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.

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.

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'.

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.

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.



Pre-qualification opened for Pekanbaru water supply project (though briefly)

The Directorate for PPP Promotion under BAPPENAS reports on their website that pre-qualification is open for parties that want to register their interest in participating in the tender process for the Pekanbaru water supply project. The full announcement is available here.

According to the announcement, the project anticipated to be worth just under IDR 1.4 trillion, or just over USD 100 million, and is being tendered under Indonesia's unsolicited PPP project framework.

The unsolicited project framework is summarised briefly in Indonesia's latest PPP book, and in more detail in chapter VII of Presidential Regulation 38/2015 concerning cooperation between government and business entities in the provision of infrastructure, but essentially, it means that some private party proposed this project and the tender is being run to subject the proposing party to some degree of competition.

Perpres 38/2015 allows for three ways to compensate the proposing party for their "intellectual property" and initiative in proposing the project:

  1. 10% advantage in the evaluation process;
  2. A right-to-match the price of the winning bidder; or
  3. To get paid out the value of their intellectual property by the winning bidder.

It's not clear from the announcement which of these is being proposed for the Pekanbaru project, but many potential investors I have spoken to over the years have expressed a lack of enthusiasm for entering a tender process where another party has an advantage.

Participating in a tender process through to the end can easily cost on the order of USD 5 million, and as I have noted in other posts, profit margins are thin in competitively tendered infrastructure projects. If one party has a 10% advantage, or a right to match, they will almost certainly win the tender process. In such a situation, most investors will save their time and money, and not bother participating in a tender like the ones envisioned for this project.

Beyond the regulatory challenges, there are other reasons to think that this tender may not be the most competitive. Interested parties have only one week to register their interest and receive the pre-qualification documentation, from the 26th to the 30th of October. And, they need to register their interest in person in Pekanbaru between the hours of 10:00 and 14:00. The announcement on the PKPS website is the only one I can find, and as far as I can tell it only went live on the afternoon of Tuesday the 27th of October.

So, if you are an investor interested in Indonesian water projects and would like to give this a go, you'd better get moving quick!

And/or, in future, set up an email alert for changes on the PKPS website...

BAPPENAS launch PPP priority project list for 2015

BAPPENAS, Indonesia's planning ministry, has published their list of priority PPP projects for 2015 by publishing BAPPENAS ministerial decree number 82/M.PPN/HK/05/2015 concerning the determination of the list of planned infrastructure projects for 2015. 

With 6 "ready to offer" projects this year, they're doing better than they were in the last book, launched in 2013, when they had zero projects in that category*. BAPPENAS do not appear to have launched their PPP book providing further details on the projects yet.

Indonesia has struggled in implementing its PPP agenda to date. So far, only one project has reached financial close (Central Java Power Plant), and no others have reached the award stage. Those currently under procurement do not appear likely to make it out the other end any time soon.

The reasons for the lack of success are varied and complex, but it all boils down to a lack of political commitment. I am hoping that this decree spurs more action than we have seen from the last few.

I list the projects from the decree below.

Ready to offer projects

I.1. TRANSPORTATION

I.1.1. Sea Transportation

Not Available

I.1.2. Air Transportation

Not Available

I.1.3. Railway

1. Soekarno-Hatta International Airport – Halim Railway

2. Bandung Light Rail Transit (LRT), West Java

3. Tanjung Enim – Tanjung Api-Api Railway, South Sumatera

I.1.4. Land Transportation

Not Available

I. 2. TOLL ROAD

Not Available

I.3. WATER SUPPLY

1. West Semarang Municipal Water Supply, Central Java

2. Pondok Gede Water Supply, Bekasi

3. Pekanbaru Water Supply, Riau

I.4. SANITATION

Not Available

I.5. TELECOMMUNICATION

Not Available

I.6. ELECTRICITY

Not Available

I.7. OIL AND GAS

I.7.1 Transmission

Not Available

I.7.2 DISTRIBUTION

Not Available

Prospective projects

II.1. TRANSPORTATION

II.1. 1. Sea Transportation

Not Available

II.1. 2. Air Transportation

Not Available

II.1. 3. Railway

1. Integrated Terminal of Gedebage (Railway), West Java

2. Development of South Sumatera Monorail

II.1. 4. Land Transportation

Not Available

II.2. TOLL ROAD

1. Manado – Bitung Toll Road

2. Tanjung Priok Access Toll Road

3. Balikpapan – Samarinda Toll Road

4. Cileunyi – Sumedang – Dawuan Toll Road

5. Pandaan – Malang Toll Road

II. 3. WATER SUPPLY

Not Available

II.4. SANITATION

Not Available

II. 5. TELECOMMUNICATION

Not Available

II. 6. ELECTRICITY

1. Karama Hydro Power Plant, West Sulawesi

II. 7. OIL AND GAS

II. 7.1. Transmission

Not Available

II. 7.2. Distribution

Not Available

Prospective projects

III.1. TRANSPORTATION

III.1.1. Sea Transportation

1. Development of Maloy International Port, East Kalimantan

2. Expansion of Kabil Port (Tanjung Sauh Terminal), Riau Island

3. Development of Kuala Tanjung International Hub Port

4. Development of Bitung International Hub Port, North Sulawesi

5. Development of Makassar New Port, South Sulawesi

6. Development of Baubau Port, Southeast Sulawesi

7. Development of Garongkong Port, South Sulawesi

III.1.2. Air Transportation

1. Development of New Bali Airport, Bali

2. Kulonprogo International Airport, DI Yogyakarta

3. Expansion of Mutiara Airport, Central Sulawesi

4. Expansion of Komodo Airport, East Nusa Tenggara

5. Expansion of Radin Inten II Airport, Lampung

6. Expansion of Juwata Airport, North Kalimantan

7. Expansion of Sentani Airport, Papua

8. Expansion of Tjilik Riwut Airport, Central Kalimantan

9. Expansion of Fatmawati Soekarno Aiport, Bengkulu

10. Expansion of H.AS.Hananjoeddin Airport, Belitung Island

11. Expansion of Matahora Airport, Southeast Sulawesi

12. Expansion of Sultan Babullah Airport, North Maluku

III.1.3. Railway

1. Development of Batam Railway

2. Pulau Baai - Muara Enim Railway, Bengkulu - South Sumatera

III.1.4. Land Transportation

Not Available

III.2. TOLL ROAD

1. Batu Ampar – Muka Kuning – Hang Nadim Toll Road

III.3. WATER SUPPLY

Not Available

III.4. SANITATION

1. DKI Jakarta Sewage Treatment Plant

III. 5. TELECOMMUNICATION

Not Available

III.6. ELECTRICITY

1. Tebo Mine Mouth Coal Fired Steam Power Plant (2 x 200 MW)

III. 7. OIL AND GAS

III. 7.1. Transmission

Not Available

III. 7.2. Distribution

Not Available

*On the plus side, at least it was more accurate than the 2012 PPP book that promised 3 "ready to offer projects" and the 2011 PPP book that promised 11. Of those 12 projects, only 1 was competitively tendered through Indonesia's PPP framework, Lampung Bulk Water Supply project, but the procurement process appears to have ground to a halt.