As a developing country, Indonesia needs to increase its economic growth. One of the fundamental factors for increasing the economic growth is the availability of sufficient infrastructure. Currently, Indonesia does not have sufficient infrastructure to improve the increase of economic growth of Indonesia. The development of infrastructure project requires a very large allocation of funds. The Indonesian Government has limitations for developing the infrastructure projects, especially from the financing aspect. The Indonesian Government has invited private sector participation to develop the infrastructure in Indonesia in form of Public Private Partnership.
However, the investor has its limitation in finding source of financing because the banks are usually only willing to finance the short and medium term projects and not long term as required by infrastructure projects. The crucial issues for the banks to consider in providing a financing to the infrastructure projects are among others, the certainty from the Indonesian Government on certain risks related to the infrastructure projects and procurement of land issues.
Various programs and regulations have been issued by the Indonesian Government with the intention to accommodate the investor’s main concerns and to achieve the rapid infrastructure development through Public Private Partnership, such as the establishment of PT Sarana Multi Infrastructure (“SMI”) and PT Penjaminan Infrastructure Indonesia (Indonesia Infrastructure Guarantee Fund) (“IIGF”).
SMI is the Infrastructure Finance Company which serves as a catalyst in the acceleration of the infrastructure development in Indonesia, an alternative source of funding of the infrastructure projects, and a vehicle to raise funds by having partnership agreement with the third parties.
IIGF is a state owned company acting as a single window for appraising, structuring, and providing guarantees for Public Private Partnership infrastructure projects. This guarantee is expected to give a quality value on the infrastructure projects which will attract the banks to finance the project and reduce the costs financing of infrastructure projects. By having this guarantee structure, it will enable the Indonesian Government to manage its fiscal risks better by ring fencing the government obligations vis a vis guarantees.
Indonesian Infrastructure Projects
The Minister for National Development Planning/Chairman of National Development Planning Agency issued Public Private Partnership Book 2011 – 2014 (“PPP Book”) in order to provide information to the private sectors on the infrastructure investment projects opportunities in Indonesia. There are three categories of Public Private Partnership Projects in the PPP Book 2011- 2014, namely potential projects, priority projects and ready for offer projects. The Book contains 79 projects having a total value of USD 53 billion.
Investors need to follow certain tender procurement process to secure the infrastructure projects. Thereafter, the Indonesian Government will enter into a Public Private Partnership agreement with the winning investor which gives the authority to the investor to construct the infrastructure project on its own risk. Types of Public Private Partnership infrastructure projects include transportation, road, watering, drinking water, wastewater, telecommunication and information, electricity and oil and gas.
Infrastructure Finance Company
On 18 March 2009, the Indonesian Government introduced a new type of financial institution in Indonesia named Infrastructure Finance Company (“IFC”). IFC is a financial institution which provides funding for the development of infrastructure projects in Indonesia.
IFC is authorized to provide financing in the form of direct lending, loan refinancing and/or subordinated loans. For such purpose, IFC may also conduct credit enhancement scheme (including to provide guarantee), advisory services, equity investment and/or other activity or facility related to the financing as prior approved by the Minister of Finance of Indonesia.
One of the efforts of the Indonesian Government to support the rapid development of infrastructure in Indonesia is by establishing SMI as an IFC on 26 February 2009, a company worth capital of IDR 2 trillion (equivalent approximately USD 200 million).
SMI is also established to serve as a holding company for its subsidiaries to be set up for infrastructure financing. Currently, SMI has 1 (one) subsidiary named PT Indonesian Infrastructure Finance, a joint venture company between SMI and Asian Development Bank (ADB), International Finance Corporation (IFC) and Deutsche Investitions-und Entwicklungsgesellschaft mbH (DEG), a company worth capital of IDR 1.6 trillion (equivalent approximately USD 160 million).
