July 26, 2017

Basic Concept of Availability Payment (AP) and Budgeting Implication

KPPIP Support Facility

JICA Technical Assistance

Table of Content

2. AP Scheme Implementation Issues relating to Budgeting

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1. Basic Concept of Availability Payment (AP)

In Indonesian context, based on Perpes 38/2015, PPP is the cooperationbetween government and Business Entity in infrastructure provision forthe public interest in accordance with the specification previouslydetermined by the Minister/Head of Institution/Head of Region/StateOwned Enterprise/Regional Owned Enterprise, which partially or fullyuses Business Entity’s resources, with particular regard to the allocation ofrisk between the parties.

Type of Return on Investment

User Pay Availability Payment (AP)

What is PPP?

Tariff is determined to ensure a return on investment that covers capital cost, operational cost, and profit within a

determined period of time.

Overview of Public Private Partnership

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What is the purpose of applying AP Scheme?

• AP Scheme is a method to deliver high quality of public services while minimizingfinancial burden of public sector.

How is the Indonesian context?

• Based on PMK No. 260/2016 Availability Payment Scheme is defined as “periodicalpayment made by Minister/ Head of Agency/ Head of Local Area to theImplementing Enterprise for Infrastructure Services delivery based on the qualityand/or criteria as decided in PPP Agreement”.

• In Indonesia, AP Scheme is applied for project which is not “financially self-sustainable”, thus the support from government/GCA is essential to increase the project attractiveness for private sector.

Purpose and Definition of Availability Payment (AP) Scheme

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Project Company

User Paye.g. Toll Road BOT

AP Scheme(Public Pay)e.g. Hospital

Users

Project Company

Users

ServiceTariff/ Fee

GCA

Service

AP

Tariff/ Fee

PPP TYPE SERVICE and REVENUE DEMAND RISK

Typically, demand risks resides with PRIVATE SECTOR

Typically, demand risks resides with PUBLIC SECTOR

Difference between PPP User Pay and AP Scheme

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Conventional (APBN/APBD) AP Scheme

Fiscal Burden/Payment Schedule

Top Heavy Flat

Typical Contract Year

Construction (1-3 years)Maintenance (Every year)

10-30 Years

Financial Source for Construction

Public Private

Typical Risk Allocation

Public *Risks are transferred to Private

Procurement Several (Design, Construction, Operation)

Only One (Single PPP Contract)

Amount ($)

Time

Amount ($)

Time

Construction Operation Construction Operation

*Actual figure may have fluctuation based on inflation adjustment

Conventional Scheme and AP Scheme

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Image of AP Payment

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*O&M might be taken over by Hospital or continued by SPC from X+ th years of operation.

AP (Capex)

AP (O&M)

Construction Period

(2 years)

Operation Period

(X years)

O&M by Hospital or SPC

Availability payment (AP) is made from GCA to SPC as a reward of ensuring availability of the facility and providing specified services under a PPP (AP) contract.

As AP, a fixed amount is paid throughout the operation period, with a possible deduction in case SPC fails to fulfill certain requirements.

The AP amount essentially covers all the costs (construction cost, O&M cost, project financing cost etc.) and return for investors.

The simple cash flow structure of SPC is shown in the figure below:

Table of Content

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1. Basic Concept of Availability Payment (AP)

2. AP Scheme Implementation Issues relating to Budgeting

Budgeting related Issues in the Last PPP AP Capacity Building at MOF Training Center

During the last PPP AP capacity building at the Training Center from April 25th-28th, the following issues were raised.

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1) The most suitable account that should be used, whether capital expenditure, good and service expenditure, or debt expenditure;

2) Thresholds amount that should be allocated by the line ministries (AP Ceiling);

3) The possibility of line ministry to secure the AP budget during concession period;

4) The possibility of Government to pay for Availability Payment before the asset is owned by the Government;

5) The risk if there is deduction of yearly budget

Today’s DiscussionTopics

AP Budget Categorization

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AP Categorization in Indonesia

• The AP budget is categorized as “good and service expenditure” but neither “capital expenditure”nor “debt expenditure” in Indonesia. Therefore, facility ownership during concession period isassumed to belong to private (facility related risk also transferred from gov’t to private).

• As a result, future AP payment would not be considered as debt (off-balance).

International Experience (UK)

Background:Ratification of Maastricht Treaty 1992 for Euro Convergence Area imposed limits on governmentpublic spending. This was dictated through limits on government debt as a proportion of grossdomestic product (GDP). The ratio of gross government debt to GDP must not exceed 60% at the endof the preceding fiscal year.

