PPP (Public-Private Partnerships) in Indonesia: Opportunities from the Economic Master Plan pdf

The biggest challenges in implementing the economic corridors set out by the MP3EI include a lack of capacity of the public sector actors who are unfamiliar with the PPP mechanism, coord

PPP (Public-Private Partnerships) in Indonesia: Opportunities from the Economic Master Plan

June, 2012

Prepared by Strategic Asia for the UK Foreign

Commonwealth Office

Table of Contents

Executive Summary of ‘PPP (Public-Private Partnerships) in Indonesia: Opportunities from the

Master Plan’ 4

I Introduction 7

II Recent Developments in Indonesia’s PPP Model 13

2.1 Sectors (toll roads, transportation, water) 13

2.2 Modalities Scheme and Institutional Support 14

2.3 PPP Opportunities in the Kalimantan Economic Corridor 20

2.4 PPP Opportunities in the Bali - Nusa Tenggara Corridor 22

2.5 Barriers and Challenges in Implementing PPP Projects in Indonesia 24

III Opportunities for UK PLC 28

3.1 Opportunities for Foreign Direct Investment 28

3.2 Opportunities for Assisting in Capacity Building in Managing PPPs in Indonesia 31

IV Opportunities for Low Carbon PPPs in Indonesia 33

4.1 Case Study: Ultra-Super Critical Steam Power Plant in Central Java 35

V Conclusions 39

Bibliography 40

APPENDIX 1 48

History of PPP in Indonesia 48

APPENDIX II 52

Best Practices from Singapore and the UK 52

Figures

Figure 1 Estimated Investment Required for the Main Economic Activities of the MP3EI 8

Figure 2 Indications of Investment in the Six Economic Corridors 9

Figure 3 The PPP System Within the MP3EI 9

Figure 4 Levels of Investment by Source 10

Figure 5 the Principle Parties in the Indonesian PPP Framework 15

Figure 6 the National PPP Network 17

Figure 7 Phases of PPP Project Realization 18

Figure 8 Description of Pre-Qualifications and the Indonesian PPP Procuring Process 19

Figure 9 Process of Submitting Unsolicited Projects According to Presidential Regulation no.56 year 2011 31

Figure 10 Transaction Description of the Central Java Steam Power Plant 36

Boxes Box 1 Case Study 1 Kirklees Metropolitan Solid Waste Project, UK 60

Box 2 Case Study 2 Tuas Desalination Plant, Singapore 58

PPP (Public-Private Partnerships) in Indonesia: Opportunities from the Master Plan

Executive Summary

The Government of Indonesia announced the Master Plan for the Acceleration and Expansion of Indonesia’s Economic Development (MP3EI) in May 2011 The MP3EI reiterated the national government’s intention to use the public private partnership (PPP) model one of the key ways to finance Indonesia’s economic development Prior to this, the use of PPPs gained momentum at the start of the National Medium Term Development Plan (RPJPM) 2010-2014 as PPP was expected to fill the financing gap for the infrastructure plans contained within this blueprint Since the commencement of the MP3EI in 2011, the PPP model has increasingly been in the spotlight in Indonesia

The MP3EI is a very ambitious plan It aims to propel Indonesia into the top ten worldwide economies and raise income per capita from US$ 3000 to US$ 15,000 by 2025 The policy rests

on three main pillars: establishing six economic corridors based on the comparative advantage of the different regions of Indonesia; promoting connectivity within Indonesia, the ASEAN region and globally as well as improving human resources and science and technology PPPs are expected to play an important role in the implementation of the MP3EI The private sector involvement in MP3EI is projected to contribute to 51% of the funding, or equivalent to Rp 100 trillion per year Earlier enforced in the RPJMN 2010-2014, infrastructure financing will require

Rp 1429 trillion, in which PPP is projected to contribute for 41% of the financing This paper demonstrates the likely roles that PPPs will play in the development of the MP3EI as well as setting out opportunities for UK PLC for developing PPPs in Indonesia

Concluding Points on the role of PPPs in the MP3EI:

1 PPPs are likely to play an increasingly important role in Indonesia 32 out of 79

infrastructure projects in the MP3EI are listed as PPP projects and this is not including other possible projects unrelated to MP3EI, or unsolicited projects being offered by the private sector PPP is likely to be a relatively constant, if not increasingly prominent feature along Economic Corridors of the MP3EI because significant infrastructure investment is envisaged for all corridors Furthermore, under the MP3EI, the Government

of Indonesia is actively encouraging private involvement in the form of financing its

infrastructure sector Previously a feature only in the toll roads sector, PPPs, as stated in

the PPP Book 2011, are set to become widely used in other sectors such as the Water Supply & Sanitation sector, the Solid Waste Management sector, the Power sector and the Transport sector (Monorail, Bus & Rail Terminals and Transjakarta)

2 The Indonesian government is committed in implementing PPP projects, especially under the MP3EI In the anticipation of a growing PPP market, the Government of Indonesia

has already made several institutional changes and reforms shown by the creation of several SOEs for financing and guarantee provision The Public-Private Partnership Central Unit (P3CU) - the central unit for PPP in Indonesia that lies inside BAPPENAS –

as well as the National Committee for the Acceleration of Infrastructure Provision (KPPI) which coordinates the acceleration of infrastructure provision with the objective of national economic growth have also been established The national government is also reassessing regulations in order to remove bottlenecks and smooth the way for PPP project realization These reforms show that the government has taken notice of persisting problems common in PPP projects around the world, and has taken preventive actions to evade them

3 Challenges and barriers to implementing the MP3EI still remain Since the MP3EI

promotes the use of PPPs and there are still implementation issues to address for the MP3EI, it follows that a poorly implemented MP3EI will lead to lower realizations of PPP projects The biggest challenges in implementing the economic corridors set out by the MP3EI include a lack of capacity of the public sector actors who are unfamiliar with the PPP mechanism, coordination between central and local levels of government; overlapping regulations and implementation of the newly enacted Land Acquisition Law Within the economic corridors, the role of the central government will be limited to regulation and allocation of central investment while the local governments will determine regulations and investment allocation in the regions Hence a lack of capacity among local governments presents a considerable challenge in the application of PPP

of Singapore and the UK’ for a more comprehensive explanation

Concluding Points on Opportunities for UK PLC

With a mature domestic market for PPP, especially for public utilities, UK PLC can look for opportunities of investment abroad Indonesia, with strong recovery after the Asian Financial Crisis, excellent demographics, high economic growth and advances to improve the investment climate, is an emerging market which cannot be ignored

Some of the areas recommended for the UK and the UK PLC to engage in the Indonesian PPP include:

1 Foreign direct investment UK PLC could penetrate into the large market in road

projects, where numerous projects are available and are also in line the MP3EI’s first phase Indonesian demand of PPPs which also match with UK expertise are the Water Supply & Sanitation sector, the Solid Waste Management sector and the Transport sector,

as well as the more common projects on Road and Power sectors UK PLC can also propose unsolicited projects, and will attain certain benefits if approved

