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PT Indonesia Infrastructure Finance Facility

Summary of Proposed Investment

This Summary of Proposed Investment is prepared and distributed to the public in advance of the IFC Board of Directors’ consideration of the proposed transaction. Its purpose is to enhance the transparency of IFC’s activities, and this document should not be construed as presuming the outcome of the Board decision. Board dates are estimates only.

Project number 26443
Company namePT Indonesia Infrastructure Finance Facility
CountryIndonesia
SectorFinance & Insurance
Environmental categoryFI
DepartmentGlobal Financial Markets Group
StatusPending Disbursement
Date SPI disclosedApril 8, 2009
Projected board dateJune 18, 2009
Previous EventsSigned: June 30, 2009
Approved: June 24, 2009
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Project description
Indonesia has made significant progress since the Asian Financial crisis and is enjoying robust economic growth but the infrastructure sector never fully recovered. Public infrastructure investments dropped from a high of $10 billion in 1994 to less than $5 billion in 2002. Currently, infrastructure investments amount to just 3 percent of GDP – the World Bank estimates Indonesia’s infrastructure investment needs at 7-9% of GDP. Private investment in infrastructure declined particularly sharply – from approximately 2 percent of GDP in the mid-1990s to around 0.4 percent in 2003-04. Infrastructure is seen as a critical constraint on economic growth in Indonesia but a series of attempts to lure back the private investors, many of them foreign, which had driven infrastructure investment in the early 1990s, has failed. The Government of Indonesia (“GoI”) has now launched a broad range of measures to attract private, particularly domestic, investment to infrastructure. An important element of this effort is the development of domestic capacity to finance infrastructure PPPs by complementing existing domestic financial institutions rather than incurring the sort of contingent liabilities to private investors which so burdened Indonesia’s public finances after the Asian crisis. This project, the Indonesian Infrastructure Finance Facility (“IIFF”) is the center-piece of this effort.

GoI has decided to establish a new, specialized lending institution offering long term, mainly local currency, financing for infrastructure, IIFF, incorporated under the name ‘P.T. Sarana Pendanaan Infrastruktur Indonesia (SPII)’. This initiative is being actively supported by the World Bank which has provided considerable advice on the general shape IIF should take. GoI has also sought IFC’s participation in IIFF, both as a signal to other investors on the viability of this initiative and as a source of technical guidance and commercial experience for this specialized venture.

IIFF is being established as a commercial financial institution, to mobilize domestic currency financing of appropriate tenor, terms and price for creditworthy infrastructure projects by: (i) using its good credit rating to borrow from domestic institutional investors and banks looking for long-term placements with risk margins higher than sovereign and large corporate offerings, and by (ii) providing financial products which meet the needs of infrastructure PPP and wholly private projects. IIFF will be a non-bank financial intermediary with the capacity to assess infrastructure projects and with the long-term liabilities to match a portfolio of long-term assets. It is expected to focus on long-term senior and subordinated debt and minority equity positions, but its range of products is likely to broaden to credit enhancements, securitizations, and other mechanisms to promote infrastructure investment.

IIF will operate as a commercial entity, with market-based rates and fees. It will respond to market demand, and adhere to international best practices on corporate governance, operating policies and risk management; providing Indonesia with much needed infrastructure financing expertise. GoI has embedded this concept in its policy statements on IIFF and it will be reflected in the structure and governance of the institution.