PID

THE WORLD BANK GROUP AWorld Free of Poverty

iAnofoShoplTh WorW i n,k

Report No AB44Updated Project Information Document (PID)

Project Name INDONESIA-Private Provision of Infrastructure Technical Assistance LoanRegion East Asia and Pacific RegionSector General industry and trade sector (100%)Project ID P076271Supplemental ProjectBorrower(s) REPUBLIC OF INDONESIAImplementing Agency OFFICE OF COORDINATING MINISTER FOR ECONOMIC AFFAIRSAddress (OCMEA)

Address Gedung Utama Dep Keuangan (#502), JI Lapangan Banteng Timur2-4, Jakarta 10710 IndonesiaContact Person Mr Jinny Katuuk, Deputy il Coordinating Ministry for EconomicAffairsTel 62-21-351-1462 Fax 62-21-351-1644 Email jinny ck@ centrinnet id

KKPPI Secretariate/PPITA-PMUAddress Menara Kebon Sirih- Lt.15- Room 1503, Jalan Kebon Sirih 17-19,Jakarta PusatContact Person Dr Wahyu Utomo, Project Manager-PPITATel 62-21-3983-6556 Fax 62-21-3983-7053 Emailppita_id@yahoo com

Environment Category BDate PID Prepared April 17, 2003Auth Appr/Negs Date March 18, 2003Bank Approval Date May 22, 2003

1. Country and Sector BackgroundBackground: Indonesia has long recognized the vital role of basic infrastructure in enabling andsupporting sustained and rapid economic development, and in improving public welfare andopportunities for the poor. This is reflected in the high priority accorded to the expansion,rehabilitation and-somewhat more recently-sound maintenance of transport, energy, urban andother infrastructure under six successive Five-Year Development Plans (Repelitas) and thecurrent National Development Program (Propenas 2000-2004).

For many years infrastructure provision had remained--with few exceptions--the exclusivepreserve of government and state-owned enterprises (SOEs). By the late 1 980s, however, it wasclearly evident that the public sector was no longer able to finance all needed investments in new

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infrastructure capacity and, moreover, that government agencies and poorly performing publiccorporations lacked the managerial capacity to deliver services to the standards increasinglydemanded by users. Indonesia accordingly embarked upon parallel programs to promote privateinvestment in new infrastructure projects and to reform and privatize its many (160+) SOEs.

The first major private infrastructure project was the Cawang-Tanjung Priok section of Jakarta'sinner ring toll road, construction of which commenced in the mid- 1980s. This originated with anunsolicited proposal from a politically-connected group that was able to drive the concessionnegotiation process and secure financing largely from public sector sources. A far moresignificant step was taken in, the power sector in 1990, when Government solicited proposals forIndonesia's first Independent Power Producer (IPP) project, a 1,200 MW coal-fueled station inEast Java. The Power Purchase Agreement (PPA) for Paiton I was signed in early 1994 andfinancial closing was achieved in April 1995, with debt financing provided by a combination ofexport credit agencies and commercial lenders. Many other private infrastructure projects, mostunsolicited, were by then already in the pipeline and--when the economic crisis struck in thesecond half of 1997--Indonesia had committed to long-term power purchase agreements with 26independent power producers and awarded concessions for numerous toll road, telecoms, watersupply, and other projects. In little over three years from the Paiton I PPA signature, over $20billion in investment commitments had been secured for private infrastructure projects,dominated by electricity ($10.2 bn), telecoms ($8.4 bn), and transport ($2.1 bn). In starkcontrast, the SOE reform and privatization program had moved very slowly. Nine years after itslaunch, GOI had sold only minority stakes in only a handful of SOEs, of which only two (Telkomand Indosat) were infrastructure providers.

In summary, Indonesia's strategy for involving the private sector in infrastructure provisioncentered mainly on the development of new "greenfield" projects rather than on transformationof public infrastructure enterprises. Implementing projects took precedence over improvingpolicies and regulations, with the eagerness shown by private equity investors and lendershelping to dissuade Government from pursuing much-needed structural reforms. Little progresswas made towards improving pricing policies and eliminating untargeted subsidies, or tointroducing competitive market structures and establishing sound regulatory arrangements. Theprocedures by which private partners were appointed were generally opaque, with the vastmajority of projects being either unsolicited or otherwise awarded through non-transparentprocesses to consortia with "politically connected" local partners.

