Information about Asia and the Pacific Asia y el Pacífico
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Chapter 4: Developing Infrastructure

Author(s):
Luis Breuer, Jaime Guajardo, and Tidiane Kinda
Published Date:
August 2018
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Information about Asia and the Pacific Asia y el Pacífico
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Author(s)
Teresa Curristine Masahiro Nozaki and Jongsoon Shin

Introduction

Recognizing Indonesia’s large infrastructure gap and the sizable growth impact of higher infrastructure investment (as illustrated in Chapter 3, “Boosting Potential Growth”), this chapter focuses on macro-fiscal issues and structural impediments surrounding infrastructure development. An existing body of literature highlights how inefficiencies in public investment processes, a key concern in developing economies, limits the observed benefits of public infrastructure programs (Pritchett 2000; Caselli 2005; Warner 2014; World Bank 2014).

Indonesia’s infrastructure gap, including in transport and power, remains large compared with its peers. Despite the infrastructure gap, infrastructure investment has been small over the past few years, constrained by limited budget space and structural bottlenecks. To close the infrastructure gap, the government has laid an ambitious plan for infrastructure development. In line with this plan, the government has accelerated capital spending supported by several reform measures and has achieved early successes in speeding up capital spending.

Notwithstanding this progress, structural impediments remain, including with revenue collection, with the regulatory and institutional framework and with monitoring potential fiscal risks. A macro-fiscal simulation suggests that increasing public investment will have positive impacts on growth. Maximizing the growth impact of public investment, in the context of macroeconomic stability, requires a well-designed and minimally distortionary package of tax measures. There is scope to improve public investment institutions and processes to enhance efficiency. The government’s plan to increase infrastructure investment through state-owned enterprises (SOEs) and public-private partnerships (PPPs) could help reduce the infrastructure gap. Nevertheless, the government should closely monitor potential fiscal risks and implement the ambitious infrastructure development plans at a measured pace, given institutional and coordination weaknesses and the limited fiscal space.

This chapter will first discuss Indonesia’s infrastructure constraints and the government’s development strategy. Second, it will provide an analysis of the macro-fiscal impact of implementing the plan to scale up infrastructure spending using the Global Integrated Monetary and Fiscal Model. Third, it will assess the institutions for public investment management; and fourth, it will evaluate the government’s plan to increase the role of SOEs and PPPs in infrastructure development. Finally, it summarizes the key findings and policy implications.

Infrastructure Constraints and Development Strategy

Indonesia’s infrastructure gap remains large compared with its peers (Figures 4.1 and 4.2), particularly in transport and power. For example, logistics costs are among the highest in Asia, estimated at an annual average of 25 percent of GDP (compared with peers’ 13–20 percent), reflecting weak connectivity among islands and a limited national road network. The large infrastructure gap has increased distribution costs, inhibited industry competitiveness, and weakened macroeconomic conditions. The result is limited foreign direct investment flows and waning export competitiveness (World Economic Forum 2014).

Figure 4.1.
Trade and Transport-Related Infrastructure, 2016

(Index; 1 = low, 5 = high)

Source: World Bank, World Development Indicators.

Figure 4.2.
Public Investment

(Percent of GDP)

Sources: National authorities; and IMF staff estimates.

Note: General government investment; 2016 for Indonesia, 2011–14 average for other economies.

Infrastructure investment has been small over the past few years, constrained by limited budget space and structural bottlenecks. In Indonesia, general government capital spending was only 3¼ percent of GDP on average over the period 2011–14, one of the lowest among emerging market peers. During this period, fiscal space for capital spending was constrained by a low ratio of revenue to GDP and large energy subsidies, which reached one-fifth of the central government’s budget in 2014. In addition, infrastructure projects were delayed by structural constraints, including central and local governments’ limited capacity to execute the budget, multiple layers of regulation, and protracted land acquisition procedures. Underinvestment adversely affected growth through weakened private investment and low productivity gains.

