Tweaking infrastructure financing
This article has been translated by PwC Indonesia as part of our Indonesia Infrastructure News Service. PwC Indonesia has not checked the accuracy of, and accepts no responsibility for the content.
Bisnis Indonesia - Utak-atik pembiayaan infrastruktur
29 August 2024
By Lorenzo A. Mahardhika and Surya D.A. Simanjuntak
Unlike the trend of increasing infrastructure spending over the past 10 years, except during the COVID-19 pandemic, President Joko Widodo's administration has decreased infrastructure spending in the transition period in the Draft State Budget (RAPBN).
Infrastructure spending for next year is planned to reach Rp400.3 trillion, which is lower than the budget ceiling of Rp423.8 trillion in the 2024 State Budget (APBN).
However, amid the plan to allocate less APBN for infrastructure, President Jokowi has issued two infrastructure financing regulations to provide more alternatives for private parties involved in public infrastructure development.
The first regulation is Presidential Regulation Number 66/2024 on Amendment to Presidential Regulation Number 32/2020 on Infrastructure Financing through Limited Management Right and the second regulation is Presidential Regulation Number 79/2024 on Funding of Infrastructure Provision through Land Value Capture.
The land concession scheme is a management rights scheme on infrastructure assets designed to enhance the operational functions of state capital participation or state-owned enterprise (SOE) assets.
In this scheme, the government typically receives funding through an upfront payment, which will be used to develop new infrastructure.
Meanwhile, land value capture is a region-based financing alternative that leverages the increase in regional value.
For instance, in a region where land has little value, an area is developed that increases the land's value. This increased value is then used as the basis for the financing scheme.
“These two new financing schemes by the private sector were launched to reduce the load on the APBN from infrastructure spending and to accelerate national strategic projects,” Coordinating Ministry for Economic Affairs Secretary Susiwijono Moegiarso said at the launch of the regulations on creative financing and infrastructure on Wednesday (28/8).
He noted that the requirement for infrastructure financing continues to increase year by year. In the 2015-2019 National Medium Term Development Plan (RPJMN), the total infrastructure funding requirement reached Rp4,796.2 trillion, with Rp1,751.4 trillion coming from the private sector.
In the 2020-2024 RPJMN, the total infrastructure funding requirement reaches Rp2,707 trillion. The 2025-2029 RPJMN indicates that infrastructure funding will increase. Susiwijono mentioned that the government plans to increase the portion of infrastructure financing from the private sector in the 2025-2029 RPJMN during the first administration of President-elect Prabowo Subianto.
“The point is that the infrastructure financing requirement was quite large at Rp6,445 trillion [in the 2020-2024 RPJMN]. It is impossible for this to be fully financed by the APBN or the APBD,” Susiwijono said.
Regarding the implementation of the land concession scheme and the land value capture, he mentioned that a derivative regulation from the Coordinating Minister for Economic Affairs will be issued. According to him, there are currently several pilot projects that have implemented these new schemes, such as the construction of Batam-Bintan Bridge and Semarang Harbour Toll Road, with investment values of Rp14.35 trillion and Rp17.5 trillion, respectively.
Coordinating Minister for Economic Affairs Airlangga Hartarto stated that the land concession scheme, also known as asset recycling, has been implemented by several countries, such as Australia in 2014 for Melbourne Port and Sydney Airport.
Meanwhile, land value capture is a region-based funding method that capitalises on the increase in land value. This increase in land value is caused by infrastructure investment in an area. The land value capture scheme has also been implemented in various countries, such as the UK, Hong Kong, and Japan.
Airlangga noted that the launch of these creative infrastructure financing regulations is only the first step.
“The implementation of these regulations must be supported by all parties, including ministries/institutions, regional governments, SOEs, and regional state-owned enterprises (BUMDs),” he stated.
Not privatisation
Special Staff for Regional Development, Infrastructure Development, and Investment Acceleration to the Coordinating Ministry for Economic Affairs, Wahyu Utomo, stated that these two creative infrastructure financing schemes are not privatisation.
He explained that the land concession scheme provides asset management rights to a business entity for a certain period of time. However, the asset being managed remains owned by the government or the SOE.
“Privatisation means the assets are lost to the business entity. In this scheme, we grant management rights for assets that are still owned by the government or SOEs,” he explained.
He mentioned that the government does not need to allocate funds for maintenance or asset development costs during the management agreement period.
He noted that the types of infrastructure that can implement the land concession scheme vary, including toll roads, railways, airports, healthcare infrastructure, and housing.
Meanwhile, an economist from the Centre of Reform on Economics (Core), Yusuf Rendy Manilet, expressed doubts that these alternative infrastructure financing schemes will significantly reduce the load on the APBN.
“Even though these schemes appear to be a win-win solution for both the government and the private sector, in their implementation, there are risks that may emerge later,” he stated.
For example, he mentioned that risks can surface when a state or SOE asset is not managed well by the private company, potentially becoming a burden for the government in the future.
Besides that, it takes time before an infrastructure project becomes profitable, so the private company must be experienced and possess excellent cash flow to manage the asset during the agreed period.
