document of the world...

Document of The World Bank

Report No: ICR00001677

IMPLEMENTATION COMPLETION AND RESULTS REPORT

(IBRD-76100)

ON A

SERIES OF LOANS

IN THE AMOUNT OF US$1.5 BILLION

TO THE

REPUBLIC OF INDONESIA

FOR

DEVELOPMENT POLICY LOANS V AND VI

11 October 2010

Poverty Reduction and Economic Management Unit East Asia and Pacific Region

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CURRENCY EQUIVALENTS (Exchange Rate Effective October 11, 2010)

Currency Unit = Rupiah (IDR) US$ 1.00 = Rp 8,925

FISCAL YEAR

January 1 – December 31

ABBREVIATIONS AND ACRONYMS AAA Analytical and Advisory Activities ICR Implementation Completion and Results Report ADB Asian Development Bank JICA Japan International Cooperation Agency BOS KITA Bantuan Operasional Sekolah (School

Operational Assistance – Knowledge Improvement for Transparency and Accountability)

KPK Komisi Pemberantasan Korupsi (Corruption Eradication Commission)

BKPM Indonesia Investment Coordinating Board LKPP Lembaga Kebijakan Pengadaan Barang/Jasa Pemerintah (National Public Procurement Office)

CMEA Coordinating Ministry for Economic Affairs

M&E Monitoring and Evaluation

CPS Country Partnership Strategy MOF Ministry of FInance DG Directorate General MenPAN Kementrian Negara Pendayagunaan Aparatur

Negara (State Ministry of State Apparatus) DNI Daftar Negatif Investasi (Investment

Negative List) MSME Micro, Small and Medium Enterprises

DPL Development Policy Loan OPCS World Bank Operations Policy and Country Services Unit

DPL-DDO Development Policy Loan – Deferred Drawdown Option

PBB Performance Based Budgeting

FDI Foreign Direct Investment PDO Program Development Objectives FSSF Financial System Stability Forum PFM Public Finance Management GDP Gross Domestic Product PNPM Program Nasional Pemberdayaan Masyarakat

(National Program for Community Empowerment)

GFMRAP Government Financial Management and Revenue Administration Project

RPJMN Rencana Pembangunan Jangka Menengah Nasional (National Medium Term Development Plan)

GOI Government of Indonesia SPAN Sistem Perbendaharaan dan Anggaran Negara (State Treasury and Budget System)

IFMIS Integrated Financial Management Information System

TA Technical Assistance

Inpres Instruksi Presiden (Presidential Instruction)

TSA Treasury Single Account

INSW Indonesia National Single Window

Vice President: James W. Adams

Country Director: Stefan G. Koeberle

Sector Director: Vikram Nehru

Lead Economist: Shubham Chaudhuri

Task Team Leader: Enrique Blanco-Armas

ICR Primary Author: Dara Lengkong

INDONESIA

DEVELOPMENT POLICY LOANS V AND VI

IMPLEMENTATION COMPLETION AND RESULTS REPORT

CONTENTS

Data Sheet A. Basic Information B. Key Dates C. Ratings Summary D. Sector and Theme Codes E. Bank Staff F. Results Framework Analysis G. Ratings of Program Performance in ISRs H. Restructuring

Main Document 1. Program Context, Development Objectives and Design ........................................................... 1

2. Key Factors Affecting Implementation and Outcomes ............................................................. 3

3. Assessment of Outcomes ............................................................................................................... 7

4. Assessment of Risk to Development Outcome .......................................................................... 15

5. Assessment of Bank and Borrower Performance .................................................................... 16

6. Lessons Learned .......................................................................................................................... 17

7. Comments on Issues Raised by Borrower/Implementing Agencies/Partners ....................... 19

Annex 1 Bank Lending and Implementation Support/Supervision Processes ..................... 20 Annex 2. Beneficiary Survey Results .................................................................................. 22 Annex 3. Stakeholder Workshop Report and Results .......................................................... 22 Annex 4. Summary of Borrower's ICR and/or Comments on Draft ICR ............................ 22 Annex 5. Comments of Cofinanciers and Other Partners/Stakeholders .............................. 23 Annex 6. List of Supporting Documents ............................................................................. 24

MAP

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A. Basic Information

Program 1

Country Indonesia Program Name Fifth Development Policy Loan

Program ID P110191 L/C/TF Number(s) IBRD-76100

ICR Date 11/09/2010 ICR Type Core ICR

Lending Instrument DPL Borrower REPUBLIC OF INDONESIA

Original Total Commitment

USD 750.00M Disbursed Amount USD 750.00M

Implementing Agencies Coordinating Ministry for Economic Affairs Cofinanciers and Other External Partners Asian Development Bank JICA

Program 2

Country Indonesia Program Name Indonesia Sixth Development Policy Loan

Program ID P113638 L/C/TF Number(s) IBRD-77840

ICR Date 11/09/2010 ICR Type Core ICR

Lending Instrument DPL Borrower GOVERNMENT OF INDONESIA

Original Total Commitment

USD 750.00M Disbursed Amount USD 750.00M

Implementing Agencies Coordinating Ministry for Economic Affairs Cofinanciers and Other External Partners JICA Asian Development Bank

B. Key Dates Fifth Development Policy Loan - P110191

Process Date Process Original Date Revised / Actual

Date(s)

Concept Review: 07/18/2008 Effectiveness: 12/22/2008 12/22/2008

Appraisal: 10/21/2008 Restructuring(s):

Approval: 12/09/2008 Mid-term Review:

Closing: 03/31/2009 03/31/2010

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Indonesia Sixth Development Policy Loan - P113638

Process Date Process Original Date Revised / Actual

Date(s)

Concept Review: 05/19/2009 Effectiveness: 10/15/2009 10/15/2009

Appraisal: 07/23/2009 Restructuring(s):

Approval: 09/24/2009 Mid-term Review:

Closing: 03/31/2010 03/31/2010

C. Ratings Summary C.1 Performance Rating by ICR Overall Program Rating

Outcomes Satisfactory

Risk to Development Outcome Moderate

Bank Performance Satisfactory

Borrower Performance Satisfactory

C.2 Detailed Ratings of Bank and Borrower Performance (by ICR) Overall Program Rating

Bank Ratings Borrower Ratings Quality at Entry Satisfactory Government: Satisfactory

Quality of Supervision: Satisfactory Implementing Agency/Agencies:

Highly Satisfactory

Overall Bank Performance

Satisfactory Overall Borrower Performance

Satisfactory

C.3 Quality at Entry and Implementation Performance Indicators Fifth Development Policy Loan - P110191

Implementation Performance

Indicators QAG Assessments (if

any) Rating:

Potential Problem Program at any time (Yes/No):

No Quality at Entry (QEA)

None

Problem Program at any time (Yes/No):

No Quality of Supervision (QSA)

None

DO rating before Closing/Inactive status

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Indonesia Sixth Development Policy Loan - P113638 Implementation

Performance Indicators

QAG Assessments (if any)

Rating:

Potential Problem Program at any time (Yes/No):

No Quality at Entry (QEA)

None

Problem Program at any time (Yes/No):

No Quality of Supervision (QSA)

None

DO rating before Closing/Inactive status

D. Sector and Theme Codes Fifth Development Policy Loan - P110191

Original Actual

Sector Code (as % of total Bank financing)

Central government administration 50 50

General finance sector 7 7

General industry and trade sector 22 22

Micro- and SME finance 7 7

Other social services 14 14

Theme Code (as % of total Bank financing)

Administrative and civil service reform 7 7

Micro, Small and Medium Enterprise support 7 7

Public expenditure, financial management and procurement 43 43

Regulation and competition policy 29 29

Social safety nets 14 14 Indonesia Sixth Development Policy Loan - P113638

Original Actual

Sector Code (as % of total Bank financing)

General public administration sector 73 73

Micro- and SME finance 9 9

Other domestic and international trade 9 9

Other social services 9 9

Theme Code (as % of total Bank financing)

Export development and competitiveness 13 13

Poverty strategy, analysis and monitoring 13 13

Public expenditure, financial management and procurement 36 36

Regulation and competition policy 19 19

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Tax policy and administration 19 19

E. Bank Staff Fifth Development Policy Loan - P110191

Positions At ICR At Approval Vice President: James W. Adams James W. Adams Country Director: Stefan G. Koeberle Joachim von Amsberg Sector Manager: Shubham Chaudhuri William E. Wallace Task Team Leader: Enrique Blanco Armas Shubham Chaudhuri ICR Team Leader: Enrique Blanco Armas ICR Primary Author: Dara Lengkong Fifth Development Policy Loan - P110191

Positions At ICR At Approval Vice President: James W. Adams James W. Adams Country Director: Stefan G. Koeberle Joachim von Amsberg Sector Manager: Shubham Chaudhuri William E. Wallace Task Team Leader: Enrique Blanco Armas Shubham Chaudhuri ICR Team Leader: Enrique Blanco Armas ICR Primary Author: Dara Lengkong

F. Results Framework Analysis Program Development Objectives (from Program Document)The overall goal of the DPL program is to help the Government of Indonesia (GoI) achieve its medium-term growth and poverty reduction objectives. The proposed DPL5 supports the GoI's reform efforts in the following objectives: (i) improve the investment climate; (ii) enhance public financial management and governance; and (iii) improve service delivery to the poor. Revised Program Development Objectives (as approved by original approving authority) N/A. (a) PDO Indicator(s)

v

Fifth Development Policy Loan - P110191

Indicator Baseline

Value

Original Target Values (from

approval documents)

Formally Revised

Target Values

Actual Value Achieved at

Completion or Target Years

Indicator 1 : GDP Growth Value (quantitative or Qualitative)

6.2% 4.2%

Date achieved 09/30/2008 09/30/2009 Comments (incl. % achievement)

Real GDP growth declined, mainly due to the ramifications and contagion effects of the 2008/09 global financial turmoil.