To close the infrastructure gap, the government has set ambitious plans to scale up infrastructure investments by US$323 billion (32 percent of GDP) during 2015–22 (Figure 4.3). These investments include constructing 3,650 kilometers of roads, 3,258 kilometers of railways, 24 new seaports, and 15 new airports. The plan also includes developing power plants with total capacity of 35 gigawatts, 33 new dams, and new oil refineries with a capacity of 600,000 barrels per day. Most of the cost is expected to be borne by the private sector (18 percent of GDP) and SOEs (10 percent of GDP) (Coordinating Ministry of Economic Affairs 2015). Out of 247 projects, 6 have been completed, 146 are being constructed, and 95 are being prepared.

Figure 4.3.
Funding Allocation Plan for 247 Projects

(Percent of GDP)

Sources: Committee for Acceleration of Priority Infrastructure Delivery (KPPIP); and IMF staff estimates.

The government has recently accelerated capital spending, supported by several reform measures:

  • The authorities increased public infrastructure spending by 1 percent of GDP between 2014 and 2017, underpinned by the fiscal space created from historic energy subsidy reforms. The funds allocated for infrastructure investment in the 2018 budget are around 6 percent higher than in the 2017 revised budget. Budget execution of capital outlays has substantially increased, reflecting the authorities’ concerted efforts. Local governments have been encouraged to increase capital spending, supported by higher transfers from the central government, which rose by 1 percentage point of GDP between 2014 and 2017.

  • To strengthen investment capacity and provide confidence, the government has injected equity into SOEs and also aims to accelerate PPP projects.

  • The authorities also improved the institutional framework for infrastructure investment, such as by establishing the Committee for Acceleration of Priority Infrastructure Delivery (KPPIP) and expediting land acquisition procedures.

Nevertheless, the scope to further increase capital spending at the general government level will be limited in the absence of revenue mobilization. Although the government has begun a series of structural reforms, including streamlining fragmented regulations and developing a new legal framework to facilitate land acquisition, the effectiveness of these reforms will be tested in the coming years (World Bank 2014; Shin 2018).

Macro-Fiscal Implications of Infrastructure Development

Increasing infrastructure spending has significant macro-fiscal implications. First, it raises output growth by boosting aggregate demand as well as the economy’s production capacity. Second, it will affect the fiscal accounts because the higher government spending would need to be financed by revenue-raising measures, expenditure cuts, or a higher deficit—or all three. Third, these fiscal policy shocks would affect corporate and household sectors through changes in macroeconomic variables such as inflation, wages, the interest rate, and the exchange rate. Last, in an open economy, these shocks will also affect the external balance, possibly resulting in a higher external current account deficit.

A macro-fiscal simulation model for Indonesia is constructed to quantitatively analyze the macro-fiscal implications of an infrastructure spending ramp-up. The model is the Global Integrated Monetary and Fiscal Model, a multicountry dynamic stochastic general equilibrium model with optimizing behavior by households and firms (Anderson and others 2013). The non-Ricardian features of the model, such as sticky prices and liquidity-constrained households, provide for a nonneutral impact from fiscal policy shocks. To analyze the macro-fiscal impact of an infrastructure ramp-up, a steady state is constructed to mimic current mac-roeconomic conditions in Indonesia. This steady state is then shocked by an increase in public investment of 3 percentage points of GDP over 2016–20 (an increase of 0.6 percent of GDP in each year) (Curristine and others 2016). This increase could be financed through tax policy measures (See Chapter 5, “Supporting Inclusive Growth”).

The macro-fiscal implications differ depending on how the spending increase is financed. In this regard, four scenarios are considered: the increase in public investment is financed by (1) a consumption tax rate increase, (2) increases in corporate and labor income tax rates, (3) an increase in lump sum taxes, and (4) government borrowing (that is, a higher deficit). The third scenario is presented to examine an option with the least distortionary tax measure. The fourth scenario is presented for illustrative purposes, even though it would not be consistent with the reality in Indonesia, where the fiscal rule caps the general government deficit at 3 percent of GDP. Similarly, in each of the tax-financed scenarios, the idea of raising the needed revenue with a single tax measure may be unrealistic, but the scenarios are intended to highlight differences in the macroeconomic impacts of various tax measures.

