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Business Insight: Indonesia

Indonesia’s top 10 donors: Responding to the promise of transformation

By Christine Dugay13 August 2012

Indonesian President Susilo Bambang Yudhoyono. Photo by: World Economic Forum / CC BY-NC-SA

Today, Indonesia is a G-20 country and the resource-rich archipelago is one of the hottest investment destinations in a world troubled by Europe’s debt crisis and slow growth elsewhere. Indonesia’s economic success is hailed by the donor community as a foreign aid success story, crediting the development industry with helping catalyze economic growth. Yet, the country’s recent transition to middle income status obscures the reality that Indonesia continues to face serious developmental challenges. Poverty remains a serious problem. Despite having a GNI per capita (Atlas method) of $2,611, more than 120 million Indonesians (over half of the population) live on less than $2 a day.

Even with an economic turnaround and a strengthened financial system, Indonesia remains susceptible to external shocks given some weak socio-economic fundamentals. Indeed, there is a possibility that if no action is taken, gains made on the development front could be lost. With major aid commitments to the country, foreign aid donors are confronting external shocks through a $5.5 billion contingency loan program. Australia, Japan, the Asian Development Bank, and the World Bank created this stand-by loan package for Indonesia in the event that the country slides.

Interestingly, a Devex analysis of aid data and pledges from 19 donors reveals that 2012 foreign aid doubled from 2010 levels to $4.21 billion. Despite this marked increase, total development assistance to Indonesia accounts for less than 1 percent of GDP. Below, Devex summarizes current pledges and disbursements of the top 10 donors to Indonesia in 2012 and outlines their specific priorities and initiatives.

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Asian Development Bank

In 2009, President Susilo Bambang Yudhoyono initiated the government’s pro-poor, pro-jobs, pro-growth, and pro-environment strategy to pursue national development. Consistent with this strategy, the Asian Development Bank’s work in Indonesia focuses on poverty reduction through “rapid, sustainable, and inclusive” economic growth projects. Over the next two years, the bank has allocated $2.5 billion in programmable funding for its operations in the middle-income country. In an effort to synchronize programming, ADB’s 2012-2014 Country Partnership Strategy is closely aligned with Indonesia’s 2010-2014 National Medium-Term Development Plan, or RPJMN.

Through the partnership, ADB aims to address constraints posed by poor infrastructure, weaknesses in governance, and inadequately skilled labor to Indonesia’s development. Focus areas of the bank’s operations include energy, transport, natural resource management, finance, water supply and other municipal services, and education. Recently, ADB approved $500 million in funding for a Precautionary Financing Facility, meant to sustain Indonesia’s pro-poor economic growth by maintaining market confidence and meeting public financing needs in the event of external shocks.

World Bank

Since 2004, recognizing Indonesia’s emerging middle-income country status, World Bank support has shifted toward a country-led and owned development strategy. Citing the lack of effective and accountable institutions as the main constraint to further development, the World Bank’s 2009-2012 Country Partnership Strategy for Indonesia focuses on investing in institutions. Though a notional annual World Bank investment of $2 billion is expected under the partnership, actual annual lending can vary significantly up or down. The Washington-based lender recognizes that a much larger share of Indonesia’s own spending or private investment is needed to ensure demonstrable impact.

The current CPS aims to improve existing government programs, strengthen institutions, and encourage the replication of effective reforms in private sector development, infrastructure, community development and social protection, education, and environmental sustainability and disaster mitigation. In particular, given that the development of large-scale infrastructure is crucial to Indonesia’s progress, the WB provides financial and advisory support for the roads, energy, and water—including irrigation and water and sanitation—sectors. (See one open Infrastructure tender under the Jakarta Urgent Flood Mitigation Project).  

Japan International Cooperation Agency

With an estimated $662 million earmarked in programmable funding for 2012, the Japan International Cooperation Agency is Indonesia’s largest bilateral donor. Since 2004, guided by the Country Assistance Program for Indonesia, JICA’s work in the resource-rich archipelago has prioritized promoting sustainable growth through the private sector, building a democratic and fair society, and ensuring peace and stability. However, with the publication of the 2010-2014 RPJMN, Japan in close dialogue with the government of Indonesia has been formulating a new policy framework for development.

With a view of Indonesia as a strategic partner, Japan envisions further cooperation to focus on improvements in the investment environment, economic partnership agreement, environment and climate change, energy cooperation, disaster prevention, and measures against external shocks brought about by terrorism and piracy, diseases, and financial and economic crises. Last year, Japan signed an agreement to provide about 62.3 billion yen ($808 million) in new climate aid to Indonesia for the construction of five geothermal power plants, among other climate-related initiatives.

Australian Agency for International Development

Given the doubling of operations and financing in the build-up towards a $1 billion annual aid program by 2016, the Australian Agency for International Development may soon become Indonesia’s leading bilateral donor. The middle-income country is currently receiving the largest share of Australian overseas development assistance—$521 million or 10 percent of the total. Aligned with the RPJMN, the Australia Indonesia Country Partnership Strategy 2008-2013 articulates Australian commitment and support for Indonesia’s further development.

Australia’s work in Indonesia concentrates on the areas of sustainable growth and economic management, education, health, democracy, justice and good governance, and safety and peace. To build on and strengthen these sectoral investments, Australia is funding Indonesia’s underdeveloped research sector through The Australia-Indonesia Partnership for Pro-Poor Policy: The Knowledge Sector Initiative. Further, as Australian assistance to Indonesia grows, developmental work in education, infrastructure and social protection are prioritized for expansion.

