Indonesia: Indonesian Infrastructure Financing Facility Company Project

Transcription

1 Completion Report Project Number: Loan Number: 2516 June 2017 Indonesia: Indonesian Infrastructure Financing Facility Company Project This document is being disclosed to the public in accordance with ADB's Public Communications Policy 2011.

2 CURRENCY EQUIVALENTS Currency Unit rupiah (Rp) At Appraisal At Project Completion (23 February 2009) (31 December 2014) Rp1.00 = $ $ $1.00 = Rp12,075 Rp12,413 ABBREVIATIONS ADB Asian Development Bank AUP Agreed Upon Procedures BAPPENAS National Development Planning Agency BOC board of commissioners BOD board of directors CAP corrective action plan CAGR compound annual growth rate GDP gross domestic product IFC International Finance Corporation IIF PT Indonesia Infrastructure Finance IRSDP Infrastructure Reform Sector Development Program MOF Ministry of Finance PPP public private partnership PSOD private sector operations department PSP private sector participation SEMS social and environment monitoring system SMI SOE PT Sarana Multi Infrastruktur (Persero) state-owned enterprise NOTE In this report, $ refers to US dollars. Vice-President S. Groff, Operations 2 Director General J. Nugent, Southeast Asia Department (SERD) Country Director W. Wicklein, Indonesia Resident Mission, SERD Team leader Team members A. Haydarov, Infrastructure Economist, SERD A. Harianja, Operations Analyst, SERD D. Simanjuntak, Senior Project Officer, SERD In preparing any country program or strategy, financing any project, or by making any designation of or reference to a particular territory or geographic area in this document, the Asian Development Bank does not intend to make any judgments as to the legal or other status of any territory or area.

3 CONTENTS Page BASIC DATA I. BACKGROUND 1 A. History 1 B. Scope of Operations 2 C. Relationship with ADB and Other Lenders 2 D. Relevance of Design and Formulation 3 II. IMPLEMENTATION 4 A. Lending Policies 4 B. Characteristics of Subloans 4 C. Implementation and Internal Operations of Subprojects 5 D. Operational Performance of Indonesia Infrastructure Finance 6 E. Financial Performance of Indonesia Infrastructure Finance 7 F. Financial Statements and Ratios 8 G. Covenants 9 H. Performance of the Asian Development Bank 9 III. EVALUATION 10 A. Loan Appraisal 10 B. Implementation 10 IV. ASSESSMENT AND RECOMMENDATIONS 11 A. Relevance 11 B. Effectiveness in Achieving Outcome 11 C. Efficiency in Achieving Outcome and Outputs 12 D. Preliminary Assessment of Sustainability 13 E. Impact 13 F. Overall Assessment 13 G. Lessons 14 H. Recommendations 14 APPENDIXES 1. Design and Monitoring Framework Subprojects Financed from ADB Loan Status of Compliance with Loan Covenants Indonesia Infrastructure Finance s Organizational Arrangements Financial Performance of Indonesia Infrastructure Finance 35 i

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5 BASIC DATA A. Loan Identification 1. Country 2. Loan Number 3. Loan Title 4. Borrower 5. Name of Development Finance Institution 6. Amount of Loan 7. Project Completion Report Number Indonesia 2516 Indonesian Infrastructure Financing Facility Company Project Government of Indonesia Indonesia Infrastructure Finance $100,000, B. Loan Data 1. Pre-Appraisal Date Started Date Completed 2. Loan Negotiations Date Started Date Completed 3. Date of Board Approval 4. Date of Loan Agreement 5. Date of Loan Effectiveness In Loan Agreement Revised Number of Extensions 6. Terminal Date for Commitments In Loan Agreement Actual Number of Extensions 7. Closing Date In Loan Agreement Revised Number of Extensions 8. Terms to the Borrower Interest Rate Maturity (number of years) Grace Period (number of years) Free Limit Repayment Terms 22 September September December December March January April April Not applicable 31 December December London Interbank Offered Rate (LIBOR) and 0.60% less credit of 0.40% 25 years 5 years None Payable semiannually on 1 March and 1 September of each year

6 ii 9. Terms of Relending Subsidiary loan agreement between the Ministry of Finance and PT Sarana Multi Infrastruktur Subordinated loan agreement between PT Sarana Multi Infrastruktur and Indonesia Infrastructure Finance Original Term: 25 years, including 5- year grace period Pricing: Interest rate of the one-month certificate of Bank of Indonesia plus 1.0% Term: 25 years, including 5- year grace period Pricing: Interest rate under the subsidiary loan agreement plus 0.50% per annum Revised Term: 25 years, including 5- year grace period Pricing: Interest rate payable under the loan agreement between the Asian Development Bank and the Republic of Indonesia plus 0.5% Term: 25 years, including 5- year grace period Pricing: Interest rate under the subsidiary loan agreement plus 0.75% per annum 10. Interest Rate for Subloans Market-based and adequate to cover all costs and risks associated with on lending. Onlending has been in dollars to projects or companies generating revenue in dollars. 11. Disbursements a. Dates Initial Disbursement 13 December 2012 Effective Date 25 April 2011 Final Disbursement 25 November 2014 Original Closing Date 31 December 2013 Time Interval 23 months Time Interval 32 months

7 iii Subproject/ Borrower 1. 2x35 megawatts gasfired power plant Batam/Energi Lisrik Batam 2. Power plant/ PT Maxpower (Navigat) Equity Loan 3. Base transceiver system/pt Professional Telekomunikasi Indonesia 4. Telecom Base transceiver system/tower Bersama Tbk 5. Liquefied petroleum gas extraction plant/pt Arsynergy 6. Air transport infrastructure/pt Garuda Maintenance Facility 7. Gas pipeline/pt Batam Trans Gasindo 8. Participation syndicated facility/pt Solusi Tunas Pratama b. Amount ($ 000) Original Allocation (1) Amount Added/ Canceled (2) Net Amount Available (3 = 1 + 2) Amount Disbursed (4) Undisbursed Balance (5 = 3 4) 9, , , , , , , , , , , , , , , , , , , , , , , , (private telecom) Total 99, a 99, a a Total is rounded.

8 iv C. Implementation Data 1. Number of Subprojects: 8 2. Sector Distribution of Subprojects Sector Projected Actual ($ 000) Energy na Transport na Information and Communication na Technology Total na = not applicable. 3. Size of Subloans (actual) ($ 000) Range (specify amounts) Number of Subloans Aggregate Amount Up to $10 million 5 27,858 From $10 million to $20 million 1 10,345 Over $20 million 2 54,879 Equity 1 6,400 Total 8 a 99,482 a One subproject received both equity and debt financing. Hence, total number of subloans is 8, the same as the total number of subprojects. 4. Other Breakdown of Subloans: not applicable 5. Subloans Above Free Limit: not applicable 6. Project Performance Report Ratings Implementation Period Development Objectives Ratings Implementation Progress From March to August 2009 Satisfactory Satisfactory From 1 to 30 September 2009 Satisfactory Satisfactory From October to December 2009 Satisfactory Unsatisfactory From January to March 2010 Satisfactory Satisfactory From April to December 2010 Satisfactory Unsatisfactory Single Project Rating From January to March 2011 From April to December 2011 From January to March 2012 From April to September 2012 From October to December 2012 From January to September 2013 From January to December 2014 On Track On Track On Track Actual Problem On Track Potential Problem On Track

9 v D. Data on Asian Development Bank Missions Name of Mission a Date No. of Persons No. of Person-Days Specialization of Members b Consultation February a,b,i Fact-Finding July a,b,c,e,f,i Pre-Appraisal September a,e,d,f Loan Negotiations 18 December a,c,d Consultation 5 October e,b,d Consultation July e,j Project Administration July e,b,f,h Project Completion Review January c, g, i a = financial sector specialist, b = economist, c = infrastructure specialist or economist, d = counsel, e = private sector development specialist, f = investment officer, g = project officer, h = director, i = consultant, j = private sector investment specialist. E. Related Loans (to some development finance institutions): not applicable

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11 I. BACKGROUND A. History 1. During , Indonesia s overall infrastructure investment need was estimated at 7% 8% of gross domestic product (GDP), amounting to $65 billion, of which $16 billion (25%) was the estimated share of domestic and foreign private sector investors. To attain this ambitious target, in 2005 the Government of Indonesia launched a major private sector participation (PSP) reform that included (i) establishing the legal and institutional frameworks for public private partnerships (PPPs); 1 (ii) strengthening sector regulations for PSP, (iii) setting up facilities for the preparation of bankable PPP projects; and (iv) developing 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 As part of the PSP reform, in 2007 the government (i) adopted a regulation on a fully government-owned infrastructure finance limited liability company, PT Sarana Multi Infrastruktur (Persero) (SMI); 3 and (ii) initiated development of a business plan for PT Indonesia Infrastructure Finance (IIF) as a private infrastructure finance company (non-banking financing institution) to lend, invest, offer credit enhancement, and provide advisory to PSP projects. 4 To help set up IIF, in March 2009 the Asian Development Bank (ADB) approved financing for the Indonesian Infrastructure Financing Facility Company Project comprising (i) a financial intermediation loan of $100 million to the Republic of Indonesia, and (ii) an equity investment of up to $40,000,000 (rupiah equivalent) in IIF s capital. 5 In June 2009, the World Bank approved similar support to IIF. 6 As SMI and IIF were not operational yet, the Directorate General of State Assets Management of the Ministry of Finance (MOF) was assigned as the executing agency responsible for the overall supervision and execution of the ADB loan. 3. The establishment of IIF was slower than initially anticipated, as it was the first private infrastructure finance company in Indonesia. Initial equity was injected in April 2010, and IIF s business license was issued on 6 August IIF s total equity amounts to Rp2 trillion (equivalent of $197 million), of which 30.00% belongs to SMI, 19.90% each to ADB and 1 PPPs as a mainstream cross-sector modality for private participation in infrastructure were introduced through Presidential Regulation no. 67 of Other modalities of PSP in Indonesia include the independent power producer arrangements and the business-to-business schemes in the water and road sectors. These modalities are governed by the relevant sector laws and regulations. 2 Commercial banks offered conventional products such as term loans and working capital finance of medium tenure (5 7 years). Domestic pension funds and insurance companies invested most of their funds in short-term time deposits and government bonds. International institutional investors were wary of long-term investments in Indonesia because of political and country-level risks. None of the conventional financial sector players provided products such as equity, mezzanine financing, bridge financing, take-out financing, stand-by facilities, and long-term rupiah- and dollar-denominated loans typical for infrastructure finance. 3 Government Regulation no. 66 of 2007, as amended by Government Regulation no. 75 of SMI was established on 26 February 2009 and reports to the Ministry of Finance (MOF). The initial intention was that SMI through provision of equity would facilitate the emergence of private infrastructure finance companies in Indonesia to catalyze financial sector funding, including from institutional investors, for the PSP and PPP projects. 4 IIF was modeled based on India s Infrastructure Leasing & Financial Services Limited and Infrastructure Development Finance Company Limited, as these nonbanking financial institutions have been successful in the context of a developing country with significant government presence in infrastructure. 5 ADB Report and Recommendation of the President to the Board of Directors: Proposed Loan and Equity Investment to the Republic of Indonesia for Indonesian Infrastructure Financing Facility Company Project. Manila. 6 World Bank Project Appraisal Document on a Proposed Loan in the amount of US$100 million to the Republic of Indonesia and a Proposed International Finance Corporation Equity Investment of up to US$40 million in the Indonesia Infrastructure Finance Facility in the Republic of Indonesia. Washington, DC.

