The biggest thing you may note is that the costs and revenues are different. This is because an availability PPP is seen as much lower risk to the private party than a full demand-risk PPP, so private parties can raise equity and borrow from banks at much lower cost, meaning they don’t need to ask for as much money to cover their debt service and repay their equity holders. But, on the other hand, as the government is bearing the risk, they should also discount the revenues they expect to receive to reflect the fact that they are bearing more risk.
I’m calling the subsidy an “effective subsidy” here because it’s not a payment in the same way that the subsidy for a demand risk subsidy is. The payments are the fixed and variable payments, the subsidy is just the residual between those payments and the revenues, whatever they may be.
As I mentioned earlier, this puts demand risk on the government. If the revenues are less than expected, the effective subsidy will be larger than expected, and the government will have to find more cash to pay the private party’s payments than it thought it would. If the revenues are higher than expected, the government takes the whole gain.
So, which is better?
In one case, the private party takes the risk, in the other, the government takes the risk. How do we decide which option is right for us?
True efficiency also means efficient risk allocation
The most basic principle of risk allocation is that you allocate the risk to the party best able to manage it**. If neither party has any control over the risk, then it doesn’t really matter which party you allocate the risk to. In a mature city, for example, there may not be much the government can do to influence traffic flows.
In this particular case, however, there are significant public actions that will need to be taken in the next few years, the government has much more control over the policy levers that will drive the traffic, while the private party will have almost no ability to influence demand. Further, the government has no track record of delivering the port, SEZ and surrounding infrastructure. Indonesia has over-promised and under-delivered in infrastructure for decades. No investor is going to bet hundreds of millions of dollars that the government will suddenly spring into action and deliver faster than it has ever delivered before.
Too many investors, and would-be investors have been burned trying to invest in Indonesian infrastructure, so private sector traffic projections for a toll road like this will always be conservative. If the government truly believes that it can deliver the work program, and it wants to get the value of the traffic flows associated with the delivery of that work program, then they must take on demand risk themselves.
Government officials here are very risk averse (for good reason), so when you offer them a choice between bearing a risk themselves, or allocating it to the private sector, the initial reaction is almost always to dump it on the private sector party. But, if the risk is one that they are truly the best party to manage, they will end up paying more, and maybe even transferring value to the private party by forcing the issue. To me, that's a worse kerugian keuangan negara (state financial loss), than any loss government might make by taking on demand risk themselves.
Note: I am simplifying it a bit by just saying “government.” In fact, the contracting agency for toll roads is BPJT, the party responsible for building the port is Pelindo IV, the party responsible for building the SEZ is the provincial government of North Sulawesi, and the parties responsible for developing Manado and Bitung are the respective city governments. So, the Indonesian government as a whole has the control, but coordinating all of the parties will be a big job. BPJT alone won’t have the authority to knock heads together, but they’ll have a lot more access to the people that do than a private party. If you hire someone to build a road, get them to build a road, don't ask them to build a road, and coordinate 5 different government entities. That's government's job.
What is the Indonesian government doing to rectify this?
Earlier this year, the government issued Presidential Regulation 38/2015 concerning government cooperation with business entities in the provision of infrastructure. This replaces an earlier piece of legislation, and the new regulation explicitly incorporates language providing greater flexibility for the government to undertake availability-based PPPs.
So, will we see an availability payment being applied for Manado – Bitung?
It’s too early to say. I hope so. I suspect it’s probably appropriate for a toll road like Balikpapan – Samarinda as well.
There has been talk about the use of performance-based annuity schemes (“PBAS”, which is just a fancy name for an availability payment) for the construction of non-tolled roads, but I haven’t yet seen any statement from BPJT on whether they intend to use this model for tolled roads as well. I guess we’ll see what they think when BAPPENAS finally publishes the PPP book with more information.