PPP (Public-Private Partnerships) in Indonesia: Opportunities from the Economic Master Plan June, 2012 Prepared by Strategic Asia for the UK Foreign Commonwealth Office 2 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 3 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 4 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). 5 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 arrangements. 4. Best practices should be taken from other countries with an already maturing PPP system. Singapore as a fellow ASEAN country member has benefited from following the UK’s PPP model and it currently in the process of building the biggest infrastructure PPP project in the world, the Sports Hub. The UK is a world leader in PPP with over two decades of experience. Indonesia could learn and incorporate the best practices as well as avoid the past failures from both of these countries, whilst still adapting to the capabilities of the government. Please refer to the appendix section on the ‘Best Practices 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. 6 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. 7 Chapter I Introduction Background The Master Plan for the Acceleration and Expansion of Indonesia’s Economic Development (MP3EI) is the Indonesian government’s current development master plan. Launched in May 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. 1 The 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 8 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. 2 This year’s ranking improved somewhat to 76 th 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 9 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 10 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.’ [...]... 43 International Unit, Infrastructure UK – HM Treasury 32 Chapter IV Opportunities for Low Carbon PPPs in Indonesia This section covers findings on potential low carbon investment opportunities for UK PLC in the Indonesian PPP The key messages include in this section: • • • • • Taking into account the current economic climate of the UK, foreign investment is of growing interest to UK businesses Indonesia... 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... advantage since the country has already an established market in the LCEGS sector whereas Indonesia is only establishing itself in the field; hence opportunities will likely arise in the thriving young market in the country However in Indonesia, PPP projects gained momentum at the same time that the government introduced the MP3EI to speed up economic development Yet at the same time, the President of Indonesia... and support from the public perspective.43 There are also opportunities for the UK private sector or the UK PLC to provide PPP training and workshops to the government and especially to the local government This could also be in the form of PPP itself Working with the Indonesian government in capacity building to improve the expertise in PPPs should be seen as a long term investment in the country... 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... 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... Kerjasama Pemerintah dan Swasta, Edisi Khusus Tahapan KPS 2011 3.2 Opportunities for Assisting in Capacity Building in Managing PPPs in Indonesia The new trajectory for economic development in Indonesia as stipulated in the MP3EI document increases the need for a better management scheme for PPPs This will be especially important since 32 out of 79 infrastructure projects in the MP3EI are listed as PPP projects... released into the atmosphere Apart from the listing of PPP projects in the MP3EI corridors, there are other PPP projects which are identified in line with the spirit of low carbon economy For instance, there are eight PPP projects regarding solid waste and sanitation listed in the PPP Book 2011 Two of these projects are ready to be offered, two projects are priorities and the rest are potential projects The. .. 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... private investment costs will be higher rendering PPP projects less attractive 27 Chapter III Opportunities for UK PLC 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 . of PPP (Public-Private Partnerships) in Indonesia: Opportunities from the Master Plan 4 I. Introduction 7 II. Recent Developments in Indonesia’s PPP. 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