12 2 International Finance Corporation (IFC), 15.12% to Deutsche Investitions- und Entwicklungsgesellschaft mbh, and 14.90% to Sumitomo Mitsui Banking Corporation. B. Scope of Operations 4. Investment products. IIF s fund-based products include (i) loans in the form of senior debt, subordinated debt, mezzanine financing, bridge financing, take-out financing, and refinancing; and (ii) equity investment in infrastructure projects. IIF also offers non fund-based products such as guarantees on the fulfillment of financial liabilities, and other credit enhancement, such as performance bonds and stand-by finance. 5. Advisory services. IIF provides advisory services to private sector investors on project preparation, bid preparation for PPP or other PSP projects, raising project finance, and mergers and acquisitions. IIF can also provide advisory services to the government on preparing, tendering, and raising financing for projects delivered through PPPs, state-owned enterprise (SOE) assignments, or other schemes. 7 In addition, IIF can advise the government on broader infrastructure development policy issues, providing the private investor and lender perspectives. C. Relationship with ADB and Other Lenders 6. Asian Development Bank. To date, ADB financing to IIF comprises (i) a $100 million loan to Indonesia, and (ii) an equity investment of up to $40 million (rupiah equivalent) in IIF s capital. MOF on-lent the loan to SMI under a subsidiary loan agreement. SMI on-lent the entire amount of ADB financing to IIF under a subordinated loan agreement (i.e., IIF s repayment obligations to SMI are subordinated to those of IIF s senior lenders). As of 31 December 2014, loan disbursement totaled $ million with the remaining $0.518 million having been cancelled. 8 ADB s equity injections have totaled the equivalent of $38.4 million. 7. World Bank. The World Bank s loan to IIF became effective on 25 April 2011 (footnote 6). As of November 2016, $99.88 million of the loan had been withdrawn. The loan agreement was amended on 24 November 2012 to allow IIF to lend in dollars in response to the strong demand for dollar financing in energy and port projects. The project was extended from the original closing on 31 December 2013 to 30 November On 24 March 2017, the World Bank approved additional financing of $200 million to strengthen IIF s financial capacity. The additional financing will be provided to IIF (via SMI) in rupiah as a subordinated loan and as perpetual bonds or convertible capital market instruments. 8. International Finance Corporation. IIF obtained two commercial syndicated loans through IFC s A/B structure: (i) $250 million in June 2014, and (ii) $150 million in February In both cases, A loans will mature in 2021, and B loans will mature in Both loans have bullet repayment arrangements. As of 31 December 2016, the first facility was fully disbursed, and the second was yet to be disbursed. 7 IIF has maintained a division between its advisory and lending businesses, given the inherent conflict posed by consulting and lending functions. The advisory and lending operations have separate reporting arrangements and operate independently of each other. 8 Drawdowns of the ADB loan from SMI were as follows: (i) $71,134,021 on 13 December 2012, (ii) $16,732,954 on 13 November 2013, (iii) $337,886 on 19 November 2013, (iv) $6,400,000 on 6 December 2013, and (v) $4,877,000 on 25 November Under the A/B structure, the borrower signs a single loan agreement with IFC, and IFC signs a participation agreement with the participants. IFC is the sole contractual lender for the borrower. The A/B loan structure allows participants to fully benefit from IFC's preferred creditor status.

13 3 9. Other lenders. In December 2015, IIF obtained a Rp1 trillion loan from PT Bank Mandiri with repayment due in As of 31 December 2016, this loan was fully drawn down. In July 2016, IIF tapped the capital market through its first bond issuance of Rp1.5 trillion: (i) Rp0.825 trillion with maturity in 2019 (fixed interest rate of 8.25%), (ii) Rp0.250 trillion with maturity in 2021 (fixed interest rate of 8.70%), and (iii) Rp0.425 trillion with maturity in 2023 (fixed interest rate of 9.00%). D. Relevance of Design and Formulation 10. During , overall infrastructure spending was 4.5% of GDP, below the estimated investment need of 6.2% of GDP. 10 Private investment in infrastructure was particularly low, averaging 0.90% of GDP during against 1.80% of GDP during Private investment in infrastructure, including through PPPs, was considered an important funding source to help fill the gap. A key challenge was to strengthen the financial sector for infrastructure finance. Hence, the strong case for, and relevance of, (i) supporting the creation of IIF as a new private non-bank financial intermediary through provision of equity, and (ii) providing IIF with initial longterm concessional funding to enable it to catalyze financing for PSP and PPP infrastructure projects Given IIF s nature as a private non-bank financial institution, the financial intermediation loan was an appropriate modality for the project. Providing the ADB loan (through SMI) to IIF as a subordinated loan was an appropriate arrangement given the intended focus on IIF to extend long-term loans and equity to PSP and PPP projects, and the need to enhance IIF s ability to raise senior debt in the market against its total capital that includes equity and subordinated debt. While the project s focus was on PPP projects, IIF s business model was designed flexibly enough to accommodate financing of all viable PSP projects. 12. The project was closely aligned with ADB s country partnership strategy. 13 The project was an integral part of ADB s comprehensive support to PPPs in Indonesia under the Infrastructure Reform Sector Development Program (IRSDP), which supported cross-sector and sector level legal and institutional reforms in PPPs and PSP, and preparation of PPP projects through an infrastructure project development facility (IPDF). 14 Within the context envisaged under IRSDP, IIF was to provide advisory services to the project sponsors and help catalyze funding for PPP projects to ensure timely financial close. The PPP program rollout was, however, delayed because of additional time needed to complete the government s institutional setup for PPPs and the weak performance of IPDF set up at the National Development Planning Agency (BAPPENAS). This has not allowed IIF to act as an important PPP project financier as expected 10 B. Bhattacharyay Estimating Demand for Infrastructure in Energy, Transport, Telecommunications, Water, and Sanitation in Asia and the Pacific: ADB Institute Working Paper. No Tokyo: ADB Institute. 11 World Bank Technical Note: Estimating Infrastructure Investment and Capital Stock in Indonesia. Jakarta. 12 The Implementation Completion Report Review of the World Bank s Independent Evaluation Group has rated the relevance of objectives and design of the World Bank s first project (footnote 6) as substantial. The report is accessible at: 13 ADB Country Strategy and Program: Indonesia, Manila; ADB Country Partnership Strategy: Indonesia, Manila. 14 ADB Report and Recommendation of the President to the Board of Directors: Proposed Program Cluster, Loans, Technical Assistance Grant, and Administration of Grant to the Republic of Indonesia for Infrastructure Reform Sector Development Program. Manila. IRSDP s subprogram 1 included the adoption of a policy paper on long-term infrastructure financing; subprogram 2 included the adoption of Government Regulation no. 66 issued on 10 December 2007 on establishing a state-owned infrastructure finance company; subprogram 3 included the establishment of IIF to provide long-term debt for PPP projects.

14 4 during appraisal. 15 II. IMPLEMENTATION A. Lending Policies 13. Regulatory and operational requirements. IIF is guided by MOF s regulation on infrastructure finance companies. 16 Per this regulation, IIF can finance projects in the transport, roads, water supply, wastewater, telecommunications, electrical power, oil and gas, and other infrastructure sectors. It can engage in infrastructure projects through (i) senior loans (including for refinancing) and subordinated debt, (ii) equity, (iii) credit enhancement, (iv) advisory services, (v) assistance in arranging for swaps, and (vi) other products and services subject to MOF approval. IIF s borrowing cannot exceed 10 times its capital and subordinated debt. 17 IIF s equity investment cannot exceed 45% of the paid-up capital of the company receiving the investment. IIF s overall equity investments cannot exceed 75% of its capital. For medium- and long-term funding, IIF may receive funds from the government, foreign governments, multilateral agencies, onshore and offshore banks, and financial institutions, as well as through the issuance of capital market instruments. IIF s operations manual provides a robust framework on managing project exposure through an integrated assessment based on the project cost limits, project rating, and overall exposure to the project s sector. 18 The portfolio s profile suggests there is significant space before approaching limits in any of the sectors of IIF operations. B. Characteristics of Subloans 14. The project adopted a flexible approach for ADB loan utilization, enabling IIF to finance any commercially viable infrastructure project consistent with the scope of MOF regulation on infrastructure finance companies. The only at-approval criterion for subloans was that these would be in rupiah. 19 However, because of non-materialization of the PPP program during the project and the strong demand for dollar financing in power, airport, port, and telecommunications sectors, IIF preferred to draw down the ADB loan in dollars The project financed eight subprojects in the power-generation, gas, telecommunications, and air transportation sectors. 21 Most of the financing was in senior loans, with one power project receiving both a senior loan and equity. All subproject loans have been fully disbursed, and one has already been repaid. Three projects were financed on a project finance basis, while other projects were financed on a corporate finance basis. Even when lending was on a corporate finance basis, it was related to creating a revenue-generating infrastructure asset, the viability of which was assessed by IIF as part of financial due diligence. 15 At its close in February 2016, IPDF provided support to 31 PPP projects. Of these, only three completed the bidding process, but none reached financial close mainly because of incomplete land acquisition, changes of leadership of the government contracting agency, or incomplete processes for obtaining government financial support. 16 MOF s decree no. 100/PMK.010/2009, dated 27 May 2009, on infrastructure finance companies. 17 In this formula, subordinated debt cannot exceed 50% of the paid-up capital. 18 Details on IIF s operations manual are in Appendix At approval, IIF was expected to support a pipeline of 24 PPP projects in the power generation, toll road, water supply, airport, and railway sectors. Most of these were at various stages of preparation under IRSDP s IPDF. As these were projects with revenues in rupiah and given the high cost and short-term nature of foreign exchange swaps, the government took the foreign exchange risk, and ADB loan proceeds were to be on-lent to SMI and IIF in rupiah. 20 For example, power purchase agreements were denominated in dollars. To implement the shift from rupiah to dollar as the drawdown currency, the loan agreement was amended on 27 November Details on subprojects financed by the ADB loan are in Appendix 2.

