PPP (Public-Private

Partnerships) in Indonesia:

Opportunities from the

Economic Master Plan

June, 2012

Prepared by Strategic Asia for the UK Foreign

Commonwealth Office

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Table of Contents

Executive Summary of ‘PPP (Public-Private Partnerships) in Indonesia: Opportunities from the Master Plan’ .................................................................................................................................... 4

I. Introduction ............................................................................................................................. 7

II. Recent Developments in Indonesia’s PPP Model ................................................................. 13

2.1 Sectors (toll roads, transportation, water) .......................................................................... 13

2.2 Modalities Scheme and Institutional Support .................................................................... 14

2.3 PPP Opportunities in the Kalimantan Economic Corridor ................................................ 20

2.4 PPP Opportunities in the Bali - Nusa Tenggara Corridor .................................................. 22

2.5 Barriers and Challenges in Implementing PPP Projects in Indonesia ............................... 24

III. Opportunities for UK PLC .................................................................................................... 28

3.1 Opportunities for Foreign Direct Investment ..................................................................... 28

3.2 Opportunities for Assisting in Capacity Building in Managing PPPs in Indonesia .......... 31

IV. Opportunities for Low Carbon PPPs in Indonesia ................................................................ 33

4.1 Case Study: Ultra-Super Critical Steam Power Plant in Central Java .............................. 35

V. Conclusions ........................................................................................................................... 39

Bibliography ................................................................................................................................. 40

APPENDIX 1 ................................................................................................................................ 48

History of PPP in Indonesia ...................................................................................................... 48

APPENDIX II ............................................................................................................................... 52

Best Practices from Singapore and the UK ............................................................................... 52

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Figures

Figure 1 Estimated Investment Required for the Main Economic Activities of the MP3EI .......... 8 Figure 2 Indications of Investment in the Six Economic Corridors ............................................... 9 Figure 3 The PPP System Within the MP3EI ................................................................................. 9 Figure 4 Levels of Investment by Source .................................................................................... 10 Figure 5 the Principle Parties in the Indonesian PPP Framework ................................................ 15 Figure 6 the National PPP Network .............................................................................................. 17 Figure 7 Phases of PPP Project Realization .................................................................................. 18 Figure 8 Description of Pre-Qualifications and the Indonesian PPP Procuring Process .............. 19 Figure 9 Process of Submitting Unsolicited Projects According to Presidential Regulation no.56 year 2011 ...................................................................................................................................... 31 Figure 10 Transaction Description of the Central Java Steam Power Plant ................................. 36

Boxes

Box 1 Case Study 1. Kirklees Metropolitan Solid Waste Project, UK ......................................... 60 Box 2 Case Study 2. Tuas Desalination Plant, Singapore ............................................................ 58

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PPP (Public-Private Partnerships) in Indonesia: Opportunities from the Master Plan

Executive Summary

The Government of Indonesia announced the Master Plan for the Acceleration and Expansion of Indonesia’s Economic Development (MP3EI) in May 2011. The MP3EI reiterated the national government’s intention to use the public private partnership (PPP) model one of the key ways to finance Indonesia’s economic development. Prior to this, the use of PPPs gained momentum at the start of the National Medium Term Development Plan (RPJPM) 2010-2014 as PPP was expected to fill the financing gap for the infrastructure plans contained within this blueprint. Since the commencement of the MP3EI in 2011, the PPP model has increasingly been in the spotlight in Indonesia.

The MP3EI is a very ambitious plan. It aims to propel Indonesia into the top ten worldwide economies and raise income per capita from US$ 3000 to US$ 15,000 by 2025. The policy rests on three main pillars: establishing six economic corridors based on the comparative advantage of the different regions of Indonesia; promoting connectivity within Indonesia, the ASEAN region and globally as well as improving human resources and science and technology. PPPs are expected to play an important role in the implementation of the MP3EI. The private sector involvement in MP3EI is projected to contribute to 51% of the funding, or equivalent to Rp. 100 trillion per year. Earlier enforced in the RPJMN 2010-2014, infrastructure financing will require Rp. 1429 trillion, in which PPP is projected to contribute for 41% of the financing. This paper demonstrates the likely roles that PPPs will play in the development of the MP3EI as well as setting out opportunities for UK PLC for developing PPPs in Indonesia.

Concluding Points on the role of PPPs in the MP3EI:

1. PPPs are likely to play an increasingly important role in Indonesia. 32 out of 79 infrastructure projects in the MP3EI are listed as PPP projects and this is not including other possible projects unrelated to MP3EI, or unsolicited projects being offered by the private sector. PPP is likely to be a relatively constant, if not increasingly prominent feature along Economic Corridors of the MP3EI because significant infrastructure investment is envisaged for all corridors. Furthermore, under the MP3EI, the Government of Indonesia is actively encouraging private involvement in the form of financing its infrastructure sector. Previously a feature only in the toll roads sector, PPPs, as stated in the PPP Book 2011, are set to become widely used in other sectors such as the Water Supply & Sanitation sector, the Solid Waste Management sector, the Power sector and the Transport sector (Monorail, Bus & Rail Terminals and Transjakarta).

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2. The Indonesian government is committed in implementing PPP projects, especially under

the MP3EI. In the anticipation of a growing PPP market, the Government of Indonesia has already made several institutional changes and reforms shown by the creation of several SOEs for financing and guarantee provision. The Public-Private Partnership Central Unit (P3CU) - the central unit for PPP in Indonesia that lies inside BAPPENAS – as well as the National Committee for the Acceleration of Infrastructure Provision (KPPI) which coordinates the acceleration of infrastructure provision with the objective of national economic growth have also been established. The national government is also reassessing regulations in order to remove bottlenecks and smooth the way for PPP project realization. These reforms show that the government has taken notice of persisting problems common in PPP projects around the world, and has taken preventive actions to evade them.

3. Challenges and barriers to implementing the MP3EI still remain. Since the MP3EI promotes the use of PPPs and there are still implementation issues to address for the MP3EI, it follows that a poorly implemented MP3EI will lead to lower realizations of PPP projects. The biggest challenges in implementing the economic corridors set out by the MP3EI include a lack of capacity of the public sector actors who are unfamiliar with the PPP mechanism, coordination between central and local levels of government; overlapping regulations and implementation of the newly enacted Land Acquisition Law. Within the economic corridors, the role of the central government will be limited to regulation and allocation of central investment while the local governments will determine regulations and investment allocation in the regions. Hence a lack of capacity among local governments presents a considerable challenge in the application of PPP arrangements.

4. Best practices should be taken from other countries with an already maturing PPP

system. Singapore as a fellow ASEAN country member has benefited from following the UK’s PPP model and it currently in the process of building the biggest infrastructure PPP project in the world, the Sports Hub. The UK is a world leader in PPP with over two decades of experience. Indonesia could learn and incorporate the best practices as well as avoid the past failures from both of these countries, whilst still adapting to the capabilities of the government. Please refer to the appendix section on the ‘Best Practices of Singapore and the UK’ for a more comprehensive explanation.

Concluding Points on Opportunities for UK PLC

With a mature domestic market for PPP, especially for public utilities, UK PLC can look for opportunities of investment abroad. Indonesia, with strong recovery after the Asian Financial Crisis, excellent demographics, high economic growth and advances to improve the investment climate, is an emerging market which cannot be ignored.

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Some of the areas recommended for the UK and the UK PLC to engage in the Indonesian PPP include:

1. Foreign direct investment. UK PLC could penetrate into the large market in road projects, where numerous projects are available and are also in line the MP3EI’s first phase. Indonesian demand of PPPs which also match with UK expertise are the Water Supply & Sanitation sector, the Solid Waste Management sector and the Transport sector, as well as the more common projects on Road and Power sectors. UK PLC can also propose unsolicited projects, and will attain certain benefits if approved.

2. Capacity building and building expertise in managing PPPs. This can be done through various ways. First, the UK or UK PLC, with two decades of experience in PPPs, could offer training for better PPP management schemes in Indonesia. Second, UKAID could engage in developing the PPP scheme in Indonesia through a form of aid or partnership in sharing the expertise.

3. Low carbon technology. Looking ahead, Indonesia has already announced the National Action Plan for Greenhouse Gas (RAN GRK) and a commitment to Reducing Emissions from Deforestation and Forest Degradation (REDD+) which are both part of the national commitment to reduce green house gases. There are, therefore, opportunities for low carbon PPP projects incorporating technological advances that have been made towards achieving lower carbon emissions. Combining the UK’s strong performance in the Low Carbon and Environmental Goods and Services (LCEGS) with the relatively untapped market of Indonesia is a key opportunity for UK PLC. One example cited is the low carbon technology used in the first PPP project in Indonesia under the MP3EI, the Central Java Steam Power Plant. The PPP showcase project was won by a Japanese consortium and uses ultra-supercritical technology to provide more efficient coal use for the steam power plant.

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Chapter I

Introduction

Background

The Master Plan for the Acceleration and Expansion of Indonesia’s Economic Development (MP3EI) is the Indonesian government’s current development master plan. Launched in May 2011, this ambitious policy aims to leapfrog Indonesia into the ten biggest economies by 2025, by increasing GDP to US $4.5 trillion as well as by increasing GDP per capita income from a current level of US$ 3000 to US$ 15,000. The Committee on Economic Development Acceleration and Expansion of Indonesia 2011-2025 (KP3EI) is an institution established the President of the Republic of Indonesia on May 20, 2011 to coordinate the implementation of MP3EI.

The initiative aims to complement the 5 year cyclic plan, the National Medium Term Development Plan (RPJPM) 2010-2014, as well as the 20 year National Long Term Development Plan (RPJPN) 2005-2023. The national government has also committed to reduce green house gases though the National Action Plan for Greenhouse Gas (RAN GRK) and Reducing Emissions from Deforestation and Forest Degradation (REDD+). Such plans are expected to be in line with the National Spatial Plan (RTRWN) which is yet to be completed.1

The MP3EI uses the term ‘Economic Corridors’ to differentiate the six economic regions across the archipelago, each with its own theme and focus of economic development. To accelerate economic growth, the MP3EI document designates eight economic programs that consist of 22 economic activities as illustrated in the figure below.

1 Indonesia’s Structural Reform Priorities, paper presented in APEC Residential Workshop Training on Structural Reform, Singapore, August 2011

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Figure 1 Estimated Investment Required for the Main Economic Activities of the MP3EI

Source: MP3EI, p50

The smooth operation of these economic activities will rely on good infrastructure to support mobility. In fact, as one of the main pillars of the MP3EI, strengthening national connectivity includes the development of infrastructure as a key strategy to achieve not only regional connectivity but also a global connectivity.

As an archipelagic country, developing infrastructure to better connect the regions is undoubtedly important. Yet Indonesia received a wake-up call when the Global Competitiveness Report 2009-2010 ranked the country 96 out of 133 countries for infrastructure competitiveness.2 This year’s ranking improved somewhat to 76th place, however, the ranking of port facilities and electricity supply have lacked progress and currently stand at 103 and 98 place, respectively. The current report also states that the greatest factor hindering investment is corruption and bribery, despite extensive government efforts to curb both.

The total investment required for the six corridors is Rp. 4,012 trillion. From this, it is expected that the Sumatra Corridor will receive Rp. 714 trillion (18% of total investment), Rp. 945 (24% of total investment) for the Kalimantan corridor, Rp. 1,290 trillion (32% of total investment) for the Java corridor, Rp. 309 trillion (8% of total investment) for the Sulawesi Corridor, Rp. 133 trillion (3% of total investment) for the Bali-Nusa Tenggara Corridor and lastly Rp. 622 trillion (15% of total investment) for the Papua- Kepulauan Maluku Corridor. See figure below.

