The provision of infrastructure is an important issue in the effort to support economic activity in many countries, including Indonesia. In order to drive the wheels of the economy and spur economic growth, adequate infrastructure is an absolute necessity.
In recent years the provision of infrastructure has become one of the focal points of government concerns in Indonesia. The need to provide infrastructure is increasing in line with economic growth in this country. As such, the government has placed infrastructure as one of the 11 National Priorities set forth in the 2010-14 National Medium-Term Development Plan ( Rencana Pembangunan Jangka Menengah Nasional, RPJMN 2010-14). In the longer term, the Master Plan for Acceleration and Expansion of Indonesia Economic Development (“MP3EI”) specifies that infrastructure provision constitutes an important component in realising the objectives of the MP3EI, namely to transform Indonesia into a developed nation by 2025 with a per capita income of approximately $14,250-15,500 and GDP between $4trn and $4.5trn.
The increase in the needs for the infrastructure provision shall of course increase the needs of investment in the infrastructure sector itself. However, the existing investment needs apparently cannot be achieved by the government of Indonesia alone. As an illustration, for 2010-14, the need for infrastructure provision required an estimated investment of Rp1.43trn ($143m). Out of this amount, the government can only provide Rp510.97bn ($51m) – around 36% of the total.
Being aware of the immense infrastructure investment needs and of its limited budgetary capacity, the Indonesian government is now trying to spur infrastructure provision through public-private partnerships (PPPs). The active participation of private enterprise in the infrastructure provision is thrust to the forefront, which also means that investment opportunities for private entities in Indonesia are increasing.
In the effort to craft the PPP scheme in infrastructure provision, in the RPJMN 2010-14, the government has determined the policy direction for infrastructure provision through the PPP scheme, namely: (i) continuing in-sectoral and cross-sectoral institutional and legislative reforms that would spur implementation of PPPs; (ii) thoroughly preparing PPP projects and thereby cutting unnecessary transactional costs; and (iii) providing facilities to support investment in the development and operation of the PPPs, including providing financial support in the state budget.
To attract investors and promote implementation of PPPs, the government has compiled PPP Books containing lists of PPP projects divided into 3 categories, namely: (i) potential projects; (ii) priority projects; and (iii) projects ready for tender. The latest PPP Book issued by the Government is the 2012 PPP Book, which specifies 29 potential projects, 26 priority projects and three projects ready for tender. To date, there are at least 12 PPP projects that have been tendered.
PPP REGULATIONS IN INDONESIA: The use of the PPP scheme in infrastructure provision is nothing new in Indonesia. In the 1990s, the government promoted independent power producers, joint operation for telecommunications expansion, and a number of toll roads were constructed based on the PPP scheme. In the context of regulation, arrangements regarding PPP in infrastructure provision were introduced in 1998, namely under Presidential Decree Number 7 of 1998 regarding Cooperation between Government and Business Entity in the Development and/or Management of Infrastructure (PD No. 7/1998).
In order to respond to the increasing need for infrastructure provision and to improve the existing PPP regulation, the government has amended PD No. 7/1998 with Presidential Regulation Number 67 of 2005 regarding cooperation between the government and Business Entity in Infrastructure Provision, which to date has been amended twice, namely under Presidential Regulation Number 13 of 2010 and Presidential Regulation Number 56 of 2011 (PR No. 67/2005). This is a general provision that regulates implementation of the PPP in infrastructure provision. There are several technical regulations that cover the implementation of the PPP in greater detail, such as the state minister for national development planning’s regulations regarding general guidelines for implementation of cooperation between government and business entities in infrastructure provision (PM No. 3/2012), the minister of transportation’s regulations regarding implementation guidelines for Cooperation between Government and Business Entity in the Provision of Transportation Infrastructure (PM No. 83/2010), the minister of finance’s regulations regarding guidelines for the implementation of infrastructure guarantee in cooperation projects between the government and private entities (PM 260/2010), and several other ministerial regulations.
