75094 lA WA -ä1 THE WORLD BANK OFFICE JAKARTA Indonesia Stock Exchange Building, Tower 11/12-13th Fl. JI. Jend. Sudirman Kay. 52-53 Jakarta 12910 Tel: (6221) 5299-3000 Fax: (6221) 5299-3111 Printed in March 2011 Unlocking the Public-Private Partnerships Deadlock in Indonesia is a product of staff of the World Bank. The findings, interpretation and conclusion expressed herein do not necessarily reflect the views of the Board of Executive Directors of the World Bank or the government they represent. The World Bank does not guarantee the accuracy of the data included in this work. The boundaries, colors, denomination and other information shown on any map in this work do not imply any judgment on the part of the World Bank concerning the legal status of any territory or the endorsement of acceptance of such boundaries. Photo cover by Hardini Puspasari Unlocking the Public-Private Partnerships Deadlock in Indonesia AndiWbsn,Jf emnadHnjoHh Table of Contents Abstract Acknowledgements iv About the Authors v Disclaimer v Chapter 1 Indonesia's PPP Program 1 1.1 Legal and Regulatory Framework 1 1.2 PPP Support Facilities 4 1.3 Indonesia's PPP Program - Status and Summary 5 Chapter 2 Benchmarking and Lessons Learned 7 2.1 Political Leadership 7 2.2 Lead PPP Agency 7 2.3 Direct Fiscal Support 8 2.4 Regulation 8 2.5 Project Selection 9 2.6 Structure for Project Development and Implementation 11 Chapter 3 Indonesia's PPP - The Way Forward 13 Challenges 13 Recommendations 14 Table 1.1: Revision of Infrastructure Laws 2 Table 1.2: Regulatory Framework that Governs PPP 3 Figure 1.1: Current Indonesian PPP Institutional Framework 6 Figure 3.1: Proposed Project Selection Process 16 Figure 3.2: Proposed Project Preparation Process 18 Unlocking the Public-Private Partnerships Deadlock in Indonesia Abstract The challenges faced by Indonesia in creating a robust public- private partnership (PPP) program are similar to those faced by many other middle-income countries. This paper provides a gap analysis for Indonesia's PPP framework based on lessons learned and good practice from countries with successful PPP programs. It identifies, in particular, the need for the government to: 1. Select good projects for PPP, rather than only complex ones that are less likely to attract private partners. * Establish a list of projects by a limited cabinet meeting and stick to it - issuing different lists of projects and holding showcase summits with open agendas tends to confuse the market. * Keep those projects on track for PPP - allowing the contracting agencies to develop prospective projects directly, or to award them without competition leads investors to question the commitment and resolve of the government to its own PPP process. 2. Prepare projects well, using the Ministry of Finance to provide access to: * A team of PPP experts to help contracting agencies develop projects. * Project preparation funding to help pay the high costs of preparation. * Viability gap funding to make projects more affordable and bankable by defraying some of the capital costs. Acknowledgements This paper has benefitted from input and advice from Indonesian PPP experts and practitioners, many of whom gathered at workshops in the Dharmawangsa hotel in February 2010 and at the Mulia Hotel in August 201 0.The authors would like to express special thanks to Mr. Farid Harianto (Office of the Vice President), Mr. Luky Eko Wuryanto and Mr. Wahyu Utomo (Coordinating Ministry for Economic Affairs / CMEA), Mr. Dedy S. Priatna and Mr. Bastary Pandji Indra (National Development Planning Agency / BAPPENAS), Mr. Himawan Hariyoga and Mr. Tamba P Hutapea (Indonesia Investment Board / BKPM), Mr. Suyono Dikun and Mr. Bambang Bintoro Soedjito (Advisor to the World Bank and BAPPENAS), Mr. Soritaon Siregar (Government Investment Center / PIP, Ministry of Finance), Mr. Freddy R.Saragih and Mr. Brahmantio Isdijoso (Risk Management Unit, Ministry of Finance), Mr. Sumaryanto Widayatin (Ministry of State Owned Enterprises), Mr. Bambang Eko Hargianto and Mr. Agita Widjayanto (Indonesia Toll Road Authority / BPJT, Ministry of Public Works), Ms. Sinthya Roesly (Indonesia Infrastructure Guarantee Fund / IIGF), and Ms. Ema Sri Martini (PT. Sarana Multi Infrastruktur / SMI). The authors would also like to thank colleagues at the World Bankfor their support and inputs, including Sophie Sirtaine, Clive Harris, Junglim Hahm, Aldo Baeitti, Jose Luis Guach, and Franz R.Drees-Gross. Inputs were also provided by the consulting firms Castalia, Rebel, and Suyono Dikun. Finally, this paper would not have been possible without generous financial and technical support from AusAID, and in particular the assistance of Mr. Benjamin Power, Mr. Andrew Dollimore, and Mr. David Hawes. * Unlocking the Public-Private Partnerships Deadlock in Indonesia About the Authors Andri Wibisono is an Infrastructure and PPP Specialist in the Sustainable Development Unit in the World Bank's Indonesia Country Office. Hongjoo Hahm is Country Manager in the World Bank's Croatia Country Office and formerly headed the infrastructure unit in the World Bank's Indonesia Country Office where he oversaw the Bank's PPP agenda in