Indicator 2 : % of people living below the national poverty line Value (quantitative or Qualitative)

15.4% 14.2%


Despite the financial turmoil, poverty declined. This is attributed to a mild crisis in Indonesia and the response of the go vernment, in the form of unconditional cash transfer program (BLT) and scaling up of PNPM, to minimize impact on poor


Indicator Baseline

Value


approval documents)

Formally Revised

Target Values



Indicator 1 : GDP Growth Value (quantitative or Qualitative)

4.2% 6.2%


By mid 2010, Indonesia has emerged from the global crisis as one of the fastest growing economies in the G20.

Indicator 2 : % of people living below the national poverty line Value (quantitative or Qualitative)

14.2% 13.3%


Poverty rate continued to decline. This is attributed to both the economic growth recovery and the expansion of national pov erty reduction programs, e.g. BLT and PNPM Mandiri.

(b) Intermediate Outcome Indicator(s)

vi

Fifth Development Policy Loan - P110191

Indicator Baseline Value


approval documents)

Formally Revised

Target Values



Indicator 1 : Investment to GDP ratio Value (quantitative or Qualitative)

26% 23.4%


Investments declined, mainly due to the global economic downturn.

Indicator 2 : FDI net inflows Value (quantitative or Qualitative)

USD9.32 billion

USD4.88 billion


FDI declined substantially by about 48%, mainly due to the global economic downturn.

Indicator 3 : Number of days to start a business Value (quantitative or Qualitative)

105 days 76 days


The number of days required to start a business declined substantially by 28%.

Indicator 4 : Number of procedures to start a business Value (quantitative or Qualitative)

12 11


The number of procedures required to start a business declined by 8%.

Indicator 5 : Year on year growth in value of non-oil exports Value (quantitative or Qualitative)

13.3% -11.6%


Non-oil exports declined, mainly due to weak global demand.

Indicator 6 : Domestic non-oil and gas tax revenues to GDP Value (quantitative or Qualitative)

5.1% 4.8%


Domestic non-oil and gas tax revenues to GDP declined, mainly due to weak global demand.

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Indicator 7 : Non performing loans Value (quantitative or Qualitative)

3.2% 3.3%


Non performing loans increased slightly, but still far below the previous years' rate of 4.07% in 2007 and 6.07% in 200 6.

Indicator 8 : MSME Loans to total banking loans Value (quantitative or Qualitative)

50.4% 51.28%


Despite the economic slowdown, which tend to hurt MSMEs the most, MSME loans to total banking loans increased.

Indicator 9 : Percentage of total capital expenditure disbursed on by end of Q2 Value (quantitative or Qualitative)

16.3% 27.2%

Date achieved 06/30/2008 06/30/2009

Comments (incl. % achievement)

Given the need to ensure effective and timely fiscal stimulus package during the global slowdown, and the continuing PFM ref orms, midyear capex disbursements were significantly accelerated.

Indicator 10 : Number of line ministries receiving qualified opinions on their financial statements

Value (quantitative or Qualitative)

30 26

Date achieved 12/31/2008 12/31/2009


In line with the extensive PFM reform program undertaken by the Government, the number of line ministries receiving qualifie d opinions on their financial statements declined substantially by 13%.

Indicator 11 : Establishment of National Public Procurement Office (LKPP) Value (quantitative or Qualitative)

LKPP did not exist

LKPP established and made operational

Date achieved 12/31/2007 12/31/2008


The LKPP was established and made operational, and became responsible for planning and development of strategies/policies/re gulations for public procurement.

Indicator 12 : Household targeted expenditures to total public spending Value (quantitative or Qualitative)

2.3% 4.5%


Household targeted expenditures to total public spending almost doubled.

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Indicator 13 : Community targeted (PNPM) expenditures to total public spending Value (quantitative or Qualitative)

0.6% 0.9%


Community targeted expenditures to total public spending increased by 50%, in line with the scaling up of the PNPM program.

Indicator 14 : Average size of PNPM community block grant (BLM) for the poor sub-districts


Rp.1.4 billion

Rp.1.7 billion

Date achieved 12/31/2008 12/31/2009


The PNPM program was scaled up, with the average size of community block grant for the poor sub-districts substantially insc reased by 19%.


Indicator Baseline Value


approval documents)

Formally Revised

Target Values



Indicator 1 : Investment to GDP ratio Value (quantitative or Qualitative)

23.4% 23.4%

Date achieved 12/31/2009 06/30/2010


As Indonesia continued to recover from the global slowdown, investments at midyear 2010 already reached the previous year 's level.

Indicator 2 : FDI net inflows Value (quantitative or Qualitative)

USD4.88 billion

USD4.87 billion


As Indonesia continued to recover from the global slowdown, FDI inflows at midyear 2010 already reached the previous year 's level.

Indicator 3 : Number of days to start a business Value (quantitative or Qualitative)

76 days 60 days


The number of days to start a business continued to decline substantially by 21%.

Indicator 4 : Number of procedures to start a business Value (quantitative or Qualitative)

11 9


The number of procedures to start a business continued to decline substantially by 18%.

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Indicator 5 : Year on year growth in value of non-oil exports Value (quantitative or Qualitative)

-11.6% 38.4%


As growth across Indonesia's major trading partners rebounded, growth in non-oil exports accelerated substantially.

Indicator 6 : Domestic non-oil and gas tax revenues to GDP Value (quantitative or Qualitative)

4.8% 5.1%

Date achieved 12/31/2009 06/30/2010


As growth across Indonesia's major trading partners rebounded, the revised budget's domestic non-oil and gas tax r evenues to GDP were increased.

Indicator 7 : Non performing loans Value (quantitative or Qualitative)

3.3% 2.98%


The health of the banking sector overall remained sound, with declining nonperforming loans.

Indicator 8 : MSME Loans to total banking loans Value (quantitative or Qualitative)

51.28% 52.68%


As Indonesia continued to recover from the global slowdown, MSME loans to total banking loans increased.

Indicator 9 : Percentage of total capital expenditure disbursed on by end of Q2 Value (quantitative or Qualitative)

27.2% 25%


Capex disbursement somewhat slowed, but still well above that of the previous year (16.3% in Q2 2008)

Indicator 10 : Number of line ministries receiving qualified opinions on their financial statements


26 21

Date achieved 06/30/2010 06/30/2010


The number of line ministries receiving qualified opinions on their financial statements reclined more rapidly than in the p revious year, by 19%.

Indicator 11 : Household targeted expenditures to total public spending Value (quantitative or Qualitative)

4.5% 3.8%

Date achieved 12/31/2008 12/31/2009 Comments Household targeted expenditures declined, given the completion of

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(incl. % achievement) the BLT program in 2008. Indicator 12 : Community targeted (PNPM) expenditures to total public spending Value (quantitative or Qualitative)

0.9% 1.4%


The PNPM expenditures were increased in line with the scaling up of the program.

Indicator 13 : Average size of PNPM community block grant (BLM) for the poor sub-districts


Rp.1.7 billion

Rp.2.4 billion

Date achieved 12/31/2009 06/30/2010


The PNPM program was scaled up, with the average size of community block grant for the poor sub-districts significantly incr eased by 45%.

G. Ratings of Program Performance in ISRs N/A

H. Restructuring (if any) N/A

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1. Program Context, Development Objectives and Design 1.1. Context at Appraisal The second programmatic DPL series was presented at a critical juncture for Indonesia, as it was facing the ramifications and contagion effects of the global financial turmoil in late 2008. However, Indonesia entered into the crisis in a relatively strong position. Real GDP growth had accelerated to a ten-year high in the previous year, despite unstable global financial markets and a slowing world economy. The budget deficit had been maintained at relatively low levels, 1.3 percent of GDP in 2007, and the debt-to-GDP ratio had also declined significantly from 55 percent in 2004 to 34.9 percent in 2007. These improvements in Indonesia’s public finances reflected strong fiscal discipline, and a significant reduction in fuel subsidies that relieved a substantial budgetary burden from soaring oil prices. Indonesia coped with the global financial turmoil relatively well, given its record of prudent fiscal management, as well as its size, robust economic demand and diverse exports. Nevertheless, because of its relatively open capital account, the significant foreign presence in its stock and bond markets, and the legacy of the 1998 crisis (which left Indonesian investors sensitive to exchange rate movements and prone to capital flight), Indonesia was more exposed to externally mobile capital than other countries in East Asia. Recognizing this vulnerability, the Government took a number of precautionary and proactive measures. These included clarifying the roles, responsibilities and procedures for different agencies in the event of failure within the financial system, raising the deposit insurance limit and submitting to Parliament a revised budget that corresponded to the global downturn. In addition, to alleviate financing constraints in the event that global liquidity conditions would not ease, the Government requested contingent financing from the World Bank and other development partners in the form of an additional DPL with a Deferred Drawdown Option (DPL-DDO). Altogether, these measures, coming on top of Indonesia’s record of prudent fiscal management, previous macroeconomic performance, and ongoing commitment to the longer-term institutional reform agenda, provided the requisite stability that warranted continued support for Indonesia’s structural and institutional reform efforts through the second DPL series. The second programmatic Indonesia DPL series was anchored to the FY09-12 Country Partnership Strategy (CPS) that was approved by the Board in September 2008. The CPS proposed that the DPL continued to be at the center of the WBG support in strengthening Indonesia’s central government institutions and systems, a key cross-sectoral engagement theme under the CPS. The second DPL series was originally envisaged to consist of three annual single-tranche loans (DPLs 5-7), which in substantive terms is a continuation of the first DPL series (DPLs 1-4), though focusing more on the medium-term institutional and policy reforms in the areas of investment climate, public finance management and poverty alleviation and service delivery. However, with the newly elected Government’s strategies and priorities in place, it was realized that there was a renewed opportunity to better realign the DPL program with those strategies and priorities. Hence, following agreement with the Government, and endorsement by the World Bank regional management, the second DPL series was closed one year earlier than envisaged and DPL 7 is being represented as the beginning of a new series. This ICR therefore covers only DPLs 5-6.

