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PROGRAM INFORMATION DOCUMENT (PID)
APPRAISAL STAGE
Report No.: AB3407
Project Name Indonesia Infrastructure Development Policy Loan
Region East Asia
Sector Water Supply (30%), Power (30%), Roads and Highways (25%),General Transportation (10%), Telecommunications (5%)
Project ID P107163
Borrower(s) The Republic of Indonesia
Implementing Agency Ministry of Finance
Mr. Rio SilabanJl. Lapangan Banteng Timur no 2-4
Jakarta 10710 Indonesia
Ph: 62-21-(384-1067)/ Fax: 62-21-(380-8395)Date PID Prepared October 24, 2007
Date of Appraisal
Authorization
October 12, 2007
Date of Board Approval December 04, 2007
1. Country and Sector Background
Prior to the 1997 financial crisis, infrastructure investment of 5-6 % of GDP contributed
substantially to Indonesias good progress on growth and poverty reduction. The first priority of
successive governments since the crisis has been to restore macro-economic stability, reducing
inflation, stabilizing the Rupiah, and reducing public debt as a share of GDP. The World Bankhas recognized these substantial macro-economic achievements in a program of four annual
policy loans, commencing in 2004 (DPL 1, DPL 2, DPL 3, and DPL 4).
While the priority lay with restoring macro-economic stability, infrastructure investment
suffered, falling to a low of less than 2 percent of GDP in 2000, and reaching less than 3 percent
of GDP in 2004. In 2004, the World Bank published a major study of Indonesias infrastructurecrisis, urging that infrastructure investment be increased by 2% of GDP, and providing
recommendations for a host of sectoral reforms to remove policy blockages to investment. The
Yudhoyono Government, elected in September 2004, recognized the importance of theserecommendations, and set infrastructure as a major priority.
An Infrastructure Summit was held in January 2005, offering 91 public-private partnership (PPP)transactions to the private sector. The reaction to these offerings was disappointing; many
existing policy blockages remained to the preparation of bankable projects, and in practice many
projects were not well prepared. The Government has recognized these weaknesses, and has
taken strong steps to address them. During the course of 2005, new regulations were put in placerequiring competitive bidding of PPPs and appropriate risk management of guarantees for PPPs.
New institutions were developed to support project preparation. During 2006 the Government
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prepared a wide-ranging Infrastructure Policy Package aiming to encourage competition, toeliminate discriminatory practices that obstruct the private sectors participation in infrastructureprovision, and to redefine the governments role, including separating policy-making, regulatoryand operational responsibilities. A second Infrastructure Summit was held in December 2006,where ten PPP transactions were identified to be the particular focus of efforts to improve the
quality of project preparation. In 2007, the PPP initiatives to boost infrastructure investmentwere complemented with major increases in budgeted public spending, made possible by theGovernments improved fiscal situation.
Indonesias improved fiscal position has permitted increases in public investment ininfrastructure. Total national public expenditure (all levels of government) was Rp. 536 trillion(about US$ 60 billion) in 2005. The Government is reviewing its overall PSO strategy inElectricity, it has a draft WSS strategy which includes development of fiscal incentives for sub-national governments to improve PDAM financial performance, addressing PDAM debt arrears,and opening up PDAM access to new borrowing, and it has doubled its roads investment budgetfor 2008 from about US$1.1 billion equivalent in 2007 to about US$ 1.9 billion equivalent
planned for 2008.
The government has created a Risk Management Unit to ensure that appropriate forms and levelsof government support are given to individual public private partnerships, and to ensure that theoverall level of contingent support is consistent with sound fiscal management. It is workingtowards the creation of a guarantee fund for private infrastructure projects and developing apipeline of PPPs.
Regarding land, environment and governance, a National Land Agency ImplementationGuideline (3/2007) has been introduced covering land acquisition. Initiatives to improveenvironmental management are going forward, both through the environmental impactassessment process and through decentralized governments. At the forefront of publicprocurement reform is the imminent creation/ establishment of a fully independentGoods/Services Procurement Policy Development Institution
2. Operation Objectives
The reform agenda will be supported through a programmatic budget support instrument. Thiswould be implemented through a series of three tranches of financial support under the proposedInfrastructure Development Policy Loan. Prior actions for the loan include: (i) increasing thecentral government budget allocation for infrastructure by 30% 2007-2008 (ii) publication of thePLN PSO compensation payment by region and customer category; (iii) ending governmentsupport for infrastructure projects that are Perpres 67 non-compliant and lack a project specificPerpres allowing for non-compliance; (iv) allocating Rp 3 trillion in the 2008 budget for theIndonesia Infrastructure Fund, the Guarantee Fund and land acquisition (v) issuing a decree toestablish an inter-ministerial Land Working Group; and (vi) use of semi-e-procurement systemfor all national roads projects in Java and Sumatra above Rp. 10 billion
3. Rationale for Bank Involvement
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Now that substantial macroeconomic progress has been achieved, inadequate infrastructure hasemerged as one of the main factors that could prevent Indonesia from reaching its full growth
potential. The Government is committed to addressing an infrastructure agenda that is complex,
technically detailed, and challenging. A separate IDPL series provides the flexibility to adjust
the timing of operations to actual progress in relatively risky infrastructure reform.Establishment of a new IDPL series also responds to strong country demand. The Government as
a whole recognizes the importance of Bank support in advancing key reforms within the
bureaucracy, as well as the intellectual leadership and assistance the Bank can provide on thedetails of particular reforms.
