Document of The World Bank

FOR OFFICIAL USE ONLY

Report No: 71531-ID

INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT

PROJECT APPRAISAL DOCUMENT

ON A

PROPOSED LOAN

IN THE AMOUNT OF US$29.6 MILLION

TO THE

REPUBLIC OF INDONESIA

FOR THE

INDONESIA INFRASTRUCTURE GUARANTEE FUND PROJECT

August 13, 2012

Indonesia Sustainable Development Unit Sustainable Development Department East Asia and Pacific Region

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

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CURRENCY EQUIVALENTS

(Exchange Rate Effective August 2, 2012)

Currency Unit = Indonesia Rupiah (Rp) Rp 9,480 = US$1 1.55US$ = SDR 1

FISCAL YEAR

January 1 – December 31

ABBREVIATIONS AND ACRONYMS

AAA ADB BAPPENAS BKPM CA EIA

Analytical and Advisory Activities Asian Development Bank Badan Perencanaan Pembangunan Nasional (National Development Planning Agency) Badan Koordinasi Penanaman Modal (Indonesia Investment Coordinating Board) Contracting Agency Environmental Impact Assessment

EMP Environment Management Plan ESMF Environment and Social Management Framework FIL Financial Intermediary Loan GOI GOS

Government of Indonesia Government of Singapore

IBRD IDPL

International Bank for Reconstruction and Development Infrastructure Development Policy Loan

IFC International Finance Corporation IIGF Indonesia Infrastructure Guarantee Fund IIFF Indonesia Infrastructure Finance Facility MOF OM

Ministry of Finance Operations Manual

PDAM PI PLN PPP PSO

Perusahaan Daerah Air Minum (public water utility) Private Investor Perusahaan Listrik Negara (State Electricity Company) Public-Private Partnership Public Service Obligation

PRG RPF RMU

Partial Risk Guarantee Resettlement Policy Framework Risk Management Unit

SIL S$ TA

Specific Investment Loan Singapore Dollar Technical Assistance

WB World Bank

iv

Vice President: Pamela Cox Country Director: Stefan G. Koeberle

Sector Director: Sector Manager:

John A. Roome Franz R. Drees-Gross

Task Team Leader: Co-Task Team Leader:

Kamran M. Khan Kalpana Seethepalli

v

INDONESIA

INDONESIA INFRASTRUCTURE GUARANTEE FUND PROJECT

TABLE OF CONTENTS

Page

I. STRATEGIC CONTEXT .......................................................................................................... 1

A. Country Issues .......................................................................................................................... 1

B. Sectoral and Institutional Context ............................................................................................ 2

C. Higher Level Objectives to which the Project Contributes ...................................................... 7

II. PROJECT DEVELOPMENT OBJECTIVES ......................................................................... 8

A. Project Development Objective ............................................................................................... 8

B. Project Beneficiaries ................................................................................................................ 8

C. PDO Level Results Indicators .................................................................................................. 8

III. PROJECT DESCRIPTION .................................................................................................. 9

A. Project Components ................................................................................................................. 9

B. Project Financing ...................................................................................................................... 9

Lending instrument ................................................................................................................... 9

Project Cost and Financing ..................................................................................................... 10

C. Lessons Learned and Reflected in the Project Design ........................................................... 10

IV. IMPLEMENTATION .......................................................................................................... 12

A. Institutional and Implementation Arrangements .................................................................... 12

B. Results Monitoring and Evaluation ........................................................................................ 16

C. Sustainability .......................................................................................................................... 16

V. KEY RISKS AND MITIGATION MEASURES................................................................... 17

VI. APPRAISAL SUMMARY ................................................................................................... 18

A. Economic and Financial Analyses ......................................................................................... 18

B. Technical ................................................................................................................................ 19

C. Financial Management ........................................................................................................... 20

D. Procurement ........................................................................................................................... 21

E. Safeguards .............................................................................................................................. 21

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F. Governance and Anti-corruption ............................................................................................ 24

G. Policy Exceptions and Readiness .......................................................................................... 24

Annex 1: Results Framework and Monitoring .............................................................................. 25

Annex 2: Detailed Project Description ........................................................................................... 28

Annex 3: Implementation Arrangements ...................................................................................... 32

Annex 4: Operational Risk Assessment Framework (ORAF) ..................................................... 62

Annex 5: Implementation Support Plan ........................................................................................ 68

Annex 6: Economic and Financial Analysis ................................................................................... 71

Annex 7: Governance Action Plan .................................................................................................. 75

MAP ................................................................................................................................................... 77

vii

.

PAD DATA SHEET

Indonesia

Indonesia Infrastructure Guarantee Fund (P118916) PROJECT APPRAISAL DOCUMENT

.

EAST ASIA AND PACIFIC

EASIS

.

Basic Information

Date: 13-August-2012 Sectors: Water supply (25%), General energy sector (25%), General transportation sector (25%), General water, sanitation and flood protection sector (25%)

Country Director: Stefan G. Koeberle Themes: Infrastructure services for private sector development (90%), Municipal finance (10%) Sector

Manager/Director: Franz R. Drees-Gross/John A. Roome

Project ID: P118916 EA Category:

A - Full Assessment

Lending Instrument:

Specific Investment Loan

Team Leader: Co-Team Leader:

Kamran M. Khan Kalpana Seethepalli

Joint IFC: No .

Borrower: Republic of Indonesia

Responsible Agency: Ministry of Finance

Contact: Mr. Bambang P.S. Brodjonegoro Title: Head of Fiscal Policy Office

Tel. No.: 62-21-3441484 Email: aristalyakusuma@gmail.com .

Project Implementation Period:

Start Date:

31-Oct-2012 End Date:

31-Mar-2018

Expected Effectiveness Date:

31-Oct-2012

Expected Closing Date: 31-Mar-2018 .

Project Financing Data(US$M)

[ X ] Loan [ ] Grant [ ] Other

[ ] Credit [ ] Guarantee

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For Loans/Credits/Others

Total Project Cost (US$M): 79.60

Total Bank Financing (US$M):

29.60

.

Financing Source Amount(US$M)

Borrower 50.00

International Bank for Reconstruction and Development 29.60

Total 79.60 .

Expected Disbursements (in USD Million)

Fiscal Year 2013 2014 2015 2016 2017 2018

Annual 0.50 1.30 1.35 1.45 10.00 15.00

Cumulative 0.50 1.80 3.15 4.60 14.60 29.60 .

Project Development Objective(s)

The Project Development Objective (PDO) is to strengthen the Indonesia Infrastructure Guarantee Fund (IIGF) as a single window institution to appraise infrastructure Public Private Partnership (PPP) projects requiring government guarantees. .

Project description

1. The WB has provided comprehensive advisory services to the MOF and other relevant Government of Indonesia (GOI) ministries and departments in the conceptualization, development and establishment of the IIGF. IIGF was formally instituted with the issuance of Presidential Decree No. 78/2011 which establishes the IIGF as the single window for appraising all infrastructure PPPs requiring GOI guarantees. The supporting Minister of Finance Regulation No. 260/2011 provides the details of how guarantees will be issued for infrastructure PPPs. IIGF is now fully operational, with current available capital of IDR3.5tn ($390 million). 2. In order for the IIGF and its guarantees to have credibility in the market, the newly established institution has to quickly demonstrate that it has the capacity to appraise projects on technical and financial merits, and that it will be allowed to operate as an independent institution with the mandate to serve as the single window for the appraisal of all infrastructure PPPs requiring GOI guarantees. It will take some time for the IIGF to develop full in-house capacity to appraise projects, and so it has rightly decided to procure the services of international consultants with the relevant expertise to support the appraisal and other key functions. However, there is a need for IIGF to demonstrate that its appraisal standards are not only sound, but that they will also stand the test of time and occasional pressure when the institution is forced to reject popular projects which are not financially or technically viable.

ix

3. The proposed IGFP is designed to support the IIGF in its initial stage of development. The strategic rationale for WB support to IIGF is threefold: (i) Helping IIGF to establish appraisal standards and other operational and institutional procedures

and codifying them in the Operations Manual (which includes the ESMF), the WB can help IIGF to demonstrate that its appraisal standards are acceptable to the WB and its institutional integrity is protected by the GOI – WB agreements under the IGFP.

(ii) WB support to IIGF can contribute to the improvement in the quality of PPP projects in Indonesia, as IIGF will use the WB-financed technical assistance to advise CAs in the preparation of projects seeking IIGF guarantee support.

(iii) While the primary objectives of WB institutional-operational support for the IIGF can be met via loan disbursement for the provision of WB-financed technical assistance to IIGF discussed under (i) and (ii) above, the loan component involving financing to IGFP - under which IIGF may utilize WB financing to work jointly with the WB to appraise projects which it may find technically complicated or sensitive to appraise on its own – is also critical for IIGF in that it will signal to the market that the quality of IIGF’s appraisal standards, governance and other internal controls are high, and that IIGF will issue guarantees based on sound project appraisal and will remain a financially viable guarantee agency.

The IGFP is designed to establish an operational relationship between the IIGF and WB which will build IIGF’s capacity and establish its credibility in the market. The project will also help to protect the institutional integrity of the institution by making IIGF’s compliance with its WB-reviewed appraisal procedures and standards a condition of the WB-GOI loan agreement and the WB-IIGF project agreement. The WB-financed TA to the IIGF will also help to improve to quality of infrastructure PPPs being prepared by the various CAs. The IIGF will use a single Operation Manual (OM) developed by IIGF with WB’s assistance to appraise all projects seeking government guarantees, regardless of financing source. It is anticipated that this key design element will ensure: (i) optimal usage of all guarantee types (IIGF guarantees using IIGF capital, IIGF guarantees using WB funds under IGFP, and MOF guarantees) based on what risks the underlying funding sources (IIGF capital, WB funds, and MOF capital, respectively) are able to cover; and (ii) clarity, transparency and administrative efficiency in IGFP guarantee appraisal operations under a single institution, using a single OM. It is envisaged that projects passing the IIGF’s appraisal criteria will be eligible to receive government guarantee(s). Such guarantees would include one or a mixture of: (a) IIGF guarantees (using IIGF capital); (b) IIGF guarantees (backed by WB funds from the SIL on-lent to IIGF projects which are appraised by the WB and meet WB policies as well as other reputational risk considerations disbursed at the time a claim is properly made and assessed against the guarantee); and (c) direct GOI/MOF guarantees1. All IIGF guarantees which are backed by WB capital will also be appraised by the WB. A project may benefit from any of these guarantees, or a combination thereof. The IGFP is expected to result in: (i) the upstream benefit of raising the standards of project preparation; and (ii) the downstream benefit of providing guarantees to mitigate the private sector’s exposure to risks related to CAs’ credit as well as reliability of government policy. It is anticipated that project preparation will improve through the guidance offered by the IIGF to CAs soon after projects are identified as PPPs and potential candidates for guarantees (see Principles for Providing Guarantees under the IGFP

1 The issuance of a direct MOF guarantee will only be done on an exceptional basis involving large projects requiring guarantee coverage which exceeds the IGF capacity vis-à-vis its capitalization and financial strength.

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Framework in Annex 3 for more details). This early guidance will help ensure that projects are bankable and meet high, internationally accepted standards of preparation, so that guarantees are provided only to well-prepared projects that pass strict and robust appraisal standards embodied in the OM agreed and acceptable to both GOI and WB. The IIGF is designed to be an open platform in that once it is fully operational, it will be able to attract third parties (in addition to the WB) in its capital / funding structure, and/or as partners in providing guarantees to eligible projects. This will enable the IIGF to gain the breadth and depth of experience that will help develop its capacity, as well as demonstrate the IIGF’s operational and institutional legitimacy to the market.

Components The project has two components: Component 1. WB-Supported IIGF Guarantees. The Project will provide US$25 million to support IIGF in issuing its own IIGF guarantees for qualifying projects. Qualifying projects will be those which are appraised by the WB and meet WB policies as well as other reputational risk considerations (“WB-Supported IIGF-projects”). In order to prevent the mingling of this $25 million with IIGF capital, the WB loan proceeds under Component 1 will be disbursed at the time a claim is properly made and assessed as payable by IIGF with respect to an IIGF guarantee for a WB-Supported IIGF-project. Component 2. Technical Assistance. The Project will provide a loan for Technical Assistance (TA) in the amount of approximately $4.6 million to develop IIGF’s institutional capacity to: screen, appraise and supervise IIGF-projects as a single window for all government guarantees for infrastructure PPPs in Indonesia; manage its operations; build capacity in Contracting Agencies (CAs), Sponsors and other relevant parties; develop standardized documents and procedures for Contracting Agencies, Sponsors and other relevant parties to use in preparing PPP projects and require the use of such documents and procedures in order for PPP projects to receive IIGF guarantees; and support PPP preparation activities, including feasibility studies, transaction advisory support and other activities. GOI contribution. The GOI contribution under the Project of up to $50 million will be used to capitalize the IIGF in order to provide IIGF guarantees (separate from and in addition to the WB-supported IIGF guarantees). The GOI has already contributed this amount to the IIGF.

Component Name Cost (USD Millions)

Component 1. WB-Supported IIGF Guarantees 25.00

Component 2. Technical Assistance 4.60 .

Compliance

Policy

Does the project depart from the CAS in content or in other significant respects?

Yes [ ] No [ X ]

.

Does the project require any waivers of Bank policies? Yes [ ] No [ X ]

Have these been approved by Bank management? Yes [ ] No [ ]

Is approval for any policy waiver sought from the Board? Yes [ ] No [ X ]

xi

Does the project meet the Regional criteria for readiness for implementation? Yes [ X ] No [ ] .

Safeguard Policies Triggered by the Project Yes No

Environmental Assessment OP/BP 4.01 X

Natural Habitats OP/BP 4.04 X

Forests OP/BP 4.36 X

Pest Management OP 4.09 X

Physical Cultural Resources OP/BP 4.11 X

Indigenous Peoples OP/BP 4.10 X

Involuntary Resettlement OP/BP 4.12 X

Safety of Dams OP/BP 4.37 X

Projects on International Waterways OP/BP 7.50 X

Projects in Disputed Areas OP/BP 7.60 X .

Legal Covenants

Name Recurrent Due Date Frequency

Loan Agreement, Schedule 2, Section I.B.2; Project Agreement, Schedule Section I.B.1

X Annually

Description of Covenant

IIGF shall apply in all of its operations (including, but not limited to the WB-Supported IIIGF Guarantees), the Operations Manual, including the Environmental and Social Management Framework, acceptable to the Borrower and the Bank.

Name Recurrent Due Date Frequency

Project Agreement Schedule, Section I.A, paragraph 1(b)

31-Oct-2013

Description of Covenant

IIGF shall engage by the earlier of the first date on which IIGF initiates appraisal of a WB-Supported IIGF-project and the date which is one (1) year after the Effectiveness Date, and thereafter maintain until completion of the Project (or until IIGF has built sufficient internal capacity as agreed between IIGF and the Bank) a consultant firm to outsource appraisal of IIGF-projects, with qualification and terms of reference acceptable to the Bank.

Name Recurrent Due Date Frequency

Loan Agreement, Schedule 2, Section IV.B.2 and Project Agreement, Schedule, Annex 2

X Annually

Description of Covenant

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Special Provisions with Respect to Withdrawals under Category (1) (WB-Supported IIGF Guarantees). (a) Notwithstanding any other provision of this Agreement, IIGF (and not the Bank) shall remain solely and exclusively liable to the WB-Eligible Guaranteed Party for the payment of any Claim under any WB-Supported IIGF Guarantee. (b) The Borrower may submit an application for withdrawal under Category (1) for payment of a Claim with respect to a particular WB-Supported IIGF Guarantee, provided that the conditions set out in Section IV.B.2 of Schedule 2 to the Loan Agreement and Annex 2 to the Schedule to the Project Agreement are met.

Conditions

Name Type

Loan Effectiveness Condition Effectiveness

Description of Condition

The Subsidiary Loan Agreement has been executed and delivered on behalf of each of the Borrower and IIGF.

Team Composition

Bank Staff

Name Title Specialization Unit

Kamran M. Khan Program Manager Task Team Leader EASSH

Kalpana Seethepalli Infrastructure Economist Co-Task Team Leader EASSH

Jose L. Guasch Consultant Former Sr. Advisor and Head of GET PPP

LCSPF

Sophie Sirtaine Sector Manager Sector Manager ECSF2

Cuong Duc Dang Sr Urban Spec. Sr Urban Spec. EASVS

Andri Wibisono Infrastructure Specialist Infrastructure Specialist EASIS

Xavier Cledan Mandri-Perrott

Lead Financial Officer Lead Financial Officer FEUFS

Ekapon Jivasantikarn Consultant Infrastructure Specialist EASSH

Juan Martinez Sr. Social Scientist Sr. Social Scientist EASIS

Chau-Ching Shen Senior Finance Officer Senior Finance Officer CTRLN

Melinda Good Senior Counsel Senior Counsel LEGES

Susan Maslen Senior Counsel Senior Counsel LEGCF

Bekir A. Onursal Consultant Sr. Environmental Specialist EASOS

Novira Kusdarti Asra Sr. Financial Management Specialist

Sr. Financial Management Specialist

EASFM

Ahsan Ali Lead Procurement Specialist

Lead Procurement Specialist EASRP

Fook Chuan Eng Sr. Water & Sanitation Spec.

Sr. Water and Sanitation Spec. EASIS

Mustapha Benmaamar Sr. Transport. Spec. Sr. Transport. Spec. EASIS

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Leiping Wang Lead Energy Specialist Lead Energy Specialist SASDE

Risyana Sukarma Consultant Water Sector Specialist EASIS

Irma Magdalena Setiono Water & Sanitation Specialist

Water and Sanitation Specialist EASIS

Sri Oktorini Program Assistant Program Assistant EACIF

Andrew Daniel Sembel Environmental Specialist Environmental Specialist EASIS

Indira Dharmapatni Senior Operations Officer Senior Operations Officer EASIS

Dayu Nirma Amurwanti Operations Analyst Operations Analyst EACIF

Yash Gupta Senior Procurement Specialist

Senior Procurement Specialist EASR1

Indrajit Kartorejo Procurement Specialist Procurement Specialist EASR1

Rajat Narula Sr. Financial Management Specialist

Sr. Financial Management Specialist

EASFM

Ndiame Diop Lead Economist Indonesia Gender Focal Point EASPR

Yulia Immajati Consultant Consultant EASPR

Inneke Herawati Ross Senior Program Assistant Senior Program Assistant EASIN

Sandra Walston Temporary Temporary EASIN

Isabel Duarte A. Junior Program Assistant Program Assistant EASIN

Evilia Nusi Team Assistant Team Assistant EACIF

Winda D. Kosasih Operations Assistant Operations Assistant EASSH .

1

I. STRATEGIC CONTEXT A. Country Issues 1. More than a decade after the 1997 crisis, Indonesia has made remarkable progress and emerged as a middle-income economy with macroeconomic stability. In contrast to the post-1997 crisis days of a 13% decline in GDP, a sharp rise in poverty and near collapse of its financial sector, Indonesia proved to be quite resilient during the 2008-09 global economic downturn, and the economy continues to build momentum towards achieving stronger and more inclusive growth. Growth slowed sharply but remained positive in the fourth quarter of 2008, at the depths of the global downturn. By mid-2009, Indonesia’s economy had recovered to pre-crisis averages, and the economy grew by 4.5 percent in 2009, making it one of the fastest growing economies in the G20. This growth was largely supported by robust domestic demand and, later in the year, improving economic conditions abroad. Indonesia’s economy grew by 6.5 percent in 2011, with a projected growth of 6.2 percent in 2012, possibly increasing to above 7 percent by mid-decade, largely due to accelerating domestic demand and external competitiveness, while accounting for greater uncertainty surrounding the global economic outlook. The overall positive economic outlook provides a robust foundation for stronger and more inclusive growth, provided that the necessary institutional reforms continue to take place. 2. Indonesia has remained committed through the years to infrastructure reform and service delivery, evidenced inter alia in (i) a series of Infrastructure Summits (January 2005, February 2006, April 2009); (ii) issuance of two infrastructure “policy packages” (Inpres (Presidential Instruction) 6/2007 and Inpres 5/2008) setting out numerous policy reforms to be undertaken during 2005-2009, and steadily implementing the program; (iii) more than doubling budget allocations for infrastructure (in nominal terms) since 2005; (iv) announcement of a substantial infrastructure element in the Government of Indonesia’s (GOI’s) March 2009 fiscal stimulus package; and (v) reforms intended to increase sub-national government spending on piped water services. Sub-national governments, particularly districts, have played an increasing role in infrastructure spending since decentralization and accounted for 57 percent of public spending in 2008; the central government accounted for the remaining 43 percent.

3. Nevertheless, to realize the vision and potential of a “rising Indonesia”, much remains to be done. Public investment in infrastructure has increased since 2005 but spending remains a small share of the total budget and GDP. Growth has restarted and has been robust, but infrastructure continues to be poor and the investment climate remains weak. The dramatic falloff in infrastructure investment from 7% of GDP before the 1997 crisis has not yet been reversed, rising to just over 2% in 2001, and since then to over 3% of GDP. This contrasts with investment levels of about 10% of GDP by some other countries in the region, such as China and Vietnam. Government spending on infrastructure has remained less than that on subsidies (5.5% of GDP), education (3.5%), and government administration (3.2%). Lower than adequate investments in the transport, energy and water and sanitation sectors have resulted in road congestion and deterioration, blackouts across the country and health issues related to the lack of water and sanitation. Significant improvements are also required in the effectiveness and efficiency of public infrastructure spending. Overall, levels of investment have been insufficient to meet the growing demand for infrastructure resulting from rapid urbanization and growth, and

2

to address the extremely low access to basic infrastructure services. At the same time, there is increasing recognition that public funding alone will not be enough to fill the financing gap in infrastructure. Indonesia needs to explore alternative models of attracting and leveraging private financing into infrastructure. This would require implementing market-oriented policies of raising infrastructure financing based on international best practice, tailored to the Indonesian context. In this regard, it would be critical to pay careful attention to the first few infrastructure transactions involving private financing so as to build credibility with the private sector and financial markets. B. Sectoral and Institutional Context 4. The GOI has made some progress in the area of infrastructure public-private partnerships (PPPs), including establishing a supportive regulatory and institutional framework, and pursuing several PPP transactions. However, progress has generally been slow, with some key institutional challenges accounting for the lack of progress in turning the PPP project pipeline into realized PPP transactions.

