Report and Recommendation of the President to the Board of Directors

Project Number: 52324-001 November 2018

Proposed Loan Republic of Indonesia: Emergency Assistance for Recovery and Rehabilitation from Recent Disasters Distribution of this document is restricted until it has been approved by the Board of Directors. Following such approval, ADB will disclose the document to the public in accordance with ADB's Public Communications Policy 2011.

CURRENCY EQUIVALENTS (as of 12 November 2018)

Currency unit – rupiah (Rp) Rp1.00 = $0.000067

$1.00 = Rp14,731

ABBREVIATIONS ADB – Asian Development Bank BAPPENAS – Badan Perencanaan Pembangunan Nasional (National

Development Planning Agency) BNPB – Badan Nasional Penanggulangan Bencana (National

Disaster Management Agency) BPK – Badan Pemeriksa Keuangan Republik Indonesia EAL – emergency assistance loan MOF – Ministry of Finance TA – technical assistance

NOTE In this report, “$” refers to United States dollars.

Vice-President Stephen Groff, Operations 2 Director General Ramesh Subramaniam, Southeast Asia Department (SERD) Directors Vijay Padmanabhan, Urban Development and Water Division, SERD Sona Shrestha, Public Management, Financial Sector, and Trade

Division, SERD Winfried Wicklein, Country Director, Indonesia Resident Mission, SERD

Team leaders Yurendra Basnett, Country Economist, SERD Robert Boothe, Public Management Specialist, SERD Arghya Sinha Roy, Senior Disaster Risk Management Specialist,

Sustainable Development and Climate Change Department Team members Priasto Aji, Senior Economics Officer, SERD Emma Allen, Country Economist, SERD Cristina de Vera, Senior Operations Assistant, SERD Siti Hasanah, Senior Project Officer (Urban Development), SERD Mohd Sani Mohd Ismail, Senior Financial Sector Specialist, SEPF Baurzhan Konysbayev, Principal Counsel, Office of the General Counsel Laurence Levaque, Senior Social Development Specialist, SERD Sevil Maharramova, Financial Management Specialist, Procurement,

Portfolio and Financial Management Department Amr Qari, Principal Infrastructure Specialist, SERD Eric Quincieu, Senior Water Resources Specialist, SERD Deeny Simanjuntak, Senior Project Officer, SERD Joris van Etten, Senior Urban Development Specialist, SERD Sutarum Wiryono, Senior Project Officer, SERD Peer reviewers Aaron Batten, Senior Planning and Policy Economist, Strategy, Policy

and Review Department One ADB Team

In preparing any country program or strategy, financing any project, or by making any designation of or reference to a particular territory or geographic area in this document, the Asian Development Bank does not intend to make any judgments as to the legal or other status of any territory or area.

CONTENTS Page

PROJECT AT A GLANCE

I. THE PROPOSAL 1

II. THE EMERGENCY ASSISTANCE LOAN 1

A. Rationale 1 B. Impact and Outcome 7 C. Outputs 7 D. Financing Plan 8 E. Implementation Arrangements 8

III. DUE DILIGENCE 9

A. Governance 9 B. Financial Reporting, Auditing, and Monitoring 9 C. Poverty, Social, and Gender 10 D. Safeguards 10 E. Summary of Risk Assessment and Risk Management Plan 11

IV. ASSURANCES 12

V. RECOMMENDATION 12

APPENDIXES

1. Design and Monitoring Framework 13

2. List of Linked Documents 15

Project Classification Information Status: Complete

PROJECT AT A GLANCE

Source: Asian Development BankThis document must only be generated in eOps. 05112018195601963327 Generated Date: 12-Nov-2018 15:48:55 PM

1. Basic Data Project Number: 52324-001Project Name Emergency Assistance for Recovery

and Rehabilitation from Recent Disasters

Department/Division

SERD/SEPF

Country Indonesia Executing Agency Ministry of Finance

Borrower Republic of Indonesia

2. Sector Subsector(s) ADB Financing ($ million)Public sector management Public expenditure and fiscal management 500.00

Total 500.00

3. Strategic Agenda Subcomponents Climate Change Information Inclusive economic growth (IEG)

Pillar 2: Access to economic opportunities, including jobs, made more inclusive

Climate Change impact on the Project

Low

4. Drivers of Change Components Gender Equity and MainstreamingGovernance and capacity development (GCD)

Public financial governance Effective gender mainstreaming (EGM)

5. Poverty and SDG Targeting Location ImpactGeographic TargetingHousehold TargetingSDG Targeting

YesNoYes

Nation-wide High

SDG Goals SDG11

6. Risk Categorization: Complex.

7. Safeguard Categorization Environment: C Involuntary Resettlement: C Indigenous Peoples: C.

8. Financing

Modality and Sources Amount ($ million)

ADB 500.00

Sovereign Special assistance (Regular Loan): Ordinary capital resources 500.00

Cofinancing 0.00

None 0.00

Counterpart 0.00

None 0.00

Total 500.00

Currency of ADB Financing: USD

I. THE PROPOSAL 1. I submit for your approval the following report and recommendation on a proposed loan to the Republic of Indonesia for Emergency Assistance for Recovery and Rehabilitation from Recent Disasters. 2. The emergency assistance loan (EAL) aims to mitigate the adverse social and economic impacts of the recent disasters in Lombok and Central Sulawesi. The emergency assistance is structured to provided immediate and flexible financing for disaster-related recovery and rehabilitation expenditures.