In addition, there are also regulations that are sectoral in nature, which regulate the respective infrastructure sectors. The following is a list of laws and government regulations that are applicable at this time for the respective sectors. Please note that in addition to such laws and government regulations hereunder, there are also regulations of the relevant minister regarding implementation for the respective sector. DEFINITIONS, OBJECTIVES, SCOPE, METHOD OF EXECUTION & FORM OF COOPERATION: PR No. 67/2005, which constitutes the umbrella regulation in the execution of the PPP for infrastructure provision, does not provide any specific definition regarding what is referred to by PPP. However, this regulation defines a PPP project as an infrastructure provision conducted through a cooperation agreement or the granting of a business permit between a minister, institutional head or head of local government (hereafter referred to as the “grantor”) with a business entity, namely a private business in the form of a limited liability company, state-owned enterprise, local government-owned enterprise and cooperatives.
The terminology of “infrastructure development” itself refers to the activity encompassing construction to build or improve the capacity of infrastructure and/or infrastructure management activities and/or infrastructure maintenance.
The objectives of PPP implementation in infrastructure provision are: (i) to meet sustainable financing requirements in infrastructure provision through the accumulation of private funding; (ii) to increase the quantity, quality and efficiency of service through fair competition; (iii) to increase the quality of management and maintenance in infrastructure provision; and (iv) to promote the use of the principle of user-paid services, considering the capacity of the user to pay.
Based on PR No. 67/2005, there are eight types of infrastructure, of which provision may be conducted under the PPP scheme, namely: (i) transportation infrastructure, covering airport and port services, rail facilities and infrastructure; (ii) road infrastructure, covering toll roads and bridges; (iii) irrigation infrastructure, covering raw water carrying channel; (iv) drinking water infrastructure, covering raw water extraction structure, transmissions network, distribution network, and drinking water processing installation; wastewater infrastructure covering wastewater treatment, collection and primary network, and waste facilities covering transport and disposal; (vi) telecommunications and information infrastructure, covering telecommunications network and e-government infrastructure; (vii) electric power infrastructure, covering power plants, including geothermal electric power, transmission, or distribution of electric power; and (viii) oil and gas infrastructure, covering transmission and/or distribution of oil and gas.
As specified in the definition of PPP project above, there are two ways to carry out the PPP, namely through cooperation agreements and business licences.
COOPERATION AGREEMENT: A cooperation agreement is a written agreement for infrastructure provision between the grantor and a project company chosen through a public tender. PR No. 67/ 2005 sets forth that the contents of a cooperation agreement must contain at least provisions regarding: (i) the scope of work; (ii) duration; (iii) performance bond; (iv) tariffs and adjustment mechanisms; (v) rights and obligations including risk allocation; (vi) service standards; (vii) the transfer of shares prior to commercial operation of the PPP project; (viii) sanctions in the event that the parties do not comply with the agreement provisions; (ix) the termination of the agreement; (x) a financial statement from the project company in the context of the implementation of the agreement, to be examined annually by an independent auditor and announced in a national newspaper; (xi) mechanisms for dispute resolution set forth in stages, namely deliberations for amicable settlement, mediation and arbitration or court proceedings; (xii) mechanisms for performance supervision in the implementation of work; (xiii) the utilisation and ownership of infrastructure assets; (xiv) the restoration of infrastructure asset and/or management to the grantor; (xv) force majeure; (xvi) a statement and guarantee of parties that the cooperation agreement is valid and binding to the parties and is consistent with the prevailing laws and regulations; (xvii) the use of language in the agreement, namely Bahasa Indonesia or both Bahasa Indonesia and English; and (xviii) the governing law.
BUSINESS PERMIT: The business permit is a permit for infrastructure provision issued by the grantor to a project company determined through public tender. However, it appears that at this time the government is more focused on PPP under the cooperation agreement as regulations regarding the PPP at this time have greater emphasis on PPP through cooperation agreements. For PPPs initiated through the business licence, Presidential Regulation No. 67/2005 sets forth that the procedure for the public tender of a business license shall be determined further by the grantor.
