Co-published project finance guide: Indonesia


concessions awarded on the basis of competitive bidding. However, the geothermal sector continues


to be plagued by pricing difficulties. The whole ethos of competitive bidding appears to be somewhat undermined by the government’s issuance of a new regulation that will set maximum feed-in tariffs at between 10 and 17 US cents, as compared to a ceiling of 9.7 cents at present. It is difficult to conceive how competitive bidding can be achieved if the price is already fixed beforehand. To date, Bappenas has identified a total of


six potential PPP projects worth some $6,478.50 in the power sector, of which only one is currently underway (the Central Java IPP project, as mentioned earlier).


Toll roads and railways The development of tolled expressways in Indonesia has been painfully slow, with the bulk of the existing network being built prior to the Asian financial crisis of 1997/98. The principal reason for the slow progress has been persistent problems with land acquisition. In addition, government guarantees are not available for the development of expressways. On the land acquisition issue, it is expected


that the new Land Acquisition Act (2012), and its ancillary regulations, will help to significantly speed up the process. However, as mentioned earlier, the legislation only applies to acquisition processes commenced subsequent to its enactment, while acquisitions initiated prior to its enactment will continue to be governed by the previous regulations, thereby perpetuating the uncertainty that has plagued a number of major expressway projects, particularly in Java. To date, a total of 87.51km of new


expressway (mostly in Greater Jakarta) are at the contract negotiation stage with PPP sponsors, while 9.7km are currently under construction in Bali. In all, a total of 14 potential PPP expressways worth $33,147.53 million have been identified by Bappenas. In the rail sector, the bulk of Indonesia’s rail


network is focused in Java, which is densely populated and thus ideal for both passenger and freight services. Despite this, the history of Indonesian railways since independence has been a sad one, at least until recently, with many lines being closed or abandoned since the 1970s. At present, the country has some 6900km of track, of which only around 4800km is in use. Until the Railways Act (2007) and its


subsequent amendments, Indonesia’s rail sector was the domain of a state railway monopoly. The sector has now been liberalised and PPP schemes are encouraged. However, the uptake has been slow in populous Java, possibly due to government-


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mandated fare caps and the poor reputation of state rail operator PT KAI. The story outside Java is different, with a


number of major railway projects (both private and PPP-based) planned for Sumatra and Kalimantan (Indonesian Borneo) on the back of the coal boom of recent years. Indonesia has become the world’s biggest


exporter of thermal coal, mainly from Sumatra and Kalimantan. To date, the coal has been transported along narrow country roads in Sumatra, much to the chagrin of local people, or by barge along Kalimantan’s wide rivers, such as the Mahakam. In all, Bappenas has identified three


potential PPP schemes in the railway sector worth a total of $4783 million. Only one project is actually underway: a dedicated coal railway in Central Kalimantan Province from Puruk Cahu to Bangkuang and eventually onwards to the coal port of Lupak Dalam. The project has commenced but has been delayed due to the need to revise the proposed alignment as a result of its likely impact on protected peatland areas.


Ports If Indonesia’s economy is to achieve its long- term growth potential and meet the targets set in the MP3EI, it is essential that its port infrastructure be upgraded. The country has some 2000 ports, most of which are state- owned and managed, and almost all of which fail to meet modern efficiency standards. Bappenas has identified four port projects worth $2875.12 million that are suitable for development as PPP schemes. While work has not yet begun on any of these, one project is ready for offer, namely, the Tanah Ampo Cruise Terminal in Karangasem, Bali.


Aviation As an archipelagic nation made up of 17500 islands, Indonesia has become enormously dependent on air travel since the liberalisation of the sector a decade ago. With the advent of low cost carriers, the country now boasts one of the most rapidly expanding domestic air traffic markets in the world, with passenger numbers increasing from 43.8 million in 2009 to 58.85 million in 2011. The Ministry of Transport’s directorate general of civil aviation predicts that the industry will grow between 15 and 20% this year. Bappenas has identified a total of four


projects worth $1,354 million in the aviation sector for development as PPP schemes, of which none are as yet underway.


Environmental technology Indonesia has fallen badly behind many of its neighbours in terms of environmental health and sanitation, and now faces an


uphill struggle to bring adequate clean water and sanitation to a rapidly growing population. Demand for clean water is increasing on the back of economic development in both urban and rural areas, plus a burgeoning middle class. While it is expected that around 50% of the Indonesian population will have access to clean water by the end of 2012, this proportion is still far below the Millennium Development Goals (MDGs) for clean water access. Similarly, the level of access to adequate sanitation is also extremely low. Bappenas has earmarked 24 sanitation and


water supply projects worth $2431.82 million for development as PPP schemes, with negotiations or work having commenced on three of these.


How much longer for the Masterplan? Among the most entrenched of the challenges for PPPs are corruption and legal uncertainty. There is also a lack of coordination between governmental agencies at central and local levels. This is related to regional autonomy, introduced in the late 1990s, which accords wide-ranging powers to municipal governments. This has given rise to constraints in many sectors as inadequate governmental capacity, corruption, vote-buying and other abuses have resulted in local governments frequently clashing with the centre over the issuance of mining permits and zoning rules, among other things. A recent example is the Sei Mangke special economic zone in Simalungun County, North Sumatra Province, where the local government is adamantly refusing to rezone land from agricultural to industrial use for the construction of a new Unilever plant. Other constraints persist, such as the fear of


changes in government policy in response to short-term political exigencies, the continued unavailability of gap funding (hopefully to be remedied soon), and weak preparation of PPP schemes, all of which tend to discourage investment by financial institutions. In addition, with President Yudhoyono


having less than two years left in office, many wonder whether the MP3EI will survive the advent of a new administration. Nevertheless, the Government to date


appears serious about implementing the Masterplan, and has produced an impressive collection of documentation, facts and figures to back up its intentions. The PPP regime seems quite robust and workable, as evidenced by the progress of the Central Java IPP scheme, while the establishment of the IIGF, SMI and IIF should help kick-start financing flows.


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