Public-Private Partnerships in Indonesia

Introduction

The Public-Private Partnership (PPP) concept was first introduced in Indonesia in 2005 via  the issue of Presidential Regulation Number 67 of 2005, dated 9 November  2005, on Public and Private Partnerships in Infrastructure Development (“Presidential Regulation 67/2005”), as amended by Presidential Regulation Number 13 of 2010, dated January 28, 2010 (“Presidential Regulation 13/2010”) (both referred to as “PR 67/2005 (as amended)”), which set out the mechanism for establishing partnerships between the Government and the private sector for the development of certain infrastructure.

In 2015, PR 67/2005 (as amended) was revoked and replaced by Presidential Regulation Number 38 of 2015, dated 20 March 2015, on Government Cooperation with Business Entities in the Procurement of Infrastructure (“PR 38/2015”), which was intended to reorganise the PPP process and to open more opportunities for the development of PPP projects in Indonesia. The improvements brought about by PR 38/2015 are in part reflected in the current pipeline of PPP projects in Indonesia, which has remained relatively robust despite the recent impact of the COVID pandemic.  

The following sections set out an overview of the current PPP regulatory framework (including the government guarantee and support available for PPP projects under PR 38/2015 and other relevant regulations) and the current state of play for PPP projects in Indonesia.   

Regulatory Framework

PPPs in Indonesia are generally covered by the main regulations listed below. Some sectors also have specific regulations, for example, infrastructure projects under the Ministry of Public Works and Housing have specific ministerial regulations for PPP projects:

• The mechanism for establishing partnerships between the Government and the business sector for the development of certain infrastructure is contained in PR 38/2015;

• Presidential Regulation No. 78/2010 on Infrastructure Guarantees in Public Private Partnerships Provided Through Infrastructure Guarantee Entities (“Perpres 78/2010”);

• Minister of National Development Planning Regulation No. 4/2010 on Guidelines for Implementation of Public Private Partnerships in Infrastructure Provision (“Permen PPN 4/2010”);

• Government Procurement Institution of Goods/Services Policy No. 29 of 2018 on Procedure for Implementing Business Entity (“IBE”) Procurement through Government Cooperation with Business Entities at the Initiative of the Minister/Head of Institution/Head of Region (“LKPP Reg. No. 20/2018”);

• Minister of Finance Regulation No. 260/PMK.011/2010 on Instructions for the Implementation of Infrastructure Guarantees in Government Cooperation Projects with Business Entities, as amended by Minister of Finance Regulation No. 8/2016 (“MoF Reg. No. 260/2010”);

• Head of the National Public Procurement Agency Regulation No. 19 of 2015 on Procedures for Procurement of Public Private Partnerships in the Provision of Infrastructure (“Head of LKPP Reg. 19/2015”); and

• Regulation of the National Public Procurement Agency No. 29 of 2019 on Procedures for Procurement of Implementing Business Entities in the Provision of Infrastructure through Solicited Public-Private Partnerships (“LKPP Reg. 29/2018”).

General Provisions

Indonesian law has established a regime in which construction of an infrastructure project may be carried out by way of cooperation/partnership between the Government and the private sector. This type of cooperation was introduced as an alternative to the conventional bureaucratic ‘Business Licensing’ to attract investors by providing a greater sense of equity, as the private party is deemed the Government’s counterparty.

Under Indonesian law, contracts are considered as law and bind those who enter them. This also means that the Government is legally bound to honour contracts, thereby conferring a greater sense of certainty compared to business licensing (where the Government has more discretion to issue a regulation that may affect the terms of the license).

Under the current regulations, the parties to a PPP agreement are the Government Contracting Agency (“GCA”)[1] and the IBE. The GCA in the PPP agreement can be the Minister/Head of Institution/Head of Region or State Owned Enterprise/Region Owned Enterprise as provider or administrator of the infrastructure that is going to be developed via the PPP scheme in accordance with applicable law and regulations.

Procedures

The procurement of infrastructure is conducted through the Minister/Head of Institution/Head of Region. However, a PPP project can be initiated by either the Minister/Head of Institution/Head of Region or a private business entity, provided that the infrastructure procurement complies with the following criteria: (i) the project is technically integrated with the master plan for the relevant sector, (ii) the project is economically and financially feasible, and (iii) the private business entity is financially capable of financing the project.

The planning of a PPP project will consist of several steps: identification and selection, budgeting, and PPP project categorization. The requirements for these steps will be explained further in sections 2.3 and 2.4 below.

Following the planning of the PPP project, preparations for the procurement process will commence. The Minister/Head of Institution/Head of Region is the party responsible for the preparation of a PPP project but the Minister/Head of Institution/Head of Region may sometimes cooperate with a Business Entity or international agencies/institutions/organizations based on an agreement with the Minister/Head of Institution/Head of Region. In the event that such arrangements exist, the project planning costs will be paid for via a retainer fee, a lump sum, or a combination of these. The cost of planning the PPP could also be passed onto (either partly or wholly) the IBE that wins the bid.

