PPP (Public-Private Partnerships) in Indonesia: Opportunities from the Economic Master Plan pdf

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










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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






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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.
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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.’
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recently begun in 2011 through the issuance of the latest Presidential Regulation no.56 year
2011.
The Government of Indonesia also formulated several regulations for sector specific PPPs, such

as in the energy and water sectors, to provide information for private business entities, refer to
the annex section for the list of PPP regulations. Deregulation and debottlenecking are therefore
seen as a vital precursor for PPP projects to be implemented in Indonesia.
Despite the improvement in regulatory reform, however the state budget is considered
insufficient to fund the required levels of investment. Looking at Indonesia’s historical
experiences of PPP, there are plentiful opportunities for business entities to invest in Indonesia in
the long term, especially now the Government of Indonesia has recently committed to accelerate
its economic development.

The UK FCO and Strategic Asia
The UK Foreign and Commonwealth Office (UK FCO) in Jakarta contracted PT. Strategic Asia
Indonesia between August 2011 and April 2012 to undertake a project looking at the
implementation barriers and requirements as well as opportunities created by the MP3EI. This
paper looks specifically at the use PPPs in Indonesia, the role they are likely to play under the
implementation of the MP3EI and outlines key PPP opportunities for UK PLC. A second paper
has been produced as part of this project which looks at the barriers and requirements for
implementing the MP3EI. The second paper looks at the national level and also specifically at
the Kalimantan and Bali – Nusa Tenggara Corridors.

Data Collection and Evidences from the Field
The conclusions and recommendations that have been put forward in this paper are based on the
data collected throughout the life of this project. Opinions from a wide range of stakeholders
were gathered during the four conferences which were hosted by Strategic Asia and the UK FCO
as part of this project. Two conferences at the regional level, Kalimantan and Lombok, were held
to assess implementation barriers and requirements as well as opportunities in the MP3EI. Two
further national conferences were also held in Jakarta. As such, part of this paper will look
specifically at PPP opportunities in the Kalimantan and Bali- Nusa Tenggara Corridors, as well
as an overview at the national level. Meetings were also held in Jakarta and in the regions, with
field trips in Kalimantan, Lombok, Bali and Aceh. Participants for conferences were also drawn
from all six of the Economic Corridors as proposed by the MP3EI. Further to this, Strategic Asia

also contracted a Jakarta based market research company, the Polling Center, to conduct surveys
amongst the participants of the conferences to gather opinions based on standardised set of
questions.

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This paper runs as follows. Firstly, PPPs in the context of the MP3EI is addressed. Secondly, a
recent development of Indonesia’s PPP model is explained. This section also covers the main
sectors where the use of PPP has been a prominent feature. Recent developments in institutional
reform and increased government support are also covered. The second section looks specifically
at opportunities as well as issues in developing PPPs in the Kalimantan and Bali- Nusa Tenggara
Corridors. Thirdly, opportunities for UK PLC are addressed and focus on matching the available
sectors offered in Indonesia to the UK PLC’s expertise. This section is broken down into
unsolicited projects and opportunities to assist the Indonesian government in capacity building to
better realize and deliver PPP projects. This section also covers current low carbon PPP
opportunities in Indonesia.
The next section covers the more recent trends in PPPs in Indonesia and provides the current
outlook for the PPP model.

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Chapter II
Recent Developments in Indonesia’s PPP Model












The use of PPPs gained momentum at the start of the National Medium Term Development Plan
(RPJPM) 2010-2014 since it was expected to fill the financing gap for 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 to accelerate economic growth. PPP opportunities in infrastructure in
Indonesia can be divided into these eight sectors:
8

• The drinking water sector (facility for raw water extraction, transmission network,
distribution network, drinking water management installation);
• The transportation sector (port, airport, railway and train station);
• The road sector (toll roads and toll bridges);
• The electricity sector (power plant, transmission and electricity power
distribution);
• The oil and natural gas sector (processing, storing, carrying, transmission or
distribution);

