How much does extending a toll road concession period lower tariffs? (Spoiler: not much)

About three weeks ago, the Minister of Public Works and People’s Housing Basuki Hadimuljono reported that his ministry was looking into extending the concessions of toll roads in an effort to reduce toll road tariffs. Katadata reports that this was in response to an order from President Joko Widodo to reduce toll road tariffs this year, as he had received many complaints from the public that they were too expensive.

This obviously begs the question: how much does extending a toll road concession period lower tariffs? (Spoiler for those who want to skip ahead: comfortably less than 2%).

OK, so we need to build a financial model and collect a bunch of data?

Actually, we don’t need to build a financial model, and don’t need to collect much data at all.

If all we need to know is the percentage change in tariff, we can get in the right ballpark with just the following data:

  • The current length of the toll road concession in question
    • Concession lengths that range from 31 to 50 years with an average all toll roads of 39.3 years (BPJT), so let’s say 40 years.
  • The desired length of the concession
  • The weighted average cost of capital (“WACC”) for Indonesian toll roads
  • The share of capital expenditure in total project cash outflows
    • Capex usually accounts for about two-thirds of cash outflows over the life of a toll road project, in present value terms

We can do this by using the PMT() function in Excel, and just modelling all of the cashflows as an amortising loan payment using the tenor of the loan as the number of periods, and the WACC as the interest rate.

table.png

So as you can see in the table above, even if we set the WACC at an unrealistically low figure of 9%, and extend the concessions all the way out to 60 years, on average, the impact on the tariff is going to be less than 2%. More than likely, it’s going to be less than 0.5%.

(Nerd note: in fact, it’s going to be even smaller than that, because amortising loan payments are constant in nominal terms, while toll road tariffs in Indonesia grow roughly at inflation, so will be backloaded; hence, further discounted. And it’s not like you can get debt on a 60 year tenor either, so you’re still going to be front-loading debt payments, and back-loading dividends, whether it’s a 20 year or a 60 year concession. In any case, the impact is comfortably less than 2%)

Why is the impact so small?

It can be counterintuitive that adding 20 years to a 40-year concession has such a small impact on the tariff; after all, there’s another 20 years’ worth of traffic to spread the capital costs over. The problem is that, 40 years in the future, those cashflows aren’t worth that much in today’s money.

Even at a 9% discount rate, one dollar in 40 years is only worth 3 cents in today’s money, so the many millions of dollars of revenue that a toll road might earn in years 41 to 60 really don’t do a lot to lower the tariff required to cover the project costs projected in today’s money.

Is lowering toll road tariffs even desirable?

The purported aim of this policy is to reduce logistics costs incurred by Indonesia’s businesses while transporting goods on roads. This is a laudable aim, after all, Indonesia’s logistics costs are among the highest in the world as a share of GDP; accounting for 26% of GDP in 2016, compared to 14% in Malaysia, and 8% in Singapore.

However, the main drivers of roads logistics costs are not toll road tariffs, but rather congestion, and wear and tear on cars due to poor quality roads. If you did lower toll roads tariffs a significant amount, you could conceivably increase traffic on the roads, making traffic worse, and increasing the logistics costs overall.

Floating policies like this drives investor perception of risk

Any infrastructure developer knows that an extra 20 years on their concession will have a negligible amount on tariffs, so the government looks unprofessional when they go public with policies like this. In a developer’s eyes, it looks like the government is politicising toll road tariffs, increasing regulatory uncertainty; the impacts of which they are very familiar with.

As I said in my article in the Lowy Institute’s Interpreter blog in August last year “The government’s propensity to undertake post-bid renegotiations is part of the reason that cost of capital for utilities developers in Indonesia is closer to the neighbourhood of its lower-income ASEAN neighbours Vietnam, and Cambodia, rather than its lower-middle-income peers of the Philippines and Thailand.” (Check out that post for the accompanying graph).

Summing up

Extending toll road concessions is not an idea that is worth the attention that has been paid to it over the past few weeks. It won’t lower tariffs by a significant amount, and it’s not clear that lowering tariffs is a sensible policy aim anyway. By promoting this policy, the government stoking investors’ perceptions of regulatory uncertainty, keeping the cost of capital high.

Looking back at the table above, it strikes me that the tariff is dramatically more sensitive to changes in WACC than it is to changes in the length of the concession period. It could be that announcing this policy has already had an impact on future toll road tariffs, but not in the direction that the government was hoping.

When is borrowing at a low interest rate a bad thing for governments?

I was pleased to write an article for the Lowy Institute's great blog, The Interpreter, on Indonesia's regulation of toll roads entitled Indonesia's unorthodox toll road debt. 

From the article:

In 2016 Indonesia’s Ministry of Public Works dramatically underestimated the funds it needed to acquire land for toll road development. To try to keep development on schedule, the government leaned on toll road developers to lend them the difference at well-below-commercial rates. 

In the article, I try to set out how borrowing from the toll road developers at low interest rates may end up costing them more in the long run. To read more, head on over and have a read.

Pre-qualification for Bandar Lampung Bulk Water Supply project is open

I'm not sure how I missed this (or how the English, and Indonesian language media also seems to have entirely missed it at time of writing), but the Bandar Lampung Bulk Water Supply public private partnership ("PPP") project pre-qualification has been open since 30 March, and is open until 30 May 2017.

Source: PDAM Way Rilau

Source: PDAM Way Rilau

 

It's odd that this isn't bigger news because, as far as I am aware, this is the first PPP project to be tendered since the Palapa Ring projects were tendered in late 2015

This is the second time this project has been tendered, and the previous go-around was quite a big deal.

What happened last time

The previous tender process was launched in 2012, and attracted substantial interest from domestic and foreign bidders, with 10 consortia submitting bids. Shortlisting happened fairly quickly, with Water Consortium (Hyundai Engineering and Construction, Itochu Corporation and PT Potum Mundi Infranusantara); Abeima and PT Wijaya Karya Persero Tbk; Acuatico and Mitsubishi Corporation; and Manila Water and Great Giant Pineaple Co forming the final four.

Yet, disagreements over the project costs; the allocation of those costs between the users, central government, and city government; and the project structure meant that the final request for proposal was substantially delayed.

The issue of the project costs was arguably the most critical issue, with widely diverging capital costs proposed by different parties within government. The Ministry of Finance allocated a maximum subsidy based on the lower estimate of the capital costs--allocating a maximum subsidy of IDR 350 billion--and the project went to tender in September 2015.