(i) Poor quality of project preparation prior to bidding, with inadequate background analysis undertaken prior to tendering, resulting in unrealistic expectations by bidders.

(ii) Weak pipeline of bankable PPP projects, with limited guidance to Contracting Agencies (CAs) on what constitutes a well prepared PPP.

(iii) Absence of a consistent framework and procedures on how a well prepared PPP can obtain a GOI guarantee in a manner that is fair to all investors.

(iv) Risks in the pre-financial close stage as well as construction and operational stages that the private sector cannot mitigate, e.g., delays in provision of land, weak credit quality of off-takers, and inability of contracting agencies to guarantee minimum revenues in toll roads and other volume based infrastructure projects.

(v) Lack of sufficient local currency debt financing, constraining the ability of domestic private firms selected for PPPs to arrange for appropriate financing packages.

(vi) Difficulties in project-level procurement and pervasive corruption.

5. The GOI is taking steps to address some of the constraints outlined above. For instance, the GOI has begun to strengthen the project preparation process, and is placing greater reliance on external advisers as well as improving the quality of feasibility studies prior to bidding. The GOI has also established the Indonesia Infrastructure Financing Facility (IIFF) to mobilize long-term local currency funds to finance PPP in infrastructure. GOI is also setting up a Viability Gap Financing (VGF) program to provide public sector financial support to well-prepared PPPs to make them financially viable for great market uptake.

6. The GOI is keenly aware that the private sector considers infrastructure PPPs in Indonesia high-risk investments and has been considering offering guarantees. However, the Government has realized that simply offering more guarantees without addressing the underlying reasons contributing to heightened perceptions of risk associated with infrastructure projects may not be the most appropriate response to mitigate private sector concerns. The GOI has therefore

3

developed the Indonesia Infrastructure Guarantee Fund (IIGF) as an independent public entity to address the concerns of the private sector, with the following objectives:

(i) Facilitate PPP deal flow by providing GOI guarantees to mitigate risk to private sector stemming from government actions (or inactions) in well prepared PPP projects.

(ii) Improve the quality of PPPs by establish a single window for appraising all PPPs requiring GOI guarantees and providing guidance to contracting agencies on how to prepare bankable PPPs.

(iii) Provide clear and consistent rules for how CAs can take advantage of guarantees vis-à-vis the IIGF for well prepared PPPs

(iv) Ring-fence GOI liability vis-à-vis guarantees to PPPs. The successful establishment of IIGF as the single window for the appraisal of all PPPs requiring GOI guarantees has therefore resulted in an improved institutional environment for the identification, preparation and implementation of PPP operations in Indonesia. 7. Implementation of key sector policy reforms under the Infrastructure Development Policy Loan (IDPL) program has progressed on several fronts, supported by appropriate legal instruments, including Presidential Decrees (Perpres) and submission of budgets to the MOF. Key sector reforms include: (i) a 5-10 percent average electricity tariff increase in 2010, the first time since 2003, improvements in PLN’s financial condition, and steps towards energy conservation; (ii) enactment of Perpres 29 providing for a government support regime to assist financially sustainable public water utilities (PDAMs) access long-term loans. A total of 104 PDAMs were assessed as “healthy” in 2010 (compared with only 37 in 2005) through financial restructuring, more than 200,000 new connections were achieved through output-based incentives paid by the MPW to well-performing PDAMs, and about USD1 billion in additional investments were made by national and local governments to PDAMs since 2007; (iii) enactment of Perpres 13/2010 extending the application of Perpres 67/2005 on PPPs to projects proposed by sub-national governments and state-owned enterprises. Other key reforms undertaken include (iv) establishment of the IIGF, including staffing of senior management and drafting of operating procedures; (v) establishment and staffing of the Indonesia Infrastructure Financing Facility (IIFF) and submission of a business license application to BAPEPAM (Capital Market Supervisory Agency); and (vi) preparation of medium-term expenditure plans (currently by the Ministry of Public Works) to serve as the basis for performance-based annual budget requests from the MOF. 8. The WBG has made a long-term commitment to support GOI in its efforts to put in place a viable PPP market in Indonesia. The IFC has also been actively offering advisory services to prepare bankable PPP projects and exploring investment opportunities in infrastructure sectors. The WB has focused on: (a) sector based engagements to correct policies and make the sectors ready for PPP activity, (b) a four-loan infrastructure DPL (IDPL) series that achieved some (though relatively modest) results between 2007 and 2010, and (c) direct investment of capital and technical assistance to help Indonesia establish key institutions which can address very specific PPP market bottlenecks and also play a key role as bridges between GOI agencies and the private sector. The first institution established by GOI with the help of the WBG was the IIFF, which is designed to make long-term local currency financing available for PPPs.

4

9. Overall, Indonesia has several mutually exclusive instruments to leverage private capital through PPPs – guarantees provided by IIGF, project financing by IIFF, and VGF by MOF to make projects financially viable. A PPP project may be supported by any one of these, or a combination thereof2. Ultimately the decision to seek guarantees (from IIGF) as a standalone instrument, or in combination with other products and services offered by the public and private sector will be taken at the transaction level by the CA sponsoring the PPP based on the project’s risk profile and financial fundamentals. The decision to provide guarantees from IIGF will be taken by IIGF’s through its appraisal process, detailed in the Operations Manual (OM), which will serve as a credible filter to offer guarantee support only to worthy projects.

10. The WB has committed to assist GOI in the establishment of the IIGF in order to help the Government establish a clear policy, procedures and the requisite capacity to provide government guarantees to well prepared PPP projects. The WB has provided advisory services over the last 3 years to help MOF conceptualize and design the IIGF. The continued consultations by the WB, MOF and IIGF with the private sector to have confirmed that there is demand for IIGF guarantees in the market. Two key types of risks have been identified as the focus for the IIGF: (a) risks associated with government inactions or delays, and (b) weak credit quality of GOI Contracting Agencies (CAs) as PPP partners. It is also clear that there is a strong need to ensure that the CAs signing PPP contracts with the private sector are appropriately incentivized: (i) to sign only well-structured contracts which can be realistically implemented; and (ii) to honor their obligations under the contracts when they are signed. The MOF recognizes that the WB’s operational engagement in the IIGF is critical at this initial stage of IIGF establishment so that the WB’s operational covenants and conditions as well as technical assistance can be used to establish and reinforce appropriate operational rules, corporate governance and other critical functions. The WB’s operational engagement in the IIGF at this stage is also important to ensure that the projects are prepared to standards which will be acceptable to the WB, particularly vis-à-vis safeguards and commercial viability.

11. IIGF was formally instituted with the issuance of Presidential Decree No. 78/2011 which establishes the IIGF as the single window for appraising all infrastructure PPPs requiring GOI guarantees. The supporting Minister of Finance Regulation No. 260/2011 provides the details of how guarantees will be issued for infrastructure PPPs. IIGF is now fully operational, having processed and signed the first Guarantee Agreement on October 6, 2011 (a co-guarantee with MOF) for the $3 billion Central Java IPP project (CJPP). A pipeline of projects in water, railway and toll road sectors is in various stages of preparation, with IIGF coordinating closely with the concerned CAs. The pipeline includes the 500 liters/sec water supply PPP in Bandar Lampung, Sumatra with an estimated total cost of $110 million over a 25 year concession period as well as bulk water transmission projects for Jakarta (Jatiluhur system) and Surabaya (Umbulan system).

12. IIGF led the processing and appraisal of the CJPP, but the size of the investment required IIGF to co-guarantee the project with the MOF. However, as per the GOI stated policy to ring 2 The covenant in the Project Agreement as well as provisions in the IGF Operations Manual have been included to ensure that WB-supported IGF guarantees will not cover loans originating from any entity which has received a loan from WB or the International Finance Corporation (IFC), or an equity investment from the IFC.

5

fence GOI liabilities vis-à-vis infrastructure guarantees, IIGF is expected to process and guarantee all future projects without MOF support, with noted exceptions for mega projects such as the CJPP.

13. In order for the IIGF and its guarantees to have credibility in the market, the newly established institution has to quickly demonstrate that it has the capacity to appraise projects on technical and financial merits, and that it will be allowed to operate as an independent institution with the mandate to serve as the single window for the appraisal of all infrastructure PPPs requiring GOI guarantees. It will take some time for the IIGF to develop full in-house capacity to appraise projects, and so it has rightly decided to procure the services of international consultants with the relevant expertise to support the appraisal and other key functions. However, there is a need for IIGF to demonstrate that its appraisal standards are not only sound, but that they will also stand the test of time and occasional pressure when the institution is forced to reject popular projects which are not financially or technically viable. Finally, as the GOI continues to make progress in developing a pipeline of PPP projects, it is also important that IIGF has access to additional capital in the future to keep up with increasing demand for guarantees. The GOI is understandably reluctance to lock in significant sums from the public budget to over-capitalize the IIGF before the project pipeline materializes; however, that increases the possibility of delays in allocation of additional capital for IIGF in the future, particularly if IIGF is seen to not be supporting projects which have strong support in the parliament.

14. The proposed IGFP is designed to support the IIGF in its initial stage of development. The strategic rationale for WB support to IIGF is threefold:

(i) Helping IIGF to establish appraisal standards and other operational and institutional procedures and codifying them in the Operations Manual (which includes the ESMF), the WB can help IIGF to demonstrate that its appraisal standards are acceptable to the WB and its institutional integrity is protected by the GOI – WB agreements under the IGFP.

(ii) WB support to IIGF can contribute to the improvement in the quality of PPP projects in Indonesia, as IIGF will use the WB-financed technical assistance to advise CAs in the preparation of projects seeking IIGF guarantee support.

(iii) While the primary objectives of WB institutional-operational support for the IIGF can be met via loan disbursement for the provision of WB-financed technical assistance to IIGF discussed under (i) and (ii) above, the loan component involving financing to IGFP - under which IIGF may utilize WB financing to work jointly with the WB to appraise projects which it may find technically complicated or sensitive to appraise on its own – is also critical for IIGF in that it will signal to the market that the quality of IIGF’s appraisal standards, governance and other internal controls are high, and that IIGF will issue guarantees based on sound project appraisal and will remain a financially viable guarantee agency.

15. WB operational support to IIGF will mean that while the WB will appraise all IIGF guarantees backed by WB loan proceeds, the loan financed technical assistance will create a risk of perception involving WB association with IIGF projects which are not appraised and financed by the WB. The requirement that IIGF use the OM for ALL projects will help to maintain IIGF

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project appraisal quality. A communications strategy prepared by WB and implemented by IIGF will publically clarify that the WB will appraise IIGF guarantees which are backed by WB loan proceeds, and that WB will not appraise all other IIGF guarantees which are backed by IIGF capital and/or the MOF balance sheet. IIGF is also likely to maintain high operational standards because MOF has established an impressive management team at the IIGF which includes high caliber, private sector oriented staff that were selected competitively. IIGF has also taken steps to strengthen its capacity through partnerships such as the MOU between IIGF, WB and the Singapore Cooperation Enterprise (SCE) which helped to develop the corporate governance structure and operations manual of IIGF, and the MOU between IIGF and MIGA to support IIGF in streamlining the underwriting and risk management framework. However, as a state-owned enterprise, the IIGF carries the risk that subsequent changes in the government or policy might dilute the pre-guarantee due diligence processes, financial controls and other operational procedures which could significantly reduce the value and credibility of the IIGF guarantee. Finally, while the possibility that Indonesia’s PPP pipeline may not readily translate into PPP transactions during the project implementation period will not be a risk to the achievement of the Project objectives, it will remain a risk to the achievement of Indonesia PPP development goals. 16. Consistency with Sector Policy: The WB is primarily pursuing sector policy reforms via its various DPL engagements, sector specific SILs, and AAA advisory engagements. The IGFP will support the sector policy reform agenda via detailed appraisal of infrastructure projects it supports through IIGF guarantees backed by IGFP loan proceeds, and strengthening the IIGF’s institutional capacity to provide early guidance to CAs on project preparation. IIGF compliance with the OM will ensure that IIGF guarantees are not utilized to cover inadequate project structuring, lack of financial viability and weak sector policy. 17. Another key driver of the IGFP’s support to policy reforms is the recourse mechanism built into the Project design. The recourse mechanism enables the IIGF/MOF to recover payments made to the guarantee recipient from the associated CA in the case of a guarantee call. This IIGF recourse mechanism will provide a key incentive to the CAs to honor their contractual obligations (such as off-take agreements, tariff adjustments), and thus focus attention on implementing the sector policy reform measures such as financial restructuring and sustainability of public utilities and cost-recovery tariffs. The following examples describe the anticipated use of IGFP loan-backed IIGF guarantees in specific sector context. 18. Water. Years of under-investment and poor cost recovery in the water sector have resulted in extremely low coverage of piped water and sanitation services. Operational and financial performance of PDAMs is poor, and there remain massive bottlenecks in getting finance to flow. The GOI has recently announced a US$ 1.33 billion financial revitalization program for water utilities, comprising debt restructuring for PDAMs and local governments, as well as output-based aid to increase water connections in sub-national governments which are current in their debt payments to MOF. WB-supported IIGF guarantees could potentially be used to strengthen the institutional capacity and operational efficiency of PDAMs which have already undertaken steps to improve their creditworthiness, service quality and operational efficiency. For example, for a bulk water PPP project, an IIGF guarantee could be used to protect private investors against off-take risk.

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19. Energy. Overall installed generation capacity as well as electrification rates in Indonesia remain low as compared to other MICs in East Asia. The WB – through its DPLs and sector engagements – has continued to help the GOI move towards appropriate pricing, but GOI efforts remain constrained by the vulnerability of low income groups to increases in electricity rates. This has greatly impeded private investment in the sector. While the WB’s DPL and sector engagements will continue to support the national level tariff reforms, the WB-supported IIGF guarantees would reduce project risk associated with uncertainty in government policy. Similarly, strategic and selective use of WB-backed IIGF guarantees could be made in alternative sources of energy to allow new private-sector models of investment to emerge to provide clean energy and establish sound standards for operational efficiency and safeguards. 20. Transport. The demand for road transport is rising rapidly and the vehicle fleet has doubled in the past five years. The development of road infrastructure and public transport services have not kept pace with rising demand, resulting in massive congestion, especially in urban areas. The absence of a multi-modal transport plan compounds the inefficiency in mobility across the urban space. WB-supported IIGF guarantees can be particularly useful in leveraging private investments in much-needed multi-modal transport systems, and/or ensuring that specific transport sector investments are conceived and implemented through a multi-modal outlook. C. Higher Level Objectives to which the Project Contributes 21. The Project will help Indonesia sustain economic growth and poverty reduction in line with the Government’s 2004-2009 medium-term development strategy (RPJM) as well as its commitments under the Millennium Development Goals. Getting substantial investment into infrastructure—in particular private investment—requires significant progress in parallel in several areas: sector policies, well-designed projects and concessions, an improved investment climate and institutional capacity in the financial sector that can finance infrastructure. WB is already assisting the GOI in the first three areas. An ongoing series of Infrastructure Development Policy Loans is aimed at improving infrastructure sector policies, identifying and structuring sound projects, and putting in place a responsible risk management framework. Most recently, the Indonesia Infrastructure Finance Facility (IIFF), funded by the WB, IFC and the Asian Development Bank (ADB) was set up to provide mostly long-term loans, equity investments, and other financial products as well as advisory services to commercially viable infrastructure projects. The IIGF will complement these on-going efforts to support private financing of infrastructure by seeking to address the gap in covering risks stemming from government (in)action, and in doing so, will support the GOI’s RPJM and streamline and clarify the process for the provision of GOI guarantees for PPPs through the IIGF. 22. The proposed operation is also well-aligned with the Indonesia Country Partnership Strategy (CPS), “Investing in Indonesia’s Institutions” (September 2008) by working towards the CPS goals of enhancing the environment for private sector development, and increasing the level and efficiency of private investment in infrastructure. The proposed project is a key component of WB’s CPS and complements other WB lending and non-lending activities to significantly improve infrastructure provision and strengthen the financial sector. Specifically, the current project is linked to other WB operations through Prior Action 6 in IDPL3: Issuance of Government Regulation establishing the Guarantee Fund, and Prior Action 7 in IDPL4:

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Guarantee Fund established, including staffing of senior management and draft operating procedures. Both these action have been undertaken. II. PROJECT DEVELOPMENT OBJECTIVES A. Project Development Objective 23. The Project Development Objective (PDO) is to strengthen the Indonesia Infrastructure Guarantee Fund as a single window institution to appraise infrastructure Public Private Partnership (PPP) projects requiring government guarantees. B. Project Beneficiaries 24. The lack of infrastructure undermines economic growth in Indonesia and remains a key constraint to the improvement of quality of life for the citizens, particularly the poor. While the Project is not designed to directly finance infrastructure projects, its focus on the institutional strengthening of IIGF will play a key role in the organized and strategic development of necessary institutions and practices which can support the preparation, financing and implementation of critically needed infrastructure projects. The IIGF will provide guarantees to leverage private sector investments in projects involving toll roads and toll bridges; airport, harbor, railroad, drinking water, irrigation, wastewater infrastructure; solid waste, telecommunication; oil and transmission and distribution; and electricity generation, transmission and distribution facilities. The projects supported by IIGF will enhance the economic opportunities of common citizens and improve their quality of life. C. PDO Level Results Indicators 25. The PDO will be measured by the following performance indicators: Project Outcome Indicators (i) Number of projects to which IIGF provided guidance in the Guidance stage of guarantee

appraisal, in accordance with the approved Operations Manual (ii) Number of projects screened by IIGF in the Screening stage of guarantee appraisal, in

accordance with the approved Operations Manual (iii) Number of projects appraised by IIGF in accordance with the approved Operations

Manual Intermediate Results Indicators (i) IIGF maintains unqualified opinion on its financial statement from reputable audit firm

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III. PROJECT DESCRIPTION

A. Project Components Component 1: WB-Supported IIGF Guarantees 26. The Project will provide US$25 million to support IIGF in issuing its own IIGF guarantees for qualifying projects. Qualifying projects will be those which are appraised by the WB and meet WB policies as well as other reputational risk considerations (“WB-Supported IIGF-projects”). In order to prevent the mingling of this $25 million with IIGF capital, the WB loan proceeds under Component 1 will be disbursed at the time a claim is properly made and assessed as payable by IIGF with respect to an IIGF guarantee for a WB-Supported IIGF-project. IIGF as the guarantor will remain solely and exclusively responsible to the guaranteed party for payment of any claim regardless of whether WB disburses the loan. Component 2: Technical Assistance (TA) 27. The Project will provide a loan for Technical Assistance (TA) in the amount of approximately $4.6 million to develop IIGF’s institutional capacity to screen, appraise and supervise projects as a single window for all government guarantees for infrastructure PPPs, manage its operations, build capacity in Contracting Agencies (CAs), and develop standardized documents and procedures for preparing PPP projects require the use of such documents and procedures in order for PPP projects to receive IIGF guarantees; and support PPP preparation activities, including feasibility studies, transaction advisory support and other activities. 28. The TA will strengthen IIIGF’s institutional capacity: (i) to appraise and select worthy PPPs for guarantee support to meet the appraisal standards outlined in the OM; and (ii) to give advice to CAs on how to prepare/improve the quality of PPP projects through initial screening, guarantee structuring, market sounding, bidding and other steps. The IIGF will not, however, provide funds to help CAs prepare projects; its advisory function will focus on reviewing project proposals and advising CAs on how to improve them to meet IIGF criteria to receive government guarantees. Although the OM has been prepared and finalized with WB assistance, it remains IIGF’s internal document and does not incorporate all relevant provisions of WB’s guarantee policy. As a result, WB is neither responsible nor can influence the application of the OM to guarantees backed by IIGF capital and to MOF guarantees. B. Project Financing

Lending instrument 29. The Project will utilize a Specific Investment Loan (SIL).

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Project Cost and Financing

Project Cost By Component and/or Activity

Local

(USS million)

Foreign

(US$ million)

Total

(US$ million)

WB-Supported IIGF Guarantees 25.0 25.0

GOI 50.0 50.0

TA 4.6 4.6 Total Project Cost 50.0 29.6 79.6

C. Lessons Learned and Reflected in the Project Design 30. The Project design incorporates and reflects key lessons learned from previous WB guarantee operations; WB infrastructure engagements in Indonesia; and Indonesia’s experience with government guarantees. 31. Strong government Ownership. Previous WB-financed infrastructure operations point to the importance of strong and consistent government ownership. The IIGF is well-anchored as a key element in the GOI’s 2009-2014 priority programs, and the IDPL series. Additionally, the GOI has built a good track record of its ownership and commitment to infrastructure financing through the establishment of the IIFF (jointly funded by the WB, IFC and ADB), and to infrastructure development more broadly through numerous policy reforms undertaken since 2005. The Task Team has worked closely with the MOF Risk Management Unit (RMU) to develop the IIGF project design, including links with the IIFF, and associated GOI provisions. The GOI has issued two important pieces of legislation: the Presidential Decree No. 78/2011 and the Minister of Finance Regulation No. 260/2011 which directly support the Project’s development objectives, and solidify the position of IIGF within the institutional structure designed to support PPPs in Indonesia. 32. Single window for guarantee operations. The IIGF has been established by law as the single window for infrastructure PPPs to seek and obtain guarantees in Indonesia. This design structure incorporates three key lessons from previous guarantee operations. First, being the sole channel to appraise and process infrastructure PPPs for guarantee support in Indonesia, the IIGF’s rigorous appraisal procedures as laid out in its OM, which also complies with WB standards, cannot be easily circumvented. Second, the single window design will ensure: (i) optimal usage of all guarantee types (IIGF guarantees using IIGF capital, IIGF guarantees using WB funds under IGFP, and MOF guarantees) based on what risks the underlying funding sources (IIGF capital, WB funds, and MOF capital, respectively) are able to cover; and (ii) clarity, transparency and administrative efficiency in IGFP guarantee appraisal operations under a single institution, using a single OM. Finally, the single window structure provides a unique opportunity for mainstreaming WB policies, including safeguards and other fiduciary policies, through the IIGF to change the behavioral of CAs and other parties involved in the PPP market.

