Infrastructure in Indonesia: Building the framework for effective PPPs

19 November 2013 | By Jared Heath (Partner)

Indonesia aims to be amongst the top 10 global economies by 2025, but this ambition depends upon infrastructure investment. Indonesia’s infrastructure needs are both significant and urgent. The Indonesian government supports infrastructure delivery through public private partnerships (PPPs), but to date none have actually been completed. While progress has been made in establishing the framework for PPPs, opportunities for improvement remain.

Indonesia needs over US$300 billion in infrastructure.  According to the Indonesian government’s MP3EI master plan,[1] around a fifth of this infrastructure is to be delivered through PPPs.

Indonesia’s National Development Planning Agency (Bappenas) recently released its latest PPP Book which identified 27 projects worth US$47.3 billion to be made available to investors from 2014. This is a very ambitious target to be achieved.

However few of these projects are actually underway. Many are still in development and are yet to be released, others have started and then stalled.  To date, no PPP project in Indonesia has achieved financial close.  The question is why?

Much of the architecture has been established

A Presidential Regulation provides the legal framework for PPPs to deliver transport, roads (including toll roads and toll bridges), irrigation systems, drinking water, liquid waste management, telecommunications, power and oil and gas infrastructure.

And a range of state-owned entities have been created to assist with the financing and bankability of PPPs.

PT Sarana Multi Infrastruktur (PT SMI) and PT Indonesia Infrastructure Finance (PT IIF) were both set up to provide alternative sources of funds (both debt and equity) to finance projects.  PT SMI is wholly owned by the Indonesian government, while PT IIF is a private enterprise jointly funded by the government, the Asian Development Bank (ADB), the International Finance Corporation and two private financing institutions.

PT Penjamin Infrastruktur Indonesia (PT PII) is another government-owned entity which provides project guarantees to the private sector. It aims to improve the creditworthiness of the public sector counterparts, hence increasing private sector participation and ring-fencing the government’s contingent liability.

Indonesia’s sovereign wealth fund, Pusat Investasi Pemerintah (PIP), is financing land acquisition for PPPs and a number of state-owned construction entities are actively involved in infrastructure projects.

The Ministry of Finance has also established a Viability Gap Fund to provide additional capital to ensure the financial viability of projects.

Capital is also available from multilateral institutions (such as the ADB and the World Bank) and private financing institutions.  While long-term local-currency funding requires more development, the biggest difficulty is enabling Indonesian infrastructure projects to attract international finance in competition with projects from more established jurisdictions with more favourable risk returns.

One major impediment to infrastructure projects has been land acquisition.  In 2012 the Indonesia parliament enacted the Land Acquisition Law.  The Law and relevant implementing Presidential Regulation are intended to streamline the acquisition process.  Although these only have limited application to projects already underway, they should assist in facilitating future projects.

So what impediments remain?

There are three major challenges for PPPs in Indonesia: project conceptualisation; certainty of the legal and regulatory framework; and capacity building.

Some have conceived of PPPs simply as a source of private sector finance or a convenient mechanism for transferring risk to the private sector.  Instead, PPPs should be seen as a method for delivering innovation and value for money.  Risks should be allocated to the party best placed to manage them.  If inappropriate risks are imposed on the private sector, the project simply becomes unbankable.

With a proliferation of players (Ministry of Finance, Bappenas, PT SMI, PT IIF and PT PII) and potential projects, establishing a central PPP unit to drive projects with proper planning and risk allocation is critical.

While the Presidential Regulation for PPPs has established the basic legal framework, regulatory certainty remains a substantial issue.  Co-ordination and consistency can be improved between the national, 34 regional and over 500 local governments.  The Presidential and parliamentary elections next year also contribute to a current general state of uncertainty regarding policies and priorities.

Finally, even though there has been significant investment in developing the national government’s capacity to deliver PPPs, opportunities remain to develop the capacity of regional and local governments, which are often the contracting authorities that enter into the PPP concession deed and are responsible for its delivery.  Without active engagement of these other levels of government, infrastructure projects will not advance.

The future

Encouragingly, there are positive developments.  After commencing in 2003, then being abandoned in 2011, the Jakarta Monorail Project recommenced this year.  A recent groundbreaking ceremony also marked the start of construction of the Jakarta Mass Rapid Transit system (108 kms with 13 stations).

At the Asia Pacific Economic Cooperation (APEC) meeting earlier this year, the leaders agreed to establish an APEC Experts Advisory Panel and a pilot PPP Centre in Indonesia.

The PPP Centre will assist the Ministry of Finance to build capacity in designing and managing PPPs.  Australia will contribute A$3 million towards the PPP Centre.

If the PPP Centre and Panel focus on the remaining challenges, and there is a collective commitment to developing quality projects rather than simply the pipeline quantity, there is every prospect that Indonesia’s infrastructure ambitions can be more rapidly translated into reality.

Jared Heath is a Senior Associate currently seconded to one of Indonesia’s leading law firms, Soemadipradja & Taher (S&T) as Foreign Counsel. S&T is recognised as having a leading energy, resources and infrastructure practice. S&T is currently advising both the public and private sector on several Indonesian PPP projects. More information on S&T is available from its website.

Corrs is not licenced to practice law in Indonesia and this should not be construed as providing Indonesian legal advice. If you would like further advice, please contact S&T.

  [1] Master Plan for Acceleration and Expansion of Indonesian Economic Development for 2011 to 2025, which identifies 389 projects.

The content of this publication is for reference purposes only. It is current at the date of publication. This content does not constitute legal advice and should not be relied upon as such. Legal advice about your specific circumstances should always be obtained before taking any action based on this publication.

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Jared Heath

Partner. Melbourne
+61 3 9672 3545