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AMENDMENT NO . 3 TO

LOAN AGREEMENT

BETWEEN THE

REPUBLIC OF INDONESIA

AND THE

UNITED STATES OF AMERICA

FOR

PROVINCIAL AREA DEVELOPMENT PROGRAM II

Dated : June 17, 1983

This AMENDMENT NO . 3 is entered into between the REPUBLIC OF INDONESIA ("Borrower") and the UNITED STATES OF AMERICA, acting

through the AGENCY FOR INTERNATIONAL DEVELOPMENT ("A . I . D . ") :

WITNESSETH THAT

WHEREAS, the Borrower and A. I . D . entered into a Loan Agreement , designated cs A.I . D. Loan No. 497-T-058 on May 23, 1979 ("Loan Agreement"), whereby A.I . D. agreed to lend to the Borrower up to Seven Million United States ("U.S.") Dollars

($7,000 , 000 ) ("Loan") to assist in financing Borrower ' s program to enable provincial and lower levels of government in Bengkulu, South Kalimantan, East Nusa Tenggara and East Java Provinces to

improve their capability for the identification, planning, implementation, management and evaluation of rural/area

development projects and activities that reach and assist the rural poor; and

WHEREAS , the Borrower and A.I.D. amended the Loan Agreement on August 15, 1979 to add $2,000 , 000 to the Loan, thereby

increasing the Loan to $9 , 000 , 000;

ｾｬｬｩｅｒｅａｓ Ｌ＠ the Borrower and A. I . D. amended the Loan Agreement on April 28 , 1980 to add the provinces of West Java and West Nusa Tenggara and to add $9 , 000 , 000 to the Loan, thereby increasing the Loan to $18,000,000, and

WHEREAS, the Borrower and A. I . D. desire again to amend to

-Loan Agreement to add an additional $12,650,000, and to make certain other changes to the Loan Agreement;

NOW THEREFORE, the Borrower and A.I.D. hereby agree as follows :

1 . The first paragraph of Section 3.1 is revised to read as follows:

"Section 3.1. The Loan. To assist the Borrower to meet the costs of carrying out the Project, A.I.D., pursuant to the

Foreign Assistance Act of 1961, as amended, agrees to lend the Borrower under the ｴ･ｲｾｳ＠ of this Agreement not to exceed Thirty

Hillion Six Hundred and Fifty Thousand United States (U.S.) Dollars ($30,650,000)("Loan")". The aggreqate amount of disbursements under the Loan is referred to as "Principal"."

2. Section 3.3 . Project Assistance Completion Date. Section 3.3(a) is revised to extend the project assistance completion date from May 23, 1985 to December l, 1989.

3 . Article 5, Conditions Precedent to Disbursement, is amended by deleting Section 5 . 2 and 5.3 and substituting the following:

3

-provinces participating in the Project which establish a new planning system agreed upon between the Borrower and A.I.D." 4. Article 6, Special Covenants, is revised to add the

following covenants:

"Section 6 . 2. Institution Building.

The Borrower agrees that, in order to maximize the institutional development of kabupaten resulting from the project, any kabupaten which participates in the project shall continue to do so for the entire life of the project whether such district is presently participating or is added during the extension of the project .

Section 6.3 . Training.

The Borrower agrees to secure the staff necessary for both the Directorate General of Regional Development,

Ministry of Home Affairs, and the local governments to permit existing staff to be sent for masters' degree training under the PDP II extension.

Section 6 . 4 . Approval of Planning Documents.

The Borrower agrees that A.I.D. will have the right to review and approve project planning documents, including the multi-year program strategy, the annual operational plan, and the individual project proposals (DUPs), before

implementation of the activities included in such documents." 5. A revised Amplified Project Description is attached as Annex I to this Amendment.

7. Except as hereinabove expressly amended, the Loan

Agreement is ratified, confirmed and conti nued in full force and effect in accordance with all of its terms.

IN WITNESS WHEREOF, the Borrower and the United States of America, each acting through its respective duly authorized

representative, have caused this Amendment No. 3 to be signed in their names and delivered as of the day and year first above wri tten.

REPUBLIC OF INDONESIA

--Signed

mo Ma tonagoro Ac 1n Director General

for Foreign Economic Relations Department of Foreign Affairs

UNITED STATES OF AMERICA

Signed

ANNEX I

AMPLIFIED PROJECT DESCRIPTION OF THE PROJECT

I. Project Purpose:

The purpose of the Provincial Area Development Project II is to increase the productive capacity of rural people by increasing the capacity of local government agencies to undertake five-year and annual planning , implementation and monitoring of rural development activities wi th in the provinces of Bengkulu, South Kalimantan, East Nusa Tenggara (NTT), East Java , West Nusa Tenggara (NTB) and West Java. As a secondary purpose the project aims to increase the capacity of central government agencies, primarily the Directorate General of Regional Development (BANGDA), Ministry of Home Affairs,

to support and coordinate decentralized planning and execution of rural development activities under the Ministry of Home Affairs.