1.2. Original Program Development Objectives The overall goal of the DPL program is to help the Government of Indonesia achieve its medium term growth and poverty reduction objectives. The program is a continuation of the first DPL program surrounding three core policy areas: (i) Improve the investment climate. Under this policy area, the objective was to focus on reforms

to help make Indonesia a more attractive place to invest overall, through reducing the uncertainties for investors by strengthening investment service institutions and improving investment regulations; reducing the time needed for, and the cost of, importing and exporting; reducing compliance costs, enhancing taxpayer services and improving the

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efficiency and equity of the tax administration; reducing the vulnerability of the financial system; and improving MSMEs’ access to credit.

(ii) Strengthen public financial management. The DPL program sought to contribute to a more

efficient, transparent and accountable management of public resources. It is expected to do so through improving budget and cash management within the central Government; improving the results orientation in the budget process; streamlining budget execution and management of budget authority; improving government accounting and audit functions; improving public procurement; and enhancing bureaucratic effectiveness.

(iii) Enhance poverty alleviation and service delivery efforts. The objective under this policy area is to improve efficiency and equity in the use of public resources by better targeting of the poor and through improvements in sub-national spending. This is expected to be achieved by strengthening the monitoring and evaluation of public expenditures and programs; enhancing the pro-poor impact of social protection and human development programs by improving their targeting; and raising the quality of public service delivery, specifically education.

1.3. Revised PDO Overall, the PDO and reform policy areas remained consistent throughout the series.

1.4. Original Policy Areas Supported by the Program (as approved)

1. Investment Climate. Business surveys suggested that an improved perception of macroeconomic

stability and economic reform may have contributed to some recovery in investment. Investment growth accelerated in 2007 by 9.2 percent, from just 2.5 percent in the previous year, accounting for one-third of total economic growth. As a share of GDP, investment was back up to 25 percent, a major improvement from less than 20 percent during the early post-East Asian crisis years of 2000-03, although still not a full recovery to pre-crisis levels of nearly 30 percent of GDP. However, much remained to be done, as the overall investment climate was still characterized by high transaction costs for business overall, which was attributed to cumbersome business licensing and approval systems, and tax and customs complications. The DPL series continued to support reform actions aimed towards addressing these gaps in order to promote a more conducive investment climate.

2. Public Finance Management. Following the adoption of a new regulatory framework in 2003-

04, the Government embarked on the implementation of ambitious public financial management (PFM) reforms as legislated. These efforts were part of a broader agenda to improve governance and enhance service delivery. Pursuant to the new legal framework, progress has been achieved in the way public finances are managed and in increasing transparency and independent oversight. In particular, the role of parliament, the Ministry of Finance and its spending agencies have been reformed and the budget formulation process has been substantially streamlined as articulated in new PFM laws. The DPL series continued to support these efforts by improving the way in which public finances are managed, increasing transparency and reliability of accounting and reporting, and creating an enabling framework for more effective public institutions.

3. Poverty Alleviation and Service Delivery. Improving the delivery of public service and

enhancing the pro-poor impact of public expenditures continued to be critical for Indonesia. While Indonesia has made significant progress in poverty alleviation and service delivery, there are still causes for concern with the pace of poverty reduction and the extent of vulnerability. Many households were clustered just above the national poverty line, making them highly vulnerable to expenditure shocks, with the potential to drive them into poverty. Lagging human development indicators such as low continuation rates from primary to secondary school also need to be tackled by improving the quality of education services. The DPL series supported the

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increase in funding for poverty programs, and improvements in the targeting of such programs, as well as enhancing the quality of professional development and training for teachers.

1.5. Revised Policy Areas (if applicable) N/A.

1.6. Other significant changes

Building on the pillars that were the focus of the first DPL series 1 to 4, the second DPL series was originally anticipated as the second programmatic series of DPLs anchored to the FY09-12 CPS, consisting of three annual single-tranche DPLs 5 to 7. Yet because the legislative and presidential elections were scheduled for 2009, and the 2010-14 national plan would not be finalized until late 2009, the team had anticipated that DPL 7 would be negotiated with the newly elected Government in late 2010. Hence, a much more indicative set of triggers for DPL 7 was developed. Indeed, this was indicated in the Government’s Letter of Development Policy for DPL 6, which stated that although major reform areas of the DPL program were expected to continue, it would be the new Government that would work with the development partners to bring future DPLs into alignment with the new RPJMN 2010-2014, new annual government action plans (RKP) and other reform programs. At the time DPL 7 was prepared, the newly-elected Government had already embarked on a robust and comprehensive reform agenda. Shortly after taking office, the new Government had issued the 100-day action plan, Inpres No.1/2010, and the RPJMN 2010-2014 containing specific outputs, target dates and responsible authorities. As such, there was a renewed opportunity to better align the DPL program with the new Government’s development strategies and priorities. Therefore, the second DPL series was terminated earlier than originally anticipated, with the DPL 7 now representing the beginning of a new, third DPL series (DPLs 7 to 9), although still anchored under the FY09-12 CPS.

2. Key Factors Affecting Implementation and Outcomes

2.1. Program Performance The second DPL series continued to be delivered annually and on a timely basis. DPL 6 in particular was delivered in September 2009, two months earlier than the previous DPLs’ usual delivery. This early processing was requested by the Government at the time, who wanted to secure financing prior to the imminent transition in Government, given that the presidential election was scheduled in July 2009 and the new government was expected to take office in October 2009. The strong dialogue between the Government and the Bank helped in ensuring that the reforms are “owned”, rather than “agreed-to”, by the Government. With that, the pace and scope of reforms were largely driven by the judgment of key reformers within the Government on whether or not those reforms were bureaucratically or politically feasible. The policy actions as proposed by the Government at times may have seemed more incremental and focused on implementation. Nevertheless, such incremental steps were actually necessary to lay the path for more substantive reforms in the longer run. In that sense, the DPL program was helpful in ensuring that the necessary steps were taken, and that government ownership was maintained. In order to ensure a more focused and programmatic approach, with advice from the World Bank’s OPCS unit, it was decided at the beginning of the DPL series to reclassify the policy actions into two categories: prior actions and benchmark actions that signify progress towards longer-term reforms. Therefore, out of the 19 indicative DPL 5 triggers identified at the time DPL 4 was prepared, 12 were developed as actual DPL 5 prior actions, whereas the remainder were maintained as benchmark actions. The following is a list of prior actions for DPLs 5 and 6.

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Fifth Development Policy Loan

List of fulfilled prior actions as listed in the Legal Agreement/ Program Document Pillar 1: Investment Climate 1. Completed a review of the investment negative list of areas closed to foreign investment to clarify and

enhance the effective implementation of the Investment Law (Law No. UU 25/2007, and issued a revised Investment Negative List as Perpres No. 111/2007 in December 2007

2. Continued implementation of National Single Window (INSW) by expanding participation in the INSW from 5 to 15 government agencies and from 100 priority lane companies to 143 companies and rolling out the INSW in 4 additional ports

3. Issued all implementing regulations (PMK No. 181/PMK.03/2007 to PMK No. 202/PMK.03/2007) for the Tax Administration Law (Law No. UU 28/2007); issued circular requiring all tax offices to report on a quarterly basis the average processing time for each of the 8 major taxpayer services; designated these as key performance indicators for the tax offices; and posted first quarterly report on the DG Tax website

4. Operationalized the Financial Sector Stability Forum by appointing a chairman and staff from the relevant agencies to serve on the FSSF and establishing teams to develop a financial system crisis management protocol, scenarios for crisis simulation exercises and early warning indicators for various sub-sectors

5. Rationalized MSME financing schemes across line ministries and SOEs, and issued Perpres No. 2/08 clearing the way for the legal establishment of provincial credit guarantee and re-guarantee institutions

Pillar 2: Public Finance Management 6. Made further progress towards the establishment of a comprehensive TSA regime by implementing daily

sweep of government revenue deposits from collecting branches of the 5 largest commercial banks into the TSA with BI, established a counterpart team for implementation of the new automated treasury system, began mapping and reviewing business processes within treasury offices, and modernized all 33 provincial treasury offices (KPPN)

7. (a) initiated a review and revision of the existing program structure used by the GoI for budgeting purposes; (b) revised budget submission templates for RKA-KL; (c) drafted accompanying MTEF-PBB budget preparation instruction manuals; and (d) began consultation process with 6 pilot ministries (inc. MoF) and drafted key performance indicators for MoF

8. Took steps to streamline budget execution by: (a) issuing all DIPAs at the beginning of the year; (b) issuing new regulations permitting the names of key officials of Satkers listed in the DIPA to be accepted as the legally authorized budget users of the Satkers; (c ) issuing a circular clarifying that parallel processing of procurement is permitted and providing guidance on how to do so; (d) drafting an action plan to level out disbursement of capital and material expenditures over the fiscal year

9. (a) Issued MoF regulations (PMK171/2007) on accounting systems for the line ministries emphasizing the responsibility of ministers for recording budget allotment to their ministries, requiring the reporting of receivables, payables and investments in line ministries financial statements and introducing new a/c subsystems into the treasury a/c system; (b) issued MoF regulation (PMK91/2007) on the standard Charter of Accounts, harmonizing the budgeting and accounting codes; and (c ) trained over 3,185 accounting staff in line ministries on the changes implied by the new regulations

10. Made the newly established LKPP operational by recruiting staff and allocating budget to cover operational costs and compiled and consolidated Keppres No.80/03 and all amendments under one document

11. (a) Initiated bureaucracy reform in the Supreme Court and the BPK under the aegis of the National Committee for BR chaired by MenPAN and monitored by KPK; (b) continued implementation of the BR within MoF with the introduction of new job description and new grading scheme, the allocation of all positions to 1 of 27 grades, and salary increases based on an extra allowance determined by the new job descriptions and grades; and (c) initiated development of a new human resources information system in MoF

Pillar 3: Poverty Alleviation and Service Delivery 12. Institutionalized a government system for program evaluation by appointing a Deputy for Performance

Evaluation within Bappenas with three directors responsible, for sector evaluation, regional evaluation and systems and reporting of development performance

