Indonesia Infrastructure Projects & PPP

Property | High Stakes for Indonesia's New Infrastructure Push

Cumbersome land acquisition procedures and other regulations have long been blamed for slow progress on public-private partnerships (PPP) for infrastructure in Indonesia. However, investment rules have been substantially overhauled in recent years to make them more attractive for private-sector engagement. In addition, the administration of President Joko Widodo, in office since October 2014, has vowed to expedite energy and transportation projects and has increased budget allocation for infrastructure (See Concrete Developments in Indonesia's Infrastructure). It is therefore time to reassess the opportunities for investors to participate in the construction of Indonesia's public infrastructure.

Unless Indonesia resolves its backlog of infrastructure projects, the country runs a risk of not only failing to meet the goals set forth in MP3EI but also letting down domestic businesses amid intensifying competition

The government of Indonesia publishes projects for private investor participation in its so-called PPP Book. In the 2015 edition, the Ministry of National Development Planning explicitly acknowledges “the importance of private participation in accelerating infrastructure development in Indonesia, especially considering the limitation of government in funding the infrastructure needs.” It further states that “the government is only able to fulfil 30% of total infrastructure funding needs” in the 2015 to 2019 period, which are estimated at 4,796 trillion IDR (equivalent to $341 billion USD as of August 2015). Even greater funds will likely be needed in the 2020 to 2025 period. This leaves hundreds of billions of dollars to be contributed by private companies, often in joint projects with state-owned enterprises (SOEs). Given the capacity and funding constraints in Indonesia, foreign investors will play a significant role in the country’s infrastructure development going forward.

Infrastructure Investment in Indonesia (trillion IDR)

Source: Government data

What is at stake?

Unless Indonesia resolves its backlog of infrastructure projects, the country runs a risk of not only failing to meet the goals set forth in its long-term Masterplan for the Acceleration and Expansion of Economic Development (MP3EI), but also letting down domestic businesses amid intensifying competition in the upcoming ASEAN Economic Community (AEC). A new infrastructure push is needed to interconnect the far-flung regions of the archipelago through transportation, communication and energy networks. If implemented successfully, this will bring down logistics costs for businesses and generate multiplier effects for the entire economy (See Indonesia’s Logistics Sector). The government has come to realize that this will not be possible without massive involvement from the private sector.

The slow pace of structural reforms in Indonesia and regulations that are sometimes stacked against foreign companies have hurt the investment climate and indirectly contributed to the slowdown in GDP growth and the depreciation of the Rupiah in recent years. The government says it is “committed to continuously improve and innovate in increasing investment attractiveness and to assure that the involvement of the private sector is not hampered” (PPP Book 2015). Underlining dissatisfaction with his cabinet's economic performance, President Widodo in August 2015 replaced the Coordinating Minister for the Economy and the Trade Minister. In the same month he demanded that any regulations that impeded investment be removed. Whatever that may mean in concrete terms, it is clear that the administration is aware of the need to act in order to attract more investment and move forward on its ambitious infrastructure agenda.

What has changed?

The legal environment for PPP projects has improved in numerous ways over the past years as the government aims to expedite project preparations and approvals.

The general PPP framework has become clearer with new regulations that specify the roles of private and public entities in PPP projects. Foreign companies have only recently been allowed to initiate PPP projects through unsolicited proposals. Presidential Regulation No. 38 of 2015 on Cooperation Between the Government and Enterprises in Infrastructure Procurement marks the most recent major change to the PPP framework. Issued in March 2015, it revokes previous rules based on a 2005 regulation and aims to make PPP projects more appealing to investors. Among other changes, it widens the scope for PPPs to include new types of projects (e.g. public housing and hospitals and schools), increases the possibilities for developers to make unsolicited proposals and expands the options for procuring a project by direct appointment rather than competitive tender.
The land procurement process has been one of the biggest obstacles for infrastructure development in Indonesia over the past years. Since they can cause years of delay or stall development altogether, land right disputes pose a serious threat to the bankability of infrastructure projects. Law No. 2/2012 on Land Acquisition for Development in the Public Interest – together with implementing Presidential Regulation No. 71 of 2012 – clarifies the administrative procedures, prescribes binding mechanisms on compensation for land owners and sets deadlines for the various steps involved in acquiring land rights (See An Update on Indonesia’s Land Acquisition Law). While this marks a significant improvement over previous rules, the entire process can still be lengthy if each deadline is exhausted to the fullest extent.
To further reduce the financial risks associated with large infrastructure construction, the government can provide guarantees to developers in PPP projects through the Indonesian Infrastructure Guarantee Fund (IIGF). Special tax incentives and government contributions towards project costs are also available in certain cases to bridge viability gaps, though implementing regulations are still needed to define more clearly who is eligible for such support.

Where is the government?

The administration of President Joko Widodo is attempting a more hands-on approach to accelerate infrastructure development in Indonesia, particularly when it comes to electricity. The government eyes an additional 35,000 MW from new power plants to be built across the nation and to support the industrialization of remote regions (See Electrifying Indonesia – Opportunities for Independent Power Producers). The private sector is expected to supply more than half of the additional capacity. Widely reported by the press, Widodo has thrown his weight behind the long-delayed Batang power plant in Central Java, a $4 billion USD joint venture of two Japanese companies with Indonesia's Adaro Energy. The project has become a symbol of stalling infrastructure projects in Indonesia. Getting it back on track could become a symbol for positive change, albeit only thanks to direct involvement from the top level of government.

When it comes to the conception, preparation and implementation of PPP projects, Indonesian authorities lack the experience found in more developed economies. Nevertheless, local know-how on PPP tenders has improved since the inception of the PPP framework in 2005. Clarity about the roles of the different stakeholders and coordination between government agencies has also improved. Greater transparency in conjunction with determination at the central government to see PPP projects through to fruition creates a more favourable environment for private investors from Indonesia and abroad.

What are the opportunities?

The PPP Book lists PPP projects that have yet to be tendered. These are divided into three categories based on the planning stage they are in: Potential projects, prospective projects and ready-to-offer projects (For details consult the most recent edition of the PPP Book). The PPP Book 2015 contains 38 untendered projects with an estimated total project cost of $24 billion USD. President Widodo has vowed to improve shipping in particular over the coming years, which reflects in some major seaport plans listed as potential projects.

Global Business Guide Indonesia - 2015

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Indonesia Property Snapshot - Infrastructure

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.