2 Capacity building and building expertise in managing PPPs This can be done through

various ways First, the UK or UK PLC, with two decades of experience in PPPs, could offer training for better PPP management schemes in Indonesia Second, UKAID could engage in developing the PPP scheme in Indonesia through a form of aid or partnership

in sharing the expertise

3 Low carbon technology Looking ahead, Indonesia has already announced the National

Action Plan for Greenhouse Gas (RAN GRK) and a commitment to Reducing Emissions from Deforestation and Forest Degradation (REDD+) which are both part of the national commitment to reduce green house gases There are, therefore, opportunities for low carbon PPP projects incorporating technological advances that have been made towards achieving lower carbon emissions Combining the UK’s strong performance in the Low Carbon and Environmental Goods and Services (LCEGS) with the relatively untapped market of Indonesia is a key opportunity for UK PLC One example cited is the low carbon technology used in the first PPP project in Indonesia under the MP3EI, the Central Java Steam Power Plant The PPP showcase project was won by a Japanese consortium and uses ultra-supercritical technology to provide more efficient coal use for the steam power plant

2011, this ambitious policy aims to leapfrog Indonesia into the ten biggest economies by 2025,

by increasing GDP to US $4.5 trillion as well as by increasing GDP per capita income from a current level of US$ 3000 to US$ 15,000 The Committee on Economic Development Acceleration and Expansion of Indonesia 2011-2025 (KP3EI) is an institution established the President of the Republic of Indonesia on May 20, 2011 to coordinate the implementation of MP3EI

The initiative aims to complement the 5 year cyclic plan, the National Medium Term Development Plan (RPJPM) 2010-2014, as well as the 20 year National Long Term Development Plan (RPJPN) 2005-2023 The national government has also committed to reduce green house gases though the National Action Plan for Greenhouse Gas (RAN GRK) and Reducing Emissions from Deforestation and Forest Degradation (REDD+) Such plans are expected to be in line with the National Spatial Plan (RTRWN) which is yet to be completed.1The MP3EI uses the term ‘Economic Corridors’ to differentiate the six economic regions across the archipelago, each with its own theme and focus of economic development To accelerate economic growth, the MP3EI document designates eight economic programs that consist of 22 economic activities as illustrated in the figure below

1 Indonesia’s Structural Reform Priorities, paper presented in APEC Residential Workshop Training on Structural Reform, Singapore, August 2011

Figure 1 Estimated Investment Required for the Main Economic Activities of the MP3EI

Source: MP3EI, p50

The smooth operation of these economic activities will rely on good infrastructure to support mobility In fact, as one of the main pillars of the MP3EI, strengthening national connectivity includes the development of infrastructure as a key strategy to achieve not only regional connectivity but also a global connectivity

As an archipelagic country, developing infrastructure to better connect the regions is undoubtedly important Yet Indonesia received a wake-up call when the Global Competitiveness Report 2009-2010 ranked the country 96 out of 133 countries for infrastructure competitiveness.2This year’s ranking improved somewhat to 76th place, however, the ranking of port facilities and electricity supply have lacked progress and currently stand at 103 and 98 place, respectively The current report also states that the greatest factor hindering investment is corruption and bribery, despite extensive government efforts to curb both

The total investment required for the six corridors is Rp 4,012 trillion From this, it is expected that the Sumatra Corridor will receive Rp 714 trillion (18% of total investment), Rp 945 (24%

of total investment) for the Kalimantan corridor, Rp 1,290 trillion (32% of total investment) for the Java corridor, Rp 309 trillion (8% of total investment) for the Sulawesi Corridor, Rp 133 trillion (3% of total investment) for the Bali-Nusa Tenggara Corridor and lastly Rp 622 trillion (15% of total investment) for the Papua- Kepulauan Maluku Corridor See figure below

2 Hadjar Seti Adji, “Mendorong Investasi Infrastruktur di Indonesia”, Investor Daily, 9 March 2012

Figure 2 Indications of Investment in the Six Economic Corridors

Source: MP3EI

The MP3EI has three phases; the first phase (2011-2012) is devoted to the construction of infrastructure projects that are prioritized to accelerate development, as well as debottlenecking and increasing infrastructure productivity; the second phase (2013-2014) on the other hand is devoted to new project developments; whilst the third phase (2015-2025) is devoted to the development of future projects.3 This is where PPP enters the picture

Figure 3 The PPP System Within the MP3EI

Source: MP3EI document, p23

3 Agustiyanti, “MP3EI Infrastructure Support: Private Sector to Contribute Rp 100 Trillion per Year”, Indonesia Infrastructure

Initiative, 24 November 2011

Source: MP3EI

Indonesia is currently on the final stage of the first phase Indonesia is intensifying the promotion

of PPP as it is quickly becoming the government’s preferred method to finance infrastructure costs Shown from the figure above, PPP is recognized as one of the strategies for the financing

of projects under the Master Plan

To achieve the targets set in the MP3EI, Indonesia should spend about 5% of its GDP for infrastructure investment However, the government only could spend 1% of GDP or equivalent

to 25% of the State Budget (APBN) In MP3EI, the total investment in the six corridors will amount to Rp 4,012 trillion and 43% of which will be channelled towards infrastructure development As seen from the figure below, the private sector involvement in MP3EI is projected to contribute to 51% of the funding, or Rp 100 trillion per year from private funding.4

In the RPJMN 2010-2014, infrastructure financing will require Rp 1429 trillion, in which PPP is projected to contribute for 41% of the financing.5 Out of the total of 84 projects planned in the MP3EI, the year 2012 will bear witness to 11 projects that worth Rp 78.2 trillion under the PPP scheme.6

Figure 4 Levels of Investment by Source

Under the MP3EI, all existing regulatory frameworks must be evaluated, and strategic steps must be taken to revise and change regulations in order to attract such support from investors Incentives will be implemented on tariffs, taxes, import duties, labor regulations, licensing and permits and land procurements In order to achieve these goals, the central and local governments must build a stronger link within and beyond the centers of economic growth

To address the complicated procedures in setting up businesses and investing, the government has also recognised the need to debottleneck both regulations and bureaucracy within this plan The MP3EI employs a ‘Not Business as Usual’ way of thinking

to accelerate economic growth; hence the private sector is encouraged to participate in project implementation.7

Indonesia started its first PPP project in the late 1990s by commissioning a toll road project The year 1998 also witnessed the first regulation of a PPP issued by the government; however deregulation and work towards removing contradictory Presidential Regulations has only

4 Ibid

5 Oxford Business Group, “At the Center of Attention”, The Report Indonesia 2012, p35

6 Edi Can, “Govt to launch 84 projects worth Rp 536 trillion”, Kontan

7 For further details on the implementation of the MP3EI itself, please refer to the second report produced by Strategic Asia as part of this project, entitled ‘Implementing Indonesia’s Economic Master Plan (MP3EI): Challenges, Limitations and Corridor Specific Differences.’

