Infrastructure Problems in Indonesia: Key Lessons from Phase I of IndII
David Ray,
IndII Facility Director
2
Structure of Presentation
• The infrastructure challenge
• Context – Urbanisation pressures
• Expenditure and efficiency – The case of roads
• Institutional problems undermining delivery of infrastructure services – Policies and planning issues, due to institutional failure/dysfunction
– Examples in roads and water
• Results based financing to promote institutional reform (output based aid) – AusAID’s water hibah program (implemented by IndII)
3
The challenge
“Indonesia has the potential to achieve economic growth of up to 8%. However, so far economic growth has been sub-optimal due to infrastructure constraints”.
“ About 6-7 years ago, the number one business hurdle in the real sector...was the rule of law and corruption. Currently the number one obstacle is inadequate infrastructure”.
Fauzi Ichsan, on the launch of the Standard Chartered report ‘Indonesia: Infrastructure Bottlenecks” (Kompas 22 Feb 2011)
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The context: increasingly urbanised nation
2010 2050 Change
Population (millions) 237.6 327 89.4
% Urban 50% 75%
Urban population (millions) 118.8 245.3 126.5
Population growth rate 1.1% 0.5%
0
50
100
150
200
250
300
350
2010
2012
2014
2016
2018
2020
2022
2024
2026
2028
2030
2032
2034
2036
2038
2040
2042
2044
2046
2048
2050
Po
pu
lati
on
(mill
ion
s)
Indonesia: Forecast Population Structure 2010 - 2050
Urban
Rural
5
Piped water urban coverage declining
25%
30%
35%
40%
45% 19
92
1994
1996
1998
2000
2002
2004
2006
Urb
an H
ou
seh
old
s Se
rve
d
Urban Water Coverage
Due to a lack of local govt investment since the late 1990s
6
Focus on urban transport
•Wealth and motorisation: positive relationship in most cities
0
100
200
300
400
500
600
700
800
900
0 10 20 30 40 50 60
GRP per capita ('000 US $)
No
of c
ars
per 1
000
popu
latio
n
Tokyo
New York
Atlanta
Rome
Singapore
Hong Kong
Taipei
Seoul
Bangkok Athens
Paris
London
JKT BJG
Shanghai MNL
Frankfurt
Houston
Source: STREAM study, EASTS 2008
7
Indonesian City motorisation rates (car)
• Jakarta well ahead, but motorisation in other cities will
increase as incomes grow
0.00
50.00
100.00
150.00
200.00
250.00
300.00
350.00
400.00
450.00
0.00 0.01 0.02 0.03 0.04 0.05 0.06
Pangkal Pinang
Pontianak Banjarmasin
Malang
Kota Metro
Cilegon
Tegal
Yogyakarta
Semarang
Makassar
Bandung
Bogor
DKI Jakarta
Milyar Rupiah/Orang
Jumlah Kendaraan Roda 4/1000 Penduduk
Perbandingan Jumlah Kendaraan Roda 4 dengan PDRB Perkapita Tahun 2008
PDRB Perkapita
Balikpapan
Source: Kebijakan Pembangunan Infrastruktur Transportasi Massal Berbasis Jalan, A. Aldian Surabaya 2010
8
Other infrastructure issues
•Sanitation – Only 1% of urban households connected to piped sewerage (only
11 sewerage systems nation-wide).
– Septic tank seepage to aquifers – that also provide primary water source for 50% of urban population.
– Only half to two-thirds of solid waste is collected by LGs, and no sanitary land-fills are in operation (despite legal requirement)
• Inter-urban mobility – Most major airports (terminals) running at 200-300% capacity.
– Road speeds between cities, typically as low as 30-40 kmh (100-200% below capacity).
– Many major national ports have 10-14 days turnaround time.
On the face of it – urgent need for rapid scale up in investment...
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Increased expenditure in infrastructure
• Accurately calculating the total public spend on infrastructure is a difficult
and tedious exercise requiring access to detailed information from govt
agencies and enterprises, at all levels of government.