The Ministry of Finance's estimate of the required subsidy proved to be excessively conservative, and none of the bidders ended up submitting conforming bids, resulting in a failed tender.

Why did no one submit a conforming bid?

Indonesia's main way to provide subsidies to infrastructure projects is through what they call Viability Gap Funding ("VGF"). The aim of this VGF is to bridge the financial "viability gap", allowing government to engage the private sector to deliver a project that they otherwise wouldn't be interested in. (Note: there's a lot more to say about VGF, and why, and when it should be offered, but that's a for separate blog post sometime.)

Indonesia's VGF guidelines are interpreted to mean that VGF is not allowed to exceed a maximum of 49% of the capital cost of a project. This means we that, based on the announced IDR 350 billion VGF, the government was assuming the capital costs for the project were IDR 700 billion (with a little rounding).

The graph below illustrates how the tender failed.

In this project, the revenues from PDAM are fixed*, the bid factor becomes the minimum VGF required to deliver a project that can fulfill the technical specifications. Whichever bidder gets the optimisation of the lowest capital, operating, and finance costs, should be able to offer the lowest required VGF to do the project, and win.

The Owner’s Estimate column showing project costs of IDR 1.4 trillion is present value terms, and equivalent revenues shows a simplified version of the project cashflows that illustrates how the government arrived at the IDR 350 billion VGF number. For this simple illustration, I’m assuming that the total operating expenditure over the life of the project is the same as the capital expenditure. If someone feels like giving me a copy of the government’s owner’s estimate financial model, I’ll happily update the figures, but it doesn’t really matter for the illustration.

The Government’s Ideal Scenario shows what the government was hoping for, where some party ideally was able to get the project done for less than they estimated, and would bid with a VGF of less than IDR 350 billion.

The Actual Lowest Bid shows what actually happened. The bidders would have been working their hardest to get the lowest capital, operating and finance costs to decrease the VGF required to meet their costs, and get under the government’s cap, but none of the four was able to do it. So, the tender failed.

Failed tenders are really expensive

The failure of the Bandar Lampung Bulk Water Supply Project destroyed a lot value in the Indonesian economy; for the government, for the bidders, but--most importantly--for the citizens of Bandar Lampung.

On the government's side, they had multiple rounds of advisers, including top-shelf (and quite expensive) commercial, legal, and technical advisers, both for the preparation of the transaction, and for the appraisal of that transaction. In aggregate, the fees paid to these advisers would be well into the millions of dollars, and I'd be surprised if it were below USD 10 million. Beyond the fees, there is the wasted time of all of the civil servants, all the way up to the minister level, in multiple ministries and agencies, who had to participate in meetings, and produce their own analysis and recommendations.

For the bidders, participating in tender processes is also expensive. Preparing a pre-qualification submission can easily run into the multiple hundreds of thousands of dollars each in staff time and advisers' fees to make sure they can do the project, and to prepare the documents in the format required. Then, the shortlisted parties easily blow another couple of million dollars to prepare a conforming bid, including their preliminary designs. With 10 pre-qualification submissions, an extended pre-bid process, then four short-listed bidders, there would easily be another USD 10 million dollars of value wasted there.

Finally, and most importantly, the citizens of Bandar Lampung have had to go another five years without adequate water supply as a result of these delays, wasting money buying water from eceran, wasting time boiling water and otherwise creating plans to make sure they can access potable water as and when they need it, and bearing health and lost productivity costs due to the poor quality water.

Source: Statistik Kesejahteraan Rakyat Kota Bandar Lampung 2016, table 6.6, page 100

Source: Statistik Kesejahteraan Rakyat Kota Bandar Lampung 2016, table 6.6, page 100

As it is, only around 20% of Bandar Lampung's 1.2 million citizens have access to piped water for cooking, or washing, and pretty much all other potential sources are worse than PDAM supply by some metric; either more expensive (private wells with jetpumps), take a lot more time (wells), or are much lower quality (unprotected wells). Although, on the other hand, most of them are more reliable. 

The estimation of economic benefits of infrastructure projects is always hazy, with lots of uncertainties, but we can come up with a ballpark figure using some simple arithmetic.

The original project was for a 500 litres-per-second facility, aimed at serving 44,000 households. This is far less than the 960,000 people currently without service in Bandar Lampung, so we can assume 100% take-up pretty quickly. So, 44,000 households went with poor quality water for 5 years. If we assume the costs of the poor quality water are a dollar a day per household (counting all the wasted time, purchasing of bottled water, health impacts, etc. etc. that's certainly too low), that's already USD 80 million.

So, just as a conservative ballpark estimate of the cost of the delay, we can get to USD 100 million pretty quickly. Suffice to say that the costs of inaction are really high, and orders of magnitude higher than a couple of millions of dollars of VGF.

What has changed this time?

The word on the street is that the project has been rescoped, and redesigned to make it deliverable under Indonesia's current PPP framework. Just from the details available in the Request for Pre-qualification document on the PDAM Way Rilau website, we can see that there have been some changes made.

The raw water intake is now 825 litres-per-second, and the water treatment plant is 750 litres-per-second, up from the 500 litres-per-second of the last go around. The extra volumes mean that there are potentially more revenues to go around, to decrease the required VGF.

However, the capital costs of the project still seem to be estimated at IDR 700 billion. I'm not entirely sure how the plant capacity increases, and the capital costs (that were already proven to be too conservative) stay the same, but I'm no engineer, so what do I know? It's possible that they have found efficiencies in other areas, or are trading off capex for opex.

If you want in, you'd better hurry up

The pre-qualification process is open for another two weeks from today, so if you are planning on bidding, you'd better get on it!

* Technically not correct, but effectively the same. There was a fixed payment to cover the capital costs, and a variable payment to cover the variable costs of operation. This aims to ensure there is no economic profit (or loss) coming from the operation of the facility if the contractor performs satisfactorily.

What's wrong with directly appointing infrastructure projects to SOEs?

This post has been adapted from my article, Learning from Indonesian Best Practice: A Way Forward for Public Private Partnerships in Indonesia, first published in the October 2015 edition of IndII’s Prakarsa journal. In the context of the large budget cuts being made to stay under the deficit limit of 3% of GDP, the government is increasingly looking to other non-budgetary sources of finance. A key decision for policy-makers around Indonesia is between delivery by SOE, or by private parties. I hope this article provides some useful context for this decision.

