PAD Guidelines 4-29-04



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January 16, 2008

INDONESIA

GPOBA COMMITMENT DOCUMENT

Project Name: Extending Telecommunications in Rural Indonesia (P102476)

Objectives: Facilitate access to the Internet and associated telecommunications and data services through “community access points” in socio-economically disadvantaged areas. Demonstrate the applicability of a private-public partnership (PPP) based approach to cost-effective public communications service financing in economically disadvantaged rural areas. Illustrate how such an approach may be scaled up using the government’s own resources and also extended to other sectors[1].

The project has been designed to: (a) highlight the issues and challenges that the government will eventually face in facilitating public Internet access throughout the country; and (b) disseminate knowledge and experience about output-based and PPP approaches across sectors and government institutions. By using subsidy funding the program will provide practical experience to the government and the private sector in the proposed service design and competitive bidding methodology. For the end-users or beneficiaries, the project will introduce low-cost and innovative technologies for the private provision of ICT services in rural Indonesia.

Scope:

The project will facilitate public Internet access for a sample group of 222 Kecamatan (district) centres in Indonesia covering Kabupatens (regencies) with a total population of 10 million (2006 census). This will be achieved through a competitive process where Service Agreements are signed, defining specific outputs. Services will be regulated under the existing telecommunications regulatory regime.

No new licensing arrangements are envisaged and the bidding documents will be technologically neutral, to anticipate potential changes in technology. The total project duration for both Groups 1 and 2 (please see below), is two years, but with the intention of completing implementation within 18 months if possible

Target areas: [total list of districts and villages to be annexed to bid documents]:

• Group 1: 92 Community Access Points (CAPs) in Java—provinces of W. Java and Banten

• Group 2: 130 CAPs in Sumatra—province of Lampung

Selection Criteria: Geographical targeting, with the following characteristics:

(a) district centres (Kecamatan) located within regencies (Kabupaten) listed as “disadvantaged” by the State Ministry for Disadvantaged Regions, and included in the Government’s national community-level poverty reduction program (PNPM) 2007-2009). Monthly per capita income in such areas is US$30-35; (b) identified by Ministry of Communications and Information Technology, Directorate-General of Applications and Telematics in consultation with national and local government stakeholders and the national planning ministry, BAPPENAS; and (c) areas with fixed or wireless telecommunications networks. The main reason for selecting areas under the PNPM program is to help empower these low-income populations through information/telecommunications access, opportunities for economic diversification, access to public services.

Total Project Cost: US$2,935,465

Total GPOBA funding requested: US$2,443,522

▪ Subsidy funding = US$$1,964,972

▪ Project administration/support to MCIT = US$329,250, including US$75,000 for the independent verification agent, US$199,250 for management and administration support, US$55,000 for public information/awareness promotion.

▪ Bank/GPOBA supervision = US $150,000

GPOBA Funding: [TBC]

• DFID = US$1.5 million

• SIDA : US$0.8 million

• AusAid: US$200,000

Additional funding sources: User payments for services (assuming about US$0.25/hour for computer rental; US$0.40 per hour for basic Internet access; US$0.60 per hour for premium Internet access, plus additional charges for photos, printing, training sessions).

Outputs: Public access facility connections to telecommunications networks (fixed or mobile)

▪ Coverage: (provision of public access Internet connections to Kecamatens within Group 1 and Group 2 areas)

▪ Internet connectivity services (as per service agreement)

▪ Quality of service (as per service agreement)

Expected beneficiaries: A potential “catchment” area of 10,000,000 Indonesian citizens in 222 Kecamatan centres, and surrounding village areas, plus local entrepreneurs. The project includes funding for public awareness/promotion in order to attract as many users as possible, particularly among the poorer citizens, since the intention is to help empower them by reducing the “digital/information divide.” CAP facilities (computers, telephony, Internet, training) will be available to all and actively promoted. Part of the funding will go toward dissemination/training activities which are extremely important especially for the poorer populations who have limited experience with these technologies. Internet is a very powerful communications tool, combining multi-media features: broadcast (radio and prospectively TV), written content (information) as well as telephony, and is accessible to literate and illiterate users. The range of users will include: students, groups of poor women receiving training e.g. on e-commerce opportunities or literacy programmes, farmers seeking price information, health workers, teachers, and poor villagers wanting to receive calls (and potentially remittances) from relatives working overseas. However, the benefits extend far beyond individual users, and are linked to the impact of access to information on the community as a whole. For example, where business development benefits are realized by individual CAP "users", the broader impact includes all those in the community who gain income, employment, and improved market efficiency as a result. Health workers would pass on the benefits of knowledge to their patients, and so on.

GPOBA subsidy “efficiency” and affordability: The project targets the whole population in the selected areas. In this regard, sustainability is fundamental: requiring a constant revenue stream to keep each CAP working. The project therefore assumes conservatively that at least 7.5 percent of the population will be regular users of the CAPs, in the first instance. For the purposes of calculating the subs efficiency the project uses these “regular users” which would give an efficiency value of US$2.59. [2]If the number of regular users increases, then this then the subsidy efficiency would also increase (the subsidy efficiency for the total population of 10 million would be US$0.20). The total number of “regular users” per CAP is assumed to be 3378 (average). Assuming about 40 minutes of usage per month at a cost of US$0.40 per hour, the cost of services would be affordable relative to income levels.