• Safe to assume that the national commitment has increased in recent years,
from around 2% of GDP in 2000, to 4-5% by the end of the decade.
10
Expenditure efficiency in national roads
While the budget over the past six years has risen significantly, the
actual output has stagnated or fallen over that period and the cost
per unit of output has risen dramatically. The efficiency of
translating budget into output has thus seriously declined.
Increasing budget commitment does not necessarily mean
translate to improved infrastructure outcomes: Consider national
highways
11
Institutional issues in the roads sector
• Range of issues undermining performance – Widespread neglect of routine maintenance
o Well resourced nationally, but performance not incentivised. $5000 per km should be more than enough to maintain national roads.
o LGs well (over) staffed, but lack budget. Incentive problems with force-account service delivery.
o Opportunities for performance based contracting
– Design failures and overloading o Most roads designed to fail, with only 8 ton axle limit max (should be at
least 16 ton). Coupled with widespread overloading, poor maintenance, roads are only lasting < 8 years (often just 2-4 yrs) instead of 12-20 yrs.
o Weighbridges are effectively revenue raising instruments for provincial governments, not a tool for regulating axle weights on national roads
– Problems in setting priorities o Default incremental approach to defer expenditure. Roads with poor
geometry and weak structure, require longer term renewal and alignment (resulting in higher initial investment, but lower costs overall)
o ‘Worst first’ approach - incentives to reconstruct/rehabilitate small sections rather than focus on maintaining larger network
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Institutional issues ...cont’d – Fragmentation and ‘high costs’ in procurement
o Large number of contracts (reportedly up to 7000) to provide 40,000 km of national highways. Contract size: 1-3 km, attracts weak firms.
o High transaction costs, lack of competition, weak fiduciary controls, poor controls on construction quality.
– Human resource management o DG Highways overstaffed: 1 staff per 5 km (versus international
comparators: 1 per 100-400 km). Preference for force account work particularly for maintenance.
o Difficult to promote outsourcing to more efficient private sector providers of maintenance services.
– Budget and planning o Difficult to plan over multi-year cycle. Funds often need to be expended
in short period (of just a few months), further undermining planning and construction quality.
o Budget allocation to fund existing arrangements/structures not desired outcomes.
o Moves to medium term expenditure frameworks (MTEF) and performance based budgeting (PBB).
Improving Asset Performance
1
1.5
2
2.5
3
3.5
4
4.5
0 5 10 15 20 25 30
EXPECTED LIFE
TARGET EXPECTED LIFE
ASSET AGE (yr)
LOW QUALITY, OVERLOADING ACTUAL
GOOD
FAIR
POOR
BAD
IMPROVED DESIGN, QUALITY
Reform Actions -
• Improve Quality and
Supervision
• Improve design for
loading & drainage
• Extend design life,
stronger designs
Observations –
• Low Survival =
( Actual Life /
Expected Life ) %
• Short Expected Life
ROAD ASSET DETERIORATION
Improving Asset Life: Budget Implications
0
2
4
6
8
0 5 10 15 20 25 30 35
PAVEMENT AGE (yr)
LOWER LIFE-CYCLE COST
& LESS DISRUPTION
POTENTIAL SAVING
30 PERCENT
CU
MU
LAT
IVE
SPEN
DIN
G
HIGHER INITIAL COST
SHORT LIFE POLICY
LONG LIFE POLICY
Action:
•Extend design life
Result:
•Better road condition
•Less disruption
•Lower life-cycle cost
•Budget savings
But note:
•Higher treatment cost,
shorter length
• Political patience!!
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Local water supply
•Range of institutional issues constraining water service delivery at the local level: – Traditional top down approach by central government, but little
incentive for LGs to maintain assets, or to invest own funds.
– Since decentralisation, LG investments have not kept pace with urban growth, and have fallen sharply. o Evidence of negligible investment by LG in PDAM equity (0.37% of
APBD budget funds in 2007).
o Evidence of substantial and growing reserves in LG Accounts (excess of IDR 90 trillion in 2006).