The main simulation results presented in Table 4.1 suggest the importance of financing an infrastructure ramp-up not by borrowing, but by a well-designed, efficient tax package.

TABLE 4.1.Indonesia: Global Integrated Monetary and Fiscal Model: Simulation Results(Deviations from baseline)
Scenario 1, Financed by Consumption TaxScenario 2, Financed by Corporate and Income TaxScenario 3, Financed by Lump Sum TaxScenario 4, Financed by Deficit
Public investment, percent of GDP in 20203.03.03.03.0
Public sector deficit, percent of GDP in 2020−0.1−0.1−0.13.4
Public sector debt, percent of GDP in 2020−1.0−0.3−1.28.4
GDP growth, percent (average for 2016-20)0.30.20.60.5
Contribution of:
Private consumption−0.3−0.2−0.10.4
Private investment0.1−0.20.20.2
Government spending0.60.60.70.7
Net exports−0.2−0.1−0.1−0.7
Current account deficit, percent of GDP in 2020−0.8−0.3−0.7−3.1
Source: IMF staff estimates.
Source: IMF staff estimates.
  • The increase in public investment boosts annual output growth by 0.2–0.6 percentage point over 2016–20 depending on the scenario. In the tax-financed scenarios (scenarios 1–3), the positive growth impact from higher public investment, through both demand and supply channels as previously discussed, is dampened by the negative impact of tax increases on private consumption or investment, or both. The dampening effect on consumption and investment is pronounced in the scenarios with increases in income and consumption tax (scenarios 1 and 2), limiting the increase in growth to 0.2–0.3 percentage point. The lump sum tax scenario (scenario 3) achieves the largest growth impact (0.6 percentage point), given that this is the least distortionary tax option. The deficit-financing scenario (scenario 4) achieves a relatively high growth impact (0.5 percentage point). Here, the boost in aggregate demand is muted by a decline in net exports.

  • Fiscal balances would be preserved in the tax-financed scenarios. By construction, the general government deficit is not affected under these scenarios, while the ratio of public debt to GDP decreases slightly, reflecting higher output growth. In the deficit-financed scenario, the fiscal deficit and public debt swell by 3.4 percentage points of GDP and 8.4 percentage points of GDP by 2020, respectively.

  • The changes in the external current account balance largely reflect the savings and investment balance. In the deficit-financed scenario, the reduction in net savings in the fiscal sector is only partially offset by an increase in net savings in the household and corporate sectors. As a result, the current account balance would have to deteriorate by as much as 3.1 percent of GDP by 2020. In contrast, the deterioration in the current account balance is much lower in the tax-financed scenarios because the domestic savings-investment balance is not disrupted by a fiscal imbalance.

The simulation results should be viewed with caution because the Global Integrated Monetary and Fiscal Model is not able to fully mimic the reality of Indonesia. In the tax-financed scenarios with consumption or income taxes, tax rates would need to be raised significantly, exerting a large negative influence on domestic private demand. Alternatively, if revenue could be raised by less distor-tionary measures such as base-broadening reforms to consumption and income taxes, the negative demand impact could be less pronounced. In addition, raising additional revenues of 3 percent of GDP from a lump sum tax would be challenging. In the context of Indonesia, an option akin to a lump sum tax would be property taxes and excises.

Institutions for Public Investment Management in Indonesia

Countries with stronger public investment management institutions have more predictable, credible, efficient, and productive investments. To help countries evaluate the strength of their public investment management practices, the IMF has developed the Public Investment Management Assessment (PIMA).1 The PIMA evaluates 15 institutions that shape public investment decision making at three key stages (see Figure 4.4): first, planning sustainable investment across the public sector; second, allocating investment to the right sectors and projects; and third, implementing projects on time and on budget. The PIMA covers the full public investment cycle, including national and sectoral planning, investment budgeting, project appraisal and selection, and managing and monitoring of project implementation.

Figure 4.4.
Framework for Public Investment Management Assessment

Source: The IMF and Public Investment Management.

According to a preliminary PIMA, there is scope to improve public investment institutions in Indonesia, particularly in the coordination and implementation of investment planning and projects. (Box 4.1).

