PROJECT INFORMATION DOCUMENT (PID) CONCEPT STAGE. Report No.: AB5273 Project Name Water and Irrigation Sector Management Program 2 (WISMP 2) Region

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1 Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized PROJECT INFORMATION DOCUMENT (PID) CONCEPT STAGE Report No.: AB5273 Project Name Water and Irrigation Sector Management Program 2 (WISMP 2) Region EAST ASIA AND PACIFIC Sector Irrigation and drainage (50%); General water, sanitation and flood protection sector (50%) Project ID P Borrower(s) Implementing Agency The Republic of Indonesia DGWR - Ministry of Public Works DG Bangda -Ministry of Home Affairs DGPLA- Ministry of Agriculture Environment Category [ ] A [X] B [ ] C [ ] FI [ ] TBD (to be determined) Date PID Prepared November 16, 2009 Estimated Date of August, 2010 Appraisal Authorization Estimated Date of Board November, 2010 Approval 1. Key development issues and rationale for Bank involvement 1.1 Indonesia s water resources and irrigation sector has gone through a transformation period from a centralized development and investment period to a decentralized system of service delivery in which more efficient use of resources and service quality are emphasized. The Bank played a donor leadership role with its support to the regulatory reform (Water Resources Sector Adjustment Loan (WATSAL, Ln IND) ( ) which led to a new Law on Water Resources (UU7/2004) and government regulations and implementation decrees in the years following. The Government of Indonesia (GoI) embarked in 2003 on implementation of these reforms using among others the Water Resources and Irrigation Management Sector Program (WISMP), a three-tranche adjustable program loan (APL) as a main vehicle. 1.2 The key development issues identified at the time of WISMP APL design in 2003 are: (i) institutional development and strengthening to meet the changing needs of integration, decentralization and governance; (ii) fiscal sustainability of the sector; and (iii) irrigated agriculture development. Although the water resources and irrigation policy environment has seen some changes (see Attachment 1), these issues remain the broad key development issues for the next phase, with sharpened focus as in the following Strengthening of New Water Resources and Irrigation Sector Governance and Management Institutions. Water resources management is becoming increasingly critical for socio-economic development of the country. Though Indonesia is in general a water rich country, the spatial and seasonal variation of water availability poses high risks on water security for domestic, municipal, industrial and agricultural uses. The rapid population growth, economic

2 development, urbanization and the impacts of climate change pose increasingly high pressure on land and water resources, especially on the densely populated islands of Java and Bali. Degradation of catchments results in increasing occurrence and extent of floods. Water scarcity during the dry seasons is leading to overexploitation of groundwater in different provinces. Pollution from urbanized and industrial centers is exacerbating this situation. 1.4 The new Water Law 7/2004 provides a framework for addressing these challenges in the new decentralized government context. In 2006, water resources management was re-organized based on river basin territories (WS) with cross-province basins and basins of strategic importance placed under national authority. In early 2007 the Ministry of Public Works (MPW) established 30 nationally managed, funded and staffed river basin agencies (Balai (Besar) Wilayah Sungai B(B)WS) superimposed on the WS managed then by the Provincial Water Resources Service (Balai PSDA). The remaining river basin territories were kept under the full authority of the Provincial Balai PSDA which was the focus of support under WISMP APL 1(WISMP1). The B(B)WS was given the responsibility for basin planning, development and management, as well as river infrastructure O&M for central basins, except that basin management in these basins is expected to be carried out jointly in collaborations with respective Balai PSDA. However, the institutional and financing mechanisms for the role sharing of the new institutional setup are still yet to be formally established and operationalized. Furthermore, a Multi-stakeholder National Water Council (Dewan Sumber Daya Air- DSDA), several provincial water councils (DSDAP) and basin coordination committees (TKPSDA) have been established. These organizations deserve further capacity building to function effectively as true representatives of their interest groups. 1.5 Similarly, following issuance of the new water and decentralization laws, irrigation management responsibilities have been divided among districts (schemes <1000ha), Provinces ( ha and cross district boundary) and Central Government (>3000 ha and cross province boundary). Main system irrigation management is to be implemented through partnership between the responsible irrigation service and the Water User Association Federations (WUAF). Tertiary canal system management is the sole responsibility of the Water User Association (WUA). The provincial and district (Kabupaten) agencies are becoming more aware of the fact that the WUAF is essential for day-to-day operation and maintenance, particularly because of the overall budget & staffing limitations of government agencies. Effective partnerships of different kinds are developing between the Kabupaten irrigation field staff and the WUAFs. Irrigation Committees composed of an equal number of representatives from Government agencies and WUAFs, are established following the ministerial regulations issued in They have the task to prepare annual and multi-year plans for irrigation management and system improvement which includes receiving, evaluating and prioritizing proposals for physical and non-physical works for funding from the various government sources and WUAF contributions. 1.6 In summary, many of the river basin water resources and irrigation sector governance and management institutions have been established with support from WISMP1. These new institutions need to be consolidated and integrated into routine water resources and irrigation operations. In addition, there are some second generation issues that require urgent attention, e.g.