I have written rather a lot about the need for PPP in Indonesia. While I do think PPP has a potential to create value for Indonesian society, I’m far from an ideologue on this matter. PPP is just one of a variety of modalities that government contracting agencies (GCAs) can choose from between when they need to deliver infrastructure services.

One modality that has historically seen a lot of action in Indonesia is direct assignment of projects to state-owned enterprises (SOEs); most notably with the Trans Sumatera Highway, Kalibaru Port, and the Jawa 5 power station. In this post, I want to talk about some of the pros and cons of directly assigning projects to SOEs, that I hope will provide a useful framework for thinking about how projects should be delivered going forward.

Pros

  • Speed of mobilisation: By being able to skip the tender process, which can take six months to a year (at least) the SOE may be able to get to work earlier than a private contractor.
  • Higher degree of Government control: If Government decides that it needs to renegotiate some aspect of the contract, perhaps to change the tariff or request a variation in design, these negotiations are typically easier to conclude with an SOE than with a purely private party as both parties view them as keluar kantong kiri, masuk kantong kanan* to some extent.
  • Track record of delivery: Indonesia has yet to deliver a single project through its PPP framework all the way to operation (though due to recent progress some are now close). SOEs, by contrast have been delivering toll roads, airport expansions, ports, water services, and a range of other infrastructure. Indonesia’s citizens, and their representatives in the GCAs want infrastructure. For a GCA, a bet on an SOE is much more of a known quantity, than a PPP process.

Cons

  • Lower confidence in efficiency of costs: Subjecting the eventual contractor to a transparent, open tender process provides the GCA with a high degree of certainty that the proposed costs are as close to efficient as possible. The SOE may indeed be the party that can deliver the project at lowest cost, and may well be willing to reveal this cost to a GCA, but without a tender process, a GCA cannot be certain of this.
  • Retained risk: When an SOE undertakes a project, it assumes various risks, including construction and operation risks. If these costs end up much higher than anticipated, historically Government has had to bail the SOE out through cash injections or tariff increases. If a private party inaccurately projects the costs of construction or operation, the private party and its lenders should be the only ones that lose money.
  • Delays in development of a large-scale project pipeline: Indonesia needs a replicable model that can deliver dozens of projects per year transparently and efficiently, rather than the handful that are being delivered by SOEs each year at present. PPP provides that model through its transparent tender processes and clear legal framework. Yet the model must be proven, both to private parties that would invest in projects, and GCAs that would propose them, before a pipeline of the magnitude that Indonesia needs can start to form. Appointing every potential project to an SOE may deliver that individual project faster, but delays the whole program from starting.

Summing up

There is a time and a place to award projects directly to SOEs, but SOE balance sheets are limited, and there is only so long that they can be the infrastructure providers of last resort. GCAs and those responsible for the delivery of infrastructure services to all of Indonesia’s citizens should consider carefully the pros and cons before awarding projects directly to SOEs in future.

*In English this roughly translates as “it goes out of the right pocket, and ends up back in the left pocket”, describing the fact that value transfers between SOEs and Government are viewed as shuffling money around under the same umbrella.

Mandatory CSR only makes sense where government is completely incompetent (and, even then, not really)

The Indonesian parliament is currently considering issuing a new law on Corporate Social Responsibility ("CSR"). I haven't seen a draft, but I understand that parliament is considering an article making CSR spending mandatory under law. 

Berita Satu quoted Komisi VII member Hamka Haq saying "There's not yet a decision, everything is still tentative. Some have said 2%, 3%, up to 10%" (translation mine). It wasn't specified in the article, but I understand the 2-10% figures mentioned refer to a percentage of revenues.

There are a range of competitiveness, and business arguments against mandatory CSR, which largely relate to the fact that it's a new tax, and new taxes harm Indonesian businesses and business-owners. My aim in writing this article isn't to take a view as to whether it harms businesses or competitiveness, but rather I'm aiming to explain whether it actually achieves a public development objective. (Hint: it doesn't).

Mandatory CSR effectively functions as a tax, with services delivered by a private party

As I noted above, forcing companies to spend on CSR activities, effectively functions as a tax. The idea is that the private companies take a proportion of their cashflows, and spend them on something that is good for society. This is also the philosophy behind taxation in general, except it's government spending on things that are good for society, rather than a private company.

You can see a simple calculation of profit and taxation in the table below:

Note that the effective tax rate with a mandatory CSR rate as a proportion of revenues changes depending on the profit margin.

Note that the effective tax rate with a mandatory CSR rate as a proportion of revenues changes depending on the profit margin.

As you can see, in Scenario 1, with no mandatory CSR, the government applies a tax rate of 25%, collects tax of 12.5. In Scenario 2, they decide to keep the impact of total mandatory "public interest" payments constant, with a 10% mandatory CSR rate, which creates a tax rate of 6.3%. This keeps the total transfers as 12.5 in total, but now 80% of that is delivered by the private sector, rather than the public sector. 

Another way to impose mandatory CSR is on top of existing taxes, where it now functions as an additional tax, modeled in Scenario 3, where the 10% mandatory CSR payment creates an effective tax rate of 40%, with "public interest" spending delivered equally by the public and private sectors. The equivalence to a scenario where government just imposes a tax rate of 40% is illustrated in Scenario 4.

So, as we can see, in a very simple model, mandatory CSR has identical impacts to taxes on returns to shareholders, and in spending on "public interest" purposes. But then, of course, the question arises: is private spending on public interest purposes equivalent to public spending?

Spending in the public interest is the government's job

One of the core jobs of government is to levy taxes on their citizenry and businesses, decide how to allocate those taxes, then actually spend them. Throughout that process, they are subject to a range of checks and balances, which can include auditors, parliamentary approvals, publication of governmental accounts, and so on. In a democracy, if a government does this incompetently--maybe by spending inefficiently, or on the wrong things--at the end of the day, it is likely to get voted out.

When a private company spends on CSR, it gets to decide what it wants to spend on, and doesn't have anywhere near the same level of scrutiny on its spending. Furthermore, private companies can't (and shouldn't be allowed to) spend on the delivery of major public-interest projects, like infrastructure, or defense, through their CSR. So, in imposing mandatory CSR, the government is taking money out of its consolidated revenue, and allowing private companies to decide to spend that money however they choose, say, on orchestras, or museums named after their major shareholders.