Summary of Subsidy Estimates

|Project |Total |Total Project |Total |

|Users |Lower-cost communications, |Reduced cost of business and other |Opportunity costs of alternative communications |

| |available locally |transactions |via more distant location (travel cost and time) |

| | |Access to commodity/market information |New income-generating opportunities |

| | |Access to information and technological| |

| | |tools | |

|Local Entrepreneurs |Revenues from Internet |New business opportunities |Potential to develop value-added service e.g. |

| |usage (retail markup) | |market information intermediation, financial |

| | | |services |

|Service Providers |Revenues from call |Development/expansion of |Value of “publicity” associated with project |

| |minutes/messages, Internet |distribution/marketing channels; |responding to needs of disadvantaged areas and |

| |usage (relatively limited) |increased market share |low-income users. |

The approach under this proposed project is to undertake a small-scale, measured deployment of new Community Access Points in locations where people are currently unable to access the Internet and ICT services easily, but where likely demand and market conditions will be sufficient to justify the modest investment. More precisely, it seeks to stimulate a market-driven mechanism to enable provision of this public Internet and ICT service access, by offering incentives – reducing barriers to entry – for existing local entrepreneurs to introduce and operate such services on a commercially viable basis.

This last point is critical: the economic assumptions underlying this project are based upon the premise that Community Access Points in most of the designated rural areas can be conducted on a profitable, sustainable basis either now or in the foreseeable future with the expected decreasing cost of Internet access in particular. The fact that such service is not already being offered in many areas indicates that there are some entry barriers or other market failure which justifies a degree of intervention. The analysis of this section seeks to quantify the scope of those barriers – and hence the magnitude of OBA subsidy that should be necessary to overcome them, while supporting the overall case for the financial viability of the Community Access Point concept in the identified areas.

Summary of Business Models

More details are given in Annex 6. The economics of the Community Access Point projects must be examined from two perspectives:

a) The contracting implementing organization (the “Contractor”) that will bid for and receive the subsidy, contract directly with the Government, and be responsible to manage and implement the project as a whole; and

b) The individual local entrepreneurs (the “Entrepreneurs”) that will operate the CAPs and deliver public Internet and ICT services directly to end-user customers in the rural centers, following some form of affiliation or transaction with the Contractor.

Although in principle there can be a direct and seamless relationship between these two, the working assumption is that the most likely market model will be that these entities will remain largely separate and arms-length in most cases, most likely along the lines of a franchise model.

(a) Local Entrepreneur Business Model

The provision of public access Internet service is in many respects no different from dozens of other retail commercial businesses that are routinely provided by small shop owners (Warungs) ubiquitously throughout Indonesia, including in rural villages. Indeed, where adequate network access is available, there are already an increasing number of established “Warnet” public Internet cafés throughout the country, particularly in larger towns at the Kabupaten level, similar to the even more ubiquitous “Wartel” facilities that provide public telephone services. These locations are often associated with local shops that sell everything from food and drink to household supplies and especially mobile telephone service pre-paid vouchers. With a relatively small amount of assistance, subsidy, and training, the service can be provided and supported by existing local entrepreneurs, which may already be in the Wartel or mobile phone voucher business, and familiar locations for local inhabitants to obtain a variety of goods and services. The business model assumptions under which the service would operate are illustrated and explained below:

Table 2. Community Access Point: Local Entrepreneur Business Model

Costs in Rp.

Table 2(a) Start-Up Costs

|Start-up Costs |No. |Unit Costs |Total |Comments |

|PC Hardware & monitors |10 |4,000,000 |40,000,000 | |

|Server/billing PC |1 |5,000,000 |5,000,000 | |

|Laptop PC and mobile modem |1 |7,250,000 |7,250,000 |25% of locations with laptop |

|PC Software |12 |0 |0 | |

|Printers |2 |150,000 |300,000 | |

|Furniture |30 |200,000 |6,000,000 | |

|Other equipment |5 |500,000 |2,500,000 | |

|Installation setup | | |20,000,000 | |

|Legal, administrative | | |5,000,000 | |

|TOTAL STARTUP | | |86,050,000 |78,800,000 without laptop |

Table 2(b) Operating Costs (Rp)

| | |Adjustments |

|Operating Costs |Costs/Month |8 months |16 months |

|Rent+Security/Insurance |1,000,000 |0% |1,000,000 |0% |1,000,000 |

|Internet Access |2,000,000 |-20% |1,600,000 |-15% |1,360,000 |

|Staff |900,000 |5% |945,000 |5% |992,250 |

|Electricity |800,000 |5% |850,000 |5% |882,000 |

|Maintenance |250,000 |5% |262,000 |5% |275,625 |

|Telephone |475,000 |0% |475,000 |-10% |427,500 |

|Supplies |200,000 |5% |210,000 |5% |220,500 |

|Promotion/publicity |200,000 |5% |210,000 |5% |220,500 |

|Other |0 |0% |0 |0% |0 |

| | | | | | |

|TOTAL Opex/month |5,825,000 | |5,542,500 | |5,378,375 |

Table 2 (c) Revenues (Rp)

|Revenues |Unit |Revenue/Unit |Initial |

| | | |Units/month |Total/month |

|Basic PC rental |Hour |2,500 |200 |500,000 |

|Internet access (basic) |Hour |4,000 |1,200 |4,800,000 |

|Internet access (premium) |Hour |6,000 |100 |600,000 |

|Printing, photos etc |% of PC |25,000 |10% |590,000 |

|Training class fees |Class |50,000 |5 |125,000 |

|Adverts/sponsorship |Account | |2 |100,000 |

|Telephone usage | | | |500,000 |

|Government income | | | |0 |

|GROSS REVENUE/month | | | |7,215,000 |

Table 2(d) Contractor-Financed Model (US$)