2 Hadjar Seti Adji, “Mendorong Investasi Infrastruktur di Indonesia”, Investor Daily, 9 March 2012

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Figure 2 Indications of Investment in the Six Economic Corridors

Source: MP3EI

The MP3EI has three phases; the first phase (2011-2012) is devoted to the construction of infrastructure projects that are prioritized to accelerate development, as well as debottlenecking and increasing infrastructure productivity; the second phase (2013-2014) on the other hand is devoted to new project developments; whilst the third phase (2015-2025) is devoted to the development of future projects.3 This is where PPP enters the picture.

Figure 3 The PPP System Within the MP3EI

Source: MP3EI document, p23

3 Agustiyanti, “MP3EI Infrastructure Support: Private Sector to Contribute Rp 100 Trillion per Year”, Indonesia Infrastructure

Initiative, 24 November 2011

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Source: MP3EI

Indonesia is currently on the final stage of the first phase. Indonesia is intensifying the promotion of PPP as it is quickly becoming the government’s preferred method to finance infrastructure costs. Shown from the figure above, PPP is recognized as one of the strategies for the financing of projects under the Master Plan.

To achieve the targets set in the MP3EI, Indonesia should spend about 5% of its GDP for infrastructure investment. However, the government only could spend 1% of GDP or equivalent to 25% of the State Budget (APBN). In MP3EI, the total investment in the six corridors will amount to Rp. 4,012 trillion and 43% of which will be channelled towards infrastructure development. As seen from the figure below, the private sector involvement in MP3EI is projected to contribute to 51% of the funding, or Rp. 100 trillion per year from private funding.4 In the RPJMN 2010-2014, infrastructure financing will require Rp. 1429 trillion, in which PPP is projected to contribute for 41% of the financing.5 Out of the total of 84 projects planned in the MP3EI, the year 2012 will bear witness to 11 projects that worth Rp. 78.2 trillion under the PPP scheme.6

Figure 4 Levels of Investment by Source

Under the MP3EI, all existing regulatory frameworks must be evaluated, and strategic steps must be taken to revise and change regulations in order to attract such support from investors. Incentives will be implemented on tariffs, taxes, import duties, labor regulations, licensing and permits and land procurements. In order to achieve these goals, the central and local governments must build a stronger link within and beyond the centers of economic growth.

To address the complicated procedures in setting up businesses and investing, the government has also recognised the need to debottleneck both regulations and bureaucracy within this plan. The MP3EI employs a ‘Not Business as Usual’ way of thinking to accelerate economic growth; hence the private sector is encouraged to participate in project implementation.7

Indonesia started its first PPP project in the late 1990s by commissioning a toll road project. The year 1998 also witnessed the first regulation of a PPP issued by the government; however deregulation and work towards removing contradictory Presidential Regulations has only

4 Ibid. 5 Oxford Business Group, “At the Center of Attention”, The Report Indonesia 2012, p35 6 Edi Can, “Govt to launch 84 projects worth Rp 536 trillion”, Kontan 7 For further details on the implementation of the MP3EI itself, please refer to the second report produced by Strategic Asia as

part of this project, entitled ‘Implementing Indonesia’s Economic Master Plan (MP3EI): Challenges, Limitations and Corridor Specific Differences.’

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recently begun in 2011 through the issuance of the latest Presidential Regulation no.56 year 2011.

The Government of Indonesia also formulated several regulations for sector specific PPPs, such as in the energy and water sectors, to provide information for private business entities, refer to the annex section for the list of PPP regulations. Deregulation and debottlenecking are therefore seen as a vital precursor for PPP projects to be implemented in Indonesia.

Despite the improvement in regulatory reform, however the state budget is considered insufficient to fund the required levels of investment. Looking at Indonesia’s historical experiences of PPP, there are plentiful opportunities for business entities to invest in Indonesia in the long term, especially now the Government of Indonesia has recently committed to accelerate its economic development.

The UK FCO and Strategic Asia

The UK Foreign and Commonwealth Office (UK FCO) in Jakarta contracted PT. Strategic Asia Indonesia between August 2011 and April 2012 to undertake a project looking at the implementation barriers and requirements as well as opportunities created by the MP3EI. This paper looks specifically at the use PPPs in Indonesia, the role they are likely to play under the implementation of the MP3EI and outlines key PPP opportunities for UK PLC. A second paper has been produced as part of this project which looks at the barriers and requirements for implementing the MP3EI. The second paper looks at the national level and also specifically at the Kalimantan and Bali – Nusa Tenggara Corridors.

Data Collection and Evidences from the Field

The conclusions and recommendations that have been put forward in this paper are based on the data collected throughout the life of this project. Opinions from a wide range of stakeholders were gathered during the four conferences which were hosted by Strategic Asia and the UK FCO as part of this project. Two conferences at the regional level, Kalimantan and Lombok, were held to assess implementation barriers and requirements as well as opportunities in the MP3EI. Two further national conferences were also held in Jakarta. As such, part of this paper will look specifically at PPP opportunities in the Kalimantan and Bali- Nusa Tenggara Corridors, as well as an overview at the national level. Meetings were also held in Jakarta and in the regions, with field trips in Kalimantan, Lombok, Bali and Aceh. Participants for conferences were also drawn from all six of the Economic Corridors as proposed by the MP3EI. Further to this, Strategic Asia also contracted a Jakarta based market research company, the Polling Center, to conduct surveys amongst the participants of the conferences to gather opinions based on standardised set of questions.

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This paper runs as follows. Firstly, PPPs in the context of the MP3EI is addressed. Secondly, a recent development of Indonesia’s PPP model is explained. This section also covers the main sectors where the use of PPP has been a prominent feature. Recent developments in institutional reform and increased government support are also covered. The second section looks specifically at opportunities as well as issues in developing PPPs in the Kalimantan and Bali- Nusa Tenggara Corridors. Thirdly, opportunities for UK PLC are addressed and focus on matching the available sectors offered in Indonesia to the UK PLC’s expertise. This section is broken down into unsolicited projects and opportunities to assist the Indonesian government in capacity building to better realize and deliver PPP projects. This section also covers current low carbon PPP opportunities in Indonesia.

The next section covers the more recent trends in PPPs in Indonesia and provides the current outlook for the PPP model.

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Chapter II

Recent Developments in Indonesia’s PPP Model

The use of PPPs gained momentum at the start of the National Medium Term Development Plan (RPJPM) 2010-2014 since it was expected to fill the financing gap for the infrastructure plans contained within this blueprint. The announcement of the MP3EI in May 2011, once again reiterated the role of PPPs in Indonesia. PPPs have been in the spotlight in Indonesia since the development of each of these plans.

2.1 Sectors (toll roads, transportation, water)

Under the scope of MP3EI, the PPP model has been allocated and prioritized as the means of infrastructure development to accelerate economic growth. PPP opportunities in infrastructure in Indonesia can be divided into these eight sectors:8

• The drinking water sector (facility for raw water extraction, transmission network, distribution network, drinking water management installation);

• The transportation sector (port, airport, railway and train station); • The road sector (toll roads and toll bridges); • The electricity sector (power plant, transmission and electricity power

distribution); • The oil and natural gas sector (processing, storing, carrying, transmission or

distribution);

8 Praptono Djunedi, “Implementasi Public-Private Partnerships dan Dampaknya ke APBN”, Majalah Warta Anggaran Edisi 6

(2007), Direktorat Jenderal Anggaran.

This section covers the recent developments of the Indonesian PPP model and focuses on priority sectors, modalities scheme and institutional support, PPP opportunities in Kalimantan and Bali-Nusa Tenggara Economic Corridors as well as barriers and challenges that face the implementation of PPP.

Key messages in this section include:

• The sectors of water supply & sanitation, road, power, solid waste management and the transport are being offered as stipulated by PPP Book 2011;

• Indonesia has acknowledged the need to debottleneck and to create assurances for the private sector through the creation of several institutional supports and modalities such as a central PPP unit (P3CU), a National Committee for the Acceleration of Infrastructure Provision (KKPPI) and SOEs for guarantee provision and financing: IIGF and PT. SMI respectively;

• PPP opportunities in the Kalimantan region include the building of ports and roads, whereas Bali-Nusa Tenggara focuses on the building of ports and power plants. Challenges facing the Kalimantan and Bali-Nusa Tenggara Economic Corridors are essentially on the inter-regional disparities, lack of human capacity and the lack of knowledge on both PPP and MP3EI itself;

• Key barriers and challenges in the PPP implementation under MP3EI include land acquisition problems, capacity of the public sector, especially at the local government level, preparation of the projects and their management, regulatory framework and poor governance.

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• The waste management sector (wastewater management installation, carrier and disposal sites);

• The irrigation sector (pipeline for raw water); • The telecommunication sector (telecommunication network).

However, referring to the PPP Book 2011 released by the National Development Agency (BAPPENAS),9 currently only selected sectors are being offered to the private sector, namely the Water Supply & Sanitation sector, Road sector, Power sector, Solid Waste Management sector and Transport sector (Monorail, Bus & Rail Terminals and Transjakarta).

Though included in the PPP Book, no projects are proposed for the other sectors, namely the oil and gas sector, water resources sector and the telecommunications sector. In other countries, PPPs such as in hospitals, education, defence facilities are common, but they are not offered in Indonesia as stipulated in the PPP-related Presidential Regulation no. 13 year 2010.10

Relating back to strengthening the national connectivity pillar, the present condition of physical infrastructure in Indonesia is in a low level of efficiency and productivity as well as poor regional connectivity, thus there is an urgent need for urban infrastructure development.

In the following sections, the modalities and institutional support that the government of Indonesia has created are explained.

2.2 Modalities Scheme and Institutional Support

Economically advanced countries are using the PPP model of Value for Money (VfM) under the Public Sector Comparator (PSC) system to support efficiency and effectiveness in financing infrastructure, as opposed to the standard governmental methods. However, the PSC is unsuitable in Indonesia as the country needs PPP as a way to fill the financing gap in public infrastructure where the government is unable to do so.

The government is aware that PPP infrastructure investment in Indonesia is often seen as a high risk to investors, thus the government had been considering to offer guarantees.11 Although relatively new in the PPP scene, Indonesia has already established institutional support and modalities for PPP. The figure below illustrates the principle parties to the Indonesian PPP framework.

9 PPP Book is an informational document consisting of PPP projects and their readiness to prospective investors. 10 Bastary Pandji Indra, Director for Public-Private Partnership Development National Development Planning Agency (BAPPENAS) Republic of Indonesia, Presentation of Urban Infrastructure PPP –an Indonesian Perspective, Linking Cities to Finance, September 27-28, 2010, Shanghai 11 World Bank, Environmental and Social Management Framework (ESMF) for Indonesia Infrastructure Guarantee Fund (IIGF), April 2012

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Figure 5 the Principle Parties in the Indonesian PPP Framework

Source: Bambang Goeritno, Regulations on Public Infrastructure Investment and Doing Construction Business in

Indonesia, Shanghai Business Forum, 29 September 2010

Other than establishing a clear framework that will be listed in the Appendix section, the Indonesian government has created several supporting bodies to ease and accelerate the PPP mechanism in the country. These bodies are in the form of embedded units in the ministries and state-owned companies.

