The Structure and Policy Implications of Indonesian Public-Private Partnership


Daechang Kang and Yoomi Kim


This report discusses the structure and current situation of the Indonesian public-private partnership (PPP), to discover measures for cooperation between Korea and Indonesia regarding the development of Indonesian PPP. It also addresses ways for the Korean government to support Korean firms in entering the Indonesian PPP market.

Chapter 1 discusses the background and necessity of research on Indonesian PPP while introducing the contents of the report.

The Indonesian government issued the MP3EI whose main objective is to develop industries suited to each of Indonesia’s six economic regions. The primary stance of MP3EI is to expand infrastructure to closely connect the six economic regions.

Currently in Indonesia, infrastructure is both small quantitatively and low qualitatively. The level of investment into that infrastructure is insufficient. which has become one of the critical obstacles to development in Indonesia. Recognizing the challenge and task, the Indonesian government is trying to promote development by enlarging its infrastructure. In order to fulfill it, it emphasizes participation from the private sector, and, in particular, aims to apply PPP broadly to infrastructure projects.

Chapter 2 analyses the overall structure of Indonesian PPP and provides a brief description of the general features of PPP. In addition, it examines specific features of Indonesian PPP, focusing on the roles and relations of the private and public sectors. Chapter 2 also analyzes the process of Indonesian PPP, describing the interaction between Indonesian government agencies and private businesses and the responsibilities of each participant at each stage.

Public-private partnership is a system in which central government agencies or provinces/municipalities and private firms agree to a long term contract; private firms invest into infrastructure instead of or jointly with the government, operates the facilities, and provides service for the users. Under PPP, the government owns the infrastructure facilities and private firms assume responsibilities for their construction, financing, and operations. The private firm earns profits and retrieves its initial investment through long term operation in exchange for bearing some of the risks.

PPP has two core characteristics: sharing of risk between the government and private firms via long term contracts; and the task bundling of building, financing, and operations. Since the PPP contract terms are usually from 20 to 50 years, private firms bear significant risks under PPP. Therefore, identifying and sharing of risks between the public and private sector is an essential element of PPP. There is diversity regarding forms of PPP depending on different ways of bundling tasks and timing of transfer of the facilities back to the government.

In the Indonesian PPP projects, the private sector plays a primary role in undertaking the projects and financing them. The project sponsor and companies proceed with the projects while financial institutions provide funds and guarantees. The Indonesian public sector plays a broad role including establishment and coordination of policies, project development, provision of financial support and guarantees, supply of funds, appropriation of lands, promotion of projects, and so on.

The process of Indonesian PPP can be largely classified into two stages: project development and project performance before and after the bidding on the project. PPP requires many steps at the project development stage which means that project development takes a long time. A successful undertaking of the project is largely dependent on project development.

Generally the process of Indonesian PPP comprises of nine stages. In the project development stage, the following processes should be carried out: project screening, public consultation, feasibility study, risk assessment, determination of PPP forms, government support, and procurement. In the project performance stage, implementation and monitoring of the project should take place. The nine-stage process applies to both solicited and unsolicited projects. However, the responsibilities of the Indonesian government and potential private entities differ with solicited and unsolicited projects.

Chapter 3 reviews the current progress of Indonesian PPP projects. It investigates planned PPP projects in MP3EI by economic region and by the category of the infrastructure, respectively.

The number of PPP projects planned in MP3EI may be small but the portion of funds allocated is large. Many projects were allocated to Papua-Kepulauan Maluku, a relatively poor and underdeveloped region; and Java, the center of economic activities in Indonesia.

The Indonesian government held the Infrastructure Summit four times from 2005 - when Indonesia began to establish institutions for regulating PPP - to 2010. During this period, the Indonesian government created the PPP project list by adopting the results of the discussion of the Infrastructure Summit without 5-year PPP plans.

The Indonesian government planned for many PPP projects in 2006, and since then has reduced the number of projects significantly and enlarged the scale of each remaining project. In establishing MP3EI, it reevaluated and adjusted the overall PPP plan in order to ensure a more rational process.

Prior to 2005, Indonesia applied PPP mostly to toll road projects by concession. Since 2005, the Indonesian government transferred the operation rights of many toll roads to PT Jasa Marga, a public enterprise, and private entities.

