National leaders have zeroed in on public-private partnership (PPP) deals as their vehicle of choice for building the infrastructure needed to power economic growth. The PPP structure is fairly new, and is often relied on by governments that do not want to incur large debts by borrowing the complete cost of a project.

ISSUES: Indonesia has yet to see a PPP through to completion. Many rural areas of the country remain relatively underdeveloped, for example. “Once you move outside of Java, there is no real industry and even less delivery of PPP projects,” said Scott Younger, the president commissioner of Glendale Partners, a local consulting firm. “Bureaucracy and insufficient preparation of regional governments remain as two of the major problems holding back delivery.” Another challenge is that private firms often find it risky to enter a long-term partnership with a government whose leadership could change over an agreement’s lifetime. Despite these and other concerns, arguments for government borrowing have not resonated in Jakarta, and PPPs remain the government’s choice method for development.

Private investors typically want a PPP agreement to include a clear relationship with the public-sector partner. Generally, it is preferable to deal with one agency. Investors tend to see greater risks if they must go to one place to get plans approved and permits issued but then to a different office to get paid. Nonetheless, Indonesia has chosen to involve several state players in its quest to develop national infrastructure through PPPs. Leading officials are confident the structure they have set up, with different roles filled by different agencies, will provide investors with the access, information and comfort they need to sign PPP agreements.

STATE ACTORS: The Board of Investment Coordination (BKPM) is envisioned as a first point of contact for potential PPP partners. This is the government’s investment-promotion arm and its officials have been holding road shows in global capitals, attending conferences and coordinating advertising campaigns. Its chairman is Gita Wirjawan, a former banker and investor and now minister of trade, who has been among the most visible public faces of the infrastructure drive.

BKPM has also been tasked with finding partners for five high-priority infrastructure projects. The largest of these, a 2000-MW power plant to be constructed on the island of Java, has already been tendered. In June 2011 BKPM announced a consortium made up of Adaro – a local firm – and Japanese power firms J-Power and Itochu would carry out the $3bn project. Construction is set to begin in 2012, with completion in 2016.

Tendering for the remaining four projects is expected to be completed by the end of 2012. These include a $700m, 35-km rail link from south Jakarta to Soekarno-Hatta Airport, in the city’s north-west; a $476m highway that will stretch from Medan, the largest city on Sumatra to Koalanamo; $200m for a potable-water project in Umbulan on the eastern side of Java, which is expected to be in place by 2014; and a $24m, 9000-sq-metre cruise ship terminal on Bali.

The National Development Planning Agency ( BAPPENAS) will be the back office to BKPM’s front office, meaning that while BKPM is in charge of promoting the effort and recruiting investors, BAPPENAS will be the agency partners consult for details on projects. Indonesian leaders wanted this agency to handle both front-and back-office tasks, but have since realised BKPM has expertise in one and BAPPENAS in the other.

BAPPENAS has 79 top-priority projects valued at a total of $53.4bn. They include 13 projects worth $27.52bn already conceived, which would relieve PPP partners of the need to participate in planning. The role of BAPPENAS will stop at planning and the “executing agency’’ will be whichever government body is required to handle that segment of infrastructure. A port, for example, could be built by a private partner and either the regional government the port falls under or one of the national government’s several port authorities.

GUARANTEES: The Indonesia Infrastructure Guarantee Fund (IIGF) was created in response to concerns from investors that they would like a guarantee that the state (or contracting authority) will honour its obligations and aid in getting long-term financing from banks. It covers eight sectors: transport, toll roads, irrigation, water, waste, telecoms, electricity, and oil and gas distribution. The initial IIGF policy stipulates that projects worth $50m or less can be guaranteed to 100% of their value, whereas those above can only be backed to 50%. No one project can account for more than 25% of IIGF’s capital, pegged at Rp2trn ($240m) in mid-2011. The idea is not just to support financing for infrastructure projects under PPP schemes, but also to help make Indonesian banks comfortable offering loans with maturities of a decade or longer. “Our contribution towards further execution of PPPs in Indonesia is through the provision of accountable and measurable guarantees to ensure the bankability of projects tendered by government contracting agencies,” said Sinthya Roesly, IIGF’s president director.

Another key player is Sarana Multi Infrastruktur (SMI), formed in 2009 and 100% owned by the government. It was established as an investment vehicle with Rp1trn ($120m) in capital. SMI’s purpose is to help fund PPP projects, and it operates somewhat like a private-equity firm: it takes minority equity stakes in projects in return for an active role, or lends in either regular loans or mezzanine financing – unsecured loans that can convert to equity after a set period in the case of non-payment. SMI’s most recent investment, announced in April 2011, was for a hydropower plant on Sumatra. SMI and JAIC-IDI Asian Energy Fund, a Japanese investor in energy and environmental projects, agreed to provide up to $19.08m to Selo Kencana Energy, which is developing a 7.5-MW plant using the Batang Sangir River.

“Indonesia is seen as a destination with great investment potential,” said Emma Sri Martini, SMI’s president director. “However, foreign and domestic investors are well aware of Indonesia’s short history of success in developing PPP projects despite the numerous advances the government has achieved over the past few years.”

Another player is Indonesia Infrastructure Finance (IIF), a non-bank financial company created by the government and private partners to invest in infrastructure projects. The government is the largest single investor, having put Rp600bn ($72m) into the IIF. Three others contributed Rp400bn ($48m): SMI, the Asian Development Bank (ADB), and the International Finance Corporation. The German Investment Corporation contributed Rp200bn ($24m). IIF also procured loans of Rp1trn ($120m) each from the World Bank and ADB.

SUPERVISION: Oversight is handled by the Presidential Delivery Unit (PDU). Set up in 2010, the PDU is a mediator between investors and public agencies when issues arise. It reports directly to the president and such authority may help state bodies move faster and reassure investors. The PDU monitors projects outside the PPP framework, addresses problems caused by contradictory laws and reviews provincial and local laws that may conflict with national regulations.