Public-private partnership infrastructure market in RI

Harun al-Rasyid Lubis, Bandung | Wed, 10/26/2011 7:51 AM

source from http://www.thejakartapost.com/news/2011/10/26/public-private-partnership-infrastructure-market-ri.html

An adequate stock of infrastructure is vital in maintaining an efficient and competitive economy within a country. Indonesia’s competitive trend has been declining mainly due to inadequate infrastructure, ineffective bureaucracy and corruption.

Based on various motives, governments all over the world are looking increasingly to public-private partnerships (PPP) to bridge their infrastructure gaps. In general terms, a PPP is a contract between a government and a private party in which the private party assumes significant project risk in the design, financing, construction and operation of a project.

More succinctly, PPP projects are aimed at providing more efficient public services delivered by private sector actors through an optimal risk-sharing arrangement.

Before the 1997 Asian financial crisis, among developing countries, Indonesia was still a leader in PPPs. The crisis suddenly ended it all, and until now the ratio between infrastructure investments and gross domestic product (GDP) has not reached the pre-crisis level, though the nominal has been increasing.

Backed by continual bilateral and multilateral loans, paper-based reports on enhancing PPPs as well as project lists are mounting. Until now, deals are still being brought to the market and closing, but very slowly.

The prolonged global financial crisis and the recent worsening liquidity in the eurozone suggest that for the continuation of infrastructure development, governments in emerging economies should rely more on public spending or partial backing by bilateral or multilateral loans. If PPP funding is still sought, it should rely more on local resources, such as local banking syndicates, pension funds and bonds.

However, the PPP market has not yet developed in emerging economies, so qualified bidders are lacking and competition is simply not in place. Basically, the market is not really contestable, while innovation and efficiency are rare. These factual economic trends then pose a very fundamental question: whether PPP can still demonstrate value for money compared to the public sector, after all?

The use of PPPs raises very complex issues and choices, while solutions are often case by case and project specific.

Having twice revised Presidential Decree No. 67/2005 on PPPs (Presidential Decrees No. 13/2010 and No. 56/2011, respectively), regulating competitive tender as mandated by this presidential decree remains political and draws controversy. Placing contestability first and foremost often delays and jeopardizes project delivery.

Frequently, a number of PPP prerequisites and tenders were repeated, because private parties’ responses underwhelmed, or rather the information given in the “info memo” was unclear due to poor project preparation. If a project is considered top priority or strategic in terms of economic benefits but is not financially viable, procurements are continued and part of the investment is subsidized or backed by government support.

Or in some cases, construction phases are funded in full through soft loans, then later tendered to private entities under an operation and maintenance contract. So, when a project is dropped from the list in a PPP concession tender, justifications are often weak and inherently political.

The role and involvement of state-owned enterprises (SOEs) in PPP tenders varies across sectors. Direct appointments to SOEs were viewed as against the market-oriented policies as mandated in the infrastructure laws. With electricity, for example, PT PLN played a role as a government contracting agency (GCA) in the recent Central Java power plant tender.

Other SOEs, such as the Toll-Road Corporation (PT Jasa Marga), Railway Corporation (PT Kereta Api) and Seaport Corporation (PT Pelindo), are positioned purely as service providers (operational), while the government is responsible for regulatory functions.

According to the laws, the Toll Road Regulatory Body (BPJT) and Port Authority, for example, act as an economic regulator as well as a GCA in their respective sectors, but no economic regulator for the rail sector is mandated by the railway law.

To date, the reposition of public institutions’ roles as regulators and the issue of state asset management are still blurred. Urgently, for PPPs to be effective, assets need to be settled and clearly defined in the contract, and recorded accordingly on the balance sheet. The sooner the better!

This bumpy arrangement and slow progress with PPPs, according to some government officials, are due to some fundamental reasons. All in all, having established financial institutions to readily support and guarantee PPP transactions, the government is now at a stage of streamlining the legal and regulatory framework, such as the issuance of a land provision law.

On the institutional issue, the memorandums of understanding (MoU) between the Finance Ministry, the National Development Planning Board (Bappenas), and the Investment Coordinating Board (BKPM) on facility coordination and PPP acceleration in infrastructure were issued last year to speed up the preparation and execution of PPP projects.

The MoU positions the BKPM as a “front office”, sharing information about ready-to-offer projects through an attractive marketing program, which in the short term focuses on showcase projects. Nevertheless, the taste of the pudding is in the eating, so we’d better wait to find out whether this inter-agency coordination is effective and fruitful.

The universal criterion for PPPs is Value for Money (VfM), which consists of a combination of cost savings, efficiency gains and risk transfer. All risks are adjusted to life-cycle costing, including the cost of private finance.

Up until now, the rationale behind why a PPP scheme is needed is problematic, since not all projects can be categorized as PPPs. The beneficiaries of infrastructure, such as container ports and their external access roads are mostly situated within the private sector, therefore public spending should be kept to a minimum.

In various PPP regulations, forms of support and guarantee are adequately specified and the operational procedure for a VfM assessment is described qualitatively together with the procedure for guarantee application. In the future, more quantitative VfM methodology is required to ensure how such support and guarantees are deemed to be adequate.

VfM requires a robust and clear definition, as it is always subject to debate and analysis, also repeated revisiting of capital grants support and partial guarantees. The bottom line is, VfM can be accomplished only when a PPP delivers high-quality services at a lower cost than the government could provide.

Minimizing total life-cycle costs requires careful and interdependent choices; a private firm is usually better than a government at making these choices.

Otherwise, public finance with separate construction and operation contracts may be as good as, or better than, PPP finance.

Practices in some countries, such as Australia and the United Kingdom, show that VfM is measured by comparing the public service comparator (PSC) with a PPP’s references. In India, it is regulated by a viability gap funding (VGF) mechanism and guidance.

It is now an urgent matter that government support and guarantees need to be formulated transparently. The methodology and rates assumed in calculating public and private cost flows along a project’s life cycle must be standardized, so that every proposal of partnership projects can be equitably judged.

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