I'm not saying companies shouldn't be allowed to spend on orchestras or dubiously-named museums, but I don't want them to do so to the detriment of the government's ability to spend on infrastructure. Indeed, concerns about the efficiency of CSR spending mean that most developed countries put limits on exactly the types of CSR spending that is tax deductible at all.

The only way in which this sort of mandatory CSR policy is actually in the public interest is where the private sector better understands the needs of the public as a whole than the government, is better at spending than the government, and can address large-scale market failures and collective action problems better than the government. Given private companies can't (and shouldn't be allowed to) plan and spend on things like infrastructure, and defense through their CSR, mandatory CSR only actually creates value for the public where governments are massively incompetent.

But then, if the governments are so incompetent at governing that they can't deliver roads better than a private company can through their CSR, then they probably can't effectively monitor the CSR spending by the companies either. In such a case, you're even more likely to see this CSR spending on vanity projects, or more likely again, in transfers to directly-owned foundations that just transfer the profits back to the owners.

The Indonesian government is not that bad

The Indonesian public sector has its problems, like all governments, but I cannot believe that it is so incompetent that mandatory CSR makes sense. I hope this policy doesn't go much further than the wacana stage...

Is Indonesian an easy language?

Last year, a bunch of talented and motivated young Indonesians and Australians formed an organisation named the National Australia Indonesia Language Awards (NAILA) to foster the development of Indonesian language learning in Australia through running an annual speech competition.

I entered the Executive category of the first ever NAILA speech competition last year, and was honoured to be chosen as the winner. You can see my rerecorded speech below, kindly recorded and edited by Klirkom*. 

I was very impressed by the NAILA team, and their creativity and dedication to put together an initiative like this. I also enjoyed meeting the team, and the winners of the other categories. I was particularly impressed by the fact that most of the other winners had never even been to Indonesia, yet had the diligence to learn to quite a high level. I have only ever successfully learnt languages to any degree of competence when I was surrounded by native speakers!

Entries are now open for NAILA 2016, and they have a range of categories from primary school, to executive, room for creativity, and even a new category for native speakers. If you want to test yourself, I would encourage you to apply; or pass it on to others who might. All of the information you need to apply is available at their website: www.naila.org.

As to the question posed in the title to this blog post: Is Indonesian an easy language? Well, you'll have to watch the video to find out what I think!

* If you're thinking of applying, please don't be put off by the fact that it's professionally shot! My very poorly lit winning entry was shot in my bedroom, with my daughter crashing around in the next room!

What the hell is going on in Nias between PLN and APR?

Last week APR Energy, a US-owned provider of electricity generation published the following open letter, indicating that they are intending to shutter their Nias plant, and pull out of the Indonesian market.

Source: APR Energy

Source: APR Energy

My (unofficial) translation of the letter follows:

Open Letter to the People of Nias

Dear citizens and business owners of Nias;

Since 2013, APR Energy has worked to give You electricity supply that can be relied upon.

Unfortunately, PLN has not yet paid our invoices. That company has not respected its contract with us. But PLN continues to collect money from the people of Nias for the electricity that they use.

As a result of PLN’s actions, we cannot continue our operation in Nias—or anywhere in Indonesia. At the end of May, we will permanently close our generator with total capacity of 20 MW.

Although we will leave, we would like to protect the people of Nias and ensure that you can still get electricity. Because of that, we have offered to sell our generator in Nias to PLN.

Unfortunately, PLN has not yet responded to our offer.

Please understand that our decision to leave Nias has not been easily undertaken. We regret the consequences that will occur with the closing of our generator. But we are also a business that has employees that work so that they can support their families. If we are not paid, we cannot pay our employees, and they are our most important responsibility.

Because PLN has refused to pay our invoice and to respect their obligations under their contract with us, APR Energy has no choice but to leave Nias at the end of May.

Our regards,

John Campion
Head and Chief Executive Officer

It is difficult to get a straight chronology of the dispute from the media, but all sources agree that it started with a dispute between PLN and APR Energy over their diesel generation facilities serving the city of Medan. The gossip around the market is that PLN requested a significant discount on its existing contract, and APR Energy refused to provide it, so PLN stopped paying them. Following this, APR Energy pulled their generators out of Medan, and warned PLN that they would do the same in Nias if their invoices were not paid by 31 March 2016.

Despite the warnings, by the deadline, PLN had not paid. So, at midnight on Friday 1 April 2016, APR Energy stopped generating, and the island of Nias--home to almost 800,000 people--went black. The estimates of the outage vary, Kompas reports that it was total blackout for at least 2 days after which time, they mobilised 17 separate generators, which would only meet 26 percent of the estimated peak load. Some other sites put the timeline at 12  or 13 days! I want to repeat again that this is an island home to 800,000 people!

Finally, the dispute was resolved, and PLN paid APR Energy’s bill after a mediation process where the US Ambassador was reported as getting involved. Although, according to the letter, which is undated, but which I first saw circulating on Whatsapp, then in Indonesian language media on the 18th of May, APR Energy is still pulling out of the Indonesian market.

Why this matters

The Indonesian government is currently making a big effort to improve its investment climate, vowing to improve Indonesia’s ranking in the World Bank’s Doing Business Index from 109 out of 189, to number 40 by 2017.

I have previously given PLN kudos for, among other things, their track record as a reasonable contractual counterpart. Looking from the outside, it difficult to assign fault in the dispute, but contractual disputes resulting in 800,000 people spending days in the dark, then the company packing up and leaving the market in frustration aren’t something you see when things are going smoothly. At the very least, the process was exceptionally poorly managed by PLN.

Whatever precipitated this, I hope the President’s office, Ministry of Trade, and PLN management take a good look at this case study to make sure that we don’t see too many more stories like this.

Palapa Ring: Indonesia signs two PPP concessions in a week, which is good, but not great news

Indonesia's Ministry of Telecommunications and Information Technology has now signed both the West and Central packets of the Palapa Ring, worth IDR 1.7 trillion and IDR 4 trillion in present value terms respectively.

As I have previously written, the quick progression of these projects is good news for Indonesian PPP, which is in sore need of it. I say "good" here, rather than "great" because, while it's definitely not bad news, there is one key aspect of the deal that limits the demonstration effect.