II . Project Outputs

At the completion of the project it is expected that the following results will have been achieved :

1. Revised planning system . During the PDP II amendment period, BANGDA and the provinces will revise the planning system to

encourage intersectoral , multi-year and annual planning by the BAPPEDAs in cooperat:on with technical agencies for the purpose

of improving the qua l ity of the six provinces' development

programs under the M:nistry of Home Affairs overall . The system will provide an annual planning calendar to give the provinces the time necessary to complete their planning and evaluations. The key documents of this system are as follows:

a . The Multi - Year Program Strategy (MPS) : The province and district BAPPEDAs are now responsible for preparing a

five-year development plan for their regions (Repelita Daerah). Under the GOI 's budgeting system the only other planning document is the annual budget proposal (DUP) which is confined to a single sector. The purpose of the MPS (and the subsequent Annual Operational Plan (AOP)) is to encourage the provinces and districts to identify

inter - related, inter-sectoral programs for funding by PDP that are consistent with the Region's development needs, national policies, and the general regional plan (Repelita Daerah) . The MPS will be the guiding document for PDP

funding over the life of PDP in each province and the basis for a more specific and useful five-year development plan (Repelita Daerah) for the region. Each province planning board and as many district boards as are able will produce an MPS in collaboration with sectoral and lower level

the Lembaga Ketahanan Masyarakat Desa (LKMD) or Village Council which is one forum for village people to meet with

local government officials. These MPSs will include an analysis of local conditions, needs, constraints, resources and potentials, as well as appropriate economic, financial, and technical analyses . On the basis of these analyses, the provinces and districts will identify priorities,

locations, target population groups and strategies to meet the needs of these groups. Recommended activities will distinguish those which are experimental from other kinds of activities, indicating whether the goal of a proposed program area or subproject is immediate impact on

beneficiaries or learning from an experiment. Program objectives and time schedules will also be identified, and

the MPS will specify the end-of- project objectives,

indicating what the PDP-supported subprojects are expected to achieve in the long run .

District MPSs in a given province will be reviewed by the provincial planning boards which are responsible for

ensuring that MPSs are consistent with BANGDA ' s and the province ' s PDP policies. The provincial planning bodies will also monitor the quality of the district MPSs. On the basis of these district strategies, the province will

produce a provincial MPS setting out the overall regional strategy for PDP. The extent to which districts prepare individual planning documents wi l l depend on the

institutional strength of the district. Initially, some districts will be unable to produce plans without extensive assistance from the province . The purpose of this

extension is to develop institutional capacity to produce these plans .

b. Annual Operational Plan (AOP): The second element of the rev1sed plann1ng system will be the Annual Operational Plan

(AOP) . The AOP will prov i de the rationale for the mix of proposed programs based on broad MPS strategy and include budget estimates for component program areas including support activities such as research and training. The AOP will also describe how activities will be implemented and coordinated. As with the MPS, the AOP will be based on

inputs from agencies below the provincial level.

c. Component Sub- project Plans (DUPs) : Within the GOI the major plann1ng and budget1ng document is the subproject proposal, or DUP . The DUPs will specify target

populations, the expected outcomes, linkages among DUPs, include information on whether or not the activity is experimental and how it will be evaluated . During the extension, USAID and the GOI will explore ways to modify the DUPs to ensure more integrated and coordinated

- 3

-All three elements of the revised planning system -- the MPS, the AOP, ｡ｾ､＠ individual subproject designs-- will in

the initial years be reviewed by BANGDA and USAID . A directive from BANGDA, outlining requirements for the AOP and improved DUPs was issued in March 1983 for

implementation in IFY ＸＳＯＸＴｾ＠ a directive on the MPS is in preparation and will be issued by July 1983 for IFY 84/85.

The criteria to be used in assessing these documents will be agreed to by BANGDA and USAID through a jointly signed

PIL. This review process will be critical to ensure a sufficient standard of planning and at the same time maximum flexibility for provincial initiatives and responsiveness ｾｯ＠ local conditions .