13. Begun establishing a uniform database for poverty targeting by updating the 2005 household-targeting database, adopting a better PMT system and preparing pilot experiments to inform the optimal design of mechanisms to identify and target poor households

14. Issued Ministerial Decree No. 18/2007 requiring teachers (other than head teachers) to be assigned a min of 24 teaching hours/week in order to receive either the professional allowance (for certified teachers) or the special area allowance (for teachers working in hardship areas) or a combination of both

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Sixth Development Policy Loan

List of fulfilled prior actions as listed in the Legal Agreement/ Program DocumentPillar 1: Investment Climate 1. Completed an inter-ministerial review and convened a ministerial-level plenary session (Letter No. UND-

95/SES.M.EKON/06/2009) which has reviewed and endorsed the draft of a new regulation on the Investment Negative List that updates sector and investment restrictions, and clarifies the status of publicly listed companies, foreign equity limits for direct investment and grandfathering

2. Issued implementing regulations (Perpres No. 27) for the 2007 Investment Law (on 23 June 2009) on One Stop Shops (PTSP), simplifying the steps required to set up a domestic or foreign company and the role of central government relative to provincial and local governments in approving or licensing domestic or foreign direct investments

3. Submitted the draft proposal (S-02/SA.IV.M.EKON/NSW/08/2009) for the operational model for the INSW to the Coordinating Minister for the Economy for inter-ministerial discussion and decision

4. Issued DG Tax decree (decree 47 on 16 December 2008) allowing recognition of digital signatures for individual taxpayer registration and for filing personal income tax returns

5. Issued DG Tax decree (PER-39/PJ on 2 July 2009) implementing new simplified standard formats capturing key financial indicators and annual tax returns from all types of businesses and eliminating the need for taxpayers to submit separate financial statements

6. Issued MoF regulation on credit guarantee and re-guarantee companies (PMK No.222/2008 in December 2008)

Pillar 2: Public Finance Management 7. Developed a revised program structure for RPJMN 2010-2014 with measurable results and targets, draft

corresponding KPIs for all budget holders and finalized requisite regulations and formats (Decree No.014/M.PPN/06/2009)

8. Implemented next day daily sweep of revenue accounts into the TSA for all commercial banks 9. Signed the contract (Contract Number 02/GFMRAP/A.3/CON/2009) for the new Treasury and Budget

system (SPAN) (on 10 July 2009) 10. Submitted (Letter No.03/D.1/VIII/2009) to line ministries for inter-departmental review a revised Keppres

No.80/03 on procurement, mandating the use of standard bidding documents Pillar 3: Poverty Alleviation and Service Delivery 11. Continued to use poverty targeting in determining the size of the sub-district community block-grants

under PNPM and increased the average size of the block grant for the poorest sub-districts (Reference No.4829/D.III/08/2009)

2.2. Major Factors Affecting Implementation

Some key factors have contributed to the timely and satisfactory performance of the DPL program overall. Some of these factors had already been identified in the ICR for the first DPL series, such as: Strong and continued government partnership. The second DPL series continued to benefit from the strong partnership that the team had built and sustained with the Government throughout the series. Overall, the DPL program has been driven largely by the Government’s own reform agenda. The DPL was able to help in a number of ways. It focused assistance from the World Bank and other development partners in implementing key reforms and it also elevated some issues to the attention of policy makers when consensus and coordination across ministries was needed. Decentralization of task team management. Strong field presence of the task teams, both of the managing team and technical teams, has also contributed positively to the implementation of the DPL program. Continued presence in the field enabled the teams to work closely with the various government counterparts on a day-to-day basis, and strengthened the breadth and depth of policy discussions. Coordination with development partners. Similar to the previous series, the second DPL series was prepared in close collaboration with the Government of Japan/JICA and the Asian Development Bank, who provided parallel financing of US$200 million and US$400 million, respectively. At times, the European Commission and AusAid were also involved as observers during policy dialogue.

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Overall, the collaboration allowed not only additional leveraging of resources, but also consistency in the development partners’ signal on the priority of reforms and reduced transaction costs for the Government. The analytic and advisory activities of the partners also complemented the Bank’s own knowledge base and fed into the DPL policy actions. In addition, the following factors were identified during the second DPL series, which also affected the implementation of the DPL program: The global financial crisis. The DPL 5 was presented to the Board when Indonesia was coping with the ramifications and contagion effects of the global financial turmoil. Although Indonesia came into the crisis in a relatively strong position, GDP growth still declined from 6 percent in 2008 to 4.5 percent in 2009, and foreign direct investments almost halved from US$9.3 billion to US$4.9 billion during the same period. Nevertheless, the Government had urgently taken a number of precautionary and proactive measures, including those aimed at minimizing the vulnerability of the financial system and reducing budget financing pressures by requesting the contingent World Bank DPL-DDO. Altogether, these proved to be positive measures that helped further the DPL program reform agenda. The DPL-DDO in particular was instrumental in advancing and/or expediting policy actions that were envisioned as part of the ongoing DPL series, particularly those that helped maintain critical public expenditures and reassure investor confidence. The political transition period. The 2009 legislative and presidential elections had expedited the earlier processing of DPL 6, compared with the usual DPL delivery schedule. Moreover, the new Government’s robust and well-articulated reform agenda, as defined in its 100-day action plan, Inpres No.1/2010 and the RPJMN 2010-2014, led the team to close the second DPL series one year earlier than envisioned and start a new series (DPLs 7 to 9), better aligned with the priorities of the new government. Because of this early termination, in some cases the originally envisaged outcomes were not yet achieved at the end of the DPL series. Nevertheless, the unfinished reform agenda will continue to be pursued under the subsequent DPL series, and with a new vigor, given the new Government in place and the potentially strong alignment with its reform priorities. Evolving Government and Bank priorities. While the Government and Bank partnership has been strong overall, in some cases, the priorities of both parties shift and/or evolve. This sometimes led to diminishing DPL policy actions. For instance, under the poverty alleviation and service delivery pillar, the priorities shifted from raising the quality of public education towards improving the targeting of the poor under social protection and human development programs. Political sensitivities of certain reform agenda. The second DPL series initially supported bureaucracy reforms under DPL 5, through the initiation of reforms in the Supreme Court and State Audit Agency, and continued implementation of reforms within the MoF. However, at DPL 6, no further follow-up actions were identified, not only because it was not clear as to when and how GoI intended to expand the reforms, but also because it seemed unfeasible to expect major revisions in the associated legal framework during an election year. Therefore, it was decided that bureaucracy reforms were better supported through other Bank instruments, such as AAA. 2.3. Monitoring and Evaluation Design, Implementation and Utilization As in the previous series, the second DPL series continued to be monitored based on continuous dialogue with government counterparts. The task teams’ field presence enabled the DPL program to be monitored continuously. Task teams communicated closely with government counterparts in developing policy actions and assessing progress and bottlenecks, benefiting also from the synergies offered by other Bank activities, e.g. investment projects, technical assistance and AAA. More organized policy dialogue sessions were also held, in order to bring about more coordinated discussions, which was particularly useful in resolving cross-cutting, multi-sector policy issues. A monitoring and results framework was developed for DPL 5, which included a series of quantitative indicators with baseline data and was further developed for DPL 6.

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The Government also strengthened its monitoring and evaluation efforts through the establishment of a new Presidential Delivery Unit (UKP4). Upon taking office, the new Government established the UKP4 unit to monitor and evaluate the implementation of ministerial programs, in the context of the 100-day action plan, Inpres No.1/2010 and the RPJMN 2010-2014. To date, the new unit has demonstrated both energy and success in performing its task, particularly in monitoring the government’s performance towards delivering their policy output targets as listed in Inpres No.1/2010 by the end of 2010, thereby helping to sustain the new Government’s reform momentum. 2.4. Expected Next Phase/Follow-up Operations (if any) DPL 7 will begin a new, third series of annual single-tranche loans (DPLs 7 to 9), although still anchored under the FY09-FY12 Country Partnership Strategy. The new DPL series is expected to continue and deepen reforms along the same objectives and pillars of the two preceding DPL series, namely investment climate, public finance management, and poverty alleviation and service delivery. Indeed, these pillars are prominently featured in the new Government’s priorities, as outlined in the 100-day action plan, Inpres No.1/2010 and the RPJMN 2010-2014. While the triggers identified in previous operations for DPL 7 were the basis for discussion with GoI, the DPL prior actions are reflective of the new emerging priorities (consolidation and improvements of anti-poverty programs, results orientation in the budget, improving logistics within Indonesia).

3. Assessment of Outcomes 3.1. Relevance of Objectives, Design and Implementation

Rating: Highly Satisfactory

The second DPL series had relied largely on the task team’s dialogue and engagements with the Government in all three DPL policy areas (investment climate, PFM, and poverty alleviation and service delivery). As such, the Government’s own reform agenda fed significantly into the objectives, design and implementation of the second DPL series. This is reflected in the fact that all three policy areas feature prominently in the development plans prepared by the new government (the 100-day action plan, Inpres No.1/2010 and the RPJMN 2010-2014). This series supported key GoI reforms to cope with the ramifications of the financial crisis, through the strengthening of the Financial Sector Stability Forum or enhancing GoI’s ability to use fiscal policy as a demand management by improving budget execution. At the same time, it also helped keep the focus on the medium term development agenda at the time of the crisis, through the development of a revised budget program structure that was more results oriented or laying the foundation for improved targeting of government anti-poverty programs. The DPL series may at times include prior and benchmark actions that seem incremental in nature, rather than critical policy decisions. However, these actions often represent the outcome of deliberations and represent the policy consensus that is necessary to move forward in the reforms being supported by the DPL. Many actions were necessary to allow the DPL series to lay the groundwork for longer-term reforms and to sustain government ownership. The second DPL series is also featured prominently in the FY09-12 Country Partnership Strategy (CPS) for Indonesia that went to the Board in September 2008. The CPS proposed that the DPL series continue to be at the center of the WBG support in strengthening Indonesia’s central government institutions and systems, a key cross-sectoral engagement theme under the CPS. Within the DPL framework, the investment climate pillar is aligned with the CPS objective of enhancing the environment for private sector development to foster accelerated growth and poverty reduction, and strengthen competitiveness and inclusiveness. The public finance management pillar supports another

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key CPS objective of strengthening central government institutions and systems through increasing accountability and transparency in government financial management and enhancing public finance management and governance to increase the development impact of priority budget expenditures. Finally, improving the institutional capacity to better target poverty alleviation and service delivery is critical in order to achieve the CPS objective of more efficient service delivery to reduce poverty levels and improve equity. The CPS recognized that the DPL program has helped the Government’s efforts to reduce inefficient public expenditures, strengthen tax administration and debt management, enhance the competitiveness of the financial sector and implement governance and fiduciary reforms. Underpinned by a large AAA program co-financed by development partners, the DPL program has also supported key reforms to improve the business climate and service delivery. The CPS envisioned that the next generation of DPLs would build on strong relationships with the reform-minded economic ministries and continue to support the central Government in strengthening effectiveness of its systems. This includes efforts to reduce inefficient public expenditures, strengthen tax administration, enhance the overall business climate and strengthen poverty alleviation and service delivery. Overall, the second DPL series’ objectives, design and implementation are highly relevant and consistent with the Government’s reform priorities and with the ongoing Bank partnership strategy for Indonesia.