Indonesia. Jeff Delmon is a Senior Infrastructure Specialist in the Finance, Economics and Urban Department, and core member of the World Bank's Global ExpertTeam on PPR Disclaimer The findings, interpretations, and conclusions expressed herein are those of the authors and should not be attributed in any manner to the World Bank, its affiliated organizations, or to the members of their Board of Executive Directors or the countries they represent. Photo by Hardini Puspasari Unlocking the Public-Private Partnerships Deadlock in Indonesia Photo by Hardini Puspasari Indonesia's PPP Program After more than four decades of structured, 1.1 Legal and Regulatory public-sector-oriented development undertaken through a series of five-year Framework development plans, in the early 1990s the government of Indonesia began to invite Indonesia ischanging many of its infrastructure private sector investors to participate as laws (see Table 1.1), dismantling public partners in infrastructure development. By monopolies and opening the infrastructure the end of 1997, Indonesia had attracted over sector and market to private sector investors. US$20 billion in public-private partnership Under the new legal framework, the private (PPP) investments in electricity ($10.2 billion), sector can invest in the development and telecommunications ($8.4 billion) and operation of financially viable infrastructure transport ($2.1 billion). But projects were often projects, without being obliged to enter into awarded based on patronage, and government joint ventures with state-owned enterprised support was provided in an ad hoc manner. (SOEs). Some projects encountered difficulties, such as the lengthy tariff renegotiations between the central government and the country's 27 independent power producers following the Asian financial crisis of 1997-98. Since then, PPP has struggled to take root in Indonesia, despite the government's best efforts to promote and develop a PPP framework. This chapter details the key institutions and mechanisms introduced by the government to mobilize PPP in Indonesia since 2000. Photo by Hardio Puspasari e * Unlocking the Public-Private Partnerships Deadlock in Indonesia Indonesia's PPP Program Old Law New Law (State Monopoly) (Open Market) Telecommunications Law No. 3/1989 Law No. 36/1999 Oil and Gas Law No. 8/1971 Law No. 22/2001 Roads &Toll Roads Law No. 13/1980 Law No. 38/2004 Railways Law No. 13/1992 Law No. 23/2007 Sea Transport & Ports Law No. 21/1992 Law No. 17/2008 Air Transport &Airports Law No. 15/1992 Law No. 1/2009 Land Transport Law No. 14/1992 Law No. 22/2009 Electricity Law No. 15/1985 Law No. 30/2009 Geothermal Law No. 27/ 2003 Water and Sanitation Law No. 11/1974 Law No. 7/2004 Source: Dikun (2010) In 2001, Keppres No. 81/2001 was issued to In 2005, Perpres No. 67/2005 was issued to establish an inter-ministerial coordinating replace the outdated Perpres No. 7/1998, and committee to accelerate infrastructure establish the principles, policy and modality development through greater private-sector Of private-sector participation in infrastructure involvement. The KKPPI (Committee for the development. Perpres 67 was subsequently Acceleration of Infrastructure Provision) amended, in 2010, by Perpres No. 13/2010 is designated to promote and champion to provide better clarity and support for the infrastructure provision by means of PPP The PPP framework as it applies to SOEs and local KKPPI's main functions include coordination governments, and to clarify the provision of infrastructure policy and planning, with the of government support and government line ministries, SOEs and local governments guarantees. (hereinafter the "contracting agencies") responsible for project preparation and implementation. Photo by Hardini Puspasarp Unlocking the Pubic-Private Partnerships Deadlock in Indonesia Indonesia's PPP Program Sector Content Issue Date Keppres No.81/2001 National Committee on the Acceleration of June 21, 2001 Infrastructure Development (KKPPI) Perpres No. 36/2005 Land Acquisition for Infrastructure Sevelopment May 3, 2005 Perpres No. 42/2005 Renewal of Keppres No. 81/2001 May 23, 2005 Perpres No. 67/2005 Public Private Partnership in Infrastructure Nov 9, 2005 Provision MOF Decree No. 38/ Standard Procedure of Risk Management of May 19, 2006 PMK.01/2006 Infrastructure Provision by Private Sector. Perpres No. 65/2006 Renewal of Perpres 36/2005 June 5, 2006 CMEA Decree No. Procedure and Criteria Concerning of Priority of June 22, 2006 Per-03/M.Ekon/06/2006 PPP Infrastructure Projects CMEA Decree No. Procedures for Project Evaluation of PPP June 22, 2006 Per-04/M.Ekon/06/2006 Infrastructure Projects Requiring Government Support Perpres No. 36/2005 Land Procurement of Development June 5, 2006 Amended by Perpres Implementation for Public Interest No. 65/2006 Perpres No. 91/2007 Renewal of Perpres No. 86/2006 Sept 19, 2007 Perpres No. 13/2010 Renewal of Perpres 67/2005 Jan 28, 2010 Bappenas Minister Operation Guideline Manual for PPP in June 21, 2010 Decree No.4/2010 Infrastructure Perpres No. 78/2010 Presidential Decree for Guarantee Application Dec 21, 2010 MOF Decree No. Renewal of MOF Decree No. 38 Dec 