| |Months |

| |1 |

|Start-Up/Investment Costs |US$ |

|Project-Wide | |

|Administration, management |75,000 |

|Marketing, promotion, recruitment |50,000 |

|Equipment procurement, testing |25,000 |

|Training program |50,000 |

|Per Kecamatan | |

|Recruitment, training |400 |

|Marketing, promotion |100 |

|Revenue-sharing | |

|Per Kecamatan | |

|% of net CAP revenues |70% |

|Operating expenses (average monthly) | |

|Project-wide | |

|Customer support system |2,500 |

|Compliance monitoring, reporting |500 |

|Per Kecamatan | |

|Customer support system |50 |

|Compliance monitoring, reporting |20 |

Table 3 (b). Community Access Point Franchiser/Contractor Business Model

Contractor-financed

|US$ |Months |

| |1 |

|GPOBA provides subsidy commitment |January 2008 |

|Project design and documentation finalized, including Grant Agreement |January 2008 |

|Documentation to government for review |January 2008 |

|Signature of GPOBA Grant Agreement |March 2008 |

|Recruitment of project admin. Support to Ministry |April 2008 |

|Launch of Tender 1 (Group 1-Java) |June 2008 |

|Service Agreement for Tender 1 |August 2008 |

|Launch of Tender 2 (Group 2-Sumatra) |September 2008 |

|Service Agreement for Tender 2 |November 2008 |

| | |

|Recruitment of Independent Verification Agent |July 2008 |

|Project Implementation begins Tender 1 |August 2008 |

|Subsidy Disbursement begins Tender 1 |September 2008 |

|Mid-Term Review |January 2009 |

|GPOBA Subsidy disbursement (all tenders) ends |December 2009 |

| | |

C.2 Institutional and implementation arrangements

GPOBA/World Bank will sign the Grant Agreement with the Ministry of Finance, representing the Government, as per standard procedures for processing of World Bank grants in Indonesia. The Project Implementing Agency is MCIT. MCIT will establish and maintain a Project Management Team responsible for overseeing all procedures related to development and implementation of the project, including procurement, financial management, monitoring and evaluation. MCIT will engage consultants funded by the project, to assist with project management and administration, monitoring and evaluation (independent verification agent), and public awareness. Detailed contractual arrangements are described in the project Operational Manual and Service Agreements, and summarized in Figure 1.

Figure 1. Overview of Contractual Arrangements and Funds Flow

C.3 Monitoring and evaluation of outcomes/results

Following contract award and execution, MCIT’s project management team will monitor and enforce the compliance of the selected Contractors for each procurement package in implementing their obligations under the Service Agreement, and also to authorize disbursement of the subsidy payments in accordance with the agreed milestones. The proposed monitoring and evaluation framework is as follows:

Compliance reports

The Contractors will be expected to provide regular written reports to the Ministry within 60 days of the Effective Date of their Service Agreements and within 45 days of the end of each calendar quarter (i.e. a period of three months), detailing the status of fulfillment of the contract obligations. These reports shall include the following information:

▪ a detailed description of facility installation plans and progress for the current period, including details on the installation and operation of Public Access Facilities in the required locations, according to the milestones set out in the Service Agreement;

▪ identification of all Local Entrepreneur operators of Public Access Facility services in the designated locations, and details on the contractual relationships, training support, business plans, and operating status of each;

▪ a report on the extent of service demand, usage, revenues, and other customer utilization of the services and facilities, for each location where service has been established;

▪ a report on the achievement of the quality of service obligations set forth in the Service Agreement;

▪ complete explanation of any difficulties encountered or anticipated in the implementation of the contract services; and

▪ other such information as determined by the Ministry.

Independent Verification

The Ministry will appoint a qualified person to serve as an Independent Verification Agent for the projects to be implemented under this program. This agent shall:

▪ Review the compliance reports submitted by Contractors , and advise MCIT on their completeness and appropriateness;

▪ Conduct site visits to selected service installations to evaluate the status and quality of the Public Access Facility and Local Entrepreneur operations, including both technical functionality and service delivery to end users;

▪ Obtain and review usage and financial reports from Contractors in relation to the required service installations, and validate results against the progress reports and contract obligations;

▪ Provide certification to MCIT of Contractors’ compliance with their contract obligations, to authorize payment milestones; alternatively, withhold such certification, explaining reasons for non-compliance, and measures necessary to mitigate any problems encountered;

▪ Evaluate the impact and extent of any extenuating circumstances, including force majeure that may affect operator compliance, and advise MCIT on such circumstances and the appropriate response.

Reports by the independent verification shall be provided simultaneously to MCIT and to GPOBA/World Bank for a maximum of 5 working days’ review before authorization of disbursement.

C.4 Financial Management and Disbursement Arrangements

Flow of Funds

The amounts payable will be determined based on the monthly reports prepared by each Contractor and against a unit cost agreed as a result of the bidding process. The reports will include the number of new Community Access Points installed. The report will be verified by MCIT with the assistance of the Independent Verification Agent.

Two types of payments re envisaged:

▪ Requests for payments will be made by the Contractor to be sent jointly to the ministry and to GPOBA together with the certification by the IVA.

▪ Program support for technical assistance – will include (a) payments to be made to consultants employed by MCIT; and (b) payment for the IVA.

Proposed Disbursement Method.

MCIT will prepare withdrawal applications for submissions to GPOBA/World Bank. Disbursement will be made under “direct payment” procedures. Disbursements from the Grant will be based on the submission of full documentation/ copies of accounting evidence (including reports, TSA certification with photo status, and third party receipts for the output based disbursement and consultant contracts for auditor contract reimbursement) along with the Withdrawal Applications.

C 5. Sustainability

Sustainability has been factored into the project design in several ways. As noted in the overview of regulatory issues, in general no special provisions are expected for the target locations, with the possible exception that CAP-specific reduced Internet service tariffs might be recommended. . The project design and implementation are not intended to create or offer any distortions that stimulate rent-seeking behaviour which might be unfavorable to the stability of competitive market conditions and the continuing growth of commercial Internet services across Indonesia. For the Local Entrepreneurs, it is anticipated that, with the increased demand for Internet applications, their business proposition will become increasingly favorable over time, and new local e-commerce and other services might increase profitability even beyond the estimates made for this project. It is intended that the CAPs to be developed under this project blend seamlessly into the market-driven business environment of Indonesian telecommunications and ICT over time. The CAP subsidies are a short-term solution, which counts upon further roll-out and increased accessibility of commercial Internet services and access centers before the end of this decade.

