serious problem,with deficiencies being found in thickness and quality of pavement materials, and also in bitumen content.However, the impact of poor construction quality on pavement life is not so conclusive, judging from results ofpost-construction monitoring.

A total of 149 sub-projects, averaging two per Kabupaten, were surveyed approximately every six months by theFCI from February 1993 until 1996. In the KREI Kabupaten, 64 sub-projects in 49 Kabupaten were surveyedand in the KR5 Kabupaten, 26 sub-projects in 27 Kabupaten were surveyed during this time. A list of allprojects surveyed under KR3, KREI and KR5 was included in the latest PCM Guidelines, with the latest rating.CTC/Bridging Consultants carried out the latest survey of these links in May 1997.

The majority (62%) of the KR3 roads were still in good condition 6 to 8 years after construction, and another38% were in fair condition, despite an imperfect maintenance regime. The deterioration curve is remarkablyflat for the penetration macadam surfaces (covering 90% of cases), compared with that for other sealed surfacetypes.

It appears that construction quality (particularly drainage) has a great effect on lifetime, therefore procurementof good contractors, and application of good supervision are the major determinants. The Project was not

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permitted to use force account construction. Therefore it was not possible to verify that force account worksshould be significantly cheaper than the equivalent standard contract works.

3.10 Performance Indicators

A set of Performance Indicators was developed in the final year of the Project to measure the Projectachievements. In addition to the findings on Network Achievements described under Section 3.1 above, it wasfound that (a) Planning Performance rose significantly from 1994 to 1999 corresponding with continuoustechnical assistance; (b) no significant improvement in construction or maintenance speed was observableduring the Project; and (c) the number of PCM surveys has dropped off sharply since the demobilisation of theField Consultants for Implementation.

3.11 Equipment

Procurement of roadworks and other equipment for the Kabupaten was managed smoothly by DGH. Problemsin financing delivery of equipment were assisted by the Bank agreeing to finance Inland Delivery out of theLoan in the final year of the Project. The KR3 Loan Covenant requirement to transfer ownership of allLoan-financed equipment to the Kabupaten was finally achieved in 1998. Ownership of all equipment procuredunder KR3, KREI and KR5 has now been transferred to the respective Kabupaten.

Improved equipment management procedures, introduction of self-financing (Swadana) mechanisms forKabupaten workshops, and introduction of more rational equipment rental rates were all supported by theKEWMI services managed by DGRD and funded from KR5. 18 Kabupaten were chosen as a pilot for Swadanaof which 4 had adopted it by the end of the Project. The Swadana model was not very attractive to theKabupaten due to the exhaustive conditions laid down by Ministry of Finance. Secondly, all income has to bereturned to Kabupaten Revenue, so Swadana does not guarantee adequate equipment maintenance funding, andlacks the incentive of privatisation. Earmarking of funds for equipment operation and replacement, and forworkshop operation would be a simpler solution. Rational rental rates (increased to include depreciation andmajor repair costs) have not been accepted by Kabupaten or contractors.

The lack of qualified experienced mechanics and operators in the Kabupaten was not helped by minimal FCImechanical engineering services, greatly reduced from that provided under previous Projects. Two loancovenants: contract packaging for Betterment and Periodic Maintenance to ensure work was done by largercontractors, and multi-years' Betterment contracts, also intended to provide larger contracts as anencouragement for contractors to buy equipment. The multi-years covenant did not work at all, as the Ministryof Finance decided that all funds must be spent in one year for fiscal discipline; secondly, for planning reasonsmost Kabupaten road projects are small scale, and suitable for completion in one year. The contract packagingcovenant had mixed success. In practice, many contractors sub-let part or all of the works to local contractors,but because this procedure was not permitted under General Conditions of Contract, it was not documented.The use of larger contractors therefore did not guarantee increased use of equipment, and raised administrativeoverheads. Many contractors are just suppliers of labour.

A serious factor inhibiting equipment ownership was identified in a paper by CTC ("Availability of Credit andGuarantee to Contractors", August 1994): the Indonesian banking system does not support lending forequipment purchase, as the equipment itself is not regarded as collateral. Contractors rarely have large fixedassets, so do not qualify for lending. This factor was well beyond the possible scope of the Project's initiatives,and recent developments in the banking sector have made it even less prospective than before. Efforts to makemore efficient use of Kabupaten-owned equipment, including force-account maintenance and construction,should therefore have been applied. However the Project covenants made it clear than force account was not infavour: it was ruled out entirely for Betterment and Periodic Maintenance, and limited to 50% of RoutineMaintenance.

As a result of the "privatisation agenda" dictating a number of impractical loan covenants, real progress inidentifying a suitable and practical role for the private sector in the Kabupatens was not achieved. This agenda,based on a faith in large contractors, impeded the Project objective of "enhancing the planning and

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implementation capacity of GOI agencies in charge of Kabupaten roads."

