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Evaluating Partnerships with Existing National Safety Nets for Emergency Payments:

Assessing the Potential for WFP Engagement in Indonesia with an Existing Government Safety Net

Date: April 27, 2015

BFA, LLC 259 Elm Street, Suite 200, Somerville, MA 02144 ▪ USA

Phone: + 617 628 0711 ▪ Fax: + 617 336 7455 ▪ www.bankablefrontier.com

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Study Purpose World Food Programme (WFP) is looking to innovate its emergency response model by incorporating more cash payments to complement in-kind payments in times of natural disasters and economic shocks. Specifically, WFP wants to understand the potential for and challenges of leveraging existing national government-to-person (G2P) payment programs in the Philippines and Indonesia to implement and scale WFP’s cash transfers in both relief and recovery contexts. To achieve this, WFP Regional Bureau for Asia contracted Bankable Frontier Associates (BFA) to study potential partner programs – Pantawid Pamilyang Pilipino Program (4Ps) in the Philippines and Program Keluarga Harapan (PKH) in Indonesia – to provide a feasibility assessment of how WFP would effectively work with such programs. BFA undertook this feasibility assessment by gathering information from key stakeholders – the programs (funders, “owners” and implementers), the payment service providers (PSPs) and their partners and the recipients – and evaluating the opportunities and challenges related to leveraging current cash and electronic disbursement mechanisms used by national G2P programs. If WFP aims to leverage existing programs to make emergency (i.e., short term) disbursements, what will it take for these programs, their PSP partners and the recipients to effectively handle such a commitment?

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Acknowledgments WFP commissioned Bankable Frontier Associates (BFA) to conduct this study. The authors of this report are Jamie M. Zimmerman and Kristy Bohling.

We owe sincere thanks to the staff at the Government of Indonesia’s The National Team for the Acceleration of Poverty Reduction (TNP2K), Ministry of Social Affairs, State Ministry of National Development Planning (Bappenas), National Board for Disaster Management (BNPB), Bank Indonesia and the Coordinating Ministry for Human Development and Culture for their time and support of this research. We are also grateful to the payment service providers and payment system experts in Indonesia who contributed so much substance and candor to this study, including e-MITRA, PT Pos, Bank Mandiri and Bank Rakyat Indonesia (BRI). Particular thanks goes to Michael Joyce at TNP2K, Micra Indonesia and the WFP country office for their substantial in-country support and guidance throughout the research. Finally, we are grateful for the support and input from BFA colleagues Caroline Pulver and Brian Loeb.

This study was funded through the generous support of the UK Department for International Development (DfID). The opinions expressed in this report are those of the research team and do not necessarily reflect those of WFP or DfID. The responsibility for the opinions expressed in this report rests solely with the authors. Publication of this document does not imply endorsement by WFP or DfID of the opinions expressed therein.

US$1=IDR 12,484 (January 16, 2015)

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Contents Abbreviations .............................................................................................................. 5 Executive Summary ...................................................................................................... 6 1. The Indonesia Context ............................................................................................... 8 2. Program Keluarga Harapan (PKH) – The Family Hope Program ............................................. 12 3. PKH Payments Implementation and PSP Experiences ......................................................... 14 4. Program Stakeholder Experiences & Perspectives on E-payments ......................................... 20 5. Recipients’ Experiences with E-money and PT Pos ........................................................... 22 6. Key Lessons .......................................................................................................... 23 7. Feasibility Assessment and Specific Recommendations ...................................................... 24 Annex 1: BNPB’s Interest in Cash Transfers for Disaster Management ........................................ 28 Annex 2: Details of the Family Welfare Deposit Scheme (KKS) ................................................ 29 Annex 3: Comparison of Cost per Transaction for G2P Programs in Low and Middle-income Countries 30 Annex 4: Meeting List .................................................................................................. 32 References ............................................................................................................... 33

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Abbreviations Alliance for Financial Inclusion AFI

Bank Indonesia BI

Bank Rakyat Indonesia BRI

Bankable Frontier Associates BFA

Bantuan Langsung Sementara Masyarakat BLSM

Beras untuk Rakyat Miskin Raskin

Bureau of Statistics BPS

Family Welfare Deposit Scheme KKS

Financial Services Authority OJK

Payment service provider PSP

Government-to-person G2P

Indonesian Rupiah IDR

Know-your-customer KYC

Mobile network operator MNO

National Board for Disaster Management BNPB

The National Team for the Acceleration of Poverty Reduction TNP2K

Pantawid Pamilyang Pilipino Program 4Ps

Program Keluarga Harapan PKH

Sentral Giro Layanan Keuangan (Center of Financial Service Gyro) SGLK

State Ministry of National Development Planning Bappenas

World Food Programme WFP

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Executive Summary1 1. In Indonesia, WFP works with the National Board for Disaster Management (BNPB) to: (1) strengthen

the Government’s emergency response capacity and (2) ensure WFP preparedness to render operational support to the Government in medium- and large-scale emergencies.2 This report assesses the potential for the Government’s conditional cash transfer (CCT) programs, run by the Ministry of Social Affairs and not designed for emergency response, to serve as implementing partners for WFP’s objectives.

2. Indonesia’s first CCT program, Program Keluarga Harapan (PKH), launched in 2007 as part of the Government’s national poverty reduction strategy. The program provides cash transfers to nearly 2.8 million poor and ultra-poor households with children under 18, conditional upon accessing certain health and education services. The payment amount is variable depending upon household circumstances and program conditionalities; the maximum potential benefit per pay period is IDR 700,000 (US$56), for a maximum family benefit of IDR 2.8 million (US$224.28) per year.3

3. The Ministry of Social Affairs uses the Unified Database to coordinate target recipients for its social protection programs. The database currently contains 96 million individuals from approximately 25 million households. While some stakeholders reported that the database is outdated, the government is looking to improve it, and it could be a valuable resource for WFP to leverage.

4. PT Pos, the national post office, is the longstanding primary payment service provider (PSP) of PKH, paying over 99 percent of recipients.4 It is the only institution with the scale to serve the program as it is currently designed and will continue to be so in the near term.

5. However, the program recently launched e-money pilots with Bank Mandiri and BRI to pay some (2,000) recipients. The new partnership was made possible by new e-money regulations issued 2014.

6. These pilots face challenges with customer awareness and capacity. Further, the value proposition for the recipient (as opposed to for the implementing institutions) of using e-money is less clear: recipients are used to the PT Pos processes and, other than waiting in long lines to get their money, they generally do not experience problems with the PT Pos payment system.

7. WFP would benefit from monitoring the progress of e-money in Indonesia. Stakeholders are increasingly focused on financial inclusion and supporting government-to-person (G2P) e-money payments. However, until e-money infrastructure and processes are sufficiently robust to pay G2P recipients at scale and in emergencies, cash-based payouts via PT Pos are the most viable option for emergency payments. These findings come from an in-depth study of PKH as well as available information on the new Family Welfare Deposit Scheme (KKS) Program, which WFP should also monitor in 2015.5

8. To evaluate whether WFP should partner with PKH specifically, the researchers developed six criteria against which to rate the alignment of WFP needs with PKH characteristics. Table 1 highlights key criteria. Red circles indicate that PKH and WFP do not align; yellow indicates they align somewhat; and green indicates that they align significantly enough to move forward.

Table 1: How PKH Aligns with WFP Key Criteria Criteria Rating Comments

Program has effective relationship with the PSPs.

PKH has a longstanding relationship with PT Pos, which is updating G2P accounts to include store of value (to keep up with government expectations). The program is also open to relationships with e-money providers to create the most efficient processes. At the head office level, timely payments did not appear to be an issue, but nearly all e-money and

1 This report is based on interviews conducted in Indonesia in December 2014; it represents the situation with PKH as of that time. 2 “DRAFT Emergency Logistics Enhancement: BNPB-WFP XXX-Year Joint Strategy.” WFP draft of May 11, 2014. 3 International Policy Centre Policy Research Brief 42. Originally from Ministry of Social Affairs, PKH Profile, 2013. http://www.ipc-undp.org/pub/IPCPolicyResearchBrief42.pdf 4 This paper refers to recipients as those receiving G2P payments. Beneficiaries or households are all those ultimately touched by the program, for example through the recipient spending money on the needs of the family or household, not just the individual. 5 Launched in November 2014, KKS is a modernized and more comprehensive version of the Bantuan Langsung Sementara Masyarakat (BLSM), which was a bi-annual fuel subsidy provided by the former government. KKS intends to reach 15.5 million recipients.

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Criteria Rating Comments

PT Pos recipients interviewed mentioned they did not receive payments for the first half of 2014.

PKH and the PSPs have the flexibility to make additional payments or add more recipients.

Partnering with PT Pos, PKH appears to have the ability to add recipients in a brief timeframe. However, PT Pos claims that only paying recipients quarterly (rather than bi-monthly, for example), provides it with sufficient time between payments to prepare. Natural disasters are not predictable events that offer months to coordinate and prepare payments.

PSP has access to sufficient infrastructure to make payments that are relatively low-cost to the program.

PT Pos has in place the necessary infrastructure for making scaled G2P payments and has even remained open during past natural disasters. Meanwhile, e-money providers continue to develop their agent networks and mobile infrastructure. However, while all three providers appear to be relatively low-cost compared to PSPs from cash transfer programs in other middle- and low-income countries, PT Pos’ fees are nearly two times higher than the e-money providers’ fees.