recently begun in 2011 through the issuance of the latest Presidential Regulation no.56 year

2011

The Government of Indonesia also formulated several regulations for sector specific PPPs, such

as in the energy and water sectors, to provide information for private business entities, refer to the annex section for the list of PPP regulations Deregulation and debottlenecking are therefore seen as a vital precursor for PPP projects to be implemented in Indonesia

Despite the improvement in regulatory reform, however the state budget is considered insufficient to fund the required levels of investment Looking at Indonesia’s historical experiences of PPP, there are plentiful opportunities for business entities to invest in Indonesia in the long term, especially now the Government of Indonesia has recently committed to accelerate its economic development

The UK FCO and Strategic Asia

The UK Foreign and Commonwealth Office (UK FCO) in Jakarta contracted PT Strategic Asia Indonesia between August 2011 and April 2012 to undertake a project looking at the implementation barriers and requirements as well as opportunities created by the MP3EI This paper looks specifically at the use PPPs in Indonesia, the role they are likely to play under the implementation of the MP3EI and outlines key PPP opportunities for UK PLC A second paper has been produced as part of this project which looks at the barriers and requirements for implementing the MP3EI The second paper looks at the national level and also specifically at the Kalimantan and Bali – Nusa Tenggara Corridors

Data Collection and Evidences from the Field

The conclusions and recommendations that have been put forward in this paper are based on the data collected throughout the life of this project Opinions from a wide range of stakeholders were gathered during the four conferences which were hosted by Strategic Asia and the UK FCO

as part of this project Two conferences at the regional level, Kalimantan and Lombok, were held

to assess implementation barriers and requirements as well as opportunities in the MP3EI Two further national conferences were also held in Jakarta As such, part of this paper will look specifically at PPP opportunities in the Kalimantan and Bali- Nusa Tenggara Corridors, as well

as an overview at the national level Meetings were also held in Jakarta and in the regions, with field trips in Kalimantan, Lombok, Bali and Aceh Participants for conferences were also drawn from all six of the Economic Corridors as proposed by the MP3EI Further to this, Strategic Asia also contracted a Jakarta based market research company, the Polling Center, to conduct surveys amongst the participants of the conferences to gather opinions based on standardised set of questions

This paper runs as follows Firstly, PPPs in the context of the MP3EI is addressed Secondly, a recent development of Indonesia’s PPP model is explained This section also covers the main sectors where the use of PPP has been a prominent feature Recent developments in institutional reform and increased government support are also covered The second section looks specifically

at opportunities as well as issues in developing PPPs in the Kalimantan and Bali- Nusa Tenggara Corridors Thirdly, opportunities for UK PLC are addressed and focus on matching the available sectors offered in Indonesia to the UK PLC’s expertise This section is broken down into unsolicited projects and opportunities to assist the Indonesian government in capacity building to better realize and deliver PPP projects This section also covers current low carbon PPP opportunities in Indonesia

The next section covers the more recent trends in PPPs in Indonesia and provides the current outlook for the PPP model

Chapter II

Recent Developments in Indonesia’s PPP Model

The use of PPPs gained momentum at the start of the National Medium Term Development Plan (RPJPM) 2010-2014 since it was expected to fill the financing gap for the infrastructure plans contained within this blueprint The announcement of the MP3EI in May 2011, once again reiterated the role of PPPs in Indonesia PPPs have been in the spotlight in Indonesia since the development of each of these plans

2.1 Sectors (toll roads, transportation, water)

Under the scope of MP3EI, the PPP model has been allocated and prioritized as the means of infrastructure development to accelerate economic growth PPP opportunities in infrastructure in Indonesia can be divided into these eight sectors:8

• The drinking water sector (facility for raw water extraction, transmission network, distribution network, drinking water management installation);

• The transportation sector (port, airport, railway and train station);

• The road sector (toll roads and toll bridges);

• The electricity sector (power plant, transmission and electricity power distribution);

• The oil and natural gas sector (processing, storing, carrying, transmission or distribution);

8 Praptono Djunedi, “Implementasi Public-Private Partnerships dan Dampaknya ke APBN”, Majalah Warta Anggaran Edisi 6

(2007), Direktorat Jenderal Anggaran

This section covers the recent developments of the Indonesian PPP model and focuses on priority

sectors, modalities scheme and institutional support, PPP opportunities in Kalimantan and Bali-Nusa

Tenggara Economic Corridors as well as barriers and challenges that face the implementation of PPP

Key messages in this section include:

• The sectors of water supply & sanitation, road, power, solid waste management and the transport

are being offered as stipulated by PPP Book 2011;

• Indonesia has acknowledged the need to debottleneck and to create assurances for the private

sector through the creation of several institutional supports and modalities such as a central PPP

unit (P3CU), a National Committee for the Acceleration of Infrastructure Provision (KKPPI) and

SOEs for guarantee provision and financing: IIGF and PT SMI respectively;

• PPP opportunities in the Kalimantan region include the building of ports and roads, whereas

Bali-Nusa Tenggara focuses on the building of ports and power plants Challenges facing the

Kalimantan and Bali-Nusa Tenggara Economic Corridors are essentially on the inter-regional

disparities, lack of human capacity and the lack of knowledge on both PPP and MP3EI itself;

• Key barriers and challenges in the PPP implementation under MP3EI include land

acquisition problems, capacity of the public sector, especially at the local government level,

preparation of the projects and their management, regulatory framework and poor governance

• The waste management sector (wastewater management installation, carrier and disposal sites);

• The irrigation sector (pipeline for raw water);

• The telecommunication sector (telecommunication network)

However, referring to the PPP Book 2011 released by the National Development Agency (BAPPENAS),9 currently only selected sectors are being offered to the private sector, namely the Water Supply & Sanitation sector, Road sector, Power sector, Solid Waste Management sector and Transport sector (Monorail, Bus & Rail Terminals and Transjakarta)

Though included in the PPP Book, no projects are proposed for the other sectors, namely the oil and gas sector, water resources sector and the telecommunications sector In other countries, PPPs such as in hospitals, education, defence facilities are common, but they are not offered in Indonesia as stipulated in the PPP-related Presidential Regulation no 13 year 2010.10

Relating back to strengthening the national connectivity pillar, the present condition of physical infrastructure in Indonesia is in a low level of efficiency and productivity as well as poor regional connectivity, thus there is an urgent need for urban infrastructure development

In the following sections, the modalities and institutional support that the government of Indonesia has created are explained

2.2 Modalities Scheme and Institutional Support

Economically advanced countries are using the PPP model of Value for Money (VfM) under the Public Sector Comparator (PSC) system to support efficiency and effectiveness in financing infrastructure, as opposed to the standard governmental methods However, the PSC is unsuitable in Indonesia as the country needs PPP as a way to fill the financing gap in public infrastructure where the government is unable to do so

The government is aware that PPP infrastructure investment in Indonesia is often seen as a high risk to investors, thus the government had been considering to offer guarantees.11 Although relatively new in the PPP scene, Indonesia has already established institutional support and modalities for PPP The figure below illustrates the principle parties to the Indonesian PPP framework

