The Government of Indonesia recognizes that poor transport infrastructure and services are constraining the economic and social development of rural areas and impeding its efforts to alleviate rural poverty, stem rural-urban migration, and more generally to achieve the Millennium Development Goals.
With current transport infrastructure expenditure accounting for approximately 10-15% of national spending, the sector is obviously an ideal subject for governance reform. If the government subsidy for the transport sector managed by the Ministry of Finance is included (in the form of transport service/fare subsidy, Public Service Obligation in transport sector, pioneering transport/operator subsidy, and fuel subsidy), this sector has the highest percentage of government expenditure and GDP. A significant increase of the public works and transportation sector budget in 2008, and presumably in following years, requires better safeguards in order to achieve sustainable policy for delivery of infrastructure. Government policy to promote public-private partnership (PPP) schemes needs to address governance issues in the area of sustainability, planning, the design of concession agreements, as well as subsidies, contracting and procurement processes, and enforcement of user charges.
The decentralization process in Indonesia requires sub-national or local governments to play an active role in infrastructure project assessment and procurement and local level/smaller scale PPP projects. Fundamental research is therefore required in designing subsidy policy and public service obligation in the transport services; the design of concession agreement for private sector-financed projects in transportation infrastructure and service provision (including the role of risk allocation); and policy and regulatory frameworks for contracting and procurement for transport projects, especially strategic planning and transparent guidelines for private finance initiatives (PFI). In this field strengthening the capabilities of central and local government agencies, and to educate the domestic and international private sectors are both of high priority and should be addressed by the provision of appropriate training and education support.
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