Progress of Infrastructure Development in Indonesia

Indonesian economic growth at 4.73 percent as of September 2015 did not live up to expectations particularly because Indonesia needs to achieve a growth rate of 7 percent at a minimum to be considered as a developed country in 2025. In the spirit of acceleration, the Government of Indonesia has made every endeavor to boost investment in various sectors related to infrastructure. Improvements in regulatory, fiscal, and institutional aspects have been made to spur the achievement of priority projects milestones.

Provision of infrastructure in Indonesia is sluggish because of obstacles encountered at various project stages from the preparation to the execution. As a whole, poor coordination between stakeholders often delays the decision-making process. At the preparation stage, problems usually arise as a result of low quality in project preparation and constraints on allocation of funds. Similarly, projects are often hindered by problems in land acquisition resulting in delays in achieving nancial close of PPP projects. Furthermore, from a financial perspective, unavailability of scal support caused by inconsistency or disagreement on equal risk sharing mechanism between the Government and Business Entity is another constraint that often emerges. In addition to nancial support, limitations on guarantee provided by the Government for infrastructure projects also reduce interest in investment in Indonesia.

To overcome these obstacles, the Government has taken corrective measures in regulatory, fiscal, and institutional aspects. In 2014 the Government formed the Committee for Acceleration of Priority Infrastructure Delivery (KPPIP) charged with leading coordination to accelerate priority infrastructure and promoting improvement in quality of project preparation by adopting OBC Guidelines. These corrective measures are further supported by the increasing capacity of Ministry of National Development Planning (PPN)/National Development Agency (Bappenas) in providing facilities for project preparation, and then continued by the PPP Unit at the Ministry of Finance that provides Project Development Facility (PDF) and Transaction Advisory for PPP projects to increase investors’ interests in funding the projects.

Aside from the above-mentioned matters, in order to surmount obstacles to land procurement, Law No. 2 of 2012 has also been issued for the purpose of accelerating land acquisition process for public interest. This particular regulation is equipped with derivative regulations that have been revised as needed.

Considering that Government support is pivotal to attract investment of Business Entity, the Government has issued regulations to provide Viability Gap Funding (VGF) and availabilty payment. To bolster this Government support, guarantee provided by the Government has been expanded to allow State Owned Enterprises (SOE), that are assigned with instructural development, to receive such a guarantee.

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Increasing support for the development of Infrastructure in Indonesia

In 2015, the Government actively drew up and issued Economic Policy Packages encompassing improvement to policies and regulations to boost Indonesia’s economy, including formulation of Presidential Regulation on National Strategic Projects and Presidential Regulation on Development and Construction of Domestic Oil Refineries. From scal-policy point of view, the Government has provided direct lending facility for State Owned Enterprises (SOE) and availability payment facility taken from APBN (the State Budget), which are expected to improve the feasibility of the projects. In addition, improvement on instutional aspects can be seen in the form of merger between PT Sarana Multi Infrastruktur (PT SMI) and Government Center for Investment (Pusat Investasi Pemerintah) as well as an extension of a mandate received by Indonesia Infrastructure Guarantee Fund (PT Penjaminan Infrastruktur Indonesia or PT PII).

Although such measures taken by the Government have shown positive impacts on infrastructure delivery and Business Entity interest in making investment, it is necessary to bear in mind that regulatory, fiscal, and institutional aspects are still in need of further improvement.

A. DEVELOPMENT IN REGULATORY IMPROVEMENT TO SUPPORT INFRASTRUCTURE PROJECTS

Below is the summary of regulatory corrective measures taken by the Government of Indonesia throughout 2015 for the purpose of creating favourable climate for the acceleration in infrastructure delivery in Indonesia:

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Regulations in nalization stage:

Revision to Perpres No. 75 of 2014
Perpres on the Development of Electricity Infrastructure

Paket Kebijakan Ekonomi

The Government has released 8 Economic Policy Packages from 9 September 2015 to 21 December 2015. The 8 packages are aimed at reorganizing Indonesia’s regulations that hinder economic growth (deregulation), restructuring Indonesian bureaucracy, and offering conveniences to create conducive investment climate and strengthen Indonesia’s economy.

Each Economic Policy Package and the expected positive impacts are as follows.

Economic Policy Package I
To deregulate 165 regulations, reduce bureaucracy in obtaining licences related to land acquisition and other licences for infrastructure projects, provide the legal certainty over land ownership as well as clarify procedures for and completeness of documents required in obtaining certain licenses.

Economic Policy Package II
To improve services in granting investment licences in industrial areas, to cut the length of time needed to apply for tax allowance and tax holiday, and to remove value added tax for transportation equipment.

Economic Policy Package III
To decrease fuel prices, gas prices, and basic electricity rate for industry and to simplify licensing process over land for the purpose of investment.

Economic Policy Package IV
To reform the labor system as well as annual salary increase mechanism and to implement policy on a larger-scale and affordable Credits for Micro, Small and Medium Businesses.

Economic Policy Package V
To give incentives in the form of tax relief and revaluation of assets of a company, state-owned enterprises (SOE), and individuals to create a more transparent and efficient economic and investment scheme.