The drafting of the PPP agreement, which is part of project preparation, will be done by the GCA. Based on Article 32 of PR 38/2015, the PPP cooperation agreement must at least contain provisions on:

1. scope of work;
2. period/term;
3. implementation of guarantee;
4. tariff and mechanism for adjustment of the tariff;
5. rights and obligations, including risk allocation;
6. service performance standards;
7. transfer of shares before the PPP is operating commercially;
8. sanctions if either party does not comply with provisions in the agreement;
9. cancellation or termination of the agreement;
10. asset ownership status;
11. dispute resolution mechanism regulated in phases, including discussions, mediation, and arbitration/court;
12. monitoring mechanism for performance of the IBE in carrying out the procurement;
13. a mechanism for job and/or services changes;
14. a mechanism for expropriation by the Government and the lender;
15. utilization and ownership of infrastructure assets or their management for the GCA;
16. return of infrastructure assets and/or their management to the GCA;
17. force majeure;
18. statement and guarantee by the parties that the PPP agreement is valid and binding on them, and in accordance with the law and regulations;
19. the language used in the agreement is Bahasa Indonesia or if necessary, Bahasa Indonesia and English (as the official translation), and Bahasa Indonesia for dispute resolution within the Indonesian territory; and
20. applicable legislation (Indonesian law).

After the preparation stage, the next step is the transaction stage to implement the PPP project which consists of the following:

1. selection and establishment of the IBE (typically through a public tender process);
2. signing of the PPP agreement (following evaluation of proposals received and selection of the preferred bidder); and
3. securing financing for the project by the IBE.

Signing of the PPP agreement must be concluded within 6 months of the winning bidder being announced, and the sponsors or winning bidder are expected to have established an IBE to implement the project. The IBE is responsible for securing financing for the PPP project within 12 months of the signing of a PPP agreement between the GCA and the IBE. 

Requirements

Planning of a PPP project

Pursuant to Article 21 (2) of PR 38/2015, the Minister/Head of Institution/Head of Region concerned will identify infrastructure projects to be implemented through a PPP structure with an IBE, by at least taking the following into consideration:

1. conformity with the national/regional mid-term development plan and the infrastructure sector’s strategic plan;
2. conformity of the project’s location with the Regional Spatial Plan;
3. interconnectivity between the infrastructure sector and regions;
4. cost analysis and social benefit; and
5. value-for-money assessment. 

In addition, a preliminary study (comprising at least the PPP formation plan, project financing scheme plan and source of funding, and initial cooperation offer that includes schedule, process and assessment) and public consultation must be drafted and performed in the identification process.

Following the result of the preliminary study and public consultation, the Minister/Head of Institution/Head of Region must stipulate a list of proposals for the PPP project plan. Further, a budget for planning, preparation, transaction and management of the PPP will be prepared by the procuring Minister/Head of Institution/Head of Region/State-Owned Enterprise/Regional-Owned Enterprise. 

Preparation of a PPP project

After completing the initial planning work, the Minister/Head of Institution/Head of Region will prepare for the tendering and implementation of the PPP project, which will involve at least:

1. a Pre-Feasibility Study;
2. Plans for Government Support and Government Guarantee;
3. Procedures for return on investment of the IBE; and
4. Land procurement for the PPP.

In the event that the PPP is initiated by a private business entity, the feasibility study must be drafted by that entity.

Selection and appointment of an IBE for a PPP project

The provision or procurement of an IBE to implement the PPP project can be by way of a public tender process or direct appointment. Under PR 38/2015, direct appointment is expressly permitted in the following circumstances: (i) development of infrastructure that has been built and/or operated previously by the same developer; (ii) the work can only be carried out via utilization of new technology, and only one developer can provide it; or (iii) the developer/bidder/private business entity controls most or all of the plots of land required to implement the PPP project. In all other cases, a public tender process must be followed to select the IBE.

Both the public tender and direct appointment processes require the GCA to engage in pre-qualification. In the event the initiator of the PPP project is a private business entity (in an unsolicited project), the initiator may receive compensation and certain advantages during the tender process as compensation via:

1. 10% extra value points in the tender;
2. right to match the best bidder in the tender; or
3. right to sell the cooperation project initiative including material or inherent intellectual property rights to the government/GCA or the tender winner.

Procurement will be carried out by a Procurement Committee formed by the GCA for the project. 

Benefits of PPP

For PPP projects, there are basically three different models under which the IBE can earn a return on its investment in the project: (i) tariff scheme (i.e. a right by the IBE to charge a tariff on users), (ii) availability payments (which was introduced by PR 38/2015), or (iii) alternative models provided by applicable law and regulations. Where an availability model is used, the GCA will take into account the capital, operational costs and required profits of the IBE in budgeting the funds for availability payments. PPP projects in Indonesia will receive Government Support and/or Government Guarantee.