3 there is a need is to provide necessary legal backing with much more clarity for the roles and responsibilities sharing in basin water resources and irrigation management among various responsible management agencies at central provincial and district levels, to further strengthen their capacity to enable them function effectively. WISMP 1 has mainly focused on provincial basins and smaller provincial and district irrigation schemes. In the next phase, more emphasis would need to be given to the national WS and larger irrigation systems. 1.7 Development of Revenue-Generating River Basin Corporations (BLU). As part of its endeavor to improve cost recovery and fiscal sustainability of river basin management systems, the GOI has established two River Basin Corporations (PJTs) responsible for river and bulk water supply infrastructure maintenance financed from sales of raw water, hydropower, water quality laboratory fees, and recreation fees, etc. These corporations also provide public goods such as flood warning and operation of flood control facilities. However, all infrastructure development and rehabilitation investments are funded from the national budget through MPW s BBWS/BWS agencies. These corporations are partially self-financing corporate state enterprises (Perum) regulated by the Ministry of State Enterprises. 1.8 For basins with a lesser revenue potential, an alternative structure of a not-for-profit public service basin agency or corporation (Badan Layan Umum or BLU) is being considered. The BLU has a semi-independent statute like that of a state hospital, and can receive income both from ministry budget and from fees (e.g. in the case of river management from the bulk water service delivery). The BLU would be under MPW and not subject to the strict positive corporate Balance Sheet requirements of a Perum state enterprise. The BLU is also expected to respond better to the Provincial & Basin Water Councils and Coordinating Committees having non-government stakeholder members. Currently 2-3 river basins have been selected for transition from management by B(B)WS to a BLU structure. Nevertheless, the corporate structure and joint finance (fees & government budget) principles of a river basin BLU have yet to be determined by MPW and sanctioned by the GoI. Furthermore, the detailed operating rules are to be developed, management capacity and service delivery quality as well as physical infrastructure systems remain to be improved. 1.9 Substantial Needs for Infrastructure Improvement. The condition and adequacy of water resources and irrigation infrastructure have degraded considerably after decades of lack of investments in maintenance. Major investments for improvement and new infrastructure are now needed in irrigation systems and river infrastructure to enhance service levels, water use efficiency, and water and food security. Such rehabilitation and improvement need to go hand in hand with the institutional development process including strengthening of an effective, well staffed and well funded O&M organization for the infrastructure. The sustainability of infrastructure is also dependent on timely allocation of sufficient O&M funds from central, provincial and district government budgets and in case of the BLU also from internal revenue generated from service fees. New mechanisms for fund allocation and transfer to executing agencies are being developed, e.g. the deconcentration budget from central government (Tugas Pembantuan - TP) for O&M of infrastructure under central government responsibility. Such a budget system has already been established for the irrigation systems but similar arrangement has yet to be developed for river infrastructure.