C.6 Critical risks and possible controversial aspects[11]

|Risk |Mitigation |Rating with Mitigation|

|Lack of interested bidders (Contractors) |Dissemination of project information by MCIT, GPOBA/World Bank; stakeholder |Modest |

| |consultations. | |

|Failure of the smart subsidy bidding process|Consultations with winning bidders on other sites to recognize their reasons |Modest |

|to produce bids for all target areas |for not offering to bid on the ignored sites, and what is required to | |

| |stimulate their participation in a re-bidding. | |

|Selection of non-acceptable or technically |Discussion with Contractors on technical feasibility, cost of access; use of |Low |

|unreachable site and public access facility |sophisticated planning and marketing tools. | |

|locations. | | |

|Affordability and willingness to pay for new|The project is expected to allow low-cost usage of basic Internet access that |Low |

|Internet services by the poor and very poor.|has been successfully used, for example by other Internet facilities (warnets)| |

| |throughout the country. | |

|Measurement and monitoring of service |Contractors and Local Entrepreneurs (where appropriate) will be required each |Low |

|quantity and access availability. |month to record hours of use from each new network access site and public | |

| |access facility installation and to ensure through market mechanisms that | |

| |usage achieves certain pre-set norms. | |

| |Verification will be the responsibility of the MCIT, as per the terms of | |

| |contract. Audit function to be preformed by external auditor. | |

|Difficulties in selection of qualified local|Selection of retail outlets will be the responsibility of the Contractors and |Low |

|entrepreneurs to operate, secure, maintain |based upon the usual market criteria of performance. | |

|equipment and sell Internet usage on “public| | |

|access facilities”. | | |

| | | |

|Sustainability |The economic analysis indicates a high chance of sustainability for most |Low |

| |locations. However, there may be some, especially in the most remote areas, | |

| |that will have difficulty remaining sustainable. | |

|Corruption | |Low |

|Procurement: |-Use of Standard Bidding Documents (SBDs), prior review | |

|Financial Management |-Direct payment of subsidy to Contractors | |

|M&E |-Technical/Service Audit; in-built customer dialling record (CDR) verification| |

|Equipment delivered to more commercially |process. | |

|attractive locations instead of villages |-Independent verification | |

Annex 1. Project Costs Schedule

|Component |Local |Foreign |Total |

| |US$ million |US$ million |US$ million |

|Subsidy | |1,964,972 |1,964,272 |

|Group 1 | |841,700 |841,700 |

|Java | | | |

|Group 2 | |1,123,272 |1,123,272 |

|Sumatra | | | |

|Consulting Services | |329,250 |329,250 |

|Management and Administration support to | |199,250 |199,250* |

|Implementating Agency | | | |

|Independent Verification Agent | | 75,000 | 75,000 |

|Public Information and Tender Promotion | | 55,000 | 55,000 |

|Bank/GPOBA Supervision | |150,000 |150,000 |

|Total | |2,443,522 |2,443,522 |

Note: Government will contribute to the costs of program management and public information/tender promotion, including through provision of office space, logistical support, telecommunications, and audit. In addition, the Government will evaluate the results of the pilot with a view to scaling up implementation through the National Budget and/or USO fund.

Budget for Management and Administration Support to the Implementing Agency:

|Procurement Specialist |55000 |

|Finance Specialist/Accountant |45000 |

|Admin. Support |12500 |

|Project Management |58000 |

|Local travel |8750 |

|Misc. |20000 |

|Total |199,250 |

Annex 2: Financial Management and Disbursement Arrangements

**CLEARANCE PENDING

1. Summary of the Financial Management Assessment

Overall, the project financial management risk assessed is moderate. The main risk of the project is related to the weak overall country environmental control, especially related to the process for selection of the Contractor. The design of the project whereby Contractors will only receive payment (from the grant fund) after the output of the project is delivered and verified (by independent auditor and random check by MCIT) contributes to lessening the project risk. Only a 20% advance payment will be made through the grant. In addition to that the MOU with the national audit body, BPKP, contributes to mitigating the project risk.

2. Risk Analysis

The Ministry of Communications and Information Technology (MCIT) will be the implementing agency for the project. MCIT has no recent experience in implementing donor funded projects. The latest experience was through implementation of Loan 4244-IND (Information Infrastructure Development Project) which was closed on June 30, 2004. The auditor provided an adverse opinion on the latest audit report due to the limited auditor understanding of WB financed procurement process. The audit findings were completely followed up, as noted in the IIDP Project files. .

As part of the audit on FY 2005 Government of Indonesia financial statement by BPK, MCIT was taken as sample. BPKP issued a report on the findings of the audit. However, no opinion was provided on the financial statement. The FY 2005 audit report of MCIT noted mostly findings related to limited implementation of government accounting system and impact of reorganization of the Ministry. No misuse of funds was reported.

In March 2006 MCIT entered into an agreement (MOU) with BPKP. The MOU intended to strengthen governance within MCIT, including accountability on implementation of APBN to improve the ministry’s performance and service to the public. The MOU will last for 3 years from the signing, starting March 29, 2006.

The amounts payable will be determined based on the monthly report prepared by each operator. The report will include number of new CAPs installed. The report will be verified by MCIT with the assistance of technical auditor assigned in the project. Verification will be conducted through random check on the telephone connection.