What we know about the deal structure

The concession agreements have not been made public (though, I think there are good reasons to do so), but some details are emerging about the structure of the deal. Various sources have reconfirmed that it is indeed an availability-payment PPP, meaning the government bears full demand risk (which I think is appropriate for lots of Indonesia's projects, more here and here).

This is the availability payment that you've heard so much about, provided for by Presidential Regulation 38/2015 (despite the fact that PLN had been doing availability payments for decades), but these two projects' availability payments differ from what was envisioned by the drafters of Perpres 38/2015 in one key way: the funds don't come from the Ministry's budget directly, but from Universal Service Obligation fees collected from Indonesia's telecommunications operators.

Indonesia's Universal Service Obligation

Indonesia's Ministry of Telecommunications and Information Technology levy a fee on telecommunications service providers. This is called the Universal Service Obligation (USO) fee, and is charged as 1.25% of gross revenues of all operators. In 2015, the number was expected to be IDR 1.3 trillion.

The funds collected through this channel are funneled into a government body under the Ministry known as the Balai Penyedia dan Pengelola Telekomunikasi dan Informatika (Body for Provision and Management of Telecommunications and Information Technology, or BPPTI). The idea is that these funds are used to enhance telecommunications access to customers for whom providing service is uneconomic.

What is the difference between paying availability payments from the USO and from the budget?

As far as I understand it (please comment and correct me if you know better), the USO funds are paid directy to BPPTI, and can then be used by the Ministry for approved purposes without prior approval from the Ministry of Finance.

This differs from the normal budgetary process, where the Ministry needs to submit a request, substantiated by particular activities, that are included in the draft budget by the Ministry of Finance. This draft budget forms a draft budget law, which becomes the national budget law if and when it is approved by the parliament. If you want to see an example, check out 2016's budget law UU 14/2015 here.

Indonesia's annual budget cycle means that, in theory, a ministry has no legal standing to sign contracts that stretch over multiple years because their budget in that year is subject to approval by parliament. A ministry signing any sort of multi-year contract oversteps their authority, and preempts the parliamentary process.

I bolded "in theory" above, because, in practice, this is nuts.

In practice, Indonesia is going to have something resembling a Ministry of Telecommunications and Information Technology, or Ministry of Transportation, or a Ministry of Public Works and People's Housing for a very long time; much longer than the 30 year maximum length of PPP contracts in Indonesia. In practice, while the value of hypothetical PPP payments can be large in absolute terms, they represent tiny fractions of the ministries' overall budgets.

To say that committing a tiny fraction of a ministry's annual budget decreases Indonesia's budget flexibility going forward is drawing an extremely long bow. Yes, it is theoretically true, but the impact is negligible, and far, far outweighed by the increased value that can be created by using contracts that actually create incentives for the contractor to deliver on time, on cost, with good quality, and with the  lowest life-cycle costs.

The other bizarre thing about this challenge to PPP projects is that it doesn't seem to be insurmountable for other kinds of multi-year contracts. The Ministry of Public Works and People's Housing have been constructing infrastructure like dams and bridges (which sometimes need more than 12 months construction, and you can't just stop in the middle of to retender), through multi-year contracts for years*. 

Taking availability payments from the USO fund limits the demonstration effect

One of the keys reasons I think delivering a PPP project is so critical for Indonesia is because of the demonstration effect. Indonesia desperately needs to demonstrate to both private investors and government contracting agencies that PPP is a model that can work (I wrote more about this  in my first post on the Palapa Ring project).

The first few test-cases of a new policy framework will always be pathfinders, to some degree. It is expected that they will run into problems. When they do, policymakers need to try to understand why to see if the policy framework is working as intended. 

The Ministry of Telecommunications and Information Technology's relatively large source of non-national budget funds is fairly unique in Indonesian infrastructure. This means that, for example, the Ministry of Public Works and People's Housing can't use this project model in trying to convince the Ministry of Finance that it should be allowed to use the availability payment scheme for the delivery of road projects. 

This is still definitely good news

Despite my reservations about the demonstration effect for those government contracting agencies that want to do availability-based PPPs, this is still definitely good news. These projects have proceeded from pre-qualification to award within an appropriate timeframe, and had a wide range of national private, state-owned enterprises, and international bidders. 

Even if the demonstration effect for availability payment projects is minimal, it's still the best news in Indonesian PPP for a long time!

Bonus appendix: Taking funds from the USO is probably sensible anyway

I really shouldn't complain about the fact that the availability payments aren't coming from the national budget, because it may actually be the case that it's most appropriate for payments to come from the USO.

I haven't read the USO regulations in enough detail, but from what I can see, paying for availability payments like this seems consistent with the intentions set out for the pool of funds. Please do correct me here if you know more.

As I wrote in an early blog post about the idea of "user pays": as far as is productive, we should generally seek to impose the costs of a service on the users of that service. Taking funds from the USO, rather than general budget funds, does put the cost of maintaining the backbone fibre optic network on the users, which is consistent with the idea that the user pays.

So, those responsible for delivering the Palapa Ring projects shouldn't let me rain on their parade too much!

*Multi-year contracts have their own major challenges, and need to be drastically scaled up, but this is slightly to big a topic for a footnote.

Infrastructure economics job: AIPEG (working with me)

The Australia Indonesia Partnership for Economic Governance (AIPEG) is currently hiring to fill a number of positions, one of which is an infrastructure policy adviser. 

If the things I write on this blog are of interest to you, then you may be interested in applying, because, if you are successful in your application, this is pretty much exactly what you'll be working on. I can say that with some authority, because the successful applicant will report directly to me.

If you are interested, please go to the AIPEG site, download the terms of reference, and apply. Applications are due no later than 9.00am (Jakarta time) on Monday, 15 February 2016.

Please do not contact me for further information about this position. If you have further questions about the opportunity, please direct them to procurement@aipeg.or.id.

Disclaimer: Please note that this job advertisement is being placed here for general interest of the readership of this blog only. The presence of this ad should not be construed as an endorsement by AIPEG, or any affiliated organisation of any content presented on this blog, or of the existence of the blog at all. This blog is run by me in my personal time, and all opinions are my own.

PLN's pipeline of deals continues to flow

IJ Global is reporting that the Request for Proposal has been issued to bidders on PLN's Jawa 1 2x800MW gas-fired, combined-cycle power project. 