3.2. Achievement of Program Development Objectives Overall Achievement of Objectives Rating: Satisfactory The second DPL series has helped the Government in progressing towards achieving its medium-term growth and poverty reduction objectives. Despite the fact that the series was terminated one year earlier than envisaged, significant accomplishments were made in the three policy pillars. In investment climate, the DPL helped reduce uncertainties for investors to invest in Indonesia by continuing to push for reforms through the revision of the investment negative list, implementation of one-stop shops (PTSP) and rollout of the Indonesia National Single Window (INSW). It has also strengthened the tax administration through key regulatory reforms aimed at reducing compliance costs, enhancing taxpayer services and improving the efficiency and equity of the tax administration. In public finance management, the governance and transparency of public spending was significantly improved, through various improvements to the budget formulation and execution systems. These include the establishment of a comprehensive Treasury Single Account regime and an automated SPAN system; the initial operation of the newly established LKPP as a national public procurement agency; and the issuance of various regulations and trainings for improved government accounting practices. In poverty alleviation and service delivery, the necessary groundwork for longer-term reforms has been laid by institutionalizing a government system for program evaluation within Bappenas and initiating the process of establishing a uniform database that will be used by various implementing agencies to develop poverty program beneficiaries list. Investment Climate Rating: Satisfactory By mid-2010, investment flows into Indonesia were already on their path to recovery after the severe slump in 2009. FDI inflows totaled US$9.3 billion in 2008 according to Bank Indonesia statistics, but halved in 2009 as the global financial crisis and economic downturn limited investment flows globally. However, by mid-2010, FDI inflows increased substantially to US$4.87 billion or about half of the peak investments in 2008, indicating their path to recovery. Evidently, firms are scaling up investments with the global economic recovery and improved long-term financing

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conditions. This, together with the Government’s renewed focus on improving the investment climate in general, has helped boost investment flows to Indonesia. While the second DPL series helped Indonesia in improving investment climate, much remains to be done. The second DPL series had supported key policy actions that are aimed to reduce barriers to investments, through improving the investment regulations such as the one-stop shops (PTSP) and negative investment list, reducing the time and costs for importing and exporting through the piloting of the Indonesia National Single Window (INSW), strengthening the tax administration regulation and systems, establishing the Financial Sector Stability Forum to reduce the vulnerability of the financial system and improving MSME financing schemes. However, much remains to be done to further improve the investment regulatory framework, streamline licensing and approvals, expand the INSW implementation, modernize the core tax administration system and address the high logistics costs within the country overall. Reforms in these areas will continue to be supported under the next DPL series. The Doing Business Survey 2010 indicated an improvement in Indonesia’s overall investment climate. As of 2009, Indonesia ranked 122 out of 183 countries, up from 129 out of 181 countries in 2008.1 In particular, double-digit jumps were made in the categories of: (i) registering property, wherein the time to register property was slashed from 39 to 22 days, thanks to the time limits introduced for standard procedures at the land registry; (ii) protecting investors, with the strength of investor protection index improved from 5.7 to 6, as disclosure requirements for related-party transactions were expanded; and (iii) starting a business, wherein Indonesia’s ranking improved from 171 (near the bottom ranking globally) to 161, with the number of procedures, time and cost of starting a new business significantly reduced.2 This overall positive development was attributed to the eased incorporation and post-incorporation processes for new business registration by introducing online services, eliminating certain licenses, making the registry more efficient and cutting company deed legalization fees, publication fees, registration fees and business license fees. Following the passage of the Investment Law in March 2007, the second DPL series has consistently supported the issuance of follow-on regulations that aim to clarify investments restrictions in Indonesia, specifically the investment negative list (DNI). Initially, the DNI was revised in July 2007, making it more detailed and comprehensive than previous negative lists, and hence more transparent. However, the revised 2007 DNI introduced new restrictions in key sectors such as telecommunications, health, shipping, ports, logistics, pharmaceuticals and insurance. It also failed to clarify issues relating to how incumbent investors in these sectors would be treated — the so-called grandfathering clause. In response to concerns raised by the industry, the Government committed in 2008 to further simplify the list and address specific shortcomings that had led to uncertainty regarding Indonesia’s investment law. Such effort was prolonged under the second DPL series, and just recently bore fruit. Following a series of discussion with stakeholders, including the Indonesian Chamber of Commerce and Industry (Kadin) and international business chambers, a new Presidential Regulation No. 36/2010 on the DNI was issued on 25 May 2010.3 As a single document containing all restrictions on investment, the regulation has improved legal clarity and opened up some sectors to foreign investment. However, overall, changes in foreign equity limits are relatively minor and the benefits of the newly issued DNI will be limited to the legal clarity provided. Regulatory reforms have also been undertaken that laid the basis to implement longer-term reform efforts that help simplify and streamline investment procedures. As another follow-on regulation to the 2007 Investment Law, the Government also issued an implementing regulation (PerPres No. 27/2009) that authorizes the Indonesia Investment Coordinating Board (BKPM) to

1 The Doing Business Surveys are advance dated by one year, hence Doing Business 2010 is based on data collected in 2009. 2 During 2008 to 2009, for starting a business, the number of procedures was reduced from 11 to 9, the number of days reduced from 76 to 60, and the cost reduced from 77.9 percent to 59.7 percent GNI per capita. 3 The issuance of the new DNI is included as a prior action for DPL 7.

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establish one-stop shops (PTSP), along with an electronic information and licensing service. In the longer run, the PTSP mechanism will enable a more simplified and online processing of domestic or foreign company’s licensing and approvals, at the sector and provincial/district level. The implementing regulation also allows ministries and central government agencies to turn over or delegate their authority to issue business licenses to BKPM, thereby allowing a more streamlined central government approval or licensing procedures for domestic or foreign investments. The time required to set up a business continued to decline, signaling that the DPL-supported investment regulatory reforms are on the right track. The Doing Business Survey showed that as of 2009, it took about 60 days to incorporate and register a new business, before it could legally operate. This is a significant reduction from 2007, when the indicator was at 105 days. Among the more cumbersome and lengthy procedures involved are: (i) registering with the Company Register (Ministry of Trade) and obtaining a registeration certificate (TDP) (15 days); (ii) application to the Ministry of Law and Human Rights for approval of the deed of company establishment (14 days); and (iii) registering with the Ministry of Manpower (14 days). Various regulatory reforms have also been introduced to strengthen the tax administration following the passage of the Tax Administration Law in 2007. Implementing regulations were issued by the Directorate General of Taxes to support the Tax Administration Law’s effort of striking a better balance between the rights and obligations of taxpayers and the powers of tax officials. These new regulations clarified and provided certainty in the administrative procedures for the taxpayers to comply with the law, as well as for the tax officials to provide services to the taxpayers. The DG Taxes has also required the tax offices to report on a quarterly basis the average time to process taxpayer registration, VAT refunds, tax objections, exemptions of witholding tax on imports, and property tax reliefs. Furthermore, DG Tax decrees were issued to allow for the roll-out of e-registration and e-filing for taxpayers: (i) to allow recognition of digital signatures for individual taxpayer registration and for filing personal income tax returns; and (ii) to implement new, simplified standard format for financial information. The groundwork for Indonesia’s National Single Window (INSW) has been put in place, which will help reduce the time and cost for importing and exporting activities. After two years of pilot implementation, the INSW has helped increase the reliability and transparency of the decision-making processes at customs. The INSW facilitated the initial electronic submission of licensing applications. Customs and other government agencies have also enhanced their supervision and monitoring capabilities over trade transactions. In addition, INSW has facilitated the development of a comprehensive database of trade regulations (Lartas). A fully operational INSW should benefit the private sector through more efficient customs release and clearance of goods, as it allows single submission, single processing and single approval of import/export documents, which involve 36 different government agencies. Currently, about half of these government agencies have been taking part in the INSW with customs as the temporary operator until a more permanent structure is to be put in place in 2012.

The DPL program has contributed to reducing the vulnerabilities of the financial system. Establishment of the Financial System Stability Forum (FSSF) has formed the basis for the financial sector safety net, which called for an integrated system to supervise the financial sector and a framework for closely monitoring financial sector stability. Through a joint decree between the MoF, BI and LPS (the deposit insurance agency), the FSSF was established in June 2007 to serve as a venue for coordination, cooperation and information exchange among the authorities responsible for safeguarding financial system stability in Indonesia. Teams were also established under the FSSF to develop a financial system crisis management protocol, scenarios for crisis simulation exercises and early warning indicators for various sub-sectors. Indeed, the FSSF played a crucial role during the financial system turmoil, particularly in addressing systemic risks and taking swift actions towards resolving insolvent banks through joint policies and decisions. At the end of the DPL series, the financial sector was in good health overall, with non-performing loans falling from 3.2 percent in

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2008 to 3.0 percent in mid-2010 and capital adequacy ratio increasing from 16.76 percent to 18.06 percent during the same period.