8
Praptono Djunedi, “Implementasi Public-Private Partnerships dan Dampaknya ke APBN”, Majalah Warta Anggaran Edisi 6
(2007), Direktorat Jenderal Anggaran.
This section covers the recent developments of the Indonesian PPP model and focuses on priority
sectors, modalities scheme and institutional support, PPP opportunities in Kalimantan and Bali-Nusa
Tenggara Economic Corridors as well as barriers and challenges that face the implementation of PPP.
Key messages in this section include:
• The sectors of water supply & sanitation, road, power, solid waste management and the transport
are being offered as stipulated by PPP Book 2011;
• Indonesia has acknowledged the need to debottleneck and to create assurances for the private
sector through the creation of several institutional supports and modalities such as a central PPP
unit (P3CU), a National Committee for the Acceleration of Infrastructure Provision (KKPPI) and
SOEs for guarantee provision and financing: IIGF and PT. SMI respectively;
• PPP opportunities in the Kalimantan region include the building of ports and roads, whereas Bali-
Nusa Tenggara focuses on the building of ports and power plants. Challenges facing the
Kalimantan and Bali-Nusa Tenggara Economic Corridors are essentially on the inter-regional

disparities, lack of human capacity and the lack of knowledge on both PPP and MP3EI itself;
• Key barriers and challenges in the PPP implementation under MP3EI include land
acquisition problems, capacity of the public sector, especially at the local government level,
preparation of the projects and their management, regulatory framework and poor governance.
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• The waste management sector (wastewater management installation, carrier and
disposal sites);
• The irrigation sector (pipeline for raw water);
• The telecommunication sector (telecommunication network).
However, referring to the PPP Book 2011 released by the National Development Agency
(BAPPENAS),
9
currently only selected sectors are being offered to the private sector, namely the
Water Supply & Sanitation sector, Road sector, Power sector, Solid Waste Management sector
and Transport sector (Monorail, Bus & Rail Terminals and Transjakarta).
Though included in the PPP Book, no projects are proposed for the other sectors, namely the oil
and gas sector, water resources sector and the telecommunications sector. In other countries,
PPPs such as in hospitals, education, defence facilities are common, but they are not offered in
Indonesia as stipulated in the PPP-related Presidential Regulation no. 13 year 2010.
10

Relating back to strengthening the national connectivity pillar, the present condition of physical
infrastructure in Indonesia is in a low level of efficiency and productivity as well as poor
regional connectivity, thus there is an urgent need for urban infrastructure development.
In the following sections, the modalities and institutional support that the government of
Indonesia has created are explained.
2.2 Modalities Scheme and Institutional Support
Economically advanced countries are using the PPP model of Value for Money (VfM) under the
Public Sector Comparator (PSC) system to support efficiency and effectiveness in financing

infrastructure, as opposed to the standard governmental methods. However, the PSC is
unsuitable in Indonesia as the country needs PPP as a way to fill the financing gap in public
infrastructure where the government is unable to do so.
The government is aware that PPP infrastructure investment in Indonesia is often seen as a high
risk to investors, thus the government had been considering to offer guarantees.
11
Although
relatively new in the PPP scene, Indonesia has already established institutional support and
modalities for PPP. The figure below illustrates the principle parties to the Indonesian PPP
framework.






9
PPP Book is an informational document consisting of PPP projects and their readiness to prospective investors.
10
Bastary Pandji Indra, Director for Public-Private Partnership Development National Development Planning Agency
(BAPPENAS) Republic of Indonesia, Presentation of Urban Infrastructure PPP –an Indonesian Perspective, Linking Cities to
Finance, September 27-28, 2010, Shanghai
11
World Bank, Environmental and Social Management Framework (ESMF) for Indonesia Infrastructure Guarantee Fund (IIGF),
April 2012
15

Figure 5 the Principle Parties in the Indonesian PPP Framework

Source: Bambang Goeritno, Regulations on Public Infrastructure Investment and Doing Construction Business in

Indonesia, Shanghai Business Forum, 29 September 2010

Other than establishing a clear framework that will be listed in the Appendix section, the
Indonesian government has created several supporting bodies to ease and accelerate the PPP
mechanism in the country. These bodies are in the form of embedded units in the ministries and
state-owned companies.
The National Committee for the Acceleration of Infrastructure Provision (KKPPI) was
established to coordinate the acceleration of infrastructure provision for national economic
recovery.
12
The KKPPI is an inter-ministerial committee chaired by the current Coordinating
Minister of Economic Affairs, M. Hatta Rajasa. It endorses requests for contingent government
support (guarantees) as a basis for consideration and approval from the Ministry of Finance.
13