The procurement process was launched in May 2015 and, while, I understand, the issuance of the RFP was postponed, reaching issuance of RFP within 8 months isn't bad for a project of this magnitude.

IJ Global are also reporting that China Oceanwide, PJB and Shanghai Electric consortium is rumoured to be the preferred bidder for the Jawa 5 2x1000MW coal-fired project. 

According to this presentation on BKPM's website, tendered 7,600MW of capacity in 2015, and anticipates completing procurement for 37 projects, representing 14,887MW of capacity in 2016. 

PLN IPP Procurement division, Market Sounding: IPP Procurement in 2016 presentation. 8 December 2015. Presentation available here

PLN IPP Procurement division, Market Sounding: IPP Procurement in 2016 presentation. 8 December 2015. Presentation available here

As I wrote in my article in Prakarsa, Learning From Indonesian Best Practice: A Way Forward for Public Private Partnerships in Indonesia, PLN has figured out a model that can deliver a significant pipeline of projects that are attractive to private sector investors, delivered via transparent tender processes that maximise value for money.

Another critical thing that PLN has demonstrated is that this model is scalable. When pressed by Jokowi to deliver the 35,000MW program, PLN has shown an ability to dramatically accelerate their pipeline of projects being delivered to market.

When I worked in private advisory, I would typically have 2-3 meetings a month with people wanting a briefing on infrastructure investment opportunities in Indonesia. Usually these people had heard of the government's ambitious targets to get hundreds of billions of dollars of investment over short time periods. The meetings weren't usually very long, because there were literally no opportunities, other than trying to buy assets on the secondary market, or as service providers to SOEs, or infrastructure delivery ministries that were the only ones delivering projects!

Now, the message is very clear: go to PLN.

As I said in my Prakarsa paper, those proposing projects in other sectors are now in direct competition with PLN for investors' money. If they want to pull investors away from PLN, they should try to emulate their model, as it's clearly working.

I wonder how long it will be until our PPP pipeline looks like this*.

*Or even like the Philippines'.

Consumer protection job: AIPEG/SMEC

If my previous post was interesting to you, you will be pleased to know that SMEC, via the Australia Indonesia Partnership for Economic Governance (AIPEG), are currently looking to hire a Consumer Protection Strategy Adviser to advise the Indonesian government on exactly those sorts of issues. You can see the job ad here.

They're looking for an experienced hire, so if anything in my blog post was news to you, the job probably isn't for you. If you're experienced in this field, give it a go!

Disclosure: I am currently employed by SMEC, to work for AIPEG, but I work in a different team, and have no role in the procurement, or evaluation of any candidates. I am linking to the job advertisement in my private capacity as a blogger, and for the general interest of my readers only. Please do not contact me for more information about this job.

What’s worse than paying peanuts and getting monkeys?

I’m currently in the market for a motorbike helmet. I was shopping around the various options in Jakarta and was frustrated by the lack of reliable information about safety standards available to me to inform my purchase.

The frustration I felt is by no means unique to me, nor to the problem of buying motorcycle helmets. In fact, it’s an example of something that is quite the hot topic in development economics these days, so I thought I’d write about it.

Lack of reliable information for consumers harms the economy as a whole

I’m not the sort of guy that places a high premium on brands, and I try not to buy into the idea of conspicuous consumption. I generally try and go for the cheapest product that meets my needs. In the case of a helmet, that means providing an adequate degree of protection to the contents of my skull, in the event that I were ever to need it while riding my motorbike.

When I was looking for my helmet, I noticed a huge range of prices available. People were selling helmets that, to my very untrained eye, looked very similar for prices ranging from IDR 3-4 million, to less than IDR 100,000.

Some of these things are not like the others

Some of these things are not like the others

In English, we have a saying: if you pay peanuts, you get monkeys. A similar one is: if you buy cheap, you get cheap. In short, it means, if something is cheap, there’s probably a reason for it, and that reason may be that the quality is poor. In Indonesian a similar distinction is made between murah meriah (cheap and cheery), and murahan (cheap and nasty).

The problem is, the converse is not always true. High price doesn’t necessarily denote high quality. The only thing worse than paying peanuts and getting monkeys, is paying real money, and still getting monkeys! There are plenty of examples of this, including bottled water in places where tap water is perfectly drinkable, or where people drink expensive wine at all.

So, when I was looking at the helmets I wanted to buy a quality one, I was wondering: would I be paying for true quality, or for the illusion of quality?

Government regulation to the rescue!

Helping consumers get what they pay for is one of the things that almost everyone can agree is the job of government. Even the nuttiest of small-government libertarians accept that we need a government to protect against fraud. Well, maybe not the nuttiest ones...

In the absence of a government holding people to account for misrepresenting the quality of motorcycle helmets, you have to expect that there will be unscrupulous firms misrepresenting the quality of their helmets, if there is a dollar to be made doing it.

In a world were fraud is unprosecuted, the money transferred to fraudsters, and the time and money spent by individuals trying to verify quality for themselves with only the tools and knowledge available to them as an individual represents a market failure. It is cheaper and more effective for some sort of centralised body to set, test, and enforce standards. The centralised body doesn’t necessarily have to be a government, there are cases where industry associations perform this function adequately, but in many cases, people are sceptical of an industry’s ability to regulate itself and government oversight is required.

My lack of certainty in the Indonesian motorcycle helmet industry’s ability to deliver me a quality helmet at the right price is due to my lack of confidence in what development economists call Indonesia’s instutions.

Institutions have been arguably the hottest topic in development economics for the past decade or so. This paper by Acemoglu (one of the key proponents of the idea), Johnson and Robinson gives a comprehensive treatment, while this one from the World Bank, also by Acemoglu and Robinson, gives a slightly updated view. Ha Joon Chang takes a slightly more sceptical view here, but his scepticism is more about the policy recommendations of people like Acemoglu than the idea that institutions are important.

The big idea of instutional economics is that poor countries aren’t poor because they haven’t got any money (or, at least, it’s not just that), a large part of why they are poor is because their institutions don’t let them use what resources they do have efficiently.

In Australia, I wouldn’t have such a big problem, because we have a range of institutions in place that set standards for motorcycle helmets (Standards Australia, here), and test them (the delightfully named Consumer Rating and Assessment of Safety Helmets, or CRASH), and punishes companies that either sell or manufacture helmets that don’t meet standards (the Australian Competition and Consumer Commission, or the ACCC, here). They’re not perfect, but they have been doing it long enough and competently enough that retailers and manufacturers of motorcycle helmets (and other providers of goods and services) have a reasonable degree of certainty that they will get in trouble if they fundamentally misrepresent the quality of their product.

