Report and Recommendation of the President to the Board of Directors

Project Number: 38479-034 November 2011

Proposed Loan Republic of Indonesia: Regional Roads Development Project

CURRENCY EQUIVALENTS (as of 3 October 2011)

Currency Unit – rupiah (Rp) Rp1.00 = $0.000110

$1.00 = Rp9,090

ABBREVIATIONS ADB – Asian Development Bank AHHTAPP BAPPENAS

– –

anti HIV/AIDS and human trafficking awareness and prevention program Badan Perencanaan Pembangunan Nasional (National Development Planning Agency)

BIMP-EAGA – Brunei Darussalam-Indonesia-Malaysia-Philippines–East ASEAN Growth Area

DGH – Directorate General of Highways EIRR – economic internal rate of return IDB – Islamic Development Bank IEE – initial environmental examination km – kilometer km2 square kilometer LARAP – land acquisition and resettlement action plan LIBOR – London interbank offered rate MPW – Ministry of Public Works PAM – project administration manual PMU – project management unit RSP – road sector program RSSP – road safety strengthening program

NOTE

In this report, "$" refers to US dollars unless otherwise stated. Vice-President S. Groff, Operations 2 Director General K. Senga, Southeast Asia Department (SERD) Director J. Lynch, Transport and Communications Division, SERD Team leader R. Valkovic, Principal Transport Specialist, SERD Team members P. Broch, Senior Transport Economist, SERD M. Buendia, Safeguards Specialist (Resettlement), SERD A. Samoza, Associate Project Analyst, SERD H. S. Soewartono, Senior Project Officer, SERD Y. Tanaka, Senior Transport Specialist, SERD A. Velasquez, Safeguards Specialist (Environment), SERD S. Zaidansyah, Counsel, Office of the General Counsel Peer reviewer L. Cai, Unit Head, Project Administration, East Asia Department 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

MAPS

I. THE PROPOSAL 1

II. THE PROJECT 1 A. Rationale 1 B. Impact and Outcome 3 C. Outputs 3 D. Investment and Financing Plans 3 E. Implementation Arrangements 4

III. DUE DILIGENCE 6 A. Technical 6 B. Economic and Financial 6 C. Governance 7 D. Poverty and Social 7 E. Safeguards 8 F. Risks and Mitigating Measures 9

IV. ASSURANCES 10

V. RECOMMENDATION 10 APPENDIXES 1. Design and Monitoring Framework 11 2. List of Linked Documents 13

PROJECT AT A GLANCE

1. Project Name: Regional Roads Development Project 2. Project Number: 38479-01 3. Country: Republic of Indonesia 4. Department/Division: Southeast Asia Department Transport and Communications Division 5. Sector Classification

Sectors Primary Subsectors Transport, and Information and Communication Technology

Road Transport

6. Thematic Classification: Themes Primary Subthemes Economic growth

Promoting economic efficiency and enabling business environment

Regional cooperation and integration Cross-border infrastructure

6a. Climate Change Impact: 6b. Gender Mainstreaming:

Adaptation Mitigation

Gender equity theme Effective gender mainstreaming Some gender benefits No gender elements

7. Targeting Classification: 8. Local Impact:

General Intervention

Targeted Intervention Rural High Geographic

dimensions of inclusive growth

Millennium Development

Goals

Income Poverty at Household

Level

Urban National Regional Low

9. Project Risk Categorization: Low risk 10. Safeguard Categorization:

Environment B Involuntary resettlement A Indigenous peoples B

11. ADB Financing:

Sovereign/Nonsovereign Modality Source Amount

($ million) Sovereign Loan Ordinary capital resources 180.0 Total 180.0

12. Cofinancing:

Financier Category Amount ($ million)

Islamic Development Bank Official, international 65.0 Total 65.0

13. Counterpart Financing:

Source Amount ($ million)

Government 135.5 14. Aid Effectiveness:

Parallel project implementation unit No Program-based approach No

PROJECT LOCATION

I N D I A N O C E A N

PACIFIC OCEAN

J a v a S e a

J a v a S e a

Jakarta

Banjarmasin

Palangkaraya

Balikpapan

Tanahgrogot

Tenggarong

Muarateweh

Putussibau

Samarinda

Tarakan

Tanjungredep

Tanjungselor

Sampit

Kualakapuas

Pangkalanbun Barabai

Pontianak Tayan

Sintang

Ketapang

Liku Merbau

Singkawang

Sambas

Mempawah

Kerumuk

Malinau

Kotabaru

34 RCPO4

34 RCPO3

34 RCPO2

30 RCPO3

30 RCPO2

30 RCPO1

Aruk

34 RCPO1

XX RCPXX

SOUTHKALIMANTAN

CENTRAL KALIMANTAN

WEST KALIMANTAN

EAST KALIMANTAN

FLORES

SUMBA TIMOR

SERAM

HALMAHERA

BALI

SUMBAWA

BANGKA

BELITUNG

KALIMANTANSUMATRA

J A V A

SULAWESI

PAPUA

National Capital

Provincial Capital

City/Town

Contract Package Name

Project Road

Other Road

Provincial Boundary

International BoundaryBoundaries are not necessarily authoritative.

