Collaboration between the state and private sector helping to finance construction projects in Indonesia

Despite the major war chest of state funding Indonesia’s government has assembled from fuel subsidy cuts and other revenue raisers, Jakarta is still short of meeting the financial targets necessary to fund its ambitious infrastructure roll out. Finding ways to bridge the gap is thus a key point of discussion in the state capital. That said, one major way to meet this challenge that has already been agreed upon is through the use of public-private partnerships (PPPs).

Frameworks

The importance of private sector development and PPPs has long been outlined clearly in the country’s main long-term development blueprint, the Masterplan for Acceleration and Expansion of Indonesia’s Economic Development (MP3EI). Introduced in 2011, this initiative aims to make the country into one of the world’s developed economies by 2025, with a per capita income of $14,250-15,500. The MP3EI makes reference to a “new way” of thinking, in which cooperation between the public and private sectors via PPPs is to replace reliance on government funding for infrastructure projects. This is also emphasised in the infrastructure sector’s third National Long-term Development Plan (RPJPN) and the 2015-19 National Medium Term Development Plan (RPJMN).

While PPPs have been employed in other countries since the early 1990s, in Indonesia they are a relatively new approach. In infrastructure, such schemes typically involve the government providing capital and/or revenue subsidies, transfers in kind or beneficial arrangements for future revenue collection by the private partner. Special purpose vehicles are usually established as legal entities for the partners to build, operate and manage the project for a specified period.

Balancing public and private interests, which can often differ in the details, is one of the challenges of a PPP, with this sometimes involving lengthy negotiations. At the same time, in the past the government has received criticism from the private sector for expecting private outfits to come up with too much of the funding, especially for infrastructure projects that may not normally be bankable. As a result, as a percentage of GDP, infrastructure investment actually fell in 2008-12, from 5.06% to a low of 4% in 2010, then back up to 4.99% at the end of that period. In 2014, the percentage was still lower than in 2008, at 5.04%, even if the total amount was more than twice as much.

In 2014 figures from the National Development Planning Agency (Bappenas) show that Rp70trn ($5.8bn) of the Rp521.7trn ($43.12bn) invested in infrastructure was from the private sector, with an additional Rp83.6trn ($6.9bn) from state-owned enterprises (SOEs), Rp206.6trn ($17.1bn) from the central state budget (APBN) and Rp161.5trn ($13.35bn) from local government budgets. Private sector funding in infrastructure thus stood at around 13.4%, a proportion that has declined slightly over the years – in 2010 the proportion had been 16%, while in 2007 it had been 23.6%.

Indeed, it is in establishing this public-private balance, and codifying it within a legal framework, that has in the past been one of the chief difficulties for construction in Indonesia. Regulatory discrepancies between state institutions, local governments and the central government, as well as various legislative bottlenecks, have hampered the implementation of PPPs, contributing to the slow pace of infrastructure evolution. The signs are, however, that all this is now changing, with the government adopting a new approach and taking on a bigger portion of the overall funding.

Institutions

One of the most important changes now under way on the administrative side is in the reorganisation of governmental responsibility and the placing of PPP execution under the fiscal authorities, rather than with those responsible for planning. Indeed, in the past PPP rollout has been generally under the control of Bappenas. Globally, however, PPP units have tended to be more successful when under control of treasuries or ministries of finance, as this status gives them extra financial leverage. Thus, in July 2014 the government formed the Committee of Infrastructure Priorities Development Acceleration (KPPIP) and placed it under the Ministry of Economic Affairs. The KPPIP specifically targets social and physical infrastructure PPP projects and the regulations surrounding them.

New Avenues

The Ministry of Finance (MoF), meanwhile, announced in October 2014 that it had completed a pilot project to establish a PPP centre, with this to handle future PPP project preparation and auction. By March 2015 the centre had completed staffing, appointing a head from within the MoF and moving towards full operational establishment. The centre was also working on producing standardised PPP documents and addressing past issues of regulatory discrepancy.

A number of other key organisations have also been established to smooth the path of PPPs and of infrastructure projects in general. These are Sarana Multi Infrastruktur (SMI) and Indonesia Infrastructure Finance (IIF) to facilitate project financing; PT Penjamin Infrastruktur Indonesia (PII) for boosting project creditworthiness, and the Government Investment Centre for financing land acquisition. The MoF has also set up a viability gap funding mechanism. This should help to realise a variety of strategic projects, such as housing. William Honoris, president-director of Modernland Realty, told OBG, “The government is aiming to have 1m affordable houses built per year for the lower-income Indonesian population. However, the key is to find the financing sources to make these projects viable.”

The other major change is in the proportion of government funding behind the projected financing of the infrastructure roll out. In February 2015 Indonesia’s parliament approved a revised annual budget for 2015, with state spending set at an historic high of Rp1980trn ($163.7bn). In this, capital expenditure is almost doubled, with the Ministries of Public Works and Transportation both receiving budget increases. The budget allocation for infrastructure was up nearly 50%, at Rp290trn ($24bn), while at the same time, the budget allows for a reduction in dividend payments by the SOEs, strengthening their financial position.

In early 2015 Bappenas was also working on the preparation of a complete PPP Book, outlining all the projects to be offered, with this to be presented to the KPPIP, after which the PPP centre would choose the high priority projects and begin work on them, from initial feasibility studies to final auction.

According to statements from the PPP centre’s director, Freddy Saragih, at the March 2015 Asia Pacific Economic Cooperation PPP experts meeting in the Philippines, some 10 PPP projects are now in the pipeline; three in power, three in water supply and four in transportation. Details of many of these had already been widely circulated, as they had been in planning for some time. Indeed, Bappenas officials had floated some 43 infrastructure projects in November 2014 with private investors, worth some $52bn. This list represents potential projects, and includes 10 major airport PPPs, and much more besides. The projects likely to roll out in 2015 also include the 2700km Trans-Sumatran toll road.