Public-Private Partnership Central Unit (P3CU) is an embedded central unit for PPP under
the Directorate of PPP Development in the Ministry of National Development Planning/ National
Development Planning Agency (BAPPENAS). Its tasks include: formulating policies; assessing
requests for contingent government support; assessing and recommending project proposals
feasible for government support; supporting Government Contracting Agencies for the
preparation of the project; monitoring and evaluating PPP Project Development; and conducting
PPP promotion, capacity building and information dissemination.
14
Currently this unit is still

12
INFRADEV & Infrastructure Experts Group
13
Coordinating Ministry of Economic Affairs Republic of Indonesia, Public Private Partnership (PPP) Investor’s Guide, April
2010, p5

14
State Ministry for National Development Planning/ National Development Planning Agency Republic of Indonesia, Terms of
Reference: Technical Assistance and Support for the Public Private Partnerships Central Unit, ADB Loan no. 2264 – INO (SF),
Infrastructure Reform Sector Development Project; Coordinating Ministry of Economic Affairs Republic of Indonesia, Public
Private Partnership (PPP) Investor’s Guide, April 2010, p5
16

under process however, BAPPENAS and the unit will be the dedicated regulators and
supervisory body for all PPP projects in Indonesia, whereas the Ministry of Finance will deal
mainly with the Risk Management of projects, policy support as well as managing the SOEs for
guarantee provision and financing.
To ease the materialization of large projects, the government has created a guarantee enterprise
(BUPI) for the project companies to access loans from banks and private financial institutions.
One of the newly created state-owned enterprises under the Ministry of Finance is the Indonesia
Infrastructure Guarantee Fund (IIGF or also known as PT PII Persero) which has the
following tasks: providing contingent support for the Government of Indonesia by guaranteeing
any contractual risks in relation to government actions; improving the quality of PPP
transactions; pushing for a fixed and accountable approach for PPP implementation, with IIGF as
the single processor and provider of infrastructure guarantees.
15
Created in December 2009, the
IIGF uses a policy called the Single Window for multiple guarantee provision processes.
Through the IIGF, the government appraises infrastructure projects, structures guarantees and
processes claims. The aim is to uphold transparency and consistency in guarantee provision and
claim processing in order to increase investor’s confidence to participate in infrastructure
projects in Indonesia. The current President Director of the IIGF is Sinthya Roesly.
Another state created company is PT Sarana Multi Infrastruktur Persero (PT SMI). It is a
non-bank financial institution wholly owned by the Ministry of Finance to assist funding of
various infrastructure projects. PT SMI was created in 2009, with the start-up capital sourced
from the Asian Development Bank (ADB), the International Finance Corporation (IFC) and

Deutsche Investitions- und Entwicklungsgesellschaft mbH (DEG) as well as from the
Government of Indonesia. PT SMI promotes PPP in accelerating infrastructure development in
Indonesia.
16
After the IIGF gives its assessment and guarantee, PT SMI can give funding through
a loan, mezzanine or equity. It is currently headed by Emma Sri Martini. The company has a
subsidiary called PT Indonesian Infrastructure Fund.
For infrastructure specific financing, the government has prepared three financial facilities for
PPP in Indonesia, which are grouped in three categories: Land Funds, Infrastructure Funds and
Guarantee Funds. Land Funds consists of Land Revolving, Land Capping and Land Acquisition
all of which are managed by the Ministry of Public Works. Infrastructure Funds are prepared by
PT SMI and PT IIF, whereas Guarantee Funds are managed by IIGF.
17
The figure below
illustrates how a project company interacts with various bodies, ministries, state-owned
enterprises, and other entities regarding project implementation.



15
IIGF, Public-Private Partnerships in Indonesia: The Guidelines for Risk Allocation, March 2011
16
PT SMI, Investment Book, April 2011
17
Freddy Saragih, “Program KPS Dijamin PT PII”, Media Keuangan vol IV no. 45, Secretary General of Ministry of Finance
Republic of Indonesia, May 2011
17

Figure 6 the National PPP Network

Source: Andri Wibisono, Jeff Delmo and Hongjoo Hahm, Terms of Reference Technical Assistance and Support for
The Public Private Partnerships Central Unit (P3CU), Infrastructure Reform Sector Development Project ADB;
Unlocking the Public-Private Partnerships Deadlock in Indonesia

