Infrastructure in Indonesia: outlook

Raj Kannan, President Director of Tusk Advisory talks about infrastructure in Indonesia.

What are the first steps we should be following in terms of infrastructure?

Historically, the issue that we had in the last 10 years is when the government introduced the PPP framework. It is true that the framework has not been delivered to many projects. In fact, one of the first PPP projects that was structured under that framework was the Central Java Power Plant-the US$4 billion program-was only signed and the financial closure was reached about couple weeks ago. That has taken a while, but the issues were not really funding; the issues were more related to land acquisition, permit issues, etc.

Again, those issues are not unique to Indonesia. But, one of the gaps that we have been helping government fill is this expectation, in some cases, perhaps, that is unreasonable; that a PPP scheme means private sector will take all the risk. Intrinsically, that is not the case in PPP; the government takes the risk that it is able to. That has been the learning process that we see the government had to go through. It needed to adopt PPP framework and also to bring its senior public servant to understand this is not about just transferring all of the risk to the private sector. They need to assume some of those risks. Like any countries, the fiscal agencies, who perhaps one of the first thing they say is no, when it comes to any form of risk taking, whether liability that are contingent liabilities or direct liabilities, then the general perceptions is no, it is not willing to take the liability. That is the process that we’ve come through.

But, the good news is, in the last few years, the government has instituted key reforms, like establishing the Indonesia Guarantee Fund. It acts as the extended arm of the fiscal agency, Ministry of Finance. It says, “whenever there is a PPP scheme, there are two parties to it: the private sector and the government”, and this agency acts as the guarantor of the government’s contractual obligations. So, they do not provide a blanket sovereign guarantee because that is not what is needed in most projects. All the private sectors want to know is, if they are supposed to do A, B, and C, and the government contracting agencies, say Ministry of Public Works or Ministry of Transport, they are supposed to be X, Y, and Z – then if the private sector do not do their part, they know they will lose the contract. Their concession would be terminated. All they want to know is if the government agencies do not do their part, what will happen. That is where IIGF comes in. So I think, in terms of the institutional framework, the government is getting smarter.