INDONESIA

REGIONAL ROADS DEVELOPMENTPROJECT

Kilometers

0 50 100 150 200 250

N

11-1430b AV

Map 1

0o0o

10 00'So 10 00'S

o

130 00'Eo

130 00'Eo

110 00'Eo

110 00'Eo

10 00'No

10 00'No

0o

0o

4 00'So

4 00'So

4 00'No

4 00'No

116 00'Eo

116 00'Eo

112 00'Eo

112 00'Eo

This map was produced by the cartography unit of the Asian Development Bank. The boundaries, colors, denominations, and any other information shown on this map do not imply, on the part of the Asian Development Bank, any judgment on the legal status of any territory, or any endorsement or acceptance of such boundaries, colors, denominations, or information.

PROJECT LOCATION

I N D I A N O C E A N

I N D I A N O C E A N

PACIFIC OCEAN

J a v a S e a

J a v a S e a

S t r a i t of M a d u r a

Sapudi Islands

Raas Islands

Bawean IslandKarimun Jawa Islands

Masalembo Island

Nusa Barung Islands

Panaitan IslandsMADURA

Nusakambangan Islands

24 RCPO1

24 RCPO228 RCPO1

24 RCPO3XX RCPXX

Jakarta

Surabaya

Semarang

Yogyakarta

Bandung

SerangJAKARTA

Cilacap

Brebes

Pemalang

Purwokerto

Kudus

Pati

Klaten

Purwakarta Cirebon

Karawang

SukabumiCianjur

Tasikmalaya

Probolinggo

Banyuwangi

JemberMalang

SumenepBangkalan

Pamekasan

MadiunSolo

Lamongan

Kediri

Pasuruan

Indramayu

Kandanghaur

Bogor

Ciamis

Kebumen

Bantul

Pekalongan

SalatigaPurwodadi

Blitar

Gresik

Situbondo

Labuhan

FLORES

SUMBA TIMOR

SERAM

HALMAHERA

BALI

SUMBAWA

BANGKA

BELITUNG

KALIMANTANSUMATRA

J A V A

SULAWESI

PAPUA

E A S T J AVA

C E N T R A L J AVA

W E S T J AVA

BANTEN

YOGYAKARTANational Capital

Provincial Capital

City/Town

Contract Package Name

Project Road

Other Road

Provincial Boundary

International Boundary

Boundaries are not necessarily authoritative.

INDONESIA

REGIONAL ROADS DEVELOPMENT PROJECT

0 25 50 75 100

Kilometers

N

11-1

430a A

V

Ma

p 2

0o0o

10 00'So 10 00'S

o

130 00'Eo

130 00'Eo

110 00'Eo

110 00'Eo

10 00'No

10 00'No

112 00'Eo

112 00'Eo

108 00'Eo

108 00'Eo

6 00'So

6 00'So

8 00'So

8 00'So

This map was produced by the cartography unit of the Asian Development Bank. The boundaries, colors, denominations, and any other information shown on this map do not imply, on the part of the Asian Development Bank, any judgment on the legal status of any territory, or any endorsement or acceptance of such boundaries, colors, denominations, or information.

I. THE PROPOSAL

1. I submit for your approval the following report and recommendation on a proposed loan to the Republic of Indonesia for the Regional Roads Development Project.1 2. The project will improve about 476 kilometers (km) of strategic and national roads in four provinces 2 of Indonesia. The roads are in less developed and poorer areas of the provinces. Roads were selected through project preparatory technical assistance3 based on corridor development and regional connectivity criteria to maximize development impacts and benefits. The project is consistent with the strategic priorities of the Indonesia country strategy of the Asian Development Bank (ADB), 4 through supporting investment in transport infrastructure to promote inclusive growth and reduce disparities across less-developed areas of the country.