The government needs to conduct several phases of project maturation before it can offer
projects to the private sector; these are elaborated in the figure below:


PPP Nodes (PPP Units)

Project Identification,
Preparation, Monitoring &
Quality Control:

• Screening
• Due Diligence
• Bid Documents
Project Prioritization

Secretary 1: Deputy Minister of
Infrastructure, CMEA
Secretary 2: Deputy Minister of
Infrastructure, BAPPENAS

Ministry of
Finance

Ministry
of

SOEs
Infrastructure
Sector Ministries

MPW, MT,
MENR, MCI


Ministry of
Home
Affairs
Government Contracting Agency
Secretariat/ P3CU

• Policy Coordination, Planning
& Development
• Monitoring & Quality Control
• Identify Projects requiring
Government Support
• Facilitate Cross-sector issues
• Transaction advisor support

Risk Management Unit
• Government support
policy
• Development and
monitoring
• Assess issues and
Manage Guarantee

Line Ministry and
SOEs

Project Development,
Implementation, and
Monitoring

Local Government
Project and LOEs

Project Development,
Implementation and
Monitoring


Project
Development
Facility (PDF)
IIGF

Assessing and
Managing
Government
Support
PT SMI/
IIFF
Financing
Project Support

Project Facilitation
Chairman:
CMEA
Co-Chair:
Ministry of Planning/ BAPPENAS
National Committee for the Acceleration of Infrastructure Provision (KKPPI)

18


Figure 7 Phases of PPP Project Realization

Source: Sustaining Partnerships, Edisi Khusus Tahapan KPS 2011, p12

In the above graph, Project Company involvement will take place at Stage 4 of project
realization. Prior to this stage, the national government works to ensure that a project is feasible.
Private consultancy services are involved in phases 1 and 2; however, in terms of project
implementation Project Companies will only be involved when tenders are issued at Stage 4. A
government contracting agency (PJPK) can be a ministry, government institution, or a
provincial, regency, or city government. Every interested investor will undergo pre-qualification
and procurement phases with the PJPK.
At stage one, the government contracting agency (PJPK) will form a procurement committee as
well as conducting market sounding to get feedback from the private sector on the quality and
attractiveness of the project. As part of the feasibility study, the committee will prepare a Self-
Assessed Price (HPS) and gather pre-qualifications documents and procurement documents.
Here the level of government support will also be determined in terms of the amount and nature
of the government contribution to the project, such as tax incentives, land acquisition, contingent
support/guarantees, direct financial support, etc.
The largest portion of risk will be allocated to the party that is most likely to be able to handle
the risk entailed. Construction and operation risks are usually given to the private sector, while

CS
Manage
ment

Government
Contracting
Agency (PJPK)
prepares the
PPP project

Suggestion of
PPP project is
being sent to
the
government


Phase I:
Project
Identificati
ons and
Selections

Preparation
of priority
projects
Stage 1

Early
preparation of

Pre-F
easibility
Study
Stage 2

Checking the
readiness of the
project
feasibility

Stage 3


Finishing
the
feasibility
study of the
project


Process of Procuring Land
Phase

IV:
Contract
Management



PPP Contract

Management
Stage 4

Procureme
nt of the
Project
Company

Government
Support Analysis
Submitting and Evaluating
Governance Support

Phase II: Project
Preparation
Phase III: Transaction

19

regulatory frameworks will be handled by the contracting agency. Market risk could be shared
by both parties.

Figure 8 Description of Pre-Qualifications and the Indonesian PPP Procuring Process

Source: Sustaining Partnerships, Edisi Khusus Tahapan KPS 2011, p22

The transaction phase is crucial for the potential private sector partner. In the pre-qualification
stage, the procurement team will select potential investors that could be short-listed for the
competitive bidding, as described in the figure above. An expression of interest will be submitted
here. Short-listed candidates will be evaluated and ranked, and the qualified candidates will be
invited to submit full proposals. The first ranked bidder will be welcomed to negotiate with the
PJPK. At this point the decision to award the bidder will be in the hands of the PJPK. As can be
seen from the above graph, the number of bidders also matters as back-up options are needed in
case the winner drops out of the project. The PJPK is not advised to have an MOU with the
project company to avoid direct indication of parties, and every deal should be made through
tenders. After reaching an agreement, the PJPK will ratify the result and the procurement
committee will announce the contract award.
Should the PJPK ask for a project guarantee from the Risk Management Unit (RMU) in the
Ministry of Finance, if the RMU approves, it will be processed by the IIGF. The IIGF will
guarantee the project and, if necessary, the Ministry of Finance will act as a co-guarantee. If the
IIGF agrees to guarantee the project it will release a letter of intent and an acceptance statement
regarding the scope, risk allocation and timeframe of the guarantee. The involvement of IIGF
Announcement

