Harun al-Rasyid Lubis
An adequate stock of infrastructures is vital in maintaining an efficient and competitive economy of a country. Indonesia’s competitiveness trend has been declining mainly due to inadequate infrastructures, ineffective bureaucracy and corruptions.
Based on various motives, governments all over the world are looking increasingly to Public Private Partnerships (PPP) to address needs for infrastructure gap. In general terms PPP is a contract between government and a private party in which the private party assumes significant project risk in the design, financing, construction and operation of a project.
More succinctly, PPP projects aimed to provide more efficient public services delivered by private sectors through an optimal risk sharing.
Before the 1997 economic crisis, among developing countries, Indonesia was still a leader in PPP. Asian financial crisis suddenly ended it all, and until now the ratio between infrastructure investments against GDP has not reached the pre-crisis level, though the nominal has been increasing.
In Indonesia the use of PPPs are targeted mainly to hard infrastructure, such as transport, energy and clean water / waste sectors. European’s PPP market, for examples in UK and Spain, is dominated by soft infrastructures such as hospitals and schools or univesities.
Backed by continual bilateral and multilateral loans, paper-based reports on enhancing PPPs as well as project lists are mounting. Until now deals are still being brought to market and closing, but very very slowly.
The prolonged global financial crisis and the recent worsening liquidity in Eurozone suggest that for the continuation of infrastructure development, governments in emerging economies should rely more on public spending or partly backed by bilateral or multilateral loans.
If PPP funding is still sought, it should rely more on local resources such as local banking syndicates, pension funds and bonds.
However, PPP market has not developed yet in developing economies, so qualified bidders are lacking and competition is simply not in place. Simply, the market is not really contestable, innovation and efficiency are questioned to be occurring as expected from private sectors.
These factual economic trends then pose a very fundamental question i.e. whether PPP can still demonstrate value for money compared to public sector comparator after all?
The use of PPPs raises very complex issues and choices, solutions is often case by case and project specific. Having revised Presidential Decree number 67/2005 on PPP twice (Presidential Decrees 13/2010 and 56/ 2011), regulating competitive tender as mandated by this Presidential Decree remain political and public controversy.
Placing contestability first and of the utmost often delay and jeopardize project delivery. Frequently, a number of PPP pre-qualifications and tenders were repeated, because private parties’ responses underwhelm, or rather information given in the info memo was unclear due to poor project preparation.
If the project is in top priority or strategic in terms of economic benefits but financially is not viable, the procurements were continued and part of the investment is subsidized or backed by government support. Or in some cases construction phase was finally decided to be funded in full through soft loans, then later tendered to private entities under operation and maintenance contract.
So, when a project was dropped from the list in PPP concession tender, justifications are weak and political.
The roles and involvement of state-owned enterprises (SOEs) in PPP tender vary across sectors. Direct appointments to SOEs were viewed against the market-oriented policies as has been mandated in the infrastructure laws.
In electricity, for example, PT. Indonesian Power (PT PLN) can play role as Government Contracting Agency (GCA) in the recent power provider tender.
Other SOEs such as Toll Road Corporation (PT Jasa Marga), Railway Corporation (PT Kereta Api) and Seaport Corporation (PT Pelindo) are positioned as service providers (operational), while government responsible for regulatory functions.
According to the laws Toll Road Regulatory Body (BPJT) and Port Authority, for examples, are being the economic regulator as well as the GCA for the respective sectors, but no economic regulator for the rail sector mandated by the railway law. To this date, reposition of public institutions’ role as regulator and the issue of state asset management are still blurred.
Urgently, for PPP being effective, asset needs to be settled and clearly defined in the contract, hence accordingly on the balance sheet. The sooner the better! This sketchy arrangements and slow PPP progress, in many occasions, has been explained by government officials as due to some fundamental reasons.
All in all, having established financial institutions to readily support and guarantee PPP transactions, government is now in a stage of streamlining the legal and regulatory framework, such as the issuance of land provision law.
On institutional issue, last year Memorandum of Understanding (MoU) amongst the Ministry of Finance, Ministry of Planning and National Development (Bappenas), and Investment Coordinating Board (BKPM) on Facility Coordination and PPP Acceleration in infrastructure had been issued to speed up the preparation and execution of PPP projects.
The MoU positions BKPM as a “front office”, packing up information about ready-to-offer projects through an attractive marketing program, and in near term period to focus on show case projects.
Ministry of Finance has duties on formulating and facilitating government’s support and guarantee, while Bappenas is to carry out PPP project planning, provide PPP Book and finalize project preparation in coordination with technical ministries and local governments. Nevertheless, the taste of the pudding is in the eating, so we’d better wait to find out whether this inter-agency coordination being effective and fruitful.
The universal criterion for PPP is Value for Money (VfM) that is a combination of cost savings, efficiency gains, and risk transfer. All risks are adjusted to life cycle costing including cost of private finance.
Until now, the rationale why PPP scheme is needed is problematic, since not all projects can be categorized as PPP. The beneficiaries of infrastructures such as container ports and its external access road are mostly private sectors, therefore public spending should be kept minimal.
In various PPP regulations, forms of support and guarantee have been adequately specified and the operational procedure for VfM assessment has also been described qualitatively together with the procedure for guarantee application.
In the future, more quantitative VfM methodology is required to ensure how support and guarantee are adequate. VfM requires strong and clear definition, as it always subject to debate and analysis, also repeated revisiting of capital grants support and partial guarantees. The bottom line is VfM can be accomplished only when PPP delivers high quality services at lower cost than government.
Minimizing total life cycle costs require careful and interdependent choices, usually private firm is better than the government at making these choices. Otherwise, public finance with separate construction and operation contract may be as good as or better than PPP finance.
The practices in several countries such as Australia and United Kingdom show that VfM measured by comparison of Public Service Comparator (PSC) with PPP references.
In India it is regulated by Viability Gap Funding (VGF) mechanism and guidance.
Urgently, government’s support and guarantee needs to be formulated transparently. The methodology and rates assumed in calculating public and private’s cost flow along project life-cycle must be standardized, so that every proposal of partnership projects can be equitably judged.
Fakultas Teknik Sipil dan Lingkungan
Indonesia: The Challenges for Infrastructure Public-Private Partnership