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ndonesia needs more and better infrastructure '€” nobody doubts this. But despite the reduction in the fuel subsidy, the government budget remains inadequate to pay for all the necessary and planned investments.

However, there would be significant benefits from financing and delivering part of the country'€™s infrastructure needs using private sector finance.

A public-private partnership (PPP) is a commercial deal under which a private consortium comprising construction companies, operating companies and financiers undertakes to finance and construct an asset for use by the government or the general public and to be paid evenly over the life of the asset based on its usage or availability for use.

In some deals (concessions), the private sector takes risk on the volume of usage and in others (performance-based annuity schemes, or PBAS), the government takes this risk and makes payments to the private sector based on the performance and/or availability for use of the asset.

Those arguing in court for the exclusion of the private sector from water and other sectors seem to have completely misunderstood that a PPP concession does not involve alienation of the nation'€™s resources, but is merely a means to create new assets to enable those resources to be distributed more effectively to the public.

The typical consumer does not care whether the pump is operated by a public or private entity as long as the pipes are installed and the water flows out of the taps.

Around the world, PPPs have been successfully used to deliver new and improved infrastructure with higher quality and at lower cost than the traditional public sector alternative. They enable the government to harness the benefits of innovation and management efficiency, driven by the desire of the private partner to make a profit by fulfilling its contractual obligations.

Modern PPPs started in the UK, but toll roads and port concessions have been around for much longer. PPPs are now used in more than 134 developing countries, contributing about 15 to 20 percent of total infrastructure investment and providing a range of assets from prisons to schools to railways to air traffic control systems.

The Indonesian government has had a pro-PPP policy since the early 2000s, but few projects have been delivered. There are just a few successful examples of such deals in the toll road and power sectors, but many other projects, for example, in the water and public transportation sectors, have failed to make progress. Even in toll roads, most of the projects have been awarded to state-linked enterprises so cannot really be called PPPs.

Why the lack of progress? It would be too easy to blame the well-documented problems of land acquisition that have affected all types of infrastructure projects and have held back PPPs like the Central Java IPP and the trans-Java toll road sections.

In the water sector, even before the court ruling, the government had found it difficult to agree on the amount of the viability gap payment (subsidy) needed when the expected revenue is lower than the expected cost of the project.

In the current budgetary framework, it has also been difficult to commit to multi-year contracts and the framework for disbursing subsidies through provincial government has not been clear.

Generally speaking, government bodies do not have the experienced staff needed to properly prepare infrastructure projects for tender.

This includes making sure they are economically viable and are evaluating and managing the many project risks.

This problem is even more serious when complex finance is involved, as in the case of a PPP.

In addition, traditional caution and a desire for consensus get in the way of action when anything new is proposed.

The key to a successful PPP is the appropriate allocation of project risks. The private sector is well placed to manage and minimize the cost of technical risks such as project management, input costs and labor efficiency, but the public sector sponsor has to take the responsibility for coordinating other public sector bodies and processes, like for land acquisition.

These involve political risk, which cannot be managed by a private sector consortium.

The government must also remember that the private sector has to be able to make a profit.

In the case of urban transit systems, such as the MRT, the revenue from passengers is never sufficient to pay back construction and financing costs. So a subsidy from the government budget will always be necessary.

The concept of transport-oriented development (TOD) is popular as it allows transportation developers to cover part of their cost from real estate development profits, but such plans are often too risky for the private sector because
the development profits are uncertain and can only be realized some time after the construction cost has been incurred.

Furthermore, the best railway constructors and manufacturers do not have the skills of real estate developers and do not always want to team up with them and share such unfamiliar risks '€” they may have other more straightforward opportunities to focus on.

So what needs to be done? Many of the ingredients for a successful privately financed infrastructure program are in place: for example, the excellent plan to establish PT SMI as the government'€™s infrastructure bank.

The recent Presidential Decree No. 38/2015 on PPPs is a definite step forward. It creates the mechanism for PBASs, offers a clearer framework for accepting unsolicited proposals and brings the concept of PPP into new sectors such as health, but still does not address all the requirements to make PPP contracts bankable by the private sector '€” further detailed guidance on standard PPP contract terms is required. But much remains to be done.

Right now, the international private sector is getting excited about opportunities in Indonesia, attracted by Indonesia'€™s great economic potential, but when they come to survey the market, they are confused by the lack of clarity about which projects will be tendered as PPPs.

For example, the Soekarno-Hatta airport railway was meant to be a flagship PPP project, but it is currently stalled because of uncertainty about its financial structure and the role to be played by state railway company PT Kereta Api Indonesia.

They are also surprised by the complexity of setting up business in Indonesia, including the restrictions on foreign ownership and the proposed restrictions on denominating contracts in foreign currency, which only serve to hinder much-needed foreign investment.

So, the government faces a complex challenge and needs a strategy to advance the PPP program. The strategy needs to be action-oriented, setting out who will do what by when and which are the key pilot PPP projects that can be used as models for others to follow.

And the strategy needs a senior-level champion with nothing else to do, who should report direct to the President, in order to make sure he or she has the authority to get various public bodies to take the necessary decisions in a coordinated way.
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The writer is infrastructure finance adviser at PricewaterhouseCoopers, Jakarta. The views expressed are his own.