Recipients trust the PSP to pay them the correct amounts on time at a reasonably convenient location.

Recipients interviewed in urban and rural areas appeared comfortable with PT Pos payments, despite the long lines. E-money recipients experienced challenges with the e-money program, many of which they are likely to overcome if they continue to receive e-money payments.

Program serves a significantly large and inclusive group of recipients, likely to be affected by natural disasters or other emergencies.

The Unified Database is significant, covering the bottom 40 percent of Indonesia’s socio-economic strata. However, data are now more than three years old, with research suggesting that exclusion errors and other missing indicators exist, which may pose challenges in leveraging it in emergency situations. The timeline for updating it is apparently approaching. PKH serves recipients in urban and rural areas but reaches significantly fewer than other government programs such as KKS, and unconditional cash transfer program, and Raskin, a rice subsidy program.

Program is ready to embrace emergency response partnership with WFP.

PKH staff play a key communicator role between PKH and recipients; those interviewed appeared to be cautiously willing to support emergency payments. However, PKH stakeholders’ focus on e-money and financial inclusion and the program’s quarterly payments schedule may conflict with WFP’s priority of rapidly getting cash into the hands of those affected by disasters.

9. WFP has an immediate opportunity to partner with a G2P program to leverage the cash-based payment system already in place with PT Pos. Meanwhile, WFP should monitor and consider eventually partnering with e-payment providers as payments infrastructure improves.

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1. The Indonesia Context6 Indonesia had a GDP per capita of US$3,475 in 2013, up from US$2,947 in 2010; it ranked 108 out of 187 countries on the Human Development Index in 2013.7 In 2007, Goldman Sachs recognized Indonesia as one of the “Next 11” countries (following Brazil, Russia, India and China, the “BRICs”) to gain economic stature globally, based on its increasing urbanization, infrastructure investment, life expectancy rates, technology adoption and energy consumption.8 Indonesia’s economy remained strong through the global recession and, recognized by the World Bank as a Middle-income Country, it is Southeast Asia’s largest economy (Exhibit 1).9 However, inequality has increased in recent years. The GINI index has risen from 34 in 2008 to 38 in 2011.10

Exhibit 1: GDP of ASEAN countries, 2012

Source: World Bank, 2012. Brunei Darussalam, Cambodia, Lao PDR and Myanmar not included. Data not available for Myanmar. Brunei, Cambodia and Lao had combined GDP of US$40 billion in 2012.

The Government increasingly favors decentralization: the 33 provinces and over 500 districts are responsible for delivering public services. While the central government believed decentralization would improve government services, the approach has exposed capacity gaps, particularly in poorer and more remote regions, which has affected its implementation of government programs.11

Food Insecurity Despite Indonesia’s economic growth, it has not seen a quick reduction in hunger and malnutrition. The government has combatted food insecurity by introducing food price stabilization and social protection programs. Its social protection and poverty alleviation programs are divided into three clusters. Cash and in-kind transfers to individuals, community-based programs and microfinance

6 This report is based on interviews conducted in Indonesia in December 2014; it represents the situation with PKH as of that time. For the list of stakeholders interviewed, see Annex 4. 7 Human Development Index, 2013 rankings. http://hdr.undp.org/en/statistics/ 8 Sandra Lawson et al. “Beyond the BRICs: A Look at the Next 11.” Goldman Sachs, 2007. http://www.goldmansachs.com/our-thinking/archive/archive-pdfs/brics-book/brics-chap-13.pdf. The other Next 11 countries are Bangladesh, Egypt, Iran, Korea, Mexico, Nigeria, Pakistan, Philippines, Turkey and Vietnam. While each country is unique and the 11 countries are not directly comparable, strong economic growth in all 11 countries have led to businesses recognizing their stature as the Next 11 countries to emerge on the global economic stage. 9 Indonesia has the largest GDP of ASEAN (Association of Southeast Asian Nations). GDP (current US$). World Bank. 2012: http://data.worldbank.org/indicator. 10 2011 is latest year with available data. GINI index measures the extent to which the distribution of income (or, in some cases, consumption expenditure) among individuals or households within an economy deviates from a perfectly equal distribution. A GINI index of 0 represents perfect equality, while an index of 100 implies perfect inequality. GINI Index. World Bank. 2011: http://data.worldbank.org/indicator. 11 Stephen Turner et al. “Country Portfolio Evaluation: Indonesia: An evaluation of WFP’s Portfolio, 2009-2013.” Inception Report. March 2014.

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programs address food insecurity caused by lack of purchasing power for food. The largest social safety net directly targeting food consumption is the Beras untuk Rakyat Miskin (Raskin) Program, aimed at helping poor households to fulfill their food needs and reduce their financial burden by providing 15 kilograms of rice per month, at a subsidized price that is about one-third of the market price. The program targeted 17.5 million households in 2012.12

Natural Disaster Management The Centre for Research and Epidemiology of Disasters ranks Indonesia as one of the five countries most frequently hit by natural disasters.13 As the world’s largest archipelago, with more than 18,000 islands, the country has suffered from natural disasters including earthquakes, tsunamis, floods and volcanic eruptions. WFP estimates that, on average, disasters affect one million Indonesians per year and, over the last 10 years, Indonesia has experienced 150 severe natural disasters.14 The Government and its international partners therefore have a continual focus on natural disaster preparedness, management and relief.

According to Indonesia’s National Board for Disaster Management (BNPB), Indonesia experiences an average of IDR 30 trillion (US$2.4 billion) worth of damage and loss from natural disasters and emergencies each year. The budget for disaster preparedness and management has increased 2,680 percent since 2008, to IDR 15 trillion (US$1.2 billion), but BNPB argues that it needs five times that amount to effectively manage all disasters each year. It wants one percent of the national budget per year allocated for preparedness and management.

Within its disaster preparedness and management budget, BNPB allocated IDR 3 trillion (US$240 million) for its response budget, IDR 1.5 trillion of which is allocated for post-disaster support and IDR 1.5 trillion for “on-call” budget to send to local governments in cases of emergency.15 BNPB views direct cash transfers to affected people as a promising means to providing a mechanism for reconstruction and resiliency of individuals and communities.16 For example, internally displaced persons (IDPs) often stay in shelters for extended periods of time without work, so BNPB has implemented cash for work or other cash transfer schemes that allow the IDPs to purchase needed goods, pay rent or rebuild their rice fields.

Importantly, BNPB uses its own database — separate from the Ministry of Social Affairs’ Unified Database — for targeting for emergency responses. (Regional level governments and approximately 20 national level ministries use the Unified Database, as well.) BNPB’s targeting system aggregates information from the social ministry, health ministry, army, police, search and rescue and public works for needs assessments, response activities and priorities. BNPB also coordinates with NGOs on a refugee database (which must include name, date of birth, gender, address and any special designations such as elderly or pregnant). And it collects daily reports of needs in affected areas during disaster situations. However, BNPB acknowledged that its database is not complete and would benefit from improvements in coverage, indicators and maintenance, which would enable them to quickly and easily coordinate in emergency situations.

WFP Indonesia

WFP’s current operations in Indonesia focus in large part on effectively enabling and providing food assistance to best compliment the government’s evolving development and aid priorities. WFP maintains close partnerships with the Coordinating Ministry for Human Development and Culture and with BNPB. Current WFP-BNPB partnership objectives include strengthening the Government’s

12 “Terms of Reference: Indonesia: An Evaluation of WFP’s Portfolio (2009-2013)” from WFP’s Office of Evaluation. 13 “Terms of Reference: Indonesia: An Evaluation of WFP’s Portfolio (2009-2013)” from WFP’s Office of Evaluation. 14 “Terms of Reference: Indonesia: An Evaluation of WFP’s Portfolio (2009-2013)” from WFP’s Office of Evaluation. 15 “DRAFT Emergency Logistics Enhancement: BNPB-WFP XXX-Year Joint Strategy.” WFP draft of May 11, 2014. 16 For more on BNPB’s interest in cash transfers for disaster management, see Annex 1.

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emergency response capacity and ensuring WFP preparedness to render operational support to the Government in medium- and large-scale emergencies.17

Financial Infrastructure for Electronic Transfers Indonesia’s population dispersion across over 13,000 islands makes financial access a challenge. In 2012, Indonesia had 9.6 bank branches for every 100,000 adults and 36.5 automated teller machines (ATMs), significantly lower than Thailand, Singapore and Malaysia and similar to the Philippines. Also, 10.5 percent of Indonesian adults had a debit card and 19.6 percent had an account at a formal financial institution, fewer than most ASEAN peers.18 Table 1 shows how Indonesia’s numbers compare to other ASEAN countries.

Table 1: Financial Access in ASEAN Countries, 2011

Country ATMs per

100,000 adults Commercial bank branches

per 100,000 adults Account at a formal financial institution Debit card

Indonesia 13.4 8.3 19.6 10.5

Thailand 77.7 11.2 72.7 43.1

Singapore 58.6 10.3 98.2 28.6

Malaysia 46.4 10.4 66.2 23.1

Philippines 14.9 7.7 26.6 13.2

Vietnam 17.6 3.3 21.4 14.6

Lao PDR 4.3 2.6 26.8 6.5

Cambodia 5.1 4.0 3.7 2.9 Source: World Bank Findex, 2011. Data for Brunei and Myanmar not available.

However, Indonesia has seen an increase in electronic payments over the past five years. From 2007 to 2013, ATM/debit card, credit card and e-money payments more than tripled, as shown in Exhibit 2.