Pre-

Qualifications
Less than 3
co. qualified
for tender
More than 3
co. qualified
for tender
Repeat pre-
qualifications
Project Offer
• ≥3  1 potential winner, 2 extras
• =2 1 potential winner, 1 extra
• 1  repeat procurement or negotiations
with ministerial approval
• No legitimate bid failure of procurement
and re-offering will take place
Winner of
Procurement
20

will span from phase one until phase three of project realization, and at the implementation phase
IIGF will continuously monitor the project.
For sectors such as water utility, the government contracting agency will head the local
government and the Regional Company for Drinking Water (PDAM). Other stakeholders include
the local parliament (DRPD) and regulatory body. For the drinking water sector, the Ministry of
Public Works (MPW) will offer projects to investors. The scheme will be Build-Operate-
Transfer (BOT), where the private sector can sell the final product to the government. Hence,
firstly the private investor must go to the body offering the project, in this case the sector-
specific ministry. Also specific programs are often offered by the local government and the
regional/ provincial head or elected official called Bupati. Reliable regents or Bupatis are to be

engaged and project talks must be conducted as early as possible.
Indonesia also regularly holds Indonesia International Infrastructure Conferences and Exhibition
(IIICE) organized by the Indonesian Chamber of Commerce (KADIN) and supported by the
United Nations Economic and Social Commission for Development in Asia Pacific
(UNESCAP). In the year 2012, the conference was hosted between the 2
nd
and 5
th
May. Such
conferences and exhibitions offer a chance for the central and local government to meet with
private sector in order to work towards the development of infrastructure in Indonesia.
18

The two sub-chapters below will elaborate on specific PPP opportunities and condition in the
Kalimantan and Bali – Nusa Tenggara Corridors, as outlined in the MP3EI.

2.3 PPP Opportunities in the Kalimantan Economic Corridor
The Kalimantan economic corridor has been designated as a Centre for the Production and
Processing of National Mining and Energy Reserves, due to its abundant mineral and energy
resources. Under the MP3EI, the GDP of Kalimantan Corridor is projected to grow at 11.9
percent annually.
Kalimantan’s main economic activities are focused on the production of Steel, Bauxite, Coal, Oil
and Gas in the mining sector and Palm Oil and Timber in the non-mining sector. This region has
four primary economic centres: Samarinda (East Kalimantan), Palangkaraya (Central
Kalimantan), Pontianak (West Kalimantan) and Banjarmasin (South Kalimantan).
Under the MP3EI, the Kalimantan region should contribute to a significant increase in economic
growth. However, the government is unable to meet the economic target stipulated in the Master
Plan on its own unless it finds an alternative source of funding, particularly in the form of private
investors’ contributions. Out of Rp. 4,012 trillion required from the private sector, only 24
percent of it or Rp. 945 trillion is designated for the Kalimantan Corridor. In addition, the MP3EI

challenges Kalimantan to optimize its economic potential in a sustainable and not Business as
Usual way to meet its target.

18
Indonesian International Infrastructure Exhibition 2012 homepage
21

In total there will be 11 projects in Kalimantan, though all are still classified under potential
projects, amounting for more than US$ 3 billion. The only one already in tender is the Puruk
Cahu – Bangkuang Coal Railway in Central Kalimantan, which accounts for a total investment
of US$ 740 million. The railway is expected to carry 10 million tons a year in the first 10 years
of its completion.
19
This project has already seen four successful bidders: the Itochu-Toll
consortium, Drydocks World LLC-PT MAP Resources Indonesian consortium, PT Bakrie-SNC
Lavalin-Thyssencrupp consortium and China Railway Group Limited-PT Mega Guna Garda
Semesta-PT Royal Energi consortium.
20
The Government Contracting Agency (PJPK) in this
project is the local government of Central Kalimantan province (BAPPEDA Kalimantan Timur).
The project will use the Design- Build-Finance-Operate (DBFO) PPP model. Construction is set
to begin in 2013 after the PJPK announces the name of the winner of the bid.
In East Kalimantan, there are five potential projects, including one airport in Samarinda, one sea
port in Maloy, a coal railway in Balikpapan, a toll road connecting Balikpapan and Samarinda, as
well as a coal fired steam power plant (2x100MW).
21
For the Maloy Port, project preparation and
estimated tender time is 2012. The port is designed to be a CPO port to support the CPO
plantation industry and its downstream industry. In West Kalimantan, there are four potential
projects, including three water supply systems and an airport. The Singkawang Airport began