The DPL has contributed to improved MSME access to finance. With suppport from the DPL, the Government has rationalized MSME financing schemes across line ministries and state-owned enterprises. Regulatory reforms were also introduced that allow for the legal establishment of national and provincial credit guarantee and re-guarantee institutions, and clarify the legal status of these institutions, their ownership structures, reporting mechanisms and investment options. These positive developments contributed to the growth in proportion of MSME loans to banking sector loans, from 50.4 percent in mid-2008 to 52.7 percent in mid-2010, even at a time of financial turmoil which tends to have more adverse effects on MSMEs. Public Finance Management Rating: Highly Satisfactory Since the adoption of a new regulatory framework in 2003/44, the Government has shown strong commitment towards building a modernized, state-of-the-art public financial management system, and to this end has embarked on a broad-based and ambitious PFM reform agenda. The Government has been undertaking remarkable efforts to improve business processes and systems throughout the entire budget cycle, from budget formulation and execution, accounting and auditing of expenditures to civil service reform. It has also addressed a multitude of risks related to capacity constraints, poor infrastructure, and weak governance across the wide PFM institutional and stakeholder landscape. In the medium to long term, it is expected that these system improvements will lead to more targeted and flexible allocation of public funds to development priority needs and more efficient, transparent and accountable disbursements. This achievement is fundamental to improving public service delivery and enhancing development outcomes. The breadth and depth of PFM reform achievements over the short reform period have been remarkable. The most notable ones include the introduction of performance based budgeting; procurement of an integrated financial management information system (IFMIS); the staged implementation of a Treasury Single Account (TSA); the establishment of cash forecasting capacity in the Treasury; the development of accounting standards to provide for a “cash towards accrual” accounting framework; the on-going inventory of government assets; the establishment of a new public procurement agency; and improvements of internal controls and internal and external audit systems. The second DPL series supported the establishment of a comprehensive Treasury Single Account (TSA), thereby consolidating and improving cash management of public finances. Under DPL 5, the Treasury in cooperation with BI has implemented the daily sweep of government revenue deposits from collecting branches of the 15 largest commercial banks and post offices into the TSA. This is a significant improvement from the previous practice established since 1989 of sweeping the revenue accounts twice a week. Under DPL 6, the daily sweeps were expanded to all commercial bank branches. Ultimately, the overall consolidation minimized idle government cash balances and encouraged better operational cash planning by government institutions, thereby substantially improving central government budget and cash management. Substantial progress has been made towards the implementation of an Integrated Financial Management System, the SPAN project. Once fully implemented, SPAN is expected to overcome the existing system fragmentation and weaknesses in the multitude of financial data processing applications used by government institutions, by providing an integrated, more robust and secure system that is aligned according to business functions. Under SPAN, government budget execution is

4 The most noteworthy laws issued include the State Finance Law No. 17/2003, the State Treasury Law No. 1/2004 and the State Financial Audit Law No. 15/2004

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expected to be streamlined through improved management of budget authority, thereby smoothening budget implementation and execution. Since 2008, progress in procuring the SPAN turnkey solution has been substantially accelerated, with evaluation of bids completed in February 2009 and contract signed in mid-2009. A new Treasury Transformation Directorate, which will focus on SPAN implementation, has been established and ministerial decrees establishing a project governance system for SPAN have been issued. DG Treasury has also completed the procurement of major consultancy related to the Business Process Improvements, which feeds into the SPAN project. To improve the results orientation of the budget process, the Government has developed a revised program structure for the RPJMN 2010-14, with measurable results and targets. The revised program structure marked the launch of performance-based budgeting (PBB) and medium-term expenditure framework (MTEF) implementation by all line ministries and ministry-level agencies, with the RPJMN 2010-2014 and Renstra-KL to form the basis for the FY2011 budget preparation process. The newly revised structure was indeed incorporated in the RPJMN 2010-14, with corresponding key performance indicators, and will be used as the basis for development of budget ceilings starting in FY2011. Implementation of the revised program structure will continue to be supported under the third DPL series. The DPL series has strengthened the regulatory framework that allowed for improved government accounting practices. Under DPL 5, two MoF regulations were issued: (i) PMK171/2007 on accounting systems for line ministries emphasizing the responsibility of ministers for recording the budget allotment in their ministries, requiring the reporting of receivables, payables and investments in line ministries’ financial statements and introducing new accounting sub-systems into the treasury accounting system; (ii) PMK91/2007 on the standard chart of accounts, harmonizing the budgeting and accounting codes. In addition, over 3,185 accounting staff at line ministries were trained on the changes implied by the new regulations. Altogether, these actions laid the basis for enhancing the accountability of line ministries and improving the quality of line ministries’ financial statements. The legal framework establishing Lembaga Pengembangan Kebijakan Pengadaan Pemerintah (LKPP) or the National Public Procurement Office was enacted in 2008. DPL 5 supported the establishment of the new institution, which reports directly to the President and is responsible for sustainable, integrated, focused and coordinated planning and development of strategies/ policies/regulations associated with the procurement of goods/works/services using public funds. Efforts to ensure that LKPP is fully operational continued, as supported also by the Indonesia: Strengthening Public Procurement Program, as well as AusAID-funded technical assistance. Throughout the DPL series, the Government also continued to improve the regulatory framework for public procurement by advancing the revision of the Keppres No.80/2003 on procurement, which mandated the use of national standard bidding documents to be used by all public agencies. The DPL has helped the Government in advancing bureaucracy reforms within various government agencies. Under DPL 5, such reforms were: (i) initiated in the Supreme Court and BPK under the aegis of the National Committee for Bureaucracy Reform chaired by MenPAN, and monitored by KPK; (ii) continued to be implemented within the MoF with the introduction of new job descriptions and a new grading scheme, the allocation of all positions to one of 27 grades, and salary increases based on an extra allowance determined by the new job descriptions and grades; (iii) expedited through the initial development of a new human resources information systems in MoF. Poverty Alleviation and Service Delivery Rating: Satisfactory The poverty alleviation and service delivery pillar has been reprioritized, as the Government began to shift its focus from enhancing service delivery to making public expenditures more pro-poor. This shift was largely driven by the growing recognition that critical reforms needed to be

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pursued to enhance the delivery and effectiveness of poverty alleviation programs, and maximize the impacts of increased funding to such programs. For instance, in 2006, it was reported that the cash transfer program (BLT) had inclusion and exclusion errors of 8 and 22 percent, whereas the Rice for the Poor Program (Raskin) subsidy received by non-poor was 2.5 times that received by the poor. As a result, throughout the DPL series, the Government continued to push ahead for reforms aimed towards enhancing the targeting of the poor under social protection programs, specifically through the initial establishment of a uniform database and poverty targeting, and continued use of poverty targeting in the adjustment of size of block grants under the PNPM program. Under the DPL series, the Government has institutionalized a system for program evaluation within Bappenas. The evaluation system focused largely on sector evaluation, regional evaluation, and systems and reporting of development performance. In this regard, a workplan has been developed and workshops held with regional governments, line ministries and other units, in order to reflect international best practices in establishing and mainstreaming a M&E function within the government bureaucracy. The process of establishing a uniform database and improving the targeting of the poor was launched. Such process was launched by BPS through: (i) updating the household registry data that were used for the earlier implementation of the cash transfer program (BLT) in 2005; (ii) adopting a better PMT system to identify poor households; and (iii) piloting experiments in 24 villages in four kabupaten (Muara Enim, Pontianak, Gowa and Tangerang) in May 2008, to inform the optimal design of mechanisms to identify and target poor households. The DPL 5 supported the Government’s introduction of incentives for teacher certification and relocation to remote areas. Ministerial Decree No. 18/2007 was issued by the Ministry of National Education, which required all teachers to deliver 24 teaching hours per week in order to receive the professional allowance for certified teachers. In addition, teachers receiving the special area allowance are required to fulfill the 24-teaching-hour requirement. Subsequently, the World Bank support to the Ministry of National Education towards raising the quality of public education was continued through other programmatic initiatives, such as BOS-KITA. The National Community Empowerment Program (PNPM Mandiri) was scaled up in terms of geographical coverage and size of average block grant. By the end of 2009, the Government’s flagship anti-poverty program reached all 6,400 sub-districts (kecamatan), of which around 4,500 are located in rural areas. Central government funding for the entire PNPM was increased to Rp 10.3 trillion. The Government also introduced poverty targeting to determine the size of community block grants so that the increased funds are allocated more effectively. 3.3. Justification of Overall Outcome Rating Rating: Satisfactory Overall, the DPL program has advanced highly relevant reform progress in the three pillars. Building on a more stable macroeconomic base, the DPL focused on continuing the longer-term institutional reforms initiated during the previous series. Most outcome indicators indicate that the DPL reforms are progressing in the right direction, with reduced percentage of people living below the national poverty line, reduced start-up time and number of procedures to start a business, a healthier banking system and increase in MSME credit. However, in some cases, the results were not as expected for a variety of reasons. For instance, the global crisis had caused slower GDP growth overall and reduced foreign investments. It should also be noted that the DPL series was terminated one year earlier than anticipated, as the DPL 7 was realigned with the new government priorities. While reforms in the investment climate area have been successful as evidenced by improvements in several investment climate surveys, reforms initiated are not complete yet and how successful they ultimately are will be determined by ongoing implementation efforts.