The National Committee for the Acceleration of Infrastructure Provision (KKPPI) was established to coordinate the acceleration of infrastructure provision for national economic recovery.12 The KKPPI is an inter-ministerial committee chaired by the current Coordinating Minister of Economic Affairs, M. Hatta Rajasa. It endorses requests for contingent government support (guarantees) as a basis for consideration and approval from the Ministry of Finance.13

Public-Private Partnership Central Unit (P3CU) is an embedded central unit for PPP under the Directorate of PPP Development in the Ministry of National Development Planning/ National Development Planning Agency (BAPPENAS). Its tasks include: formulating policies; assessing requests for contingent government support; assessing and recommending project proposals feasible for government support; supporting Government Contracting Agencies for the preparation of the project; monitoring and evaluating PPP Project Development; and conducting PPP promotion, capacity building and information dissemination.14 Currently this unit is still

12 INFRADEV & Infrastructure Experts Group 13 Coordinating Ministry of Economic Affairs Republic of Indonesia, Public Private Partnership (PPP) Investor’s Guide, April 2010, p5 14 State Ministry for National Development Planning/ National Development Planning Agency Republic of Indonesia, Terms of Reference: Technical Assistance and Support for the Public Private Partnerships Central Unit, ADB Loan no. 2264 – INO (SF), Infrastructure Reform Sector Development Project; Coordinating Ministry of Economic Affairs Republic of Indonesia, Public Private Partnership (PPP) Investor’s Guide, April 2010, p5

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under process however, BAPPENAS and the unit will be the dedicated regulators and supervisory body for all PPP projects in Indonesia, whereas the Ministry of Finance will deal mainly with the Risk Management of projects, policy support as well as managing the SOEs for guarantee provision and financing.

To ease the materialization of large projects, the government has created a guarantee enterprise (BUPI) for the project companies to access loans from banks and private financial institutions. One of the newly created state-owned enterprises under the Ministry of Finance is the Indonesia Infrastructure Guarantee Fund (IIGF or also known as PT PII Persero) which has the following tasks: providing contingent support for the Government of Indonesia by guaranteeing any contractual risks in relation to government actions; improving the quality of PPP transactions; pushing for a fixed and accountable approach for PPP implementation, with IIGF as the single processor and provider of infrastructure guarantees.15 Created in December 2009, the IIGF uses a policy called the Single Window for multiple guarantee provision processes. Through the IIGF, the government appraises infrastructure projects, structures guarantees and processes claims. The aim is to uphold transparency and consistency in guarantee provision and claim processing in order to increase investor’s confidence to participate in infrastructure projects in Indonesia. The current President Director of the IIGF is Sinthya Roesly.

Another state created company is PT Sarana Multi Infrastruktur Persero (PT SMI). It is a non-bank financial institution wholly owned by the Ministry of Finance to assist funding of various infrastructure projects. PT SMI was created in 2009, with the start-up capital sourced from the Asian Development Bank (ADB), the International Finance Corporation (IFC) and Deutsche Investitions- und Entwicklungsgesellschaft mbH (DEG) as well as from the Government of Indonesia. PT SMI promotes PPP in accelerating infrastructure development in Indonesia.16 After the IIGF gives its assessment and guarantee, PT SMI can give funding through a loan, mezzanine or equity. It is currently headed by Emma Sri Martini. The company has a subsidiary called PT Indonesian Infrastructure Fund.

For infrastructure specific financing, the government has prepared three financial facilities for PPP in Indonesia, which are grouped in three categories: Land Funds, Infrastructure Funds and Guarantee Funds. Land Funds consists of Land Revolving, Land Capping and Land Acquisition all of which are managed by the Ministry of Public Works. Infrastructure Funds are prepared by PT SMI and PT IIF, whereas Guarantee Funds are managed by IIGF.17 The figure below illustrates how a project company interacts with various bodies, ministries, state-owned enterprises, and other entities regarding project implementation.

15 IIGF, Public-Private Partnerships in Indonesia: The Guidelines for Risk Allocation, March 2011 16 PT SMI, Investment Book, April 2011 17 Freddy Saragih, “Program KPS Dijamin PT PII”, Media Keuangan vol IV no. 45, Secretary General of Ministry of Finance Republic of Indonesia, May 2011

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Figure 6 the National PPP Network

Source: Andri Wibisono, Jeff Delmo and Hongjoo Hahm, Terms of Reference Technical Assistance and Support for

The Public Private Partnerships Central Unit (P3CU), Infrastructure Reform Sector Development Project ADB;

Unlocking the Public-Private Partnerships Deadlock in Indonesia

The government needs to conduct several phases of project maturation before it can offer projects to the private sector; these are elaborated in the figure below:

PPP Nodes (PPP Units)

Project Identification,

Preparation, Monitoring &

Quality Control:

• Screening

• Due Diligence

• Bid Documents

Pro

ject

Pri

ori

tiza

tio

n

Secretary 1: Deputy Minister of

Infrastructure, CMEA

Secretary 2: Deputy Minister of

Infrastructure, BAPPENAS

Ministry of

Finance

Ministry

of

SOEs

Infrastructure Sector Ministries

MPW, MT, MENR, MCI

Ministry of

Home

Affairs

Government Contracting Agency

Secretariat/ P3CU

• Policy Coordination, Planning & Development

• Monitoring & Quality Control

• Identify Projects requiring Government Support

• Facilitate Cross-sector issues

• Transaction advisor support

Risk Management Unit

• Government support

policy

• Development and

monitoring

• Assess issues and

Manage Guarantee

Line Ministry and

SOEs

Project Development, Implementation, and

Monitoring

Local Government Project and LOEs

Project Development, Implementation and

Monitoring

Project

Development Facility (PDF)

IIGF

Assessing and Managing Government Support

PT SMI/

IIFF

Financing

Pro

ject S

up

po

rt

Project Facilitation

Chairman:

CMEA

Co-Chair:

Ministry of Planning/ BAPPENAS

National Committee for the Acceleration of Infrastructure Provision (KKPPI)

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Figure 7 Phases of PPP Project Realization

Source: Sustaining Partnerships, Edisi Khusus Tahapan KPS 2011, p12

In the above graph, Project Company involvement will take place at Stage 4 of project realization. Prior to this stage, the national government works to ensure that a project is feasible. Private consultancy services are involved in phases 1 and 2; however, in terms of project implementation Project Companies will only be involved when tenders are issued at Stage 4. A government contracting agency (PJPK) can be a ministry, government institution, or a provincial, regency, or city government. Every interested investor will undergo pre-qualification and procurement phases with the PJPK.

At stage one, the government contracting agency (PJPK) will form a procurement committee as well as conducting market sounding to get feedback from the private sector on the quality and attractiveness of the project. As part of the feasibility study, the committee will prepare a Self-Assessed Price (HPS) and gather pre-qualifications documents and procurement documents. Here the level of government support will also be determined in terms of the amount and nature of the government contribution to the project, such as tax incentives, land acquisition, contingent support/guarantees, direct financial support, etc.

The largest portion of risk will be allocated to the party that is most likely to be able to handle the risk entailed. Construction and operation risks are usually given to the private sector, while

CS

Manage

ment

Government

Contracting

Agency (PJPK)

prepares the

PPP project

Suggestion of

PPP project is

being sent to

the

government

Phase I:

Project

Identificati

ons and

Selections

Preparation

of priority

projects

Stage 1

Early

preparation of

Pre-Feasibility

Study

Stage 2

Checking the

readiness of the

project

feasibility

Stage 3

Finishing

the

feasibility

study of the

project

Process of Procuring Land

Phase IV:

Contract

Management

PPP Contract

Management

Stage 4

Procureme

nt of the

Project

Company

Government

Support Analysis

Submitting and Evaluating

Governance Support

Phase II: Project

Preparation

Phase III: Transaction

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regulatory frameworks will be handled by the contracting agency. Market risk could be shared by both parties.

Figure 8 Description of Pre-Qualifications and the Indonesian PPP Procuring Process

Source: Sustaining Partnerships, Edisi Khusus Tahapan KPS 2011, p22

The transaction phase is crucial for the potential private sector partner. In the pre-qualification stage, the procurement team will select potential investors that could be short-listed for the competitive bidding, as described in the figure above. An expression of interest will be submitted here. Short-listed candidates will be evaluated and ranked, and the qualified candidates will be invited to submit full proposals. The first ranked bidder will be welcomed to negotiate with the PJPK. At this point the decision to award the bidder will be in the hands of the PJPK. As can be seen from the above graph, the number of bidders also matters as back-up options are needed in case the winner drops out of the project. The PJPK is not advised to have an MOU with the project company to avoid direct indication of parties, and every deal should be made through tenders. After reaching an agreement, the PJPK will ratify the result and the procurement committee will announce the contract award.

Should the PJPK ask for a project guarantee from the Risk Management Unit (RMU) in the Ministry of Finance, if the RMU approves, it will be processed by the IIGF. The IIGF will guarantee the project and, if necessary, the Ministry of Finance will act as a co-guarantee. If the IIGF agrees to guarantee the project it will release a letter of intent and an acceptance statement regarding the scope, risk allocation and timeframe of the guarantee. The involvement of IIGF

Announcement

Pre-

Qualifications

Less than 3

co. qualified

for tender

More than 3

co. qualified

for tender

Repeat pre-

qualifications

Project Offer

• ≥3 � 1 potential winner, 2 extras

• =2� 1 potential winner, 1 extra

• 1 � repeat procurement or negotiations

with ministerial approval

• No legitimate bid �failure of procurement

and re-offering will take place

Winner of

Procurement

20

will span from phase one until phase three of project realization, and at the implementation phase IIGF will continuously monitor the project.

For sectors such as water utility, the government contracting agency will head the local government and the Regional Company for Drinking Water (PDAM). Other stakeholders include the local parliament (DRPD) and regulatory body. For the drinking water sector, the Ministry of Public Works (MPW) will offer projects to investors. The scheme will be Build-Operate-Transfer (BOT), where the private sector can sell the final product to the government. Hence, firstly the private investor must go to the body offering the project, in this case the sector-specific ministry. Also specific programs are often offered by the local government and the regional/ provincial head or elected official called Bupati. Reliable regents or Bupatis are to be engaged and project talks must be conducted as early as possible.

Indonesia also regularly holds Indonesia International Infrastructure Conferences and Exhibition (IIICE) organized by the Indonesian Chamber of Commerce (KADIN) and supported by the United Nations Economic and Social Commission for Development in Asia Pacific (UNESCAP). In the year 2012, the conference was hosted between the 2nd and 5th May. Such conferences and exhibitions offer a chance for the central and local government to meet with private sector in order to work towards the development of infrastructure in Indonesia.18

The two sub-chapters below will elaborate on specific PPP opportunities and condition in the Kalimantan and Bali – Nusa Tenggara Corridors, as outlined in the MP3EI.

2.3 PPP Opportunities in the Kalimantan Economic Corridor

The Kalimantan economic corridor has been designated as a Centre for the Production and Processing of National Mining and Energy Reserves, due to its abundant mineral and energy resources. Under the MP3EI, the GDP of Kalimantan Corridor is projected to grow at 11.9 percent annually.

Kalimantan’s main economic activities are focused on the production of Steel, Bauxite, Coal, Oil and Gas in the mining sector and Palm Oil and Timber in the non-mining sector. This region has four primary economic centres: Samarinda (East Kalimantan), Palangkaraya (Central Kalimantan), Pontianak (West Kalimantan) and Banjarmasin (South Kalimantan).