– LGs did see themselves responsible for water service delivery, rather this was the mandate of LG owned PDAMs (water utilities). Common view was that: o The PDAM is a commercial enterprise and should be self-financing,
despite the legislative obligation that LGs have to ensure their constituents have access to acceptable water services.
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Local water supply...cont’d
– LGs regulate water prices, and commonly lack the political will to allow their PDAMs to raise tariffs to allow, or go in the direction of cost-recovery (approx Rp 3000 per m3).
o Circular problem: LGs unwilling to raise tariffs due to poor service standards, PDAMs cannot raise standards due to lack of funds.
o Clear lack of mutual trust between PDAMs and their owners. PDAMs complain of LGs don’t understand their problems, and LG complain that PDAMs are not responding to LG needs. Hence any funds invested in water supply at local level often channelled through LG public works agency, creating further ‘ownership’ issues.
– Urgent need to improve the external governance environment for PDAMs, by improving LG commitment to, and investment in PDAMs:
o AusAID water hibah program using ‘results based financing.’
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Results-based financing
• Links payment to performance: – “Results based financing is an umbrella term that includes
output-based aid, provider payment incentives, performance-based interfiscal transfers, and conditional cash transfers. What these mechanisms have in common is that a principal entity provides a financial or in-kind reward, conditional on the recipient of that reward undertaking a set of predetermined actions or achieving a predetermined development goal. The ultimate goal is to increase the effectiveness of scarce public resources for the provision of basic services.” (World Bank 2010)
– Output based option used to (re) stimulate new LG equity investment in PDAMs, using new GOI fiscal transfer mechanism known as Hibah.
– Minimises fiduciary risks of using partner government systems: o funds released only after outputs are verified.
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AusAID water hibah
•Output based subsidy for water connections for 76,000 poor households: – Designed to stimulate LG equity investment in PDAMs and to
expand PDAM business into low-income segment.
– Uses GOI fiscal transfer systems and is part of broader GOI policy initiative to stimulate water sector.
– Consistent with ‘Jakarta Commitment’ to better use GOI systems and align donor programs with GOI policies and priorities.
– New mechanism, no precedents. Pioneering qualities.
•Key design features – Grant is 35-45%, roughly Rp 2-3 million, of connection cost.
– Paid to LG once connection is verified:
o 3 months working/billable connection,
o LG equity investment in PDAM.
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Water Hibah: Overall progress
500 500 383
500
-
750
1,500
1,000
500
1,000
-
1,000 992 850
1,000
600 730
1,150 1,200 1,300
732
2,000 2,000 1,900 2,000
4,779
2,850 2,650
2,404
3,000
2,000
1,500
3,060
2,201
4,000
450
2,041
-
1,000
2,000
3,000
4,000
5,000
6,000
KO
TA B
ALI
KP
AP
AN
KO
TA S
UR
AK
AR
TA
DK
I JA
KA
RTA
KO
TA B
AN
DU
NG
KO
TA B
AN
JAR
MA
SIN
KA
B. L
OM
BO
K T
IMU
R
KO
TA P
EKA
LON
GA
N
KO
TAJA
YAP
UR
A
KA
B. K
AP
UA
S
KA
B. L
AM
PU
NG
UTA
RA
KO
TA P
ALA
NG
KA
RA
YA
KA
B. B
AN
JAR
BA
RU
KO
TA B
OG
OR
KA
B. K
UD
US
KA
B. P
AN
DEG
LAN
G
KA
B. S
ITU
BO
ND
O
KA
B. M
UA
RA
EN
IM
KO
TA B
ALI
KP
AP
AN
KA
B. C
IAN
JUR
KA
B. S
UK
OH
AR
JO
KA
B. D
ON
GG
ALA
KA
B. B
AN
GK
ALA
N
KA
B. B
OYO
LALI
KA
B. J
OM
BA
NG
KA
B. C
ILA
CA
P
KO
TA P
AD
AN
G
KO
TA M
ALA
NG
KA
B. B
AN
JAR
KA
B. W
ON
OG
IRI
KA
B. S
ERA
NG
KA
B. W
ON
OSO
BO
KA
B. G
AR
UT
KA
B. K
UN
ING
AN
KA
B. K
LATE
N
KA
B. K
AR
AW
AN
G
KA
B. S
IDO
AR
