Indonesia: Infrastructure Reform Sector Development Program (Subprograms 1, 2, and 3, and an Infrastructure Project Development Facility)

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1 ompletion Report Project Numbers: , , , and Loan Numbers: 2263, 2264, 2475, and 2708 Grant Number: 0064 Technical Assistance Number: 4872 August 2017 Indonesia: Infrastructure Reform Sector Development Program (Subprograms 1, 2, and 3, and an Infrastructure Project Development Facility) This document is being disclosed to the public in accordance with ADB s Public ommunications Policy 2011.

2 URRENY EQUIVALENTS urrency Unit rupiah (Rp) At Appraisal At Program ompletion 15 September November 2010 Rp1.00 = $ $ $1.00 = Rp9,130 Rp8,927 ABBREVIATIONS ADB Asian Development Bank BAPPENAS Badan Perancanaan Pembangunan Nasional (National Development Planning Agency) BKPM Badan Koordinasi Penanaman Modal (Indonesia Investment oordinating Board) BPPSPAM Badan Pendukung Pengembangan Sistem Penyediaan Air Minum (National Water Supply Development Supporting Agency) MEA oordinating Ministry for Economic Affairs DMF design and monitoring framework GA government contracting agency GDP gross domestic product IDPL infrastructure development policy loan IF International Finance orporation IIF PT Indonesia Infrastructure Finance IIGF PT Indonesia Infrastructure Guarantee Fund IPDF infrastructure project development facility IRSDP Infrastructure Reform Sector Development Program JIA Japan International ooperation Agency KKPPI Komite Kebijakan Percepatan Penyediaan Infrastruktur (National ommittee for the Acceleration of Infrastructure Provision) KPPIP Komite Percepatan Penyediaan Infrastruktur Prioritas (ommittee for Acceleration of Priority Infrastructure Delivery) LKPP Lembaga Kebijakan Pengadaan Barang/Jasa Pemerintah (National Public Procuremet Agency) MOF MP3EI Ministry of Finance Masterplan Percepatan dan Perluasan Pembangunan Ekonomi Indonesia (Master Plan for Acceleration and Expansion of Indonesia's Economic Development) NPDF national project development facility PAS procurement and administrative services PDAM Perusahaan Daerah Air Minum (regional water supply enterprise) PDF project development facility PLN Perusahaan Listrik Negara (State Electricity orporation)

3 PKPS Pengembangan Kerjasama Pemerintah dan Swasta (BAPPENAS directorate for PPPs) PMU project management unit PP project preparation consultant PPITA Private Provision of Infrastructure Technical Assistance Loan PPMS project performance monitoring system PPP public private partnership PSO public service obligation PS project steering committee PSP private sector participation PT perseroan terbatas (limited liability company) RPDF regional project development facility RPJMN Rencana Pembangunan Jangka Menengah Nasional (National Medium Term Development Plan) sector development program SDP SDR special drawing right SMI PT Sarana Multi Infrastruktur SOE state-owned enterprise TA technical assistance TAS technical advisory services VGF viability gap funding NOTES (i) (ii) The fiscal year (FY) of the Government of Indonesia ends on 31 December. In this report, $ refers to United States dollars. Vice-President S. Groff, Vice-President, Operations 2 Director General R. Subramaniam, Southeast Asia Department (SERD) ountry Director W. Wicklein, Indonesia Resident Mission, SERD Team leader Team members A. Haydarov, Infrastructure Economist, SERD D. Simanjuntak, Senior Project Officer, SERD A. Harianja, Operation Analyst, 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.

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5 ONTENTS BASI DATA i I. PROGRAM DESRIPTION 1 II. EVALUATION OF DESIGN AND IMPLEMENTATION 2 A. Relevance of Design and Formulation 2 B. Program and Project Outputs 3. Program and Project osts 5 D. Disbursements 5 E. Program and Project Schedule 5 F. Implementation Arrangements 6 G. onditions and ovenants 6 H. Related Technical Assistance 6 I. onsultant Recruitment and Procurement 7 J. Performance of onsultants, ontractors, and Suppliers 7 K. Performance of Borrowers and the Executing Agency 7 L. Performance of the Asian Development Bank 8 III. EVALUATION OF PERFORMANE 8 A. Relevance 8 B. Effectiveness in Achieving Outcome 9. Efficiency in Achieving Outcome and Outputs 10 D. Preliminary Assessment of Sustainability 11 E. Impact 12 IV. OVERALL ASSESSMENT AND REOMMENDATIONS 13 A. Overall Assessment 13 B. Lessons 13. Recommendations 15 APPENDIXES 1. Design and Monitoring Framework Policy Matrix List of Deleted Outputs List of Supported Public Private Partnership Projects Status of ompliance with Loan ovenants Technical Assistance ompletion Report 86

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7 BASI DATA A. Loan and Grant Identification 1. ountry 2. Loan Number Grant Number 3. Program Title 4. Borrower 5. Executing Agency 6. Amount of Loan 7. Program ompletion Report Number Indonesia Loans 2263, 2264, 2475, 2708 Grant 0064 Infrastructure Reform Sector Development Program Republic of Indonesia National Development Planning Agency (Badan Perancanaan Pembangunan Nasional) Loans: $400 million, SDR million, $280 million, $200 million; Grant: $7.56 million 1643 B. Loan Data 1. Appraisal Date Started Date ompleted 2. Loan Negotiations Date Started Date ompleted 3. Date of Board Approval Loan 2263 Loan 2264/Grant 0064 Loan 2475 Loan Date of Loan Agreement Loan 2263 Loan 2264/Grant 0064 Loan 2475 Loan July October October October November November November December November November December December Date of Loan Effectiveness Loan 2263 In Loan Agreement Actual Number of Extensions Loan 2264/Grant 0064 In Loan Agreement Actual Number of Extensions Loan 2475 In Loan Agreement Actual Number of Extensions 29 November November 2006 None 29 November November 2006 None 18 December December 2008 None

