PROJECT INFORMATION DOCUMENT (PID)

APPRAISAL STAGE

Report No.: AB4237

Project Name

/ Aceh Economic Development Financing Facility
Region / EAST ASIA AND PACIFIC
Sector / Private Sector (100%)
Project ID / P109024
Borrower(s) / REPUBLIC OF INDONESIA
Ministry of Finance
Jl. Lapangan Banteng Timur No 2-4
Indonesia
10710
Tel: +62 (0)21 384-1067 Fax: +62 (0)21 380-8395
Implementing Agency
State Ministry for the Development of Disadvantaged Areas (KPDT) and Government of Aceh, Indonesia
Environment Category / [] A [X ] B [ ] C [ ] FI [ ] TBD (to be determined)
Date PID Prepared / November 5, 2008
Date of Appraisal Authorization / April 21, 2008
Date of Board Approval / November 30, 2008

Country and Sector Background

  1. The devastation of the December 2004 Tsunami coupled with the preceding years of civil unrest contributed to high unemployment and poverty in Aceh. A large share of the Aceh population remains vulnerable with average consumption just above the poverty line, so that a small shock such as the end of the reconstruction effort could send them back into poverty. The Tsunami not only caused tremendous loss of life, but ended the prospects of long term employment for many people. It is estimated that 80,000 small and medium sized enterprises (SME)[1], providing employment to 140,000 people were destroyed. The reconstruction has created new job opportunities in some sectors (construction, transport), but these jobs have been closely linked to the availability of reconstruction funds and are not likely to be sustainable in the long run. Annex 1 provides details on country and sectoral issues.
  2. The Government of Indonesia (GOI), through the Agency for Rehabilitation and Reconstruction for Aceh and Nias (BRR), and the provincial Government of Aceh (GoA) have committed to building the community of Aceh back to being stronger and better than it was pre-Tsunami. Both have identified economic growth and development as essential elements of recovery from the Tsunami. The GoA, in its Medium Term Development Plan (RPJMD), has identified key factors hampering Aceh’s economic development as weak government institutions, damaged infrastructure and low investment levels. The RPJMD also identifies key constraints for economic activity for some sectors: in agriculture, availability of land, low productivity, low quality of production and lack of access to inputs and markets are identified as constraints in manufacturing, weak business environment, low quality of production as well as the failure to adopt recent technological changes. Aceh’s economy is dominated by oil and gas production, which accounts for 28 percent of regional GDP (2007) and over 90 percent of the province’s exports. However, the mining and related manufacturing sectors have been declining for several years and known gas reserves are projected to decline to near zero by 2014. This together with current growth trends, concentrated in sectors linked to the availability of large funds for reconstruction reinforces concerns regarding Aceh’s economy beyond 2009.

3.  Aceh’s economy contracted in 2004 (pre-Tsunami) by 10 percent and experienced a further 10 percent decline in 2005 (post-Tsunami). The contraction in the economy was the result of the declining mining and related manufacturing sectors, and the impact of the Tsunami, which caused a decline of the manufacturing and agricultural sectors. The economy grew at a modest 1.6 percent in 2006, driven mostly by growth in the services sector, related to the reconstruction effort. In 2007 Aceh’s economy continued to decline, a result primarily of the decline in the oil and gas sectors. Without a significant recovery of the agricultural and manufacturing sectors, Aceh will be facing a structural downturn as the reconstruction effort winds down in 2009. This could have negative implications for employment and poverty alleviation efforts[2].

  1. The current reconstruction effort, estimated at approximately US$7.7 billion spread over a five years period (2005-2009), is one of the largest such efforts in a developing country. The generosity of donors and the reconstruction program have been lifting Aceh’s economy in the short run. The reconstruction effort commenced in 2005 and by 2006 was the main driver of economic growth. The reconstruction effort has been creating a real construction boom in some parts of the province, but since it has not addressed issues related to the competitiveness of Aceh’s economy and the sustainability of current growth trends, it is not strictly in line with the BAPPENAS Master Plan which foresees the recovery of Aceh’s economy as part of the third phase of the province’s reconstruction. In addition, the large aid influx and initial supply side constraints have contributed to high inflation levels. Inflation reached over 40 percent year-on-year in December 2005. The differential between Aceh and the national inflation level has been declining since then, but in May 2008 inflation in Aceh, at 15.3 percent, was still significantly higher than the national inflation level, at 10.4 percent.
  2. In Aceh, investment as a share of GDP was only 7 percent in 2004, well below the levels in the rest of Indonesia or other countries in the region. Investment has increased significantly since then, a result of the massive reconstruction funds being invested in the province, and by 2006 it was worth 14 percent of GDP. This is still significantly lower than investment in the rest of the country. A renewed effort is needed to rehabilitate the agricultural sector to improve job opportunities in the longer term. The pre-conditions for economic recovery are in place. There is better political stability and greater institutional support for economic growth. Knowledge is accumulating as to the realistic possibilities of critical sectors to develop and the framework for a coherent economic growth strategy is coming into place. The next phase in providing assistance to the communities and rural areas in Aceh should expand upon the past successes.
  3. GoA’s Economic Development Strategy. Recognizing the extent of the devastation, the GOI declared the Tsunami in Aceh a national disaster and formulated a master plan for the reconstruction of Aceh. Challenges to the successful recovery of Aceh were identified, which included socio-economic needs of all sectors, restoration of local institutions and implementation capacity as well as building peace and reconciliation. One of the key principles of this plan was that “reconstruction should not rebuild poverty, but ensure that local economies are robust enough to prevent poverty over the long term”. The GoA through its elected Governor has again become the leader in strategic planning and direction for Aceh. Recently, it released its Medium Term Development Plan and (details on the RPJMD can be found in Annex 1). The GoA has elaborated its strategic framework for economic development based on the Triple-A concept, comprising of an Atlas (compilation of relevant economic data), Agenda (providing the economic development vision and strategies to promote economic development) as well as the Aturan-main, which explains the institutional mechanisms by which this vision and strategies can be implemented. This framework identifies three lead economic sectors for the province (agriculture, trade and services), key because of their contribution to both regional production as well as employment.

