1. INDONESIA Peter D. Ellis Senior Urban Economist EASIS

2. Local Government (LG) Engagement Approach Lack of transparency and accountability Inadequate and cumbersome reporting Weak monitoring and evaluation Very little verification BANK DUNIA │ THE WORLD BANK Strengthen Country Institutions Target large set of LGs Improve LG internal controls Work through existing transfer system

3. Dana Alokasi Khusus (Specific Purpose Grants) allocated from national budget to local governments (LGs) to finance specific activities which are determined by the central government but under the jurisdiction of LG. DAK allocation amount is determined on annual basis within the national budget, with LGs satisfying specific criteria to qualify Total DAK allocation for 2010 is about US$2.32 billion. BANK DUNIA │ THE WORLD BANK

4.  The Project will be a pilot with a proposed size of US$ 220 million over four years.  Focused in five provinces: Jambi, East Java, Central Kalimantan, West Sulawesi, and North Maluku.  Will be designed as Specific Investment Lending and the mechanism will be Output-Based Disbursement (OBD) triggered by achievement of results.  The project will focus on the infrastructure sector (road, irrigation, water and sanitation), which makes up about 21% of DAK allocations Overview of DAK Reimbursement Program BANK DUNIA │ THE WORLD BANK

5. Five Pilot Provinces

6. Institutional Arrangements

7. Project Development Objectives (DO) and Results Framework (RF) PDO: Improve the accountability and reporting of the central government’s Specific Purpose Grants (DAK) for the infrastructure sectors. RF: Improve financial and technical reporting RF: Conduct output verification of projects financed by DAK funds BANK DUNIA │ THE WORLD BANK

8. Results focused Reward Performance with grants Reimburse eligible outputs Strengthen Government Systems Central government ownership and control Strengthen LG Internal Controls Web-based Monitoring and Reporting Systems Independent Verification of Outputs and Compliance Government internal auditor, BPKP Key Features of DAK Program BANK DUNIA │ THE WORLD BANK

9. Physical Realization of Outputs Construction Completion Certificates. Compliance with Technical Specifications BANK DUNIA │ THE WORLD BANK Compliance with National Procurement National Procurement Law and Regulations through competitive procedures in hiring of contractors. Compliance with Environmental & Social Safeguards: Compliance with Indicators listed in the Project Operations Manual. MPW Minister Issue Supplement to Technical Guidelines.

10. Follow national procurement procedures Procurement BPK as auditor of program Financial Management Comply with Bank policies on social and environment Environmental AMDAL acceptable Social Addendum to Technical Guidelines for compliance with Involuntary Resettlement and Indigenous People Safeguards BANK DUNIA │ THE WORLD BANK

11. The State Finance and Development Supervisory Board (BPKP) will carry out the output verification process on a representative sample basis for projects in LGs. Verification of Outputs (VO) BPKP will finance the VO function. BPKP will report its finding and recommendations in an Output Verification Report (OVR). OVR will be the only basis to request Bank disbursements. BANK DUNIA │ THE WORLD BANK

12. Delivering Institutional Strengthening (TA) to LGs. Delays in the delivery of TA due to restructuring in MoF. Compliance with Technical Guidelines. LGs lack capacity to deliver DAK outputs and to submit reports. Coordination within Central Government. Multiple GoI stakeholders have overlapping roles. Monitoring & Evaluation Unclear on who should conduct M&E.

13. Advance Payment. Made on July 5, 2011 and covers 64 percent of eligible districts. Verification Arrangement. BPKP has finalized verification guidelines and started verification test-run with LGs. Development of WBRS. Developing a new web-based system for financial and technical reporting. Improved Coordination. GoI has held several coordination meetings to define the role of each stakeholder in the project implementation.

14. Scale up existing project to more Provinces or sectors Deepen reforms within LGs  Promote improved accountability downwards  Greater transparency in budgeting  Strengthen LG annual planning and execution  Improve efficiency and effectiveness of expenditures