Under the MP3EI, the Kalimantan region should contribute to a significant increase in economic growth. However, the government is unable to meet the economic target stipulated in the Master Plan on its own unless it finds an alternative source of funding, particularly in the form of private investors’ contributions. Out of Rp. 4,012 trillion required from the private sector, only 24 percent of it or Rp. 945 trillion is designated for the Kalimantan Corridor. In addition, the MP3EI challenges Kalimantan to optimize its economic potential in a sustainable and not Business as Usual way to meet its target.

18 Indonesian International Infrastructure Exhibition 2012 homepage

21

In total there will be 11 projects in Kalimantan, though all are still classified under potential projects, amounting for more than US$ 3 billion. The only one already in tender is the Puruk Cahu – Bangkuang Coal Railway in Central Kalimantan, which accounts for a total investment of US$ 740 million. The railway is expected to carry 10 million tons a year in the first 10 years of its completion.19 This project has already seen four successful bidders: the Itochu-Toll consortium, Drydocks World LLC-PT MAP Resources Indonesian consortium, PT Bakrie-SNC Lavalin-Thyssencrupp consortium and China Railway Group Limited-PT Mega Guna Garda Semesta-PT Royal Energi consortium.20 The Government Contracting Agency (PJPK) in this project is the local government of Central Kalimantan province (BAPPEDA Kalimantan Timur). The project will use the Design- Build-Finance-Operate (DBFO) PPP model. Construction is set to begin in 2013 after the PJPK announces the name of the winner of the bid.

In East Kalimantan, there are five potential projects, including one airport in Samarinda, one sea port in Maloy, a coal railway in Balikpapan, a toll road connecting Balikpapan and Samarinda, as well as a coal fired steam power plant (2x100MW).21 For the Maloy Port, project preparation and estimated tender time is 2012. The port is designed to be a CPO port to support the CPO plantation industry and its downstream industry. In West Kalimantan, there are four potential projects, including three water supply systems and an airport. The Singkawang Airport began project preparation in 2011 and the estimated tender time will be later in 2012. Meanwhile, in South Kalimantan, there is only one potential project, which is the Pelaihari sea port.

Apart from the PPP projects being offered in the PPP Book 2011, the East Kalimantan local government has signed an MOU with a subsidiary of state firm Russian Railway, the Kalimantan Rail PTE Ltd, to build a railway for transporting people and coal. The project will be done in two phases, the first one connecting inter-East Kalimantan itself, which connects Balikpapan to West Kutai, and the second one will be extended to the Central Kalimantan province. The ownership of this infrastructure will be discussed further in a technical agreement following the MOU. Currently, the project is in the land release phase. This will be the first cooperation of Indonesia undertaken with a Russian private sector business. It is expected that the first phase will be finished in the year 2017. A US$ 2.4 billion fund aid will be wholly from the State Affairs and Foreign Economy Bank in Russia and the Kalimantan Rail PTE Ltd.22

Therefore, the majority of the potential PPP projects in Kalimantan are mining related infrastructure projects. However, the growth of the oil and gas sector has been declining in recent years and the MP3EI document acknowledges the need to develop the non-oil and gas sector in

19 PT Buena Persada Mining Services, “Indonesia’s Adaro eyes $1.5 billion Coal Railway”, 17 Apr 2010 20 Jakarta Post, “PII to guarantee $2.3b railway project in C. Kalimantan”, 1 December 2011 21 Direktorat Pengembangan Kerjasama Pemerintah dan Swasta, “ Development of Maloy International Port, East Kalimantan” 22 Satya Festianirai, “Russia and Indonesia Project Kalimantan Railway”, Republika Online, February 28, 2012; “Indonesia-Rusia kerjasama pembangunan rel kereta api”, Antara, February 7, 2012; “Rusia Bangun Infrastruktur Kereta Api di Kalimantan Timur”, Pikiran Rakyat Online, February 8, 2012

22

Kalimantan. Hence there exists the opportunity to offer low carbon projects through the unsolicited mechanism, which will be explained in the following chapters.

According to the findings from the surveys conducted by the Polling Center, problems related to implementing the MP3EI in the Corridor III are the following:

• An inter-provincial disparity, since East Kalimantan is a much richer province and more developed compared to other provinces on the island;

• A lack of infrastructure to implement the MP3EI; • A lack of human resource capacity. It has been argued that the key messages of

the MP3EI have not yet been fully socialized, and local government and local private sector are thus not yet prepared to implement PPP projects ;

• Complex bureaucratic procedures in issuing mining permits; • Public resistance, especially for sensitive issues such as land release and lack of

synchronization between central and local governments, towards implementing the projects in MP3EI.

2.4 PPP Opportunities in the Bali - Nusa Tenggara Corridor

Corridor V of the MP3EI consists of the provinces of Bali, West Nusa Tenggara (NTB) and East Nusa Tenggara (NTT). The theme of the Bali - Nusa Tenggara Economic Corridor is the ‘Gateway for Tourism Industry and National Food Support’. This upsurge in economic activity aims to improve people’s welfare in this corridor where 17 percent of the population is below the poverty line and where there is a relatively high income disparity of Rp. 17.7 million per capita (between the richest and poorest regencies/cities in this corridor). This corridor faces various problems including unequal population distribution, low investment levels and limited availability of basic infrastructure. Therefore, this corridor requires acceleration and expansion of economic development, which will focus on 3 main economic activities: tourism, fisheries and animal husbandry.

As tourism is one of the key sectors in Corridor V of the MP3EI, the Ministry of Tourism and Creative Economy is involved quite intensively in accelerating economic growth in the region. The Ministry has stated that the corridor will be open for private investment in several infrastructure projects. There are approximately 136 projects with an estimated total cost of Rp. 210 trillion up to 2025. Here the government has allocated its share at 20%, the rest will be contributed by the private sector and state-owned enterprises.23

Infrastructure development will ultimately aid national connectivity which will in turn reduce transportation and logistical costs, making economic activities more efficient. In the Bali – Nusa Tenggara corridor, the prioritized connectivity activities are focused on enhancing airport development, capacity building, developing road infrastructure and constructing new power

23 Ashari Purwo , “Koridor V MP3EI Terbuka untuk Swasta”, Bisnis Indonesia, 1 Desember, 2011

23

plants to support the main economic activity of tourism, increase fishery production, develop the salt business and support livestock production.24

According to a report of the MP3EI’s kick-off meeting, this corridor will need key infrastructures which include the expansion of Ngurah Rai Bali International Airport, terminal cruise in Tanah Ampo, the Trans-Bali toll road, as well as an electricity power plant.25 Infrastructure in the tourism sector is developed in line with centres of tourism in this corridor. One of the projects, the Tanah Ampo terminal cruise, is set to be a tourism port in the eastern regency of Bali, Karangasem. It is the only cruising port in Bali and the expansion of the over burdened port is being offered to investors under PPP.26 The port provides a good opportunity for meeting international standards, increasing connectivity and aiding tourism development in the region. To meet these objectives, the starting phase of the project requires Rp. 160 million.27

In order to perfect and maximize the expansion of the cruise terminal, the regency of the Karangasem government has conducted meetings with the Australian consultant SMEC Peter Benson as well as the Ministry of Transportation and the Balinese provincial government, and other technical parties.28 This terminal is of particular interest to investors from Japan and Australia because of its location in the east.29 Other interested investors hail from Singapore, Turkey, USA, and China, most of whom have conducted surveys on Karangasem. Due diligence and pre-feasibility studies has been carried out by the SMEC consultant. The Directorate General of Marine Transportation is the Government Contracting Agency (PJPK) for this project. The proposed scheme for this port is Operate & Maintain (O&M), because if the building is included in the scheme then the financial return will not be met. If this is approved, then the winning bidder will not need a guarantee from IIGF.30 The Tanah Ampo port is currently being operated by port operator Pelindo III and the local government. However, the progress of this project is still questionable due to some issues with changes to authorities from Pelindo to the local government and the availability of the documents required conducting pre-qualifications.

In NTB, the largest infrastructure project this year in the corridor will be the Bima Port which is estimated to need a total investment of Rp. 400 billion. The realization of the project, however, is still undetermined.31 In NTB, the local government is pushing for private investors to invest in one of the biggest projects for tourism, the Mandalika Resort. So far, six national investors have signed contracts with the regional government. The Mandalika Resort is a 1,350 hectare integrated tourism area similar to Bali’s Nusa Dua. It is set to be a special economic zone which will benefit greatly from the fiscal and non-fiscal facilities that will attract more investors to the

24 Directorate for Public Private Partnership Development, “The Connectivity of Six Economic Corridors”, Sustaining

Partnerships: Media for Information on Public Private Partnerships , December 2011, p21. 25 Coordinating Ministry of Economic Affairs, “Penyusunan Masterplan Percepatan dan Perluasan Pembangunan Ekonomi Indonesia 2011-2025”, Pengembangan Koridor Ekonomi Indonesia Kick Off Meeting, 7 February, 2011. 26 “Tanah Ampo to Serve as Main Cruise Ship Terminal in Bali”, Jakarta Post, 12 July, 2011. 27 “2012 Dua Proyek Infrastruktur Transportasi Ditender”, Investor Daily, 23 December, 2011. 28 “Pelabuhan Wisata Berpeluang Layani Puluhan Kapal Besar”, Investor Daily, 11 March, 2011. 29 “Lima Proyek Infrastruktur PPP Mulai Jalan 2011”, Investor Daily, Juni 12, 2011. 30 Indonesia Investment Coordinating Board (BPKM), PPP Infrastructure Showcase Project Tanah Ampo Cruise Terminal 31 Edy Can, Kontan.

24

tourism sector.32 The building of the tourist area, Mandalika, will require US$ 3 million or around Rp. 27 trillion, with the State-Owned Enterprise, PT Bali Tourism Development Corporation, investing Rp. 2.2 trillion. The rest will come from the private sector.33

NTB also aims to be a centre for animal husbandry, especially for cattle. However, currently the province still faces problems in meeting national beef consumption, hence the need for better infrastructure, as well as better techniques and science and technology in the field. The Ministry of Research and Technology gives funding amounting to Rp. 50 million for research into 125 innovations in the corridor that could make Indonesia a self-sustaining meat producer by 2014. To reach the goal of meeting national beef consumption, NTB is aided by the Indonesian Science Agency (LIPI) that provides 2,500 superior cow seeds from Bali.34

In NTT, there are currently no projects offered under the PPP scheme. This could demonstrate the lack of equality and the disparities within the corridor. For example, Bali is very well known and quite developed in the PPP scheme in comparison to the neighbouring Nusa Tenggara islands.

As opposed to the development of mining activities in Kalimantan, mining sector development in corridor V is not prioritized due to the negative impacts it could bring to the livestock and fisheries sectors.

According to findings from the Polling Center, problems related to implementing MP3EI in corridor V could be outlined as below:

• A lack of technology and innovation in infrastructure in local business; • The government has stated that it is not ready to implement the MP3EI due to

lack of infrastructure, financing and human resources; • Financing problems for the private sector to invest in the corridor; • For the tourism sector, NTB and NTT are living under the shadow of Bali.

Product differentiation from Bali is deemed necessary; • Lack of socialization from the central government regarding the MP3EI initiative

to the local government, private sector and the civil society, hence not equal spread awareness from all stakeholders.

2.5 Barriers and Challenges in Implementing PPP Projects in Indonesia

As in any new unprecedented initiative or policy, barriers and challenges will persist. This section further explains the factors that still hinder the implementations of PPPs in Indonesia.