4 1.10 Improvement of Irrigated Agriculture Performance. Farmers are still at the lower end of the poverty scale and are most vulnerable to climate and market risks. Farmers adaptive capacity rises with their awareness of the risks and income level. Higher income in turn enables farmers to contribute more to irrigation system management. Therefore, investments in infrastructure and irrigation management institution strengthening need to be accompanied by improvement of irrigated agriculture practices to adapt to climate change, raise agricultural productivity and strengthen the agricultural value chain. This would contribute to increase in farming households income. Pilots have been successfully initiated under WISMP1 using the critical mass created by the WUAFs for integration of water management, raising productivity and farmers income through intensification, diversification, value-addition activities and enhancing extension and credit services credit. These initiatives need to be further advanced and scaled up in other areas Government strategy and commitment: The government s strategy towards strengthening the new sector governance and management institutions is to shift the focus to national/more strategic river basins (territories) and larger irrigation systems, building on the WISMP1 experiences and achievements in institutional development and capacity building with limited investments in infrastructure improvement, to increase the program coverage and impacts. It also calls for increase in investment scale of infrastructure improvement to make up for the deferred maintenance in the last decade or so. For improvement of fiscal sustainability, the government intends to continue building the asset management capacity of basin and irrigation management agencies, and establish good model of cost recovery and need-based infrastructure O&M through a combination of revenue collection by PJT at the basin level, WUAFs contributions to and taking increasing share of responsibilities and expenditures for irrigation system management, as well as earmarked government O&M budget. Finally, the government s strategy for PIM remains unchanged, that is, to empower and strengthen WUAFs as self-sustaining and autonomous groups that can take new initiatives in irrigated agriculture and take advantage of multiplier opportunities (group purchase of agricultural production inputs, group credit and marketing, and village enterprises, etc.) for raising productivity and farmers income, with necessary technical support and extension services from district line agencies. The GOI has demonstrated its strong commitment to continuing with the next phase of WISMP. This is reflected by the fact that preparatory work for WISMP2 has been initiated using bridging funds from WISMP1, and the GOI has earmarked $200 million of Bank loan in the MOU with the Bank WISMP 1 Achievements: The first tranche of WISMP APL (WISMP-1) is coming to a close in December The main achievements of WISMP 1 to date in relation to the program objectives are as follows: (i) Part A BWRM: Under the new Law on Water Resources (Law 7/2004) and its downstream government (PP) and ministerial regulations (PerMen) which form a new institutional framework of the sector for decentralization, stakeholder participation, transparency and accountability, a large number of provincial and national river basin organizations (Balai PSDA and Balai WS respectively) have been established and their capacity strengthened through WISMP1. Following the issuance of an instructive decree in 2008, several provinces and river basins established multi-stakeholder Provincial Water Councils and Basin Coordination Committees. This was followed establishment of an apex organization - the National Water Council by GOI through a presidential decree in 2009.

5 (ii) For Part B PIM: The PP 20/2006 lays out the PIM principles and provides legal basis for empowering farmers through their WUAs/WUAFs in all management processes from planning, design, and construction to operation and maintenance. With most of the facilitating nationalgovernment regulations now issued and most institutions in place, local governments are starting to act upon them. To date, over 1,000 Water User Association Federations (WUAFs) covering some hectares of irrigation command areas have been legally established and strengthened. In most of the participating districts and provinces, Irrigation Committees have been established with WUAF representation. Provincial and district regulations (PERDA) on irrigation have been issued reflecting the participatory irrigation management principles and mode of implementation. In many of the irrigation schemes, water users and especially farmer irrigators, are assuming their new responsibilities through their WUAFs. Preliminary qualitative results of independent surveys show that with the partnerships established between irrigation services and WUAFs and the linking of irrigation management programs with agricultural improvement programs irrigation water use efficiency increased, harvested area increased and crop yields increased. Conflicts among water users reduced and additional income is generated through a higher level of involvement of the WUAFs in the maintenance and rehabilitation works of the irrigation agencies main systems. Nevertheless, for the majority of schemes the participatory process has just started. This development progresses at slow pace as it needs to adjust to the rate at which the local governments, newly empowered by the Regional Autonomy Laws, and civil society-based organizations can develop the requisite local consensus, and absorb the new opportunities. Moreover, the newly formulated tasks, responsibilities and associated activities need to be consolidated and firmly embedded in routine government and users systems and operations Triggers for initiating WISMP2. The four triggers for initiating APL2, as defined in the PAD of WISMP1 have been achieved or exceeded as explained below (see also Attachment 4), which shows that the APL program is ready to the next phase. (i) 4 fully functioning Balai PSDA: (a) 8, instead of 4, Balai PSDA are staffed adequately as determined by work load analysis and have been trained in aspects of management, technical, financial and communication skills; (b) all 16 Balai PSDA in Java are adequately funded up to 50% by provincial APBD funds for all administrative, operational and O&M aspects based on a Need-Based Budget; (c) all Balai PSDA have full planning, budgetary and implementation control as evidenced by designating the Balai PSDA Staff as Project Manager or as Sub-Project Manager with full spending authority; (d) introduction and implementation of asset management and quality assurance programs for managing the river infrastructure asset are implemented in at least two provinces; (e) all core Balai have completed the required data base for basin water resources management and developed an MIS; (f) all Balai implemented the basin activities that are of importance and agreed to by BWRC, in terms of bulk water allocation, water quality monitoring and river infrastructure management as evidenced by the Balai PSDA annual report; and (g) all have obtained a satisfactory rating in the annual Balai PSDA institutional evaluation by the Dinas PUP; (ii) 50 WUAFs legally established and functional: Over 740 WUAFs, far exceeding the target, have been legally established and functional with respect to O&M of lower irrigation systems, and organizing irrigation and agricultural extension services;

