Indonesian Insights

Written by Dewi Savitri Reni and Richard Emmerson

While Indonesia continued to enjoy robust economic growth in 2011, such growth increasingly highlighted the nation’s infrastructure woes. There are enormous shortages – and thus opportunities for investors – in transportation, irrigation, drinking water, waste management, telecommunications, private power and the distribution of oil and gas. Partly in response to this growth and a renewed focus on infrastructure, the government issued in May 2011 the Master Plan for the Acceleration and Expansion of Indonesia’s Economic Development. The plan outlines investments worth US$468 billion, including infrastructure projects, over the next 15 years.

Public Private Partnerships (PPP)

On the legal and regulatory side, one of the recent milestones achieved by the Indonesian government in the development of infrastructure facilities is the Public Private Partnership Scheme (Kerjasama Pemerintah Swasta or “PPP”).

A PPP infrastructure project involves both the public and private sector.  PPP agreements normally involve a Build, Operate and Transfer (BOT) concession in which the private party assumes responsibility to construct, operate and fund the project, while the government provides certain financial assurances and ultimately acquires the project at the end of the term.  In some cases, the PPP concession involves a license to a private entity to take over, operate and develop existing infrastructure.  Normally, a PPP Agreement has a lengthy term between 15-30 years to facilitate a return on the investment by the private party.

Recent Legal Developments

In recent years, Indonesia has established a strong legal foundation for its PPP projects including the following:

1.    The enactment of Presidential Regulation No. 67 of 2005 dated November 9, 2005 regarding cooperation between the Government and legal entities in providing infrastructure, which was later amended by Presidential Regulation No. 13 of 2010 dated January 28, 2010 as the basis for PPP implementation in Indonesia (the “PPP Regulation”)

2.    New laws passed by the Indonesian Parliament for specific business sectors:

a.         Law No. 23 of 2007 (April 25, 2007) regarding Railways;

b.         Law No. 17 of 2008 (May 7, 2008) regarding Shipping;

c.         Law No. 18 of 2008 (May 7, 2008) regarding Waste Management;

d.         No. 1 of 2009 (January 12, 2009) regarding Aviation;

e.         No. 4 of 2009 (January 12, 2009) regarding Mineral and Coal Mining;

f.          Law No. 22 of 2009 (June 22, 2009) regarding Land Transportation;

g.         Law No. 30 of 2009 (September 23, 2009) regarding Electricity.

3.    The establishment of the Indonesia Infrastructure Financing Facility (IIFF) and the Indonesian Infrastructure Guarantee Fund (PT Penjaminan Infrastruktur Indonesia (Persero) or “IIGF”).  The IIGF is mandated by the Ministry of Finance to provide guarantees for infrastructure projects under the PPP scheme.  The guarantee is meant to mitigate project risks including those in connection with offtake obligations of any State Owned Enterprises involved and to enhance the bankability of PPP projects. Most recently in October 2011, the IIGF provided a Rp 300 billion (US$33.9 million) guarantee in connection with the construction of a US$3.2 billion coal power plant in Batang, Central Java.

4.    The establishment of the Project Development Facility under the supervision of the National Development Planning Agency (Bappenas) which funds the preparation and launch of PPP initiatives.

5.    The issuance of a PPP Book for the period 2010 – 2014. This book highlights PPP initiatives under preparation or currently being launched for prospective investors.

The above laws and regulations were introduced by the Indonesian Government to promote investment in infrastructure. Given the financial and operational limitations of the Government, it is hoped that continued implementation of the above legislation will facilitate the realization of Indonesia’s vast infrastructure requirements through domestic and foreign private investment. The Government has prioritized projects with high economic and social returns, such as railways, airports, highways, and geothermal and coal fixed power projects.

Uncertainty in the Regulatory Framework

However, some uncertainties remain in the evolving regulatory framework for infrastructure projects.  Land acquisition for PPP projects remains a fundamental problem and while a draft land bill may be issued shortly, its implementation remains to be seen. In addition, the Government has also issued Government Regulation No. 6 of 2006 dated March 14, 2006 Regarding State/Regional Asset Management, as amended by Government Regulation No. 38 of 2008 dated May 19, 2008 (“GR 6”) as well as Government Regulation No. 50 of 2007 dated August 22, 2007 regarding the Implementation Procedures for Regional Cooperation (“GR 50”).  Under GR 6, there must be a minimum of five bidders for Build-Operate-Transfer (“BOT”) or Build-Transfer Operate (“BTO”) cooperation projects whereas only three bidders are required for such projects under the PPP Regulation. This inconsistency could benefit from greater legal clarity on behalf of the government.

This article is part of our 2011 Indonesian Law Review series, in which our attorneys discuss recent legal developments  over the past year and track the main trends in each industry.