The World Bank Calls Low-Quality RI Infrastructure Projects
LiputanNet. The World Bank calls infrastructure projects in Indonesia of low quality, lack of readiness, and not well planned.
This is a major obstacle for the Government of Indonesia to mobilize more private capital into various infrastructure development projects.
In a report titled the Infrastructure Sector Assessment Program released in June 2018, the World Bank explained that Indonesia's infrastructure projects were not prioritized based on clear criteria or selection.
"The reputation of the project in Indonesia is of low quality and not well planned," the World Bank report said.
In addition, the choice of procurement method was decided too early before in-depth analysis. For example through the scheme of Government Cooperation with Business Entities (PPP), business to business (B2B), or through public financing.
In fact, other countries prioritize the gradual study and analysis process, before finally making decisions regarding the appropriate procurement and financing schemes.
A number of countries also completed the Final Business Case Study (FBC) to provide a full understanding of the project, before deciding on a procurement and financing scheme.
"In Indonesia, the decision to use the PPP scheme is made before the initial Study of Feasibility Pre-study or Outline Business Case (OBC)," wrote the world bank.
In addition, the World Bank revealed that the initial analysis provided by the Government Contracting Agency (GCA) was often incomplete and doubted its reliability.
Before being proposed to the National Development Planning Agency (Bappenas), CGA was required to prepare a preliminary study related to the legal, technical, economic, commercial, environmental and social aspects of the PPP project. But in practice, they rarely do that.
According to the World Bank, this is due to the provision of limited instructions about the format of the preliminary study and funding constraints. The World Bank considers Bappenas lacks human resources (HR) and adequate budget, to coordinate the CGA so that it provides the best analysis results for each project.
Project Financing and Land Acquisition
In carrying out infrastructure development, the World Bank believes, the government and stakeholders do not have good coordination, thus creating confusion for investors.
"They are not sure who they have to communicate with and who will ensure the government's commitment in mobilizing infrastructure project funds," the World Bank wrote.
In fact, in recent years the government has fixed various obstacles to infrastructure projects in order to market Indonesia's infrastructure projects. In World Bank records, the steps taken by the government include increasing the role of the Ministry of Finance and Bappenas in infrastructure projects.
In addition, the government has prepared a funding injection scheme through cash support funds for infrastructure projects or Viability Gap Funds (VGF) and availability payment (AP) patterns. The government is also preparing the State Asset Management Agency (LMAN) to assist land acquisition.
For this effort, the government managed to increase infrastructure financing in the last two years. Recorded, there are 13 PPP projects that have reached the stage of financial closing in the 2015-2017 period. The total investment value of these projects was recorded at US $ 8.94 billion, equivalent to Rp 129.63 trillion, referring to the exchange rate of Rp14,500 per US dollar.
It was stated, in the VGF scheme the government covered 49 percent of the infrastructure costs that were economically feasible but not financially feasible. This scheme has not been widely used, it has not even been implemented at all by foreign investors.
One project that uses the VGF scheme is the Umbulan Drinking Water Management System (SPAM) in East Java.
"Government funding support mechanisms, such as VGF and AP, are considered too slow and not well coordinated," the World Bank wrote.
World Bank research says the delay in infrastructure land acquisition costs around US $ 5 billion - US $ 10 billion per year. Delayed access to land is classified as one of the main obstacles to private investment in infrastructure projects.
The government finally issued Law No. 12/2012 concerning Land Procurement for Development in the Public Interest which provides the legal force to acquire land for public purposes.
The World Bank said, despite progress with the enactment of the regulation, there were still significant obstacles to the timeliness of land acquisition.
the presence of the State Asset Management Institute (LMAN) in 2016 was also considered not enough to alleviate the problem of land acquisition. In 2017, LMAN prepared a land acquisition budget of Rp. 16 trillion.
The allocation, for toll roads is Rp. 13.3 trillion, railway infrastructure is Rp. 3.8 trillion, dam is Rp. 2.4 trillion, and port infrastructure is Rp. 500 billion. After that, the amount of funds for toll road acquisition was added to Rp. 25.3 trillion. However, these funds are not enough.
Until finally, the government opened opportunities for the private sector and state-owned enterprises to buy land for infrastructure projects in the National Strategic Project (PSN). Then, the government paid it off through LMAN.
Nevertheless, the World Bank considers that the Government does not provide information relating to procedures and the timing of payments in a clear manner.
"LMAN funding must be sufficient for land acquisition, and the LMAN approval process must be tracked quickly. The government must also obtain all infrastructure land before the financial closing of the project," said the World Bank.
