As a regulator and facilitator for Indonesia infrastructure projects, the Government has invited participation by the private sector through Public Private Partnership (“PPP”) arrangements. Public Private Partnerships are generally characterized by a private sector entity raising finance to construct an asset required by Government, and providing a facility or service in return for a contractual revenue stream from Government or users.
Regulatory and policy reform has gradually been put in place to create a more conducive environment for private sector participation, including:
- PPP Directives: Presidential Regulation No.67/2005 has recently been revised by Presidential Regulation No.38/2015 to stimulate investment in PPP projects by expanding eligible sectors and offering more incentives.
- Land acquisition bill: Law No.2/2012 and Presidential Regulation No.71/2012 regarding Land Acquisition for Public Interest, effective as of 2015, limits the land acquisition procedure to 583 days, and allows for revocation of land rights in the public interest.
- BKPM One Stop Service: BKPM, the Investment Coordinating Board, now provides a centralised licensing point for certain sectors, which should increase the efficiency of investment.
These measures are supported by a number of public finance institutions such as the Indonesia Infrastructure Guarantee Fund, Indonesia Infrastructure Finance Company (PT SMI), and PT Indonesia Infrastructure Finance.
PPPs are complex to structure and implement (see Figure 1), but provide a number of opportunities for private sector companies to participate:
- Investors provide equity for construction and other costs and receive a revenue stream in return
- Banks provide loans for construction and other costs and receive an interest stream in return
- Construction Companies build facilities, often under a single Lump Sum Turn Key contract
- Operating and Maintenance Companies run facilities once they are operational
- At the centre of these entities is a legal vehicle known as a Special Purpose Company, with which all parties contract
The figure below illustrates this structure.
Figure 1: Typical PPP Structure
Pursuing PPP projects requires a significant investment of time and money. It follows that careful project selection is key to success. The needs of public sector entities are also different from those of the private sector and the process for each can vary greatly.
Understanding these disparities is vital to tailoring an approach to meet the needs of the public or private entities. Investors in particular need to consider:
- the extent of the public sector’s commitment;
- the status of the legal and regulatory frameworks supporting PPPs and concessions;
- the effectiveness and transparency of the tender processes;
- the capacity of the government authorities responsible for project implementation;
- subsequent supervision, pricing, and the opportunity for partnerships with credible players; and
- sustainability management which may become a requirement or bidding differentiator.
To learn more about our Advisory services for PPPs, click here.
