Infrastructure as growth policy
Today, Indonesia constitutes the world’s 10th largest economy. With over 260 million people spread across 17,000 islands, a modern and efficient infrastructure is vital for connecting its people to Indonesian and global markets.
Improving Indonesian infrastructure is the top policy priority of President Joko Widodo. In the 2016 budget, the Indonesian government earmarked the highest amount ever allocated for infrastructure development (approx. USD $22.9 billion), which will remain a priority at least for the next four years, according to the 2015-2020 medium-term development plan.
Funding infrastructure investments
With over 24 state-owned enterprises (SOEs) across different sectors, Indonesia is well positioned to fund individual infrastructure projects since each SOE can potentially borrow from the financial markets.
But borrowing can be costly especially when an SOE issues a bond without the backing of a government guarantee. The challenge for the Indonesian ministry of finance was to develop a risk-sharing model so that SOEs could benefit from government-backed lower borrowing costs, but without exposing the national budget to undue fiscal burden. Specifically, they needed to find a robust way of measuring and managing the risks that could materialize should an SOE default on its debt before issuing a guarantee agreement.
“Governments issue guarantees so that the costs for the project or for the utility provided are lower, so that utility companies charge less to the people,” said Lalu Taruna Anugerah, Deputy Director of Contingent Liability, Ministry of Finance, Indonesia, at the 2014 World Bank Sovereign Debt Management Forum.
Developing the right model for evaluating risks for government guarantees
The Indonesian ministry of finance, based on its long standing relationship with the World Bank, partnered with the Government Debt and Risk Management (GDRM) Program of the World Bank Treasury to build capacity to assess and manage risks of providing government guarantees.
The first step in the partnership was bringing together practitioners from around the world in a forum where they could learn about the approaches used in other countries. The GDRM team conducted in-person, peer-to-peer workshops, hosted a seminar in Istanbul with experienced practitioners in the Turkish public debt office, and led online sessions. Countries like Colombia, South Africa, and Sweden also shared their experiences with Indonesia in these workshops. Evaluating what they had learned, the Indonesian Debt Management Office (DMO) compared the lessons and examples against the characteristics and limitations of their debt portfolio. Then they developed a new methodology specific to Indonesia with the support of the World Bank.