Promote private investment in infrastructure projects by providing government guarantees

Context

The rapid growth in Indonesia’s urban areas compared to other countries in Asia, coupled with migration to cities, required a scale-up in infrastructure investment by the Indonesian government to provide adequate urban infrastructure for its people. There was a 3% increase in urban population year-on-year between 2000 and 2010.

Problem

• To accelerate the development of its infrastructure, Indonesia needed to invest more than the annual budgetary allocation in greenfield infrastructure.
• Due to prevailing fiscal constraints, the government found it challenging to have access to the funds needed to finance infrastructure projects.
• To attract international investors, Indonesia needed to establish a strong track record for successful PPP delivery.

Stakeholders involved

• Government of Indonesia
• World Bank Group
• Japan International Cooperation Agency
• Asian Development Bank

Innovation

• The Government of Indonesia set up Indonesia Infrastructure Guarantee Fund (IIGF) as a state-owned enterprise (SOE) under the Ministry of Finance (MoF).[1]
• The IIGF leverages private investments in infrastructure projects by providing government guarantees or credit enhancements to PPP projects that are financially feasible.
• Given the limited capital base, the IIGF guarantees are backed up by co-guarantors, including the MoF and the World Bank Group.

Timeline

Results and impact

• IIGF provided advice to contracting agencies on improving PPP project preparation so that projects meet its appraisal standards and comply with applicable regulations and criteria prior to guarantee issuance.
• The availability of the IIGF guarantee increased the certainty of private sector participation and financing for infrastructure development in Indonesia.
• IIGF has provided guarantees to 21 PPP projects worth IDR210 trillion (USD14.6 billion) and two guarantees for a direct loan worth IDR6 trillion (USD416 million) between 2010 and 2020.[2]

Key lessons learnt

• Procurement: The IIGF had to overcome hurdles to reach a consensus with other government institutions and ministries when it was first established. It also struggled to convince investors to join government projects, so the IIGF did not perform well in the beginning. It was essential to show how a guarantee fund can prove valuable to long-term infrastructure projects by facilitating better stakeholder engagement.
• Governance: As the single body to appraise infrastructure PPPs that sought guarantees, IIGF provided consistency, clarity, and standardised procedures as well as better management of MoF fiscal risk vis-à-vis normal government guarantees.
• Governance: It was critical for the IIGF to build an ecosystem with experts in alternative financing and PPP schemes such that IIGF's role as development risk manager was strengthened.

[1] Rate used was USD1 = IDR14,414.00.

[2] IIGF is capitalised by contribution from the Government of Indonesia’s budget (authorised capital of approximately USD1 billion). In addition, IIGF can access financial assistance provided by the World Bank to provide World Bank-supported IIGF guarantees.