15 5 16. Overall, the ADB loan was used for two strategic sector groups: (i) connectivity (transportation and telecommunication); and (ii) energy, power, and utilities. Within connectivity, the telecommunications sector has been dominant, since this sector carries a relatively low credit risk given the short loan maturity. Within energy, power, and utilities, a large proportion of the financing has been in power generation, given the industry s strong demand both for the shortand long-term debt. C. Implementation and Internal Operations of Subprojects 17. Overall, the ADB loan-financed subprojects have been implemented smoothly. An issue affecting the subprojects during preparation was convincing borrowers to comply with IIF s social and environmental principles that go beyond what other lenders normally require from project sponsors. This was particularly challenging for large subprojects, for which IIF had only a small share of the overall loan syndication. In such cases, more effort and time was required to convince the mandated lead arranger to mainstream IIF s social and environmental safeguards principles in the subproject documentation. Issues affecting the subprojects during implementation included delays in the completion of interface infrastructure (e.g., connecting gas pipelines) and lowerthan-expected business growth of the borrowers because of changes in government plans and policies on the delivery of infrastructure in certain sectors through PSP. 18. The following ADB safeguard policies applied to the project: Involuntary Resettlement Policy (1995), Policy on Indigenous Peoples (1998), and Environment Policy (2002). To meet the associated requirements, in 2011 IIF developed a social and environmental management system (SEMS) that followed the IFC Performance Standards. IIF updated the SEMS in December 2014 to follow IFC Performance Standards All IIF s shareholders approved the updated SEMS IIF assigned category A to three of the ADB loan-financed subprojects following IIF s SEMS. 23 These were two gas power plant subprojects and one gas pipeline subproject. Other subprojects were assigned category B. 24 Most of the ADB loan-financed subprojects had no resettlement impact, as the construction was on the client-owned land or the land had been acquired prior to IIF involvement. Where land had to be acquired, it was mostly undertaken through a negotiated land-acquisition arrangement. There is no information on indigenous people impacts under the project-financed subprojects. 20. Issues encountered in the ADB loan-financed subprojects included (i) inadequate assessment of the cumulative impact and impact from associated facilities, (ii) weak capacity of the borrower to implement the agreed corrective action plan (CAP) measures (e.g., land audit to assess livelihood restoration for displaced households, establishment and operationalization of the grievance mechanism), and (iii) apprehension of the subproject borrowers to disclose the CAP 22 ADB s private sector operations department (PSOD) conducted a safeguards annual review mission during February The mission found that IIF s systems on (i) scoping and screening, (ii) categorization, (iii) project appraisal and corrective action plan (CAP) development, and (iv) stakeholder engagement were adequate and compliant with SEMS. Areas for improvement were (i) monitoring and reporting on compliance with agreed safeguards requirements during and after disbursement of IIF financing to subprojects, (ii) including IIF s SEMS compliance requirement in loan agreements on all subprojects, especially for category A subprojects, and (iii) capacity building of safeguards experts of IIF s borrowers on IIF s SEMS requirements. 23 Similar to ADB, IIF classifies the proposed investments as category A, B, C, or FI. IIF does not, however, separately categorize for environment and involuntary resettlement and indigenous people risks and impacts but applies the single most stringent categorization of each. 24 Environment and social categories assigned to the subprojects are in Appendix 2. ADB s prior approval of subprojects was not required. The World Bank was not involved in approving individual subprojects either, subject to IIF s Environmental and Social Unit having sufficient capacity to implement SEMS.

16 6 monitoring reports. In some subprojects, IIF got involved after the borrower completed environmental assessments and land acquisition. In those cases, IIF agreed with the borrowers on CAPs to ensure compliance with IIF s SEMS. Overall, there were no major issues with social and environment safeguards under the ADB loan-financed subprojects during the project s life. 21. The subprojects have contributed to the much-needed expansion of the telecommunication tower network throughout the archipelago. For example, one subproject enabled the borrower to acquire 3,500 operating telecommunication towers, making it Indonesia s third-biggest tower company. The power-generation subprojects have contributed to raising the population s access to electricity through the construction of new gas pipelines (for supply of gas to a power plant) and provision of additional gas-based electricity capacity through a standard power plant in Batam (with the potential of also supplying to Bintan Island), as well as gas engines in 19 sites across Java Island. The project also helped raise the aircraft-servicing capacity of Garuda Indonesia, a major Indonesian airline, by supporting construction of an additional hangar for maintenance, repair, and overhaul of 16 narrow-wide body aircrafts. D. Operational Performance of Indonesia Infrastructure Finance 1. Organization, Management, and Staffing 22. Initial project operations were affected by changes in IIF s top management (which took time) and the overall limited availability of PPP and project finance expertise in the finance sector. Despite these difficulties, IIF has built a robust organization structure and ensured adequate staffing capacity. IIF has adopted a two-tier decision-making oversight system through the board of directors (BOD) and the board of commissioners (BOC), comprising experienced financial sector professionals. IIF operates following a comprehensive operations manual that was initially designed with World Bank and ADB support and then approved by all of IIF s shareholders IIF staff progressively grew from 48 employees in 2014 to 77 in All employees have obtained adequate domestic or overseas training. Of IIF s total employees, 45% are female, including at manager, senior manager, and director levels. In the next 2 years to support its projected growth, IIF plans to recruit 28 additional employees, of whom 50% will be allocated to investment and risk management directorates, and the rest to the advisory directorate and back office support departments. 2. Personnel Administration 24. Discussions with financial sector players and IIF s ability to attract good talent suggest competitiveness of salaries, benefits, and incentive programs. To maintain this competitiveness, IIF carries out benchmark studies to make sure the packages offered match industry standards. Recently, IIF s human capital division has developed a performance management program based on performance indicators. IIF continuously strengthens its staff capacity through trainings and aims to provide 8 person-days of training per employee per year. Emphasis is given to training for staff assigned to SEMS compliance. 25 As all Indonesian limited liability companies, IIF s BOC represents the shareholders, and BOD is responsible for dayto-day operations. IIF s organizational arrangements are reflected in Appendix Of 77 staff, (i) 14 staff are under the directorate of the chief executive officer, (ii) 19 staff are under the directorate of the chief financial officer, (iii) 27 staff under the directorates of the chief investment officers, (iv) 13 staff are under the directorate of the chief risk officer, and (v) 4 staff are under the transaction advisory office. Of these, 37 hold master s degrees, while another 35 hold bachelor s degrees and 5 hold diplomas.

17 7 3. Lending Operations 25. IIF subjects each subproject to a detailed due diligence study focusing on assessing the subproject s commercial feasibility. Due diligence covers legal, financial (e.g., sponsor financial performance and debt service capacity), environmental, and social aspects. Special attention is paid to risk assessment focusing on commercial, reputational, regulatory and legal, compliance, macroeconomic, political, insurance, and severity of audit-finding risks. In addition, risks are identified that may occur from the infrastructure asset s construction and operation. The internal rating is determined based on the risk analysis. Based on the feasibility and risk analyses, an assessment is conducted on whether any form of guarantee or collateral is needed to raise the subproject s bankability. Site visits are carried out to verify the preliminary data and information received from the potential borrower. Depending on the subproject s size, the subproject evaluation is done by the either the BOD s or BOC s investment committees. IIF has a continuous monitoring of risks arising from its operations through its risk management department. The status of enterprise risk profile is reflected in quarterly risk management reports submitted to the BOD s risk management committee and the BOC s risk oversight committee. 4. Other Operations 26. There has only been one active equity investment in IIF s portfolio: $12.5 million equity in a power-generation company (May 2014). Similarly, there has been only one mezzanine loan in IIF s portfolio: Rp300 billion (about $24 million equivalent) to a power solution company. This loan was fully repaid in December The fair value of the equity investment has decreased since its acquisition in 2014: it decreased from $10.5 million in 2015 to $8.5 million in IIF s equity and mezzanine financing amounted to 6.3% of the portfolio in Despite the challenging experience with the equity investment, IIF plans to increase its equity investments and mezzanine financing (portfolio s share with higher margin products) to 10.0% of its investment portfolio by the end of Transaction advisory operations have significantly grown: IIF has received 13 advisory mandates, of which 7 are ongoing. Loan syndication operations have also started growing in 2016, with IIF-led senior loan syndication for (i) one facility of Rp1.15 trillion, with IIF s portion of Rp500 billion; and (ii) another facility of Rp1.9 trillion, with IIF s portion of Rp500 billion. In both facilities, IIF was the lead arranger. IIF expects the annual advisory income to grow from Rp9 billion in 2016 to Rp22 billion in Annual income from loan syndication is expected to grow from Rp33 billion in 2016 to Rp50 billion in E. Financial Performance of Indonesia Infrastructure Finance 28. IIF s gross financing commitments grew from Rp0.5 trillion in 2012 to Rp10.5 trillion in 2016, at a compound annual growth rate (CAGR) of 114%. 27 Gross financing commitments surged from Rp6.8 trillion in 2015 to Rp10.5 trillion 2016 because of the award and financial close of four PPP projects, two of which received IIF financing the Palapa Ring Fiber Optic Development PPP Project in Central Indonesia and the Umbulan Water Supply PPP Project. The share of greenfield projects grew from 15% in 2015 to 38% in 2016, with an average loan tenor of 7.3 years. The total investment cost of IIF-financed projects is estimated at Rp177 trillion, translating into a multiplier effect of 17 times. 27 IIF s financial statements, annual reports for , and portfolio summary are accessible at:

