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Countries and Regions Country Partnership Strategies Document
II. Implementation of the Country Strategy and ProgramA. Poverty Reduction5. Poverty incidence was last estimated in August 1999 at 18.2 percent. Since then, the impact of recovery on poverty was affected by various influences such as rising inflation and its impact on real wages; aggregate employment growth, encouraged by modest GDP growth; and availability and disposition of public resources. Decentralization could also greatly reduce poverty by bringing governance nearer to the people; participatory methods would allow the people to make their needs known and help the Government address them. 6. The Government entered into the Poverty Partnership Agreement (PPA) with ADB on 4 April 2001. An important action mentioned in the PPA that has been fulfilled is the formal establishment of the Poverty Reduction Coordination Agency, which intends to involve the poor and local governments in developing a new strategy. The PPA provides for a review of the medium-term targets and long-term objectives of the agency’s poverty reduction strategy. 7. The program emphasizes poverty reduction. Projects categorized as either core poverty interventions or poverty interventions constitute 50 percent by number and 54 percent by amount in the 2002-2004 program. The program’s strategy for poverty reduction is to (i) help the Government accelerate a pro-jobs pro-poor economic recovery, (ii) provide basic services in the decentralized environment, and (iii) aid the process of decentralization. ADB is also developing a geographical focus in country operations to increase the impact of ADB’s operations in Indonesia. Sharper targeting of poor areas and better synergies arising from complementary project investments will allow the Government to reduce poverty and attain other strategic development goals more efficiently. The geographical focus is being prepared and will be implemented gradually beginning in 2002. B. Thematic Priorities in Country Strategy1. Good Governance8. Reforms, particularly in the judiciary, civil service, and corporate governance will prove the seriousness of the Government’s intent. However, while progress in improving governance and combating corruption continues at the policy level, implementation is slow, and political uncertainty is likely to exacerbate delays. 9. A governance study for Indonesia is scheduled for 2001. The study is expected to take stock of ADB efforts and develop new initiatives. ADB is striving to raise its profile within the Governance Partnership, of which it is a founding member, and actively support activities in line with the Country Operational Strategy (COS). The partnership is a good conduit for ADB involvement in projects that are too large, diverse, or contentious for a single funder to undertake. For example, the partnership is launching several new initiatives, including extension of activities to the regional level, which will include support for regional offices of the Ombudsman and Human Rights Commission, and work on police reform. 10. The forward program will support governance reform, with interventions mainstreamed into all areas of COS focus. The program stresses decentralization and treats it separately (para. 20). Integral to ADB’s support for the corporate and financial sectors is promoting good governance in them (para. 11). The ADB program also supports anticorruption activities, legal and judicial reforms, and civil society. Anticorruption initiatives include (i) support for audit reform, particularly in the context of decentralization; (ii) continued support for improving procurement; (iii) support for the attorney-general’s office; and (iv) effective anticorruption efforts in ADB’s own projects. ADB will also support the World Bank/ADB Country Financial Accountability Assessment. In legal and judicial reform, apart from legislation in critical sectors, an important need is access of the poor to legal services and right to fair treatment under the judicial system. To strengthen ADB’s constructive relationship with the Non-Government Organization (NGO) community and to develop more participatory processes in ADB’s operations, ADB’s Indonesia Resident Mission is strengthening its linkages with civil society by establishing a consultative group of NGOs. An important area of partnership with NGOs is the oversight of ADB projects. 2. Economic Growth - Encouraging Sustainable Recovery11. Economic structural weaknesses slow down recovery and threaten long-term growth, and program loan support depends upon the success of much-delayed reforms. A program loan cluster to develop the nonbank financial sector and capital markets and to improve their governance practices has thus been scheduled for 2001 and 2002. Technical Assistance (TA) to increase competition in the financial and industrial sectors has also been programmed. A project is planned to give SMEs financial, nonfinancial, and infrastructure support. Economic and Sector Work (ESW) to develop strategies for corporate governance and SME development, and pension and insurance reform is also planned. 12. Delays in infrastructure reforms seriously affect private investment, particularly in energy. ADB urged the Government to pass the Electricity Bill within 2001 as it is important to the ADB-supported reform program. Should progress in reforms be made, ADB will help consolidate the restructuring process through program and project lending and address the transmission needs of the geographically focused area. Better energy use for rural development will be explored through ESW. Two projects are programmed to rehabilitate national and local roads and build new local roads. Local road development and more effective interisland transport links are major challenges in the decentralized context. Strategies to handle these challenges will be explored through ESW. To encourage private sector participation in infrastructure, the Government is employing TA in three priority areas: (i) establishing a water supply regulatory authority; (ii) developing a law for private sector participation in infrastructure; and (iii) establishing a national infrastructure information center. ESW to explore private sector participation in transport is also planned, and a TA loan for Local Government Infrastructure Development Facility is programmed for 2003 to enable local governments to prepare feasibility studies for Build-Operate-Transfer type projects. 13. Project preparatory TA support to develop technical and vocational skills for globalization and advisory TA support for an information technology development strategy, are planned. 