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TRANSCRIPT
i
Document of
The World Bank
FOR OFFICIAL USE ONLY
Report No: PAD1571
INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT
PROJECT PAPER
ON A
PROPOSED ADDITIONAL LOAN AND RESTRUCTURING
IN THE AMOUNT OF US$200 MILLION
TO THE
REPUBLIC OF INDONESIA
FOR A
INDONESIA INFRASTRUCTURE FINANCE FACILITY PROJECT (IIFF)
MARCH 3, 2017
Finance & Markets Global Practice
EAST ASIA AND PACIFIC REGION
This document has a restricted distribution and may be used by recipients only in the
performance of their official duties. Its contents may not otherwise be disclosed without World
Bank authorization.
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1
CURRENCY EQUIVALENTS
(Exchange Rate Effective February 24, 2017)
Currency Unit = IDR
13,336 = US$1
FISCAL YEAR
January 1 – December 31
ABBREVIATIONS AND ACRONYMS
ADB Asian Development Bank
CAP Corrective Action Plan
CPF Country Partnership Framework
DEG German Investment and
Development Company E&S Environmental and Social
ESMF Environmental and Social
Management Framework (SMI)
ESMS Environmental and Social
Management System (SMI) ESSF Environmental and Social
Safeguards Framework (IIF) FY Fiscal Year
FIF Financial Intermediary Financing
GDP Gross Domestic Product
GOI Government of Indonesia
IBRD International Bank for
Reconstruction and Development
ICR Implementation Completion and
Results Report
IFC International Finance Corporation
IIF PT Indonesia Infrastructure Finance
IIFF Indonesia Infrastructure Finance
Facility
IIFF-AF Indonesia Infrastructure Finance
Facility – Additional Finance
MIGA Multilateral Investment Guarantee
Agency
NPF New Procurement Framework
OJK Otoritas Jasa Keuangan (Financial
Services Authority)
OM Operations Manual
PDO Project Development Objective
PPP Public Private Partnership
RPJMN Rencana Pembangunan Jangka
Menengah Nasional (National
Medium Term Development Plan) SEDD Social and Environmental Due
Diligence
SEMS Social and Environmental
Management System (IIF)
SMBC Sumitomo Mitsui Banking
Corporation SMI PT Sarana Multi Infrastruktur
SOE State Owned Enterprises
SRAP Supplemental Resettlement Action
Plan
WB World Bank
Regional Vice President: Victoria Kwakwa
Country Director: Rodrigo A. Chaves
Senior Global Practice Director:
Practice Manager/Manager:
Sebastian Molineus
Jennifer Isern
Task Team Leader: Kalpana Seethepalli
2
INDONESIA
INDONESIA INFRASTRUCTURE FINANCE FACILITY – ADDITIONAL FINANCING
(IIFF-AF)
Table of Contents
I. Introduction .................................................................................................................................. 6
II. Background and Rationale for Additional Financing in the amount of US$200 million ......... 6
A. Country Context ........................................................................................................................... 6
B. Sectoral and Institutional Context ................................................................................................ 7
C. Relationship to CAS/CPF ............................................................................................................ 9
D. Financing ...................................................................................................................................... 9
E. Project Development Objective ................................................................................................. 10
F. Overall Scope and Project Components ..................................................................................... 10
G. Performance ............................................................................................................................... 10
III. Proposed Changes................................................................................................................... 11
IV. Appraisal Summary ................................................................................................................ 16
ANNEX 1. REVISED RESULTS FRAMEWORK ................................................................................. 32
ANNEX 2. IMPLEMENTING AGENCY ASSESSMENT ..................................................................... 34
ANNEX 3. SUMMARY OF MARKET CONSULTATIONS ................................................................. 36
ANNEX 4. INSTITUTIONAL CAPACITY AND FINANCIAL ASSESSMENT OF IIF ..................... 39
ANNEX 5. INSTITUTIONAL CAPACITY ASSESSMENT OF SMI ................................................... 69
ANNEX 6. SAFEGUARDS ..................................................................................................................... 76
ANNEX 7. IMPLEMENTATION ARRANGEMENTS .......................................................................... 82
ANNEX 8. ECONOMIC ANALYSIS ..................................................................................................... 86
3
ADDITIONAL FINANCING DATA SHEET
Indonesia
Indonesia Infrastructure Finance Facility - Additional Financing (P154779)
EAST ASIA AND PACIFIC
Finance & Markets Global Practice .
Basic Information – Parent
Parent Project ID: P092218 Original EA Category: F - Financial
Intermediary Assessment
Current Closing Date: 31-Mar-2017
Basic Information – Additional Financing (AF)
Project ID: P154779 Additional Financing
Type (from AUS): Scale Up
Regional Vice President: Victoria Kwakwa Proposed EA Category:
Country Director: Rodrigo A. Chaves Expected Effectiveness
Date: 22-Aug-2017
Senior Global Practice
Director: Sebastian-A Molineus Expected Closing Date: 28-Feb-2022
Practice
Manager/Manager: Jennifer Isern Report No: PAD1571
Team Leader(s): Kalpana Seethepalli
Borrower
Organization Name Contact Title Telephone Email
Republic of Indonesia Robert Pakpahan DG DMO 62-21-3500841
Project Financing Data - Parent ( Indonesia Infrastructure Finance Facility-P092218 ) (in
USD Million)
Key Dates
Project Ln/Cr/TF Status Approval
Date Signing Date
Effectiveness
Date
Original
Closing Date
Revised
Closing Date
P092218 IBRD-77310 Effective 24-Jun-2009 15-Jan-2010 25-Apr-2011 31-Dec-2013 31-Mar-2017
Disbursements
Project Ln/Cr/TF Status Currency Original Revised Cancelled Disbursed Undisbu
rsed
%
Disbursed
P092218 IBRD-77310 Effective USD 100.00 100.00 0.00 99.88 0.12 99.88
4
Project Financing Data - Additional Financing Indonesia Infrastructure Finance Facility -
Additional Financing ( P154779 )(in USD Mi llion)
[X] Loan [ ] Grant [ ] IDA Grant
[ ] Credit [ ] Guarantee [ ] Other
Total Project Cost: 200.00 Total Bank Financing: 200.00
Financing Gap: 0.00
Financing Source – Additional Financing (AF) Amount
Borrower 0.00
International Bank for Reconstruction and Development 200.00
Financing Gap 0.00
Total 200.00
Policy Waivers
Does the project depart from the CAS in content or in other significant
respects? No
Explanation
Does the project require any policy waiver(s)? No
Explanation
Team Composition
Bank Staff
Name Role Title Specialization Unit
Christopher Juan
Costain
Acting Team
Leader (ADM
Responsible)
Lead Financial
Sector Specialist
GFM02
Kalpana Seethepalli Team Leader Senior Financial
Sector Economist
GFM08
Ahsan Ali Procurement
Specialist (ADM
Responsible)
Lead Procurement
Specialist
GGO08
Novira Kusdarti Asra Financial
Management
Specialist
Sr Financial
Management
Specialist
Financial
Management
GGO20
5
Chau-Ching Shen Team Member Senior Finance
Officer
Finance Officer WFALN
Dara Lengkong Team Member Consultant Finance GFM02
Ekapon Jivasantikarn Team Member Consultant Infrastructure Finance GFM02
Indira Dharmapatni Safeguards
Specialist
Senior Operations
Officer
Social Safeguards GSUID
Jennifer Isern Program
Manager
Practice Manager GFM02
Krisnan Pitradjaja
Isomartana
Environmental
Specialist
Senior
Environmental
Specialist
Environmental
Safeguards
GEN2A
Pratyush Prem
Prashant
Team Member Consultant Infrastructure Finance GFM02
Extended Team
Name Title Location
Locations
Country First Administrative
Division
Location Planned Actual Comments
Indonesia Jakarta Raya Daerah Khusus
Ibukota Jakarta
X X
Institutional Data
Parent ( Indonesia Infrastructure Finance Facility-P092218 )
Practice Area (Lead)
Finance & Markets
Contributing Practice Areas
Additional Financing Indonesia Infrastructure Finance Facility - Additional Financing ( P154779 )
Practice Area (Lead)
Finance & Markets
Contributing Practice Areas
6
INDONESIA INFRASTRUCTURE FINANCE FACILITY (IIFF)
ADDITIONAL FINANCING (P154779)
I. INTRODUCTION
1. This Project Paper seeks the approval of the Executive Directors to provide an additional
loan in the amount of US$200 million following satisfactory implementation of the Indonesia
Infrastructure Finance Facility (IIFF/P092218) (IBRD Loan 77310). The IIFF was designed to
establish PT Indonesia Infrastructure Finance (IIF) as a non-bank financial intermediary to
increase provision of private sector financed infrastructure. IIF is now fully operational and the
original loan amount of US$100 million has been fully disbursed. The Government of Indonesia
(GOI) has requested Additional Financing for IIFF (IIFF-AF) in the amount of US$200 million,
which would help strengthen IIF’s financial capacity further to increase provision of private sector
financed infrastructure, thereby addressing Indonesia’s infrastructure investment needs.
2. In addition, the following changes are proposed as part of the Additional Financing: (i) a
revision to the PDO for simplification purposes; (ii) a revision to the Results Framework to account
for the scale up of project activities; and (iii) a five year extension of the closing date from March
31, 2017 to February 28, 2022.
3. Partnership arrangements. The Bank has collaborated with other international financial
institutions, i.e. the International Finance Corporation (IFC), Asian Development Bank (ADB) and
German Investment and Development Company (DEG) in support of IIF since its establishment in
2009. IFC and ADB provided both loan and equity investment, whereas DEG provided equity
investment. ADB is currently also in the process of preparing additional finance to IIF, with an
expected loan amount of US$100 million.
II. BACKGROUND AND RATIONALE FOR ADDITIONAL FINANCING IN THE
AMOUNT OF US$200 MILLION
A. COUNTRY CONTEXT
4. Indonesia has made remarkable progress and emerged as a middle-income economy
with macroeconomic and political stability. Indonesia proved to be resilient during the 2008-09
global economic downturn, bouncing back at one of the fastest rates in the G-20, and the economy
continues to build momentum. The overall positive economic outlook provides a robust
foundation for stronger and more inclusive growth, provided that necessary reforms continue to
take place. In the next two decades, Indonesia aspires to generate prosperity, avoid a middle-
income trap and diminish inequality as it attempts to catch up with high-income economies.
Realizing these ambitious goals requires sustained high growth, job creation and reduced
inequality. Indeed, Indonesia’s economic progress will be dependent upon a growth strategy that
unleashes the economy’s productivity potential, and consistent implementation of a few long-
standing structural reforms to boost growth and share prosperity.
7
B. SECTORAL AND INSTITUTIONAL CONTEXT
5. An essential and critical element of Indonesia’s structural transformation is closing
the country’s large infrastructure gap. Despite rising government spending in recent years,
Indonesia’s core infrastructure stock - such as road networks, ports, electricity, irrigation and water
and sanitation services - has not kept pace with economic growth and the infrastructure stock as a
share of Gross Domestic Product (GDP) has actually declined over the past decade. It is estimated
that Indonesia has lost more than 1 percent of additional GDP growth due to under-investment in
infrastructure. Reduced access to basic infrastructure has translated into road congestion, health
issues stemming from poor water and sanitation, energy shortages, as well as stunted business
growth due to poor logistics and transportation.
6. It is estimated that the total financing gap for infrastructure is about US$50-60 billion
a year. In 2014, the central government capital spending allocated was IDR188 trillion (two
percent of GDP). The 2015 figure is reported at a significantly higher value of IDR290 trillion, but
still falls far short of the investment needs in Indonesia. While subnational governments have
stepped up their investment recently to 1.5 percent of GDP, spending remains insufficient and
often misallocated. Overall, over the past decade, total government spending on and private
investment in infrastructure have fallen in comparison with those in the 1990s.
7. There remains a shortage of long-term resources, both domestic and international, to
appropriately finance infrastructure. While the GOI has announced recapitalization of State
Owned Enterprises (SOEs) of US$7 billion, this appears inadequate to bridge the infrastructure
financing gap. On the demand side, Indonesia’s infrastructure market needs sustainable long term
capital - both long duration debt and additional sources of equity – to ensure that infrastructure
projects are financially sustainable. There is increasing recognition that public funding alone will
not be enough to fill the financing gap in infrastructure. Indonesia needs to explore alternative
models of attracting and leveraging private financing into infrastructure. PPP is a promising
alternative, but has been slow to develop despite numerous efforts by GOI with support from the
Bank and other development partners. As a regulated PPP framework and a set of funding
mechanisms have recently been put in place, the challenge now is to get and demonstrate some
successful PPPs off the ground.
8. Banks’ financing of infrastructure is likely to be constrained by Legal Lending Limits
and Basel III norms. Indonesian commercial banks’ infrastructure financing market has a small
number of large lenders1 and few large borrowers such as Astra, Salim, Bakrie, Medco, PLN, etc.
Private business groups such as Astra, Salim, etc. have huge borrowing requirements that are
typically serviced by the large commercial banks. This will lead to a situation of saturation of the
Legal Lending Limits2 to borrowers and borrower groups as prescribed by OJK. Commercial
banks will also face challenges to lend long term (10-15 years) to infrastructure due to asset-
liability mismatches. Moving forward with the implementation of tighter financial regulations,
1 As per OJK’s bank statistics for November 2015 there is a total outstanding of IDR 441 trillion by all banks to Infrastructure
sector. Of this the four banks - BMRI, BRI, BNI and BCA - are estimated to have a 44% share. 2 As per OJK/BI Regulations, Legal Lending Limits for related party transactions should not exceed 10% of bank’s capital. For
non-related party transaction, the LLL are 20% of bank’s capital for a single borrower and 25% for borrower group exposure.
The limit for lending to SOEs is higher at 30% of bank’s capital.
8
such as Basel III norms, banks would need to maintain higher capital adequacy requirements. This
is likely to motivate banks to reduce their exposure to riskier assets, particularly infrastructure
projects, and also to increase their lending costs. Moving forward, while banks are expected to
play a leading role in infrastructure finance, there will be an imminent need to seek out alternative
sources of funding.
9. Banks have conventional product offerings that do not adequately address
Indonesia’s infrastructure financing needs. Banks’ product offerings are conventional –
typically term loans and working capital finance of medium tenure (5-7 years) and mostly on a full
recourse basis. Large banks also prefer to focus on SOEs and large corporate clients. Thus, in
general, the medium sized companies are underserved. Furthermore, products such as promoter
financing, bridge financing, mezzanine financing, take-out financing are not sufficiently available
at present, as indicated below. Indeed, consultations with market players have highlighted unmet
market needs, including: (i) flexible provision of debt financing packages, such as promoter
funding, bridge finance and take-out financing; (ii) long term rupiah and dollar denominated loans;
and (iii) longer tenor loans. Detailed findings of the market consultations are included in Annex
3.
Table 1: Project Life Cycle Funding Needs
Project Life Cycle
Preparation & Financial
Close
Construction Operations
Funding needs served by
the market Guarantees
Debt Syndication
Private Equity
Term loans
Working capital finance
Working capital finance
Re-financing
Guarantees
Funding needs not served
by the market, usually Equity
Bridge loans
Promoter funding loans
Equity
Mezzanine financing
Bond financing
Take-out Financing
Bond financing
10. Pension funds and insurance companies have significant levels of assets under
management in Indonesia, but the vast majority of funds are invested in short-term time
deposits and government bonds. While the GOI is encouraging pension funds to finance
infrastructure projects, because of their limited risk appetite, pension funds generally hesitate to
invest in Greenfield projects. Similarly, most international institutional investors are wary of long-
term investments in Indonesia. Institutional investors will require alternative investment structures
and comforts to better manage the political/country-level and portfolio level risks.
11. Given the lack of depth and liquidity, capital markets in Indonesia do not appear to
be a viable immediate option to raise new infrastructure finance. With the exception of
government bonds (with average daily turnover of about US$885 million), the stock and corporate
bond markets in Indonesia have much lower daily turnovers of about US$450 million and US$50-
60 million, respectively. Thus the ability of private developers to raise new equity from capital
markets is limited. Overall, there is a heightened need for securing long term and risk-taking capital
to finance infrastructure.
12. Building on its unique market niche, IIF is now well-positioned to respond to evolving
market needs. Significant institutional development has been achieved within IIF since its
9
establishment in 2009. IIF has now emerged as a small but credible player in the Indonesian
infrastructure finance market based on its unique expertise vis-a-vis project finance and
environmental and social (E&S) safeguards management. The proposed IIFF-AF will help
consolidate IIF’s market position by: (i) broadening IIF’s capital base, thereby strengthening its
ability to fund larger size projects and provide longer term, Rupiah financing; (ii) continuing to
support IIF’s senior debt and equity operations; and (iii) addressing unmet market needs by
selectively engaging in riskier market segments, including bridge financing, promoter funding and
take-out financing, all of which are already included in the World Bank (WB)-approved IIF
Operations Manual (OM).
13. The proposed IIFF project is complemented by other various Bank instruments in
support of the GOI infrastructure finance agenda overall. Over the past decade, the Bank has
developed a robust partnership with GOI on helping strengthen infrastructure sector policy and
leverage private capital into Indonesia’s infrastructure through PPPs. On GOI’s request, the Bank
has provided financing support and technical advice on key strategic engagements that have
contributed to developing the country’s institutional architecture governing private infrastructure
financing. These include the Infrastructure Development Policy Loan and Connectivity
Development Policy Loan series, the establishment of the Indonesia Infrastructure Guarantee Fund
(IIGF), IIF, Viability Gap Fund (VGF) program, and various key sector dialogues notably on
power and transport. Similarly, over the past several years, the WB Group has been working with
the GOI and public-private stakeholders in identifying and addressing the issues impeding
financing for infrastructure. The work includes, among others, a Bond Market Study and
stakeholder dialogues on new financial products for infrastructure (e.g. infrastructure bonds,
securitization). The Bank is thus uniquely positioned to leverage its long-standing partnership with
GOI and help support institutional clarity and interfacing required to make public and private
capital work for infrastructure development.
C. RELATIONSHIP TO CAS/CPF
14. The IIFF-AF is closely aligned with the World Bank Group (WBG) Indonesia
Country Partnership Framework (CPF) filters of supporting the GOI priorities to build a more
prosperous, equal and economically independent Indonesia, and eliminating extreme poverty
and boosting shared prosperity. At the end of 2015, the WBG renewed its partnership with
Indonesia through the CPF for the period of FY2016-2020, which envisions analytical and lending
support of over US$10 billion dollars from IBRD, IFC, and MIGA. The CPF is aligned with the GOI’s
national medium term development plan, known as the RPJMN, of 2015-2019 and was developed
through consultations with stakeholders, including civil society organizations, development partners
and the private sector. The IIFF-AF is included in the FY2016-20 IBRD Indicative Lending Pipeline
and supports three engagement areas identified in the CPF: (i) national infrastructure programs that are
essential for growth and improving the lives of Indonesians across the archipelago; (ii) the energy
sector, in order to increase sustainable energy and connect millions of families to reliable electricity;
and (iii) programs to build the maritime economy and improve connectivity.
D. FINANCING
15. The original IIFF IBRD Loan (Ln7331-ID/P092218) for US$100 million was
approved by the Bank on June 24, 2009 and became effective on April 25, 2011. The original
10
loan closing date was December 31, 2013. The loan closing date was first extended to November
30, 2015 to complete the project’s activities and achieve the PDO. The second extension to
November 30, 2016 and most recent third extension to March 31, 2017 were done to provide time
to prepare for the additional financing operation.
E. PROJECT DEVELOPMENT OBJECTIVE
16. The original IIFF project development objective was to strengthen and further develop the
institutional framework of the financial sector to facilitate financing of commercially viable
infrastructure projects, and thereby increase provision of private infrastructure in Indonesia. The
IIFF project was expected to achieve the PDO by establishing IIF and building the necessary
capacity and skills in providing long-term financing, innovative financial products, and advisory
services. The proposed revised Project Development Objective (PDO) for the project is to
strengthen the financial capacity of IIF to increase the access to private sector financing for
infrastructure in Indonesia. As IIF has now been established and is fully operational, as part of
the IIFF-AF processing, the PDO is being revised to make it clearer and related specifically to
increasing IIF’s capital and addressing Indonesia’s huge infrastructure deficit, in particular through
the provision of long-term, Rupiah financing. The ultimate objective is to increase the provision
of infrastructure in Indonesia to support a more inviting investment climate, sustained growth, and
poverty reduction in the long-term.
F. OVERALL SCOPE AND PROJECT COMPONENTS
17. Consistent with the parent IIFF operation, the proposed IIFF-AF will have one
component: an investment loan by the Bank to be made available to IIF as subordinated debt
and/or perpetual/convertible capital instrument to be used for eligible infrastructure
projects. The Bank’s lending instrument will remain a Financial Intermediary Financing under
OP10.00. Accordingly, the World Bank provides an investment loan to the Republic of Indonesia
as the Borrower. The Borrower provides these funds to IIF as the sole participating financial
intermediary, through SMI. IIF in turn, uses these funds to provide predominantly long-term loans,
equity investment and other financial products as well as advisory services for infrastructure
development.
G. PERFORMANCE
18. Despite initial delays, implementation of the parent IIFF project has progressed well.
The delays in loan effectiveness were largely attributed to legal, regulatory and institutional
complexities, particularly surrounding the initial establishment of both SMI and IIF at the time.
However, following loan effectiveness, these key institutions were able to build their capacities
and made up for the initial delays. Hence, progress towards achievement of the PDO and
Implementation Progress have been consistently rated Satisfactory for the past two years. The
US$100 million existing loan funds have been disbursed, with only US$120,000 remaining,
mainly due to exchange rate movements during the project implementation period.3 As of end
2015, IIF had a portfolio of 15 infrastructure projects, with total commitments of US$333 million
equivalent, and a robust pipeline of projects. IIF continues to strengthen its institutional capacity
3 IIF received the US$100 million loan funds from the GoI/SMI in IDR equivalent, and on-lent these to sub-
borrowers in both IDR and US$. The US$120,000 remaining is largely due to the IDR depreciation against the US$.
11
and play an increasingly active role in the financing of infrastructure projects in Indonesia.
Designed as a catalyst for funding infrastructure projects in Indonesia, IIF provides long-term
financing products, including senior loans, mezzanine finance and equity participation. IIF
continues to build its unique expertise and skills to support this ‘niche’ business model, and has
emerged as an experienced and credible repository of knowledge and skills in Indonesia’s
infrastructure financing, particularly vis-à-vis project finance, and environmental and social (E&S)
safeguards management. Aiming to become among the most advanced non-bank financial
institutions in Indonesia within the next few years, IIF estimates a funding need of IDR10 trillion
(about US$722 million), which is expected to be raised through alternative sources, e.g. capital,
subsidiary loans from the GOI based on Multilateral Development Bank borrowings, and
commercial loan or bonds/medium term notes.
19. An Implementation Completion and Results Report (ICR) on the parent IIFF project
has been completed, which rates the project overall outcome as Moderately Satisfactory and
risk to development outcome as Substantial. The overall outcome rating is based on the
aggregation of the ratings of three criteria: (i) relevance of objectives and design; (ii) efficacy on
the achievement of the PDO as measured through the associated results indicators; and (ii)
efficiency in the costs involved in achieving the PDO in comparison with the benefits. The ICR
highlights the project outcomes in terms of both efficacy and efficiency as Substantial. Yet the
initially weak PDO formulation led to a Modest rating of the overall relevance, thereby resulting
in an overall project outcome rating of Moderately Satisfactory. Indeed, such weak PDO
formulation is an important issue, and the PDO is thus one of the changes requested under this
proposed IIFF-AF.
20. The proposed AF complies with OP10.00 Investment Project Financing, paragraph 29:
(i) both progress with implementation (IP) and towards the achievement of the development
objective (DO) have been rated “Satisfactory” for the past 12 months; and (ii) all key loan
covenants including audit and financial management reporting requirements have been complied
with. There are no overdue audit reports.
III. PROPOSED CHANGES
Summary of Proposed Changes
The GOI had initiated a proposal to amend the PDO for the IIFF Project, as the current PDO was
considered too broad, and thereby difficult to measure.
It is proposed that the loan closing date is extended from March 31, 2017 to February 28,
2022, in order to support the scaling-up of IIF activities. The IIFF project has been extended
three times. The first extension from December 31, 2013 to November 30, 2015 provided time to
complete project activities and achieve the PDO. Indeed, this extension fulfilled its
purpose. During this first extension period, IIF significantly built its operational capacities and led
to a rapid take off of disbursements (IIFF's disbursements increased from US$25 million as of end
12
2013 to virtually the entire US$100 million loan amount at end February 2017). The second
extension from November 30, 2015 to November 30, 2016 and third extension from November 30,
2016 to March 31, 2017, were to provide additional time to prepare the proposed IIFF-AF. The
GOI and the Bank agreed to proceed with the AF rather than a new loan in order to save
processing and implementation time within Government, as well as within the Bank, and to ensure
project continuity overall.
Change in Implementing Agency Yes [ ] No [ X ]
Change in Project's Development Objectives Yes [ X ] No [ ]
Change in Results Framework Yes [ X ] No [ ]
Change in Safeguard Policies Triggered Yes [ ] No [ X ]
Change of EA category Yes [ ] No [ X ]
Other Changes to Safeguards Yes [ ] No [ X ]
Change in Legal Covenants Yes [ X ] No [ ]
Change in Loan Closing Date(s) Yes [ X ] No [ ]
Cancellations Proposed Yes [ ] No [ X ]
Change in Disbursement Arrangements Yes [ ] No [ X ]
Reallocation between Disbursement Categories Yes [ ] No [ X ]
Change in Disbursement Estimates Yes [ ] No [ X ]
Change to Components and Cost Yes [ X ] No [ ]
Change in Institutional Arrangements Yes [ ] No [ X ]
Change in Financial Management Yes [ ] No [ X ]
Change in Procurement Yes [ ] No [ X ]
Change in Implementation Schedule Yes [ X ] No [ ]
Other Change(s) Yes [ ] No [ X ]
Development Objective/Results PHHHDO
Project’s Development Objectives
Original PDO
The objective of the Project is to strengthen and further develop the institutional framework of the financial
sector to facilitate financing of commercially viable infrastructure projects and thereby increase provision
of private infrastructure in Indonesia. Key performance indicators to judge PT. IIF's success include the
following outcomes: (i) increase in the number of commercially viable infrastructure projects achieving
financial closure through long-term debt financing, other financial products, and advisory services from the
IIFF over the life of the project; (ii) Increase in the amount of private capital (including long-term debt and
equity) available for infrastructure projects over the life of the project; (iii) Increased support to
Government’s policy making in private provision of infrastructure through advisory services from IIFF;
and (iv) Increase in privately financed infrastructure in Indonesia.