18 8 F. Financial Statements and Ratios 29. Balance sheet. IIF s assets grew from Rp1.97 trillion in 2012 to Rp10.8 trillion in 2016, at a CAGR of 37%. Loan and equity investment assets grew from Rp1 trillion in 2013 (25% of total assets) to Rp5.1 trillion in 2016 (43% of total assets) at a CAGR of 73%. The loan and equity portfolio is distributed by sector as follows: 26% in electricity, 16% in telecommunication, 13% in toll road, 13% in airport, 11% in oil and gas, 6% in seaport, and 15% in other sectors. As of 31 December 2016, IIF s loan portfolio comprised (i) Rp3.1 trillion loans with maturity between 1 and 5 years, (ii) Rp1.6 trillion loans with maturity between 5 and 10 years, and (iii) Rp0.4 trillion loans with maturity beyond 10 years. Roll out of more PPP projects from 2016 onwards should provide more avenues for IIF to offer long-term (with tenor of over 10 years) senior loans in rupiah, in line with its mandate. IIF s balance sheet is significantly underleveraged compared to regional peers, leaving good scope for asset growth. As of 31 December 2016, IIF s portfolio had no nonperforming loans. 30. Income statements. IIF s total revenue continuously increased from Rp65.8 billion in 2012 to Rp543 billion in In 2016, the share of interest income from lending in the total interest income increased to 65% from 55% in 2015 (during the start-up stage, all interest income was derived from treasury operations). This shows a decreasing reliance on revenue from treasury activities and underlines that IIF s financing function has become the main driver of its revenue. Income from advisory services grew significantly, from Rp0.4 billion in 2015 to Rp7.4 billion in In 2016, there was a breakthrough in IIF s loan syndication fee, which totaled Rp7.7 billion. Total net income rose from Rp14 billion in 2012 to Rp75 billion in 2015 and Rp102 billion in 2016, showing good signs of profitability. 31. Cash flow statements. Cash and cash equivalents decreased from Rp2.6 trillion at the end of 2014 to Rp1 trillion at the end of 2015 because of a significant increase of cash outflows under operating and investment activities and a decrease of cash inflow from the financing activities. Cash and cash equivalents increased to Rp3.5 trillion at the end of 2016 because of a significant increase in IIF s withdrawal of borrowed funds from the domestic and international banks and an issuance of bonds for Rp1.5 trillion. Cash outflow was because of (i) increased investment activities from Rp0.6 trillion at the end of 2015 to Rp1.6 trillion at the end of 2016, and (ii) slightly decreased operating activities from Rp1.5 trillion in 2015 to Rp1.1 trillion in Key ratios. As of 30 September 2016, IIF s capital adequacy ratio was 41.2%, well above the required minimum of 12.0% per IIF lenders covenant. The debt-to-equity ratio increased from 1.5x in 2015 to 3.7x in 2016 (average debt-to-equity ratio of Indonesia s finance company sector is 5x). The subordinated debt-to-equity ratio was 1.1x in December 2016, well below the 2.5x covenant ratio. 28 The ratio of total expenses (excluding interest expense) to total assets has continuously decreased from 2.5% in 2012 to 1.5% in Return on equity rose from 1.3% in 2012 to 4.8% in 2016, while the return on assets increased from 0.9% in 2012 to 1.4% in The net investment margin reduced from 6.4% in 2012 to 3.8% in 2016 because of an investment portfolio increase that required borrowing in the market. The current ratio is 48x, far above the required level of at least 1.2x. Overall, IIF s financial ratios show adequate capitalization against the risks related to its assets, healthy status of its assets, adequate quality of management, improving profitability and earning, and a high level of liquidity The subordinated debt-to-equity ratio is a specific covenant used under the first loans of ADB and the World Bank. 29 Appendix 5 provides a summary of IIF s financials and key ratios during

19 9 G. Covenants 33. The loan agreement covenants have been complied with. The covenants of the project agreement between ADB and SMI/IIF have been complied with, except for the covenants on (i) IIF s submission to ADB of the annual reports on the project execution, (ii) IIF s submission to ADB of the project accomplishment report, and (iii) SMI s and IIF s submission of audited project financial statements and auditors opinions on the use of the loan proceeds and compliance with the loan agreement covenants. 34. IIF submitted annual entity-level reports to ADB s private sector operations department (PSOD), given their understanding that the term project meant IIF as the entity and not only the loan. 30 Similarly, SMI and IIF submitted to ADB their entity-level audited financial statements, which covered the ADB loan among other funding sources. Reputable auditors audited SMI s and IIF s financial statements, and the auditors opinion on both IIF and SMI has always been unqualified. 31 There was no dedicated project account at SMI, as the ADB loan proceeds were disbursed directly to IIF upon certification of the withdrawal application by SMI and MOF. Instead of the audited project financial statements, IIF submitted the Agreed Upon Procedures (AUP) reports for 2013 and 2014 to ADB. 32 IIF submitted to ADB the project completion report highlighting IIF s assessment of the project s accomplishments in April Given this context, the above-mentioned covenants are assessed partly complied. 35. IIF must also fulfill certain financial and negative covenants related to its borrowing from the banks and the capital market. The financial covenants include the maximum debt-to-equity ratio of 5 times, risk-weighted capital-adequacy ratio of at least 12%, debt-to-total-capitalization ratio not exceeding 3:1, and current ratio of at least 1.2:1. The negative covenants include the requirement to obtain lender s consent to (i) conduct transactions outside of the ordinary business activity of IIF, (ii) distribute the dividend, (iii) provide long-term incentive plans to employees, and (iv) incur financial debts. As of December 2016, IIF had complied with all such covenants. H. Performance of the Asian Development Bank 36. ADB, jointly with bilateral and other multilateral development financing institutions, played a critical role in the underlying analytical work, conceptualization, and design of IIF as an innovative financing mechanism to support infrastructure development. While there were no formal project administration and midterm review missions during , ADB maintained an ongoing dialogue with SMI and IIF, as the project team leader was based at ADB s Indonesia Resident Mission. This enabled timely action on emerging issues that impeded the ADB loan utilization. Coordination between ADB s Southeast Asia Department (responsible for the loan administration) and PSOD (responsible for administration of ADB s equity in IIF) was facilitated by the location of both the mission leader and PSOD staff in the Indonesia Resident Mission. However, project performance was monitored only against the loan agreement, not the project agreement. Hence, several project agreement covenants could only be partly complied with. ADB's supervision was generally insufficient to adequately monitor project performance, with weaknesses in project progress reporting, covenant compliance monitoring, and risk management. Therefore, ADB s overall performance is rated less than satisfactory. 30 IIF also submitted other information and reports required under the shareholders agreement. 31 IIF s financial statements can be accessed at: SMI s financial statements can be accessed at: 32 The auditor advised IIF that an AUP arrangement is more appropriate when there is a need to attest a specific process or account. The AUP arrangement is, however, not acceptable to ADB, as it does not represent an audit.

20 10 III. EVALUATION A. Loan Appraisal 1. Distribution of Subloans 37. The project was expected to help provide local-currency financing to the PPP projects, most of which were being developed by the IPDF at BAPPENAS. The project was also expected to provide long-term financing on a project-finance basis. However, the PPP program took off only in 2016, two years after project completion. Given this and the project sponsors still-available balance sheet space, IIF utilized the ADB loan to provide dollar financing (mostly on a corporate finance basis) to non-ppp infrastructure projects delivered by the private sector or state-owned enterprises (SOEs). The project did not have any particular requirements for sector eligibility, subproject size, and subproject selection criteria, allowing IIF to follow the MOF s regulation on infrastructure finance companies and its operations manual. This approach provided muchneeded flexibility to IIF at its start-up phase during Covenants 38. The review of the loan and project agreement covenants suggests no need for any modification or waiver of the covenants. 3. Quality of Appraisal 39. The project was based on the clear need for more private investment in infrastructure and was part of the government s ambitious PPP reform agenda. It was prepared based on a comprehensive IIF business plan and thorough discussions among government stakeholders and private sector and development partners. However, the project underestimated risks related to (i) the government s institutional and fiscal readiness and capacity for PPPs, which only reached a critical level of maturity in 2015; (ii) the conduciveness of the then land acquisition framework for PPPs; (iii) the complicated licensing and permit system; (iv) the economy s structural features, such as the active role of SOEs in infrastructure delivery and limited interest of the domestic financial sector in infrastructure investments; and (v) the availability of PPP expertise in the financial sector. Neither did the project anticipate the likelihood of SMI s change of role from a holding company to a full-fledged infrastructure finance company focusing on lending and investments in infrastructure SOEs and (since February 2015) providing loans to local governments for infrastructure projects a target market different to that of IIF. B. Implementation 40. The project was effectively implemented during , as this was when IIF utilized the loan proceeds. The ADB loan utilization followed the procedures and policies of IIF s operations manual, which provided a robust framework to IIF staff on all aspects of IIF s operations and subprojects throughout the project cycle. The project encountered several issues during implementation, including (i) delayed rollout of the PPP program that required a shift from the initially envisaged local currency to dollar lending to accommodate the market demand; (ii) difficulty of IIF to attract and retain staff in the initial phase of its operations; (iii) challenges to mainstreaming IIF s safeguards requirements in loan documentation given IIF s small share of financing to subprojects; and (iv) inadequate coordination between ADB, SMI, and IIF on project issues, including on reporting arrangements. Entity-level issues that require attention include (i) the need to better manage liquidity to avoid negative carry, and (ii) the need to strengthen IIF s

21 11 systems and capacity in equity investments to avoid loss in investment value. 33 These issues are manageable given the significant progress in the PPP program since 2016 and the IIF s more established institutional and financial capacity. 34 IV. ASSESSMENT AND RECOMMENDATIONS A. Relevance 41. The project was highly relevant at appraisal, implementation, and completion (paras ). Its flexible design allowing the ADB loan to be utilized for all sectors and purposes covered under MOF regulation on infrastructure finance companies enabled IIF to withstand the delayed rollout of the PPP program without the need for any major change in the project. Indonesia s average annual infrastructure investment needs are estimated at $74 billion or 5.5% of gross domestic product (GDP) during , against the estimated total infrastructure investment of $23 billion in 2015 (2.6% of GDP). 35 This implies an average infrastructure investment gap of $49 billion (or 2.9% of GDP). Given the public sector s fiscal constraints, private investment in infrastructure must play a prominent role in filling this gap. 42. With growing number of PPPs being rolled-out in Indonesia, the lack of infrastructure finance specific products in the domestic financial sector is emerging as a critical constraint to accelerated delivery of infrastructure projects undertaken by the private sector. IIF is uniquely positioned to help address this immediate constraint and to make an important contribution to filling Indonesia s infrastructure investment gap, including through catalyzing capital market resources. Given this and the discussion on the relevance of IIF at appraisal, the project is assessed highly relevant. B. Effectiveness in Achieving Outcome 43. IIF started its lending operations in 2012, two years later than expected at appraisal. 36 This was because of the novelty of the infrastructure financing company mechanism and longerthan-expected time needed to complete organization, staffing, operations, funding frameworks, and social and environmental safeguards management systems. The PPP program s rollout was also delayed because of legal, institutional, budget, and government capacity constraints. After completing its internal setup, IIF rapidly expanded the number of infrastructure projects in which it is involved. During , IIF s gross financing commitments grew by more than 110% annually. The total cost of IIF-cofinanced infrastructure projects is estimated at $13.2 billion (multiplier effect of 17 times). This far exceeds the expected IIF facilitation of $5 billion for infrastructure in the first 5 years of operations. Overall, IIF has shown an efficient allocation of financing to economically viable infrastructure projects. Therefore, the project is assessed effective Though not explicitly stipulated in the loan and project agreements, it was expected that IIF would focus on providing long-term debt to infrastructure companies, mainly on project finance basis. When IIF extends financing on corporate finance basis (which is normally short term), it ensures that such financing is directly linked to the creation of new fixed infrastructure assets. IIF plans to gradually increase long-term lending on a project finance basis given the rollout of PPP infrastructure projects that will require this type of lending. 34 Since 2016, four PPP projects reached financial close (total investment estimated at $3.4 billion), and 10 PPPs were signed (total investment estimated at $6 billion). 35 ADB Meeting Asia s Infrastructure Needs. Mandaluyong, Philippines. 36 Appendix 1 provides a status of achievements against the design and monitoring framework targets and indicators. 37 The World Bank rated the achievement of objectives (efficacy) of their first project as substantial.

