“The framework developed by us is really good”-

The Indonesian government has launched a massive infrastructure development plan with the aim to increase the country’s GDP by six times to $4.5 trillion and quintuple its per capita income by 2025. A development plan on such a large scale would not be possible without substantial involvement of the private sector. To this effect, in late 2009, the government established the Indonesia Infrastructure Guarantee Fund (IIGF), a new state-owned enterprise, as a fiscal tool, to serve as a single window for appraising, structuring, and providing guarantees for public–private partnership (PPP) infrastructure projects.

Southeast Asia Infrastructure brings you the views of Ms Sinthya Roesly, President Director, IIGF, pertaining to the enterprise’s key priorities, plans, achievements, and challenges…

What have been the key achievements of the IIGF since its inception?

The IIGF was established in December 2009 by the Indonesian government. Its objective is to ensure that the provision of the government guarantee is done in a more accountable manner such that it is provided only to well structured projects so as to improve the bankability of PPP projects for the provision of infrastructure in Indonesia.

In October 2011, the IIGF issued its first guarantee, within two years of establishment, for a coal-fired power plant in Central Java with a capacity of 2 x 1,000 MW – you may be aware of that. The investment is about $4 billion. The government contracting agency for the power is PT PLN, a state-owned electricity corporation and the project company is PT Bhimasena Power Indonesia or PT BPI that participated in an international competitive tendering process for this project. The IIGF has been able to structure a guarantee for this particular project. We have also coordinated closely with Ministry of Finance (MoF) along the way in providing the guarantee.

This is the first step to show that the IIGF scheme is something that is accepted by the MoF and is considered viable by the market. It is important that the IIGF be perceived as a structure that can ensure that the project can proceed, while protecting the government’s interest in providing fiscal support for big infrastructure projects involving cross-border investments.

Can you tell us about the bid process and whether your expectations were met? What are the future milestones for the project?

The response was good. There were seven companies that pre-qualified for the bid: four from Japan, two from China, and one from Korea. The consortium members among the pre-qualified bidders included European companies as well.

The winner, PT BPI was a consortium comprising three companies: Adaro – a local mining company; JPower – a Japanese utility company; and Itochu Corporation. This was a good transaction, as there was an international, open competition and transparency.

From an economic standpoint, we were quite happy with this deal, as the tariff was below our expectations. We are in the process of ensuring that full financial closure of the project is achieved this year; in fact, we are really hoping to close this deal by October 2013.

During the initial stage, the aim of this institution was to set up a model process in terms of how the project preparation, documentation, appraisal and a series of activities that are required for PPP projects which can be guaranteed by us, in various sectors can be carried out.

What are the challenges that you are facing?

First, we need to ensure that the market understands our business model and the guarantee scheme under our structure.

Second, since the public sector has had no exposure in securing PPP projects in the sector at the international level, limitations in capacity are a challenge. The capacity is limited not only in project preparation and structuring, but also in resource allocation, especially in financing, talking about risk sharing, and putting it down in a contract. The government is more used to public or programme funding or corporate finance than project finance, having given the private sector concessions or rights to build and operate assets for a long time. We, at the IIGF, also need to be able to build capacity and provide real examples of well-structured PPP projects at the same time. In addition, we have to explain the complexity of the guarantee scheme as well as the PPP concept. We plan to work on these challenges, step by step. Instead of addressing all these challenges right away, we would first like to talk about project viability, structuring, and commercial viability.

How do you determine which projects are suitable for PPP funding that require a guarantee and which are more suitable for traditional government financing?

This is an issue in Indonesia where we have to do our homework because this requires the use of a kind of public sector comparator tools in selecting PPP projects. Such planning process or project selection and prioritizing before executing the PPP projects may still need to be improved.

Currently, the government is trying to promote specific PPP projects based on a list of proposals which are coming from various line ministries and agencies. However, before that, the project selection criteria needs to be in place to ensure that a project that is genuinely worthy of being promoted is placed in the list for PPP funding. Such projects must show economic soundness and must be capable of attracting private players.

