The Indonesian government has been showing a strong commitment to accelerating private sector participation in infrastructure development and investment. The government’s National Medium-Term Development Plan, 2015-2019, estimated the total investment needed for infrastructure development during the period at IDR 4,796.2 trillion; this is expected to increase to IDR 5,957.7 trillion during 2020-2024. The government expects that around 59 per cent of the investment value will be provided by state-owned enterprises and the private sector. However, private sector involvement in infrastructure investment from 2015 to 2018 was still lower than the target, reaching only 21 per cent. Given funding limitations, private sector participation through public-private partnership (PPP) schemes will be pivotal for the provision of infrastructure in Indonesia.

PPP framework in Indonesia

The development of PPPs in Indonesia started in the early 1990s, when the initial set of projects with private sector participation in the toll road and energy sectors were implemented. Since then, the PPP regulatory framework in Indonesia has undergone major refinements, to address the challenges and changing needs of PPPs, as well as the evolving business environment. Presidential Regulation No. 67 of 2005, related to cooperation between government and business entities in the provision of infrastructure, was a key milestone in the development of a PPP regulatory framework in Indonesia. The framework continued to evolve, and the current PPP regulation, Presidential Regulation No. 38 of 2015, offers more incentives for private participation, especially in terms of government support schemes. The current regulatory framework offers three major improvements over the previous one: the inclusion of social infrastructure; the provision of stronger government support through mechanisms such as viability gap funding, project development facility, and availability of payments; and funding provided by the government to acquire land for infrastructure projects. Currently, there are 19 economic and social infrastructure sectors across which projects can be procured through the PPP route. A PPP project may also be proposed for a combination of two or more infrastructure sectors. Indonesia allows for all standard forms of PPPs, such as build-operate-transfer (BOT), build-own-operate-transfer (BOOT), build-operate-own (BOO), design-build-finance-operate-transfer (DBFOT), management contracts, annuity-based agreements, and operations and management (O&M) agreements.

In addition, there are companies that play an active role in facilitating PPPs in the country, such as the PT Infrastructure Finance Facility (PT IFF), a private non-banking finance corporation; the Indonesia Infrastructure Guarantee Fund (IIGF), a state-owned enterprise that is responsible for providing government guarantees for infrastructure projects developed under the PPP scheme; and PT Sarana Multi Infrastruktur (PT SMI), another state-owned enterprise that provides long-term financing and advisory services for infrastructure development in Indonesia. From an institutional perspective, PPPs in Indonesia have been driven by the Ministry of National Development Planning (BAPPENAS); the PPP Unit, under the Ministry of Finance; and the PPP Joint Office. Indonesia has a decentralised form of government, which enables the provinces, regions and cities to plan and implement their projects. These governments are thus empowered to undertake projects across various sectors, in consultation with the Ministry of Finance. In addition to the budgetary allocations, to support the capacity of subnational governments to undertake infrastructure projects, the Indonesian government has set up the Rural Infrastructure Development Fund, with the support of the World Bank and the Asian Infrastructure Investment Bank.

Private participation in infrastructure projects

Between 1990 and the first half of 2020, over $63 billion worth of private investment has been made in PPP projects across various infrastructure sectors such as electricity, information and communication technology (ICT), natural gas, ports, roads, railways, waste and water. However, of these, 12 projects representing over 10 per cent of the total private sector investment have been cancelled or are currently under distress. From a sectoral perspective, electricity has the dominant share of PPPs, followed by roads and railways.

Of the total PPP projects, about 39 with a total investment of $41.7 billion have been sponsored by 10 key entities.

Upcoming PPPs

The PPP Book published annually by BAPPENAS noted that in 2020, there were 37 PPP projects at various stages of preparation in Indonesia, and 14 PPP projects under procurement across various infrastructure sectors including roads, railways, ports, airports, energy, water and wastewater, ICT and social infrastructure. These projects entail a total investment of $20.9 billion. 

Recently, Indonesia’s Ministry of Public Works and Public Housing (PUPR) announced plans to issue tenders for 14 PPP projects. The PUPR is planning to spend IDR 186.08 trillion on the programmes, which will comprise the road, bridge, housing, and water sectors. Bidders were invited to participate in the pre-qualification round in February 2021 and the outcome is expected to be declared in June 2021. Of the total, 10 projects including five road and bridge projects, two water projects, and three waste-to-energy projects are currently in the pre-feasibility study stage. The PUPR plans to invite bidders for these 10 projects by 2024.

Issues and challenges

Although the PPP market in Indonesia is relatively mature, there have been various challenges to PPP implementation in Indonesia. One of the major impediments has been the land acquisition process, which has led to quite a few PPP projects being stalled in the past. Another issue is the delay in reimbursements of land acquisition fees due to the lack of clarity during the processing of documents, leading to higher interest expenses for the private sector. To speed up the land acquisition process, the government adopted a new law on land acquisition in 2012, and followed up with the implementation of a series of rules and regulations. The law limits the land acquisition procedure to approximately 512 days and allows for the revocation of land rights in the public interest.

Besides, specifically in the case of toll road concessions, the absence of a standard risk-sharing matrix and of concession agreements has led to several projects facing time and cost overruns and revenue shortfalls. Lower demand, due to the delayed development of other supporting infrastructure, has weakened the private sector appetite for infrastructure investment in Indonesia. In the airport sector as well, the lack of sufficient funding for upgrading existing airports or building new ones has been an obstacle. So far as the energy sector is concerned, the lack of experience in private financing of long-term renewable energy projects remains a significant challenge. The challenges for geothermal projects specifically include the lack of community acceptance of geothermal projects and the lack of government guarantees for geothermal field development and resource confirmation. A significant challenge for the energy distribution system is the lack of transmission lines and supporting infrastructure. In the water sector, there is a reluctance among some private sector partners to take responsibility for the construction of the “last mile” of customer connections, and for persuading potential customers to shift away from groundwater or other existing water sources to new water supplies. Meanwhile, due to the lack of a centralised body to coordinate all issues related to water resource management, the public sector project proponents and investors have to manage multiple stakeholders.

Another challenge faced by PPPs in Indonesia is the limited capacity of government contracting agencies (GCAs) to properly prepare and procure projects on par with international standards. The government is addressing this issue in various ways, such as providing more active support to the GCAs through the Ministry of Finance and the Committee on Acceleration of Priority Infrastructure, which employs qualified advisers to ensure quality project preparation. However, this takes place only for certain PPP projects, and PPPs are yet to become a regular feature of GCA investment programmes. The public sector in Indonesia is decentralised and characterised by multiple levels of government agencies. The lack of co-ordination among the various government stakeholders and the lack of clarity regarding the responsibilities of each agency during PPP project preparation and approval have often caused project delays, particularly in relation to decision-making.