Indonesia: Inclusive Growth through Improved Connectivity Program (Subprograms 1 and 2)

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Lessons

A good selection of policy triggers ensures a good start to the reform agenda, which in turn will sustain the reforms over the medium- to long-term.

The selection of policy triggers should be in line with the reform strategy and milestones should be carefully defined in accordance with the reform sequence and targeted outcomes. A good selection of policy triggers ensures a good start to the reform agenda, which in turn will sustain the reforms over the medium- to long-term. Some of the policy outputs of this program were incapable of triggering reforms due to the non-linear sequence of the reform agenda and the lack of a roadmap of reform milestones. For example, the new policy of reducing transportation costs from the western to the eastern region was not sustainable due to the lack of a clear roadmap of reform milestones in transportation costs and port productivity. Future similar programs should ensure better alignment and sequencing of reforms, and the development of a roadmap for achieving all the reform milestones.

Building on past results and experiences enables continued success in the implementation of reforms.

The program design was based on the results and experiences under previous programs by the government, ADB, and other development partners notably, the Infrastructure Reform Sector Development Program. This key strength helped enable this program to achieve planned outputs and outcomes efficiently and effectively. Future similar initiatives may as well draw on the lessons and insights gained under this program to enable continued success in the implementation of reforms.

Achieving palpable results in rural poverty reduction requires targeting the improvement of the connectivity between poor rural areas and economic centers.

Poor access to economic centers is one of the key causes of the more severe poverty levels in the rural areas compared to the urban centers and nationally. This concern provided a strong argument for the second component of the program, the improvement of intra-island connectivity. However, as there was no reform that targeted improving the connectivity between rural areas and economic centers, program impact on rural poverty reduction was marginal. Future reform programs should carry on this concern and aim for rural poverty reduction as a key result area.

Connectivity is best enhanced through integrated transport development.

While the program underlined the pivotal role of infrastructure development to improve connectivity, the port master plan prepared by the Ministry of Transport and the national road network plan formulated by the Ministry of Public Works and Housing had not addressed the need for an integrated development of the land and sea transport infrastructure and services. An integrated approach to the development of these two subsectors would enhance connectivity and strengthen the integration of the commodity supply chain in logistics planning.

Better connectivity combined with a strong fiscal policy can significantly reduce the costs of transport and logistics.

The government’s policy on pioneer services has improved inter-island connectivity significantly and made a positive impact on transport and logistics costs. The policy has effectively addressed the disparity of trade between western and eastern parts of Indonesia and provided an incentive for more economic activity between the two regions. The financial scheme to support pioneer services was adopted and has been improved beyond program completion, resulting in the significant reduction of transport and logistics costs and even reducing several commodity prices in the eastern region. This was achieved through the combination of improved connectivity and fiscal policy initiated under the program.

Background

Underdeveloped infrastructure and poor domestic and international connectivity prevented Indonesia from achieving its growth potential. Furthermore, the pace of economic growth and job creation was insufficient to reverse the declining poverty reduction rate and widening rural-urban disparity as well as close the socioeconomic gap between the western and eastern regions.

To address the situation, the government adopted the Master Plan for the Acceleration and Expansion of Indonesia’s Economic Development, 2011–2025 (MP3EI). The MP3EI had 3 pillars: (i) the development of six economic corridors, (ii) the improvement of domestic and international connectivity, and (iii) the enhancement of human resources and technology. In response to a government request, the Asian Development Bank (ADB) approved in November 2013 a $700 million loan for the Inclusive Growth through Improved Connectivity Program, a policy-based loan that focused on the second pillar and provided a platform for coordinating the programmatic support of ADB and other development partners.

The program built on ADB’s earlier policy-based loans that supported government reforms to improve regulatory frameworks, open key infrastructure projects to private sector participation including public–private partnerships (PPPs), increase competition, and enhance infrastructure. It had 2 subprograms and 4 components: (i) strengthening coordination and the regulatory framework for connectivity and infrastructure development, (ii) improving intra-island connectivity, (iii) improving inter-island connectivity, and (iv) improving international connectivity.

Key program outputs included the development of new PPP budget support mechanisms and institutions such as viability gap funding (VGF) policy, procedures, and operational frameworks; the issuance of implementing regulations for the Law on Land Acquisition for Public Use that enabled the completion of land acquisition processes in key infrastructure projects; the implementation of a 15% target increase in government spending on road maintenance and reconstruction; improved inter-island connectivity planning and policy and more competitive pricing for cargo handling; a national port master plan; improved information and communication technology connectivity between eastern and western Indonesia; and various issuances to support the development of a single-window system and the deregulation of export–import procedures.

The delivery of key outputs enabled the program to achieve its 3 main outcome targets: (i) reduced land acquisition delays in key projects supporting connectivity, (ii) increased share of public and private investment in the transport sector, and (iii) improved dwelling time in Tanjung Priok Port, Indonesia’s busiest seaport.

Public transport sector investment rose by 18.2% in 2013 and by 50.4% in 2015, while domestic private sector investment grew by 53.0% in 2013 and 35.8% in 2015. The land acquisition policy and increased government expenditure strengthened infrastructure projects by state-owned enterprises, which in turn stimulated private sector investment. By end-2016, 7 PPP projects were under construction and 2 more were officially closed. Port productivity was also improved, as the average dwelling time in Tanjung Priok Port was more than halved from 6.7 days in 2011 to 3.14 days in 2016.

ADB’s Southeast Asia Department rated the program successful. Indonesia’s National Development Planning Agency (BAPPENAS) acted as the executing agency. Six line ministries and government institutions served as implementing agencies.

Project Information

Project Name:

Inclusive Growth through Improved Connectivity Program (Subprograms 1 and 2)

Report Date:

July, 2017

Main Sector:

Transport

Country:

Indonesia

Project Number:

46093-001 46093-004

Project/Modality:

Loan

Technical Assistance

Themes:

Inclusive Economic Growth

Regional Integration

Private Sector Development and Private Sector Operations

No gender elements

Sub Sector:

Transport policies and institutional development

Report Rating:

Successful