31, 2010 260/2010 Source: Dikun, 2010, and other sources Photo by Hardini Puspasari Unlocking the Public-Private Partnerships Deadlock in Indonesia Indonesia's PPP Program TheRiskManagementUnit(RMU)oftheMinistry PPP projects were designed without estimates of Finance (MOF) was formed by Minister of of the cost of land acquisition and without Finance Decree No.518/KMK.01/2005.The RMU resettlement/social impact assessments. In evaluates and determines whether specific addition, the land valuation/assessment was infrastructure transactions qualify for public not done in a transparent manner, resulting in support or any other nonfinancial assistance. extended negotiations, distortions, unequal In May 2006, the Minister of Finance issued treatment of project affected peoples, and Decree No. 38/PMK.01/2006 on the standard land speculation. operating procedures for risk management of infrastructure provision by the private sector. In response, the government sought to With the issuance of Perpres 13/2010, the provide financial support for private land government issued an amendment of PMK 38 acquisition and to clarify laws and regulations (MOF Decree No. 260/ 2010). on both public and private land acquisition. The government's draft Land Acquisition Law, intended to make the process "faster" and "fairers'is now in parliamentary consultation and is expected to be approved and go into effect in 2011. In the meantime, in 2008 the government established a Land Acquisition Revolving Fund (LARF) in the national budget combined with a cost-capping scheme in which the LARF would pay any land costs that exceed by more than 110% those agreed in the concession agreement. The government also established a Rp 6 trillion Land Fund to finance private companies acquiring land for 2010 (Rp 3.8 trillion) and 2011 (Rp 2.2 trillion). Photo by Hardini Puspasari Project Development Facility. A Project 1.2 PPP Support Facilities Development Facility (PDF) was created to assist in providing needed funds for examining The government of Indonesia has introduced whether a project is indeed viable (feasibility various funds and financing facilities to study) before it is brought to tender. The support PPP transactions. Principal among PDF is funded by the Asian Development these are: Bank (ADB) and managed by BAPPENAS. PDF management has encountered numerous Land Fund. In many countries, the public problems, and has been relatively ineffective sector acquires the land needed for large to date. There are currently discussions on infrastructure PPP projects as part of its requiring the winning bidder to replace the contribution to project investment costs. This funds expended by making a payment to was the practice in Indonesia during the the PDF. In doing so, the PDF will become 1970s. However, in the case of toll roads, land revolving and sustainable. acquisition became a major constraint after 1996, when this responsibility was transferred Guarantee Fund. In December 2009 the to the private sector. As a result, many toll road government established the PT Penjaminan I Unlocking the Pubtic-Private Partnerships Deadlock in Indonesia Indonesia's PPP Program Infrastruktur Indonesia (PT. P11 Persero), PDF to fund project preparation. also known as the Indonesia Infrastructure Public Private Participation Central Unit Guarantee Fund, (IIGF), with a seed capital (P3CU) to support selection of well- of Rp 1 trillion from the state budget (APBN) developed PPP projects. based on Government Regulation No. MOU between the Ministry of Finance, 35/2009. The IIGF will provide a single window BAPPENAS and the Coordinating for guarantees for PPP projects and is now Investment Board (BKPM) to define their operational. roles and responsibilities and accelerate the PPP process. PT. SMI. A state-owned enterprise called PT. Sarana Multi Infrastruktur (PT. SMI), a Figure 1.1 shows the PPP institutional structure nonbanking financial institution dedicated in Indonesia. This structure was intended to specifically to infrastructure financing, was empower the Risk Management Unit at the established in February 2009 through a Ministry of Finance as the single decision government regulation. making authority to provide public support for any PPP investment. This arrangement Infrastructure Financing Facility. PT. has successfully moved Indonesia away from Indonesia Infrastructure Financing Facility (PT. the practice of individual line ministries or 1lF) a privately owned subsidiary of PT. SMI, agencies issuing government guarantees, was established in January 2010. PT. IIF will and consolidated such guarantees in a single provide local currency project financing in agency that will only provide government the form of loans, equity, and nonpolitical risk support for projects that are in accordance with guarantees. PT. IIF has start-up capital from government PPP laws. the International Finance Corporation (IFC), ADB, DEG and the World Bank. However, while Indonesia has many PPP project proposals, most are not well prepared, 1.3 Indonesia's PPP Program and to date no successful PPP project has been developed within the current framework. Status and Summary The line