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.

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...