2. Institutional Development of the Province and District level BAPPEDAs. During the extension the capacity of these agencies will be strengthened and their roles in decentralized

development defined operationally. The provincial BAPPEDAs are responsible for overall coordination and quality control of development programs and for general strategy setting for the province; district BAPPEDAs are responsible for specific strategies for the district and for managing the process of communicating with rural people through the forum of elected Village Councils (LKMDs).

3. Revised Information System. This system includes monitoring and evaluat1on systems and complements the planning system. The monitoring system tracks ｩｭｰｬ･ｭ･ｮｴ｡ｴｩｯｮｾ＠ the evaluation system measures impact.

4. Revised Training System. Training will be identified and conducted by provinces through the planning and budgeting

(DUP/DIP) system and will be an adjunct to the planning process. Training will emphasize 1) skills training in

administrative processes (planning, monitoring, and evaluation), 2) management training for planning officials, 3) skills

training for recipients of project inputs, and 4) community development training for members of village councils (LKMDs) to improve the bottom up planning process.

5. Improved Subproject Activity: The above planning system is being put in place to develop more appropriate program areas and subprojects for implementation by the various provincial and district technical agencies, both in terms of subproject

selection and implementation. The selection and review process described above will identify a series of program areas and subprojects appropriate Loan area's development needs, which are consistent with the province ' s development strategy, and which are implementable and technically and economically sound. It is expected that such subprojects \>lill be non-capital

intensive and be largely concentrated in the areas of agriculture, credit, small industry, training and local

that their part in a province's or district's strategy is explained and justified in the planning documents.

PDP II thus will help to finance subprojects that are (i) targetted on increasing the incomes of the rural poor; (ii) relatively small scale, of a pilot nature, and capable of execution within a reasonable time frame; (iii) technically, economically, financially, socially, environmentally and

administratively sound; (iv) capable of replication; (v) focused spatially to maximize the likelihood of beneficial linkages

between activities under auspices of the PDP and other

governmental efforts, and (vi) within the framework and major objectives of the individual provincial development plan

(REPELITA).

III. Responsibilities of Parties: 1. AID :

A financial plan is attached as Annex II to the Agreement. AID loan and grant funds added under the Amendment will be

used for technical assistance, training, limited

commodities, and provincial subprojects identified under the new planning system. Within the total contributions agreed to by the GOI and AID as noted in this Agreement, changes of up to 20% in the amount of funds allocated to any project budget line item may be made with the written concurrence of both parties.

In summary AID will fund:

1. Technical Assistance: Technical assistance is estimated at forty - four person years for long term expatriate assistance, four person years of short term assistance, and six person years of expertise through Indonesian firms for six provinces and the Center . On average it is anticipated that each province (and the Center) will receive eight person years of assistance over the six - year life of this extension. Assistance to the Directorate General of Regional Development will consist of a chief of party/training advisor , a long

term credit advisor, and a training advisor.

All provinces except Bengkulu will have a long term planning advisor working with the BAPPEDA and technical agencies to implement the revised planning and

information systems. Technical consultants in

specialized fields (i.e. credit and agriculture) will also serve in selected PDP provinces.

3. Commodities : consultants .

- 5

-Twelve vehicles for use by long term

4. Evaluation: Funds for a comprehensive evaluation of project inputs, outputs, and the extent to which the project has achieved its goals including the goal of beneficiary participation in project selection.

5 . Subprojects: AID will fund subprojects identified over four bugetary cycles. Financial mechanisms to be

applied for the A. I.D . local currency contributions for subproject implementation may include percentage of actual cost reimbursement and direct disbursement of local currency . The most appropriate mechanisms for each activity as well as the amount of the A.I.D . and GOI contributions, will be decided annually upon the

review of provincial plans and be agreed to in writing.

2 . Government of Indonesia:

The GOI contribution consists of an in-kind contribution to technical assistance and the funding of local provincial subprojects identified under the project. Support for provincial subprojects identified under the planning process will be in regular GO! fiscal year budget allocations.

The Provincial Area Development Program II will be under the overall direction and guidance of the national level Steering and Technical Committees, representing the

Ministry of Home Affairs , BAPPENAS, the Ministry of Public Horks and the Ministry of Finance . The Committees were established by the Ministry of Home Affairs Decree No. 309 of 1976. The Directorate General for Regional Development

(BANGDA} of the Ministry of Home Affairs will be

responsible for overall execution of PDP II for the central government . The operating level PDP II project management unit will be located within BANGDA's Directorate for

Provincial Development. In the provinces of Bengkulu, South Kalimantan, East Nusa Tenggara, East Java, West Nusa Tenggara , and West Java the governors and their provincial planning boards (BAPPEDA} will be the primary counterparts responsible for guiding, directing and coordinating the participating technical service agencies and districts.