project preparation in 2011 and the estimated tender time will be later in 2012. Meanwhile, in
South Kalimantan, there is only one potential project, which is the Pelaihari sea port.
Apart from the PPP projects being offered in the PPP Book 2011, the East Kalimantan local
government has signed an MOU with a subsidiary of state firm Russian Railway, the Kalimantan
Rail PTE Ltd, to build a railway for transporting people and coal. The project will be done in two
phases, the first one connecting inter-East Kalimantan itself, which connects Balikpapan to West
Kutai, and the second one will be extended to the Central Kalimantan province. The ownership
of this infrastructure will be discussed further in a technical agreement following the MOU.
Currently, the project is in the land release phase. This will be the first cooperation of Indonesia
undertaken with a Russian private sector business. It is expected that the first phase will be
finished in the year 2017. A US$ 2.4 billion fund aid will be wholly from the State Affairs and
Foreign Economy Bank in Russia and the Kalimantan Rail PTE Ltd.
22

Therefore, the majority of the potential PPP projects in Kalimantan are mining related
infrastructure projects. However, the growth of the oil and gas sector has been declining in recent
years and the MP3EI document acknowledges the need to develop the non-oil and gas sector in

19
PT Buena Persada Mining Services, “Indonesia’s Adaro eyes $1.5 billion Coal Railway”,
17 Apr 2010
20
Jakarta Post, “PII to guarantee $2.3b railway project in C. Kalimantan”, 1 December 2011
21
Direktorat Pengembangan Kerjasama Pemerintah dan Swasta, “ Development of Maloy International Port, East Kalimantan”
22
Satya Festianirai, “Russia and Indonesia Project Kalimantan Railway”, Republika Online, February 28, 2012; “Indonesia-Rusia
kerjasama pembangunan rel kereta api”, Antara, February 7, 2012; “Rusia Bangun Infrastruktur Kereta Api di Kalimantan
Timur”, Pikiran Rakyat Online, February 8, 2012
22

Kalimantan. 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 compared to other provinces on the island;
• A lack of infrastructure to implement the MP3EI;
• A lack of human resource capacity. It has been argued that the key messages of
the MP3EI have not yet been fully socialized, and local government and local
private sector are thus not yet prepared to implement PPP projects ;
• Complex bureaucratic procedures in issuing mining permits;
• Public resistance, especially for sensitive issues such as land release and lack of
synchronization between central and local governments, towards implementing
the projects in MP3EI.

2.4 PPP Opportunities in the Bali - Nusa Tenggara Corridor
Corridor V of the MP3EI consists of the provinces of Bali, West Nusa Tenggara (NTB) and East
Nusa Tenggara (NTT). The theme of the Bali - Nusa Tenggara Economic Corridor is the
‘Gateway for Tourism Industry and National Food Support’. This upsurge in economic activity
aims to improve people’s welfare in this corridor where 17 percent of the population is below the
poverty line and where there is a relatively high income disparity of Rp. 17.7 million per capita
(between the richest and poorest regencies/cities in this corridor). This corridor faces various
problems including unequal population distribution, low investment levels and limited
availability of basic infrastructure. Therefore, this corridor requires acceleration and expansion
of economic development, which will focus on 3 main economic activities: tourism, fisheries and
animal husbandry.
As tourism is one of the key sectors in Corridor V of the MP3EI, the Ministry of Tourism and
Creative Economy is involved quite intensively in accelerating economic growth in the region.
The Ministry has stated that the corridor will be open for private investment in several

infrastructure projects. There are approximately 136 projects with an estimated total cost of Rp.
210 trillion up to 2025. Here the government has allocated its share at 20%, the rest will be
contributed by the private sector and state-owned enterprises.
23