Indonesian Infrastructure Guarantee Fund
IIGF is a state owned company, with 100% of its shares owned by the Indonesian Government. The issuance of Presidential Regulation No. 78 of 2010 is as a legal basis to the operation of IIGF. The Indonesian Government has injected capital of IDR 2 trillion (equivalent approximately USD 200 million) and expected to reach a minimum of IDR 5 trillion (equivalent approximately USD 500 million) in the next two years. IIGF was developed with assistance from the World Bank which has relevant international experiences involving the use of government guarantees to leverage private financing of infrastructure.
The application to obtain IIGF’s guarantee must be submitted by the relevant authority which is by law responsible for providing such infrastructure (“Contracting Agency”) prior to the tender process to the investor. IIGF further will conduct (i) a feasibility assessment from technical and financial aspects of Public Private Partnership project and (ii) guarantee structuring (i.e. either in form of single guarantee provided by IIGF or co-guarantee with multilateral development agency/other institutions having the same purpose or co-guarantee with the Minister of Finance of Indonesia as the last resort). If the proposed project is qualified, IIGF would issue an In-Principal Approval which later be disclosed in the tender document to the investor. There are certain fees have to be paid by the investor to IIGF for entering into the guarantee scheme.
IIGF guarantees the financial obligations of the Contracting Agency’s under Public Private Partnership agreement in which such obligations arise from risks that are caused by the following triggering events:
Based on the information published in the website of IIGF, it is noted that IIGF’s current internal policy governs that for projects with value of up to IDR 500 billion (around USD 50 million), IIGF provides a maximum of 100% of project value. For projects above IDR 500 billion, the guarantee is a maximum of 50% of the project value. The maximum amount of guarantee for one project is 25% of IIGF’s available capital.
IIGF has issued a guideline of risks allocation of each type of sectors of infrastructure projects in order to assist Contracting Agency in conducting risk identification and allocation. Basically such determination of risk allocation by the Contracting Agency should follow the principle of the allocation of risks to the party that is relatively better able to control the risks. In general, the following non-exhaustive list is some of the possible risks that can be covered by IIGF. Please note however that the final/exact category of risks would vary between sectors of infrastructure projects and it also subject to each of the potential infrastructure project specific conditions.
|1.||Licenses, permits, and approvals||Cover the risk of any delay or failure to grant licenses, permits, and approvals which would have adverse effects on the construction costs, financing charges, and the commencement of revenue.|
|2.||Financial close delay / failure||Cover the risk of any delay/failure of financial close due to any action/inaction on the part of the Contracting Agency other than the land procurement and licenses/permits/approvals delay/failure.|
|3.||Change in law / regulations||Cover the risk of any change in law/regulation which adversely affects/impacts the project, such as the tax law, law on the tariff structure, or law that affects the project’s technical specifications which results in changes of costs. Applies only If the contract is explicit (not silent) in its basis on and ties with the existing law (i.e., protects from changes in law), where it is common for Contracting Agency to bear the risk of discriminatory change of law.|
|4.||Breach of contract||Cover the risk of the Contracting Agency’s action/inaction in violation of contract, or Contracting Agency’s changing clauses of contract unilaterally.|
|5.||Integration with network||Cover the risk of any action/inaction of the Contracting Agency (or relevant authority) that affects the project operations/revenue due to failure (or inadequate) integration with existing or future networks.|
|6.||Competing risk||Cover the risk in which there is other similar facility/infrastructure built which eventually competes with the delivery of the agreed services.|
|7.||Revenue risk||Cover the risk on the fulfillment/enforcement of Contracting Agency’s obligations related to the revenue of the project. This coverage applies only if the Contracting Agency has contractually agreed on the payments of the services (annuity/viability gap/minimum revenue).|
|8.||Demand risk||Cover the risk of any change which is borne by the investor due to the Contracting Agency’s actions that influence on demand for the project’s services.|
|9.||Pricing risk||Cover the risk to the fulfillment of the level of revenue that was not reached due to unilateral change of tariff.|
|10.||Expropriation Risk||Cover the risk of takeover of the project by Contracting Agency or other public agencies which is causing the end of project contract.|