22 12 C. Efficiency in Achieving Outcome and Outputs 44. In total, 99.5% of the ADB loan was disbursed, financing eight projects for an investment cost of $1.3 billion. This implies a loan multiplier effect of 12.7 times. As shown in section II, IIF is a cost efficient, profitable, and financially viable infrastructure finance company able to raise shortand medium-term local- and foreign-currency funding from domestic and international financiers. 45. IIF has also contributed to improving the debt market for infrastructure projects. During , IIF s cumulative debt finance commitment was about $785 million, representing 8.6% of the total debt finance commitment under PSP projects. 38 This is below the ambitious target at appraisal of 11.0% of IIF s contribution to the infrastructure sector s overall debt need by However, given the PPP program s delayed rollout and the small weight of IIF in the financial sector, it is a commendable achievement. Though difficult to quantify because of a lack of data, qualitatively it may be assumed that the IIF-financed subprojects have been (i) efficient, as they financed private sector projects; and (ii) economically viable, as they contributed to the improved supply of electricity, increased movement of people and goods transported through roads, airports, and ports, and better access to communication and information technology services At appraisal, IIF was expected to be contributing 8% of the infrastructure sector s equity needs by IIF s only equity investment of $12.5 million is insignificant against $4 billion of the total estimated equity investment commitment during (footnote 38). This was because of the delay in the PPP program delivery and IIF s prudent decision to defer equity investments (high risk by nature) until IIF s internal systems and capacity are commensurate to ensure adequate management of a larger equity investment exposure. 47. IIF s establishment has contributed to the growth of viable financial institutions and the development of financial markets through SMI s emergence as the government s lead infrastructure financing vehicle, rather than its initially envisaged role as a shell company to channel and manage the government s investment in IIF. 40 SMI has been focusing on lending to infrastructure SOEs and advising government agencies on the preparation and transaction of PPP projects. During , SMI is targeting to become Indonesia Development Financing Agency to provide financing for infrastructure, local government infrastructure projects, small- and medium-sized enterprises, agriculture, and other developmental needs per the government s priorities IIF s role as a transaction and financial advisor has grown, and its project advisory skills are increasingly recognized in the market. With the expected increase in the PPP project market, IIF is well positioned to become one of the go-to advisors for project sponsors and lenders. IIF s safeguards systems are considered a good benchmark, and in some aspects are more robust and demanding than the national safeguards systems. IIF has done well in raising the awareness 38 Total debt finance commitment during is estimated at $9.1 billion in the energy, electricity, transport, and information and communication technology sectors. Source: The World Bank s Private Participation in Infrastructure Database. 39 Evaluation of economic rates of return on the subprojects was impossible as IIF s due diligence does not include an economic analysis of its investment projects and the subproject information is private and proprietary. The World Bank notes a similar issue in the evaluation of its first project s efficiency. 40 The initial intention was that SMI through the provision of equity would facilitate the emergence of private infrastructure finance companies in Indonesia to catalyze financial sector funding for infrastructure. 41 In March 2017, the World Bank approved a $100 million loan for the Regional Infrastructure Development Fund, administered by SMI to help prepare and finance economically viable basic environmental, productive, and social infrastructure projects of the local governments. The fund is cofinanced by the Asian Infrastructure Investment Bank through a $100 million loan and SMI through a $200 million counterpart contribution.

23 13 of financial sector players on the importance of following best international practices in environmental and social safeguards in PPI projects. SMI used IIF s safeguards systems as a reference to develop their own social and environmental safeguards management arrangements, which were adopted at the end of Given the above, the project is assessed efficient both in terms of utilizing the inputs to achieve the desired outcome and in terms of supporting the establishment of efficient processes and arrangements in IIF. D. Preliminary Assessment of Sustainability 50. Since its establishment, IIF has become a credible though still small player in the domestic infrastructure finance market because of its focus on project finance, robust risk management framework, expertise in social and environment safeguards management, and ability to provide long-term debt to infrastructure projects. It has a capable leadership team and technical staff. During , Fitch and PT Pemeringkat Efek Indonesia assigned IIF an AAA national long-term rating with a stable outlook. More importantly, IIF has proven its ability to raise (i) medium- and long-term rupiah funding domestically, and (ii) medium-term funding from international lenders. This enables IIF to meet the growing portfolio needs and adequately manage asset-liability exposure. IIF plans to come out with an Initial Public Offering in 2020 to further strengthen its capital base and hence its ability to raise debt in the market. Given this and Indonesia s growing infrastructure finance market, IIF and the project are assessed likely sustainable. 42 E. Impact 51. The project was expected to support economic growth and poverty reduction through improved and equitable access to infrastructure to result from the total infrastructure investments in Indonesia growing to 7.0% 8.0% of GDP during In reality, total infrastructure investments averaged 2.6% of GDP during , However, the long-awaited increase of the government s infrastructure spending (necessary to catalyze private infrastructure investment) in 2015 and the PPP program s take-off in 2016 bode well for IIF s intended impact to materialize in the medium term. 43 While IIF s impact was lower than expected during and after the project life, the project is likely to show the envisaged impact in the medium term. F. Overall Assessment 52. The project helped create, operationalize, and establish IIF as an innovative mechanism in the domestic financial sector. The loan funds were effectively utilized only in 2 years a good record for a newly established infrastructure financial intermediary. IIF has contributed to leveraging significant private investment in infrastructure, though this remained lower than expected because of the delay of the PPP program s rollout. This was a major reason for the only change in the project to allow IIF to use the ADB loan proceeds to lend in dollars to commercially viable PPI subprojects. Though 1 year later than expected, the project has achieved the intended outcomes and outputs. Given this and the assessment of the relevance, effectiveness, efficiency, and sustainability, the project is assessed overall successful The subprojects are assumed to be sustainable given they met IIF s commercial viability criteria and there was full disbursement of IIF s financing to these subprojects. 43 The reform of fuel subsidies in January 2015 enabled the government s infrastructure budget to increase from Rp144.4 trillion in 2014 to Rp280.3 trillion in 2015 and Rp302.6 trillion in ADB Guidelines for the Evaluation of Public Sector Operations. Manila.

24 14 G. Lessons 53. Better coordination with stakeholders. Given ADB s sovereign and nonsovereign support and IIF s novel nature, closer coordination between the Southeast Asia Department and PSOD, through joint missions and including on safeguards-related concerns, 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 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 s financing or advisory services. 54. Close project administration and technical assistance. The novelty of IIF, the project s complex onlending arrangement, and the specifics of the financial intermediation loan modality should have merited continuous administration with close involvement of staff with infrastructure finance, financial management, and safeguards expertise. This would have ensured SMI s and IIF s full compliance with the project agreement s reporting and audit provisions. Capacity building technical assistance piggy-backed to the project would have helped IIF and SMI in the initial phase of their operations, through supporting advocacy and awareness raising on IIF among the financial sector and investor community and assisting in safeguards of the first batch of subprojects. 55. Subproject eligibility criteria. Subproject eligibility criteria were not defined under the project, and IIF utilized the ADB loan proceeds for commercially viable projects that met the requirements of the MOF regulation on infrastructure financing companies and IIF s operations manual. Allowing for flexibility was prudent given the IIF s start-up stage. However, in the future it may be expedient to better define the subproject eligibility criteria, such as required benchmarks of economic and financial viability, focus on long-term debt (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. 45 H. Recommendations 1. Project-Related 56. Future monitoring. Given the novelty of the infrastructure finance company mechanism and the associated regulatory arrangements, as well as SMI s evolving nature, IIF s financial and institutional performance needs to be monitored to ensure possible policy, advisory or financial support from ADB if required. Environmental and social impact of the ADB-financed subprojects needs to be monitored to avoid potential reputation issues. Such monitoring drawing on, among others, IIF s quarterly risk management reports, annual performance and safeguards reports, audited financial statements, credit rating agency, and civil society organizations reports will be conducted during preparation and implementation of the new ADB loan to IIF planned for delivery in IIF s subprojects have a clear developmental nature similar to public investment projects. Given this, IIF should also assess the subproject s economic and financial internal rates of return. For example, ADB-financed projects need to show (i) an economic internal rate of return of at least 9% for the transport, energy, urban development, and agriculture projects; and (ii) a financial internal rate of return exceeding the weighted average cost of capital in all scenarios.

