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Focus: Indonesia – Infrastructure – Indonesia's PPP program for infrastructure development

13 November 2006

In brief: The Government of Indonesia held its second annual infrastructure conference in November aimed at boosting investor confidence in the Government's public private partnership program for infrastructure development. Partner Steve Pemberton(view CV) and Senior Associate Cameron Negraiff report on the key outcomes of the conference.

How does it affect you?

  • The Government of Indonesia has offered 10 key infrastructure projects worth US$4.5 billion to private investors which will receive top priority; in total, there are currently 101 projects worth US$19.7 billion.
  • The Government has attempted to address investor concerns over government guarantees and other financial support of its infrastructure projects, as well as land acquisition risks, and new PPP laws passed in the past year provide some additional legal certainty in relation to Indonesia's PPP process.  
  • A Rp 2.65 trillion (US$287 million) infrastructure investment fund has been proposed by the Government, to consist of a land acquisition fund to assist in paying for the costs of acquiring project land and a guarantee fund to fund the Government's support obligations.
  • The Asian Development Bank has set aside US$1 billion of its total US$4 billion loan package to Indonesia to support the Government's infrastructure program (which will include loans to private investors). In addition, the World Bank will undertake a guarantee program for Indonesia's public private partnership infrastructure projects.
  • While the Government has stated its commitment to the country's PPP infrastructure development program and has taken some concrete steps to make investment in the PPP projects more attractive by attempting to address investor concerns, the Government needs one or two key successes from its model project list in order to fully establish investor confidence and bring in the level of investment that the Government desires.

Background

The Indonesia Infrastructure Conference 2006 (November 1-3) was hosted by the Government of Indonesia (GOI) and the Indonesian Chamber of Commerce. The purpose of the conference was to attract and encourage investor interest in the Government of Indonesia's much needed infrastructure development projects, by providing an update on the status of the Government's public private partnership (PPP) regime, to address concerns of investors regarding government financial support of the proposed PPP projects and to re-affirm the Government's commitment to these projects.

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The projects

Private investment in GOI sponsored or supported infrastructure projects has been ongoing for a number of years in sectors such as oil, gas and mining exploration and development. In 2005, the GOI held the first Infrastructure Summit at which it formally offered more than 90 projects (valued at more than US $22 billion) to private investors in all infrastructure sectors, including telecommunications, power and electricity generation and distribution, transportation (toll roads, airports, railway and sea ports) and water supply and waste management. Given the lack of progress on these PPP projects since the 2005 conference (only six winning bidders were announced and only one project has begun construction) the GOI has scaled back its list of critical infrastructure projects to 10 'model' projects (see Model Infrastructure Projects). These projects are considered by the GOI to be realistic and financially feasible, with planning (including feasibility studies) already at an advanced stage. It is hoped that these projects will serve as successful models for future infrastructure projects. In addition, the GOI has put more than 90 other infrastructure projects on the table, worth approximately US$15 billion (see Current Infrastructure Projects). In total, the GOI has stated that it needs US$22 billion each year for infrastructure spending.

Model Infrastructure Projects

Telecommunications sector:

1

The 'Palapa Ring' fiber optics network

US$

1.5

billion

Power plants:

2

2x600 megawatt (MW) coal-fired power plant in Central Java

US$

1.2

billion

3

500MW coal-and-oil-fired power plant in Pasuruan, East Java

US$

275

million

Toll roads:

4

165-km Solo-Kertosono toll road in Central Java

US$

928

million

5

60-km Medan-Kuala Namu-Tebing Tinggi toll road in North Sumatra

US$

142

million

Sea ports:

6

Surabaya's Tanjung Perak port expansion

US$

280

million

7

Margagiri-Ketapang ferry terminal

US$

97

million

Water projects:

8

Dumai, Riau

US$

44

million

9

Tangerang, Banten

US$

37

million

10

Bandung

US$

26

million

Total

US$

4.5

billion

Source: National Development Planning Board (Bappenas)

Current Infrastructure Projects

Projects

Number

Project models

Potential projects (US$ million)

Total Investment

Turn pikes

20

2

18

5,340.34

Drinking water

13

3

10

502.46

Power plants

36

2

34

4,527.00

Gas pipelines

12

-

12

2,855.00

Transportation

29

2

27

1,998.82

Telecommunications

1

1

-

1,517.00

Total

111

10

101

16,740.62

Source: National Development Planning Agency (Bappenas)

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Indonesia's Public Private Partnership regime

The General PPP Law

In an effort to reform the GOI's PPP scheme, the GOI in November 2005 passed Presidential Regulation No. 67/2005 - Cooperation Between The Government and Enterprises in Infrastructure Procurement (the 'New PPP Regulation'), which revoked the previous PPP law, Presidential Decree No. 7/1998.

The New PPP Regulation sets out the general framework for the GOI's infrastructure development partnership with private industry. The New PPP Regulation was passed in view of the urgent need for infrastructure development and the need for the GOI to take comprehensive steps to create an investment climate to increase the participation of private enterprises in such infrastructure development.