Overall, the project financial management risk assessed is moderate. The main risk of the project is related to the weak overall country environmental control especially related to the process selection of operators. The design of the project whereby operators will only receive payment (from the grant fund) only after the output of the project delivered and verified (by independent auditor and randomly check by MCIT) contributes to lessening the project risk. Therefore no advance payment made through the grant. In addition to that the MOU with BPKP contributes to mitigating the project risk.

Based on the above risk, below is the proposed financial management action plan for the project, to mitigate the project risks,

|Action Plan |Expected Output |Due Date |

|1. Term of Reference (TOR) for the independent verification |No objection on the TOR by the Bank |Grant disbursement |

|agent who will verify the project outputs and trigger | |condition |

|disbursement. | | |

Audit Arrangement

The annual financial audit for the project financial reports will be carried out by BPK. The annual financial audit report will be furnished to the Bank no later than six months after the end of the government’s fiscal year (June 30 of the following year). The audit assignment will be in accordance with the agreed Terms of Reference. The TOR will basically include an assertion on the reliability of the project financial reports. The annual audited financial reports will include a review and reconciliation of Designated Account transactions.

|Type of Audit Report |Executing Agency |Due Date |

|Project Financial Statement (a single audit opinion |MCIT |Six months after the end of the government |

|comprising project account). | |fiscal year |

Funds Flow and Disbursement Arrangement

Under the GPOBA grant, the payment will be made towards output-based disbursement. Therefore, there is no requirement for the government to open a Designated (Special) Account (DA) for the project. Disbursement will be made under “direct payment” procedures. Disbursements from the Grant will be based on the submission of full documentation/ copies of accounting evidence (including reports, auditor certification with photo status, and third party receipts for the output based disbursement and auditor contracts for auditor contract reimbursement) along with the Withdrawal Applications.

MCIT will be responsible to prepare the application for withdrawal for advances and reporting the use of the DA, for submissions to the Bank.

All documentation for expenditures submitted for disbursement will be retained at the implementing government unit and shall be made available to the auditors for the annual audit and to the Bank and its representatives if requested.

The amounts payable will be determined based on the monthly report prepared by each implementing organization. The report will include number of new Community Access Points installed and the reported usage. The report will be verified by MCIT with the assistance of technical auditor assigned in the project. Verification will be conducted through random check on the Community Access Points.

Annex 3. Procurement

**CLEARANCE PENDING

General

Procurement for the proposed project would be carried out in accordance with the World Bank’s “Guidelines: Procurement under IBRD Loans and IDA Credits” dated May 2004, revised October 2006; and “Guidelines: Selection and Employment of Consultants by World Bank Borrowers” dated May 2004, revised October 2006 and the provisions stipulated in the Legal Agreement. The various items under different expenditure categories are described in general below. For each contract to be financed by the Credit, the different procurement methods or consultant selection methods, the need for prequalification, estimated costs, prior review requirements, and time frame are agreed between the Borrower and the Bank in the Procurement Plan. The Procurement Plan will be updated at least every six months or as required to reflect the actual project implementation needs and improvements in institutional capacity.

Procurement of Works: N/A.

Procurement of Output-Based Schemes: The pilot projects included in this Project are for expansion of Internet access to the rural areas. In general, the goal is to use OBA funds, through a competitive procurement process, to create sufficient economic incentives for operators to set up and operate “Community Access Points” in the target locations, which will connect to the existing (or planned) ICT infrastructure (fixed/wireless/satellite) to allow public Internet usage at the community level. A total of about US$1,802,000 in subsidy payments will be awarded in accordance with the provisions of paragraphs 3.13(a), 3.14 and 3.15 of the Guidelines for Procurement under IBRD Loans and Credits issued by the WB in May 2004. All contracts will be procured through ICB. Since the Bank does not have standard bidding documents for this type of procurement, the Bidding Documents will be prepared by the Borrower in consultation with the Bank and must be satisfactory to the Bank. The Borrower must allow all bidders from eligible countries to bid, and will not grant domestic preferences. The evaluation criteria for the bids will be that the Borrower will award the Project to the Bidder that offers to carry out the Project with the minimum financing (lowest subsidy) from the Government.

Procurement of non-consulting services: N/A

Selection of Consultants: A total of about US$330,000 of consulting services will be procured under the project to carry out assignments in the following areas of expertise: project management/administration, including procurement support; public awareness; and technical/service audit. Short lists of consultants for services estimated to cost less than US$400,000 equivalent per contract may be composed entirely of national consultants in accordance with the provisions of paragraph 2.7 of the Consultant Guidelines. The Bank’s Standard Request for Proposal will be used for selection of consultants.

Assessment of the agency’s capacity to implement procurement

Procurement activities will be carried out by the Directorate General of Applications and Telematics)[12] of the Ministry of Communications and Information Technology. The unit is staffed by less than five procurement officers who have some training in Government Procurement Procedures. Some of these staffs will be members of the Project Management Team (PIU) set up for the project. A Project Operational Manual will be prepared and will include, in addition to the procurement procedures, the Standard Bidding Documents (SBDs) to be used for each procurement method, as well as model contracts for works and goods procured.

An assessment of the capacity of the Implementing Agency to implement procurement actions for the project has been carried out by Bisma Husen, EAPCO, in November 2007. The assessment reviewed the organizational structure for implementing the project and the interaction between the project’s staff responsible for procurement and the Ministry’s relevant central unit for administration and finance.