After more than two decades since the Indonesian government implemented the first PPP project on toll roads, followed by two Indonesia International Infrastructure Conferences and Exhibition (IIICE) events, Indonesia is still unable to attract many private business entities to invest in the

32 Andhika Pertiwi, “Produk Wisata NTB Harus Beda dari Bali”, Kompas, Oktober 25, 2011. 33 “Hatta Janji Percepat Penetapan Status KEK untuk Mandalika”, Investor Daily, October 21, 2011. 34 “Membangun Bumi Sejuta Sapi”, Media Indonesia , Februari 29, 2012.

25

country. There is a common consensus among local governments that PPP schemes help resolve governments’ financial difficulties, especially in terms of infrastructure development projects. However, there are still a number of obstacles that Indonesia faces to effectively realize PPP projects. Based from the empirical findings, among them are the following:

Land Acquisition Problems To date, land acquisition is deemed to be one of main problems in the overall PPP transaction process. Land acquisition in Indonesia is part of the government support but is also included in investment costs. Furthermore, the land release process in Indonesia for PPP projects can take much longer than stated in the investment agreement. This means the private sector still bears the cost of releasing the required land. Commonly, governments have to provide compensation to the community from which land has been acquired thereby increasing the expense and the length of the process. High compensation costs for land affects the length of a project’s concession period making the investment less attractive to the private sector parties since the return on investment is prolonged. However, the current land appraisal method has improved significantly in the last two years which may reduce disputes between land owners and local governments. In addition, in January 2012, the government issued Law No.2 year 2012 to ease the land acquisition process in Indonesia but the Presidential Regulation is still pending. To date, it is still too early to judge whether the new regulation is able to minimize land release problems to support the implementation of PPP project. Thus, there is a hope that the land acquisition problem can be simplified through the PPP execution process in the near future. Capacity of the Public Sector at the Local Government Level Throughout the many PPP projects undertaken across provinces in Indonesia, the discussion often centres on the fiscal capacity of the government in terms of infrastructure project finance. However, another key theme often emerges, related to the lack of human capital capacity regarding knowledge of the PPP mechanism and its procedures for implementation. It is often found that local governments lack the authority to play a more significant role in the operational procedure of the project. Local governments in the past have often only had limited responsibilities up until the completion of the land release process, as seen in the development of the Pekanbaru - Dumai Toll Roads. They also even had problems dealing with asset recognition and land ownership in the community. During the implementation of PPP projects, it has been known for local governments to require technical assistance from private parties pushing up costs for the private sector and in turn deterring investment. Preparation of the Projects and their Management The success of a PPP project is usually determined at the beginning of its lifecycle when the government devises the project. The development of the PPP model in Indonesia has been relatively slowing in comparison to countries such as Singapore or the UK. Furthermore, the Indonesian government is still relatively new to the concept of better project preparation and

26

management, yet the country is on the right track towards improving PPP project implementation. The government still needs to considerably improve project preparation relating to asset, resource and financial management. It should also provide clear procedures for the private sector in order to provide a clear view of potential projects as well as the mechanism to enter the market in Indonesia. To date, the government is still preparing to establish a website detailing prospective projects and various related information including information about the government contracting agencies with which business entities should cooperate. The government should give a clear picture of PPP investment processes, ensure a good business climate, and provide government support to increase the bankability of a given project, as well as reduce potential risks throughout a project’s lifecycle. Moreover, the government is not yet in the habit of conducting public consultations prior to project implementation. Thus, the government is not seen to take account of the general public’s opinion on the project resulting in protests and demonstrations by the public against the project. Regulatory Framework It is often found that articles in separate government regulations contradict each other. This has been characteristic of the regulatory framework for the Indonesian PPP scheme. Overlapping regulations among line ministries also exist, prompting calls for national legal reform. For example, there is presently a conflict between Presidential Regulation no.6 year 2006 to no. 30 year 2008 and no.50 year 2007 regarding Procedures for Implementation of Regional Partnerships with Presidential Regulation no. 13 year 2010 and Presidential Regulation no.56 year 2011 on PPP as mentioned by Gunsairi (Sub-Director of Institutional Regulation and Information, Directorate of PPP) from the National Development Planning Agency.35

However, the recommendation to solve the issue of contradiction between government regulations has been taken into consideration as a means of providing consistent law enforcement throughout PPP lifecycles to accelerate PPP project development in the country. Poor Governance: Issues of Coordination There is a large communication gap between central and local governments leading to poor coordination in PPP project implementation. Moreover, in the current PPP institutional framework, the National Committee for Acceleration of Infrastructure Development is led by two institutions with Coordination Minister for Economic Affairs as the chairman and Ministry of BAPPENAS as the co-chair of the committee.36

The complex structure of the PPP regulating bodies is likely to lengthen the process of project identification and preparation and also prolong the implementation of the PPP project. It should be noted that the length of the process, from Request for Qualification (RfQ) to Financial Close, affects the concession period offered to the private sector. With the BOT PPP type, which is used relatively often in many PPP projects, a longer concession period will lengthen the time before the transfer of project operation from the

35 Angga Bratadharma, “Tumpang Tindih Peraturan Hambat Proyek Infrastruktur”, March 13, 2012. 36 Unlocking the Public-Private Partnerships Deadlock in Indonesia, World Bank Jakarta, Indonesia, May 2011.

27

private business entity to the government. This means that the government would risk a lowered value of the asset. As for the private sector, longer concession contracts mean private investment costs will be higher rendering PPP projects less attractive.

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Chapter III

Opportunities for UK PLC

3.1 Opportunities for Foreign Direct Investment

With less domestic demand for PPP, especially for public utilities, UK PLC can look for opportunities of investment abroad. Indonesia with its demographic bonus,37 high projected economic growth, and a young largely untapped PPP market would be a suitable place for the UK PLC to invest.

Opportunities for UK PLCs will arise if they can match their expertise to Indonesia’s current priority investment list. Indonesia has listed priorities in the infrastructure sector at least up until 2014, or the second phase of MP3EI and the end of the current RPJPM.

As has been stipulated above, several sectors are a priority in the development of urban infrastructures, such as the Water Supply & Sanitation sector, the Road sector, the Power sector, the Solid Waste Management sector and the Transport sector. Specifically, UK experiences and expertise in the roads sector and solid waste or waste water management will also have to be taken into account when looking for opportunities in Indonesia.

Investors should know the regulatory body for PPP in Indonesia, the Directorate for Public Private Partnerships in the Ministry of National Development Planning/ National Development

37 Of the 240 million people, over 50% of the population is under 29 years old, and 60% of the population is under the age of 39, with around 52% of the population living in urban areas. This provides for dynamic labor market participation, growing at 2.3 million per year. A rapidly urbanizing population also provides for strategic pools of labor force in centers of investment. Source: Indonesia Investment Coordinating Board (BKPM), Facts of Indonesia| Demographic, accessed 30 May 2012

This section covers the areas of opportunities for UK PLC to invest in Indonesian PPP.

The key messages include in this section:

• With the current economic climate of the UK, Indonesia is of growing interest to UK business interests as it is currently enjoying a surging middle class, sound economic growth and a demographic bonus for productivity;

• UK PLC can find opportunities in Indonesian PPP investments by tapping into the sectors for which UK PLC is known for its expertise. Such sectors include the Road sector, the Solid Waste or Waste Water Management sector, as well as other priority sectors such as Water Supply & Sanitation sector, the Power sector and the Transport sector;

• Opportunities in unsolicited projects must also be taken into account as projects could be proposed which anticipate the emergence sectors that are not yet covered in the PPP Book 2011 as well as having several privileges compared to the solicited ones;

• UK PLC can also act as a partner with the Indonesian government to work specifically on capacity building. UKAID, IUK, as well as UK PLC could offer trainings, partnerships, or even aid for the Indonesian government.

29

Agency (BAPPENAS), as well as other relevant stakeholders such as the Indonesian Investment Coordinating Board (BKPM) and the Indonesian Chamber of Commerce (KADIN).

Given that the UK began work in PPP two decades before Indonesia and is considered a benchmark country for PPP among implementing countries around the world, such as Singapore and Australia, it can be argued that the UK is on a strong footing should it wish to invest in Indonesia.

Indonesia has hundreds of yet to be offered projects on toll roads and national roads. In particular, the Indonesian Toll Road Authority (BPJT), the Ministry of Public Works (MPW) and Ministry of Transportation (MT) are important sources of information for UK investors. As procurement will be done publicly either via the government website (e-procurement) or via newspapers, it will be good practice for the investor to know firsthand and always be in touch with the relevant government contracting agency (PJPK) in order to know the latest status of road projects. Whilst the common approach is for the government to maintain contact with potential investors, the Government of Indonesia is only recently exposed to PPP practices and therefore investors may find that they will be the one to initiate contact.38

Opportunities in the water supply sectors could be great as Indonesia has stated its commitment towards meeting the target of the MDGs by 2015 on the availability of clean water. UK PLC must know the status of projects by keeping in touch with related ministries and regional government. The PJPK of solid waste would be either the MPW or the local government as waste management is handled locally. As for the water supply, the PJPK would also either be the MPW through the Supporting Body for Water Supply System Development (BPPSPAM) or the local government.

Referring to the PPP Book 2011, there are two offered projects on solid waste, two priority projects and four potential projects amounting to a total investment required of US$ 500 million. Meanwhile in the water supply sector, there are 6 offered projects and 18 potential projects, with the total investment value of US$1.4 billion. As both of the solid waste and waste water management and water supply sectors are handled locally, it may prove to be good practice for investors to deal closely with reliable regents or Bupatis, since it is these stakeholders in particular who offer the PPP projects. Dealing with agents or Bupatis with less experience in carrying out PPP projects may prolong the overall process and increase costs for the investor to reach project realization.

38 “Often in the past, where PPPs have been successful, one reason has been that the government remains in close contact with the private sector,” said Raj Kanan, founder and managing director of Tusk Advisory. Source: Oxford Business Group, “Realising Potential”, p106.

30

Unsolicited Projects

There are two different mechanisms of PPP projects in Indonesia comprising of Solicited and Unsolicited Projects. Unsolicited PPP projects are projects proposed by a private business entity outside of the listed projects in the PPP Book 2011. The initiative to implement an unsolicited project is possible in accordance with Presidential Regulation no.56 year 2011.39 This indicates that the private sector could submit a proposal regarding a PPP project to the government; in this case, to the BKPM. If the government agrees to the particular project proposed, the private sector actor could receive compensation while the government follows up on their proposal with an open tender mechanism. The compensation that would be received by the private investor as an initiator would be:40

• Up to an additional 10 percent of the appraisal value could be awarded to the project initiator; • Having the right to match the highest bidder of the project; • Having the possibility to purchase the intellectual patent of initiating the project.

Looking at the first phase of the MP3EI framework, the Indonesian government focuses heavily on PPP infrastructure projects and relatively less on other sectors which may become priorities later in the second and third phases. Taking into account the possibility of proposing new PPP projects to the government, private investors have huge opportunities to either submit their own project proposals whereby the Indonesian government can learn from other benchmark countries or participate in the tender process of listing prospective projects according to the government plan. The former option creates more chances to introduce a new point of view on PPP, not only within infrastructure projects but beyond to PPP projects in terms of other sectors and services.

The process of submitting a PPP project proposal as an unsolicited scheme can be described as the following next page:

39 Novie Andriani, S.H. and M. Taufiq Rinaldi, ST. “Unsolicited Project”, Mengapa Memilih KPS? Identifikasi dan Seleksi

Proyek Kerjasama, Sustaining Partnership: Media Informasi Kerjasama Pemerintah dan Swasta, , Edisi Khusus Tahapan KPS 2011, BAPPENAS, 2011, 23. 40 Ibid.