Economic Policy Package VI
Memberikan insentif berupa kemudahan investasi daerah KEK, regulasi sumber daya air dan proses perizinan yang cepat (paperless).

Economic Policy Package VII
To give incentives in the form of ease of investment process of Special Economic Zone (SEZ), regulations on water resources, and expedited licensing process (paperless).

Paket Kebijakan Ekonomi VIII
To provide labor intensive industry, where income tax (PPh 21) is paid by the company, with relief.

Presidential Regulation on National Strategic Projects (PSN)

Despite the fact that the central government has issued conducive policies on infrastructure, in practice, their execution often encounter obstacles. Considering that infrastructure delivery requires punctuality, additional facilities are needed to accelerate completion of projects considered to have national strategic interests. Facilities provided range from privilege or special treatment in applications for permits and non-permits, government procurement, land procurement, local content, debottlenecking, spatial planning, and government guarantee.

This Presidential Regulation attaches a list of projects deserving the facility and privilege/special rights as stipulated in the body of the regulations. KPPIP plays a role in selecting national strategic projects carried out in consultancy with ministries/government institutions/regional government serving as project coordinators. The list comprises of 225 projects and 1 electricity program.

Presidential Regulation No. 3 of 2016 on Acceleration of the Implementation of National Strategic Projects and Presidential Instruction No.6 of 2016 on Acceleration of National Strategic Projects were issued in January 2016.

Revision to Presidential Regulation on the Assignment to Hutama Karya for the Development of Trans Sumatra Toll Road

Pursuant to Presidential Regulation No. 117 of 2015, which is a revision to Presidential Regulation No. 100 of 2014, as many as 24 sections of toll road from Bakauheni to Banda Aceh will be built to accelerate the construction of toll roads in Sumatera. The first stage of the construction puts priority on the construction of 8 toll road sections including the 4 sections stated in Presidential Regulation No. 100 of 2014, namely Medan-Binjai, Palembang- Simpang Indralaya, Pekanbaru-Dumai, and Bakauheni-Terbanggi Besar, and 4 additional sections, consisting of Terbanggi Besar-Pematang Panggang, Pematang Panggang-Kayu Agung, Palembang-Tanjung Api-api, and Kisaran-Tebing Tinggi sections. Prioritization for the development of the following sections will be decided by the Minister of Public Works and Public Housing based on evaluation results.

The Government assigns PT Hutama Karya (Persero) for the aforementioned operation of Trans Sumatera toll road, and this assignment encompasses funding, technical preparation, construction, operation, and maintenance with a concession lasting for 40 years. In its implementation, the operation and maintenance of these toll road sections are predicted to be finalized by the end of 2019 at the latest.

Presidential Regulation No. 146 of 2015 on Construction and Development of Domestic Oil Re neries

As part of Economic Policy Package VIII and for the purpose of supporting KPPIP priority projects, namely construction of domestic oil refineries, Presidential Regulation No.146 of 2015 on Construction and Development of Domestic Oil Refineries has been issued.

This regulation serves as the guidelines for the implementation and acceleration measures that can be done if oil refinery projects are to be carried out by the Government using PPP scheme or SOE assignment, and Business Entities. In addition, Presidential Regulation also gives room to PT Pertamina to become Government Contracting Agency (GCA) if the project adopts PPP scheme. This Presidential Regulation further dictates incentives that can be given by the Government of Indonesia and parties acting as offtaker.

Regulation of the Head of National Public Procurement Agency (LKPP) No. 19 on the Procedure for Procurement of Business Entity in Infrastructure Delivery

Presidential Regulation No. 38 of 2015 on Public Private Partnership in Infrastructure Provision requires several derivative regulations relating to availability payment and procurement of the implementing business entity to support the implementation of PPP in Indonesia.

As a follow up, Head of LKPP Regulation no. 19 of 2015 on the Procedure for Procurement of Business Entity in Infrastructure Delivery was issued in September 2015 governing the procurement of preparatory Business Entity and implementing Business Entity for PPP projects.

In the implementing business entity procurement, the procurement is aimed to select a business entity to act as the counterpart for the GCA to execute the PPP project. The selection itself can be made through a tender with pre- qualification or direct appointment. The latter can be made under certain conditions. By making direct appointment, it is expected that tender failure can be mitigated and delivery process can be expedited.

In the procurement of the preparatory business entity, the procurement is intended to choose a business entity, institution, national or international organization that is selected through a selection process or by consensus. The chosen entity is then tasked to carry out supporting activities in order to prepare for the PPP transaction.

Support given by KPPIP for developing and revising regulations

In accordance with Presidential Regulation No. 75 of 2014, KPPIP has a mandate to assist, facilitate, coordinate, recommend amendment and/or issuance of new regulations for the purpose of accelerating infrastructure delivery, including to resolve issues arising in infrastructure implementation. In line with the mandate given, KPPIP undertakes several activities to make and revise regulations related to infrastructure delivery.

