Given a number of constraints in the previous public private partnership (PPP) implementations, a new PPP regulation titled Presidential Regulation (PR) No. 38/2015 has been issued that supersedes PR No. 67/2005 (as severally amended). This new PR was issued on March 20th, 2015.
The current stalling of PPP projects can be partly attributed to the lack of incentives for investors.
The previous PR already provided many progressive changes to support the acceleration of infrastructure development with its government support regime (providing the grounds for the government to give support in the form of viability gap funding, infrastructure guarantee, and land acquisition support). However, certain regulatory uncertainties remained, causing many projects to become stuck in the project preparation and implementation phases.
Consequently, the new regulation provides additional incentives such as the availability payment mechanism, which allows the government to commit to long-term payments for infrastructure services provided by business entities. It is expected that with these changes, projects with slim margins, or projects with high demand risk, will still be considered appealing to and will be carried out by private investors.
Another current barrier is the inefficiency of the business entity procurement process. With the new PR, the government intends to shorten the bidding process by providing criteria under which the government can directly select the best bidder.
Objectives of PR No. 38/2015
PR No. 38/2015 is expected to accomplish five objectives, namely to (i) emphasize the authority of the parties involved in PPP, (ii) expand the scope in the implementation of PPP, (iii) accelerate the business process from preparation up to transaction, (iv) increase bankability and sustainability of projects, including the possibility of alternative financing, and (v) provide legal certainty in PPP processes (for example, the success fee mechanism, land acquisition, and environmental impact assessments).
PR No. 38/2015: Key Changes
Types of Infrastructure
An important addition to PR No. 38/2015 is the list of the new types of infrastructure that business entities are now allowed to establish in cooperation with the government.
This addition specifically identifies new types of social infrastructure such as health and education facility infrastructure. It also introduces processing and storage to the existing oil and gas infrastructure, which previously only included transmission and/or distribution. These new additions accommodate the needs of infrastructure in other sectors and increase private investment opportunities in these sectors.
Bundling of Projects
The new PR also provides a basis for several PPP projects to be bundled and carried out under a single procurement process. The relevant authority for each PPP project that is bundled with another PPP project must act jointly as the government contracting agency (GCA).
This new PR also allows for the scope of PPP projects to include commercial activities. This serves as the basis for business entities to develop commercial areas to support the revenue stream.
Business Entity Procurement
PR No. 38/2015 also introduces a new transaction scheme for business entity procurement.
Specifically, it not only bases the categorization of PPP projects on initiative (solicited vs. unsolicited projects), but also on specific conditions, namely that (i) the project is an expansion of an existing infrastructure project, or (ii) only one provider has the technology or the intellectual property (IP) required, or (iii) the business entity owns a part of or all the land required for the PPP project. These new additions are provided to accelerate the PPP project process.
Direct appointment may also be conducted by a GCA if the result of the prequalification of public tender is only one bidder. This mechanism is provided to avoid the process of re-tender, which was often implemented under the previous PPP regulations.
Under the new PR, the availability payment mechanism is also introduced as an alternative to tariff payments. Through this mechanism, the business entity will be compensated directly by the government as long as the infrastructure is available for use, therefore holding little revenue risk for the business entity. However, the public sector will retain the revenue risk, and, therefore, the business entity will not be entitled to an upside from the revenue.
The exact types of infrastructure projects that may use the availability payment mechanism for investment return are not specified in PR No. 38/2015, given that further implementation of this mechanism will be addressed in the Ministry of Finance regulations. The Ministry of Finance will also regulate the mechanisms for budgeting and the criteria to make the payment available for the private entity that develops the infrastructure.
The new PR allows for the GCA to also contribute some funds to cover partial investment costs. This is expected to provide an additional source of funding for the business entity.
General criteria for PPP contracts is provided in this new PR. The criteria are generally similar to those in the previous PR, with a few modifications. Some important changes include: (1) the requirement to use Bahasa Indonesia as the prevailing language (English language can be used for official translations only); and (2) the capping of the performance bond at 5% of the investment costs.
The new changes to the previous Presidential Regulations regarding PPPs in infrastructure are intended to make the process of engaging in PPPs more efficient, bankable, and sustainable over time.
The new PR is expected to increase the clarity and specificity of the previous regulations and thus provide legal certainty in PPPs. However, certain aspects will need to be further discussed in order for this new PR to be in full effect. The Ministry of National Development Planning (BAPPENAS) and sector ministries are mandated to establish further regulations on the implementation of PPPs, the Ministry of Finance and Ministry of Home Affairs are mandated to establish regulations on availability payments, and the National Public Procurement Agency (LKPP) is mandated to establish regulations on the procurement process of the business entities.
Overall, these government initiatives provide a strong outlook regarding the future of PPPs and their impact in the development and growth of Indonesia's infrastructure. [FP/JB]
Originally published April 23rd, 2015
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