Impacts of the Economic Crisis: Private infrastructure projects-and particularly those withforeign financing--were quickly impacted as the Rupiah plunged. In September 1997, Keppres39 of 1997 decreed that many major investment projects, including private infrastructureschemes for which contracts had already been signed, were to be postponed or reviewed.Subsequently, other private projects that had been cleared to proceed failed to reach financialclosing or were halted as their financing sources dried-up. Affordability concerns and mountingsocial pressures caused Government to abandon automatic tariff adjustment mechanisms in thepower and telecoms sectors and defer other tariff increase proposals, thereby affecting thecommercial viability of private projects already in operation or close to completion. Agreementsfor most operating and committed private projects-including all IPPs-were "re-opened", withthe subsequent renegotiations generally proceeding slowly. Sponsors generally accepted the needto renegotiate, and several subsequently agreed to "close-out" their projects. However, a few

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opted for international arbitration and / or to claim under political risk insurance, and decisions todate have so far favored the project sponsors.

The rate of growth in demand for infrastructure services is showing signs of picking-up asIndonesia slowly emerges from the crisis,. However, severe constraints on the State Budget havenecessitated sharp cutbacks in the level of development spending, while most infrastructureSOEs are in very poor financial shape. With the flow of new private investment forinfrastructure having all but ceased, there is little new infrastructure capacity currently underconstruction while in some sectors-such as roads--existing assets are deteriorating as a result ofinadequate maintenance. This, coupled with the long lead-times for developing new capacity,poses the risk that infrastructure constraints will impede restoration of rapid and sustainableeconomic growth and limit the quality and coverage of public services for the poor.

Key Challenges: The public sector was unable to finance all needed infrastructure investmentsbefore the crisis, and its capacity to do so now is much diminished. Unless Indonesia is preparedto accept further deterioration in living standards, it will need to mobilize substantial new privateresources while striving to optimize the utilization and financial self-sustainability of existingassets. Securing renewed private sector participation on reasonable terms will be extremelydifficult in the present environment, and will require Government to confront several difficultand inter-related challenges. These can be grouped into four broad areas:

1. Restoring Indonesia's overall attractiveness to investors. The level of new investment inIndonesia, and particularly new foreign direct investment, has slumped since the onset of thecrisis. While many other countries in the region also suffered badly during 1997/98,Indonesia fell further and has since recovered more slowly due to a combination of factorsincluding political uncertainty, systemic corruption, a dysfunctional judicial system, andsporadic social unrest and disorder. The magnitude of the challenges now facingGovernment in seeking to attract new investment is starkly reflected in assessments that showIndonesia as having one of the highest country risk ratings in the region, and being among themost corrupt countries in the world.

2. Restoring Indonesia's attractiveness to infrastructure investors. Infrastructure projects arecharacterized by their capital-intensity, long lead-times, long pay-back periods, and-in someinstances-social sensitivity. Globally, investor appetite for infrastructure opportunities islikely to have been impacted by the fall-out from California's power crisis, the Enroncollapse, and the bursting of the G3 mobile telephony bubble. Even without these externalfactors, Indonesia faces a much tougher task in persuading investors to commit toinfrastructure schemes than, say, to labor-intensive manufacturing (and even here the pictureremains somewhat bleak!). Meeting the challenge will require concerted action on severalfronts.

* Tariff and Subsidy Reform: Tariffs in many infrastructure sectors remain well below thelevels needed for long-term commercial viability. A rapid transition to cost-coveringtariffs, coupled with mechanisms for delivering well targeted subsidies to the most needy,is needed to restore fiscal sustainability and attract new private investment.

* Modern Regulatory Frameworks: Heightened perceptions of country risk mean thatprivate investors and their lenders will be much more demanding as regards the clarity,predictability, and credibility of regulatory frameworks. New models of arm's length

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regulation have been under study for some years, but decisions need to be taken, newlaws enacted, and new institutions put in place. As part of this process, the additionalregulatory uncertainties arising from regional autonomy need to be resolved.

* Other Risk Mitigation Measures: Investors in new infrastructure projects in Indonesiawill likely demand some form of public support to mitigate country and project risks.Even in ordinary circumstances, such support packages require careful design to avoidexpanding public exposure beyond prudent levels or undermining incentives for efficientrisk bearing. Formulating sound policy and strategy in the current circumstances will beextremely challenging.

* Procurement Processes: In order to provide comfort to prospective investors, helprebuild the legitimacy of private infrastructure in the eyes of local stakeholders, and helpensure the best terms possible for the country, private partners will need to be chosenthrough fully transparent, competitive processes so as to preclude later claims thatprojects were awarded corruptly.