13
Change in Project's Development Objectives PHHCPDO
Explanation:
The GOI had initiated a proposal to amend the PDO for the IIFF Project, as the current PDO was
considered too broad, and thereby difficult to measure.
Proposed New PDO - Additional Financing (AF)
To strengthen the financial capacity of IIF to increase the access to private sector financing for
infrastructure in Indonesia
Change in Results Framework PHHCRF
Explanation:
Given that the project was intended to focus on the establishment of IIF as an institution and on delivering
its infrastructure financing mandate, the development of the institutional framework of the financial sector
is beyond the project’s scope.
Compliance PHHHCompl
Covenants - Additional Financing (Indonesia Infrastructure Finance Facility - Additional Financing
- P154779 )
Source of
Funds
Finance
Agreement
Reference
Description of Covenants
Date Due
Recurrent
Frequency
Action
IBRD Section I.B.5
The Borrower shall cause PTSMI to exercise its voting
powers in relation to the Company and all powers of
control available in relation to its nominee to the Board
of Commissioners and Board of Directors of the
Company (if any) in favor of the Company undertaking
the Project in accordance with the Operations Manual.
Recurrent
IBRD Section II.A.
The Borrower shall monitor and evaluate the progress of
the Project and, through PTSMI, prepare Project Reports
in accordance with the provisions of Section 5.08 of the
General Conditions and on the basis of indicators agreed
with the Bank. Each Project Report shall cover the
period of one (1) calendar semester, and shall be
furnished to the Bank not later than forty-five (45) days
after the end of the period covered by such report.
Recurrent
IBRD Section II.C
The Borrower shall cause PTSMI to cause the
Company to prepare and furnish to the Bank – not later
than six (6) months after the end of each calendar year
– an annual social and environmental performance
report in accordance with the requirements in the
SEMS.
Recurrent
Covenants - Parent (Indonesia Infrastructure Finance Facility - P092218)
Change in Legal Covenants
14
Section I.B.6(a) of Schedule 2 to the Loan Agreement is amended to read as follows:
‘Financial Covenant. (a) Except as the Bank and the Borrower shall otherwise agree, the Borrower shall
exercise its rights under the Subsidiary Loan Agreement to cause PTSMI to exercise its rights under the
Shareholders Agreement and the Subsidiary Loan Agreement to such that the Company shall not incur any
subordinated debt if after the incurrence of such subordinated debt, the ratio of subordinated debt to equity
shall be greater than 5 to 1.’
The definition of subordinated debt in Section I.B.6(b)i of Schedule 2 to the Loan Agreement is amended
to read as follows:
‘The term “subordinated debt” means any indebtedness of the Company under: (A) the Subordinated Loan
Agreement; (B) the contract, agreement or other instrument between the Company and PTSMI pursuant to
which the proceeds of the Co-financing Agreement are made available to the Company; and (C) any other
contract, agreement or other instrument under which the repayment obligations of the Company to the
lender are subordinated to those of certain senior lenders with regard to claims on the Company's assets or
earnings.’
This amendment was proposed by IIF on the basis that the restriction on use of subordinate debt placed IIF
at a competitive disadvantage to other institutions and the ratios of subordinate debt to equity are
effectively established by the financial sector regulation in Indonesia.
Source of
Fund
Finance
Agreement
Reference
Description of Covenants Date Due Status
IBRD-
77310 Article V,
5.01(c)
The Company shall have been legally
incorporated pursuant to the Borrower’s laws and
regulations and the Articles of Association of the
Company shall have been executed by the
founding Shareholders and approved by MLHR.
25-Apr-2011 Complied
with
IBRD-
77310 Article V,
5.01(d) The Borrower, through the MOF, shall have
issued the Business License to the Company. 25-Apr-2011
Complied
with
IBRD-
77310 Article V,
5.01(e)
The Cofinancing Agreement shall have been
executed and delivered and all conditions
precedent to its effectiveness or to the right of the
Borrower to make withdrawals under it (other than
the effectiveness of this Agreement) have been
fulfilled.
25-Apr-2011 Complied
with
IBRD-
77310 Article V,
5.01(f)
The Shareholders Agreement, and any related
share subscription documents to be entered into by
and among the founding Shareholders and/or
between the Company and the founding
Shareholders shall have been executed and
delivered on behalf of the parties and shall have
become effective and binding upon such parties in
accordance with their respective terms.
25-Apr-2011 Complied
with
15
IBRD-
77310 Article V,
5.01(h)
The Operations Manual, including the ESSF,
acceptable to the Borrower and the Bank, shall
have been adopted by the Company. 25-Apr-2011
Complied
with
IBRD-
77310 Article V,
5.01(i)
Each founding Shareholder shall have subscribed
and paid up its respective initial capital
contribution in such amount as required by the
Shareholders Agreement.
25-Apr-2011 Complied
with
IBRD-
77310 Article V,
5.01(j)
PTSMI shall have made available and disbursed
financing in an amount of not less than Rupiah
600,000,000,000 (less the amount of the initial
equity contribution of PTSMI as required under
the Shareholders Agreement).
25-Apr-2011 Complied
with
IBRD-
77310 Article V,
5.01(k)
The Company shall have appointed and employed
a chief executive officer, a chief financial officer
and an environment and social safeguards staff
acceptable to the Borrower and the Bank.
25-Apr-2011 Complied
with
Conditions
Source of Fund Name Type
IBRD-8715 Article V, 5.01(a) Effectiveness
Description of Condition
The Subsidiary Loan Agreement, acceptable to the Bank, shall have been duly executed and
delivered on behalf of the Borrower and PTSMI and shall have become effective and binding
upon such parties in accordance with their respective terms, subject only to the effectiveness of
the Loan Agreement
Source of Fund Name Type
IBRD-8715 Article V, 5.01(b) Effectiveness
Description of Condition
The Subordinated Debt Arrangement, acceptable to the Bank, shall have been duly executed
and delivered by or on behalf of PTSMI and the Company and shall have become effective and
binding upon such parties in accordance with their respective terms, subject only to the
effectiveness of the Loan Agreement
Source of Fund Name Type
IBRD-8715 Article V, 5.01(c) Effectiveness
Description of Condition
The Project Agreement, shall have been duly executed and delivered on behalf of PTSMI and
the Company and shall have become effective and binding upon PTSMI and the Company in
accordance with their respective terms
Source of Fund Name Type
IBRD-8715 Article V, 5.01(d) Effectiveness
Description of Condition
16
The Action Plan, acceptable to the Bank, shall have been adopted and publicly disclosed on its
website by the Company
Risk PHHHRISKS
Risk Category Rating (H, S, M, L)
1. Political and Governance Substantial
2. Macroeconomic Moderate
3. Sector Strategies and Policies Substantial
4. Technical Design of Project or Program Moderate
5. Institutional Capacity for Implementation and Sustainability Moderate
6. Fiduciary Low
7. Environment and Social Substantial
8. Stakeholders Moderate
9. Other N/A
OVERALL Moderate
Finance PHHHFin
Loan Closing Date - Additional Financing (Indonesia Infrastructure Finance Facility -
Additional Financing - P154779)
Source of Funds Proposed Additional Financing Loan Closing Date
IBRD Guarantee 28-Feb-2022
Allocations - Additional Financing (Indonesia Infrastructure Finance Facility -
Additional Financing - P154779)
Source of
Fund Currency
Category of
Expenditure
Allocation Disbursement %(Type
Total)
Proposed Proposed
IBRD USD Company Investments in
Sub-projects 200,000,000.00 100.00
Total: 200,000,000.00
IV. APPRAISAL SUMMARY PHHHAppS
Economic and Financial Analysis PHHASEFA
Explanation:
1. The proposed IIFF-AF will help IIF build on its track record of providing debt
financing, and allow it to mobilize new financial products into infrastructure projects in
17
Indonesia. IIF’s activities are expected to attract additional private investment (domestic and
international institutional investors) that will provide much-needed investments in Indonesia’s
infrastructure projects. In addition, these infrastructure projects/SPVs/holding companies would
also raise debt capital, further amplifying the multiplier effect. The growth payoff of greater
investment in infrastructure cannot be overstated—underinvestment in infrastructure has been a
substantial drag on Indonesia’s growth over the past decade. The WB loan proceeds would have a
significant leveraging effect on the boost in private investment in infrastructure that the project
would generate.
2. Positive developmental impacts are expected to be generated on IIF and Indonesia’s
infrastructure investments. The IIFF-AF will support IIF in expansion of its asset base and
credibility, and in turn lead to a multi-fold increase in Indonesia’s infrastructure over the next five
years (more details on IIF’s financial projections are provided in Annex 4). The key developmental
benefits are enumerated below.
(i) World Bank financing enables IIF to leverage much more in the future and scale up its
operations and consequent developmental impact. Due to IIFF-AF, the IIF is able to increase
its leverage to 4.08 times by FY2020 from the current level of 1.5 times in FY2015. This
enables IIF to not only grow its asset base by 4.13 times to IDR 22,758 billion (~US$ 1714
million) by FY2020 (FY2015: IDR 5509 billion or ~ US$ 415 million) but also improve its
Return on Equity to 12.2 percent by FY2020 (FY2015: 3.5 percent).
(ii) The long duration loan from the World Bank under IIFF-AF will help IIF better manage its
asset-liability mismatch and support IIF’s credibility to raise additional debt as well as IPO
and listing by 2020. The positive implications of IIFF-AF long duration loan on the overall
duration of IIF’s liabilities can be seen from Figure 1 below. Without the IIFF-AF, the long
term borrowings of IIF will only be 16 percent (i.e. less than half of the share in FY 2015)
thus impacting its asset liability mismatch.
Figure 1: Positive Impact of IIF AF Loan on Duration of IIF’s Liabilities in 2020
Source: Financial projections for 2016-2020 provided PT IIF
18
(iii)IIF’s developmental impact will be substantial as through IIF’s investment operations it
would be able to catalyze infrastructure investments of 5 times its asset base, i.e.
approximately IDR 113,792 billion (US$ 8,571 million) assuming that IIF invests up to 20
percent of the project cost in each sub-project.
3. The economic analysis of potential subprojects to be financed under the IIFF-AF will
be undertaken as part of IIF’s appraisal of the identified subprojects. Therefore, for the
purpose of the IIFF-AF, it is more appropriate to elaborate the appraisal framework being used by
IIF. The same appraisal framework has been used by IIF to disburse the initial financing under the
parent IIFF operation and has been found satisfactory, as also noted in the ICR. Indeed, a robust
economic analysis can help IIF in its assessment of market, sectoral, financial and other risks.4 IIF
is well established in undertaking the necessary economic analysis as part of its work, thereby
improving the quality of the projects it invests in, which is described as follows.
Each sub-project has a feasibility study and appraisal conducted by IIF prior to any loan or
investment approval. The exact template for their feasibility studies varies somewhat
depending upon the type of sub-project and when the feasibility study was conducted.
However, in general it includes: industry and sub-project analyses; a financial analysis of
the borrower, with financial projections and a sensitivity analysis; a detailed management
review; a risk and mitigation analysis; and clear recommendations on amounts of financing,
type of financing and pricing.
Important aspects of IIF’s Economic Analysis are incorporated in the Environmental and
Social (E&S) Safeguards section of the Risk Analysis. Effectively, this addresses the Costs
side of any Cost-Benefit Analysis that would underlay any formal calculations of an
Economic Rate of Return. The main instrument in this regard is a Corrective Action Plan
(CAP), which includes clear target dates and priorities for the sub-project developer. A
typical CAP covers all applicable E&S principles, such as environmental degradation; land
acquisition; re-settlement; community relations; and continuing local employment
opportunities.
Effectively, IIF’s Economic and Financial Analysis of the sub-project examines carefully
the financial benefits to IIF while minimizing the broader economic cost to society. It is
difficult to imagine private sector arrangements that go much beyond this.
Examples of the broader economic impact of sub-projects financed by IIF are provided in
Box 1. These illustrate how better infrastructure contributes to Indonesia’s improved
economic and social well-being. Moving forward, similar results can be reasonably
expected under the IIFF-AF.
4 Robust micro-economic analysis and modelling can shed light on: (i) how a new toll road might attract traffic or
result in lower volumes than anticipated as people seek to avoid the toll road; (ii) willingness of users to pay for
services; (iii) economic costs of delays and disruptions in infrastructure services; (iv) social benefits and costs,
including externalities; (v) optionality value of increasing size of infrastructure today and/or allowing scope for future
growth; and (vi) benefits of co-locating multiple infrastructure services along same land corridor/easement (e.g. road,
water, power, telephone/ICT, gas, trains).
19
Technical Analysis PHHASTA
Explanation:
Institutional Assessment of IIF
4. IIF has emerged as a small but credible player in the Indonesian infrastructure finance
market based on its unique expertise vis-a-vis project finance and social and environmental
(S&E) safeguards management. IIF is now taking a calibrated approach to expand into riskier
market segments, and grow into a mature platform for financial intermediation to mobilize and
channel private investments into infrastructure projects, and bridge Indonesia’s infrastructure
financing gap. The following are IIF’s key achievements to date (Details on IIF’s institutional
assessment are provided in Annex 4).
(i) IIF is an important additional source of infrastructure financing. Supported by a strong
capital base from its shareholders and 25-year subordinated loan on-lending facilities from the
World Bank and the Asian Development Bank, IIF is well positioned to assist in bridging the
Box 1: Illustrating Broader Economic Benefits of IIF’s Sub-projects
Roads:
The LMS toll road helps connect all provinces across Java, and traffic volume is estimated at 20,000
vehicles per day.
Reduces travelling time by 2 hours vis-à-vis the national road, which cuts logistical costs and
consumer prices.
Reduces congestion on the national road, including during heavy traffic of the Idul Fitri religious
festival.
Power Sector:
A power platform company has established more than 150MW of power in remote areas of the
country, using clean, gas-fired plants.
The equity portion improves the company’s debt capacity and the shareholder profile to attract new
investors.
A solar power plant in northern Sulawesi provides electricity to a province with a large gap between
electrical supply and demand.
The Solar power is coupled to an existing diesel generator. This reduces diesel consumption; lowers
maintenance costs; extends the generator’s lifetime; and supports the government’s objective of
increased renewable energy.
Telecommunications:
Supports the acquisition of 3,500 towers from a major, telecom services provider. Ownership of
the towers by a third party encourages competition in the industry because telecommunication
providers are more comfortable with leasing the tower for their network equipment.
Air Transport
Purchase of equipment to establish of new aircraft hangar.
Improves maintenance, repair and safety of aircraft in the rapidly growing local airline industry
Source: Data provided by IIF and field interviews.
20
gaps in the country’s requirements for infrastructure financing. IIF provides long-term fund-
based products such as senior loans, mezzanine finance and equity participations, in addition to
non-fund-based products such as guarantees and fee-based services, and thereby provides an
important additional source of funding for infrastructure projects in Indonesia.
(ii) High standards for appraisal and safeguards. IIF applies international-standard best
practices in terms of social and environmental safeguards and exercises good corporate
governance in order to promote more sustainable infrastructure project development in
Indonesia. For social and environmental management, it has adopted IFC performance
standards 2012 and the World Bank standards.
(iii)Good risk management. IIF has instituted a comprehensive risk management framework in
line with international practices. This is implemented through an independent Risk Management
Directorate (RMD) under the leadership of Chief Risk Officer; while the risk management
process includes active supervision from the Risk Management Committee of the Board of
Directors (RMC) and oversight by the Risk Oversight Committee of the Board of
Commissioners (ROC). The RMD monitors at least four key risks – credit risk, market risk and
portfolio management, operational risk and compliance/KYC, social and environment risk; and
reports on a quarterly basis to the RMC and ROC. IIF’s risk management framework aims at
keeping IIF’s risk appetite at moderate level. Its current self-assessment of enterprise level risk
is at ‘Low to moderate’ level thus placing IIF in a comfortable zone. IIF also prepares and
submits a quarterly risk management report to its shareholders.
(iv) Future deal pipeline. IIF expects to have a strong pipeline of future deals aggregating to
about US$1 billion, consisting of US$792 million of dollar denominated loans and IDR2.87
trillion of rupiah loans. A sample indicative list of projects from the future deal pipeline is
presented below.
Table 2. Sample of IIF Project Pipeline
No. Indicative Projects Rupiah Loans In IDR Billion
US$ Facility In US$ million
1 Palapa Ring II 500
2 Kuala Tanjung Seaport 500
3 Sumatra Power Transmission Line 800
4 Telecom Towers 150
5 Aircraft Maintenance Overhaul & Repair Facility 40
6 510 MW Batang Toru Hydro Power 35
7 230 km Cirebon – Semarang Gas Pipeline 35
8 Bintan Airport 30
9 40 MW Mini Hydro Platform 150 23
10 110+40 MW Gas Fired Power Plant 20
11 LNG Receiving Terminal 30
21
5. While IIF has set high standards of corporate governance and risk management, the
following areas could be strengthened further in order for IIF to realize its growth
aspirations:
Performance benchmarking and development of medium term strategy and business plan
for IIF. This could include undertaking a benchmarking exercise with select global
infrastructure financing institutions, and helping IIF shape a medium strategy and business
plan for an accelerated growth and development impact.
Strengthening the public disclosure and developing a grievance redressal mechanism on
projects financed by IIF. This could include certain disclosure of relevant project
information on its website so that it enables the stakeholders to get information about the
project being financed by IIF, as long as the sub-projects provide clearance to IIF for such
disclosure. In addition, IIF could establish a dedicated contact person in its web to address
grievance redress platform to receive and resolve stakeholder concerns and grievances about
the client or project’s environment and social performance.
Human resource development and training. For example, global twinning programs with
infrastructure banks and financing agencies. Helping IIF’s HR function to shape skill
upgrade training and career development programs.
Financial Assessment of IIF
6. IIF’s total assets has grown at a compound annual growth rate of 41 percent from
IDR1,969 billion (~US$148 million5) in FY2012 to IDR5,509 billion (~US$415 million) as of
FY2015. Within this the loans advanced constitute IDR3,343 billion (~US$252 million) as of
FY2015 (FY2012: Nil). The loan book is well balanced between local currency and USD lending,
with a large proportion of long term loan assets. With no Non Performing Loans, the quality of the
IIF’s loan book is stable. In addition, IIF has invested in equity and mandatorily convertible bonds,
demonstrating the diversification of investment across various classes of facilities. The equity and
marketable securities constitute IDR1,050 billion (~US$79 million) as of FY2015 (FY2012:
IDR152 billion or ~ US$11 million).
7. Since inception, IIF has shown stable growth by expanding its product and service
offerings and diversifying its sectorial and geographical coverage. IIF’s revenues have grown
at a CAGR of 67 percent from IDR66 billion (~US$5million) in FY2012 to IDR306 billion
(~US$23 million) as of FY2015, with a healthy net profit margin of 20-35 percent.
8. IIF has achieved solid investment ratings. Strong shareholders, strategic importance of
IIF for achieving the infrastructure development agenda of the government, increased demand for
infrastructure financing, tight control, improved financial performance and substantial borrowing
capacity has enabled IIF to achieve a National Long-Term Rating of ‘AAA(idn)’ with a Stable
Outlook from Fitch Ratings Agency. For its recent bond issuance, IIF has obtained a credit rating
from Pefindo (the local affiliate of S&P) of ‘Ind AAA’ reflecting highest level of credit rating.
5 The conversion rate is based on BI reference exchange rate for March 31, 2016 of IDR 13,276 = US$1.
22
9. During FY2015, IIF has raised additional equity by IDR233 billion (~US$17.55 million
and includes share premium paid by SMBC) to reach IDR 2 trillion and fulfill the minimum
requirement of capital in accordance with the MOF Regulation No.100/2009. Consequently,
the shareholding pattern has slightly changed: SMI 30 percent (PY:34 percent); ADB 20 percent
(PY:20 percent); IFC 20 percent (PY:20 percent); DEG 15 percent (PY:11 percent); and SMBC 15
percent (PY:15 percent).
10. IIF’s borrowings are well balanced as they have a high proportion of long duration
loans, and mix of local currency and USD denominated debt. To increase its domestic
borrowings, recently IIF has diversified its borrowings portfolio by raising IDR denominated debt
from Bank Mandiri of IDR1 trillion (~US$75.32 million) in FY2015. In addition, IFC has
sanctioned an additional loan of US$150 million, which is expected to be disbursed during 2017-
2018.
11. IIF has sufficient borrowing capacity with a debt-to-equity ratio of 1.5 times. IIF
maintains a high level of liquidity (~35 percent of its assets are held as cash and cash equivalent)
and is not facing any asset liability mismatch as majority of sources of financing for IIF are long-
term in nature. It has a Capital Adequacy Ratio of 71.93 percent, well above the minimum 12
percent stipulated as financial covenants6 in IFC’s loan agreement to IIF.
12. IIF launched a public issue of new bonds aggregating IDR2 trillion in July 2016. The
bonds are rupiah denominated with tranches of 3, 5 and 7 year durations. The bond proceeds will
go towards IIF’s investment in infrastructure projects in Indonesia. The bonds carry a fixed interest
rate payable quarterly and aligned to an Indonesian ‘AAA’ rating. The 5 and 7 years’ tranches are
attractive to pension funds and insurance companies, while the 3 year tranche is of interest to retail
and other investors. For the new bond issuance, IIF has obtained a credit rating from Pefindo (the
local affiliate of S&P) of ‘IndAAA’ reflecting highest level of credit rating.
13. In line with its growth strategy for 2016-2020, IIF has set for itself an ambitious target
as reflected in its financial projections. These include:
a. Asset Growth. By FY 2020, IIF’s total assets are projected to grow at a CAGR of 18 percent
to IDR22,758 billion (~US$1714 million) from IDR11,754 billion (~US$885 million)
budgeted in FY2016. The loan book is projected to grow at CAGR of 23 percent and the
equity and mezzanine investments at a CAGR of 47 percent.
b. Profitability Ratios. IIF’s operating and net profit margins improve to 39.8 percent and 25.9
percent by FY2020 from 30.2 percent and 17.6 percent in FY2016, respectively. Similarly,
the ROA and ROE improve to 2.2 percent and 12.2 percent by FY2020 from 1.4 percent
and 5.3 percent budgeted in FY2016, respectively.
c. Capital Adequacy. IIF is projected to maintain a healthy Capital Adequacy Ratio of 30.4
percent by FY2020 and remaining well above the minimum CAR requirement of 12 percent
as per IIF’s OM.
6 Financial covenants under IFC’s loan agreement require IIF to maintain a risk weighted capital adequacy ratio
>12%, debt to capitalization ratio of ≤ 3:1 and a current ratio of ≥1.2:1.
23
d. Leverage. The growth in asset base and ROE is primarily due to the increase in leverage of
IIF to 4.08 times by FY2020 from the current level of 1.5 times in FY2015. IIF also aspires
to do an IPO and listing of equity in FY2020 of around IDR1 trillion. Thus reflecting a
strong fund raise program. However, the IIFF-AF will be vital for IIF’s credibility in future
fund raise and IPO. Without the IIFF-AF, the long term borrowings of IIF will only be 16
percent (i.e. less than half of the share in FY2015) thus impacting its asset liability mismatch
and possibly the ability for future fund raise and IPO.
Assessment of SMI
14. SMI is the executing agency for the IIFF-AF, which will channel the WB loan
borrowed through GoI and on-lend to IIF. Accordingly, it is in this context that SMI’s capacity
assessment has been undertaken.
15. SMI is an infrastructure financing company that supports the GOI’s infrastructure
development agenda. The company is a state-owned enterprise operating under the Ministry of
Finance. SMI was established under Government Regulation No. 66/2007, which has been
amended subsequently by various government regulations. The company obtained the license to
operate as an infrastructure financing company based on the Minister of Finance Decree No.
396/KMK.010/2009, and commenced commercial operations on October 12, 2009. With the
objective of catalyzing private investment and infrastructure development, SMI formed a joint
venture company IIF together with the ADB, IFC and DEG. The proposed IIFF-AF reflects
continued support by GoI/SMI to IIF in furthering Indonesia’s infrastructure development agenda.
16. SMI has instituted satisfactory internal controls and procedures to transparently and
efficiently manage the continued on-lending operations under IIFF-AF Project. The terms and
conditions of this pass-through will be back-to-back, with fees, margins and other costs at cost-
recovery levels with no subsidies involved. They will also include fiduciary and implementation
undertakings by SMI commensurate with those contained in the Bank’s legal agreements with the
GOI. Even though the GOI is its sole shareholder, SMI is professionally managed via a Board of
Commissioners and a Board of Directors reflecting its role as prudential non-banking financing
institution.
17. SMI is now transforming into Indonesia Development Financing Institution (or
Lembaga Pembiayaan Pembangunan Indonesia/LPPI), with the GOI: (i) entrusting SMI the asset
portfolio of former Government Investment Unit (Pusat Investasi Pemerintah/PIP), a sovereign
wealth fund previously managed by the Ministry of Finance; (ii) expanding SMI’s mandate to local
government financing through the PIP and RIDF (under a proposed World Bank lending
operation); and (iii) initiating dialogue with SMI on covering new sectors such as industry,
agriculture and maritime. SMI’s capital structure, human resourcing and operational procedures
are being strengthened to manage the expanded role, which also reflects the continued support of
GOI.
18. SMI has a strong credit rating and financial position. SMI has been rated ‘idAAA’ with
a Stable Outlook by PEFINDO Rating for local rating and global rating of BBB- which reflects the
sovereign rating from Fitch Rating. The rating assigned to SMI is supported by key considerations,
24
such as sufficient capital infusions by the GOI (Rp 24.4 trillion already invested by GOI over the
last five years), very strong asset quality indicators and a low leverage. It can be reasonably
expected that SMI will continue to enjoy support from GOI in the medium term, given the vital
nature of SMI’s role in infrastructure development in Indonesia.