No.	Regulations	Description
1.	Amendment to Presidential Regulation No. 75 of 2014 on Acceleration of Priority Infrastructure Provision	Presidential Regulation No. 75 of 2014 has stipulated KPPIP’s membership. Along with recent development, there are other agencies that need to be included in KPPIP, namely Coordinating Minister of Maritime Affairs and Minister of Environment and Forestry. Additionally, operational strengthening of KPPIP in procurement of goods and services is necessary, especially to support the establishment of pool of consultants. In order to accommodate attempts at accelerating provision of priority infrastructure, Perpres No. 75/2014 needs to be revised.
2.	Head of KPPIP Decree to assemble Working Team for Acceleration of Land Acquisition	Even though Law No. 2 of 2012 has been issued, land procurement remains the biggest problem that slows down the execution of infrastructure projects. Obstacles identified are: (1) Information gap between Project Implementing Agency and Ministry of Agrarian Affairs and Spatial Planning concerning location and planning of land procurement; (2) Poor coordination among stakeholders when obstacles to land procurement arise; and (3) Lack of monitoring and synchronization in transferring the Government’s/SOE’s/ROE’s land for public use Consequently, KPPIP intends to form a Working Team for Acceleration of Land Acquisition to solve the aforementioned obstacles as well as to expand its capacity needed for the acceleration.
3	Issuance of Presidential Regulation on Acceleration in Electricity Infrastructure Provision	Until 2019, the Government is planning to build power plants with total capacity of 35,000 MW. All projects in the Ten-Year Electricity Infrastructure Development Plan (RUPTL), including projects both developed by PT PLN itself and those under partnership with the private sector, are contained in this Presidential Regulation.

B. DEVELOPMENT OF FISCAL POLICY

Availability Payment

Presidential Regulation No. 38 of 2015 on PPP provides legal basis for availability payment. Availability payment means periodic payment is made by the GCA to the business entity for the availability of infrastructure that satisfies the quality and criteria set in PPP contracts. Availability payment is expected to increase project feasibility to stimulate investors’ interest.

In October 2015, Ministry of Finance issued Minister of Finance Regulation No. 190/PMK.08/2015 to manage the mechanism of availability payment derived from the State Budget (APBN). This will be followed by, Minister of Home Affairs regulation, which will regulate the mechanism of availability payment from the Regional Budget (APBD).

Government Guarantee for Direct Lending

Previously, project guarantees were focused merely on projects financed through PPP schemes or Government Budget (APBN/APBD). However, the government has expanded its guarantee to projects receiving direct lending from international financial institutions as has been governed under Presidential Regulation No. 82 of 2015.

With the existence of Minister of Finance Regulation No.189/PMK.08/2015, the scope of the projects eligible for such guarantee has been broadened by including projects assigned to State-Owned Enterprises (SOE) under Presidential Regulations or SOEs that are completely owned by the government.

Project Development Fund

At this moment, the implementation of PPP funding scheme is still limited due to the unavailability of expertise and special funding as required for high quality project preparation needed for the success of PPP projects. Considering the importance of PPP schemes to increase private sector investment in infrastructural development, the Ministry of Finance has formed Directorate of Government Support and Infrastructure Financing Management (PPP Unit) to provide technical support and funding as has been mandated in Presidential Regulation No. 75 of 2014. This facility is nanced by Project Development Fund governed in Minister of Finance Regulation No.265/PMK.08/2015.

C. INSTITUTIONAL DEVELOPMENT

Additional Capital to PT Sarana Multi Infrastruktur (PT SMI)

In December 2015, Ministry of Finance issued Minister of Finance Regulation No.232/PMK.06/2015 on the Shifting of Government Investment at the Government Investment Center to Become State Capital Injection for the Limited Liability Company PT. Sarana Multi Infrastruktur (PT SMI) which serves as the ground for capital injection of PT SMI in the amount of IDR 18.4 trillion. Prior to receiving the additional capital, the state capital injection into PT SMI was limited to IDR 2 trillion.

Along with the State Capital Injection, PT SMI has expanded its role to become the center for infrastructure nancing in Indonesia with the capacity to fund development of infrastructure by State-Owned Enterprises (SOE), Regional Government-Owned Enterprises (ROE), and Regional Governments.

Expansion of Facility of Indonesia Infrastructure Guarantee Fund (IIGF)

Government guarantee is one of the important factors to attract investment in projects. However, in the past, guarantee can only be provided for projects under PPP scheme.

Through the issuance of Presidential Regulation No. 82 of 2015 on Central Government Guarantee for Infrastructure Finance Using Direct Lending from International Financial Institutions to a State Owned Enterprise, the scope of projects eligible for such guarantee is broadened. This guarantee can be provided for a SOEs that are wholly owned by the Government. SOEs that has been given assignment under the Presidential Regulation is also provided with a guarantee. As a result, the number of projects eligible for guarantee provided by IIGF is likely to increase.

Improvements and new initiatives in regulatory, scal, and institutional policies undertaken by the Government are expected to be able to solve obstacles encountered in infrastructure provision so that decision on decisions made by the central and regional government for acceleration can be executed.