In Indonesia, Private Finance Initiatives (PFIs) are known as Public Private Partnerships (PPPs).
However, the underlying principles of the PPPs are very similar to Malaysia’s PFIs, which are basically, about getting the private sector to work with the public sector to implement the many infrastructure projects that the country requires.
The Infrastructure Needs of Indonesia
The funding gap for infrastructure in Indonesia for the five years to 2010 is estimated at US$18bil. This is calculated based on the country’s infrastructure needs for the five-year period, which are more than US$22bil whilst the State's budget allocation is some US$4bil.
In 1993/94, the country's infrastructure expenses reached 5.3% of total GDP. The financial crisis of 1997/1998 saw a rapid decline in government investments in the country’s infrastructure. By 2002, infrastructure expenses dropped to about 2.3% of total GDP.
To put things into perspective, if the country were to have a GDP growth of some 6%, the Government would need to spend at least 5% of GDP on new infrastructure. As a result, there is a huge backlog of infrastructure projects today.
Indonesia generally has a lot of catching up to do in improving infrastructure in the country. The country has a relatively low level of infrastructure service coverage. For instance, the road density level is 1.6 km per 1,000 people; electricity consumption is 319 kwh per capita and 45% of households are not connected; urban sanitation service stands at 3%, water supply (39% of urban population), and fixed line teledensity is 27 lines per 1,000 people while mobile line density is at eight per 1,000.
This compares with 195 fixed lines and 123 mobile lines per 1,000 people in Malaysia.
As a result of the financial crisis, the volume of private investment in all infrastructure sectors fell significantly and has yet to recover fully since. The only sectors that had been able to attract significant private sector investment were telecommunication and energy, while transport and water and sewerage have still not attracted significant investment.
It became apparent that post-financial crisis, Indonesia is lagging behind the rest of the developing world. The reason for this is not lack of demand for infrastructure within Indonesia, nor is it a long-term lack of interest from private investors, nor even lack of financing available to the private sector. Rather, the reason is the lack of a clear, cross-sector policy, legal, institutional, and regulatory framework for selecting, preparing, analysing, approving, tendering, contracting, and monitoring PPPs.
Reforms to Promote Infrastructure Development
In the wake of the financial crisis, the Government established the National Committee for the Acceleration of Infrastructure Provision, commonly known locally as KKPPI (Komite Kebijakan Percepatan Penyediaan Infrastrucktur) through the Presidential Decree 81 of 2001. KKPPI is a senior inter-ministerial body responsible for the development and completion of new infrastructure. A key priority is to ensure that public private infrastructure projects receive priority in their preparation, approval, and completion.
To underline the serious intentions of the Government to facilitate the implementation of infrastructure projects, the Policy Package on Infrastructure was launched in February 2006. The Package contains 153 policy actions to be taken by the Government in 2006 in four main areas - establishing an effective policy, regulatory and institutional framework; sector reforms; local government participation and project transactions
Promotion of Private Sector Participation through PPP
The main piece of legislation covering PPP is Presidential Decree 67 of 2005, commonly known locally as Prepres 67. The decree spells out the policies behind getting the private sector to participate in infrastructure. It covers the seven sectors of transportation (sea, river, ports, airports and railways), roads, water, waste-water, telecommunication, electricity, and oil and gas. These are the big-ticket sectors.
Prepres 67 sets out the guiding principles, rules and procedures by which all future PPP agreements and operational permits should be structured and implemented. It also makes it clear that all potential PPP projects must have a pre-feasibility study, a cooperation scheme plan, a project financing plan and source of funds, and a cooperation proposal plan comprising the schedule, process and method of evaluation.
The decree sets out some significant rules which any serious private sector investor should take note of, including the following:
1. Public bidding is mandatory. The public sector partner forms a procurement committee and determines the winner of the bidding based on the recommendation of the procurement committee;
2. The decree also covers Operation Permits contracts;
3. Unsolicited proposals are allowed, but if accepted by the public sector partner, bidding is required to select the private sector partner. Compensation is made to the private sector proponent through an added maximum bonus of 10% of the bid value, or a reimbursement of the cost of the unsolicited proposal;
4. Tariffs are to be based on full cost recovery, plus reasonable profit. Compensation by the public sector partner to the private sector is allowed if the tariffs determined exceed the users’ ability to pay. This can only happen for socially oriented PPP projects where the EIRR is high;
5. Financial close must be achieved by the winning bidder within 12 months, failure of which will result in the termination of the PPP Agreement and the forfeiture of the bid bond. To assist KKPPI, the Government is also setting up the P3 Central Unit (‘P3CU’) within KKPPI. This is like a PPP Task Force and may serve as a one-stop agency for the dissemination of information to investors, and also to the public sector partners.
PSCU’s overall goal is to establish a national PPP network to sustain the process of identifying, preparing, contracting, financing, completing, and operating priority infrastructure projects. One of the main foci of the P3CU is assist in transaction completion.
The Unit will centralise capacity to coordinate, consolidate, and enhance PPP transactions; provide a strategic infrastructure development plan and road map for investment; provide best practice guidelines for PPP transactions; create a Project Development Facility to assist local and regional governments to develop PPP projects; establish a network with Ministerial PPP nodes; and conduct study into dismantling the dual functions (operator and regulator) of state-owned enterprises.
The Unit is currently finalising the guidelines and standard operating procedures (SOP) for the project cycles of the PPP programme. Transparency is key to the whole process.
Government Support and National Risk Management
The Government has announced that it is willing to provide financial support to certain PPP projects.
Since the 1997 financial crisis, the Government has been very cautious in giving blanket government guarantees (or comfort letters). It has incorporated the lessons learnt into the new framework. A new Risk Management Committee has been established within the Ministry of Finance to set the policy guidelines on risk mitigation and management, and to evaluate project risks prior to making recommendations to the government on the fiscal support needed to be given to each of the PPP projects.
This Committee plays a very important role.
The risks that the Government may consider bearing in some of the PPP projects are political risks, project performance risks, site risk (delay in land acquisition and increase in land price); operational risk (delay in operation permit; lower-than-agreed initial tariff; delay in or cancellation of tariff adjustments; and change in agreed output specifications); and demand risk (lower-than-guaranteed minimum, with clawback clause).
With these commitments from the Government, many of the potential deal-breakers have now been removed.
As an example, certain costs associated with land acquisition in toll road concessions may now be borne by the Government, thus making the Concession Agreements more bankable. The Government is already setting aside funds to assist in land acquisitions for PPP projects.
Opportunities for Malaysian investors
Above is a summary of the investment opportunities in infrastructure PPP projects. The projects vary in their ‘preparedness’ for bidding. It is best to check these out with the P3CU or KKPPI in Jakarta, which would have the latest details on these projects and other potential PPP projects that may be undergoing pre-feasibility studies.
Jakarta will be hosting the Second Infrastructure Conference and Exhibition from Nov 1-3 in Jakarta. It is expected that certain key announcements would be made that will further boost the bankability and implementation of many of the PPP projects.