II. THE PROJECT

A. Rationale

3. Strategic context. Indonesia is a middle-income country with varied development across its provinces and islands. The Government of Indonesia plans to promote sustainable economic growth by significantly increasing infrastructure investment over the next 5 years. To achieve more equitable development across the country, the government recognizes the urgent need to (i) improve transport accessibility in less-developed areas, which will also reduce poverty in local communities; and (ii) expand long-term growth opportunities and attract investment through the development of stronger trade ties under regional cooperation initiatives. 4. The proposed project will improve strategic and national road corridors in northern Kalimantan and southern Java to support economic growth in these two less developed and poorer areas of the country. The rehabilitation and capacity expansion of road corridors will strengthen national and regional connectivity, and improve access to markets, job opportunities, and social services. The national road network in southern Java is incomplete, with some road sections of the southern Trans Java Highway not yet constructed, resulting in gaps in network coverage; other sections are constructed below national standards and are in poor condition. Improved road infrastructure in southern Java is necessary to remove existing constraints to economic growth and investment in this isolated area. Similarly, road network improvements are needed to support economic development in less-developed and remote districts in northern Kalimantan. Improved road connections in Kalimantan to the Malaysian border will support the Brunei Darussalam-Indonesia-Malaysia-Philippines–East ASEAN Growth Area (BIMP-EAGA) transport initiatives to develop two land-based transport corridors for greater connectivity and reduced transport costs5, as well as complement other BIMP-EAGA programs to reduce nonphysical barriers to trade by improving customs, immigration, quarantine, and security. 1 The design and monitoring framework is in Appendix 1. 2 East Java, Central Java, East Kalimantan, and West Kalimantan provinces. 3 Asian Development Bank (ADB). 2008. Technical Assistance to the Republic of Indonesia for Preparing the

Regional Roads Development Project. Manila (TA 7085-INO). 4 ADB. 2006. Country Strategy and Program: Indonesia, 2006-2009. Manila; ADB. 2010. Country Operations

Business Plan: Indonesia, 2011-2013. Manila. 5 ADB. 2004. Technical Assistance for Support to Strategize Regional Cooperation in Southeast Asia. Manila (TA

6174-REG).

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5. The road subsector. Roads are the dominant mode of transport in Indonesia, meeting 83% of passenger and 70% of freight demand. Although Indonesia has a vast network of roads with 37,500 kilometers (km) of national roads, 41,100 km of provincial roads, and 249,000 km of district (kabupaten) roads, the density of the national road network is relatively low at about 0.4 km per 1,000 square kilometers (km2), and is significantly lower in less-developed areas.6 Road transport demand in the country has been growing significantly faster than the gross domestic product for nearly a decade, and congestion on the arterial road network is becoming a widespread problem, especially in Java. 6. Roads are a key enabler for the country’s poverty reduction strategy, as they improve people’s access to education, health services, and job opportunities. In recent years, the government has concentrated on eliminating the large maintenance backlog for the national highway network, rather than expand the road network. This has limited funding for improving access to areas away from primary traffic corridors. In addition to persistent maintenance requirements, ongoing challenges include poor interdepartmental coordination, inadequate institutional capacity, poor control of vehicle overloading, and insufficient focus on road safety. The government’s 2010–2014 strategy for national highways 7 is to ensure that roads are improved and constructed to enhance connectivity between major towns in order to increase access to markets and other centers of economic activity, including (i) expansion of road capacity to meet traffic demand; and (ii) extension of the road network to serve poor, isolated communities and to promote regional cooperation with neighboring countries. 7. Road financing and sustainability. National road budgets have more than doubled from $1.0 billion in 2002 to almost $2.1 billion in 2009, equivalent to average annual growth of 7%–8% in real terms but lower than the average growth in vehicles and transport demand. Despite this increase in funding, improper maintenance planning, inadequate standards, and poor implementation have contributed to unsustainable outcomes. Variable quality of work, short-life design standards, and inconsistent supervision for maintenance and new construction works reduce the life of road assets, which subsequently require higher maintenance expenditure. In addition, endemic vehicle overloading accelerates the deterioration of roads. The government has come to recognize that new and more cost-effective road maintenance practices are essential to improve overall road conditions and to reduce transport and logistics costs. Sustainability of the road subsector also requires institutional capacities to be strengthened, especially at the provincial level given the decentralization of responsibilities, particularly for road maintenance. 8. Relevance. The government’s medium-term development goals commit to increasing sustainable economic growth, creating jobs, and accelerating achievement of its millennium development goals. 8 Infrastructure development and investment—including that related to road transport—is critical to meeting these objectives. Improvement of road infrastructure is a key priority under the government's 2010–2014 5-year medium-term strategy, and is consistent with the Indonesia transport sector assessment, strategy, and road map of the ADB (footnote 4). 9. Lessons. Lessons from previous ADB transport loans and sector assessments are incorporated in the project design. The focus on corridor development addresses the relatively low impacts of recent loans for roads that were spread widely throughout the country. The

6 The road density for Kalimantan is only 0.19 km per 1,000 km2, compared with 0.90 km per 1,000 km2 in Java. 7 Ministry of Public Works. 2009. National Road Assessment 2005–2009 and Strategic Plan 2010–2014. Jakarta. 8 Government of Indonesia. 2009. National Medium Term Development Plan (Rencana Pembangunan Janga

Menengah Nasional - RPJMN) 2009–2014. Jakarta.