II. THE EMERGENCY ASSISTANCE LOAN A. Rationale 3. Indonesia is in one of the world’s most disaster-prone regions. The country is exposed to a range of natural hazards, including flooding, earthquakes, landslides, tsunamis, volcanic eruptions, and recently liquefaction.1 Since 1990, Indonesia has experienced an average of 289 significant disasters per year and an average annual death toll of about 8,000.2 The direct economic cost of disasters is about Rp22.9 trillion annually ($1.8 billion).3 The severity and frequency of these disasters stretch national and local government capacity to respond. 4. On 28 September 2018, a magnitude 7.4 earthquake struck Central Sulawesi province, triggering cascading catastrophic events. The earthquake led to a near-field tsunami that struck the coast of Central Sulawesi.4 The earthquake and tsunami triggered landslides and caused liquefaction of soil in several densely populated districts, reportedly burying entire villages and complicating relief and recovery efforts. The disasters in Central Sulawesi were preceded by a devastating magnitude 7.0 earthquake in Lombok, West Nusa Tenggara province in August 2018. 5. Damage reports from the National Disaster Management Agency (BNPB) on Central Sulawesi and West Nusa Tenggara identify severe damage to property, infrastructure, and livelihoods. Figure 1 summarizes key indicators for the two disasters. More than 2,600 people have been confirmed dead, 680 people are still missing, and more than 650,000 people have been displaced. Houses, schools, and health care centers have suffered extensive damage. The movement of people and goods is hampered by damage to hundreds of kilometers of roads, and livelihoods have been hit particularly hard. Field reports suggest that about 29 of the 36-kilometer Gumbasa irrigation system in Central Sulawesi have been completely destroyed. The coastal areas were battered by the tsunami, destroying fishing vessels, ports, and warehouse and cold chain facilities. The risk of liquefaction has rendered much of Palu City unusable, forcing government to explore significant relocation of the city to a new site. BNPB’s initial assessment indicated damage and losses of Rp13.8 trillion ($950 million) for Central Sulawesi and Rp18.2

1 Liquefaction is a process in which sand and silt that is saturated with water loses strength and acts as a fluid when

shaken by an earthquake (United States Geological Survey. What is Liquefaction?). 2 Global Facility for Disaster Reduction and Recovery. 3 Government of Indonesia, Ministry of Finance. 2018. Indonesia Disaster Risk Financing and Insurance: National

Strategy to Build Fiscal Resilience. Jakarta. 4 Humanitarian Country Team in Indonesia. 2018. Central Sulawesi Earthquake and Tsunami: Humanitarian Country

Team Situation Report #5 (as of 23 October 2018). Jakarta. The Humanitarian Country Team comprises United Nations agencies, international and national nongovernment organizations, and the International Federation of Red Cross and Red Crescent Societies.

2

trillion ($1.3 billion) for West Nusa Tenggara, totaling Rp32.0 trillion ($2.2 billion). Of this amount, about Rp24.2 trillion is damage and Rp7.8 trillion is losses.5 6. The human cost of disasters is particularly acute for women and girls, who are especially vulnerable. While the disasters have harmed large segments of the population, experience from other disasters shows that women and girls are likely to be disproportionately affected given preexisting gender inequality and discrimination. Women’s chances of survival in disasters are reduced by trying to protect the children, elderly, and infirm in their care.6 With displacement and the absence of adequate shelter, women and adolescent girls experience limited privacy and are highly vulnerable to sexual harassment and other forms of gender-based violence.

Figure 1: Disasters, Damage, and Losses

Source: Asian Development Bank (ADB).

7. The economic cost to both provinces will rise when losses in output and household incomes are included. Growth in Central Sulawesi had accelerated past the national average since 2015 and was expected to reach about 7% in 2018 before the disaster. The consequences of the disaster will be most acute for agriculture, fisheries, mining, and quarrying, which jointly account for more than 50% of the province’s economy. While the full economic cost of the disaster is difficult to project, initial estimates suggest gross regional domestic product growth will fall to 3.6% in 2018—cutting growth by half—with the economy recovering to pre-disaster levels only by

5 S.P. Nugroho. 2018. Disaster Losses and Impact Damage in Central Sulawesi Reached 13.82 Trillion Rupiah. Badan

Nasional Penanggulangan Bencana (National Disaster Management Agency). 22 October (article in Indonesian). 6 D. Mazurana et. al. 2011. Sex and Age Matter: Improving Humanitarian Response in Emergencies. Medford,

Massachusetts, United States: Feinstein International Center. p. 27.

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2021. Capital stock is further expected to contract by 7.0% over the same period.7 In West Nusa Tenggara, weakening export performance slowed growth to 0.1% in 2017. The effects of the August earthquake are estimated to cut the gross regional domestic product growth rate by 1.6 percentage points, with the local economy expected to contract and recover to pre-disaster levels only after 2022. Capital stock is expected to contract by 3.1% in the province. Figure 2 presents selected indicators on the impact of the disasters. Initial estimates suggest the potential impact on the national growth rate to be as high as 0.1% of gross domestic product for 2019, representing forgone output of Rp16.2 trillion ($1.1 billion).