contracting agencies do not place sufficient priority on selecting good PPP Indonesia has invested significant effort in projects, nor do they invest the resources developing PPP institutions and financing needed to develop the available projects on a facilities, yet still has an overly complex PPP best practice basis. The RMU has not given any framework that lacks a clear lead agency. The financial assistance to contracting agencies to main institutional and financing elements support a PPP transaction.The government has developed include: on many occasions identified lists of "priority" * KKPPI to assist with high level coordination projects, but these are rarely well developed of PPP issues. or financially viable. Indonesia lacks a pipeline * RMU to manage government contingent of financially viable, technically feasible, legally liabilities associated with PPP projects. reliable projects to attract strong private * PT. SMI and PT. IIF to mobilize long-term, investors. local currency financing for PPP projects. * IlGFtosupporttheprovisionofguarantees The complexity of this current framework is for PPP projects. exemplified in the following diagram. * Unlocking the Public-Private Partnerships Deadlock in Indonesia Indonesia's PPP Program II National Committee of Policy for Infrastructure Acceleration (KKPPI) Chairman: I.I Coordinating Minister for Economic Affairs Co-chair: II Minister of Planning/ BAPPENAS State inisterof LineMinisters Minister of Secretary 1: Deputy Min, Infrastructure CMEA SHo Affa Secretary 2: Deputy Min. Infrastructure, Enterprise MPW, MOT, Hom BAPPENAS PPP Nodes0 LocalenovtlPUnitt(P3ProjectkIManPT.meMt /niF Project identification and preparation, Monitoring and Quality control, oe: N Facilit Mag v i n Gv - Project identification Govtso SupprtpPlic Preparation for tender documentation spot rs etrfcltto,TascinMntrn - Transaction and post transaction process Lnis SOEProject Loa0ot rjc Project IIF PT. SMI/lIFF Project devt. Project devt. Poetv.adDevelopment Asessing and and Monitoring and Monitoring MoioigFacility Ma nagng Govt Financing Support Government Contracting Agency (GCA) Project Facilitation Source: BKPM Presentation Photo y.HMrinitorpasa Photo by Hardini Puspasari Unlocking the Pubtic-Private Partnerships Deadtock in Indonesia Benchmarking and Lessons Learned Indonesia's PPP program has struggled monitors their performance. This 12-member compared with those in other countries. committee is headed by the Indian prime Indonesia's difficulties lie in the many subtle minister. but important differences in the areas of project selection and preparation, leadership By contrast, while the president of Indonesia and effective coordination, integration of supports PPP and has made high-profile fiscal decisions in the PPP process, and the statements about its importance, he does quality and type of transaction advisors being not formally select projects. In a bureaucracy hired. as large and fragmented as Indonesia's, this formal level of executive leadership can be 2.1 Political Leadership essential to achieving effective coordination. Inmostcountrieswith successful PPPprograms, 2.2 Lead PPP Agency the program and initial projects were strongly and personally backed by the president or All countries with a strong PPP tradition have prime minister. For example, in both Colombia a single, powerful agency that coordinates and the Philippines, the president chairs the PPP decisions, creating a unified government inter-ministerial committee responsible for approach that ensures consistency in policy PPP projects. In the Netherlands, Australia and project development. In the Netherlands and the United Kingdom, decisions on major and South Africa, as well as the United PPP projects, as well as the overall PPP Kingdom and Australia, the lead agency is program, are made by the cabinet, which is housed within the ministry of finance. This chaired by the prime minister. In India, the works well in these countries because the Cabinet Committee on Infrastructure (CCI) finance ministry has dlignificant influence decides on infrastructure sector projects and over fiscal expenditure decisions, as well as * Unlocking the Public-Private Partnerships Deadlock in Indonesia Benchmarking and Lessons Learned a culture of scrutinizing major infrastructure duplication and coordination problems. In projects carefully. Finance ministries also the benchmark countries, one single agency tend to bring a value-for-money mind-set to has the responsibility for promoting PPP decisionmaking and can exert influence over Moreover, governments in the benchmark other agencies through their control of the countries manage to combine the decision budget. In Colombia, South Korea and the on whether to do a PPP with a decision on Philippines, PPP policy and decisionmaking is what fiscal support to provide, since most coordinated by the national planning agency. PPPs need some fiscal support to be viable. In South Korea, PPP is led by the Ministry of The Indonesian approach results in a decision Planning and Budget, which chairs the Private to proceed with a PPP on a theoretical level, Investment Project Committee. In Colombia, but real progress is not possible until the fiscal the National Council on Economic and Social support decision is made. Policy (Conpes) is responsible for major decisions involving economic and social 2.3 Direct Fiscal Support development, and the National Planning Department (DNP) acts as its executive arm. In the Netherlands and South Africa, the amountofdirectfiscal support toa projectcan be as much as 100 percent of the cost of the project-usually in the form of an availability payment made over the life of the facility. Such high levels of direct fiscal support are common for education and health facilities and government accommodation PPPs. In India, the Government provides direct fiscal support of up to 40 percent of cost or the amount needed to make them commercially viable (whichever is less), provided the project is justified on a cost-benefit basis. In contrast, many Indonesian government Photo by Hardini Puspasa i officials believe that PPPs should be largely self-funded, with infrequent and strictly In Indonesia, there is no clear lead agency for limited use of direct government support. The PPPThe KKPPl isco-chaired bytheCoordinating unintended consequence of this approach is Minister for Economic Affairs and the State that opportunities to stretch public funds and Minister for National Development Planning! increase their impact are lost, time is wasted Chairman of BAPPENAS.The result of this dual in preparing projects that never proceed chairmanship structure is that coordination at because direct fiscal support is unavailable, the committee level is more difficult than in and projects still continue to obtain hidden the benchmark countries with a similar central subsidies through contingent support anyway. planning agency structure. In addition, the dual chairmanship deprives Indonesia's PPP program ofbinstitutionalized high-level political 2.4 Regulation support, and blurs control and accountability. The KKPPI's Secretariat comprises staff from While many important new regulations are in CMEA and BAPPENAS, creating unnecessary place in Indonesia, these reforms have not yet a Unlocking the Pubic-Private Partnerships Deadlock in t ldonesia Benchmarking and Lessons Learned gone far enough in terms of establishing clear that represent a higher level of government and consistent rules, policies and guidelines regulation, and the plethora of other rules. for PPPs. Of course to put expectations in Not surprisingly, when processes are unclear, perspective, it should be recognized that rules contradictory, responsibilities blurred, many countries, including PPP leaders such and fiscal support limited, implementing as the United Kingdom and Australia, also agenciesarereluctanttoproposePPPprojects made mistakes in connection with their early and serious investors are even more reluctant PPP projects and used the lessons from these to spend valuable resources on project experience to improve their subsequent assessment. efforts. Such ongoing enhancements are often achieved through issuance or revision of 2.5 Project Selection detailed implementing rules and procedures. In Colombia, Conpes (the equivalent of the The inter-ministerial committees that make KKPPI) has issued more than 100 written PPP decisions in other countries are chaired policy decisions building on and improving by the president or prime minister. These the PPP legal framework as it gains experience committees have a value-for-money ethos, implementing PPP projects across multiple viewing PPPs primarily as a way to increase the infrastructure sectors and with evolving total value of services to the public, and not as approaches to financing. a substitute for public finance. For example, in the Philippines, the National Economic Development Agency (NEDA) runs a process that brings together the Department of Financeand the sectoragency, and presents all relevant information to a powerful committee of ministers, who decide simultaneously on whether a project should go ahead, whether it should be a PPP, and what fiscal support it should be given. In contrast, the criteria and priorities on which BAPPENAS selects PPP projects are not always sufficiently clear or formally defined. Furthermore, the selections are made without a concomitant decision by the MOF to provide financial support to Photo by Hardini Puspasarl the projects. As a leading institution in the The PPP framework in Indonesia is not selection of PPP projects, BAPPENAS still supplemented by such a detailed and helpful has an engineering and physical-planning body of implementing rules and procedures mentality, viewing PPPs primarily as a way to as used in the benchmark countries. In obtain physical infrastructure using private addition, many of Indonesia's regulations rather than public funds. conflict with each other, are ambiguous, or in some way hinder rather than help In the benchmark countries, before being PPP projects. In particular, there appear to considered as a PPP candidate, a project be significant conflicts between the PPP must be shown to be both technically and framework established by Perpres No.67/2005 economically feasible. PPP value drivers will and Perpres 13/2010, the sector regulations be identified and risks allocated efficiently as * Unlocking the Public-Private Partnerships Deadlock in Indonesia Benchmarking and Lessons Learned part of designing a PPP contract structure, financial models that compare the PPP option and this work is typically completed before with the public-sector comparator to confirm the procurement phase. Contracts will that value for money is being achieved. In the be drafted to international standards. Netherlands, the burden of proof has actually Implementing agencies will be assisted by been switched because the PPP option is world-class transaction advisors to prepare assumed for projects above a certain size. the contracts and other bid documentation, It is then up to the implementing agency to market the transaction and run the bid demonstrate affirmatively why a conventional process. In contrast, Indonesia frequently approach would deliver bettervalue for money prepares PPP projects before there is anything than the PPP approach. In Colombia and the approaching a feasibility study. Indonesia has Philippines, the planning agency staff are not yet implemented an appropriate process responsible for PPP coordination with a mind- for dealing with unsolicited proposals. Risk set driven by economics and maximizing value modeling or risk allocation is still weak and for money for government expenditures. Staff contracts fall well short of international in the PPP unit are qualified in economics and standards for clarity and robustness. For finance, and supported by external advisors example, compensation on termination is with strong transaction and project finance often poorly defined in PPP contracts and fails experience. to consider lenders'exposure sufficiently. In Indonesia, project selection is based In successful programs, the lead agency is on political imperatives to fill PPP books, focused on maximizing the value achieved showcase PPP at infrastructure summits, from government expenditures. This mind-set or otherwise demonstrate progress where isrooted in theagency's role in economic policy there is little. BAPPENAS approaches project development and project selection (in the selection with a planning and engineering, case of the planning agencies) or safeguarding rather than value for money mind-set. and optimizing the use of public resources (in Feasibility studies are rare, in particular in the case of finance ministries). The activities of relation to commercial and financial viability, the British, Dutch and South African ministries subjects less familiar to BAPPENAS staff. The of finance illustrate this point. They review RMU, where such a value-for-money mind- Photo by Hardini Puspasari Unlocking the Pubic-Private Partnerships Deadlock inIndonesia Benchmarking and Lessons Learned set is more common, does not get involved officials work closely with their finance in project selection, preferring to play a ministry colleagues on multi-agency teams. reactive role once projects are submitted to Both also utilize sector specialists during the it for allocation of government support. This project development phase. The Netherlands is a critical shortcoming-without a viable and South Africa form similar working groups, pipeline of feasible projects, other PPP reforms but seem to rely more on the implementing initiated by the government will achieve little. agencies for the needed sector specialists.The United Kingdom arranges for secondment 2.6 Structure for Project from commercial with expertise banks and in project law firms finance. Southof staff Africa Development and and Egypt initially hired long-term consultants Implementationto work intheir PPP units to improve access to Implmenttionglobal best practices. In Indonesia, capacity Flexible, multi-agency, multi-disciplinary procue andlmanage ncs istlimte teams are the best way to develop and implement PPP projects. Government officials PPP experts are difficult to hire at government initially lack the specialized skills needed for salaries, and when specialist consultants are so they need toto be successful PPP transactions, tansctins,so succssfl PP heynee tomanaged accordingly. There has been limited bring in experienced advisors if they are to perform their roles effectively. In Colombia and the Philippines, the planning agency Puspasari Photo by HAboINu t Unlocking the Public-Private Partnerships Deadlock in Indonesia Photo by Hardini Puspasari Indonesia's PPP - The Way Forward As a general observation, the Indonesian Challenges authorities need to improve their overall understanding of PPP and not view it simply Poor Project Selection-too many projects, as a budget substitute-free infrastructure too few of them viable. Project selection funded by the private sector. In this regard, a in Indonesia currently tends to focus on concerted effort is needed to build capacity lstrategic" projects that are less viable and in government departments and contracting more difficult to implement. BAPPENAS has agencies (local government and SOEs alike) to a "PPP Book" that lists more than 100 PPP help improve their understanding of PPP and projects, only one of which has RMU approval how to implement PPP projects. This capacity for government support and few of which building program should be implemented have been demonstrated to be potentially centrally, perhaps under the auspices of viable. Other government agencies have BAPPENAS or CMEA. The government (perhaps different lists of PPP projects. CMEA had BKPM) should also develop a road map for at one point identified a list of ten "model" its PPP framework, to provide clarity and projects. The IIGF has a list of six guarantee transparency for investors to understand how -priority" projects, while BKPM has released PPP projects are selected, prepared, procured a list of five "showcase" projects. Local and and implemented in the Indonesian context. provincial governments also have their own list of PPP projects. And all of them are This chapter summarizes the key challenges different! These multiple lists create confusion currently faced in the development of among investors. The government-across PPP in Indonesia and provides a list of agencies and ministries-must agree and be recommendations to address the most critical able to articulate a priority list of Indonesia's gaps in the Indonesian PPP framework. PPP projects in a single voice. Unlocking the Public-Private Partnerships Deadlock in Indonesia Indonesia's PPP -The Way Forward The selected PPP projects should be priority has been no project preparation support projects identified by and agreed across within government. The one exception has government on the basis of their strategic been the Central Java IPP project, which was importance as well as their demonstrated prepared by PLN with involvement by the IFC, financial viability and value for money. These using international good practices and as a projects need to be developed using global result successfully attracting global bidders. best practices. A pipeline of credible projects BAPPENAS, P3CU, CMEA, the RMU and is critical to the success of the PPP reforms and government entities have not provided any institutions established by the government. support to contracting agencies in developing It is also critical for the reputation of the a best practice PPP. A center of expertise on country. Once such a list is identified and PPP(transactionsupportunit,orTSU)needsto announced, the government PPP project be developed to support line ministries, SOEs, list should not change at whim. In the past, and local governments in their PPP efforts. viable and attractive projects have been In addition, during project preparation, the announced as PPP only to be taken out and RMU-IGF is not sufficiently involved at an implemented directly by the SOE or allocated early stage with the contracting agencies in directly to a concessionaire on a business- developing PPP projects. The MOF through to-business or government-to-government the RMU plays a reactive rather than proactive basis. This damages Indonesia's reputation role, waiting for projects to be developed and and creates a perception of disorganization submitted for consideration. This isfartoo late and lack of discipline. There must be greater in the process. In addition there is still a lack accountability for project selection, viability, of clarity regarding the specific roles of the and implementation. IIGF and the RMU and the requirements for accessing government financial support. RecoinPmendations StRecommendation 1: Select only the most a t fstrategic and viable PPP projects, and support them across government with a unified voice. This can be achieved through the following steps: Establish a PPP selection process. BAPPENAS should work with the contracting agencies (line ministries, SOEs, beeno local PPP governments) to identify potential the Central projectsJar and to do a preliminary peafreview of those projects with the support PhetooProct Pr ractin-o faecst nid of MOF/RMU, CMEA and BKPM. Criteria roCnesneed to be established to ensure that assistance from experts experienced in PPP to these projects are viable, with the kind structure projects in a manner that will attract of characteristics that will facilitate investors, understand best practice, and shareent ise n know-how for other projects. To date, therepr e ne * Unlocking the Pubic-Private Partnerships Deadlock in Indonesia Indonesia's PPP - The Way Forward process must be properly funded and Stop contracting agencies from staffed, with experts intimately familiar implementing the chosen PPP projects with PPP investment (not just theory) and by any means other than through able to propose projects not currently PPP. There has been a tendency for the contemplated in BAPPENAS' PPP Book. government to announce that a project The shortlist of proposed PPP projects is to be undertaken through PPP, only for should then be submitted for final the contracting agency to then pursue selection to a limited cabinet meeting of other methods of financing, often B-to-B the MOF, BAPPENAS, CMEA and BKPM, or G-to-G. Such leakages from the formal chaired directly by the president (rather program should be penalized and the than being selected by the KKPPI, which contracting agency should be held is not functioning effectively for purposes responsible for all costs incurred in PPP of coordinating PPP). This meeting project preparation in such cases. should select a few projects that will be undertaken through PPP on the basis Stop issuing PPP project lists other that they are implementable, viable, than those announced by the limited represent "value for money," and are likely cabinet meeting, and avoid announcing to receive government support (direct new and different PPP projects until and/or contingent). The shortlist could there is real progress on any already include short, medium, and long-term announced PPP projects and until viable PPP projects to ensure the creation of projects are ready for market. There is a a sustainable PPP pipeline. Priority PPP risk that holding additional Infrastructure projects could include a well-prepared Summits or similar events in the absence geothermal IPP or mini-hydro IPP to of these prior actions may actually lower promote green energy, the Bali cruise Indonesia's credibility with prospective terminal, the Lampung PDAM investment, PPP investors. the Jatilahur water transmission project, and the Medan toll road, all of which could be implemented in the short- to medium- term. For the long-term, consideration could be given to developing projects requiring more preparation, such as the Trans-Java Expressway, the Soekarno- Hatta Airport Railway, Umbulan Water Supply,and a new deepwater port for West Java.The decision to provide government support must be a fundamental part of the initial project selection process. The Figure 3.1 ilustrates the proposed project selection process. Mandate the Vice President's Office (UKP4) to monitor project preparation and implementation to ensure they are undertaken in a timely manner.Phto b e unr Unlocking the Public-Private Partnerships Deadlock in Indonesia Indonesia's PPP -The Way Forward Project Identification Project Verification Decision for PPP Project by Limited Cabinet PPP Project List Monitored by MOF and UKP4 BAPPENAS BKPM President Ministnes BAPPENAS MOF CMEA BKPM 1 rprto Minister Minister Minister I MinisterPP MOF BPN UKP4 MoF Recommendation 2: Prepare better PPP to be a proactive, mutually supportive projects involving MOF and its affiliate team that is chaired by the contracting agencies early and throughout the process. agency and reports on progress regularly This can be achieved by adopting the following: to the Vice President's Office (UKP4). EstablishaProjectTaskTeamtodevelop * Create a team of PPP experts to help each individual PPP project, led by the contracting agencies and the Project the contracting agency and made up of Task Team to develop the PPP projects specialists from different government according to international best practice. bodies. Currently, the contracting agency The PPP Expert Team, comprised by and has only limited interaction with key large of investment bankers and lawyers, government counterparts (MOF/RMU, could be hired by an SOE such as SMI, BAPPENAS/P3CU, the National Land given its ability to carry out procurement agency/BPN).The ProjectTaskTeam needs more quickly than government agencies Photo by Hardini Puspasari Unlocking the Public-Private Partnerships Deadlock in Indonesia Indonesia's PPP - The Way Forward and to pay market salaries. The cost of the PPP program between multiple donors. PPP ExpertTeam would need to be shared The criteria for allocating such support by the contracting agency, possibly must be set out clearly. The MOF could through the revolving project preparation then claw back such funding in the event funding discussed below. that contracting agencies implement projects in ways other than through PPP. MOF should provide financial incentives to the contracting agencies to pursue PPP * Resolve land issuesbeforecommencing to ensure that their interests are aligned project procurement. Land acquisition with the government's PPP policy. In in Indonesia is extremely difficult and particular, project preparation funding poses serious challenges to private and viability gap funding should be investors. PPP land acquisition should be provided, possibily by creating a revolving supported by government, in particular fund that would charge success fees through PIP, in close coordination with to winning bidders or fine contracting BPN. It is always better to resolve land agencies that fail to fulfill their PPP acquisition issues as early as possible, obligations.These mechanisms could also since land acquisition in Indonesia can be used to pool donor funds and support, take many many years. thereby avoiding fragmentation of the Photo by Hardini Puspasari Unlocking the Public-Private Partnerships Deadlock in Indonesia Indonesia's PPP -The Way Forward The diagram below illustrates the proposed preparation structure. 4 W Project Marketing Market Feed Back Delivery of PPP Project Project Team supported by Transactionr 1 Viability Gap Transaction Fund (VGF) Support Unit Advisory Support on: I1FF Project Preparation Project Viability Gap Funding Preparation Guarantees Fund (PPF) Financing --- - ----- : Coordination Function Unlocking the Public-Private Partnerships Deadlock in Indonesia 蕉 � 臘 隨 調