6 (iii) Operational Guidelines agreed on river basin management including environmental and social safeguards: This target has virtually been met. The operational guidelines have been developed and agreed on except that the environmental and social safeguards guidelines are being finalized and are expected for full completion by March, 2010; (iv) 50% of external funding disbursed: The loan/credit disbursement is about 60% as of end October, An overview of the level of achievement of the triggers, the DCA performance indicators and the PAD Logframe indicators is presented in Attachments 2 and 3. The Logframe indicators shows that substantial progress has been made in achieving the PDOs and that the outcome targets of each component are largely achieved or exceeded in many cases. The latest report of the WISMP 1 Independent Evaluation & Monitoring Unit (IMEU) indicates that field surveys reveals a perception of increased household income and food security amongst irrigator household beneficiaries. Achievement level of these indicators is high and all targets are likely to be satisfactorily achieved by WISMP1 closure. Rationale for Bank Involvement 1.15 The Bank is in a good position to support the proposed project as it has accumulated knowledge and experience on decentralization issues, local government and water sector reform through its sector work and lending operations. More specifically, the Bank involvement is justified because of the following reasons: (i) this program is in line with the CPS for Indonesia which emphasizes decentralization of civil services, and improvement of governance for natural resources management, as well as the Infrastructure theme for Central and Sub-National Government sector institutions and systems. First, the WISMP aims to strengthen sector institutional accountability through: (a) the social accountability mechanisms of the project/program; (b) promoting external transparency & public access to information via its stakeholder representation & community organization (WUAFs) institutions; and (c) promote efficiency in use of public funds by addressing the problem of deferred maintenance and premature rehabilitation. Second, it promotes sector institutional capacity building via: (a) improved legal & regulatory framework; (b) better operational, technical & administrative policies, procedures & standards; (c) better management organizations with clear roles & responsibilities; (d) better management information & evaluation systems that support policy formation and effective management; and (e) enhanced planning, programming & budgeting capacity; (ii) through the WISMP1 and NTB-WRM, as well as other investment projects supported by the Bank in different sectors, it has been deeply involved in building government capacity at the national, provincial, kabupaten and community levels; (iii) the Bank has developed good channels of communication with central and provincial policy makers through which it can influence debate and policy decisions; (iv) the Bank has also established constructive relations with civil organizations in the water sector through different projects it supported at various levels; and

7 (v) the Bank has been leading the sector reform through a series of reform-oriented engagements in collaborations with other development partners. It is thus logical for the Bank to continue to show leadership in fostering the GoI/Development partnership to improve sector performance. 2. Proposed objective(s) 2.1 The development objectives of the proposed project are to further improve the governance, institutional capacity and infrastructure for basin water resources and irrigation management and service delivery, and increase irrigated agriculture productivity in the target river basins and provinces. 2.2 Achievement of the development objectives would be assessed through the following performance indicators: (i) effective role-sharing and funding mechanism legally established for management of national river basins covered by the Project; (ii) number of BLU basin agencies operational with satisfactory governance structure and adequate resources for sustainable O&M of the river systems; and (iii) increase in agricultural productivity and farmer income in the project irrigation command areas. 3. Preliminary description 3.1 Broadly the Project will cover: (i) further improvement of water resources and irrigation management capacity and effectiveness through investments in institutional strengthening, capacity-building and infrastructure; and (ii) interventions to increase irrigated agriculture productivity and farmers income, likely with the following three components. Component 1. Improvement of basin water resources management and participatory irrigation management (Tentative cost US$145 million) This component supports the consolidation of water sector reforms at national and local government levels, and development of selected service-provision river basin organizations. It will provide funding to further improve BWRM and PIM, in terms of technical capacity, operational effectiveness and physical system performance, and fiscal sustainability. The Component would likely have the following sub-components: A. Basin Water Resources Management A1. Improvement of Basin Management Institutions and Infrastructure: It provides support for further development and strengthening of selected river basin agencies established under WISMP 1 in basin planning, water allocation & water right management, asset management and inter-agency coordination, and for river infrastructure improvement; A2. Development of Sustainable Public-Service River Basin Organizations (BWS-BLU): It would support appropriate governance structure, improvement of management capacity and infrastructure in a number of selected river basins that are earmarked for transition from Balai (Besar)Wilayah Sungai (BBWS river territory management unit under MPW) to a Badan Layanan Umun (BLU). It would likely cover: (i) establishment and capacity building