Figure 2: Potential Impact on Regional Economic Growth and Poverty Rates (annual change)

GRDP = gross regional domestic product. s = simulation. Source: Statistics Indonesia; and ADB estimates based on IndoTERM (regional economic model).

8. The trend of falling poverty incidence in the affected provinces will be reversed. Compared with the national average of 9.8%, the Asian Development Bank (ADB) estimates the share of people below the poverty line is 14.0% in Central Sulawesi and 14.8% in West Nusa Tenggara. Provincial averages mask significant disparities, with poverty incidence as high as 32% in North Lombok. The pre-disaster poverty gap, which measures how far an individual falls below the poverty line, is also substantially higher in both provinces than the national average, driven in part by the large share of the population that resides in rural areas in Central Sulawesi and high urban poverty in West Nusa Tenggara. This large gap suggests that the poor are likely to be pushed deeper into poverty, are more vulnerable to ongoing risks, and will take longer to recover from the events. Initial ADB estimates suggest that poverty incidence will increase to 16.4% in Central Sulawesi and 16.8% in West Nusa Tenggara in 2018.8 9. Job prospects will be significantly reduced by the disasters. Most people in Central Sulawesi and West Nusa Tenggara rely on agriculture or services in the informal sector to support their livelihood.9 More than two-thirds of employment is informal, and limited social assistance is available for the jobless adult population. Women’s participation in the labor force is higher than the national average, but one in three is an unpaid worker. Growth in average wages has stagnated since 2013, and a considerable gender wage gap exists. Given these conditions, the

7 Asian Development Bank (ADB) estimates. 8 Poverty Impact Assessment (accessible from the list of linked documents in Appendix 2). 9 Statistics Indonesia. 2018. Labor Force Situation in Indonesia: February 2018. Jakarta.

-5%

0%

5%

10%

15%

2016 2017 2018s 2019s

GR

DP

gro

wth

Central Sulawesi West Nusa Tenggara

pre-disaster projected(Central Sulawesi)

pre-disaster projected(West Nusa Tenggara)

12%

14%

16%

18%

Perc

enta

ge o

f poor

people

Central Sulawesi West Nusa Tenggara

4

effects of the disasters have been particularly damaging to livelihoods. In Central Sulawesi, jobs in agriculture, fisheries, and mining have been immediately reduced, driving more workers into the informal economy. Primary irrigation channels have been damaged, with immediate consequences for farmers. Wide stretches of coastline have been rendered unusable for aquaculture, and marine life will be slow to recover. Damage to maritime ports in Central Sulawesi will constrain trade. In Lombok, the impact of the earthquakes on tourism has had major adverse effects on both formally and informally employed people in the sector. 10. Fiscal adjustments will be required nationally and locally to meet the disaster recovery needs. The economic and social costs of the recent disasters, estimated to exceed Rp40.0 trillion ($2.8 billion), place significant additional fiscal pressure on the Government of Indonesia. The national government has mobilized immediate resources to aid in the relief and rescue efforts. Initial cost estimates from Ministry of Finance suggest an additional Rp4.0 trillion of spending beyond the initially budgeted resources of Rp4.0 trillion for 2018 and 2019. The National Development Planning Agency (BAPPENAS) is coordinating the development of short- and medium-term rehabilitation and reconstruction plans for Central Sulawesi and Lombok. Initial estimates from BAPPENAS suggest a cost of Rp22.0 trillion for Central Sulawesi and Rp12.0 trillion for Lombok. Furthermore, key agencies, including the ministries of public works and housing, education and culture, and transport have been instructed by the government to reallocate existing allocations under the 2018 budget to provide priority support for affected areas, with preliminary estimates of Rp1.7 trillion. Without additional financing resources, these reallocations will reduce planned government investment and services in other parts of the country as funds are diverted to meet emergency needs. 11. The additional financing needs have occurred as Indonesia faces significant economic uncertainties and surging financing costs. Support from ADB and other development partners will be critical to help the government meet the costs of the recovery and rehabilitation efforts and to ensure that essential development spending on health, education, and social protection is maintained. Table 1 provides a sample of indicative recovery and rehabilitation expenditures that the government expects to undertake.

Table 1: Indicative Recovery and Rehabilitation Activities Planned by the Government Recovery Category

Estimated Amount Indicative Activity or Item

Urban Development, Housing and Settlement

Rp19.1 trillion ($1.3 billion)

Provision of drinking water for the affected population Provision of tents and temporary shelter for disaster victims Assistance for housing repair Relocation of victims

Economic Recovery

Rp1.5 trillion ($102 million)

Cash-for-work programs for the affected population Cash assistance to restart small businesses Credit schemes for local businesses Training and skills improvement programs, including for women

Social Protection and Social Services

Rp4.3 trillion ($303 million)

Psychosocial treatment for affected population Compensation for death toll for heirs Benefits for injured victims Provision of public kitchens Provision of temporary health posts Provision of emergency school tents Provision of textbooks Cash assistance to women (Family Hope Program) Distribution of food assistance

Source: BAPPENAS. 2018. Presentation on Recovery Efforts, 23 October 2018. Jakarta.