Currently, PPP projects in Indonesia that have been created since 2005 are not proceeding smoothly. As of 2013, there are 13 PPP projects still in the pipeline, 17 at the bidding stage, and only 1 project past the bidding stage. progress for most projects in the bidding stage have been slow, due to the problem related to land appropriation. This is especially true with toll road projects. At present, the Central Java Power Project is the only project that moved beyond the contract process, meaning the project has made it past the process specified by PPP regulations since 2005 and secured a guarantee. However, this project reportedly almost came to a stop, because of the condition of the guarantee.

Chapter 4 analyzes the institutional aspects of the factors that hinder the progress of PPP projects and discusses measures for advancing PPP in Indonesia. There is also discussion of ways in which the Korean government can cooperate with Indonesia with respect to PPP.

Most of all, the Indonesian government needs to clearly comprehend the objectives for pursuing PPP. In this regard, it must arrange ways to share the risks appropriately through a public sector comparator (PSC), the main tool for evaluating PPP. There is also a need to strengthen individual phases for project development, and by understanding and appraising the PPP projects more clearly, it can increase the potential for active investment into PPPs by private entities. This requires expansion of cooperation among the government agencies involved in PPP and reinforcement of KKPPI, the supreme decision making body for long-term management of PPPs. It should also resolve conflicts of interest by adjusting the roles of state owned enterprises (SOEs).

As for the Korean government, it seeks to support Korean firms indirectly by cooperating with Indonesia in the area of policy finance. In particular, it has sought the ways to promote the development of Indonesian PPP and cooperate with Indonesia through the Korea-Indonesia Economic Cooperation Committee. The discussion in the policy finance sub-committee has been focused on creating a system of cooperation among policy finance agencies of the two countries and measures to support Indonesian PPP by utilizing the Economic Development Cooperation Fund (EDCF) of Korea. The EDCF gives Korea and Indonesia a foundation for cooperation. Although the two countries share basic principles, operate a cooperation committee, and kept the discussion moving forward, they have not achieved concrete results yet.

Recently, many Korean firms have expressed interest in the Indonesian PPP market, and several of them have seen positive results. However, Korean firms should keep in mind that direct support from the Korean government will be quite limited. To ensure progress of the Indonesian PPP, the Korean government should bolster cooperation with Indonesia by sharing Korea’s experience with PPP. The Korean government thereby needs to obtain some means of indirect support for Korean firms thinking about pursuing Indonesian PPP projects by providing information on Indonesian PPP institutions and market, and strengthening the cooperation among state finance institutions of Korea and Indonesia.

Chapter 5 evaluates the current situation of the development of Indonesian PPP, suggesting that Korean firms and government approach the Indonesian PPP market with both the short term and the long term outlook in mind.

Although the long term outlook for the Indonesian PPP market seems positive because it is large and dynamic, it is not developing smoothly at the present. Though Indonesia made efforts to establish a basic institutional framework to operate PPP schemes, further and more consistent development of PPP institutions is required in terms of project development and risk sharing. Considering this, the Korean government needs to strengthen the cooperation with Indonesia on PPP.

But given the positive outlook in the long term, Korean firms and government need to approach the Indonesian PPP market actively, irrespective of difficulties in the short term. The Korean government should formulate measures for continued support of Korean firms to facilitate their unfettered entry into the Indonesian PPP market. They need to act from a long term perspective, considering that the operation period of PPP projects typically takes place over 20 years.

The Korean firms should have full understanding of the Indonesian government's primary policy stance on PPP when entering the Indonesian PPP market. As the Indonesian government generally restricts providing direct funding and guarantees for PPP projects, Korean firms need to pursue the Indonesian PPP projects by first establishing plans for cooperation with financial institutions dealing with long-term investments or loans.

국문요약

제1장 서 론
1. 연구 배경과 필요성
2. 연구 내용과 구성

제2장 인도네시아 공공민간협력제도의 구조
1. 공공민간협력제도의 일반적 성격
2. 인도네시아의 공공민간협력제도 운영 절차

제3장 인도네시아 공공민간협력사업 추진 현황
1. 인도네시아 공공민간협력사업 계획
2. 인도네시아 공공민간협력사업의 주요 내용

제4장 정책적 시사점
1. 인도네시아 공공민간협력제도 발전 방안
2. 인도네시아 공공민간협력사업에 대한 한국의 협력 현황
3. 한국 정부의 대응 방안

제5장 결론

참고문헌

부 록

Executive Summary