* Disputes on Existing Private Projects: Until disputes concerning existing projects aresatisfactorily resolved, Indonesia will find it difficult to persuade mainstream privateinvestors, lenders and insurers to return. Moreover, the manner in which Indonesiahandles ongoing disputes on private infrastructure projects may have more generalimplications for future foreign direct investment flows.

* Link with SOE Privatization: To realize the full potential benefits of privateparticipation, Government will need to accelerate the restructuring and privatization ofinfrastructure SOEs. In addition to generating resources for the Government, this willhelp enable effective competition and enhance efficiency and service quality. It can alsohelp lock-in cost-covering retail tariffs, thus ensuring investments in new wholesalefacilities--such as power plants-will have credit-worthy customers.

* Preparation of soundprojects. Many of the projects that were offered to the privatesector in the past were poorly prepared and, in some instances, ill-chosen. In seeking topersuade private investors to return quickly, Indonesia will need to be able to offer wellconceived and prepared schemes that are amenable to early and rapid implementation.

* Building institutional capacities: Concerted efforts will be needed to strengthen thecapacity of the central and regional agencies and enterprises charged with developing andimplementing policy and regulatory reforms and with dealing with prospective privateinvestors. Few central government officials and SOE staff currently have relevanttraining, in part because there are few, if any, quality programs offered in Indonesia.Even fewer have sound practical experience as most of the private infrastructure dealsconcluded pre-crisis were concentrated in a few sectors and originated with unsolicitedproposals. And the situation is worse at the sub-national level.

3. Building domestic financing capacities: To reduce the impact of currency risks, Indonesiawill need to strengthen its domestic capacity to finance infrastructure projects. Success withfinancial sector restructuring will help, but there may also be a need and opportunity todevelop new infrastructure-specific financing mechanisms and instruments.

4. Building public acceptance of private infrastructure. There are continuing indications ofstrong resistance to restoring private investment in infrastructure, both from within the publicsector and from civil society. Three underlying causes can be identified:

* Private participation requires sector departments and infrastructure SOEs to accept a

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paradigm shift in their roles and in the way they do business. It also requires effectiveinter-agency co-operation and co-ordination, areas where Indonesia has traditionally notbeen strong. Experience with the privatization program suggests that securing the neededcultural changes will be a slow and difficult process in the absence of concerted efforts toanticipate and deal with problems.

* Closely linked with this, involving the private sector in traditional public sector domainsthrough transparent processes will likely threaten vested interests by squeezingopportunities for supplementing personal incomes or diverting funds for political ends.

* The public's perception of private infrastructure delivery has been colored byvigorous--but often poorly-informed--debate on the failings of the power, toll-road, watersupply, and telecoms deals concluded during the Suharto era. This is reflected in thenegative stance of many civil society organizations, which in turn is open to exploitationby those with vested interests in maintaining the status quo.

Recent achievements. The Government has recognized the importance of addressing thesechallenges, and has prepared the draft of an Infrastructure "White Paper" which overviewscurrent status and issues in each of the major infrastructure sectors. A draft of this paper,prepared by the Infrastructure Deputy Chairman of BAPPENAS, was presented at the annualConsultative Group on Indonesia (CGI- donors forum) meeting in January of 2003 as adiscussion paper for further refinement based on additional sector studies and other inputsexpected. It is hoped that a "final" version of the paper will be ready for Cabinet discussion bylate 2003. One additional input to this process and to guide future Bank activities in theinfrastructure sectors is a planned AAA review of priority infrastructure issues in Indonesiaduring the current Bank FY 03 (report to be completed by June 2003). This work has beenfocused on power, transport, water supply, telecommunications and rural infrastructure sectorsdue to resource constraints, but will provide valuable insights to the options for Bank and GOIcooperation in "Averting The Coming Infrastructure Crisis in Indonesia", as the report istentatively titled. These reports will serve as a well-advanced starting point for the sectorassessments and strategy options work of the advisory teams to be mobilized by the project, andfacilitate the development of the Country Framework Assessment for PPI (per PPIAF guidelines- see Annex 14) now incorporated in the draft TOR for the OCMEA advisory team. Addtionally,GOI has already made significant progress in several areas, including:

* Tariff and subsidy policy. The Government has announced its commitment to restoring thepower tariff to its pre-crisis US$ level by 2005. A series of substantial increases has alreadybeen implemented, with the main brunt having so far fallen on large consumers, and atargeted subsidy scheme has been introduced to protect very small residential customers.Tariffs have also been increased in several other sectors, including--after muchdelay--fixed-line telephone services. However, the picture is far from uniform and--forexample--toll road tariffs have not increased since 1992.