Exhibit 2: Volume of ATM/Debit Card, Credit Card and E-Money Payments in Indonesia, 2007-2013

Source: Bank Indonesia, 2014. http://www.bi.go.id

17 “DRAFT Emergency Logistics Enhancement: BNPB-WFP XXX-Year Joint Strategy.” WFP draft of May 11, 2014. 18 World Bank. 2012. http://data.worldbank.org/indicator. Full references in References.

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Indonesia has seen an increase in mobile cellular subscriptions in recent years. Indonesia had 211.3 million mobile cellular subscriptions in 2010 (for a total population of 241 million), which rose to 282 million subscriptions in 2012 for 247 million people and 303.7 million in 2013 for 250 million people.19 GSMA reported SIM penetration to be 121 percent in 2014.20 A majority of consumers subscribe with the leading three mobile network operators (MNOs), Telkomsel, Indosat and XL Axiata, though eight other MNOs are also in the market.21

In 2007, Telkomsel was the first MNO to launch an e-money product, TCash, followed by Indosat in 2008. The government introduced its first e-money regulations in 2009. XL launched an e-money product in 2012, while smaller MNOs and banks also launched e-money products. In 2013, the big three MNOs partnered to enable customers to send money across each other’s networks, although interoperability among most banks and agents does not yet exist.22 Indonesians’ use of mobile phones for payments is still nascent; while e-money products have been in the Indonesian market since 2007, the World Bank’s Findex database revealed that less than one percent of adults used their mobile phone to pay bills, receive money or send money in 2011.23

The central bank (Bank Indonesia, or BI) is a member of the Alliance for Financial Inclusion (AFI) and has promoted a “less cash” policy with a particular focus on financial inclusion, notably in the latest branchless banking regulations from 2014. Progress has been slow: BI launched branchless banking pilots in 2012, only to abandon them in 2013 due to regulatory confusion created when the government formed the Financial Services Authority (OJK, a quasi-independent entity) and put branchless banking under its purview rather than BI’s. Digital financial services continue to be regulated by BI.

As a core promoter of the government’s “less cash” policy, BI has played a central role in advocating for e-money-based G2P disbursements as a means of achieving a shift to electronic payments and enabling financial inclusion in Indonesia.

Evolution of Cash Transfers Schemes Indonesia’s first conditional cash transfer (CCT) program, Program Keluarga Harapan (PKH), launched in 2007 as part of the Government’s national poverty reduction strategy, provides cash transfers to poor and ultra-poor households with children under 18, conditional upon accessing certain health and education services. The payment amount is variable depending upon household circumstances and program conditionalities; the maximum potential benefit per pay period is IDR 700,000 (US$56), for a maximum family benefit of IDR 2.8 million (US$224.28) per year.24

The National Team for the Acceleration of Poverty Reduction (TNP2K), an ad hoc body convened by the office of the Vice President, plays a central role in the push to modernize social transfers in Indonesia. It led the creation of the country’s Unified Database, with technical assistance from the World Bank.25 In 2011 the Bureau of Statistics (BPS) collected 40 variables related to individual, family and household conditions, using a national survey. It ranked the households to prioritize and select them for social protection programs. The bureau identified and prioritized forty percent of the Indonesian population through this exercise.

The Unified Database currently contains 96 million individuals among approximately 25 million

19 World Bank. 2013. http://data.worldbank.org/indicator. Full reference in References. 20 GSMA Intelligence 2014: Data Dashboard. Data from Q4 2014. https://gsmaintelligence.com/markets/1531/dashboard/ 21 “The Structure of Indonesia’s Telecom’s Industry.” Redwing, 2012-2014. http://redwing-asia.com/context/telecoms-industry-structure/ 22 “Implementing Mobile Money Interoperability in Indonesia.” GSMA, 2013. http://www.gsma.com/mobilefordevelopment/wp-content/uploads/2013/10/Implementing-mobile money-interoperability-in-Indonesia.pdf 23 World Bank Findex. 2011. http://datatopics.worldbank.org/financialinclusion/. Full reference in References. 24 International Policy Centre Policy Research Brief 42. Originally from Ministry of Social Affairs, PKH Profile, 2013. http://www.ipc-undp.org/pub/IPCPolicyResearchBrief42.pdf 25 For more information on the background, objectives and functions of the Unified Database see: http://www.TNP2K.go.id/en/frequently-asked-questions-faqs/unified-database/

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households.26 Regional level governments and national level ministries can choose to use the database but are not required to do so. TNP2K intended to update the database every three years. As of December 2014, TNP2K was reviewing the next survey, which may include questions about households’ banking and financial services practices.

To date, only banks and PT Pos, the national post office, have been authorized to act as payment service providers (PSPs) for G2P payments. The Ministry of Finance sets all rules around authorized G2P PSPs via a decree, which it updates periodically. The State Ministry of National Development Planning (Bappenas) and Bank Indonesia anticipate changes to the decree that would expand the pool of authorized payers to include e-money issuers, such as MNOs.

Indonesia’s newest cash transfer program is the Family Welfare Deposit Scheme (KKS), which intends to reach 15.5 million recipients. Launched in November 2014, it is a modernized and more comprehensive version of the Bantuan Langsung Sementara Masyarakat (BLSM), which was a bi-annual fuel subsidy provided by the former government. Every other month, Bank Mandiri, one of the four largest banks in Indonesia, pays one million recipients via e-money and PT Pos pays the other 14.5 million recipients. The program leverages the Unified Database to target and manage recipients. Annex 2 provides more details about the program.

2. Program Keluarga Harapan (PKH) – The Family Hope Program

Background The Ministry of Social Affairs launched PKH as a pilot in 2007. The program served 388,000 recipients across seven provinces, and it quickly shifted from a pilot to permanent social safety net program. However, PKH has been slower to scale than many expected: between 2007 and 2010 the program barely doubled in size. By the end of 2014, PKH had reached 2.8 million (87 percent) of the 3.2 million recipients it intended to target; it intend to reach four million recipients by the end of 2015. According to TNP2K, the program aspires to eventually reach the poorest 40 percent of the population across all 497 districts and provinces in the country, approximately 7.2 million households.

Exhibit 3: PKH Growth, 2007-2012

26 This paper refers to recipients as those receiving G2P payments. Beneficiaries or households are all those ultimately touched by the program, for example through the recipient spending money on the needs of the family or household, not just the individual.

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Source: International Policy Centre Policy Research Brief 42. Originally from Ministry of Social Affairs, PKH Profile, 2013. Primary access provides number of households and secondary axis provides the budget numbers. Budget numbers beyond 2012 were not available.

Table 2: PKH Overview

Payment Frequency Every 3 months (4 times per year)

Payment Amount Variable; up to a maximum of IDR 2.8 million (US$224.28) per household per year

Population Targeted Poor and ultra-poor households with school-aged children (target of reaching bottom 40% in all districts and provinces)

# Recipients Currently Served 2,797,574 (approximately 8% of the lowest income group)

Disbursement Types 2,486,299 (88.87%) via PT Pos’ Giro Pos (described below)

309,486 (11.06%) via PT Pos’ Pos Wesel (community payouts; described below)

1,304 (0.05%) via e-money at Bank Mandiri

485 (0.02%) via e-money at BRI

Geographic Areas Covered Across all 33 provinces

Targeting Method Proxy means testing conducted by BPS until 2011. Since 2012, the Unified Database, which also identifies recipients of Raskin and KKS.

Focus on Nutrition or Food Security?

No; focus on health and education

Critical Actors PKH is a centrally managed social protection program in a highly decentralized government. The Ministry of Social Affairs runs the program, yet benefits from the support of several other national-level government agencies: the BPS (Bureau of Statistics) manages targeting; Bappenas (the State Ministry of National Development Planning) provides oversight; and TNP2K provides additional support for systems modernization, particularly payment systems and the implementation of e-money pilots. According to the International Policy Centre, TNP2K’s influence on the program has grown since 2010 as it promotes faster expansion of the program, the creation of more efficient systems and greater impacts on the targeted populations.27

PKH Targeting Beginning in 2005, BPS conducted proxy means tests to identify extremely poor households as well as health and education facilities in each district (in order to determine readiness for PKH). BPS recorded 19.1 million households in 2005 and then updated the registry in 2008. In 2008, BPS included 14 indicators to determine households’ program eligibility. Since 2012, the program has relied on the Unified Database. According to PKH program officials, the Unified Database targets and selects new PKH recipients, but local government officials use the list to make recommendations for new recipients and then the Ministry of Social Affairs makes the final selection. This system has also been the basis for e-money pilots.

The Unified Database does have limitations. First, the 2011 update survey only captured households living in fixed residences, and not homeless or displaced individuals or families. Second, since 2011, the Government has not approved funding to update the data. Finally, BPS did not collect the data with electronic payments in mind. Hence necessary information for account (bank or e-money) opening, such as accurate name spelling, dates of birth and identification (ID) numbers, is erroneous or missing.

27 International Policy Centre Policy Research Brief 42. Originally from Ministry of Social Affairs, PKH Profile, 2013. http://www.ipc-undp.org/pub/IPCPolicyResearchBrief42.pdf

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PKH Communications The program has an interesting operational structure that involves local program officers (called “facilitators”) and group leaders, rather than direct contact with each and every recipient (see Exhibit 4). The national level provides policy, supervision and operational guidance, and it has authority over payment orders and actively communicates with PT Pos.