19. SMI’s corporate governance structure is consistent with a professionally managed
financing company. Pursuant to SMI’s Articles of Association, the company’s oversight and
management is conducted by three major organs namely, the Shareholders, the Board of
Commissioners and the Board of Directors.
20. On safeguard standards, SMI has developed an Environmental and Social
Management Framework (ESMF) focusing on ensuring that the national and international
standards are implemented. The ESMF has been developed as SMI prepared for the Regional
Infrastructure Development Fund (RIDF) project with the Bank for local government infrastructure
financing and also for PPP sub projects. The ESMF was developed on the basis of SMI’s
Environmental and Social Management System (ESMS) and the World Bank safeguards policies.
SMI’s ESMS has two components: (i) The “ESMS project” has adopted national laws and
regulations pertaining to land acquisition and environmental management, and applies to projects
funded from SMI’s own financial resources. (ii) The “ESMS multilateral” has adopted national
laws and regulations as well as some international standards, and applies to projects financed by
multilateral agencies. SMI currently uses the ESMSs in its current operations, mainly PPP projects,
whereby social and environmental safeguards due diligence is undertaken once a subproject is
defined as eligible for financing based on the financial and investment assessments.
21. Moving forward, SMI aspires to adopt international standards (i.e. the ESMF from
2017 onwards). The ESMF has been consulted with stakeholders in June 2016. This ESMF was
approved by the Bank in September 2016 and SMI has adopted this ESMF in November 2016.
Accordingly, SMI’s staff would need training and hand-holding assistance in implementing the
ESMF. SMI will need to undertake awareness socialization and training for its internal staff on the
requirements specified in the ESMF, as well as technical capacity building of the staff of the
Environmental Social Safeguards and Business Continuity Management under the Directorate of
Risk Management to enable it to cope with the increased project portfolio that would arise from
the Government Investment Center (PIP) and RIDF activities. It needs to be noted that SMI and
IIF are different entities with different project nature and clients, hence they will be having
different safeguards management frameworks.
22. From the perspective of the limited role of channeling the Bank’s sovereign loans to
IIF, SMI has instituted satisfactory internal controls and procedures to transparently and
efficiently manage the continued on-lending operations under IIFF-AF Project. Certain
suggestions on strengthening the coordination between MOF, SMI and IIF in relation to financial
management standard operating procedures have been made by the financial management
specialists in the Task Team. These are in the process of being socialized and finalized. Other than
this, the overall performance of SMI as the executing agency has been satisfactory. There are
several indications that the GOI support to SMI will continue in coming years and that SMI will
continue to implement capacity strengthening policies to manage its performance on par with
25
applicable national and international standards. More detailed assessment of SMI’s institutional
capacity is provided in Annex 5.
Social Analysis PHHASSA
Explanation:
23. As reflected in the IIF’s portfolio and pipeline, the nature of subprojects to be financed
by IIF-AF will remain the same as those by the parent IIFF operation. As is the case with IIFF,
the IIFF-AF will continue to trigger OP 4.10 on Indigenous Peoples and OP 4.12 on Involuntary
Resettlement. Subprojects will have low, medium and high risks defined based on potential impacts
identified during the screening of the proposals, which then confirmed during the Social and
Environmental Due Diligence (SEDD). Experiences in the IIF subprojects suggested that seven of
16 subprojects in the portfolio are high risks, and the remaining are medium risks. Only one out of
16 subprojects in the IIFF portfolio involved large-scale land acquisition carried out by the
government, i.e. the Cikampek-Palimanan toll road. Issues on vulnerable groups due to land
acquisition impacts were addressed in the Supplemental Resettlement Action plan (SRAP) and
Livelihood Restoration Program. Most of other subprojects did not involve land acquisition,
however, those that did, only required land from a much smaller number of land owners than that
of the toll road, ranging from 3 to 63, which all were obtained through willing-buyer-willing-seller
scheme.
24. The indicative pipeline indicates that two subprojects, i.e. Telecom Towers and Mini
hydropower are likely to be medium risks, while other subprojects are likely to be high risks.
As has been the case with IIFF-financed subprojects, only few subprojects under IIFF-AF as shown
in the indicative pipeline would involve involuntary resettlement including land acquisition. In such
cases most land acquired will be small scale, and very likely will be obtained through “willing-
buyer-willing-seller” scheme. IPs might be presence and affected in the Palapa Ring II and
Sumatera Transmission Line subprojects, as these subprojects will have long alignments surpassing
remote areas. IIF will continue to use its current SEMS as specified in its Operations Manual and
an SOP during the project cycle for loan processing whereby environmental and social safeguards
management is part of. The principles of the SEMS is disclosed in the IIF’s website.
Environmental Analysis PHHASEnvA
Explanation:
25. The proposed IIFF-AF will continue as a Category FI project that triggers OP/BP 4.01
Environmental Assessment, OP/BP 4.04 Natural Habitats, OP/BP 4.36 Forests, OP/BP 4.37
Safety of Dams and OP/BP 4.11 Physical Cultural Resources. IIFF-AF will trigger the same
World Bank safeguards policies as those under the parent IIFF operation. No new safeguards policy
is triggered. IIFF-AF shall continue to promote environmentally responsible investment decisions.
Potential large scale, significant/irreversible impacts from the indicative sub-projects under this
IIFF-AF are still similar in nature and scale to the parent IIFF operation. They are mainly derived
from the construction activities of the linear infrastructure such as road, gas pipeline, transmission
line, and the construction of airport improvement and seaport facilities, medical waste management
facilities, biomass and biogas plant, LNG processing plant, floating storage facility, port terminal
automatization, fiber optic telecommunication, Mini Hydro Power Plant and industrial estate. The
26
impacts to natural habitats, forest, people (from land acquisition) and to Indigenous People are
likely. However, for this IIFF-AF, the magnitude of potential impact is not as large as the parent
IIFF (e.g. Cikampek-Palimanan Toll Road and Run off river power plant). Other than that there are
still possibilities of induced impact, such as a new access to forest area or natural habitats or access
restriction. In addition, there are likely cumulative impacts and other impacts related to dam safety
and linked activities funded by government or other donors and potential impacts of ancillary
facilities such as quarry management. The potential downstream impacts from IIF’s advisory
services are also possible. The current 2014 SEMS has already ensured that IIF’s advisory services
are also consistent with the safeguards requirements in the SEMS. Overall, the list of potential sub-
projects pipeline is dynamic, and preliminary Social and Environmental screening are being carried
out in reference to IIF’s Social and Environmental Management System (SEMS) to identify the
level of potential risks of each sub-projects. The risk level will be reconfirmed during the Social
and Environmental Due Diligence (SEDD) based on the complete set of sub-project proposal
package. Given the nature of eligible sectors of IIF, potential environmental and social impacts of
subprojects will range from medium to high, significant, diverse, and irreversible. The assessment
of the applicability of the current SEMS of IIF and the capacity of its S&E unit in managing
safeguards aspects of the future projects is elaborated in Annex 6.
26. The nature of sub-projects to be financed under IIFF-AF will be similar to that under
the parent IIFF project. All sub-projects to be financed under IIFF-AF will be screened by IIF
based on its SEMS to determine safeguards policies triggered, EA category, safeguards instruments
and associated analyses to incorporate risk and impact minimization, mitigation measures and
monitoring program. Based on the screening result, a subproject might be rejected for IIFF-AF
financing if critical safeguards requirements could not be met- as already happened previously.
Previously, full environmental assessments (including social impact assessment) were prepared for
some IIFF-financed subprojects, such as the Cikampek-Palimanan toll road and gas fired power
plant; whereas EMPs were prepared for others, such as the micro hydro projects, solar power
generation plant, aircraft maintenance facilities, gas processing plant and telecommunication
service provider. IIF also requested sub-projects to prepare CAP (Corrective Action Plan) should
the client not meet IIF standards (see Table 16-Annex 4). As part of project supervision, the Bank
together with IIF S&E staff conducts field visits to ‘high risk’ sub-projects to ensure adequate
capacity building and comprehension of the Bank’s safeguards policies requirements.
27. The potential downstream impacts from advisory services are also likely, such as from
project structuring and feasibility studies. The current 2014 SEMS has already stipulated that
their advisory services shall also be consistent with the environmental and social safeguards
requirements of their SEMS. The assessment of the applicability of the current SEMS of IIF and
the capacity of S&E unit in managing safeguards aspects of the future projects is elaborated in
more detail at Annex 2, 4 and Annex 6. A checklist to do the assessment of IIF’s safeguards
capacity is presented in Annex 6. Social and Environmental Due Diligence (SEDD) on the
complete set of sub-project proposal package including safeguards instruments will be conducted
during project implementation. As was the case of the parent IIFF, sub-projects that cannot meet
the SEMS or investment requirements may be dropped from IIFF-AF financing support.
27
28. Implementation Issues of SEMS. Although the overall implementation of the IIF project
is considered satisfactory and IIF is considered among the best infrastructure investment facilities
in its field in Indonesia, issues of safeguards compliance and quality during the implementation of
the initial project have been raised during a recent desk supervision undertaken by IFC. Safeguards
compliance and/or quality issues cover several aspects of project implementation such as the
documentation of safeguards instruments, screening of sub-project potential impacts, timing of
preparation of safeguards instruments, preparation of TORs, public consultations and ongoing
engagement with communities.
29. In order to address any outstanding safeguards compliance issues and to improve the
quality of safeguards instruments and oversight, an Action Plan has been developed and
agreed upon with IIF and will be adopted and publicly disclosed by IIF prior to effectiveness
of the Additional Financing. The Action Plan agreed upon, which includes a requirement for IIF
to set up an S&E related Grievance Redress Mechanism, will be implemented by the IIF within an
applicable timeline agreed with the Bank. The Action Plan will contain measures to support project
monitoring in particular for high risk projects as well as measures to further develop the
environmental and social safeguards technical capacity of IIF. IIF recognizes the importance of the
actions designed to strengthen IIF safeguard capacity and enhance oversight and monitoring of
high risk projects. The Action Plan combined with the existing SEMS allows IIF to address
outstanding safeguards compliance, quality and capacity issues. Because of the complex revision
procedures, notably the requirement that IIF shareholders must approve any amendments, IIF is
not able to agree on a specific timeline for concluding the revision of an updated SEMS. It is
noteworthy that the previous revision of the SEMS required approximately a year to complete.
However, IFF has committed to update the SEMS to include the specific dispositions of the Action
Plan agreed upon with the Bank and the agreed Action Plan which already requires IIF to
implement a plan with actions designed to strengthen IIF safeguard capacity and enhance
monitoring and reporting of high risk projects. The updated SEMS was disclosed on the IIF’s
website on February 24, 2017. Furthermore, the role of IIF engaged in promoting private sector
investment in infrastructure is taken into account, especially the commitment from IIF to do far
more on environmental and social safeguards than many of its competitors in Indonesia.
Financial Management
Explanation:
30. A Financial Management Assessment (FMA) was undertaken to assess the adequacy
of the financial management system of the implementing agencies, particularly IIF and SMI,
to produce timely, relevant and reliable financial information on project activities. The FMA
also assesses whether the accounting systems for project expenditures and underlying internal
controls are adequate to meet fiduciary objectives and allow the Bank to monitor compliance with
agreed implementation procedures and appraise progress towards its objectives.
31. The overall the project financial management risk is assessed as being moderate. There
is no outstanding audit report under the original financing. The project financial management
arrangements follow the government systems and IIF procedures agreed by the Bank, as reflected
in IIF’s standard operational procedures. Overall, IIF management and staff have sufficient
experience in implementing the previous project. At appraisal, IIF has undertaken mitigation
28
actions of associated risks that were previously identified, which will continue to be supervised
closely throughout project implementation, particularly with regards to the following:
Based on the FY2015 annual audit report findings, two weaknesses were observed by the
auditor in relation to internal control on disbursements and absence of regular bank
reconciliation. At appraisal, follow-up actions on the audit findings have been taken. The
internal control on disbursement has been strengthened by adding a new layer of review
through the recruitment of new accounting manager and implementation of new accounting
system. With regards to absence of regular bank reconciliation, IIF has currently performed
100 percent reconciliation for all of its accounts, including non-active bank accounts.
On treasury procedures, including management of World Bank excess funds,7 IIF has agreed
to add general statement "The placement of funds that are originated from the borrowing
proceeds must also follow the requirements as agreed with lenders." This statement is meant
to accommodate the Bank’s request to maintain either in the project Designated Account or
in a 1 month time deposit (not in automatic rollover mode), in keeping with the spirit that
the advance of the DA should be readily available to meet expenditures.
The strengthening of IIF computerization has accommodated IFR preparation. The data for
IFR was received from “loan system T24” and “Axapta” (for World Bank designated
account management). However, minor manual process is still needed before its submission
to the World Bank.
With regards to the improvement of coordination among stakeholders of the project, the
Directorate of Information Management System under DG Treasury, MoF has agreed to
closely monitor the project by initiating regular meetings in line with the project’s IFR
preparation period.
32. The overall disbursement arrangements established under the parent IIFF operation
will continue under the IIFF-AF. The current DA will continue to be maintained and there will
be no separate DA for the proposed IIFF-AF. Under the parent IIFF project, there is only one
disbursement category – Company Investment in Sub-projects. The IIFF-AF will carry the same
disbursement category description with allocation of the entire US$200 million.
Procurement
Explanation:
33. Procurement arrangements under the proposed IIFF-AF shall continue to be carried
out in accordance with the “Guidelines: Procurement of Goods, Works and Non-consulting
Services under IBRD Loans and IDA Credits and Grants by World Bank Borrowers”, dated
January 2011 (revised July 2014) and “Guidelines: Selection and Employment of Consultants
under IBRD Loans and IDA Credits and grants by World Bank Borrowers” dated January
2011 (revised July 2014). IIF has demonstrated adequate overall capacity to manage procurement
activities under the parent IIFF project financing. Further, IIF has strengthened and enhanced its
relevant components of institutional capacity so that its procurement related functions continue to
7 IIF has been using IFR as the basis for disbursement. The 6 months projection of funds needed is transferred to the
DA. Within the 6 months period, the DA balance should be maintained to ensure fund available to finance PPP project
(as the purpose intended in this project) and not use to earn interest by treasury unit. The Bank’s excess fund refers to
the balance of the DA which is waiting to be used by IIF for its investments.
29
perform satisfactorily. For further strengthening, improvement of fiduciary capacities at both the
IIF institutional and sub-project enterprise levels are recommended in the following areas:
(a) checking the eligibility of the contractors, suppliers, or consultants procured and selected by
the sub-borrowers against WB’s suspended and debarred firms and individuals; (b) ensuring
compliance with WB’s Anti-Corruption Guidelines (ACGL) for all future procurements, including
those by the sub-borrowers under the Project; (c) maintaining IIF’s procurement functions, which
includes overall spelling out IIF’s responsibility for carrying out the procurement to meet its own
requirements, and also assessing the adequacy of the procurement and contract management
systems of the sub-project enterprise during sub-project preparation and overseeing their
compliance with the agreed procedures during implementation through regular project monitoring.
Risk PHHASRisk
Explanation:
34. The overall risk towards achievement of the PDO is increased from Low to Moderate,
based on key considerations below.
a Political and Governance. Since taking office in 2014, the current Government
administration has indicated infrastructure development – particularly in the areas of
connectivity and maritime - as a key priority. Some important actions have been taken to
support this priority, such as the launching of key infrastructure projects (US$20 billion),
capitalization of SOEs ($7 billion) and strengthening of GOI financial institutions to support
long term infrastructure financing. Some reforms have also been implemented, aimed at
greater autonomy and simplification of procedures within large infrastructure entities such
as PLN, which are expected to help strengthen overall governance. Yet the GoI’s ownership
in IIF might be seen as creating a conflict of interest, particularly with regards to ensuring
the financial viability, versus socio-economic considerations, of IIF’s investment decisions.
There is also the possibility IIF could undercut the market price for infrastructure financing
in Indonesia, thereby distorting the market and crowding out funding from the private sector.
However, such risks are reasonably mitigated, particularly with IIF’s track record,
established governance structure, the minority GoI shareholding and medium term plan for
an IPO. The proposed project is also expected to promote the strengthening of governance
further, through its support and application of standards and procedures through IIF.
Overall, as the overarching political and governance environment remains complex and
vulnerable to be influenced by vested interests, the associated risks surrounding the political
and governance environment remain Substantial.
b Macro-economic. The Government faces fiscal pressures, amidst a potentially more
challenging international environment. However, the overall macro policy framework is
responsive to risks of imbalances, and a range of contingency financing and crisis protocols
are in place. The Government has also developed a track record in undertaking
precautionary and proactive measures to counter external shocks. The policy decision to
reduce fuel subsidy has also created much needed fiscal space, not only for better
macroeconomic resilience, but also increased capital expenditure on infrastructure. The
proposed project is also expected to promote higher infrastructure investments, which would
further contribute to improved macroeconomic conditions overall. Hence, the
macroeconomic risk is rated as Moderate.
30
c Sector strategies and policies. Although the Government continues to push for acceleration
of infrastructure investment, there is still a need for more systemized and prioritized
approach towards amending the laws and regulations that are relevant for infrastructure
investments in general. The establishment of an infrastructure prioritizing body (KPPIP)
and PPP center is expected to encourage good coordination and decision making overall,
thereby promoting private sector involvement in the sector. Nevertheless, the lack of
coordination and policy coherences among the various infrastructure related institutions in
Indonesia remains a significant challenge, undermining investors’ sentiments. Against this
backdrop, the proposed project’s Fund approach for its equity component is will involve the
need to strengthen the underlying regulatory and taxation frameworks. Hence, the risk
surrounding the sector strategies and policies is rated as Substantial.
d Technical design of Project. The proposed additional financing will support IIF in
deepening its lending operations. IIF has developed a good pipeline of projects for
infrastructure financing and the additional financing will be used to help IIF address the
market need effectively. IIF has in place a robust corporate governance and risk
management framework that has been tested well during the implementation of ongoing
IIFF project. Hence, the risk with regards to the technical design of the proposed project is
rated as Moderate.
e Institutional capacity for implementation and sustainability. The proposed IIFF-AF
entails scaling-up of IIF’s operational capacities. As it has significantly built its operational
capacity overall within the last few years, IIF has developed a solid track record in terms of
its institutional development capacities. IIF will therefore likely to be able to build its
capacities further, in order to support its scaling-up of activities, particularly as it is now
taking a calibrated approach to expand into riskier market segments, and grow into a mature
platform for financial intermediation to mobilize and channel private investments into
infrastructure projects, and bridge Indonesia’s infrastructure financing gap. Hence the
institutional capacity risk is rated as Moderate.
f Fiduciary. The fiduciary arrangements of the ongoing IIFF project have been assessed as
satisfactory. The fiduciary arrangements follow the government system and IIF procedures
agreed by the Bank and reflected in the IIFFs standard operational procedures. To further
improve the fiduciary arrangements, proposed strengthening measures include efforts to
enable robust coordination among stakeholders during project implementation, enhance the
appraisal and supervision by IIF of procurement and contract implementation carried out by
the beneficiaries under the sub-projects, including ensuring consistency of provisions in the
sub-project and contract documents with the Bank’s requirements on Anti-corruption and
Safeguards. The resulting Fiduciary risk is Moderate.
g Environment and social. Although IIF has demonstrated significant progress towards
building its environment and social safeguards management capacities, the potential
increase in investments deal volume could put pressure on social and environmental
safeguards (S&E) management, which would require careful planning in accordance with
the SEMS and institutional capacity build-up. The ongoing outreach and hands-on
assistance of IIF on S & E safeguards to its potential clients has strengthened their capacity
in managing the S & E risks meeting the requirements of the SEMS. Hence, the environment
and social risk is rated as Substantial.
31
h Stakeholders. The IIFF project has helped in setting up a platform for engaging some key
stakeholders in infrastructure investments. There is a multiplicity of stakeholders involved
in the ongoing IIFF project, which include MOF, SMI and IIF. While coordination has been
satisfactory, there remains a need to further strengthen the coordination between these
agencies, as mentioned in the Financial Management analysis. The risk is rated as Moderate.
V. World Bank Grievance Redress
Communities and individuals who believe that they are adversely affected by a World Bank (WB)
supported project may submit complaints to existing project-level grievance redress mechanisms
or the WB’s Grievance Redress Service (GRS). The GRS ensures that complaints received are
promptly reviewed in order to address project-related concerns. Project affected communities and
individuals may submit their complaint to the WB’s independent Inspection Panel which
determines whether harm occurred, or could occur, as a result of WB non-compliance with its
policies and procedures. Complaints may be submitted at any time after concerns have been
brought directly to the World Bank's attention, and Bank Management has been given an
opportunity to respond. For information on how to submit complaints to the World Bank’s
corporate Grievance Redress Service (GRS), please visit http://www.worldbank.org/GRS. For
information on how to submit complaints to the World Bank Inspection Panel, please visit
www.inspectionpanel.org.
32
ANNEX 1. REVISED RESULTS FRAMEWORK
Project Development Objectives
Original Project Development Objective - Parent:
The objective of the Project is to strengthen and further develop the institutional framework of the financial sector to facilitate financing of
commercially viable infrastructure projects and thereby increase provision of private infrastructure in Indonesia. Key performance indicators to
judge PT. IIF's success include the following outcomes: (i) increase in the number of commercially viable infrastructure projects achieving financial
closure through long-term debt financing, other financial products, and advisory services from the IIFF over the life of the project; (ii) Increase in
the amount of private capital (including long-term debt and equity) available for infrastructure projects over the life of the project; (iii) Increased
support to government’s policy making in private provision of infrastructure through advisory services from IIFF; and (iv) Increase in privately
financed infrastructure in Indonesia.
Proposed New Project Development Objective – Additional Financing:
To strengthen the financial capacity of IIF to increase the access to private sector financing for infrastructure in Indonesia
Results
Core sector indicators are considered: Yes Results reporting level: Project Level
Project Development Objective Indicators
Status Indicator Name Core Unit of Measure Baseline Actual(Current) End Target
Marked for
Deletion
Increase in the amount of
private capital (including long-
term debt and equity) available
for infrastructure projects over
the life of the project (values in
USD million).
Amount(USD) Value 0.00 1800.00 0.00
Date 27-Mar-2009 30-Nov-2015 30-Nov-2015
Comment
Marked for
Deletion
Increase in number of privately
financed infrastructure projects
made bankable through the
IIF?s advisory services
Amount(USD) Value 0.00 0.00
Date 27-Mar-2009 30-Nov-2015 31-Dec-2013
Comment
Revised The amount of financing from
Bank funds provided by IIF to
commercially viable
infrastructure projects.
X Amount(USD) Value 0.00 0.00 200.00
Date 28-Feb-2017 28-Feb-2017 28-Feb-2022
Comment Basic Bank indicator of project progress.
33
IIF will track the composition of IIF financing committed
by financial products transacted by IIF
New The amount of private capital
supported by IIF relative to its
own investment.
Number Value 0.00 0.00 4.00
Date 28-Feb-2017 28-Feb-2017 28-Feb-2022
Comment For project financing: to be calculated as [total project
costs]/[total IIF financing]
For corporate financing: to be calculated as [total debt
and equity of the company]/[total IIF financing]
New Number of infrastructure
financing supported by IIF
using innovative financing,
such as: (i) rupiah financing;
(ii) take out financing; (iii)
maturity greater than 10 years.
Number Value 0.00 0.00 3.00
Date 28-Feb-2017 28-Feb-2017 28-Feb-2022
Comment Includes all sub-projects receiving financial instruments
that are considered as innovative in nature.
Intermediate Results Indicators
Status Indicator Name Core Unit of Measure Baseline Actual(Current) End Target
Revised Number of infrastructure sub-
projects financed by IIF
Number Value 0.00 0.00 7.00
Date 28-Feb-2017 28-Feb-2017 28-Feb-2022
Comment Includes all IIF’s sub-projects.
New Number of IIF advisory
engagements
Number Value 0.00 0.00 7.00
Date 28-Feb-2017 28-Feb-2017 28-Feb-2022
Comment Includes both public and private sector advisory
engagements .
34
ANNEX 2. IMPLEMENTING AGENCY ASSESSMENT
1. IIF as an institution has established itself as a small but credible player in Indonesia’s
project finance market, and is seen as an important vehicle to deliver privately financed
infrastructure projects to help address the huge infrastructure gap. After five years of IIFF Project
implementation, IIF is now fully operational, with well-developed institutional capacity and with
an infrastructure investment portfolio of nine projects, with total commitments of IDR 2.5 trillion
($201 million) and outstanding investments of IDR 1.8 trillion (US$145 million). IIF also
continues to build its advisory services business line, through which it is contributing to GOI’s
broader policy-making in relation with PPP and infrastructure financing.
2. Capital structure. IIF’s total equity currently stands at IDR 1.91 trillion (US$154 million),
comprising IDR 1.8 trillion (US$144 million) in paid-in capital and retained earnings of IDR 110
billion ($9 million). With IDR 1.8 trillion in paid-in capital, IIF is close to reaching its target of
maintaining total equity of IDR 2 trillion and is actively engaged in meeting this requirement. At
inception, IIF had four shareholders, of which SMI had the largest stake of 40 percent. The original
shareholding of SMI and International Financial Institutions (IFIs) is expected to be diluted over
time as private sector investors acquire stakes in IIF. On the debt-funding side, WB and ADB
each made loans of US$100 million to IIF at inception. Subsequently in June 2014, IFC, together
with Standard Chartered (SC) Bank and Deutsche Bank (DB), led a syndication of 16 banks to
provide loans of US$250 million to IIF, which are expected to help diversify IIF’s funding base
and increase its access to longer term funding.
3. Institutional development. 2014 marked the conclusion of a three-year phase of initial
institutional development, and IIF is ready to progress to its next three-year plan. IIF has engaged
in developing the areas of human capital, organization structure, risk management, standard
operating procedures, and corporate finance. IIF is implementing a risk management framework
that includes the areas of credit risk, operational and compliance risk, market risk and portfolio
management, and social and environmental risk. IIF’s Risk Management Directorate (RMD)
monitors and reports its risk management activities to the organization and leadership.