Objectives

  1. The project will promote post-tsunami economic recovery and foster sustainable equitable long-term economic development in Aceh in line with the GoA’s own plans for economic development (RPJMD). To achieve this, the project will finance sub-projects that contribute toward the following development objectives, identified by the GoA as key for sustainable economic development in Aceh:

(a)  Development of job-creating, market-driven enterprises engaged in value-added processing and manufacturing, especially in agriculture and fisheries;

(b)  Sustainable improvement of production quality and value in agriculture, fisheries and estate crops that contributes to alleviation of poverty;

(c)  Increase in international trade, especially direct exports; and

(d)  Increase in domestic and foreign investment in Aceh.

  1. These development objectives will be achieved through the following intermediate outcomes: (i) Improving the Business Environment: a better enabling environment for private sector development and investment; (ii) Private Sector Support: support to improving the productivity of the private sector, farmers and fishermen; and (iii) Public Infrastructure: financing of economic infrastructure necessary for business development and job creation. The beneficiaries of sub-projects will be either directly or indirectly the people and communities of Aceh. As a result of the defined beneficiary pool, the proponents of sub-projects will not be individuals. The focus of the project is on sustainable and equitable economic development. The project, while a sizable amount, is very small when measured against the economic development challenges and needs of Aceh and as such will serve as a starting point and demonstration of what can be done in the Aceh province.
  2. An important aspect of the project will be the building of capacity at BAPPEDA, the Development and Planning Agency of Aceh. BAPPEDA, with the assistance of an international consultant firm, will learn through hands on experience how to evaluate, select and monitor the implementation of sub-projects to support long term economic development. This is particularly important in light of the large amount of resources available to the provincial government and the recent decision to allocate the Special Autonomy Fund on a programmatic basis between the provincial and district governments. The experience gained under the project will better position the GoA to further its economic development agenda from its own resources.
  3. The following key performance indicators (KPI) will be used to assess progress toward achieving results in the development outcomes mentioned above:

(a)  Number of business constraints that were successfully alleviated in Aceh

(b)  Employment generated in enterprises supported by the project

(c)  Number of users of public infrastructure financed by the project

(d)  Success rate of sub-projects financed by the project

Rationale for Bank Involvement

  1. The World Bank will serve as the partner agency. Its extensive involvement in Aceh as well as its broader developmental work in Indonesia and else where in the world provides it with a strong background for the project (Annex 2 provides a list of projects supported by the World Bank Group and other agencies). The World Bank has responded to the GOI request for assistance across areas where the institution possesses comparative advantage, building much on the central directions set out in the Indonesia Country Assistance Strategy FY04-07, namely the emphasis on the role of communities and local governments in shaping their own development objectives, and on the emphasis of the recently approved Country Partnership Strategy (CPS) 2009-12 for Indonesia on relying and strengthening government systems. The CPS also foresees continued World Bank involvement in Aceh and Nias for the duration of the CPS (until 2012) and the need for the MDF to support the transition from post-Tsunami reconstruction towards sustainable economic development in Aceh.

Description

  1. The EDFF project, a US$50 million Facility funded by a grant from the MDF, consists of two components-- the first is a financing facility (US$44.5 million) and the second component will facilitate and strengthen the operation of the GoA’s and KPDT project management capacity (US$5.5 million).