Most of major issues and risks concerning the procurement component for implementation of the project have been identified and corrective measures have been agreed as followed:

|Main Risks / Issues |Corrective Measures |

|Weak capacity in procurement in general and the World Bank’s |Bank’s Procurement training is provided at project’s launch. |

|procurement in particular. |Support of Procurement Specialist is required as project’s |

| |effectiveness condition and provided for the entire duration of the |

| |project. |

|Independency of procurement decisions |Procurement Committee to be headed by a high echelon official (min. |

| |echelon 2). |

|Generally weak procurement environment due to corruption, |Anti Corruption Plan to be prepared and implemented. |

|collusion, and nepotism. | |

|Concerns of speculative inquiries relating to corruption, | |

|collusion and nepotism reduces interests of qualified staffs | |

|to take on procurement functions. | |

|Delays in procurement |Procurement Plan is effectively used as procurement progress |

| |monitoring tool. |

Subject that the corrective measures above are implemented, the overall project risk for procurement is AVERAGE.

Procurement Plan

The Recipient, at appraisal, developed a draft Procurement Plan for project implementation which provides the basis for the procurement methods. The Procurement Plan will be finalized and reviewed by the Bank prior to the signing of the Agreement. It will also be available in the Project’s database and in the Bank’s external website. The Procurement Plan will be updated by the Project Team on a six-monthly basis or as required to reflect the actual project implementation needs and improvements in institutional capacity.

Frequency of Procurement Supervision

It is recommended that the first procurement supervision mission be carried out three (3) months after effectiveness and once every year thereafter. A post procurement review of all contracts not prior reviewed should be included in the ex-post review program, which will be carried out by BPKP for the Bank.

Details of the Procurement Arrangement involving international competition[13].

1. Goods and Works and non consulting services.

(a) List of contract Packages which will be procured following ICB and direct contracting:

|1 |2 |3 |4 |

| |All |ICB |All contracts |

|Goods | | | |

| |≤150,000 |NCB(*) |First contract |

| |≤50,000 |Shopping(*) |First contract |

|Consultant Services | | |

|Firms |All |QCBS |All contracts |

| |≤100,000 |CQ |First contracts |

|Individuals |All |Competitive |Specified in Procurement Plan |

(*) Although NCB and Shopping are not foreseen in this project, the Agreement will still include these methods for flexibility.

Annex 4. Environment (OP/BP 4.01)

Disposal of Computer Equipment and Peripherals

Purpose

This guideline specifies the procedure for the proper disposal of computer equipment and peripherals in compliance with all GOI legislations for activities under the GPOBA-financed Project

Background

The proposed project is aimed to support implementation of a limited number of Community Access points (CAP) in Indonesia. The proposed project will establish CAP in a small number of locations where public access to advanced communications is not currently available or affordable yet telecommunications network access is already in place. CAPs will offer a range of Information and Communication Technology (ICT) services, including voice telephony (VOIP), internet access, computer applications and training.

Telecommunications processes do not normally require the use of significant amounts of hazardous materials, however, operations and maintenance activities may result in generating electronic wastes (e.g. printed circuit boards from computer, other electronic equipment).

Environmental Impacts

In general, the materials-and energy-intense production process, greater adoption of PC, plus the rapid rate at which they are discarded for newer machines, add up to growing mountains of garbage and increasingly serious contributions to resource depletion, environmental pollution. The main risk of exposure is probably from computers that have been dumped in landfills or from environmentally unsafe recycling processes.

Desktop computers generally consist of three major units: the main processing machine (CPU – consist of power supply, fan, IC boards, DVD drive, CD drive, hard disk, soft disk and shell casing), the monitor and keyboard. These major units are composed of various materials, which, in turn consist of a wide range of chemicals, elements and heavy metals (see table 1).

Monitors, and to a lesser extent computer, contain significant quantities of heavy metals such as lead, mercury, cadmium and chromium, which pose potential health risks to water supplies near landfills where they are eventually dumped. Lead is especially an issue in waste disposal because it becomes bio available in soils with increasing pH, and becomes available to animals and humans through the food chain and soil dust inhalation.

Table 1: composition of a personal desktop computer

|Name |Recycling Efficiency |

|Plastics |20 % |

|Lead |5% |

|Aluminium |80% |

|Iron |80% |

|Selenium |70% |

|Rhodium |50% |

|Tin |70% |

|Copper |90% |

|Barium |0% |

|Nickel |80% |

|Zinc |60% |

|Tantalum |0% |

|Indium |60% |

|Gold |99% |

|Ruthenium |80% |

|Cobalt |85% |

|Palladium |95% |

|Silver |98% |

|Platinum |95% |

Source: Handy and Harman Electronic Materials Corp., 1999, “Composition of a Personal Desktop Computer

Methods

The main principle of disposal method is to optimize the lifespan of computers, and avoiding as much as possible dumping the used (and not fully function) equipments into the landfill. Below is the list of practical methods of disposal for computer equipment and peripherals:

1. Avoid buying new computer when the current one does not work, upgrading machine could serve the same purpose. Promptly selling old machines to the used-product market is also important.

2. Use energy saving practices: use of ‘sleep’ modes that occur when the computer is idle. While in sleep mode, the computer consumes 15% less power than when in regular mode (USEPA, 2005). The computer or monitor can be ‘woken up’ simply by touching the keyboard or moving the mouse.

3. Monitors: for extended periods of non-use, such as overnight or weekends, computer monitors which will be not be in use for these periods should be turned off completely. The reason for this is that even in a sleep mode the monitor continues to draw power aggregating energy use.

4. Reduction and Reuse: reducing the amount of computer waste relies heavily upon the reuse of systems that may be out of date, but fully functional. Reusing old computers can manifest itself in two main ways: by the selling or donation of old systems, or by up-grading existing systems. The key concept with respect to reuse is to meet the user’s needs with existing machines, while extending that machine’s lifespan.

5. Recycling and Reduction: monitors are another components that require careful recycling measures due to their high lead content.