3

project is designed to avoid inefficient implementation by relying on project readiness criteria, strengthening governance mechanisms, providing immediate training to enhance skills development for road agencies, and addressing road safety issues and vehicle overloading control through a multistakeholder approach. B. Impact and Outcome

10. The impact of the project will be increased efficiency of road transport supporting integrated and sustainable economic growth along project corridors. The outcome will be improved capacity and safety of national and strategic roads. C. Outputs

11. The project outputs will consist of two components: (i) development of national and strategic roads, and (ii) road sector development program. 12. The component to develop national and strategic roads includes rehabilitation and improvement of approximately 476 km of existing roads, mainly within the existing right-of-way, in the four provinces of East and West Kalimantan, and East and Central Java. ADB will finance approximately 400 km of roads and the Islamic Development Bank (IDB) will finance approximately 76 km of roads. This component includes consulting services for project management, environment and social safeguards, and construction supervision. 13. The road sector development program component will include two subprograms:

(i) Road safety strengthening subprogram (RSSP). The RSSP will adopt an integrated multiagency approach to road safety to support implementation of the new road traffic law enacted in June 2009. The RSSP will include (a) road safety engineering and audits; (b) a road safety awareness campaign for communities in the project districts, which will also address gender issues related to road safety; (c) road safety training; and (d) strengthening capacity for overloading and speed enforcement.

(ii) Road sector subprogram (RSP). The RSP will address key road issues and build capacity in road agencies by (a) developing an integrated capacity development program for national, provincial, and district road agencies; (b) developing an anti HIV/AIDS and human trafficking program for project districts; (c) a study to develop an overall strategic approach to transport sector planning to prioritize investments; and (d) designing and implementing an effective approach for an integrated vehicle overloading control strategy.

D. Investment and Financing Plans 14. The project is estimated to cost $380.5 million (Table 1).

15. The government has requested a loan of $180 million from ADB’s ordinary capital resources to help finance the project. The loan will have a 25-year term, including a grace period of 5 years, an annual interest rate determined in accordance with ADB’s London interbank offered rate (LIBOR)-based lending facility, a commitment charge of 0.15% per year, and such other terms and conditions set forth in the draft loan agreement. The government has provided ADB with (i) the reasons for its decision to borrow under ADB’s LIBOR-based lending

4

facility based on these terms and conditions, and (ii) an undertaking that these choices were its own independent decision and not made in reliance on any communication or advice from ADB. 16. The financing plan is in Table 2. The IDB will provide parallel cofinancing of $65.0 million equivalent under Istisna loan terms, 9 which was approved by IDB on 1 May 2011. The government will provide counterpart financing of $135.5 million equivalent.

Table 1: Project Investment Plan

($ million) Item ADB IDB Gov’t Amounta A. Base Cost 1. Development of national and strategic roads Land acquisition and resettlement 0.0 0.0 0.7 0.7 Civil worksb 155.0 53.5 65.7 274.2 Consultant services 12.2 3.0 0.0 15.2 2. Road sector development program Road safety strengthening subprogramc 6.9 0.0 0.0 6.9 Road sector subprogram 3.3 0.0 0.0 3.3

3. Taxes and Duties 0.0 0.0 22.1 22.1 Subtotal (A) 177.4 56.5 88.5 322.4 B. Contingenciesd 2.6 8.5 37.4 48.5 C. Financing Charges During Implementatione 0.0 0.0 9.6 9.6

Total (A+B+C) 180.0 65.0 135.5 380.5

ADB = Asian Development Bank, IDB = Islamic Development Bank, Gov’t = government. a In 2010 prices. b Excludes taxes and duties under ADB components; includes taxes and duties under IDB component. c Road safety equipment in the amount of $1.3 million is included. d Physical contingencies at 5% of civil works; price contingencies at 0.7%–2.5% on foreign exchange costs and 3%–

27% on local currency costs. e Includes interest during construction and commitment charges for the ADB loan. Source: Asian Development Bank estimates.

Table 2: Financing Plan Source

Total ($ million)

Share of Total (%)

Asian Development Bank 180.0 47.4 Islamic Development Bank 65.0 17.1 Government 135.5 35.5 Total 380.5 100.0 Source: Asian Development Bank estimates.

