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Project preparation key to lure private investment
In the past 10 years, only less than 10 intended public-private partnership (PPP) projects enter into the pre-qualification stage and not a single project went beyond tendering. Only one project managed to reach financial closure: the $2.1 billion Batang power plant, a project that has since stalled for more than three years before being financially closed last week.
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Trucks and heavy equipment are in operation at an infrastructure project in Indonesia. President Joko “Jokowi” Widodo has pledged to focus on infrastructure development in his five-year term as president, boosting share prices of infrastructure-related firms. (Tempo/-)
T
he scale and significance of the infrastructure challenge in Indonesia cannot be underestimated. Creating new growth centers around the country and developing the needed infrastructure are the main building blocks of Indonesia’s economic growth that are critical.
Set in complex economic and political circumstances of being the fourth most populous country and third largest democracy in the world, provision of infrastructure requires a focused strategy in
which both private investors and governments need to play significant roles.
Having been involved in transactions and the operation of infrastructure in Indonesia, I can see that Indonesia’s challenge is much greater than just optimizing existing infrastructure. Hence existing project sponsors, developers, operation and maintenance (O&M) companies and concession operators in Indonesia today should take up more new greenfield projects.
Don’t forget, the gap is not only on financing and O&M capabilities, which are the least of our problems. The capacity of our existing infrastructure to cope with growth is beyond poor, it’s in a state of emergency. The backlog is immense.
Of more than 200 strategic projects launched by the government, as many as 30 are on the priority list. More than US$400 billion is needed until 2019. The list is a grand wish-list, with projects not “ready for offer”.
In the past 10 years, only less than 10 intended public-private partnership (PPP) projects enter into the pre-qualification stage and not a single project went beyond tendering. Only one project managed to reach financial closure: the $2.1 billion Batang power plant, a project that has since stalled for more than three years before being financially closed last week.
A PPP is one model government and the private sector engage, mostly in the form of long-term concessions, asset regeneration and maintenance.
Concessionaires will typically need to utilize their pools of capital and apply global best practices to deliver innovation and efficiency to these assets and in turn achieve its intended internal rate of return and economic benefits for the project to sustain throughout its whole life.
Various strategy papers and studies have shown us that delivering infrastructure through private participation would need clear government plans, set-out globally accepted processes, effective dispute resolution and strong institutions to coordinate all relevant agencies and appropriate legal systems.
It requires innovative and cost-efficient solutions, efficient exit resolutions, robust technology solutions and reorganization of financially troubled projects.
Indonesia needs a strong commitment to encourage banks to syndicate deep pools of equity and project finance both domestically and internationally.
Central and local governments need to start initiating the changes to legislation, making quicker ways to private participation in operation and ownership through tested schemes. There is no need to reinvent the wheel.
As rightly mentioned in an opinion piece in this newspaper on June 17, the government needs to restructure and reorganize the working relationship of the three PPP agencies, the infrastructure priority unit (KPPIP) at the Office of the Coordinating Economic Affairs Minister, the PPP unit at the National Fiscal Agency at the Finance Ministry and one under the National Development Planning Agency or Bappenas.
The agencies needs high profile support such that policy can be influenced and that current project barriers can be overcome.
The PPP units at the three ministries should have a role as a PPP coordinating unit (Simpul KPBU) for government contracting agencies (GCAs), focusing only on providing guidelines and policy enforcement. It is clear that progress has been slow because of the lack of investable projects offered. At first glance, many of the projects offered lack bankability since these projects lack sufficient user-pay revenue. There are at least three immediate areas of improvement that can be done.
First, although it has been introduced through many studies and research, the Finance Ministry seems to not yet be fully supportive of providing a robust performance based annuity scheme or availability payments as possible PPP schemes.
The ministry must work with other peer ministries to de-bottleneck some of the hesitancies by launching the first few availability payments projects such as the Serang-Panimbang and Manado-Bitung toll roads.
The Bontang refinery project and the revitalization of old refineries can be jumpstarted almost immediately, as can a few social infrastructure projects such as hospitals.
Second, we need to encourage more unsolicited bids. Countries such as Canada and Korea have been successful in launching PPP projects, especially the social infrastructure projects, through unsolicited bids.
The private sector comes up with initiatives and potential projects, presents a business case and feasibility study, sets out required government risk portions and bids for the project. With a highly qualified GCA tender committee and processes, unsolicited bids can produce good quality projects.
Last, but not least, on the leadership of the government’s PPP efforts, Presidential Decree No. 38/2015 and the subsequent regulation of the Indonesian Procurement Agency, Perka LKPP No. 19/2015 stipulates the required existence of the PPP Preparation Unit (Badan Penyiapan KPBU).
This Project Preparation Unit, which has the specific task of procuring consultants and advisors, conducting business cases and feasibility studies, running pre-qualification processes, tendering and financially closing projects.
The cost to prepare projects is estimated to be 1 to 3 percent of the total project cost.
A study by the Melbourne University team for the Indonesian Infrastructure Development Initiative has suggested the need to focus on infrastructure delivery and also the need of a leadership with sound communication skills to be a bridge between government and the private sector, so that potential projects can progress and the private sector can receive guidance on achieving appropriate project assurance.
I strongly believe we need a new standalone PPP project preparation unit that is set up as a project management office and will focus on delivery, promoting more effective and efficient processes for preparation, conducting feasibility studies, pre-qualifying, tendering and financially closing.
It needs to be commercially savvy, run by professionals who understand and are familiar with the PPP ecosystem locally and globally and who are able to prepare projects both solicited and unsolicited. This unit must employ global best practices, have a direct responsibility to the President and be able to work with contracting agencies at central and local government levels.
The picture is not all grey. As I worked with various local governments, both on city and provincial levels, I found that local governments are ready to take up the challenge. In the absence of national initiatives, working to expedite PPP projects at subnational and local levels is starting to bear fruit.
The Makassar PPP Investment Center is the first in Indonesia, pending one local regulation to be issued soon, and is starting to gain traction in preparing projects. Bandung has decided to set up a PPP unit and, also pending a few pieces of legislation, will soon be able to prepare projects. Provinces such as West Java and South Sumatra are more than ready with potential projects. Get ready and work!
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The writer is an infrastructure practitioner. He is the managing partner of HD Asia Advisory and an advisory council member of the APEC Center for Urban Infrastructure Network headquartered at RMIT in Melbourne.
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