6. Buying products from suppliers which offer a take-back or trade-in program.

7. Encourage efficient reuse, refurbishment or recycling by the purchasing equipment that is easily dismantled.

Annex 5. Indonesia Telecommunications Market Structure, 2007

|Responsibilities |Institutions |

|Policy |Ministry of Communications and Information Technology (Kominfo) |

|Regulatory Body |BRTI: independent regulatory authority, but chaired by Director-General of Post and Telecommunications under |

| |Ministry of Communications and IT |

|Spectrum Management |DG Post and Telecommunications (Ministry of Communications and IT) |

|Agency to enforce Law |Ministry of Communications and Information Technology (Kominfo) |

|Owner of main fixed network |PT Telkom |

|backbone | |

|International Gateway |PT Indosat, PT Telkom, PT Bakrie |

|Market Segment |Main Players |

|Fixed Line (copper) |Total lines: about 9.1 million. PT Telkom, PT Indosat, PT Bakrie (limited) |

|Fixed Wireless |Total subscribers: around 6 million (Q4 2006). PT Telkom (90% market share): through Telekom Flexi CDMA-2000 1X), |

|(CDMA 2000-1x. Limited to |PT Indosat. StarOne (fixed wireless in Surabaya, Malang, Pasuran, Bogor), PT Bakrie. Esia fixed-wireless in |

|within one fixed-line area |selected cities in Jakarta and W. Java, PT Batam Bintan Telekomunikasi. Fixed wireless, licensed to operate in |

|code; no roaming) |Batam-Bintan |

|Mobile |Total subscribers: about 80 million (end-2007 estimate). Three GSM operators with total of 98% market share; also |

| |offering GPRS, EDGE data services: PT Telkomsel (about 40 million subscribers), PT Indosat (about 15 million |

|(GSM, CDMA 450, CDMA2000-1x, |subscribers) PT Excelcomindo (XL) (about 10 million subscribers). |

|WCDMA) |Other: GSM: Hutchinson (also 3G), Natrindo (Lippo), |

| |CDMA 2000 : Bimantara Citra (Mobile-8); Mandara, Mobisel, Primasel |

| |CDMA 450: PT Sampoerna Telekomunikasi (pilot basis) |

|3rd- Generation mobile (3G) |Five licenses awarded, Hutchinson Telecom; PT Natrindo Telepon Selular (Lippo Telecom) (2005); Telkomsel, Indosat |

| |and XL awarded licenses in March 2006. Telkomsel, Indosat and XL are operational with over 1.5 million subs. |

|Internet and Data |About 23 million subscribers. 11 percent penetration rate. |

| |150 licensed Internet Services Providers; about 60 operating. |

| |Seven licensed VoIP Operators: Telkom, Indosat, XL, Atlasat, Gaharu, Swaguna Widya Pratama, + unlicensed |

| |operators/services |

| |20+ licensed broadband wireless operators using 2.5, 3.3, 3.5, 5 and 10 GHz bands. |

| |Broadband; Telkom (ADSL) provider through Speedy service; limited to Jakarta, Bogor and Serang; Kabelvision |

| |(cable) in Jakarta, Surabaya and Bali. |

Annex 6. Economic Analysis

Economic Rate of Return Analysis

[pic]

Annex 7. Project Preparation and Supervision

A. Institutions responsible for project preparation:

1) GPOBA c/o World Bank

2) Ministry of Communications and Information Technology (MCIT)

B. GPOBA/World Bank Team:

Core Team:

|Name |Title |Unit |

|Natasha Beschorner |Task Team Leader |CITPO |

| |Sr. ICT Policy Specialist | |

|Juan Navas-Sabater |Sr. Telecommunications Specialist |CITPO |

| |Practice Leader | |

|Kashmira Daruwalla |Sr. Procurement Specialist |CITPO |

|Naomi Halewood |Operations Analyst |CITPO |

|Andri Wibisono |ETC (Infrastructure) |EASIS (Country Office) |

|Bisma Husen |Procurement Specialist |EAPCO (Country Office) |

|Novira Asra |Sr. Financial Management Specialist |EAPCO (Country Office) |

|Vivianti Rambe |Environment Specialist |EASSO (Country Office) |

|Sulistiowati Nainggolan |Social Safeguards Coordinator |EASSO (Country Office) |

|Melinda Good |Sr. Counsel |LEGEA |

|Jan van Rees |Consultant (technical specialist) |External |

|David N. Townsend |Consultant (transaction specialist, economist) |External |

Advisory team:

|Name |Title |Role |Unit |

|Patricia Veevers-Carter |Program Manager |Peer Review/ Advisory |GPOBA/FEU |

|Cledan Mandri-Perrott |Infrastructure Specialist |Advisory |FEU/GPOBA |

|Irving Kucynski |Panel of Experts |Advisory |GPOBA |

|Alejandro Jadresic |Panel of Experts |Advisory |GPOBA |

|Hongjoo Hahm |Lead Infrastructure |Advisory |EASIS (Country Office) |

| |Specialist/Coordinator | | |

C. Project Preparation Costs

Expenditures as of December 2007 for project preparation: US$200,000 (including all external consultants).