4. Safeguards. IIF continues to build on progress made towards establishing good S&E
management capacity. IIF is demonstrating robust capability in implementing the Social and
Environment Management System (SEMS) as specified in the OM consistently for its portfolio
and pipeline projects, with its Standard Operating Procedures (SOP) in place and its S&E team
comprising of four S&E specialists with extensive relevant experiences prior to joining IIF. The
proposed IIFF-AF will continue to finance subprojects through the range of IIF’s financial
products that are already included in the OM (as detailed in Annex W of the OM). There will
therefore be no changes to the IIF OM. An explanatory note has been, describing specific
implementation procedures to administer the IIFF-AF.
5. IIF’s institutional capacity in managing social and environmental safeguards. IIF has
demonstrated strong capacity in managing S&E safeguards that is governed by its Social and
Environmental Management Systems (SEMS) for its current portfolio and pipeline. An S&E
Division (SED) under the Risk Management Directorate has been established and well-functioned,
which is mainly responsible for ensuring that the SEMS, which is part of the Operations Manual,
is consistently followed by all subprojects financed by IIF. S&E safeguards have been
35
mainstreamed in the IIF’s subproject loan processing cycle as governed in the Safeguards Standard
Operating Procedures (SOP), an operational tool for implementing the SEMS. IIF management
has strong commitment to strengthen its S&E capacity through recruitment of necessary S&E
safeguards staff and providing continuous capacity building and training activities. Beyond the
call of duty, IIF has actively promoted sustainable infrastructure financing by sharing its S&E
principles and experiences with some commercial and regional development banks in the country
as well as with the largest private bank in Indonesia. In line with these achievements, the Bank has
noted that IIF has successfully conducted the SEDD and managed to implement the SEMS
consistently for all of its portfolio projects. The recent WB safeguards specialists’ field visit to the
MW Solar Power Plant Project in Gorontalo also confirms this overall assessment.
6. IIFF-AF implications for safeguards management. The proposed IIFF-AF will continue to
finance projects through the range of IIF’s financial products that are already included in the OM
(as detailed in Annex W). There will therefore be no changes to the IIF OM. As the proposed IIFF-
AF’s financial products, sub-project types and sectors will remain the same as those of the ongoing
IIFF project, the S&E safeguards risks of projects to be financed by IIFF-AF will remain similar
to those of the IIFF project. Therefore, the 2014 SEMS and current practice of S&E management
of the IIFF remain appropriate for the proposed IIFF-AF. IIF will continue to adopt the current
principles, procedures, requirements and institutional arrangements of S&E safeguards
management as specified in the 2014 SEMS. Further, IIF will continue to strengthen its current
S&E staff through training, more exposures in the workshops or seminars, recruit new S&E
manager and staff to manage S&E safeguards in accordance with its growing portfolio and
pipelines. IIF is also planning to strengthen its grievance redress mechanisms and disclosure
arrangements.
7. Financial Management and Procurement. Through implementation of the IIFF project, the
WB Task Team has consistently found fiduciary performance to be satisfactory. As IIF has
progressively built its business and operations, it has boosted its relevant components of
institutional capacity so that its financial management and procurement related functions continue
to perform satisfactorily with improvement of PT IIF control over disbursement and its treasury
procedures to include management of Bank’s excess fund and coordination among all stakeholders
of the project.
8. Overall, IIF has emerged as a fully operational non-bank financial institution set to meet
current and future business demands, playing an increasingly important and visible role in the
financing of infrastructure projects in Indonesia. In particular, IIF presents unique value
proposition in:
Financing. IIF is the one of the few local financial institutions that can provide US dollar-
denominated financing and with tenures over seven years. While foreign banks may be able
to offer products with those attributes, unlike IIF, foreign banks are generally reluctant to take
long-term public sector counterparty risk without some element of sovereign support.
Capacity. Indonesian banks are drawn to collaborate with IIF due to its unique expertise in
project finance and due diligence, skills that have added a previously missing element to the
Indonesian infrastructure finance market and mark a paradigm shift. In addition, Indonesian
banks have come to realize the value of the environmental and social safeguards expertise—
arising from WB and IFC involvement with IIF—that allows IIF deals to meet international
standards.
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ANNEX 3. SUMMARY OF MARKET CONSULTATIONS
In order to better understand the existing challenges to long term infrastructure finance, market
consultations were held in two rounds, broader consultations in 2015 and more focused
consultations in 2016.
Market consultations 2015
The first round of one-on-one market consultations with key market players were held in 2015,
which is summarized below.
Table 3.1: Market Consultations: Key Messages
Category Organization Key Messages
Banks BNI Typical loans have 5-7 years term. Difficult to lend longer term due to ALM.
Mostly lending to government/ SOE projects, with promoter guarantees.
Avoid lending to infrastructure projects as high political and operational risks,
land acquisition. Many instances - need to restructure loans.
Prefer club deals to manage borrower exposure norms and risks.
CIMB
BCA
Financial
Investors
Macquarie Capital There is a limited local pool of money for infrastructure.
Few bankable deals, long development cycle for green-field projects.
Small but growing private equity interest in consumer and retail sectors.
Few PE deals done in infrastructure that too largely in telecom towers.
High tax incidence on equity transactions, especially on private trade.
Macquarie has been highly selective in picking up deals, sees high political
and regulatory risks in infrastructure projects.
Bahana Pembinaan
Saratoga Investama
Developers Medco Power Need for new sources of equity and quasi-equity in Indonesia, as today
promoters have to rely primarily on internal accruals to fund equity.
Equity returns expectation should be moderated to the Indonesian environment
with longer term holding period, given profitability constraints.
The President’s infrastructure push is welcome but major concerns voiced– (i)
Delays due to poor preparation and government’s capacity constraints, and (ii)
SOEs likely to get good deals and dominate investments.
Nusantara Infra
Astratel
Bakrie Global
Institutional
Investors
DPPLN
Bahana TWG Historically have been investing in government bonds and bank deposits.
Most investments are made of 3-5 years in view of the 5-year term of the board
members of the PF. A practice that requires modification based on greater
awareness/ education.
Indonesian PFs are now exploring infrastructure investments, as the GOI is
asking PF’s to invest 10% of funds into infrastructure.
Lack of clear exit options will be a major concern for this risk-averse group of
investors.
Market consultations 2016
During April-May 2016, consultations were held with select market participants to
reconfirm market appetite for IIF’s financing products and IIFF Additional Financing. Key
findings of the consultations include:
The findings are encouraging and confirm a niche market for IIF’s financing.
37
However, accelerating the off-take of IIF’s financing products would need greater market
engagement with project sponsors, regional and local banks, government contracting
agencies, and collaboration with key infrastructure financiers such as IIGF and SMI.
Besides deal origination, deal incubation should form a major strategy for IIF to accelerate
off-take of IIF’s financing products.
The following are summaries of the findings from consultations.
(i) Equity bridge financing (consultation with PT Dharma Hydro Nusantara)
For undertaking large infrastructure projects, developers find difficulty in raising large portions of
equity from internal resources. It is also difficult to find strategic investors at the development and
construction stage for large infrastructure projects given high risks. Foreign investors are wary of
the government approval and long project development cycle of infrastructure projects in
Indonesia. Thus, a product like equity bridge finance provides developers with an alternative to
supplement their own equity during the early stages of the project. Once the project is constructed
and operational, the project’s risk profile reduces significantly and the project is able to attract
additional equity from strategic investors. Such a product can improve the equity returns for
developers. Furthermore, developers also feel that initially having one or two equity investor(s)
facilitates speedier decision making and tighter project management. IIF is in an early stage
dialogue with the developer for providing an equity bridge finance to a large renewable energy
project.
(ii) Promoter Funding (consultation with PT Len Industri [Persero])
PT Len is a diversified electronics company that is recently moving into infrastructure
development. Having a small equity capital base, it is finding investing into large infrastructure
projects difficult. It has stable cashflows coming from government contracts related to supply and
commissioning of equipment and construction works. It has contracts with Angkasa Pura II,
Department of Defense, GOI, PLN, etc. It has recently won the availability based payment PPP
for central Palapa ring project and is facing constraints in raising its internal resources to meet the
equity commitments for the project. For such infrastructure developers, Promoter Funding can be
an attractive alternative to raise additional funding for meeting its equity commitments in the
medium term. Promoter Funding loans could be serviced at the promoter company level, i.e. at PT
Len level through stable cash flows from government contracts while the funds could be channeled
into infrastructure projects as equity or subordinate debt from promoters. There is a niche market
for Promoter Funding till such time that infrastructure developers are able to raise additional equity
through capital markets or from strategic investors.
(iii) Take out financing (consultation with Commonwealth Bank of Australia)
Foreign banks such as CBA are keen to invest in infrastructure projects in Indonesia that have a
balanced risk sharing structure. As most foreign banks, it is constrained to lend more than 7 years
and thus is keen to explore blending its loans with take-out financing. As of date CBA does not
have a large loan book in Indonesia and hence seeks to build it through well structured financing
solutions. Lending from CBA will likely be as senior debt with standard security and collaterals
such as charge on fixed assets, lien on accounts receivables, escrow arrangements, and with project
38
completion and cost over risks with project promoters. For large infrastructure projects, CBA will
prefer club deals in a consortium of 5-10 banks depending on deal size. In terms of take-out
financing structure, it would be prefer to have an option to be taken out rather than a mandatory
take out. In recent months, CBA has received a few enquiries on infrastructure financing where it
feels that take out financing could provide a suitable solution.
An issue raised by CBA in the context of IIF was the latter’s single borrower exposure limit that
is restricted to 35 percent of the project cost and may not be sufficient to cover all senior debt in a
project. A possible solution proposed by IIF is to structure the deal wherein IIF could lend to mid-
size projects to the extent of say 50 percent of debt while providing a take-out financing for the
remaining portion that would be financed by other lenders. By the take out date, say after 5-7 years,
a significant portion of the principal of both types of loans would have been repaid (say, 30 percent-
50 percent of the debt) thus allowing IIF to take over the loans from other lenders while still
maintaining its exposure within the single borrower exposure norm. The success of the product
would depend upon its attractiveness for borrowers (cost vs benefits) and the manner in which it
is structured. Therefore, CBA is keen to explore the structuring of take-out financing with IIF.
(iv) Debt financing for PPPs (consultation with IIGF)
There is inherent need for providing comprehensive financing for infrastructure PPPs in Indonesia.
A full financing package can be offered to project developers and thus reduce the financing risk
and delays in financial closure. The demand for providing a comprehensive PPP financing solution
also depends on how and where it is deployed. For instance, such financing could work well in
projects that are not too large in scale where developers find it difficult to tie up funding from large
national or international banks, or in sectors where PPPs are not so well established. The financing
would work well in availability based payment PPPs as well as user charges based PPPs. Projects
in sectors such as ICT, roads, water, wastewater, waste management are more likely to have an
appetite for comprehensive financing solutions as against electricity, airports, oil and gas.
A major factor for IIF to consider is that they will only be able to finance a portion of the project’s
debt. Hence, in order to provide a full package solution, IIF would need to lead a syndicate of
banks and lenders. Another factor to consider is the learning curve within the GCA’s team. So
there will be a need to generate awareness amongst GCAs and considerable hand-holding to make
the project structure bankable. IIGF is working with a few GCAs on projects that can benefit from
a comprehensive financing solution and this could be a good opportunity for IIF to collaborate
with IIGF to introduce comprehensive PPP financing solutions in Indonesia. According to IIGF,
they envision 2-3 deals over the next 2 years that could utilize such financing.
39
ANNEX 4. INSTITUTIONAL CAPACITY AND FINANCIAL
ASSESSMENT OF IIF
A. Review of IIF’s Institutional Positioning and Strategic Objectives
Company profile
1. PT Indonesia Infrastructure Finance (IIF) was
established on January 15, 2010 as a private non-bank financial
institution, under an initiative of the Government of Indonesia,
in cooperation with the World Bank, Asian Development Bank
(ADB) and other international multilateral agencies under
regulation (PMK) No. 100/PMK.010/2009 dated May 27, 2009
with a focus on investing in commercially viable infrastructure
projects in Indonesia and to encourage private sector
engagement in the country’s infrastructure development.
2. IIF provides long-term fund-based products such as
senior loans, mezzanine finance and equity participations, in
addition to non-fund-based products such as guarantees and fee-
based services, and thereby provides an important additional
source of funding for infrastructure projects in Indonesia.
Supported by a strong capital base from its shareholders and 25-
year subordinated loan on-lending facilities from the World
Bank and the Asian Development Bank, IIF is well positioned
to assist in bridging the gaps in the country’s requirements for
infrastructure financing.
3. Designed as a catalyst for this particularly unique but
strategically vital sector, IIF also plays a distinctive role in
providing advisory services and supporting the Indonesian
Government in infrastructure policy making by providing
transactional advisory services to public sector clients for the
procurement of infrastructure services under the Public Private
Partnership (PPP) model. This is in line with IIF’s
determination to emerge as an experienced and respected
repository of knowledge and skills in the field of commercially
viable infrastructure project development and financing, including those projects under the PPP
model.
4. IIF applies international-standard best practices in terms of social and environmental
safeguards and exercises good corporate governance in order to promote more sustainable
infrastructure project development in Indonesia.
Vision
To become the leading catalyst for
financing infrastructure in
Indonesia.
Mission
To ensure investor needs are
reflected in contractual structures
and concessions.
To lead in offering a mix of long
term financing instruments
appropriate for infrastructure
To work with Indonesia’s
financial institutions and other
institutional investors to channel
the nation’s savings into the long
term development of Indonesia’s
infrastructure.
SMBC14.90
%
SMI, 30%
DEG, 15.20
%
ADB, 19.99
%
IFC, 19.99
%
Shareholders
SMBC SMI DEG ADB IFC
40
Business lines
5. IIF has two business lines, viz. Investment business that provides senior debt, subordinate
finance and equity investments to commercially viable infrastructure projects in Indonesia; and
Advisory business that provides advisory services to public and private sector on policy issues,
project preparation and financial structuring of bankable infrastructure projects in line with
international standards. IIF’s business lines focus on creation of infrastructure in sectors such as,
transportation, roads, irrigation, drinking water, waste water, telecommunication and information,
electricity, oil and gas. Select examples are provided in Table 4.1.
Table 4.1: Products and Services of IIF
Products and Services Select Deals
Investment Products
Fund based - Senior debt, subordinated debt,
mezzanine finance and equity investment
Non fund based – guarantees, credit enhancement,
performance bonds, standby facilities
Financing of 2 MW solar power plant in North Gorantalo
Financing of expansion of terminal 3 of Soekarno Hatta
International Airport
Mandatory convertible bonds for a renewable energy
platform
Advisory Services
Transaction advisory services to the government
Infrastructure policy, legal and regulatory advisory
Transaction advisory services to private sponsors
Co-advisory on Trans Sumatra toll toad
Private sector advisory on Batam PPP project
Advisory to Ministry of Home Affairs on regulatory
framework for availability payment based PPPs at
regional government level
Source: IIF’s Annual Report, 2015
Loan and Investment Portfolio
6. IIF has commitments of IDR 5479 billion (~US$412.74 million), of which investments
made of IDR 4175 billion (~US$314.52 million). Following figures highlight the portfolio’s
composition.
Figure 4.1: IIF’s current loan and equity portfolio, as of March 31 2016
41
Source: Loan and equity investment monitoring data from IIF, April 2016
Credit Rating
7. Fitch Ratings has assigned IIF with a national long-term rating of ‘AAA(idn)’ with a
stable outlook. The rating assigned to IIF is supported by the following key considerations.
Table 4.2: Key considerations for IIF’s credit rating
Strengths
Strategic importance of PT IIF: PT IIF is a credit-linked public sector entity created to act as a catalyst for
achieving the infrastructure development agenda of the Government of Indonesia through various fund based,
non-fund based, and fee based instruments and services. Infrastructure improvement is a highly strategic priority
of the Government of Indonesia. Therefore, PT IIF is expected to receive strong support from the Government of
Indonesia in terms of political and financial commitments.
Strong shareholders: The major shareholder of PT IIF is PT SMI, a government-owned entity with a credit
rating of ‘idAAA’ with a Stable Outlook by PEFINDO Rating for local rating and global rating of BBB- which
reflects the sovereign rating from Fitch Rating. In addition, three other shareholders of PT IIF are multilateral
agencies with an investment grade rating and a stable outlook. The only non-public sector shareholder of PT IIF
also has an investment grade rating and a stable outlook. Given the strong commitment of support to PT IIF from
these shareholders, based on their weighted average rating, the rating of ‘AAA(idn)’ with a Stable Outlook of PT
IIF is justified.
Tight control: The daily operations and management of PT IIF are actively supervised and monitored through
regular meetings between the Board of Commissioners (BoC) and the Board of Directors (BoD). The BoD need
approval from the BoC for projects above a threshold level. There are nine members of the BoC including, one
member of each shareholder group, two representatives from the MoF and three independent commissioners. This
tight control and monitoring by government justifies the rating of ‘AAA(idn)’ with a Stable Outlook of PT IIF.
Improved financial performance of PT IIF: The major source of revenue for PT IIF is the interest income from
loans advanced. The interest income increased from IDR 118 billion in FY2014 to IDR 196 billion in FY2015.
As its lending portfolio grow, PT IIF is expecting its interest income to increase to IDR 832 billion by FY2019.
In addition, PT IIF also receives treasury income from investments in time deposits and bonds with its large
holdings of funds that have not been lent out. The treasury income has been growing at a healthy CAGR of 29
percent from FY2012 to FY2015. This healthy financial performance of PT IIF justifies its rating of ‘AAA (idn)’
with a Stable Outlook.
Increased demand for infrastructure financing: The loans advanced by PT IIF increased two-fold from IDR
1,592 billion in FY2014 to IDR 3,343 billion in FY2015. Majority of these loans have been advanced by PT IIF
42
in sectors of Telecommunications, Toll Roads, Energy, Airports, Seaports, and Aircraft Maintenance. Loans to
other mandated sectors including roads and drinking water are likely to increase in the medium term. In addition,
nearly 48 percent of the total loans advanced are denominated in US$, reflecting the demand for foreign-currency
loans for infrastructure projects. This robust demand for infrastructure loans justifies the rating of ‘AAA (idn)’
with a Stable Outlook of PT IIF.
Sufficient borrowing capacity: PT IIF has been maintaining a debt to equity ratio of less than 1.5 times and a
debt to capital ratio of less than 0.6 times. With regular equity capital infusions and maintaining more than 35
percent of the total assets as cash and cash equivalents and marketable securities, PT IIF has been adhering to the
various financial covenants agreed in the borrowing agreements with existing lenders. With sufficient borrowing
capacity available with PT IIF and a track-record of successfully and satisfactorily adhering to the financial
covenants agreed in the borrowing agreements with existing lenders, PT IIF is not likely to face any borrowing
constraints. This justifies the rating of ‘AAA(idn)’ with a Stable Outlook of PT IIF.
Some of the critical considerations that are likely to trigger a ratings downgrade for PT IIF include, a reduction in
the shareholding of PT SMI and the multilateral agencies below 50 percent (controlling stake), and a reduction in
MoF’s influence on the BoC of PT IIF.
Source: Fitch Ratings Indonesia, 2015
8. IIF has recently launched a public issuance of new bonds aggregating IDR 2 trillion in July
2016. For the new bond issuance, IIF has obtained a credit rating from Pefindo (the local affiliate
of S&P) of ‘IndAAA’ reflecting the highest level of credit rating.
B. Corporate Governance Arrangements
9. IIF follows the principles of good corporate governance – transparency, accountability,
responsibility and impartiality. It has incorporated a code of conduct that supports governance
activities within the company’s structure. This section summarizes the institutional framework of
IIF including its existing and proposed organization structure, staffing and governance practices.
1. Governing Bodies
10. The main organs of good corporate governance that are instituted in IIF are the General
Meeting of Shareholders (GMoS), the Board of Commissioners (BOC) and the Board of Directors
(BOD). They are assisted by the committees of the BOC and BOD. More details below.
11. General Meeting of Shareholders. The GMoS is the highest governing body, whose
authority is regulated by law and IIF’s articles of association. The GMoS consists of the annual
GMoS and, if required, the extraordinary GMoS. The GMoS has the following authority, amongst
others:
Table 4.3: Authority of the General Meeting of Shareholders
Appointment and termination of the BoC and the BoD members
Evaluation of the performance of the BoC and the BoD members.
Approval of IIF’s financial statements, and
Determination of the remuneration of the BoC and the BoD members.
Source: Information from IIF, 2016
43
12. Board of Commissioners. The Board of Commissioners (BOC) assisted by its specialized
committees is at the apex of IIF’s organization structure. The BoC is responsible for overseeing
the policies and management of the company, which is under the responsibility of the Board of
Directors (BOD), as well as providing counsel and recommendations to the BoD. This includes
supervising the execution of the IIF’s business plan and budgeting, ensuring compliance with the
articles of association, resolutions from the GMoS, and prevailing laws and regulations, in
accordance with the Company’s best interests. The composition of the current BOC is presented
below.
Table 4.4: Composition of IIF’s Board of Commissioners
No. Name Representation
1 M Chatib Basri President Commissioner & Independent Commissioner, and former Minister of
Finance of Republic of Indonesia
2 Edwin Gerungan Independent Commissioner & former President Commissioner of Bank Mandiri
and former Independent Commissioner at Bank Danamon and Bank Central Asia
3 Zulkifli Zaini Independent Commissioner & former President Director of Bank Mandiri and
former Commissioners of Bank BNI and PLN
3 Marwanto Harjowiryono Director General of Treasury, Ministry of Finance of the Republic of Indonesia
4 Robert Pakpahan* Director General of Budget Financing and Risk Management, Ministry of Finance
of the Republic of Indonesia
5 Robert Dolk ADB representative and independent ED of Zurich Financial Services Australia
Limited, Law Cover Insurance Pty Limited, and Amber Holdings
6 Hans-Juergen Hertel DEG representative and former Director of DEG Office in Jakarta
7 Richard Ranken* IFC representative
8 Rajeev Kannan SMBC representative and General Manager, Project & Export Finance
Department in Sumitomo Mitsui Banking Corporation
*) Appointed as members of Board of Commissioners since March 2016.
Source: Information from IIF, 2016
13. Committees of the Board of Commissioners. In line with good corporate governance
practices and to support the effective discharge of the Commissioners’ duties and responsibilities,
the BOC has constituted the following specialized Committees.
Table 4.5: Committees of IIF’s Board of Commissioners
No. Name Responsibilities
1 Audit Committee Supervises internal controls, accounting policy, financial reporting, and the
internal and external auditors
2 Investment Committee Supervises IIF’s investment activities and considers investment proposals
3 Nominations and
Remuneration Committee
Recommends the remuneration for members of the Board of Directors and
Independent Commissioners and also sets forth the general remuneration
policies for the company’s staff
4 Risk Oversight Committee Supervises IIF’s risk management function, introduction of adequate risk
controls for IIF’s assets and liabilities, and provision of recommendations
on risk mitigation
Source: Information from IIF, 2016
44
14. Board of Directors: Headed by the President Director, the BOD is accountable for the
achievement of IIF’s corporate objectives. Throughout the implementation of its duties and
responsibilities, the BOD represents IIF in any circumstance within and outside courts, and has the
power and authority to bind IIF with any third party and undertake any action pertaining to IIF’s
property ownership and disposition. The BOD is collectively and individually responsible for
coordinating, monitoring and leading the company in accordance with the company’s interests and
for managing and safeguarding its assets. The composition of the current BOD is presented below.
Table 4.6: Composition of IIF’s Board of Directors
No. Name and Designation Role
1 Ari Soerono
President Director & Chief
Executive Officer
Responsible for establishing and executing IIF’s policies, budgets, objectives,
strategy and vision while ensuring alignment with and support from the BOC
and shareholders, and to provide direction to the company and the Corporate
Directorate.
2 Indrawati Darmawan
Director & Chief Financial
Officer
Responsible for contributing to IIF’s strategic plan and developing yearly plan,
objectives, budgets, policies, procedures and systems in order to give direction
to the company and the Finance Directorate.
3 Harold Tjiptadjaja
Director & Chief
Investment Officer
Responsible for contributing to IIF’s strategic plan and developing yearly plan,
objectives, budgets, policies, procedures and systems in order to give direction
to the company and the Investment Directorate.
4 Wito Krisnahadi
Director & Chief Risk Officer
Responsible for contributing to IIF’s strategic plan and developing yearly plan,
objectives, budgets, policies, procedures and systems in order to give direction
to the company and the Risk Management Directorate.
5 Hilda Savitri
Director & Chief Investment
Officer
Responsible for contributing to IIF’s strategic plan and developing yearly plan,
objectives, budgets, policies, procedures and systems in order to give direction
to the company and the Investment Directorate.
Source: Information from IIF, 2016
15. Committees of the Board of Directors. To support the effective discharge of the
Directors’ duties and responsibilities, the BOD has constituted the following specialized
Committees.
Table 4.7: Committees of IIF’s Board of Directors
No. Name Responsibilities
1 Investment Committee Reviews all investment proposals to be submitted to BOC-IC for further
assessment, subject to approval thresholds. Coordinates with Assets &
Liabilities Committee to ensure funding adequacy for proposed
investments, monitors implementation of all investments and
periodically reviews credit investment policies.
2 Assets and Liabilities Committee Monitors the risk and management of funds and other resources,
primarily in managing market risk and liquidity risk.
3 Risk Management Committee Monitors the risk management of IIF’s business activities and provides
recommendations in formulating risk management policies and
strategies.
4 Information Technology Steering
Committee
Prioritizes and aligns IT initiatives with business strategy, and oversees
major IT related strategies, projects and technology architecture
decisions.
45
No. Name Responsibilities
5 Human Resources Committee Legislate and review the Company’s internal regulation and policy
regarding employment, human resources, benefits.
Source: Information from IIF, 2016
2. Organization Structure
16. IIF’s organization structure has been aligned to the good corporate governance framework
adopted. Some reorganization is being effected in 2016 to better align with the business plan for
2016-2020. The organization structures for 2015 and 2016 – 2020 are provided in 3. Following
section provides a brief overview of the salient features.