Infrastructure development will ultimately aid national connectivity which will in turn reduce
transportation and logistical costs, making economic activities more efficient. In the Bali – Nusa
Tenggara corridor, the prioritized connectivity activities are focused on enhancing airport
development, capacity building, developing road infrastructure and constructing new power

23
Ashari Purwo , “Koridor V MP3EI Terbuka untuk Swasta”, Bisnis Indonesia, 1 Desember, 2011
23

plants to support the main economic activity of tourism, increase fishery production, develop the
salt business and support livestock production.
24

According to a report of the MP3EI’s kick-off meeting, this corridor will need key
infrastructures which include the expansion of Ngurah Rai Bali International Airport, terminal
cruise in Tanah Ampo, the Trans-Bali toll road, as well as an electricity power plant.
25

Infrastructure in the tourism sector is developed in line with centres of tourism in this corridor.
One of the projects, the Tanah Ampo terminal cruise, is set to be a tourism port in the eastern
regency of Bali, Karangasem. It is the only cruising port in Bali and the expansion of the over
burdened port is being offered to investors under PPP.
26
The port provides a good opportunity for
meeting international standards, increasing connectivity and aiding tourism development in the

region. To meet these objectives, the starting phase of the project requires Rp. 160 million.
27

In order to perfect and maximize the expansion of the cruise terminal, the regency of the
Karangasem government has conducted meetings with the Australian consultant SMEC Peter
Benson as well as the Ministry of Transportation and the Balinese provincial government, and
other technical parties.
28
This terminal is of particular interest to investors from Japan and
Australia because of its location in the east.
29
Other interested investors hail from Singapore,
Turkey, USA, and China, most of whom have conducted surveys on Karangasem. Due diligence
and pre-feasibility studies has been carried out by the SMEC consultant. The Directorate General
of Marine Transportation is the Government Contracting Agency (PJPK) for this project. The
proposed scheme for this port is Operate & Maintain (O&M), because if the building is included
in the scheme then the financial return will not be met. If this is approved, then the winning
bidder will not need a guarantee from IIGF.
30
The Tanah Ampo port is currently being operated
by port operator Pelindo III and the local government. However, the progress of this project is
still questionable due to some issues with changes to authorities from Pelindo to the local
government and the availability of the documents required conducting pre-qualifications.
In NTB, the largest infrastructure project this year in the corridor will be the Bima Port which is
estimated to need a total investment of Rp. 400 billion. The realization of the project, however, is
still undetermined.
31
In NTB, the local government is pushing for private investors to invest in
one of the biggest projects for tourism, the Mandalika Resort. So far, six national investors have
signed contracts with the regional government. The Mandalika Resort is a 1,350 hectare

integrated tourism area similar to Bali’s Nusa Dua. It is set to be a special economic zone which
will benefit greatly from the fiscal and non-fiscal facilities that will attract more investors to the

24
Directorate for Public Private Partnership Development, “The Connectivity of Six Economic Corridors”, Sustaining
Partnerships: Media for Information on Public Private Partnerships , December 2011, p21.
25
Coordinating Ministry of Economic Affairs, “Penyusunan Masterplan Percepatan dan Perluasan Pembangunan Ekonomi
Indonesia 2011-2025”, Pengembangan Koridor Ekonomi Indonesia Kick Off Meeting, 7 February, 2011.
26
“Tanah Ampo to Serve as Main Cruise Ship Terminal in Bali”, Jakarta Post, 12 July, 2011.
27
“2012 Dua Proyek Infrastruktur Transportasi Ditender”, Investor Daily, 23 December, 2011.
28
“Pelabuhan Wisata Berpeluang Layani Puluhan Kapal Besar”, Investor Daily, 11 March, 2011.
29
“Lima Proyek Infrastruktur PPP Mulai Jalan 2011”, Investor Daily, Juni 12, 2011.
30
Indonesia Investment Coordinating Board (BPKM), PPP Infrastructure Showcase Project Tanah Ampo Cruise Terminal
31
Edy Can, Kontan.
24

tourism sector.
32
The building of the tourist area, Mandalika, will require US$ 3 million or
around Rp. 27 trillion, with the State-Owned Enterprise, PT Bali Tourism Development
Corporation, investing Rp. 2.2 trillion. The rest will come from the private sector.
33