8 ii Loan 2708 In Loan Agreement Actual Number of Extensions 6. losing Date Loan 2263 In Loan Agreement Actual Number of Extensions Loan 2264 In Loan Agreement Actual Number of Extensions Grant 0064 In Grant Agreement Actual Number of Extensions Loan 2475 In Loan Agreement Actual Number of Extensions Loan 2708 In Loan Agreement Actual Number of Extensions 28 December December 2010 None 31 March November 2006 None 30 September February 2016 Two 31 May May 2011 None 31 March December 2008 None 31 March December 2010 None 7. Terms of Loan Loan 2263 Interest Rate Maturity (number of years) Grace Period (number of years) Loan 2264 Interest Rate Maturity (number of years) Grace Period (number of years) Loan 2475 Interest Rate Maturity (number of years) Grace Period (number of years) Loan 2708 Interest Rate Maturity (number of years) Grace Period (number of years) London interbank offered rate (LIBOR) and 0.6% % per annum during the grace period, and 1.5% per annum thereafter 32 8 LIBOR and 0.6% less credit of 0.4% 15 3 LIBOR and 0.6% less credit of 0.3% 15 3

9 iii 8. Terms of Relending Interest Rate Maturity (number of years) Grace Period (number of years) Second-Step Borrower None 9. Disbursements a. Dates Loan 2263-INO Initial Disbursement 29 November 2006 Effective Date 29 November 2006 Final Disbursement 29 November 2006 Original losing Date 29 November 2006 Time Interval Time Interval Loan 2264-INO Initial Disbursement 2 October 2008 Effective Date 29 November 2006 Final Disbursement 23 December 2015 Original losing Date 30 September 2012 Time Interval 87 months Time Interval 70 months Grant 0064 Initial Disbursement 21 July 2008 Effective Date 29 November 2006 Final Disbursement 31 May 2011 Original losing Date 31 May 2011 Time Interval 34 months Time Interval 54 months Loan 2475-INO Initial Disbursement 19 December 2008 Effective Date 18 December 2008 Final Disbursement 19 December 2008 Original losing Date 18 December 2008 Time Interval Time Interval Loan 2708-INO Initial Disbursement 29 December 2010 Effective Date 28 December 2010 Final Disbursement 29 December 2010 Original losing Date 29 December 2010 Time Interval Time Interval

10 iv b. Amount ($ million) 1. Loan 2263-INO: Subprogram 1 Date Disbursed Amount Disbursed 29 November Loan 2264-INO (concessional ordinary capital resources lending / Asian Development Fund) and Grant 0064-INO ($) a. Loan 2264-INO ($ equivalent of special drawing rights) ategory 1 onsulting Services Original Allocation Last Revised Allocation Amount Disbursed Undisbursed Balance 16,606,000 17,482,094 14,174,613 3,307,481 2 Equipment 150,000 18,210 18, Interest 521, , , ,616 4 Unallocated 748, Total 18,025,000 18,025,000 14,588,899 3,436,101 b. Grant 0064-INO ($) 1 onsulting Services 7,307,000 2,948,261 4,358,739 2 Equipment 90,000 10,800 79,200 3 Administrative and 163, ,000 Audit osts Total 7,560,000 2,959,061 4,600, Loan 2475-INO: Subprogram Loan II ($ million) Date Disbursed Amount Disbursed 19 December Loan 2708-INO: Subprogram Loan III ($ million) Date Disbursed Amount Disbursed 29 December

11 v. Program and Project Data 1. Program and Project ost ($ million) Loan 2263 ost Appraisal Estimate Actual Foreign Exchange ost Local urrency ost Total Loan 2475 ost Appraisal Estimate Actual Foreign Exchange ost Local urrency ost Total Loan 2708 ost Appraisal Estimate Actual Foreign Exchange ost Local urrency ost Total Loan 2264; Grant 0064 (Project) ost Appraisal Estimate Actual Foreign Exchange ost Local urrency ost Total Project Financing Plan ($ million) (Loan 2264 and Grant 0064) ost Appraisal Estimate Actual Implementation osts Borrower Financed ADB Financed Other External Financing (Grant 0064) Total ID osts Borrower Financed ADB Financed Other External Financing Total ADB = Asian Development Bank, ID = interest during construction.

12 vi 3. ost Breakdown by Project omponent ($ million) omponent Appraisal Estimate Actual A. PPP Project Preparation and Transaction Execution B. Technical Advisory Services and apacity Building Procurement and Administrative Services Unallocated 1.1 Interest and Fees Total PPP = public private partnership. 4. Project Schedule Item Appraisal Estimate Actual Date of ontract with onsultants June 2007 June 2008 Equipment and Supplies Dates First Procurement June 2007 May 2010 Last Procurement ompletion of Equipment Installation NA NA Other Milestones NA = not applicable. 5. Program and Project Performance Report Ratings 5.1 Program Performance Rating Implementation Period Ratings From To Development Objectives Implementation Progress Loan 2263-INO 1 November November 2006 Satisfactory Satisfactory Loan 2475-INO 1 December December 2008 Partly Satisfactory Partly Satisfactory Loan 2708-INO 1 December December 2010 Partly Satisfactory Partly Satisfactory 5.2. Project Performance Report Ratings (Loan 2264-INO [Asian Development Fund]) Implementation Period Ratings From To Development Objectives Implementation Progress Jan 2007 Dec 2007 Satisfactory Satisfactory Jan 2008 Dec 2008 Satisfactory Partly Satisfactory Jan 2009 Dec 2009 Satisfactory Partly Satisfactory Jan 2010 Dec 2010 Satisfactory Partly Satisfactory Jan 2011 Dec 2011 On Track Jan 2012 Dec 2012 Potential Problem Jan 2013 Dec 2013 On Track Jan 2014 Dec 2014 On Track Jan 2015 Dec 2015 On Track