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33. Mechanism to provide government guarantees. GOI has not had a successful track record on providing guarantees. For example, for urban rail, power generation and toll road projects, various forms of guarantees have been provided with limited or no success. This is because government guarantees in the past were provided on an ad-hoc basis with limited review of the financial viability of the underlying projects and its impact on the contingent liabilities of the state balance sheet. The establishment of IIGF as a single window for appraising all PPPs requiring GOI guarantee has introduced a more systematic approach to valuing government-related contractual risks vis-à-vis PPPs. Together with the recourse mechanism, this will establish accountability, provide strong incentives to CAs to honor their contractual obligations, and limit the risk to the state balance sheet. Early guidance provided by the IIGF to the CAs will establish a clear threshold of acceptable standards for project preparation and serve as a powerful signaling mechanism to CAs that only well-structured projects will be considered for guarantee support. 34. PPP pipeline. IIGF, in consultation with MOF and BAPPENAS and other stakeholders, carefully considers on a continuing basis the PPP projects in various stages of development and preparedness in Indonesia to identify a pipeline of projects that could possibly approach the IIGF for guarantee coverage. WB support under Component 2 will allow IIGF to provide technical support to CAs in preparing these adequately for market bidding. IIGF, with the technical support of the WB, will engage with these CAs under its guidance role during the preparation stage. 35. Strong IIGF management. A high quality, private sector oriented IIGF management team is in place, and functioning. The IIGF will also benefit from the TA available under the Project. In order to address the capacity constraints, the IIGF will outsource its guarantee appraisal function to a private firm in the initial stage of operations. IIGF, with the assistance of these outsourced consultants, will conduct appraisal of all projects for guarantee support. WB will appraise only those projects that receive WB-support IIGF guarantees, jointly with IIGF in the interest of skill transfer, and compliance with WB standards and policies. Alternatives considered and reasons for rejection 36. Partial Risk Guarantee Facility. Given the difficulties Indonesia has encountered in preparing market-ready PPP transactions, it was concluded that the volume of anticipated PPP projects in the near future does not warrant the use of a PRG Facility. 37. Deferred Draw-Down Option (DDO) Loan. The use of a DDO loan would allow the GOI to exercise the draw-down option when it needed additional capital to honor a guarantee call. A key benefit of the DDO would be that the 3 year term could be extended to a maximum of 15 years. This alternative was rejected because DDOs are currently typically used in the context of lending operations pertaining to catastrophe risk management and Development Policy Loans (DPL DDOs). This option also did not lend itself to properly provide (and, importantly, actively supervise the provision of) the necessary TA to help establish and maintain the operational standards of IIGF.

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38. Development Policy Loan (DPL). The Team considered supporting the IIGF through a DPL instrument subject to the GOI undertaking policy measures to improve the private sector investment environment. However, the IIGF’s status as a new institution meant that the developmental objectives from issuing guarantees would not be realized even if the GOI attained the requisite prior actions. Moreover, currently there is limited strategic rationale for a guarantee-related DPL given the role played by other ongoing DPLs in Indonesia. A DPL would also not have provided the WB with a platform for ongoing engagement with IIGF in the development and appraisal of PPP infrastructure operations. The Team therefore elected to support the institutional development of the IIGF and establish it as a credible, single window for appraising PPPs according to an OM acceptable to the WB. IV. IMPLEMENTATION A. Institutional and Implementation Arrangements 39. The IIGF will be the implementing agency for the Project. The IIGF is 100% Government-owned, and has been established for the purpose of supporting the PPP program and mitigating specific risks associated with infrastructure PPP projects. The IIGF was officially launched on May 11, 2010 by the Indonesian Minister of Finance. 40. The IIGF will use a single OM developed under the IGFP to appraise all projects seeking government guarantees. If IIGF proposes a project for WB support under component 1, the WB will conduct a full appraisal of the project together with IIGF. Based on WB appraisal, the WB will give an NOL to IIGF to provide a loan-based WB-supported IIGF guarantee. Key contractual arrangements for the implementation of the IGFP are listed below. Details of the proposed contractual and institutional arrangements, are provided in Annex 3.

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Figure 1. IGFP Project Design and Contractual Arrangements

WB MOF

IGF

Project CompanyLenders Sponsors

ABC

Xyz

WB project level components

Infra project level components

ContractingAgency

WB Loan Agreement

IGF Guarantee Agreements

RecourseAgreement

Debt Equity

Legend

Typology of Risks to be Covered by the IIGF 41. The typology of risk which IIGF may cover have been identified by IIGF in consultation with private sector and based on the Indonesian experience, and they are listed in Annex 3. IIGF will make the final decision on risk coverage on a project-by-project basis to minimize probability of guarantee call and other operational consideration vis-à-vis quality of project preparation which are stipulated in details in the OM.

Typology of Risks to be Covered under WB-Supported IIGF Guarantees 42. The IIGF will be able to utilize the WB loan proceeds under Component 1 of IGFP to cover a subset of eligible risks identified by IIGF, which include the following (details are provided in Annex 3): (i) Breach of contract risk

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(ii) Changes in Laws and Regulations that adversely affects the financial equilibrium of the private investor/sponsor3 in so far as these translate into payment obligation by the CA/government under project contracts.

43. WB-supported IIGF Guarantees will not cover the following risks: (i) Delays/failures relating to land acquisition (ii) Delays/failures relating to approvals of licenses and permits4 (iii) Delays/failures relating to financial close (iv) Failure to enforce against illegal activity (v) Termination risk 44. IIGF guarantees utilizing WB funds will cover debt service defaults on a loan provided by a private bank or lender, when such defaults are caused by a government's failure to meet its obligations under project contracts to which it is a party. The eligible beneficiary of a WB-Supported IIGF Guarantee may also be a PPP company provided that such guarantee covers only the debt service of Lender(s) to such project. Payment will be made, therefore, if the debt service default is caused by the government’s failure to honor the terms of the contract to which it is a party. As appropriate, WB funds may also cover non insurable events. WB-supported IIGF guarantees will not cover loans originating from any entity which has received a loan from WB or the International Finance Corporation (IFC), or an equity investment from the IFC. 45. The table below summarizes the risks covered by IIGF guarantees utilizing IIGF’s own capital, IIGF guarantees utilizing WB funds under the IGFP framework, and MOF guarantees to augment IIGF guarantee coverage.

3 The material change in the financial equilibrium of the concessionaire is defined as an occurrence of events (that) fundamentally alter the equilibrium of the contract either because the cost of a party’s performance has increased or because the value of the performance a party receives has diminished, and (a) the events occur or become known to the disadvantaged party after the conclusion of the contract; (b) the events could not reasonably have been taken into account by the disadvantaged party at the time of the conclusion of the contract; (c) the events are beyond the control of the disadvantaged party; and (d) the risk of events was not assumed by the disadvantaged party. (Mandri-Perrott & Guasch, Optimizing Project Finance Solutions in the Water Sector, and UNDROIT Principles of International Commercial Contracts). 4It must be noted that a WB funds could cover revocation of a license or permit once a contract has been entered into as this would constitute a material government failure to honour the terms of the contract to which it is a party.

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Table 1: Project Debt Risk Coverage under the IGFP Framework

Risks covered IIGF

guarantees* IIGF guarantees using WB funds

MOF guarantees**

(i) Breach of contract risk, including inter alia: a. Failure of the CA to comply with financial

payments contractually agreed with the private investor/sponsor

()

b. Failure by CA to adjust, in a timely manner, contractually agreed service tariffs, or unilateral changes in tariffs by Government or CA that were not contractually specified, and or change or repeal by government of pre-agreed framework

()

(ii) Changes in laws and regulations () (iii) Delays/failures relating to land acquisition () (iv) Delays/failures relating to approvals of

licenses and permits ()

(v) Delays/failures relating to financial close () (vi) Failure to enforce against illegal activity () (vii) Termination risk ()

Notes: * IIGF guarantees backed by the WB loan (component 1) will cover only a subset of risks, as indicated in column 2. ** The possible coverage is presented in brackets to reflect the fact that MOF should not be thought of as a “regular” provider of guarantees, and that these will only be considered on an exceptional basis. 46. The nature and scope of the risks to be covered by the IIGF for a particular project will be determined through IIGF’s risk assessment methodology and as a result of consultations with the project sponsors and their respective lenders. As a result of this assessment the IIGF will determine the most suitable risk(s) to be covered and the most appropriate guarantee structure. Based on the nature of the risks to be covered, the size of the project, and credit enhancement requirements by project lenders, the IIGF will determine, in consultation with WB, which guarantees will be provided by the IIGF using its own capital, by the IIGF using WB funds, MOF guarantees, or a combination thereof. IIGF Capital and Management & Operations 47. Capital adequacy ratio. IIGF is being operationalized under a very conservative investment policy based on a maximum 1:1 capital adequacy ratio for all guarantees it will issue5. Once it has established a track record of underwriting guarantees, and importantly, its recourse mechanism has been well established and confirmed, the IIGF may start to explore underwriting models involving more leverage.

5 The regulation under which IGF has been established, provides for : • Adequate amount of capital to meet IGFs obligation. • Specific mechanism to ensure that guarantees provided by IGF are able to maintain their credit position. • MOF to act as an ultimate guarantor who will pay out if the reason for lack of capital is breach of these rules.

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48. Recourse mechanism. The recourse mechanism enables the IIGF/MOF to recover payments made to the guarantee recipient from the associated CA in the case of a guarantee call, and provides incentives to the CAs to honor their contractual obligations. The key elements of the framework include:

• The CA, IIGF and MOF sign an agreement prior to the issuance of the guarantee.

• If the default is caused by a CA action or inaction, the IIGF pays the corresponding guarantee payment to the private investor. MOF is then legally authorized to reduce the budget of the CA by an equivalent amount.

• The event that triggered guarantee call is tabled at the cabinet level where the CA will be required to explain why the default happened. This will be the first time that CAs will be held accountable for their actions vis-à-vis PPP contracts.

49. IIGF Project Pipeline. IIGF, in consultation with MOF and BAPPENAS and other stakeholders, carefully considers on a continuing basis the PPP projects in various stages of development and preparedness in Indonesia to identify a pipeline of projects that could possibly approach the IIGF for guarantee coverage. B. Results Monitoring and Evaluation 50. The WB Task Team will work closely with IIGF to ensure effective project implementation. Sector staff will help review potential projects to ensure that projects benefiting from the use of WB funds are in line with the sector policy that GOI and the WB are pursuing, and to make sure that they are technically sound and financially viable. WB staff will appraise all projects proposed by IIGF under component 1 for IBRD support. 51. A monitoring system/process has been established in collaboration with IIGF to monitor and evaluate project activities and operations leading to the project objectives. Further details are provided in Annex 3. The detailed Implementation Support Plan (ISP) is presented in Annex 5. C. Sustainability 52. Institutional sustainability. Senior management positions in the IIGF, including its President Director, COO, CFO, and other key positions (Heads of Project Appraisal and Underwriting (PAU), Accounting, Planning and Reporting (APR), Human Resources, as well as Risk Officer), have been filled with high quality, private sector oriented, and competitively selected staff. Second, the IIGF’s corporate governance structure is based on international best practice and has been prepared with technical assistance from the GOS under a partnership with the WB. Details of the IIGF corporate governance structure are reflected in the OM. The WB’s financial engagement in the IIGF will involve the establishment of important conditions and covenants vis-à-vis the operations of the IIGF, which will be critical to support the long-term sustainability of the IIGF’s business model. Taken together, these are expected to significantly strengthen capacity for the IIGF to sustain its operations beyond the IGFP. Since its establishment the IIGF has developed the capacity to undertake procurement actions, and has undertaken several high profile procurement actions involving international and local firms. The

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list of the international firms whose services have been procured by IIGF over the last two years include: Castalia Strategic Advisors, KPMG, Allen and Overy, Clifford Chance and CIMB Niga Securities. 53. Financial sustainability. As mentioned above, a clear, well-defined recourse mechanism that enables the IIGF to recover funds from CAs and hold them accountable to their commitments is critical for the viability, sustainability and credibility of the IIGF. The legislative and budget process operationalizing the recourse procedure is included in the Implementing Ministerial Regulation No. 260/2010 under the Presidential Decree No. 78/2010 on infrastructure guarantees, which was issued in December 2010. Partnership Arrangements 54. Support from the Government of Singapore (GOS). The WB – Singapore Urban Hub has arranged GOS technical assistance, including a Temasek Foundation grant of US$470,000 to assist the IIGF in developing its corporate governance framework. Under the grant, public and private sector experts from Singapore helped establish the IIGF’s overall corporate governance framework, including terms of reference for senior managers, financial controls and fund management functions. The appraisal function of the IIGF is being outsourced to professional firms to procure the best possible technical services and maintain staffing flexibility within the IIGF’s organization structure. The GOS TA grant also helped the IIGF in carrying out due diligence on market demand for guarantees through discussions with the private sector.

55. PPIAF grant. The Task Team secured a US$500,000 PPIAF grant to support the establishment of the IIGF. This follows on the US$ 500,000 PPIAF grant that was arranged to help MOF conceptualize and design the IIGF. The current grant was used towards developing a detailed OM to guide the IIGF in its guarantee operations. V. KEY RISKS AND MITIGATION MEASURES

A. Risk Ratings Summary Table

Stakeholder Risk Substantial

Implementing Agency Risk

- Capacity Substantial

- Governance Substantial

Project Risk

- Design Substantial

- Social and Environmental Moderate

- Program and Donor Low

- Delivery Monitoring and Sustainability Substantial

Overall Implementation Risk Substantial

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56. Conditions for Negotiations

(i) IIGF has adopted an Operations Manual (acceptable to the WB), which includes the ESMF, the RPF and the IPPF.

(ii) IIGF has finalized the TORs (acceptable to the WB) for the outsourced consulting firm contract for appraisal, and issued the Request for Expression of Interest (REOI) for the contract to the prospective bidders.

57. Condition for Loan Effectiveness The Subsidiary Loan Agreement has been executed and delivered on behalf of each of the Borrower and IIGF. VI. APPRAISAL SUMMARY A. Economic and Financial Analyses 58. Economic analysis. The economic benefits resulting from the IGFP are at least equal to the sum of the economic benefits resulting from each project that will receive a guarantee supported by the WB loan. In addition, as a result of investors seeing the implementation of the IGFP as a government strong commitment to the PPP program, there are the benefits from increased investor participation in the PPP program, and from reduced investor perception the usual political/regulatory risks even on projects not supported by the WB loan6. 59. Significant economic benefits are expected from provision of IIGF guarantees to support well prepared projects. The provision of guarantees will (i) decrease the cost of capital through significantly improved project financing terms, including extension of loan maturities and reduced interest rate spread reflecting a lower risk perception of the project; (ii) lead to lower tariffs and government financial contribution to projects as a result of improved terms of infrastructure project debt; and (ii) contribute to the development of a market for long term lending in Indonesia. Finally, the establishment and functioning of the IIGF demonstrates strong GOI commitment vis-à-vis PPPs, which will increase investor participation in the PPP program. 60. Financial Analysis. IIGF has developed an overall financial model for IIGF operations, including the projected financial statements, details on projected operating costs, contingent liabilities vis-à-vis guarantees, and guarantee pricing. A key component of the financial model is the guarantee/risk analysis model, which has been developed with the support of the WB team as well as a consulting firm specializing in infrastructure finance. The Risk Officer will be responsible for the implementation of the model and for its integrated use with the overall IIGF financial model. A guiding principle in the initial phases of IIGF operations will be to have a

6 Guarantees in general are likely to increase the leverage of private capital and it should be associated with an increase in the number of properly appraised projects. However, there is a residual risk in the longer-term that guarantees could lead to a shift of risks to the taxpayer, such as in cases of non-performing infrastructure projects that are “too big to fail”.

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conservative capital adequacy ratio, so that the IIGF has enough capital to cover its potential liabilities from its guarantee provisions. 61. The guarantee/risk analysis and overall financial models include the following features: a) The risk model incorporates elements of simulation as well as pre-set ranges of

probability assumptions, based on assigned levels of risks by project sector and risk category discussed in the Operations Manual.

b) The overall financial model of IIGF will take into account cash/liquidity management

considerations in order to ensure that operational costs are covered in the event that capital must be drawn down to pay guarantee claims. This consideration will be especially important in the early stages of IIGF operations, when a steady-state level of income from fee payments will not yet be available. In addition, implications on interest due through the recourse agreement will also be considered.

c) The IIGF risk and finance officers will include a simple dashboard alongside the models,

to facilitate a fast understanding/overview of the models’ outputs. d) An instructional note on usage of the model will accompany the model.

62. An OP8.30 Review of the Project was conducted by FPD which confirmed that IGFP is not subject to OP8.30. The Review and Findings are included in the Project File. B. Technical 63. The technical design of the proposed Project is the result of a AAA advisory assignment in which WB supported the MOF through extensive planning, analysis, and consultation. The proposed Project will help GOI operationalize the IIGF, with the specific aim of developing it as a “single window” for the appraisal of all government guarantees provided for infrastructure projects. The “single window” concept has been reinforced in the Presidential Decree and Ministerial Regulations on Government Guarantees. Eligible projects passing the IIGF’s appraisal criteria will receive guarantees which would include one or a mixture of: (i) IIGF guarantees (using IIGF capital); (ii) IIGF guarantees (using WB funds from the SIL on-lent to IIGF for projects which are appraised by the WB and meet WB policies as well as other reputational risk considerations and disbursed at the time a claim is properly made and assessed against the guarantee; and (iii) GOI/MOF guarantees. A project may benefit from any of these guarantees, or a combination thereof. 64. The IIGF will also benefit from Technical Assistance, which is critical to its institutional development. This includes significant and timely enhancement of its capacity vis-à-vis project appraisal and other key functions to establish its credibility in the market. 65. The IIGF is designed to be an open platform in which -- once fully operational --it will be able to attract third parties (e.g., other development institutions in addition to the WB) in its capital structure and/or as guarantee providers. This support will enable the IIGF to gain the

20

breadth and depth of experience that will help develop its capacity and demonstrate the IIGF’s operational and institutional legitimacy to the market.

C. Financial Management 66. Financial management assessment. A financial management assessment was conducted to determine whether the financial management system of IIGF has the capacity to produce timely, relevant and reliable financial information on the project activities, and whether the accounting system for the project expenditures and underlying internal controls are adequate to meet fiduciary objectives and satisfies the WB’s OP/BP 10.02, and allows WB to monitor compliance with agreed implementation procedures and appraise progress towards its objectives. The assessment concluded that the IIGF satisfies WB’s requirements for financial management arrangements, as laid out under OP/BP 10.02. The main risk of the project will be due to the fact that IIGF is a newly established institution with limited track record. To overcome this, the FM arrangement will rely on the OM, which has been finalized with WB assistance, and appraised by the WB. The overall risk of the project is considered ‘Substantial’ before mitigation and ‘Moderate’ after mitigation. 67. Disbursement arrangements. In order to prevent the mingling of the amount allocated for Component 1 under the SIL with the IIGF capital or other accounts, the sequence of steps for disbursement will be as follows: (a) WB appraises the project along with IIGF, (b) IIGF provides an appraisal report to the WB, (c) WB provides a No Objection to the designation of the particular IIGF project as a “WB-Supported IIGF-project”. IIGF may then submit a withdrawal request with respect to a particular WB-Supported IIGF Guarantee after the guarantee is issued and after a claim has been made by the guaranteed party and IIGF has properly assessed the claim as payable. Disbursement may be made: (i) through direct payment by the Bank to the eligible guaranteed parties7 upon a call on the guarantee; or (ii) through reimbursement to IIGF if IIGF has made the payment. IIGF as the guarantor will remain solely and exclusively responsible to the guaranteed party for payment of any claim regardless of whether the Bank disburses the loan. 68. The proposed disbursement method will be direct payment, and reimbursement. Minimum withdrawal application will be USD 100,000, except the last withdrawal application. Any expenditures or invoices below the minimum amount need to be paid by IIGF and consolidated for submission to WB for reimbursement when the amount reaches the minimum of USD 100,000 equivalent. Further details are provided in Annex 3. 69. Accounting. The project accounting policies and procedures for this project will follow the standard operating procedures detailed in the IIGF OM. All project transactions will be included in the IIGF financial statements. 70. Audit. Internal audit for the project will be conducted as part of the internal audit of IIGF. The internal audit procedures are part of the IIGF OM. The project financial statements under

7 The eligible beneficiary of a WB-Supported IIGF Guarantee could be a lender to that project, or could be a PPP company provided that such guarantee covers only the debt service of Lender(s) to such project.

