I. Introduction
1. On 7 April 2005, the Asian Development Bank (ADB) approved a support package for rehabilitation and reconstruction of Aceh and North Sumatra, comprising: (i) the Earthquake and Tsunami Emergency Support Project (ETESP) for $290 million and the contribution for Multi-Donor Trust Fund (MDTF) of $10 million, both grant financed from the Asian Tsunami Fund (ATF); and (ii) the Community Water Services and Health Project (CWSHP) grant of $16.4 million.(1) In addition, the Government of Luxembourg has recently signed a contribution agreement to provide $1 million through the ATF, aimed at supporting a fast-tracked irrigation subproject in North Sumatra. This Report provides an update on the steps being taken by the Government of Indonesia (the Government) and ADB to launch implementation work on rehabilitation and reconstruction, and it also reports on the implementation progress of the MDTF.

II. The Steps Taken by the Government of Indonesia

2. Over April-June 2005, the Government has progressed in developing an institutional coordination mechanism and in addressing some of the initial hurdles facing the start up of reconstruction and rehabilitation. On 29 April 2005, the President of Indonesia signed the Emergency Decree for the establishment of the Aceh-Nias Rehabilitation and Reconstruction Agency, now called the Badan Rehabilitasi dan Rekonstruksi (BRR) for Aceh and Nias. The Chairman of BRR is Dr. Kuntoro Mangkusubroto.(2) The BRR currently has 58 full-time professionals handling key sectors (Attachment 1).3 BRR targets to have a lean organization with staff at the lower end of the 70-120 range, and it is relying on technical assistance from donors and outsourcing mechanisms. The chairperson of BRR and all its members are appointed by the President of Indonesia. The BRR is overseen and managed by:

(i) A 17-member Advisory Board, chaired by the Coordinating Minister for Political and Security Affairs, with Chairperson of the National Development Planning Agency (BAPPENAS) as the Secretary, and with the other two Coordinating Ministers, Ministers of Finance and Public Works (among others), Governors of North Sumatra and Aceh, and a few local government officials as members;

(ii) A 9-member Oversight Board entrusted with supervising the implementation of the rehabilitation and reconstruction activities and ensuring that public complaints are addressed; and

(iii) A 9-member Implementation Coordination Board, comprising the BRR Chairman and 8 Deputies, entrusted with the day-to-day coordination of the rehabilitation and reconstruction activities.

3. Under its mandate, BRR is responsible for a coordinated approach to planning, fundraising and implementation, to ensure that the reconstruction program is effective, duplication is minimized, and that donor funds are optimally used. BRR recognizes the important role of local community input and participation in the reconstruction effort. Government bodies, community leaders, academics, religious leaders and NGOs in Aceh and Nias will be continuously consulted and involved in shaping and implementing the reconstruction activities in the affected regions.

4. The BRR Chairman has signaled a strong commitment for effective management, governance of funds, and expeditious delivery of services. BRR is now operational, but has faced start-up problems due to delays in budget releases and lack of coordination with other central ministries and local governments. This has created uncertainties regarding project implementation arrangements, including procurement and funds flow mechanisms.

5. In the first few weeks of its being operational, BRR has structured and familiarized itself with different assistance programs and laid the groundwork to fast track projects. BRR has reached agreements totaling about $1.8 billion in support from bilateral donors, various international non-government organizations (INGOs) and assistance through the MDTF. Out of these commitments, BRR has thus far approved 172 projects ($585 million), and another 70 projects ($260 million) are in the pipeline for approval. The BRR has also signed agreements with International Red Cross and Red Crescent for $600 million for housing, and harbor restoration etc. and with the United States Agency for International Development (USAID) for $245 million to reconstruct the road between Banda Aceh and Meulaboh.

6. Support from other donors is also being fast-tracked. For instance, the Government of Japan disbursed $146 million to the budget as early as in January 2005, earmarked for various reconstruction projects. The implementation of these initiatives has recently started. In addition, Japan has contributed about $110 million through the UN system for rehabilitation and reconstruction. Besides, Japan has also earmarked $20 million each in its trust funds for ADB (JFPR) and World Bank, respectively. Technical assistance for various assessments and planning is underway in several areas, most notably the Japan International Cooperation Agency (JICA) is developing a Master Plan for Banda Aceh city rehabilitation and reconstruction. The Government of Netherlands has committed $100 million to the MDTF. The European Commission is in the process of securing commitments of about Euro200 million to be channeled through the MDTF. Other donors have pledged support through MDTF and bilateral sources. Australia, through the Australia-Indonesia Partnership for Reconstruction and Development (AIPRD), is channeling significant resources, estimated at close to AUS$1 billion. Out of this, over $175 million worth of funding has already been allocated and work has started on several major activities. This includes $50 million for the Aceh Rehabilitation Program to restore health, hospital and education services, a $50 million program of support for governance reform, a $62 million postgraduate scholarship scheme for 600 new students, and $15 million for disaster preparedness and responses to other recent disasters in Indonesia.

7. In Indonesia, ADB has been among the first to respond by committing and approving significant resources for the rehabilitation and reconstruction process through the ATF and the ETESP. As the ETESP was approved prior to the formal establishment of BRR, all subprojects will be designed and implemented in close coordination with BRR as the executing agency for the overall project. In doing so, ADB is working closely with BRR in a number of areas, providing technical support in project and financial management and formulation of guidelines and standard operating procedures.

8. Table 1 provides official estimates for donor funded commitments and planned disbursements. However, the utilization of loans is appearing increasingly difficult in view of heavy flows of grant commitments. The drawdown from grants has been slow to take off and is likely to be below projections because of the delays in start up.

9. The Ministry of Finance released about $12 million to meet BRR's initial operational expenditure requirements in 2005 and the Government of Australia also provided grant support to meet the immediate start-up needs. An independent procurement advisor (Crown Agents) has been appointed on a 6-month trial basis, through a grant from DFID. ADB has helped the Ministry of Finance establish a special treasury office in Banda Aceh to deal with all on-budget payments for expenses related to Aceh and Nias rehabilitation and reconstruction. Upfront capacity development and advisory support is being provided under ETESP to the Supreme Audit Institution (BPK), to enhance its oversight on the use of the substantial aid flows. Given the emergency needs, in May 2005 the Government submitted to Parliament amendments to the 2005 budget, which were approved by the Finance Committee in early June 2005 and full approval is expected shortly.