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.
- 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.
- 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.
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.