* Regulatory reform: Presidential Decree 7 of 1998 (Keppres 7), issued in January 1998,provided an important first step towards establishing a overarching framework for privateparticipation in infrastructure projects, including on matters such as the choice of projects tobe offered for private participation, the processes for selecting private partners and dealingwith unsolicited proposals, and basic principles relating to provision of public supports.Achievements at the sector level include:o Telecommunications: A new Telecommunications Law, passed in 1999, has enabled

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more effective competition by removing the "exclusivities" and other special rightspreviously enjoyed by the two partially privatized SOEs, PT Telkom and PT Indosat.o Oil and Gas: A new Oil and Natural Gas Law, approved by the DPR in October 2001,provides among others for the removal of Pertamina's downstream monopoly and theestablishment of an independent regulatory body whose key duties will include regulation ofgas transportation infrastructure.o Electric Power: The DPR has also adopted a new Electricity Law in September 2002that would enable bulk and retail competition and permit the vertical and horizontalunbundling of PLN in line with the policies mapped out in the Government's August 1998White Paper. The law also provides for the establishment of an independent regulatoryagency, and of a mechanism for channeling targeted subsidies and supports, although not yetimplemented.o Water: The Bank-financed WATSAL sector policy reform initiative is supporting theamendment of water resources legislation that would, inter alia, enable private participationin water resources development. In September 2001 DKI Jakarta established Indonesia's firsturban water supply regulatory body and a number of municipalities, including Pekan Baru,are also now exploring such arrangements.o Transport: Government has recognized the need to revise existing modal laws forTransport (Roads, Roads Traffic and Transport, Railways, Sea and Inland WaterwayTransport, and Civil Aviation) to align with the laws relating to regional autonomy and tobroaden the modalities for private participation, and preliminary discussions have started forsome sectors (e.g. maritime transport).Infrastructure SOE Restructuring and Privatization. Progress on SOE reform andprivatization accelerated sharply in the period immediately following the onset of the crisis,although it has since slowed again. A masterplan for SOE reform and privatization waslaunched in December 1999 and several significant transactions were concluded shortlythereafter, including sales of stakes in two international container terminal concessioncompanies (Jakarta and Surabaya) and of a further stake in PT Telkom. Politicalcommitment then faltered in the face of public opposition to privatization in general andprivatization of infrastructure SOEs in particular. Another private placement of shares in PTTelkom was concluded in late 2001, and GOI is now completing arrangements for PT Indosatto be majority private-owned as a result of a late-2002 tender and is acting to address theserious concerns created by its failure to conclude the planned further privatization of SemenGresik in late 2001.Inter-Agency Coordination. In June 2001 the Government established a Minister-levelCommittee on Policy for the Acceleration of Infrastructure Development (KPPI Committee).The Committee is chaired by the Coordinating Minister for Economic Affairs, and its othermembers include the Ministers for Finance, National Planning (Bappenas), and the keyinfrastructure sectors. KKPPI's duties include: (a) formulating policy and strategy foraccelerating infrastructure development, including through creating a climate conducive toprivate investment and participation; (b) coordinating integration of plans and programs andmonitoring implementation of adopted policies and resolving emerging problems; and (c)preparing an improved cross-sectoral regulation on public private partnerships to replaceKeppres 7. The Committee is assisted by a Secretariat and supported by a Sub-Committeefor Planning and Investment, both of which are already operational. Work on the revision of

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Keppres 7 is now well advanced.

2. ObjectivesThe project's development objective is to assist GOI develop and implement the policy andregulatory reforms and build the institutional and social foundations needed to enable, promoteand facilitate efficient and sustainable large-scale private investment in infrastructure.

3. Rationale for Bank's InvolvementThe Bank brings to the project an unrivalled combination of global knowledge and expertize inthe broad area of private participation in infrastructure and in-depth understanding of Indonesia'skey infrastructure sectors and its experiences to date with private participation.