25 Covenants. In future operations, it may be helpful to specify that the Agreed Upon Procedures (AUP) arrangement is unacceptable to ADB, and to agree on a project audit arrangement that is acceptable to ADB and can be implemented in Indonesia s financial sector. Also, it may be useful to define subproject eligibility using the criteria suggested in para Further action or follow-up. Indonesia s private infrastructure market is growing, given the government s increased infrastructure spending and willingness to provide guarantees, as well as an expanding PPP program. To adequately meet the growing market challenge and realize its purpose, IIF has yet to build its (i) balance sheet to be able to access long-term localand foreign-currency funding, and (ii) capacity to launch new products (e.g., take-out finance or stand-by facilities), to adequately manage the planned increase of mezzanine and equity investments, and to ensure compliance with environmental and social safeguards of a growing loan portfolio. ADB is well positioned to support IIF in meeting these challenges and to expand IIF s operations through provision of new financial intermediation loans and technical assistance to facilitate a transfer of knowledge on new financial products from other countries. 59. Timing of the project performance evaluation report. To support IIF's expansion in response to the growing infrastructure finance market, the government obtained $200 million in additional financing from the World Bank, and requested a new $100 million financial intermediation loan from ADB for implementation during Given this, it will be important to plan for the project performance evaluation report in This will enable a more accurate assessment of IIF s sustainability and its ability to raise a broad range of funding in the market on competitive terms. 2. General 60. Financial intermediation loan modality. The emergence of SMI and IIF as anchor infrastructure financing mechanisms with solid institutional systems provides a good platform for establishing financing facilities to lend or invest in infrastructure projects delivered by SOEs or the private sector. ADB s financial intermediation loan modality would fit this purpose well, as it represents a timely and more efficient (including from an ADB and client transaction cost perspective) instrument to deliver ADB assistance to a range of infrastructure stakeholders in Indonesia. 61. Efficient coordination and reporting. The project s implementation shows the importance of efficient communication and coordination with participating financial institutions, development partners, and key government stakeholders. For the follow-up operation, it would be useful to have a coordination mechanism comprising MOF, BAPPENAS, IIF, SMI, ADB, and the World Bank to proactively discuss project issues. To ensure IIF s ability to autonomously and timely take credit decisions and given IIF s robust appraisal systems the reporting arrangements may follow the covenant approach rather than requiring IIF to seek development partner clearance on subprojects before being able to commit IIF s funding. This would require more intensive project administration by ADB, including in safeguards. 46 Indonesia Infrastructure Finance Expansion Support Project (project number ). The proposed project s initial poverty and social analysis can be accessed at

26 16 Appendix 1 DESIGN AND MONITORING FRAMEWORK Design Summary Impact Support Indonesia s economic growth and poverty reduction through improved and equitable access to infrastructure Outcome Efficient allocation of financing to economically viable infrastructure projects Performance Indicators with Targets and Baselines Infrastructure investments grow to 7% 8% of GDP by IIF facilitates the development of a new generation of infrastructure projects by increasing the flow of private investment into infrastructure projects. Satisfactory Achievement of Targets Total infrastructure investments averaged 2.6% of GDP during , of which 1.4% of GDP came from the government, 0.9% of GDP from SOEs, and 0.3% of GDP from the private sector. The longawaited increase of government infrastructure spending (necessary to catalyze private infrastructure investment) that started in 2015 and the PPP program s take-off in 2016 bode well for the initially intended impact to materialize in the medium term. Achieved IIF supported the development of 13 projects and led two loan syndications. Income from advisory has grown significantly from Rp0.4 billion in 2015 to Rp7.4 billion in In 2016, there was a breakthrough in IIF s loan syndication fee that totaled Rp7.7 billion. Outputs IIFF operates as a financially viable infrastructure finance institution. It leads public and private capital to finance commercially viable infrastructure projects in Indonesia. IIF facilitates investments of about $5.5 billion for infrastructure in the first 5 years of its operations. IIF s total capital structure is $1 billion by 2013 (equivalent of Rp12.1 trillion using exchange rate at appraisal). a At least 40 infrastructure projects identified and processed by IIFF, and loans disbursed in Indonesia from 2008 to 2013 IIF has provided financing to 23 infrastructure projects for an estimated total cost of Rp176.7 trillion ($13.2 billion) against IIF s financial commitments of Rp10.5 trillion ($785 million) a multiplier effect of 17x. Substantially achieved As of 31 December 2016, IIF s total capital was Rp10.8 trillion. As required by the regulation, IIF s equity was increased to Rp2 trillion in IIF signed its first financial commitment in As of the end of 2016, IIF had identified 31 commercial infrastructure projects, of which it proceeded with 23 projects. Delayed rollout of the PPP program and the longerthan-expected operationalization of IIF (given the novelty of the infrastructure finance company arrangement) affected IIF s ability and need to raise funding in the market as ambitiously as envisaged at appraisal. Hence, its total capital structure and number of identified projects are lower than projected at appraisal. However, the total capital structure and number of projects are likely to grow beyond the appraisal targets in the short-term, given the rapid pick-up in Indonesia s infrastructure market.

27 Appendix 1 17 Design Summary Improved long-term debt market due to increased financing of infrastructure projects Increased equity investments in infrastructure projects in Indonesia Performance Indicators with Targets and Baselines IIFF contributes 11% of sector s debt need by IIFF contributes 8% of sector s equity requirement by Substantially achieved Achievement of Targets During , IIF s cumulative debt finance commitment was about $785 million, representing 8.6% of the total debt finance commitment under PSP infrastructure projects. This is a commendable achievement given the delay of the PPP program, which was expected to be the main recipient of IIF financing. The long-term infrastructure debt market is expected to grow rapidly given the rollout of infrastructure projects in Partly achieved IIF s only equity investment is $12.5 million against the total estimated equity investment need during of $4 billion. The non-achievement of the ambitious equity target is because of the delay in the PPP program delivery and IIF s prudent decision to defer equity investments (high risk by nature) until its internal systems and capacity can ensure adequate management of a larger equity investment exposure. Growth of viable financial institutions and financial markets development Positive externalities of the subprojects in the targeted sectors Increased participation by other domestic and international financial institutions to provide long-term funding. At least 6 8% increase in generation of power, increased traffic volumes and better movement of goods, additional handling volumes in ports, passenger and cargo transported through airports, improved supply and quality of water supply facilitated through IIFF intervention by 2013 Achieved All IIF-financed subprojects have attracted other local lenders as cofinanciers. IIF s financial participation has led to a multiplier effect of 17x. In addition, IIF s establishment has triggered the emergence of SMI as the government s lead infrastructure financing vehicle, against the pure money conduit company envisaged at appraisal. PT SMI focused on lending to infrastructure SOEs and advising government agencies on the preparation and transaction of PPP projects. Achieved IIF financed subprojects in the electricity, telecommunications, airports, seaport, oil and gas, and toll road sectors. Though difficult to quantify as IIF s appraisal and monitoring focuses on commercial viability aspects, qualitatively it may be accurate to assume that the IIF-financed subprojects have contributed to an improved supply of electricity, increased movement of people and goods transported through roads, airports, and ports, and better access of individual and corporate consumers to communication and information technology services. b

28 18 Appendix 1 Design Summary Performance Indicators with Targets and Baselines Achievement of Targets Development of PPP projects facilitated At least 15% 20% of new PPP projects developed through IIFF advisory services by Substantially achieved During the project period, the project development facility at BAPPENAS was the lead mechanism to support government contracting agencies with the preparation and transaction of PPP projects. This facility closed in February Since 2014, the Committee on Accelerated Delivery of Priority Infrastructure has facilitated the preparation of outline business cases for priority PPP projects. In 2015, MOF established a project development fund to support the preparation of full business cases and transaction of PPP projects, mostly through assigning PT SMI as the transaction advisor. Given the availability of this comprehensive support from other agencies and delayed rollout of the PPP program, IIF has focused on providing transaction and financial advisory to the private sector sponsors under other PPI modalities. As of the end of 2016, IIF had provided advisory services for 13 projects. IIF s project advisory skills are getting recognized in the market, and more mandates are expected going forward. Institutional awareness and capacity to implement environmental, health and safety, and social issues Projects and subprojects meet required environmental and social safeguards. Achieved Key Activities with Milestones January March 2009 (updated) 1. Draft Articles of Association for incorporation of IIF (done) 2. Submit for presidential approval draft amendment to Presidential Regulation 68 on Finance Companies for incorporation of IIF (done) 3. Get approval for nominations to SMI s BOC and BOD (done) 4. Establish SMI (done) 5. Appoint BOC and BOD for PTSMI (done) All IIF s subprojects are appraised and monitored following IIF s SEMS (updated in December 2014 to follow IFC Performance Standards 2012). SEMS is implemented by the social and environmental management unit reporting to the chief risk officer. SEMS follows (i) the prevailing Indonesian laws and regulations; (ii) all of IFC 2012 Performance Standards; (iii) the World Bank s safeguards policies on environmental assessment, natural habitats, cultural property, indigenous peoples, involuntary resettlement, forests, and safety of dams; and (iv) environmental and social policy and procedural guidelines for projects financed jointly by the World Bank, IFC and/or MIGA. Inputs $40 million equity from ADB (equivalent of $38.4 million has been drawn down) ADB s $100 million sovereign loan to the government (done)

29 Appendix Obtain in-principle commitments from international financial institutions for investing equity in IIF (done) 7. Prepare term sheet and draft shareholders agreement for IIFF (done) 8. Draft and send letters to prospective shareholders, enclosing brochure and/or information memorandum on IIF business plan and seeking time for presentations (done) 9. Appoint consultant for detailing IIF s organization structure, systems, and processes (Phase 2) (done) 10. Finalize authorized equity capital and shareholding structure based on responses received (done) 11. Incorporate IIF, with government and committed shareholders paying in equity capital as required (done) 12. Submit final report on organization structure, systems, and processes of IIFF (done) 13. Finalize authorized equity capital and shareholding structure based on response received (done) 14. Pay in equity contribution to IIFF (done) IBRD loan of $100 million to the government (done) Government s subordinated debt to IIF through PTSMI of $200 million (done) Government contribution of about $60 million in IIF equity, later reduced from 40% to 30% as agreed (done; government contribution in IIF s equity is now equivalent of $60.9 million) Other investor equity investment in IIF of $100 million (total equivalent of $97.4 million: IFC s equity share is equivalent of $38.4 million, DEG s is equivalent of $30 million, and SMBC s is equivalent of $29 million) a Total capital structure is the sum of IIF s total equity, total debt, reserves and other liabilities. b About 35 million people (16% of the population) lack access to electricity. In many small power markets and in parts of Eastern Indonesia, electricity supply is limited to a few hours a day. Indonesia s national electrification ratio is 84%, against 100% in Malaysia, 99% in Thailand, and 96% in Viet Nam. ADB = Asian Development Bank, BAPPENAS = Badan Perancanaan Pembangunan Nasional (National Development Planning Agency), BOC = board of commissioners, BOD = board of directors, DEG = Deutsche Investitions- und Entwicklungsgesellschaft, GDP = gross domestic product, IBRD = International Bank of Reconstruction and Development, IFC = International Finance Corporation, IIF = PT Indonesia Infrastructure Finance, MOF = ministry of finance, MIGA = Multilateral Investment Guarantee Agency, PPP = public private partnership, PSP = private sector participation, SEMS = social and environmental management system, SMBC = Sumitomo Mitsui Banking Corporation, SMI = PT Sarana Multi Infrastruktur, SOE = state-owned enterprise. Source: ADB staff.