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12. The government has responded strongly to the disasters. Following the earthquake in Central Sulawesi, the governor announced an initial 14-day state of emergency for the province on 29 September 2018, which was subsequently extended by another 14 days as a more serious picture of the damage emerged.10 Coordinated by BNPB, about 11,000 government personnel were deployed to the affected areas to provide immediate rescue, evacuation, and relief operations. BAPPENAS is leading the Central Sulawesi Action Plan for Rehabilitation and Reconstruction (Central Sulawesi Action Plan) in coordination with key agencies such as the ministries of public works and housing, agrarian affairs and spatial planning, social affairs, and energy and mineral resources. Because of the complexities caused by liquefaction, the government plans to prepare the Central Sulawesi Action Plan in phases—the plan for recovery and rehabilitation will be finalized by the end of 2018 and the reconstruction plan will be finalized by March 2019. The rehabilitation and reconstruction plan for West Nusa Tenggara Barat (Lombok Action Plan) has been finalized. Both action plans are based on robust understanding of the damage assessment and disaster risk, including gender-differentiated impacts of the disaster and recovery needs. The plans include sections on (i) urban development, housing, and settlement; (ii) infrastructure reconstruction; (iii) social protection; (iv) economic recovery; and (v) cross-sector programming. The Central Sulawesi Action Plan also covers financing partnerships and institutional and regulatory development. 13. The national and local governments are providing leadership to ensure the effective coordination of development partners. Humanitarian partners have been coordinating their response and recovery efforts. Effective coordination for emergency response is managed through the establishment of eight clusters, each led by a line agency and a member from the Humanitarian Country Team. An early recovery coordination cluster led by BNPB and the United Nations Development Programme is working together with local government to identify local recovery needs. Development partners, including ADB, the European Union, Japan International Cooperation Agency, the United Nations Development Programme, and the World Bank, have collectively offered support to the government in the assessment process. 14. In consultation with the government, ADB has put together a comprehensive support package for the disasters, including technical assistance (TA) grants and three channels of financing support. On 8 October 2018, ADB approved an emergency grant of $3 million from the Asia Pacific Disaster Response Fund.11 The grant will support BNPB with immediate relief works in Central Sulawesi in compliance with the implementation guidelines of the fund. TA grants of up to $3 million from various resources have also been identified and set aside to support the government’s post-disaster needs assessment and preparation of an action plan and sector-specific projects for reconstruction (para. 17). In addition to providing grant support, ADB has worked with the government to identify three potential channels for financial support. First, the Emergency Assistance for Recovery and Rehabilitation for Recent Disasters loan will help the national and local governments meet the near-term requirements in dealing with the aftermath of the disaster, while ensuring that other critical social and development priorities are met. Second, ADB is preparing an emergency assistance project loan to support reconstruction and relocation of critical infrastructure, including public facilities in affected areas. Third, ADB and the government are considering reprogramming of existing loans to support reconstruction efforts. 15. Several factors were considered when determining the appropriate modality for the emergency assistance (Figure 3). The EAL is a quick-disbursing loan to support the government’s

10 Governor of Central Sulawesi. 2018. Decree on State of Emergency for Earthquake and Tsunami Disaster

Management in Central Sulawesi Province. No. 466/45/BPDB. 29 September. Palu. 11 ADB. 2018. ADB approves initial grant for Sulawesi earthquake and tsunami affected areas. Manila.

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disaster response. Initial recovery and rehabilitation efforts are likely to be spread across many activities requiring smaller amounts, rather than a small number of investments with large amounts. As such, providing support that works through the government’s budget system, rather than directly financing individual activities, will be a more efficient and effective response mechanism. The loan is aligned with the six characteristics of an EAL as it (i) helps rebuild high-priority physical assets and restore economic, social, and governance activities after emergencies; (ii) is designed to mitigate immediate losses to priority assets, capacity, or productivity rather than to provide relief or comprehensive reconstruction; (iii) provides immediate short-term transitional assistance; (iv) is restricted to the transition phase and exclusively for priority rehabilitation; (v) is linked with and complements humanitarian relief efforts by other development partners to ease the transition from relief to normal development; and (vi) may include quick-disbursing components, but is not a policy-based loan.12

Figure 3: Factors Supporting ADB Response Modality

ADB = Asian Development Bank, EAR3D = Emergency Assistance for Recovery and Rehabilitation from Recent Disasters, IDP = internally displaced person, TA = technical assistance. Source: ADB.

16. The EAL builds on lessons from past emergency assistance, including the following: (i) providing immediate financing is essential to ensure timely rehabilitation and recovery, thereby reducing the overall social and economic impacts of a disaster; (ii) coursing the financial assistance through the government’s budget helps build ownership of the rehabilitation and recovery process; (iii) developing a comprehensive monitoring and evaluation framework is crucial for the effective implementation of the post-disaster response; (iv) providing TA to develop the rehabilitation and reconstruction plans helps ensure potential implementation challenges are identified early on; and (v) providing TA that helps the government integrate building back better and resilience principles ensures that the EAL contributes to the objectives and priorities of ADB’s country partnership strategy, 2016–2019 for Indonesia.13 The EAL is consistent with ADB’s Strategy 2030, particularly the operational priorities on poverty reduction, gender equality, and disaster resilience.14 17. ADB has mobilized TA resources to support the government’s response planning. Planning and preparation of the Central Sulawesi Action Plan will be supported under the

12 ADB. 2004. Disaster and Emergency Assistance Policy. Manila. 13 ADB. 2016. Country Partnership Strategy: Indonesia, 2016–2019—Towards a Higher, More Inclusive and

Sustainable Growth Path. Manila. 14 ADB. 2018. Strategy 2030: Achieving a Prosperous, Inclusive, Resilient, and Sustainable Asia and the Pacific.