The launching of a new infrastructure series provides a strong signal of Bank support for theinfrastructure policy loans of the ADB and JBIC. The policy loans provide a platform for all
three development partners to work together in support of the Governments infrastructureprogram.
4. Financing
The Borrower is the Republic of Indonesia and this operation is a single-tranche IBRD loan ofUS$ 200 million that would be made available upon loan effectiveness, as all policy actionssupported by the loan/credit would have been completed prior to Board presentation. For theIBRD loan, the Government has confirmed that Indonesia would borrow this amount as a FixedSpread Loan (FSL) in US$ currency with annuity repayment schedule linked to commitments.5. Institutional and Implementation Arrangements
The Ministry of Finance will be in charge of implementation. Bank staff will focus on the
impact outcomes of the program and the adjustments that need to be made to the operation as itevolves, to take into account the latest country developments, stakeholder support, and feasibleoptions for realizing the intended development goals.
6. Benefits and Risks
The IDPL is expected to support a considerable increase in the extent and quality ofinfrastructure provision in Indonesia, on the basis of a 25 percent increase in spending onnational infrastructure and a 20 percent increase in subnational infrastructure capital expenditure
2006 2010 as well as sectoral reform that will encourage private investment and improvedefficiency of both public and private financing. This will support (inter alia) the extension andimproved condition of the national road network, an expansion in access to electricity and pipedwater, improved environmental monitoring and a decline in the open-dump disposal of solidwaste and expanded and fair compensation for land acquisition.
There remain strong political pressures to circumvent competitive bidding pressures, to bringprojects to market before they are adequately prepared, or to support the bankability of PPP
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projects with inappropriate government guarantees. At the same time, the present Government
appears strongly committed to the reform program. In addition, the launch of the IDPL series isitself aimed at mitigating commitment risks since future loans will be delayed if the reform
agenda stalls (Moderate Risk).
The Governments infrastructure reform program is undoubtedly complex and it is clear that therelatively slow pace of progress so far is due at least in part to capacity constraints. The
Government is well aware of these issues and the Governments request for Bank support
through the IDPL series is aimed in part at enlisting Banks assistance in this regard (High Risk).
Indonesia is struggling with issues of corruption, and corruption could certainly have an impact
on the success of the IDPL series. The Bank is pursuing multiple anti-corruption initiatives in
Indonesia, including in respect of infrastructure. There are anti-corruption initiatives in multiple
Bank infrastructure projects, and the procurement reforms set out in the IDPL are part of the
anti-corruption effort (High Risk).
Macroeconomic performance is subject to multiple risks, of varying likelihood and gravity. Thepotential risks to macro-economic stability which are most likely to be realized are shocks over
which the Government has little or no control (natural disasters, the world economy). The
mitigation strategy is to improve the Governments overall fiscal and monetary management, to
improve the economys resilience. Moderate risk)
6. Poverty and Social Impacts and Environment Aspects
International experience indicates strong linkages between infrastructure service provision and
poverty reduction. Several IDPL reforms are focused on directly increasing household access to
services, including rural electrification and access to piped water. Access to such services is
currently highly regressive. Network expansion is likely to reduce this regressivity. Policies
addressing sub-national governments incentives to invest in infrastructure may, in time, improve
the provision of rural roads. Rural roads typically have significant effects on the reduction of
poverty. Upward electricity tariff revisions would adversely affect those who already have
connections, but would help to expand the rate of connection, particularly in the eastern
provinces where poverty rates tend to be higher.
Notwithstanding the many social benefits of improved infrastructure, there may be some social
costs associated with expanded infrastructure investment. In particular, land acquisition
associated with road construction may have adverse social consequences. The IDPL reforms
which envisage improved compensation standards may help to mitigate the adverse social
consequences.
Many of the reforms supported by the IDPL will help improve environmental outcomes in
priority areas, such as sanitation and energy efficiency. Investments in water supply, quality and
access have the potential to improve sanitation and environmental health outcomes for affected
populations. The operation has been designed to help mitigate or strengthen the Governments
capacity to address potential negative environmental impacts. The implementation of the IDPL
will be accompanied by the provision of technical assistance to help the Ministry of Public
Works improve its environmental performance. The first step will involve the conduct of an
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assessment of the capacity and needs of the Ministry to carry out environmental assessments of
infrastructure projects. The proposed work will build on the existing work done on AMDAL atnational and local level and will be led jointly by the Ministry of Environment and the World
Bank. It is expected that this assessment will inform a complementary capacity building effort to
ensure that projects comply with the existing environmental legislation (and that which is in the
process of being updated) at planning, construction and implementation stages.
7. Contact point
Hongjoo J. Hahm
Lead Infrastructure Specialist
World Bank IndonesiaJakarta Stock Exchange Building, Tower 2, 12th & 13th Floor
Telephone: +(62-21) 5299-3000
Fax: +(62-21) [email protected]
8. For more information contact:
The InfoShop
The World Bank
1818 H Street, NW
Washington, D.C. 20433
Telephone: (202) 458-5454
Fax: (202) 522-1500
Web: http://www.worldbank.org/infoshop)
wb282386
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