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Abstract: In the fall of 1986, the World Bank offered the government of Indonesia a loan of approximately US $200-250 million for highway construction in the capital city of Jakarta and the country's other four largest urban centers. It was an attractive proposal: plummeting world oil prices had squeezed the national treasury, which had derived about 60 percent of its revenues from Indonesian oil profits. But for much the same reason, Indonesia's Ministry of Finance felt compelled to find new revenue sources to repay the loan.
Learning Objective: The case requires students to consider several questions: (1) What are the pros and cons of user charges versus general taxes as a way to finance government services? (2) By what criteria should one judge potential highway user charge systems? (3) Should the fact that roads are thought to be critical to Indonesia's development influence the choice of financing mechanisms? Among other things, the case illustrates that there is a continuum between general taxes and user charges, with the appropriate choice depending on the degree to which the user charge approximates the marginal cost of highway service. The case also can be used to highlight the importance of tailoring user charges to the marginal cost to reap the full efficiency benefits, and to illustrate the practical problems of instituting user charges, especially in a country where other prices are controlled.