  • Regarding the planning phase, Indonesia has well-developed national and sectoral planning processes. However, planning coordination among ministries and with local governments could be improved. Specifically, each spending ministry develops its own medium-term strategic plan, which is not necessarily in line with the national plan. Also, coordination between central and local organizations for land acquisition and regulations could be improved.

  • The institutions for the allocation phase are at mixed development stages. The national five-year plan appropriately includes medium-term projections for capital expenditure and a resource envelope which is broken down across ministries and programs. Project appraisal and selection are largely devolved to spending ministries, however there are limited central guidelines and oversight. This situation also applies to projects implemented by local governments and SOEs. Spending ministries both commission feasibility studies for infrastructure projects and approve the projects, potentially giving rise to issues about the quality and objectivity.

  • Indonesia scores relatively poorly on the implementation phase. Budget execution is concentrated in the last quarter, within-year budget execution would benefit from smoothing out through better planning. The quality of project management and the transparency of execution are varied but are weaker at the regional and local levels. The procedures for monitoring individual projects also vary widely across ministries and local governments and there is limited use of systematic ex post evaluations.

The Role of State-Owned Enterprises and Public-Private Partnerships in Infrastructure Development

Stated-Owned Enterprises

The government envisages a greater role for SOEs in infrastructure development. To encourage SOEs to ramp up infrastructure investment, the government has taken a multipronged approach, including injecting capital, limiting dividend payments, and upgrading the financing framework.

  • Injecting capital: To expand investment capacity and provide confidence, the government has injected new capital into SOEs, focusing on the electricity, construction, and transportation sectors (Figure 4.5).2 This capital injection equated to 0.6 percent of GDP in 2015–16. To ensure the proper use of the funds, the government has limited its use to specific priority infrastructure projects.3

  • Limiting dividend payments: To encourage capital spending and send a strong signal about its intentions, the government allowed SOEs to lower dividend payments to the government in 2015–16, so long as the retained earnings were channeled into infrastructure investment (Figure 4.6). Also, asset revaluation to reflect a recent increase in asset value has been allowed to expand SOEs’ balance sheets.

Figure 4.5.
Capital Injection to Selected Infrastructure State-Owned Enterprises, 2015

(Percent of GDP)

Sources: Indonesia, Ministry of State Owned Enterprises and Ministry of Finance.

Note: PT SMI (state-owned infrastructure financing facility); PT PLN (electric); PT Hutama Karya (construction); PT Waskita Karya (construction); PT Antam (mining); PT Angkasa Pura (air transportation); PT Kereta Api Indonesia (railway transportation); PT Pelindo IV (ports); PT Adhi Karya (construction).

  • Upgrading the financing framework (ADB 2017): The role of SOEs has strengthened with the improved financing framework. PT SMI is envisaged to become an infrastructure bank, supported by a large capital injection (0.2 percent of GDP). Direct borrowing by SOEs from international financial institutions has been allowed under a sovereign guarantee. The scope of the Indonesia Infrastructure Guarantee Fund has also been expanded to include borrowing by SOEs.

Strengthened balance sheets allowed SOEs to increase infrastructure investment. SOEs’ capital expenditures increased to 2.8 percent of GDP in 2015 and 3.1 percent of GDP in 2016, from 2.2 percent of GDP in 2013 (Figure 4.7). Even so, SOEs’ leverage fell because of the government’s capital injection. Beginning in 2016, however, SOEs have been slowly leveraging to finance infrastructure projects, such as by issuing domestic and external bonds. By sector, spending on electricity generation accounted for the largest part of the spending as of the second half of 2015, followed by the mining and construction industries (Figure 4.8).

Figure 4.6.
Dividend Payments from State-Owned Enterprises to the Government

(Percent-of GDP)

Source: Ministry of State Owned Enterprises.

Figure 4.7.
Capital Spending by Government and State-Owned Enterprises

(Percent of GDP)

Sources: Ministry of Finance and Ministry of State Owned Enterprises; and IMF staff estimates.

