Public Private Partnerships in Public Private Partnerships in Indonesia’s Water SectorIndonesia’s Water Sector

Bambang Bintoro SoedjitoBambang Bintoro SoedjitoSenior PPP Specialist – Bappenas/ADB SIDSenior PPP Specialist – Bappenas/ADB SID

Plenary Session 4: Sample Programs/Projects that Demonstrate Options and Plenary Session 4: Sample Programs/Projects that Demonstrate Options and SolutionsSolutions

WATER FINANCING CONFERENCEWATER FINANCING CONFERENCEGovernment of Indonesia and Asian Development BankGovernment of Indonesia and Asian Development BankBandung: 7-9 November 2007Bandung: 7-9 November 2007

The Role of InfrastructureThe Role of Infrastructure

A continued push for the development of A continued push for the development of infrastructure is crucial to support an average growth infrastructure is crucial to support an average growth rate of 6.6% annually for the next five years, as rate of 6.6% annually for the next five years, as expanding infrastructure is essential for sustaining expanding infrastructure is essential for sustaining future rapid growth. future rapid growth.

Moreover, quality infrastructure services are Moreover, quality infrastructure services are necessary to sustain growth and maintain or improve necessary to sustain growth and maintain or improve competitiveness in an increasingly integrated world. competitiveness in an increasingly integrated world. And inadequate infrastructure services mean a lower And inadequate infrastructure services mean a lower quality of life, despite rising incomes - especially in quality of life, despite rising incomes - especially in urban areas.urban areas.

Infrastructure is key to sustainable Infrastructure is key to sustainable growthgrowth

Infrastructure improves productivity and competitiveness, Infrastructure improves productivity and competitiveness, the basis of sustainable economic growth.the basis of sustainable economic growth.

Good infrastructure means reduced transport time, fast Good infrastructure means reduced transport time, fast communication, and reliable energy and water supply,communication, and reliable energy and water supply,

Providing easy access to local and global markets and efficient support Providing easy access to local and global markets and efficient support for private sector investment.for private sector investment.Also providing the poor access to basic services.Also providing the poor access to basic services.

GoodGoodInfrastructureInfrastructure

CompetitivenessCompetitiveness

Economic Economic GrowthGrowth

Poverty Poverty ReductionReduction

ProductivityProductivity

Why Indonesia Needs Private Sector Why Indonesia Needs Private Sector Participation (PSP) in InfrastructureParticipation (PSP) in Infrastructure

However, the huge investment needs in infrastructure However, the huge investment needs in infrastructure for the next five years, clearly confront us with for the next five years, clearly confront us with enormous challenge if we are to sustain development enormous challenge if we are to sustain development and improve the quality of life and enhance and improve the quality of life and enhance competitiveness. There is an estimated financing gap competitiveness. There is an estimated financing gap of 73 to 98.5 billion USD over the next 5 years;of 73 to 98.5 billion USD over the next 5 years;

The need for increasing private sector participation in The need for increasing private sector participation in infrastructure is inevitable as to some extent the infrastructure is inevitable as to some extent the private sector has access to the resources, private sector has access to the resources, technologies, and skills that are necessary to deliver technologies, and skills that are necessary to deliver infrastructure services.infrastructure services.

Funding Gap: Leveraging NeedsFunding Gap: Leveraging Needs

Infrastructure Annual Needs

(2005-2010): 22 Billion USD

Funding Gap:

Average Funding needs from donors and

private sector equivalent to:

17.80 Billion USD

Leveraging Needs:

17.80 / 4.20 = 4.24 USD of Donors & Private sector per

USD of State Budget Allocation

Average State

Budget Allocation

(2005-2010) equivalent

to

4.2 Billion USD

Average Investment

Needs (2005-2010) equivalent

to

22 Billion USD

Public Development ExpendituresPublic Development Expenditures

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

1997 1998 1999 2000 2001 2002 2003 2004 2005

CentralCentral Province Kabupaten/Kota

Public Capital Expend.

Public Revenues

Substantial fiscal space not translating into development expenditures at all levels of government…

Note: all figures in % of GDP

The Nature of Private Sector The Nature of Private Sector Involvement in InfrastructureInvolvement in Infrastructure

Involving the private sector infrastructure is much more complex than Involving the private sector infrastructure is much more complex than people originally thought and requires a level of sophistication on the people originally thought and requires a level of sophistication on the part of government that takes time and experience to develop. part of government that takes time and experience to develop.

In some way, the responsibility on the government to guide the In some way, the responsibility on the government to guide the process is even greater than when the system was almost exclusively process is even greater than when the system was almost exclusively public. This is because adding a private component to any public. This is because adding a private component to any infrastructure network opens up a whole new range of complicated infrastructure network opens up a whole new range of complicated management and design issues which the government has learned the management and design issues which the government has learned the hard way in the past.hard way in the past.