9 PPP Book is an informational document consisting of PPP projects and their readiness to prospective investors

10 Bastary Pandji Indra, Director for Public-Private Partnership Development National Development Planning Agency

(BAPPENAS) Republic of Indonesia, Presentation of Urban Infrastructure PPP –an Indonesian Perspective, Linking Cities to Finance, September 27-28, 2010, Shanghai

11 World Bank, Environmental and Social Management Framework (ESMF) for Indonesia Infrastructure Guarantee Fund (IIGF), April 2012

Figure 5 the Principle Parties in the Indonesian PPP Framework

Source: Bambang Goeritno, Regulations on Public Infrastructure Investment and Doing Construction Business in Indonesia, Shanghai Business Forum, 29 September 2010

Other than establishing a clear framework that will be listed in the Appendix section, the Indonesian government has created several supporting bodies to ease and accelerate the PPP mechanism in the country These bodies are in the form of embedded units in the ministries and state-owned companies

The National Committee for the Acceleration of Infrastructure Provision (KKPPI) was

established to coordinate the acceleration of infrastructure provision for national economic recovery.12 The KKPPI is an inter-ministerial committee chaired by the current Coordinating Minister of Economic Affairs, M Hatta Rajasa It endorses requests for contingent government support (guarantees) as a basis for consideration and approval from the Ministry of Finance.13

Public-Private Partnership Central Unit (P3CU) is an embedded central unit for PPP under

the Directorate of PPP Development in the Ministry of National Development Planning/ National Development Planning Agency (BAPPENAS) Its tasks include: formulating policies; assessing requests for contingent government support; assessing and recommending project proposals feasible for government support; supporting Government Contracting Agencies for the preparation of the project; monitoring and evaluating PPP Project Development; and conducting PPP promotion, capacity building and information dissemination.14 Currently this unit is still

12 INFRADEV & Infrastructure Experts Group

13 Coordinating Ministry of Economic Affairs Republic of Indonesia, Public Private Partnership (PPP) Investor’s Guide, April

2010, p5

14 State Ministry for National Development Planning/ National Development Planning Agency Republic of Indonesia, Terms of

Reference: Technical Assistance and Support for the Public Private Partnerships Central Unit, ADB Loan no 2264 – INO (SF),

Infrastructure Reform Sector Development Project; Coordinating Ministry of Economic Affairs Republic of Indonesia, Public Private Partnership (PPP) Investor’s Guide, April 2010, p5

under process however, BAPPENAS and the unit will be the dedicated regulators and supervisory body for all PPP projects in Indonesia, whereas the Ministry of Finance will deal mainly with the Risk Management of projects, policy support as well as managing the SOEs for guarantee provision and financing

To ease the materialization of large projects, the government has created a guarantee enterprise (BUPI) for the project companies to access loans from banks and private financial institutions

One of the newly created state-owned enterprises under the Ministry of Finance is the Indonesia

Infrastructure Guarantee Fund (IIGF or also known as PT PII Persero) which has the

following tasks: providing contingent support for the Government of Indonesia by guaranteeing any contractual risks in relation to government actions; improving the quality of PPP transactions; pushing for a fixed and accountable approach for PPP implementation, with IIGF as the single processor and provider of infrastructure guarantees.15 Created in December 2009, the IIGF uses a policy called the Single Window for multiple guarantee provision processes Through the IIGF, the government appraises infrastructure projects, structures guarantees and processes claims The aim is to uphold transparency and consistency in guarantee provision and claim processing in order to increase investor’s confidence to participate in infrastructure projects in Indonesia The current President Director of the IIGF is Sinthya Roesly

Another state created company is PT Sarana Multi Infrastruktur Persero (PT SMI) It is a

non-bank financial institution wholly owned by the Ministry of Finance to assist funding of various infrastructure projects PT SMI was created in 2009, with the start-up capital sourced from the Asian Development Bank (ADB), the International Finance Corporation (IFC) and Deutsche Investitions- und Entwicklungsgesellschaft mbH (DEG) as well as from the Government of Indonesia PT SMI promotes PPP in accelerating infrastructure development in Indonesia.16 After the IIGF gives its assessment and guarantee, PT SMI can give funding through

a loan, mezzanine or equity It is currently headed by Emma Sri Martini The company has a subsidiary called PT Indonesian Infrastructure Fund

For infrastructure specific financing, the government has prepared three financial facilities for PPP in Indonesia, which are grouped in three categories: Land Funds, Infrastructure Funds and Guarantee Funds Land Funds consists of Land Revolving, Land Capping and Land Acquisition all of which are managed by the Ministry of Public Works Infrastructure Funds are prepared by

PT SMI and PT IIF, whereas Guarantee Funds are managed by IIGF.17 The figure below illustrates how a project company interacts with various bodies, ministries, state-owned enterprises, and other entities regarding project implementation

15 IIGF, Public-Private Partnerships in Indonesia: The Guidelines for Risk Allocation, March 2011

16 PT SMI, Investment Book, April 2011

17 Freddy Saragih, “Program KPS Dijamin PT PII”, Media Keuangan vol IV no 45, Secretary General of Ministry of Finance

Republic of Indonesia, May 2011

Figure 6 the National PPP Network

Source: Andri Wibisono, Jeff Delmo and Hongjoo Hahm, Terms of Reference Technical Assistance and Support for The Public Private Partnerships Central Unit (P3CU), Infrastructure Reform Sector Development Project ADB; Unlocking the Public-Private Partnerships Deadlock in Indonesia

The government needs to conduct several phases of project maturation before it can offer projects to the private sector; these are elaborated in the figure below:

Ministry of Finance

Ministry

of

SOEs

Infrastructure Sector Ministries MPW, MT, MENR, MCI

Ministry of Home Affairs

Government Contracting Agency

Secretariat/ P3CU

• Policy Coordination, Planning

& Development

• Monitoring & Quality Control

• Identify Projects requiring Government Support

• Facilitate Cross-sector issues

• Transaction advisor support

Risk Management Unit

• Government support policy

• Development and monitoring

• Assess issues and Manage Guarantee

Line Ministry and

Project Development Facility (PDF)

IIGF Assessing and Managing Government Support

PT SMI/

IIFF Financing

Ministry of Planning/ BAPPENAS

National Committee for the Acceleration of Infrastructure Provision (KKPPI)

Figure 7 Phases of PPP Project Realization

Source: Sustaining Partnerships, Edisi Khusus Tahapan KPS 2011, p12

In the above graph, Project Company involvement will take place at Stage 4 of project realization Prior to this stage, the national government works to ensure that a project is feasible Private consultancy services are involved in phases 1 and 2; however, in terms of project implementation Project Companies will only be involved when tenders are issued at Stage 4 A government contracting agency (PJPK) can be a ministry, government institution, or a provincial, regency, or city government Every interested investor will undergo pre-qualification and procurement phases with the PJPK

