Project Preparation in Indonesia – how has the government attracted private participation?

Indonesia’s progression in project preparation has been founded on learning-by-doing, based on its own context and challenges.

The Global Infrastructure Hub (GI Hub) has collaborated on this blog with Farid Arif Wibowo, Head of Subdirectorate of Government Support Approval within Indonesia’s Ministry of Finance (MoF). The MoF is a champion of policy support for public-private partnerships (PPPs), as well as their project preparation and financing.  When promoting PPPs, the MoF has adopted a two-pronged approach:

1. It established the Directorate of Government Support and Infrastructure Financing Management to provide policy and approvals on government support mechanisms; and
2. It has set up key, specialised infrastructure finance institutions to scale up financing and champion the adoption of good project preparation.

This blog outlines some of the lessons learned in Indonesia on the topic of project preparation, which can be found in more detail in the Indonesia case study in the GI Hub’s Reference Tool on Governmental Processes Facilitating Infrastructure Project Preparation.

Background

Although Indonesia’s PPP regulations date back to 2005, initially the number of actual project transactions between the government and private sector was very limited. The private sector’s interest in Indonesian projects was constrained by three main factors; the low quality of project preparation, low financial feasibility of projects (particularly those related to the determination of tariffs) and uncertainty related to the political risk of projects.

Plugging the institutional and financial gaps

Indonesia has systematically implemented a series of initiatives in the last decade to plug the gaps in its enabling and institutional environment.  These initiatives were highlighted as noteworthy practices in the GI Hub’s Reference Tool.

The government started to introduce financial instruments that specifically addressed each of the challenges:

• a government guarantee scheme for PPP projects was introduced in 2010 (including the establishment of the Indonesia Infrastructure Guarantee Fund) to address the issue of risk allocation;
• a Viability Gap Fund (VGF) to provide direct contributions for projects with marginal feasibility; and
• a Project Development Facility (PDF) to provide support to Government Contracting Authorities (GCAs) in preparing projects.

Moreover, the government also introduced an availability-payment PPP scheme, in addition to the existing user-pays scheme, to address the need for more types of public services.

Umbulan Water Supply Project, Indonesia

Strengthening the quality of project preparation

The MoF ensures Value for Money is achieved through the PDF scheme by using it as a platform to comprehensively analyse projects within the context of the wider facilities offered by the ministry, such as guarantees and VGF.  In this way, the MoF determines whether public resources are being used in the most efficient manner and it can attract private sector interest through project preparation and structuring.

The PDF is seeking to prepare its first set of PPPs as per international standards.  PPP projects which have completed market sounding and can demonstrate investor interest are eligible for assistance under this scheme.

Developing and operationalising the PDF

The Directorate of Government Support and Infrastructure Financing Management is tasked with managing the PDF, including disseminating information to GCAs, reviewing proposals from GCAs, and providing recommendations to the Minister on PDF approvals.

The directorate is also responsible for the integration and synchronisation of the VGF and government guarantee facilities with the PDF.

The MoF has assigned PT SMI, a state-owned enterprise (SOE) which sits under the MoF, with the day-to-day implementation of many of the PDF’s activities, including the procurement of consultants, assisting GCAs in discussion with consultants and capacity building of GCA staff. The assistance of PT SMI is instrumental in simplifying the procurement process and in providing the flexibility to manage resources more efficiently. Recently, the government also assigned responsibility for some of PDF’s activities to the Indonesia Infrastructure Guarantee Fund (IIGF), another SOE under the MoF.

Opportunities and challenges

As Indonesia’s PPP program expands, both in number of projects and complexity, the need for projects to be prepared by the PDF scheme is also increasing.

It is well-acknowledged that the GCAs and the related SOEs face challenges in keeping pace with the demands of PPPs and boosting institutional capacity remains an area of focus.

Due to the increasing number of projects being proposed to the PDF, the MoF plans to expand the capacity and funding of the facility.  It is critical that GCAs work hand-in-hand with consultants to prepare and transact projects. The local market of consultants in Indonesia is not yet deep enough to support the increasing number of PPP projects.  Whilst consultants from the wider global market are encouraged under the PDF scheme, the importance of local expertise and its value in feeding in the local context should not be underestimated, and this capacity should continue to be developed.

More detail on how the Indonesian Government is facilitating private investment in Indonesia through project preparation processes can be found in the GI Hub Reference Tool.