Regarding the form of cooperation in the PPP implementation, PR No. 67/2005 does not set any specific guidelines. PR No. 67/2005 only specifies that the form of cooperation be determined based on an agreement between the grantor and business entity, insofar as it is not contrary to the prevailing laws. Therefore, the cooperation in the PPP project may be carried out in various forms such as build-own-operate (BOO), build-operate-transfer (BOT), operate and maintain, and lease-develop-operate (LDO) by taking into account the prevailing laws for the respective infrastructure sector.
PARTIES INVOLVED IN THE PPP: The following section gives an overview of the parties generally involved in a PPP project.
Grantor: The grantor is the minister, institution head or local government head serving as partner to investors in the PPP project. The grantor should draw up a cooperation agreement with the project company or issue business licences for the project company in the context of carrying out the PPP project.
Sponsor(s): The sponsors are project company shareholders who may comprise local or foreign investors. In the event that sponsors are foreign investors, the provisions regarding limits to foreign capital ownership that are set forth in PR No. 36/2010 concerning business fields closed to investment and business fields open, with conditions, to investment must be taken into account.
Project company: The project company is an Indonesian entity owned by sponsors, which signs a cooperation agreement with the grantor or receives a business permit from the government to carry out the PPP project. In PPP projects carried out through cooperation agreements, PM No. 3/2012 sets forth that the tender winner must establish a project company that will execute the cooperation agreement. The project company must be validly established no later than six months after the issuance of the tender by the grantor.
Licensing agencies: Licensing agencies are government agencies responsible for issuing licences in connection with the establishment and operation of project companies. These include the Ministry of Law and Human Rights, the Indonesian Investment Coordinating Board (BKPM), and the manpower and immigrations agencies.
Lenders: Lenders may comprise foreign or domestic commercial banks that provide loans for project financing.
Service providers: Service providers are parties that maybe involved in supporting the project, for example for procurement and construction.
Users: Users may be single off-taker buyers, such as in electricity procurement in which PT Perusahaan Listrik Negara is the single off-taker, or public consumers.
Minister of finance: The minister of finance has the authority to approve government support in the form of tax incentives and/or fiscal contributions based on the proposal of the grantor. In addition, the minister of finance is authorised to provide government guarantees in the form of financial compensation and/or compensation in other forms through the risk distribution scheme for the PPP project.
Policy Committee for the Acceleration of Infrastructure Development (KKPPI): The KKPPI is an inter-ministerial committee established pursuant to PR No. 42/2005 and is chaired by the Coordinating Minister of Economic Affairs.
The KKPPI coordinates policies to accelerate infrastructure provision. In connection with the granting of government support, the role of the KKPPI is to provide input and advice for the consideration of the minister of finance.
PT Penjaminan Infrastruktur Indonesia (PT PII): PT PII is the state-owned enterprise established by the government as part of the effort to effect acceleration of infrastructure provision in Indonesia by providing security support with regard to risks arising from the action or non-action of the government that result in the reduction of economic value of the PPP project.
In brief, the purpose of establishing PT PII is as follows: (i) to provide guarantees to the PPP project; (ii) improving creditworthiness, particularly bankability of the PPP project; (iii) improving management procedures, consistency and transparency in the process of providing guarantees; and (iv) minimising the possibility of sudden shock to the APBN and ring-fencing the government’s exposure to contingency obligations.
Pursuant to PM No. 260/2010, PT PII is the executor of the single-window policy in the provision of government guarantees for the PPP project.
STAGES OF A PPP PROJECT: The PPP project may originate from projects compiled by the government (“solicited project”) as well as proposed by private entity (“unsolicited project”). Solicited projects shall be determined by the grantor in the project priority list after going through the process of identification and public consultation.
Such a project priority list is included in the planned infrastructure project list compiled by the minister of national development planning based on the level of readiness, and declared open to the public.