In Australia, relatively secure in my trust in our institutions, I’d just buy the cheapest helmet that met the standards, and be on my bike. From what I can see, it seems like the cheapest ones in Australia retail for about AUD 100, or around IDR 1 million.

In Indonesia, some of these institutions exist, such as the Badan Standardisasi Nasional, and the Yayasan Lembaga Konsumen Indonesia, and the Komisi Pengawas Persaingan Usaha, but I don’t think it’s too unfair to say that your average seller of cheap helmets on Tokopedia doesn't worry too much about the wrath of any of those institutions.

In Indonesia, standards do exist for helmets set by the Badan Standardisasi Nasional and, in theory, all that meet those standards should have an SNI stamp on them. Despite this, there are plenty of helmets for sale on Tokopedia, and through plenty of other retailers including major hardware stores and grocery stores that claim to have SNI helmets for sale for IDR 100,000 (AUD $10), or less.

SNI for IDR 80,000? Really?

SNI for IDR 80,000? Really?

When development economists use the word “institutions” they don’t just mean BSN, YLKI, and KPPU, they mean every single piece of Indonesia’s economy that contributes to the delivery of helmets to consumers, and governs the use of those helmets by consumers. This includes everything from the institutions I mentioned, to plastics manufacturers, to trucking companies, to the traffic police that are meant to check that motorcyclists’ helmets meet standards, to the court system that is meant to prosecute people that put fake stickers on helmets, to the individual consumers themselves who don’t demand or even expect helmets with legitimate SNI stickers, and so on, and so on.

The fact that I can see a helmet for sale on Tokopedia for IDR 80,000 makes me question the ability of the entire network of institutions that make up Indonesia’s motorcycle helmet industry to deliver me accurate product quality information.

So, what can we do?

One of the lessons that we have learnt in development economics over the past few decades is that solving the problem is not as simple as just saying “oh, it’s the institutions", and walking away. Given the complexity of the networks of institutions that are involved in delivering goods and services to consumers, it’s naïve to think that a single policy change, or the establishment or reform of a new institution will magically turn the Indonesian motorcycle helmet industry into the Australian motorcycle helmet industry.

Sometimes it is the case that a particular regulation, policy, or institution is acting as a key constraint, so reforming it can make a material change. But the biggest thing that creates change, and development in institutions is time. Over time, each of these individual small reforms, and the actions of the regulators, contribute to changes in the expectations of consumers and producers, which will eventually lead to consumers being delivered better quality helmets at more appropriate prices.

People can often forget that societies like Australia are built off a set of institutions that have been under development under a relatively stable system for over 200 years; and even those institutions are based off developments in the UK for going-on 500 years. By contrast, Indonesia’s institutions have undergone at least four major periods of upheaval and fundamental redesign in the last 70 years; the latest of which was less than 20 years ago!

Despite this upheaval, Indonesia does have the institutions in place that should, eventually, deliver a market for motorcycle helmets that is functionally equivalent to Australia’s. And, given where Indonesia have come from, they’re doing about how you’d expect. They could be better, but they could definitely be worse!

While I’m waiting for the institutions to change, I’ll try and do my part as a consumer by communicating my desire for good quality at an appropriate price… I ended up going through a small, but reputable company, and I bought a helmet that cost IDR 1 million: about what one that meets Australian standards costs in Australia. I don’t have any guarantee that it does meet Australian standards, but at that price, at least there’s a chance that it does! 

Infrastructure economics jobs in Indonesia: PwC

I noticed this week that PwC Indonesia were advertising for economists from the Associate (fresh-grad) to Assistant Manager (4-5 years experience) to join their Capital Projects and Infrastructure team. You can see the link to their full ad here.

I never worked for PwC, but the work that the Capital Projects and Infrastructure team do is pretty much exactly what I blog about, and working for firms like them is where I learnt almost everything I know about what I do. They call the job "economist", but in this part of the world, most of the work sits around the nexus of economics and finance; which I like to think is a particularly fascinating area!

So, if you're interested in the issues I blog about, and you're at around the right level, give it a shot and apply.

Disclosure: I have no affiliation with PwC, I just thought readers of this blog may be interested in the job advert. If other firms that work in this field are also recruiting, I'm happy to link to those ads too!

Indonesia doesn’t need to look far to see what a successful PPP program looks like

I wrote earlier this week about how a significant pipeline of PPP projects doesn’t follow until 4-5 years after the delivery of the first. There is a country, right on Indonesia’s doorstep that demonstrates this effect exactly: the Philippines.

The graph below shows the Philippines' astounding progress in just 4 years.

Source: Philippines PPP Center, presented by the author

Source: Philippines PPP Center, presented by the author

The Philippines signed the CA for their first project under their PPP framework in 2012: the Daang Hari-SLEX Link Road (Muntinlupa-Cavite Expressway) Project, worth just USD 45 million. Since then, the pipeline has grown such that they intend to sign 5 projects by the end of the year, worth over USD 3 billion. Beyond those signed this year, the PPP center has 43 projects in their pipeline and, given their track record, there is no reason to believe they will not deliver a good chunk of them over the coming years.

Outside of telecommunications (a bit of a special case), and PLN (which seems to have the model down), the only private investment in Indonesian public infrastructure in the past 5 years has been on toll roads whose concessions were signed in the 1990s! No credible pipeline of projects currently exists that can deliver the volume of infrastructure investment that Indonesia’s economy requires, and its citizens demand.

As I said on Monday, a really significant pipeline of PPP projects for Indonesia is probably 4-5 years away, much as it has been for the last 10 years! We need to take action now to deliver Indonesia’s first PPP project, or our significant pipeline of projects will stay 4-5 years away forever!

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.

Private participation in Indonesia's water sector still lacks legal certainty

I blogged two weeks ago about the launch of the Pekanbaru Water Supply PPP project pre-qualification process. The launch of the transaction process took a lot of Indonesian infrastructure watchers by surprise as, according to most interpretations of the current legal framework, private participation in the water sector is currently illegal.