Manila.

(i) earthquake, tsunami, liquefaction

(ii) IDPs (iii) unemployment (iv) social assistance

eroded (v) damaged infrastructure

(i) economic shock (ii) fiscal pressure from

recovery and reconstruction spending

(iii) spending and investment diverted from other key areas

EAR3D (recovery and rehabilitation +

Emergency Assistance Project (reconstruction) + grant and/or TA

Emergency (cause) Fiscal and financial pressure (effect)

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Sustainable Infrastructure Assistance Program,15 the Southeast Asia Urban Services Facility,16 and the Urban Climate Change Resilience Trust Fund17 under the Urban Financing Partnership Facility. These inputs include gender expertise to identify and design recovery activities that are gender responsive and take into account the different post-disaster needs and challenges women and girls face. 18. ADB is also preparing new TA to support the implementation, monitoring, and evaluation of the action plans. The TA will help build capacity within the central and local governments, as well as provide additional dedicated resources to support the effective delivery and monitoring of recovery and rehabilitation activities. The new TA will focus on three key areas: (i) developing and implementing rigorous monitoring and evaluation, including coordination within and across government agencies; (ii) building capacity for effective financial management, and tracking and reporting on disaster recovery and rehabilitation expenditures in line with the action plans; and (iii) ensuring that rehabilitation activities are implemented considering the special needs of women, girls, the elderly, and other vulnerable groups, in line with government regulations. Where appropriate, the TA will use civil society organizations and nongovernment organizations to provide monitoring inputs.18 B. Impact and Outcome 19. The EAL is aligned with the following impact: socioeconomic impact of disaster reduced, in line with the national medium-term development plan, 2015–2019.19 The EAL will have the following outcome: adverse social impact of the recent disasters on the poor mitigated.20 C. Outputs 20. The EAL will provide $500 million in immediate support to the government to meet its additional financing requirements linked to new public expenditure under the action plans for Central Sulawesi and Lombok. 21. Output 1: Funding of the national government expenditure program for 2019 met. The EAL will provide immediate, flexible financing support for the government to efficiently and effectively respond to the disasters of 2018. The original projected net financing gap was Rp412.0 trillion for 2018 and Rp88.0 trillion for 2019. However, this gap is expected to increase significantly because of the Rp40.0 trillion needed for the disasters Indonesia faced in 2018. At the same time, the government is committed to protect the delivery of critical public services across the country. 22. Output 2: Government action plans for rehabilitation and reconstruction implemented. The government’s action plans for Central Sulawesi and Lombok will guide the recovery and rehabilitation efforts. Spanning a 2-year period after the disasters, the action plans cover short-, medium-, and long-term efforts in five key areas (para. 12). ADB’s emergency assistance will focus on immediate recovery and rehabilitation needs in three of these areas: (i) urban development, housing and shelter; (ii) social protection; and (iii) economic recovery. For the Central Sulawesi Action Plan, the immediate loss and damage assessment period is October–November 2018. The early transition and recovery period, which will include a more thorough

15 ADB. Indonesia: Sustainable Infrastructure Assistance Program. SIAP is supported by the Government of Australia. 16 ADB. Regional: Southeast Asia Urban Services Facility. 17 Financing partners: the Rockefeller Foundation and the governments of Switzerland and the United Kingdom. 18 Additional detail on the proposed TA is accessible in the list of supplementary documents. 19 BAPPENAS. 2015. National Medium Term Development Plan 2015-2019. Jakarta. 20 The design and monitoring framework is in Appendix 1.

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needs assessment, will be November 2018–January 2019. From January to March 2019, the government will focus on early rehabilitation, emphasizing temporary housing, resumption of basic public services such as education, cash transfers for victims, livelihood assistance, and training and skills development. During March 2019–October 2020, the government will focus on reconstruction and relocation to the new Palu City site. The Lombok Action Plan will follow a similar schedule. This output will cover the recovery and rehabilitation phases of the action plans. A gender perspective will be applied during implementation. D. Financing Plan 23. The government has requested an EAL of $500 million from ADB’s ordinary capital resources to help fund the financing gap for 2019 arising from additional public spending for the 2018 disasters and the action plans.21 The EAL will have a 20-year term, including a grace period of 5 years; a straight-line repayment method; an annual interest rate determined in accordance with ADB’s London Interbank offered rate (LIBOR)-based lending facility; a commitment fee of 0.15% per year; and such other terms and conditions set forth in the draft loan agreement. Based on this, the average loan maturity is 12.75 years, and no maturity premium applies. E. Implementation Arrangements 24. The EAL will provide immediate mitigation assistance to the government. It will enable quick-disbursing support to help ensure that vital recovery and rehabilitation expenditures are met without compromising other economic and social development expenditures in the national budget. This reflects the urgent need to mitigate the immediate economic and social impacts of the disasters. 25. The support will flow through government systems to enable a timely response. The government faces a significant gap in its disaster financing plan (para. 21). The EAL will enable the government to generate counterpart funds in rupiah equivalent to the loan proceeds. These funds will be used to meet the essential public expenditures related to the disasters, in line with the action plans. The EAL will not directly finance recovery activities. The Board is requested to waive the requirement under the Disaster and Emergency Assistance Policy for such quick-disbursing components to finance only a list of identified imports necessary for effective recovery assistance.22 EAL disbursement and related arrangements will follow ADB’s policies and procedures applicable to policy-based lending,23 based on a list of ineligible items,24 following ADB’s Loan Disbursement Handbook (2017, as amended from time to time). 26. The Ministry of Finance (MOF) will be the executing agency. The proceeds of the EAL will be disbursed upon effectiveness25 and the loan will close by December 2019. Implementation of the emergency response outputs is expected to take 2 years and will be completed by December 2020.