13 vii D. Data on Asian Development Bank Missions Name of Mission Date No. of Persons No. of Person- Days Specialization of Members Loan 2263 Fact Finding Reconnaisance Review 12 December January February May 27 June a, b, c, i, j, h d, i, g, j Loan 2475 Reconnaisance Fact Finding Review 1 10 February April May 20 June d, a, c, i, b e, b, j Loan 2708 Fact Finding Loan Appraisal Program ompletion 21 June 30 June August 3 September November 30 November b, d, e, i, k b, d, e, i, j i Loan 2264/Grant 0064 Fact Finding 12 December January a, b, c, i, j, h Review Mission 14 May 27 June d, i, g, j Review Review 8 29 April May 20 June d, a, c, i, b e, b, j Midterm Review 15 November 17 December e, b, f, g Review 1 July 16 August e, b, g Review 25 November 20 December c, g, b Review 26 March 3 May b, g Project Review 10 June 16 July g, h Review Mission 4 6 November g Program ompletion February c, g, j a = economist; b = investment officer; c = infrastructure specialist or economist; d = public private partnership advisor; e = public private partnership specialist; f = procurement specialist; g = project officer; h = procurement officer; i = project implementation specialist; j = consultant; k = head, public private partnership advisory services.

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15 I. PROGRAM DESRIPTION 1. During , infrastructure investments in Indonesia dropped to an annual average of 3% of gross domestic product (GDP), from 8% of GDP during Private infrastructure investment in particular fell sharply from 1.8% of GDP during to 0.5% of GDP in This was largely due to the 1997 Asian financial crisis that necessitated the cancellation or suspension of many planned public and private infrastructure projects, as the Government of Indonesia needed to prioritize the cost of financial sector restructuring. To raise infrastructure investments to 5% 6% of GDP during , the government estimated the country s total infrastructure investment need at $65 billion, of which $30 billion (47% of the total investment need) was expected to be provided by the private sector (footnote 4). This ambitious target was deemed necessary to address the large infrastructure provision gap constraining growth and the reduction of poverty in the country. 2. To launch the private infrastructure investment agenda, in January 2005, the government held the Indonesia Infrastructure Summit that resulted in the Declaration of Action on Developing Infrastructure and Public Private Partnerships. Following the summit and based on the joint policy advice of the Asian Development Bank (ADB), Government of Japan, and the World Bank, in February 2006 the oordinating Ministry of Economic Affairs (MEA) released an infrastructure policy package that included 153 actions to be implemented in At the core of the package was a call for major private sector participation (PSP) in infrastructure, and public private partnerships (PPPs) were chosen as the preferred approach for increasing PSP. After the Asian financial crisis, PPPs were considered a suitable modality to revive PSP in Indonesia through better governance, strengthened risk management, and dedicated institutions To sustain the PPP reforms during the term of the National Medium Term Development Plan (RPJMN), the government requested ADB, the Japan International ooperation Agency (JIA), and the World Bank to provide medium-term policy reform support. In response, in October 2006 ADB approved the Infrastructure Reform Sector Development Program (IRSDP) comprising subprogram 1 (a $400 million ADB loan) to support (i) crosssector reforms for PPPs; (ii) reforms to strengthen PSP in nine sectors (land transportation, railways, sea and air transportation, roads, power, oil and gas, telecommunications, and water supply and sanitation); and (iii) PPP project transactions. The program also included an infrastructure project development facility (IPDF) to support the preparation and transaction of both national and regional PPPs, and $2 million in technical assistance (TA) to enhance PSP in infrastructure provision. 3 The IPDF was financed through an Asian Development Fund loan of $26.5 million equivalent and a $7.56 million grant from the Government of the Netherlands (administered by ADB). Subprogram 2 (a $280 million ADB loan) was approved in October 2008, 4 and subprogram 3 (a $200 million ADB loan) was approved in November JIA provided cofinancing in the form of a $100 million loan for each subprogram. 1 These included 33 cross-sector, 83 sector, and 5 local government actions, as well as 32 project transactions. 2 In the first half of the 1990s, unsolicited project proposals from politically connected private sector parties created large public sector liabilities that were exposed by the Asian financial crisis, particularly in the power sector. 3 ADB Report and Recommendation of the President to the Board of Directors: Proposed Program luster, Loans, Technical Assistance Grant, and Administration of Grant to the Republic of Indonesia for the Infrastructure Reform Sector Development Program. Manila (TA 4872). 4 ADB Report and Recommendation of the President to the Board of Directors: Proposed Loan for Subprogram 2 to the Republic of Indonesia for the Infrastructure Reform Sector Development Program. Manila. 5 ADB Report and Recommendation of the President to the Board of Directors: Proposed Loan for Subprogram 3 to the Republic of Indonesia for the Infrastructure Reform Sector Development Program. Manila.