Facilitators mobilize PKH recipients and serve as a point of first contact between the community and the PKH program. They teach recipients about the payments and why they are receiving the money, and they alert recipients about when payments will arrive. They also monitor the recipients and help PKH update the recipient database. Their role in keeping an open line of communication is especially useful when comparing PKH to KKS. One source interviewed reported that even a month after KKS payments had arrived, some recipients had yet to get their payments, or were just picking up their payments; they had not heard the payments had arrived and the program has no local staff akin to PKH’s program officers to inform recipients.

Facilitators first inform group leaders when payments will arrive, what documents recipients will need and when recipients should withdraw their money from the post office. Group leaders are recipients selected to lead communications with facilitators. Since they live in the same neighborhoods as other recipients, group leaders inform the recipients through word of mouth, phone call or text message.

Exhibit 4: PKH Flow of Communications

3. PKH Payments Implementation and PSP Experiences Each year, the Ministry of Social Affairs contracts a PSP for PKH through a tender. Only PT Pos and large regulated commercial banks qualify to apply. With the exception of two years in which Bank Rakyat Indonesia (BRI) and PT Pos shared the payments portfolio, PT Pos has been the only PSP to apply. Due to the lack of presence of other qualified PSPs outside of Java, it always wins the contract.

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However, as PKH has grown, it has begun to digitize its payments. Following the e-money regulations of 2014, PKH saw an opportunity for the banks to improve their service and launched a new pilot, with the support of TNP2K, using e-money. PKH and TNP2K invited Bank Mandiri and BRI to partner on the pilot as soon as the banks received approval from Bank Indonesia to introduce e-money products. The partners now make e-money payments to a combined total of nearly 2,000 recipients, all of whom have been with the program since 2007 and are familiar with the program.28

Table 3: Comparing PKH PSPs

Features PT Pos BRI Bank Mandiri

Payment Type Giro Pos & Pos Wesel E-money (T-Bank) E-money (E-Cash)

Deposit Amount & Frequency Quarterly payments, up to IDR 700,000 per quarter and up to IDR 2.8 million per year

# of Recipients Served 2,795,750 485 1,304

Geographic Areas Covered All 33 districts 2 areas in Jakarta & East Java

Koja, Cirebon, Kupang

Withdrawal Fee None None None

Minimum Balance None None, but if no positive balance on SIM, it will expire

None, but if no positive balance on SIM, it will expire

Pay Points (Type and Number)

4,000 physical branches, plus ad hoc community based payments

10 agents in 2 districts 20

Withdrawal Restrictions Only one withdrawal per month

None None

Store of Value?a Yes Yes Yes

Authentication Required/Used

Card & ID PIN or EDCb & ID Phone number OTPc & ID

Fee per Transaction Charged by PSP to PKHd

IDR 9,000 (US$0.72) IDR 5,000 (US$0.40) IDR 6,000 (US$0.48)

a Value is stored on the SIM in the case of the e-money accounts and into GIRO POS accounts for PT Pos. Neither of these are savings products, per se, as they do not offer interest. b EDC stands for electronic data capture.

c OTP stands for one-time password. d Recipients do not pay a fee to withdraw ever.

PT Pos PKH Payments PT Pos is the government’s longest running G2P payments partner. It has partnered with PKH since the program’s launch in 2007. It has 4,000 post offices in mostly rural areas throughout Indonesia, and it is the only PSP that can effectively execute G2P payments countrywide.

Since 2011, PT Pos has used its bulk payment system called Giro Pos. Money goes into non-financial accounts: recipients do not receive a card or passbook and they cannot deposit money into the accounts.

PT Pos uses an extensive scheduling system to manage its payments. The payouts at PT Pos branches typically occur as follows:

1. Based on the master schedule, PT Pos coordinates with the local government, which relies on facilitators to communicate the payment schedules to recipients.

28 At a January 2015 workshop on e-money hosted by TNP2K, several commercial banks expressed a keen interest in competing for PKH payments now that more entities qualify as PSPs. However, they were surprised to hear that PKH expected them to provide the accounts free of charge to recipients. Banks said it would severely decrease their business case for operating the accounts.

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2. PKH sends both the money for the payments and all necessary payroll information based on its database to the PT Pos head office.

3. The PT Pos head office executes the payroll process and transfers the funds to the local offices through the SGLK system.

4. Group leaders or program officers notify recipients when the payment will arrive, which is typically two to seven days after the notification.

5. Recipients travel to their nearest PT Pos branch at a time designated by their program officer. 6. At the PT Pos branch, the program officer or group leader takes recipients’ national IDs and

PKH cards, completes one paper withdrawal slip per recipient and submits the slips for the post office staff to process.

7. Post office staff process the paperwork and call recipients to give them their money. 8. Staff record each payment into the Giro Pos system, which allows payment reconciliation

online and in real-time. However, recipients still need to fill out paper withdrawal slips at each transaction.

Technically, recipients can keep money in their accounts, but this is not well known or understood. In response to the government’s focus on financial inclusion for G2P recipients, PT Pos recently tried to educate PKH recipients on their Giro Pos account features. But this effort slowed down PT Pos staff’s processing of PKH payments as post offices filled with recipients, so staff abandoned it. PT Pos aims to transition recipients to more traditional financial accounts and is working to obtain approval from BI for a license to interoperate with the banking system.29 Stakeholders interviewed from PKH, Bappenas and Bank Indonesia contend that PT Pos’ G2P payment system needs to be modernized. However, PT Pos considers itself the most viable option for G2P distribution in the country. It cites that the banks currently authorized to disburse G2P payments have the technology but lack the capacity and infrastructure necessary to deploy payments at scale everywhere in the country. PT Pos earns IDR 9,000 (US$0.72) per transaction, 33 percent more per transaction than that charged by banks. However, at two percent of the average grant amount, PT Pos’ fee as a proportion of grant is similar to national G2P programs in South Africa, Mexico and Kenya (Annex 3).

PT Pos staff said post offices face staffing and liquidity challenges with the monthly or bi-monthly payments expected with the KKS system, and the quarterly PKH payments are more manageable and allow branches to hire temporary staff for scheduled pay dates. This has implications for any partnership with PT Pos in which WFP requires more frequent payments to recipients.

Despite PT Pos’ extensive reach across Indonesia, PKH includes recipients located more than 20 kilometers from the nearest PT Pos branch. In such cases where PT Pos determines that a significant number of recipients must travel more than 20 kilometers to reach a branch, post office staff will travel to the communities to make cash payments via “Pos Wesel”, or community payments, at temporary pay points. PT Pos uses a paper-based manual recording and reconciliation system for its community payments.

In Emergencies PT Pos staff interviewed in Padang, West Sumatra said PT Pos would be an effective partner in preparing for and operating through emergencies. They cited their ability to pay about 6,000 new PKH recipients with only one month’s notice from the regional office in late 2014. PT Pos was prepared to make the payments because its systems were in place, staff were prepared and PKH facilitators were available to support the process and verify recipients’ identities. The branch also stayed open in the aftermath of a 7.9-magnitude earthquake in 2009, attesting to its reliability.

Staff suggested that, should it have an agreement with PKH or WFP to do so, making emergency payments to more than the current number of recipients in the wake of a natural disaster would be relatively simple, provided they had clear instructions about (1) how much money the branch will need to disburse, (2) how many recipients the branch will pay and (3) what resources and support the

29 The researchers cannot speculate as to whether Bank Indonesia would authorize such a request.

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branch will have to make the payments. Support would include additional staff and capital resources (such as computers) and local government assisting facilitators with informing recipients.

E-Money PKH Payments

SIM Cards for Recipients For the PKH e-money pilots, TNP2K elected to provide all e-money recipients with new SIM cards. TNP2K cited the universality of Telkomsel SIM cards as a key reason for providing new SIM cards; a number of recipients only had SIM cards from smaller providers not compatible with Bank Mandiri’s system. Additionally, TNP2K found that fewer recipients than it expected had SIM cards in the first place. As such, rather than surveying recipients about SIM card ownership for the e-money pilot, TNP2K decided to provide new SIM cards to all recipients.30 Recipients’ minimal SIM card ownership is something for WFP to take into account, especially in emergency situations when SIM card distribution ahead of payment would risk being a clumsy, resource-intensive step.

The standard SIM to which PKH e-money accounts are linked requires minimum usage and balance to stay active, an admitted oversight in the design of the payment mechanism. PKH has encountered significant problems in its e-money pilot as recipients fail to use (or leave a balance) on their program-registered SIM cards, rendering the SIMs expired by the next payment date. For example, a BRI agent served 99 recipients for the first e-money payout. However, she only served 51 recipients at the second payout due to a number of recipients having expired SIM cards.31 After receiving reports from facilitators and field staff on inactive SIMs, PKH must provide new SIMs to recipients with expired SIMs. The program and government are hoping to resolve this issue in 2015, whereas KKS operations have benefited immensely from an agreement with MNO partners to waive SIM activity requirements for five years for all KKS SIM holders.

Recipients interviewed also complained about needing to pay for airtime in order for their SIM cards to stay active. Interestingly, no one seemed to agree on how much they needed to spend. One group of recipients said they should add IDR 10,000 (US$0.80) per month, another group said IDR 5,000 (US$0.40) per week. One woman pointed out that, only receiving IDR 125,000 (US$10) every three months, the airtime plus the transport cost hardly made it worth getting the PKH payment. Additionally, if the payments are delayed for any reason, this would require recipients to add more airtime without receiving a PKH payment.