21 Letter of the Minister of Finance of Indonesia to ADB dated 17 October 2018. 22 Footnote 12, para. 111. 23 ADB. 1998. Simplification of Disbursement Procedures and Related Requirements for Program Loans. Manila; and

ADB. 2015. Enhancing Operational Efficiency of the Asian Development Bank. Manila. 24 List of Ineligible Items (accessible from the list of linked documents in Appendix 2). 25 The EAL may be withdrawn in one or more installments.

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III. DUE DILIGENCE A. Governance 27. Governance, transparency, and anticorruption efforts are core government priorities. The 2017 Public Expenditure and Financial Accountability Assessment for Indonesia showed that 17 of the 31 indicators scored A or B, which are both considered above the basic alignment with international good practice.26 Indicators with particularly good assessment results included transparency of public finance, and accounting and reporting—all key for the successful implementation of the action plans. The assessment also identified some areas for improvement, including the strategic allocation of resources and the efficiency of public spending by linking performance information more effectively to planning and budgeting. The established legal and regulatory framework for public financial management was strengthened in 2017 through the government regulations mandating coordination between the National Planning Agency and the MOF to improve the policy orientation of budgeting. Recent reforms to public procurement systems have improved the efficiency, competitiveness, and transparency of government procurement. ADB supports the government’s governance reform agenda through its Fiscal and Public Expenditure Management Program and Stepping Up Investments for Growth Acceleration Program.27 ADB’s Anticorruption Policy (1998, as amended to date) was explained to and discussed with the government. B. Financial Reporting, Auditing, and Monitoring 28. The EAL is anchored on the government’s action plans for Central Sulawesi and Lombok. The government has allocated an additional Rp2.5 trillion for BNPB beyond the Rp4.0 trillion initially planned in the 2018 budget. In the 2019 budget, the government has allocated Rp15.0 trillion for disaster response. Disbursements of funds from the state treasury will be based on the action plans. Depending on the activity, funds will be made available for withdrawal to BNPB and relevant line ministries and agencies. Local treasury offices will undertake necessary internal controls in coordination with BNPB. The MOF will submit an annual consolidated statement of expenditures under the action plans based on actual disbursements.28 29. The government has strengthened its financial management and reporting arrangements relating to disasters. The Audit Board of the Republic of Indonesia conducts annual audits of BNPB and concerned line ministries. The government will provide BNPB’s annual audited statement to ADB. Following the 2004 tsunami in Aceh, Indonesia was closely involved in developing the international audit standards for disaster-related aid.29 The government intends to conduct a special audit of the expenditures for the recent disasters. The Corruption Eradication Commission will have oversight on all implementation activities.

26 World Bank. 2018. Indonesia Public Expenditure and Financial Accountability (PEFA) Assessment Report 2017.

Jakarta. 27 ADB. Indonesia: Fiscal and Public Expenditure Management Program (Subprogram 1); and ADB. Indonesia:

Stepping Up Investments for Growth Acceleration Program (Subprogram 3). 28 Financial management arrangements agreed between Government of Indonesia and ADB are identified in the

Summary Public Financial Management Assessment and Loan Agreement, accessible from the list of linked documents in Appendix 2.

29 International Organization of Supreme Audit Institutions. ISSAI 5520—The Audit of Disaster-Related Aid.

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C. Poverty, Social, and Gender 30. The EAL will help mitigate the adverse social effects of the disaster. Poverty incidence is expected to surge as a result of the economic and social costs of the disasters—from 14.0% to 16.4% in Central Sulawesi and from 14.8% to 16.8% in Lombok in 2018 (para. 8). The growth of regional economies is also expected to slow by 3.6 percentage points in Central Sulawesi and 1.6% percentage points in Lombok in 2018 (para. 7). The EAL supports priority interventions to help mitigate these adverse impacts on affected communities. 31. The EAL is classified effective gender mainstreaming at entry. It aims to ensure that a gender perspective is integrated in the government’s Central Sulawesi Action Plan for Rehabilitation and Reconstruction30 in line with the 2014 BNPB regulation on Gender Mainstreaming in Disaster Management, which mandates gender-responsive planning and budgeting during the emergency phase and the rehabilitation and reconstruction phase. The EAL also seeks to ensure sufficient resources are allocated to implement gender-specific recovery interventions. The following measures will be implemented to achieve these objectives:

(i) Consultations to prepare the Central Sulawesi Action Plan will include gender stakeholders such as women’s organizations.