Funds expected for completion of project preparation: US$30,000

Annex 8. Documents in the Project File

Providing Telecommunications for Rural Indonesia, World Bank, March 2007 (financed by Netherlands ICT Trust Fund)

Indonesia Telecommunications Sector Update for November 2006 Indonesia Infrastructure Summit 2

Draft Operational Manual, Bidding Documents and Service Agreements

Government policies, decrees, regulations on USO and related matters

Indonesia: Rural Investment Climate Assessment, 2006 (World Bank)

Indonesia: Averting an Infrastructure Crisis, 2005 (World Bank)

Income distribution survey (2002, 2005 partial; SUSENAS)

Census (village-level), 2005, 2006 (PODES)

Annex 9. Proposed Project Sites

|Region |Java |

| |  |

|Province |Banten |Java Barat |

|Kabupaten |Lebak |Pandeglang |Sukabumi |

|  |Banjarsari |Angsana |Bantargadung |Kalibunder |

|  |Bayah |Banjar |Bojong Genteng |Kebonpedes |

|  |Bojongmanik |Bojong |Caringin |Lengkong |

|Kecamatan |Cibadak |Cadas sari |Cibadak |Nagrak |

|  |Cibeber |Cibaliung |Cibitung |Nayalindung |

|  |Cijaku |Cigeulis |Cicantayan |Pabuaran |

|  |Cikulur |Cikedal |Cicurug |Parakan Salak |

|  |Cileles |Cikeusik |Cidadap |Parung Kuda |

|  |Cilograng |Cimanggu |Cidahu |Pelabuhan Ratu |

|  |Cimarga |Cimanuk |Cidolog |Purabaya |

|  |Cipanas |Cipeucang |Ciemas |Pelabuhan Ratu |

|  |Curugbitung |Cisata |Cikakak |Sagaranten |

|  |Gunungkencana |Jiput |Cikembar |Simpenan |

|  |Leuwidamar |Kaduhejo |Cikidang |Sukalarang |

|  |Maja |Karangtanjung |Ciracap |Sukaraja |

|  |Malingping |Labuan |Cireunghas |Surade |

|  |Muncang |Mandalawangi |Cisaat |Tegal Buleud |

|  |Panggarangan |Menes |Cisolok |Waluran |

|  |Sobang |Munjul |Curugkembar |Warung Kiara |

|  |Sajira |Pagelaran |Gegerbitung |  |

|  |Wanasalam |Panimbang |Gunung Guruh |  |

|  |Warunggunung |Patia |Jampang Kulon |  |

|  |  |Picung |Jampang Tengah |  |

|  |  |Saketi |Kabandungan |  |

|  |  |Sumur |Kadudampit |  |

|  |  |  |Kalapa Nunggal |  |

|Total |22 |25 |45 |

|  |92 |

Figure 9A: Java Project Sites

[pic]

[pic]

Figure 9b. Sumatra Project Sites

[pic]

-----------------------

[1] This pilot project directly follows up on previous World Bank assistance to the Indonesian government in support of its telecommunications and ICT development objectives. The Bank has provided advisory assistance on possible business models/private-public partnerships, and recommended an OBA approach using the least subsidy model. Over the past year, the Bank’s ICT Department worked with the Ministry on an initial proposal to support pilot deployment of public access voice telephone centers in remote locations, offering further assistance for program design, and implementation support in the launching of pilot OBA-based rural telecommunications access projects. The Commitment Paper for that project was approved by the GPOBA Panel on March 6, 2007. However, upon further discussion of the scope of services, and in light of the accelerating mobile rollout, the government decided in mid-2007 to shift the focus to Internet access.

[2] This compares favourably to the US$2.74 per capita subsidy efficiency for Group 2 public access telecommunications in the previously-designed Project.

[3] The main mobile technology used in Indonesia is GSM (Global System for Mobile Communications). Fixed-wireless uses CDMA (code division multiple access), e.g. CDMA 2000 and CDMA 450 depending on frequency, and offers limited mobility, typically within a single area code, at prices on par with fixed-line services.

[4] 2.5 generation technologies offer basic, mainly text-based, mobile Internet access, e.g. to Blackberry email services or simplified Web pages. The dominant technology, used by GSM operators, is General Packet Radio Service (GPRS).

[5] Although over 20 bidders initially expressed interest, many subsequently withdrew because specifications and regulatory requirements in the tender documents were perceived to be overly complex and not cost-effective. Requirements proposed by government included special tariffs (based on fixed line rates) and numbering for “USO areas.” The government intends to rebid in 2008.

[6] (Canning 1997, Röller and Waverman 1995, Madden and Savage 1998, Riaz 1997, Easterly and Levine 1997, Jensen, 2007). Based on the increase in ICT investment in industrial countries between 1995 to 2000, Haacker and Morsink (2002) estimate an average increase in growth of total factor productivity of about 0.4% per year. Malaysia’s return on ICT capital (44.8%) is about three times higher than that for non-ICT capital (15.4%) (Lee and Khatri 2003).

[7] World Bank, Rural Investment Climate in Indonesia (RICA), Washington, DC, 2006.

[8] Price discovery is the ability to know prices for inputs and selling outputs in a range of local and national markets, and based on this information make efficient decisions about when to purchase inputs and supply—short or long—to particular geographic markets. It assists in reducing the wedge traditionally taken by middle-men.

[9] In addition to the positive externalities listed in the text, there are also environmental benefits from further use of Internet and ICT services across rural Indonesia. Public Health benefits can arise from improved access to advice from clinics and distant medical practitioners, easier ordering of prescription drugs and prosthetics for rural and remote locations, improved information about public health practices, avoidance of communicable diseases such as TB and HIV-AIDS, and faster emergency health responses. Social benefits from better family and village communications, particularly for socially and topographically ignored household groupings; more equitable access to key information weather and emergency information sources and emergency response teams; and in general more likelihood of alleviating rural poverty and reducing the widening gap between Indonesia’s urban rich and rural poor. In terms of positive externalities, social benefits and related gains in non-cash values; the CAP program is also expected to yield a very substantial ‘consumers surplus’. A positive social rate of return can be calculated if these economic side-benefits and social externalities are ascribed, given that subsidy levels have already been chosen.

[10] Telecommunications Universal Access Programs in Latin America:Lessons from the Past and Recommendations for a New Generation of Universal Access Programs for the 21st Century (PPIAF-World Bank, 2007)

[11] Risk ratings: High (>75%), Substantial (50-75%), Modest (25-50%), Low/Negligible (*[pic]CJaJ

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