Registering Recipients Under a relaxed KYC agreement with BI, Bank Mandiri and BRI have been able to open e-money accounts for recipients with the following minimum information: name, ID number, PKH ID, birthdate, mother’s maiden name and occupation. For the e-money pilot, PKH required e-money recipients to register their e-money accounts and SIMs. The vast majority, 91 percent, do so with assistance from others, typically a PKH program officer, a family member or a group leader. While more than half of recipients were able to successfully register their e-money account on their first try, one third reported it took three tries to successfully register their accounts due to network problems.32 Mass SIM registration was also a significant hurdle, as most SIMs in the marketplace are not registered to their owners. In the PKH program, TNP2K hired interns to manually register all 1,800 SIM cards over USSD.

BRI PKH Payments In response to a government policy push to extend banking services to the unbanked and poor, BRI first became a PSP in 2011, managing 100,827 PKH payments totalling IDR 35 billion (US$2.8 million) to recipients via their Simpanan Tabunganku savings product. By 2012, BRI served 500,827 recipients (34 percent of total) who could retrieve their money at any of the 15 BRI bank branches or 120 bank units

30 Information gathered by MICRA at TNP2K-led workshop on the evaluation of e-money for PKH payments. January 2015. 31 A program-wide number of recipients unable to withdraw their payments due to SIM card issues was not available at the time of the research. 32 TNP2K, 2014.

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(similar to a bank agent) in the covered areas. Although the recipients received their payments into regulated bank accounts and could take advantage of the account features (e.g., safe place to store value, interest on deposits), very few recipients actually did take advantage; rather, they typically cashed out their payments in full.

PKH cancelled BRI’s contract in 2013 due to challenges such as long lines at the pay points, challenges verifying customer identities (know-your-customer, or KYC, requirements) arising from lost or damaged IDs, poor customer service and unfulfilled expectations that BRI would deploy mobile ATMs to help serve recipients faster.33 PKH then relied exclusively on PT Pos for its growing number of payments.

When the e-money pilot opportunity arose in 2014, BRI agreed to participate again with PKH, using e-money accounts and its agent network. BRI served 485 recipients in Jakarta and East Java during the pilot using 10 agents. According to BI, BRI already has 14,000 agents nationally and plans to grow its agent network to 25,000 within the next two years.

BRI uses a proprietary electronic data capture (EDC) technology for the transactions. It relies on MNO Telkomsel for enough signal strength to ensure online, real-time reconciliation. If the signal is weak or the network goes down during payments, agents either wait or conduct their transactions offline and reconcile manually. The EDC machine used for transactions is essentially a unique POS device solely owned and operated by BRI to connect to and transact via their EDC system. To pay recipients, BRI proceeds as follows:

1. BRI sends an SMS blast to recipients informing them that their payments are available. 2. Based on its program lists PKH sends both the money for the payments and all necessary payroll

information to the BRI head office. 3. The BRI head office then executes the payroll process and coordinates with agents to ensure

adequate liquidity at payouts. 4. Notified by SMS, recipients can withdraw their money at an agent, an authorized ATM or

supermarkets Aflamart and Indomart.34 As soon as they receive the SMS telling them that money is available, recipients can go to cash out from ATMs, whereas if they go to an agent, they must wait until their designated day.

5. At the agent, recipients request and receive pass codes sent via SMS message. 6. Recipients give pass code and phone number to agent, and agent enters phone number in EDC

machine. 7. Recipients input PIN, followed by the pass code. 8. Agent pays recipient and records on receipt paper. 9. BRI conducts and reconciles all transactions electronically and sends a data report to PKH for

monitoring.35

The government pays BRI by committing to deliver the total payment amount in advance of the disbursement and by paying a per-transaction fee (which BRI splits with agents). Interestingly, however, it charges the lowest transaction fee of the three PKH PSPs (IDR 1,000, or US$0.08, per transaction less than Bank Mandiri and nearly half of what PT Pos charges). With the emphasis on e-money and payments innovation growing in the country, BRI also appears to be leveraging the e-money pilot as an opportunity for product testing as it moves forward with its e-money and branchless banking expansion strategy. BRI expressed no concerns over challenges of agent liquidity. However, one BRI agent expressed concern with the banking technology: BRI’s IT division trained her on the EDC machine

33 To learn more about PKH’s experience disbursing payment through BRI bank accounts, see the 2012 OPM report Disbursement of Social Cash Transfers through Bank Accounts. 34 Withdrawals at ATMs and merchants seem merely aspirational at this time, as most BRI ATMS are unstandardized and not yet compatible with the SIM-based cards. 35 Payment process comes from interviews that BFA conducted in December 2014 and TNP2K & Spire Research and Consulting. “Monitoring and Evaluation of Digital Payments Services for a Pilot of Payment of PKH Beneficiaries.” Presentation. January 29, 2015.

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three times, yet she claimed she would still prefer the BRI staff to be present during PKH payouts (as they were for the first two payments) since she is still learning the machine.

BRI reported that recipients have trouble with the banking technology and with remembering their PINs. The same BRI agent said that most of her recipients are older women who are unfamiliar with operating mobile phones and do not own their own phones. She observed recipients giving their PINs to her, to BRI staff or to PKH staff to enter into the EDC because they were not familiar with PINs, the EDC or the mobile phone. She benefited from BRI and PKH staff being present during the payouts to assist with these issues.

In Emergencies One agent recommended making emergency payments in cash, rather than e-money, until the e-money system is better established. Particularly due to recipients’ lack of familiarity with the mobile phones, she also feared recipients would be confused and doubtful about the payments, which would cause more work for the agents, bank staff and PKH staff. Nonetheless, she claimed to have sufficient liquidity to serve additional recipients in times of emergency, and recommended that she would benefit from (1) more staff to help pay recipients, (2) additional EDC machines to process payments and, since she would likely be handling more money, (3) more security (particularly given the emergency context).

Bank Mandiri PKH Payments Bank Mandiri is a new partner for PKH, currently serving 1,304 recipients. It has previous experience with G2P payments, having formerly served the Ministry of Religion to pay teachers via its electronic bank account product. Similar to the BRI experience with delivering PKH payments through basic bank accounts, Bank Mandiri struggled with crowded branches at times of payment and found little financial benefit in the arrangement. It did not renew its contract with the Ministry of Religion and has largely stayed out of the G2P space until its recent partnership with PKH and KKS to pay recipients through e-money, which the bank sees as a potentially lucrative business line. Bank Mandiri intends to recruit 10,000 agents in 2015, with the ultimate goal of having 25,000 agents by the end of 2016.

Bank Mandiri’s e-money product, available over USSD or smartphone app for users connected on any of Indonesia’s three largest MNOs, features no minimum balance and no withdrawal fees for accountholders. The Mandiri e-cash management system is web-based down to the agent level, such that it depends on a strong network signal in order for the bank and its agents to access the accounts and process and reconcile payments. The payment process is as follows:

1. Bank Mandiri sends an SMS to recipients informing them that their payments are available. 2. To process payments, the agent inputs recipients’ mobile phone numbers (one at a time) into

his/her laptop computer and then asks the recipients how much money they would like to withdraw.

3. Recipients receive six-digit one-time passwords (OTPs) via SMS to their phones, typically with assistance from the agent, which the agent inputs back into the computer.

4. The agent confirms the amount to pay the recipients. 5. The recipients receive transaction confirmations and balance notifications via SMS. The agent

also receives a transaction confirmation. 6. The agent records the withdrawal on receipt paper and in his notebook.36

What is notably missing is the use of a PIN to ensure a secure payment. Mandiri reports that they do not use PINs because recipients cannot remember them. After observing BRI, observed BRI recipients’ challenges with PINs, Bank Mandiri decided it would pursue an alternative, potentially easier method for recipients by using OTPs.

36 Payment process comes from interviews that BFA conducted in December 2014 and TNP2K & Spire Research and Consulting. “Monitoring and Evaluation of Digital Payments Services for a Pilot of Payment of PKH Beneficiaries.” Presentation. January 29, 2015.

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Finding the Right Agents As BRI and Bank Mandiri grow their agent networks, TNP2K evaluated the ideal criteria for agents. Specifically, agents should be trusted in their communities, have liquidity, be in convenient locations for the recipients and know how to use the banks’ technology. Interestingly for the pilot, the banks brought the cash to the agents before they began payouts, rather than requiring the agents to provide the cash up front and apply for reimbursement. The bank staff would assist the agents with the payouts, complete the settlement reports and take excess cash back to the bank with them. While such intensive intervention from bank staff may be helpful to ensure liquidity and quick settlement while agents are trained and growing, these practices are costly, atypical and hence unsustainable in agent-led financial services models.

The best examples of agents are retail shop owners who are reliably in their shops so that, if a recipient cannot withdraw her money on the designated payout day, she can find the agent on another day (and the agent would have enough money to serve her). Problems would arise with agents who are village chiefs, for example. While community members may trust the chief, he would not have cash on hand to serve recipients on any day; he would rely on the bank to bring the cash on payout days and disburse it.37

Financial Inclusion and E-Money Accounts Considering the government supports e-money G2P payments in order to promote financial inclusion, BRI and Bank Mandiri e-money recipients reportedly can and are even actively encouraged to save some of their payments in their e-money accounts. TNP2K reported that as much as 10 percent of recipients kept money on their phones. One BRI agent reported serving some recipients who decided to keep a portion of their payments in their phones. However, when the recipients asked to withdraw the money on the next payment date, the agent could not disburse it. BRI told her that agents can only disburse the cash amounts stated in the data given by the Ministry of Social Affairs (which would be equivalent to the amount for one pay period per recipient). The agent was unclear whether and how the recipients would be able to retrieve the money remaining in their accounts. TNP2K and PKH will surely need to modify the systems based on such lessons from the pilot, and WFP will want to monitor this situation as it seeks to partner with G2P programs using these payments methods.