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this loan shall be prepared by IIGF. External independent auditor of the IIGF will audit project financial statements and provide an opinion on the same. D. Procurement 71. The Bank’s Procurement Guidelines and Consultant Guidelines, dated January 2011, shall be applicable to the Project. Procurement under Part 2 of the Project is expected to include only one consultant services contract for the hiring of a consulting firm which will be carried out by IIGF in accordance with the Bank’s Consultant Guidelines. For any PPP project that will be covered by guarantees provided by IIGF under Part 1 of the Project, procurement shall be carried out by the beneficiaries of such guarantees in accordance with the principles of economy and efficiency with due attention to cost, quality and timeliness, as per (a) paragraphs 1.5 and 3.18 of the Procurement Guidelines with respect to goods, works and non-consulting services; and (b) paragraphs 1.8 and 3.14 of the Consultant Guidelines with respect to consulting services. As part of its appraisal and monitoring functions, IIGF will assess the capacity and review the procedures of the Contracting Agency to ensure that its procurement is carried out in accordance with the principles of economy and efficiency with due attention to the cost, quality and timeliness of the procured goods, works, non-consulting and consulting services. IIGF will utilize the support of an international consulting firm hired specifically for helping conduct such assessments for projects seeking guarantees under Part 1 and based on the framework provided in the OM. 72. IIGF is a new organization and has no prior experience in the application of the World Bank’s Consultant Guidelines. However, IIGF has qualified procurement and technical staff who will be able to manage the selection of the one consultant services contract expected under Part 2 of the Project, with the help of training provided by the Bank. The Bank will also provide guidance and close monitoring during the selection process as the contract will be subject to the Bank’s prior review. The risk of the overall weak governance environment in the country will be mitigated through IIGF’s established corporate governance structure set out in its OM as explained below. The overall procurement risk before mitigation is "substantial" which will be reduced to “moderate” after mitigation. E. Safeguards 73. As it is likely that all the infrastructure projects receiving guarantees backed by WB loan proceeds will have moderate to significant impacts, the Project was assigned an Environmental Category A. 74. Environmental and Social Management Framework (ESMF). As projects that will receive IIGF guarantees using WB loan proceeds have not been identified, an Environmental and Social Management Framework (ESMF) has been prepared by IIGF with guidance from the WB. The ESMF provides a set of policies and guidelines that will assist IIGF in the screening, appraisal, and supervision of the environmental and social aspects of projects. The ESMF outlines: (i) WB safeguards policies as well as Indonesian laws and regulations, and international labor and occupational health & safety standards that will apply to projects supported by IIGF using the WB loan; and (ii) the arrangements that will be put in place to ensure that these policies

22

and implemented successfully and that projects meet all these requirements. The ESMF includes: (i) background information on the IGFP; (ii) the Project Development Objective; (iii) project components and financial products; (iv) risk covered by IIGF guarantees using the WB loan; (v) types of projects; (vi) objective and applicability of the ESMF; (vii) applicable policies and standards; (viii) environmental and social safeguards principles; (ix) safeguards procedures in project cycle; (x) due diligence, incompliance and audits; (xi) institutional roles for safeguards management and implementation arrangements; (xii) institutional capacity building for IIGF and CAs; (xiii) stakeholder consultation and disclosure of safeguards documents; (xiv) grievances; and (xv) reporting. In addition, the ESMF also includes the Resettlement Policy Framework (RPF) and Indigenous Peoples Planning Framework (IPPF). A summary of the ESMF is presented in Annex 3. The ESMF, including the RPF and IPPF, is included in the list of documents in the Project File. 75. Based on the ESMF, the IIGF is developing detailed procedures for the environmental and social review of projects that will potentially receive guarantees under the IGFP single window framework. These procedures, covering project screening, appraisal, construction, operation and handover, have been incorporated into the IIGF’s OM appraised by WB. The IIGF has also prepared Guidance Notes to CAs and PIs based on the OM. This OM and Guidance Notes will be used by the IIGF regardless of the source of guarantee financing. The WB will supervise the IIGF in implementing the OM based on its Quarterly Implementation Report submitted to the MOF. 76. It is envisaged that the IIGF will apply the safeguards requirements described above to all projects supported under Component 1 (projects receiving IIGF guarantees that are funded by the WB loan), and ensure that these safeguards requirements comply with: (i) the Indonesian laws and regulations; (ii) the seven WB safeguards policies that could be triggered by the infrastructure projects to be guaranteed (see below); and (iii) the international standards on labor and occupational health and safety. WB has prepared a Communication Strategy to clarify the responsibility of the WB with respect to the IIGF in cases where projects are supported solely by IIGF’s and/or MOF’s own guarantees, and to clearly distinguish between IIGF’s actions that may be attributed to the WB Project from those that are beyond the scope of the WB Project. 77. Institutional Capacity Building for Safeguards Implementation. The IIGF being a newly established entity, has recruited an Environmental Specialist, and a Social Development Specialist to oversee the environmental and social management aspects of projects during their preparation, construction, operation, and handover phases. These specialists will implement the detailed procedures, requirements and formats prescribed in IIGF’s OM, which will comply with the GOI’s laws and regulations, the seven WB’s safeguards policies, and international labor and occupational health and safety standards. The IIGF’s environmental and social specialists will hire expert consultants to support detailed project reviews depending on their specific characteristics. These Specialists will provide training to the IIGF and related CAs in the areas of PPP project preparation and adoption of the IIGF operational and safeguards procedures. In addition, a professional firm has been recruited to assist IIGF in all phases of guarantee screening/appraisal/monitoring and further provide capacity building, including safeguards review and management. The individual environment and social specialists might be converted

23

into full time staff of IIGF, subject to their satisfactory performance and sufficient workload resulting from the larger IIGF project pipeline. 78. For all projects that receive WB-supported IIGF guarantees, the WB will supervise IIGF’s operations associated with safeguards instruments required under the approved ESMF, which include EA, EMP, PMP, PCRMP, IPP and LARAP, as well as TS and Corrective Action Plans for IPs and corrective actions to address the incompliance of the LARAP implementation. The WB will appraise the project(s) before issuing a NOL, which will allow IIGF to issue a WB-supported IIGF Guarantee for a project. 79. As part of the TA component a safeguard capacity building plan will be developed for the IIGF, potential CAs and PIs. 80. Stakeholder Consultations and Disclosure of Safeguards Documents. The IIGF and WB have organized multiple rounds of consultations with CAs, PIs, and NGOs on safeguards management and ESMF under the IGFP. Feedback received from interactions with key stakeholders has been very valuable and incorporated in subsequent drafts of the ESMF and IGFP project documentation. In addition, the IIGF has held numerous meetings with potential PIs. Project related information, including the safeguards aspects have been disseminated through the IIGF’s website. The English and Bahasa versions of the ESMF were disclosed at the IIGF’s Website and at the WB’s InfoShop in Oct 2010. The final revised ESMF has been disclosed on the local (IIGF) website, www.iigf.co.in and in the InfoShop. Annex 3 provides a summary of the revised ESMF. As mentioned above, WB has developed a Communication Strategy to address any public (mis)perception that the WB is responsible for all projects guaranteed by the IIGF, and to disseminate information about actions taken by IIGF (such as ESMF/OM) to manage potential environmental and social risks. 81. Project-specific safeguards instruments will be subject to stakeholder consultations and disclosure by IIGF’s clients, as required by the OM and by WB policies.

Safeguard Policies Triggered by the Project Yes No

Environmental Assessment (OP/BP/GP 4.01) [X] [ ]

Natural Habitats (OP/BP 4.04) [X] [ ]

Pest Management (OP 4.09) [X] [ ]

Cultural Resources (OP/BP 4.11) [X] [ ]

Involuntary Resettlement (OP/BP 4.12) [X] [ ]

Indigenous Peoples (OP/BP 4.10) [X] [ ]

Forests (OP/BP 4.36) [ ] [X ]

Safety of Dams (OP/BP 4.37) [X] [ ]

Projects in Disputed Areas (OP/BP 7.60) [ ] [X]

Projects on International Waterways (OP/BP 7.50) [ ] [X]

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F. Gender Consideration 82. The structure and focus of the IGFP ensure that the project is gender neutral and presents no clear risks vis-à-vis gender equity. The primary focus of the project is on provision of technical assistance to IIGF, and no specific investments/projects have been defined at this stage which might utilize WB loan proceeds in the form of WB-supported IIGF guarantees. The ESMF prepared by the client, and reviewed and cleared by the WB, provides the framework for IIGF to manage all social, including gender related, issues which may come up during implementation. The ESMF also includes an Indigenous Peoples Plan (IPP), which makes specific references to ensuring gender equity during project implementation in the IPP context. The ESMF has been officially adopted by the Board of IIGF as an operational document. It has also been disclosed publically by IIGF on its website, as well as by WB through the InfoShop. Finally, the Jakarta-based Indonesia Gender Coordinating team is part of the Task Team to provide further support and guidance to IIGF if and when any gender related issues are encountered during project implementation. G. Governance and Anti-corruption 83. IIGF has established and adopted a corporate governance structure in line with international best practice, which is reflected in IIGF functions and practices and incorporated into its OM (including the sections on fund management, financial controls, risk identification and management, procurement and claims assessment and payment). The strategy adopted by IIGF involves: (i) reliance on enforceable and implementable corporate governance practices and procedures; (ii) utilization of outsourcing as a tool to manage capacity gaps in the initial stages of IIGF operations; (iii) taking advantage of transparency and public disclosure in financial accounts as a tool for managing governance risks; and (iv) appropriate use of committees with outside experts to improve the decision making process. 84. The capital of IIGF will be managed by a third party financial institution under an asset management contract, with clear instruction on how to manage the funds and mandatory monthly reports providing detailed account status. The WB funds disbursed to the IIGF (under Component 1) will be disbursed against claims made. WB funds used for TA will be procured using TORs, which will be approved by the WB under WB procurement guidelines. IIGF has established an Underwriting Committee and a Fund Management Committee to reinforce its corporate governance structure. IIGF’s financial accounts will be made public in the form of an Annual Report. All projects receiving IIGF guarantees will be listed on the IIGF website. H. Policy Exceptions and Readiness Policy Exceptions: NA Readiness: The project meets regional readiness criteria.

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Annex 1: Results Framework and Monitoring

INDONESIA INFRASTRUCTURE GUARANTEE FUND PROJECT (P118916)

Results Framework .

Project Development Objectives .

PDO Statement

The Project Development Objective (PDO) is to strengthen the Indonesia Infrastructure Guarantee Fund (IIGF) as a single window institution to appraise infrastructure Public Private Partnership (PPP) projects requiring government guarantees. .

Project Development Objective Indicators

Cumulative Target Values Data Source/

Responsibility for

Indicator Name Core Unit of Measure

Baseline YR1 YR2 YR3 YR4 End

Target Frequency

Methodology

Data Collection

1. Number of projects to which IIGF provided guidance in the Guidance stage of guarantee appraisal, in accordance with the approved Operations Manual.

Number 0.00 6.00

2. Number of projects screened by IIGF in the

Number 0.00 4.00

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Screening stage of guarantee appraisal, in accordance with the approved Operations Manual

3. Number of projects appraised by IIGF in accordance with the approved Operations Manual

Number 0.00 2.00

.

Intermediate Results Indicators

Cumulative Target Values Data Source/

Responsibility for

Indicator Name Core Unit of Measure

Baseline YR1 YR2 YR3 YR4 End

Target Frequency

Methodology

Data Collection

IIGF maintains unqualified opinion on its financial statement from reputable audit firm

Text

.

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.

Project Development Objective Indicators

Indicator Name Description (indicator definition etc.)

1. Number of projects to which IIGF provided guidance in the Guidance stage of guarantee appraisal, in accordance with the approved Operations Manual.

Number of projects.

2. Number of projects screened by IIGF in the Screening stage of guarantee appraisal, in accordance with the approved Operations Manual

Number of projects.

3. Number of projects appraised by IIGF in accordance with the approved Operations Manual

Number of projects.

.

Intermediate Results Indicators

Indicator Name Description (indicator definition etc.)

IIGF maintains unqualified opinion on its financial statement from reputable audit firm

Audit report from auditing firm provided.

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Annex 2: Detailed Project Description

INDONESIA INFRASTRUCTURE GUARANTEE FUND PROJECT (P118916)

1. The Project Development Objective (PDO) is to strengthen the Indonesia Infrastructure Guarantee Fund (IIGF) as a single window institution to appraise infrastructure Public Private Partnership (PPP) projects requiring government guarantees. 2. The WB has provided comprehensive advisory services to the MOF and other relevant GOI ministries and departments in the conceptualization, development and establishment of the IIGF. IIGF was formally instituted with the issuance of Presidential Decree No. 78/2011 which establishes the IIGF as the single window for appraising all infrastructure PPPs requiring GOI guarantees. The supporting Minister of Finance Regulation No. 260/2011 provides the details of how guarantees will be issued for infrastructure PPPs. IIGF is now fully operational and its currently available capital is IDR3.5tn ($390 mil). 3. In order for the IIGF and its guarantees to have credibility in the market, the newly established institution has to quickly demonstrate that it has the capacity to appraise projects on technical and financial merits, and that it will be allowed to operate as an independent institution with the mandate to serve as the single window for the appraisal of all infrastructure PPPs requiring GOI guarantees. It will take some time for the IIGF to develop full in-house capacity to appraise projects, and so it has rightly decided to procure the services of international consultants with the relevant expertise to support the appraisal and other key functions. However, there is a need for IIGF to demonstrate that its appraisal standards are not only sound, but that they will also stand the test of time and occasional pressure when the institution is forced to reject popular projects which are not financially or technically viable. Finally, as the GOI continues to make progress in developing a pipeline of PPP projects, it is also important that IIGF has access to additional capital in the future to keep up with increasing demand for guarantees. The GOI is understandably reluctant to lock in significant sums from the public budget to over-capitalize the IIGF before the project pipeline materializes; however, that increases the possibility of delays in allocation of additional capital for IIGF in the future, particularly if IIGF is seen not to be supporting projects which have strong support in the parliament. 4. The proposed IGFP is designed to support the IIGF in its initial stage of development. The strategic rationale for WB support to IIGF is threefold: (i) The WB can help to build IIGF capacity by working jointly with IIGF to appraise

some important PPP projects which can receive a WB-supported IIGF guarantee. IIGF only guarantees technically and financial viable projects.

(ii) By helping IIGF to establish appraisal standards and other operational and institutional procedures and codifying them in the Operations Manual (which includes the ESMF), the WB can help IIGF to demonstrate that its appraisal standards are acceptable to the WB and its institutional integrity is protected by the GOI – WB agreements under the IGFP.

(iii) WB support to IIGF can contribute to the improvement in the quality of PPP projects in Indonesia, as IIGF will use the WB-financed technical assistance to advise CAs in the preparation of projects seeking IIGF guarantee support.

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5. The IIGF is designed to address the key bottlenecks to, and contribute to improving the quality of, infrastructure PPPs in Indonesia. Infrastructure projects potentially benefitting from government guarantees will be subject to eligibility criteria depending on the type and nature of the projects and the sector. Qualifying projects passing the IIGF’s appraisal criteria will be eligible to receive a possible guarantee(s). Such guarantees would include one or a mixture of: (a) IIGF guarantees (using IIGF capital); (b) IIGF guarantees (using WB funds from the SIL on-lent to IIGF for projects which are appraised by the WB and meet WB policies as well as other reputational risk considerations and disbursed at the time a claim is properly made and assessed against the guarantee; and (c) direct GOI/MOF guarantees8. A project may benefit from any of these guarantees, or a combination thereof. Details of the risks covered by guarantees using IIGF’s own capital, WB loan proceeds and MOF capital are provided in Annex 3. 6. The WB’s support to the provision of guarantees in Indonesia through the IGFP is expected to result in: (i) the upstream benefit of raising the standards of project preparation; and (ii) the downstream benefit of providing guarantees to mitigate the private sector’s exposure to risks related to CAs’ credit as well as reliability of government policy. It is anticipated that project preparation will improve through the guidance offered by the IIGF to CAs soon after projects are identified as PPPs and potential candidates for guarantees (see Principles for Providing Guarantees under the IGFP Framework in Annex 3 for more details). This early guidance will help ensure that projects are bankable and meet high, internationally accepted standards of preparation, so that guarantees are provided only to well-prepared projects that pass strict and robust appraisal standards embodied in the OM agreed and acceptable to both GOI and WB. 7. The IIGF will use a single Operation Manual (OM) developed under the IGFP to appraise all projects seeking government guarantees. It is anticipated that this key design element will ensure: (i) optimal usage of all guarantee types (IIGF guarantees using IIGF capital, IIGF guarantees using IGFP loan proceeds, and MOF guarantees) based on what risks the underlying funding sources (IIGF capital, WB funds, and MOF capital, respectively) are able to cover; and (ii) clarity, transparency and administrative efficiency in IGFP guarantee appraisal operations under a single institution, using a single OM. 8. MOF has established an impressive management team at the IIGF which includes high caliber, private sector oriented staff who were selected competitively. Under the IIGF’s management team, the IIGF requires significant and timely enhancement of its capacity (i) to effectively deliver its guarantee operations as well as institutional functions; and (ii) to signal its capabilities as a competent and reliable partner in PPP transactions to the private sector. The appraisal and monitoring of the IIGF have therefore been outsourced to professional firms to procure the best possible technical services and maintain staffing flexibility within the IIGF’s organization structure. IIGF, with the assistance of these outsourced consultants, will conduct appraisal of all projects for guarantee support. However, the final decisions pertaining to the award of IIGF guarantees will be taken by IIGF senior management. WB will appraise only those projects that receive WB-support IIGF guarantees, jointly with IIGF in the interest of skill transfer, and compliance with WB standards and policies.

8 The issuance of a direct MOF guarantee will only be done on an exceptional basis.

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9. The corporate governance structure, and associated financial controls and fund management functions of the IIGF, has been put in place with a TA grant of S$470,000 from the Government of Singapore and the Temasek Foundation.

Figure 2. IIGF Operating as a Single Window

10. The IIGF is designed to be an open platform in that once fully operational, it will be able to attract third parties (e.g., other development banks in addition to the WB) in its capital / funding structure and/or as guarantee providers. This support will enable the IIGF to gain the breadth and depth of experience that will help develop its capacity as well as continue to demonstrate the IIGF’s operational and institutional legitimacy to the market. Project components Component 1: WB-Supported IIGF Guarantees 11. The Project will provide US$25 million to support IIGF in issuing its own IIGF guarantees for qualifying projects. Qualifying projects will be those which are appraised by the WB and meet WB policies as well as other reputational risk considerations (“WB-Supported IIGF-projects”). In order to prevent the mingling of this $25 million with IIGF capital, the WB loan proceeds under Component 1 will be disbursed at the time a claim is properly made and assessed as payable by IIGF with respect to an IIGF guarantee for a WB-Supported IIGF-project. IIGF as the guarantor will remain solely and exclusively responsible to the guaranteed party for payment of any claim regardless of whether the Bank disburses the loan.

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Component 2: Technical Assistance (TA) 12. The Project will provide a loan for Technical Assistance (TA) in the amount of approximately $4.6 million to develop IIGF’s institutional capacity to appraise and monitor projects as a single window for government guarantees for infrastructure PPPs, manage allocated capital, build capacity in Contracting Agencies (CAs), and develop standardized documents and procedures for preparing PPP projects – the adoption of which would become conditions for eligibility for IIGF guarantees. The TA will strengthen IIGF’s institutional capacity: (a) screen, appraise and supervise IIGF-projects as a single window for all guarantees for infrastructure PPPs in Indonesia; (b) manage its operations; (c) build capacity in Contracting Agencies, Sponsors and other relevant parties; (d) develop standardized documents and procedures for Contracting Agencies, Sponsors and other relevant parties to use in preparing IIGF-projects and require the use of such documents and procedures in order for PPPs to receive IIGF Guarantees; and (e) support PPP preparation activities, including feasibility studies, transaction advisory support, and other activities.

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Annex 3: Implementation Arrangements

INDONESIA INFRASTRUCTURE GUARANTEE FUND PROJECT (P118916)

1. This Annex provides details of project design and implementation arrangements, including procurement, disbursement of loan proceeds, financial management, implementation of WB safeguards policies, and corporate governance provisions. 2. The IIGF will be the implementing agency for the IGFP Project. The IIGF is 100% Government-owned, and has been established for the purpose of supporting the PPP program and providing coverage of specific risks of PPP infrastructure projects. The IIGF was officially launched on May 11, 2010 by the Indonesian Minister of Finance. 3. The IIGF will use a single Operations Manual developed under the IGFP to appraise all projects seeking government guarantees. For projects that IIGF wishes to propose for WB support under component 1, the WB will conduct its own full appraisal in accordance with IBRD’s usual procedures and policies. In so doing, the WB will start with the review of what IIGF has done first (this will save time and effort, and help improve IIGF capacity), and then conduct additional analysis or review as necessary. If WB considers that there is a reputational risk associated with a given project, it will reserve the right to not allow the use funds to guarantee such project. Key agreements for project implementation 4. Key agreements for the implementation of the IGFP are as follows, and reflect the legal explanations required of, and pertaining to, each agreement: a) The Loan Agreement between the WB and Republic of Indonesia and Project

Agreement between WB and IIGF will relate to a Specific Investment Loan (SIL), which will finance Components 1 (WB-Supported IIGF guarantees) and 2 (Technical Assistance) of the Project. The agreements will incorporate references as needed to the OM, including the environmental and social safeguards arrangements, which will be used by IIGF in all of its operations regardless of sources of funding. MOF and IIGF will enter into a standard Subsidiary Loan Agreement by which the IBRD funds will be on-lent from Republic of Indonesia to IIGF.

b) Presidential Decree. The Presidential Decree9 on infrastructure guarantees and the accompanying Ministerial Regulation10 have been passed by the GOI, and are included in the Project File. IIGF was formally instituted with the issuance of Presidential Decree No. 78/2011 which establishes the IIGF as the single window for appraising all infrastructure PPPs requiring GOI guarantees. The supporting Minister of Finance Regulation No. 260/2011 provides the details of how guarantees will be issued for infrastructure PPPs. IIGF is now fully operational, with current available capital of IIGF is IDR3.5tn ($390 mil).

9 Regulation of the President of the Republic of Indonesia Concerning Infrastructure Guarantees in Cooperation Projects Between the Government and Business Entities Provided through the Infrastructure Guarantee Fund 10 Regulation of the Minister of Finance Concerning Infrastructure Guarantee In Cooperation Between the Government and Business Entities

33

c) Recourse Mechanism by IIGF vis-à-vis Contracting Agencies: The credibility, viability, and sustainability of IIGF’s operations crucially hinges on IIGF’s ability to recover funds from contracting agencies (in case the IIGF has had to make a payment to honor a claim under a guarantee) and on holding the contracting agencies accountable to their contractual commitments through such a recourse mechanism. The recourse mechanism addresses two issues: (i) to ensure that IIGF will recover payments made to the guarantee recipient; and (ii) to create the incentives for contracting agencies to comply with contractual obligations in the PPP project or/and to reimburse IIGF in the event that a guarantee is triggered. It is therefore critically important that a clear, well-defined recourse mechanism with supporting guidelines is in place. A legislative and budget process operationalizing the recourse procedure as well as setting its legal basis is included in the Implementing Ministerial Regulation under the Presidential Decree on infrastructure guarantees. Specifically, the regulation stipulates that the MOF, on behalf of the IIGF, shall have the right to introduce budget procedures (reductions from initial budget allocations) to recover from CAs an equivalent sum of money (as well as applicable interest) that the IIGF pays towards fulfilling guarantee claims11. Furthermore, if the CA fails to reimburse IIGF in a reasonable time period, the MOF is obliged to step in and reimburse IIGF for the compensation amount and relevant transaction and financial costs, either through MOF existing discretionary funding, or in its absence, through the annual general budget allocation (or though the biannual budget adjustments). In addition, so as to create the right incentives for CAs to comply with contractual obligations and address the potential moral hazard problem, MOF is obliged to penalize the CA through a reduction on the annual budget allocation to the contracting agency by the same amount that the MOF reimbursed IIGF.

