Lack of investable projects

The government, faced with increasingly severe budget restraints, has encouraged ministries to develop infrastructure projects under public-private partnership (PPP) schemes, rather than relying on state budget financing.

But Finance Minister Bambang Brodjonegoro’s criticism of the mindset of most ministries, which prefer to wait mainly for government financing, instead of working hard to attract private investors to develop infrastructure projects under the PPP scheme, tends to simplify the complex problems that have hindered PPP programs.

The main barriers to PPP are an acute lack of leadership that has made interministerial coordination and cooperation almost impossible, while this factor is key to selecting and preparing and eventually making infrastructure projects bankable under a PPP scheme.

The government has never been able to set up an effective, well-resourced PPP management center in charge of selecting, preparing (with feasibility studies) and tendering projects. A PPP unit was set up a few years ago under the Finance Ministry but this unit has not received full support from other ministries. Another PPP central unit was also established at the National Development Planning Board (Bappenas), but was not effective.

PPP is a good concept because the government still owns the project/facility, while private investors put up the bulk of the needed investment. But the projects need to be managed by highly competent officials in view of the complex supply chains involved, regulatory risks and long gestation period. However, most ministries, as the government contracting agencies in the implementation of PPP projects, have an acute lack of competent managers, especially for big projects.

Most analysts conclude there are sufficient long-term funds from pensions and insurance firms available for infrastructure because this facility can secure a long-term, stable stream of revenue.

Returns from debts secured against real assets are fairly high because financial instruments linked to infrastructure are typically hedged against inflation and offer stable returns, with low volatility. The long life of these assets is a perfect match for the long-term liabilities of a pension fund.

But the acute lack of project preparation and development seems quite obvious in Indonesia, which has since 2005 offered hundreds of projects under the PPP scheme, but very few, however, attracted investor interest because the government did not or hesitated to allocate adequate funds for hiring professional consulting firms and advisors to prepare bankable projects. Project development is an important tool for catalyzing professional development of complex infrastructure and services and a key contributor to realizing investable, bankable projects.

Too often projects that are put out to competitive tender under the PPP program lack proper contracts, appropriate risk allocation, a sustainable revenue model, government support, key project input such as international-standard studies for feasibility, environment or social safeguards, uncertain resource assessments and properly secured land.

Hence, the government should develop a powerful management center directly under the President in charge of coordinating and supporting PPP-related programs to prepare a pipeline of ready-to-finance infrastructure projects. This would go a long way in helping to address impediments to investment decisions, supporting project design, preparations and structuring.

source The Jakarta Post, Friday, June 17, 2016