NTB also aims to be a centre for animal husbandry, especially for cattle. However, currently the
province still faces problems in meeting national beef consumption, hence the need for better
infrastructure, as well as better techniques and science and technology in the field. The Ministry
of Research and Technology gives funding amounting to Rp. 50 million for research into 125
innovations in the corridor that could make Indonesia a self-sustaining meat producer by 2014.
To reach the goal of meeting national beef consumption, NTB is aided by the Indonesian Science
Agency (LIPI) that provides 2,500 superior cow seeds from Bali.
34

In NTT, there are currently no projects offered under the PPP scheme. This could demonstrate
the lack of equality and the disparities within the corridor. For example, Bali is very well known
and quite developed in the PPP scheme in comparison to the neighbouring Nusa Tenggara
islands.
As opposed to the 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 has stated that it is not ready to implement the MP3EI due to
lack of infrastructure, financing and human resources;
• Financing problems for the private sector to invest in the corridor;
• For the tourism sector, NTB and NTT are living under the shadow of Bali.
Product differentiation from Bali is deemed necessary;
• Lack of socialization from the central government regarding the MP3EI initiative
to the local government, private sector and the civil society, hence not equal
spread awareness from all stakeholders.
2.5 Barriers and Challenges in Implementing PPP Projects in Indonesia
As in any new unprecedented initiative or policy, barriers and challenges will persist. This
section further explains the factors that still hinder the implementations of PPPs in Indonesia.

After more than two decades since the Indonesian government implemented the first PPP project
on toll roads, followed by two Indonesia International Infrastructure Conferences and Exhibition
(IIICE) events, Indonesia is still unable to attract many private business entities to invest in the

32
Andhika Pertiwi, “Produk Wisata NTB Harus Beda dari Bali”, Kompas, Oktober 25, 2011.
33
“Hatta Janji Percepat Penetapan Status KEK untuk Mandalika”, Investor Daily, October 21, 2011.
34
“Membangun Bumi Sejuta Sapi”, Media Indonesia , Februari 29, 2012.
25

country. There is a common consensus among local governments that PPP schemes help resolve
governments’ financial difficulties, especially in terms of infrastructure development projects.
However, there are still a number of obstacles that Indonesia faces to effectively realize PPP
projects. Based from the empirical findings, among them are the following:

Land Acquisition Problems
To date, land acquisition is deemed to be one of main problems in the overall PPP transaction
process. Land acquisition in Indonesia is part of the government support but is also included in
investment costs. Furthermore, the land release process in Indonesia for PPP projects can take
much longer than stated in the investment agreement. This means the private sector still bears the
cost of releasing the required land. Commonly, governments have to provide compensation to
the community from which land has been acquired thereby increasing the expense and the length
of the process. High compensation costs for land affects the length of a project’s concession
period making the investment less attractive to the private sector parties since the return on
investment is prolonged. However, the current land appraisal method has improved significantly
in the last two years which may reduce disputes between land owners and local governments. In
addition, in January 2012, the government issued Law No.2 year 2012 to ease the land
acquisition process in Indonesia but the Presidential Regulation is still pending. To date, it is still

too early to judge whether the new regulation is able to minimize land release problems to
support the implementation of PPP project. Thus, there is a hope that the land acquisition
problem can be simplified through the PPP execution process in the near future.

Capacity of the Public Sector at the Local Government Level
Throughout the many PPP projects undertaken across provinces in Indonesia, the discussion
often centres on the fiscal capacity of the government in terms of infrastructure project finance.
However, another key theme often emerges, related to the lack of human capital capacity
regarding knowledge of the PPP mechanism and its procedures for implementation. It is often
found that local governments lack the authority to play a more significant role in the operational
procedure of the project. Local governments in the past have often only had limited
responsibilities up until the completion of the land release process, as seen in the development of
the Pekanbaru - Dumai Toll Roads. They also even had problems dealing with asset recognition
and land ownership in the community. During the implementation of PPP projects, it has been
known for local governments to require technical assistance from private parties pushing up
costs for the private sector and in turn deterring investment.

Preparation of the Projects and their Management
The success of a PPP project is usually determined at the beginning of its lifecycle when the
government devises the project. The development of the PPP model in Indonesia has been
relatively slowing in comparison to countries such as Singapore or the UK. Furthermore, the
Indonesian government is still relatively new to the concept of better project preparation and