The Bank's Private Sector Advisory Services Department, through its Private Provision of PublicServices (PPPS) group, has rich experience in critically important sector policy areas--includingregulatory reform and regulatory agency development, public supports for private projects--and isdeveloping "tool kits" designed to provide practical guidance on PPI-related topics. The groupwas the driving force behind the establishment of the multi-donor Public-Private InfrastructureAdvisory Facility (PPIAF) and is responsible, at arm's length, for the ongoing management of theFacility. The PPPS group has long been involved in Indonesia, including through providingguidance on the shaping of a cross-sectoral regulatory framework for private participation ininfrastructure that was ultimately issued as Keppres 7. It is intended that this important linkwould be maintained during project preparation and implementation.

The Bank has been closely involved in supporting Indonesia's efforts to establish soundoverarching policies and strategies for private participation since the early 1990s, includingthrough the two TAP4I projects described earlier. It has also worked closely with Indonesia onregional initiatives aimed at promoting PPI and, for example, in 1996 co-hosted with Bappenasthe Ministerial Level International Conference on Infrastructure Development (proceedingspublished as "Frontiers of the Public-Private Interface in East Asia's Infrastructure" (Institute forNational Development Studies). The Bank has also has been actively involved in helping shapethe policy and regulatory reform agenda in all key infrastructure sectors, including transport(roads, railways, ports), energy (power, domestic gas), urban (water supply, public transport,solid waste), telecommunications, and water resources through both lending and ESW supportactivities.

This combination of global and local and cross-cutting and sector-specific expertize enables theBank to provide effective support for the Project, a capacity that will be further enhanced by therecent consolidation of EAP's Transport, Urban and Energy Sector Management Units into asingle Infrastructure Department, as well as the completion of the on-going Infrastructure AAAwork by June 2003, as noted previously.

ADB and USAID have and will continue to play very important roles in supporting Indonesia'isefforts to promote private participation in infrastructure. ADB, along with USAID, has nowtaken the lead in providing assistance on regulatory reform and private sector development in thepower sector, and has provided parallel assistance for the domestic gas sector. ADB has alsobeen active in promoting private sector participation in urban infrastructure development, and is

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considering to continue this support through a proposed Private Sector Participation (PSP)Facility for Urban Infrastructure. It has also financed relevant technical assistance in thetransport sector. USAID has also been very active in the past in promoting reforms designed tofacilitate private provision of urban infrastructure (e.g., through the "PURSE" project), andcontinues to provide limited and narrowly targeted support in the transport and telecoms sectorsthrough its "PEG" project. CIDA has financed technical assistance to Bappenas in the broad areaof infrastructure development policy, but as yet there are no firm plans for further support in thisarea.

The project has been designed to complement, reinforce and integrate ongoing and plannedinitiatives, including through helping to ensure that each of these activities is positioned within asound overall PSP strategy and that outputs and lessons emerging from them are properlyanalyzed and disseminated.

4. DescriptionOverview

The project is designed around and to support two important and inter-linked initiatives byGovernment to restore private investment in public infrastructure, namely:

* the establishment of the KPPI Committee; and

* the preparation and operationalizing of improved cross-sectoral policies, practices andprocedures for handling private participation in infrastructure provision.

The KPPI Committee is already operational and well advanced with drafting an improvedcross-sectoral regulation on PPI to replace Keppres 7.

The Project's core focus is on assisting the KPPI Committee to make timely and well-informeddecisions, on operationalizing the new cross-sectoral framework through supportingsector-specific policy and regulatory reforms, on strengthening institutional capacities in areasrelated to PPI, and on improving the quality and availability of information on PPI-related topics.Also see Annex 12 for the Initial Project Work Plan. This will be accomplished through:

* Cross-sectoral technical assistance and advisory services, including the development of acountry framework assessment for PPI policies;

* Sector-specific technical assistance and advisory activities, including sectoral assessments ofPPI potential and strategy;

* Capacity building, training assistance, and public information/education activities, and;

* PMU support services.

The agencies that will be involved in the implementation of the project--notably the KPPICommittee and key sector ministries--have limited expertise in the PPI area, but of necessity arealready being required to take decisions on important and complex issues (including the draftingof the new Keppres 7). Accordingly the project will, as a top priority, support the recruitment of"in-house" PPI advisors to assist these core agencies with their ongoing activities. Terms ofreference (TOR) for these advisory services and for high priority studies have been developed

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and reviewed during project appraisal. However, the urgency of mobilizing the "in-house"advisory support will preclude the TORs for all envisaged activities being fully developed priorto project start. It is accordingly intended that the TORs for many activities will be firmed-upduring the initial stages of project implementation with the assistance of the "in-house" advisors.