3. Human and Social Developmenta. Health, Education and Social Protection14. Emergency social protection programs implemented during the crisis period have protected the most vulnerable (children under five, pregnant and lactating women, and junior-secondary students). The 2000 National Socioeconomic Survey (SUSENAS) shows that more children are in junior secondary school than in 1999, more mothers and children are using integrated health posts, and more women use trained midwives and doctors to give birth. Thus, focused safety-net programs appear to be doing well. 15. Budgetary difficulties, however, impact on social service delivery, and nutrition levels are particularly low. Basic service provision must be monitored for signs of disruption caused by decentralization. The 2000 SUSENAS also indicates a decline in the net enrollment in elementary education and a significant decrease in the use of public health centers, perhaps due to poor quality, in favor of doctors and hospitals. 16. The regional dimensions of these changes need to be explored and weak local governments supported. Capacity of health and education personnel needs upgrading. The merging of central and local government offices requires comprehensive organizational restructuring. Continued ethnic strife has displaced over a million people, putting pressure on the receiving communities. The 2000 national census shows that population growth rate declined to 1.35 percent for 1990–2000 compared to 1.97 percent in the previous decade. Better reproductive health services are needed if this trend is to continue and allow the country to meet its population targets. Despite increased interisland migration, 59.2 percent of the population still resides in Java. 17. In response to these concerns, ADB has just begun implementing a decentralized health project and two more have been programmed. A decentralized basic education project is currently under processing and support for two more have been indicated in the program. These loans and TA interventions will help build up capacity of education and health services at the local level. Decentralization will be monitored through advisory TA. Improved nutrition is a priority and will be supported through advisory TA. Provision of basic services for vulnerable groups, including internal refugees, will be addressed through ESW to develop a social protection strategy followed by a project that will build on the earlier crisis response safety net programs and develop a comprehensive and sustainable social protection system. b. Gender and Development18. The Government increasingly emphasizes its support for gender equality and equity through measures such as the restructuring of the State Ministry for Women’s Empowerment to promote gender mainstreaming, and introduction of gender equality as a development goal in the 1999 Broad Guidelines for State Policies. The 2000 Presidential Decree on Gender Mainstreaming requires all government agencies to mainstream gender into government policies, legislation, and programs. This initiative is supported by the National Development Program (PROPENAS), which especially addresses gender equity and equality. The Government has introduced a zero-tolerance policy and adopted the National Plan of Action for the Elimination of Violence against Women, which recognizes state and military violence in conflict areas. 19. To strengthen ADB’s Gender and Development policy, a gender study was completed last year resulting in the Gender Briefing Paper. To further gender mainstreaming, the State Ministry for Women’s Empowerment, the National Planning Agency (BAPPENAS), and ADB are collaborating to develop a mechanism, supported by advisory TA, to better monitor gender mainstreaming in ADB projects. Crucial changes in public policy and administration to achieve gender equality and equity will be assisted. ESW has been programmed in 2002 to help develop an advisory TA, which is in the forward program, and to indicate other possible areas of support. 4. Regional Development and Regional Equitya. Decentralization20. Decentralization, formally initiated on 1 January 2001, is well underway. Of 1.9 million Government staff transfers to local governments, 1.6 million had been achieved by end-April 2001. The main laws and regulations governing the administrative and financial aspects of decentralization have been issued, but revisions are expected. The ADB program supports the massive national effort by aiding policy formulation and capacity building. Advisory TA is planned to support the Regional Advisory Council, bring changes in public financial arrangements, and improve center-local financial relations. Assistance is programmed to encourage private sector participation in infrastructure development in local areas, and amend the policy and regulatory environment. Support for capacity building will be sectoral and cross-sectoral. For sectoral support, loans exceeding a total of $100 million have been provided to projects in education, health, environment, road transport, agriculture, etc. More assistance is planned in the forward program. Project assistance is planned for 2002 to draw up institutional arrangements to address cross-sectoral needs such as planning and financial management capacities, public procurement, project implementation, general administration, etc. in a sustainable manner. As the program period covers the difficult initial post decentralization years, almost all projects in the program will address issues in areas of policy, capacity building, or implementation related to decentralization. b. Rural Development21. With continuing high poverty incidence in rural areas, where around two thirds of the poor live, support for agriculture and rural development is a key instrument of poverty reduction. The need to increase farm incomes is critical, but policy deficiencies pose an important bottleneck. The sector also needs to gear itself up for foreign competition resulting from Indonesia’s compliance with World Trade Organization agreements. Accordingly, an agriculture sector strategy study will review the necessary policy and institutional changes. The study could be the basis for an investment loan later, if necessary. ADB will continue support for community empowerment, focusing especially on the needs of the rural poor, irrigation, and provision of microfinance through four separate projects. Project preparatory TA to tackle deficiencies in the tree crops sector; and advisory TA to support research and extension in the decentralized context have also been programmed. c. Urban Development22. Major issues in urban development and provision of urban services for the poor are (i) increased urbanization, (ii) weakness of local utilities and local governments in general, and (iii) lack of adequate private sector investments. ADB’s program addresses these problems squarely. ADB will provide TA in 2001 to deal with problems of water utilities. Continuing dialogue with the Government includes (i) water tariff policy to reflect cost recovery for services, (ii) private sector participation, and (iii) financial and corporate autonomy. Providing basic urban services for the poor is a priority, with loans programmed for each forward program year from 2002 to 2004. These projects will focus on urban poverty reduction; urban services delivery and management issues for secondary cities; and slum upgrading and shelter for the urban poor. The program also encourages private sector participation in urban infrastructure development (paras. 