Figure 4.8.
Capital Expenditure, by State-Owned Enterprises, 2015:H1

(Percent of GDP)

Source: Ministry of State Owned Enterprises. Note: H1 = first half of the year.

Given SOEs’ increase in capital spending, the authorities should closely monitor contingent liabilities and SOEs’ financial performance as the infrastructure plans are gradually implemented. Fiscal risk appears to be moderate, given that SOEs’ guaranteed debt is estimated to be about 1.2 percent of GDP per year into 2019 (Figure 4.9).4 The government has also limited the use of the injected equity and retained earnings to specific priority projects, and it has implemented a good supervisory scheme.5 Nevertheless, close monitoring of SOEs’ infrastructure projects is warranted in view of the expected steady increase in investment and rising external debt, as well as SOEs’ weakening financial performance (Figure 4.10) (Nozaki 2015). Given the need to ensure high-quality investment but with still-weak execution capacity, gradual implementation of infrastructure projects is recommended. Such caution will help minimize the potential adverse effects of increased public borrowing on interest rates (that is, crowding out private investment) and of higher contingent liabilities.

Figure 4.9.
Pipeline of Guaranteed Infrastructure Projects

(Percent of GDP)

Source: Ministry of Finance.

1Includes infrastructure projects for electrity generation using coal and gas or renewable energy; 35 GW program; Trans Sumatera; and drinking water projects.

Figure 4.10.
Performance of State-Owned Enterprises

(Percent)

Source: Ministry of State Owned Enterprises (as of November 2017). Note: Q3 = third quarter.

Public-Private Partnerships

Despite an initiative since the early 2000s to promote PPPs, implementation of PPP projects has been slow until recently. The slow progress has been in stark contrast with other peer economies, particularly Chile and Mexico, where PPPs contributed to more than 20 percent of public infrastructure investment (Table 4.2) (OECD 2012a). Indonesia saw only a few successful PPP projects in toll roads and the power sector, whereas many projects in the water and transportation sectors made little progress.

TABLE 4.2.Public-Private Partnership Infrastructure Investment Relative to Public Infrastructure Investment, 2010
PercentCountry
0–5Austria, Germany, Canada, Denmark, France, Netherlands, Hungary, Norway, Spain
5–10United Kingdom, Czech Republic, Slovak Republic, Greece, Italy, South Africa, Ireland
10–15Korea
20Mexico, Chile
Source: OECD 2012a.
Source: OECD 2012a.

Slow progress was due to complex regulations, lack of coordination, and weak execution capacity. Delayed land acquisition (Box 4.2) and complex regulations (that is, several layers of national and local regulations) were the major bottleneck. Lack of leadership and coordination (for example, duplication of the evaluation function) across line ministries and local government was also a major barrier. In addition, weak capacity for executing complex financing projects was an impediment, together with a small base of institutional investors with limited long-term investment demand. Restrictions on foreign participation remain relatively high in the infrastructure sector.

To accelerate PPP projects, the government has improved the institutional and regulatory framework, particularly with prioritizing and monitoring projects:

  • The KPPIP was established as a coordinating body to focus on the delivery of priority projects, including by commissioning or amending feasibility studies. Since the setup of the KPPIP, which also covers PPP projects, coordination across line ministries and government agencies has strengthened.6 The KPPIP has identified 37 priority projects, totaling 8 percent of GDP. These projects include 12 oil refineries, 1 electricity program, 74 roads, and 23 railroads. The KPPIP has also expanded its evaluation expertise by bringing in financial experts from the private sector. The Investment Coordinating Board’s one-stop service has also helped expedite investment approval.

  • The PPP unit was set up in the Ministry of Finance as a one-stop shop for PPP coordination and facilitation. At present, eight PPP projects are in the pipeline, totaling about 2 percent of GDP. The PPP unit has strengthened the review process for assessing contingent liabilities. Financial support schemes were also improved, particularly guarantee programs to ensure acceptable market returns for private investors, including the Viability Gap Fund (covering up to 49 percent of the construction cost) and the Availability Payment scheme (annuity payment during the concession period). Several PPPs have been launched, including the Palapa Ring Broadband project (US$0.6 million, supported by the Availability Payment scheme), the Umbulan Water project (US$0.3 million, supported by the Viability Gap Fund), the Central Java Power Plant (US$3 billion), and three toll roads (US$2.2 billion).