Global Fund to Fight AIDS, Tuberculosis and Malaria

After funding freezes, leadership changes, and staff cuts, the Global Fund to Fight AIDS, Tuberculosis and Malaria is back to business as normal. This time, however, health programming under the Global Fund stresses value for money through strategic interventions in 20 high-impact countries, one of which is Indonesia. Though likely to meet its health Millennium Development Goals, Indonesia will miss its targets of halting the spread of tuberculosis, reducing malaria incidence, and improving HIV/AIDS prevention and care without significant investment.

To date, total approved funding for the middle-income country is $544 million, of which $411 million has been disbursed. To stem the spread of the “Big 3” of communicable diseases in Indonesia, the Global Fund has allocated $145.4 million for tuberculosis, $142.4 million for malaria, and $122.1 million for HIV/AIDS. At present, the Global Fund has 13 grants in progress—tuberculosis (5), HIV/AIDS (4), malaria (3), and others (1)—in Indonesia.

Agence Française de Développement

France’s latest framework document for its development cooperation articulates a shift in how the Agence Francaise de Développement normally does business. French assistance has moved from an asymmetrical donor-beneficiary relationship towards one of cooperation, with partnerships tailored along according to identified needs, objectives pursued, and resources mobilized. From 2011 to 2013, French cooperation with emerging countries, including Indonesia, will exceed no more than 10 percent of overall bilateral aid earmarked for this triennium. This year, Indonesia is set to receive an estimated $192 million in French development assistance. The AFD in Indonesia works exclusively on the preservation of biodiversity, the fight against emerging and communicable diseases, and combating climate change.

The emerging economy is the world’s fifth largest emitter of greenhouse gases. At present, Indonesia is leading the way through its significant voluntary commitment of cutting national emissions by 26 percent unilaterally, and 41 percent with the support of the international donor community by 2020. Supporting this substantive and innovative gesture, the AFD has been implementing renewable energy development projects in Indonesia as well as providing the Government with technical expertise on industrial energy efficiency and forest preservation and management.

United States Agency for International Development

Last July 24, U.S. Secretary of State Hillary Clinton was in Bali to discuss progress on commitments made under the United States-Indonesia Comprehensive Partnership agreement. In 2010, the two countries agreed to boost cooperation in security, investments, and climate change initiatives. Since then, under the SOLUSI partnership framework, the U.S. Agency for International Development has initiated new climate and environment programs in forestry, marine conservation, and clean energy. Underlining this engagement is USAID’s commitment to mitigate global threats and diminish poverty in Indonesia.

The USAID Strategy Indonesia 2009-2014 is designed to respond to the promise of Indonesia’s remarkable transformation—a strong, prosperous, and inclusive nation. To this end, USAID allocated $180 million this year, with sectoral allocations as follows: $45.5 million for education and social services, $27.5 million for environment, $47.3 million for health, $5.5 million for economic development, $31.5 million for peace and security, and $22.6 million for democratic governance. As part of its work to strengthen democratic institutions across the country, USAID is expected to solicit proposals this November for the Multi-Sector Community Governance Project in Indonesia’s Papua Region.

United Nations

Recognizing Indonesia’s middle-income status and strengthened resource base, the United Nations has shifted away from direct service delivery towards the provision of high-quality policy advice and technical assistance. Guided by the 2011-2015 partnership development framework, UN support in Indonesia has stressed making development inclusive for the poor, marginalized, and vulnerable, with a special focus on the regions of Aceh, Papua, and West Papua. An estimated $800 million is required over five years to ensure that Indonesia realizes its vision for the future—a just, democratic, and prosperous state. For 2012, UN allocated $160 million for development assistance to Indonesia.

U.N. capability-building support for Indonesia is concentrated in five key areas: social services, sustainable livelihoods, governance, disaster management, and climate change and environmental sustainability.  Aside from the provision of technical expertise, the UN strengthens the country’s public institutions through modernization initiatives. One example of which is the Provision of Direct Reception of Satellite Data in Indonesia.     

Millennium Challenge Corp.

In November 2011, at the sidelines of the East Asia Summit in Bali, the Millennium Challenge Corp. signed a $600 million five-year compact with Indonesia that supports low-carbon economic growth, early childhood nutrition development, and the modernization of public service delivery systems. Under the compact, Indonesia will implement three projects designed to ensure sustainable development: the Green Prosperity Project, Community-Based Nutrition to Prevent Stunting Project, and the Procurement Modernization Project.

Recently, experts questioned the contents of MCC’s current compact with Indonesia, which, they say, can hurt rather than improve the country’s economy. Ken Adelman, vice president of the U.S.-based leadership training institute Movers & Shakespeares, argued that the compact’s $332 million Green Prosperity Project does not promote Indonesia’s economic priorities, but advances instead those of the Obama administration. Though supporting the use of renewable energy and improvement of natural resources management, Indonesia’s main economic interests, says Adelman, lie in the plantation, forestry, and agricultural sectors. Bottom line: to prevent another Solyndra, critics of MCC’s Green Prosperity Project contend that the development agency should not focus on environment or energy-related initiatives.

Federal Ministry for Economic Cooperation and Development (BMZ)

Germany is one of Indonesia’s leading bilateral donors. As defined jointly in government discussions held last October, the Federal Ministry for Economic Cooperation and Development, or BMZ, - Indonesia   partnership prioritizes the areas of climate protection, private sector promotion, and good governance/decentralization. This year, the BMZ has allocated $116 million for developmental assistance to Indonesia.

Heeding the need to curb Indonesia’s emissions, Germany’s top aid agencies are currently working with the Government to promote climate change mitigation through the adoption of measures in the fields of forestry, environmental protection, energy, and agriculture. One example of such measures is the Chiller Energy Efficiency Project in Indonesia.

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