4. Program Stakeholder Experiences & Perspectives on E-Payments

PKH The 2014 approval of national e-money regulations broadened the possibilities for PKH partnerships with banks for disbursing payments. However, bottlenecks still exist. First, the program reported that onerous annual procurement processes cause payment delays, as the tender process must finish before payments can go out. Although PKH envisions a scenario in which a variety of PSPs could serve the program, drawn out tenders leading to delayed payments may only be exacerbated if the program contracts with numerous PSPs. Second, the pilots have exposed some challenges to using traditional e-money services. For instance, the program reports that SIM cards are an expensive investment, despite lower transaction fees for e-money payers, especially if recipients do not use their SIM cards frequently enough and the SIMs expire. Third, recipients do not appear to grasp the e-money concept and are prone to giving away or forgetting their PINs, causing concerns of security risks on the one hand, and stalled or prolonged payout processes on the other.

Despite PKH’s challenges with e-money and despite PKH’s ongoing partnership with PT Pos, the PKH director saw limitations with PT Pos’s current cash-based and non-financial system. The director saw the new e-money and branchless banking regulations as an opportunity to expand the payment options, particularly leveraging agent networks. Staff were also open to partnerships that leverage their different cash disbursement methods in emergencies. However, they were at the same time quick to

37 Information gathered by MICRA at TNP2K-led workshop on the evaluation of e-money for PKH payments. January 2015.

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note that the budget, internal capacities, current reach and the available infrastructure for e-money are all lower than may be needed to do so in even non-emergency situations.

State Ministry of National Development Planning (Bappenas) Bappenas is a staunch promoter of more effective and efficient government programs. It firmly believes that electronic payments will reduce waste and leakage within government as well as provide opportunities for more effective policies that link the Indonesian people with markets and services. Yet it acknowledges that electronic payments are still in their infancy.

For PKH especially, it has observed that in some pilot areas, the network signal is still too weak, both for BRI’s EDC technology and Bank Mandiri’s web-based platform.38 Even where signals and infrastructure are strong, staff acknowledged challenges with recipient capacity to use and understand the new systems, such as forgetting and losing PINs and SIMs, or registering twice for the same account or product.

Nonetheless, Bappenas finds the need for PKH to innovate and modernize as critical. PT Pos fees continue to increase annually and, as coverage of the program continues to grow, Bappenas expressed concerns that PT Pos’ fee increases will become inc reas ing ly unsustainable. The prospect of paying via e-money agents is particularly appealing when the transaction fees charged are nearly half of what is charged by PT Pos.

TNP2K TNP2K has done the most of all the stakeholders to promote and design G2P e-payment solutions. Its staff monitor and evaluate the PKH e-money pilots and have commissioned new research to consider the future of e-payments opportunities, not only for PKH but for several other government social protection schemes as well.

TNP2K believes that e-money and electronic payments, by offering multiple pay points and information via mobile phone, will offer flexibility and convenience to recipients while boosting the operational efficiencies of the program. Its staff were encouraged to see that in the early stages of the e–money pilots, 10 percent of recipients left a balance in their accounts and 15 percent of recipients chose to withdraw from ATM instead of agent.

However, TNP2K staff also offered several observations on the most critical issues related to the PKH payments and e-money pilots. First, staff interviewed noted that TNP2K overestimated recipients’ familiarity with phones and capacity to manage SIMs and the understanding of the added value that e-money accounts might provide them. Despite a sensitization campaign spearheaded by Bank Indonesia on e-money for recipients, TNP2K staff involved in the pilots noted that children helped their mothers operate the phones and few recipients choose to save. Second, they expected that real-time reconciliation, which reduces the number of required staff and the potential for leakage and corruption, would be an advantage of e-money. However, the program will only benefit from real-time reconciliation with reliable network signal. The continued requirements for paper documentation in addition to electronic records further weaken the envisioned potential efficiencies and savings from real-time reconciliation. Third, agents are still learning the e-money processes and have not consistently been prepared enough to disburse the money once recipients receive notice that the money is available.

Bank Indonesia TNP2K staff described Bank Indonesia as the champion of e-money in Indonesia, writing the e-money regulations in 2014 and advocating the use of e-money for financial inclusion, particularly through G2P

38 At a January 2015 event hosted by TNP2K, the Indonesian Telecommunication Regulatory Authority cited political and procedural roadblocks impacting signal strength in certain areas: some local regional governments have not allowed sufficient investment in cell towers. They also require MNOs to renew their tower permits every two years, which carries heavy costs for the MNOs. In some instances, if MNOs do not comply with the permit renewal requirements, local governments have torn down the towers. MNOs are now advocating for relaxed regulation.

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payments. BI staff noted that their biggest investments toward the shift to electronic G2P payments have been in payment infrastructure and e -money awa renes s and f i nanc ia l education initiatives, for both the recipients and for the new e-money agents.

BI staff expressed their satisfaction with the gradual approach PKH is taking to its e-money pilots, such

as conducting agent training and recipient awareness building activities one month in advance of the

first payments. However, they believe more could be done through this process to facilitate awareness

and capabilities of agents and recipients. For instance, they note that PKH facilitators and agents are

on the front lines, but they are not consistently trained and may be confused about who is responsible

for recipients registering, transacting and understanding the e-money based payments process.

Additionally, BI raised questions about to whom recipients turn when they have problems with their e-

money-based payments.

5. Recipients’ Experiences with E-Money and PT Pos PKH reaches people of diverse backgrounds in rural, peri-urban and urban areas with different terrains and economic activities and who are at risk for different natural disasters, including flooding, earthquakes and tsunamis.39 The majority of recipients did not own their own cell phone and few had bank accounts or had ever used an ATM. Some recipients (both e-money and PT Pos) saw the payment as a gift and did not feel that they are in a position to complain when something goes wrong with a payment. One group said they were not even sure to whom they should complain.

Surprisingly, recipients did not complain about the late payments – which were six months late for several e-money and PT Pos groups interviewed. All the groups emphasized their reliance on PKH to pay for school costs, such as exams, new semester fees and uniforms and supplies, and they were even able to borrow against the PKH payments. However, the quarterly frequency of payments caused recipients to rank them as less reliable and important than their income from employment, typically casual labor and micro businesses.

PT Pos recipients did not know they could keep money in their account, though several recipients expressed interest in keeping money in the account. E-money recipients interviewed for this study said they do not keep money in their account, in part because they are afraid that the government will take away the amount they leave in and then exclude them from the program. Few other recipients claimed they would prefer receiving payments through the bank because it is easy to reach, but they were afraid to have an account, as they did not want to pay administrative and maintenance fees.

While PT Pos recipients said they would be interested in receiving their payments via e-money, few of them either owned or were comfortable operating a cell phone. The recipients were willing to use whatever payment method was necessary to receive their payments and they assumed (without any mention or probing from the researchers) that an e-money agent would be more conveniently located and more quickly able to process payments than PT Pos. Ultimately, the recipients’ responses underline that their biggest constraints to accessing the current PKH payment process appear to be the distance and cost to reach the pay point, and the time they wait to receive their payments.

While some recipients reported taking advantage of waiting at the post office for their payment to also see their friends and socialize, recipients said they have spent hours waiting for their payments. In 2012, the average waiting time to receive a Giro Pos payment at PT Pos branches was two hours, while Pos Wesel community payments were less than 90 minutes. PT Pos staff interviewed pointed to the PKH program as the root of this continued problem, claiming that the program, which currently

39 BFA conducted research with recipients with the following characteristics for this study:

- Recipients in Semper Barat and Koja in North Jakarta, most recently receiving their payments through e-money - Recipients in Pasisir Selatan, south of Padang in West Sumatra, receiving their payments through Giro Pos payments at

PT Pos branches - Recipients in Padang, West Sumatra, just receiving their first payments through Giro Pos payments at PT Pos branches

in December 2014

- Recipients in Bogor, south of Jakarta, receiving their payments through Giro Pos payments at PT Pos branches

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manages all communication with recipients, does not always give complete and accurate information to recipients.

In cases of emergency, recipients expressed their fear to stray from their homes. In cases of flooding, they have found it nearly impossible to leave their homes or neighborhoods (such as to get money, food or other necessities). In cases of earthquakes, they prefer to wait for aftershocks to subside before traveling any distance. As such, they would prefer for government or PSPs to deliver any post-disaster payments to them, rather than traveling to withdraw money. Costs to the program aside, PT Pos is currently in the best position to provide convenient, close-to-home payment options in post-disaster situations.

6. Key Lessons In analysing PKH, its payments evolution and its potential as a WFP partner for emergency cash transfers, the following lessons emerge:

1. E-money infrastructure, agent networks and recipient understanding are nascent and, while evolving, are currently key barriers to scaling G2P e-money payments. WFP should monitor e-money piloting and growth before adopting it as a reliable way to make emergency payments.