E. Implementation Arrangements

17. The Directorate General of Highways (DGH) of the Ministry of Public Works (MPW) will be the executing agency. The Directorate of Planning (Bina Program) in DGH will be

9 Istisna terms can be up to 20 years, including grace period of up to 5 years. There are no interest charges and

commitment fees. Interest rates are either fixed or LIBOR-based plus a fixed rate.

5

responsible for overall project management. Chaired by the National Development Planning Agency (BAPPENAS), a project steering committee representing BAPPENAS, the Ministry of Finance, MPW, and the Ministry of Transportation will monitor and coordinate project implementation. DGH will be the main implementing agency and provide support for civil works and road safety engineering. The three other implementing agencies are (i) the Directorate General of Land Transportation for road safety awareness, road safety training, and the overloading control program; (ii) the Directorate of Traffic Police for the overloading and speed enforcement program; and (iii) the BAPPENAS Directorate of Transportation for the transport sector development strategy and policy study. DGH will establish a project management unit (PMU) headed by a manager with experience in externally financed projects. The PMU staff will be responsible for day-to-day implementation, technical and financial reporting, and ensuring compliance with ADB procurement and consulting guidelines and safeguard policies. The PMU will include experienced engineers, accountants, and other staff as required and be supported by a core team of consultants. Based on successful implementation of previous ADB loans, DGH has sufficient capacity to implement the project. 18. Of the 11 civil works contracts, 3 are in Central Java, 1 in East Java, 3 in West Kalimantan, and 4 in East Kalimantan. IDB will finance the 3 contracts in Central Java; ADB and the government will finance all other contracts. Of the 11 consulting services contracts, IDB will finance the design review and supervision consulting services for the civil works in Central Java; ADB will finance the remaining consulting services. Consulting services and civil works contracts to be financed by IDB will be implemented in accordance with its procedures, and IDB will not use ADB procurement and disbursement guidelines. IDB has agreed to comply with ADB’s Safeguard Policy Statement (2009) requirements for all components to be financed under the project. 19. The implementation arrangements are summarized in Table 3 and described in detail in the project administration manual (PAM).10

10 Project Administration Manual (accessible from the list of linked documents in Appendix 2).

6

Table 3: Implementation Arrangements Aspects Arrangements Implementation period November 2011–February 2016 Estimated completion date 29 February 2016 Management

(i) Oversight body Project Steering Committee (ii) Executing agency Directorate General of Highways,

Ministry of Public Works (iii) Key implementing agencies

(a) Civil works, road safety engineering Directorate General of Highways (b) Road safety awareness and training, overloading control program

Directorate General of Land Transportation

(c) Overloading and speed enforcement program

Traffic Police Corps of Indonesian National Police

(d) Transport sector development study BAPPENAS Directorate of Transportation (iv) Project management unit Jakarta 12 staff

Procurement of civil works ICB 11 contracts $274.2 million Shopping 1 contract $1.3 million Consulting services QCBS 11 contracts

3,012 person-months

$24.9 million

Advance contracting Procurement of civil works and consulting services Disbursement The loan proceeds will be disbursed in accordance

with ADB's Loan Disbursement Handbook (2007 as amended from time to time) and detailed arrangements agreed upon between the government and ADB.

ADB = Asian Development Bank, BAPPENAS = State National Development Planning Agency, ICB = international competitive bidding, QCBS = quality- and cost-based selection. Source: Asian Development Bank

III. DUE DILIGENCE

A. Technical

20. The project will rehabilitate and widen existing substandard two-lane national highways and strategic roads with asphalt in accordance with updated national highway standards. The project roads will follow existing alignments, with some minor deviations from the right-of-way and realignment to comply with national highway standards. The civil works will strengthen the existing road pavement and improve road alignments to meet forecast traffic demand. The improved roads will increase capacity and safety of existing highways and provide new all-weather links to the border with Malaysia at Aruk and Simanggaris in West and East Kalimantan provinces, respectively. The detailed design for all road sections is complete. DGH has verified the cost estimates for the civil works for the project. B. Economic and Financial

21. The project will benefit road users and communities in four provinces and indirectly benefit adjoining provinces and neighboring countries. The main benefits derived from improved accessibility are better, safer, cheaper, and faster transportation. The better connectivity will provide social benefits that include improved access to health, education, and other government services. The project is economically viable with an economic internal rate of return (EIRR) of 13.0%. The sensitivity and switching value analyses shows that the EIRR is marginal and risks falling below the 12% threshold. With a 20% change in user benefits and project costs, the

