By Diaan-Yi Lin

Can public private partnerships

solve Indonesia’s infrastructure needs?
Public private partnerships, The urgent need to address Indonesia’s critical
infrastructure gaps was a key issue during the
when delivered successfully, Presidential campaign, when both candidates pledged to
could help Indonesia address improve the country’s infrastructure as a means to drive
economic growth. Sustained over time, infrastructure
critical infrastructure gaps that investments will have a huge impact on Indonesia’s GDP
require investments of $600 and longer-term growth prospects.
billion in the next 10 years.
To achieve its ambitious growth targets, Indonesia needs to
address critical infrastructure gaps and invest at least $600
billion in the next 10 years in building and upgrading
infrastructure according to estimates by McKinsey &
Company. Infrastructure investments have decreased
dramatically in the last decade, hovering at 3 – 4 percent of
GDP—about half of what is required. A recent World Bank
report estimates that Indonesia has lost at least 1 percent of
economic growth each year over the past decade as a
result. The government’s ability to tackle infrastructure
investment has been limited by a host of issues including
fiscal constraints with significant budget commitments to
fuel subsidies. A difficult land acquisition process has been
another serious stumbling block. As a result, less than half of
the infrastructure projects planned for this year—13 out of
34—will be launched.

A $180 billion opportunity for PPPs

Public-private partnerships (PPPs) can help bridge some of
the investment gap by bringing in private finance. The PPP
model transfers to the private sector responsibility for
financing, designing and constructing an asset, as well as
some of the responsibilities for operating and $46.8 billion in 2010 to 27 projects worth USD 45.7
maintaining it after completion. In several emerging billion in 2013. The status of several projects has
countries such as India, Mexico and Brazil, PPPs are also been downgraded, with no clear rationale for
contributing 25 – 30 percent to infrastructure change. The Pondok Gede Water Supply project,
development, on average, at a lower cost and faster for example, was classified as “ready for offer” in
delivery time than traditional procurement. PPPs in 2011, and downgraded to “priority” in 2012 without
Indonesia offer an estimated $180 billion opportunity any explanation. The lack of transparency and
if they could meet 30 percent of Indonesia’s consistency makes it hard for the private sector to
infrastructure needs, based on these international make commitments and undermines the credibility
benchmarks. of Indonesia’s PPP process.

The Indonesian government has shown strong Second, PPPs are still viewed primarily as a means
commitment to involving the private sector in of financing, and often perceived as too complex
infrastructure development. In 2005, Indonesia because of the extensive coordination required for
introduced the legal concept of PPPs to boost implementation. PPPs involve more stakeholders
procurement through a competitive tender process. (e.g., financiers, construction firms, government
Other regulations were also introduced to encourage ministries) and more steps to complete than
private investments in sectors including traditional public procurement. Contracting
telecommunications, oil and gas, railways, ports, agencies, for example, have the additional
electricity, and water and sanitation. More recently, responsibility of allocating risk between public and
the Land Acquisition Law was amended to ease the private stakeholders and drafting more complicated
land clearing process. In addition, fiscal support has bid proposals for the multiple stakeholders. As a
been made available throughout the PPP process. result, they often prefer to use public budget funds
The government’s Project Development Facility, for or international grants, which are much easier to
example, is a revolving fund for feasibility studies administer. PPPs become the last resort, typically
during project preparation. used for lower priority projects.

Despite the efforts, however, few PPPs in Indonesia Third, many government contracting agencies lack
have been able to finalize contract terms. According the right set of skills. PPPs are a complex
to BAPPENAS, Indonesia’s Ministry of National undertaking, requiring specialized skills in
Development Planning, only 24 PPPs have made it to structuring transactions, financial analysis and
construction or operation, with no new PPPs reaching modeling, commercial legal expertise and more.
financial close—signed contracts between the Contracting agencies often lack the project finance
government, winning bidder and financing parties— skills to develop pre-feasibility studies, to allocate
since 2009. Most are stuck in the preparation and risks, to structure the PPP, and to interact and
transaction stages. Out of the 48 PPP projects worth negotiate with private investors. Projects that have
more than $57 billion (approximately 570 trillion not been formulated well have resulted in PPP
rupiah) announced in 2013 by BAPPENAS, 26 are in concessions being cancelled and projects being
preparation stage and 21 are in transaction stage. returned to the government. The Medan-Kuala
Even the five PPPs identified as showcase projects Namu and Cileunyi-Sumedang-Dawuan PPPs, for
are struggling, and only one—the Central Java Power example, were converted into government funded
Plant—is signed and currently embarking on financial projects in 2009 due to lack of investor interest.
close.
With more than 45 laws and regulations governing
Indonesia’s PPP gridlock PPPs in Indonesia, many provisions in the PPP
regulatory framework conflict or overlap across
To understand why PPPs remain in gridlock in
different levels of government, and across different
Indonesia, McKinsey made an assessment of the
agencies. This creates confusion among the
process of PPP management in Indonesia, and found
investor community and contracting agencies,
several critical challenges that explain why few PPPs
further deterring them from participating in PPPs.
succeed.
Furthermore, Indonesia’s cumbersome PPP permit
process entails obtaining more than 40 permits and
First is the lack of transparency on how projects are
licenses from an array of government agencies, with
selected and prioritized as PPPs. The number of PPP
a PPP entity required to apply for a business
projects initially listed by BAPPENAS has changed
license, secure approvals for the project’s technical
drastically; going down from 100 listed projects worth
specifications, obtain operating permits, and secure
approval for construction. The Central Java Power
Plant required more than 50 permits and licenses
prior to construction. While this is not uncommon in
developing countries, Indonesia’s decentralized
government adds further complexity, with regional
permitting agencies issuing conflicting approvals. For
example, regents at the sub-provincial level can stall
the approval of environmental impact permits even
when requirements have been fulfilled, while line
agencies at the national level do not have the
authority to challenge such decisions.

Finally, land acquisition, a major challenge in any

infrastructure project, has crippled several
infrastructure projects with the private sector required
to cover up to 30 – 40 percent of the total investment
costs. New enabling laws have been put into place,
for example, the new Land Acquisition bill in 2012
which speeds up the process with time limits
established to contest and sell land, independent
appraisals for property valuation and responsibilities
designation for every stage of the process. However,
the law does not apply retroactively, meaning only
new projects that have not yet started their land
acquisition processes, will benefit.

Capturing the $180 billion PPP opportunity in

Indonesia requires new approaches. For the
partnerships to have impact, the new Indonesian
government needs to focus on driving change across
contracting agencies at the national and regional
level, bringing PPPs into the mainstream and
unequivocally supporting private sector involvement
in infrastructure development. A strong and
centralized body should be established to support
PPPs. Addressing process inefficiencies is necessary,
and, at the same time building the skills and
competencies of contracting agencies at scale. The
new government should also proactively support and
deliver on 2 – 3 priority projects within the next 6 – 12
months, to demonstrate its renewed commitment to
PPPs. These projects can be selected from the
current five showcase projects that are currently
stalled. The success of these projects would go a
long way to enable significant change, creating
confidence in Indonesia’s infrastructure opportunity
for the future.

Diaan-Yi Lin is a Partner in McKinsey's

Southeast Asia office