4. BANK PERFORMANCE

Intensive Bank supervision was given, averaging one Supervision Mission every 4.5 months. The Govermmentrecognises the value of a disciplined framework of regular progress reviews, accompanied by short-term actionplans and task lists. The Bank's practice of supervising KR3, KREI and KR5 together (in "clusters") assistedthe Government in management of the Projects.

However, some problems arose from the periodic nature of Bank supervision, characterised by short bursts ofintensive activity. During the short mission periods, it was often impracticable for all the relevant govermmentstaff to be involved, attempts were made to address too many issues simultaneously and communicationproblems arose. The apparent understandings laid out in mission Aide Memoires were not always fully graspedby staff from all concerned government agencies.

Although the Bank was fully committed to the PS/PIU arrangements, the Mission staff still made an effort tosee key staff from all central agencies on each visit, recognising that the PS/PIU had no real authority. Howeverthe Missions apparently did not have authority to discuss a redesign of the Project's institutional arrangementsduring the Project implementation period.

5. BORROWER PERFORMANCE

Decentralisation of management functions to appropriate administrative levels is a key objective of govermnentpolicy. However this objective was made more difficult to achieve due to extensive effort required to arrangeco-operation and co-ordination between four central level agencies and their sub-agencies in the Project, andpartly due to management weaknesses among concerned staff. By spending too much time on centralgovernment management, not enough has been done for local government management, and in this sense theProject has contributed little to improving Borrower performance.

The Mid-Term Review of KR5 (April 1996), it was observed that: "There seems to be still some confusion overcentral roles as regards responsibility for supervision of implementation of the program, and henceparticipation of central agencies in the quality control of planning, design and implementation has been muchless effective than warranted." (par. 5 of Aide Memoire).

The Government accepts there is a continuing need for management upgrading within local government, andwould welcome the Bank's advice on how the problem might be tackled. Unfortunately, managementupgrading has been limited in scope to contract management and financial management, with very littleemphasis on principles of organisation, office management or personnel management and communications.

6. CONCLUSIONS

The main questions are whether the Project loan has provided good value for money, whether it has led toimprovements that would not otherwise have occurred and whether these improvements are sustainable.

The economic re-evaluation of the KR5 Project suggests that the investmnent in road betterment andmaintenance yielded a sound return averaging about 30%, but that returns could have been higher if qualityhad improved. The sustainability of the KR5 Project still remains to be demonstrated during the coming periodwhen further decentralisation is expected.

The main lessons of KR5 are that:

* Strengthening local capacity cannot be achieved through technical assistance alone, without properincentives to the civil service. The costs of inadequate incentives were seen in loss of productivity and output ofofficials, field consultants and contractors.

Construction quality has a great effect on works lifetime, therefore procurement of good contractors

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and good supervision are major determinants. The incentive issue directly affects these issues.* A privatisation agenda and faith in large contractors impeded the Project objective of "enhancing theplanning and implementation capacity of GOI agencies in charge of Kabupaten roads" while not necessarilypromoting the second Project objective of providing road access.* The Government's objective of strengthening decentralisation was not clear in the Project design.* Effective decentralisation requires a good monitoring system. Local Parliaments and other localstakeholders need to be trained in this task. Central agencies or their consultants cannot assist without adequatestaffing and contact with the implementing agencies.* There was little accountability for poor quality work, as the implementing agencies were notaccountable to the Executing Agency. Field Consultants did not have the authority to enforce contracts.* Improving the Kabupaten road network is not achievable while the local authorities give priority toexpanding their networks. In future, if a central agency is responsible for a Project funded by a foreign loan, itshould be made responsible and accountable for the specific road links which are targeted.* Initiatives to encourage equipment ownership by contractors were not successful, as the banking sectordoes not provide lending. Efforts to make more efficient use of Kabupaten-owned equipment should have beenapplied, however force-account was discouraged by Loan covenants.* The Swadana model was not attractive to the Kabupaten: only 4 have been introduced. All incomehas to be returned to Kabupaten Revenue, so Swadana does not guarantee adequate equipment funding, andfalls well short of privatisation. Specific earmarking of funds for equipment operation and replacement, and forworkshop operation would be a simpler and more direct solution.* Too few real resources were devoted to practical training in a Project with the supposed objective of"enhancing capacity". Direct training delivery was not funded, not counting the CTC's planning training effortwhich succeeded in training as well as in institutionalising SK77.* Future Bank assistance should continue to concentrate on maintenance as it is highly economic but isa difficult concept, while Kabupaten should finance their own betterment and network extension.

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MAP SECTION

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