31

Figure 9 Process of Submitting Unsolicited Projects According to Presidential Regulation

no.56 year 2011 41

Source: BAPPENAS, Unsolicited Project, Media Informasi Kerjasama Pemerintah dan Swasta, Edisi Khusus

Tahapan KPS 2011

3.2 Opportunities for Assisting in Capacity Building in Managing PPPs in

Indonesia

The new trajectory for economic development in Indonesia as stipulated in the MP3EI document increases the need for a better management scheme for PPPs. This will be especially important since 32 out of 79 infrastructure projects in the MP3EI are listed as PPP projects. Fulfilment of these will require serious action to be taken by the government to attract business entities to invest in public sector facilities or services. Considering this huge private sector contribution to Indonesia’s development, in particular as part of the MP3EI, there is a need to enhance the capacity of the government officials in managing PPPs.

Since the launch of the first PPP Book in 2010, only one project has been realized, a coal-fired steam power plant (PLTU) in Central Java. Further details regarding this project will be elaborated below under Chapter IV ‘Opportunities for Low Carbon PPPs in Indonesia’ in the case study section. This shows that the government is progressing slowly in realising projects and developing PPPs. This is due to the lack of human capacity and expertise. The Polling Center found that a general concern from government officials at both the national and local level as well as from the private sector was that governments were underprepared to implement

41 Ibid.

Procurement of PS

Private Sector submits their

Feasibility Study with all the

other required documents

Evaluation by GCA

GCA stipulates the

private sector as an

initiator and

compensations given to

PS

6 5

Private

Business

Sector

1 Approval from the GCA given

to the private sector to

proceed on Feasibility Study

Proposing Pre-Feasibility

Study to Government

Contracting Agency

2 3

4

7

- Plan of the Cooperation Structure

- Plan of the Project Finance and the

Funding Sources

- Plan of Partnership Offer covering

schedule, process and assessment

method.

32

PPPs. The main reason cited was that they also lack information regarding PPP procedures and mechanisms and therefore maybe under informed on the underlying aims of PPP projects.42 There is an urgent need for improving the managerial skills of the government, and especially local governments that are the most unfamiliar with PPP procedures. This is especially important, because many PPP projects will be realized and managed at the local level, with the local government acting as the PJPK.

The UK Department for International Development (DFID), through UKAID, is a suitable partner for the Indonesian government to work on capacity building and managing PPPs. DFID has cooperated with Indonesia in a wide range of sectors, including climate change, tsunami recovery, HIV and AIDS, governance and civil society, amongst others. Building PPP expertise in Indonesia could be categorised as one of the key issues of focus in DFID, which is ‘Economic Growth and Private Sector’.

Indeed, the UK also undertakes capacity building through Infrastructure UK (IUK) and its international unit around the world. The international unit of IUK has provided strategic high level advisory to foreign governments to provide advice and support from the public perspective.43

There are also opportunities for the UK private sector or the UK PLC to provide PPP training and workshops to the government and especially to the local government. This could also be in the form of PPP itself.

Working with the Indonesian government in capacity building to improve the expertise in PPPs should be seen as a long term investment in the country. An enhanced capacity and better expertise in managing PPP means that the government will have increased support in terms of human capital which will increase the likelihood of private investment in the country. Many benefits could be gained from assisting capacity building and managing expertise of the local government as a more efficient delivery of project would also reduce costs from the private sector side.

42 More reinforced by a statement from Scott Younger, president of Glendale Partners, “most of the regional governments lack the skills required to execute and deliver PPP projects. There has to be a team of expert working closely with the government to help them develop their capacity and knowledge of how to execute these kinds of complex projects”. Source: Oxford Business Group, “Realising Potential”, The Report Indonesia 2012, p106 43 International Unit, Infrastructure UK – HM Treasury.

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Chapter IV

Opportunities for Low Carbon PPPs in Indonesia

The UK has established and developed expertise in a domestic sector called the Low Carbon and Environmental Goods and Services (LCEGS). This sector includes traditional environmental activities, renewable energy and promoting a low carbon market; and had an estimated value of over £106 billion in the year 2007-2008. Based on a government report, the UK should focus on developing sectors where there are clear and existing comparative advantages, in this case its clear strength and capabilities in low carbon technologies.44 Within the sector, another UK government commissioned report by Innovas stated that opportunities for the UK exist in the wind energy sector, carbon credit funds and carbon trading transaction activities, the production of synthetic fuels, waste treatment, wastewater treatment and recycling of materials.45

These strong sectors should be taken into account when UK PLC looks for investing opportunities abroad, as they will have a better experience in managing the foreign conditions. Matching the strengths of UK LCEGS and relevant private sector companies with the available low carbon market in Indonesia would be the key opportunity for the UK. According to the report, Indonesia is part of Tier 3 countries where these countries account for between 1 to 2% of global value in the relative market sizes in the LCEGS sector, and account for 8.82% of the

44 BIS, Towards a Low Carbon Economy – Economic Analysis and Evidence for a Low Carbon Industrial Strategy, Department for Business, Innovation and Skills of the UK Government. BIS Economics Paper, no. 1. 45 Innovas, Low Carbon and Environmental Goods and Services: an industry analysis, Report commissioned by Department of Business Enterprise and Regulatory Reform (BERR), March 9, 2009.

This section covers findings on potential low carbon investment opportunities for UK PLC in the Indonesian PPP.

The key messages include in this section:

• Taking into account the current economic climate of the UK, foreign investment is of growing interest to UK businesses. Indonesia is a promising emerging market and is currently enjoying a surging middle class, sound economic growth and a demographic bonus for productivity;

• UK PLC can find opportunities in Indonesian PPP investments by tapping into the sectors in which UK PLC has expertise. Such sectors include the Road sector, the Solid Waste or Waste Water Management sector, as well as other priority sectors such as Water Supply & Sanitation sector, the Power sector and the Transport sector;

• Opportunities in unsolicited projects must also be taken into account as projects could be proposed which anticipate emerging sectors that are not yet covered in the PPP Book 2011 as well as having several privileges compared to the solicited ones;

• UK PLC can also act as a partner with the Indonesian government to work specifically on capacity building. UKAID, IUK, as well as UK PLC could offer trainings, partnerships, or even aid for the Indonesian government;

• Opportunities in low carbon exist in Indonesian PPP, especially for energy efficient technology.

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global market value. Tier 3 countries are considered potential markets for the UK.46 Both of these countries are moving towards a low carbon economy. The UK arguably has a comparative advantage since the country has already an established market in the LCEGS sector whereas Indonesia is only establishing itself in the field; hence opportunities will likely arise in the thriving young market in the country.

However in Indonesia, PPP projects gained momentum at the same time that the government introduced the MP3EI to speed up economic development. Yet at the same time, the President of Indonesia has made an international public commitment for Indonesia to lower its carbon emissions by 26% in 2020. The country has a lot of work to do to accomplish this target. Considering a strong commitment made by the government to improve its economic growth combined with lowering its carbon emissions, the listing of PPP projects requires business intelligence from the private market to propose new technology or project design for producing lower carbon emissions throughout the PPP project lifecycle. For example, the Central Java Steam Power Plant, being the first PPP project in Indonesia, has been developed using an ultra-supercritical technology utilizing national coal which has low calorie content in its operational process.47 Therefore, the power plant will produce lower carbon emissions than the common coal-fired power plant and the case study will be elaborated further below in the next section.

Other examples of PPP projects can be found in the PPP scheme under REDD+. These particular projects, however, are not part of the MP3EI projects. For instance, the Berau Forest Conservation Program allowed The Bank of America Charitable Foundation (Bank of America Merril Lynch) and the Nature Conservancy to support the program cooperating with the District of Berau, Kalimantan Province.48 This partnership will last for 20 years in which time it is hoped to produce low carbon emissions and protect wildlife as well as increasing the standard of living of the neighbouring community.49 The Berau Forest Conservation project is the first pilot project under the PPP scheme which is designed to help protect the existing forest and its biodiversity as well as mitigate carbon emissions released into the atmosphere.

Apart from the listing of PPP projects in the MP3EI corridors, there are other PPP projects which are identified in line with the spirit of low carbon economy. For instance, there are eight PPP projects regarding solid waste and sanitation listed in the PPP Book 2011. Two of these projects are ready to be offered, two projects are priorities and the rest are potential projects. The project Solid Waste Management Improvement in Bandung, West Java is estimated to cost US$ 100 million. The Mayor of Bandung is designated as the PJPK in charge of the project. Another similar project is the Solid Waste Final Disposal and Treatment Facility- Putri Cempo Mojosongo, in Surakarta, Central Java, with an estimated project cost of US$ 30 million. As waste is one source of carbon emissions, PPP projects in Solid Waste Management and 46 Ibid. 47 PT.PLN (Persero), “Proyek PLTU Jawa Tengah 2x1000MW”. 48 Elis Nurhayati, et al., “Bank of America Merrill Lynch Supports The Nature Conservancy’s Innovative Forest Project on Kalimantan”, Bank of America. 49 Ibid.

35

Sanitation are a promising means of lowering green house gases comprised of methane and carbon.

Overall, there are numerous opportunities to invest in Indonesia. Most options are in the infrastructure sector but also there are also non-infrastructure projects, such as those in the tourism sector and those which aim to improve public services whilst also reducing green house gases.

4.1 Case Study: Ultra-Super Critical Steam Power Plant in Central Java

Among the 32 projects listed in the MP3EI’s PPP projects, a steam power plant (PLTU) in Central Java will be the first PPP project to be operated by 2016 in order to provide approximately 8-9% of annual electricity demand. The need to expand power generation and transmission capacity has been ranked as a top priority in the RPJMN. This is in light of the fact that the country is seeing increasing electrical consumption by industry, demand for rural electrification, and the expected high demand for electricity from residential consumption. Moreover, the National Electricity Company (PLN), a state-run power company which has suffered financial difficulty is unable to support payments to Independent Power Producers (IPPs). Therefore, with the intention to promote more clean energy utilization and less coal use, the government has made a deal with the private sector to invest in the 2x1,000 MW steam power plant at a total cost of US$ 2.91 billion.

At first, the initiative to have a cleaner power plant was outside of the MP3EI framework because the proposal for the power plant was designed in 2005 with Presidential Decree no.67 year 2005 as an underlaying regulation. However, later on the project was included in the PPP showcase under the MP3EI platform. The power plant project is located in Batang, Central Java and uses the Build-Own-Operate-Transfer (BOOT) PPP model. The private sector consortium named PT. Bhimasena Power Indonesia, which consists of PT. Adaro Power, Itochu Corporation and J-Power, obtained an exclusive franchise to finance the project, build, operate, maintain and manage the facility during the concession contract to amortize the investment. After the concession term ends, the transfer of ownership will be undertaken from the consortium to PLN.

The figure below portrays the transaction description of the Central Java Steam Power Plant from the IIGF.