Back in February, Indonesia's constitutional court struck down as law 7/2004 on Water Resources as unconstitutional, effectively returning regulation of the water sector to law 11/1974 on Irrigation, which does not permit private participation in the sector. I'm no lawyer, but people who should know have told me that, effectively, this means any proposed water PPP project is on hold until the law is replaced.

The lack of legal certainty has been used as an excuse for the lack of progress on the procurement of the long delayed Umbulan and Lampung water projects, both of which began procurement many years ago.

There have been recent media reports that the signing of the draft governmental regulation on water resources (an interim measure while the new law is prepared) is imminent. I haven't seen a draft, but  private operators voiced their concerns with the draft that was put to them back in June. 

I hope the launch of a new PPP project in the water sector is a sign that the new governmental regulation is indeed imminent, and that it is drafted in a way that allows private sector operators to participate and improve water service to Indonesia's citizens.

The importance of disclosure in major infrastructure projects

I enjoyed this article by Marcos Siqueira, from the World Bank's Handshake Journal on public private partnerships, titled "What if we disclosed everything? Reactions to a radical proposal".

He sets out a really nice argument for transparency in public contracting, especially in developing countries that have governance concerns.

“The crude truth is that opaque PPP policies serve a lot of interests, but almost none of them benefit service users or taxpayers. Here are some of the key points on transparency in PPPs, from my perspective:

First, much of the developing world faces complex governance challenges. Fairness issues haunt the day-to-day life of procurement processes. PPPs are very big projects, subject to sophisticated risk allocation mechanisms, and governments do not always have the capacity to fully understand the consequences of the contracts, which only increases the level of illegitimate interests surrounding projects. Therefore, in my opinion, unfortunately opacity is the best way to protect those interests.

Second, opacity feeds inefficiency, even when no explicit governance issues are present. The long-term nature of PPP contracts make managers want to protect themselves. After all, valid information can be a very powerful tool for users to push for contractually determined service levels to be effectively delivered, and for the government to use its regulatory tools to monitor costs and quality. I understand why contract regulators and private sector infrastructure operators prefer that service users do not have adequate information: they feel less pressure.

Third, opacity stimulates opportunistic behaviors, both of government and of the private sector. I have noticed around the world that parties often enter into agreements knowing all too well they will break it (or try to change it) as soon as they can. Opacity helps keep watchdogs at a safe distance, and creates an adequate environment for discretionary changes to a contract that might push it away from its original objectives. So the more opaque the practices, the more difficult it is to enforce a contract in the long run.”
— Marcos Siqueira, What if we disclosed everything? Reactions to a radical proposal.

He goes on to say that "From my perspective, a full, radical, proactive transparency policy is the single best and least-expensive strategy to reduce the influence of those interests in the PPP project cycle. The transparency policy (see examples from PPPIRC) should include, at least, the unrestricted disclosure of:

  • Unredacted contracts
  • Associated financial deals
  • Unredacted bids
  • Unredacted amendments
  • Performance reports
  • Financial data of the project company
  • Fiscal commitments and risks"

But this is far from something that World Bankers and international policy advisers like myself try and impose on developing countries alone. At least in my case, my home jurisdiction practices what I preach.

Since 2007, the Victorian Department of Treasury and Finance has been publishing project summaries of every PPP project they enter into. And, in many cases, they even publish the unredacted contracts, as suggested by Siqueira. 

If you are interested in seeing what a real project agreement looks like, I do recommend taking a look through some of the contracts on the Victorian websites. Interesting ones for me are the City Link Concession Deed, and the sale deeds of all of our old power plants; which incidentally, worked out pretty well for the government, given the disruptions created by rooftop solar, among other technological changes...

After you've had a look at the concession deeds, most of which are well over 100 pages, you'll appreciate the effort made in producing project summary documents, which lay out most of the relevant information from the agreements, plus a lot more relevant information in a much more reader-friendly way.

The Victorian Desalination Project is a nice case study that shows how a government goes through the process of confirming that the project is needed, and that the private option creates value relative to the public option. The project summary document reports it was estimated that the winning bidder's price saved the government almost a billion dollars in present value terms.

The State Government of Victoria, through Partnerships Victoria was at the vanguard of developing manuals and training materials that form a lot of what is considered "international best practice" in managing private participation in public service provision. In some cases, developing countries adopted what they understood to be "international best practice" without understanding that they lacked certain key capacities or institutions to implement them. A lack of regulatory capacity is one key constraint for developing countries in particular.

Indonesia is still a reasonable distance from the State Government of Victoria's model of transparency. If you google around, you can find some excerpted or redacted power purchase contracts for PLN, but not much else is publicly available. 

Like Siqueira, I struggle to see the public interest in keeping such contracts confidential. As he notes: "I have been challenged that there are legitimate commercial secrecy concerns that indicate the need to keep information away from the public’s eye. My view on this is that the same lack of transparency required to keep commercial secrecy also serves to hide fairness issues during procurement, protects inefficient organizations from scrutiny, and creates difficulties for contract enforcement."

While many have learnt the hard way to be wary of swallowing developed country best-practice whole, enhanced transparency is hard to argue against in almost any jurisdiction. Indeed, it is arguably more critical in places like Indonesia.

Belajar dari praktik terbaik di Indonesia: cara memajukan KPS di Indonesia

Indonesia Infrastructure Initiative (IndII) baru saja menerbitkan edisi Prakarsa terbaru. Dalam edisi tersebut ada sebuah karangan dari saya yang menunjukkan apa yang dapat kita pelajari dari PT PLN (Persero) untuk sukseskan agenda kerjasama pemerintah swasta (KPS) di infrastruktur di Indonesia.

Saya lampirkan karangan saya dibawah. Bagi mereka yang ingin membaca edisi Prakarsa secara keseluruhan, yang berfokus kepada keterlibatan sektor swasta dalam infrastruktur di Indonesia, lanjut saja ke situs IndII. Edisi Prakarsa dapat dibaca dalam Bahasa Inggris dan Bahasa Indonesia.


Learning From Indonesian Best Practice: A Way Forward for Public Private Partnerships in Indonesia

The Indonesia Infrastructure Initiative (IndII) just published their latest issue of  their journal Prakarsa, which includes an article I wrote on how those that want to see Indonesian PPP projects succeed need to learn from PLN's example.

I have embedded the article below, for those that want to read it here. For those that want to read the whole edition, focusing on private participation in infrastructure in Indonesia, please head to the IndII site, where you can read it in English or Indonesian.