E-money, particularly as a means of delivering social assistance, is in its infancy in Indonesia. Policy momentum is behind the e-money model and several promising policy developments indicate that Indonesia’s payments infrastructure and the availability of e-money will grow and strengthen over time. To reach scale, let alone to rely on e-money for emergency payments, the program and PSPs have a number of items to examine, including:

E-money infrastructure – mobile network and agent network - and its limitations

The complex e-payment payout processes

Recipients’ lack of e-money and mobile phone awareness and the best ways to educate them

Agent preparedness, liquidity and payment process education

Recipient phone ownership

2. Until e-money infrastructure and processes are sufficiently robust, cash-based payouts via PT Pos is likely the most – if not only – viable option for emergency payments.

The interviewed post office branches felt confident in being able to serve more recipients, as long as they received sufficient notice to hire additional staff, such as in the case in Padang. Additionally, recipients appeared comfortable with the PT Pos payment processes and the branch locations, even if they had to wait hours for their payments. Furthermore, even if PKH increasingly relies on e-money to pay recipients, PT Pos will continue to play an important role as cash payment provider for the foreseeable future. Particularly in emergency situations, when even reliable electronic payment infrastructure may be vulnerable to collapse, an emergency cash transfer program requires a strong cash-based payment option. WFP’s ability to leverage PSPs making cash payments in the Philippines after Typhoon Haiyan is a prime example of this: With power down and roads destroyed, WFP and its partner, the Pantawid Pamilyang Pilipino Program (4Ps), were not able to make electronic payments, which typically comprise around 40 percent of all 4Ps payments, in some of the affected areas. Since the 4Ps already used cash and electronic payments, WFP and the program were able to coordinate with PSPs to choose the best payment types to effectively deliver money to recipients in different areas.

3. Stakeholders are increasingly focused on financial inclusion and supporting G2P e-money payments, which will influence the trajectory of G2P payment modalities and could, thus, influence the feasibility of a WFP partnership.

TNP2K, the Ministry of Social Affairs, Bappenas, BI and BNPB all appeared eager to modernize and improve G2P systems toward electronic and preferably financially inclusive payment schemes, and recognize that these improved systems can and should be used for emergency and disaster

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response. However, whether and how their enthusiasm aligns with WFP’s priority of delivering cash to vulnerable populations in emergencies remains to be seen. During interviews, stakeholders demonstrated a clear focus on pushing ahead with e-money payments, even if it slows the payment process temporarily as the program, agents, PSPs and recipients adapt to a new, more modern system. Additionally, the stakeholders appear to prioritize financial inclusion in such a way that demands the G2P payment mechanism includes a store of value account. Such focus is not directly relevant to WFP’s desire to find the most effective way to pay recipients in emergencies.

4. The Unified Database is a targeting tool to leverage, though it has room for improvement. With an impressively large and comprehensive list of poor households in Indonesia, the Unified Database is increasingly used not only to target PKH recipients but all other manner of social programs targeted to the poor. However, its supposed cases of outdated data underline the need for the government to update it, and it is unclear whether that will happen soon. With updates and improvement, which WFP could potentially inform to align them with WFP targeting needs, the Unified Database can offer a clear opportunity for leveraging a central government list for targeting in emergency situations, regardless of a G2P partnership.

5. KKS is another potential partner program for WFP to monitor in 2015 and beyond. An in-depth analysis of the structure and functioning of the newly launched KKS was outside of the

scope of this research. Early information available, however, indicates that the program, which

wi l l reach 15.5 million poor recipients using cash and electronic payment methods, has the

potential to be a partner program for WFP. At this time, the government has focused on its

modernization through aiming to pay one million recipients through e-money. With such an

ambitious plan, KKS has already encountered challenges such as those experienced by PKH.

Before engaging as partners, WFP would benefit from monitoring the program’s progress, the

PSPs’ commitment (particularly the e-money PSPs) and the recipients’ experiences to confirm

whether it would serve WFP’s needs and be interested in so quickly partnering with WFP on a

new initiative. For more information on KKS, see Annex 2.

7. Feasibility Assessment and Specific Recommendations

Program Feasibility: PKH Given the current limitations of e-money, PT Pos’ position as lead G2P payments provider, stakeholders’ prioritization of e-money and financial inclusion, the strengths and limitations of the Unified Database and the other G2P programs managed by the Ministry of Social Affairs, six criteria emerge for evaluating whether WFP should partner with PKH:

Program has effective relationship with PSPs. Do the program and PSP(s) see a continued relationship, or is it at risk of ending soon? Are the program and PSP typically able to coordinate to pay recipients on time? In emergency situations, such as after an earthquake or flood, would the program and PSP be able to work together to make on-time payments?

Program has the flexibility to make additional payments or add more recipients. Do the program and PSPs have the capabilities to promptly add payments or recipients (at least temporarily)?

PSP has access to sufficient infrastructure to make payments that are relatively low-cost to the program. Are the necessary infrastructure and systems in place for each PSP? How do PSP transaction fees compare to other fees in low- and middle-income countries?

Recipients trust PSP to pay them the correct amounts on time at a location convenient (or at least not inconvenient) for recipients. Do recipients have problems receiving their payments, whether because payments are late or the incorrect amount? How far do recipients have to travel for their payments? How long do they have to wait to get their payments?

Program serves a significantly large and inclusive group of recipients likely to be affected by natural disasters or other emergencies. Does the program cover a substantial number of

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relevant beneficiaries in rural and urban areas?40 Does the program have a database that is comprehensive, inclusionary and up-to-date?

Program is ready to embrace emergency response partnership with WFP. Are the program and supporting stakeholders prepared to partner on an emergency cash transfer initiative? Do staff appear willing to (and perhaps compensated for) work additional hours, such as in emergency situations? Are staff available to deliver messages to recipients when necessary? (Do they?)

Table 4 lists the criteria and rates how PKH aligns with the criteria based on a scale of red, yellow and green circles. Red indicates that PKH and WFP do not align; yellow indicates they align somewhat; and green indicates that they align significantly.

Align significantly

Align somewhat

Do not align

Table 4: How PKH Aligns with WFP Key Criteria

Criteria Rating Comments

Program has effective relationship with the PSPs.

PKH has a longstanding relationship with PT Pos, which is updating G2P accounts to include store of value (to keep up with government expectations). The program is also open to relationships with e-money providers to create the most efficient processes. At the head office level, timely payments did not appear to be an issue, but nearly all e-money and PT Pos recipients interviewed mentioned they did not receive payments for the first half of 2014.

PKH and the PSPs have the flexibility to make additional payments or add more recipients.

Partnering with PT Pos, PKH appears to have the ability to add recipients in a brief timeframe, as demonstrated in Padang. However, PT Pos claims that only paying recipients quarterly (rather than bi-monthly, for example), provides it with sufficient time between payments to prepare. Natural disasters are not predictable events that offer months to coordinate and prepare payments.

PSP has access to sufficient infrastructure to make payments that are relatively low-cost to the program.

PT Pos has in place the necessary infrastructure for making scaled G2P payments and has even remained open during past natural disasters. Meanwhile, e-money providers continue to develop their agent networks and mobile infrastructure. However, while all three providers appear to be relatively low-cost compared to PSPs from cash transfer programs in other middle- and low-income countries, PT Pos’ fees are nearly two times higher than the e-money providers’ fees.41

Recipients trust the PSP to pay them the correct amounts on time at a reasonably convenient

Recipients interviewed in urban and rural areas appeared comfortable with PT Pos payments, despite the long lines. E-money recipients

40 The research team used program size as a criteria in earlier stages of the project in determining which program to study in depth. 41 For a comparison of transaction fees across select low- and middle-income countries, see Annex 3.

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Criteria Rating Comments

location. experienced challenges with the e-money program, many of which they are likely to overcome if they continue to receive e-money payments.

Program serves a significantly large and inclusive group of recipients, likely to be affected by natural disasters or other emergencies.

The Unified Database is significant, covering the bottom 40 percent of Indonesia’s socio-economic strata. However, data are now more than three years old, with research suggesting that exclusion errors and other missing indicators exist, which may pose challenges in leveraging it in emergency situations. The timeline for updating it is apparently approaching. PKH serves recipients in urban and rural areas but reaches significantly fewer than other government programs such as KKS, and unconditional cash transfer program, and Raskin, a rice subsidy program.

Program is ready to embrace emergency response partnership with WFP.

PKH staff play a key communicator role between PKH and recipients; those interviewed appeared to be cautiously willing to support emergency payments. However, PKH stakeholders’ focus on e-money and financial inclusion and the program’s quarterly payments schedule may conflict with WFP’s priority of rapidly getting cash into the hands of those affected by disasters.

PKH’s alignment with the criteria suggest that it remains a potential partner for WFP, but not the only one. In order for WFP to further evaluate its options for emergency cash transfer partners, the researchers recommend the following actionable steps for WFP.

Host workshop on the potential of G2P payments for emergency preparedness in Indonesia with government players including Bappenas, BNPB, TNP2K, Ministry of Social Affairs, BI and OJK. Use the workshop as an opportunity to (a) become familiar with all the stakeholders as they become familiar with WFP’s interest in leveraging G2P schemes; (b) understand the stakeholders’ roles in G2P payments and emergencies; and (c) discuss how and when to improve the Unified Database.

Approach and establish relationships with the Ministry of Social Affairs, TNP2K and Bappenas. As the stakeholders that appeared most willing to explore a partnership with WFP on emergency cash transfers, they will be WFP’s most likely champions for any implementation.