16 2 4. During , the World Bank complemented the IRSDP through four annual infrastructure development policy loans (IDPLs). 6 The IDPLs focused on (i) enhancing the efficiency of government spending at the national and subnational levels; (ii) increasing private sector financing through PPPs; and (iii) improving governance in infrastructure provision (e.g., land acquisition, environmental protection, public procurement, and internal audit). 7 The 2009 IDPL amount was $250 million; all other IDPLs amounted to $200 million each. II. EVALUATION OF DESIGN AND IMPLEMENTATION A. Relevance of Design and Formulation 5. The IRSDP was fully consistent with the and RPJMNs, as well as with ADB s country partnership strategy. 8 Given its focus on PSP, the IRSDP was also well aligned with ADB s growing private sector operations in Indonesia, and had a comprehensive policy matrix covering 69 policy areas during Although unusually comprehensive in scope, 10 the matrix was seen by the government as an effective tool to support and monitor progress of the wide-ranging sector reforms that several ministries and agencies had to be deliver under the RPJMN. The policy matrix included cross-sector reforms that focused on institutionalizing PPPs as the main PSP modality, as well as sector reforms facilitating sector-specific PSP arrangements meant to be eventually phased out through PPPs The IPDF supported the PPP agenda by developing model projects. 12 The IPDF s design was complex: (i) it comprised national and regional project development facilities (PDFs) as revolving funds to deliver 10 national and 40 regional model PPPs, (ii) all economic infrastructure sectors and government agencies at the central and local government level were eligible to access the IPDF, and (iii) the concerned government contracting agency (GA) was to select the PPP project preparation consultants (PPs). As the IPDF did not focus on any sector, it was adequate to place it at the National Development Planning Agency s IDPLs built on the World Bank s support under (i) the First and the Second Technical Assistance Projects for the Public and Private Provision of Infrastructure (TAP4I-I and TAP4I-II) during totaling $58 million, and (ii) the $17.1 million Private Provision of Infrastructure Technical Assistance (PPITA) loan approved in May 2003 and closed in The PPITA loan supported policy and regulatory reforms to facilitate large-scale private infrastructure investment, including through PPPs. World Bank Implementation ompletion and Results Report on a Loan in the Amount of USD17.1 Million to the Republic of Indonesia for a Private Provision of Infrastructure Technical Assistance Loan (IBRD-46960). Washington, D. World Bank Implementation ompletion and Results Report on a Series of Loans in the Amount of US$850 Million to the Republic of Indonesia for Infrastructure Development Policy Loans I, II, III, and IV. Washington, D. Presidential Regulation No. 7 (2005) on the RPJMN, ; Presidential Regulation No. 5 (2010) on the RPJMN, ; ADB ountry Strategy and Program: Indonesia, Manila; ADB ountry Partnership Strategy, Indonesia, Manila. During , PPPs featured prominently in the annual policy packages adopted through the President Instructions No. 3 (2006), No. 5 (2007), and No. 5 (2008). In its original form in 2006, the policy matrix consisted of 69 actions with a total of 215 specific outputs: subprogram 1 had 63 outputs, subprogram 2 had 99 outputs, and subprogram 3 had 53 outputs. At appraisal of the relevant subprograms, the outputs of subprogram 2 were set at 74, and those of subprogram 3 at 69. For example, the local government finance and governance reform sector development program (phase 1) approved in October 2005 had 20 policy actions. The third development policy reform program and the capital market development program cluster (subprogram 1) approved in December 2007 had 17 and 46 policy actions, respectively. The World Bank s IDPL 1 had 7 triggers, IDPL 2 had 9, IDPL 3 had 10, and IDPL 4 had 11 triggers. Sector-specific PSPs, such business-to-business arrangements in the toll road and water concessions or individual power producer contracts, were anchored in sector laws or government regulations. PPPs were introduced through a presidential regulation, which was lower in the legal hierarchy than government regulations and sector laws. The list of the candidate model projects is in Appendix 4.

17 3 (BAPPENAS) Directorate of PPPs (PKPS). The piggybacked TA appropriately focused on supporting the Ministry of Finance (MOF) in strengthening risk management, developing infrastructure financing mechanisms for PPPs, and assisting the BAPPENAS during the IPDF s start-up. The TA also included support to the National ommittee on Acceleration of Infrastructure Provision (KKPPI), which was benefitting from ADB s and the World Bank s comprehensive support The IRSDP s use of the sector development program (SDP) modality was novel, as it incorporated programmatic policy-based lending (three separate subprograms) and a project loan. There was no financing to the involved sector agencies given the support through the World Bank s Private Provision of Infrastructure Technical Assistance Loan (footnote 6). The design of the policy component substantially remained the same during the IRSDP s life. 14 Key changes to the IPDF s design included (i) the merger of the national and regional PDFs in 2011 due to the non-extension of the Government of the Netherlands grant, (ii) the selection of the IPDF consultants by BAPPENAS rather than by the GAs, and (iii) the dropping of the IPDF s revolving fund feature given the lack of a legal basis for reflow of funds to BAPPENAS. B Program and Project Outputs i. ross-sector reforms 8. The IRSDP supported establishing the legal and operational framework for PPPs in Indonesia through the adoption of the landmark Presidential Regulation No. 67 (2005). 15 The program also included the establishment of the following innovative financial sector mechanisms to support PSP infrastructure projects: (i) PT Indonesia Infrastructure Guarantee Fund (IIGF) to provide guarantees for PPP projects; (ii) PT Indonesia Infrastructure Finance (IIF), a majority privately owned infrastructure finance company, to provide equity and long-term debt to private sponsors; and (iii) PT Sarana Multi Infrastruktur (SMI), a fully government-owned infrastructure finance company, focusing on provision of equity and debt to infrastructure projects undertaken by state-owned enterprises. 16 A risk management unit was established at the MOF, and the framework on government financial support for PPPs was revised. The public service obligation (PSO) framework was implemented in the energy sector, and PSO payments were made to the State Electricity orporation (PLN) every 3 months providing it with the necessary liquidity to continue operations. Finally, the IRSDP facilitated development of the new land acquisition law (Law 2 [2012]), which was enacted in 2012 and became effective in January This law was a major reform aimed at addressing one of the most important constraints affecting PPP project delivery in Indonesia. At the same time, the IRSDP s cross-sector institutional reforms have not performed as expected: (i) the KKPPI was not functioning given its large composition and lack of political support, (ii) no central PPP and PSO units were formed at the KKPPI, and (iii) PPP nodes at line ministries have not become operational The KKPPI was established in It was cochaired by ministers of the MEA and BAPPENAS and included the ministers of finance, home affairs, energy and mineral resources, public works, transportation, communications and informatics, and SOEs, as well as the cabinet secretary. ADB supported the BAPPENAS part of the KKPPI Secretariat through a $2 million TA (ADB Technical Assistance to the Republic of Indonesia for Support for Infrastructure Development. Manila). The World Bank s PPITA project supported the MEA part of the KKPPI Secretariat, as well as the ministries of transport, public works, and energy and mineral resources. At the time of the IRSDP s approval, the subprogram 2 and 3 loans were each expected to be $300 $400 million. In reality, the loans amounted $280 million for subprogram 2 and $200 million for subprogram 3. As amended through Presidential Regulations No. 13 (2010), No. 56 (2011), and No. 66 (2013), which improved the provisions on unsolicited proposals, PPP agreements, and the government s support and guarantees to PPPs. Details on the IIGF, IIF, and SMI can be found on their websites: and