|11.||Currency inconvertibility & non-transfer Risk||Cover the risk on the revenue/profit from the project which could not be converted to the foreign currency and /or repatriated to the investor’s home country.|
|12.||Sub-sovereignor parastatal risk||Cover the risk of the sub-sovereign or parastatal entity which acts as the Contracting Agency in the project which has failed to perform its contractual payment or other material obligations (i.e. due to unilateral decision).|
|13.||Force majeure risk affecting Contracting Agency||Cover the risk on a specified event that is occurred outside the control of either party (e.g. act of god, man-made catastrophic event) which may result in a delay or default by the Contracting Agency in the performance of its contractual obligations.|
|14.||Interface risk||Cover the risk on the method or standard of delivery of the public services which will prevent or in some way frustrate the delivery of the agreed services or vice versa. The risk includes when the quality of works done by the Indonesian Government not conform/suitable with those done by the investor.|
Procurement of Land
The Presidential Regulation No. 36 Year 2005 as amended by Presidential Regulation No. 65 Year 2006 (“Land Procurement Regulation”) has defined the procurement of land as every activity to obtain land by means of giving compensation to the party which is releasing or waiving its rights over the land, building, plant and other things related to the land. The Land Procurement Regulation is to govern the procurement of land of projects that involves public interest.
In the process, the land procurement committee (“Land Procurement Committee”) shall be established which includes number of government institutions as the members of such committee. The Land Procurement Regulation provides a limitation period for 120 (one hundred twenty) calendar days to agree on the type and/or amount of compensation. If there is no consensus within such period of time, the Land Procurement Committee shall have the right to stipulate the amount of compensation and if necessary, consign such amount of compensation to the relevant district court.
The land title holders have the right to make an objection on the amount of compensation to the relevant authority and if there is still no agreement reached by the relevant parties, the President of Indonesia may decide to revoke such land rights. The land title holders may appeal such decision to the High Court.
In practice, the Land Procurement Regulation is deemed insufficient and ineffective to support the acceleration of the development of infrastructure project in Indonesia. Currently a draft of law on the land procurement is still being discussed in the parliament to accommodate a fair compensation, involvement of independent appraisal committee to determine amount of compensation, appointment of single government authority as the responsible party (in order to make the process becomes more efficient) and determination a predictable timing for the process.
The Indonesian Government has issued various programs and regulations as necessary to accommodate the investors’ major concerns and to support the rapid infrastructure development in Indonesia. Although the framework of Public Private Partnership infrastructure financing concept is already in place, however in practice the infrastructure projects in Indonesia have not been developed rapidly as expected by the Indonesian Government.
Infrastructure projects needs big amount of investment. SMI and IIGF’s capital are not enough to support the development of infrastructure projects. SMI and IIGF should reduce its dependency on the State Budget in order to make them actively support the development of infrastructure projects in Indonesia. It further becomes the challenge of SMI and IIGF to get more supports from the third parties such as multilateral agencies, bilateral institutions as well as other institutions or event perhaps raise funds from the public in order to expand the pool of funds available for the development of infrastructure projects in Indonesia.
The investors are also expecting that the Indonesian Government be able to issue the law on the land procurement as soon as possible which may accommodate issues arise in practice so that the process of land procurement becomes fair, efficient and effective.
It is very important for the investor to really understand the terms and conditions of the infrastructure project being offered to them. The terms and conditions shall be disclosed by the Contracting Agency to the investor during the tender process. One thing should be observed is on whether there is a guarantee scheme to be provided by IIGF/Indonesian Government on the offered project and what kind of risks assumed under such guarantee scheme.
In that respect, the investor should be aware on the risks dealt in such particular infrastructure project. The category of risks in each of the infrastructure projects would vary between sectors and it also relates to the specific conditions of such infrastructure projects.