  • The PPP modality has expanded to include social infrastructure and availability-based PPPs. In addition to economic infrastructure, the PPP modality can be used for social infrastructure, including facilities for education, sports, arts, tourism, health, public housing, and commercial facilities. In addition to user-pay PPPs, availability-based PPPs (in which the source of payment is the government) and hybrid PPPs (a mix of user-pay and availability-based PPPs) are allowed. Restrictions on foreign ownership (the Negative Investment List) were eased in some of the transport and energy sectors. In the transport sector, the foreign ownership limit for a seaport facility increased to 50 percent from 49 percent. The foreign ownership limit for toll road operators and telecommunications and testing companies has risen to 100 percent from 95 percent. The foreign ownership limit for distribution and warehousing has increased to 87 percent from 33 percent. The foreign ownership of a power plant (greater than 10 megawatts) has also increased to 100 percent from 95 percent.

  • The land acquisition process has been streamlined and made more flexible. The maximum time needed for land acquisition has been shortened to about 400 days from 518 days. The revised regulations allow for revocation of land rights in the public interest and enable businesses to acquire land on behalf of the authorities and be reimbursed later. The State Asset Management Agency was established to facilitate the financing of land acquisition. The agency integrates land acquisitions for national strategic projects and carries over unused budget resources into the following year. The land acquisition process was completed for a toll road project (the Trans-Sumatra Toll Road) and a rail project (the Java North Line Double Track), both of which had been delayed for decades.

  • The regulatory framework for PPPs has improved,7 together with rollbacks of other regulations to stimulate investment, including streamlining licensing processes and time.

The government needs to closely monitor contingent liabilities, with the prudent implementation of projects. The enhanced institutional framework contributes to better screening of projects, and the amount of PPP guarantees in the pipeline appears to be moderate, at less than 1 percent of GDP per year into 2019.8 Nevertheless, because more PPPs will likely be launched, with a potential increase in fiscal risk, the authorities need to closely monitor contingent liabilities and ensure proper risk sharing between the private and public sectors:

  • Priority should be given to financing infrastructure development with revenue from a medium-term revenue strategy. Despite a recent increase, there is still significant room for public investment to expand, aided by tax revenue reforms (Figure 3.6). This would allow for steady funding for infrastructure investment while limiting the buildup of external debt.

  • Infrastructure development should be paced in line with available financing and the economy’s absorptive capacity. Given low fiscal space, limited institutional capacity, and shallow domestic financial markets, a too-rapid rise in infrastructure investment could increase external debt. A more measured pace of infrastructure development, aligned with a medium-term revenue strategy (See Chapter 6Implementing a Medium-Term Revenue Strategy), would help preserve macro-financial stability. Projects with larger impacts on production capacity should be prioritized. Efforts should continue to expand the capacity of the fiscal authorities, particularly at the local government level, to prepare complex financing schemes. Uniform guidelines for project selection and feasibility studies for infrastructure projects, similar to those for SOEs as discussed in the previous section, are also important.

  • Infrastructure development should be accompanied by sound risk management for SOEs and PPPs. SOEs’ financial performance, including of their domestic and external debt, should be closely monitored, given that SOEs in the infrastructure sector have continued to borrow. Although a proper balance between SOEs and the private sector is needed to ensure that SOEs do not crowd out private investment, the burden of financing infrastructure investments could be further shifted to the private sector through PPPs and foreign direct investments. Proper design of PPP contracts—including respective rights and responsibilities, risk allocation, and mechanisms for dealing with changes—is important. Overemphasis on the equity aspect of infrastructure projects may undermine feasibility studies.

Attracting private sector financing requires that the regulatory framework for new financing instruments (debt and equity) and institutional investors be improved.