7

EIRR will decrease to 10%, which is considered acceptable as the project areas will experience substantive social benefits due to the improved road conditions. However, as conservative values are used for diverted and generated traffic, and cost increases should be low since detailed design is complete, the probability of the EIRR falling below 12% is considered to be very low. 22. The low project EIRR values are due to the large number of road projects that will improve road links that connect with the border and presently have low traffic volume; benefits are mainly derived in later years as traffic volume and trade increase. Benefits from increased trade traffic have been conservatively estimated, but potential for improved benefits is high, especially if the current nonphysical constraints to trade are lowered; expected regional cooperation measures under BIMP-EAGA initiatives are successfully implemented; and sustainable development is expanded, including proposed ecotourism measures in Kalimantan. 23. The project will be a public sector investment, as low traffic volume will not attract private sector participation. DGH currently allocates about $1.2 billion of the annual budget for routine, periodic, and major road maintenance, or about 70% of the annual budget for national highways. The maintenance budget is expected to increase over the next 5 years to fully meet needs, and sufficient funding will be allocated for maintenance of project roads. C. Governance

24. The governance assessment, undertaken as part of the due diligence process, focuses on DGH’s capacity in financial management, procurement, enforcement of regulations, and other institutional issues including risk of corruption during procurement. The governance performance of DGH has improved steadily in recent years. From 2007, DGH has incorporated an anticorruption action plan for all loan-funded projects, with specific measures adopted to meet specific financier requirements. These measures include information disclosure, oversight and monitoring, mitigation of fraud and collusion risks, complaints handling, and sanctions and remedies. 25. The country's performance on national and local governance has been lacking in some areas, but progress is being made on several fronts. The establishment in December 2007 of the National Public Procurement Agency and the Anti-Corruption Commission has resulted in positive changes in terms of monitoring and enforcement of good governance. A major problem is lack of transparency in the public procurement process, and difficulties in validating prices for foreign-funded contracts and contract variations. The project will include international competitive bidding, which improves oversight and helps mitigate corrupt practices. This validation process improves governance but can also cause implementation delays if information is not readily shared. 26. ADB’s Anticorruption Policy (1998, as amended to date) was explained to and discussed with the Ministry of Finance and DGH. The specific policy requirements and supplementary measures are described in the PAM, including the proposed anticorruption action plan (footnote 10). D. Poverty and Social

27. The project is a general intervention with indirect poverty reduction impacts. For the coastal highway in Southern Java, road transportation is still constrained by poor road conditions and much of the traffic flow is for the transport of agricultural commodities from

8

poorer areas to larger northern cities. Local economies are expected to benefit from lower transport costs to major centers and better access to lateral markets where current connections are poor or nonexistent. With improved east–west access and easier access to the southern beaches, tourism opportunities will increase and improve prospects for local businesses. In Kalimantan, upgrading two international border corridors will promote interregional and international linkages, and provide alternate markets and opportunities for local communities. Access to alternative sources of goods will reduce costs, promote all-year access, and increase the potential for small and medium-scale entrepreneurs to develop sustainable businesses. In all areas, the improved road access will facilitate government administration and social service delivery, which will also promote women’s empowerment through access to and use of relevant services, resources, assets, and opportunities.

28. Local communities will benefit from temporary construction jobs, and routine maintenance will employ unskilled and semiskilled workers. The employment and fair treatment of women in construction and maintenance will be encouraged. DGH will ensure that employment opportunities are announced to local communities and will ensure that contractors conform with appropriate labor laws and standards. 29. The potential adverse social impacts from the project are increased risk of exposure to HIV/AIDS and human trafficking of women and children during construction and operation due to the influx of construction workers, improved border connections, and increased transit traffic. Safety risks will increase for communities along the road because of increased traffic and higher vehicle speeds along the improved road. These risks will be addressed through the anti HIV/AIDS and human trafficking awareness and prevention program (AHHTAPP) and RSP. Focus will be placed on supporting local communities in designing, implementing, and monitoring community-based, gender responsive, and culturally appropriate AHHTAPP and RSP awareness activities. All civil works contracts under the project incorporate provisions and budgets to the effect that contractors carry out the AHHTAPP in the construction campsites in coordination with the government's programs and other initiatives. E. Safeguards

30. The project is classified category A for involuntary resettlement and category B for environment and indigenous people. An initial environmental examination (IEE) and land acquisition and resettlement action plans (LARAPs) for project districts were prepared to meet the requirements of ADB’s Safeguard Policy Statement. The LARAPs, based on preliminary design of the roads, will be updated during project implementation. 31. The IEE covers a general environmental profile of all subprojects and includes an assessment of potential environmental impacts during various project phases. It includes the environmental management plan with a set of mitigation and management measures to be taken during project implementation to avoid, reduce, mitigate, or compensate for adverse environmental impacts. The subprojects could have some adverse environmental impacts, but they would be short-term, temporary, and reversible; the impacts can be minimized and managed by implementing mitigation measures. 32. No subprojects will pass through conservation forests. One subproject in Java and six in Kalimantan will pass through forests that are protected or used for production, but no tree cutting and land acquisition in such forests will be needed. No rare, threatened, or endangered species of flora and fauna are in or close to the subproject areas. No heritage sites of national and international importance, or sites that are historically or archaeologically sensitive, are in or

