DATA SHEET TEMPLATE FOR

Does the restructured project require any exceptions to Bank policies? Have these been approved by Bank management? I s approval for any policy exception sought from the Board?

PROJECT PAPER

- Yes X N o - Yes -No - Yes &No

Environmental category: B

Borrower: Republic o f Indonesia Responsible agency: Ministry o f Public Works Revised estimated disbursements (Bank FY/US$m)

NIA

Does the restructured project trigger any new safeguard policies? If so, click here to indicate which one(s) [selection box like the one in the new ISR] No

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Republic of Indonesia Second Eastern Indonesia Region Transport Project (EIRTP-2)

Project Paper for Second Order Restructuring

1. Introductory Statement This project paper seeks the approval o f the Regional Vice President to introduce the following changes in the Republic o f Indonesia, Second Eastern Indonesia Region Transport Project (EIRTP-2), Loan No. 4744-IND, P074290, and accompanying amendments to the Project’s legal documents. The proposed changes are (i) cancellation o f several technical assistance (TA) components, (ii) Revision o f the measurement methods o f a few performance indicators (PI), (iii) reallocation o f savings and unallocated funds, and (iv) the extension o f the closing date by 21 additional months. The proposed changes are in line with and w i l l contribute toward meeting the original project development objectives o f the Project.

2. Background and Reasons for Restructuring The project was approved on June 22, 2004, and became effective on October 21, 2004. The project development objectives (PDOs) are to (i) improve condition o f the strategic road network in order to reduce transport costs and enhance regional accessibility, (ii) support decentralization o f planning and management responsibilities for works on Provincial and Kabupaten roads to the respective provincial and Kabupaten governments, and (iii) increase the efficiency, quality and transparency o f works procurement and implementation.

The project has been performing moderately satisfactory (MS) to date wi th regard to the PDOs and implementation progress (IP). A summary o f past ISR ratings i s shown in Annex 1. The MS rating for PDOs and IP are mainly due to the slow progress o f the implementation o f the c iv i l works components. As o f March 2009, 92 contracts representing nearly 1,600 km o f road valued at IDR 1.839 bi l l ion (US$172 mi l l ion equivalent) have been contracted, o f which 45 contracts, representing about 590 km o f roads, valued at about IDR 513 bil l ion (US$35 mill ion equivalent) are complete. This means the overall physical progress i s about 37 % in projected road length, and 20 9% in monetary value. The disbursements are about US$105 million, which i s about 53 9% o f the Loan amount (US$199 million).

Given delays in implementation o f both national and sub-national roads, the Project w i l l require an extension o f the Loan closing date. Although the Project has significant delays in implementation, the bulk o f the design and preparation o f the bidding documents are now complete, and the Project i s performing moderately satisfactory. The outcomes would be enhanced through the proposed restructuring associated with the extension o f the closing date and the proposed changes.

3. Proposed Changes The proposed changes are as follows:

(i) Cancellation o f three TA components. Due to the changes in the technical environment and policies during the last five years the following TA components are proposed to be cancelled. (a) TA for training support, due to

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the difficulties in the selection process and GOI’s new policy to use i t s own funds, not foreign loan, for internal training, (b) TA for establishment o f Road Board and Road Fund, as the Government has put a proposal to the parliament to revise the current legislation (Traffic and Road Transport Law) to allow for the establishment o f a Road Fund and i s waiting for the outcome before committing to this component, (c) TA for Traffic and Road Asset Monitoring System, as the MPW decided that the proposed system i s premature in the current technical environment o f Provincial and Kabupaten roads.

Revision o f the measurement methods o f two performance indicators. The following two revisions are proposed for refinement o f the P I measurement. (a) 2c: “percentage o f works packages reported by the RDSCs in environmental monitoring reports to Bapedalda” - the words “to Baledalda” w i l l be deleted. This i s because the Regional Design and Supervision Consultants (RDSC) does not report to Bapedalda (Environmental Agency in each sub-national government), and report to DGH on all contracts. (b) 3c: “Number o f technical audits carried out b y Inspectorate General” - the word “number” i s to be replaced with the word “ratio”, as the number o f original contracts has fallen substantially, so the target i s proposed to be set at the same ratio (52 %) as the original target.

(iii) Reallocation o f savings and unallocated funds related to the modification o f the project structure. This i s due to the facts that (a) The Government has updated strategic plan for maintenance o f National roads, which necessitates increased allocation for National roads, and also the MPW needs to provide special support to infrastructure development for the new province o f Sulawesi Barat which was established in October 2004, (b) the project w i l l have some savings by the design adjustments and low tender prices o f Goods category, and (c) several TA components need to be cancelled, and (d) reallocation of Unallocated component i s intended to complete the National roads component. The proposed reallocation of funds i s shown in Annex 2.

(iv) The extension o f the closing date bv 21 additional months to March 31, 201 1. The Ministry o f Public Works (MPW) has examined the status o f all the works packages and analyzed the factors to influence the further implementation, including the grant mechanism for ongoing sub-national works. I t i s expected that 15 National road contract packages (9 ongoing, 5 rebid and 1 not yet tendered) and 49 Provincial and Kabupaten road contract packages (27 ongoing, 16 in tender process or to be rebid, and 6 not yet tendered) w i l l not be completed b y the original closing date (June 30, 2009). The estimated works completion i s expected in December 201 0 *(the revised implementation schedule i s shown in Annex 3). This i s considered as the optimal time for completion o f all the packages o f Notional, Provincial and Kabupaten road works, and optimal use o f Loan funds without exceeding the total Loan amount. The proposed extension o f the closing date i s based on this estimate and the proposed action plan (shown in Annex 4) to complete the project by the revised closing date.