The key elements of the framework –which has now been implemented via a Presidential decree, a Ministry of Finance decree and various implementation ordinances, include: • The CA, IIGF and MOF sign an agreement prior to the issuance of the guarantee. • If the default is caused by a CA action or inaction, the IIGF pays the private

investor, and MOF makes it whole. MOF is then by law required to reduce the budget of the CA by the same amount.

• The issue is also automatically tabled at the cabinet level where the CA will be required to explain why the default happened. This will be the first time that the CAs will be held accountable for their actions vis-à-vis PPP contracts.

11 In addition, the regulation clarifies that, under relevant Indonesian laws, the financial obligations of the CA under a PPP contract are not permanently transferred to the IGF if a guarantee is called and claim payment is made, and that the IGF does not inadvertently become accountable for all future obligations originally held by the CAs. During project preparation, the WB Task Team provided options and recommendations for recourse mechanisms based on international experience (included in the Project File).

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Figure 3. IGFP Project Design and Contractual Arrangements

WB MOF

IGF

Project CompanyLenders Sponsors

ABC

Xyz

WB project level components

Infra project level components

ContractingAgency

WB Loan Agreement

IGF Guarantee Agreements

RecourseAgreement

Debt Equity

Legend

Typology of Risks and Risk Coverage to be provided by the IIGF 5. The typology of risk which have been identified by IIGF in consultation with private sector and based on the Indonesian experience and for which IIGF can provide coverage on PPPs are captured in Table 2. 6. The IIGF guarantees can provide coverage for the following risks: (i) Breach of contract risk (ii) Changes in laws and regulations (iii) Delays/failures relating to land acquisition (iv) Delays/failures relating to approvals of licenses and permits (v) Delays/failures relating to financial close (vi) Failure to enforce against illegal activity (vii) Termination risk 7. The IIGF can utilize the WB loan proceeds under Component 1 cover a subset of risks identified above, and may include the following:

35

(i) Breach of contract risk, which could include, inter alia, the following types of breach of contract:

a. Failure of the Contracting Agency (CA) or the sovereign to comply with financial

payments contractually agreed with the private investor/sponsor for e.g., off-take contractual agreements, such as with water treatment plants or electricity generation plants, contractually agreed shadow tolls, contractually agreed annual (or lump sum) subsidies, contractually agreed availability payments, contractually agreed minimum revenue guarantees etc.

b. Failure by CA to adjust, in a timely manner, contractually agreed service tariffs, or unilateral changes in tariffs by Government or CA that were not contractually specified, and or change or repeal by government of pre-agreed framework.

c. Failure by CA or the sovereign to deliver on other contractually agreed inputs e.g. fuel supply by a sovereign-owned entity for a private power generation project

(ii) Changes in Laws and Regulations that adversely affects the financial equilibrium of the concessionaire12 in so far as these translate into payment obligation by the CA/government under project contracts. IIGF guarantees utilizing WB loan proceeds may cover governmental contractual undertakings which may include sovereign contractual undertakings or those of a political sub-division (such as regional or municipal contractual undertakings), plus state-owned enterprises.

8. WB loan proceeds will not cover the following risks: (i) Delays/failures relating to land acquisition (ii) Delays/failures relating to approvals of licenses and permits13 (iii) Delays/failures relating to financial close (iv) Failure to enforce against illegal activity (v) Termination risk 9. The table below summarizes the risks covered by IIGF guarantees utilizing IIGF’s own capital, IIGF guarantees utilizing WB funds, and MOF guarantees under the IGFP framework.

12 The material change in the financial equilibrium of the concessionaire is defined as an occurrence of events (that) fundamentally alter the equilibrium of the contract either because the cost of a party’s performance has increased or because the value of the performance a party receives has diminished, and (a) the events occur or become known to the disadvantaged party after the conclusion of the contract; (b) the events could not reasonably have been taken into account by the disadvantaged party at the time of the conclusion of the contract; (c) the events are beyond the control of the disadvantaged party; and (d) the risk of events was not assumed by the disadvantaged party. (Mandri-Perrott & Guasch, Optimizing Project Finance Solutions in the Water Sector, and UNDROIT Principles of International Commercial Contracts). 13It must be noted however that a WB funds could cover revocation of a license or permit once a contract has been entered into as this would constitute a material government failure to honour the terms of the contract to which it is a party.

36

Table 2: Project Debt Risk Coverage under the IGFP Framework

Risks covered IIGF

guarantees* IIGF guarantees using WB funds

MOF guarantees**

(i) Breach of contract risk, including inter alia: a. Failure of the CA to comply with

financial payments contractually agreed with the private investor/sponsor

()

b. Failure by CA to adjust, in a timely manner, contractually agreed service tariffs, or unilateral changes in tariffs by Government or CA that were not contractually specified, and or change or repeal by government of pre-agreed framework

()

(ii) Changes in laws and regulations () (iii) Delays/failures relating to land

acquisition ()

(iv) Delays/failures relating to approvals of licenses and permits

()

(v) Delays/failures relating to financial close () (vi) Failure to enforce against illegal activity () (vii) Termination risk ()

Notes: * IIGF guarantees backed by the WB loan (component 1) will cover only a subset of risks, as indicated in column 2. ** The possible coverage is presented in brackets to reflect the fact that MOF should not be thought of as a “regular” provider of guarantees, and that these will only be considered on an exceptional basis. 10. While MOF, in principle, can cover all of the above listed risks, MOF guarantees should only be considered under exceptional circumstances mainly linked to cover risks where the expected compensation is substantially larger than the capital of IIGF. Accordingly, MOF guarantees may be provided for risk such as termination compensation. Risks Covered under IIGF Guarantees utilizing WB loan proceeds 11. IIGF guarantees utilizing WB funds will cover debt service defaults on a loan, normally for a private sector project, provided by a private bank or lender when such defaults are caused by a government's failure to meet its obligations under project contracts to which it is a party. The eligible beneficiary of a WB-Supported IIGF Guarantee may also be a PPP company provided that such guarantee covers only the debt service of Lender(s) to such project. Payment will be made, therefore, if the debt service default is caused by the government’s failure to honor the terms of the contract to which it is a party. As appropriate, WB funds may also cover non insurable events. WB-supported IIGF guarantees will not cover loans originating from any entity which has received a loan from WB or the International Finance Corporation (IFC), or an equity investment from the IFC. Guarantee Structuring under IGFP 12. Under the proposed operation, the nature and scope of the risks to be covered by the IIGF for a particular project will be determined through IIGF’s own risk assessment

37

methodology and as a result of consultations with the project sponsors and their respective lenders. As a result of this assessment the IIGF will determine the most suitable risk(s) to be covered and the most appropriate guarantee structure to provide such risk coverage. Based on the nature of the risks to be covered, the size of the project, and credit enhancement requirements by project lenders, the IIGF will determine, in consultation with WB, which guarantees will be provided between an IIGF guarantee using its own capital, IIGF guarantees using WB loan proceeds, or in exceptional cases, the MOF guarantees. The WB will appraise all projects requiring IIGF Guarantee backed by WB funds before providing a NOL to IIGF. Principles for Providing Guarantees under the IGFP Framework 13. Project guarantee appraisal framework. Projects that will be considered for guarantee coverage by the IIGF will be appraised following a detailed appraisal framework established in IIGF’s OM. The figure below provides a snapshot of the entire guarantee lifecycle for each project. The subsections below briefly describe each step contained therein. The IIGF OM provides detailed guidance on the implementation of the steps, including the schedule/timeline to be followed when carrying out the appraisal process. 14. Guidance. The Contracting Agency (CA) makes an initial inquiry to IIGF regarding a potential guarantee coverage of a given project under preparation as PPP. In response, IIGF provides the CA with a guidance package, including eligibility criteria, a detailed checklist of items required in the Guarantee Application Package, information on safeguards requirements, and sample concession agreements that address the necessary elements required for guarantee coverage. 15. The following three steps are explained in complete detail in the OM, which is included in the Project Files. Step 1: Screening 16. CA provides the IIGF with an overview of the project, as well as preliminary indication of risks that may require guarantee coverage. IIGF screens the CA’s submission and determines whether a project is eligible to proceed to the guarantee appraisal step and the nature and type of risks to be covered. IIGF will determine, in consultation with WB, which guarantees will be provided between an IIGF guarantee using its own capital, IIGF guarantees using WB loan proceeds, or MOF guarantees. Step 2: Appraisal & Structuring of Potential Guarantees 17. The IIGF conducts its appraisal – specifically, IIGF’s outsourced consulting firm carries out the detailed appraisal based on the CA’s pre-feasibility study and its own analysis, and provides its recommendation to the IIGF’s Underwriting Committee, and Board of Directors for the decision to provide IIGF and/or MOF guarantees. IIGF guarantees (supported by WB funds under Component 1) will also be appraised through the OM but WB will review such appraisal to ensure it complies with the procedures established under the OM. 18. For the structuring of the guarantee package, the IIGF devises and customizes the guarantee package/suite. As appropriate, guarantee term sheet (s) will be included in the

38

Request for Proposals in order to provide all bidders with the same clear information on the guarantee structure that is being proposed. Step 3: Guarantee Issuance, Monitoring and Associated Procedures 19. The IIGF will monitor the project during construction and operation to ensure that the private investor implements the project according to the responsibilities transferred to the investor according to the IIGF OM, as they are articulated in the PPP agreements. Specifically in respect of projects where support under Component 1 of IGFP is involved, WB will conduct supervision and monitoring in accordance with its usual policies and procedures.

Figure 4. Project Life Cycle

GuidanceIGF to provide guidance

to CAs / PIs on itsrequirement / services available

Screening(Y/N)

Appraisal

No

IGF to screen projectbased on eligibility criteria

IGF to reject projectnot complying with

eligibility criteria

IGF to refer projectsto either IBRD or GoI,

if not been able to take riskon own balance sheet

CA to submit GAP for project

Structuring

CA to discuss guaranteepricing and structure with

Short listed bidders

Covers pricing, tenure,types of risks covered

The guarantee structureshall be same for all shortlisted bidders,creating consistency and transparency

Yes

39

Payment toIGF

MoF reimburses claimpayment to IGF

Event ofdefault

Guaranteeissuance

No Guaranteeclaim

No

GuaranteeClaim

Yes

IGF pays tobeneficiary

Beneficiary raiseGuarantee claim in case of

CA defaults

RecourseMechanism

IGF to initiate recourseprocess with MoF

Selection ofPI

The guarantee will beissued to the project

on a terms & conditions agreed upon during pre-bid stage

Transparent Bidding process

CA repays default claim amount to MoF

MoF shall have bindingrecourse to CA on

default claim payment

20. The additional procedures and principals, including: binding arbitration; claims process; pricing of IIGF guarantees; financial and risk models; and capital adequacy ratio are included in their entirety in the OM, which is included in the Project Files. Management of the IIGF 21. Outsourced Management Contract (OMC). The IIGF requires significant and timely enhancement of its capacity (i) to effectively deliver its guarantee operations as well as institutional functions; and (ii) to signal its capabilities as a competent and reliable partner in PPP transactions to the private sector. The appraisal and monitoring functions of the IIGF have therefore been outsourced to professional firms to procure the best possible technical services and maintain staffing flexibility within the IIGF’s organization structure. All decisions pertaining to the award of IIGF/MOF guarantees will be taken by IIGF senior management only. The IIGF’s corporate governance rules require that management decisions be supported by in-house committees, particularly the Underwriting Committee, Fund Management Committee (FMC), and the Claims, Assessment and Payments (CAP) Committee. 22. Corporate governance structure. IIGF’s corporate governance and operational guidelines have been designed with Government of Singapore (GOS) assistance with the objective of establishing the IIGF as a credible guarantee provider, providing effective protection to sponsors and lenders against project risks. This corporate governance structure minimizes the risk of interference by influential parties by setting very high standards of transparency and disclosure, ring-fencing the IIGF’s assets from direct GOI interference, and establishing a mechanism to ensure operational independence of the IIGF.

40

Financial Management and Disbursement Arrangements 23. The WB will support to PT Penjamin Infrastruktur Indonesia or Indonesia Infrastructure Guarantee Fund (IIGF), a newly established State Owned Enterprise for its operationalization in providing guarantee for well structured Public Private Partnership (PPP) and ring fence government of Indonesia liability to PPP contract vis-a-vis guarantees. The project will utilize WB loan proceeds to assist IIGF in issuing its own guarantees and to benefit from TA. The project will be implemented for about five years, with a proposed size of IBRD financing of US$ 29.6 million. 24. This report documents the financial management assessment of the IIGF. The purpose of the assessment is to determine whether the financial management system of IIGF has the capacity to produce timely, relevant and reliable financial information on the project activities, and if the accounting system for the project expenditures and underlying internal controls are adequate to meet fiduciary objectives and satisfies the WB’s OP/BP 10.02, and allows WB to monitor compliance with agreed implementation procedures and appraise progress towards its objectives. 25. The main risk of the project will be the PPP project appraisal and the claim payment processes, especially due to the fact that IIGF is newly established institution; there is no track record of the institution. To overcome this risk, the IIGF OM agreed with the WB provides detail procedures of PPP project appraisal, claim processes and financial management system. The agreed audit arrangement includes disclosure of component 1 and 2 of the project. Internal audit staff and procedures are already in place. 26. Overall, the project financial management risk assessed is considered Substantial before mitigation and Moderate after mitigation. This assessment concluded that with the implementation of the action plan, the risk will be substantially mitigated and the proposed financial management arrangements will satisfy WB’s minimum requirements under OP/BP 10.02. 27. IIGF is staffed with competent and experience people in their field and all transactions (under component 2) will be consultant contracts and subject to prior review. However, they do not have prior experience in managing WB or other donor financed project. Country Issues 28. At certain level, since the fund will still go through government process, where Ministry of Finance will on-lend the loan fund to IIGF. IIGF requires preparing annual plan which will be reflected on MoF annual budget (DIPA-PP). Withdrawal of the fund will be made directly to the third party based on the request prepared by IIGF. The risk-mitigating measures proposed for the project related to such process have been designed taking the assessment of the country level PFM issues in account. Strengths and Weaknesses 29. Strengths • IIGF is 100% owned by the Government of Indonesia. It is designed to be a credible

guarantee provider with a robust governance structure minimizing any risk of

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interference by influential parties, high standards of transparency and disclosure and a mechanism to ensure full operational independence of the IIGF.

• Currently with support from Singapore Government grant, IIGF is preparing its Operations Manual which includes (i) guarantee processing; (ii) risk management; (iii) corporate governance and (iv) financial management system.

30. Weaknesses • IIGF is newly established State Owned Enterprise (SOE). No historical financial

management performance/ records of the institution. • IIGF staff has no experience in managing WB or other donor financed project. Financial Management Capacity Assessment 31. Financial management capacity assessment conducted for the IIGF which will be the implementing agency for the proposed Project. The IIGF was established under Government Regulation no. 35/2009 for the purpose of supporting the PPP program and providing coverage of specific risks of PPP infrastructure projects. The IIGF was officially launched on May 11, 2010 by MoF. MoF will be the signatory of the Loan Agreement (for the WB-Supported IIGF Guarantees and TA components). During the assessment, we discussed with the Chief Financial officer and Executive Vice President Head of Planning, Reporting and Accounting of IIGF and met with Director Investment Management System of DG Treasury, MoF. Risk Assessment Summary 32. A detailed analysis of the financial management risks arising from the country situation, the proposed project entities, and specific project features and related internal controls was completed during the assessment. These risks have been rated on a scale of high, substantial, moderate and low.

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Risks Risk

rating before mitiga

tion

Mitigation measures Residual Risks

Condition of Negotiations/

of Effectiveness

(Y/N?) A. Inherent Risks Country Level

WB recognizes existing weaknesses in GoI public financial management. The GoI is continuing addressing the situation.

S This project implementation will rely on government financial management system at a limited stage such as on budgeting/ planning and treasury. Where the budget of WB funds for the project will be channeled through MoF and it will be subject to Parliament approval. Withdrawal of the funds will also be through KPPN, government treasury office. However, since IIGF is an SOE, its day to day operation will rely on its own OM as it is following commercial practices, not government procedures.

S N

Overall Country Risk S S Entity Level IIGF is a newly established SOE (established through Government Regulation no. 35/ dated Dec 30, 2009. No historical experience of the institution. The institution was officially launched in May 2010. IIGF currently has three accountants who work in its finance and accounting unit.

S IIGF has sufficient capacity to manage its own accounting and the project when it is become effective. IIGF has finalized its Operations Manual (OM). The outsourcing consultant will follow the OM.

M Refer to condition in

Project Complexity.

Overall Entity Risk S M Project Complexity

IIGF will implement component 1 WB-Supported IIGF Guarantees and component 2, Technical Assistance for the project. The main risk of the project will be the PPP project appraisal and the claim payment processes.

S

For Components 1 and 2, the OM for IIGF covers: (i) robust system for project appraisal,

claim payment for guarantee and financial management system;

(ii) sufficient segregation of duties (iii) Acceptable payment verification

mechanism on contract. (iv) All payments made through bank

transfer.

M Done

Overall Project Risk S M

B. Control Risk

43

Risks Risk rating before mitiga

tion

Mitigation measures Residual Risks

Condition of Negotiations/

of Effectiveness

(Y/N?) 1. Budget

IIGF will follow SLA mechanism. There is risk that process for budget under SLA mechanism is not fully understood by IIGF.

S IIGF should coordinate and work closely with DG Treasury, MoF to ensure timely inclusion of IIGF annual budget into MoF (Directorate Investment Management System, DG Treasury) DIPA. We already provide assistance to IIGF to get familiarize with Government Regulation no. 2/ FY 2006 and Ministry Finance regulation no. 207/FY 2008 on subsidiary loan mechanism.

M N

2. Accounting During the FM assessment, IIGF outsource its accounting practice to local management consultant. In FY 2011, IIGF is fully staffed with 3 accountants.

M IIGF has sufficient capacity to manage the project.

M Refer to condition in

Project Complexity

3. Internal Control The project will face the risk that appraisal and payments processes will be made without proper verification.

S Components 1 and 2 The OM for IIGF covers: 1. Robust system for project

appraisal, claim payment for guarantee and financial management system

2. sufficient segregation of duties 3. Acceptable payment verification

mechanism on contract. 4. All payments made through bank

transfer.

M Refer to condition in

Project Complexity

4. Flow of Funds IIGF and MoF will enter into SLA (sub Loan Agreement) for IIGF to access loan from the WB for components 1 and 2 of the project. There is a risk that IIGF not familiar with flow of funds of SLA.

S Flow of fund under SLA arrangement will follow the mechanism as regulated in MoF regulation no. 207/PMK.05/2008, which updated with MoF regulation no. 216/PMK.05/2009, regarding withdrawal mechanism on loan and/ grant which on-lend to state owned enterprises/ local government. IIGF will need to work closely with MoF and get familiar with the existing regulation.

M

5. Reporting For financial management purposes, IFR (interim un-audited Financial Report) for the project will be part of project report. IIGF staff does not have experience in managing WB or other donor financed project.

S IFR will have to be submitted on quarterly basis. IIGF has sufficient capacity to prepare IFR. IFR format and how to fill in will be part of the OM. Training on the OM should be conducted right after the project becomes effective

M Refer to condition in

Project Complexity

Y, training on OM after project effectiveness

44

Risks Risk rating before mitiga

tion

Mitigation measures Residual Risks

Condition of Negotiations/

of Effectiveness

(Y/N?) 6. Internal Audit Currently IIGF is developing its internal audit unit.

S The use of project funds will be subject to be audited by the IIGF internal audit unit. The OM includes procedures for internal audit. Internal audit procedures and associated staffing is in place.

M N

7. External Audit For this loan, an independent private audit firm will be selected to conduct audit for the project. There is a risk that there is delay on auditor selection process.

S ToR for the annual audit will be agreed so auditor selection process can be done immediately. IIGF will make the annual audit report of the project available in its website.

M Done

Overall Control Risk S M

Overall Risk S M

Funds flow 33. There will be SLA between MoF and IIGF. Based on the SLA, IIGF will require preparing annual work plan to MoF who will then put it in on-lending budget (DIPA-PP) in Directorate Investment Management System, DG Budget, MoF. Detail of the mechanism is regulated in MoF regulation no. 207/PMK.05/2008, which updated with MoF regulation no. 216/PMK.05/2009, regarding withdrawal mechanism on loan and/ grant which on-lend to state own enterprises/ local government. Component 1 34. In order to prevent the mingling of the amount allocated for Component 1 under the SIL with IIGF capital or other accounts, the sequence of steps for disbursement will be as follows: (a) WB appraises the project along with IIGF, (b) IIGF provides an appraisal report to the WB, and (c) WB provides a No Objection to the designation of the particular IIGF project as a “WB-Supported IIGF-project”, IIGF may then submit a withdrawal request with respect to a particular WB-Supported IIGF Guarantee after a guarantee is issued and after a claim has been made by the guaranteed party and IIGF has properly assessed the claim as payable. Disbursement may be made: (i) through direct payment by the Bank to the eligible guaranteed parties14 upon a call on the guarantees; or (ii) through reimbursement to IIGF if IIGF has made the payment. IIGF as the guarantor will remain solely and exclusively responsible to the guaranteed party for payment of any claim regardless of whether the Bank disburses the loan. Component 2 35. There will only be three consultancy assignments. Additional consultants may be selected to enabling the IIGF to facilitate the preparation of PPP projects seeking government guarantees to international standards.

14 The eligible beneficiary of a WB-Supported IIGF Guarantee could be a lender to that project, or could be a PPP company provided that such guarantee covers only the debt service of Lender(s) to such project.