Financing

Source: / ($m.)
Borrower / 2.85
Single Purpose Trust Fund / 50
Total / 52.85

Implementation

  1. The project will use a management structure supportive of local government participation, capacity building and achieving the maximum benefits from the EDFF. The implementation of the overall project rests with the GoA thru BAPPEDA, which will house the PMU. The PMU will be supported by an international consultant management firm. The individual sub-projects will be implemented by third parties as specified in this document. The overall process of evaluating, selecting and monitoring of selected sub-projects has been designed to minimize unnecessary interference and duplication. Sub-project selection will take place after project approval to ensure transparency and consistency in the selection process. The BAPPEDA will manage the PMU and will play a key role in the selection process of sub-projects through leadership and participation in the Selection Committee. Although BAPPEDA Aceh will be the implementing agency of the EDFF at the provincial level, to ensure EDFF supports the implementation of the GoA strategies related to economic development in the province, it will be key to ensure the support of the relevant Dinas and district governments for activities financed through this project. The EDFF will support provincial level programs for the development of economic clusters; as such the fiscal responsibility for continuing activities financed through EDFF lies with the provincial government. Nonetheless it will be important to ensure the participation of the relevant districts and/ or Dinas in the identification of priorities and the design of subprojects. BAPPEDA Aceh has initiated discussions with the relevant Dinas which will intensify in the initial phases of project implementation. In addition, agencies proposing subprojects for EDFF funding will be required to consult extensively with the relevant Dinas and district governments and to report their consultation efforts in the application.
  2. The BAPPENAS, as the GoI’s executing agency, will be responsible for EDFF’s overall planning and evaluation consistent with the grant agreement between the World Bank and the GOI. It will also provide the necessary coordination with the Ministry of Finance (MOF), the KPDT and other central government agencies. The BAPPENAS will be responsible for counterpart financing (government staff honoraria, taxes and other operational expenses) for BAPPENAS and KPDT. The KPDT will be responsible for overall project implementation and budget execution including making an annual budget application to the MOF and establishing a project satker (Satuan Kerja) to be located in BAPPEDA Aceh that will be responsible for overall management of the annual budget (DIPA). The budget application will be allocated in the following manner: (i) payment to the consulting firm assisting BAPPEDA and KPDT, (ii) operating costs of BAPPEDA Aceh and KPDT, (iii) block grant for sub-projects to the GoA. Further allocation of the block grants will not be possible at the time of the preparation of budget document (DIPA) since projects selection (and allocation of funds to sectors and districts) is part of project implementation. Finally, it will be responsible for dealing with withdrawal applications by the SIAs after they have been approved by the PMU.

Sustainability

  1. A number of steps in the context of the EDFF are being (and will be) undertaken to promote the sustainability of economic development based upon the private sector and to facilitate the transition of local and provincial governments’ beyond BRR’s mandate. Sub-project applications will be evaluated based upon a number of factors, one of those will be (to the extent appropriate), the likely sustainability of the impact and results of the sub-project as well as its ability to enhance the capacity of those involved in the sub-project as well as those who may later have some role in managing to ensuring continued results of the sub-project. To that effect, the evaluation of subprojects will pay particular attention to the inclusion of the relevant Dinas and/ or District governments in consultations and the design of the subproject as appropriate. To the extent that activities will require the relevant Dinas and/ or District Government to assume responsibilities related to the subproject after completion, this should be clearly reflected and addressed in the application. Project sustainability is further enhanced by the GoA’s commitment to improve it business environment and to help facilitate private sector development and resulting job creation. The EDFF has been under preparation for sometime and, throughout this period, the GoA and the BRR have been very active and committed to EDFF objectives. The project approach permits attention to be paid initially to sub-projects with the greatest likelihood to show immediate results in addition to others that meet the terms and conditions of the facility. Support provided under the project also aims to further support sustainability by establishing a mechanism within the Facility to enhance GoA capacity to oversee similar activities in the future through the use of its own resources. These benefits should continue beyond the end of EDFF.
  2. Technical Assistance: The EDFF and some of the sub-projects will include TA components that emphasize hands-on training of those involved (often including beneficiaries) in the sub-project as well as GoA staff. Such TA is an important tool that will contribute to ensuring quality in the economic development sub-projects and should help to prepare local authorities for the post-BRR era. These capacity building efforts will cover a number of aspects of sub-project selection and implementation, including sub-project preparing detailed design and tender documents, safeguards compliance, procurement, sub-project supervision, and other development monitoring tools and anti-corruption measures.
  3. Ownership: Steps will be taken to ensure that the GoA and as applicable the local communities in which sub-projects are implemented develop a sense of ownership with respect to the sub-projects financed by the EDFF. The GoA (thru its PMU) will be selecting all sub-projects. All sub-project proposals will be required to show endorsement by the beneficiary communities or districts. The extent to which the agency proposing a subproject has undertaken consultations with the beneficiary communities and the relevant Dinas and/ or District Government and the degree of ownership of the project by these will be key selection criteria.

Lessons Learned from Past Operations in the Country/Sector