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3.4. Overarching Themes, Other Outcomes and Impacts (a) Poverty Impacts, Gender Aspects and Social Development During the DPL series, the poverty headcount fell from 15.4 percent in 2008 to 13.3 percent in mid-2010. However, many people remain poor and vulnerable, wherein about 32.5 million Indonesians are still living below the poverty line and about half of all households remain clustered around the national poverty line (Rp 200,262 per month). The gap between the poor and non-poor was also quite significant, with the Gini coefficient, a measure of consumption inequality, at about 37 percent during the same period. Regional disparities also persisted with eastern Indonesia lagging behind other parts of the country, notably Java. Critical gender issues also remained, with the still high maternal mortality (228 per 100,000 in 2009), and under-representation and lower wages in professional fields. The DPL series helped address poverty and gender issues directly through: (i) institutionalizing an M&E system for public expenditures and programs, to help strengthen accountability in policy formulation and budget allocation processes; (ii) enhancing the pro-poor impact of social protection and human development programs by improving the targeting of such programs; and (iii) completing efforts to raise the quality of public provided education, which were initiated under the previous series as public expenditures were reallocated from untargeted fuel subsidies; and (iv) improving the investment climate and strengthening public financial management systems, which in the longer run contribute to sustainable economic growth and reduction of poverty, including of women; and (v) emphasizing the promotion of women’s participation under PNPM, with various initiatives to improve gender equity and increase women’s participation, such as creating separate sub-project windows for women, holding separate special meetings to discuss proposals originated by women and tracking of gender data throughout project implementation (b) Institutional Change/Strengthening (particularly with reference to impacts on longer-term

capacity and institutional development) Significant reforms have been undertaken to strengthen various institutions across the three DPL pillars. These include improving analytical capacity, enhancing efficiency through better technology and more reliable and transparent reporting. These efforts are also complemented by other Bank instruments, including investment projects, technical assistance and AAA. In the investment climate area, the DPL series supported the following institutional strengthening or establishment of: (i) up to 36 government agencies that were involved in the implementation of the INSW, in granting permits or licenses for export or import; (ii) tax offices reporting on a quarterly basis the average processing time for major taxpayer services; (iii) the Financial Sector Stability Forum to help reduce the vulnerability of the banking sector; and (iv) the legal basis for provincial credit guarantee companies and re-guarantee companies, through the issuance of Government Regulation No.2/2008. In public finance management, the DPL continued to strengthen Treasury’s capacity to implement the Treasury Single Account system and modernized all provincial treasury offices (KPPN); enhanced the accountability of line ministries by putting in place a more results-oriented program structure for the RPJMN 2010-14 and budget submission templates for RKA-KL; supported the operationalization of the newly-established LKPP through recruitment of staff and sufficient budget allocation; and initiated bureaucracy reforms in the Supreme Court and BPK, and continued to implement those within the MoF In poverty alleviation and service delivery, the DPL institutionalized a government system for program evaluation within Bappenas, supported BPS’s efforts towards establishing a unified database and promoted the use of poverty targeting in the adjustment of PNPM block grants.

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(c) Other Unintended Outcomes and Impacts (positive and negative) The continued policy dialogue under the DPL strengthened the knowledge base and allowed the Government to move proactively in taking precautionary measures at the time of crisis. For instance, teams were established to develop a financial system crisis management protocol, scenarios for crisis simulation exercises, and early warning indicators for various sub-sectors. At the time of crisis, these allowed the Government to quickly assess the vulnerability of the financial system, and enabled it to swiftly request for the DDO-DPL, which was delivered to the Board only three months after the DPL 5 delivery. In turn, the DDO-DPL helped in restoring public confidence and advancing other policy reforms, particularly under public finance management area. Without the DPL series, such quick processing of the DDO-DPL would not have been possible. 3.5. Summary of Findings of Beneficiary Survey and/or Stakeholder Workshops NA. 4. Assessment of Risk to Development Outcome Rating: Moderate With strong commitment and ownership, the Government has demonstrated a track record in undertaking successful reforms throughout the first and second DPL series. While many of the reforms are unlikely to reverse, there is a slight risk that the extensive reforms initiated under the DPL series so far may not be advanced further following the recent change in government counterparts, at both the higher policy-making and the operational levels. Nevertheless, this risk is minimal, given that most DPL reforms are driven by priorities that were developed and articulated formally through consensus within the Government, rather than by individual government officials. Another risk is Indonesia’s external vulnerabilities, wherein significant and rapid shifts in global financial market sentiments may result in sudden, large and somewhat disruptive capital outflows, thereby reversing the development impacts of the DPL-supported reforms. However, this risk has been lowered with the significant improvements in the Indonesian macroeconomic framework in recent years, thereby improving resilience to external shocks. Recent experience (in the last quarter of 2008 and more recently in May 2010) has shown that Indonesia, while still vulnerable to large capital outflows, is able to cope relatively well with turbulences in international financial markets, reversing previous sentiments that Indonesia’s financial tend to overreact to turbulences in international markets. Investment Climate (Moderate). The global financial crisis has revived protectionist sentiments in many countries, including Indonesia. It remains to be seen whether these also translate into protectionist policies. This could weaken the investment climate reforms that have been introduced, particularly those aimed towards facilitating foreign investment and trade. External vulnerabilities could also affect Indonesia’s attractiveness to investors, thereby undermining the results of investment climate reforms that have already been introduced. Nevertheless, the reforms introduced to date are promising in terms of providing greater clarity and reducing uncertainties surrounding investment in Indonesia. Public Finance Management (Low). The reforms achieved under the public finance management area have been extensive and involved significant system and institutional investments and are thereby unlikely to be reversed. The performance-based budgeting, the integrated financial management information system and Treasury Single Account, for instance, have been established and will be continued throughout the next DPL series. Poverty Alleviation and Service Delivery (Low). With the reprioritization of the poverty and service delivery pillar, there is an increased vigor within the Government towards enhancing the delivery and effectiveness of poverty alleviation programs, and maximizing the impacts of increased funding to

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such programs. The recent establishment of a new poverty alleviation team under the Vice-President’s office, which is a trigger for DPL 7, is also a promising sign. 5. Assessment of Bank and Borrower Performance 5.1. Bank Performance

(a) Bank Performance in Ensuring Quality at Entry Rating: Satisfactory The DPL series was well designed in response to Indonesia’s needs, as it evolved from a macroeconomic stabilization towards longer-term development. While particular attention was paid to the financial crisis in the preparation of this series, the focus continued to be on medium term structural reforms, therefore ensuring that responses to the crisis did not jeopardize but rather contribute to advancing the medium term reform agenda. The Bank worked closely with the Government in mapping out the reform policy actions to be undertaken over the subsequent three years. The existence of other Bank instruments, such as investment projects, TA and AAA — some of which funded through trust funds — also allowed broad and intensive Bank engagement with the Government, along with other development partners, thereby facilitating a strong knowledge base when designing the DPL series at entry. Close collaboration was also maintained with the Government of Japan/JICA and Asian Development Bank. Both participated actively in the policy discussions during the preparation stage throughout the DPL series. This allowed a more harmonized approach towards policy-based lending, more synergies from other investment and technical assistance activities, and reduced transaction costs for the government. (b) Quality of Supervision Rating: Satisfactory Given the DPL nature, all of the prior actions were fulfilled upfront in order for the loan to be disbursed. Hence, the supervision of DPL mainly took place during the policy dialogue for the DPL preparation. Such policy dialogue was conducted through the day-to-day communication between the government counterparts and Bank technical teams, as well as a series of roundtable discussions involving various government and Bank stakeholders. This facilitated substantive and continued policy dialogue throughout the DPL series, during which key issues and obstacles to reforms were addressed. (c) Justification of Rating for Overall Bank Performance Rating: Satisfactory The Bank performed well and supported the DPL in supporting reforms that were fully implemented and produced desirable outcomes. The DPL series was delivered timely and, in the case of DPL 6, even earlier than the usual delivery schedule. Strong dialogue was maintained with the Government throughout the series, which ensured full ownership of the program, with active participation of the Government of Japan/JICA and ADB. In addition, other Bank investment projects, TA and AAA also provided synergies in terms of providing solid knowledge base in the design and implementation of the DPL series.

5.2. Borrower Performance

(a) Government Performance

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Rating: Satisfactory The DPL series’ supported reforms involved various government ministries/agencies. The investment climate area involved BKPM, which was responsible for the DNI and PTSP; MoF DG Customs for the INSW; and MoF DG Taxes for tax reforms. In public finance management, the following agencies were involved: (i) MoF DG Budget and BAPPENAS for budget formulation; (ii) MoF DG Treasury for budget execution systems; and (iii) LKPP for procurement issues. The poverty alleviation and service delivery area involved Bappenas, BPS, the Coordinating Ministry for People’s Welfare and the Ministry of National Education. While the performance across different agencies varied, the overall commitment and ownership to reforms is strong. Seeing the DPL as a useful tool, reform-oriented government officials have also used the DPL series to strategically advance their reform agenda. Hence, the overall rating for Borrower performance is Satisfactory. (b) Implementing Agency or Agencies Performance Rating: Highly Satisfactory As the implementing agency, the Coordinating Ministry for Economic Affairs (CMEA) was responsible for overall coordination and oversight of the DPL program. The CMEA, as in the previous DPL series, performed very well in ensuring consistent and effective cross-ministerial coordination, and was a key player in the success of the program. The CMEA also ensured that the a comprehensive reform agenda is developed by the different agencies, and that any follow-up actions are taken by the responsible agency in a timely manner. (c) Justification of Rating for Overall Borrower Performance Rating: Satisfactory The overall rating of the Borrower is Satisfactory. The Government was fully committed and extended strong ownership over the program, providing the necessary resources and personnel to facilitate the program. This was a key factor for the success of the program. Strong coordination amongst the multiple Government ministries/agencies was also maintained throughout the DPL series, which enabled the undertaking of critical and complex reforms.

6. Lessons Learned Some important lessons have been learned over the course of the DPL program. These lessons largely stem from the nature and evolution of the relationship between the Bank and the Government, and also from the characteristics of the DPL program as a means of offering policy support, together with the changing policy environment on the ground. Some of the lessons may be particular to the Indonesian case because of the broad scope and depth of the Bank’s engagement with the Government, and the range of resources that the World Bank program in Indonesia has available.

