Indonesia: Inclusive Growth through Improved Connectivity Program - Subprogram 1

Sovereign Project | 46093-001

Summary

The proposed program will support a key strategic pillar of the government's medium- and long-term development plans to achieve higher and more inclusive economic growth through improved domestic and international connectivity. The program focuses on helping achieve the government's connectivity reform agenda priorities that include: (i) strengthened coordination, regulatory and institutional frameworks; (ii) improved intra-island connectivity aimed at connecting rural areas with regional growth poles, and accelerated development and better maintenance of inland transport networks; (iii) improved inter-island connectivity to enhance efficiencies and service performance of transport services; and (iv) improved international connectivity by making the country's key ports, logistics and intermodal systems more efficient in handling increasing traffic and trade volume.

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Project Name Inclusive Growth through Improved Connectivity Program - Subprogram 1
Project Number 46093-001
Country Indonesia
Project Status Approved
Project Type / Modality of Assistance Loan
Technical Assistance
Source of Funding / Amount
Loan 2942-INO: Inclusive Growth through Improved Connectivity Program-Subprogram 1
Ordinary capital resources US$ 300.00 million
Loan: Inclusive Growth through Improved Connectivity Program-Subprogram 1
World Bank US$ 100.00 million
TA 8215-INO: Supporting Inclusive Growth through Better Connectivity
Technical Assistance Special Fund US$ 1.00 million
Strategic Agendas Inclusive economic growth
Regional integration
Drivers of Change Private sector development
Sector / Subsector Transport - Transport policies and institutional development
Gender Equity and Mainstreaming No gender elements
Description The proposed program will support a key strategic pillar of the government's medium- and long-term development plans to achieve higher and more inclusive economic growth through improved domestic and international connectivity. The program focuses on helping achieve the government's connectivity reform agenda priorities that include: (i) strengthened coordination, regulatory and institutional frameworks; (ii) improved intra-island connectivity aimed at connecting rural areas with regional growth poles, and accelerated development and better maintenance of inland transport networks; (iii) improved inter-island connectivity to enhance efficiencies and service performance of transport services; and (iv) improved international connectivity by making the country's key ports, logistics and intermodal systems more efficient in handling increasing traffic and trade volume.
Project Rationale and Linkage to Country/Regional Strategy

Indonesia's economic growth performance and poverty. GDP growth edged up to 6.5% year on year in 2011, the highest since the Asian financial crisis, supported by sustained private consumption, stronger investment, and expanding net exports. Despite improved growth rates, recent economic growth is still significantly below the country's growth potential. For 2014-2016, IMF estimates a baseline potential growth rate of 7.1%, but which would increase to 7.9% if infrastructure development and economic reforms are accelerated. The recent ADB Study Diagnosing the Indonesian Economy also identifies inadequacies in infrastructure as one of the critical constraints to economic growth. Indonesia's overall ranking in the Global Competitiveness Index is at 46 out of 142 countries. However, the country only ranks 76 out of 142 on overall quality of infrastructure, far below its overall ranking, implying that infrastructure is a drag on the country's competitiveness (Figure 1a). The impact of lagging infrastructure appears in a number of forms. Deteriorating road systems in the provinces and districts increases domestic transport and logistics costs. Congested port and underdeveloped inter-island transport systems have led to expensive domestic shipping costs. Congested and unproductive international ports have made Indonesia's manufacturing sector not well integrated into international production networks. Achieving and sustaining higher growth rates over the medium-term will require an enabling environment for much higher investments in infrastructure.

Poverty reduction. Growth of 6.5% in 2011 resulted in about 1.5 million new jobs being generated, exceeding the number of new entrants to the labor force. The quality of employment also improved as formal employment rose by 16.0% (5.7 million positions). Most jobs were in construction, manufacturing, and services. Employment in the informal sector fell by 5.9%, or 4.2 million, as workers left the agricultural labor force. However, significant challenges remain in reducing poverty incinence further. About 62% of the employed labor force (about 68.2 million people) still works in the informal sector, where wages and job security are low. Poverty incidence fell to 12.4% in September 2011, from 13.3% in March 2010. While poverty and unemployment have trended downward, many Indonesians remain vulnerable to economic shocks. More than 60 million people still live just above the poverty line and are at high risk of falling back into poverty. The national rural poverty rate of 15.6% is still much higher than the national urban poverty rate of 9.1%. Poverty rates in some provinces in eastern Indonesia are much higher than elsewhere in the country

Inclusive growth through improved connectivity. Addressing the country's multidimensional poverty will require not only accelerated economic growth but also a more inclusive growth process that provides rural areas and disadvantaged regions with improved economic opportunity and access to social services. As the largest archipelagic state in the world by area and population and the largest economy in the Association of Southeast Asian Nations (ASEAN), Indonesia requires improved connectivity to make growth more inclusive. The country's connectivity can be improved with: (i) better intra-island connectivity to connect rural areas with regional growth poles, which is essential for reducing rural poverty; (ii) better inter-island connectivity between the western and the eastern parts of Indonesia, which is indispensable to reducing higher poverty incidence in the east; and (iii) improved international connectivity to make the country's productive sector more competitive, which is vital in reducing poverty overall and improving the quality of employment by reducing the size of the labor force employed in the informal sector.