18 4 ii. Sector-specific reforms 9. Transportation. To separate policy and regulatory functions from operations, the IRSDP covered the adoption of several laws, including Law 22 (2009) on road traffic and transportation, Law 23 (2007) on railways, Law 17 (2008) on seaports, and Law 1 (2009) on aviation. Government Regulation 15 (2005) on toll roads (i) established a new regulatory body, the Indonesian Toll Road Authority; (ii) ended the monopoly of Jasa Marga, the toll road SOE; and (iii) allowed toll road PSPs. 17 Tariff regulations based on cost recovery principles have been adopted. Despite being provided for in Law 22 (2009), the road preservation fund was not implemented Energy. New laws on energy (Law 30 [2007]) and electricity (Law 30 [2009]), along with the required implementing regulations, were introduced under the IRSDP enabling PSP in the power sector on the basis of both competition and direct award. During the IRSDP, several power purchase agreements using the electricity law s framework were signed. In the oil and gas subsector, reforms were undertaken to improve infrastructure master planning, promote gas in the national policy mix, remove fuel subsidies, and promote unconventional oil and gas production. 11. Water supply and sanitation. Key IRSDP-supported reforms in this sector included improving the performance of regional water utilities (PDAMs), restructuring the PDAMs debt, setting full cost recovery tariffs for water, streamlining PSP procedures in the water supply and sanitation sector, and establishing a water sector regulator. 19 However, the PSO mechanism for the PDAMs was not implemented as intended due to the lack of a legal framework. The PDAMs lack the necessary autonomy and are generally unable to access commercial funding. 12. Telecommunications. Among the IRSDP-supported reforms were the introduction of new tariffs for fixed-line and mobile phones, the adoption of regulation on interconnection allowing a move from revenue sharing to a cost-based approach for tariff setting, the adoption of an operational framework for the sector regulator, and the development of a universal service obligation policy. iii. Project Transactions 13. This IRSDP component focused on preparation and transaction of 10 model national and 40 regional PPP projects mainly in the transportation, energy, water supply, and solid waste sectors in accordance with the PPP framework. 20 This was to be attained through an IPDF composed of three outputs: (i) PPP project preparation and transaction execution, which included a national PDF (NPDF) and a regional PDF (RPDF); (ii) technical advisory services (TAS) and capacity building; and (iii) procurement and administrative services (PAS). 21 In May 2011, the NPDF and RPDF were merged into a single PDF. Overall, the IPDF supported 31 potential projects, three of which went through bidding (none reached financial close during the Before 2004, toll road concessions were possible only through cooperation with Jasa Marga. The list of dropped outputs is in Appendix 3. The water supply and sanitation sector also covered the solid waste management reforms, such as the adoption of Law 18 (2008) on municipal waste management. This output also included other reforms such as the development of standard bidding documents and concession agreements for toll road, airport, port, power plant, and water supply PSP projects. For item (i), PPs were recruited against the requirements of specific projects and based on the defined terms of reference. For items (ii) and (iii), two separate consulting firms were initially recruited. In May 2011, the contract with the TAS firm was terminated and its roles and responsibilities were assigned to the PAS firm.

19 5 IPDF s life), and seven reached the transaction stage. 22 After the introduction of availabilitybased PPPs through Presidential Regulation No. 38 (2015) and the full roll-out of the new land acquisition framework in 2015, demand for the IPDF increased. By the end of 2015, the IPDF had helped retender seven toll road projects and prepare the transaction of an information and communication technology project that was successfully bid out and financially closed in Program and Project osts 14. Program. The overall cost of reforms under the three IRSDP subprograms was estimated at $5.2 billion, of which ADB provided loans totaling $880 million and JIA provided loans totaling $300 million. 23 Project. At appraisal, the IPDF s cost was estimated at $38.80 million, comprising (i) the ADB loan of $26.60 million, (ii) the Government of the Netherlands grant of $7.56 million, and (iii) the government s contribution of $4.70 million. At appraisal, the cost allocation was (i) 56% for project preparation and transaction; (ii) 31% for TAS and capacity building; (iii) 8% for PAS; and (iv) 5% for interest, fees, and unallocated funds. However, as the Government of the Netherlands did not extend the closing date for its grant, this closed on 30 November 2010, with only $2.95 million (39%) of the funds disbursed. At completion, the actual project cost was $28.00 million, comprising (i) the ADB loan of $22.20 million, (ii) the Government of the Netherlands grant of $2.95 million, and (iii) the government s portion of $2.90 million. 24 At completion, the cost allocation was (i) 38% for project preparation and transaction; (ii) 47% for TAS; (iii) 10% for PAS; and (iv) the remaining 5% for interest, fees, and unallocated funds. The larger-than-planned share of TAS was needed to ensure adequate completion of the work of PPs to enable timely initiation of the procurement action. D. Disbursements 15. Program. Disbursement under the IRSDP policy component followed the simplified procedures and related requirements for program loans. All three subprogram loans were disbursed in single tranches upon declaration of effectiveness: a $400 million loan for subprogram 1 was disbursed on 29 November 2006, a $280 million loan for subprogram 2 was disbursed on 19 December 2008, and a $200 million loan for subprogram 3 was disbursed on 29 December Project. Though the IPDF loan was declared effective on 29 November 2006, the initial disbursement was only made on 2 October 2008 due to the delayed recruitment of TAS and PAS consultants. By the original completion date in September 2012, the IPDF could only disburse 46.5% ($12.3 million) of the ADB loan. As most of the IPDF consultants were based outside of Indonesia and all consultant contracts were administered in BAPPENAS, the project adopted the direct payment procedure. E. Program and Project Schedule 16. Program. Subprogram 1 covered January 2005 September 2006, subprogram 2, October 2006 September 2008, and subprogram 3, October 2008 September Project. IPDF was scheduled to start in the first quarter of 2007, but, due to delays in procuring the TAS and PAS firms, implementation began in May PAS were mobilized in May 2008 and TAS in October The IPDF was originally meant to be completed by 30 September 2012; however, it was extended twice, first to 31 August 2014 and then to 31 December 2015, for a 22 The list of all IPDF-supported PPP projects is in Appendix In parallel, the World Bank provided a total of $850 million through its IDPLs. 24 The unutilized part of the ADB loan amounting to $4.7 million was cancelled. 25 The periods of subprograms 2 and 3 were both extended by 3 months to synchronize with IDPLs 2 and 4.