Assessment of Public Investment Institutions

Planning stage

  • Public investment planning is guided by national and sectoral planning. The national long-term development plan 2011–25 is broken down into a series of five-year medium-term development plans (RPJMN). At the start of each presidential term, a new RPJMN is prepared by the Ministry of National Development Planning (BAPPENAS) reflecting inputs from spending ministries, local governments, and Parliament.

  • However, each spending ministry develops its own medium-term strategic plan containing medium-term outputs although they are not necessarily the same as those in the RPJMN.

  • There appears to be scope to improve coordination between central and local authorities in the areas of land acquisition, regulations (for example, environmental protection), integrated planning, and capacity development.

Allocating stage

  • The RPJMN is developed within a medium-term resource envelope and provides details about the allocation of funds across ministries and programs. Each ministry’s annual work plan and annual budget proposal contains three-year-forward expenditure estimates for the next three years at the program and activity levels.

  • Budget unity has improved. The size of extrabudgetary operations is not significant. The majority of capital projects are included in the annual budget.

  • Nevertheless, when making allocative decisions on capital projects, recurring costs and medium-term implications are not clearly presented.

  • Project appraisal and selection are largely devolved to spending ministries, with limited central guidelines and oversight. BAPPENAS establishes and monitors aggregate capital spending ceilings and output targets, while spending ministries appraise and select individual projects to meet these output targets. This is also the case for infrastructure projects implemented by local governments and state-owned enterprises.

Implementing stage

  • Information on total project costs covering multiple years is included in planning documents, however outlays are approved by Parliament on an annual basis. The government has changed the regulations to allow unspent budget resources to be carried forward to the next fiscal year in certain cases.

  • The budget is approved with sufficient time to plan execution, however capital budget execution is concentrated in the last quarter. Even though the budget is approved two months before the start of the year and detailed cash forecasts are prepared, project execution is typically slow. The government has recently taken steps to address this delay. For example, procurement has been allowed to be initiated before the start of the year.

  • The quality of project management and the transparency of execution appear weaker at the local level. The procedures for monitoring individual projects are not standardized and vary widely across ministries and local governments. Except for externally financed projects, systematic ex post evaluations are limited.

Recent Reforms to Land Acquisition Procedures

The government has taken important steps to address barriers to land acquisition:

  • The revised land acquisition law came into effect in early 2015. Among other issues, the law has clarified that (1) all ongoing projects will benefit from the new law,1 which can force relevant parties to sell their property for public infrastructure projects with fair compensation; and (2) land acquisition procedures should be complete within a maximum of two years. Under the new law and recently revised regulations, land acquisition could occur as quickly as three to four months. Other deregulations have also occurred.

  • The function of the National Land Agency (BPN) has been revamped by setting up a special deputy for land acquisition acceleration and a dedicated team for priority infrastructure projects, as well as the development of standard operating procedures.

  • Land can be directly procured by a private entity: (1) a private entity can obtain the authority for land procurement from a relevant government institution or state-owned institution and act as a proxy; and (2) with the authority, or proxy mandate, a private entity can pay in advance for land procurement on behalf of the authorities in all the preceding stages (that is, preparation, consultations, valuation, and negotiation).

The legal framework has improved, but thorough implementation is essential, particularly at the local administration level. The effects of the improvement have been gradually experienced on the ground. The new law has successfully been applied to the Palembang-Indralaya Toll Road project in South Sumatera. Another successful case is a rail project in Bojonegoro, where the land acquisition process for the Java North Line Double Track Rail project took less than two years. Early on in this process, civil society was socialized to the new law. Nonetheless, numerous cases have been stalled because of land issues.2 It is important for the government to establish and demonstrate its ability to push ahead with the new law and to build trust and create stable investment flows for infrastructure projects.

1Previously, infrastructure projects that had acquired three-quarters of the required land were subject to the old 1960 law. Also, projects for which the land acquisition process was less than 75 percent complete had to start again if a relevant entity wanted to acquire land under the new law.

2For example, development of the light rail transit project in Jakarta was hampered by land acquisition problems. The state developer asked the local administration to help purchase land along the route from residents. Cutting trees on the route also required approval from the local administration.