Convergence of government's national strategies and ADB strategy. The government recognizes that lagging infrastructure, underdeveloped intra- and inter-island connectivity, weak international connectivity, and inefficient logistics constrain achieving its medium- and long-term targets of higher growth and faster poverty reduction. Strategically, the government's National Medium-Term Development Plan (RPJMN) 2010-2014 provides direction for the two pillars of ADB's Indonesia country partnership strategy (CPS) 2012-2014: inclusive growth and environmental sustainability. Reforms supported by the proposed program will support the inclusive growth pillar of the CPS. In addition, improving connectivity is a strategic focus of the government's long-term Master Plan for Acceleration and Expansion of Indonesia's Economic Development, 2011-2025 (MP3EI). The MP3EI will guide the convergence of ADB's policy-based, sector and thematic interventions related to connectivity and the government's vision of accelerated economic development.

Impact Reduced transport and logistics costs
Project Outcome
Description of Outcome The Government improves domestic and international connectivity
Progress Toward Outcome The TA is progressing well.
Implementation Progress
Description of Project Outputs

Connectivity coordination on regulatory frameworks strengthened

Key initiatives to upgrade intra-island connectivity implemented

Measures and strategy to improve inter-island connectivity put in place

Key policies executed to enhance international connectivity

Status of Implementation Progress (Outputs, Activities, and Issues)

The TA has been supporting the government in its connectivity reform priorities. These include the following:

i. Assist to develop effective and integrative national connectivity policy at the national and regional level. These include providing a framework for an efficient and integrative network of transport (land, sea, and air), energy, information and communication, and housing and water provision. The TA also assisted to synchronize policy recommendation on national connectivity in the government'.

ii. Assist to incorporate the Strategic Environment Assessment Framework in connectivity programs of the Master Plan for the Acceleration and Expansion of Economic Development (MP3EI) 2014-2025.

iii. Assist the government in preparing the Indonesia Broadband Plan (IBP) 2015-2019, which include discussion with external stakeholders and recommendation for changes and additions to the IBP. The IBP was successfully launched in mid-October 2015 through a Presidential Decree.

iv. Provide legal advice on the revision to the existing regulation on Public-Private Partnership (PPP) for infrastructure development. The input of the TA include: regulatory mapping related to PPP in infrastructure development, legal opinion on the main laws related to PPP, initial draft of a revised regulation on PPP, and further in-depth discussion with all key sectors related to PPP.

v. Assist on the analysis of maritime intra-island freight transport costs and identification of conditions and interventions for reducing transport costs in the eastern part of Indonesia.

vi. Assist on logistic cost analysis. These include: (i) measuring Indonesia's logistic performance by using National Logistic Cost Indicator and National Logistic System (Sislognas) Performance Index (SPI); and (ii) develop a proposal for a standard cost of port.

The TA will also support the new government in its connectivity reform. The implementation period of the TA was extended for 1 year to October 2015.

Geographical Location
Safeguard Categories
Environment C
Involuntary Resettlement C
Indigenous Peoples C
Summary of Environmental and Social Aspects
Environmental Aspects No impact
Involuntary Resettlement No impact
Indigenous Peoples No impact
Stakeholder Communication, Participation, and Consultation
During Project Design
During Project Implementation The government will form a steering committee (SC), chaired by Bappenas, with senior representatives of the implementing agencies and development partners (ADB, the World bank and JICA) as members.
Business Opportunities
Consulting Services In consultation with the BAPPENAS, ADB will recruit consultants as required under the CDTA (34 person-months of consulting services, consisting of one international consultant for 16 person-months and two national consultants for a total of 18 person-months). The consultants will be selected and engaged on an individual basis by ADB in accordance with ADB's Guidelines on the Use of Consultants (2010, as amended from time to time).
Procurement All procurement under the CDTA will accord with ADB's Procurement Guidelines (2010, as amended from time to time).
Responsible ADB Officer Edimon Ginting
Responsible ADB Department Southeast Asia Department
Responsible ADB Division Indonesia Resident Mission
Executing Agencies
National Development Planning Agency (BAPPENAS)EDDYTK@BAPPENAS.GO.IDJl. Taman Suropati No. 2
Jakarta 10310
Indonesia
Timetable
Concept Clearance 25 May 2012
Fact Finding 25 Jun 2012 to 13 Jul 2012
MRM 23 Aug 2012
Approval 16 Nov 2012
Last Review Mission -
Last PDS Update 31 Mar 2015

Loan

Financing Plan Loan Utilization
Total (Amount in US$ million) Date ADB Others Net Percentage
Project Cost 100.00 Cumulative Contract Awards
ADB 0.00 - 0.00 0.00 %
Counterpart 0.00 Cumulative Disbursements
Cofinancing 100.00 - 0.00 0.00 %

Loan 2942-INO

Milestones
Approval Signing Date Effectivity Date Closing
Original Revised Actual
16 Nov 2012 26 Nov 2012 18 Dec 2012 31 Mar 2013 - 31 Mar 2013
Financing Plan Loan Utilization
Total (Amount in US$ million) Date ADB Others Net Percentage
Project Cost 400.00 Cumulative Contract Awards
ADB 300.00 16 Nov 2012 300.00 0.00 100%
Counterpart 0.00 Cumulative Disbursements
Cofinancing 100.00 16 Nov 2012 300.00 0.00 100%

TA 8215-INO

Milestones
Approval Signing Date Effectivity Date Closing
Original Revised Actual
16 Nov 2012 21 Feb 2013 21 Feb 2013 30 Oct 2014 17 Oct 2015 -
Financing Plan/TA Utilization Cumulative Disbursements
ADB Cofinancing Counterpart Total Date Amount
Gov Beneficiaries Project Sponsor Others
1,000,000.00 0.00 0.00 0.00 0.00 0.00 1,000,000.00 16 Nov 2012 406,070.76

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