You have mentioned the need for enhancing coordination between different government bodies. How do you plan to tackle this issue?

Coordination is required not just between the line ministries, but also between provincial and local governments, since there is regional autonomy and decentralisation of power in Indonesia.

The capacity of the local governments is constrained by the fact that they have inadequate balance sheet or even less exposure than the central government and thus face the issue of credit worthiness. The IIGF’s assistance to any project that involves local governments can help increase local government-sponsored projects’ bankability and enhance the credit worthiness of the entity. This is how the IIGF can help to make infrastructure projects possible at the local level.

For example, the IIGF is providing assistance to structure a medium-scale project in one of local government, where the municipal government is the contracting agency. The IIGF’s potential support – subject to project meeting all the IIGF selection criteria – will bolster the governments’ ability to take on the financial obligations of the project. Also, for the concession agreement with the private sector for bulk water supply in this project, IIGF support will ensure that the private partner’s banks are comfortable with the risks involved.

The IIGF works with and coordinates between various parties: within the private sector, it deals with equity investors and banks. Within the government, it deals with regulators, policymakers, contracting agencies, and advisers, which helps to structure the deal. It bridges both sides to ensure that the project is bankable. So, the IIGF is responsible for getting the financing and structuring the project in the end.

What are the projects in the pipeline and how are they spread across the sectors?

Our main objective is to make infrastructure projects credit worthy. We are currently focusing on the power sector, since the need for power in big scale is dominant among other infrastructure sectors. Also, there is not much of a choice among projects and sectors, as there is a lack of credible projects. For the government, this is a key challenge.

The first project that we provided a guarantee for was in the power sector. Subsequently, in addition to working on power sector, we are in the process of preparing projects in other sectors such as the water and transportation sectors.

How is the IIGF funded? How have multilateral and bilateral development agencies been involved in the IIGF?

The IIGF is capitalised from the state budget on an annual basis. At the moment, the authorised capital is $1 billion and the paid-up capital is $500 million.

One route of funding is the government’s annual injection of funds. Or else additional funds can be sought, depending on the readiness of the project to be guaranteed. If the IIGF backs a project and the funds are inadequate, then as the last resort, the government stands as a co-guarantor with the IIGF.

The second route is through other international institutions such as the Multilateral Investment Guarantee Agency (MIGA), the Asian Development Bank (ADB), as well as other bilateral and multilateral agencies. We try to work out risk and guarantee capacity issues. We may work with them as co-guarantors. In other instances, we collaborate with their PRG (partial risk guarantee) type of products, or on a reinsurance model with them.

The loan of $30 million from the World Bank strengthened the IIGF as a liquidity facility and technical assistance to support any eligible project guaranteed by the IIGF. It has helped to improve the institutional capacity of the IIGF to provide project guarantees.

You talked about the lack of capacity in the country with regard to PPP projects and thus the IIGF has been engaged in capacity building in the PPP space. Can you tell us about your efforts?

There are two areas in which capacity building is needed: internal and external capacity. Currently, we are sourcing internal capacity from the market. We have international programme partners like MIGA, which are helping to set up workshops and capacity building programmes at an international level.

We are also involved in injecting capacity through the engagement of world-class consultants. They help to develop the governance and business processes in the IIGF and put systems in place. They also assist us as independent party in project appraisals and structuring. This type of capacity in the IIGF is unique, which involves a mix of competencies within the organisation. The IIGF employs a lot of consultants who help to boost its internal capacity to execute projects. Our mandate is to ensure that what we guarantee is actually worth it for the projects, while protecting government interests. Our utmost concern is to make sure the internal capacity is adequate to conduct the IIGF’s responsibilities correctly.

For external capacity building, we are bringing in international experts as well as through cooperation with universities to various workshops for public entities who are and would be involved in designing infrastructure projects in order to ensure that they grasp the PPP concept well.