17. Divisional reporting. Below the BOD, various divisions of IIF report to their respective
Directors.
Investment Directorate. Within the Investment vertical, the Investment Managers,
Transaction Legal and Project Supervision report to their respective Directors (Chief
Investment Officers - A and B). The Syndications division, which was earlier reporting to
the Advisory Group Head, will now report to the CIO A, from 2016 onwards. This
effectively segregates the investment functions from advisory functions and will bring in
greater synergy between investment and syndication activities.
Advisory Group. The public sector and private sector advisory divisions that were working
independently have been regrouped under the head of the Advisory Group. The
syndications team has now been relocated within the investment function.
Risk Management Directorate. The Risk Management function works independently under
the Chief Risk Officer. This includes credit risk management, social and environmental
management, market risk and portfolio management, operational, KYC and compliance
risk management.
Finance, Operations and Corporate Planning Directorate. The functions of finance,
operations and corporate planning report to the Chief Financial Officer. At present, the
President Director holds the interim charge of CFO.
Corporate Secretary, Human Resources and General Administration (HR & GA) and
Internal Audit are under Corporate Directorate and report directly to the President Director.
46
Figure 4.2: Organization Structure of IIF
Note: The Committees of the BOC and BOD are reflected in grey.
Table 4.7: Headcount 2015 to 2020 Figure 2.3: Manpower Distribution 2015 to 2020
2015 2016 2017 2018 2019 2020
CEO 7 11 12 13 14 15
CFO 16 19 22 23 24 25
CIO 22 29 33 35 37 39
CRO 9 12 14 14 15 16
Advisory 3 4 5 5 5 5
Total 57 75 86 90 95 100
Source: Information from IIF, 2016
47
18. Headcount. IIF increased its total staff strength by 32 percent from 57 employees in 2015
to 75 employees in 2016 to gear up for its growth in business. By 2020 it plans to increase the staff
strength to 100 employees, almost double its size today. The planned increase in manpower is
evenly distributed across its business verticals. Details are provided in Table 4.7 and Figure 4.3
above.
19. Corporate Governance Policies. IIF has implemented good corporate governance
policies in line with international standards. The principles underlying the company’s good
corporate governance are transparency, accountability, responsibility, independence and fairness.
IIF implements good corporate governance based on its shareholders’ agreement, articles of
association, charters of BOC, BOD and their committees, IIF’s operations manual, policies,
standard operating procedures and guidelines, company regulation for employees, code of ethics.
3. IIF’s Risk Management Framework
20. IIF has instituted a comprehensive risk management framework in line with international
practices. This is implemented through an independent Risk Management Directorate (RMD)
under the leadership of CRO who acts under the supervision of BOD – RMC and BOC – ROC.
The RMD monitors at least four key risks – credit risk, market risk & portfolio management,
operational & compliance risk management, and social and environment risk. An overview of the
framework is provided below.
Table 4.8: IIF Risk Management Framework
1.Risk Management Policies 2.Guidelines & Policy Implementation Procedures
Credit Risk Operation Manual
Operational Risk Operation Manual
Market Risk Operation Manual
Social and Environment (S&E) Operation Manual
Policy in Managing Potential Conflicts of Interest for
IIF’s Loan and Equity Investments
Portfolio Management Guideline
Exposure Limit Framework
Insurance Guideline
Policy Implementation Procedure for Credit Risk
Policy Implementation Procedure for Capital
Adequacy
Policy Implementation Procedure for Loan Loss
Provisioning
Group Exposure Guideline
Business Continuity Management Guideline
Data Protection Guideline
Policy Implementation for Risk Rating
Policy Implementation Procedure for Investment
Pricing
Policy Implementation Procedure for Corporate Risk
Rating Adjustment
Commitment Fee Guideline
Sector Allocation Guideline
Credit Risk Appetite Statement
Guideline for KYC Principle
Periodic Review Document Template Credit Risk
Department and Investment Directorate
3.Charters
BOC– Investment Committee Charter
BOD– Investment Committee Charter
Asset and Liability Committee Charter
Risk Oversight Committee Charter
Risk Management Committee Charter
4.Standard Operating Procedures (SOP)
Credit SOP
Operational Risk SOP
Market Risk SOP
Portfolio Management SOP
Social and Environment (S&E) SOP
5.Service Level Agreement (SLA)
SLA with Investment Directorate (Credit and S&E
Unit)
SLA with Finance Directorate
6.Delegation of Authority from BoC to BoD-IC
Source: Information from IIF, 2016
48
21. Credit risk management. This focuses on assessing counterparty risk and in assuring
appropriate credit management analysis, structures and decisions processes. Key activities include,
appraising, site visit and due diligence of the financial opportunity and the project, and then rating
the level of credit risk exposure to a project company or borrower. If the financing proposal is
approved by the BOD-IC/ BOC-IC then the suitable covenants are placed in the financing
documents as conditions to be fulfilled by the borrower. Thereafter, the credit risk is monitored
annually and re-rating of the borrower is undertaken as required.
22. Rating Tools. IIF has its internal rating tools to rate the level of credit risk exposure of a
project company to which the IIF extends financing facility. Each proposed transaction is rated
before an approval to transact is given. The rating process includes evaluation of the transaction
using specific internal rating tools. For project financing, IIF has acquired the project finance rating
model from S&P Capital IQ, a subsidiary of S&P, which has been implemented starting October
2014. For corporate financing, IIF has conducted an exercise to adjust IIF's risk rating model from
CRISIL for corporate financing, of which the first version has been approved by RMC on Dec 2,
2015. This will be a continuous project for Risk Team.
Table 4.9: Rating tools used by IIF
Project Finance Rating Tool Corporate Finance Rating Tool
1. Model uses 5 parameters to determine for rating:
Revenue and contract
Competitive market position
Financial strength
Construction, operation and technology
Legal and financial structure
2. Each parameter has several risk factors that are scored
between 1 to 10 (from best to worst). The tool takes the
lowest score of factors within each parameter as the
overall score of that parameter.
3. All five parameters will be combined together to
obtain Project level score that will be become the
Implied Project Rating (“IPR”)
4. Final Project Rating (“FPR”) will be determined by
another three adjustments, if any:
Force majeure adjustment, if there are any major
force majeure anticipated that would notch down
the IPR to max four notches
Country risk cap, to be applied if country risk
rating is lower than IPR
Credit enhancement In the absence of the above
adjustments, IPR will be the same with FPR.
1. Model uses 4 parameters for rating:
Business risk
Financial risk
Sector/Industry risks
Management and governance
2. As in project finance scorecard, each of the factors is
scored between 1 to 10 (from best to worst) based on the
characteristics of the project.
3. Unlike the S&P Capital IQ model for project finance
rating, the corporate rating model from CRISIL has
determined specific weighting of the factors for each
parameter.
4 Using the score of 1 to 10 and weight of each factors,
the tool will generate total risk score that will later
determine the overall rating. There is no adjustment
flexibility to overall rating to determine final rating as in
the project finance scorecard.
Source: Information from IIF, 2016
49
23. Rating Scale. The risk rating is scaled between IIF1 (the best) to IIF10 (the worst). The
Investment Team will propose the rating using the tool for Credit Risk Team review. In case there
is difference opinion between Investment and Credit Risk Team, the BOD-IC will provide final
decision. The lowest rating of any projects for investment consideration is limited at IIF7. Table
4.10 below provides illustrative ratings assigned by IIF.
Table 4.10: Select ratings of IIF’s loan portfolio
No Name Sector Rating Financing Facility Approval
Date
Loan
Agreement
Date
Monitoring Latest
Rating
Date
1 Project A Road IIF2 Project Senior Loan 25.4.12 26.9.12 Semi Annual 28.1.16
2 Project B Electricity IIF3 Operational Senior Loan 02.4.14 28.5.14 Annual 23.6.15
3 Corporate A Telecom IIF3 Corporate Revolving Facility 22.7.13 18.10.13 Annual 21.8.15
4 Project C Electricity IIF4 Project Senior Loan 12.6.13 18.10.13 Semi Annual 11.3.16
5 Corporate B Airport IIF4 Corporate Senior Loan 18.7.13 16.7.14 Annual 24.8.15
Source: Information from IIF, 2016
24. Exposure limits based on ratings. The ratings assigned to each project determines the
level of IIF’s exposure. This is based on the following prudential norms that have been adopted by
IIF.
Table 4.11: Maximum exposure limits of IIF
Project Exposure Limit Overall Portfolio Exposure Limit
Based on
Project Cost
Facility Limit % of project cost
Based on
overall
Portfolio
Composition
Rating Limit (% of Total IAUM2)
Senior 20% for Large Project (“L”)
35% for Mid/Small (“M”) Grade 8 and below 0%
Equity &
sub- debt
10% (L) or 15% (M) within respective overall
exposure cap
Grade 7 and above 5%
Based on
Rating of the
Project
Rating Limit % of project cost
Grade 6 and above 15%
Grade 5 and above 30%
1-3 25% Grade 4 and above 50%
4-5 15% Grade 3 and above 80%
6-7 10% Grade 2 and above 100%
8-10 Do not lend Grade 1 and above 100%
Group
Exposure
Limit
30% of IIF’s capital
(group = 2 or more entities that are
associated through “commonality of
management” or “effective control on the
management”)
Sub-Debt and
Equity
Portfolio
Limit
40% of IIF’s capital
(this limit include all Sub-Debt/Mezzanine/Non-Dilutive Instruments and Equity Portfolio)
25% of IIF’s capital
(this limit include any direct equity stake, participation through the secondary market and
any sponsor funding done against equities as collateral) *)
Sector
Exposure
Limit3
Sector Score Limit Sector Score Limit
Electricity 2.07 40% Airport 3.09 25%
Oil and Gas 2.09 40% Railways & MRT 3.64 15%
Telecommunication 2.52 40% Water & Waste 3.91 15%
Roads 2.63 25% Others - 15%
Port 2.71 25%
50
Source: Information from IIF, 2016, Reference: IIF’s Investment Manual – Lending Guidelines, IIF’s Credit Risk Management
Policy, Memo to BoC-IC June 13, 2012, ROC’s Group Exposure Guideline dated on June 11, 2014 and Portfolio Management
Guideline as approved in the RoC meeting dated on June 8, 2015 1. Large Projects are with total costs >IDR 1 trillion, while Medium and Small Project are with total costs ≤IDR 1 trillion 2. Limit refers to Total Investment Asset Under Management (IAUM) as confirmed by RMC and ROC dated October 1, 2014. IAUM is defined as
total equity, subordinated loans, syndicated loans (including undrawn portion); after deducting 10% reserve for liquidity purpose.
3. At any time, total commitment for each sector cannot exceed 50% of Total Current Portfolio. Sub-limit for coal-based projects not more than10% of Total Exposure. Maximum allocation each sector with buffer up to 10% ; which needs to be properly justified by the portfolio management, by
taking into account credit profile of the portfolio, diversification and correlation risk, including market opportunity and macroeconomic condition.
25. Social and environment risk management. Each project or borrower needs to comply
with all applicable national S&E laws and regulations, as well as IIF’s SEMS which are in line
with the Bank’s requirements on an on-going basis, during the tenure of IIF financing. The 2014
SEMS Chapter 2.2 stipulates that IIF will comply with:
Indonesian laws and regulations;8
The 2012 IFC Performance Standards (PS), which are also utilized by DEG in its E&S
assessment and management process;
The seven World Bank Safeguard Policies that could be triggered by IF’s subprojects; and,
The ADB Safeguard Policies that would be triggered by the IIF’s subprojects.
Table 4.12: S&E compliance with key country requirements
Related to the S&E requirements, all of the project activities financed by IIF have to comply with the Indonesian
Government Regulations, among others:
Law of the Republic of Indonesia No. 1 of 1970 on Safety.
Law of the Republic of Indonesia No 13 of 2003 on Manpower – Labor.
Law of the Republic of Indonesia No. 32 of 2009 on Environmental Protection and Management.
Law of the Republic of Indonesia No. 2 of 2012 on Land Acquisition for the Development of Public Interest.
Indonesian Government Regulation Number 18 of 1999, regarding Management of Hazardous and Toxic Wastes.
Indonesian Government Regulation No. 41 of 1999, concerning Control of Air Pollution.
Indonesian Government Regulation No. 82 of 2001, regarding Management of Water Quality and Water Pollution Control.
Indonesian Government Regulation Number 16 of 2004, regarding Land Stewardship.
Indonesian Government Regulation No. 15 of 2005, on Toll Roads.
Indonesian Government Regulation No. 27 of 2012 regarding Environmental Permit.
President Regulation No. 71 Year 2012 regarding Land Acquisition for the Development of Public Interest.
President Regulation No. 40 of 2014 regarding First Amendment of President Regulation No. 71 Year 2012 regarding Land
Acquisition for the Development of Public Interest.
President Regulation No. 99 of 2014 regarding Second Amendment of President Regulation No. 71 Year 2012 regarding
Land Acquisition for the Development of Public Interest.
Regulation of the Ministry of Environmental, No. 21 of 2008 regarding Emission Threshold Value of Static Source for the
Thermal Power Plant.
Regulation of the Ministry of Environment, No. 5 of 2012 regarding Types of Activities and/or Businesses that require
AMDAL.
Regulation of the Ministry of Environment, No. 51 of 2004 regarding The Threshold Value for Seawater Quality.
Regulation of the Ministry of Environment No. 51 of 1995 about the Waste Water Threshold Value.
Regulation of the Minister of Health Republic of Indonesia, Number: 4167/MENKES/PER/IX/1990, on Terms of Water
Quality Monitoring.
Decree of the Minister of Environment / Head of BAPEDALDA Number: KM-48/MENLH/11/1996, about Raw Noise Level.
Decree of the Minister of Environment Number: KEP-299/11/ 1996. Technical Guidelines Review of Social Aspects In the
preparation of Environmental Impact Assessment.
Decree of the Minister of Environment Number: KEP-124/11 / 1997. Technical Guidelines Review of Public Health Aspects
of the Preparation of Environmental Impact Assessment. As reference for the preparation of the EIA documents for societal
health aspects.
8 Notwithstanding the list as specified in Table 15, as a financial entity operating in Indonesia, IIF shall comply with
all prevailing Indonesian laws and regulations.
51
Decree of the Minister of Public Works 295/PRT/M Rl No. 2005, on Toll Roads. As a reference preparation of the EIA
document.
Source: IIF Annual S&E Performance Report, 2015
26. Social and Environmental Management System (SEMS). IIF’s S&E Principles are
consistent with the requirements of the IIF’s Strategic Investors as defined in the Shareholders
Agreement dated March 19th, 2012, as amended from time to time. In 2014, IIF has augmented
and harmonized its SEMS to comply with the 2012 IFC PS. IIF S&E Principles consists the
following:
Table 4.13: IIF’s S&E Principles
IIF’s S&E Principles under its Social & Environmental Management System (SEMS)
Principle 1: Social and Environmental Assessment and Management System (SEMS)
Incorporates the following elements: Screening and categorization of projects; Social and Environmental (S&E) Assessment;
S&E management program; Organizational capacity and competency; Training Emergency preparedness and response;
Stakeholder engagement; Monitoring and review; and Reporting. Applicable to all IIF projects.
Principle 2: Labor and Working Conditions
Promote the fair treatment, non-discrimination, and equal opportunity of workers; Establishes, maintains and improves worker
- management relationship; Addresses child labour, forced labour, migrant workers, workers engaged by third parties, and
workers in the client’s supply chain; and Promotes safe and healthy working conditions and practices. Applicable to all IIF
projects.
Principle 3: Pollution Prevention and Abatement and Climate Change
Addresses pollution prevention and management of impacts arising from project activities; Ensures conformance with global
good practice and standards; Promote more sustainable use of resources; and Ensures that climate change issues associated with
projects activities are assessed, mitigated and monitored over the life of IIF’s investment. Applicable to all IIF projects.
Principle 4: Community Health, Safety and Security/Dam Safety
Seeks to avoid or minimize the risks and impacts to Affected Community health, safety and security that may arise from project
activities; The project’s direct impacts on priority ecosystem services may result in adverse health and safety risks and impacts
to Affected Communities; Ensures that the safeguarding of personnel and property is carried out in accordance with relevant
human rights principles and in a manner that avoids or minimizes risks to the Affected Communities; and Includes special
requirements related to the safety of dams associated with projects. Applicable to all IIF projects.
Principle 5: Land Acquisition and Involuntary Resettlement
Refers to both physical displacement (relocation or loss of shelter) and economic displacement (loss of assets or access to assets
that leads to loss of income sources or means of livelihood) as a result of project-related land acquisition; Does not apply to
physical or resettlement resulting from voluntary land transactions; Avoid, minimize, mitigate or compensate for adverse social
and economic impacts from land acquisition or restrictions on land use through the process of Social and Environmental
Assessment under Principle 1; and No forced evictions will be carried out except in accordance with law and the requirements
of this Principle. Applicability of this Principle will be determined during project screening and appraisal.
Principle 6: Biodiversity Conservation and Natural Resource Management
Includes protection, conservation and sustainable management of biodiversity and living natural resources; Maintain the benefits
from ecosystem services; and Evaluate primary suppliers’ risk of significant conversion of natural and/or critical habitats.
Applicability of this Principle will be determined during project screening and appraisal.
Principle 7: Indigenous Peoples (IP)
Includes identification of all impacts (positive & negative) on IP; social assessment, informed consultation and Participation
(ICP) to Indigenous Peoples’ Development Plan; Anticipate and avoid, or when avoidance is not possible, minimize and/or
compensate project adverse impacts on communities of Indigenous Peoples; and applies to projects that impact individuals or
communities that meet the definition of Indigenous People, determination of which may require Free, Prior, Informed, and
Consent (FPIC). Applicability of this Principle will be determined during project screening and appraisal.
Principle 8: Cultural Property and Heritage
Recognizes the importance of cultural property and heritage for current and future generations, consistent with the Convention
Concerning the Protection of the World Cultural and Natural Heritage; and Seeks to guide IIF project sponsors in identifying
and protecting cultural heritage in the course of project design and execution. Applicability of this Principle will be determined
during project screening and appraisal.
Source: IIF Annual S&E Performance Report, 2015
27. SEMS Assessment & Monitoring. The SEMS is implemented through a dedicated SEMS
unit of IIF that independently works under the CRO. The SEMS unit ensures that the S&E
safeguards are integrated by developer or borrower into the project design prior to financing,
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during the construction, and operational phases. The unit ensures the project developer follows
national labor laws and regulations and internationally recognized labor practices, and mitigates
S&E risks of the projects through corrective actions acceptable to IIF, project developer and/or its
sponsors. The SEMS unit aims at transparency in IIF’s S&E risk assessment and mitigation
process. The project cycle comprises of three stages as presented in the Table below.
Table 4.14: IIF’s Social and Environment SOP
Preliminary review stage Project appraisal and sanction
stage
Post loan signing and Post
operation monitoring stage
In this stage, all procedures required
before the in-principal approval of
the project, are carried out.
In this stage, all procedures required
before the project is appraised for
funding are performed. It includes a
detailed appraisal of the project to be
funded.
In this stage, all procedures required
for project monitoring during
implementation as well as at the end
of funds disbursement period are
performed. Subsequently, these
procedures are followed during the
project operation cycle until IIF
exits the investment.
Source: IIF Annual S&E Performance Report, 2015
28. Hence during initial project assessment, IIF has to conduct a separate S&E Due Diligence
(SEDD) for each project (either self-conducted by IIF’s S&E Team or with assistance from IIF’s
S&E Consultant) to review compliance against its S&E requirements as specified in the SEMS.
Based on SEDD results, a customized Corrective Action Plan (CAP) is normally prepared if there
are any gaps found. As part of IIF’s financing requirements, the project needs to implement CAP
by the required deadline.
Generally, CAP will be part of the transaction document. Compliance with the CAP and other
standard covenants will be imposed in the loan documentation or other legal agreements. However,
certain project cases may need a degree of flexibilities in the approach of documentation (for
example: when the project involves a large syndication and that IIF’s participation in the project
is post the financing and therefore, it would not be feasible to re-open the existing financing
document), that instead of putting the CAP requirements as covenants in the main documentation,
IIF uses other arrangements. The following table presents an illustrative example of S&E
assessment.
53
Table 4.15: Illustrative Example of S&E Assessment in IIF’s portfolio
No Project Type Status Categorization & Rationale & Key
Safeguards Issues
S&E Assessment and Safeguards
Instruments Prepared
1 Toll Road
(Cipali, PT
Lintas Marga
Sedaya)
Operating,
partly
disbursed
A The project potentially
contributes significant
adverse impact to the
environment and social.
About 6000 HH affected by
the project.
SEDD and CAP, ESIA ESMP
CAP is part of the covenant in
the loan agreement.
Implementation and monitoring
of CAP.
Supplemental RAP
2 Telecom
(Corporate
Financing):
Indosat, XL,
Solusi Tunas
Operating,
fully
disbursed
B The project potentially
contributes very limited
adverse environmental or
social impacts.
No involuntary resettlement
involved
SEDD and CAP.
CAP is part of the Statement
letter.
Monitoring of CAP.
EMP
3 Gas Fired
/Engined Power
Plant –LPG
Processing
Plant- Gas
Piping. Batam
and Jakarta
Greenfield
project,
fully
disbursed
A,
B The project potentially
contributes significant
adverse impact to the
environment and social.
Key issue: Health and Safety
during construction,
operations. Noise.
SEDD and CAP.
CAP is part of the covenant in the
loan agreement.
Implementation and monitoring
of CAP.
ESIA and ESMP, abbreviated
LARAP
4 Airport and Port
(Corporate
Financing)-
Garuda
Maintenance
Facility-and
Terminal III
upgrading _in
Jakarta. Port
stevedoring and
equipment
supply in
Jakarta and
Makassar.
Operating,
Partly
disbursed
A,
B The project potentially
contributes limited adverse
impact to the environment.
No involuntary resettlement
involved.
Key safeguards issues: Health
and Safety issues during
construction, operations and
waste management.
SEDD and CAP.
Statement letter.
AMDAL/ESIA
5 Renewable
Energy
(Mezzanine-
Mandatory
Convertible
Bond)- Solar
Power, Wind,
mini hydro.
Operating,
fully
disbursed
B The project potentially
contributes limited adverse
impact to the environment.
No involuntary resettlement
involved.
Key safeguards issues:
Health and Safety issues
during construction and
operations.
SEDD and CAP.
CAP is part of the covenant in the
loan agreement.
EMP/UKL UPL
Source: IIF Annual S&E Performance Report, 2015
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29. Market risk & asset liability management: The management of market risk & liquidity
risk is closely monitored by the ALCO, which meetings are held regularly on monthly basis to
discuss (a) market updates & economic indicator, (b) assets & liabilities position, and key ratios –
including IIF fulfillment to financial covenants, (c) investment portfolio profile – including
available funds for investments (IDR & USD), (d) treasury portfolio – composition, yields,
modified duration, (e) maturity and re-pricing gap, cash flow monitoring – of which no negative
cash flows are permissible in buckets 0 – 6 months, (f) pricing guideline. In order to avoid currency
mismatch, so far IIF’s strategy has been to mainly allocate USD funds to fund investments
denominated in USD currency (where borrowers have mainly USD revenues).
30. IIF’s internal policy stipulates (a) minimum 10% reserve of total funds available for
liquidity purposes, which can be invested in treasury instruments such as marketable securities
rated AA (domestic scale) or better, and deposits placement in banks, (b) deposits placement in
state owned banks must be split at least among three banks, whereas deposits placement in selected
private banks rated AA (domestic scale) or better, (c) the available surplus fund to maintain the
required liquidity can also be placed in marketable securities with the sub limits for bonds up to
50% and mutual funds at 30% of available surplus funds, respectively and (d) the average modified
duration of the surplus funds invested above shall be less than 2.5 years.
31. Operational risk management. This deals with managing the risks resulting from
inadequate or failed internal processes, people, and system or from external events. To manage
these risks, IIF has implemented/introduced several programs/initiatives:
Business Continuity Plan (“BCP”), including call tree exercise for all employees (12 Dec 15).
In 2016, IIF will implement Disaster Recovery Center and do BCP exercise using DR server.
SOP and Guidelines. Guideline for KYC Principle (Nov 15).
Project Compliance Checking. To monitor project’s compliance to laws and internal policies.
Training through employee awareness sessions related to Call Tree Exercise (10 Dec 15).
Internal Audit. Periodic review on the effectiveness of the operational risk policies/procedures.
Insurance. The current insurance protection that IIF is already been covered includes D&O, FIPI,
BBB, CGL, CyberEdge, PAR, and Movable PAR.
32. Quarterly risk management report: IIF’s Risk Management Directorate continuously
monitors the level of risks inherent to IIF’s business operation through risk parameters. IIF self-
assesses the level of each risk type as well as the composite risk profile; considering business
activities that IIF is operating and its risk profile based on risk grading of measurable risks and
non-measurable risks. IIF’s risk management is reported on a quarterly basis to RMC and ROC
and is also submitted to IIF’s shareholders.
33. Enterprise level assessment: Under current risk parameters framework, the self-assessment
of both measurable and non-measurable risk parameters is combined to determine overall risk
profile of the Company’s enterprise level. As per the quarterly risk management report December
2015, based on IIF’s self-assessment on business activities and risk parameters monitoring during
the last quarter of 2015, the composite measurable risk parameters for the period has changed from
‘Low’ to ‘Low to Moderate’ as a result of increased credit risk profile, while the rest of risk
55
parameters remained the same compare to that of previous quarter. This is well within the overall
risk appetite of the BOD and consistent with the increase in investment operations of IIF.