Budget Categorization of AP: *Under the above-mentioned circumstance, AP is categorized as “Service Expenditure” in UK. Itinvolved the private financing of capital assets that bundled together the provision of additionalrelated services with these assets. Also, the AP payment is off-balanced.

* In Japan, AP would be divided into service and capital expenditure portion. Capital potion is usually considered as lease obligation(depending on risk allocation). Therefore AP in Japan is on-balanced.

=> Categorization of AP as “good and service expenditure” is in line with the context ofPPP AP (Public Service Purchase).

AP Ceiling

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International Experience (UK)

AP is categorized as “Service Expenditure” and off-balanced. However, Annual AP iscapped under 2% of annual budget of national government in UK.

International Experience (Japan)

AP is categorized as “Lease Obligation” and on-balanced. For local government, the APobligation is controlled by Actual Public Bond Ratio. (See Appendix for detail calculation.)

=> Since AP is not considered as debt in Indonesia, it would not shown on balance sheet.However, AP has similar characteristics of debt. AP budget ceiling should be considered inorder to avoid the situation that AP increase beyond the Government Contracting Agency(GCA)’s fiscal capacity.

=> This AP ceiling management issue become more important for the AP projects of LocalGovernment GCA, which fiscal capacity is much weaker than Central Government GCA.

Utilization of BLU for Smooth AP Disbursement

GCA

SPC

Users

BLU

IIGF

AP payment

Top up

PPP/AP

agreement Guarantee

agreement

Recourse

agreement

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<Typical structure using BLU for AP Scheme>

Service deliveryTariff

User

SPC

GCA

Service fee revenue escrow account

Gap-fill account

AP disbursement

process

Cash pool

BLU

Project ABC Accounts

Project DEF Accounts

Project XYZ Accounts

Tariff

AP

Necessary Gap-fill / liquidity

Initial budget pool to cover for working expenses

excess

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Utilization of BLU for Smooth AP Disbursement

Gap-fill mechanism maybe best suit to ensure smooth disbursement of AP payment

Merits of Utilizing BLU Scheme

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Less yearly parliament budget approval concern (especially for Local Government)

Flexibility of financial management

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• By using BLU, pool of fund can be created and thus minimizing the concern of yearly budget approval by Parliament (especially for the Local Government project)

• Therefore, GCA can secure the budget for AP payment more easily than going through yearly budget approval process

• BLU can receive tariff from users and pool it on behalf of GCA • BLU can be a buffer for unforeseen budget reduction and therefore enhancing liquidity

for AP disbursement

Questions to be Further Considered

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How to estimate the future shortage that needs to be covered by GCA?

How to budget for top-up portion by GCA?

How to incentivize BLU to maximize income from users?

Should the BLU be established in every project?

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Future shortage needs to be estimated and manage for future budget allocation

Whether contingent budget could be made available for the top-up portion.

BLU may not have sufficient incentive in maximizing income from users because the shortage of the AP payment is not a responsibility of BLU and GCA will top-up.

Considering the lengthy process and costs for the establishment of BLU, should BLU be established in every project? Is there any other alternative? (for example, to establish only one umbrella BLU for multiple AP projects).

Appendix

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Appendix: Project Scheme of Palapa Ring Project

Equity/Sponsor

Kominfo-BP3TI Business Enterprise

Creditor

Guarantee Agreement

Network Users

Access Charge

Network Services

AvailabilityPayment

Regres Agreement

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(A+B) – (C+D)

(E – D)Actual Public Bond Ratio = (3 yr average)

Where;

A: Total repayment of public bond (interest and principal)

B: Repayment obligation similar to public bond (PFI Availability Payment Obligation, and obligation

related to local public corporation, etc)

C: Special local income which could be allocated to repayment of public bond (urban planning tax, etc)

D: Central government support for repayment of public bond allocated in local tax revenue payment

from central government

E: Standard Fiscal Size (Standard Fiscal Size = Standard local tax revenue + Central government tax revenue allocation)

Appendix: Fiscal Control Measures on Availability Payment Commitment through Actual Public Bond Raio in Japan

APB Ratio Measure

1. APBR > 18% Issuance approval is necessary from central government or from provincial government, improvement proposal must be submitted

2. APBR > 25% Bond issuance for local project is constrained

3. APBR > 35% Bond issuance for joint project with central government is constrained

AP commitment of Local Gov’t is treated as one of obligation similar to public bond and controlled by Actual Public Bond Ratio as follows;

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