20 6 total of 40 months. The IPDF loan was closed on 29 February 2016, and the Government of the Netherlands grant was closed in November F. Implementation Arrangements 17. Program. BAPPENAS was the executing agency for the IRSDP. Key implementing agencies were the MEA, National Land Agency, Ministry of Energy and Mineral Resources, MOF, Ministry of Transport, Ministry of Public Works, and PLN. The KKPPI was responsible for overseeing the IRSDP s implementation and guiding and directing the line ministries in charge of the various infrastructure sectors. However, the KKPPI did not perform as effectively as expected (footnote 31). 18. Project. The PKPS established a project management unit (PMU) to administer the IPDF. A project steering committee (PS), chaired by the BAPPENAS deputy chairman for infrastructure affairs, was to be established to serve as a high-level decision-making and guiding forum for NPDF and RPDF; 26 however, it was largely inactive and the director of the PKPS performed its functions. Upon approval of IPDF support, GAs were supposed to appoint a dedicated team to oversee project preparation on their behalf; however, no teams were appointed and the GAs only provided in-kind contribution (office space) to the PPs engaged by BAPPENAS. The PMU was meant to monitor the IPDF through a project performance monitoring system (PPMS). G. onditions and ovenants 19. Program. All three subprograms policy actions were accomplished prior to Board approval of the relevant subprogram. Under subprogram 2, the covenant on program monitoring was partly complied with, and under subprogram 3, the covenants on progress and completion reports and on program monitoring were not complied with as no dedicated reports were submitted to ADB. Project. IPDF loan agreement had numerous covenants, of which the following were not complied with: (i) the role of the PS as a decision-making body over the IPDF, and (ii) the establishment of PPP regional units. The partly-complied-with covenants relate to (i) project review and monitoring (the PPMS was not implemented), (ii) the disclosure of environmental information under IPDF-prepared projects, 27 (iii) the effective mainstreaming of PPP project preparation in the GAs annual work plans, and (iv) the establishment of the central PPP unit. The partly- or non-complied-with covenants did not materially affect the IRSDP s performance. Details on compliance with the covenants of the subprograms and IPDF s loan agreements, including the reasons for partial or non-compliance, are in Appendix 5. H. Related Technical Assistance 20. The IRSDP included a piggybacked TA of $2 million for enhancing PSP in infrastructure provision. It became effective on 12 April 2007, with an original closing date of 31 December The TA had four components: (i) enhancing PSP- and PPP-related risk management, (ii) establishing sound frameworks for PSP- and PPP-related infrastructure funds, (iii) strengthening communication and social marketing for PSP and PPP reforms, and (iv) providing start-up support to the IPDF. The TA was completed on 30 June 2013 after a total extension of 18 months, having utilized $1.64 million. The TA was effective in delivery of outputs (i) and (iv), 26 The PS was supposed to comprise senior representatives of the MEA, MOF, Ministry of Home Affairs, and concerned line ministries, and a representative of the associations of regional governments as a resource person. 27 Environmental impact assessments could not be disclosed due to coordination issues.