At stage one, the government contracting agency (PJPK) will form a procurement committee as well as conducting market sounding to get feedback from the private sector on the quality and attractiveness of the project As part of the feasibility study, the committee will prepare a Self-Assessed Price (HPS) and gather pre-qualifications documents and procurement documents Here the level of government support will also be determined in terms of the amount and nature

of the government contribution to the project, such as tax incentives, land acquisition, contingent support/guarantees, direct financial support, etc

The largest portion of risk will be allocated to the party that is most likely to be able to handle the risk entailed Construction and operation risks are usually given to the private sector, while

CS Manage ment

Preparation

of priority projects

Stage 1

Early preparation of Pre-Feasibility Study

Stage 2

Checking the readiness of the project feasibility

Stage 3

Finishing the feasibility study of the project

Process of Procuring Land

Phase IV:

Contract Management

PPP Contract Management

Stage 4

Procureme

nt of the Project Company

Government Support Analysis

Submitting and Evaluating Governance Support

Phase II: Project Preparation

Phase III: Transaction

regulatory frameworks will be handled by the contracting agency Market risk could be shared

by both parties

Figure 8 Description of Pre-Qualifications and the Indonesian PPP Procuring Process

Source: Sustaining Partnerships, Edisi Khusus Tahapan KPS 2011, p22

The transaction phase is crucial for the potential private sector partner In the pre-qualification stage, the procurement team will select potential investors that could be short-listed for the competitive bidding, as described in the figure above An expression of interest will be submitted here Short-listed candidates will be evaluated and ranked, and the qualified candidates will be invited to submit full proposals The first ranked bidder will be welcomed to negotiate with the PJPK At this point the decision to award the bidder will be in the hands of the PJPK As can be seen from the above graph, the number of bidders also matters as back-up options are needed in case the winner drops out of the project The PJPK is not advised to have an MOU with the project company to avoid direct indication of parties, and every deal should be made through tenders After reaching an agreement, the PJPK will ratify the result and the procurement committee will announce the contract award

Should the PJPK ask for a project guarantee from the Risk Management Unit (RMU) in the Ministry of Finance, if the RMU approves, it will be processed by the IIGF The IIGF will guarantee the project and, if necessary, the Ministry of Finance will act as a co-guarantee If the IIGF agrees to guarantee the project it will release a letter of intent and an acceptance statement regarding the scope, risk allocation and timeframe of the guarantee The involvement of IIGF

Announcement

Pre- Qualifications

Repeat

pre-qualifications

Project Offer

• ≥3
1 potential winner, 2 extras

• =2
1 potential winner, 1 extra

• 1
repeat procurement or negotiations with ministerial approval

• No legitimate bid
failure of procurement and re-offering will take place

Winner of Procurement

will span from phase one until phase three of project realization, and at the implementation phase IIGF will continuously monitor the project

For sectors such as water utility, the government contracting agency will head the local government and the Regional Company for Drinking Water (PDAM) Other stakeholders include the local parliament (DRPD) and regulatory body For the drinking water sector, the Ministry of Public Works (MPW) will offer projects to investors The scheme will be Build-Operate-Transfer (BOT), where the private sector can sell the final product to the government Hence, firstly the private investor must go to the body offering the project, in this case the sector-specific ministry Also specific programs are often offered by the local government and the regional/ provincial head or elected official called Bupati Reliable regents or Bupatis are to be engaged and project talks must be conducted as early as possible

Indonesia also regularly holds Indonesia International Infrastructure Conferences and Exhibition (IIICE) organized by the Indonesian Chamber of Commerce (KADIN) and supported by the United Nations Economic and Social Commission for Development in Asia Pacific (UNESCAP) In the year 2012, the conference was hosted between the 2nd and 5th May Such conferences and exhibitions offer a chance for the central and local government to meet with private sector in order to work towards the development of infrastructure in Indonesia.18

The two sub-chapters below will elaborate on specific PPP opportunities and condition in the Kalimantan and Bali – Nusa Tenggara Corridors, as outlined in the MP3EI

2.3 PPP Opportunities in the Kalimantan Economic Corridor

The Kalimantan economic corridor has been designated as a Centre for the Production and Processing of National Mining and Energy Reserves, due to its abundant mineral and energy resources Under the MP3EI, the GDP of Kalimantan Corridor is projected to grow at 11.9 percent annually

Kalimantan’s main economic activities are focused on the production of Steel, Bauxite, Coal, Oil and Gas in the mining sector and Palm Oil and Timber in the non-mining sector This region has four primary economic centres: Samarinda (East Kalimantan), Palangkaraya (Central Kalimantan), Pontianak (West Kalimantan) and Banjarmasin (South Kalimantan)

Under the MP3EI, the Kalimantan region should contribute to a significant increase in economic growth However, the government is unable to meet the economic target stipulated in the Master Plan on its own unless it finds an alternative source of funding, particularly in the form of private investors’ contributions Out of Rp 4,012 trillion required from the private sector, only 24 percent of it or Rp 945 trillion is designated for the Kalimantan Corridor In addition, the MP3EI challenges Kalimantan to optimize its economic potential in a sustainable and not Business as Usual way to meet its target

18 Indonesian International Infrastructure Exhibition 2012 homepage

In total there will be 11 projects in Kalimantan, though all are still classified under potential projects, amounting for more than US$ 3 billion The only one already in tender is the Puruk Cahu – Bangkuang Coal Railway in Central Kalimantan, which accounts for a total investment

of US$ 740 million.The railway is expected to carry 10 million tons a year in the first 10 years

of its completion.19 This project has already seen four successful bidders: the Itochu-Toll consortium, Drydocks World LLC-PT MAP Resources Indonesian consortium, PT Bakrie-SNC Lavalin-Thyssencrupp consortium and China Railway Group Limited-PT Mega Guna Garda Semesta-PT Royal Energi consortium.20 The Government Contracting Agency (PJPK) in this project is the local government of Central Kalimantan province (BAPPEDA Kalimantan Timur) The project will use the Design- Build-Finance-Operate (DBFO) PPP model Construction is set

to begin in 2013 after the PJPK announces the name of the winner of the bid

In East Kalimantan, there are five potential projects, including one airport in Samarinda, one sea port in Maloy, a coal railway in Balikpapan, a toll road connecting Balikpapan and Samarinda, as well as a coal fired steam power plant (2x100MW).21 For the Maloy Port, project preparation and estimated tender time is 2012 The port is designed to be a CPO port to support the CPO plantation industry and its downstream industry In West Kalimantan, there are four potential projects, including three water supply systems and an airport The Singkawang Airport began project preparation in 2011 and the estimated tender time will be later in 2012 Meanwhile, in South Kalimantan, there is only one potential project, which is the Pelaihari sea port

