The Asian financial crisis caused all infrastructure development to grind to a halt with funding being rapidly withdrawn, particularly from foreign sources. Since economic growth returned and sped up, the bottlenecks caused by the lack of infrastructure have become increasingly apparent. Infrastructure development was a central theme of President Yudhoyono’s electoral campaign in 2009 with a pledge of $140 billion USD to be spent on it over 5 years. Realising the 100 infrastructure projects proposed by the Ministry of Public Works for 2010-2014 will require not only investment from the state and the private sector and effective coordination on PPP (Private Public Partnerships) projects, but regulations surrounding land acquisition and taxes to make the much needed projects a reality.
Infrastructure spending has been neglected by the government with less than 5% of GDP being spent annually on it in the past decade and 3.42% estimated for 2011. The estimated $140 billion needed will largely come from the private sector with the state contributing around 30% or $51 billion USD. The Indonesian government is keen to involve private investors into much needed infrastructure projects through the PPP scheme. In order to entice investors and create a strong legal framework for the projects, the Indonesia Infrastructure Guarantee Fund was set up in May 2010 alongside the World Bank. The AAA rated guarantee fund is designed to mitigate against particular risk for the sector concerned such as contractual and political risk. The stalling on changes to the land acquisition law makes this guarantee fund all the more necessary. The World Bank is providing a $30 million USD loan as well as a $480 million USD guarantee facility. The fund will provide Partial Risk Guarantees to the private sector on a subproject basis as well as facilitating project financing.
Other bodies that support infrastructure development are the State Investment and Multi-Infrastructural Facility Centre that allocate funds and conduct feasibility studies. The state has also provided up to $2 billion USD in funds for land acquisition and exploratory risk mitigation. Tax holidays for certain categories of PPP are another measure aimed at encouraging investors to engage in the initiative. The tax breaks will apply to infrastructure projects deemed high risk such as geothermal power plants. The exact details of the tax breaks are yet to be announced by the Ministry of Finance but they will be a welcome addition for investors and will help to intensify lagging infrastructure projects.
Simplifying the process of accessing infrastructure projects has been a further step forward in realising PPP projects. The Investment Coordinating Board, BKPM, will now act as a single window for infrastructure investments following the signing of an MOU with BAPPENAS thereby centralising the process for PPP projects throughout the regions. This will aim to overcome the difficulties associated with dealing with numerous ministries as well as local and regional governments. BKPM has taken up five PPP projects to date including toll roads and a railway project connecting the main airport in Jakarta to the city centre. The streamlining has attracted more investors such as India’s Reliance Industries that are investing $5-10 billion USD. Yet, attracting investors is only part of the process as obstacles to realisation such as land acquisition must be tackled at the same time and BKPM is not positioned to do so.
The types of infrastructure needed vary widely across the country with sanitation and water supply high priorities for less developed regions and transportation infrastructure in demand for urban and industrial centres. Social infrastructure projects that provide low margins and only long term returns for investors are to be undertaken by the state. PPPs are focused on several key areas with potentially high returns in light of the size of the population and economic climate. Over the next 5 years, these include 20,000 km of new roads and toll roads, ports, railways, 14 new airports as well as 15,000 MW of power plants. These projects require private sector investors with the technology and expertise as well as access to financing. Here, foreign contractors and investors have a vital role to play in being able to supply financing. Indonesian banks’ high lending rates and unwillingness to wholly finance most infrastructure projects open up an opportunity for foreign investors and financial institutions to combine their financing with that of local funds.
The head of the infrastructure division at BAPPENAS, the National Development Planning Agency announced in May 2011 that 79 projects will be offered through the PPP scheme.
Based on the Negative Investment List, foreign companies have varying levels of ownership in PPP schemes and are required to take on a local partner for construction and execution:
Some notable PPP Infrastructure Projects for 2011:
JAVA
BALI
SUMATRA
SULAWESI
KALIMANTAN
Source : BAPPENAS
In order to bid for PPP tenders, foreign companies must purchase pre-qualification documents and pass a pre-qualification stage overseen by BAPPENAS.
To execute the project, a foreign company may operate in the following ways:
Foreign and local companies must be certified by the National Construction Services Development Board.
Joint Ventures and Representative Offices must obtain an investment permit from BKPM.
Skilled Labour visa permits for technical experts, managers and directors are subject to Ministry of Labour regulations. Experts must be registered and have a Competence Certificate with the NCSDB.
Foreign construction companies cannot participate in PPP projects below the value of 100 billion RP (approximately $10 million USD) as these are reserved for local contractors.
Consultancy companies can only bid on projects over the value of 10 billion RP (approximately $1 million USD)
Overview of the PPP process
Source: Ministry of Public Works
Global Business Guide Indonesia - 2012
Average Government Spending: 2.9% of GDP (2015)
Investment Required: $500 billion USD (2015-19, RPJMN)
Global Infrastructure Ranking: 63/160 (WB 2016)
Infrastructure Quality Score: 2.65 (ASEAN Average 4)
Main Project Areas Under PPP: Toll roads & railways, power generation, water supply & waste management.
Government Bodies: BAPPENAS, BKPM, Ministry of Public Works and Housing, KPPIP.
Relevant Law: Law No. 2 of 2012 on Acquisition of Land for Development in the Public Interest, Presidential Regulation No. 38 of 2015 on Cooperation Between the Government and Business Entities in the Provision of Infrastructure, and Presidential Regulation No. 78 of 2010.
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