34. Measureable risk parameters. As per IIF’s Risk Management Report Q4 2015, the Credit
risk profile has changed from ‘Low’ to ‘Low to Moderate’ in Q4 2015, mainly as a result of (i)
increased number of projects with outstanding S&E CAPs in this period to 5 (five) projects or
represented 33 percent of total number of projects, thus increasing the inherent risk level for the
indicator from ‘Low’ to ‘High’, even though these are mostly due to late submission of documents
related to S&E which have been submitted in the following period; (ii) increased ‘percentage of
total mezzanine plus equity investment to IIF’s total capital’ following investment in mandatory
convertible bonds (“MCB”) for an investee amounted to IDR300bn in December 2015, thus
increasing the inherent risk level for the indicator from ‘Low’ to ‘Low to Moderate’, however it is
still within IIF’s acceptable risk appetite; and (iii) the additional indicator to incorporate credit
rating downgrade as approved by ROC on December 7, 2015, which was measured at ‘Low to
Moderate’ in Q4 2015, which is also still within IIF’s acceptable risk appetite. For measurable risk
parameters, IIF’s risk self-assessment for Q4 2015 is summarized below in Table 4.164.16.
Table 4.16: Summary of risk assessment for measurable risk parameters
Risk Type December 31, 2015 September 30, 2015 Outlook
Credit Risk Low to Moderate Low Negative
Market Risk Low Low Stable
Liquidity Risk Low Low Stable
Operational Risk Low Low Stable
Other: Business, Reputation, Legal Risks Low to Moderate Low to Moderate Stable
Composite Risk Profile Low to Moderate Low Stable
Source: IIF’s Risk Management Report Q4 2015, as of 31 December 2015
35. Non-measurable risk parameters: As per IIF’s Risk Management Report Q4 2015, the
political risk in Q4 2015 has improved from ‘Low to Moderate’ in the previous quarter to ‘Low’,
particularly on the convergence of political parties’ coalition to support the Government.
Meanwhile, the risk assessment on other non-measurable risk parameters remain unchanged from
the previous quarter, thus the overall risk level for the non-measurable risk parameters remains at
‘Low to Moderate’; given the ‘Moderate’ level of macroeconomic condition, the ‘Low to
Moderate’ level of IT risk, yet offset with the ‘Low’ level for the rest. Strategic Risk is deemed
‘Low to Moderate’ for this period. The assessment of non-measurable risk parameters is
summarized in Table .
Table 4.17: Summary of risk assessment for non-measurable risk parameters
Risk Type December 31, 2015 September 30, 2015 Outlook
Macroeconomic condition Moderate Moderate Stable
Political risk Low Low to Moderate Stable
Regulatory and legal risk Low Low Stable
Strategic risk Low to Moderate N.A. Stable
56
Risk Type December 31, 2015 September 30, 2015 Outlook
IT risk Low to Moderate Low to Moderate Stable
Severity of audit findings Low Low Stable
Insurance risk Low Low Stable
Compliance risk Low Low Stable
Composite Risk Profile Low to Moderate Low to Moderate Stable
Source: IIF’s Risk Management Report Q4 2015, as of 31 December 2015
3. Financial Assessment
36. Summary financial position. Since inception, IIF has shown stable growth by expanding
its product and service offerings and diversifying its sectorial and geographical coverage. The total
revenues have grown at a CAGR of 67 percent from IDR66 billion in FY2012 to IDR306 billion
as of FY2015, with a healthy net profit margin of 20-35 percent. Strong shareholders, strategic
importance of IIF for achieving the infrastructure development agenda of the government,
increased demand for infrastructure financing, tight control, improved financial performance and
substantial borrowing capacity has enabled IIF to achieve a National Long-Term Rating of
‘AAA(idn)’ with a Stable Outlook from Fitch Ratings Agency. More details provided in section 1
of this Annex. This section provides an assessment of IIF’s existing financial position.
Table 4.18: Summary of IIF’s key financials during 2012-FY2015
Particular FY2012 FY2013 FY2014 FY2015
Income Statement (IDR Billion)
Revenue 66 127 292 306
Operating Costs 51 93 170 203
Operating Profit / Profit Before Tax 15 33 122 103
Tax Expense 1 6 30 29
Net Profit / Profit After Tax from operations 14 28 92 75
Other Comprehensive Profit (Loss) - net of tax (0.1) 3.8 2.2 (2.8)
Total Net Profit to equity investors 14 31 94 72
Balance Sheet (IDR Billion)
Cash and Cash Equivalents 1,783 2,462 2,646 1,026
Marketable Securities 152 366 269 905
Equity Investments - - 168 145
Loans Advanced - 990 1,592 3,343
Other Assets 33 47 75 91
Total Assets 1,969 3,865 4,749 5,509
Borrowings 778 2,032 2,790 3,249
Other Liabilities 17 24 56 52
Total Equity 1,174 1,810 1,904 2,208
Total Liabilities and Equity 1,969 3,865 4,749 5,509
Key Financial Ratios
57
Particular FY2012 FY2013 FY2014 FY2015
Net Interest Margin NA 0.24% 4.02% 3.25%
Operating Profit Margin 23% 27% 42% 34%
Net Profit Margin 22% 22% 31% 24%
Return on Assets 0.77% 0.86% 2.57% 1.88%
Return on Equity 1% 2% 5% 3%
Debt to Equity Ratio 66% 112% 147% 147%
Debt to Capitalization Ratio 40% 53% 59% 59%
Cash and securities as a % of Total Assets 98% 73% 61% 35%
Cash Ratio NA 286% 183% 58%
Source: Analysis based on audited annual reports of PT IIF
Observations on key financial ratios
37. Net Interest Margin. Over the past four years, the NIM has increased in line with the
growth in the loan book of 61 percent from FY2013 to FY2014, and 110 percent from FY2014 to
FY2015. During these years, the loans were advanced at market-linked interest rates with support
from loan term and cost-effective borrowing from international development agencies. The
average interest rate realized by IIF in FY2015 is 11.42 percent p.a for IDR and 5.08 percent p.a
for US$ denominated loans (FY2014: IDR-11.27 percent p.a., US$-4.96 percent p.a.) In FY2015,
the NIM has marginally reduced due to increase in interest expenses on account of borrowings
from IFC and Bank Mandiri. For details please refer to Table .
38. Operating and Net Profit Margins. The operating profit and the net profit have grown at
a CAGR of 89 percent and 73 percent respectively, from FY2012 to FY2015. The company is
operating at a healthy Operating Profit Margin of 25-45 percent and a healthy Net Profit Margin
of 20-35 percent. The margins are relatively higher than Indonesian banks averages (average
banking sector OPM ~ 18-30 percent and NPM ~ 15-20 percent). This is attributable to the
availability of cost-effective and long-term capital from international development agencies to IIF,
as compared to Indonesian banks that rely on more expensive short term deposits as their major
source of funds. However, IIF’s OPM/NPM dipped in FY2015 due to increase in interest expenses
to IDR87.33 billion or 28.5 percent of revenue in FY2015 (FY2014: IDR 53.58 billion or 18.4
percent of revenue) and recognition of unrealized loss on its equity investment9 of IDR 41.29
billion in FY2015 (FY2014: unrealized profit of IDR 11.16 billion).
39. Return on Assets (ROA). Over past four years, the ROA10 has improved in line with the
growth in IIF’s business. During FY2012 and FY2013, the ROA was around 1 percent as IIF’s
business was getting established. During FY2014, the ROA improved to 2.8 percent with operating
profit increasing at 266 percent as compared to only 23 percent increase in total assets (majorly
contributed by a 61 percent increase in loans advanced). However, during FY2015, the ROA has
9 In July 2014, the company has invested USD12.5 mn as equity in PT Maxpower Indonesia. In accordance with the
company’s accounting policies, the Fair Value of this investment was reduced to US$ 10.48 mn in FY2015. This
reduction in unrealized loss in value of investment has been recognized in the company’s accounts for FY2015. 10 Return on Assets (ROA) is calculated as operating profit divided by average total assets.
58
declined to 2 percent resulting from a 15 percent decrease in operating profit as against a 16 percent
increase in the total assets.
40. Return on Equity (ROE). Between FY2012 to FY2014, IIF’s ROE11 has grown in line
with the growth in the business. During FY2015, the ROE has declined to 3.5 percent resulting
from a decrease of 24 percent in the net profit and 16 percent increase in the total equity.
41. Leverage Ratios. Between FY2012 to FY2015, IIF has been operating at a debt to equity
ratio of less than 1.5 times, indicating that IIF has sufficient borrowing capacity. Along with
healthy growing retained earnings, the company has infused equity capital at regular intervals. The
company is not expected to face any challenges to leverage its Balance Sheet to finance the growth
in its business moving forward and maintain the financial covenants12 of IFC’s loan.
42. Solvency. The cash ratio indicates the solvency position of IIF vis-à-vis the loans advanced
to external borrowers and indicates the ability to absorb losses resulting from loan impairment.
From FY2012 to FY2015, the cash ratio is at least 57.8 percent, well above comparable
international benchmarks like IIFCL-India and KDB-South Korea that maintain a cash ratio of 45-
50 percent as a regulatory requirement and a prudent fiscal management practice. In addition, with
more than 35 percent of the total assets accounted for by cash and cash equivalents and marketable
securities from FY2012 to FY2015, and with sufficient equity capital infusion at regular intervals,
IIF is expected to sufficiently cover its asset risk (majorly attributable to the loan book).
43. Asset quality. With no Non Performing Loans, the quality of the IIF’s loan book is stable.
In line with international good practices IIF makes provisions for impairment losses as per its
prudential norms by reporting the fair value of the loans outstanding and making provisions for
impairment losses on a year-on-year basis. The impairment losses for a particular year are
calculated as the book value of the loan less the expected present value of the cash flows from the
borrower for the loan. From FY2013 to FY2015, the impairment loss provisions have grown at a
CAGR of 62 percent, in line with the growth in IIF’s loan book, accounting for 3 percent of the
total operating expenses in FY2013, 9 percent of the total operating expenses in FY2014, and 4
percent of the total operating expenses in FY2015. During FY2015, the company has reclassified
a few loans to better reflect its loan portfolio and make it consistent with its impairment
provisioning methodology13. This has resulted in a decrease in current years provisioning to IDR
8.2 billion (FY2014 : IDR 15.65 billion).
44. Capital adequacy. According to IIF’s Risk Management Report December 31, 2015, the
company has sufficient level of Capital Adequacy Ratio (CAR) to provide ample capital cushion,
which also still far above the minimum capital requirement to cover credit risk of 12 percent as
11 Return on Equity (ROE) is calculated as net profit divided by average total equity 12 Financial covenants under IFC’s loan agreement require IIF to maintain a risk weighted capital adequacy ratio
>12%, debt to capitalization ratio of ≤ 3:1 and a current ratio of ≥1.2:1. 13 IIF classifies its loan portfolio into corporate finance (where source of payment will be from the operations of the
borrower company) and project finance (where source of payment will solely be from the revenue generated from the
project financed by IIF). In calculating provisions for impairment of loans classified as corporate finance, IIF uses the
probability of default and loss given default as provided from a study by S&P. For project finance, IIF uses the
impairment rate 2% of outstanding loan value for projects that have not commenced operations and 1% of outstanding
loan value for projects that have commenced operations.
59
stipulated in IIF’s OM. IIF’s CAR after taking into account the Risk Weighted Assets (RWA) for
credit, market and operational risk as of December 31, 2015 was 71.93 percent.
45. Asset Book. Total assets of IIF have grown at a CAGR of 41 percent from IDR1,969 billion
in FY 2012 to IDR 5,509 billion as of FY 2015. Within this the largest share is of loans and
advances, followed by cash and cash equivalents, investments in marketable securities and equity
investments. Table below provides more details.
Table 4.19: IIF’s Assets during FY2012-FY2015
Particular (in IDR Billion) FY2012 FY2013 FY2014 FY2015
Cash and Cash Equivalents 1,783 2,462 2,646 1,026
% Growth 38% 7% -61%
Marketable Securities 152 366 269 905
% Growth 140% -27% 237%
Equity Investments - - 168 145
% Growth NA NA -14%
Loans Advanced - 990 1,592 3,343
% Growth NA 61% 110%
Other Assets 33 47 75 91
% Growth 41% 60% 21%
Total Assets 1,969 3,865 4,749 5,509
% Growth 96% 23% 16%
Source: Analysis based on audited annual reports of PT IIF
Loans advanced: The company has built a growing loan book over the last three years from
IDR990 billion in FY2012 to IDR3,343 billion in FY2015, reflecting a CAGR of 84 percent from
FY2013 to FY2015. The portfolio is well balanced between local currency and US$ lending, with
a large proportion of long term loan assets.
46. Figure below shows the composition of IIF’s loan book.
60
Figure 4.4: Loan Book of IIF as of December 31, 2015
Source: Analysis based on audited annual reports and Risk Management Report December 2015 of PT IIF
47. Equity investment. In addition, IIF has made an equity investment in PT Maxpower
Indonesia in July 2014 for US$12.5 million. In accordance with the company’s accounting
policies, the Fair Value of this investment was reduced to US$10.48 mn (~ IDR144.57 billion) in
FY2015. This reduction in unrealized loss in value of investment of IDR41.29 billion in FY2015
(FY2014: unrealized profit of IDR11.16 billion) has resulted in 14 percent reduction in value of
equity investment for FY2015.
48. Marketable securities, cash and cash equivalent. With growth in loan disbursements,
the relative contribution of cash and cash equivalents has decreased from FY2012 to FY2015.
However, during the corresponding period, the investment in marketable securities has grown at a
CAGR of 81 percent. This highlights the sufficient liquidity position of IIF. In addition during
FY2015, IIF has invested in Mandatorily Convertible Bonds (MCBs) issued by PT Sumberdaya
Sewatama, demonstrating the diversification of investment across various classes of instruments
and facilities.
49. Sources of Funding. IIF’s major sources of capital has been equity from shareholders and
medium-to-long term borrowings from international development agencies. Total equity and
liabilities of IIF have grown at a CAGR of 41 percent from IDR1,969 billion in FY2012 to
IDR5,509 billion as of FY2015. Table below provides more details.
Table 4.20: IIF’s Liabilities and Equity during FY2012-FY2015
Particular (in IDR Billion) FY2012 FY2013 FY2014 FY2015
Borrowings 778 2,032 2,790 3,249
% Growth 161% 37% 16%
Other Liabilities 17 24 56 52
% Growth 40% 133% -6%
Total Liabilities 795 2,056 2,846 3,301
61
Particular (in IDR Billion) FY2012 FY2013 FY2014 FY2015
% Growth 158% 38% 16%
Paid-up Capital 1,193 1,797 1,797 2,030
% Growth 51% 0% 13%
Retained Earnings (19) 12 106 178
% Growth -166% 757% 67%
Total Equity 1,174 1,810 1,904 2,208
% Growth 54% 5% 16%
Total Liabilities and Equity 1,969 3,865 4,749 5,509
% Growth 96% 23% 16%
Source: Analysis based on audited annual reports of PT IIF
50. Equity capital: The shareholders of IIF have infused equity capital from time-to-time to
ensure sufficient capital adequacy in line with the growth in the loan book and loans advanced.
The company has been capitalized three times with IDR1.2 trillion at inception, IDR605 billion in
FY2013, and more recently IDR233 billion in FY2015. The company has been capitalized through
issuance of new shares to equity investors, and through additional paid-in capital including
premium for shares paid by the equity investors. Figure below provides a snapshot of fund raise
by IIF through various sources.
Figure 4.5: Capitalization and Debt Financing of IIF through Various Sources
Source: PT IIF Annual Reports
51. Debt financing: IIF’s major source of borrowings are from international development
agencies. The World Bank and the Asian Development Bank have channelled long term
subordinated loan facilities of US$100 million each through SMI. IFC (through an A and B Loan
structure) has provided medium term senior loan facility of US$ 50 million in June 2014 and
US$150 million in February 2016. IFC’s syndications were participated by 16 banks for the first
loan and 8 banks for the second loan. More recently, IIF has diversified its borrowings portfolio
by raising IDR denominated debt from Bank Mandiri (Persero) Tbk. of IDR1 trillion in FY2015.
The proceeds from the borrowings are proposed to be used for financing infrastructure projects.
From FY2012 to FY2015, the borrowings have grown at a CAGR of 61 percent in line with IIF’s
lending operations. Table 4.21 below provides the terms of debt financing from various sources.
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Table 4.21: Terms of debt financing raised by IIF
Facility Terms
WB channeled
through PT
SMI
Tenor 24.5 years
Amount US$ 100 million
Interest Rate 6-month LIBOR + 1.52% per annum payable semi-annually
Repayment Semi-annually (November 1, 2018 – November 1, 2033)
ADB
channeled
through PT
SMI
Tenor 25 years
Amount US$ 100 million
Interest Rate 6-month LIBOR + 1.45% per annum payable semi-annually
Repayment Semi-annually (September 1, 2014 – March 1, 2034)
IFC I
“A+MCPP
(Managed Co-
lending
Portfolio
Program)”
Tenor 7 years
Amount US$ 52.5 million
Interest Rate 3-month LIBOR + 2.51% per annum payable quarterly
Repayment Bullet payment on Maturity (June 19, 2021)
IFC I
“B Loan”
Tenor 5 years
Amount US$ 197.5 million
Interest Rate 3-month LIBOR + 2.21% per annum payable quarterly
Repayment Bullet payment on Maturity (June 19, 2019)
IFC II
“A Loan” Tenor 5 years
Amount US$ 15million
Interest Rate 3-month LIBOR + 1.55% per annum payable quarterly
Repayment Bullet payment on Maturity (February 22, 2021)
IFC II “B
Loan”
Tenor 3 years
Amount US$ 135 million
Interest Rate 3-month LIBOR + 1.15% per annum payable quarterly
Repayment Bullet payment on Maturity (February 22, 2019)
PT Bank
Mandiri
(Persero) Tbk.
Tenor 3 years
Amount IDR 1 Trillion
Interest Rate 1-month JIBOR + 1.29% per annum payable monthly
Repayment Bullet payment on Maturity (December 16, 2018)
Source: PT IIF
IIF’s borrowings are well balanced as they have a high proportion of long duration loans and mix
of local currency and US$ denominated debt. About 47 percent of IIF’s borrowings are for more
than 20 years (this includes World Bank loan for 24.5 years and ADB loan of 25 years). IFC’s
lending constitutes 38 percent, which is medium term in duration and Bank Mandiri’s lending
which constitutes 15 percent is for 3-year duration.
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Figure below provides the composition of IIF’s borrowings.
Figure 4.6: Composition of IIF’s Borrowings, 2015
Source: PT IIF Annual Reports
52. Retained earnings: From FY2013 onwards, IIF’s profitability has improved and the
retained earnings have shown a healthy growth at a CAGR of 279 percent from FY2013 to
FY2015.
53. Leverage ratios: IIF has been operating at a debt to equity ratio of less than 1.5 times
indicating that IIF has sufficient borrowing capacity. With more than 35 percent of the total assets
accounted for by cash and cash equivalents and marketable securities, which are likely to have a
zero risk weight, and with sufficient equity capital infusion at regular intervals, IIF is expected to
sufficiently cover its asset risk (majorly attributable to the loan book). In addition, majority of the
sources of financing for IIF are long-term in nature. More than 50 percent of the loans advanced
by IIF are medium to long-term in nature with a minimum tenure of 5 years. Therefore, IIF is not
expected to face Asset Liability Management issues.
54. Operating Income. IIF’s revenues are derived from three sources, namely: (a) investment
income, (b) advisory income and (c) other income. Table 4.22 below provides a break-up of the
revenue from FY2012 to FY2015.
Table 4.22: IIF’s Operating Income During 2012-2015
Particular (in IDR Billion) FY2012 FY2013 FY2014 FY2015
Investment Income 65 125 284 338
% Growth 91% 127% 19%
- Interest Income from loans advanced - 24 118 196
% Growth NA 390% 67%
- Interest from investment in bonds and
marketable securities (Treasury income) 65 101 166 142
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Particular (in IDR Billion) FY2012 FY2013 FY2014 FY2015
% Growth 54% 65% -15%
Advisory Income 0.38 0.10 - 0.42
% Growth -75% -100% NA
Other Income (Loss) 0.01 1.71 7.94 (31.66)
% Growth 27542% 365% -499%
Total Revenue 66 127 292 306
% Growth 93% 130% 5%
Source: Analysis based on audited annual reports of PT IIF
55. Investment Income. The investment income accounts for approximately 99 percent of the
total revenue. The investment income has grown at a CAGR of 73 percent from FY2012 to
FY2015. This includes both interest from lending operations and treasury income.
56. Interest Income. With growth in the loan book, the interest income grown at a CAGR of
186 percent from FY2013 to FY2015, and the contribution of interest from loans advanced to the
investment income has increased from 19 percent in FY2013 to 58 percent in FY2015.
57. Treasury Income. The treasury income is earned from investments in bonds, time deposits,
mutual fund units, and other marketable securities. With no loans advanced during FY2012, the
investment income was majorly contributed by treasury income. However, with the growth in the
loan book, the contribution of treasury income to the investment income has decreased from 100
percent in FY2012 to 42 percent of investment income in FY2015. In absolute terms, the treasury
income has grown at a CAGR of 29 percent from FY2012 to FY2015 and has accounted for a
sizeable portion of the investment income. This is attributable to IIF maintaining at least 35 percent
of the total assets in cash and marketable securities from FY2012 to FY2015 as a prudent fiscal
management practice.
58. Advisory Income. IIF selectively provides advisory services to government and private
sector clients. Between FY2012 to FY2015 the advisory income has grown at a CAGR of 3
percent. FY2014 was an exception with no advisory income because of delays in advisory projects
due to general and presidential elections. However, the advisory income got revived in FY2015,
with MoUs signed with West Java provincial government for transaction advisory services in
Geothermal Fund Facility and with the Governor of Central Sulawesi for the development of the
Borapulu geothermal site.
59. Other Income. The other income is contributed by income (gain) from the sale of
securities, income (gain) from the fair value of equity investment, and foreign exchange gain. The
other income has been contributing a fractional portion of the total revenue and has been
fluctuating with movements in various macro-economic variables, capital markets, and valuation,
accounting and reporting mechanisms for securities.
60. Operating Expenses. The three contributors to the operating expenses are general and
administrative expenses, interest expense, and impairment loss provisions. Table 4.23 below
provides a breakdown of the operating expenses from FY2012 to FY2015.
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Table 1: Operating expenses of IIF (FY2012-FY2015)
Particular (in IDR Billion) FY2012 FY2013 FY2014 FY2015
General and Administrative Expenses 50 69 101 107
% Growth 38% 47% 7%
- Employee salaries and benefits 30 51 56 67
% Growth 70% 10% 20%
Interest Expense 1 22 54 87
% Growth 2817% 148% 63%
Impairment Loss Provision - 3 16 8
% Growth NA 405% -48%
Total Operating Expenses 51 93 170 203
% Growth 85% 82% 19%
Source: Analysis based on audited annual reports of PT IIF
61. General and administrative expenses. The general and administrative expenses have
grown at a CAGR of 29 percent from FY2012 to FY2015. Their share in total operating expenses
has decreased from 99 percent in FY2012 to 53 percent in FY2015. This decrease is attributable
to the relative increase in the contribution of the interest expense to the total operating expenses
resulting from increased borrowings to part finance the growth in the loan book.
62. Employee salaries and benefits expenses. A major component of the general and
administrative expenses is the employee salaries and benefits accounting for at least 55 percent of
the total general and administrative expenses from FY2012 to FY2015. The employee salaries and
benefits expense has grown at a CAGR of 31 percent from FY2012 to FY2015. This growth is
majorly attributable to increase in headcount in line with IIF’s business growth and accrual of
incentive on management’s compensation aligning to shareholders’ objectives. .
63. Interest expenses. The interest expense has been the second major contributor to the total
operating expenses. The interest expense has grown at a CAGR of 390 percent from FY2012 to
FY2015, contributing 1 percent of the total operating expenses in FY2012, 23 percent of the total
operating expenses in FY2013, 32 percent of the total operating expenses in FY2014, and 43
percent of the total operating expenses in FY2015. This increase in the interest expense has been
in line with the increased borrowings to part finance the growth in the loan book from FY2012 to
FY2015. Until FY2013, the IIF’s borrowings were limited to two subordinated long term loan
facilities of US$100 million each from the Asian Development Bank and the World Bank
channeled through SMI. These subordinated loan facilities are at a relatively lower LIBOR linked
interest rate. However, during FY2014, the company obtained a medium term (7 year) senior loan
facility of US$250 million from IFC. Also, in FY2015, the company obtained a short term (3 year)
IDR denominated senior loan facility of IDR 1 trillion from PT Bank Mandiri. The relatively
higher spread of 2.21 percent to 2.51 percent over LIBOR for the IFC facility and the market
(JIBOR) linked interest rate for the PT Bank Mandiri facility has also contributed to the increase
interest expense.
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64. Impairment loss provisions. With increase in loan portfolio from FY2013 to FY2015, the
impairment loss provisions have grown at a CAGR of 62 percent accounting for 3 percent of the
total operating expenses in FY2013, 9 percent of the total operating expenses in FY2014, and 4
percent of the total operating expenses in FY2015. During FY2015, the company has reclassified
a few loans to better reflect its loan portfolio and make it consistent with its impairment
provisioning methodology14. This has resulted in a decrease in provisioning to IDR 8.2 billion
(FY2014:IDR 15.65 billion). As of FY2015 ending, IIF does not have any non-performing assets,
and has not incurred any impairment losses.
4. Financial Projections
66. In line with its growth strategy for 2016-2020, IIF has set for itself an ambitious target as
reflected in its financial projections.