36

Figure 10 Transaction Description of the Central Java Steam Power Plant

Source: IIGF, the Role of Indonesia Infrastructure Guarantee Fund for PPP Projects Development in Indonesia, A

Presentation on PPP Days 2012, Geneva

A complete picture of how this first big PPP project, among 5 others promoted by BKPM, has been implemented is provided in the following:

• The government proposed a steam power plant in the Central Java IPPs during the Indonesia Infrastructure Summit in 2005. The event was organized by the Indonesian Chamber of Commerce in cooperation with the Indonesian government;

• An International Finance Corporation (IFC) acted as a broker to provide an advisory service to PT. PLN by working together with other stakeholders, consisting of PT. PLN, the National Development Planning Agency (BAPPENAS), the Ministry of Finance, and the Infrastructure Guarantee Fund (IIGF). IFC was also responsible for conducting a feasibility study of this particular project;

• In November 2009, under IFC’s support, PT. PLN implemented a tender to find a potential private business entity enabling the steam power plant to take place. Based on a pre-qualification process, seven consortia met the technical and financial requirement and were eligible to submit their bids;

• In April 2011, out of seven consortia, only four submitted their bids; • In June 2011, a consortium consisting of PT. J-Power, Itochu Corporation, and

Indonesia’s Adaro Power won the bidding process and was granted the project as an exclusive franchise to realise the 25-year BOOT power plant project under the PPP scheme with PT. PLN. It has been agreed that the plant will start to commercially operate (COD) by 2016;

37

• In October 2011, a contract was signed between PT. Bhimasena Power Indonesia and PT. PLN. This contract comprised of a Power Purchase Agreement (PPA), as well as other project and guarantee agreements. Crucially, part of the agreement was to guarantee sales of electricity to IPPs on a monthly basis as well as agreeing to a buyout obligation. The IIGF as a single window guarantee fund acts through the Ministry of Finance by giving the project guarantee made on a guarantee agreement. In order to claim the reimbursement by PLN, recourse agreements were made to support the guarantee agreement. The project will reach a financial close in 2012 when project finances will be received from five banks from Singapore and six from Japan;

• The project took 39 months to complete, which makes the beginning of the process to financial close. Compared to other countries, Indonesia’s steam power plant project needed longer time to reach financial close. In Singapore, an average infrastructure project needs 18 months from RfQ to Financial Close, while in Canada and the UK it takes about 18 months and 30 months respectively.50 In this case, Indonesia lags behind other countries. This extra time increased some costs to the private business entities to finance the project.

50 IIGF, “The Role of Indonesia Infrastructure Guarantee Fund for PPP Projects Development in Indonesia”, A Presentation on PPP Days 2012, Geneva, Switzerland.

38

39

Chapter V

Conclusions

.

40

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APPENDIX 1

History of PPP in Indonesia

PPPs or “Kerjasama Pemerintah dan Swasta (KPS)” in Indonesia were initially introduced in the early 1990s for the development of infrastructure projects, especially for toll roads. Due to the increased need for the government to expand a toll road project which had started in 1978, the government began to opt for a financial arrangement under a PPP scheme. Under this scheme, business sector involvement was used to fulfil government targets to accelerate the development of transport infrastructure through partnerships with a state-owned enterprise. PT Jasa Marga has been assigned as the regulator and was the operator until being replaced by a buffer body named the Indonesian Toll Roads Authority (BPJT).

As a legal foundation for private sector participation as well as to attract private sector interest in the construction of roads through PPPs, the government enacted Act no. 13 year 1980. Following this, toll roads began to be managed by the private sector from 1989 from which point private sector participation in toll road operations began to grow, although at a slow pace.

Figure A.1 Toll Roads Development in Indonesia in Three Different Periods

Source: Complex and Uncertain Land

Acquisition: One of Major Obstacles

in Toll Road Public Private

Partnership (PPP) Project in

Indonesia, International Symposium

on Social Management System, 2011

Following the transformation of Indonesia’s administrative system in the era of decentralization, local governments were granted greater authority to organize and manage their own economic development. The Presidential Regulation no.56 year 2011 is expected to be able to debottleneck the PPP project implementation process in Indonesia. The regulation addresses loopholes in previous regulations sets the agenda for open and transparent public priority projects to be implemented; created the mechanism for proposing unsolicited projects and increasing government support. Apart from the main regulations related to PPPs, each line ministry has also published a number of relevant government regulations in order to provide more detailed information to private business entities working on and outside of infrastructure projects. The government has also issued many policies and implemented regulatory reform as an umbrella to speed up PPP project implementation and boost private investment in public services.

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Table A.1 the Evolution of PPP Legal Framework in Indonesia

The Evolutions of PPP Legal Framework in Indonesia

The Presidential Decree No.7/1998 The Government and Private Business Entities in the Development and Management of infrastructure

The Presidential Regulation No. 67/2005 The Government and Private Business Entities Cooperation in the Provision of infrastructure

The Presidential Regulation No. 13/2010 The amendment on the Regulation of the Presidential Regulation Number 67 2005 about The Government and Private Business Entities Cooperation in the Provision of infrastructure

The Presidential Regulation No.56/2011 The second amendment on the Regulation of the Presidential Regulation Number 67 2005 about The Government and Private Business Entities Cooperation in the Provision of Infrastructure

Sources: Compiled from various sources

Table A.2 Indonesia's Infrastructure Laws and Revision

Sector Old Regulation New Regulation

Electricity Act No.10/1985 Act No. 30/2009

Water Resource Act No. 11/1974 Act No. 7/2004

Air Transport System Act No. 15/1992 Act No.1/2009

Railway System Act No. 13/1992 Act No. 23/2007

Roads Act No. 13/1980 Act No. 38/2004

Telecommunications Act No. 3/1989 Act No. 36/1999

Sea Transport System Act No. 21/1992 Act No.17/2008

Oil and Gas Act No. 8/1971 Act No. 22/2001

Waste Management - Act No. 18/2008

Geothermal - Act No. 27/2003

Provision and Utilization of Electricity Power

Govt. Law No. 8/1971

Govt. Law No. 3/2005

Govt. Law No. 26/2006

Downstream Business Activities of Oil and Gas

- Govt. Law No. 36/2004

The Development of the Drinking Water Supply System

- Govt. Law No. 16/2005

Telecommunication Implementation - Govt. Law No. 52/2005

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Toll Roads - Govt. Law No. 15/2005

Sources: Compiled from “Unlocking the Public-Private Partnerships Deadlock in Indonesia”, World Bank Office

Jakarta, May 2011; Public Private Partnership (PPP) Investor’s Guide, Coordinating Ministry for Economic

Affairs, Jakarta, April 2010; “Bagaimana Aturan Main PPP di Indonesia”, May 14, 2009.

Table A.3 Indonesia's Cross-Sectoral Regulations

Content Regulation

The Acceleration of Infrastructure Development National Committee(KKPPI)

Presidential Decree No. 81/2001 renewed by Presidential Decree No 42/2005.

Organization and Management of The Acceleration of Infrastructure Development National Committee(KKPPI)

Coordinating Ministry of Economic Affairs Decree No.01/2006

Land Acquisition for Infrastructure Project Development

Presidential Regulation No.36/2005

Standard Procedure of Risk Management of the Provision of Private Sector’s Infrastructure Projects

MOF Decree No.38/PMK.01/2006 renewed by MOF Decree No.260/2010

Procedure and Criteria for Priority List Arrangement of PPP Infrastructure Projects

Coordinating Ministry of Economic Affairs Decree No.Per-03/M.Ekon/06/2006

Procedures for Project Evaluation of PPP, Infrastructure Projects that Needs Government Support

Coordinating Ministry of Economic Affairs Decree No.Per-04/M.Ekon/06/2006

Land Procurement for Development for General Public Interest

Presidential Regulation No.65/2006 renewed by Law No. 2/2012

Manual Guideline for Operational Procedure of PPP National Development Planning Agency (BAPPENAS) Decree No.4/2010

Presidential Regulation for Providing Guarantee Application

Presidential Regulation No.78/2010

The Implementation Guideline of Providing Infrastructure Guarantee in the PPP

PMK No.26/.011/2010

Source: “Unlocking the Public-Private Partnerships Deadlock in Indonesia, World Bank Office Jakarta, May 2011;

“Bagaimana Aturan Main PPP di Indonesia”, May 14, 2009.

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Table A.4 List of Key Positions and Names collated March 2012

Source: compiled from various sources.

No Position Name

1 Minister of CMEA/ Head of KKPPI Hatta Rajasa

2 Minister of Finance Agus Martowardjojo

3 Minister of Trade/ Head of BPKM Gita Wiyarwan

4 Minister of Home Affairs Gamawan Fauzi

5 Minister of State Owned Enterprises Dahlan Iskan

6 Minister of Nat. Development Planning/ BAPPENAS Armida Alisjahbana

7 Minister of Energy and Nat. Resources (MENR) Jero Wacik

8 Minister of Public Works (MPW) Djoko Kirmanto

9 Minister of Transportation (MT) EE Mangindaan

10 Deputy IV Minister of Infrastructure, CMEA Lucky Eko Wuryanto

11 Deputy Minister of Infrastructure, BAPPENAS Dedy Supriadi Priatna

12 Directorate of Public Partnership Development BAPENNAS/ P3CU Bastary P. Indra

13 Planning and Partnership Office, Electricity Sector MENR Rida Mulyana

14 Indonesian Toll Road Authority (BPJS) MPW Ahmad Ghani Gazali

15 Supporting Body for Water Supply System Development (BPPSPAM) MPW

Mohamad Rachmat Karnadi

16 Center for Studies on Partnership and Transportation Service (MT) Hanggoro Budi Wiryawan

17 Head of Indonesia Investment Agency (PIP) Soritaon Siregar

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APPENDIX II

Best Practices from Singapore and the UK

This section looks at some of the key lessons from two of the world’s leading countries in PPPs, namely Singapore and the UK. Both of these countries could provide a learning model for a new PPP implementing country such as Indonesia. Lessons from the Singapore PPP Model

First, Singapore has been chosen as this country has a notable history in successfully realizing PPP projects. Today, it is often remarked that Singapore is the regional leader in PPPs and as such, is a good model for Indonesia to take best practices from. Singapore has finished 8 projects since the launch of their PPP Handbook in 2004,51 and is now currently set to undertake the largest sports infrastructure PPP in the world, the Sports Hub, as a landmark of their emerging PPP market.52 Singapore’s success stems from several aspects, such as a skilled workforce, an English-speaking population and an ability to attract investors due to a reputation of low levels of corruption.53 Furthermore, table A.5 demonstrates a ranking of countries in the region based on the ease of doing business. Singapore is shown at the number one spot; whereas Indonesia on the other hand is shown to lag behind in many aspects. .

Table A.5 Ease of Doing Business Ranking in Selected Asian Countries

Economy Ease of

Doing

Business

Rank

Starting

a

Business

Dealing with

Construction

Permits

Getting

Electricity

Registering

Property

Getting

Credit

Protecting

Investors

Paying

Taxes

Trading

Across

Borders

Singapore 1 4 3 5 14 8 2 4 1

Hong Kong 2 5 1 4 57 4 3 3 2

Thailand 17 78 14 9 28 67 13 100 17

Malaysia 18 50 113 59 59 1 4 41 29

Vietnam 98 103 67 135 47 24 166 151 68

Indonesia 129 155 71 161 99 126 46 131 39

51 PPP, Ministry of Finance, Singapore. 52 Singapore Sports Hub PPP, Application for Project Finance International (PFI) Awards. 53 Harvey Weaver, PPPs in Singapore

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Cambodia 138 171 149 130 110 98 79 54 120

Source: International Finance Corporation, World Bank Group, Going Business Ranks per June 2011, out of 184

countries

Specifically, the dominant best practices of Singapore in PPPs are outlined below:

• The use of a centralized unit (administered by the Ministry of Finance) makes access easier for both the government and investors alike to refer to policies and regulatory frameworks;

• Follows the best practices from an established PPP-using country, the UK and Australia;54

• Fundamental to the Singaporean model is its vision of establishing itself as a centre of excellence in the region, and this tends to be more driven in its implementations of PPP projects;

• The fact that Singapore began to use the PPP model when the country had already achieved a sound investment grade meant that it was relatively easier to attract investors;

• Started implementing PPP projects in traditional infrastructure projects and gradually moved towards much larger projects such as currently undertaking one of the biggest PPP projects in the world (a good example being the Sports Hub);

• The use of a clear division of roles and risk allocation between the public and private sector, otherwise known as meeting the ‘Supply Attributes’ and ‘Demand Attributes’;

• The Singaporean government employed a team of advisors and experts, including experienced professionals to help structure the PPP tender, which is in part also involves the private sector;

• Meets targeted deadlines, so no added costs burden the private sector.