The New PPP Regulation attempts to assure investors that the PPP process will be fair (all participating enterprises will be treated equally), open (all enterprises that have met the designated prerequisites will be permitted to tender), transparent (all information and requirements for selection, evaluation and awarding of tenders will be open to all investors and the public) and competitive (the selection process will be through auction) while recognising that projects must be based on mutual benefit of the investors and the public and supported by both the GOI and investors. The terms of the partnership will be set out in either a cooperation agreement between the investor and the GOI or a governmental licence issued for the project.

One of the key provisions of the New PPP Regulation deals with risk management and government support for infrastructure projects. It sets out the general principle that project risks will be allocated between the GOI and investors based on which party is capable of best controlling such risk. The general amount of government support will be based on the GOI's fiscal budget. These provisions also contemplate that government support may be given by the regional (provincial) governments.

The New PPP Regulation also provides for:

  • the selection by the ministers or other government officials of infrastructure projects to be offered for tender, and the information and support to be provided by the government in connection with such tender (eg feasibility study, funding requirements);
  • material matters to be agreed in the cooperation agreement between the GOI and private investors; and
  • details of the tendering process.

In addition to the general framework provided by the New PPP Regulation, the various industry sectors also have their own set of relevant laws and regulations. Many of these laws have recently been amended to facilitate private investment in sector projects or are currently undergoing amendments which are expected to be implemented over the next year.

Government support

To provide further incentive for private investment and to clarify the GOI's plan to provide financial support to its infrastructure projects, in May of 2006 the GOI passed Minister of Finance Regulation No. 38/PMK/2006 on the Technical Directives for Controlling and Managing Risks of Infrastructure Development. Under this regulation, the GOI is permitted to offer financial or other forms of compensation to private enterprises participating in infrastructure projects. Compensation may be granted for three types of project risk:

  • Political risk – Risks arising from unilateral government action and inflicting significant financial loss on the enterprise in relation to government acquisition of assets, amendments to legislation and restrictions on conversion of currency and prohibition on repatriation of funds. The mechanism and amount of compensation in respect of political risk will be as agreed by the government and private investors in the project agreement.
  • Project performance risk – Risks to the completion of the project including delay in, or increased costs of, land acquisition and changes by the government in project specifications. Where the delay in acquiring the land is the fault of the GOI; there is an unanticipated increase in land prices; there is a delay in the 'stipulation of operation'; or there are changes to the tariff adjustments, the GOI may extend the concession period or grant other forms of compensation, as approved by the Minister of Finance. Changes to the agreed project specifications which causes financial loss to the investor will be counted against the production cost.
  • Demand risk – Risks to achieving projected revenue as a result of lower project consumer end-demand. Where the realised revenue of the project is less than the minimum revenue guaranteed by the GOI, as a result of lower agreed demand, the GOI may provide financial or other forms of compensation as agreed by the Minister of Finance.

Regulation No. 38/PMK/2006 provides that GOI support may be granted to a project if it is in accordance with current legislation, the project is of sufficient technical and financial feasibility and the cost and risks of such support do not exceed the capability of the State Budget to bear such support. Before the GOI will grant support in the project documents, the details of the support proposal must be evaluated and declared feasible by the National Committee for the Acceleration of Infrastructure Provision (KKPPI) and then passed to the Minister of Finance (through the Committee for the Management of Risks of Infrastructure Provision) for final approval or rejection. The Minister of Finance emphasised at the conference that the GOI would not give blanket guarantees, but that guarantees would be given on a case-by-case basis.

A GOI infrastructure project support fund has been proposed to be established out of the 2006-07 State Budget to provide the necessary financing to cover GOI guarantees and other forms of support which have been approved by the Ministry of Finance. The amount of this fund is expected to be Rp 2 trillion (approximately US $217 million). The World Bank also announced at the conference that it is offering a backstop facility which will be available to infrastructure investors as a guarantee of any GOI guarantee provided to investors for PPP projects.

Land acquisition

In recognition of the importance of land acquisition to the PPP scheme, the GOI has passed a regulation providing for the mechanism for acquiring land and the compensation to be given to owners of land needed for infrastructure development (the Provision of Land for Realising the Development for Public Interests, Presidential Regulation No. 36/2005, as amended by Presidential Regulation No. 65/2006). This legislation provides the legal basis for the GOI to acquire infrastructure project land from the landowners by providing compensation in the form of money, substitute land and/or resettlement or other forms of compensation agreed by the parties. Compensation is to be based on the assessed fair market value of the land and buildings located on the land. The regulation also sets forth an appeal process for landowners who do not agree to the compensation offered by the GOI.

The GOI stated at the conference that it had proposed to set up a land acquisition fund. This fund, which is to be established as part of the State Budget, will be used to compensate the owners of land needed for infrastructure projects. Investors will be required to reimburse the GOI for land acquisition costs by instalments as the project generates revenue. It is expected that the establishment of this fund will give further assurances to investors that the land needed for the PPP projects will be available in a timely manner. The current amount of the revolving fund is Rp. 600 billion (approximately US $65 million). While the amount of this fund is not considered to be large, the GOI has stated that further amounts will be contributed to this fund in the coming year.

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