Innovative Infrastructure Financing through Value Capture in Indonesia

By Asian Development Bank

Indonesia needs significant additional infrastructure investment to sustain its economic growth. However, the COVID-19 pandemic has further limited the fiscal space of the government. This report proposes a new method to increase infrastructure investment based on the concept of value capture. The report studies how Indonesia's existing policies and regulations can be used to build a value capture framework that ensures the maximization of the social, economic, and environmental value of infrastructure investments. The framework focuses on strategies to deliver infrastructure projects that create greater value and, at the same time, generate funding for up-front investment.

• Language: English
• Publisher: Asian Development Bank
• Release date: May 1, 2021
• ISBN: 9789292628536

Book preview

INNOVATIVE INFRASTRUCTURE FINANCING THROUGH VALUE CAPTURE IN INDONESIA

MAY 2021

Creative Commons Attribution 3.0 IGO license (CC BY 3.0 IGO)

© 2021 Asian Development Bank

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Some rights reserved. Published in 2021.

ISBN 978-92-9262-852-9 (print); 978-92-9262-853-6 (electronic); 978-92-9262-854-3 (ebook)

Publication Stock No. SPR200093-2

DOI: http://dx.doi.org/10.22617/SPR200093-2

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In this publication, $ refers to United States dollars, Rp refers to Indonesian rupiah, unless otherwise stated.

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Cover design by Rhommell Rico.

Photo credits (clockwise from left): South Central Business district in Jakarta by AsiaTravel/Shutterstock.com; Jakarta MRT Bundaran HI Station by Shalstock/Shutterstock.com; View of Ampera bridge in Palembang by wide in creative/Shutterstock.com; Jakarta LRT by Joko SL/Shutterstock.com.

Contents

Tables and Figures

Foreword

As noted in the Asian Development Bank report, Meeting Asia’s Infrastructure Needs, the Asia and Pacific region needs to invest around $1.7 trillion annually in infrastructure until 2030 if it is to maintain robust growth, eradicate poverty, and respond to climate change. The main challenge, however, is the infrastructure investment gap—that is, the difference between investment needs and current investment levels. Closing this gap requires freeing up financial resources through public finance reforms, relying much more on private sector financing, and exploring innovative sources of financing.

An important example of the latter is land value capture (LVC), or more generally, value capture financing. The basic idea is that the positive externalities generated by infrastructure investment are monetized and used to finance infrastructure projects. To help ADB’s developing member countries pursue this option, ADB published in 2019 a report, Sustaining Transit Investment in Asia’s Cities, to serve as a primer on the potential of LVC in financing investments in urban transit infrastructure following global best practices. The report described specifically how megacities in Southeast Asia, such as Bangkok, Jakarta, and Manila could replicate the positive experience with LVCs using land value improvements associated with public mass transit investments.

The present report, Innovative Infrastructure Financing through Value Capture in Indonesia, represents a natural progression in ADB’s knowledge work on infrastructure finance based on value capture. Its objective is to support the Government of Indonesia in its efforts to build a national framework for value capture. It provides an in-depth analysis of Indonesia’s existing policy and regulatory framework in terms of its ability to support this innovative concept and finds that the existing regulatory and taxation frameworks have substantial, but not the complete, components required for successful implementation. It therefore develops a road map of short-term and medium-term action plans for realizing the full potential of value capture.

Infrastructure financing based on value capture provides a new way forward that triggers a virtuous value cycle of value creation and value funding to guarantee repayment and reinvestment of capital, thereby enabling further infrastructure development. With the COVID-19 pandemic constraining the availability of public finances—the main source of funding for infrastructure—exploiting the full potential of tools such as value capture financing has therefore become even more urgent. Cities in emerging economies, such as Jakarta, Makassar, and Palembang in Indonesia, have much to gain from implementing this concept, especially in these unprecedented times.

We hope that this report serves as an important policy tool to support the Government of Indonesia in the preparation of a national-level value capture framework. The report is the outcome of extensive consultations with government stakeholders who provided valuable feedback and insights. ADB will continue to provide technical assistance to help its developing member countries in identifying new and effective financing mechanisms in making cities more livable—one of the key operational priorities of ADB Strategy 2030.

Bambang Susantono

Vice-President for Knowledge Management and Sustainable Development

Asian Development Bank

Acknowledgments

This report was prepared at the request of the Coordinating Ministry for Economic Affairs (CMEA) to support the Government of Indonesia in building a land value capture (LVC) framework that ensures the maximization of the social, economic, and environmental value of infrastructure investments.

The report was financed by the Asian Development Bank (ADB) under Knowledge and Support Technical Assistance 9441: Asia Infrastructure Insights. The groundwork was carried out by the Economic Research and Regional Cooperation Department (ERCD) under the supervision of Rana Hasan, Director of Economic Analysis and Operational Support Division in ERCD and Said Zaidansyah, Deputy Country Director of the Indonesia Resident Mission (IRM), in close coordination with Winfried Wicklein, Country Director of IRM. Kathleen Farrin, Economist, and Matthias Helble, Senior Economist, were the focal persons for this report. Orlee Velarde of ERCD provided technical support and led the production of the report together with Cahyadi Indrananto of IRM. Joanne Gerber edited the manuscript extensively to ensure coherence and consistency. Rhommell Rico designed the cover and typeset the publication.

PT PricewaterhouseCoopers Indonesia Advisory (PwC) led the drafting of the report, which included intensive research, consultations, and documentation. The contributors from PwC were Julian Smith, Euan Low, Faris Saffan, Rudi Setiaji, Gene Maxcell, Jardin Bahar, Regina Wong, Dika Fiisabillillah, Eloisa Fe Lusotan, and Maria Veronica. The contributors of PwC dedicate this report to the memory of Dika Fiisabillillah.

Special thanks are due to the officials from CMEA, namely, Wahyu Utomo, Deputy Minister of Regional Development and Spatial Planning; Bastary Pandji Indra, former Assistant to Deputy Minister for Acceleration and Utilization of Development; Suroto, Assistant to Deputy Minister for Acceleration and Utilization of Development; Yudi Adhi Purnama, Head of Development Utilization Division; Rury Fuadhilah, Subdivision Head of Development Utilization Policy Analysis; and Fachri Firdaus, Economic Analyst. They provided feedback and inputs during the report drafting process and together with ADB, also facilitated the planning of in-country workshops. The active participation of the representatives from government offices from different regions during the in-country workshops and discussion meetings is highly appreciated.

Yasuyuki Sawada

Chief Economist and Director General

Asian Development Bank

Abbreviations

Legal Abbreviations