IV. Implementation Plan:

The program w1ll function within the context of the GO! fiscal year budget cycle for planning, preparation of annual budgets and implementation . It is anticipated that ten years of

government administration, and therefore PDP II will be

primarily concerned with Indonesian Fiscal Years (IFY) 79/80 through IFY 88/89.

Implementation procedures will be the subject of subsequent Project Implementation Letters (PILs). Implementation Actions will follow along the project outputs described earlier and will include the following major activities: (1) annual instructions/ guidelines sent to the provinces and districts; (2) multi-year program strategies (MPS) and annual operational plans (AOP) developed at these local levels in accordance with the revised planning system as described in the PDP II Project Paper

Amendment; (3) a joint National Steering/Technical Committee/ USAID review following submission of these provincial plans in at least the first year of the new planning cycle (IFY 84/85). Implementation will be complemented by two major evaluations throughout the life of the project that will identify aspects of the project for revision as well as the degrees to which local participation, primarily village level, is incorporated in planning program areas and subproject execution and

implementation. The evaluation will also examine the extent to which decentralization has proceeded, the impact of PDP

activities on decentralization generally as a GOI objective , the impact of subproject activity on the standard of living and

I. Tedhnical Assistance

II. T r a i n i n g

III. Commodities

IV. External Evaluaticn

v.

Projects and Programs

VI . COnti r:¥Jency

Total

ANNEX II(a)

StJMMr\RY FINAN:IAL PIAN PDP II EXTENSION

(OBLIGATIONS 'IO DI\TE AND FUNrS EXPOCTED 'IO BE OBLIGATED IN FUTURE 'YEAR))

($000}

I

_ffiMD

I

I

I

_Grant

I

_LOan

I

_Total

I

_GO!

I

I

tEAID

I

I

I

Fx

I

Lc

I

Fx

I

_Lc

I

I

I

I

_8,415

I

₇₈₀

I

_{4,890 534.6}

I

_14,619.6

I

_1,875

I

I

I

I

I

I

I

I

₄₀

I

₄₆₀

I

_{1,ooo -}

I

_1,5oo.o

I

₂₃₅

I

I

I

I

I

I

I

I

₁₉₃

I

-

I

_{180 -}

I

_373.0

I

_5,600

I

I

I

I

I

I

I

I

₁₁₂

I

-

I

-

₁₆₀

I

_212.0

I

-

I

I

I

I

I

I

I

I

-

I

-

I

_{2,5oo 19,800}

I

_22,300.0

I

_24,290

I

I

I

I

I

I

I

I

-

I

-

I

_{300 2,135.4}

I

_2,435.4

I

-

I

I

I

I

I

I

I

ｾＭＭＭＭＭＭｔＭＭ

I

---T - _____ T _____ T -

I

I

_8,760

I

_1,240

I

_8,870

I

_22,630

I

_41,500

I

_32,ooolf

I

I

I

I

I

I

I

I

Total ffiAID

+

GOI

16,494.6 1,735 5,973 272 46,590

2,435.4

73,500

Y

Includes in-kim contributions

ｾＧ＠ ) ,\

·-I

I

Grant

I

Fx

I . _{Tedhnical Assistance}

I

6,527

I

I I . T r a i n i n g

I

40

I

III. Commodities

I

193

I

rv.

External Evaluation

I

-I

v.

Projects and Programs

I

-I

VI.

ContinJency

I

-I

RE.VISED ｆｉｾｉａｌ＠ PU\N : OBLIGATIONS 'lD IlP.TE

(SooO)

t.SAID

I

LOan

I

Total

I

I

USAID

I

Fx

I

Lc

I

I

780 4,890 534.6

I

_12,731.6

I

I

I

460 1,000 -

I

1,500

I

I

I

-

180

-

I

373

I

I

I

-

-

160

I

160

I

I

I

-

2,500 19,800

I

22,3oo .o

I

I

I

-

300 1, 2B5.4

I

1,585.4

I

I

I

Total

I

6, 760

I

1,240

I

8,870

I

21,780

I

38,650

I

I

ｾ＠ Includes in-kind contributions

c. ,.

'

, _

.

I

I

I

I

I

Total GOI

I

t.SAID

I

+

I

GOI

1,875

I

14,606 . 6

235

I

1,735

5,600

I

5,973

-

I

160

24,290

I

46,590

-

I

1,585.4

32,oool/1 70,650

I

' 1: