Enhancing projects’ bankability under Indonesia’s PPP regime

By Abdul Haris Rum and Indra Pambudy, Lubis Ganie Surowidjojo
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Indonesia is attracting private investment to deal with a chronic infrastructure shortage. The nation is estimated to need about US$400 billion in infrastructure financing, for which the government could only provide 63%, leaving the private sector to fill the gap. In recent years, Indonesia’s government has made efforts to enhance the bankability of public-private partnership (PPP) projects through fiscal and non-fiscal instruments.

Abdul Haris Rum Partner Lubis Ganie Surowidjojo
Abdul Haris Rum
Partner
Lubis Ganie Surowidjojo

PPP-based infrastructure projects in Indonesia are unique in that the project company is eligible for a number of government support initiatives otherwise unavailable to projects undertaken under other schemes. This article lists the tools and measures at the government’s disposal to offer investors an enhancement of a PPP project’s bankability based on existing regulations.

Presidential regulation No. 38 (2015) allows payment mechanisms for PPP projects in the form of: (1) tariff payment; (2) availability payment; and (3) other legally compliant mechanisms to enable returns on investment. The base tariff rate is set based on an investor being able to obtain return on investment, taking into account capital expenditure, operational expenditure and profit margin. Where such base tariff is deemed too high for end users, the government contracting agency may offer viability gap funding.

However, viability gap funding is available only for infrastructure deemed socially important, covers only 50% of the infrastructure construction costs, and a project receiving viability gap funding will not be eligible for availability payment. Previous governments had considered and debated the concept of availability payment – i.e., the payment for an infrastructure facility to be at operational level, without necessarily delivering the goods or services contracted for – in PPP projects. The enactment of regulation No. 38 formalizes availability payment, a step forward in the positivist legal system that is Indonesia.

The government contracting agency can pay for availability payment for projects of high economic and social significance, and where the return of investment on which cannot be adequately obtained from tariff payment. Availability payment is payable only when the infrastructure is deemed operationally ready by the government contracting agency, based on the standards and specifications set in the PPP co-operation agreement.

Indonesia seeks to juggle between offering adequate guarantee against sovereign and sub-sovereign risk, and minimizing direct liability to the government. Consistent with this approach, sovereign risk guarantee is primarily provided by Penjamin Infastruktur Indonesia (Persero, known in English as the IIGF), an SOE established to provide guarantee against a contracting agency’s defaults.

Indra Ppambudy Associate Lubis Ganie Surowidjojo
Indra Ppambudy
Associate
Lubis Ganie Surowidjojo

The IIGF guarantees the project company against a government contracting agency’s non-payment caused by risk allocated to the contracting agency. Please note that the scope and category of risks guaranteed by the IIGF refers to its risk allocation guideline, which is regularly updated. To put a guarantee payment into force, non-payment caused by the guaranteed risk must have occurred. The IIGF will pay to the project company the sum payable by the contracting agency, and will in turn recourse against the non-paying government contracting agency. As such, at least in theory, the project company would be shielded from contracting agency defaults.

Viability gap funding is granted to enhance the financial feasibility of a project. It is granted by Indonesia’s Minister of Finance for the purpose of covering a certain portion of construction costs (e.g., materials, installations, and construction loan interests).

Only projects that are financially feasible but for the viability gap funding will be eligible. In addition, the Ministry of Finance needs to be satisfied that the following criteria are met:

  • The project applies the user-pays principle;
  • The investment value is at least 100 billion Indonesian rupiah (US$7.5 million);
  • The project company is established by the winner of a competitive project tender;
  • The project scheme is BOT (build-operate-transfer);
  • The feasibility study demonstrates:
    (1) optimum risk allocation between the government contracting agency and the winning bidder; (2) economic feasibility of the project, covering technical, legal, environmental and social aspects; and
    (3) the project becomes financially feasible if the viability gap funding is granted.

Notwithstanding all the above measures available for the government to enhance a PPP project’s bankability, PPPs generally have not progressed as fast as those financed purely through the government budget. Reasons for this include: there are additional feasibility studies that need to be concluded regarding the contracting model; the amount of guarantee and funding that the government will commit to; the financial and economic feasibilities of the project; and the risk allocations.

The authors are encouraged to see that the government has made available these regulatory tools, an important step before it can make financial commitments to projects. Feasibility studies will soon be finalized and projects will then move on to the tender stage.

ABDUL HARIS RUM is a partner at Lubis Ganie Surowidjojo and INDRA PAMBUDY is an associate at the firm.

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