21 7 while outputs (ii) and (iii) have been less effective. Overall, the TA is rated successful. 28 I. onsultant Recruitment and Procurement 21. Under the IPDF, 17 consulting firms and 12 individual consultants were engaged for PPP project preparation and transaction purposes. One consulting firm was engaged for TAS and one consulting firm for the PAS assignment. All consultants were recruited in accordance with ADB s Guidelines on the Use of onsultants (April 2006, as amended from time to time). The consultant selection was delayed significantly due to the centralization of consultant recruitment in the PKPS as well as the PMU s limited resources to cope with selecting many consulting firms based on a technically and institutionally complex scope of work. 29 On average, it took 7 months to recruit a consulting firm for PPP project preparation. J. Performance of onsultants, ontractors, and Suppliers 22. The performance of the TAS consulting firm was less than satisfactory, resulting in the termination of its contract in the second year of engagement and the merger of the TAS with the PAS contract. The performance of the PAS consulting firm was satisfactory. The PPs performance was less than satisfactory due to the lack of national PPP expertise and the inadequate provision of international PPP expertise due to budget considerations. 30 Inadequate performance of PPs led to ad hoc solutions, such as the establishment of sub-teams comprising TAS members to improve the PPs outputs and meet the timelines and expectations of the GAs and BAPPENAS. K. Performance of the Borrower and the Executing Agency 23. Program. There was strong high-level government commitment to IRSDP reforms, especially during subprogram 1. However, involvement and ownership by midlevel government officials was mixed and limited in the case of some line ministries and SOEs, slowing reforms during subprograms 2 and 3. As the top decision-making committee for PPPs in Indonesia, KKPPI was less effective in facilitating the country s PPP program. 31 Despite these challenges, BAPPENAS ensured overall coordination, oversight, and follow-up with the line ministries and agencies on the IRSDP s comprehensive reform agenda. It also facilitated the fulfillment of administrative requirements, and was a constructive counterpart to ADB. 24. Project. The IPDF lacked strategic guidance, as the KKPPI and PS were largely inactive. The PKPS performance in screening, selecting, and appraising (compliance vetting) the PPP projects was impaired by its lack of personnel experienced in risk management, financial modeling, and the economic analysis of PPP projects. The PKPS often had to rely on 28 The TA completion report is in Appendix Originally, the intention was to have GAs procure the PPs; however, this was not explicitly stated in the IPDF loan agreement. Although the GAs were allowed to procure consultants (MOF Regulation 156/PMK.07 (2008) on the Guidance on the Deconcentration and Assistance Task Funds), this did not occur due to BAPPENAS previous experience of remaining liable before the auditor for all matters although funds had been transfered to local governments. Hence, it was decided that BAPPENAS would procure the PPs. 30 The IPDF s implementation was affected by the national consulting industry s low capacity for PPP project preparation and transaction. The contracts had been initially sized assuming that most inputs would come from national experts, who were mostly good sector specialists but lacked expertise in the economic, financial, procurement, and legal aspects of PPP projects. Eventually, the IPDF could not attract many reputable international firms specializing in PPP project development. 31 The KKPPI s performance was partially affected by the government s push for non-ppp PSP projects, as the PPPs were increasingly perceived as requiring much more time and effort than other PSP modalities.

22 8 TAS and PAS to perform its screening and gatekeeping role. There was insufficient coordination between BAPPENAS and MOF (resulting in uncertainty regarding the government financial support that affected the pace of bidding of PPP projects), and between the PKPS and the BAPPENAS sector directorates. The PPMS was not implemented. Despite its constrained staff resources, the PKPS did substantial work on capacity building and socialization of PPPs, especially with the local governments that were unfamiliar with PPPs. 25. Despite institutional coordination and capacity constraints, the government continued to implement the IRSDP, which proved to be a useful tool to strategically maintain the PPP and PSP reform agenda in the government bureaucracy. Overall, the performance of the borrower and executing agency is rated satisfactory. L. Performance of the Asian Development Bank 26. Program. ADB, together with JIA and the World Bank, provided important analytical advice to the government during the design and implementation of the PSP and PPP reforms. ADB, through its staff or consultants, provided quality and timely support to BAPPENAS, the MEA, the MOF, and other key agencies for the IRSDP reforms. The supervision of the IRSDP reforms was continuous and benefitted from the project team leaders location in ADB s Indonesia Resident Mission. ADB, JIA, and the World Bank coordinated closely throughout the IRSDP period. The complex reporting requirements specified in the subprograms loan agreements were unevenly implemented, often substituted by progress reports under the associated TA. Overall, ADB s performance under the program component is rated satisfactory. 27. Project. The IPDF s complex design and ambitious targets did not reflect the weak capacity of (i) the PKPS to perform the gatekeeping function, and (ii) the national consulting industry to deliver the required quality of PPP project preparation and transaction. Moreover, the IPDF s design required close monitoring by a staff with PPP experience. After 2011, project administration was assigned to resident mission staff with limited knowledge of project finance and PPP transaction advisory. Due to the resident mission s administration of the IPDF, ADB remained well informed of project progress and processed government requests for changes to the project and various consultant contracts in a timely fashion. Supervision reports were generally timely and reflected the key project administration information. The inactivity of the PS and KKPPI required intensive coordination by ADB with PKPS, MOF, and GAs. ADB, however, was unable to perform this coordination. ovenant compliance management was uneven. Overall, ADB s performance under the project component is rated less than satisfactory. III. EVALUATION OF PERFORMANE A. Relevance 28. Given the constrained fiscal space after the Asian financial crisis and growing infrastructure provision gap, the IRSDP s focus on raising private investment in infrastructure was highly relevant and fully aligned with the government s development plans and ADB s country partnership strategy. Use of the programmatic approach to policy reforms was the right way to flexibly support the legal and institutional changes that required time to design and implement, especially considering the PPPs novel nature, the size of the country, and the decentralized nature of the government. It was also appropriate to support the development of the first batch of PPP projects to establish a track record in the market and build the GAs trust in PPPs as an effective modality to contribute to sector infrastructure investment plans. Despite the design issues discussed in paras. 5 8 and lack of progress in PPP project delivery, IRSDP s

