Government Secures Public Private Partnership in Indonesia—Sort Of

By Alexander A. Hutauruk 

Through the issuance of a number of regulations on public private partnerships, the Government is improving public private partnerships (PPP) to providing infrastructure. The new regulations are a good gesture for investors, since they are required to improve the implementation of PPP in Indonesia. The Government guarantee of infrastructure projects seems like a positive way to go for many secure investments in Indonesia. 

The PPP concept was first introduced in 1992 in the UK, where they have been one of the largest and biggest investments in UK infrastructure. The PPP has also blossomed in South Korea where  a PPP were used to facilitate the Incheon Bridge project - one of 10 wonders of the construction world. While the Government budget is limited, there is a huge need for new infrastructure. PPP can be used to solicit private participation.

In Indonesia, the PPP concept was formally introduced in 1998 by the issuance of a Presidential Decree which was replaced by Presidential Regulation No. 67 of 2005 on Cooperation Between the Government and Private Entities in Infrastructure Procurement. Under the regulation, PPP is conducted through a business license granted by the Government to private entities, or a cooperation agreement held between the Government and private entities.

Unfortunately, the private sector preferred other methods at the time, due to, among other things, difficulties in funding infrastructure procurement and the unavailability of a  guarantee. As a result, the Government now provides funding facilities for PPP projects through PT Sarana Multi Infrastruktur (Persero) (PT SMI) along with multilateral development banks, which established PT Indonesia Infrastructure Finance (PT IIF).  To provide guarantees, the Government established a state owned company, PT Penjaminan Infrastruktur Indonesia (Persero) (PT PII), an infrastructure guarantee private entity. The Government also issued Presidential Regulation No. 78 of 2010 on Infrastructure Guarantees in Cooperation Projects made between the Government and Private Entities conducted through the Infrastructure Guarantee Private Entity.

The Government of Indonesia has decorated PPP with a captivating insurance, but are secured PPPs truly secure? There are at least 2 things that investors must consider at the initial stage of a transaction, before jumping to a conclusion or agreeing to a PPP transaction.

First, investors must consider the readiness of regional governments, including their officials, since PPP is relatively new in Indonesia. The Indonesian system of regional autonomy gives the Regional Government the authority to be a contracting agency in some PPP contracts.  A private investor may be in contract with the mayor, or the regent, or the governor of a region depending on the categorization under the regional autonomy law. This of course, depends on the type of project.  

However, considering the need for development in all Indonesian regions, regional governments are likely to be involved in the PPP. While the officials of these regional governments will be tremendously involved in PPP, investors should consider whether they have the relevant knowledge to be involved in and to make decisions on the project?  Do they have the knowledge and the capacity to conduct a proper auction process, to select the type of cooperation, and to conduct other decisive actions that must be taken by a PPP contracting party? Given the pivotal role of PPPs, we expect that the regional government will have to be ready and equipped with sufficient skills and knowledge not just on PPP but also on Project Finance.  Capacity building in regional governments is urgently required in this field.

The second issue investors should consider is how the Government defines a guarantee for PPP?  The regulation says that a guarantee is basically granted by PT PII to private entities that have cooperation agreements with the government and will only cover infrastructure risks. If it is deemed necessary by PT PII, a guarantee may also be granted by PT PII together with the Minister of Finance to a private entity. Consider how narrowly the Indonesian Law defines guarantees.

Under the regulation, a guarantee by PT PII is only granted to private entities in cooperation with the Government (not to subcontractors of the private parties) and it only covers infrastructure risks. Note that under the regulation, infrastructure risks mean any risks that are detrimental to private entities and occur due to: actions (or the absence of action) by the Government as the contracting party to a cooperation agreement or the Government as the institution; policies issued, and arbitrary decisions made by the Government as the contracting party to a cooperation agreement or the Government as the institution; and breaches by the Government as the contracting party to a cooperation agreement. This means that not all kinds of private parties or risks in a PPP project are secured. Sadly, the Government-defined-Guarantee means that an infrastructure risk guarantee cannot be granted to lenders of the private entity.  Despite the regulation, the coast is still not clear for lenders of PPP projects in Indonesia.

Alexander A. Hutauruk is a legal consultant working at a law firm in Jakarta