The Government of Indonesia hosted the
“2006
Infrastructure Forum” on November 1-3, 2006 as a follow-up to it’s
2005 Infrastructure Summit. The government provided unprecedented
access to ministers and focused the 91 projects of the 2005 Summit
into 10 “Model Projects” seen as the most feasible of the
infrastructure projects. The government also clarified the legal
structure, regulation, and financing of infrastructure projects. For
your reference, we have compiled here useful presentations and
speeches made during the Forum and links to further information.
Table
of Contents:
o
Summary
o
President
Yudhoyono Cites Positive Climate, Acknowledges Challenges
o
Funds
for Guarantees, Projects, Land Acquisition
o
Clarification
on Risk Sharing for Existing Projects
o
Model
Projects Span Sectors
o
Ministers
Pitch Projects in Break-Out Sessions
o
Interest
Level Highest on Energy Projects
o
Clarification
on Public Service Obligations
o
List of Model
Projects support
Speeches & Presentations
- Keynote address by Indonesian President Susilo Bambang Yudhoyono
- the speech [PDF
870 KB]
- Presentation by Indonesian Coordinating Minister for Economic
Affairs Boediono
- the speech [PDF
1.7 MB]
- Speech by Indonesian Minister of Finance Sri Mulyani Indrawati
- the speech [PDF 1.4
MB]
- Presentation by Indonesian Minister for State Owned Enterprises
Sugiharto
- the presentation [Powerpoint
2,99MB]
Infrastructure Forum Attracts Investors and Highlights Model
Projects
Summary
The Government of Indonesia (GOI) renewed its appeal for private
investment under it's five-year, USD 150 billion infrastructure
development program at a November 1-3 Infrastructure Forum in Jakarta.
President Susilo Bambang Yudhoyono touted improvements in Indonesia's
investment climate, but also acknowledged investor concerns over the
need for a transparent and fair regulatory framework. Minister of
Finance Sri Mulyani assured investors that the National Committee for
the Acceleration of Infrastructure Provision (KKPPI) would evaluate
all Public-Private Partnership (PPP) projects in the infrastructure
sector according to established, transparent criteria. Coordinating
Minister for the Economy Boediono announced separate risk guarantee,
infrastructure investment, and revolving land acquisition funds to
which the GOI plans initial contributions of Rp 4.7 trillion (USD 503
million). Unlike the 2005 Infrastructure Summit , the GOI narrowed its
focus to ten model projects across five sectors worth USD 4.4 billion,
although none are yet ready for tender. Ministers from
infrastructure-related ministries were on hand to meet one-on-one with
potential investors in five separate break-out sessions. Energy sector
projects attracted the most interest. The World Bank and the Asian
Development Bank (ADB) announced at the conference that they are
expanding their support for the KKPPI with program and project loans
as well as possible contributions to the proposed risk guarantee fund.
A senior official from the Japanese Bank of International Cooperation
(JBIC) unveiled an "umbrella agreement" his organization has
signed with the Ministry of Finance (MOF) that acts as an indirect GOI
guarantee for power projects. This report uses an exchange rate of Rp
9130/USD for all transactions. End Summary.
Nearly two years after the January 2005 Infrastructure Summit, The
Indonesian Chamber of Commerce (KADIN) and the Coordinating Ministry
for Economic Affairs co-sponsored a follow-up "Infrastructure
Forum" from November 1-3 in Jakarta. Over 1000 delegates from 300
Indonesian companies and 100 foreign firms attended the Forum. The
Forum agenda underscored the GOI's more focused efforts under
President Yudhoyono to attract greater private investment into its USD
150 billion, 5-year infrastructure plan.
President Yudhoyono Cites Positive Climate, Acknowledges
Challenges
In his opening address, President Yudhoyono touted improvements in
Indonesia's investment climate and macroeconomic situation, including
a successful transition to democracy, increased political stability,
strengthened anti-corruption efforts, rising GDP growth, and a rising
per capita income of USD 1500 that now exceeds pre-crisis levels. He
cited the stable Rupiah, Jakarta's strong stock market, and reserves
of over USD 40 billion as concrete signs of Indonesia's underlying
economic health.