Apart from the PPP projects being offered in the PPP Book 2011, the East Kalimantan local government has signed an MOU with a subsidiary of state firm Russian Railway, the Kalimantan Rail PTE Ltd, to build a railway for transporting people and coal The project will be done in two phases, the first one connecting inter-East Kalimantan itself, which connects Balikpapan to West Kutai, and the second one will be extended to the Central Kalimantan province The ownership

of this infrastructure will be discussed further in a technical agreement following the MOU Currently, the project is in the land release phase This will be the first cooperation of Indonesia undertaken with a Russian private sector business It is expected that the first phase will be finished in the year 2017 A US$ 2.4 billion fund aid will be wholly from the State Affairs and Foreign Economy Bank in Russia and the Kalimantan Rail PTE Ltd.22

Therefore, the majority of the potential PPP projects in Kalimantan are mining related infrastructure projects However, the growth of the oil and gas sector has been declining in recent years and the MP3EI document acknowledges the need to develop the non-oil and gas sector in

19 PT Buena Persada Mining Services, “Indonesia’s Adaro eyes $1.5 billion Coal Railway”,

17 Apr 2010

20 Jakarta Post, “PII to guarantee $2.3b railway project in C Kalimantan”, 1 December 2011

21 Direktorat Pengembangan Kerjasama Pemerintah dan Swasta, “ Development of Maloy International Port, East Kalimantan”

22

Satya Festianirai, “Russia and Indonesia Project Kalimantan Railway”, Republika Online, February 28, 2012; “Indonesia-Rusia

kerjasama pembangunan rel kereta api”, Antara, February 7, 2012; “Rusia Bangun Infrastruktur Kereta Api di Kalimantan

Timur”, Pikiran Rakyat Online, February 8, 2012

Kalimantan Hence there exists the opportunity to offer low carbon projects through the unsolicited mechanism, which will be explained in the following chapters

According to the findings from the surveys conducted by the Polling Center, problems related to implementing the MP3EI in the Corridor III are the following:

• An inter-provincial disparity, since East Kalimantan is a much richer province and more developed compared to other provinces on the island;

• A lack of infrastructure to implement the MP3EI;

• A lack of human resource capacity It has been argued that the key messages of the MP3EI have not yet been fully socialized, and local government and local private sector are thus not yet prepared to implement PPP projects ;

• Complex bureaucratic procedures in issuing mining permits;

• Public resistance, especially for sensitive issues such as land release and lack of synchronization between central and local governments, towards implementing the projects in MP3EI

2.4 PPP Opportunities in the Bali - Nusa Tenggara Corridor

Corridor V of the MP3EI consists of the provinces of Bali, West Nusa Tenggara (NTB) and East Nusa Tenggara (NTT) The theme of the Bali - Nusa Tenggara Economic Corridor is the

‘Gateway for Tourism Industry and National Food Support’ This upsurge in economic activity aims to improve people’s welfare in this corridor where 17 percent of the population is below the poverty line and where there is a relatively high income disparity of Rp 17.7 million per capita (between the richest and poorest regencies/cities in this corridor) This corridor faces various problems including unequal population distribution, low investment levels and limited availability of basic infrastructure Therefore, this corridor requires acceleration and expansion

of economic development, which will focus on 3 main economic activities: tourism, fisheries and animal husbandry

As tourism is one of the key sectors in Corridor V of the MP3EI, the Ministry of Tourism and Creative Economy is involved quite intensively in accelerating economic growth in the region The Ministry has stated that the corridor will be open for private investment in several infrastructure projects There are approximately 136 projects with an estimated total cost of Rp

210 trillion up to 2025 Here the government has allocated its share at 20%, the rest will be contributed by the private sector and state-owned enterprises.23

Infrastructure development will ultimately aid national connectivity which will in turn reduce transportation and logistical costs, making economic activities more efficient In the Bali – Nusa Tenggara corridor, the prioritized connectivity activities are focused on enhancing airport development, capacity building, developing road infrastructure and constructing new power

23 Ashari Purwo , “Koridor V MP3EI Terbuka untuk Swasta”, Bisnis Indonesia, 1 Desember, 2011

plants to support the main economic activity of tourism, increase fishery production, develop the salt business and support livestock production.24

According to a report of the MP3EI’s kick-off meeting, this corridor will need key infrastructures which include the expansion of Ngurah Rai Bali International Airport, terminal cruise in Tanah Ampo, the Trans-Bali toll road, as well as an electricity power plant.25Infrastructure in the tourism sector is developed in line with centres of tourism in this corridor One of the projects, the Tanah Ampo terminal cruise, is set to be a tourism port in the eastern regency of Bali, Karangasem It is the only cruising port in Bali and the expansion of the over burdened port is being offered to investors under PPP.26 The port provides a good opportunity for meeting international standards, increasing connectivity and aiding tourism development in the region To meet these objectives, the starting phase of the project requires Rp 160 million.27

In order to perfect and maximize the expansion of the cruise terminal, the regency of the Karangasem government has conducted meetings with the Australian consultant SMEC Peter Benson as well as the Ministry of Transportation and the Balinese provincial government, and other technical parties.28 This terminal is of particular interest to investors from Japan and Australia because of its location in the east.29 Other interested investors hail from Singapore, Turkey, USA, and China, most of whom have conducted surveys on Karangasem Due diligence and pre-feasibility studies has been carried out by the SMEC consultant The Directorate General

of Marine Transportation is the Government Contracting Agency (PJPK) for this project The proposed scheme for this port is Operate & Maintain (O&M), because if the building is included

in the scheme then the financial return will not be met If this is approved, then the winning bidder will not need a guarantee from IIGF.30 The Tanah Ampo port is currently being operated

by port operator Pelindo III and the local government However, the progress of this project is still questionable due to some issues with changes to authorities from Pelindo to the local government and the availability of the documents required conducting pre-qualifications

In NTB, the largest infrastructure project this year in the corridor will be the Bima Port which is estimated to need a total investment of Rp 400 billion The realization of the project, however, is still undetermined.31 In NTB, the local government is pushing for private investors to invest in one of the biggest projects for tourism, the Mandalika Resort So far, six national investors have signed contracts with the regional government The Mandalika Resort is a 1,350 hectare integrated tourism area similar to Bali’s Nusa Dua It is set to be a special economic zone which will benefit greatly from the fiscal and non-fiscal facilities that will attract more investors to the

24 Directorate for Public Private Partnership Development, “The Connectivity of Six Economic Corridors”, Sustaining

Partnerships: Media for Information on Public Private Partnerships , December 2011, p21

25 Coordinating Ministry of Economic Affairs, “Penyusunan Masterplan Percepatan dan Perluasan Pembangunan Ekonomi Indonesia 2011-2025”, Pengembangan Koridor Ekonomi Indonesia Kick Off Meeting, 7 February, 2011

26 “Tanah Ampo to Serve as Main Cruise Ship Terminal in Bali”, Jakarta Post, 12 July, 2011

27 “2012 Dua Proyek Infrastruktur Transportasi Ditender”, Investor Daily, 23 December, 2011

28 “Pelabuhan Wisata Berpeluang Layani Puluhan Kapal Besar”, Investor Daily, 11 March, 2011

