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MANILA, PHILIPPINES - An ADB loan of $50 million will over three years assist the Government of Indonesia's ongoing rural infrastructure program in selected provinces in the east of the country.

The project, part of the Indonesian Government's Fuel Subsidy Reduction Compensation Program (PKPS-BBM), will rehabilitate and improve rural infrastructure in about 1,800 poor and often isolated villages in East Java, Nusa Tenggara East, Southeast Sulawesi and South Sulawesi provinces.

Indonesia has reduced its fuel subsidies amid rising world oil prices, resulting in a 186% rise in the price of kerosene, the common fuel for the poor. To mitigate the direct and indirect impacts, which could further aggravate poverty, the Government has initiated a series of programs directed at the poor, including higher investments in health, education, and rural infrastructure.

The loan will finance the construction and repair of village roads, bridges and culverts, irrigation systems, water supply and sanitation, and drainage works, with the help of community organizations. The project is expected to benefit about two million rural poor people or about 400,000 households.

"The project's community-driven approach will help develop a sense of ownership among communities, which will reflect not only in the quality of the work carried out but also the long-term sustainability through upkeep and maintenance," says Muhammad Ehsan Khan, an ADB Project Economist.

A recent ADB study confirmed that infrastructure investment not only provides income to people in the project area, but has generated non-income impacts such as improvements in health, education, security, and community interaction.

Based on official estimates, the number of rural poor in Indonesia was about 24.7 million, or one fifth of the rural population, in 2004.

Among rural households, only 15% had access to drinking water from piped or pumped sources, and just 21% had septic tanks for final disposal of human waste. The low level of access to safe drinking water and lack of adequate sanitation facilities have contributed to a high incidence of water-borne diseases such as diarrhea, intestinal worms, and skin diseases.

More than half of the rural villages are not connected through asphalt roads, and about one third of these lack year-round road access.

Investment levels in Indonesia have dropped sharply since the 1997-1998 Asian financial crisis. In current terms, such public expenditures declined from about $16 billion in 1996 to $3 billion in 2001 and further to $1.5 billion in 2002. In a recent study, Indonesia was ranked bottom in terms of infrastructure among countries with populations of more than 20 million.

According to Indonesia's Medium Term Development Plan 2004-2006, the Government has identified investment needs of about $145 billion for infrastructure projects in order to sustain a gross domestic product growth rate of 6% over the period 2005-2009 and for making steady progress toward meeting the Millennium Development Goals.

The total cost of the project is estimated at $60.82 million, of which the Government will contribute $5.96 million and the beneficiaries $4.85 million. ADB's loan comes from its concessional Asian Development Fund and has a 32-year term, including a grace period of eight years. Interest is charged at 1% during the grace period and 1.5% subsequently.

The Indonesian Government will borrow the money and relend the funds to selected villages on a grant basis. Each participating village will be eligible for a grant of up to $25,000. Larger or slightly developed villages will get further grants based on the performance of their first grant.

The Ministry of Public Works through its Directorate General of Human Settlements will be the executing agency for the project.

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