Table 4.24: IIF’s Financial Projections for 2016 - 2020
Particular FY2016 FY2017 FY2018 FY2019 FY2020
Income Statement (IDR Billion)
Revenue 684 1004 1191 1517 1753
Operating Costs 478 708 789 1026 1055
Operating Profit / Profit Before Tax 206 297 402 491 698
Tax Expense 49 64 96 118 176
Net Profit / Profit After Tax from operations 157 233 306 373 521
Other Comprehensive Profit (Loss) - net of tax 37 76 72 70 68
Total Net Profit to equity investors 121 156 234 303 453
Balance Sheet (IDR Billion)
Cash, Cash Equivalents & Marketable Securities 4,122 3,856 4,130 3,909 4,555
Equity Investments & Mezzanine 474 1,045 1,529 1,774 2,197
Loans Advanced (net of provisions) 7,034 8,483 10,347 12,953 15,907
Other Assets 124 122 110 101 99
Total Assets 11,754 13,507 16,117 18,736 22,758
Borrowings 9,390 10,987 13,378 15,718 18,244
Other Liabilities 38 38 38 38 38
Total Equity 2,326 2,482 2,701 2,981 4,477
Total Liabilities and Equity 11,754 13,507 16,117 18,736 22,758
Key Financial Ratios
Net Interest Margin 4.2% 4.0% 4.0% 4.1% 4.3%
Operating Profit Margin 30.2% 29.5% 33.7% 32.4% 39.8%
Net Profit Margin 17.6% 15.6% 19.7% 20.0% 25.9%
Return on Assets 1.4% 1.2% 1.6% 1.7% 2.2%
Return on Equity 5.3% 6.5% 9.0% 10.7% 12.2%
14 IIF classifies its loan portfolio into corporate finance (where source of payment will be from the operations of the
borrower company) and project finance (where source of payment will solely be from the revenue generated from the
project financed by IIF). In calculating provisions for impairment of loans classified as corporate finance, IIF uses the
probability of default and loss given default as provided from a study by S&P. For project finance, IIF uses the
impairment rate 2% of outstanding loan value for projects that have not commenced operations and 1% of outstanding
loan value for projects that have commenced operations.
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Debt to Equity Ratio 4.04 4.43 4.95 5.27 4.08
Cash and marketable securities as a % of Total
Assets 35.1% 28.6% 25.6% 20.9% 20.0%
Capital Adequacy Ratio 38.8% 32.8% 28.1% 24.6% 30.4%
Source: Financial projections for 2016-2020 provided PT IIF
67. Asset growth. By FY 2020, IIF’s total assets are projected to grow at a CAGR of 18
percent to IDR22,758 billion from IDR11,754 budgeted in FY2016. The loan book is projected to
grow at CAGR of 23 percent and the equity and mezzanine investments at a CAGR of 47 percent.
68. Revenue growth. IIF’s revenues are projected to grow at a CAGR of 27 percent to reach
IDR1753 billion in FY2020 (FY 2016: IDR684 billion).
69. Profitability ratios improve. IIF’s operating and net profit margins improve to 39.8
percent and 25.9 percent by FY2020 from 30.2 percent and 17.6 percent in FY 2016, respectively.
Similarly, the ROA and ROE improve to 2.2 percent and 12.2 percent by FY 2020 from 1.4 percent
and 5.3 percent budgeted in FY2016, respectively.
70. Solvency. Cash and marketable securities as a percentage of Total Assets remains over 20
percent during FY2016 to 2020. The ratio declines from an initial high of 35.1 percent in FY 2016
when the funds raised by IIF are not fully deployed in core investment operations and as more
funds get invested in core activities the ratio stabilizes to 20 percent.
71. Capital Adequacy. IIF is projected to maintain a healthy Capital Adequacy Ratio of 30.4
percent by FY2020 and remaining well above the minimum CAR requirement of 12 percent as per
IIF’s OM.
72. Leverage. The growth in asset based and ROE is primarily due to the increase in leverage
of IIF to 4.08 times by FY2020 from the current level of 1.5 times in FY 015, thus reflecting a
strong debt raising program by IIF.
73. New Fund Raising. Between FY2016 – 2020, IIF plans to raise debt from different
sources. These include: the proposed US$150-200 million under the IIFF-AF; an additional loan
from ADB of US$100 million; short-to-medium term US$ loans of ~ US$480 million; IDR bonds
issuance in 2016 of IDR2 trillion and subsequent issuances between FY 2018 – 2020 aggregating
to IDR4 trillion; and additional short-to-medium term IDR term loans. IIF also plans to do an IPO
and listing of equity in 2020 of around IDR1 trillion. Therefore, the long duration and dollar
denominated loan from the World Bank under IIFF-AF will be critical for IIF’s credibility in future
fund raise and IPO. The positive implications of IIFF-AF long duration loan on the overall duration
of IIF’s liabilities can be seen from Figure below. Without the IIFF-AF, the long term borrowings
of IIF will only be 16 percent (i.e. less than half of the share in FY2015) thus impacting its asset
liability mismatch.
68
Figure 4.7: Positive Impact of IIFF-AF Loan on Duration of IIF’s Liabilities
Source: Financial projections for 2016-2020 provided PT IIF
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ANNEX 5. INSTITUTIONAL CAPACITY ASSESSMENT OF SMI
Introduction and Context
1. SMI is the executing agency for the proposed IIFF-AF that will channel the World Bank
loan borrowed through GOI and then on-lent to IIF. Accordingly, it is in this context that the
institutional capacity assessment has been undertaken.
2. SMI is an infrastructure financing company that supports the GOI’s infrastructure
development agenda. The company is a state-owned enterprise (SOE) operating under the Ministry
of Finance (MoF). SMI was established under Government Regulation No. 66 Year 2007, which
has been amended subsequently by various government regulations. The company obtained the
license to operate as an infrastructure financing company based on the Decree of the Minister of
Finance No. 396/KMK.010/2009 and commenced commercial operations on October 12, 2009.
With the objective of catalyzing private investment and infrastructure development, together with
the ADB, IFC and DEG, SMI formed IIF as a joint venture company. The proposed IIFF-AF is a
logical next step in continued support by GOI/SMI to IIF in furthering Indonesia’s infrastructure
development agenda.
3. SMI has instituted satisfactory internal controls and procedures to transparently and
efficiently manage the continued on-lending operations under the IIFF-AF Project. The terms and
conditions of this pass-through will be back-to-back, with fees, margins and other costs at cost-
recovery levels with no subsidies involved. They will also include fiduciary and implementation
undertakings by SMI commensurate with those contained in the Bank’s legal agreements with the
GoI. Even though the GOI is its sole shareholder, SMI is professionally managed via a Board of
Commissioners and a Board of Directors reflecting its role as prudential non-banking financing
institution.
4. SMI is now transforming into a national development bank, with the GOI (i) entrusting
SMI the Government Investment Center (Pusat Investasi Pemerintah/PIP) portfolio, (ii)
expanding SMI’s mandate to local government financing through the PIP and the proposed WB
RIDF, and (iii) initiating dialogue with SMI on covering new sectors such as industry, agriculture
and maritime. SMI’s capital structure, human resourcing and operational procedures are being
strengthened to manage the expanded role, which also reflects the continued support of GOI.
Financial position
5. SMI has a strong credit rating and financial position. SMI has been rated ‘idAAA’ with a
Stable Outlook by PEFINDO Rating for local rating and global rating of BBB- which reflects the
sovereign rating from Fitch Rating. The rating assigned to SMI is supported by key considerations,
such as sufficient capital infusions by the GOI (Rp 24.4 trillion already invested by GOI over the
last five years), very strong asset quality indicators and a low leverage. It can be reasonably
expected that SMI will continue to enjoy support from GOI in the medium term, given the vital
nature of SMI’s role in infrastructure development in Indonesia. Accordingly, based on SMI’s
business plan the five year financial projections are summarized below.
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Table 5.1: Summary of SMI’s Financial Projections 2015 to 2019
In IDR Billion Audited Actual Projected
Particular FY 2014 H1 2015 FY 2015 FY 2016 FY 2017 FY 2018 FY 2019
Total Assets 9,170 10,034 31,368 38,857 53,794 78,719 114,594
Loans advanced 6,577 7,625 19,423 27,929 44,526 70,887 106,512
Total Liabilities & Equity 9,170 10,034 31,368 38,857 53,794 78,719 114,594
Borrowings 4,384 5,129 5,855 7,122 20,389 43,656 77,670
Equity 4,786 4,905 25,513 31,735 33,405 35,063 36,924
Total Income 598 336 1102 2293 3101 4845 7583
Financing & Investments 56215 331 959 2107 2998 4748 7554
Advisory 4 1 6 7 9 12 16
Project Development 32 4 137 179 94 85 13
Net Profit 245 134 505 1275 1450 1348 1653
Key Ratios
Net Interest Margin 4.73% 4.21% 2.10% 5.98% 4.79% 3.00% 2.50%
Net Margin 40.93% 40.06% 45.85% 55.62% 46.75% 27.82% 21.79%
Return on Equity 5.38% 5.72% 2.02% 4.19% 4.54% 4.00% 4.69%
Return on Assets 2.67% 2.68% 1.61% 3.28% 2.69% 1.71% 1.44%
Debt to Equity Ratio 86.75% 99.91% 22.05% 21.68% 60.28% 123.75% 209.60%
Source: CRIS analysis from business plan projections provided by PT SMI
6. Capital Adequacy. SMI is not required to compute and provide for capital adequacy, as the
OJK regulation on non-banking infrastructure financing institutions does not require so as yet.
However, SMI has initiated the process of computing CAR and it is understood that as of now the
CAR stands at ~65 percent.
7. Non-Performing Loans. An asset quality policy was introduced in January 2015, in line
with standard banking practice to recognize asset quality and provide for non-performing loans
(NPLs) and CAR. There are a few NPLs and accordingly the annual financial statements provide
for loan impairment. In relation to the PIP portfolio transferred to SMI, it is understood that there
aren’t any NPLs and that the risk of NPLs is expected to be low given the MoF guarantee to
intercept mechanism to be in place in the implementing regulations for transferring PIP to SMI.
As per SMI’s monitoring report of September 2015, the NPLs stood at IDR205.58 billion,
constituting 3.27 percent of the loan portfolio excluding IIF loan and constituting 2.24 percent of
the loan portfolio if we include the IIF loan. SMI’s NPLs are within the average range (~3.5 percent
as per BI’s banking statistics for September 2014) of Indonesia bank’s infrastructure lending
portfolio and similar international institutions like IIFCL, India and KDB, South Korea (~2-4
percent). SMI has been closely monitoring its NPLs and is following up with its sluggish
borrowers. Given the sluggishness of the Indonesian economy, SMI would continue to closely
monitor its NPLs and plan for adequate provisions in line with financially prudent practices.
8. Asset-liability mismatch. It is understood that as SMI’s assets and liabilities are mostly long
term in nature, it has government equity and is borrowing on a long term basis from international
institutions, and therefore has not experienced any significant ALM mismatch. The recent bond
15 Includes commitment fee of IDR 1 billion
71
issuance, series A of ~ US$7.41 million with maturity of 3 years and series B of ~ US$66.67
million with maturity of 5 years (using 1 USD = IDR 13,500), would have some impact on ALM
but it is not expected to be substantial.
Corporate governance structure
9. SMI’s corporate governance structure is consistent with a professionally managed
financing company. Pursuant to SMI’s Articles of Association, the company’s oversight and
management is conducted by three major organs namely, the Shareholders, the Board of
Commissioners and the Board of Directors.
10. The Board of Commissioners (BoC) supervises the management of SMI’s business
activities, and is responsible for supervising and providing direction to the BoD and to assure that
SMI has implemented Good Corporate Governance (GCG). In addition, the BoC submits its
supervisory report on the management of the company by the BoD to shareholders.
11. To support these three key organs, there are several committees, such as an independent
Audit Committee to BoC that is chaired by an independent commissioner. The Audit Committee
assists the BoC for effective supervision of the company and is governed by the Audit Committee
Charter. Key responsibilities of the Audit Committee include ensuring the effectiveness of the
internal control system and the effectiveness of the internal and external auditors’ performance,
reviewing activities and audit results of Internal Audit Division and external auditor; reviewing
any financial information that is to be released to public and/or authority such as, financial
statements, projection reports, and any other reports related to the company’s financial
information, reviewing the risk management implementation programs by the BoD, reviewing any
complaints regarding the accounting process and financial reporting of the Company, and
providing recommendations to BoC regarding the appointment of accountants on the basis of
independency, scope of work, and fee.
12. The Board of Directors (BoD) is responsible for managing SMI and to ensure business
continuity. The BoD reports its management to the shareholders within the General Meeting of
Shareholders. The Board of Directors comprises of the President Director, Director of Financing
and Investment, Director of Project Development and Advisory and the Director of Risk
Management, Finance and Support.
13. The BoD is supported by four committees that assist in the decision making process by
providing their recommendations. These include, the (i) Credit and Investment Committee, which
provides recommendations to BoD on financing transactions; (ii)Project Development & Advisory
Committee, which provides recommendations to BoD on the mandated activities and project
preparation activities; (iii) Information System and Technology Committee, which formulates the
annual strategy for technology and information management activities; and (iv) Risk and Capital
Committee, which is responsible for ensuring the alignment of main business strategy in fulfilling
SMI’s mission and achieving annual targets. The Committee is also responsible for ensuring that
any risk related to SMI’s activities has been managed effectively and prudently according to its
pre-defined capital ownership and risk appetite.
14. In addition, the sub-committees to the Risk and Capital Committee manage specific areas
of risks as mentioned below:
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(a) Risk Management sub-committee sets the risk management framework and establishes policies
(guidelines, procedures, and limits) in response to the recommendations of risk-taking divisions
and/or the Risk and Capital Committee.
(b) ALM sub-committee formulates SMI’s asset and liability management (ALM) strategy, sets
pricing (range) of lending interest rate and treasury interest and funds rate. The sub-committee is
also responsible for providing recommendations on changes in ALM.
(c)Target and Monitoring sub-committee formulates annual strategy on the allocation of corporate
resources and recommend changes in policies of business processes. It is also responsible for
providing relevant decisions on asset quality, such as restructuring, the sale of completed financing
assets, or litigation decisions.
Corporate governance policies
15. The Company’s corporate governance practices are based on its Good Corporate
Governance Charter, Code of Conduct, the Audit Committee Charter and the Whistle-blowing
system. SMI has implemented Good Corporate Governance (GCG) based on the implementation
outline provided by the Ministry of State Owned Enterprises Decree No. PER-01/MBU/2011. The
principles underlying the Company’s Good Corporate Governance are Transparency,
Accountability, Responsibility, Independence and Fairness. In order to fulfil the principles of
GCG, the Corporate Secretary Division (DSP) has been disseminating and monitoring the
implementation of the Code of Business Ethics and Conduct. The ethics guideline of the Company
details the ethics to be maintained by the Company personnel and staff (the Board of
Commissioners, Directors and employees of the Company) in interacting with the stakeholders.
The Ethics Committee monitors the Company’s working environment and reports to the President
Director on official complaints or on any alleged violation of the Code of Ethics and Conduct
submitted to the Ethics Officer of the Corporate Secretary Division.
16. SMI has put in place a whistle-blowing System. Frauds and deviations against regulations,
unethical/immoral behaviours as well as other actions performed by the company’s employees and
management, which may impact the company and its stakeholders, can be reported independently
and confidentially by the whistle-blower. Reports can be submitted through telephone, fax, letter
mail or email. The whistle-blower reports an incident through the company’s website. Identity of
the whistle-blower is protected in accordance with the regulations applicable in the company. The
whistle-blower’s report is managed by a Whistle-Blowing System (WBS) officer. Internal Audit
staff have been appointed as Whistle Blowing System officers. The officer will have an obligation
to periodically report the results of the WBS management at least once a month and submit it to
the person-in-charge. In case of a complaint against members of the Audit Committee or Board of
Directors, the IAD forwards report to the BoC. When a complaint is related to the financial
reporting process or things to be acted upon by the Board of Commissioners, IAD will be
forwarded the report to the audit committee. For any complaint, the report is submitted to the
President Director.
73
Risk management processes
17. Risk management frameworks and processes are in early stages in SMI. The project risk
rating tool based on S&P’s Capital IQ templates has been recently introduced in SMI. This tool is
in line with international practice. SMI is using the tool for new investment applications and is yet
to update its entire portfolio with this tool. This would also need to be integrated into the annual
appraisal and rating review of its existing project portfolio and then the output of the rating tool
would need to be integrated with its future processes related to decision making, risk management,
portfolio management and capital adequacy provisions. In the context of appraisal and internal
rating of financing local government projects, SMI with assistance from local credit rating agency
PEFINDO has developed the local government rating tool. This procedure has been finalised in
early 2016. A risk register and a risk control matrix tool is under development with assistance from
E&Y. It is anticipated that this would get implemented in 2016.
Safeguard standards
18. It is understood that at present SMI is focusing on ensuring that the national standards are
implemented. As on date, in projects where SMI has co-financed with international agencies, the
international safeguard standards have been applied. SMI’s Environmental and Social
Management System (ESMS) has two components. (i) The “ESMS project” has adopted national
laws and regulations pertaining to land acquisition and environmental management, and applies to
projects funded from SMI’s own financial resources. (ii) The “ESMS multilateral” has adopted
national laws and regulations as well as some international standards, and applies to projects
financed by multilateral agencies. SMI currently uses the ESMSs in its current operations, mainly
PPP projects, whereby social and environmental safeguards due diligence is undertaken once a
subproject is defined as eligible for financing based on the financial and investment assessments.
A Corrective Action Plan to meet ESMS requirements is prepared based on gaps identified in the
due diligence assessment, and its implementation is covenanted in the loan agreement between
SMI and the borrower. Moving forward SMI aspires to adopt international standards (from 2017
onwards). One of the example is the establishment of ESMF for RIDF project that follows World
Bank Safeguards Policies.
19. For the RIDF project, an Environmental and Social Management Framework (ESMF) has
been prepared that is consistent with the World Bank policies. The ESMF includes a Resettlement
Policy Framework (RPF), Process Framework (PF), and an Indigenous Peoples Planning
Framework (IPPF), as well as Grievance Redress Mechanisms and Disclosures and arrangements
for monitoring the implementation of social safeguards instruments (such as a Resettlement Plan,
A Plan of Action, and an Indigenous Peoples Plan). The draft ESMF was disclosed in SMI’s
website on June 15, 2016, and submitted for disclosure through the Bank’s Infoshop on June 17,
2016. Consultations with stakeholders on the draft ESMF were held on June 21 and 22, 2016. The
revised version of the ESMF incorporating relevant inputs from the stakeholder consultations has
been approved by the Bank and has been disclosed on SMI’s website and the Infoshop.
20. Moving forward, SMI’s staff would need training on implementing safeguard standards
and increasing staff strength. SMI will need to undertake capacity building of its ESMS unit to
enable it to cope with the increased project load that would arise from the PIP and RIDF activities.
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Human resource management
21. Human resource management strategy. SMI’s human resource management strategy
involves activities to improve staff capabilities, through trainings, workshops, seminars, discussion
forums as well as other development programs. These capability enhancing initiatives span the
entire spectrum of SMI’s businesses: financing, project development, advisory and other
supporting programs and improvement of soft skills. Besides, these initiatives, SMI also
incentivises its best employees through promotions and developing a pay and benefit strategy
based on fairness and competitiveness. SMI also undertakes routine job reviews based on which
employees are engaged and retained. With its expanded mandate, SMI is in process of enhancing
the skill sets of its staff as also the staff strength.
22. Staff Strength. As of 2015, SMI had 167 employees, of which 40 are under the Finance &
Investments directorate, 28 under the Project Development & Advisory directorate, 60 under the
Risk Management, Finance and Support Directorate, 7 in Strategic Planning & Business
Development, 11 in legal division, 6 in internal audit division and 15 in the corporate secretary
division. In line with its medium term business plan, SMI is focusing on human resource capacity
augmentation both in terms of increased manpower and also training of its existing resource base.
In 2016, SMI proposes to add another 100 employees. The maximum employee additions are
proposed in Financing & Investments, Project Development & Advisory and Risk Management
directorates. The staff strength in RMD, including the ESMS unit, will be doubled in 2016-2017
to cater to increased business activities of SMI due to expansion of its mandate. Besides manpower
expansion the Risk Management Division along with its ESMS unit would require skill
development in order to cater to a larger and more diverse portfolio that will include PIP and RIDF
projects.
Future Outlook
23. GoI’s expectations from SMI are high. Its transformation journey over the next 5 years to
evolve into a national development bank will place several challenges on the relatively small
institutional set up of SMI.
24. From a business perspective, SMI would need to quickly diversify its client base from a
few large infrastructure players to a more regionally dispersed and disparate clientele that would
include sub-national governments, SMEs, SOEs and private sector. To ensure that operating costs
are under control, SMI would require cost-effective ways of business network expansion. It will
need to enhance its financial intermediation. By raising both public and private resources and
channel them to a diverse set of projects – national priority projects, local government projects,
state-owned entities (SOEs), small and medium sector enterprises (SMEs) and private sector
projects. Moving forward, SMI would need to institutionalize national and international best
practices in safeguards, risk management and corporate governance, to achieve high performance
standards as a national level financial institution comparable to the world’s best. To achieve the
above, SMI will require financial support and technical assistance in strategic planning,
organization change & growth, execution excellence and performance management, safeguards
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risk management and corporate governance, legal and regulatory reforms, advocacy and
programmatic project preparation at both national and sub-national government level.
25. From the perspective of the limited role of channeling the Bank’s sovereign loans to IIF,
SMI has instituted satisfactory internal controls and procedures to transparently and efficiently
manage the continued on-lending operations under IIFF Additional Financing Project. Certain
suggestions on strengthening the coordination between MOF, SMI and IIF in relation to financial
management standard operating procedures have been made by the financial management
specialists in the Task Team. These are in the process of being socialized and finalized. Other than
this, the overall performance of SMI as the executing agency has been satisfactory. There are
several indications that the GOI support to SMI will continue in coming years and that SMI will
continue to implement capacity strengthening policies to manage its performance on par with
applicable national and international standards.
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ANNEX 6. SAFEGUARDS
1. Assessment of IIF’s institutional capacity, development and systems to implement
IIFF AF vis-à-vis safeguards has been carried out. The WB safeguards team assessed IIF
safeguards institutional capacity, development, and systems using criteria as shown in Table 6.1.
In addition, the P-D-C-A approach (Plan-Do-Check-Review) was used to assess the Social and
Environment Management System (SEMS) of PT IIF to implement IIFF-AF.
Background.
2. Since October 2012 the WB safeguards team has participated in 7 formal implementation
support missions. The team has visited three IIF subprojects and participated in three informal
missions. In addition, a team from RSS Washington has also met with IIF Managing
Director/Chief Risk Officer and had an intensive discussion about safeguards implementation and
conducted site visit during the safeguards thematic review of Indonesia portfolio in February 2015.
In Q1 2015, World Bank’s IAD (Internal Audit Department) also conducted audit to IIF
operations. The objective of the audit was to assess the adequacy of risk management processes in
consideration of the unique characteristics of FIF projects. Specifically, it focused on the
effectiveness of the Safeguards framework. Overall, the review results were positive and this
exercise has become an opportunity for IIF to show their good performance in implementing
safeguards frameworks in their project.
Institutional Capacity and Development of Social and Environment (S&E) Safeguards
3. A fully dedicated Social and Environmental (S&E) Management Unit had been established
at IIF since 2012. The Chief Risk Officer (CRO) is the ultimate responsible position for
safeguards. A new S&E manager position had been created and filled since 2015, to support the
CRO. The unit has now 3 full time safeguards staff to maintain a portfolio of 15 projects under
implementation and 11 projects in the pipeline with total commitment of Rp. 4.316 trillion (about
US$ 332 million equivalent). A staff fully dedicated for Health and Safety aspects has recently
joined the team.
4. This S&E unit has also conducted training programs and workshops/seminars related to
S&E topics involving IFC, ADB and WB. All S&E specialists have undertaken some trainings or
workshops, among others: Risk Management and World Bank Safeguards Policies (May 2013),
IFC Performance Standards and Green House Gases Management (March, April 2015);
Stakeholders Engagement Training (October 2015) and Environmental Analysis (October 2015).
IIF has partnered with eight Indonesia-based international and national consulting firms16 to
support SEMS implementation or to produce safeguards instruments such as SEDD, EIA, and
LARAP that had also improved the capacity of IIF’s S&E.
5. Since 2015 IIF has carried out SEDD in-house for projects having moderate risks such as
telecommunication projects, solar power, and renewable energy. WB has provided a sample of
in-house SEDD for the Gorontalo Solar Power Energy, and noted that it is satisfactorily done in
16 PT ERM Indonesia, PT EnviroSolutions and Consulting, PT Delta Prima Mitra Manajemen, PT AECOM Indonesia,
PT BERI, PT Hatfield Indonesia, PT Lorax Indonesia and PT Hatch Indonesia.
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accordance with the revised SEMS. A small note for IIF to improve the future SEDD is to include
the assessment of the potential impacts on the access road to the project location during and post
construction.
6. IIF S&E staff carried out a knowledge sharing session in September 2015, whereby IIF’s
S&E Principles and SEMS were socialized to all of the IIF employees. Furthermore, in November
2015 IIF conducted safeguards workshop for clients on “Benefit and Best Practice of Doing S&E
Principles” in addition to one-to-one explanation to the potential clients. IIF has been invited by
BCA and other financial institution to share its safeguards experience. IIF believes that S&E is
now becoming a “strength” rather than a “liability.” IIF has also provided safeguards advises to its
public and private clients under its Advisory Services business line.
7. Social and Environment Management System (SEMS). The ESSF as the environment and
social safeguards management framework of the project has been fully adhered to and the already
established SEMS (Social Environment Management System) in now fully implemented. The
SEMS is used to screen and evaluate proposed sub-projects and to monitor S&E implementation
for active sub-projects and shall also be used to screen project’s pipelines in the future. The SEMS
is tailored to manage safeguards risk for all range of financial products that IIF offers, from fund
based to non-fund based and guarantees. Progress has been made in establishing IIF’s operational
procedures (SOP), for the business operation17 and safeguards management. The Social and
Environmental SOP highlights working arrangement and relationship with other sections in the
form of a flow chart diagram (high level process flow) followed by 4 operating SOPs18.
8. Assessment of SEMS Implementation. In assessing SEMS implementation of IIF the Plan-
Do-Check-Review approach is used to gather evidence of management system implementation
and to assess IIF S&E capacity in implementing the commitments made in the SEMS.
Plan – IIF has developed the Social and Environmental Policy, consisting of seven
commitments to be applied during sub-project selection, preparation, construction and
operations to ensure the compliance to S&E regulatory requirements and international best
practices. SOP for sub-project screening has been established and criteria for social and
environmental assessment has also been set in the SEMS. Continual improvement of the
SEMS is assured by the application of the Corrective Action Plan system. S&E Policy was
stipulated in the SEMS.
