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Sovereign and nonsovereign support by the Asian Development Bank (ADB) for novel projects require close coordination between ADB relevant departments and key stakeholders.

Given ADB’s sovereign and nonsovereign support and the novel nature of the PT Indonesia Infrastructure Finance (IIF), closer coordination between ADB’s Southeast Asia Department and Private Sector Department, would have helped address some of IIF’s performance issues. Closer coordination with the World Bank, through an IIF−led arrangement and based on a mutually agreed framework, would have improved IIF’s understanding of ADB and World Bank requirements. Finally, closer coordination with Indonesia’ national planning agency (BAPPENAS), Financial Services Authority (OJK), Bank Indonesia, and key infrastructure government contracting agencies would have helped raise awareness on policy and regulatory issues affecting IIF and may have led to more subprojects for IIF financing or advisory services.

Close project administration and technical assistance are essential to the success of novel and complex projects.

The novelty of the IIF, the project’s complex onlending arrangement, and the specifics of the financial intermediation loan modality should have merited more intensive project administration with close involvement of ADB staff with infrastructure finance, financial management, and safeguards expertise. This would have ensured full compliance with the project agreement’s reporting and audit provisions by the IIF as well as the related government infrastructure finance limited liability company, PT Sarana Multi Infrastruktur (Persero) (SMI). Capacity building technical assistance, piggy-backed to the project, would have helped IIF and SMI in the initial phase of their operations, particularly in raising their profile in the financial sector and investor community and addressing the ADB environmental and social safeguards requirements which go beyond what other lenders would normally oblige from the subproject sponsors.

Well-defined subproject eligibility criteria enhance project impact.

Subproject eligibility criteria were not defined under the project, and IIF utilized the ADB loan to finance commercially viable projects that met the requirements of the Ministry of Finance regulation on infrastructure financing companies and IIF operations manual. Allowing for flexibility was prudent given the IIF’s start-up stage. However, in the future it may be important to better define the subproject eligibility criteria such as required benchmarks in economic and financial viability; focus on long-term debt, with more than a 10-year tenor provided on a project-finance basis; minimum subproject size; and exclusion of subprojects with adverse environmental or social impacts. This will enhance project coherence and impact.

Background

During 2005–2009, Indonesia’s overall infrastructure investment need was estimated at $65 billion, $16 billion of which was targeted to come from private sector investors. To attain this ambitious target, the Government of Indonesia launched in 2005 a major private sector participation (PSP) reform that included (i) establishing the legal and institutional frameworks for public–private partnerships (PPPs), (ii) strengthening PSO sector regulations, (iii) setting up facilities for the preparation of bankable PPP projects, and (iv) developing a legal framework for infrastructure finance companies as non-bank financial institutions to provide equity, long-term debt, and credit enhancement products for PSP and PPP projects.

Two years later, the government created a fully government−owned infrastructure finance limited liability company, PT Sarana Multi Infrastruktur (Persero) (SMI), and initiated the development of a business plan for PT Indonesia Infrastructure Finance (IIF) as a private non-banking infrastructure finance company to lend, invest, offer credit enhancement, and provide advisory to PSP projects. To help establish the IIF, the Asian Development Bank (ADB) approved in March 2009 a financing package for the Indonesian Infrastructure Financing Facility Company Project comprising (i) a financial intermediation loan of $100 million to Indonesia, and (ii) an equity investment of up to $40 million in IIF capital. The World Bank provided similar support in June 2009.

Being Indonesia’s first private infrastructure finance company, IIF establishment was slower than anticipated. Initial equity was injected in April 2010; business license was issued in August 2010; and lending operations started in 2012. The project adopted a flexible approach to ADB loan utilization, enabling the IIF to finance any commercially viable infrastructure project consistent with the Ministry of Finance (MOF) regulation on infrastructure finance companies. The only at−approval criterion for subloans was that these would be in rupiah. However, because of the PPP program’s non−implementation during the project and the strong demand for dollar financing in key sectors, the IIF preferred to draw down the ADB loan in dollars.

In total, 99.5% of the ADB loan was disbursed, financing 8 subprojects in power generation, gas, telecommunications, and air transportation, for an investment cost of $1.3 billion. This implies a loan multiplier effect of 12.7 times. The subprojects had contributed to the much-needed expansion of the telecommunications network, increased population access to electricity, and improved the aircraft servicing capacity of Garuda Indonesia. At project completion, all subproject loans had been fully disbursed, and 1 had been repaid.

The IIF also contributed to improving the debt market for infrastructure projects. During 2012–2016, IIF’s cumulative debt finance commitment was about $785 million, representing 8.6% of the total debt finance commitment under PSP projects. While this was below the appraisal target of 11.0% IIF contribution to the infrastructure overall debt need by 2013, given the PPP program’s delayed rollout and the IIF’s small weight in the financial sector, it was a commendable achievement.

Despite several issues during implementation, the project was rated successful by ADB’s Southeast Asia Department. The MOF acted as the executing agency for the ADB loan.

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