12 and 26). 5. Environmental Protection and Natural Resources Management23. Major concerns regarding natural resources and environmental management have arisen due to lack of enforcement and regulation after decentralization. While decentralization brings citizens closer to vital decision making, unless local capacity and willingness to address policy and governance issues are adequate, resources might be used only for short-term gain, with serious implications for long-term viability. Although legislation is adequate, enforcement is not. The multiplicity of agencies and confusion over jurisdiction have contributed to severe environmental problems such as forest fires, which have affected Southeast Asia, and measures to prevent them are weak. These problems are compounded by decentralization. Emerging global cooperation in environmental management could lead to countries institutionalizing the Clean Development Mechanism (CDM) by adopting cleaner production approaches to meet international environmental standards. 24. All ADB loans will pay heed to potential environmental impacts. An advisory TA will help improve decentralized management of natural resources. The forestry sector faces major problems relating to governance, forest fires, and haze. ADB has extended considerable TA to address policy issues, and focus will be on monitoring progress and rehabilitation of degraded areas. ADB will help improve management of natural resources and rehabilitation through a project to be posed for financing by the Global Environment Facility, and through projects for coral reef rehabilitation, coastal resources management and fisheries. Government efforts to improve air quality will be supported through a project for cleaner energy use as part of the “Blue Skies” program, while efforts to reduce pollution will be supported through TA for adoption of cleaner production approaches. TA for urban waste management, institutionalizing the CDM, and generating gas from waste will help clean up the environment and improve management of depleting natural resources. The program will be supported by ESW to prevent land degradation and implement ADB’s water policy. C. Private Sector Development25. Private investors remain cautious in the face of political uncertainty, irregularities in trading of shares, slow resolution and disposal of distressed debt, and ineffective courts. Some improvements in the business environment have been made under ADB’s Industrial Competitiveness and Small and Medium Enterprise Program Loan approved in 2000, although the introduction of an investment policy and other key measures are delayed. The public is increasingly aware that unethical business practices and lack of transparency in governance contributed to the crisis and is affecting recovery. Among the efforts to rectify the situation is the establishment of the National Committee for Corporate Governance, with members drawn from the private and public sectors. The committee issued the Code of Good Corporate Governance in March 2001, drawing on best international practices. 26. Private sector development continues to be a key goal of the forward program and is pursued through (i) financial and capital market reforms, (ii) support for private sector participation in infrastructure in local government areas, and (iii) institutional and regulatory reform. As many as 30 percent of loans by number and as much as 33 percent by amount of the total 2002-2004 program have private sector development as a cross-cutting operational priority. Lack of a conducive environment has hindered development of a pipeline of prospective projects of the Private Sector Group (PSG). However, the risk-mitigating role of ADB under the political risk guarantee is a potentially valuable tool for privatizing infrastructure facilities and services. The deal to privatize the Kota Depok solid waste management is complete and discussions are ongoing on the Pekanbaru municipal water supply project for possible ADB assistance. Similar projects will be pursued. Support to establish a private hospital in Kalimantan is under evaluation. Consideration has also been given to support the establishment of an equity investment fund to target SMEs, drawing on PSG’s Thailand experience. D. Subregional Cooperation27. The prospects for regional cooperation in the Brunei-Indonesia-Malaysia-Philippines East Asian Growth Area (BIMP-EAGA) have improved as Asian countries gradually recover from the crisis and although political uncertainty continues. The Senior Officials Meeting of BIMP-EAGA in August 2000 and the 4th Association of Southeast Asian Nations (ASEAN) Informal Summit have stated their support for BIMP-EAGA. ADB’s efforts in regional cooperation include a strategy to strengthen economic development through regional cooperation in Southeast Asia, and an assistance program to support the strategy. The possibility of strengthening ties between members of the Indonesia-Malaysia-Thailand Growth Triangle (IMT-GT) will be explored in view of the area’s development potential, subject to reaffirmation of participating governments. Accordingly, the strategy study proposed on transport requirements in BIMP-EAGA will also cover IMT-GT. The idea of subregional cooperation between eastern Indonesia, southern Philippines, and northern Australia was also mooted during the Country Programming Mission (CPM) and will be explored. 28. The assistance program has earmarked TA to encourage regional transport cooperation. Several projects have the scope to include subregional cooperation initiatives, including the interisland transport and the SME development projects. The latter could be used to follow up on the results from the regional TA for SME Development in the EAGA region.
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