1. Cross-sectoral TA and Advisory Services2. Sector-specific TA and advisory services3. Capacity building and training4. Incremental PMU support services @ 80%

Repayment of PPF Advance

5. FinancingTotal (US$m)

BORROWER $1.90IBRD $17.10IDATotal Project Cost $19 00

6. ImplementationThe project will be implemented over a period of three years and involve several centralgovernment agencies--principally MOC and MSRI as well as the KPPI Secretariat--as primaryimplementing agencies. A Project Management Unit will report to and work under the technicaldirection of the KPPI Secretariat. The Secretariat is chaired by OCMEA's Deputy CoordinatingMinister for Infrastructure and Fiscal and Economic Decentralization, which should help ensurethe project supports and is highly responsive to top-level decision-making. Administratively, theproject will form part of the OCMEA budget.

The PMU is a newly-established (February 2003) body but its design and financial managementprocedures have been based on those developed for the ongoing Corporate RestructuringTechnical Assistance Project (Loan 4448-IND) and reflect the extensive experience gainedthrough the implementation of the two TAP4I projects (First and Second Technical AssistanceProjects for the Public and Private Provision of Infrastructure; Loans 3385-IND and 3913-1ND).The project flow of funds arrangements are designed to be broadly similar to those for theTAP4I-II project. OCMEA has already recruited qualified staff to manage the projectpreparation process and its subsequent implementation.

5. The Indonesian Pilot for Enhanced Disclosure of Information being pursued in the context ofthe Bank's revised Information Disclosure Policy:

As part of the implementation of the Bank's revised disclosure policy, countries were selected forpiloting enhanced disclosure if the governments of these countries were interested inparticipating. In Indonesia during the CAS consultations and other discussions, both thegovernment and civil society expressed keen interest in substantially greater access toinformation on Bank activities, especially during project implementation, to allow full publicdiscussion of project implementation findings. Under the Indonesia pilot enhanced disclosure isproposed to enable civil society oversight leading to greater transparency and openness. It isexpected that initially civil society will require time to become familiar and reach the level of

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understanding of the information being provided, to use it constructively to reduce fiduciary risks

In the Indonesia Pilot for enhanced information disclosure being carried out in the context of theBank's revised Information Disclosure Policy, an approach to enhanced information disclosurehas been agreed with BAPPENAS on behalf of the Borrower. This approach consists of thefollowing arrangements:

a. Agreement on the approach for disclosure of information for new projects to the effect thatspecific provision for enhanced disclosure will be built into the project arrangements duringproject preparation for an agreed upon list of projects to be included in the initial phase of thepilot. This agreed list consists of 4 projects, including the proposed Private Provision ofInfrastructure Technical Assistance Project. (The other 3 projects are the proposed WaterResources and Irrigation Sector Management Project, the proposed Health Workforce andServices Project and the proposed Third Kecamaten Development Project.) Annex 15provides in more detail the arrangements developed by the KKPI secretariat to put in place ananti-corruption action plan.

b. The specific issues where enhanced disclosure has been agreed upon concern: (i) final auditreports issued under projects in the pilot will be made publicly available by both theBorrower and the Bank; (ii) the mid-term report on progress under a project in the pilot willbe made publicly available by the Borrower; and (iii) the procurement process, where theBorrower has agreed that additional information concerning parts of the procurement processin projects in the pilot will be made publicly available. The draft Loan Agreement for thisPrivate Provision of Infrastructure Technical Assistance Project (PPITA) includes specificundertakings to effectuate these agreements. These undertakings would eliminate the needfor GOI approval to be obtained prior to the public release of such information.

c. For documents other than those referred to in sub-paragraph b above (and which are currentlynot disclosed without Borrower consent), the Bank will continue to consult GOI prior todisclosure of such documents. GOI may consider moving to a more general practice ofautomatic release of such documents after the Government completes its review of enhancedinformation disclosure concerning the public provisions of services that it is currentlyundertaking. In this regard, the anti-corruption guide for task teams and the anti-corruptionannex (15) based on this guide (together with the covenants on disclosure of audits, mid-termreview report and procurement documents) are expected to facilitate the adoption ofenhanced disclosure, and more open and transparent practices.

d. Agreement to utilize an IDF grant to support activities for developing GOI policies forincreased information disclosure under all government projects in Indonesia. A GOIimplementation team has been established, and a Bank counterpart team has also beenformed. Start-up activities for administrative arrangements and preparation of terms ofreference of consultants under this grant have been launched.