If WFP is anxious to establish a relationship with a PSP in the short-term, approach PT Pos to introduce the idea of partnering on emergency cash transfers to gauge their interest, commitment and financial expectations.

As Indonesia currently lacks a cash and vouchers (C&V) working group, play a leadership role in facilitating a cross-sector dialogue on cash and vouchers in Indonesia, particularly considering the potential opportunities and challenges of e-money and branchless banking options, to explore additional opportunities for partnerships.

Meet with TNP2K to discuss how WFP might get involved in strengthening the Unified Database, with an eye toward emergency response targeting. TNP2K (along with Bank Indonesia) may also be interested in exploring ID verification systems, such as UN’s Scope system or other biometrics, that could replace recipients using PINs and pass codes to receive e-money payments.

Using the above criteria, evaluate how programs such as KKS and Raskin align with WFP’s needs as compared with PKH. One way to evaluate these programs would be to conduct a pilot with Bappenas that provides e-payments via the new nutrition cards connected to the KKS scheme, or that experiments with electronic payments for Raskin. According to Bappenas, all PKH recipients should also receive Raskin as a matter of course (though this is not supported by findings from the recipient research).

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Conclusion PKH’s e-money pilots could be the first step toward a robust and competitive system that offers a range of payment mechanisms. However, the current status of the program would make leveraging the system in a post-natural disaster or other emergency environments difficult — payments just do not get to recipients in a timely manner. Because it would benefit from improved local capacity in targeting and payment, WFP can take a leadership role and engage with the Government to identify priority areas for funding and training support.

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Annex 1: BNPB’s Interest in Cash Transfers for Disaster Management BNPB has some limited experience deploying cash transfers for emergency response. However, BNPB staff expressed clear interest in understanding how best to most efficiently and systematically conduct emergency payments. In general, they were enthusiastic about the idea of leveraging G2P schemes that are already in place, especially as those schemes move toward more electronic payments. Staff viewed recipients having one card through which to receive payments as convenient for the program and a better way to track who qualifies for payments. Trying to pay qualified displaced people in refugee camps, they have experienced problems with the number of people in camps suddenly multiplying at payment times. Staff also suggested that recipients would be less likely to spend money on unnecessary goods because they would not have physical cash to easily spend.

BNPB outlined the following areas in which they believe additional technical or operational support from WFP could help them enhance their capacities on cash transfers or e-payments:

Providing information on best practices in cash and voucher working group implementation, regulation and payment options.

Supporting BNPB’s integration and coordination with other institutions for emergency response.

Advising on how to communicate best with people about cash transfers payments, purposes and processes in an emergency (such as early warning and evacuation).

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Annex 2: Details of the Family Welfare Deposit Scheme (KKS) Launched in November 2014, KKS is an unconditional cash transfer scheme that reaches the bottom 25 percent (15.5 million recipients) of the Indonesian population every other month. The program pays 14.5 million through PT Pos and the other one million through Bank Mandiri’s e-cash account using Telkomsel SIMs. Recipients receive IDR 400,000 (US$32.04) every two months. They learn about payment dates from local government officials, which receive letters from the PSPs, or from neighbors and other KKS recipients. Recipients have no clear program officer to contact in case of questions, problems or misunderstandings.

Learning from the challenges of PKH e-money registration, TNP2K and PSPs have simplified the SIM registration process for KKS payments. For KKS, Bank Mandiri benefits from a government waiver that allows it to register recipients’ accounts and activate recipients SIMs (via Telkomsel, XL and Indosat) in bulk. This process requires registration data to be precise with no spelling errors, or the data will not match the information in the Unified Database. Bank Mandiri claims that KKS offers a much simpler back end system than PKH. For recipients to register, TNP2K arranged registration points where recipients exchange their cards related to the previous version of the KKS program for four new cards to access different family welfare services, including a SIM-embedded card to receive KKS payments. Unlike PKH SIM cards, KKS SIM cards will remain active for five years regardless of the owner’s activity level of calls, SMS and adding airtime.

Upon registration, recipients go to an agent who scans their SIM-embedded card, checks their ID and disburses their money. Although considered an e-money transaction by the program, the transaction is not a traditional e-money payment. At PT Pos, recipients complete withdrawal slips, the PT Pos staff scans recipients’ SIM-embedded cards and checks their ID to conduct the transaction. Some PT Pos branch staff prefer the PKH system where program officers typically complete the withdrawal slips for recipients; KKS does not have similar program officers.

Bank Mandiri drives the e-money payment system but has contracted PT Pos as a payment agent in certain areas. KKS transmits funds to Bank Mandiri, which transmits the grants to recipients’ SIM-embedded cards. Recipients receive their payments through a designated e-money agent or PT Pos branch and Bank Mandiri, Telkomsel and PT Pos split the fees paid by KKS. However, PT Pos found that Mandiri’s phone number-based account numbers were three digits longer than its Giro Pos account numbers. When PT Pos branches tried using Bank Mandiri’s system to complete transactions, they found signal strength to be too weak, leading to long waiting times for recipients. PT Pos therefore elected to use its own system to conduct transactions. Bank Mandiri’s payments are real-time but completed the following day to balance with PT Pos’ payments.

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Annex 3: Comparison of Cost per Transaction for G2P Programs in Low and Middle-income Countries 42 Exhibit 5 show PKH’s position in terms of cost per transaction as compared with other G2P programs in low and middle-income countries. Table 5 provides more details about the programs.

Exhibit 5: Cost per Transaction for G2P Programs in Low and Middle-Income Countries

42 Data for Brazil, Colombia, Mexico and South Africa comes from CGAP’s Focus Note 77: Bold, Chris, David Porteous and Sarah Rotman. Social Cash Transfers and Financial Inclusion: Evidence from Four Countries. Washington, February 2012. http://www.cgap.org/sites/default/files/Focus-Note-Social-Cash-Transfers-and-Financial-Inclusion-Evidence-from-Four-Countries-Feb-2012.pdf Data for Haiti, Kenya, Philippines and Uganda comes from CGAP’s Focus Note 93: Zimmerman, Jamie, Kristy Bohing and Sarah Rotman. Electronic G2P Payments: Evidence from Four Lower-Income Countries. Washington, April 2014. http://www.cgap.org/sites/default/files/Focus-Note-Electronic-G2P-Payments-April-2014.pdf Data for Indonesia comes from interviews conducted by BFA in December 2014.

11.3%

9.1%

3.5%2.4% 2.1% 2.0% 1.6% 1.3% 1.2% 1.2% 1.1%

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Table 5: Details about Transaction Costs for G2P Programs in Low and Middle-Income Countries

Country Colombia Haiti Uganda South Africa

Mexico Indonesia - PT Pos

Kenya Indonesia

- Bank Mandiri

Brazil Philippines Indonesia

- BRI

Program and date data gathered

Familias en Accion

(2011)

Ti Maman Cheri (2013)

SAGE (2014)

Child Care, Old

Age Pension (2011)

Oportunidades (2011)

PKH (2014)

WFP Cash for

Assets (2013)

PKH (2014) Bolsa

Familia (2011)

4Ps (2014) PKH

(2014)

% electronic payments43

91% 31% 80% 100% 34% 0% 100% 100% 99% 41% 100%

Number of recipients

2.4 million 75,000 95,000 9 million 5.8 million 2.8 million 62,000 1,304 12.9

million 4.5 million 485

Payment frequency

Bi-monthly Bi-

monthly Bi-

monthly Monthly Bi-monthly Quarterly Monthly Quarterly Monthly Bi-monthly Quarterly

Average grant per recipient

$55.10 $15.00 $19.34 $144.70 $118.20 $36 $34.12 $36 $71 $63.01 $36

Weighted average fee per payment

$6.24 $1.36 $0.68 $3.5 $2.52 $0.72 $0.53 $0.48 $0.84 $0.75 $0.40

As % of average grant

11.3% 9.1% 3.5% 2.4% 2.1% 2% 1.6% 1.3% 1.2% 1.2% 1.1%

Rates used in conversion

COP 1,784.50

HTG 40 UGX

2,585 ZAR 7.20 MXN 12.40 IDR 12,484 KES 85 IDR 12,484 BRL 1.62 PHP 44.44

IDR 12,484

43 Electronic payments refer to payments initiated electronically by PSP to pay recipient via debit card or mobile money by depositing money into an account accessible to the recipients. The accounts may have limitations around the length of time funds may be stored, the infrastructure at which recipients may withdraw the funds or whether recipients may use the account for additional financial activity.

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Annex 4: Meeting List Name Organization

Nancy Widjaja Alliance for Financial Inclusion (AFI)

Pak Pungky and Staff Bank Indonesia

Pak Sumedi Bank Mandiri

Tidhar Wald Better Than Cash Alliance (BTCA)

Pak Agus Noorsanto Bank Rakyat Indonesia (BRI)

Eky Amrullah e-MITRA

Leesa Shrader Independent Consultant

Ibu Oetami Dewi and staff Ministry of Social Affairs

Pak Supoto National Board for Disaster Management (BNPB)

Pak Amrizal and Staff PT Pos

Ibu Vivi Yulaswati State Ministry of National Development Planning (Bappenas)

Michael Joyce, Hilman Paloan, Ari Perdana

The National Team for the Acceleration of Poverty Reduction (TNP2K)

Brian Dusza USAID

Daniel Adriens, Sandra Luvisutto, Mohamad Marji, Diandra Pratami, Ismawanti Arif

WFP Indonesia Country Office

Blake Audsley WFP Regional Bureau

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