Government Support

The Minister/Head of Institution/Head of Region may provide Government Support[2] to a PPP project in accordance with the scope of PPP activities. This Support is provided by the Ministry of Finance (MoF) based on a proposal from the GCA, and can take the form of Viability Support or tax incentives, in accordance with the law and regulations, based on the proposal from the GCA. Viability Support is provided as a financial contribution in cash to a PPP Project to cover part of the construction cost in order to ensure a PPP project of social value and benefit is financially viable for a potential investor.

Government Guarantee

The Government Guarantee, also known as an Infrastructure Guarantee, is granted to PPP projects by taking into account the principle of management and supervision of financial risk in the State Budget (APBN).

The Government Guarantee for PPP projects is granted through PT Penjaminan Infrastruktur Indonesia (PII) the Indonesia Infrastructure Guarantee Fund (“IIGF”), a business entity established by the Government to provide the Infrastructure Guarantee based on Government Regulation No. 35 of 2009 on Participation of State Capital in the Establishment of Companies (Persero) in the Infrastructure Guarantee Sector.

The Government Guarantee covers the payment obligations of the GCA under the PPP agreement. The IBE and IIGF will enter into a guarantee agreement that incorporates all terms and conditions of the Government Guarantee. In relation to the Government Guarantee/Infrastructure Guarantee, pursuant to Article 17 (5) of PR 38/2015, the Minister of Finance is authorized to:

1. determine criteria for the grant of a Government Guarantee/Infrastructure Guarantee to be provided to a PPP project;
2. request and obtain necessary data and information from the parties related to the proposal to be granted Government Guarantee/Infrastructure Guarantee;
3. determine the form, procedure, and mechanism of Government Guarantee/Infrastructure Guarantee granted to a PPP project; and
4. stipulate the grant of Government Guarantee/Infrastructure Guarantee to the IBE in a PPP project upon recommendation from the IIGF.

Government Guarantee is further regulated in MoF Reg. No. 260/2010. This stipulates that the guarantee can be effectuated as:

1. a sole guarantee by PII/IIGF, which covers all or part of the infrastructure risk in a PPP project; or
2. a guarantee by the IIGF together with the MoF, based on distribution of infrastructure risk between the IIGF and the MoF.

In respect of a co-guarantee between IIGF and the MoF, based on Article 5 MoF Reg. No. 260/2010, the co-guarantee will only be provided if one of the following conditions are met:

1. Assets owned by the IIGF are insufficient to fulfil the guarantee in accordance with the guarantee proposal from the GCA;
2. There is no cooperation between the IIGF and multilateral financial institutions or another party that has similar purposes and objectives, or if there is any, the facility made available from such financial institutions is insufficient, inadequate or not suitable to support the Government Guarantee/Infrastructure Guarantee to be provided to the relevant PPP project; or
3. the optimization of the IIGF asset (to become the sole guarantor in the PPP project) has not yet been achieved, while the procurement process of the IBE in the PPP project under the guarantee proposal can no longer be postponed by the relevant GCA.

Scope of Guarantee

In principle, infrastructure risks that can be covered under an IIGF Guarantee are: (1) those that are better controlled, managed, prevented or absorbed by the GCA instead of the IBE; (2) risks that emanate from the GCA or; (3) risks that emanate from the Government (other than the GCA itself).

On coverage of the IIGF Guarantee, Article 10 (1) of MoF Reg. 260/2010 stipulates that financial obligations of the GCA under a PPP agreement that can be covered by the IIGF guarantee are those arising from risks caused by the following trigger events:

1. GCA or Government action/inaction, which according to the law or regulations, the GCA or Government has authority to perform;
2. Policy of the GCA or Government (other than the GCA);
3. Unilateral decision by the GCA or Government (other than the GCA);
4. Inability of the GCA to perform its obligations under the PPP agreement (breach of contract).

In practice, the scope of risks that can be covered by the IIGF (and MoF in the case of joint or co-guarantee) is to be assessed on a case by case basis, e.g. (i) for a toll road project, the IIGF would only guarantee risks in relation to land acquisition, specific changes in law, tariff adjustment, termination due to force majeure and political risks; (ii) for a fibre-optic project, the IIGF guaranteed risks in relation to specific changes in law, termination due to force majeure, political risks, and demand risks; and (iii) for a water supply project, IIGF guaranteed all risks that are guaranteed in both toll road and fibre-optic projects, such as those in relation to land acquisition, specific change in law, demand risks and political risks; in addition, the IIGF also guaranteed risks in relation to the quality and quantity of raw water for the project.

Market Snapshot

Track Record

As of March 2022, 31 PPP projects were guaranteed by PII/IIGF[3], comprising roads, telecommunications, electricity, drinking water, and transportation projects, with nearly half of these projects being in the roads sector and the electricity sector coming a distant second in terms of the number of projects guaranteed (5 projects). The following table lists some of the major projects guaranteed by IIGF to date for which guarantee agreements have been signed:[4]