45

36. Uses of the project funds as reflected in the SLA will be made through request for payment from IIGF to Directorate Investment Management System with letter of absolute responsibility attached. Directorate Investment Management System then prepare SPP (request for payment) to finance unit of MoF. After reviewing the SPP, MoF finance unit than issue SPM (payment order). The SPM then forwarded to KPPN (Government Treasury Office) for issuance of SP2D (payment remittance order) to third party consultant or to the IIGF account in case of reimbursements. Accounting and Reporting 37. The project accounting policies and procedures for this project will follow IIGF OM. All project transactions will be included in the IIGF financial statements. To have better project information, IIGF will prepare IFR (Interim un-audited Financial Report (IFR) on a quarterly basis. IFR should be received by WB no later than 45 days after the end of each quarter Internal control and Internal Audit 38. The project internal control will be mitigated as follows. The IIGF OM includes the following: 1. Robust system for project appraisal and claim payment for guarantee; 2. Sufficient segregation of duties 3. Acceptable payment verification mechanism on contract. Payment verification that

work paid for is completed and is eligible for funding. 4. All payments made through bank transfer.

Internal audit for the project will be conducted as part of the internal audit of IIGF. The internal audit procedures are part of the OM of IIGF. Internal audit staff are in place. Disbursement 39. The proposed disbursement method will be direct payment, and reimbursement methods for Component1; for Component 2, disbursement method includes only reimbursement and direct payment. Minimum withdrawal application will be USD 100,000, except the last withdrawal application. Any expenditures or invoices below the minimum amount need to be paid by IIGF and consolidated for submission to WB for reimbursement when the amount reached the minimum of USD 100,000 equivalent. Applications for requesting direct payment and reimbursement shall be supported by records evidencing such expenditures and evidences of payments made in case of reimbursements. Allocation of Loan Proceeds 40. The project will be financed by the Bank at 100%, inclusive of taxes. Allocation of loan proceeds is in the table below:

46

Category Amount of the Loan Allocated

(expressed in USD)

Percentage of Expenditures to be financed

(inclusive of Taxes) (1) WB-Supported IIGF Guarantees under Component 1of the Project

25,000,000 100%

(2) Consultants’ services, non-consulting services and goods under Component 2 of the Project

4,600,000 100%

TOTAL AMOUNT 29,600,000 Withdrawals may be made under Category (2) for retroactive financing up to an aggregate amount not to exceed US$2,300,000 equivalent for payments for eligible expenditures made on or after July 19, 2012. 41. Applications for reimbursements will be supported by: a) The same documentation as (i) referred to above in the case of payments for eligible

call on WB-Supported IIGF guarantees; b) List of payments against contracts that are subject to the Bank’s prior review; c) Statement of expenditures (SOEs); and d) Evidence that payments were made, such as bank statements. 42. Applications for Direct Payments will be supported by records evidencing eligible expenditures, e.g., copies of receipts and supplier invoices or claim invoice.

External Audit Arrangements 43. The project financial statements under this loan shall be prepared by IIGF. External independent auditor of the IIGF will audit project financial statements and provide an opinion on the loan, its use and an opinion and disclosure on the use of the funds (for components 1 and 2). A copy of the audited financial statements of IIGF, along with the auditor’s opinion related to project expenditure, will be submitted to WB not later than six months after the end of each calendar year. IIGF will make the annual audit report of the project available in its website. Implementation Support Plan 44. Supervision of project financial management will be performed on a risk based approach. The supervision will review the project’s financial management system, including but not limited to accounting, reporting and internal control. The financial management supervision will be conducted by the assigned financial management specialist and consultants. It is estimated that around four staff weeks will be required from the FM team annually. Procurement Arrangements General 45. Procurement for the proposed project would be carried out in accordance with the World Bank’s Guidelines: “Procurement of Goods, Works, and Non-Consulting Services under IBRD Loans, IDA Credits & Grants by World Bank Borrowers” dated January 2011;

47

and Guidelines: “Selection and Employment of Consultants under IBRD Loans and IDA Credits & Grants by World Bank Borrowers” dated January 2011 and the provisions stipulated in the Loan Agreement. The various items under different expenditure categories are described below: 46. For each consultant contract to be financed by the Loan under Part 2 of the Project, estimated costs, prior review requirements, and time frame has been agreed between the IIGF and WB in the Procurement Plan. The Procurement Plan shall be updated at least annually or as required to reflect the actual project implementation needs and improvements in institutional capacity. 47. For selection of consulting firms, WB’s Standard Request for Proposals shall be used. For selection of individual consultants, contracts acceptable to WB will be used. 48. Procurement of goods, works, and non-consulting services. There is no procurement of works services expected under Part 2 of the project. It is expected that consultants’ services will be procured under Part 2. However, in case an unforeseen need arises during Project implementation to procure goods or non-consulting services under Part 2 the Project, the value of such procurement will be very small and the Shopping method will be used. Under Part 1, the Bank’s loan funds will be used by IIGF to issue guarantees for PPP projects. Goods, Works and non-consulting services under any PPP project that will be covered by such guarantees shall be procured by the beneficiaries of the guarantees in accordance with the principles of economy and efficiency with due attention to the cost, quality and timeliness of the procured goods, works and non-consulting services, as per paragraphs 1.5 and 3.18 of the Bank’s Procurement Guidelines. As part of its appraisal and monitoring functions, IIGF will assess the capacity and review the procedures of the Contracting Agency to ensure that its procurement is carried out in accordance with the principles of economy and efficiency with due attention to the cost, quality and timeliness of the procurement process. IIGF will utilize the support of an international consulting firm hired specifically for helping conduct such assessments for projects seeking guarantees under Part 1 based on the framework provided in the OM which has been reviewed and approved by the Bank. 49. Consultant Selection. Part 2 will provide Technical Assistance to IIGF. Under this component only one contract for consultant services is expected to be procured, and the Consultant Guidelines will apply. An international consultant firm will be hired to help IIGF in project screening, and appraisal process, including environmental and social safeguard requirements, and claims processing. It was agreed that the contract will be divided into two phases: Phase-1 for the first two years of IGFP implementation and Phase-2 for a further two years, proposals will be invited and evaluated for both phases but the contract will be awarded initially for Phase-I only, whereas the contract for Phase-II will be awarded through a subsequent contract extension/amendment subject to satisfactory performance of the consultant in Phase-1 and continued need of the client for the services. For any PPP that will be covered by guarantees provided by IIGF under Part 1 of the Project, procurement of consultant services shall be carried out by the beneficiaries of the guarantees in accordance with the principles of economy and efficiency with due attention to the quality, cost and timeliness of the procured consultant services, as per paragraphs 1.8 and 3.14 of the Consultant Guidelines. The capacity, procedures and practices of PPPs will be assessed by IIGF as part of the appraisal and monitoring conducted by IIGF, with support of an

48

international consulting firm hired specifically for this purpose, of the projects seeking guarantees under Part 1 based on the framework provided in the OM. 50. Contracts for consulting firms under Part-2 of the Project will generally follow Quality-and Cost-Based Selection (QCBS) method. Selection based on Consultants’ Qualification (CQS) method may also be used for contracts estimated to cost less than US$200,000 equivalent. Selection of individual consultants will be carried based on comparison of qualifications in accordance with Section V of the Consultant Guidelines. 51. Shortlists of consultants for services estimated at cost less than US$400,000 equivalent per contract may be composed entirely of qualified national consultants in accordance with the provisions of paragraph 2.7 of the Consultants Guidelines. Assessment of the Capacity of Implementing Agency’s to implement procurement 52. Most findings and recommendation below are based on assessment of the IIGF, which was undertaken by WB in May 2010 and updated in September 2010; as well as assessments of private sector practices carried during the preparation of the “Indonesian Infrastructure Financing Facility”. IIGF is a new organization and has recently drafted its procurement procedures which mainly rely on the current national procedures i.e. Perpres 54/2010, though these procedures will not have any impact on the Project as there is no NCB procurement of goods and works expected under Part 1 of the Project and there is only one contract for selection of consultant firm which will follow the Bank’s Consultant Guidelines. The procurement committee for selection of consultants will be established under the legal department and will be headed by the Chief Financial Officer of IIGF. While IIGF has no prior experience of procurement under World Bank financed projects, it has a full-time qualified Procurement Officer who will serve as the focal person for all procurement matters and through training provided by the Bank will guide the procurement committee in carrying out the selection of the only one consulting services contract under Part 2 of the Project. 53. WB identified the following key issues and risks concerning procurement for implementation: (i) Corruption and Collusive Practices: This is a general country level issue because of

the still weak governance environment. (ii) Capacity of the procuring unit: The IIGF is a newly created agency and still lacks

knowledge and experience in public procurement in general and no prior experience on Bank procurement policies and procedures. However, IIGF has a qualified procurement staff member who will be the focal person for all procurement matters under the Project and will also guide the procurement process carried out by the procurement committees. The procuring committees will also require technical expertise in carrying the technical evaluation of the proposals for the firm selection, which will be provided by IIGF’s technical staff.

(iii) Procurement delays: Low capacity in application of Bank Procurement Guidelines and procedures, late initiation of the procurement process and long evaluation process (especially in hiring consultants) normally contribute to significant delays in contracts award.

Table 3 below presents a list of measures agreed between the IIGF and WB to mitigate the above mentioned risks.

49

Table 3: Agreed Corrective Measures

Actions Due Date Responsible Unit

Adoption of the corporate governance section of the Operations Manual (which reflects the provisions of the Governance Action Plan (Annex 7))

Action completed by negotiations

IIGF

Decision to appoint procurement committee Action completed prior to negotiations

IIGF

Procurement training conducted Training conducted prior to negotiations, and will be conducted during project implementation

WB

Procurement Plan for the first 18 months of implementation available

Action completed prior to negotiations

IIGF

Request for Expressions of Interest for Consultant Services package under Part 2 issued

Action completed prior to negotiations

IIGF

OM for appraisal and monitoring of projects covered by IIGF guarantees under Part 1 includes the framework for assessing the PPP entity’s procurement practices and procedures in accordance with the principles of economy and efficiency with due attention to the cost, quality and timeliness of the procurement process

Action completed by negotiations

IIGF

IIGF assessment of projects proposed to be covered by guarantees based on OM framework

Implementation IIGF, with support of international consulting firm

Taking into consideration the above and the fact there is only selection of firms and two individual consultants, the overall procurement risk of the Project is considered “Substantial” which will be reduced to “Moderate” after mitigation. Procurement Plan 54. The Borrower has developed a procurement plan for the selection of consultants required under Part 2 for the project implementation. This plan was finalized by the Borrower by negotiations and will be available at the IIGF. It will also be available in the project’s database and in WB’s external website. The Procurement Plan will be updated in agreement with the Project Team annually or as required to reflect the actual project implementation needs.

50

Ref. No.

Description of Assignment

Estimated Cost

(USD 000)

Selection Method

Review by Bank (Prior / Post)

Expected Proposals

Submission Date

Comments

TA 1 Outsourced guarantee appraisal process , and claims processing

4,600 QCBS Prior Aug 2012 Initial contract will be for 2years (Phase-I of the contract) with possibility of 2 year extension (Phase-II of the contract).

QCBS: Quality and Cost Based Selection Frequency of Procurement Supervision 55. At least once per year. All contracts for consultant services under part 2 will be subject to prior review, and any other contract will be subject to expost review. Safeguards Policy Issues Executive Summary of the Environmental and Social Management Framework 56. At the current stage of Project preparations, the Environmental and Social Management Framework (ESMF) has been completed and will form the basis for treatment of Safeguards going forward. Once IGFP reaches the implementation stage, the procedures detailed in the ESMF will be followed, along with all of the proper instruments, regardless of the financing source backing the IIGF guarantees issued. The ESMF was disclosed in the InfoShop on Oct 2, 2010, and on the IIGF website on Oct 6, 2010. The final revised ESMF was disclosed on the local (IIGF) website, www.iigf.co.in and in the InfoShop prior to completion of appraisal. This Annex provides a summary of the ESMF. Environmental and Social Management Framework (ESMF) and Operations Manual 57. Since the potential projects have not been fully defined an Environmental and Social Management Framework (ESMF) has been prepared by IIGF to manage the potential safeguards risks in projects as and when they are identified and defined. 58. The ESMF establishes a set of policies and guidelines that will assist IIGF in the screening, appraisal and supervision of the environmental and social aspects of all projects wishing to obtained guarantee from IIGF irrespective of the source of funding, and for associated activities or projects that are (1) directly and significantly related to the guaranteed projects; (2) necessary to achieve the objectives of the guaranteed projects; and, (3) carried out or planned to be carried out contemporaneously to the guaranteed projects. The ESMF outlines (i) WB safeguards policies as well as Indonesian laws and regulations, and international standards that will apply to projects supported by IIGF, and (ii) the arrangements that will be put in place to ensure that these policies are implemented successfully and that projects meet all these requirements. 59. Based on the ESMF, detailed procedures for the environmental and social review of projects have been incorporated into IIGF’s Operations Manual (OM), covering project screening, appraisal, construction, operation and handover. The OM specifies the roles and

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responsibilities of IIGF, Contracting Agencies (CAs), Private Investors (PIs), and WB during the project screening/preparation, construction, operation, and handover phases. The OM describes the establishment and capacity building of IIGF’s Environmental and Social Management System (ESMS) as well as assistance to CAs and IPs for safeguards strengthening and Project implementation. The OM will be used to develop Guidance Notes to assist the CAs during the project screening/preparation phase and the PIs during the project construction, operation, and handover phases. The OM will be used to guide IIGF in carrying out due diligence and in addressing incompliance of projects in the implementation of the environmental and social safeguards instruments. 60. It may be noted that in the PPP context in Indonesia, the designation “Contracting Agency” includes the line agencies of the central government as well as local governments. CAs will implement the safeguards instruments including LARAP and IPP. However, as WB will only supervise the implementation of OM by the IIGF, it does not have direct relationship or influence on the local government’s roles in managing the implementation of safeguards instruments. For projects receiving WB-supported IIGF guarantees, the institutional arrangements with local government to implement the safeguards instruments will be fully defined by the CA in accordance with the national regulations and to the satisfaction of the WB, i.e., to the same standard that are followed in other WB-supported SILs in Indonesia. Applicable Policies and Standards 61. As it is likely that all these infrastructure projects to be guaranteed will have moderate to significant impacts, the Project was assigned an Environmental Category A. The scale, type and location of impacts will only be confirmed at project preparation stage by the CAs. Preparation of projects by the CA, and the construction, operation and handover of projects by the PI will be conducted in conformity with the requirements of IIGF’s OM. IIGF will provide a single window operation in processing guarantees for infrastructure projects in Indonesia. Guarantees for the infrastructure projects will be provided after selection of the PI for the construction, operation and handover phases of the projects, as applicable according to guarantee coverage terms and in conformity with the requirements of IIGF’s OM. IIGF will follow one set of safeguards requirements that will comply with:

(i) The Indonesian laws and regulations; (ii) The seven WB Safeguard Policies that could be triggered by the infrastructure

projects to be guaranteed under this Project: Environmental Assessment (OP/BP 4.01); Natural Habitats (OP/BP 4.04); Pest Management (OP 4.09); Physical Cultural Resources (OP 4.11); Involuntary Resettlement (OP/BP 4.12); Indigenous Peoples (OP 4.10); Safety of Dams (OP/BP 4.37);

(iii) International standards on Labor and Occupational Health & Safety.

62. The resulting set of standards has been elaborated in detail in the OM, which provides detailed procedures, institutional arrangements, processes and control points for implementing the ESMF. Further, the OM specifies the safeguards screening mechanisms, instruments to be prepared, consultation and disclosure requirements for IIGF projects during the preparation, construction, operation and handover stages. The OM includes specific detailed instructions for each of the above safeguards requirements; more specifically on the relevant Indonesian laws and regulations, and International standards on Labor and Occupational Health & Safety. In addition, CA Guidance Note and PI Guidance Note will

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also be prepared. These guidance notes, which will be based on the OM, will specify all the safeguards responsibilities to be undertaken by CAs and PIs for every IIGF guaranteed project, regardless of financing course. Environmental and Social Safeguards Instruments ESMF and Environmental Audit

63. The environmental safeguards instruments to be used under this Project are ESMF and environmental audit. The policies and guidelines in the ESMF, as well as corresponding procedures in the OM, will be utilized to conduct an environmental and social review of projects that do not require investigation of past liabilities, whereas the environmental audit will be conducted during transfer of management responsibility of the project from one party to another (e.g. during transfer of the constructed project facilities to the PI, or during handover of the project by the PI). 64. The environmental assessment required under the ESMF will:

(i) Identify and assess the potential environmental and social impacts of the project in the project’s area of influence;

(ii) Include an analysis of alternatives that justifies the selected option as the one with the lowest environmental and social risk; and

(iii) Prescribe an EMP (based on the selected alternative) that will specify a mitigation plan (i.e. a plan with the measures to prevent, mitigate and/or compensate for the potential adverse environmental and social impacts of the project) and an environmental monitoring plan with an implementation schedule and budget, identifying the institutional roles and responsibilities and training needs.

65. The environmental audit will be used to:

(i) Determine the nature and extent of all potential environmental issues and adverse impacts from an existing facility;

(ii) Prescribe an EMP that will identify appropriate measures mitigate and/or compensate for the potential adverse environmental and social impacts of the project; and

(iii) Determine whether the CA and/or the PI have adjusted the originally planned mitigation measures during project implementation and why and was it appropriate.

Safeguards Instruments for Indigenous Peoples

66. As potential projects that would apply for guarantees are not yet firm, the extent to which they will affect the IP communities cannot be determined at this stage. In anticipation that a project may affect IP communities, the Project develops an Indigenous Peoples Planning Framework (IPPF), to guide IIGF in preparing an Indigenous Peoples Plan (IPP) ensuring that the impacts are properly assessed, IP communities are fully consulted, and measures to mitigate or address negative impacts are properly developed. CA will prepare an IPP in case the proposed project affects IPs communities. In the case that a CA has carried out some activities involving IP communities that would be affected by the proposed project prior to applying for a guarantee from IIGF and/or WB, the CA will submit to IIGF an IPP

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which include activities that have been taken of the handling of the IPs as part of the appraisal document package. IIGF will review the report and undertake a due diligence assessment as per the OM. Should there be inconsistencies between the handling of IP communities and the requirements in the OM, IIGF will request the CA to prepare a corrective action plan for the affected IP communities in accordance with the OM. 67. It is anticipated that due diligence and in-depth assessment will be conducted on the project’s design (including the SA and preparation of IPP), implementation procedures and supervision requirements. If the CA cannot prepare and implement an acceptable corrective action plan, IIGF and WB will not provide guarantee for CA’s private investor. 68. IIGF will monitor the implementation of the IPP by the CA and/or PI (as applicable). The CA has to establish a corrective action plan if there is incompliance of the IPP implementation. The corrective action plan will have to be reviewed and cleared by IIGF and WB as applicable. IIGF may request the CA to postpone the start of the construction work or the ongoing construction works, or operations, or handover, as applicable (in the case that activities related to IPs are continued during construction, operation or handover), until the correction action plan is approved and activities specified in the approved correction action plan are implemented, as applicable. The approved correction action plan will have to be amended in the relevant Agreements15. Safeguards Instruments for Involuntary Resettlement 69. As potential projects that would apply for guarantees are not yet firmed, at this stage it is uncertain that these projects will involve any land acquisition and associated impacts. The Project develops a Resettlement Policy Framework (RPF) as a guideline is to define the principles, procedures and organizational arrangements for IIGF’s projects that involve involuntary resettlement and for the CA and/or PI in preparing a Land Acquisition and Resettlement Action Plan (LARAP). Key principles to guide the preparation and implementation of projects requiring land acquisition include:

• Involuntary resettlement should be avoided where feasible, or minimized to the extent possible. During the process of preparation of projects, the potential impacts of land acquisition should be assessed so that, where feasible, design alternatives to minimize adverse impacts can be identified as early as possible.

• Persons who lose land and/or other assets as a result of land acquisition for projects should be provided with prompt and fair compensation.

• Project Affected Persons (PAPs) who must move to another location as a result of land acquisition for projects should be (i) meaningfully consulted about compensation and relocation options, (ii) offered opportunities to participate in the planning and implementation of relocation plans, and (iii) assisted during the relocation process.

• PAPs that lose income sources or means of livelihood as a result of land acquisition for projects should be assisted in their efforts to restore their livelihoods and standards of living.

70. It is anticipated that land acquisition for projects to be guaranteed by IIGF can be acquired either by the CA and/or PI, through one or combination of these two approaches: (a) land acquired by local government or a government entity as requested by the CA and/or PI, 15 IGF Guarantee Agreement between IGF and the PI, Recourse Agreement between IGF and the CA, and PPP Agreement between the CA and the PI, as applicable.

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except for projects that are not covered by Perpres 65/2006 and Law 2/2012; (b) land acquisition through direct negotiations between land owners and the CA and/or PI, and/or between land owners and local government or government entity if the size of the land to be acquired is less than one hectare. In the case that the CA and/or PI have implemented resettlement prior to the submission of the appraisal document to IIGF, they have to prepare a Tracer Study (TS) that (i) explains in detail the procedures, requirements and outcomes of land acquisition and resettlement that had been carried out, (ii) analyzes whether land acquisition and resettlement had been carried out in accordance with this RPF and the OM; (iii) provides corrective actions that will address issues due to the gaps between the requirements in the RPF and OM and in the implementation of land acquisition and resettlement. 71. Due diligence is anticipated for projects and will require an in-depth assessment of the project’s design (including the preparation of LARAP and TS), implementation procedures and supervision requirements to assess the projects’ compliance with IIGF’s OM. 72. In the case that a CA and/or PI do not consistently implement the approved LARAP and/or the approved TS, IIGF will not issue a No Objection for the commencement of the project construction, or operation, or hand over, as applicable, until the implementation of the approved LARAP and TS are satisfactorily implemented. 73. In the case that the CA and/or PI do not implement the activities (incompliance) in the approved LARAP or TS after the signing of the Recourse Agreement, IIGF Guarantee Agreement and/or Public-Private Partnership (PPP) Agreement, either to be implemented during construction, operation and/or hand over stage, IIGF will request the CA and/or PI to stop the construction, operation and/or handover until the corrective actions are implemented satisfactorily. Safeguards Procedures 74. The safeguards procedures that will be used under this Project have been specified in detail in the ESMF and OM. In summary:

(i) IIGF intends to be the intake point for all infrastructure guarantees. IIGF will screen and appraise all projects - regardless of the source of guarantee financing - based on the ESMF as elaborated in the OM.