JO
KA
B. C
IAM
IS
KA
B. B
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OR
KO
TA B
AN
JAR
MA
SIN
KO
TA P
ALE
MB
AN
G
Sanitation Water
Co
nn
ect
ion
s (
Un
it)
Status : 31 March 2011
Additional Hibah
Water Hibah Allocation
Sanitation Hibah Allocation
Installed
Verified
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Water Hibah: Cumulative progress
1,350 2,530
4,890
7,840
12,560
19,640
23,552
32,402
44,652
55,722
65,022
71,372
76,000
1,445
4,750
10,756 12,779
17,980
21,528
25,864
33,542
40,263
52,531
-
10,000
20,000
30,000
40,000
50,000
60,000
70,000
80,000
Co
nn
ect
ion
s (u
nit
)
Status : 31 March 2011
Cum.Target
Cum. Istalled
Pro
ject
De
sig
n A
pp
rais
ed
Fu
nd
ing
Ap
pro
ved
Gra
nt A
wa
rd N
otif
ica
tion
Gra
ntA
gre
em
en
ts S
ign
ed
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Lessons learned
•Effective grant program design features: – Outcome, not just output related:
o Ultimate objective should be governance related; i.e. Mainstreaming and promoting stronger LG commitment to road safety, sanitation etc; improving external governance of water utilities.
o Outputs will give us the photo ops, but it is the outcome (such as stronger institutional commitment to sanitation) that will have the long term development impact.
– Additionality, not redundancy:
o Grants should have transformational / catalytic qualities
– Pioneering:
o Paving the way for others to follow (e.g. Donors, GOI).
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Effective grant programming...cont’d
•5 “Cs” of effective grant program design o Conditionality: To ensure maximum impact from investment, grants
should have entry requirements that are aligned with developmental, institutional, and governance policy objectives
o Consolidation: Working with less not more LGs
o Contestability: LGs competing for grants by demonstrating capacity, commitment and fitness to execute the grant programs
o Consistency: multi-period grants to ensure longer run incentives
o Communications: building constituency for improved service delivery
0% 200% 400% 600% 800% 1000% 1200%
Average over 22 LGs Kota Malang
Kab. Garut Kab. Karawang Kab. Wonogiri Kab. Kuningan
Kab. Klaten Kab. Wonosobo
Kab. Serang
WSI water connections as a % of annual average, select PDAMs
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Abstract
Infrastructure Problems in Indonesia: Key Lessons from Phase I of the Indonesia Infrastructure Initiative (IndII) David Ray is the Director of the Indonesia Infrastructure Initiative (IndII), an AusAID-funded facility to promote economic growth through improvements in both the quality and quantity of Infrastructure in Indonesia, particularly in urban areas. To date, IndII has focussed on the water/ sanitation sector and the roads/transport sector as well as a number of cross-sectoral issues, such as infrastructure finance. This presentation will outline key lessons learned from the first phase of IndII, highlighting the main infrastructure problems and constraints; and their potential remedies, from both a policy and donor-action perspective. Central to the presentation, is the argument that institutional problems, rather than resource constraints, is the primary reason for infrastructure failures. Various examples will be drawn from the watsan and transport sectors to show how poor institutional coordination, capacity and commitment have undermined infrastructure delivery and outcomes. Time permitting; the discussion will also consider a new, innovative and promising mechanism for donors in the infrastructure sector known as results-based financing, covering output and performance based aid. The first phase of IndII is scheduled for completion in June 2011. It is expected that IndII will be extended beyond this date for a period of four years.
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