Filling the gap: Improving institutional capacity and inter-ministry coordination

In a series of bold steps to improve the infrastructure sector in the past few years, Indonesia has introduced regulatory reforms, expanded the space for private sector participation, extended investment risk guarantees, raised tariffs, passed the Land Acquisition Act and simplified registration processes. However, bureaucratic red tape, lack of coordination between government agencies and weak institutional capacity in the civil service remain the top challenges in the country’s attempt to attract more private investment.

Capacity constraints within state institutions and a lack of clarity as to who has the power to make decisions (and when) has contributed to significant delays in project implementation. Efforts to prepare bankable, market-ready public-private partnership (PPP) projects are often hamstrung by the lack of capacity at ministries to design such schemes. Land acquisition delays have caused project suspension and investors have been put off by insufficient coordination. So, while the infrastructure sector itself looks promising, inconsistent policies and regulatory uncertainties make it a risky proposition for investors.

Bureaucratic Restraints

Governance shortcomings in Indonesia are similar to those found in other big emerging economies, such as India and Brazil. It is saddled with a large number of state-owned entities entrusted with the task of planning, financing, coordinating and implementing infrastructure projects. However, many of these bodies have overlapping authority and do not always coordinate their strategies and plans. For example, the responsibility for building and maintaining all national roads lies not with the Ministry of Transportation, but the Ministry of Public Works. The Ministry of Agriculture manages grain storage, but not irrigation facilities, which come under the purview of public works. Yet, when it comes to industrial zones the responsibility for providing power, transport, water and sewage falls under the Ministry of Industry. While the Indonesia Investment Coordinating Board is tasked with creating an investor friendly climate, it does not exercise authority over any other ministries. Complicating matters further are other agencies calling shots in the sector.

These include state logistics body BULOG and the Ministry of State-Owned Enterprises (MSOE).

While each ministry has its own responsibilities for planning, policy and regulatory control, state-owned enterprises (SOEs) hold the key to implementation and have budgets of their own. SOEs fall under the MSOE’s chain of command, but can also receive direction from affiliated sector-specific ministries and the Ministry of Finance. The relationship of SOEs to government ministries can vary, as can the level of control they have over policy or project implementation. In the energy sector, for example, state-owned electricity firm Perusahaan Listrik Negara (PLN) holds a de facto monopoly and is the exclusive provider of electricity for consumers connected to the national grid. Local grid power providers do exist, but they face pricing restrictions set by PLN. This becomes a deterrent for the development of any large-scale power projects.

Disagreements over policy are common and government departments are known to guard what they see as their turf. Ever since Indonesia decided to divest greater revenue and administrative authority to the provincial and sub-provincial level, inconsistencies have emerged between policies and their implementation. Following decentralisation, local governments now have greater responsibility for realising projects, but these bodies often do not have the capacity to conduct feasibility studies, risk evaluations or prepare PPPs. All levels of government face capacity constraints in planning, implementation, and operation and maintenance of infrastructure.

Capacity Constraints

Much of the bureaucratic delay in spending existing budgets is due to the inability of government entities to identify and formulate new projects. There is a tendency for government priorities for high-cost infrastructure projects to shift within a short period of time. The National Development Planning Agency and the Coordinating Ministry for Economic Affairs (CMEA) provide guidance to investors, but much of the power still lies in the hands of SOEs, with direction from relevant ministries often politically motivated.

While institutional inefficiencies and bureaucracy are often a source of delay, it is not always the reason for complete project suspension. The legal and regulatory environment in Indonesia can stall the implementation of infrastructure plans as well. A prime example can be found in regulations surrounding private sector involvement in the power sector. In 2002 the government enacted the new Electricity Law allowing the private sector to participate in electricity generation; the law also linked tariffs to the market. Two years later, in 2004, the Constitutional Court ruled the 2002 law to be unconstitutional, noting that electricity was a social necessity and that the right of delivery should sit with SOEs alone. This dealt a blow to the government’s attempt to open the sector up to private sector investments.

Meeting Needs

The government has also limited capacity to procure consultants and tender services consistent with donor agency guidelines and its own national laws. Project readiness and safeguards in particular are often not advanced adequately to support effective and timely implementation. Lack of coordination among ministries can lead to long delays in obtaining forestry permits and environmental clearances. Even though the Land Acquisition Act has been passed by parliament, the actual process of land acquisition is still slow and continues to result in delays. Capacity constraints at the provincial level have hindered the use of budget allocations and project delivery. These constraints become more apparent during the initial phase of project design and development. Lack of skills and the limited operational capabilities of local government departments have led to delays in project implementation. Indonesia will need to work on improving its institutional capacity in order to meet the needs of the private sector during the pre-construction stage, as well as resolve regulatory bottlenecks. Besides a lack of agency coordination, these include: slow progress in determining spatial planning; lack of institutional capacity to resolve contract disputes; a lack of robust legal safeguards for investors; and overlapping central and regional regulations.

Greater Recognition

But there is now recognition, at least within the federal cabinet, that reforms must be undertaken to speed up infrastructural development. In Jakarta there have been efforts to coordinate the work of various ministries.

The establishment of the CMEA was a significant step forward. It is charged with coordinating various economic and infrastructure efforts across several ministries. It was the lead body that assembled the Master Plan for the Acceleration and Expansion of Indonesia’s Economic Development for 2011-25. In his second term in office, President Susilo Bambang Yudhoyono established the Presidential Work Unit on Monitoring and Controlling Development with the mandate of removing investment obstacles caused by inefficiencies in the bureaucracy.

The government has also sought the help of foreign governments and institutions. It is cooperating on a technical assistance cluster (TAC) programme with the Asian Development Bank to help meet its infrastructure objectives. Financed largely by the government of Australia, the $23m TAC programme will run until July 2017 and provide policy advise to the government of Indonesia, prepare bankable infrastructure projects and help to build capacity of relevant government agencies to implement PPP projects.

In October 2013 leaders from the Asia-Pacific Economic Cooperation (APEC) met in Bali and announced the Multi-Year Plan on Infrastructure Development and Investment. The plan, which is set to run until 2016, is aimed at promoting a more business-friendly environment among member states in the infrastructure sector. As a first step the body has established a PPP Centre in Jakarta with the capability to assess infrastructure projects to receive private finance and guide the successful execution of PPP projects. By offering to host this centre, and with it an APEC PPP experts advisory panel, Indonesia has taken a bold step towards bridging the capability gap that exists within its local institutions. The centre will connect them to other regional networks, facilitating valuable exchange of ideas and best practices and fostering an investor-friendly attitude within the government.

Foreign assistance, however, can only go so far. There is much that Indonesia can do on its own to address this deficit. It needs to bring about a wholesale shift in attitudes towards project management and partnership with the private sector. However, this is unlikely to happen overnight and will require sustained investment in training and skills development. Indonesia needs to raise the human resource capacity of its civil service, improve coordination and further remove obstacles in the way of faster project implementation to provide last-mile connectivity.

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The Report: Indonesia 2014

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