Commentary: Breaking the Deadlock in Indonesia's PPP Program
Indonesia remains at the forefront of the region's infrastructure boom, championed by the pipeline of public-private partnership (PPP) projects. But while President Joko Widodo promised $52 billion in projects in 2014, the full PPP framework has struggled to take root.
Earlier this year, the president's office introduced new regulations to further this program. As is often the case, the regulations cover a diverse assortment of issues. On the whole, however, they are designed to encourage cooperation between the government and private developers for the provision of infrastructure.
The continued focus on PPP is definitely a move in the right direction for Indonesia, but investors need to make note of the details if they want to be part of the country’s infrastructure boom.
Extending the scheme
Key changes include extending the PPP scheme to certain types of social infrastructure such as health, education and public housing. The regulations also allow for different types of revenue from concessions.
These changes are likely to lead to an increase in the number of PPP opportunities. According the most recent edition of the PPP Book – a list of projects open to the private sector - the National Development Planning Agency (Bappenas), the institution responsible for PPP planning, identified 38 infrastructure opportunities with an estimated total project cost of $24 billion. Up from 11 projects in 2013, these are mainly in transportation, water supply and power. New opportunities in the social infrastructure sector are expected in the coming months.
Availability payments
Investors will need to understand how deals can be structured to ensure a stable and attractive return on investment. Previously restricted to a tariff based mechanism, developers can now receive their investment return in the form of an availability payment.
This change is significant for developers interested in Indonesian infrastructure projects. Instead of dealing with an unacceptable level of demand or revenue risk, project companies will be entitled to payments for making the asset available for use, subject to meeting certain performance indicators, regardless of whether this is actually happening. This is an effective means of allocating risk to the public sector, and should be viewed as a positive development that can help to lay the foundation for bankable projects.
What to watch for
For new projects there is currently a reluctance among the public sector to offer government guarantees. This is likely to be an issue if the creditworthiness of the contracting agency is in question, although for some projects multilateral development agency support may be available. Further thought is also needed on how the Ministry of Finance will fund payments from the state budget. New regulations are expected to address this issue, and investors will be closely monitoring how the interface between the Ministry of Finance and contracting agencies will be developed.
Road to success
A clear regulatory framework is one of several ingredients that investors consider when entering a new market. With a PPP deal involving big capital commitments and a long payback period, it becomes critical. PPPs are complex, and preparation is equally important, with project readiness often the result of a long period of hard work by a specialized team comprising technical, commercial and legal advisers.
While steps have been taken to build institutional PPP capacity, such as the establishment of important enablers such as Sarana Multi Infrastuktur and Penjaminan Infrastruktur Indonesia, there is still a long way to go. More needs to be done at a local level, in light of decentralized decision-making and the recognition that it is not only Jakarta that needs adequate infrastructure. There also needs to be better coordination and a clearly defined separation of power between different government agencies.
Above all, Jokowi’s government needs to make sure it remains committed to the development of these key PPP projects, which will prove critical to Indonesia’s economy in the long-term. PPPs are not one-off projects, they are long-term partnerships; the government and the business community need to take them seriously.
Marius Toime is a partner at international law firm Berwin Leighton Paisner.
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