Introduction

The government of Indonesia has recently issued the following regulations relating to the grant of infrastructure guarantees by PT Penjaminan Infrastruktur Indonesia (Persero) ("Indonesia Infrastructure Guarantee Fund" or "IIGF") for infrastructure projects:-

  1. Regulation of President of Republic Indonesia No. 78 Year 2010, dated 21 December 2010, concerning Infrastructure Guarantee under the Public-Private Partnership ("PPP") scheme between the Indonesian government and the private business entity through an infrastructure guarantee fund entity ("Regulation of President No. 78/2010"); and
  2. Regulation of Minister of Finance No. 260/PMK.011/2010, dated 31 December 2010, concerning the implementation guidance of infrastructure guarantee in PPPs ("Regulation of Minister of Finance No. 260/2010").

IIGF was incorporated on 30 December 2009 by the Indonesian government mainly to provide infrastructure guarantees under the PPP scheme and support the development of infrastructure projects in Indonesia.

Following the issuance of the above regulations, IIGF is expected to perform a greater role in improving the creditworthiness and quality of PPP infrastructure related projects by establishing clear appraisal guidelines and a framework for seeking a claim under the guarantee, improving the governance and implementation of guarantee provisions, and facilitating increased deal flow for the principal of the project (e.g. local ministries or regional governments) ("Principal") by providing guarantees to well structured PPPs and protecting government contingent liabilities vis-à-vis such guarantees.

This article discusses the infrastructure guarantee as regulated in Regulation of President No. 78/2010 and Regulation of Minister of Finance No. 260/2010.

Infrastructure guarantees

The guarantors

The PPP infrastructure guarantee may be granted either by (1) IIGF in its sole capacity, or (2) jointly by IIGF and the Indonesian government as represented by Minister of Finance ("Government").

The infrastructure guarantee granted by IIGF may include any and all types of infrastructure risks in a PPP. However, should IIGF consider it necessary that such infrastructure risks shall also be jointly covered by the Government, IIGF and the Government may jointly grant the infrastructure guarantee, pursuant to a clear allocation of such risks between the PPP and the Government. The maximum liability of IIGF and/or the Government under the infrastructure guarantee shall be subject to the total financial liability of the Principal under the relevant infrastructure project.

With reference to the Regulation of Minister of Finance No. 260/2010, IIGF is advised to promptly consider the grant of the infrastructure guarantee upon receiving a submission request from any Principal involved with a new infrastructure project. To accelerate the grant of the infrastructure guarantee, IIGF is advised to either have greater cooperation with multilateral finance institutions or any other party which has the same objectives with IIGF or to increase the Indonesian government's capital in IIGF pursuant to the mechanism of state revenues and expenditure budget (Anggaran Pendapatan dan Belanja Negara). As of 17 January 2011, IIGF has a total capital in amount of Rp. 2.000.000.000.000 (two trillion Rupiah).

Procedure to seek the grant of the infrastructure guarantee

To control and manage finance risks involving the state government, the grant of an infrastructure guarantee shall be only be processed by IIGF where IIGF is the sole authorised party to consider a Principal's recommendation of infrastructure guarantee. The Government itself may not grant infrastructure guarantee if such recommendations are not submitted to IIGF first.

Investors will need to note the following procedures in seeking to obtain an infrastructure guarantee from IIGF:

  1. The Principal shall first submit a recommendation for IIGF to grant an infrastructure guarantee in respect of the PPP.
  2. IIGF shall evaluate the recommendation: the recommendation by the Principal is likely to be accepted upon meeting the following conditions:
    1. the recommendation has been made and submitted to IIGF in accordance with the procedures as set out in Regulation of President No. 78/2010 and Regulation of Minister of Finance No. 260/2010. Such recommendation shall at least contain:
      1. complete description of the risk distribution plan in compliance with the risk allocation mutually agreed by the Principal and the relevant business entities to be set forth in the cooperation agreement;
      2. complete description of the government support to be provided to the PPP, if any;
      3. the proposed scope of guarantee that consists of the proposed type of the infrastructure risks to be guaranteed;
      4. the proposed percentage of the financial liability of the Principal to be guaranteed; and
      5. the proposed guarantee period such as during the whole or part of the preparation period of the PPP, during the whole or part of the construction period of the PPP and/or during the whole or part of the operational period of the PPP;
    2. the recommendation shall be attached at least with the risk matrix of the PPP; the draft cooperation agreement; and the financial projection of the PPP;
    3. the PPP has fulfilled the technical and financial qualifications of the relevant infrastructure project;
    4. the draft cooperation agreement as attached to the recommendation has contained the general requirements as set out in the section below; and
    5. the value of the proposed scope of guarantee does not result in IIGF exceeding its capital adequacy. If the recommendation is not met with this, IIGF may forward the recommendation to the Minister of Finance for further consideration.
  3. Evaluation results by IIGF is notified to the Principal and the private business entity.
  4. The letter of intent to grant the infrastructure guarantee is prepared and granted.
  5. The cooperation agreement between the Principal and the relevant business entity is prepared, negotiated and signed.
  6. The infrastructure guarantee agreement either by (a) IIGF or (b) IIGF and the Government is prepared, negotiated and signed.

General Requirements

The cooperation agreement to be entered into between the Principal and the relevant business entity shall at least provide for the following:

  1. the distribution of the infrastructure risks in accordance with the risk allocation scheme;
  2. relevant mitigating efforts from both contracting parties to prevent the occurrence of foreseeable risks and to reduce the impact of such risk in the event such risks occur;
  3. setting out the total financial liability of the Principal or the calculation method to determine the amount of the financial liability of the Principal should there be no fixed sum determined as of the date of the cooperation agreement;
  4. sufficient period for the Principal to fulfil its financial liability, including any grace periods;
  5. procedure to reasonably determine whether the Principal is able to fulfill its financial liability during the term of the cooperation agreement;
  6. dispute mechanics to settle any disputes which may arise between the Principal and the relevant business entities in relation to the performance of the financial liability of the Principal. The dispute is prioritised to be settled through dispute settlement body and/or arbitration body; and
  7. Indonesian law shall be the governing law.

The Principal shall also:

  1. issue an official statement letter addressed to IIGF acknowledging the legality of the cooperation agreement with the relevant business entities; and;
  2. issue a written commitment to IIGF that it will:
    1. give its best efforts to control, manage or prevent, and reduce any impacts of any infrastructure risks which are allocated to it under the cooperation agreement within the period of the infrastructure guarantee; and
    2. fulfil any rights of recourse as regulated in the agreement with IIGF.

Procedure to file a claim for the infrastructure guarantee

The guaranteed party under the infrastructure guarantee agreement may submit a claim to IIGF where:

  1. the guaranteed party has received a written notice from IIGF that the Principal has confirmed that the Principal is unable to meet its financial liability; or
  2. the Principal has failed to settle invoiced payments as submitted by the guaranteed party to the Principal, within such payment timelines as provided for in the cooperation agreement.

IIGF shall verify such claims and ensure that:

  1. there is consistency between the submitted claim and the scope of guarantee as set out under the infrastructure guarantee agreement; and
  2. there is no dispute between the Principal and the guaranteed party on the amount to be paid.

Where such claims have been duly verified and valid, IIGF shall be obliged to perform its payment obligations in accordance with the terms of the infrastructure guarantee agreement to the guaranteed party. The infrastructure guarantee agreement shall set out the specific terms and conditions of claims under the infrastructure guarantee.

Conclusion

Following the issuance of the Regulation of President No. 78/2010 and the Regulation of Minister of Finance No. 260/2010, IIGF is expected to play a greater role towards raising the interest of investors to participate in infrastructure projects within Indonesia.

The Regulation of President No. 78/2010 and the Regulation of Minister of Finance No. 260/2010 provide greater confidence to investors of infrastructure projects by regulating the terms and conditions of the recommendation of infrastructure guarantee funds for which IIGF is now able to definitively implement. Potential investors of the Indonesian infrastructure market are invited to further examine these regulations, especially the terms and conditions of the recommendation for the infrastructure guarantee.

However, investors should note that the Regulation of President No. 78/2010 and the Regulation of Minister of Finance No. 260/2010 do not regulate some important issues in detail such as the payment terms by IIGF upon determining a valid claim. Further examination would be necessary following greater commitments of IIGF in granting more infrastructure guarantees under the PPP scheme.