(ii) For projects for which IIGF will issue an IIGF Guarantee or MOF will issue a MOF Guarantee, IIGF will fully appraise and thereafter supervise all projects in accordance with the OM.

(iii) A subset of IIGF guarantee projects will be backed by a loan from WB (component 1). For those projects, WB will also conduct its own full appraisal (and supervision) after the IIGF has appraised them in accordance with the OM.

(iv) For guarantee projects that do not an IIGF guarantee backed by WB loan (component 1), WB will not review or supervise the project with respect to the preparation, construction, operation, or handover of the projects.

(v) WB will, during supervision, review IIGF’s use of the OM in the activities funded by WB technical assistance (component 2), including the IIGF’s appraisal of projects that do not receive an IIGF guarantee backed by the WB loan.

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75. For all projects, IIGF will disseminate information about actions taken by IIGF to manage potential environmental and/or social risks, as one of the communication strategies to reduce reputational risks. Institutional Roles for Safeguards Management and Implementation Arrangements 76. The specific roles of institutions involved for safeguards management under IIGF Project are as follows:

(i) Contracting Agency (CA) will be responsible for the preparation of projects, including screening for safeguards risks and identification of and preparation of the relevant safeguards instruments required under the approved ESMF, such as EA/EMP, environmental audit/EMP, IPP, LARAP, Tracer Study, Corrective Action Plan for IPs or corrective action for compliance of the LARAP implementation. CA will be responsible for implementing the approved IPP, LARAP, Tracer Study, Corrective Action Plan for IPs or corrective action for compliance of the LARAP implementation, as applicable. In some projects where CA is responsible for the partial or full construction of the project, CA will also be responsible for implementing the EMP and IPP, LARAP, Tracer Study, Corrective Action Plan for IPs or corrective action for compliance of the LARAP implementation during the construction phase, as necessary.

(ii) Private Investor (PI) will be responsible for project construction, operation and handover, including implementation of safeguards aspects. PI will also be responsible for environmental liabilities occurring during construction (if responsible for construction) and operation of the project investment, and also for remediating the environmental damage to specified standards. PI will be also responsible to implement the approved LARAP, IPP, TS, and corrective action plan for the IPs and corrective action for the incompliance of the LARAP implementation, as applicable, as some activities may have to be implemented during the construction and operation phases such as rehabilitation support for income restoration and livelihoods.

(iii) IIGF will be responsible for processing guarantees for infrastructure projects through a single window operation in Indonesia. For all projects, IIGF will apply one set up safeguards standards which are incorporated in the OM. IIGF will provide guidance to CA in meeting the safeguards requirements of the CA during the project preparation phase or construction phase in the case that it may also construct the project. It will also supervise PI implementation of the safeguards instruments during the project construction, operation and handover phases together with the CA. IIGF will report on the status of the preparation and compliance of the implementation of all environmental and social safeguards instruments along with other aspects of projects to the MOF.

(iv) Ministry of Finance (MOF) will be responsible for monitoring the performance of IIGF management to ensure that it complies with IIGF policies, including the Operations Manual. The MOF will share IIGF’s report including safeguards-related aspects with WB.

77. World Bank’s role. WB will, during supervision, for all projects, review the IIGF’s use of the OM in the activities funded by WB technical assistance. This may include assessment of information received from IIGF submitted through MoF, and may include field

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visits to check IIGF projects in the field to assess that it adopted and applied the OM satisfactorily. In particular, assessment of the compliance of the IIGF in implementing the OM covers, but not limited to the following, whether IIGF (a) approves projects after conducting appropriate appraisal, including on safeguards aspects, (b) monitors and supervise the performance of the CA with respect to the PPP agreements and contracts, including the commitments made by the PI vis-à-vis safeguards, and (c) reports to WB through MoF on project performance vis-à-vis financial as well as safeguards risk management as defined in the OM. 78. For Component 1, IIGF guarantees backed by the WB loan, appraisal and supervision will be done by IIGF, but will also be subject to appraisal and supervision by WB in accordance with its own procedures. However, these projects will not be subject to further Board approval during implementation. WB will not review or supervise projects which are not supported by Component 1. WB will however, review during supervision, the IIGF’s use of the OM in the activities funded by WB technical assistance (component 2), including the IIGF’s appraisal of projects that do not receive an IIGF guarantee backed by the WB loan. Institutional Capacity Building 79. IIGF – being a newly established entity – has hired an Environmental Specialist, and a Social Development Specialist, to oversee the environmental and social aspects of the infrastructure projects during their preparation, construction, operation, and handover phases. These Specialists will implement the detailed procedures, requirements and formats to be prescribed in IIGF’s OM that will comply with the Government of Indonesia’s laws and regulations, the seven World Bank’s safeguards policies, and international labor and occupational health and safety standards. IIGF’s environmental and social specialists will hire expert consultants to support detailed project reviews depending on specific project characteristics, and provide training to the IIGF and related CAs in the areas of PPP project preparation and adoption of the IIGF operational and safeguards procedures. In addition, a professional firm will be recruited to assist IIGF in all phases of guarantee screening/appraisal and further provide capacity building, including safeguards review and management. The individual environment and social specialists might be converted into full time staff of IIGF, subject to their satisfactory performance and sufficient workload resulting from the larger IIGF project pipeline.

80. As IIGF is responsible to implement consistently the Project’s OM, IIGF’s environmental and social development specialists as well as IIGF’s consultants will have a thorough understanding of IIGF’s OM. The IIGF’s environmental and social specialists will hire expert consultants to support detailed project reviews depending on specific project characteristics.

81. To plan for the implementation of the institutional capacity building measures, IIGF has taken/will take the following actions:

(i) Prior to project negotiations, IIGF has built a capacity building plan for itself and potential CAs and PIs, and include a budget in the TA component 2 to implement it.

(ii) During appraisal of proposed guarantee projects, IIGF will assess the capacity of the CA in managing environmental and social safeguards of the associated project.

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Stakeholder Consultations and Disclosure of Safeguards Documents 82. IIGF and World Bank have organized three rounds of consultations, and held a number of bilateral meetings, with Contracting Agencies (CAs) and Private Investors (PIs) on environmental and social safeguards management under this Project. Feedback received from key stakeholders has been very valuable and incorporated in subsequent drafts of IIGF Project documentation, including ESMF.

83. A workshop for consultation with CAs and civil society was organized before appraisal completion. In addition, separate meetings were held with the potential PIs. A project brochure that contains inserts on safeguards was prepared and disseminated to NGOs. Project related information, including the safeguards aspects were disseminated through IIGF’s website. The final version of the ESMF has been disclosed at IIGF’s Website and at WB’s InfoShop. WB has developed a Communications Strategy to address any public misperception about WB’s responsibility for all projects guaranteed by IIGF and to disseminate information about actions taken by IIGF (such as ESMF/OM) to manage potential environmental and social risks.

84. The consultations and disclosure carried out to date are appropriate, given the fact that specific IIGF projects to be guaranteed by IIGF have not yet been firmly identified. IIGF project-specific safeguards instruments required under the approved ESMF will be determined through screening by IIGF’s clients, i.e. the CA. IIGF’s clients (CA and PI) will disclose draft and final versions of EA reports, Land Acquisition and Resettlement Action Plans (LARAPs), Indigenous Peoples Plans (IPP), etc., both in English and Bahasa Indonesia, EA TOR for Category A projects in a public place accessible to affected groups, local NGOs and other stakeholders. If needed, the IPP has to be translated to the IPs’ language.

Grievances

85. The ES Unit/Division of IIGF will establish a grievance redress mechanism (GRM) that will allow public, affected IP communities or individuals, or PAPs to file complaints and to receive satisfying responses in a timely manner. The system will also record and consolidate complaints and their follow-ups. This system will be designed not only for complaints regarding the preparation and implementation of LARAP, IPP and TS, but also for handling complaints of issues (including environmental and other social safeguards issues) related to the projects guaranteed by IIGF under this Project. IIGF will hire a professional to manage the GRM, and this expert will closely work with the ES Unit/Division.

86. At the project level, the relevant CA and/or PI will have to establish a grievance redress mechanisms (GRM) for complaints related to the guaranteed project. The CA and/or PI have to assign a staff to be responsible in managing the GRM system. The system will receive, and properly follow up complaints from the public, IP communities or individuals, and PAPs in a timely manner, as well as records complaints and their follow-ups. The CA and/or PI could use its existing GRM system, if it is already available and well-functioned with procedures and mechanisms that are in line with the requirements of the GRM as specified in the OM. Otherwise, the CA and/or PI will have to improve its current GRM system and capacity to be able to implement the GRM as specified in the OM.

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87. Details on the procedures, requirements, documentation, and reporting formats of the GRM at the project level, i.e. at IIGF, and at the project level, i.e. at the CA and/or PI level, are incorporated in the OM.

Reporting

88. IIGF will prepare a Quarterly Implementation Report (IR), to be submitted to the Ministry of Finance (MoF) and WB. The IR will contain, among other things, the status and progress of the project appraisals including environmental and social safeguards aspect, implementation of safeguards instruments, and follow-up actions to address previously identified issues, if any; and the implementation of the approved capacity building plan for environmental and social safeguards.

89. IIGF will also incorporate the appraisal status and implementation progress of the implementation of the environmental and safeguards instruments in its quarterly report to be submitted to the MoF, which will be then shared with WB.

90. The Contracting Agency (CA) will prepare a Quarterly Implementation Report, to be submitted to IIGF. This Quarterly Implementation Report will provide information to be incorporated in the IR of IIGF. The Report will contain, among other things, the status and progress of the preparation and implementation of environmental and social safeguards instruments as well as follow-up actions to address issues, if any. This report will include information provided by the Quarterly Implementation Report of the Private Investor (PI).

91. In the event of non-compliance with the OM and/or safeguards instruments by CAs and PIs in any phase of the project cycle, appropriate recourse measures will be undertaken by IIGF and/or World Bank.

92. The PI will prepare a Quarterly Implementation Report, to be submitted to the CA. The Report contains, among others, the status and progress of the preparation and implementation of environmental and social safeguards instruments and follow-up actions to address issues, if any.

All of the above reports will incorporate supervision reports as applicable.

93. IIGF will also submit an External Monitoring and Evaluation Report which, among other things, will contains the compliance evaluation of the implementation of the safeguards instruments in reference to the OM, to be submitted to the MoF and WB. This Report will be prepared by an Independent Consultant annually. IIGF will make the External Monitoring and Evaluation Report public.

94. The CA and the PI will also prepare an Audit Report on the compliance and effectiveness of the implementation of the environmental and social safeguards instruments, and submitted to IIGF (and shared with WB as necessary) for approval, prior to the bidding for the construction, and/or operation, and/or hand over.

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Summary of Indonesia’s environmental assessment system 95. Indonesia’s environmental assessment (Analisis Mengenai Dampak Lingkungan or AMDAL), which has been in use for nearly 25 years,16 was conceived as a tool for requiring both public and private sector project sponsors to integrate environmental concerns into their development plans. The AMDAL process is linked to project approval permits to ensure enforcement. Screening procedures were simplified in the 1990s and less complex management instruments, Upaya Pengelolaan Lingkungan (UKL) and Upaya Pemantauan Lingkungan (UPL) or Preliminary Environmental Management Plan and Preliminary Environmental Monitoring Plan, were introduced for projects not considered to require a full environmental assessment. 96. Under the Indonesian legislation, all projects and activities, in both public sector and private sector, must meet the requirements of the AMDAL system. The WB, and in fact all donors, rely on the use and application of the AMDAL process. The AMDAL system is fully accepted and recognized by government and private sector proponents, as well as practitioners; the requirement for its use is never questioned, and the various stakeholders in the AMDAL process are familiar with the system. At the same time, KLH, the ministry responsible for AMDAL administration, is well aware of the shortcomings and problems with the use of the AMDAL system and is actively engaged in reforming AMDAL. 97. World Bank environmental staff in Jakarta consider the environmental requirements of Indonesia’s AMDAL system to be “broadly consistent” with the requirements of the WB’s environmental safeguard policies. As provided under the approved ESMF, wherever the use of the AMDAL process is not likely to yield the necessary quality of work or the desired results, WB staff requires that project proponents take the necessary additional steps and actions to ensure that the EA process and outputs fully meet all WB requirements under OP 4.01. This may mean WB requests for revisions to the terms of reference for the EA study, increases to the consultants’ shortlist or the EA budget, improvements to the format of public consultations, more efforts to consider alternatives, additional work on the EMP, or some or all of the above. 98. In addition to working hard to improve EA work project-by-project, the WB’s approach has been to cooperate with Government on improving the Indonesian EA system, as evidenced by the ongoing dialogue and the current WB support for KLH’s AMDAL Reform project. These efforts are also supported by a number of other donors; they are expected to improve AMDAL performance country-wide, especially at the level of local authorities, in the short and medium term. A new Law was issued in 2009 related to environmental protection and management, i.e., Law No. 32 of 2009 on Environmental Protection and Management (“Environmental Law”) and followed by a number of implementation regulations including State Minister of Environmental Affairs Regulation No. 5 of 2012 on Types of Planned Businesses and/or Activities Subject to Mandatory Environmental Impact Assessment (Analisis Mengenai Dampak Lingkungan - AMDAL).

16 AMDAL was originally defined in Law No. 4 (Art. 16) of 1982 and Regulation No. 29 of 1986, and further modified in 1993 and 1999.

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Plan for WB supervision of IIGF implementation 99. The WB Task Team will work closely with IIGF to ensure effective project implementation. Sector staff from the WB Jakarta office will help review projects at all stages to ensure that projects are in line with the sector policy that GOI and the WB are pursuing, and to make sure that they are technically sound and financially viable. Based on specific project characteristics and requirements for review and appraisal, additional technical resources can be provided by WB regional staff. 100. Project pipeline development: IIGF will continue to maintain close contact and technical discussion with potential CAs to develop a strong project pipeline. IIGF will update the pipeline on a quarterly basis and submit to the WB within 15 days from the quarter end. 101. Semi-annual supervision mission: The WB Task Team, in addition to support made to IIGF on an as-needed basis, will perform formal project supervision every six months. Review IGFP overall progress and update implementation plan:

• Assess IIGF’s pipeline and project monitoring performance as required by the OM, including safeguards monitoring and appraisal;

• Evaluate IGFP compliance with covenants and OM • Review financial performance of IIGF and disbursement under Component 1 • Provide IIGF with updated sector policy as necessary so that IIGF can address such

changes in working with CAs and in project reviews • Review progress of consultant selection under Component 2 and subsequently

performance of consultants, including the capacity-building activities for IIGF and CAs

• Undertake as necessary, in conjunction with IIGF, safeguards monitoring for guaranteed projects

• Advise IIGF and CAs as necessary on project screening and preparation, including risk assessment, project preparation issues and realistic progress, and sector issues to be taken into account

• Review revisions to OM as proposed by IIGF • Report to MOF on issues requiring MOF’s intervention/decisions

102. Workshops: As IIGF and TT deem necessary, workshops may be organized during supervision missions with participation of CAs and private sector, in order to strengthen their understanding on IIGF operations, and to report to the public on performance of the IIGF. Monitoring and evaluation of outcomes/results 103. A monitoring system/process has been established in collaboration with IIGF to monitor and evaluate project activities and operations leading to the project objectives. The monitoring system has the following components: a) IIGF will provide data and report on: (i) number of projects receiving IIGF guarantees

using its own capital; IIGF guarantees using WB loan proceeds; MOF guarantees; and (ii) US$ value of WB loan-backed IIGF guarantees.

b) IIGF will provide records on requests from Contracting Agencies and private sector for guidance on guarantee applications for projects.

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c) IIGF will provide records on projects that are submitted by Contracting Agencies for screening to determine eligibility for projects to be appraised.

d) IIGF will provide records / Guarantee Application Package on projects that it appraised

Long-Term Vision of IIGF 104. The evolution of IIGF as an institution will dovetail Indonesia’s economic growth prospects. The first test for IIGF would be to establish credibility in the market as a reliable and effective financial institution. Success for IIGF would be realized if IIGF is able: a) To have a positive impact on the quality of the PPP transactions through its guidance

to CAs and standards of its appraisal process. b) To make well prepared PPP transactions reach financial close due to the financial and

non-financial impact of its guarantees. c) To play a key role, through active monitoring, in identifying and helping to resolve in

a timely manner any problems with projects under implementation. 105. Once the credibility of the institution is established, the IIGF would be expected over time to transition away from behavioral risks stemming from CAs’ (in)actions to focus more on the risks that are specific to projects and directly impact financial terms. The shape and direction of this transition will be determined by the speed with which the IIGF portfolio grows and the success the institution has in helping well prepared PPP projects reach financial close. 106. IIGF is being operationalized under a very conservative investment policy based on a 1:1 capital adequacy ratio for all guarantees issued. Once it has established a track record of underwriting guarantees, and importantly, its recourse mechanism has been well established and confirmed, the IIGF may start to explore underwriting models involving more leverage. 107. In the initial stage of operations the IIGF will clearly rely upon the WB technical assistance and WB-supported IIGF guarantees to expand the support for well prepared PPP projects. After a few years of operation, the open platform model for the IIGF will allow it to also partner with other institutions (bilateral and multilateral donors, as well as possibly private sector) to expand its capital base and/or expand its coverage for well prepared PPP projects. The transition to higher leverage in the underwriting policy (based on the establishment of a successful track record) may also lead to the issuance of bonds by the IIGF. It is expected that the change in the capital structure will start to put IIGF on a path towards financial independence, which will go hand in hand with the sophistication of the PPP market in Indonesia.

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Annex 4: Operational Risk Assessment Framework (ORAF)

INDONESIA INFRASTRUCTURE GUARANTEE FUND PROJECT (P118916)

Project Stakeholder Risks

Stakeholder Risk Rating Substantial

Description: Successful operation of the IIGF is crucial to demonstrate it can add value and act as a catalyst to jumpstart the PPP market in Indonesia. Despite a series of Infrastructure Summits (January 2005, November 2006) in which numerous PPP project ideas were announced by the GOI, few PPP transactions have materialized. There is a risk that public perception of unsuccessful GOI attempts to jumpstart the PPP market and lack of investor appetite might taint stakeholder reception of the IIGF.

Risk Management:

The IIGF Operations Manual (IIGF OM) provides the basis for the common agreement between the WB and GOI on how the IIGF will operate. The adoption of the IIGF OM, the quality of which is satisfactory to the WB, was a condition for Project Negotiations, and was fulfilled. IIGF’s compliance with the OM will enforced by legal agreements between WB and GOI. The IIGF OM provides detailed guidelines to deliver its operations: guidance to contracting agencies and private sector, PPP project screening, guarantee appraisal (including the necessary management of environmental and safeguard functions), development of customized guarantee packages for projects, monitoring, and claims processing and payment). It also defines the institutional functions (fund mobilization and management, internal audit, financial management). These are well-aligned with the GOI’s stated purpose of establishing the IIGF, as well as the WB’s fiduciary requirements, and are based on international best practice.

Resp: Client Stage: Preparation Due Date:

Status: Completed

Risk Management:

MOF and IIGF management have done extensive work to identify a credible list of potential projects that can reach financial close. IIGF has already processed and issued a co-guarantee with MOF for the Central Java IPP Project, which was prepared under an IFC transaction advisory mandate. GOI has also identified showcase PPP projects, assigned responsibility for their preparation to top managers in the relevant CAs (ministerial level), and allocated sufficient funds and institutional support to ensure that the projects are prepared to international standards before they are put out to bid for investor selection. MOF and IIGF efforts to identify potential projects, support project preparation, and mitigate contractual risks via guarantees is expected to establish the credibility of the IIGF and confirm GOI commitment to PPPs in Indonesia.

Resp: Bank Stage: Preparation Due Status: Completed

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Misalignment of GOI and WB interests and objectives could compromise IIGF project implementation.

Date:

Risk Management:

WB - GOI common understanding vis-à-vis IIGF is also established through the Presidential Decree and MOF Ministerial Regulation on government guarantees. The two legislations, finalized with WB technical support and guidance, and issued in 2010, clarify the basis for the establishment of the IIGF and codify the operational standards as well as the institutional positioning of the IIGF within the GOI.

Resp: Client Stage: Preparation Due Date:

Status: Completed

Implementing Agency (IA) Risks (including Fiduciary Risks)

Capacity Rating Substantial

Description: Inappropriate selection of projects benefiting from IIGF guarantees could dilute portfolio quality and increase risk exposure. The IIGF is a new entity, and its staff may not be familiar with FM procedures and requirements of the Government and the Bank. IIGF will follow the SLA mechanism. There is risk that the budgeting process under the SLA mechanism is not fully understood by the IIGF.

Risk Management:

The IIGF OM as well as the Presidential Decree and Ministerial Regulations on Government Guarantees which established the IIGF and govern its operations provide clear qualification standards for the projects which the IIGF can support. The IIGF OM provides clear qualification criteria for the selection of projects, as well as fiduciary requirements by the WB. IIGF has also signed a MOU with MIGA to get assistance on streamlining the guarantee appraisal and allocation process. IIGF has put in place a very competent, private sector oriented management team, which was selected competitively. In order to address any remaining capacity constraints, IIGF has decided to outsource its guarantee appraisal operations to a private firm under a contract which will be financed with WB loan under IGFP.

Resp: Client Stage: Implementation

Due Date:

Status: Not Yet Due

Risk Management:

IIGF has a very qualified CFO and 2 accountants with significant private sector experience. Previously, the FM function was being outsourced, however since FY 2011, is fully staff with 3 accountant and manage it s own accounting function . If in the future, IIGF would like to outsource its accounting function again, the Financial Management Specialist will review the TOR of the accounting outsourcing consultant to ensure its acceptability to WB. IIGF should coordinate and work closely with DG Treasury, MOF to ensure timely inclusion of the IIGF annual budget into the

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MOF (Directorate Investment Management System, DG Treasury) DIPA. IIGF operations will be supervised by the WB.