  • Regulations on structured products should be enhanced, including by clarifying the risk allocation between special purpose vehicles and issuers (OECD 2012b). Building on the recent successful issuance of asset-backed securities for the Jagorawi toll roads (Rp 2 trillion), asset-backed securities should be further explored, especially for toll roads and power plants, which have more predictable cash flows. Infrastructure investment schemes (for example, project finance, infrastructure bonds, or rupiah-linked global bonds) need to be developed, and the potential fiscal risks need to be thoroughly assessed. These could benefit from a sound legal framework, as in Thailand.9

  • Limited concession schemes should be explored, offering concessions to the private sector for infrastructure assets that are already operational and generating cash flows. This would help free financial resources for other infrastructure investment, increase management efficiency, and transfer know-how from the private sector.

  • Expansion of the institutional investor base (for example, insurance firms, social security funds, private pension funds) can be supported by a stronger regulatory and supervisory framework to allow better asset and liability management (see Chapter 11, “Advancing Financial Deepening and Inclusion,” for more details).

Conclusion

The main findings and policy implications of this chapter are summarized as follows:

  • The government’s ambitious plans for infrastructure development would rightly address the infrastructure bottleneck in Indonesia. The government has achieved early successes in accelerating capital spending, supported by a number of reform measures.

  • Structural impediments remain, including with revenue collection, with the regulatory and institutional framework, and with assessing and monitoring potential fiscal risks from SOEs and PPPs. These constraining factors call for gradual implementation of the infrastructure plan, supported by steady progress in structural reforms.

  • A macro-fiscal simulation suggests that ramping up public investment will have positive impacts on growth. Maximizing the growth impact while maintaining macroeconomic stability would require a well-designed and least-distortionary package of tax measures. Hypothetically, ramping up public investment without revenue mobilization would lead to large fiscal and current account deficits, giving rise to funding risks.

  • There is scope to improve public investment institutions in Indonesia. Producing uniform guidelines for project selection and conducting (higher quality) feasibility studies would help improve the quality, objectivity, and transparency of infrastructure project appraisal and selection. Also, coordination between the central and local levels could be enhanced in land acquisition and regulation. Institutions for implementing infrastructure projects are relatively weak, and there is room to improve within-year budget execution and the quality of project management.

  • The increasing role for SOEs and PPPs could help reduce the infrastructure gap, and the fiscal risks appear to be manageable. Nevertheless, the authorities should closely monitor potential fiscal risks and implement these ambitious infrastructure development plans at a measured pace, given structural constraints, such as institutional and coordination weaknesses, limited execution capacity, and reduced fiscal space. Prudent implementation will also help ensure high-quality infrastructure development.

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    World Economic Forum. 2014. The Global Competitiveness Report 2014–2015. Geneva.

For more information, see the IMF and Public Investment Management at http://www.imf.org/external/np/fad/publicinvestment/.

Including PT PLN (electricity), PT Hutama Karya (construction), PT Waskita Karya (construction), PT Angkasa Pura (air transportation), and PT Kereta Api (railway transportation).

The government has encouraged SOE managers to take a proactive role in infrastructure investment by holding regular discussions on the implementation of their expenditure plans and evaluating execution results using key performance indicators.

Based on estimates from the Ministry of Finance.

SOEs are required to prepare quarterly reports so that the usage of funds is closely monitored. An audit committee also supervises SOEs’ expenditure.

The committee is chaired by the Coordinating Minister for Economic Affairs, with members from the Ministry of Finance, the Ministry of National Development Planning/Head of National Development Planning Agency (BAPPENAS), and the Head of the National Land Agency (BPN).

In addition to a tender mechanism, direct appointment of concessionaires is allowed under certain conditions; bundling of projects is allowed to accommodate projects that extend beyond the boundary of one agency or local government; and the private sector and international financial institutions can support preparation of PPP projects.

Based on estimates from the Ministry of Finance.

Infrastructure funds were introduced in 2013 in Thailand. The funds are listed instruments to facilitate infrastructure development, launched by corporations that plan infrastructure development, including in the telecommunication and utilities sectors (Ekberg and others 2015).

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