The experience under this pilot will be reviewed after two years and recommendations for future

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developments under the Bank's disclosure policy would be developed.

7. SustainabilityIndonesia needs to attract large scale and efficient private investment in infrastructure on reasonableterms in order to sustain its economic recovery, maintain and improve its international competitiveness,and expand and improve delivery of basic public services. This need should in principle provide strongand sufficient incentives for ensuring the sustainability of project benefits. There will, however, be aneed for strong political commitment to ensuring the private sector is involved through processes that aretransparent, competitive and maximize public benefits, and to resisting vested interests urging a return tobusiness-as-usual. More generally, there will also be a need for significant progress towards improvingthe overall investment climate and strengthening the domestic banking system and capital markets ifimprovements in policy and regulatory environments and institutional capacities are to result in increasedprivate investment flows in infrastructure.

At the more micro level, the sustainability of project benefits will also depend on the ability andwillingness of the key participating agencies to assign sufficient competent and suitably motivated staffto work as counterparts to the advisory teams and consultants, to offer career development opportunitiesthat encourage such staff to further develop and utilize their skills and expertize, and to actively promotecross-boundary working within their own organizations.

8. Lessons learned from past operations in the country/sector(First) Technical Assistance Project for the Public and Private Provision of InfrastructureThe OED Project Performance Audit Report (Report 19462, June 16, 1999) identified thefollowing main lessons learned:

* Counterpart funding should be significant to ensure increased ownership and sustainability ofthis type of project.

* The effectiveness of the project management unit depends on the PMU's capacity to accesskey decision-makers in both the national development planning agency and the executingagencies, as well as the strength of its operational staff.

* Free-standing and open-ended technical assistance projects need to emphasize 1) rapidity ofreview and approval process of requests for financing and 2) agreement at appraisal on aseries of terms of reference and project development packages.

* Technical assistance projects involving executing agents/decentralized units should focusmore on these units. Intermediate results from project components to overall projectobjectives (from implementing studies to concluding contracts) must be made clear to themfrom the beginning.

* Specific guidelines must be provided by the PMU to such agencies to avoid having to rejectrequests for financing.

* Good supervision and continuity in the supervision team is critical for satisfactory projectimplementation. The size and skill mix of the team should be adjusted depending on thecomplexity of project components and the sectors they address.

Second Technical Assistance Project for the Public and Private Provision of Infrastructure.TAP4I-I1 was approved in June 1995, some 21 months before TAP4I-I was completed, and somefour years before the above OED Performance Audit Report was issued. Its design nonethelessattempted to address some but not all--of the lessons flagged by the OED audit. In particular, itsought to ensure a substantial pipeline of well prepared sub-components was ready by the time of

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appraisal, although in the event many of those identified subsequently lost the support of thesponsoring sector agencies or were financed from other sources. The Project closed in December2001 and preparation of the ICR was completed in June 2002.

The task of identifying meaningful lessons is complicated by the dramatic change in Indonesia'scircumstances and attractiveness to private infrastructure investors as a result of the economiccrisis. Nonetheless, a number of important points emerged with regard to the overall strategy forrestoring PPI:

* Sector institutions need to better integrate private sector participation within their overallinfrastructure development policy formulation, planning, and implementation activities.Private infrastructure projects are often being handled by different groups within sectorinstitutions, and there has been a tendency for those promoting traditional public sectorprograms to undermine the case for private participation and hence send mixed messages toprospective investors. Moreover, officials involved with promoting private participationoften show a limited grasp of what the private sector can bring to infrastructure projects andwhat they will require in return (including with respect to tariffs and possible needs forgovernment supports).

* Don 't under-estimate resistance to change within public institutions. As noted in SectionB.2, transparently managed private section participation-whether through green-fieldprojects or privatization-may threaten vested interests. This applies in particular to privateprojects that would encroach on the domains of public enterprises that are now enjoyingmonopoly or quasi-monopoly positions. Efforts to promote rapid and sustainable privateinfrastructure development should therefore include carefully designed and coordinatedactions to anticipate and address such resistance.

* Champions are needed. As indicated previously, the TAP4I-PMU has functioned asIndonesia's de facto promoter of private infrastructure investment and P3 center. However,its influence and effectiveness was constrained by the absence of strong political championsand by its remoteness from key decision-makers. Champions are needed both to lend weightto efforts to overcome institutional resistance and to help shape efforts to overcome publicopposition to an expanded private sector role.