(ii)

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4. Analysis The proposed changes are not expected to have any major effect on the original economic, financial, technical, institutional or social aspects o f the project as appraised. The proposed changes do not raise environmental category o f the project nor trigger new safeguard policies. The proposed changes do not involve any exceptions to Bank policies.

5. Expected Outcomes The proposed changes w i l l not affect the achievement o f the intended PDOs, outcome targets, or outcome indicators.

6. Benefits and Risks With the proposed restructuring o f the Project, there i s no major r isks that could jeopardize the achievement o f the original PDOs and outcome targets including political, policy-related, social/stakeholder related, macro-economic, financial, institutional or capacity related risks.

Fraud and corruption are serious risks in the context o f infrastructure development in Indonesia. Both EJRTP 1 and EIRTP 2 have been subject to investigations by the Bank's Integrity Vice Presidency (INT). INT has ,substantiated a number o f allegations which have resulted in the application o f appropriate remedies, and some entities may be subject to Bank sanctions for engaging in collusive and corrupt practices. EJRTP 2 includes a substantial anticorruption plan, the elements o f which aim to detect and mitigate such risks.

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I tem

Project Development Objectives

Implementation Progress

Financial Management

Project Management

Counterpart Funding

Procurement

Monitoring & Evaluation

1 Overall Safeguard Compliance

Annex 1: Summary of ISR Ratings

Note: S=Satisfactory; MS=Moderately Satisfactory; MU=Moderately Unsatisfactory; U=Unsatisfactory

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Annex 2: Proposed Reallocation of Funds

Allocation (US$) Aide-memoire Proposed

No Category Original November 2006 reallocation * 1 Civil Works

(a) National Road (b) Provincial Road (c) Kabupaten Roads

2 Goods 3 Incremental Operating Cost 4 Consultant Services & Training

5 Front End Fee 6 Unallocated

TOTAL

23,260,000 53,470,000 52,440,000 6,000,000 1,600,000

34,470,000 2,000,000

26,760,000 200,000,000

43,653,832 53,203,506 54,072,662 6,000,000 1,600,000

34,470,000 1,000,000" 5,000,000

199,000,000

77,3 34,000 40,000,000 4 1,000,000 4,446,000

750,000 34,470,000

1,000,000

199,000,000

* The Loan amount has become US$199,000,000 after the Bank cancelled US$l,OOO,OOO o f the Front-end Fee.

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Annex 3: Revised Implementation Schedule

(please see the attached bar-chart)

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Annex 4: Action Plans to Complete the Project by the Revised Closing Date

Actions for Continuous Financing for Sub-national Roads Component 1. a.

b.

C.

d.

The critical issue for continuing the implementation o f Provincial and Kabupaten roads i s the difficulty to extend the Sub-national Grant Agreement to maintain financing o f Provincial and Kabupaten road packages. The original Grant mechanism was based on the MOF decree No. 35/KMK.07/2003 on Loans to Regions, and has continued under transition arrangements contained in the revised decree No. 52/PMK.010/2006. However, these arrangements are no longer valid under the new decrees No. 168 and 169 o f 2008. A new Grant mechanism would need to be developed under decrees No. 168 and 169 o f 2008, however, this process i s l ikely to take considerable time, and potentially runs beyond the current Loan Closing Date.

In order to speed up the process, i t i s proposed to continue to use a mechanism based on transfers from the Central Government, since the Road Law no. 38/2004, Article 30. I d allows the Central Government to assist sub-national governments. The MPW has already set aside a budget o f Rp.251.84 bi l l ion in 2009 for the purpose o f financing the Loan share o f sub-national road works under EIRTP-2.

The above action plan needs a mechanism to involve transfer of rights to work on certain sections o f sub-national road components to the Central Government in line with the Loan portion, which w i l l be returned to the sub-national governments at the completion o f the works. The sub-national governments wi l l continue to contribute their own share in l ine with the original Grant Agreements. The DGH wi l l be responsible for the usage of the Loan share funds.

A statement o f obligations including allocation o f funds, accepting the Loan Agreement covenants including the Project Management Manual and maintaining the works on the targeted roads w i l l be contained in a Declaration by each sub- national government.

2. Actions for Managing Implementation of the Remaining Works To ensure good control o f the remaining works implementation including both ongoing and new contracts, the following actions w i l l be taken: - Ongoing contracts w i l l maintain their validity, and w i l l not be split. However,

they w i l l have two sources o f funds, namely the national portion (Loan share) and the Region’s contribution (equivalent to the counterpart funds),

- The contracts w i l l be managed by a single unit, the “Work Unit” (Satker Daerah) who w i l l be authorized by a decree from the Central Government for the Loan share, and from the sub-national governments for their contribution.

- Supervision o f the whole works w i l l continue to be carried out by the Regional Design and Supervision consultant (RDSC) engaged by the Central Government.

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