29 “Lima Proyek Infrastruktur PPP Mulai Jalan 2011”, Investor Daily, Juni 12, 2011

30 Indonesia Investment Coordinating Board (BPKM), PPP Infrastructure Showcase Project Tanah Ampo Cruise Terminal

31 Edy Can, Kontan

tourism sector.32 The building of the tourist area, Mandalika, will require US$ 3 million or around Rp 27 trillion, with the State-Owned Enterprise, PT Bali Tourism Development Corporation, investing Rp 2.2 trillion The rest will come from the private sector.33

NTB also aims to be a centre for animal husbandry, especially for cattle However, currently the province still faces problems in meeting national beef consumption, hence the need for better infrastructure, as well as better techniques and science and technology in the field The Ministry

of Research and Technology gives funding amounting to Rp 50 million for research into 125 innovations in the corridor that could make Indonesia a self-sustaining meat producer by 2014

To reach the goal of meeting national beef consumption, NTB is aided by the Indonesian Science Agency (LIPI) that provides 2,500 superior cow seeds from Bali.34

In NTT, there are currently no projects offered under the PPP scheme This could demonstrate the lack of equality and the disparities within the corridor For example, Bali is very well known and quite developed in the PPP scheme in comparison to the neighbouring Nusa Tenggara islands

As opposed to the development of mining activities in Kalimantan, mining sector development in corridor V is not prioritized due to the negative impacts it could bring to the livestock and fisheries sectors

According to findings from the Polling Center, problems related to implementing MP3EI in corridor V could be outlined as below:

• A lack of technology and innovation in infrastructure in local business;

• The government has stated that it is not ready to implement the MP3EI due to lack of infrastructure, financing and human resources;

• Financing problems for the private sector to invest in the corridor;

• For the tourism sector, NTB and NTT are living under the shadow of Bali Product differentiation from Bali is deemed necessary;

• Lack of socialization from the central government regarding the MP3EI initiative

to the local government, private sector and the civil society, hence not equal spread awareness from all stakeholders

2.5 Barriers and Challenges in Implementing PPP Projects in Indonesia

As in any new unprecedented initiative or policy, barriers and challenges will persist This section further explains the factors that still hinder the implementations of PPPs in Indonesia After more than two decades since the Indonesian government implemented the first PPP project

on toll roads, followed by two Indonesia International Infrastructure Conferences and Exhibition (IIICE) events, Indonesia is still unable to attract many private business entities to invest in the

32 Andhika Pertiwi, “Produk Wisata NTB Harus Beda dari Bali”, Kompas, Oktober 25, 2011

33 “Hatta Janji Percepat Penetapan Status KEK untuk Mandalika”, Investor Daily, October 21, 2011

34 “Membangun Bumi Sejuta Sapi”, Media Indonesia , Februari 29, 2012

country There is a common consensus among local governments that PPP schemes help resolve governments’ financial difficulties, especially in terms of infrastructure development projects However, there are still a number of obstacles that Indonesia faces to effectively realize PPP projects Based from the empirical findings, among them are the following:

Land Acquisition Problems

To date, land acquisition is deemed to be one of main problems in the overall PPP transaction process Land acquisition in Indonesia is part of the government support but is also included in investment costs Furthermore, the land release process in Indonesia for PPP projects can take much longer than stated in the investment agreement This means the private sector still bears the cost of releasing the required land Commonly, governments have to provide compensation to the community from which land has been acquired thereby increasing the expense and the length

of the process High compensation costs for land affects the length of a project’s concession period making the investment less attractive to the private sector parties since the return on investment is prolonged However, the current land appraisal method has improved significantly

in the last two years which may reduce disputes between land owners and local governments In addition, in January 2012, the government issued Law No.2 year 2012 to ease the land acquisition process in Indonesia but the Presidential Regulation is still pending To date, it is still too early to judge whether the new regulation is able to minimize land release problems to support the implementation of PPP project Thus, there is a hope that the land acquisition problem can be simplified through the PPP execution process in the near future

Capacity of the Public Sector at the Local Government Level

Throughout the many PPP projects undertaken across provinces in Indonesia, the discussion often centres on the fiscal capacity of the government in terms of infrastructure project finance However, another key theme often emerges, related to the lack of human capital capacity regarding knowledge of the PPP mechanism and its procedures for implementation It is often found that local governments lack the authority to play a more significant role in the operational procedure of the project Local governments in the past have often only had limited responsibilities up until the completion of the land release process, as seen in the development of the Pekanbaru - Dumai Toll Roads They also even had problems dealing with asset recognition and land ownership in the community During the implementation of PPP projects, it has been known for local governments to require technical assistance from private parties pushing up costs for the private sector and in turn deterring investment

Preparation of the Projects and their Management

The success of a PPP project is usually determined at the beginning of its lifecycle when the government devises the project The development of the PPP model in Indonesia has been relatively slowing in comparison to countries such as Singapore or the UK Furthermore, the Indonesian government is still relatively new to the concept of better project preparation and

management, yet the country is on the right track towards improving PPP project implementation The government still needs to considerably improve project preparation relating

to asset, resource and financial management It should also provide clear procedures for the private sector in order to provide a clear view of potential projects as well as the mechanism to enter the market in Indonesia To date, the government is still preparing to establish a website detailing prospective projects and various related information including information about the government contracting agencies with which business entities should cooperate The government should give a clear picture of PPP investment processes, ensure a good business climate, and provide government support to increase the bankability of a given project, as well as reduce potential risks throughout a project’s lifecycle Moreover, the government is not yet in the habit

of conducting public consultations prior to project implementation Thus, the government is not seen to take account of the general public’s opinion on the project resulting in protests and demonstrations by the public against the project

Regulatory Framework

It is often found that articles in separate government regulations contradict each other This has been characteristic of the regulatory framework for the Indonesian PPP scheme Overlapping regulations among line ministries also exist, prompting calls for national legal reform For example, there is presently a conflict between Presidential Regulation no.6 year 2006 to no 30 year 2008 and no.50 year 2007 regarding Procedures for Implementation of Regional Partnerships with Presidential Regulation no 13 year 2010 and Presidential Regulation no.56 year 2011 on PPP as mentioned by Gunsairi (Sub-Director of Institutional Regulation and Information, Directorate of PPP) from the National Development Planning Agency.35 However,

the recommendation to solve the issue of contradiction between government regulations has been taken into consideration as a means of providing consistent law enforcement throughout PPP lifecycles to accelerate PPP project development in the country

Poor Governance: Issues of Coordination

There is a large communication gap between central and local governments leading to poor coordination in PPP project implementation Moreover, in the current PPP institutional framework, the National Committee for Acceleration of Infrastructure Development is led by two institutions with Coordination Minister for Economic Affairs as the chairman and Ministry

of BAPPENAS as the co-chair of the committee.36 The complex structure of the PPP regulating

bodies is likely to lengthen the process of project identification and preparation and also prolong the implementation of the PPP project It should be noted that the length of the process, from Request for Qualification (RfQ) to Financial Close, affects the concession period offered to the private sector With the BOT PPP type, which is used relatively often in many PPP projects, a longer concession period will lengthen the time before the transfer of project operation from the