Key lessons learned from the previous series and reaffirmed during this DPL series:

Strong Government ownership and committed counterparts are vital for the DPL program

to help accelerate key reforms. Given their complexities and significant effects over the way the Government works, policy reforms should be driven by the Government and not development partners. Furthermore, the pace and scope of reforms should also be driven by the judgment and tactical sense of the key government counterparts on whether or not those reforms are bureaucratically or politically feasible. The DPL program has been successful in ensuring Government ownership and committed government counterparts through strong dialogue and

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broad engagement. In areas where policy consensus is still evolving, the pace and scope of implementation may seem more modest than desired, but their very inclusion in the DPL-supported agenda maintains a focus on the policy issue, prompts on-going deliberation of policy options, strengthens the resolve of reform champions, and may eventually lead to reform breakthroughs. Indeed, the DPL is useful not only as a financing instrument, but more as a tool for accelerating the Government’s own critical reforms overall.

Constant collaboration and dialogue between the Government and the Bank continued to be fundamental for the success of the DPL program. The Bank’s strong field presence continued to facilitate constant collaboration and dialogue with the Government, not only on the DPL but also on other engagements that provide synergies with the DPL. Such collaboration and dialogue also benefited from the involvement of key reform champions, both within the Government and the Bank, who were able to complete actions in the timeframe agreed upon and ensure the successful delivery of the DPL program.

Mapping out a reform program provides meaningful direction and substantive results down

the road, but a degree of flexibility is still needed, especially to ensure sustained government ownership. Compared with the first, the second DPL series was more systematic in adopting a multi-year strategic frame for the program, and laying out a basic mapping of the reform program that more specifically describes the end goals. While the initial mapping out of a detailed strategy and a multi-year agenda under each of the various DPL reform aims allowed a more strategic consideration of what the most critical next reform steps might be, ensuring sustained Government commitment to furthering the various reform objectives was even more critical. Indeed, institutional and policy reforms are usually complicated and involve unpredictable undertakings. Such reforms often need to go through a trial and error process, where there may be the occasional dead-ends that require backtracking and finding an alternate route. Hence a degree of flexibility should be maintained, so that when the right opportunity presents itself, reforms that had otherwise been apparently slow can be supported and advanced more rapidly.

In addition, some new lessons were learned under this second DPL series, which are beneficial for future DPL operations: Continuous DPL dialogue strengthened the Government’s knowledge base, which in turn

allowed more proactive and swift measures to be taken at a time of crisis. The continued policy dialogue under the DPL has strengthened the knowledge base and allowed the Government to move proactively and take precautionary measures at the time of crisis. Establishment of the FSSF, for instance, has formed the basis for the financial sector safety net and allowed the Government to swiftly address systemic risks in the financial system. The Government was also able to proceed quickly in requesting for the DDO-DPL, which eventually helped in restoring public confidence and advancing other policy reforms, particularly those under public financial management and investment climate. Had the DPL been non-existent, the swift resolution of the financial systemic risks and quick delivery of the DDO-DPL at the time of crisis would not have been possible.

The reclassification of policy actions — into prior and benchmark actions — allowed a more

prioritized and programmatic approach. While DPL 5 is very much a continuation of the first DPL series’ medium-term institutional efforts, the indicative DPL 5 triggers identified at the preparation of DPL 4 were reassessed, then reclassified into prior and benchmark actions that signify progress towards longer-term reforms. Indeed, some benchmark actions that may appear incremental at face value are actually steps that need to be taken before more substantive reforms can take place. Hence, the reclassification of actions allowed more priority and focus over the more critical, key prior actions, while still acknowledging the Government’s pace and scope of reform process. This not only helped in ensuring a sustained Government ownership, but also in mapping out a more comprehensive, multi-year strategic frame for the program.

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DPLs are only one instrument among many that are available in a multi-faceted

engagement, and the choice of instrument should be contingent on the issue, the political context and the institutional circumstances. This is particularly applicable in the Indonesian case because of the size and scope of the World Bank program in Indonesia. The Bank program in Indonesia is one of the largest of any country in terms of number of staff and overall resources. Large teams are working closely on a daily basis with government counterparts at often very senior levels on a wide range of issues from public financial management and trade and investment, finance, public expenditures and poverty. In this context, the DPL is not the only instrument for supporting reform, but rather complementary to other instruments such as investment projects, TA and AAA.

7. Comments on Issues Raised by Borrower/Implementing Agencies/Partners (a) Borrower/Implementing agencies NA (b) Cofinanciers Comments provided by JICA The World Bank thanks JICA for providing their views on the results achieved in this DPL series as well as areas where improvements can be made (see Annex 5 for JICA comments on this ICR). The World Bank team would like to provide the following comments to some of the issues raised by JICA: Reflect the voices of the private sector and the poor. This is already being done, although not necessarily through surveys conducted explicitly to evaluate the DPL program. The design of the program is based on analysis that identified key constraints both for private sector development as well as poverty reduction, and many of the reforms being supported aim at addressing those constraints. The results framework being proposed also uses information collected through surveys to assess results achieved through the implementation of these reforms. Improve results framework to include targets/ goals. This has been addressed in the preparation of the next series, with both baselines and targets identified for results by reform aim. (c) Other partners and stakeholders (e.g. NGOs/private sector/civil society) NA

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Annex 1 Bank Lending and Implementation Support/Supervision Processes (a) Task Team members

Name Unit Name Unit P110191 – Fifth Development Policy Loan Shubham Chaudhuri EASPR Jens Kromann Kristensen EASPR William Wallace EASPR Sebastian Eckardt EASPR Timothy Bulman EASPR Roksana Khan EASPR Peter Milne EASPR Mafalda Duarte EASPR Chris Stewart EASPR Josef Leitmann EASES Soekarno Wirokartono EASPR Timothy Brown EASES P.S. Srinivas EASFP Imad Saleh EAPCO Vivi Alatas EASPR Rajat Narula EAPCO Djauhari Sitorus EASFP Andrew Raddatz EASHD Peter Rosner EASPR Mae Chu Chang EASHD Vijay Ramachandran EASPR Elaine Tinsley EASPR Frank Jenkins EASPR Susan Wong EASSO Sjamsu Rahardja EASFP Nina Herawati EASPR P113638 – Sixth Development Policy Loan Shubham Chaudhuri EASPR Frank Jenkins EASPR William Wallace EASPR Douglas Ramage EASPR Mafalda Duarte EASPR Sarah Horrigan EASPR Timothy Bulman EASPR Jens Kromann Kristensen EASPR Peter Rosner EASPR Christina Schmalhofer EASPR Imad Saleh EAPCO Vivi Alatas EASPR Rajat Narula EAPCO Noriko Toyoda EASPR Siti Wardhani EASPR John Victor Bottini EASSO Sjamsu Rahardja EASFP Susan Wong EASSO Vijay Ramachandran EASPR Nina Herawati EASPR Hari Purnomo EASPR (b) Staff Time and Cost P110191 - Fifth Development Policy Loan

Stage Staff Time and Cost (Bank Budget Only)

No. of staff weeks USD Thousands (including travel and consultant costs)

Lending FY08 1.5 7.24 FY09 45.8 219.22

FY10 0.2 0.63 Total: 47.5 227.09

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P113638 - Sixth Development Policy Loan

Stage Staff Time and Cost (Bank Budget Only)

No. of staff weeks USD Thousands (including travel and consultant costs)

Lending FY09 7.8 32.54

FY10 23.1 101.19 Total: 30.9 133.73

Supervision FY10 0.7 4.15

Total: 31.6 137.88

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Annex 2. Beneficiary Survey Results N/A.

Annex 3. Stakeholder Workshop Report and Results N/A.

Annex 4. Summary of Borrower's ICR and/or Comments on Draft ICR N/A.

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Annex 5. Comments of Cofinanciers and Other Partners/Stakeholders

JICA Comments on ICR for DPL 5-6 2010.9.14

Overall, JICA considers the second DPL series achieved its objectives and we are proud to be part of the DPL dialogue. Following are the some consideration for further improvement of DPL in future. i) Opinion of private sectors and the poor. In order to achieve further substantial

improvement in investment climate and public service delivery to the poor, it is important to reflect the voices from private sectors (in case of Investment Climate) and the poor (in case of Poverty Alleviation).

ii) Comprehensiveness. Policy actions should be mutually exclusive and collectively exhaustive, in order to realize substantial policy reform. In the field of investment climate improvement, JICA considers that it’s worth considering addressing issues related to intellectual property right, labor and SMEs in future. In addition to issues on trade and tax, those issues are also very important to for realizing investment climate improvement in Indonesia.

iii) Involvement of stakeholders. In order to make actions under each policy aim more effective, involvement of all stakeholders is very important. In this respect, it might be worth considering the involvement of non-governmental institutions. For instance, the procedure of investment permission has been streamlined through efforts by the BKPM as we addressed in DPL 5-6. However, in order to realize substantial decrease in time for investment permission, the procedure by notary, which the BKPM is not responsible for, need to be also streamlined, and the DPL has not addressed this issue so far.

iv) Cooperation for capacity development among donors. In order to realize the substantial reforms, the capacity development needs to be realized. In this respect, capacity building of local/implemental level officials is very important. The lack of such capacity building might undermine benefit to be potentially acquired by customers of government services through achievement of policy action(s). We could further promote our cooperation among donors with regard to capacity development for local/implemental level.

v) Linkage between each action and output/outcome indicators. It is ideal if we could indicate achievement of each action leads to improvement of relevant indicator(s). In addition, it might be better for us to examine if we could set policy actions which contain numerous targets/goals.

vi) Number of Policy Actions. Compared with DPL 1-4, the policy actions tend to be getting small-scaled in general, and at the same time that the number of policy actions tends to increase. If we could set policy actions to be large scale and the number of the actions to be limited, like at the first stage of DPL series, this will help reduce administrative cost of DPL and also promote substantial policies and institutional reforms through policy dialogue.

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Annex 6. List of Supporting Documents

1. Program Documents: Report No.46332-ID, Report No. 50149-ID and Report No.47280-ID 2. Letter of Development Policy 3. Country Partnership Strategy for Indonesia FY2009-2012 4. Doing Business 2009 - Indonesia 5. Doing Business 2010 – Indonesia 6. Indonesia Economic Quarterly, June 2010