World Bank Recommendations
Seeing various problems in infrastructure projects in Indonesia, the World Bank provides several recommendations divided into short, medium and long term recommendations.
In the short term, the World Bank made a number of recommendations. First, the World Bank advised Bappenas to develop a model of infrastructure project proposals, set criteria for assessing, and return proposals to the GCA if the proposals and information received were incomplete or of high quality.
Second, increase the capacity of PPP unit staff in the Ministry of Finance through assignments and involvement in PPP transaction preparation. In addition, he transferred the head of the Ministry of Finance's PPP unit to the position of one Echelon.
Third, change the process and coordination for institutions responsible for completing funds for land acquisition quickly.
Fourth, the government must ensure that appropriate risk mitigation can be implemented for each infrastructure project, thereby attracting private investors. In addition, the government also needs to develop a concession agreement model for key sectors.
Fifth, the World Bank advises the Minister of Finance to increase the limit of 49 percent injection of funds on VGF for certain projects. In addition, it opens opportunities for the use of VGF and AP schemes in one project.
Sixth, give the mandate to the winner of the land acquisition project to ensure the acquisition of land is 100 percent completed before financial closing.
Seventh, develop a dashboard that provides and collects information about PPP projects that are being prepared, the transaction process, and implementation, so that it can be monitored by senior government officials.
The World Bank also advised the government to make the concept and initial model as a guide for the CGA before implementing OBC.
In the medium term, the World Bank recommends the government to review the complexity of regulations and accounting standards for the VGF and AP schemes, to ensure that the VGF and AP application processes are efficient and have the expected financial impact.
Whereas in the long term, the government needs to consolidate supporting instruments from the Ministry of Finance, for example VGF and AP under one entity responsible for approving and disbursing these funds.
"These articles cite a World Bank report that is currently being finalized in collaboration with the Government of Indonesia. This report is titled Indonesia Infrastructure Financing Sector Assessment Program (InfraSAP)," wrote the World Bank.
Separately confirmed, Finance Minister Sri Mulyani and National Planning and Development Minister (PPN / Bappenas) Bambang Brodjonegoro also claimed to have discussed the World Bank report. The core of the report, according to Bambang, is to strengthen PPP (Government Cooperation with Business Entities) related to the provision of infrastructure.
"It was discussed with us at that time. So, what we got from the World Bank report is that we need to continue to strengthen the PPP scheme and give confidence to potential investors that the scheme in Indonesia has investment and provides certainty," Bambang said.
This is a major obstacle for the Government of Indonesia to mobilize more private capital into various infrastructure development projects.
In a report titled the Infrastructure Sector Assessment Program released in June 2018, the World Bank explained that Indonesia's infrastructure projects were not prioritized based on clear criteria or selection.
"The reputation of the project in Indonesia is of low quality and not well planned," the World Bank report said.
In addition, the choice of procurement method was decided too early before in-depth analysis. For example through the scheme of Government Cooperation with Business Entities (PPP), business to business (B2B), or through public financing.
In fact, other countries prioritize the gradual study and analysis process, before finally making decisions regarding the appropriate procurement and financing schemes.
A number of countries also completed the Final Business Case Study (FBC) to provide a full understanding of the project, before deciding on a procurement and financing scheme.
"In Indonesia, the decision to use the PPP scheme is made before the initial Study of Feasibility Pre-study or Outline Business Case (OBC)," wrote the world bank.
In addition, the World Bank revealed that the initial analysis provided by the Government Contracting Agency (GCA) was often incomplete and doubted its reliability.
Before being proposed to the National Development Planning Agency (Bappenas), CGA was required to prepare a preliminary study related to the legal, technical, economic, commercial, environmental and social aspects of the PPP project. But in practice, they rarely do that.
According to the World Bank, this is due to the provision of limited instructions about the format of the preliminary study and funding constraints. The World Bank considers Bappenas lacks human resources (HR) and adequate budget, to coordinate the CGA so that it provides the best analysis results for each project.
Project Financing and Land Acquisition
In carrying out infrastructure development, the World Bank believes, the government and stakeholders do not have good coordination, thus creating confusion for investors.
"They are not sure who they have to communicate with and who will ensure the government's commitment in mobilizing infrastructure project funds," the World Bank wrote.
In fact, in recent years the government has fixed various obstacles to infrastructure projects in order to market Indonesia's infrastructure projects. In World Bank records, the steps taken by the government include increasing the role of the Ministry of Finance and Bappenas in infrastructure projects.
In addition, the government has prepared a funding injection scheme through cash support funds for infrastructure projects or Viability Gap Funds (VGF) and availability payment (AP) patterns. The government is also preparing the State Asset Management Agency (LMAN) to assist land acquisition.