Resp: Both Stage: Implementation

Due Date:

Status: In Progress

Risk Management:

The WB has already provided assistance to IIGF to familiarize it with Government Regulation no. 2/ FY 2006 and Ministry of Finance regulation no. 207/FY 2008 on the SLA mechanism.

Resp: Bank Stage: Implementation

Due Date:

Status: Not Yet Due

Governance Rating Substantial

Description: Risk Management:

The IIGF is a new institution with a relatively new organization and corporate governance structure to implement its guarantee operations (including guarantee appraisal, monitoring, administration, recourse mechanism), and interface appropriately with CAs, MOF and the private sector.

An international best practice corporate governance structure has been put in place with a TA grant of S$470,000 from the GOS to ensure that the organization structure of the IIGF is well-aligned with its guarantee operations (appraisal, monitoring, claims assessment and payment) and functional roles (FM, financial controls, and fund management). Details of the IIGF corporate governance structure, as well as the interface between this structure and the processes relating to the IIGF’s guarantee operations and institutional functions are reflected in the OM. The Presidential Decree and MOF Regulations clarify the relationship between IIGF and CAs and MOF.

Resp: Client Stage: Preparation Due Date:

Status: Completed

Risk Management:

Further to Country Level systemic fraud and corruption discussed under Section II above, the MOF has issued a comprehensive civil service reform program (January 2007). However, the diffused counterpart structure and lack of broader political appetite may slow progress.

Resp: Client Stage: Implement Due Status: In Progress

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ation Date:

Project Risks

Design Rating Substantial

Description: Shortage of qualifying projects due to limited capacity in line ministries (CAs) and other institutional and sector related factors—or lack of private sector interest in IIGF product. Inadequate regulatory and legislative frameworks in place to allow IIGF to recoup its capital from GOI CAs responsible for guarantee call. IIGF might support technically complicated or controversial projects through MOF and IIGF guarantees, using MOF and IIGF’s own resources. In such cases, the IIGF may not apply the WB’s OM and ESMF with the same rigor as for subprojects potentially supported by IBRD-funded guarantees.

Risk Management:

IIGF, in consultation with MOF and BAPPENAS and other stakeholders, carefully considers on a continuing basis the PPP projects in various stages of development and preparedness in Indonesia to identify a pipeline of projects that could possibly approach the IIGF for guarantee coverage. In addition, MOF, Bappenas and BKAM have recently signed an MOU to work together to prepare PPP projects. The government is also allocating significant resources to help pay for project preparation.

Resp: Client Stage: Both Due Date:

Status: In Progress

Risk Management:

The RMU in consultation with the MOF has prepared a recourse mechanism to enable the IIGF to recover its capital from CA’s in the event of a guarantee call. This is reflected in the Presidential Decree and MOF Regulation on Guarantees issued in 2010. The MOF-supported recourse mechanism, supported by the Presidential Decree and Ministerial Regulation on Government Guarantees, has been established and already tested in the CJPP project contracts.

Resp: Client Stage: Preparation Due Date:

Status: Completed

Risk Management:

A Communication Strategy has been prepared and will be implemented after Board approval of the loan in collaboration with IIGF to clarify the responsibility of the WB with respect to the IIGF, and clearly distinguish between those IIGF’s actions that may be attributed to the WB from those that are beyond the WB’s responsibility and control.

Resp: Bank Stage: Both Due Date:

Status: In Progress

Social and Environmental Rating Moderate

Description: Risk Management:

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CAs and private investors may not have the adequate institutional capacity to meet WB standards for environmental and social safeguards risk management policies and operations, including the quality and timing for EA/ RP/EMDP preparation, disclosure, clearance in the project cycle, and monitoring.

An Environmental and Social Management Framework (ESMF) has been prepared by the IIGF with guidance from WB. The ESMF provides a set of policies and guidelines that are detailed in the OM which will assist IIGF in the screening, appraisal, and supervision of the environmental and social aspects of projects receiving IIGF guarantees. IIGF will also provide detailed guidance to the CAs and prospective private investors on how to implement the safeguards policies stipulated in the OM. Trained social and environmental safeguards specialists will be on board before IIGF starts processing any projects under the WB project. Their TORs include supervision of the work done by the appraisal consultants. The environmental safeguards specialist has already been recruited.

Resp: Client Stage: Preparation Due Date:

Status: Completed

Program and Donor Rating Low

Description: Risk Management:

Potential delays in grant approval and implementation. The TA from Singapore to assist the IIGF establish its corporate governance arrangements along international best practice has been delivered and operationalized. WB has reviewed the proposed IGFP safeguards, FM, and procurement arrangements as well as the OM. Execution of the project is expected to be timely.

Resp: Bank Stage: Preparation Due Date:

Status: Completed

Delivery Monitoring and Sustainability Rating Substantial

Description: Risk Management:

The IIGF being a new entity, existing policies, mechanisms and staffing may be inadequate and insufficient to deliver its mandate.

Senior management positions in the IIGF, including its President Director, COO and CFO, and other key staff are in place. All staff mobilized are of high quality with private sector experience, and have been competitively selected. The OM has been adopted prior to project negotiations. The IIGF will benefit from the TA component of the IGFP designed to support its institutional development.

Resp: Client Stage: Both Due Date:

Status: Completed

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Other (Optional) Rating

Description: Risk Management:

Resp: Stage: Due Date:

Status:

Other (Optional) Rating

Description: Risk Management:

Resp: Stage: Due Date:

Status:

Overall Risk

Implementation Risk Rating: Substantial

Comments:

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Annex 5: Implementation Support Plan

INDONESIA INFRASTRUCTURE GUARANTEE FUND PROJECT (P118916)

Strategy and Approach for Implementation Support 1. Risk minimization through design. The strategy for implementation support is based on the design of the project and the identified risk. The project has undergone various reviews which have helped to identify the key risks, and the project design has been adjusted during the project preparation process to mitigate the key risks, which are necessary to take in order to achieve the project objectives. The approach involved limiting the project scope to reduce complexity in technical design, and utilization of appraisal and negotiation conditions to confirm government commitment and preparedness on critical project elements to ensure that agreed risks control measures are carried out prior to implementation. 2. Risks during Implementation. Notwithstanding these risk minimization measures adopted and mitigation measures incorporated in project design, significant residual risks will remain during implementation, in particular stemming from (i) perceived association of the WB with IIGF projects which will not be appraised by the WB, and (ii) IIGF’s ability to perform safeguards due diligence and monitor private sector performance during the implementation. The Bank’s implementation oversight activities will need to meet the Bank’s own fiduciary obligations. In addition, the Bank’s implementation support approach will focus on providing technical support to IIGF to support its efforts to (i) successfully carry out the project activities, (ii) meet the fiduciary, environmental and social safeguards compliance requirements of Indonesia and the Bank, and (iii) strengthen inter-agency cooperation and coordination. 3. The implementation support approach includes the following: a) Technical guidance and supervision. This aspect of implementation will be much

aided by the limited scope of the project, and the inclusion of a technical assistance component in the project design. However, given the setting within which the project will be implemented, it is likely that IIGF in spite of the consultants financed with the WB loan, it will require some WB advice from time to time during project implementation in areas such as financial management and disbursement, safeguards, and project appraisal and guarantee structuring options. This kind of WB advice will be provided via the following approaches: (i) Standard project supervision support from the Task Team which can provide

support to IIGF on fiduciary, safeguards as well as the PPPs and guarantees related issues which may come up during project implementation.

(ii) Support provided to IIGF by the Global Infrastructure Finance Center of Excellence (GIFCOE) in Singapore as well as the PPP GET and SDN/FEU team as they work on other engagements in Indonesia and the EAP region.

(iii) In cases where IIGF will require substantial hands-on technical support in project appraisal, the provision of component 1 provides an opportunity for IIGF to invite WB team to jointly participate in project appraisal. It is anticipated that in cases where WB-supported IIGF guarantees are being considered the IIGF will do most

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of the data gathering and other preparatory work, which will reduce the burden on the WB team which will remain responsible for fully appraising the project.

b) Management of the risk of market perception that WB-Supported IIGF Guarantees

under the IGFP are instead direct WB Guarantees. Disbursement under Component 1 (WB-supported IIGF guarantees) may be: (i) through for direct payment by the Bank to the eligible guaranteed parties17 or (ii) through reimbursement to IIGF if IIGF has made the payment.18 Under the direct payment disbursement, there is a need to clearly communicate to the market that guarantees offered by IIGF are supported by WB through its loan, and are not direct WB guarantees. To this end, WB will supervise IIGF’s communications to the market about the nature of WB-Supported IIGF Guarantees, and specifically that the IIGF, and not the WB, is the guarantor and that IIGF has the corresponding guarantee obligations to pay claims under the WB-Supported IIGF Guarantee, irrespective of whether the SIL is disbursed. WB will also supervise the IIGF’s claims assessments for guarantee calls that will be the basis of any disbursement request under the SIL.

c) Management of the risk of perceived WB association with IIGF projects which will

not be appraised by the WB. WB will appraise IIGF guarantees backed by loan proceeds under Component 1, but not the guarantees backed by IIGF’s own capital. The requirement that IIGF use the OM for ALL projects will help to maintain IIGF project appraisal quality, but the risk of perception of a WB association with IIGF projects not appraised by the WB will remain. This risk will be managed during the project implementation period via the following approach: (i) A communications strategy has been prepared by WB in consultation with IIGF

which will be implemented by IIGF to publically clarify that the WB will appraise IIGF guarantees which are backed by WB loan proceeds. The WB will not appraise all other IIGF guarantees which are backed by IIGF capital and/or the MOF balance sheet. The Task Team will work with IIGF and EXT to ensure that the strategy is implemented following Board approval.

(ii) The Task Team will work with WB staff and partners involved in the PPP market in Indonesia to ensure that WB is not associated with any IIGF projects which are not being appraised by the WB and are not included under Component 1, and work with IIGF to take the necessary actions as necessary to try to correct the perceptions, for example, by the issuance of IIGF press release and or provision of updates on the IIGF and WB/Indonesia websites.

17 The eligible beneficiary of a WB-Supported IIGF Guarantee could be a lender to that project, or could be a PPP company provided that such guarantee covers only the debt service of Lender(s) to such project. 18 Under Component 1 (WB-supported IGF guarantees), IGF may submit a withdrawal request with respect to a particular WB-Supported IGF Guarantee after a guarantee is issued and after a claim has been made by the guaranteed party and IGF has properly assessed the claim as payable.

70

Implementation Support Plan 4. The Bank team. The Bank’s implementation review and support team members for the project will be primarily based in the Bank’s office in Indonesia and Singapore. This will ensure rapid and effective response to the needs of IIGF and GOI for implementation support as well as facilitate continuous monitoring and supervision of the project implementation. Formal supervisions (and field visits) are expected to be conducted semi-annually. However, given the location of all project activities as well as implementing agencies in Jakarta, continuous contacts with the implementing agencies as well as close and frequent implementation oversight activities are expected. Planned inputs from the Bank team are outline in Table 4.

Table 4: Skills Mix and Resources Required

Number of

Annual Staff Weeks (SWs)

Number of Missions

Task Team Leader, EASSH 3 SWs Annually 2 formal missions, other visits as required

Co-Task Team Leader & Infrastructure Economist, EASSH

3 SWs Annually 2 formal missions, other visits as required

PPP GET and SDN/FEU 1 SW Annually Consultations as required

Infrastructure Specialist, EASIS 3 SWs Annually 2 formal missions and consultations as required

Sr. Financial Mgmt Specialist, EAPFM 2 SW Annually 2 formal missions and consultations as required

Lead Procurement Specialist 2 SW Annually 2 formal missions and consultations as required

Environmental Safeguards Specialist, EASIS 3 SW Annually 2 formal missions and consultations as required

Social Safeguards Specialist, EASIS 3 SW Annually 2 formal missions and consultations as required

WB Communications Specialist 2 SW Annually 2 formal missions and consultations as required

Team Assistant, EACIF 1 SW Annually Consultations as required

71

Annex 6: Economic and Financial Analysis

INDONESIA INFRASTRUCTURE GUARANTEE FUND PROJECT (P118916) Economic Analysis 1. Indonesia's PPP market, linked to its large infrastructure needs, has been suppressed for a number of years due to the absence of credible mitigation against the private sector's exposure to specific risks stemming from the (in)actions of sponsoring CAs. The IIGF will fill this critical gap as the single window tasked with appraising projects for guarantee provision (as well as downstream activities such as monitoring, claims assessment, payment and recourse), i.e., the only institution authorized to directly provide guarantees (or facilitate channeling WB and GOI capital to support guarantees) to mitigate the private sector’s exposure to specific risks associated with infrastructure PPPs. Indeed, a strong message confirming the demand for guarantees has repeatedly emerged from the 4 group consultation sessions organized over the last 6 months with major private sector players (investors, lenders, advisors, operators), and CAs. At the same time, investors have also voiced their concerns of the IIGF being a new entity with limited capital, and have welcomed the provision of WB direct credit support alongside IIGF guarantees. In this key role, IIGF operations are expected to unlock private financing of infrastructure, with WB support playing a central part in leveraging private capital into public infrastructure projects which will in turn contribute to economic growth in Indonesia, increase access to public infrastructure, and improve the lives of citizens. 2. Importantly, the establishment and institutional development of the IIGF is well-grounded in the broader set of infrastructure policy reforms being undertaken by the GOI through the issuance of two infrastructure policy packages (Inpres 6/2007 and Inpres 5/2008) setting out numerous policy reforms between 2005-2009, and more than doubling budget allocations for infrastructure (in nominal terms) since 2005. Launched from a baseline of 2006, the IDPL program recognizes the GOI’s reform progress, and is built around four areas of engagement: national infrastructure (e.g., electricity and roads); sub-national infrastructure (e.g., water); public-private partnerships; and cross-cutting governance issues including land acquisition, environment, and procurement. The common theme in each of these areas is increasing the amount and effectiveness of infrastructure spending, in order to contribute to economic growth and poverty reduction. 3. The economic benefits resulting from the IGFP are at least equal to the sum of the economic benefits resulting from each project that will receive a guarantee supported by the WB loan. In addition, as a result of investors seeing the implementation of the IGFP as a government strong commitment to the PPP program, there are the benefits from increased investor participation in the PPP program, and from reduced investor perception the usual political/regulatory risks even on projects not supported by the WB loan. 4. The first sets of benefits will be evaluated for each project separately at the time they are presented to the IIGF for guarantee coverage. Numerous economic benefits are indeed expected from each project supported by IIGF guarantees, as is usually expected from much needed infrastructure development projects. However, it is not possible to quantify these benefits ex

72

ante for not knowing the exact projects that will participate in the project nor their exact design. Thus, the Operational Manual includes methodological guidelines regarding the type of economic cost benefit analysis needed to process projects, and criteria to ensure that the projects benefiting from a guarantee are economically desirable. 5. The second sets of benefits, resulting from the project itself are linked to the impact on the cost of capital. The decreases in the cost of capital induced by the guarantees translates into (i) lower tariffs and government financial contribution to projects as a result of improved terms of infrastructure project debt, and (ii) development of a market for long term lending in Indonesia. Again, these benefits cannot be quantified ex ante as they require knowing how much debt and at which financial conditions will be levied by projects participating in the WB project. It would also require modeling a counterfactual scenario of bids, tariffs, project financing, and of the domestic infrastructure lending market, without guarantees, to establish the net benefit resulting from the guarantees. While this cannot be easily done, WB experience indicates that they lead to significantly improved project financing terms, including extension of loan maturities and reduced interest rate spread reflecting a lower risk perception of the project (see charts below on the impact of WB guarantees). These have in turn translated into financial benefits for the Government and the users of the services, as well as for the domestic infrastructure financing market.

Figure 5. WB guarantees extend debt maturities

73

Figure 6. WB Guarantees reduce interest rate spreads

Financial Analysis 6. The IIGF has established a core financial, accounting, and risk analysis team led by a Chief Financial Officer and supported by a full-time Accounting and Financial Reporting Officer. Both staff members have extensive finance and accounting backgrounds from major corporations in Indonesia. In addition, IIGF has hired Risk Officer with highly specialized training in guarantee-specific risk analysis. The Risk Officer will be a member of the Underwriting Committee and provide his analysis and input to support the decision-making of the Board of Directors in the guarantee appraisal process. 7. The finance and accounting team of the IIGF has developed an overall financial model for IIGF operations, including the projected financial statements, details on projected operating costs, contingent liabilities vis-à-vis guarantees, and guarantee pricing. A key component of the financial model is the guarantee/risk analysis model, which has been developed with the support of the WB team as well as a consulting firm specializing in infrastructure finance. The Risk Officer will be responsible for the implementation of the model and for its integrated use with the overall IIGF financial model. 8. A guiding principle in the initial phases of IIGF operations will be to have a conservative capital adequacy ratio, so that the IIGF has enough capital to cover its potential liabilities from its guarantee provisions. 9. The guarantee/risk analysis and overall financial models include the following features: a) The risk model incorporates elements of simulation as well as pre-set ranges of

probability assumptions, based on assigned levels of risks by project sector and risk category discussed in the Operations Manual.

74

b) The overall financial model of IIGF will take into account cash/liquidity management considerations in order to ensure that operational costs are covered in the event that capital must be drawn down to pay guarantee claims. This consideration will be especially important in the early stages of IIGF operations, when a steady-state level of income from fee payments will not yet be available. In addition, implications on interest due through the recourse agreement will also be considered.

c) The IIGF risk and finance officers will include a simple dashboard alongside the models, to facilitate a fast understanding/overview of the models’ outputs.

d) An instructional note on usage of the model will accompany the model.

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Annex 7: Governance Action Plan

INDONESIA INFRASTRUCTURE GUARANTEE FUND PROJECT (P118916) 1. IIGF operates under a governance structure similar in culture to a public company, which involves a Board of Commissioners (BOC), a Board of Directors (BOD) and selected board sub committees. The BOC reviews company risks, developing recommendations for risk mitigation and overseeing their implementation on a regular basis. To execute the task, the BOC authorized to establish committees under its control comprising people with relevant expertise. The BOC has established an Audit & Risk Committee, a Remuneration Committee and a Nomination Committee. To provide full transparency, a Code of Conduct and Whistle Blowing process will be adopted and implemented. IIGF has developed an Anti-Fraud policy, which is detailed in the OM. IIGF management will prepare governance summaries annually to highlight the status of processes, risks etc., and present to the BOD. 2. The Board and Management charters will clearly show the processes of disclosure by any Director/employee should they become conflicted by any transactions. Management’s reporting to the Board will be segregated to ensure different functions deal with front end enquiry, opportunity analysis and monitoring (reporting to COO) from back end recording, funding and reporting (reporting to CFO). The BOD will need to be satisfied that for the major outsourcing of key functions (appraisal and monitoring, claims assessment, and fund management) a member of the BOD is specifically charged with ensuring that the IIGF obtain value for money. For other outsourcing activities (e.g. HMR, INA, and the appointment of ad-hoc advisors) the BOD will ensure they have in their permanent staffing someone accountable for the process of outsourcing who is experienced in the mechanisms of identifying the right contractor, specifying clear terms of conditions and also can ensure a robust transparent process of selection, appointment and monitoring of all such contractors. 3. The IIGF will summarize such good practices in a governance policy document that would reinforce to external parties, especially local and foreign investors, that IIGF will be managed with the highest possible level of corporate governance. At a Board level it would aim to show how there should be clear and effective working relationships between Board of Commissioners and Board of Directors supported by several special committees such as the ARC. It would also explain IIGF’s philosophy of using outsourcing as a means of obtaining the level of expertise that it needs both to undertake its role as guarantor, and also give markets confidence that it has the quality of Management needed. 4. The capital of IIGF will be managed by a third party financial institution under an asset management contract, with clear instructions identifying how the funds should be invested. It is understood that IIGF capital will not be invested in risky securities, e.g., financial derivatives. The contract instructions will also clarify the appropriate focus on investments in fixed income instruments such as GOI bonds. The asset management company will be selected via a competitive selection process. The asset manager will provide a monthly report to IIGF which will describe the detailed account status. 5. The Project will provide US$25 million to support IIGF in issuing its own IIGF guarantees for qualifying projects. Qualifying projects will be those which are appraised by the

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WB and meet WB policies as well as other reputational risk considerations (“WB-Supported IIGF-projects”). In order to prevent the mingling of the WB loan proceeds with IIGF capital, the WB loan proceeds under Component 1 will be disbursed at the time a claim is properly made and assessed as payable by IIGF with respect to an IIGF guarantee for a WB-Supported IIGF-project. WB funds used for Technical Assistance (TA) will be procured using TORs which will be approved by the WB under WB procurement guidelines. 6. IIGF has established 2 key management committees to reinforce IIGF’s governance practices: (i) Underwriting Committee: with the aim of verifying and recommending projects to be guaranteed to the BOD; and (ii) Fund Management Committee: with the aim of supporting the BOD establish cash funding criteria, and be responsible for monitoring and ensuring that short and long term funding is available as needed. The committees will have subject matter experts (SMEs) contracted in to advise the committees on areas of expertise not held within the permanent management of IIGF. 7. IIGF has committed to make its financial accounts public in the form of an Annual Report. IIGF has already established a website and put its products and services on line. A dedicated feedback email address is also being created to receive comments and suggestions from the private sector and civil society. All projects receiving IIGF guarantees will be listed on the IIGF website, including details on the type of risks which have been guaranteed.

Puncak JayaPuncak Jaya(5030 m)(5030 m)

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JAWA BARATJAWA TENGAHD.I. YOGYAKARTAJAWA TIMURBALINUSA TENGGARA BARATNUSA TENGGARA TIMURRIAU KEPULAUANKALIMANTAN BARATKALIMANTAN TENGAHKALIMANTAN SELATAN

KALIMANTAN TIMURSULAWESI UTARAGORONTALOSULAWESI TENGAHSULAWESI BARATSULAWESI SELATANSULAWESI TENGGARAMALUKU UTARAMALUKUPAPUA BARATPAPUA

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This map was produced by the Map Design Unit of The World Bank. The boundaries, colors, denominations and any other information shown on this map do not imply, on the part of The World Bank Group, any judgment on the legal status of any territory, o r any endo r s emen t o r a c c e p t a n c e o f s u c h boundaries.