8 of BWS-BLU, including a set of interventions for institutional development, management strategy, and capacity-building to improve service delivery and fiscal sustainability; and (ii) river and irrigation infrastructure rehabilitation and improvement, possibly including nonstructural measures. A3. National Hydrology Management Program and Information System (NHMP/SISDA): It would support development and implementation of a NHMP that would help improve the availability and quality of critical hydrological information, and enable assessment of water resources potential and utilization for scientific decision-making. B. Participatory Irrigation Management This sub-component will provide continued support to selected irrigation schemes which received supports from WISMP1, and support to larger irrigation systems under central government responsibility (>3000 ha). B1. Institutional strengthening and capacity building for participatory irrigation management: Continued support for empowerment and scaling up of WUA/WUAFs and irrigation committees, and for capacity-building of irrigation management agencies and WUAFs to improve irrigation service delivery, multi-year planning and O&M of irrigation and drainage infrastructure; B2. Irrigation System Improvement at different levels: Rehabilitation and improvement of central, provincial and district government irrigation system infrastructure taking into account climate change impacts; B3. Irrigated agriculture support and climate change adaptation: support for agriculture extension activities, climate change adaption measures incl. replication of technological innovations (e.g. SRI), and other interventions for improving agricultural productivity and raising farmers income. Component 2. Jatiluhur Irrigation System Rehabilitation and Improvement (Tentative cost US$ 90 million) This Component will provide support for the rehabilitation and modernization of the largest irrigation system of the country - Jatiluhur Irrigation System in northern West Java, including the North and East Tarum Canal systems, for management improvement including development/strengthening and capacity building of the WUAFs, the Irrigation Committees and the Kabupaten Irrigation Services, and for measures to increase agricultural productivity. It likely includes three sub-components: J1. Institutional strengthening for Irrigation system management: development and operationalization of an effective inter-agency management scheme involving related management agencies and farmer water user associations and their federations; J2. Infrastructure rehabilitation for I&D, flood and sediment management; and J3. Irrigated agriculture support and climate change adaptation: Agriculture extension activities for productivity improvement, replication of technological innovations (e.g. SRI), and limited post-harvest support, etc. Component 3. Project Management and Technical Assistance (Tentative cost: US$15 million)

9 This Component would support project management, technical assistance for project implementation, independent M&E, investment planning studies and other preparatory activities needed for preparation of future investment interventions. 3.2 Project Costs and Schedule. The total project costs are expected to be around $250 million, including a Bank loan of $200 million. The project would become effective in January, 2011, immediately after the completion of WISMP 1. The project would last for 5 years. 3.3 Implementation Arrangements. Implementation arrangements will build on the experiences of WISMP1 and introduce necessary adjustments based on the results of PIP TA and Jatiluhur Irrigation System Management Improvement Study. It is expected that project implementation units (PIUs) would need to be established at national, provincial and district levels. The central implementing agencies of the project would be MoPW-DGWR, MoA DG PLA and MoHA- DG Bangda, with MoPW and Bappenas as the anchor ministry and crosssector coordination agency respectively. Civil societies would be engaged in project investment identifications and selections, as well as social mobilization and capacity building of irrigation water user community organizations (WUAs and WUAFs). 4. Safeguard policies that might apply [Guideline: Refer to section 4 of the PCN. Which safeguard policies might apply to the project and in what ways? What actions might be needed during project preparation to assess safeguard issues and prepare to mitigate them?] The initial assessment indicates that the following safeguard policies may apply: environmental assessment, pest management (to be confirmed), and dam safety (to be confirmed). A fuller assessment of the policies applicable would be made during project preparation. The implementing agencies are committed to carrying out the necessary assessments and action plans in a participatory manner and information disclosure in accordance with the Bank safeguard policies as mentioned in more detail in the ISDS. 5. Tentative financing Source: ($m.) Borrower 50 Beneficiary Contributions Bilateral Grant International Bank for Reconstruction and Development 200 Total Contact point Contact: Xiaokai Li Title: Senior Water Resources Specialist East Asia and Pacific Region Washington, D. C., USA Tel: (202) xli@worldbank.org

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