30 SUBPROJECTS FINANCED FROM ADB LOAN Project Name 1. 2x35 MW gasfired power plant, Batam 2. Power plant 3. Corporate financing for base transceiver system program 4. Bond participation in telecommunicatio n base transceiver system provider 5. Liquefied petroleum gas extraction plant (40 million metric standard cubic feet per day) Borrower Energi Listrik Batam PT Maxpower Indonesia (Navigat) PT Profesional Telekomuni kasi Indonesia PT Tower Bersama Tbk (private telecom tower company) PT Arsynergy Total Project Cost ($ millio n) Project Type $ Million ADB Loan Purpose (senior loan, equity, subdebt, other) Other Financiers Name 48.0 Greenfield 9.9 Senior Loan Multiple lenders Corporate Financing Corporate Financing N/A Corporate Financing Status (as of 15 October 2016) IIF s Social and Environment Safeguards Category During Due Diligence Fully disbursed A A Senior Loan Multiple Fully disbursed A A lenders 6.4 Equity Standard Chartered Private Equity Fully disbursed A A 28.4 Senior Loan 34 lenders Fully disbursed; B B already fully prepaid by the debtor 5.0 Corporate Bond 47.3 Greenfield 5.2 Senior Loan 4 lenders, including Bank Syariah Mandiri Fully disbursed B B Fully disbursed B B Implementati on 20 Appendix 2

31 Project Name 6. Air transport infrastructure, West Java 7. Gas pipeline construction for Energi Listrik Batam 8. Participation to syndicated facility Borrower PT Garuda Maintenanc e Facility PT Batam Trans Gasindo PT Solusi Tunas Pratama (private telecom tower company) Total Project Cost ($ millio n) Project Type 21.5 Corporate Financing 47.0 Corporate Financing, Refinancing Corporate Financing $ Million Total 1,268.0 a 99.5 a ADB Loan Purpose (senior loan, equity, subdebt, other) Other Financiers Name Status (as of 15 October 2016) IIF s Social and Environment Safeguards Category During Due Diligence 10.3 Senior Loan Bilateral Fully disbursed B B 7.8 Senior Loan PT Sarana Multi Infrastruktur 26.5 Senior Loan Multiple lenders a Total sum may be different due to rounding. ADB = Asian Development Bank, IIF = Indonesia Infrastructure Finance, MW = megawatt, N/A = not applicable. Fully disbursed A A Fully disbursed B B Implementati on Source: Indonesia Infrastructure Finance. Appendix 2 21

32 22 Appendix 3 STATUS OF COMPLIANCE WITH LOAN COVENANTS I. Loan Agreement between ADB and the Republic of Indonesia Covenant Particular covenants (a) The Borrower shall, to the extent possible, ensure that PTSMI carries out the Project with due diligence and efficiency and in conformity with sound administrative, financial, and business practices. (b) In carrying out the Project and operation of the Project facilities, the Borrower shall perform, or cause to be performed, all obligations set forth in Schedule 4 of this Loan Agreement and the Schedule to the Project Agreement. The Borrower shall, and shall cause PTSMI to make available to the Company, promptly as needed, the required funds, in addition to the proceeds of the Loan, for the carrying out of the Project. Reference in Loan Agreement Section 4.01 Section 4.02 Status of Compliance Complied. Complied (no such circumstance took place). The Borrower through PTSMI shall, to the extent possible, ensure that the activities of the Company and operation of the Project facilities are conducted and coordinated in accordance with sound administrative policies and procedures The Borrower shall take all action which shall be necessary on its part to enable PTSMI and the Company to perform their respective obligations under the Project Agreement, Shareholders Agreement and the Subordinated Loan Agreement and shall not take or permit any action which would interfere with the performance of such obligations. (a) The Borrower shall exercise its rights under the Subsidiary Loan Agreement in such a manner as to protect the interests of the Borrower and ADB and to accomplish the purposes of the Loan. (b) No rights or obligations under the Subsidiary Loan Agreement shall be assigned, amended, abrogated or waived without prior concurrence of ADB. Allocation and withdrawal of loan proceeds Deposit Account 5. Except as ADB may otherwise agree, the Borrower shall ensure that the Company establish immediately after the Effective Date, a deposit account to be managed by PTSMI at a commercial bank acceptable to ADB and to be used solely for the purpose of the Project. The currency of the deposit account shall be in Dollar. The amount to be deposited into the deposit account shall be based on the withdrawal application submitted by the Borrower, which will be made pursuant to the investment needs of the Company to be evidenced by the certification issued by PTSMI, endorsed by the Borrower and acceptable to ADB. Any fees, charges or similar expenses payable of Dollar amount(s) to be Section 4.03 Section 4.04 Section 4.05 Complied. Complied (no such circumstance took place). Complied. SCHEDULE 2, para. 4 Complied.

33 Appendix 3 23 deposited in the deposit account shall be for the account of the Borrower. Condition of Withdrawals from Loan Account 6. Notwithstanding any other provision of this Loan Agreement, no withdrawals shall be made from the Loan Account until the following conditions have been satisfied: (a) the Ministry of Law and Human Rights shall have approved the Articles of Association of the Company; (b) the Borrower, through the MOF, shall have issued the Business License to the Company; (c) the Shareholders Agreement, and any related share subscription documents to be entered into by and among the founding Shareholders and/or between the Company and the founding Shareholders shall have been executed and delivered on behalf of the parties and shall have become effective and binding upon such parties in accordance with their respective terms; (d) the Project Agreement, shall have been duly executed and delivered on behalf of PTSMI and the Company and shall have become effective and binding upon the PTSMI and the Company in accordance with their respective terms; (e) each founding Shareholder shall have subscribed and paid up its respective initial capital contribution in such amount as required by the Shareholders Agreement; (f) PTSMI shall have made available and disbursed financing in an amount of not less than six hundred billion Rupiah (Rp.600,000,000,000) (less the amount of the initial equity contribution of PTSMI as required under the Shareholders Agreement); and (g) the Company shall have appointed and employed a chief executive officer and a chief financial officer. Execution of Project and Operation of Project Facilities; Financial Matters Project Executing Agency DGSAM shall be the Project Executing Agency and shall be responsible for the overall supervision and execution of the Project. Project Management The Borrower shall manage its investment in the Company through PTSMI. The Company shall have a two-tier board structure, i.e., the Board of Directors and the Board of Commissioners. The Board of Directors shall be responsible for the day to day management of the Company and the Board of Commissioners shall be responsible for providing oversight function Counterpart Funds The Borrower shall, on timely basis, provide counterpart funds required to be used for the establishment and operation of PTSMI and the Company. SCHEDULE 2, para. 5 Complied. SCHEDULE 4, para. 1 Complied. SCHEDULE 4, para. 2 Complied. SCHEDULE 4, para. 3 Complied.

34 24 Appendix 3 PTSMI The Borrower shall ensure that PTSMI shall provide funding to the Company pursuant to the time-frame and terms and conditions agreed under the Shareholders Agreement, the Subordinated Loan Agreement, and other relevant agreements. PTSMI The Borrower shall cause PTSMI to (a) ensure that the Shareholders Agreement provides that the entire proceeds of the Loan be applied for purposes consistent with the provisions of this Loan Agreement, and (b) exercise its voting powers in relation to the Company and all powers of control available in relation to their nominee to the Board of Commissioners and the Board of Directors of the Company (if any) so as to ensure that the Company applies the proceeds of the Loan for the purposes described herein. Safeguards The Borrower shall ensure that the Project shall be carried out in accordance with (a) ADB s Environment Policy (2002) and ADB s Involuntary Resettlement Policy (1995), (b) the Borrower s environmental laws, and involuntary resettlement laws, and (c) the harmonized ESMS Audit The Borrower shall ensure that PTSMI shall be audited annually by an independent external auditor. Audited financial statement of PTSMI shall be submitted to MOF and to ADB annually, at the latest, six (6) months after the end of each fiscal year. Anti Corruption Measures The Borrower shall comply with, and shall cause PTSMI to comply with ADB s Anticorruption Policy (1998, as amended to date) and the Policy relating to Enhancing ADB s Role in Combating Money Laundering and the Financing of Terrorism (2003). The Borrower (a) acknowledges ADB s right to investigate, directly or through its agents, any alleged corrupt, fraudulent, collusive or coercive practices relating to the Project; (b) agrees to cooperate fully with and to cause PTSMI to cooperate fully with any such investigation and to extend all necessary assistance, including providing access to all relevant books and records, as may be necessary for the satisfactory completion of any such investigation; and (c) agrees to refrain, and cause PTSMI to refrain, from engaging in money laundering activities or financing of terrorism and shall allow, and cause PTSMI to allow, ADB to investigate any violation or potential violation of these undertakings. SCHEDULE 4, para. 4 Complied. SCHEDULE 4, para. 5 Complied. SCHEDULE 4, para. 6 Complied. SCHEDULE 4, para. 7 Complied. SCHEDULE 4, para. 8 Complied.

35 Appendix 3 25 II. Project Agreement between ADB and PT Sarana Multi Infrastruktur and PT Indonesia Infrastructure Finance Covenant Particular covenants (a) PTSMI shall use its best efforts to cause IIF and IIF shall use its best efforts to carry out the Project with due diligence and efficiency, and in conformity with sound administrative, financial, engineering, and environmental practices. (b) In carrying out of the Project and operation of the Project facilities, each of PTSMI and IIF shall perform all obligations set forth in Schedule 4 of the Loan Agreement and the Schedule to the Project Agreement to the extent that they are applicable to each of them Subject to the provisions of the Subordinated Loan Agreement, PTSMI shall make available to IIF the funds received by it under the Subsidiary Loan Agreement Except as ADB may otherwise agree, all Goods to be financed out of the proceeds of the Loan shall be procured in accordance with the provisions of Schedule 3 to the Loan Agreement and the Schedule to this Project Agreement. ADB may refuse to finance a contract where Goods have not been procured under procedures substantially in accordance with such provisions. IIF shall carry out the Project in accordance with plans, specifications, work schedules and construction methods that meet international best practices. (a) IIF shall take out and maintain with responsible insurers or make other arrangements satisfactory to ADB for insurance of its facilities to such extent and against such risks and in such amounts as they may be customarily carried or maintained under similar circumstances by persons of established reputation engaged in similar businesses. (b) Without limiting the generality of the foregoing, IIF undertakes to insure, or cause to be insured, the Goods to be imported for the Project and to be financed out of the proceeds of the Loan against hazards incident to the acquisition, transportation and delivery thereof to the place of use or installation, and for such insurance any indemnity shall be payable in a currency freely useable to replace or repair such goods IIF shall maintain, or cause to be maintained, records, and accounts adequate to identify the Goods and other items of expenditure financed out of the proceeds of the Loan, to disclose the use thereof in the Project, to record the progress of the Project (including the cost thereof) and to reflect, in accordance with consistently maintained sound accounting principles, its operations and financial condition. (a) ADB, PTSMI and IIF shall cooperate fully to ensure that the purposes of the Loan will be accomplished (b) Each of PTSMI and IIF shall promptly inform ADB of any condition which interferes with, or threatens to interfere with, the progress of the Project, the performance of its obligations under this Project Agreement, the Shareholders Agreement, the Reference in Project Agreement Section 2.01 Section 2.02 Section 2.03 Section 2.04 Section 2.05 Section 2.06 Section 2.07 Status of Compliance Complied. Complied. Complied. Complied. Complied. Complied. Complied. Complied. Complied. Complied.

