Bobby Umar, President Director, Bakrie & Brothers: Interview

Interview: Bobby Umar

Why have public-private partnerships (PPPs) in infrastructure projects been relatively minimal?

BOBBY UMAR: Before the 1998 crisis, infrastructure, including electricity, was a government priority, and its support and development of major projects helped the Indonesian economy to grow some 8-10% per year. However, since then, the country has yet to be able to attain the same level of success. The current administration is working hard to improve the regulations and facilitate a more favourable investment climate. PPPs have been identified as one of the main channels to accelerate infrastructure development. The issue now is how to make PPPs an attractive instrument to encourage local and foreign investment. Specifically, the challenge is how to create partnerships where the rate of return is attractive for both the government and investors while ensuring that risk is evenly shared between both parties. Currently, there are very few concession agreements that have been deemed potentially profitable. A move to enhance the capacity of those responsible to construct bankable or commercially viable PPP projects would be recommended. However, of the upmost importance to investors is the issue of land acquisition. Land acquisition is directly linked to the internal rate of return for infrastructure projects as the price of land can fluctuate during the bidding process, negating the usefulness of cash projections and feasibility studies. If a clear law is established governing acquisition it would provide a certain level of financial guarantee so that companies to properly analyse on the commercial viability of a particular project and ultimately stimulate investment. So, while there has been considerable progress in the way in which the PPP model has been developed, as well as in the supporting regulations to facilitate investment, it may be misplaced effort if a bill on land acquisition is not ratified.

The sustainable long-term economic advancement of the country will be directly dependent on the government’s ability to address Should priority be given to energy projects?

UMAR: The supply of energy is paramount. Since the majority of the economy is still very much concentrated in Java, its development will require increased amounts of coal and gas to fuel its growth. The supply and distribution of these vital energy sources needs to be adequately developed by constructing new toll roads and ports. However, these projects must be built through a coordinated effort to maintain efficient costs of production. There is also a need to increase the number of power generation projects. In the last five years, Indonesia has had many difficulties in attracting investment to develop the industry, mostly due to low tariff rates being offered by the state. However, that trend is changing and the increased price of electricity has now made projects profitable. That has stimulated more interest from private investors, including Bakrie & Brothers. Private investment, which is vital to power generation facilities development, will be available as long as the state maintains an attractive tariff rate.

What financing challenges exist for PPP projects?

UMAR: The establishment of Sarana Multi Infrastruktur under the Ministry of Finance and the creation of the Indonesia Guarantee Fund have both alleviated some of the concerns of investors by mitigating our risk and our exposure. However, within the concession agreements, measures that guarantee our investment in the event that there is some sort of contractual default by the government are either not strong enough or are not there at all. Additionally, the government must find ways to assist private companies in raising money to develop infrastructure projects. Either the government should directly provide the necessary funds through its own fundraising mechanisms or it should encourage banks to allocate a certain percentage of their lending to be specifically directed at infrastructure financing. This should especially be the case for state-owned banks that have a specific responsibility