Do- Environmental and Social Assessment has been applied by the application of SEDD
(Social and Environment Due Diligence), IEE (Initial Environmental Examination), or
EIA/EMP as outlined in their SEMS – to screen all proposed sub projects and to determine
appropriate mitigation measures and safeguards instruments needed. During missions WB
found evidence of SEDD report for PT Garuda Maintenance Facility’s project, Grievance
Mechanism Monthly Report, EIA documents and ESMP for PT LMS project - completed
17 Investment, credit risk, insurance policy/guidelines, internal audit, credit operation, procurement, accounting, tax,
treasury and HR. 18 The SOPs regulate pre-approval of sub projects (greenfield and brownfield project), approval process, post
approval process ( client/developer duties and S&E officer duties) and the completion phase SOP (the production of
ICR) supplemented by the check list for site visits, templates for environmental and social assessment, regular
reporting and project appraisal memo.
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with international standard sub-plans. A fully dedicated Social and Environmental (S&E)
Management Unit has been established, as previously explained, to ensure that this
happens. Various trainings and workshop/seminars have been held, which helped built the
capacity of the S&E Management Unit and also its clients. The S&E SOP that clarifies
responsibility, workflows and decision making process of the units responsible for S&E
aspect was also found.
Check- IIF has demonstrated a satisfactory monitoring scheme by the implementation of
CAP (Corrective Action Plan) to address all the gaps found during project’s due diligence
survey for all subprojects. Intensive communication and reporting system with developers
(sub-projects) have been established in ensuring SEMS application. For example, IIF has
received separate 36 reports from PT LMS in one single calendar year and have received
7 reports regularly of the CAP report, monthly contractor reports for safety health and
environmental aspect, ESMP implementation report, environmental noise monitoring
report, EMP report for government (RKL RPL), Resettlement Action Plan report,
Grievance Mechanism Report and GHG inventory report and Monitoring & Evaluation
Report.. Implementation of CAP is formally bound as a legal covenant in the loan
agreement between IIF (and / or syndicate lenders) and its clients or in a side letter agreed
by two parties. At the project level, clients have to submit a quarterly, bi-annually or annual
monitoring report on the implementation performance of CAP. S&E monitoring are carried
out under the Risk Management Directorate through: (i) periodic review of CAP; (ii)
Quarterly Risk Management Report (QRMR); and (iii) Annual S&E Safeguards
Monitoring Report that are shared with the Bank. They have also developed 3 (three)
performance indicators for safeguards19 to be reported in the QRMR. In addition to this,
IIF has also the regular project review that is carried out by the Directorate for Investment.
First, the Semi Annual Review, particularly for green field project, which includes
performance of the company in terms of credit risks and compliance of the S&E
requirements; second, is the Annual review for COD project which consists of the
performance of the company in terms of credit risks and also compliance of S&E
requirements.
Review- the SEMS also regulates the preparation of the ‘Project Implementation
Completion Report’ to describe the lessons learnt for future project’s improvement. In
addition, during Annual Shareholder meeting issues related to social and environmental
safeguards are also discussed. The S&E unit prepares the Annual S&E Performance
Reports to strategic investors. The formal Bank’s supervision mission is also part of the
SEMS review process. Implementation support has included (i) regular meetings at all
management levels to review overall project implementation; (ii) site visits (iii) meetings
and capacity building training and workshop/seminar for capacity building; and (iv) formal
placement of an S&E specialist at IIF.
19 The three parameters are: outstanding S&E CAP that is percentage number of projects with outstanding and
incompliance CAP in the last quarter divided by total number of projects; number of S&E claims cases that is claim
cases in the last quarter divided by total number of projects; and number of negative publications in the last quarter
with regard to S&E issues of the project.
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Safeguards Implications and Approach towards the Proposed IIFF-AF
9. The IIFF-AF will provide an additional loan in the amount of about US$200 million
following successful implementation of the Indonesia Infrastructure Finance Facility (IIFF)
Project (P092218). The products outlined in the AF are covered under the types of IIF’s financial
products and types of possible sub-projects for financing (refer to SEMS page 8 and 9 and Annex
W20 for safeguards assessments for financing types).
10. The current SEMS can still be used for the IIFF-AF purpose for the following reasons.
Firstly, the operating procedures stipulated in the SEMS for all possible project types are still
applicable for the proposed financing products. For example, if the take out financing is triggered,
the IIF will apply the current ‘due diligence’ procedure (section 3.2 para 19) to mitigate potential
reputational risks or to address legacy issues or liabilities from the sub-projects. Secondly, based
on the assessment to the current SEMS using the “Environmental and Social Policy and Procedural
Guidelines for Projects Financed Jointly by Bank, IFC, and/or MIGA” dated January 21, 2009, the
SEMS still satisfies the requirement from IFC Performance Standards and World Bank OPs.
11. During the assessment, it was found that for some aspects the IIF S&E Principles are even
more conservative than the IFC PS or WB OPs. The World Bank OP requirements are used for
the subprojects that involving private sectors. For example, the definition of project area of
influence is using both the IFC’s and also the Bank’s definition. Also for natural habitats aspect,
the SEMS has put all together two requirements from IFC and WB (section 3.6.1.3 and 3.6.1.4 of
the SEMS Vol. I into its IIF S&E Principles. For the initial screening of project impacts, IIF will
undertake this screening process by themselves following the WB practices (section 3.2 of the
SEMS Vol. I) while IFC standards allow the clients to do by themselves. Also, another good thing
about this SEMS is that the project categorization has been based on the potential adverse
environmental and social impacts of the project and not be influenced by any technical threshold
or government regulations to determine safeguards instruments required. The disclosure policies
are also strictly adhered and applied (section 3.3). In general, the IIFF-AF still can use the current
SEMS.
12. Indeed, there are some minor revisions required for the SEMS based on several discussions
during appraisal, such as to update the obsolete terms and regulations, and other non-substantive
revisions. Rather than carry out another cycle of SEMS revision during the IIF AF process21, the
recommendations below can be undertaken later in the next cycle of SEMS revisions:
Revise Annex W to include new financial products of IIF.
To ensure that the SEMS will always follow the latest national regulations (even though
section 1.4, 2.1 and 2.2 about the S&E Policy and Applicable policies have stipulated that
the SEMS will always comply to the applicable laws and regulations); the SOP for
“updating the list of regulations and its regulatory requirements” shall be prepared
20 Annex W of the SEMS elaborate approach of the S&E risk management correspond to each type financing products with
examples and definition. Recently the SEMS has just been revised to incorporate the new IFC PS 2012 and it took around 1.5 years
to get approval from Ministry of Finance, PT SMI and other IIF stakeholders including ADB, DEG etc. 21 During the process of SEMS revision to the incorporate new IFC Performance Standard 2012, IIF need around 1.5
years to get approval from the shareholders among others: Ministry of Finance with its related directorate generals,
PT SMI, ADB, IFC and World Bank.
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equipped with the feedback mechanisms to address related implication the SEMS. The
review shall be done regularly.
13. S&E Management Strengthening Plan. With the growing portfolio22 and pipeline, and the
intention of doing more in-house SEDD and increasing monitoring activities of the CAP
implementation, IIF is planning to recruit another Environmental and Social Safeguards Specialist
in 2016. In addition, IIF is planning to have various training program such as LARAP training,
training on selected infrastructure sector such as renewable energy; and prepare a booklet on IIF’s
S&E principles. IIF will continue to disseminate its S&E principles and experiences through series
of workshops for existing clients, potential clients, regulators or financial institutions. IIF will
continue to outsource the SEMS implementation activities to strengthen IIF capacity and to
promote partnership learning.
Consultation and Disclosure Requirements
14. For Category A sub-projects that require ESIA/AMDAL, the client of IIF carried out
consultation and disclosure in compliance with the GoI regulation PermenKLH 16/2012 and
SEMS. For LARAP, consultation and disclosure follows Law no 2/2012 and SEMS. For the
proposed IIFF-AF, IIF will continue to carry out outreach workshop (e.g. in November 2015) for
its clients and potential clients on SEMS including requirement for consultation and disclosure for
subproject instruments. IFF has continuously improved its website. The website has disclosed
specific safeguards instruments for subprojects financed by IIF such as UKL-UPL,
AMDAL/ESIA, and Supplemental RAP.
22 See Annex 3 on IIF Institutional Capacity and Financial Assessment.
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Table 6.1. Checklist for Assessing Institutional Set-up and Working Arrangements with
regards to the Implementation of the SEMS/OM for Projects in the Portfolio and Pipeline:
1. Institutional arrangement: e.g. corporate policy, organizational structure, S&E safeguards policies
and instruments; business plan; budget for S&E management; internal and external arrangements;
communications with clients; documentation and reporting; outreach to clients or potential clients on
S&E, avoid or minimize and address potential reputational risks due to E&S, etc.
2. Responsibility, work flows and decision making of the unit responsible for SEMS implementation.
3. Working arrangements with other units that contribute to the decision whether potential projects
are proceeded for IIF financing.
4. Operational instruments that have been developed and implemented: e.g., various Standards
Operational Procedures pertaining S&E.
5. Staffing: e.g. number and area of responsibilities; recruitment policies; program for development.
6. Staff qualification vs. evolving needs of the IIF: e.g. existing and future recruitment.
7. Scheme for capacity strengthening for S&E staff (e.g. training, outsourcing, expert hiring, etc.).
8. Practice in implementing the SEMS (e.g. work flows and methodologies, how to carry out due
diligence, what innovative initiatives/approaches/adjustment have been made; etc.).
9. Self-assessment or review of the SEMS, SOP pertaining S&E, performance of units in charge of
S&E, and staffing—lessons learned, weaknesses, constraints, and plan of actions that lead for better
operations (update SEMS, proposed risk-based approach management for clients—flexibility for
implementation--, etc. etc.); expected advice and assistance from the World Bank.
10. Approaches, tools and practices in monitoring the compliance of the clients in implementing the
agreed action plan; measures adopted to ensure clients meet the agreed action plan.
11. Experiences: description and documentation of process for “go” projects and “no go” projects.
12. Other aspects, for instance: the above pointers in relation with ADB and IFC’s requirements.
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ANNEX 7. IMPLEMENTATION ARRANGEMENTS
Executing Agency
1. PT. Sarana Multi Infrastruktur (SMI) will be the Executing Agency for the Bank’s
loan. SMI is a 100% State Owned Enterprise under the Ministry of Finance whose purpose is to
invest in infrastructure financing institution(s) or otherwise provide funds for infrastructure
financing. SMI holds 40% equity stake in PT IIF and has channeled the earlier IIFF financing
from the Bank to IIF. The DG Treasury, Ministry of Finance will be responsible for the execution
of the subsidiary loan agreement between the GoI and SMI and for processing and transferring
loan funds to SMI.
Implementing Agency
2. PT IIF will be the Implementing Agency for the Bank’s loan. IIF has established itself
as a small but credible player in Indonesia’s infrastructure financing market. WB’s assistance
under the IIFF Project has helped IIF develop unique expertise in Indonesia vis-à-vis project
finance and environment and social safeguards management. IIF is now well-positioned to
respond to evolving market needs through its range of financial products detailed in its Operations
Manual (OM), including senior debt, take-out financing, equity, mezzanine, promoter funding,
bridge financing, etc. The IIFF Additional Financing (IIFF-AF) will help consolidate IIF’s market
position.
3. The Bank’s lending instrument for this project is a Financial Intermediary
Financing (FIF)”. The Bank will provide an investment loan to the Borrower. The Borrower
will in turn provide these funds to the IIF – the sole participating financial intermediary – through
SMI. The IIF will in turn, use these funds to provide predominantly infrastructure financing to
commercially viable infrastructure projects.
4. Drawdowns from the loan will be made on the basis of requests from the IIF to SMI,
which in turn will be transmitted to the Government, and the Government will request the
Bank for drawdowns. Bank funds will be provided to the GOI, which will on-lend the funds to
SMI through a subsidiary loan agreement. In turn, SMI will provide these funds to the IIF through
a subordinated loan agreement and/or perpetual/convertible capital instrument, which may be
assessed as contributing to the Tier 1 “equity” capital of IIF, as opposed to the previous treatment
of Bank funds as Tier 2 capital.
5. The treatment of part or all of the Bank funds as Tier 1 “equity” capital will allow
IIF to increase its investment portfolio significantly. Given that a major growth impediment
for IIF has been its imposed single exposure limit of 25 percent of total capital,23 the envisaged
perpetual/convertible capital instrument is expected to increase both IIF’s Tier 1 and 2 capital,
thereby broadening its capital base overall and enabling it to continue to fund longer term projects
and fund larger size projects. Nevertheless, the World Bank Loan Agreement’s financial covenant
23 Total capital equals to the sum of Tier 1 and Tier 2 capital, with the Tier 2 capital capped at a maximum of 50
percent of Tier 1 capital.
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that limits the ratio of subordinated debt to equity at 2.5 will need to be monitored closely
throughout implementation.
6. Indonesia will borrow from the Bank in US$ and the GoI will provide equivalent
IDR funds to SMI. The Bank funds will be provided to SMI at its standard interest rate for such
subsidiary loans (applicable to all state owned enterprises) at an interest rate of borrower’s bonds
(‘SUN’) benchmark series with twenty (20) years maturity. The difference between this rate and
the Bank’s lending rate to Indonesia effectively represents the premium charged by the
Government for taking on the exchange rate risk. SMI in turn will add a spread (0.5 percent)
towards its administrative expenses and on-lend these IDR funds to the IIF24.
7. The subsidiary loan agreement and the subordinated loan and/or capital instrument
agreement will contain undertakings by SMI and IIF, respectively, to implement all
fiduciary and implementation undertakings made by GoI to the Bank. These requirements
are the same as the ones made earlier under the original IIFF project and hence will continue for
this IIFF Additional Financing. While the capital treatment of part or all Bank funds will not
directly affect the structure of the loan agreement between the Bank and the GoI, it will be
necessary to ensure that the Bank’s remedies, particularly relating to procurement, social and
environment safeguards, and non-eligible investments, are maintained.
Figure 7.1: IIFF-AF Funds Flow
24 The net spread charged by SMI to IIFF will be 0.5 percent over the cost of funds that SMI receives from the
Government. In addition, the subordinated loan agreement will specify a formula by which SMI will be entitled to
recover any actual tax payments that it may incur as a result of the lending to IIFF.
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8. SMI will continue to channel the Bank’s sovereign loans to the IIF. SMI is an
infrastructure financing company that supports the GOI’s infrastructure development agenda.
The company is a state-owned enterprise (SOE) operating under the Ministry of Finance (MoF).
SMI was established under Government Regulation No. 66 Year 2007, which has been amended
subsequently by various government regulations. The company obtained the license to operate as
an infrastructure financing company based on the Decree of the Minister of Finance No.
396/KMK.010/2009. SMI commenced commercial operations on October 12, 2009. With the
objective of catalyzing private investment and infrastructure development, SMI formed a joint
venture company IIF together with the ADB, IFC and DEG. The proposed IIFF-AF is a logical
next step in continued support by GOI/SMI to IIF in furthering Indonesia’s infrastructure
development agenda.
9. SMI has instituted satisfactory internal controls and procedures to transparently
and efficiently manage the continued on-lending operations under IIFF-AF Project. The
terms and conditions of this pass-through will be back-to-back, with fees, margins and other costs
at cost-recovery levels with no subsidies involved. They will also include fiduciary and
implementation undertakings by SMI commensurate with those contained in the Bank’s legal
agreements with the GoI. Even though the GOI is its sole shareholder, SMI is professionally
managed via a Board of Commissioners and a Board of Directors reflecting its role as prudential
non-banking financing institution. SMI is now transforming into a national development bank,
with the GOI: (i) entrusting SMI the Government Investment Center (Pusat Investasi
Pemerintah/PIP) portfolio; (ii) expanding SMI’s mandate to local government financing through
the PIP and proposed RIDF; and (iii) initiating dialogue with SMI on covering new sectors such
as industry, agriculture and maritime. SMI’s capital structure, human resourcing and operational
procedures are being strengthened to manage the expanded role, which also reflects the continued
support of GOI.
10. SMI has been rated ‘idAAA’ with a Stable Outlook by PEFINDO Rating for local
rating and global rating of BBB- which reflects the sovereign rating from Fitch Rating. The
rating assigned to SMI is supported by key considerations, such as sufficient capital infusions by
the GOI (Rp 24.4 Trillion already invested by GOI over the last five years), very strong asset
quality indicators and a low leverage. It can be reasonably expected that SMI will continue to
enjoy support from GOI in the medium term, given the vital nature of SMI’s role in infrastructure
development in Indonesia.
Operations Manual
11. IIF is now well established, along with its Operations Manual and Social and
Environmental Management System (SEMS). The OM include, inter alia; the policies and
procedures followed by the IIFF to address operational, credit and foreign exchange risks in its
day-to-day operations; agreed financial management, procurement, and disbursement policies
and procedures; environmental and social policies and procedures to be followed in line with the
Bank’s policies, IFC’s PSs and applicable Indonesian laws and regulations; a detailed framework
for the measurement and monitoring of outcomes; guidelines on preventing fraud and corruption
in line with WBG policy; the supervisory arrangements for the project; and terms and conditions
for agreements between IIFF and subproject companies reflecting all the above. IIF applies
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international-standard best practices in terms of social and environmental safeguards and
exercises good corporate governance in order to promote more sustainable infrastructure project
development in Indonesia. For social and environmental management, it has adopted IFC
performance standards 2012 and the World Bank standards. An updated SEMS has been recently
approved by the shareholders of IIF. This is consistent with the Operations Manual of IIF.
12. IIF has instituted a comprehensive risk management framework in line with
international practices. This is implemented through an independent Risk Management
Directorate (RMD) under the leadership of Chief Risk Officer; with the risk management process
includes active supervision from the Risk Management Committee of the Board of Directors
(RMC) and oversight by the Risk Oversight Committee of the Board of Commissioners (ROC).
The RMD monitors four key risks – credit risk, market risk and portfolio management,
operational risk and compliance/KYC, social and environment risk; and reports on a quarterly
basis to the RMC and ROC. IIF’s risk management framework aims at keeping IIF’s risk appetite
at moderate level. Its current self-assessment of enterprise level risk is at ‘Low to moderate’ level
thus placing IIF in a comfortable zone. IIF also prepares and submits a quarterly risk management
report to its shareholders.
13. The continued application of the operations manual will be a covenant in the Loan
Agreement between the Government and the Bank and the Project Agreement among SMI, IIFF
and the Bank, and will be included in the subsidiary loan agreement and subordinated loan
agreement from the Government to SMI and from SMI to IIFF, respectively.
Project Supervision
14. Under the initial IIFF project, efficient project supervision arrangements were
implemented. This includes quarterly progress reporting by IIF to SMI and the Bank, six
monthly supervision of IIF’s operations and investment portfolio by the Bank’s Task Team,
quadripartite meetings between the Bank, MOF, SMI and IIF. In addition, selective review of
investment projects and field visits to assess the efficacy and progress of implementation of IIF’s
Operations Manual and SEMS procedures in the context of its investment sub-projects.
Bank/IFC Conflicts of Interest
15. This aspect relates to the possibility of potential or perceived conflicts of interest
arising in relation to the World Bank’s lending operation and IFC’s equity and debt
investment in IIF. The Bank’s funds have been provided to Indonesia; these have been in turn
on-lent to IIF (through SMI) as subordinated debt. IIF has on-lent these funds to eligible
infrastructure subprojects. The terms and conditions of the Government’s subordinated debt to
IIF mirrors the terms and conditions of the Bank's loan to Indonesia. IFC, on the other hand, has
invested directly in the common equity of the company. In the past few years of the Bank’s
lending operations under IIFF project there hasn’t been a single instance of a perceived or
potential conflict of interest. The Bank and IFC teams are working independently and
independently manage their respective investment operations and other engagements with IIF.
Such independent arrangements were instituted in the initial IIFF project based on the guidance
from WBG COI. Given that the proposed lending operation of the Bank is a continuation of the
earlier IIFF project, it is anticipated that similar arrangements shall continue to manage the
potential or perceived conflict of interest situation that may arise in the future, if at all.
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ANNEX 8. ECONOMIC ANALYSIS
Overview of IIF’s Sub-project Analysis
1. The reviewed sample of IIF’s feasibility studies were substantial pieces of financial
analysis, and IIF staff were keen to discuss their internal processes and the substance of their
studies. The exact template for their feasibility studies varies somewhat depending upon the type
of sub-project and when the feasibility study was conducted. However, in general it includes:
industry and sub-project analyses; a financial analysis of the borrower, with financial projections
and a sensitivity analysis; a detailed management review; a risk and mitigation analysis; and clear
recommendations on amounts of financing, type of financing and pricing.
2. For the purposes of this Annex, important aspects of IIF’s Economic Analysis are
incorporated in the Environmental and Social (E&S) Safeguards section of the Risk Analysis.
Effectively, this addresses the Costs side of any Cost-Benefit Analysis that would underlay any
formal calculations of an Economic Rate of Return. The main instrument in this regard is a
Corrective Action Plan (CAP), which includes clear target dates and priorities for the sub-project
developer. A typical CAP covers E&S principals like: environmental degradation; land
acquisition; re-settlement; community relations; and continuing local employment opportunities.
3. Effectively, IIF’s Economic and Financial Analysis of the sub-project examines carefully
the financial benefits to IIF while minimizing the broader economic cost to society. It’s difficult
to imagine private sector arrangements that go much beyond this.
4. Examples of the broader economic impact of IIF’s sub-projects are provided in Box 8.1.
These illustrate how better infrastructure contributes to Indonesia’s improved economic and social
well-being. If the Bank were to desire a deeper investigation into the wider costs and benefits of
IFF’s sub-projects, it might consider undertaking a separate, detailed study possibly in conjunction
with other shareholders. Such a study would only be useful after a significant number of sub-
projects are completed,25 and it would need to be negotiated with and endorsed by IIF’s
management and Board of Commissioners.
25 At drafting of this ICR, only a handful of IIF’s projects had been completed.
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5. Additional financial analysis. To supplement this assessment of IIF’s impact, two
additional pieces of analysis were undertaken, as presented below.
Table 8.1: Financial Analysis of IIF
Number of
Projects
Loan cost
per Sub-project
(millions of USD)
Actual Sep-12 1 100.0
Apr-13 3 33.3
Dec-13 9 11.1
Late 2014 9 11.1
Nov-15 15 6.7
Projected
Mid-2016 26 3.8
At IIF’s Full Financing Capacity 36 2.8
Source: Project documentation (ISRs) and author’s analysis.
Box 8.1: Illustrating Broader Economic Benefits of IIF’s Sub-projects
Roads:
The LMS toll road helps connect all provinces across Java, and traffic volume is estimated at 20,000
vehicles per day.
Reduces travelling time by 2 hours vis-à-vis the national road, which cuts logistical costs and consumer
prices.
Reduces congestion on the national road, including during heavy traffic of the Lebaran religious festival.
Power Sector:
A power platform company has established more than 150MW of power in remote areas of the country,
using clean, gas-fired plants.
The equity portion improves the company’s debt capacity and the shareholder profile to attract new
investors.
A solar power plant in northern Sulawesi provides electricity to a province with a large gap between
electrical supply and demand.
The Solar power is coupled to an existing diesel generator. This reduces diesel consumption; lowers
maintenance costs; extends the generator’s lifetime; and supports the government’s objective of increased
renewable energy.
Telecommunications:
Supports the acquisition of 3,500 towers from a major, telecom services provider. Ownership of the
towers by a third party encourages competition in the industry because telecommunication providers
are more comfortable with leasing the tower for their network equipment.
Air Transport
Purchase of equipment to establish of new aircraft hangar.
Improves maintenance, repair and safety of aircraft in the rapidly growing local airline industry
Source: Data provided by IIF and field interviews.
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6. The Bank’s cost per sub-project. The cost per IIF sub-project, and how it evolves over time,
are presented in table 2. Clearly, the cost per sub-project is very high initially, but drops off as
IIF’s portfolio of sub-projects expands. The point of this analysis is that the average cost was
dropping sharply during the last year or so of this project. At ICR drafting, it was down to less
than USD7 million per sub-project (or about 20% of the average cost of a sub-project). Taking into
account IIF’s pipeline of sub-projects, the cost is expected to halve again during 2016.
7. Looking even further ahead, IIF still has financing room for more sub-projects within its
existing sources of finance. Considering this remaining financing room and the average size of a
sub-project to date, the cost per sub-project drops again before this financing room is exhausted
(see the bottom line in table 3). At this time, which could be within the next two years or so, the
Bank’s average cost per sub-project is down to less than USD3 million per sub-project (or less
than 9% of value of the average sub-project).
8. Eventually, when IIF becomes self-sustaining, completed sub-projects are replaced by new
sub-projects in IIF’s portfolio, and the average cost will drop-off further, indeed asymptotically to
zero. This looks likely require another 5 years or so, based upon current levels of financing from
the World Bank and the ADB.
9. The Bank’s project ‘leverage’. The World Bank’s cost per sub-project, as just described,
is low because the Bank has served as a catalyst for IIF to mobilize significant amounts of private
sector financing. In 2014, USD250 million in 5-7 year financing was raised from a consortium of
22 foreign and domestic banks,26 and another USD150 million was in store as of late 2015 as well
as Rp 1 trillion (roughly USD73 million) from a major local bank. Furthermore, in March 2012
the Sumitomo Mitsui Banking Corporation took a 14.9 percent equity stake in IIF.
10. The ratio between these other sources of IIF financing and the Bank’s financing is referred
to ‘Bank leverage’ and some simple analytical results are presented in Table 8.2. The World Bank
Bank leverage was a factor of 7.5, which is substantially above the value of 5, as envisaged in the
Project Paper. Furthermore, on current financing arrangements it is projected to rise well above 8,
which appears to be a solid outcome.
26 IFC was actively involved in IIF’s syndicated bank loans.
Table 8.2: World Bank Leverage
WB Loan $
(USD
millions) Total IIF Equity
plus Borrowings
WB
'Leverage'
USD m. USD m.
Actual
late 2015 99.9 746.6 7.5
Projected
end-2015 99.9 820.0 8.2
2016 100.0 856.6 8.6
Source: World Bank documentation (ISRs) and author’s analysis.