The President candidly acknowledged significant economic challenges
facing Indonesia and said that infrastructure development stands at
the top of the list. During the years following the financial crisis
the GOI virtually stopped funding infrastructure, a trend Yudhoyono
said the country must reverse. (Note: Pre-crisis infrastructure
spending stood at about 6% of GDP, almost three times the level in
2005). He appealed to private investors to participate as partners in
the USD 22 billion annual investments needed for the energy sector,
roads, ports, harbors, housing, water, and sanitation.
President Yudhoyono also addressed on-going investor concerns over
substandard project feasibility studies, lack of transparency in the
bidding process, and regulatory uncertainties. He stressed that
Presidential Regulation 67/2005 provides a more robust legal and
regulatory framework for PPPs in infrastructure development, and said
the KKPPI would ensure all projects meet international standards of
transparency and fairness in the tender and bidding process "from
start to finish." Minister of Finance Sri Mulyani echoed the
President's remarks, saying that the KKPPI is already working with
sixteen line ministries and is evaluating the quality of all proposed
PPP projects according to the standards of Presidential Regulation
67/2005.
Funds for Guarantees, Projects, Land Acquisition
Ministers Boediono and Mulyani provided detail on three, separate
infrastructure-related funds the GOI has set up or proposed:
§ The GOI has established a "Risk Guarantee Fund" with
an initial, Rp 2.5 trillion (USD 274 million) contribution from the
2006 and 2007 national budgets. In addition, the GOI has asked the
World Bank, ADB and other institutions to support the Risk Guarantee
Fund through partial credit guarantee or other risk management
products. The GOI has stated clearly in the Letter of Development
Policy for its forthcoming, USD 400 million ADB "Infrastructure
Reform Sector Development Program" loan that only projects that
fully comply with the KKPPI would be eligible for support through the
Risk Guarantee Fund.
§ Mulyani announced the GOI would establish an
"Infrastructure Investment Fund" with an initial
contribution of Rp 1.5 trillion (USD 164 million, also from the 2006
and 2007 budgets. This fund is intended to fund direct GOI
participation in infrastructure projects, likely through Indonesian
state-owned enterprises (SOEs).
§ Boediono stated the GOI would ask Parliament for funds to
establish a Rp 600 billion (USD 66 million) revolving land acquisition
fund. The Ministry of Public Works will manage the fund, under
guidelines the National Land Agency (BPN) will draft. According to
Boediono, the guidelines will ensure land acquisition is both
"investor-friendly" and "not at the expense of
vulnerable groups."
Once established, the land acquisition fund could play an important
role in breaking the current deadlock over land acquisition for toll
road and other infrastructure projects. Presidential Regulation
65/2006 and other regulations limit the legal options available to
property owners to challenge Government efforts to acquire land for
infrastructure projects, an important consideration for land-intensive
toll road development. However, the GOI has been extremely reluctant
to acquire land through eminent domain-type legal proceedings.
Potential investors have long sought such a revolving fund to finance
land acquisition to limit or remove this risk for investors.
Clarification on Risk Sharing for Existing Projects
Finance Minister Sri Mulyani provided some clarification on the
complex issue of the availability of government guarantees or support
for various types of PPP projects, a threshold issue for most
investors. Under Finance Ministry Decree 38/2006 issued in May 2006,
the government may consider sharing political, project performance,
and demand risk. Mulyani stated that a Risk Management Unit (RMU)
within the MOF would review all requests for government guarantees for
projects awarded under Presidential Regulation 67/2005 based on the
risk-sharing principles in MOF Decree 38/2006. As in prior
infrastructure meetings, Mulyani cautioned investors not to expect
blanket guarantees. However, she pledged that the GOI would evaluate
guarantee proposals for high quality projects based on "a
reasonable rate of return." She added that the GOI needs to issue
another Presidential Regulation to address guarantees for regional
projects.
The GOI also clarified how it would approach requests for GOI
financial or risk sharing support for projects that fall outside
Presidential Regulation 67/2005 and MOF Decree 38/2006. Some of these
projects were awarded during the Suharto era, but have been stalled
since the 1997-98 financial crisis. In Mulyani's remarks and its
October 24 ADB Letter of Development Policy, the GOI has outlined how
it will treat infrastructure projects that fall outside the KKPPI
system:
- § Projects to be Directly Executed by the Government or
Contracting Agencies: The GOI plans to design and execute
infrastructure projects using purely public sector resources. The
most noteworthy example of this type of project is the 10,000
megawatt "crash program" for electricity generation in
which a number of Chinese companies and banks have expressed keen
interest.
