The government has announced that the implementation of public-private partnerships (PPPs) is a critical priority for President Joko Widodo’s administration, especially as it moves to deliver a massive infrastructure agenda, including transport, utilities and social infrastructure projects. Although progress has been made in expediting the delivery of dozens of planned projects, PPP implementation has remained somewhat limited. However, the Committee for Acceleration of Prioritised Infrastructure Delivery (KPPIP), which aims to debottleneck priority projects, has been created, and stakeholders have welcomed the move as a sign of government commitment to infrastructure development. Meanwhile, the adoption of new financing mechanisms, including the availability payment scheme (APS), should further incentivise PPP investment and development.

FUNDING NEEDS: While infrastructure spending is expected to rise to a record Rp387.4trn ($29.2bn) in 2017, up from Rp317trn ($23.9bn) in 2016 (see analysis), the Asian Development Bank (ADB) forecast in February 2017 that Indonesia’s infrastructure spending requirements could reach $1.2trn through to 2030. Infrastructure spending currently stands at $23bn per year, leaving the country with a $51bn annual shortfall. In its 2017 PPP book, the National Development Planning Agency (BAPPENAS) estimated that Rp2877trn ($216.9bn), or 60% of funding needs could not be met by public spending, noting that the government should “accelerat[e] infrastructure development in Indonesia up to 40% through [the] PPP scheme”.

PIPELINE: In addition to independent power producer projects which do not fall within the government’s definition of a PPP, seven public-private projects – as well as one that had reached financial close – were under construction in 2017. Worth a total of $6.1bn, four were in the transport sector, two in ICT and one in utilities. The Batang power plant is the largest PPP currently under construction. The 2000-MW coal-fired power plant, developed under the Viability Gap Fund (VGF) model, will be located in Batang and built at a cost of Rp54trn ($4.1bn). The Palapa Ring West and Palapa Ring Middle projects, meanwhile, will form the backbone of a planned national fibre-optic link to be built across all districts and municipalities in Indonesia. Worth Rp7.76trn ($584.9m), the projects were developed under an APS. The remaining four PPPs are all toll roads – the Serpong-Balaraja, Manado-Bitung, Balikpapan-Samarinda and Pandaan-Malang projects – and are being developed as build-operate-transfer (BOT) models. Meanwhile, the Umbulan Water Supply project on East Java is expected to begin operations in 2019. The project will establish a 93-km drinking water pipe network across five cities in East Java, including Surabaya and Sidoarjo. Like the Batang power plant, this was also tendered with VGF support.

CHALLENGES: Land acquisition challenges, capacity gaps, and complex regulatory and contract frameworks continue to hinder PPP development. BAPPENAS listed 22 upcoming projects slated for PPP development; however, just the $81.48m Bandar Lampung Water Supply project is ready to offer, while the remainder are still under preparation. The number of PPP projects under development in the country has also fallen from 87 in 2009 to 79 in 2011, 58 in 2012 and 27 in 2013 as BAPPENAS has removed projects that were not making progress. While land acquisition challenges have created delays for projects such as the Batang power plant, the Trans-Sumatra Toll Road project and a high-speed rail network linking Jakarta to Bandung (see overview).

Complex development and contract negotiations also pose a problem, particularly at the local government level. In June 2017 the state-owned Indonesia Infrastructure Guarantee Fund (IIGF) reported that significant capacity gaps and insufficient understanding of projects’ feasibility were preventing the state from moving forward. Profitability, too, could create difficulties. “One of the main challenges for infrastructure development in Indonesia is that several projects are not yet bankable,” Raj Kannan, managing director of Asia-based infrastructure strategic advisory firm Tusk Advisory, told OBG. “The previous government wanted the private sector to invest in projects that often didn’t make financial sense, but the government is now paying more attention to developing better business cases before inviting the private sector.”

LOCAL GOVERNMENT ISSUES: The IIGF emphasised that unlike direct-investment projects, PPP projects include clear prerequisites such as detailed information on planned margins and profits, which must be agreed before signing a contract. Parties must also reach an agreement on their chosen finance scheme.

Developing infrastructure across all regions of the country is a priority for President Widodo’s administration, with the World Bank reporting that a minimum of 25% of general transfers to sub-national governments will be reserved for infrastructure development as of 2017. Schemes like the APS require local governments to allocate instalment funds in their regional budgets, as well as obtain approval from regional lawmakers – a process that requires considerable time and effort at present. “The central government needs to provide more decentralisation and allocate resources for regional authorities to develop some infrastructure projects on their own,” Herianto Pribadi, president director of Kopelindo Infrastruktur, told OBG. “It will be more efficient, and local residents will have access to accountability and a sense of ownership.”

LEGAL REFORMS: Recent regulatory reforms, as well as the adoption of new financing models, should help support PPP development and reduce budgetary pressures, while offering new opportunities for profitable private sector participation in infrastructure development. Important reforms were introduced with Presidential Regulation No. 38 of 2015 and related legislation, also known as the PPP Regulations, which established clearer and more detailed stipulations about unsolicited proposals, cooperation agreements, returns on investment, government support and government guarantees for projects. BAPPENAS Regulation No. 4 of 2015, for example, set out operational guidelines for PPPs in infrastructure. National Procurement Agency Regulation No. 19 of 2015 outlined infrastructure PPP procurement guidelines, while Ministry of Finance Regulation No. 190 of 2015 established an APS for infrastructure PPPs. PPPs can now be developed using the government’s VGF or under an APS. The VGF offers government support of construction costs for PPP projects that are economically viable but not financially feasible, and is used only when there is no other financing alternative (see overview).


APS: APS is defined as a periodical payment made by an authority to the implementing enterprise for infrastructure services delivery based on the quality and/or criteria as decided in a PPP agreement. Under the scheme, the government receives toll revenue and makes availability payments to the private sector.

In November 2015 President Widodo revised Indonesia’s foreign negative investment list to remove the last remaining foreign ownership restrictions on private toll road management, and 100% foreign ownership of toll road businesses is now permitted. “Most foreign companies are willing to bring capital to Indonesia, as long as there is a scheme to protect the interests of the investors,” Heri Susanto, managing director of construction firm L&M Systems, told OBG.

PINA MODEL: In a bid to reduce infrastructure budgetary pressure, the government has moved to lower borrowing costs and encourage bond issuances among its network of SOEs tasked with new builds (see analysis). In February 2017 the 498-km Trans-Java Toll Road became the first project to reach financial close under the non-state budget infrastructure funding, or PINA, model. BAPPENAS reported that SOE developer Waskita Karya Toll Road had funded nine toll road sections of the road valued at Rp70trn ($5.3bn) using the model.

Under the PINA scheme, funds from large institutional investors, including pension funds, can be channelled to an intermediary and deployed to issue bonds, with proceeds from bond sales used to buy equity in companies executing infrastructure projects. When the project is operational, the intermediary sells the equity.

The model is set to expedite financial agreements for infrastructure development, complementing the VGF, BOT and APS mechanisms already in place while further supporting bond-financed development, which has already risen considerably in recent years (see analysis).

KPPIP: In 2014 the KPPIP replaced the Committee for Infrastructure Development Policy. The agency was given a mandate to accelerate infrastructure development. The committee officially launched in late 2015 and was charged with implementing 30 projects by the end of President Widodo’s first term in 2019.

Unlike other government committees, KPPIP operates on a five-year budget. Its day-to-day operations are supported by both public and private stakeholders, with representation from the Coordinating Ministry for Economic Affairs, BAPPENAS, the Ministry of Finance, and the Ministry of Agrarian and Spatial Planning.