9

near the subproject areas. Consultations were conducted from September 2008 to August 2011 involving about 275 people including affected people, community leaders, nongovernment organizations, and national and provincial government officials. The IEE is available to the public through the DGH office and ADB’s website. 33. The Tambakmulyo—Wawar road (38.5 km) is one of the three sections in Central Java. The land acquisition for the first 24 km of Tambakmulyo—Wawar road was completed, 11 for the remaining 14.5 km, a LARAP was prepared. As the resettlement impacts will be significant, this subproject road is classified category A for involuntary resettlement. About 145 households will be severely affected; 106 households will lose at least 10% of their productive land, while 31 houses and 8 shops will be physical displaced. A total of1,400 households will be marginally affected by this subproject. Land acquisition for the other two subprojects in Central Java, has been completed (footnote 11). The 10 subprojects in East Java, and East and West Kalimantan provinces are classified category B for involuntary resettlement. Land acquisition and resettlement impacts will not be significant. LARAPs for East Kalimantan, West Kalimantan, and East Java were prepared. About 530 households will be marginally affected by these 10 subprojects. 34. During the preparation of the LARAPs for all subproject roads, meetings were held with potentially affected households and other stakeholders to determine potential impacts on land, non-land assets, and income of households along the subproject roads. The aim was to elicit concerns and suggestions from the stakeholders to mitigate, if not avoid, these impacts. Key information in the LARAPs was disclosed to the affected people. No site clearing will be done until after DGH and ADB have agreed upon the updated LARAPs and the provisions in the updated LARAPs have been implemented satisfactorily. 35. Ethnic groups, such as Melayu, Chinese, and Dayak, live along the roads in West Kalimantan. They have been integrated into the wider socio-economic and cultural community, while retaining many aspects of their culture. Specific actions related to ethnic groups are included in the LARAPs, such as consultation measures that use local leaders and the traditional grievance redress process for Dayak people. F. Risks and Mitigating Measures

36. The project will involve standard road design and construction techniques; the risks associated with project design and construction are minimal. However, the greatest risks during project implementation will be related to public financial management, procurement, corruption, and due diligence. Risks to sustainability and policy reform require the application and enforcement of appropriate mitigation measures. Major risks and mitigating measures are summarized in Table 4 and described in detail in the risk assessment and risk management plan. 12 Benefits and impacts are expected to outweigh any mitigation costs.

11 For completed land acquisition, land owners are still allowed to use the land for farming and will be provided

sufficient time to clear the land through socialization during project implementation. 12 Risk Assessment and Risk Management Plan (accessible from the list of linked documents in Appendix 2).

10

Table 4: Summary Risks and Mitigating Measures

Risks Mitigating Measures Lack of an effective policy for road safety and inadequate control of overloaded vehicles

The government will expedite approval of the road safety implementing regulations in 2012. The government will complete the overloading assessment study in 2012 then implement the recommended measures. The Traffic Police Corps will implement speeding and overloading enforcement program.

DGH fails to maintain the project roads once improved

Consultants will be appointed to help strengthen maintenance planning, funding, and implementation.

The government will assure availability of adequate funds and selected use of performance-based maintenance contracting.

Corruption DGH and ADB will implement annual project monitoring through the anticorruption action plan and through two full review missions, and make information available through the MPW and ADB websites.

ADB = Asian Development Bank, DGH = Directorate General of Highways, MPW = Ministry of Public Works. Source: Asian Development Bank.

IV. ASSURANCES

37. The government has assured ADB that implementation of the project 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 project administration manual and loan documents. 38. The government has agreed with ADB on certain covenants for the project, which are set forth in the loan agreement.

V. RECOMMENDATION

39. 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, I recommend that the Board approve the loan of $180,000,000 to the Republic of Indonesia for the Regional Roads Development Project from ADB's ordinary capital resources, with interest to be determined in accordance with ADB's London interbank offered rate (LIBOR)-based lending facility; for a term of 25 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.