35 Angga Bratadharma, “Tumpang Tindih Peraturan Hambat Proyek Infrastruktur”, March 13, 2012

36 Unlocking the Public-Private Partnerships Deadlock in Indonesia, World Bank Jakarta, Indonesia, May 2011

private business entity to the government This means that the government would risk a lowered value of the asset As for the private sector, longer concession contracts mean private investment costs will be higher rendering PPP projects less attractive

Chapter III

Opportunities for UK PLC

3.1 Opportunities for Foreign Direct Investment

With less domestic demand for PPP, especially for public utilities, UK PLC can look for opportunities of investment abroad Indonesia with its demographic bonus,37 high projected economic growth, and a young largely untapped PPP market would be a suitable place for the

UK PLC to invest

Opportunities for UK PLCs will arise if they can match their expertise to Indonesia’s current priority investment list Indonesia has listed priorities in the infrastructure sector at least up until

2014, or the second phase of MP3EI and the end of the current RPJPM

As has been stipulated above, several sectors are a priority in the development of urban infrastructures, such as the Water Supply & Sanitation sector, the Road sector, the Power sector, the Solid Waste Management sector and the Transport sector Specifically, UK experiences and expertise in the roads sector and solid waste or waste water management will also have to be taken into account when looking for opportunities in Indonesia

Investors should know the regulatory body for PPP in Indonesia, the Directorate for Public Private Partnerships in the Ministry of National Development Planning/ National Development

37 Of the 240 million people, over 50% of the population is under 29 years old, and 60% of the population is under the age of 39, with around 52% of the population living in urban areas This provides for dynamic labor market participation, growing at 2.3 million per year A rapidly urbanizing population also provides for strategic pools of labor force in centers of investment Source: Indonesia Investment Coordinating Board (BKPM), Facts of Indonesia| Demographic, accessed 30 May 2012

This section covers the areas of opportunities for UK PLC to invest in Indonesian PPP

The key messages include in this section:

• With the current economic climate of the UK, Indonesia is of growing interest to UK business interests as it is currently enjoying a surging middle class, sound economic growth and a demographic bonus for productivity;

• UK PLC can find opportunities in Indonesian PPP investments by tapping into the sectors for which UK PLC is known for its expertise Such sectors include the Road sector, the Solid Waste or Waste Water Management sector, as well as other priority sectors such as Water Supply & Sanitation sector, the Power sector and the Transport sector;

• Opportunities in unsolicited projects must also be taken into account as projects could be proposed which anticipate the emergence sectors that are not yet covered in the PPP Book 2011 as well as having several privileges compared to the solicited ones;

• UK PLC can also act as a partner with the Indonesian government to work specifically on capacity building UKAID, IUK, as well as UK PLC could offer trainings, partnerships, or even aid for the Indonesian government

Agency (BAPPENAS), as well as other relevant stakeholders such as the Indonesian Investment Coordinating Board (BKPM) and the Indonesian Chamber of Commerce (KADIN)

Given that the UK began work in PPP two decades before Indonesia and is considered a benchmark country for PPP among implementing countries around the world, such as Singapore and Australia, it can be argued that the UK is on a strong footing should it wish to invest in Indonesia

Indonesia has hundreds of yet to be offered projects on toll roads and national roads In particular, the Indonesian Toll Road Authority (BPJT), the Ministry of Public Works (MPW) and Ministry of Transportation (MT) are important sources of information for UK investors As procurement will be done publicly either via the government website (e-procurement) or via newspapers, it will be good practice for the investor to know firsthand and always be in touch with the relevant government contracting agency (PJPK) in order to know the latest status of road projects Whilst the common approach is for the government to maintain contact with potential investors, the Government of Indonesia is only recently exposed to PPP practices and therefore investors may find that they will be the one to initiate contact.38

Opportunities in the water supply sectors could be great as Indonesia has stated its commitment towards meeting the target of the MDGs by 2015 on the availability of clean water UK PLC must know the status of projects by keeping in touch with related ministries and regional government The PJPK of solid waste would be either the MPW or the local government as waste management is handled locally As for the water supply, the PJPK would also either be the MPW through the Supporting Body for Water Supply System Development (BPPSPAM) or the local government

Referring to the PPP Book 2011, there are two offered projects on solid waste, two priority projects and four potential projects amounting to a total investment required of US$ 500 million Meanwhile in the water supply sector, there are 6 offered projects and 18 potential projects, with the total investment value of US$1.4 billion As both of the solid waste and waste water management and water supply sectors are handled locally, it may prove to be good practice for investors to deal closely with reliable regents or Bupatis, since it is these stakeholders in particular who offer the PPP projects Dealing with agents or Bupatis with less experience in carrying out PPP projects may prolong the overall process and increase costs for the investor to reach project realization

38 “Often in the past, where PPPs have been successful, one reason has been that the government remains in close contact with the private sector,” said Raj Kanan, founder and managing director of Tusk Advisory Source: Oxford Business Group,

“Realising Potential”, p106

Unsolicited Projects

There are two different mechanisms of PPP projects in Indonesia comprising of Solicited and Unsolicited Projects Unsolicited PPP projects are projects proposed by a private business entity outside of the listed projects in the PPP Book 2011 The initiative to implement an unsolicited project is possible in accordance with Presidential Regulation no.56 year 2011.39 This indicates that the private sector could submit a proposal regarding a PPP project to the government; in this case, to the BKPM If the government agrees to the particular project proposed, the private sector actor could receive compensation while the government follows up on their proposal with an open tender mechanism The compensation that would be received by the private investor as an initiator would be:40

• Up to an additional 10 percent of the appraisal value could be awarded to the project initiator;

• Having the right to match the highest bidder of the project;

• Having the possibility to purchase the intellectual patent of initiating the project Looking at the first phase of the MP3EI framework, the Indonesian government focuses heavily

on PPP infrastructure projects and relatively less on other sectors which may become priorities later in the second and third phases Taking into account the possibility of proposing new PPP projects to the government, private investors have huge opportunities to either submit their own project proposals whereby the Indonesian government can learn from other benchmark countries

or participate in the tender process of listing prospective projects according to the government plan The former option creates more chances to introduce a new point of view on PPP, not only within infrastructure projects but beyond to PPP projects in terms of other sectors and services The process of submitting a PPP project proposal as an unsolicited scheme can be described as the following next page:

39 Novie Andriani, S.H and M Taufiq Rinaldi, ST “Unsolicited Project”, Mengapa Memilih KPS? Identifikasi dan Seleksi

Proyek Kerjasama, Sustaining Partnership: Media Informasi Kerjasama Pemerintah dan Swasta, , Edisi Khusus Tahapan KPS

2011, BAPPENAS, 2011, 23

40 Ibid