- § Projects Awarded Prior to Presidential Decree 67/2005 and MOF
Decree 38/2006: The MOF will review these pre-KKPPI projects
already in the pipeline on a case-by-case basis, and if they do
not meet the requirements of the two decrees, will "apply the
principles of transparency, accountability, proper risk allocation
and sharing, and fiscal prudence in determining fiscal support for
such projects through the general budget allocation process."
Model Projects Span Sectors
Unlike the 2005 Infrastructure Summit, this year the GOI focused
its pitch to investors on a short-list of ten model projects worth USD
4.4 billion. Coordinating Minister for Economic Affairs Boediono
acknowledged the poor response of investors to the 91 projects
announced at the 2005 Summit because "the projects were not
properly and adequately prepared". In contrast, the GOI considers
the Forum's ten model projects, crossing the energy, transportation,
public works, and telecommunications sectors, commercially viable and
"bankable," Boediono said. Each of the projects will go
through the KKPPI and RMU review processes from start to finish.
Although the GOI provided information memoranda on all but one of the
projects, no tender documents were ready at the Forum. Participants
noted that several of the model projects are still in the feasibility
assessment stage, and encouraged the GOI to focus on moving an initial
one or two model projects through the KKPPI and RMU review process to
demonstrate to investors that the two institutions are fully
functioning.
Infrastructure
Forum: 10 Model Projects
Note: Information memoranda are available on the KKPPI website (http://www.kkppi.go.id)
for all projects except the Surabaya Tanjung Perak expansion.
Ministers Pitch Projects in Break-Out Sessions
Forum organizers delivered on their pledge of offering full access
to key infrastructure ministers. Highlights from individual breakout
sessions follow:
§ Transportation: Minister of Transportation M. Hatta Rajasa
promised investors that the Transportation Law amendments for air,
land, sea, and rail, expected to pass Parliament by early 2007, would
"revoke the state-owned enterprise monopoly" on
transportation, permit longer concession periods, and allow foreign
investors "free rein" to build and operate transportation
infrastructure. Investors representing existing port facility
operators in Surabaya pressed Rajasa on the need for the Lamong Bay
container port project in Surabaya, given the significant
underutilization of current facilities. Rajasa responded that Lamong
Bay is a "long-term" project and planning for anticipated
growth in 2010 and beyond.
§ Water Resources: Public Works Minister Djoko Kirmanto
highlighted the three model municipal water supply and sanitation
projects, noting that only 17% of all Indonesians have piped water
into their homes, and only 8% in rural areas. The model projects offer
25 year concession agreements to inject greater efficiency into the
existing system where 63% of municipal water companies are essentially
bankrupt. The proposed water project in the Jakarta suburb of
Tangerang would serve the most rapidly growing area in greater Jakarta
with a current population of 243,000. Many consumers currently
purchase potable water trucked into urban areas at much higher cost.
§ Telecommunications: Communications Minister Sofyan Djalil
unveiled an ambitious agenda to transform Indonesia into a fully
connected information society by 2015. Indonesia has one of the lowest
rates of mobile and fixed line penetration in South East-Asia
according to Arwin Rasyid, director of state-owned telecommunications
company PT Telekom. Rasyid added this low level of penetration
represents a tremendous (and lucrative) capacity for growth. Telecom
Minister Djalil presented GOI plans for an ambitious "Palapa
Ring" project that would create a self-contained fiber optic ring
running through seven major Indonesian islands at a cost of USD 1.5
billion. The Telecommunication Ministry estimates a 21% internal rate
of return on the projects and a five-year revenue stream of USD 2.9
billion. However, some investors voiced doubts about the project's
feasibility and questioned the need for a new, privately funded fiber
optic ring when Telekom could use its existing networks and keep the
project for itself. Investors also commented on the fact that
interconnection rates in Indonesia are among the highest in the world
and a major cost barrier for new entrants in the market. Minister
Djalil assured investors that the GOI is formulating regulations to
reform lease line regulations. Some investors noted that unclear
regulatory authority and GOI support for the Telekom/Indosat duopoly
are major barriers to potential investment.
