Indonesia’s need for infrastructure to drive economic growth and social progress is clear. Two new Presidential Regulations offer some hope that the legal framework is becoming more enabling.

In 2014, President Joko Widodo (known as Jokowi) was elected with a vision for new airports, roads and seaports, with an emphasis on developing a “sea highway” to connect the archipelago.

Since then, as growth has slowed, Jokowi has reaffirmed the importance of infrastructure to the nation’s future prosperity.

But regulatory certainty and co-ordination remain significant issues, constraining confidence and investment.

Two critical issues have been the difficulty in acquiring land for public infrastructure purposes and the legal framework to support public private partnerships (PPPs).

In March 2015, President Jokowi signed two regulations which seek to address both these issues.

MAKING LAND ACQUISITION EASIER

Land acquisition has been a major impediment to infrastructure projects.

Indonesian land acquisition is governed by the 2012 Land Acquisition Law and an implementing Presidential Regulation (Old Regulation).

The new President Regulation (30 of 2015) amends the Old Regulation in three important ways:

1. Private entities included: previously only specified government entities, including state owned enterprises (SOEs), were part of the scheme. Under the new Regulation, private entities that are authorised under an agreement with a specified government entity (including an SOE), as part of a program for providing public infrastructure, are included in the framework.

2. New funding model: under the Old Regulation, only the government could fund land acquisition. Specified government entities (other than SOEs) had to fund acquisitions from the relevant state or regional budgets, while SOEs were able to fund acquisitions from their internal revenue.

Under the new Regulation, private entities can now provide funding for acquisitions under an agreement with a specified government entity (other than SOEs). These funds must then be repaid by the government entity through the relevant budget after the land has been acquired, with the repayment based on a calculation of the return on investment.

3. Application to existing projects: the new Regulation applies not only to new projects, but also to any project which started prior to the commencement of the Old Regulation on 7 August 2012, provided 75% of the required land has already been acquired.

The new Regulation seeks to facilitate government partnering with the private sector in the process and funding of land acquisition. It may breathe new life into existing projects which have stalled because of incomplete acquisition, but which can now benefit from such private sector partnerships.

However the new Regulation does create fresh uncertainty and an inconsistency:

  • The basis for repaying any private sector funding, including the calculation of the return on investment, remains to be further regulated. The details around repayment, which will need to be certain and commercial, will be the basis for attracting private investment and ensuring the new funding model actually works in reality.
  • While private entities may be included in the scheme if authorised under an agreement with an SOE, those private entities cannot provide funding to that SOE.

Finally, the new Regulation does not by itself do anything to address the other key challenge: providing an effective and efficient legal mechanism to terminate existing rights in the target land, while preserving appropriate compensation claims by the holders of those rights.

GETTING THE PPPS FRAMEWORK RIGHT

The basic Indonesian legal framework for PPPs was established by a previous Presidential Regulation, which was subsequently amended three times.

The new Presidential Regulation (38 of 2015) repeals and replaces the previous framework, introducing the following reforms:

1. Eligible sectors expanded: the range of infrastructure projects which can be delivered as PPPs has been significantly expanded from transportation, roads, irrigation, water, sanitation and waste management, telecommunication, electricity, and oil and gas to now also include regional government, municipal government, corrections, education, energy conservation, health, public housing, sports and arts, and tourism

2. Government co-operation contemplated: the new Regulation provides that government entities may jointly initiate a PPP project which covers:

  • more than one sector, with a different government entity responsible for each sector; or
  • more than one region, with more than one regional government involved.

3. Unsolicited proposals easier: both the old and new framework provide for a private sector initiated proposal, which must be technically integrated with the relevant infrastructure master plan, as well as economically and financially feasible. Under the new Regulation, while the private sector entity must have the financial ability to fund the project, the previous requirement that the project not require any government contribution has been abolished.

4. Direct appointment allowed: similarly, both the old and new framework contemplate a competitive procurement process. Under the new Regulation, however, direct appointment is expressly permitted if:

  • there is only one bidder during the pre-qualification phase; or
  • there is only one private sector entity which can deliver the project, due to it having exclusive access to specific technology.

5. Remuneration addressed: the old framework was largely silent as to remuneration. The new Regulation contemplates the private sector partner receiving a return on investment covering capital and operations cost and profits over a defined period, either under a tariff scheme, an availability payments scheme or a method provided for by other laws or regulations.

The new Regulation facilitates PPPs in new sectors and across sectors and regions. It improves elements of the initiation and procurement processes, as well as engaging with market expectations and recognised models of remuneration. Once again, however, important details remain to be further clarified.

CONCLUSION

The two new Presidential Regulations improve the legal framework for infrastructure and private sector investment. As always, however, regulatory reform also requires appropriate government capacity for, and commitment to, implementation.