23 9 agenda has remained the government s priority over the years. Hence, the IRSDP is rated highly relevant. B. Effectiveness in Achieving Outcome 29. At the outcome level, the IRSDP aimed to increase (i) total infrastructure investments, (ii) the electrification ratio, (iii) access to piped water connections (changed under subprogram 3 to an increase in PDAM investments), and (iv) the share of national roads in good or fair condition. 32 Total infrastructure investments increased during , but dropped in 2009 following the global financial crisis and remained at about 3% of GDP until Total infrastructure investments were mainly driven by SOEs and non-ppp infrastructure investments, while the focus of IRSDP was on PPPs and associated government spending. There was good progress with the electrification ratio that rose from 62% in 2004 to 85% in The national roads condition also improved, but more slowly than expected: by 2015, only 94% of national roads were in good or fair condition against the target of 100%. The least progress was achieved in the water supply area: (i) annual growth of household connections averaged 390,000 during 2006 against the target of 1 million new connections annually, and (ii) the PDAMs investment capacity has remained insufficient to meet the network growth demand. 30. The first output on the cross-sector policy, institutional, and legal framework has substantially achieved the expected results. Specifically, this output included (i) establishing the legal and regulatory framework for PPPs; (ii) maintaining central government s infrastructure budget, including the budget for direct and contingent liabilities related to PPP and PSP projects; (iii) setting up the IIF, SMI, and the IIGF as a the country s first nonbanking financial institutions specializing in infrastructure finance and guarantees; (iv) developing a new land acquisition framework and improving the financing arrangements for land acquisition in the public interest; (v) developing and operationalizing the PSO subsidy mechanism in the energy sector; and (vi) setting up and operationalizing although with a mixed degree of independence and efficacy regulatory bodies in the toll road, downstream oil and gas, telecommunications, and water supply sectors. This output also supported the development of a rolling pipeline of projects through the BAPPENAS annual PPP books. 33 Reforms not achieved under this output include the KKPPI s intended role as the government champion of infrastructure and PPP reforms, and the establishment of a central PPP unit. 31. Under the second output on sector-specific reforms, critical laws and regulations were passed on aviation, electricity, road traffic and transportation, shipping, railways, and municipal waste management that promote competition and PSP in these sectors. The following objectives were partly achieved: full cost-recovery tariffs, improved efficiency and wider sector application of the PSO mechanism, better integration and longer term planning of sector infrastructure development, spring-cleaning of stalled toll road concessions, the roll-out of e- procurement in public works, and the restructuring of PDAMs. 32. The IRSDP s third output on the facilitation of PPP project transactions was supported through the IPDF, which was designed to support the preparation and procurement of PPP projects. The design and monitoring framework (DMF) targeted at least 10 national and Under subprogram 2 the time horizon for measuring the entire program s outcome targets was Under subprogram 3, the time horizon was reduced to The details of the attainment of the IRSDP outcomes are in Appendix 1. During the IRSDP period the implementation of the PPP pipeline was constrained by the lack of mainstreaming of PPPs in sector development plans and infrastructure investment programs of line ministries and government agencies as a regular modality to deliver public investment projects.

24 10 regional PPP projects prepared and put to bidding. Overall, support was extended to 31 potential projects, of which (i) three projects completed the procurement phase during IPDF period; (ii) two national and five regional projects went through procurement but were not awarded; (iii) feasibility studies for three projects were completed but procurement was not initiated due to delayed land acquisition and approval of government support; and (iv) prefeasibility studies were completed for 18 projects, but these were dropped due to (a) their unsuitability for PPPs, (b) a lack of or disruption in GA commitment (especially at the local level), (c) the lack of a coordination mechanism to ensure timely action by central and local government agencies, and (d) the ultimate unavailability of critical government inputs (land or water resources). 34 Private participation in the airport, port, and railway sectors turned out to be problematic due to the predominance of SOEs. Though the IPDF brought a total of 10 projects to the procurement phase (three awarded projects plus two national and five regional projects that have not completed the procurement), this fell below the minimum number of PPPs that it was meant to bring to bidding The objective of the ISRDP s program component (cross-sector and sector reforms) to build the critical mass of the legal and institutional framework for PPPs and PSP was substantially achieved. Hence, the program component is rated successful. The IPDF, the IRSDP s project component, was not successful in bringing the minimum number of PPPs to bidding. Therefore, the project component is rated less than successful. Overall, IRSDP has been adversely affected by an exogenous shock, the global financial crisis of The prominent role of SOEs (with which the private sector was expected to compete for PPP projects) in the delivery of public services, and the readiness of the then land acquisition framework for PPPs impaired the IRSDP more than anticipated. 36 Thus, and considering the contribution of the program and project components to the operation s overall size, on balance the IRSDP is rated effective.. Efficiency in Achieving Outcome and Outputs 34. Program. The IRSDP s total financing is estimated at $5.2 billion, including ADB and JIA cofinancing of $1.18 billion. The key objective of IRSDP surge of private investment through the PPP modality could not be fully achieved during the program s life, as only one of the model PPP projects reached financial close during IRSDP period. 37 However, it helped facilitate private investment in the electricity, toll road, and telecommunications sectors, 38 and establish important and efficient government and private financing mechanisms for PPPs. Hence, the program component is rated efficient. Project. Despite the IPDF s 40-month extension, only 10 PPP projects (one-fifth of the original minimum target of 10 national and 40 regional PPPs) were brought to bidding. Moreover, only 72% of the IPDF was eventually utilized The entral Java Power Plant PPP project (one of the IRSDP s model projects) reached financial close in June 2016, 5 years after the contract was awarded. This delay was due to land acquisition issues. The list of IPDFsupported projects in in Appendix 4. omplementary to the IPDF, ADB also supported selected GAs through a $0.5 million TA on capacity development assistance for PPPs (TA 7729-INO). This TA, approved in December 2010 and completed in June 2014, helped (i) the city of Batam prepare the Batam Municipal Solid Waste Management PPP project, and (ii) the city of Bandar Lampung prepare an implementation plan for the Lampung Water Supply PPP project. The strong role of SOEs in infrastructure stems from Article 33 of Indonesia s constitution that provides that the production sectors vital to the state and affecting the livelihood of a considerable part of the population, as well as the land, water, and the natural resources contained within them are to be controlled by the state. The control is perceived to require state ownership rather than regulation. Tangerang Water Supply Project supported under the World Bank s PPITA reached financial close in late It followed the provisions of Presidential Regulation No. 67 (2005), but did not require government financial support. During , average annual non-ppp private investment was about $742 million in electricity, $1.7 billion in information and communication technology, and $202 million in transport.