SOLICITED PROJECT: PM No. 3/2012 sets forth that the implementation stage of solicited PPP projects through the cooperation agreement shall cover: (i) PPP project planning; (ii) PPP project preparation; (iii) PPP project transaction; and (iv) cooperation agreement implementation management. In conjunction with such stages, support activities that are part of the PPP project stages may be conducted, covering: (a) planning and execution of land acquisition and resettlement; (b) environmental assessment; and (c) application for government support and/or guarantees.
PPP project planning stage comprises the activities of (i) identification and selection of PPP project; and (ii) determination of PPP project priority. This stage yields the preliminary study document and the PPP project priority list to be included in the planned infrastructure project list. This last list comprises potential PPP projects, prospective PPP projects, and PPP projects that are ready for offer.
The PPP project preparation stage comprises activities of preparing the initial assessment pre-feasibility study to obtain an initial conclusion of the PPP project, as well as an assessment to ensure that the project is ready to transfer into the transaction stage. This stage yields the PPP project readiness document.
The project transaction stage comprises activities that make up the pre-feasibility study and the draft project company procurement plan, as well as the project company public tender. This stage yields the pre-feasibility study document, determination of the tender winner, and a cooperation agreement.
In the event that government support and/or guarantees are required, the grantor would present pre-feasibility study documents to the minister of finance to obtain a statement of readiness to provide government support, and/or for PT PII to obtain a statement of government guarantees.
The cooperation agreement implementation management stage comprises cooperation agreement management planning and cooperation agreement implementation management, which is conducted during pre-construction, construction, commercial operation, and the lapse of the cooperation agreement. This stage yields a cooperation agreement management implementation report periodically. STAGES OF UNSOLICITED PROJECTS ( COLLABORATION AGREEMENTS):Pursuant to PM No. 3/2012, the stages for proposing an unsolicited project are: (i) the unsolicited project approval stage; and (ii) the unsolicited project tender stage.
It must be noted that unsolicited projects must meet the following requisites: (a) they must not be included in the master plan of the relevant sector; (b) they must be technically integrated to the master plan of the relevant sector; (c) they must be economically and financially feasible; and (d) they must not require government financial support.
The unsolicited project approval stage yields the project concept document, the pre-feasibility study documents and the feasibility document.
For the project initiator, PR No. 67/2005 sets forth the granting of compensation in the form of: (i) additional value, maximum in the amount of 10% of the project initiator’s tender evaluation; (ii) the right to match, that is, the right of the project initiator to change the offer based on the results of the public tender show that there is a better offer from other tender participants; or (iii) the purchase of project initiative including intellectual property rights that accompany it by the grantor or tender winner.
A project initiator receiving compensation in the form of additional value and right to match shall still be obligated to participate in the offering as required in the public tender documents. In the event that such compensation has been granted, all feasibility studies and supporting evidence thereof shall automatically become the property of grantor without payment or compensation in any form whatsoever.
In the event that the compensation determined is in the form of purchase of the project initiative, including all related intellectual property rights, the project initiator shall not be permitted to participate in the offering as required in the public tender document. The purchase of the project initiative shall constitute compensation by grantor or tender winner for a number of direct costs in connection with the project preparation that has been incurred by project initiator.
The amount of such cost shall be determined by grantor based on the evaluation by an independent evaluator, which would be appointed by the grantor.
GOVERNMENT SUPPORT: To improve the financial feasibility of a PPP project, the government may provide support to the project company as set forth in PR No. 67/2005. Support may be given in the form of licensing, land acquisition, partial construction support and/or in other forms in line with the prevailing regulations established by the grantor.
In addition, the minister of finance may approve the granting of support in the form of tax incentives and/or financial fiscal contributions based on the proposals of the grantor. For example, in the field of toll road infrastructure the government can provide land acquisition support in the form of both the Land Revolving Fund and land capping.
The Land Revolving Fund is managed by the public service agency known as the Tollroad Regulatory Agency or Badan Layanan Umum Badan Pengatur Jalan Tol (BLU-BPJT) to fund land compensation for the development of toll roads. The Land Revolving Fund would be reimbursed by the project company in accordance with the provisions of the agreement between BLU-BPJT and the project company.