36 26 Appendix 3 Subsidiary Loan Agreement and the Subordinated Loan Agreement or the accomplishments of the purposes of the Loan. (c) ADB and each of PTSMI and IIF shall from time to time, at the request of either party, exchange views through their representatives with regard to any matters relating to the Project, PTSMI (to the extent they relate to the Project, IIF or the Loan), IIF and the Loan (a) Each of PTSMI and IIF shall furnish, as applicable, to ADB all such reports and information as ADB shall reasonably request concerning (i) the Loan and the expenditure of the proceeds thereof; (ii) the operations of PTSMI (but only to the extent that those reports or information are available and are relevant to IIF or the Loan) and IIF; and (iii) any other matters relating to the purposes of the Loan. (b) Without limiting the generality of the foregoing, IIF shall furnish to ADB annual reports on the execution of the Project and on the operation and management of the Project facilities. Such reports shall be submitted in such form and in such detail and within such a period as ADB shall reasonably request, and shall indicate, among other things, progress made and relevant problems encountered during the period under review, steps taken or proposed to be taken to remedy these problems, and proposed program of activities and expected progress during the following period. (c) Promptly after 28 February 2013, but in any event not later than 3 months thereafter or such later date as ADB may agree for this purpose, IIF shall prepare and furnish to ADB a report, in such form and in such detail as ADB shall reasonably request on the execution and initial operation of the Project, including its cost, the performance by IIF of its obligations under this Project Agreement and the accomplishment of the purposes of the Loan. (a) Each of PTSMI and IIF shall (i) maintain separate accounts for the Project and for its overall operations; and (ii) have such accounts and related financial statements (balance sheet, statement of income and expenses, and related statements) audited annually in accordance with appropriate auditing standards consistently applied, by independent auditors whose qualifications experience and terms of reference are acceptable to ADB. Each of PTSMI and IIF shall furnish to ADB promptly after their preparation but in any event not later than 6 months after the close of the fiscal year to which they relate, certified copies of audited accounts related to the Project or the Loan, as applicable, and financial statements and the report of the auditors relating thereto (including the auditors opinion of the use of the Loan proceeds and compliance with the covenants of the Loan Agreement) all in the English language. Each of PT SMI and IIF shall furnish to ADB such other information concerning such accounts and financial statements and the audit thereof as ADB shall from time to time reasonably request. Section 2.08 Section 2.09 Complied. Complied. Partly complied. IIF submitted annual entitylevel reports to ADB given its understanding that project meant IIF as the entity and not only the loan. Partly complied. IIF submitted the project completion report highlighting IIF s assessment of the project s accomplishments in April Partly complied. SMI and IIF submitted to ADB their entitylevel audited financial statements, which covered the ADB loan among other funding sources. Reputable auditors audited SMI s and IIF s financial statements, and the auditor s opinion on both IIF and SMI has always been

37 Appendix 3 27 unqualified. Instead of the audited project financial statements, IIF submitted the AUP reports for 2013 and 2014 to ADB. This was based on the auditor s advice to IIF that an AUP arrangement is more appropriate when there is a need to attest a specific process or account. (b) Each of PTSMI and IIF shall enable ADB, upon ADB s request, to discuss the financial statements and its financial affairs from time to time with the auditors appointed by PTSMI and IIF pursuant to Section 2.09(a) hereabove, and shall authorize and require any representative of such auditors to participate in any such discussions requested by ADB, provided that any such discussion shall be conducted only in the presence of an authorized officer of each PTSMI and IIF unless each of PTSMI and IIF shall otherwise agree. IIF shall enable ADB s representative to inspect the Project and the Goods financed out of the proceeds of the Loan, all other plants, sites properties and equipment of IIF, and any relevant records and documents (a) Each of PTSMI and IIF shall promptly as required, take all action within its powers to maintain its corporate existence, to carry on its operations and to acquire, maintain and renew all rights, properties, powers, privileges and franchises which are necessary in the carrying out of the Project or in the conduct of its business (b) Each of PTSMI and IIF shall at all times conduct its business in accordance with sound administrative, financial, environmental and business practices, and under the supervision of competent and experienced management and personnel. Except as ADB may otherwise agree, IIF shall not sell, lease or otherwise dispose any of its assets which shall be required for the efficient carrying on of its operations or the disposal of which may prejudice its ability to perform satisfactorily any of its obligations under the Project Agreement. Except as ADB may otherwise agree, IIF shall apply the proceeds of the Loan to the financing of the Project in accordance with the provisions of the Loan Agreement and this Project Agreement and shall ensure that all Goods financed out of such proceeds are used exclusively in the carrying out of the Project. Section 2.10 Section 2.11 Section 2.12 Section 2.13 Complied (no such need took place). Complied. Complied. Complied. Complied. Complied.

38 28 Appendix 3 Except as ADB may otherwise agree, each of PTSMI and IIF shall Section 2.14 Complied. duly perform all its obligations under the Subsidiary Loan Agreement and Subordinated Loan Agreement and shall not take, or concur in, any action which would have the effect of assigning, amending, abrogating or waiving any rights or obligations of the parties under the Subsidiary Loan Agreement and Subordinated Loan Agreement. PTSMI shall promptly notify ADB of any proposal to amend, suspend or repeal any provision of its Articles of Association related to the (a) Name and Domicile; (b) Time of Inception and Duration; (c) Purpose and Objectives; (d) Capital, and shall afford ADB an adequate opportunity to comment on such proposal prior to taking any action thereon. IIF shall promptly notify ADB of any proposal to amend, suspend or repeal any provision of its Articles of Associations and shall afford ADB an adequate opportunity to comment on such proposal or prior to taking any action thereon. Section 2.15 Complied. ADB = Asian Development Bank, AUP = Agreed Upon Procedures, IIF = PT Indonesia Infrastructure Finance, SMI = PT Sarana Multi Infrastruktur.

39 Appendix 4 29 INDONESIA INFRASTRUCTURE FINANCE S ORGANIZATIONAL ARRANGEMENTS A. Shareholder Composition Figure A4.1: Shareholders of Indonesia Infrastructure Finance Source: Indonesia Infrastructure Finance Together Building a Remarkable Indonesia: 2015 Annual Report. Jakarta. 1. At approval, four institutions were proposed to be PT Indonesia Infrastructure Finance s (IIF s) founding shareholders: (i) Government of Indonesia (through PT Sarana Multi Infrastruktur [SMI]), up to 45.0% of equity; (ii) the Asian Development Bank, up to 20.0%; (ii) International Finance Corporation, up to 20.0%; (iii) Deutsche Investitions- und Entwicklungsgesellschaft mbh, up to 7.5%; and (iv) KfW, up to 7.5%. Originally, SMI s share comprised a core equity of 30% and an additional equity of up to 15%, representing the portion of shares to be eventually taken up by other investors. SMI s voting rights were limited to 30.0% of IIF's ordinary shares. It was precluded that SMI (or any other agency or subdivision of the government) could contribute more than 50.0% of IIF's total share capital. On 1 November 2011, Sumitomo Mitsui Banking Corporation subscribed to newly issued shares of IIF to acquire 14.9% of the shareholding.

40 Table A4.1: Indonesia Infrastructure Finance: History of Equity Injections (in Rp) No. Shareholder 23-Apr-10 7-Dec Mar Dec Apr-15 Total PT Sarana 1 Multi Infrastruktur 40,300,000, ,700,000, ,000,000, ,000,000,000 (Persero) 2 Asian Development 19,900,000, ,100,000, ,044,000,000 45,756,000, ,800,000,000 Bank 3 International Finance 19,900,000, ,100,000, ,044,000,000 45,756,000, ,800,000,000 Corporation 4 Deutsche Investitionsund Entwicklungsg 19,900,000, ,100,000, ,400,000, ,400,000,000 esellschaft mbh 5 Sumitomo Miitsui Banking 175,000,000,000 88,780,000,000 34,220,000, ,000,000,000 Corporation Total 100,000,000, ,000,000, ,000,000, ,868,000, ,132,000,000 2,000,000,000, Appendix 4 Note: The initial minimum paid-up capital of IIF, per the Ministry of Finance s regulation on infrastructure finance companies, was required to be Rp100 billion. IIF s paid-up capital was to increase to Rp2,000 billion within 5 years from the date of its business license. Source: Indonesia Infrastructure Finance

41 Table A4.2: Indonesia Infrastructure Finance: History of Equity Injections (in $) No. Shareholder 23-Apr-10 7-Dec Mar Dec Apr-15 Total PT Sarana 1 Multi Infrastruktur 4,468, ,143, ,311, ,924, (Persero) 2 Asian Development 2,206, ,822, ,837, ,532, ,400, Bank 3 International Finance 2,206, ,822, ,837, ,532, ,400, Corporation 4 Deutsche Investitionsund Entwicklungsg 2,206, ,822, ,982, ,012, esellschaft mbh 5 Sumitomo Miitsui Banking ,001, ,351, ,641, ,994, Corporation Total 11,088, ,612, ,001, ,339, ,689, ,731, Note: The following exchange rates were used for conversion in $: 2010 Rp9,018 per $, 2011 Rp9,035 per $, 2012 Rp9,212 per $, 2013 Rp12,077 per $, and 2015 Rp12,953 per $. Source: Indonesia Infrastructure Finance Appendix 4 31

42 32 Appendix 4 B. Organization Structure Figure A4.2: Organization Structure of Indonesia Infrastructure Finance ACC = Audit Committee Charter, ALCO = Asset and Liability Committee, BOC = board of commissioners, BOD = board of directors, CEO = chief executive officer, CFO = chief financial officer, CIO = chief investment officer, CRO = chief risk officer, GA = general affairs, HR = human resources, IC = Investment Committee, ITSC = Information Technology Steering Committee, KYC = know your client, MIS = management information system, NRC = Nomination and Remuneration Committee, PCA = private client advisory, PSA = public sector advisory, RMC = Risk Management Committee, ROC = Risk Oversight Committee. Source: Indonesia Infrastructure Finance: 2016 Annual Report.