* Demonstration projects have value. The preparation and implementation of demonstration orpilot projects provides an important means of refining and applying policies, and can play acatalytic role in attracting private investment. Negative lessons in particular can greatly assistthe design of future projects. While institutional and regulatory reform should ideallyprecede,project interventions, there may be instances where such reforms can appropriatelybe refined in parallel with the design of demonstration projects.

The key lessons and issues from TAP4I-II relevant to the design of a new technical assistanceoperation include:

* Needfor clear and well-focused objectives. The objectives of TAP4I-II were very broad, asalso were the criteria for deciding whether proposed studies or technical assistance would beeligible for support under it. While the Project financed much useful assistance, it is difficultto relate the resultant outputs meaningfully to its overarching development goals. The

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objectives of a follow-on operation should be more narrowly focused on enabling privateparticipation in infrastructure rather than on infrastructure development in general.

* Needfor an effective linkage to senior decision-makers. The TAP4I-II steering committeedid not function as envisaged and the PMU--and hence the project--became increasinglyisolated from high-level decision-making on key infrastructure policy and strategy issues.These problems were further exacerbated by changes in the structure of government changesthat resulted in Bappenas' authority on infrastructure issues diminishing. A future projectshould be attached to and support a functioning high level coordinating agency or centralagency that enjoys effective support within Government.

* Needfor strong ownership by TA users. Follow-up on some of the technical assistancepackages funded under TAPI-II has been very limited.. While this is partly attributable to theonset of the crisis and subsequent widespread changes in government organization andstaffing, there are also indications that some agencies did not fully "own" the assistance theymanaged. A future project should therefore be more selective and focus on supportingagencies that are pro-active in committing staff resources to work on proposal development,and should employ competitive mechanisms for allocating scarce TA resources.

* Needfor clear roles of participating agencies. Many individual technical assistance servicessuffered long delays due to lack of clarity regarding the respective roles of the PMU andindividual implementing agencies. In principle, the PMU was responsible for ensuring fundswere used in accordance with the terms of the Loan Agreement while implementing agencieswere responsible for ensuring the quality of outputs and their transformation into outcomes.In practice, there were numerous instances of procurement-related issues causing longimplementation delays. The design of a follow-on project accordingly needs to incorporate aclearer accountability framework.

* Positioning technical assistance at the right level. It is not realistic to expect agencies toreform themselves. Thus for example, providing technical assistance relating to thedevelopment of a new non-ministerial regulatory body through a Directorate General that willlose powers if such a body is established is unlikely to be successful. It will be importanttherefore to ensure that technical assistance serves the right clients.

9. Environment Aspects (including any public consultation)Issues : The project will not finance any physical investments and no significant environmental

issues are envisaged. Where applicable--for example in technical assistance packages involving thedesign of proposed PPI pilot projects--appropriate provison will be included in TORs for identifying,evaluating and mitigating adverse environmental impacts and for consultation with stakeholders. SuchTORs will be required to be cleared by the Bank before consultant recruitment commences. Annex IIprovides a summary of the procedures and a checklist of potential issues to be used in screening allTORs, resulting recommendations, and potential demonstration projects for safeguards issues toincorporate appropriate provisions. (The Bank will NOT finance the implementation of thesedemonstration projects; the project will only assist in the design, tendering and negotiation with privateinvestors for the pilot schemes.)

10. List of factual technical documents:A. Project Implementation Plan

14PID

1. Project Implementation Plan2. Financial Management System Manual3. Project Activities and Implementation Schedule4. Project Procurement Plan and Procedures Manual

B. Bank Staff Assessments

1. Proposed Private Provision of Infrastructure Technical Assistance Loan (PPITA) -Summary of Project Preparation Activities, February 2003

2. Proposed Private Provision of Infrastructure Technical Assistance Loan (InitialPreparation Mission), May 2002

3. Private Provision of Infrastructure Technical Assistance Loan, Project ConceptDocument, April 2002.

11. Contact Point:

Task ManagerStephen R. DiceThe World Bank1818 H Street, NW

Washington D.C. 20433Telephone. (202) 473-3369Fax: (202) 522-1787

12 For information on other project related documents contact.The InfoShopThe World Bank1818 H Street, NWWashington, D.C 20433Telephone (202) 458-5454Fax (202) 522-1500Web http /1 www worldbank org/infoshop

Note: This is information on an evolving project. Certain components may not be necessarilyincluded in the final project.

Tables, Charts, Graphs:

Processed by the InfoShop week ending. 04/23/2002

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