Investing in Indonesia’s roads: improving efficiency and closing the financing gap

Indonesia faced major challenges in meeting the demand for infrastructure investment during the late 1990s. Infrastructure investment fell from above 7 percent of gross Domestic Product (GDP) in 1995 and 1996 to around 3 percent in 2000 as the Government focused on fiscal consolidation and cutting public debt following the 1997/1998 Asian financial crisis. Poor levels of infrastructure development are also holding back Indonesia’s growth potential and poverty reduction progress. The symptoms of more than a decade of low infrastructure investment include increasing congestion in urban areas, high levels of inter-island cargo transport costs, and limited access to improved sanitation. Improving infrastructure is also the main focus of the master plan for acceleration and expansion of Indonesia’s economic development 2011-2025, which was launched in May 2011. There have also been some supportive legislative developments such as the creation of the risk management unit in the Ministry of finance and the enactment of Presidential regulation, which sets out the criteria that apply to Public Private Partnership (PPP) projects requiring government financial support. The government has recognized the challenges of the road sector and has set an ambitious target in the medium term development plan. The road sector has also received increasing budget allocations, accounting for example more than 60 percent of total public expenditure on transport in 2008. At the same time, the government has also initiated reforms of the fiscal and legislative framework to further improve road sector performance and management, as well as to attract greater private sector participation. The government has also set up various institutions and financing facilities to support PPP transactions, to assist with high-level coordination of PPP issues and a Risk Management Unit (RMU) in the Ministry of finance to assess projects that require financial support from the government.