In conclusion, applicable lessons from Singapore for Indonesia include the need of establishing a dedicated one-stop governmental institution to provide a hassle-free PPP implementation (which Indonesia has already started to develop, the P3CU), clear risk sharing between the public and private sector and involving relevant parties from the outset of project preparation.

54 Singapore borrows heavily from the UK and Australian precedent. Source: Harvey Weaver, PPPs in Singapore: The International Perspective, Ashurst, 2010.; From the experience of the UK with PPP, the Ministry of Finance has identified three major lessons for using PPPs in Singapore, namely to pursue PPP to get better value for money, maintain value for money over the life of the contacts and simplify and standardize the PPP procurement process. Source: Patricia Lam, Public Private Partnerships and the Search for Value, Ethos, July 2004.

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Lessons from the UK PPP Model

Second, the UK is taken as an example of best practices since the country is arguably the world’s most developed PPP model. The UK’s form of PPP, the Private Finance Initiative (PFI), started in 1992 and since then has already realised hundreds of successful projects and is often regarded as a learning benchmark for many countries in the world, including Singapore and Australia.55 Between 1990 and 2009, the UK accounted for some two thirds of all European PPP projects.56 The UK PPP is a very mature market, as indicated from the figure below, and offers abundant learning opportunities for Indonesia.

Figure A.1 Maturity Curves of PPP Countries

Source: Dr Scott Younger OBE Presentation

on Implementing the MP3EI Seminar on the

National Scale, 14 March 2012, British

Chamber of Commerce Indonesia

The best practices from the UK experience are as follows:

• Deregulation of employment and services begun in the 1980s, so privatization has already been undergoing for 30 years;

• The UK has one centralized infrastructure PPP unit called Infrastructure UK (IUK). IUK will develop strategies for infrastructure, acquire options on financing for infrastructure, develop policies on PFI/PPP and other forms of infrastructure delivery, advise the government on priority spending, support Treasury approval processes, become the

55 UNISON, 2005. 56 PPPs in the UK account for 53% of the total value of European PPPs. Source: Economic Financial Report, Public-Private Partnerships in UK – Before and After the Financial Crisis, European Investment Bank, July 2010, Andreas Kappeler and Mathieu Nemoz, p8

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Government’s focal point for infrastructure investors as well as support in the departments for delivery of major projects and programs;57

• The UK uses an assessment system to decide whether to use PPP/PFI (Private Finance Initiative) or conventional procurement (Value for Money assessment);

• Internationally, the UK promotes the use of PPPs by helping with institutional setup, policy support, training courses on PPP, as well as conducting dialogue on PPP units all over Europe;

• All of the UK’s PPP/PFI contracts must comply with “Standardization of PFI Contracts” (SoPC4), developed by the UK Treasury with the private sector, hence it follows a certain regulation and standardization;

• Secondary issues surrounding the implementation of PPP projects, such as the ‘Two Tier Workforce’ issue, should be anticipated through clear control mechanisms on the issues indirectly connected to the PPP projects.

In conclusion, applicable lessons from the UK for the Indonesian PPP model include active and consistent efforts to deregulate in order to entice private sector involvement, to have an assessment system to decide whether to use a PPP model or the traditional procurement system, to anticipate secondary issues that could persist in the PPP implementation and lastly, standardizing contracts so that future projects can make use of clear templates.

The way forward for the Indonesian PPP Model

Although not yet as developed as Singapore and the UK, Indonesia, as depicted by the figure A.1, has the potential to leapfrog and catch up in the maturity curve in PPP implementation. This process will be supported by a large and growing population, good demographics and an emerging middle class. The table below shows comparisons of Indonesia, Singapore and the UK in terms of PPP maturity stages. Indonesia is maturing in the second stage of PPPs development, whereas Singapore and UK have matured through to the third stage.

57 Creating Public Sector Capacity The UK Experience, James Ballingall, February 2012, Infrastructure UK

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Table A.6 Comparisons of Indonesia, Singapore and UK

Stages Indonesia Singapore United

Kingdom

1 Define policy framework √ √ √

Test legal viability √ √ √

Identify project pipeline √ √ √

Develop foundation concepts √ √ √

Apply lessons from earliest deals to other sectors √ √ √

Start to build marketplace √ √ √

2 Introduce legislative reform √ √ √

Publish policy and practice guidelines √ √ √

Establish dedicated PPP units √ √ √

Refine PPP delivery models √ √ √

Continue to foster marketplace √ √ √

Expand project pipeline and extend to new sectors √ √

Leverage new sources of funds √ √ √

3 Fully defined, comprehensive “system” established √ √

Legal impediments removed √ √

PPP models refined and reproduced √ √

Sophisticated risk allocation √ √

Committed deal flow √ √

Long-term political consensus √ √

Use of full-range of funding sources √ √

Thriving infrastructure investment market involving pension funds and private equity funds

√ √

Well-trained civil services utilizes PPP experiences √ √

Source: United Nations Economic Commission for Europe, Guidebook on Promoting Good Governance in Public-

Private Partnerships, 2008, with the authors’ assessment.

On the route to long term maturity, Indonesia has made recent progress in deregulating and establishing institutional support which has helped to ease the PPP process.

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Alongside learning from reflecting on its own experience, Indonesia can also benefit from the lessons learned in Singapore and the UK. Though there is no one-size-fits-all model of PPPs, Indonesia could modify best practices from others to cater the specific needs of Indonesia.

Modifying lessons learnt in the following categories would be especially beneficial:

• Analysing the core aims and objectives of using PPPs; • Forecasting secondary issues that might arise which could cause political, economic or

social disruption; • Making a clear and realistic timeline for the implementation of a particular project; • Strategising for risk division; • Devising plans to attract the private sector to invest.

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Below are relevant case studies from Singapore and the UK.

Box 1 Case Study 1. Tuas Desalination Plant, Singapore

This case study is chosen as an example for a first-time PPP project to be undertaken. Singapore allocates a certain period of time to make the project ripe and suitable for investment and investors. Risk sharing is also a key lesson of the project as seen by the clear division of risks. Meeting targeted deadlines has helped Singapore build a good reputation for investments. The Tuas Desalination Plant was the first PPP project to be executed in Singapore. It was created with the objective of reducing Singapore’s dependence on water imports from Malaysia, as well as to fulfill national demand. Singapore is water stressed hence the importance of this project, making it of high national interest and also the first benchmarking project for future excellence. Loan syndication was possible for the Tuas Desalination Project where the Development Bank of Singapore (DBS) was the lead arranger with three other banks: Standard Chartered, KBC and ING Bank. The project was financed on a limited recourse basis. The recourse was generally provided by payment guarantees to the parties' off-taking the service (i.e. buying water) such as the Public Utilities Board (PUB, Singapore). PUB bore payment risk as they were the monopoly buyer. The investors were more concerned with the financial conditions of the utility boards. The guarantee provided by PUB was highly credible for these two projects due to the strong financial viability and track record of these two organizations. This reduced the risk of default on payments for service delivery. Hence, a high sovereign credit rating with low sub-sovereign risk paved a strong foundation for attractive financing in the case study PPP project. The project took 18 months for tender and pre-qualification. The winner of the competitive bidding of this project was SingSpring PTE Ltd, a consortium of companies. The reason for this being that SingSpring offered the lowest cost of supply over the 20 year contract. Desalination started in September 2005, 2 years after the project.

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Box 1 Case Study 1. Tuas Desalination Plant, Singapore (continued)

During the operations phase of the PPP, the Water Purchase Agreement came into effect for the utility, in this case, the WDA and PUB, and SingSpring as the operator. The agreement consisted of terms under the ‘Take or Pay’ structure, which means that the utility will pay for an agreed amount of water as stated in the agreement, and if the water is not taken, the utility will still have to pay. This mechanism eliminates the demand risk faced by the private sector. The PPP projects developed in Singapore have always used this mechanism. Here PUB is the sole purchaser of bulk water and ensures protection against demand risk of SingSpring. Although bankable, this leaves no dispatch flexibility for the contracting agency. SingSpring assumed financing, design, construction and operation and maintenance risk. On the other side, PUB assumed credit, revenue, inflation and exchange rate risks. The Singaporean government does not provide loans or guarantees, but offers other form of guarantees such as the giving of permits in the form of leases for land access; a guarantee of the minimum purchase of water; freedom to set tariff rates in according with the Consumer Price Index (CPI); the government also guarantees it will make capacity payments in the event there is a change in the monetary law or any new regulations that affect the investment. From this, Abu et al concluded that the contracting agency, in this case PUB, must provide the investors with ‘Supply Attributes’ such as necessary supports from the government, adequate legal and contractual structure within a suitable political environment, minimal guarantees, etc. that can satisfy the ‘Demand Attributes’ of the private sector. It is argued that missing one or more of these categories could cause the project to be delayed or even to fail.

Source: Abu Naser Cwodhury and Dr. Robert L. K. Tiong, Financing and Case Study of Singapore PPP

Desalination Project, China Engineering Consultants Inc. (CECI), 90 April 2011.

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Box 2 Case Study 2. Kirklees Metropolitan Solid Waste Project, UK

This example of PPP is chosen to provide a better picture for a low carbon project undertaken in UK which is relevant for low carbon PPPs in Indonesia. The lesson learnt here is that risk sharing should be done prior to the project realization to provide a guarantee to the private sector.

The Kirklees Metropolitan Council was facing deterioration in their solid waste management system, rapidly diminishing landfill capacity and the prospect of strengthened environmental legislation and the increased cost of land filling. In 1998 Kirklees signed a 25-year joint venture agreement with United Waste Services Limited to deliver integrated waste solution. This resulted in the creation of a special purpose vehicle called Kirklees Waste Service Limited in which Kirklees has a 19% minority voting interest.

The contract involves new capital investment of approximately £41 million, incorporates re-use, recycling and recovery principles and decreases dependency on land filling. The capital infrastructure will include a new waste to energy plant, a multi-materials recycling centre, a transfer loading station, 2 composting plants and 2 household waste recycling centers. £33 million of the total was provided by a Government credit scheme.

The provider is responsible for delivering a waste management solution guaranteed to divert a minimum of 60% of waste from land filling through a combination of re-use, recycling and energy recovery schemes. The payment mechanism has been designed to provide incentives for increased waste diversion. The unitary payment made by Kirklees covers all costs related to service provision.

The provisions for risk sharing / transfer are such that Kirklees assumes only the risk of increases in landfill taxes and the major financial impact of new legislation (subject to a review of impact on cost of services). Additionally the risk of residual value and major changes in waste volumes are shared subject to review agreements.

Source: European Commission Directorate General for Regional Policy, Resource Book on PPP Case

Studies, June 2004.