(ii) The most appropriate disbursement modality of cash grants and benefits for households will be done in close consultation and agreement with women and men in affected communities.

(iii) The action plan will take into account findings of rapid gender assessment(s) conducted after the disaster and will integrate specific interventions to address major gender issues.31

(iv) The action plan will address the needs of women and girls in terms of sanitation and hygiene, sexual and reproductive health, gender-based violence, and restoration and improvement of livelihoods.

(v) The action plan will include adequate measures and strategies to strengthen the preparedness and resilience of communities to climate change and disasters, and will ensure an active role and voice for women in disaster risk reduction initiatives.

(vi) Gender focal points will be established in local offices of the Disaster Management Agency in both disaster areas, as mandated by the Gender Mainstreaming in Disaster Management regulation.

32. Gender expertise will be mobilized with TA resources to support this process and build the capacity of the local gender focal point system (paras. 17 and 18). The TA will also support inclusive monitoring of the action plan implementation involving civil society organizations, including women’s groups and other vulnerable groups. D. Safeguards 33. The EAL supports the government’s fiscal response by providing quick-disbursing funds through the government’s budget system. Because the loan proceeds are not earmarked for specific spending or investments, the EAL does not trigger the safeguard policies and is classified category C for the environment, involuntary resettlement, and indigenous peoples. However, the

30 Emphasis is placed on the Central Sulawesi Action Plan, which is still being developed with ADB support. The

completed Action Plan for Lombok emphasizes ensuring gender perspectives are applied during implementation, monitoring, and evaluation.

31 The CARE Rapid Gender Analysis is an example of such an assessment (CARE Indonesia. 2018. CARE Rapid Gender Analysis: Sulawesi Earthquake and Tsunami Indonesia—Version 2. Jakarta).

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EAL will apply a monitoring and evaluation framework to track government-funded recovery activities, with indicators tracked in the design and monitoring framework (paras. 28 and 29). E. Summary of Risk Assessment and Risk Management Plan 34. Significant risks and mitigating measures are summarized in Table 2 and described in detail in the risk assessment and risk management plan.32

Table 2: Summary of Risks and Mitigating Measures

Risks Mitigation Measures Worsening conditions in international financial markets put further pressures on the economy, drawing spending away from recovery efforts.

Bank Indonesia has raised the policy rate five times in 2018, totaling 150 basis points, signaling strong commitment to macroeconomic stability. Fiscal policy further reinforces the government’s commitment to stability. Prior to the disasters, the budget deficit was projected to decline from 2018 to 2019. Appropriate policy responses combined with strong macroeconomic fundamentals and a sound financial system help reduce risks from external shocks.

Additional disasters and their impact on other regional economies may undermine implementation of the action plans.

The government has introduced a new disaster risk financing strategy to improve financial preparedness for disaster response. Near-term priorities include implementation of a pilot scheme for state asset insurance; strengthening the current schemes for agriculture and fisheries insurance; and building awareness of key line agencies, subnational governments, and Parliament.

Coordination across government agencies and development partners is weak.

The government has taken the lead in coordinating across concerned agencies and with development partners. BNPB is taking the lead in coordinating all humanitarian and relief efforts and coordinating damage and loss assessments. BAPPENAS is leading the formulation of the recovery and reconstruction plans in close coordination with all key agencies and development partners. BNPB will coordinate the implementation of the action plans. ADB is coordinating closely with development partners, including JICA, UNDP, and the World Bank.

The early stage of preparation for the action plans poses challenges for strong financial management measures, including identification of eligible expenditures, monitoring, and external audit provision.

The MOF’s SPAN manages all financial transaction data of the central government in a full cycle from budget appropriations, allotment, and/or execution to the production of financial statements. Budget allotment and execution for rehabilitation and recovery will be based on the approved disaster response action plans. The MOF will produce a consolidated annual financial report on expenditure related to recovery and rehabilitation in Central Sulawesi and West Nusa Tenggara. Indonesia’s BPK will conduct annual audits of BNPB and concerned line ministries involved in the implementation of the action plan for recovery. BPK can perform an audit of the disaster-related fund following ISSAI 5520.a

ADB = Asian Development Bank, BAPPENAS = Badan Perencanaan Pembangunan Nasional (National Development Planning Agency), BNPB = Badan Nasional Penanggulangan Bencana (National Disaster Management Agency), BPK = Badan Pemeriksa Keuangan Republik Indonesia (The Audit Board of the Republic of Indonesia), JICA = Japan International Cooperation Agency, MOF = Ministry of Finance, SPAN = Sistem Perbendaharaan dan Anggaran Negara (State Treasury and Budget System), UNDP = United Nations Development Programme. a International Organization of Supreme Audit Institutions. ISSAI 5520—The Audit of Disaster-Related Aid. Source: ADB.

32 Risk Assessment and Risk Management Plan (accessible from the list of linked documents in Appendix 2).

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IV. ASSURANCES 35. The government has assured ADB that implementation of the emergency assistance shall conform to all applicable ADB policies, including those concerning anticorruption measures, safeguards, gender, procurement, consulting services, and disbursement as described in detail in the loan agreement. The government has agreed with ADB on certain covenants for the assistance, which are set forth in the loan agreement.

