Waiting for Pick-up of Infrastructure Projects with PPP Scheme

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 201405132226560.Menanti Geliat Proyek Infrastruktur Skema KPS.pdf

Investor Daily, 7 May, 2014, Page 6, Section: Infrastructure & Transportations 

By Yudha P Jayadikarta

There is no denying that the volume of economic activities is strongly influenced by the availability of infrastructure. Availability of adequate infrastructure will help the community of a region to develop, spur business activities, and open accesses to the region to the widest possible.

The Indonesian Government has committed itself to continue providing infrastructure in various regions in Indonesia. However, funding constraints have prevented the government from doing much in financing the construction of infrastructure in a comprehensive and sustainable manner.

As stated in the Millennium Development Goals (MDG) document, the figure of infrastructure financing during 2009 - 2014 reaches around Rp 1,400 trillion. Meanwhile, the funding ability of the government, as reflected in the State Revenue and Expenditure Budget (APBN) for five years, is only about Rp 400 trillion. That means there is quite a large financial gap, which is about Rp 1,000 trillion.

In order to cover this gap, one of the ideas of the government is to invite the private sector to play a larger role and take greater initiatives in the form of government cooperation with the private sector (KPS), or better known as public private partnership (PPP).

PPP Fiscal Scheme

Provisions regarding the PPP itself are already provided in Presidential Regulation No. 67 Year 2005 jo. Presidential Regulation No. 13 Year 2010 jo. Presidential Regulation No. 56 Year 2011. Based on these provisions, the government, as the responsible party for cooperation projects (PJPK), executes contracts with private parties to undertake PPP projects.

In order to enhance the interest of the private parties, the government through the finance minister can approve the granting of a fiscal facility in financial form based on proposal by the minister/ head of institution/ head of region through the provision of instruments as follows: (1) bridging funds such as land fund through the Government Investment Centre (PIP); (2) infrastructure financing for the preparation of PPP projects, as conducted by PT Sarana Multi Infrastruktur (SMI); (3) guarantee fund against the risks of PPP projects, namely guarantee against risks on investment returns, political risks and the risk of project termination, through PT Penjaminan Inrastruktur Indonesia (PII).

PT SMI and PT PII are state-owned enterprises (BUMNs) that are directly under the guidance and supervision of the finance minister and they are not handed over to the minister of BUMNs.

In addition to the above three facilities, the government through Ministry of Finance has also prepared several other facilities in order to accelerate the realisation of PPP projects, including the project development services (PDS) scheme, viability gap funding (VGF), and land revolving fund.

To prepare PPP projects and make them attractive and ready to be offered to investors, Ministry of Finance has provided the PDS facility through PT SMI. However, in practice, the management of funds for the PDS facility has yet to be made revolving, or it is still classified as mere government spending. To date, there are two projects that have received assistance with this scheme, namely the Soekarno-Hatta Airport - Manggarai railway line project and the Umbulan drinking water supply system (SPAM) development project in East Java.

In addition to this facility, Ministry of Finance has also prepared the mechanism for the provision of feasibility support for cooperation projects, or VGF. The scheme of this facility aims to improve the financial feasibility of the cooperation projects and to provide certainty in the procurement of cooperation projects in accordance with the quality and time period that have been planned. In the 2014 APBN, the government has allocated Rp 1.1 trillion for the Umbulan SPAM project and Bandar Lampung SPAM project.

Need for Managing Institution

However, the involvement of the private sector in the implementation of infrastructure in some key sectors has not shown any significant progress. In fact, the government has sought institutional development in recent years to strengthen the existing regulations, such as the establishment of the Policy Committee for the Acceleration of Infrastructure Provision (KKPPI).

There are many factors hindering PPP, such as issues of institutional coordination and leadership, poor packaging of PPP projects, land acquisition problems, regulatory overlap between the national government and the regions, and the lack of capacity among the stakeholders with regard to the implementation of PPP projects.

Seeing the development of PPP projects that have not met expectations, it is proper that the upcoming new government needs to develop an institution for the management of PPP projects. The institution can be within the structure of Ministry of Finance, or outside the structure but can work closely with the Ministry of Finance. Even, if necessary, it can be directly under the control of the President.

The main role of this institution is to ensure fiscal sustainability. It would be better if the institution is the secretariat of KKPPI that has been reorganised. This Committee is to be chaired by the President, with membership consisting of Coordinating Minister for Economic Affairs, Bappenas Minister, Finance Minister, Head of the Indonesian Investment Coordinating Board (BKPM), as well as Head of the National Land Agency (BPN).

This Committee is of course expected to have the authority to approve PPP projects and determine those PPP projects that are viable to undertake, primarily related to environmental issues. Ideally, the institution can be regarded as the headquarters of the PPP project managers. Another thing that needs attention is the availability of PPP framework; this has been there since 2005, hence it has been tested for nine years.

There is an important lesson from this experience, namely the requirement for a regulatory framework of PPP projects, which is integrated in one implementing regulation and the [subsequent] regulations that will be issued successively by the Committee. The government’s initiatives to improve existing regulations will send a good signal to the market participants and investors and this will eventually produce lower project bid prices and it can increase the benefits to the public.

A more realistic approach in the formation of the project management institution will offer a number of opportunities to increase private sector participation in infrastructure development under the PPP scheme.

The business-as-usual attitude will not be enough. The existence of strong leadership and high commitment to the development of sustainable infrastructure is equally important. Hopefully this becomes a real message to the new government later.

Yudha P Jayadikarta