However, it must be noted that the use of the Land Revolving Fund is limited to only toll roads, as intended in Regulation No. 04/PRT/M/2007 made by the minister of public works regarding the procedure for use of the fund.
Provisions regarding land capping are set forth in Regulation Number 12/PRT/2008 of the minister of public works regarding the method of execution of government support on land acquisition for toll road development financed by a business entity. Land capping is government funding of land acquisition that exceed the limits of land acquisition borne by the project company, namely the maximum amount being: (i) 110% of land acquisition costs in the toll road business agreement (PPJT); or (ii) 110% of the land acquisition cost in the PPJT in addition to 2% of the investment expenses in the PPJT.
In the case of land capping, the government would consider the budget and level of financial feasibility of the project, where the level of financial feasibility of the project considered for acquiring Land Capping shall be the smallest value of the following conditions: (i) the difference in financial feasibility of the project prior to and following the maximum increase of land acquisition costs of 4%; or (ii) financial feasibility of the project following the increase of land acquisition costs of not less than 12%.
Between 2008 and 2013, the government has budgeted land capping funds in the amount of Rp4.89trn ($489m) for 28 toll road sections as specified in the attachment of PM No. 12/2008.
GOVERNMENT GUARANTEE: In addition to being able to provide support, which would improve the creditworthiness of the PPP project, the government can also provide guarantees. Pursuant to PR No. 67/2005, a government guarantee shall be financial compensation and/or compensation in other forms provided by the minister of finance to the project company through a risk-sharing scheme for the PPP project.
REGULATIONS ON GUARANTEES: In technical terms, provisions regarding government guarantees are set forth in two key regulations. These are PR No. 78/2010 regarding infrastructure guarantees in PPP projects affected by the infrastructure guarantee agency and PMK No. 260/2010.
Pursuant to PMK No. 260/2010, there are two forms of government guarantee for any given PPP project; namely: (i) guarantees given directly by the government based on a government guarantee agreement; and (ii) government guarantees given through business entities specifically established to provide such guarantees; in these cases, the guarantees would be given through the PT PII.
The provision of the latter government guarantees may be carried out in two main ways, namely: (a) guarantees given solely by PT PII, which may comprise full or partial infrastructure risk in one PPP project; or (b) guarantees given by PT PII in conjunction with the government’s guarantees for different infrastructure risks contained in one PPP project, as based on the idea of infrastructure risk-sharing between PT PII and the Ministry of Finance.
However, it must be noted that in the context of mitigation of risk to state finances in accordance with the mechanism for controlling and managing risks to state finances (locally known as ring-fencing), the provision of government guarantees should be as optimum as possible through guarantees by PT PII.
The government guarantee by PT PII in conjunction with the government can only be conducted in the following conditions: (i) PT PII does not have adequate assets to cover loan in line with guarantee proposals, but such guarantees based on PT PII evaluation need to be put in place for the sake of achieving the objectives of the infrastructure guarantee; (ii) there is no collaboration between PT PII and multilateral financial institutions or other parties having similar purposes and objectives, or in the event that there is such a collaboration, the available facilities therein are not sufficient, not adequate or not consistent to support the implementation of the infrastructure guarantee; or (iii) efforts to comply with feasibility of PT PII assets cannot as yet be met, while the procurements of the project company for the PPP project proposed in the loan proposal can no longer be delayed.
Regarding the risks that may be linked to the infrastructure guarantees, PMK No. 260/2010 sets forth four main types of risks. These are the following: (i) risks that occur due to the actions or lack of actions by the grantor or a government other than the grantor in situations in which, by law or regulations, the grantor or government has the authority to undertake such actions; (ii) risks that occur due to the policies of the grantor or a government other than grantor; (iii) risks that occur due to unilateral decisions of the grantor or a government other than the grantor; and (iv) risks that occur due to the inability of the grantor to carry out an obligation imposed upon it by the project company pursuant to the cooperation agreement, a situation more commonly known as a breach of contract.
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