For this effort, the government managed to increase infrastructure financing in the last two years. Recorded, there are 13 PPP projects that have reached the stage of financial closing in the 2015-2017 period. The total investment value of these projects was recorded at US $ 8.94 billion, equivalent to Rp 129.63 trillion, referring to the exchange rate of Rp14,500 per US dollar.
It was stated, in the VGF scheme the government covered 49 percent of the infrastructure costs that were economically feasible but not financially feasible. This scheme has not been widely used, it has not even been implemented at all by foreign investors.
One project that uses the VGF scheme is the Umbulan Drinking Water Management System (SPAM) in East Java.
"Government funding support mechanisms, such as VGF and AP, are considered too slow and not well coordinated," the World Bank wrote.
World Bank research says the delay in infrastructure land acquisition costs around US $ 5 billion - US $ 10 billion per year. Delayed access to land is classified as one of the main obstacles to private investment in infrastructure projects.
The government finally issued Law No. 12/2012 concerning Land Procurement for Development in the Public Interest which provides the legal force to acquire land for public purposes.
The World Bank said, despite progress with the enactment of the regulation, there were still significant obstacles to the timeliness of land acquisition.
the presence of the State Asset Management Institute (LMAN) in 2016 was also considered not enough to alleviate the problem of land acquisition. In 2017, LMAN prepared a land acquisition budget of Rp. 16 trillion.
The allocation, for toll roads is Rp. 13.3 trillion, railway infrastructure is Rp. 3.8 trillion, dam is Rp. 2.4 trillion, and port infrastructure is Rp. 500 billion. After that, the amount of funds for toll road acquisition was added to Rp. 25.3 trillion. However, these funds are not enough.
Until finally, the government opened opportunities for the private sector and state-owned enterprises to buy land for infrastructure projects in the National Strategic Project (PSN). Then, the government paid it off through LMAN.
Nevertheless, the World Bank considers that the Government does not provide information relating to procedures and the timing of payments in a clear manner.
"LMAN funding must be sufficient for land acquisition, and the LMAN approval process must be tracked quickly. The government must also obtain all infrastructure land before the financial closing of the project," said the World Bank.
World Bank Recommendations
Seeing various problems in infrastructure projects in Indonesia, the World Bank provides several recommendations divided into short, medium and long term recommendations.
In the short term, the World Bank made a number of recommendations. First, the World Bank advised Bappenas to develop a model of infrastructure project proposals, set criteria for assessing, and return proposals to the GCA if the proposals and information received were incomplete or of high quality.
Second, increase the capacity of PPP unit staff in the Ministry of Finance through assignments and involvement in PPP transaction preparation. In addition, he transferred the head of the Ministry of Finance's PPP unit to the position of one Echelon.
Third, change the process and coordination for institutions responsible for completing funds for land acquisition quickly.
Fourth, the government must ensure that appropriate risk mitigation can be implemented for each infrastructure project, thereby attracting private investors. In addition, the government also needs to develop a concession agreement model for key sectors.
Fifth, the World Bank advises the Minister of Finance to increase the limit of 49 percent injection of funds on VGF for certain projects. In addition, it opens opportunities for the use of VGF and AP schemes in one project.
Sixth, give the mandate to the winner of the land acquisition project to ensure the acquisition of land is 100 percent completed before financial closing.
Seventh, develop a dashboard that provides and collects information about PPP projects that are being prepared, the transaction process, and implementation, so that it can be monitored by senior government officials.
The World Bank also advised the government to make the concept and initial model as a guide for the CGA before implementing OBC.
In the medium term, the World Bank recommends the government to review the complexity of regulations and accounting standards for the VGF and AP schemes, to ensure that the VGF and AP application processes are efficient and have the expected financial impact.
Whereas in the long term, the government needs to consolidate supporting instruments from the Ministry of Finance, for example VGF and AP under one entity responsible for approving and disbursing these funds.
"These articles cite a World Bank report that is currently being finalized in collaboration with the Government of Indonesia. This report is titled Indonesia Infrastructure Financing Sector Assessment Program (InfraSAP)," wrote the World Bank.
Separately confirmed, Finance Minister Sri Mulyani and National Planning and Development Minister (PPN / Bappenas) Bambang Brodjonegoro also claimed to have discussed the World Bank report. The core of the report, according to Bambang, is to strengthen PPP (Government Cooperation with Business Entities) related to the provision of infrastructure.
"It was discussed with us at that time. So, what we got from the World Bank report is that we need to continue to strengthen the PPP scheme and give confidence to potential investors that the scheme in Indonesia has investment and provides certainty," Bambang said.
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