Private participation in infrastructure projects invariably involve Private participation in infrastructure projects invariably involve government at the planning, construction and operating stages.government at the planning, construction and operating stages.

If the particular project is part of a broader public system such as toll If the particular project is part of a broader public system such as toll road, or a water treatment facility, or an individual electricity road, or a water treatment facility, or an individual electricity generator, then some public utility or authority will expect the new generator, then some public utility or authority will expect the new facility to fit comfortably within their existing systems and planning facility to fit comfortably within their existing systems and planning arrangements. arrangements.

There will be pressure to use similar equipment, compatible There will be pressure to use similar equipment, compatible technology, existing contractors and to maximize value of the public technology, existing contractors and to maximize value of the public network whether existing or planned. All along there will be a tension network whether existing or planned. All along there will be a tension as to what exactly the nature of the private sector involvement.as to what exactly the nature of the private sector involvement.

Promoting PSP in InfrastructurePromoting PSP in Infrastructure

Two key factors are important in promoting private sector Two key factors are important in promoting private sector participation in infrastructureparticipation in infrastructure::

Government and private sector commitmentGovernment and private sector commitment: :

Key decision makers in the public sector must be convinced that private provision of Key decision makers in the public sector must be convinced that private provision of infrastructure makes sense and be willing to follow through on that commitment, while the infrastructure makes sense and be willing to follow through on that commitment, while the private sector must be willing to engage in a long-term commitment to the economy since private sector must be willing to engage in a long-term commitment to the economy since infrastructure investment cannot be expected to yield lucrative returns in a short period of infrastructure investment cannot be expected to yield lucrative returns in a short period of time.time.

Government must establish a well conceived operating framework for Government must establish a well conceived operating framework for the private sector if they are to get good value out of private sector the private sector if they are to get good value out of private sector involvement. Such a clear policy framework for private sector involvement. Such a clear policy framework for private sector involvement could simultaneously tackle the interrelated objectives of:involvement could simultaneously tackle the interrelated objectives of:

reducing the risk factors and pricing distortion;reducing the risk factors and pricing distortion; ensuring private providers deliver high quality services efficiently and at reasonable cost;ensuring private providers deliver high quality services efficiently and at reasonable cost; ensuring projects are approved efficiently, fairly and in timely fashion; andensuring projects are approved efficiently, fairly and in timely fashion; and dealing with important societal concerns about the environment, resettlement, and dealing with important societal concerns about the environment, resettlement, and

provision provision of basic services to the poor.of basic services to the poor.

Public Private Partnerships (PPP) Public Private Partnerships (PPP) can facilitate private participationcan facilitate private participation

Country or sector conditions give rise to risks that Country or sector conditions give rise to risks that the private sector often find difficult to manage.the private sector often find difficult to manage.Public-private partnership (PPP) provides a solution Public-private partnership (PPP) provides a solution to managing risks.to managing risks.In PPP, the public and private sectors collaborate to In PPP, the public and private sectors collaborate to combine in partnership their strengths and combine in partnership their strengths and capabilities, and agree on capabilities, and agree on a sensible allocation of a sensible allocation of risksrisks between them. between them. Risk is assigned to the partner best able to manage Risk is assigned to the partner best able to manage it. it.

In PPP, the objective is to optimize, not maximize, In PPP, the objective is to optimize, not maximize, the assignment of risk to the private partner in the assignment of risk to the private partner in

order to strike a viable risk-reward balanceorder to strike a viable risk-reward balance

The private sector has the capacity to deal with commercial The private sector has the capacity to deal with commercial risks, but needs relief from noncommercial risks that are risks, but needs relief from noncommercial risks that are

beyond its control. beyond its control.

Perpres 67/2005: A Cross-sector PPP Perpres 67/2005: A Cross-sector PPP Regulatory FrameworkRegulatory Framework

A cross-sector regulatory framework on PPP in A cross-sector regulatory framework on PPP in Infrastructure Provision -- Perpres 67/2005 -- has been Infrastructure Provision -- Perpres 67/2005 -- has been issued in November 2005;issued in November 2005;It emphasizes the ‘partnership’ aspect in a public-private It emphasizes the ‘partnership’ aspect in a public-private partnerships (PPP) venture - the overriding principle is partnerships (PPP) venture - the overriding principle is that the private investor is entitled to profit from the that the private investor is entitled to profit from the venture;venture;It sets the ‘rules of the game’ for PSP according to best It sets the ‘rules of the game’ for PSP according to best practice; andpractice; andThe Perpres has four main objectives, i.e.:The Perpres has four main objectives, i.e.:

to provide a credible regulatory framework;to provide a credible regulatory framework; to ensure clarity and predictability of the rules of the game to ensure clarity and predictability of the rules of the game

forfor infrastructure investment;infrastructure investment; to promote sustainable infrastructure provision; andto promote sustainable infrastructure provision; and to ensure accountable, competitive, fair and transparent PPPto ensure accountable, competitive, fair and transparent PPP procurement.procurement.

