Palapa Ring: the biggest news in Indonesian PPP that no one is talking about

With little fanfare, over the past few months Indonesia’s Ministry of Communications and Information Technology (MCIT) has been making solid progress in developing and procuring what is, arguably, the most exciting project in the history of Indonesia’s PPP program. As I tweeted last week, I think this is the biggest, best news story in Indonesian PPP that no one is talking about.

In this article I’ll explain what I think makes it so exciting, and why I think this project could be transformative for Indonesia’s PPP agenda.

This is a good project

At time of writing, your only sources for information about the project is BAPPENAS's PKPS website. They published both the announcement of the pre-qualification process, and the announcement of the pre-qualified parties.

The project aims to procure a PPP contrator to construct and operate three fibre-optic backbone networks divided into three packets serving, respectively, the west, central and east of Indonesia. The total capital cost of all three is estimated to be on the order of USD 250 million.

The prequalified parties differ slightly between packets (check out the announcement for specifics), but include: 

  1. PT. iForte Solusi Infotek 
  2. PT.Indosat, Tbk  
  3. Konsorsium Mora Telematika Indonesia - Ketrosden Triasmitra 
  4. Konsorsium Super Sistem Ultima - Huawei 
  5. PT.Telekomunikasi Indonesia, Tbk 
  6. PT. XL Axiata, Tbk
  7. Konsorsium Pandawa Lima
  8. Konsorsium PT.Matra Mandiri Prima - PT. Hitachi High Technologies Indonesia - PT.Partibandar Utama 

Update: By time of posting, there have been a few articles written. Including this quite good one, that even talks about the project structure including a subsidy. It also promises that the RFP would be out this month, which seems very ambitious. Watch this space!

Following the checklist I set out in my Prakarsa article, the project is looking pretty good so far.

Criteria Status
Appropriate risk models
USD tariffs for the private party ???
A track record as a reliable offtaker and reasonable contractual counterpart
Ability and willingness to hire professional advisers ???
A willingness to let private parties compete on a level playing field with SOEs
Sufficient authority and a track record of solving problems

Appropriate risk models: The private party will be remunerated on an availability basis, meaning the government will be bearing demand risk and will have full control over user-charges. There may come a time in future where it may be appropriate to allocate demand risk to the private party, and allow them to levy user charges directly at regulated prices, but that is a substantially more complicated proposition than the proposed project. Keeping it simple for now is a good thing.

I also understand that the Ministry of Finance and IIGF having taken some steps towards approving guarantees for the project. This will also be seen positively by investors.

USD tariffs: I don’t know whether the private party will be remunerated in USD, IDR or a mix, but either way, the parties that are prequalified do a lot of Indonesian business, so are the type that could probably find a way to be comfortable with whatever tariff is proposed. When I find out the answer to this question, I will update the article.

A track record: MCIT has never done a PPP project before, and, to my knowledge, they have never signed a contract remotely with the same tenor of this one. But then, they have regulated and overseen an industry that has delivered almost IDR 600 trillion (USD 44 billion) of private investment in Indonesian infrastructure between 1995 and 2012 (in 2015 IDR, using the investment deflator). Obviously, they're doing something right, and private investors are relatively comfortable with the regulatory environment.

 Source data from World Bank Technical Note: Estimating Infrastructure Investment and Capital Stock in Indonesia (forthcoming), presentation by the author.

Source data from World Bank Technical Note: Estimating Infrastructure Investment and Capital Stock in Indonesia (forthcoming), presentation by the author.

Professional advisers: I don’t know who is advising the government on this project, but from what I have seen so far, they seem to know what they are doing.

Level playing field with SOEs: It may be too soon to say for sure, but the fact that Indosat and Telkom are competing against each other through the tender process makes me think that it would be less likely that one or the other would be advantaged relative to other bidders.

Sufficient authority: I had the good fortune to meet Minister Rudiantara last week at Indonesia Australia Business Week, and he spoke of his strong support for the project. Sadly, support up to the top level of government has not been a feature of many PPP projects in Indonesia’s history. This senior support will make it much easier to address problems as they arise.

Other good stuff: In addition to all of those advantages I list above, much of the alignment is undersea, so land acquisition and resettlement (major drivers of problems in other projects) will be relatively simpler.

All of these things add up to a project that I think has a good chance at being Indonesia’s first PPP project to reach operations*.

Indonesian PPP desperately needs a win on the board

Indonesia needs a replicable model that can deliver dozens of projects per year transparently and efficiently. Yet, that pipeline of dozens of projects doesn’t follow until 4-5 years after the delivery of the first project. Indonesia’s pipeline of PPP projects has been 4-5 years away for the last 10 years!

Those of us that have been working in the field since Indonesian PPP’s coming out party in 2005 at the first Indonesian Infrastructure Summit have been shouting about it for so long that we now lack credibility. We lack credibility with the private sector, who are sick of coming to hear about projects that never get tendered, or whose tenders get cancelled without explanation. We also lack credibility with government contracting agencies, who see PPP as a failed model because of its lack of success to date.

Think about it, if I’m a Bupati with a water project, why I would send my project down the PPP road, when I can see that Lampung, Umbulan, and Jatiluhur have been stalled, barely moving for years? What would make me think I would have a better chance of getting through?

Delivering a PPP project could flip the narrative. Once investors can see that there are good projects that provide appropriate returns, and contracting agencies see that the model can work to deliver infrastructure, transfer risk, and provide value for money, the world will beat a path to Indonesia’s door. But, unless to do deliver a project, we’ll stay 4-5 years away from a real PPP pipeline forever!

So, what now?

Solid fundamentals, and the desperate need for a project are often, sadly, not enough to get a project over the line. Infrastructure projects are complex, and diligence, and strong leadership will be needed to see the Palapa Ring project through the remainder of the tender process, to issuance of the RFP, to award, financial close, construction, commissioning, through to operations.

The Indonesian government as a whole, and MCIT more specifically deserve credit for creating a good project and getting it this far. I have been somewhat mystified by the lack of coverage so far. Going forward, I hope to see the media playing their role in reporting on, and monitoring this project, to make sure it stays on the straight-and-narrow, and creating a sense of urgency for its delivery in government.


*I very much hope Central Java Power Plant, Lampung Bulk Water Supply Project, or Umbulan Bulk Water Supply Project prove me wrong, but I wouldn’t put much money on it, given how long they have been stalled.