V. RECOMMENDATION 36. I am satisfied that the proposed loan would comply with the Articles of Agreement of the Asian Development Bank (ADB) and, acting in the absence of the President, under the provisions of Article 35.1 of the Articles of Agreement of ADB, recommend that the Board approve

(i) the loan of $500,000,000 to the Republic of Indonesia for Emergency Assistance for Recovery and Rehabilitation from Recent Disasters, from ADB’s ordinary capital resources, in regular terms, with interest to be determined in accordance with ADB's London interbank offered rate (LIBOR)-based lending facility; for a term of 20 years, including a grace period of 5 years; and such other terms and conditions as are substantially in accordance with those set forth in the draft loan agreement presented to the Board; and

(ii) the waiver of the requirement that quick-disbursement components finance a list of identified imports under the Disaster and Emergency Assistance Policy (2004) and the application of disbursement arrangements, as discussed in para. 25 of this report.

Stephen Groff Vice-President

12 November 2018

Appendix 1 13

DESIGN AND MONITORING FRAMEWORK Impact the Project is Aligned with Socioeconomic impact of disasters reduced (RPJMN, 2015–2019)a

Results Chain

Indicative Performance Indicators with Targets and

Baselines Data Sources and

Reporting Mechanisms Risks Outcome Adverse social impact of the recent disasters on the poor mitigated

By end of 2022: Per capita consumption (adjusted for inflation) of the poorest 50% of households in disaster-affected areas recovered to pre-disaster levels (2018 baseline: average per-capita consumption 2014–2017)

BAPPENAS poverty data

Exogenous external economic shocks Additional disasters resulting in adverse social and economic impacts and higher poverty rates

Outputs 1. Funding of the national government expenditure program for 2019 met 2. Government action plans for rehabilitation and reconstruction implemented

By 2020: 1a. Financing for the recovery and rehabilitation plan finalized and initiatives launched to mobilize resources from domestic and international sources (2018 baseline: not applicable) 1b. Government maintains spending allocations for essential services, such as health, education, and social protection, at pre-disaster planned levels (2018 baseline based on 2018 APBN allocations: Rp110.0 trillion for health; Rp444.1 trillion for education; Rp81.0 trillion for social protection 2a. 70% of affected households suffering damage, including 90% affected households led by women, received housing assistance in cash (2018 baseline: 0 of 145,000 affected households) 2b. 70,000 affected people in Sulawesi and 77,000 affected people in Lombok provided shelter by the government, with adequate consideration for the safety and privacy of girls and womenb (2018 baseline: 0)

1a. MOF, BAPPENAS 1b. MOF, APBN 2019 2a. Government’s recovery and rehabilitation plan, quarterly monitoring reports 2b. Ministry of Public Works and Housing, local governments

Additional disasters in 2018 and/or 2019 and their impact on other regional economies that may undermine implementation of the action plans

14 Appendix 1

Results Chain

Indicative Performance Indicators with Targets and

Baselines Data Sources and

Reporting Mechanisms Risks 2c. Temporary schooling for at least 50% of affected students provided by the government (2018 baseline: 0 of 400,000 students affected) 2d. 70% of eligible affected people received casualty and/or fatality cash transfers (2018 baseline: 0 of 21,353 eligible affected people) 2e. At least 30% of households in affected areas received livelihood assistance, training, and skills improvement, including at least 50% of households led by women (2018 baseline: to be confirmed)

2c. BNPB, Ministry of Education and Culture 2d. BNPB 2e. MOSA, quarterly monitoring reports

Key Activity with Milestone

BAPPENAS produces draft Action Plan for Rehabilitation and Reconstruction integrating a gender perspective (December 2018)

Inputs

ADB: $500,000,000 (loan)

Assumptions for Partner Financing

Not Applicable

ADB = Asian Development Bank, APBN = Anggaran Pendapatan dan Belanja Negara (state budget), BAPPENAS = Badan Perencanaan Pembangunan Nasional (National Development Planning Agency), BNPB = Badan Nasional Penanggulangan Bencana (National Disaster Management Agency), MOF = Ministry of Finance, MOSA = Ministry of Social Affairs, RPJMN = Rencana Pembangunan Jangka Menengah Nasional (National Medium-Term Development Plan). a BAPPENAS. 2015. National Medium Term Development Plan: 2015-2019. Jakarta. b Including, for example, safe location and segregation of latrines and bathing facilities; safe location of water points;

doors and internal locks; and lighting near and in all water, sanitation, and hygiene facilities. Source: Asian Development Bank.

Appendix 2 15

LIST OF LINKED DOCUMENTS http://www.adb.org/Documents/RRPs/?id=52324-001-3

1. Loan Agreement 2. Summary Assessment of Damage and Needs 3. Contribution to the ADB Results Framework 4. Emergency Assistance Coordination 5. Country Economic Indicators 6. Summary Poverty Reduction and Social Strategy 7. Risk Assessment and Risk Management Plan 8. List of Ineligible Items 9. Summary of Public Financial Management Assessment Supplementary Documents 10. Poverty Impact Assessment 11. Summary of Proposed Technical Assistance