§ Toll Roads: Minister Djoko Kirmanto told investors that from
2005-2009, Indonesia hopes to build 1,100 kilometers, of toll roads at
a cost of Rp 80 trillion (USD 8.7 billion). More than 760 kilometers
would be included in the "Trans Java" system, the GOI's top
toll road priority. According to Kirmanto, Presidential Regulation
65/2006 has streamlined the process of clearing land titles and
increased the certainty of land acquisition. The proposed revolving
land acquisition fund should also give the GOI greater flexibility to
acquire land before tendering projects. Land titling and acquisition
remain the greatest concerns for investors.
Interest Level Highest on Energy Projects
Interest among potential investors remains highest in energy sector
projects, particularly in the electric power generation sub-sector.
The GOI offered two model projects in this sub-sector:
§ Central Java Coal-Fired Power Plant: A 1,200 MW coal-fired
thermal plant developed on a build-own-operate basis at an estimated
cost of USD 1.2 billion
§ Pasuruan Combined Cycle Power Plant, East Java: A 500 MW double
chambered coal-fired plant developed on a build-own-operate basis at
an estimated cost of USD 275 million.
Minister of Energy and Mineral Resources Purnomo Yusgiantoro said
the GOI would strictly follow the KKPPI process for the two model
electricity projects. The GOI has completed site studies and bidding
documents for both projects, but potential investors must complete
feasibility, environmental, and energy sourcing studies, according to
Purnomo. Although Purnomo set a goal of getting the projects into
KKPPI process by 2007, he was unable to give an exact timeline, noting
much of the institutional structure of the KKPPI process is not yet
fully functional.
Investors also focused their interest and questions on projects
announced earlier in the year under the so-called 10,000 MW
"crash program." The program aims to add 10,000 MW to the
national grid by 2009. To date, the GOI has identified 40 fast-track
projects totaling more than 8,750 MW. The largest project will be on
the island of Java with planned operational dates of 2010. Purnomo
said these projects must be transparent. He also said GOI funding for
these projects should not take precedence over those following the
full KKPPI process. The two model electricity projects are former
"crash" projects previously offered through direct bid.
Clarification on Public Service Obligations
State electricity company PLN will be the first beneficiary of the
2003 GOI Public Service Obligation (PSO) compensation policy. In the
past, the GOI required State Owned Enterprises (SOE) to subsidize
unprofitable basic services provided to the public through
"hidden input subsidies," according to Finance Minister Sri
Mulyani. This opaque process hindered accountability as well as
performance benchmarking of SOEs. The GOI will now directly compensate
the SOEs for the full cost of their PSOs. PLN will receive direct
compensation based on the difference between prevailing tariffs and
the cost of supply. PLN may also seek reimbursement for costs such as
electricity purchases and debt service. The GOI included a Rp 35.5
trillion (USD 3.8 billion) line item in the revised 2006 budget to
cover PLN's public service obligation.
The PSO policy also forms the basis for an indirect GOI guarantee
for energy sector projects through an "umbrella agreement"
between the Japanese Bank of International Cooperation (JBIC) and the
GOI. The agreement will allow JBIC financing of power projects without
a GOI "comfort letter" or other blanket guarantee. According
to a model project prospectus provided by the GOI, PSO subsidy funds
may be used to meet any payment defaults by PLN. The agreement
apparently reiterates the GOI commitment to honor PSOs as provided for
under Indonesian law. The GOI has also stated its intent to use a
similar, PSO-linked guarantee mechanism for power projects not funded
by JBIC as well as projects in other sectors.
Investors in the forum expressed their frustration at the lack of
deregulation in the electricity and mineral resources sectors. Purnomo
noted the GOI and Parliament are reviewing key energy deregulation
laws.
Support from Development Banks
Development lenders including the World Bank, the ADB, and JBIC
signaled their strong commitment to support the GOI through program
and project loans as well as financial support for the risk guarantee
fund. The ADB has completed negotiations on its USD 400 million
infrastructure reform program loan and an associated USD 19 million
project loan to support the establishment of an infrastructure
"Project Development Facility." The ADB and World Bank have
signaled their willingness to contribute to the GOI's Risk Guarantee
Fund. Additionally, the World Bank has provided a USD 425,000 grant to
build capacity at the RMU.
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