Our next programme is what we called the Targeted Active Learning Program (TALP), involving three prominent universities in Indonesia. In this programme, we pick key stakeholders from our potential projects and identify their capacity gap and capacity building needs, thus ensuring that they understand what they are undertaking, that is, the risks involved as well as ensuring that they maintain the capacity to manage the PPP contract well during the concession period or at least the guarantee period. Thus we strive to ensure that the guarantee is not called throughout the duration of the project.

For our first project – the power project in Central Java – a Joint Monitoring Committee comprising representatives from the IIGF, project developers, and PLN with MOF support was set up to monitor the project so as to ensure that the guarantee is managed throughout the project cycle. We conduct regular meetings to resolve any issues, or direct them to appropriate authorities that can resolve them.

Based on what we have learnt from the first project, we now want to ensure that contracting agencies understand the entire process. Therefore, coming up with the TALP is critical: the curriculum is built and customised around specific projects and capacity building is provided according to need when the time is right. The main challenge is to convince the government agencies that are politically driven and are in some cases only concerned with urgency and not the feasibility of the project. During the appraisal, the IIGF focuses on different aspects of the project, while the government agencies may go into the market at its infancy stage, without proper knowledge of risk allocation. This delays projects since the homework is not done in the beginning and then time targets are missed.

The challenges with the first project that the IIGF guaranteed were much less since PLN has several years of experience in contracting with the private sector. With regard to water sector projects, the local government does not have much experience with private projects. Water is an emotive issue and the success of the first few projects are expected to lead to the roll-out of more such projects. The water sector projects are dependent on the availability of Viability Gap Funding (VGF). It is good that recently the Government of Indonesia has set up a VGF facility as another type of government fiscal support to PPP projects. To obtain the VGF should not be difficult so long as the project is well structured, meets the VGF criteria and follows PPP process properly. A well-structured project will not have problems in securing the MoF’s support. Thus the role of the IIGF in building capacity at the local government level in proper structuring of projects and ensuring its success is critical.

What are the IIGF’s funding targets within the overall MP3EI targets?

The MP3EI has an approximately $200 billion target within a five-year period. At least 10 per cent of that is quite a good estimate for private sector participation where the IIGF may be involved.

MP3EI offers a macro perspective on funding numbers. The government is currently in the process of picking up 10–15 key projects that may have either PPP funding or may be state-owned enterprise funded.

What are the key priorities of the IIGF for 2013–14? What is your message to prospective investors?

Our first priority is to ensure the financial closure of the Central Java power project. The real proof of the IIGF scheme will be the financial closure of this project, since it will show that the PPP format is workable in Indonesia. This is our top priority.

Second, we are working on at least two more sectors, apart from the power sector (water and transport mainly). We need to get into the water sector to structure projects such that we can show the market that it is a good sector for private investors. The water sector in Indonesia has been underdeveloped for several years. Access to clean water is just 48 per cent, far, far below the refined MDG’s target of 68 per cent  in 2015; hence, we need to boost private investors’ confidence in this sector. The transport sector is also in its infancy stage as far as private sector involvement is concerned as it has so far been monopolised by state-owned enterprises. Connectivity issues cannot be improved without opening up the market to private investors.

Our third priority is to improve capacity leverage: to have a model that facilitates our cooperation with various bilateral and multilateral agencies that can then be used to support financing of the PPP projects.

We want the world markets to see that the IIGF model is worth looking at and that this institution is credible and respected. Any private sector entity that enters PPP infrastructure projects in Indonesia may need to go through and seek IIGF’s advise: we are trying to develop the IIGF not only as a gatekeeper for the government, but also as a door for representing the PPP framework in Indonesia.

I believe that the model and framework developed by Indonesian Government is already good, in terms of accountability and practice, as well as from the perspectives of both the government and the private sector. We just need to work harder to push for well structured PPP projects in Indonesia to prove that the initiative is worthwhile and that efficient, quality infrastructure is delivered timely for Indonesian people.