Ursula Schaefer-Preuss Vice-President

2 November 2011

Appendix 1

11

DESIGN AND MONITORING FRAMEWORK Design Summary

Performance Targets and Indicators with Baselines

Data Sources and Reporting Mechanisms

Assumptions and Risks

Impact Increased efficiency of road transport supporting integrated and sustainable economic growth along project corridors

By 2020, per capita gross domestic product growth of project districts increased by 10% from the province’s average trend in 2010 Cross-border transport costs per ton decreased by 20% and volume of trade increased by 50% from 2010 to 2020 in Kalimantan

Provincial yearbook Project benefit monitoring and postevaluation reports

Assumptions Continued strong growth in trade by Indonesia with regional countries. Risks Cooperation deteriorates under BIMP-EAGA initiatives

Outcome Improved capacity and safety of national and strategic roads

Volume–capacity ratio in both southern Java highway corridors reduced from 0.8 to less than 0.5 by the end of 2016 By the end of 2016, traffic volume of northern Kalimantan roads doubled from 2010 Average number of road accidents in project corridors decreased from 15 deaths per 10,000 vehicles in 2009 to less than 10 by the end of 2016

Annual DGH traffic counts and road and bridge condition surveys Ministry of Transportation accident statistics Independent road safety audit reports Project benefit monitoring and postevaluation reports

Assumption Improved road safety design incorporated into construction planning Coordination improves between different agencies responsible for road safety Risks Rapid deterioration of the road network caused by poor overloading enforcement Inadequate road maintenance financing

Outputs 1. Development of

national and strategic roads

2. Road sector

development program implemented

Rehabilitation and widening of 476 kilometer of road in West and East Kalimantan, and East and Central Java provinces by 2015 Road safety engineering and audit completed and measures implemented for all project links by 2015 All communities participate in road safety awareness program by December 2015, with 80% participation of transport providers and school children

DGH road and bridge inventory database DGH progress reports ADB review missions Directorate General of Land Transportation safety reports

Assumption Road safety coordination mechanism between road agencies is implemented Risk Corruption issues impact road project implementation

Appendix 1

12

Design Summary

Performance Targets and Indicators with Baselines

Data Sources and Reporting Mechanisms

Assumptions and Risks

Speed and overloading enforcement system successfully completed on all project roads Indonesia transport sector development strategy and policy study completed by end of 2015 Anti HIV/AIDs and human trafficking program implemented in all provinces by 2015 Successful training of 250 road agency staff by December 2015

Activities with Milestones Inputs 1. Development of national and strategic roads 1.1 Recruitment of core team consultant by March 2012 1.2 Recruitment of construction supervision consultants by March 2012 for

Kalimantan and June 2012 for Java 1.3 Award of all civil works contracts by December 2012 and physical completion

by 31 December 2015 2. Road sector development program 2.1 Recruitment of road safety support and capacity development consultants by

December 2012 and completion of the services by February 2014 2.2 Recruitment of road safety awareness campaign and training consultant by

December 2012 and road safety awareness campaign conducted on all project roads by August 2014

2.3 Consultant recruitment for enforcement and speed enforcement program by December 2012 and completion of district programs by December 2014

2.4 Recruitment of transport sector development strategy and policy study consultant by December 2012 and adoption of recommendations by May 2015

2.5 Consultant recruitment for integrated vehicle overloading control strategy by December 2012 and completion of the services by June 2014

2.6 Consultant recruitment for anti HIV/AIDS and trafficking awareness and prevention program by December 2012 and completion of the program by June 2014

ADB: $180 million - Civil works: $155.0

million - Project management

and supervision: $12.2 million

- Road safety strengthening program: $6.9 million

- Road sector program: $3.3 million

- Other: $2.6 million Government: $135.5 million - Civil works:

$65.7 million - Land acquisition and

resettlement: $0.7 million

- Other: $69.1 million IDB: $65 million - Civil works:

$53.5 million - Supervision:

$3.0 million - Other: $8.5 million

ADB = Asian Development Bank, DGH = Directorate General of Highways, IDB = Islamic Development Bank. Source: Asian Development Bank.

Appendix 2

13

LIST OF LINKED DOCUMENTS (http://adb.org/Documents/RRPs/?id=38479-034-3)

1. Loan Agreement 2. Sector Assessment (Summary): Transport 3. Project Administration Manual 4. Contribution to the ADB Results Framework 5. Development Coordination 6. Economic and Financial Analysis 7. Country Economic Indicators 8. Summary Poverty Reduction and Social Strategy 9. Initial Environmental Examination 10. Land Acquisition and Resettlement Plan: Central Java 11. Land Acquisition and Resettlement Plan: East Java 12. Land Acquisition and Resettlement Plan: East Kalimantan 13. Land Acquisition and Resettlement Plan: West Kalimantan (Sambas District) 14. Land Acquisition and Resettlement Plan: West Kalimantan (Sanggau District) 15. Risk Assessment and Risk Management Plan