The Asian Development Bank (ADB) will provide US$428 million in loans to support Indonesia in its efforts to implement the critical reforms needed to develop its infrastructure and spur economic growth.
The agreement for the provision of the support funds was signed Thursday by ADB country director Edgar A. Cua and the Finance Ministry's director general for debt management, Rahmat Waluyanto.
The money will be used to finance the Infrastructure Reform Sector Development Program (IRSDP), a three-tracked support program that runs up until 2010, which is designed to help improve Indonesia's investment climate and involve the private sector in overcoming the country's huge infrastructure deficit.
The first part of the support program will be funded through a $400 million program loan to help improve the policy, statutory and institutional framework for public-private partnerships (PPP) so as to encourage large-scale private-sector investment in the infrastructure sector.
The loan has a 15-year term with a grace period of three years, with interest being calculated in line with the ADB's LIBOR-based lending facility.
The first part of the support program has been underway since January 2005, and is coordinated by the National Development Planning Agency (Bappenas) and the Acceleration of Infrastructure Provision Policy Committee (KKPPI).
Given that one of the most critical constraints on infrastructure development in Indonesia is the lack of adequate project preparation, the second part of the support program will take the form of a $26.5 million concessional project loan from the ADB, with the Dutch government providing another $7.6 million to set up a project development facility (PDF).
Support will be provided for preparing the 10 model projects offered at the infrastructure conference earlier this months, as well as some 40 projects in the regions.
The concessional loan has a 32-year term, and carries a 1 percent annual interest rate over the course of an eight-year grace period, and a 1.5 percent interest rate subsequently. It is expected that the support funds will eventually be converted into a self-sustaining revolving fund over time.
In addition, the ADB will provide $2 million in technical assistance grants to support the Finance Ministry in establishing a risk-management unit for the projects.
Ramesh Subramanian, ADB principal economist for Indonesia, said he hoped the reform support program would help increase infrastructure investment in Indonesia to 6 percent of GDP from only 2 percent at present.
Reform may be difficult and take time, Ramesh said, yet it was essential as the public sector alone was unable to meet investment needs, which the government expects to come to around $65 billion over the next five years.
Ramesh also stressed that a 3 percent increase in infrastructure investment would contribute an additional 1 percent to economic growth and a 1.5 percent reduction in poverty.
"The private sector has to be brought in. But private investors look for a level playing field between the public and private sectors, clarity in the regulatory framework and transparency in the bidding process."