Inadequate infrastructure has long been identified as an obstacle to higher economic growth in Indonesia. The government has fallen behind schedule on promises to tackle gridlocked traffic, address shaky power supply and relieve overburdened airports and seaports – often because projects failed to attract the necessary private sector engagement. Following more than a decade of underinvestment, infrastructure spending continued to account for less than 5% of GDP in 2012. Today, however, amid a new sense of political urgency, Indonesia’s shortfall in transportation and energy infrastructure, water sanitation and waste management must be viewed as an opportunity rather than an obstacle for business activity.
The implementation of the Land Acquisition Act in 2012 (See An Update on Indonesia’s Land Acquisition Law) expedites the land procurement process, thereby removing what used to be a major stumbling block for public-private partnerships (PPP). Meanwhile, the PPP framework has improved over the past years to provide greater clarity on public procurement, while tax holidays, investment guarantees and higher feed-in tariffs have done their bit to create an altogether more appealing regulatory environment. Challenges that remain are the frequent lack of coordination between central and regional authorities, bribery and nepotism, as well as reported incompetence at some local governments.
The government’s roadmap for economic development in the years 2011-2025, known as the Master Plan for the Acceleration and Expansion of Indonesia’s Economic Development (MP3EI), includes infrastructure projects totalling hundreds of billions of dollars. Due to financing constraints on the domestic market, particularly for long-term capital, foreign funds are needed on an enormous scale.
The government has taken a series of steps to refine PPP regulations:
BAPPENAS in November 2013 published the latest edition of its PPP Book, which lists public-private partnership projects worth $47.3 billion USD in total. The Sunda Strait Toll Bridge (and adjacent development) alone accounts for an estimated $25 billion.
The 27 projects include 14 categorized as prospective, and 13 as potential. Potential projects are based on a preliminary study and must be in line with national/regional development goals, while prospective projects must demonstrate their economic, financial, legal, social and technical feasibility based on project preparation documents and a risk assessment. In the third and final stage (ready for offer), projects must satisfy further requirements, including an environmental impact assessment, but none are listed in the 2013 PPP Book.
The 2013 PPP register provides details on each of these projects, as well as a summary of 21 other PPPs offered for tender before 2013, including nine toll roads, five water supply projects, three power plants, a dedicated coal railway and a cruise ship terminal.
The proposed PPPs assign most on-the-ground responsibilities to the private sector, such as design, engineering, construction, commissioning and procurement (including of rolling stock on railway projects). Private partners, who will generally run and maintain the infrastructure for long concession periods, are usually expected to provide substantial financing as well.
Government participation is generally limited to a supporting role, notably with land acquisition and land access rights, thereby alleviating what is arguably the most daunting aspect for private investors. However, the government’s role can also extend to construction where deemed necessary. In addition, the government provides contingent guarantees to mitigate low demand or unfavourable shifts in the political environment. Revenue guarantees (with claw-back mechanisms) aim to enhance a project’s financial feasibility. PPP plans leave details on the form and extent of government involvement to be specified at a later stage, pending further studies.
The government has set up a number of entities to back private-sector funding: PT Indonesia Infrastructure Finance (IIF), a non-bank financial institution under the Ministry of Finance, provides long-term financing, guarantees, and fee-based services for infrastructure projects. Its shareholders aside from the Indonesian government are the World Bank, the Asian Development Bank, Germany’s DEG and Japan’s Sumitomo Mitsui Banking Corporation (SMBC). The government’s ownership in IIF runs through state-owned PT Sarana Multi Infrastruktur (SMI), which promotes PPPs and facilitates their financing with loans and equity.
While Indonesia’s deepening capital markets (See Capital Markets: Widening the Local Investor Base), government guarantees and favourable tax rules help to contain the financial risks of PPPs, a number of projects have run up against bureaucratic hurdles or local political opposition. Central government representatives have complained that some of their infrastructure plans were stopped in the tracks by bureaucratic inertia on the local level.
A 3,000-megawatt coal-fired power plant in Batang, Central Java, hailed as the first deal under the PPP programme, was held back by years due to problems with land acquisition, local opposition and the environmental assessment. The central government assembled a special team to help resolve matters and push forward the project, which is conducted by a venture jointly owned by Indonesia’s Adaro Energy and Japanese firms Electric Power Development and Itochu. Projects launched after the 2012 Land Acquisition Act should not experience the same degree of difficulty, but serious delay is still possible if all deadlines in the land acquisition timeline are maxed out.
As the power plant case suggests, bureaucratic and political risks may be somewhat checked by rising economic pressure and central government resolve to push projects through to fruition. Nevertheless, PPP investors and contractors need to carefully assess any outside factors that could cause disruption after agreements have been signed. Establishing a close rapport with regional authorities and local stakeholders and explaining how municipalities stand to gain from better infrastructure can help forestall or overcome resistance. Joint ventures with Indonesian companies can afford foreign players valuable insight into local business practice. Given proper risk management, the opportunities that await infrastructure investors in the world’s fourth most populous country are nothing short of tremendous.
Global Business Guide Indonesia - 2014
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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