Perpres 67/2005: A Cross-sector PPP Perpres 67/2005: A Cross-sector PPP Regulatory FrameworkRegulatory Framework

Perpres 67/2005 has important features, Perpres 67/2005 has important features,

namely:namely:

1)1) the general principles of partnership (mutual needs, the general principles of partnership (mutual needs, mutual support and mutual profitability); mutual support and mutual profitability);

2)2) the importance of government due diligence (in preparing the importance of government due diligence (in preparing the social cost-benefit analysis, capital cost scrutiny, the social cost-benefit analysis, capital cost scrutiny, environmental study, and choice of PPP modalities); environmental study, and choice of PPP modalities);

3)3) commercial issues, including tariff setting and adjustment, commercial issues, including tariff setting and adjustment, risk management, and government support;risk management, and government support;

4)4) fair, transparent, competitive and accountable fair, transparent, competitive and accountable procurement of the PPP concessionaire; and procurement of the PPP concessionaire; and

5)5) the provision on government financial support.the provision on government financial support.

The Scope of InfrastructureThe Scope of Infrastructure

a.a. transportation infrastructuretransportation infrastructure, covering ports at sea, rivers or , covering ports at sea, rivers or lakes, airports, railway networks and railway stations; lakes, airports, railway networks and railway stations;

b.b. road infrastructureroad infrastructure, covering toll highways and toll bridges;, covering toll highways and toll bridges;c.c. water infrastructurewater infrastructure, covering channels for the flow of fresh , covering channels for the flow of fresh

water;water;d.d. drinking water infrastructuredrinking water infrastructure which covers the development which covers the development

of fresh water extraction, transmission network, drinking water of fresh water extraction, transmission network, drinking water processing installation; processing installation;

e.e. waste water infrastructurewaste water infrastructure which covers installation of waste which covers installation of waste water processing installation, gathering network and main water processing installation, gathering network and main network; and waste facilities which cover transportation and network; and waste facilities which cover transportation and landfills for disposal;landfills for disposal;

f.f. telecommunications infrastructuretelecommunications infrastructure, covering , covering telecommunications networks; telecommunications networks;

g.g. electric power infrastructureelectric power infrastructure, covering power plants, , covering power plants, transmission or distribution of electric power; and transmission or distribution of electric power; and

h.h. natural oil and gas infrastructurenatural oil and gas infrastructure covering processing, covering processing, stocking, transportation, transmission or distribution of natural oil stocking, transportation, transmission or distribution of natural oil and gas. and gas.

The Prospect of PPP Projects in The Prospect of PPP Projects in Water Sector in IndonesiaWater Sector in Indonesia

Status & Performance in Water Supply and Sanitation (WSS)Status & Performance in Water Supply and Sanitation (WSS) Lags behind most countries in the region for WSS provision (ranked 7 out of 11);Lags behind most countries in the region for WSS provision (ranked 7 out of 11); 300 local utilities (PDAMs) cover only 16% of the population - self provision and 300 local utilities (PDAMs) cover only 16% of the population - self provision and unregulated small scale private providers account for the balance;unregulated small scale private providers account for the balance; Reluctant to increase tariffs and poor efficiency has constrained PDAM service Reluctant to increase tariffs and poor efficiency has constrained PDAM service coverage and quality.coverage and quality.

ProblemsProblems– To ensure availability and sustainability of bulk water supply due to declining To ensure availability and sustainability of bulk water supply due to declining

water reserves;water reserves;– As the nature of water supply provision is local, the investment size tend to be As the nature of water supply provision is local, the investment size tend to be

small. Government encourages regionalization (inter-local governments small. Government encourages regionalization (inter-local governments cooperation) approach for the provision of water supply;cooperation) approach for the provision of water supply;

– Tariff setting and its adjustments need to take into account the affordability and Tariff setting and its adjustments need to take into account the affordability and social aspect of the consumers.social aspect of the consumers.

Potential RisksPotential Risks

– Business sustainability depends primarily on the supply of bulk water;Business sustainability depends primarily on the supply of bulk water;– Process of tariff setting and its long-term adjustmentProcess of tariff setting and its long-term adjustment..

LIST OF OPPORTUNITIES OF INVESMENT

4. Cileduk Water Supply (Tangerang City)

5. Kecamatan Benda & Cengkareng WaterSupply ( Tangerang City )

6. Ciparen Tangerang Water Supply

7. Sepatan Water Supply (Kab. Tangerang)

8. Pondok Gede Water Supply (Kota Bekasi)

9. Cikarang Water Supply (Kabupaten Bekasi)

10. Jatinangor Water Supply (Kab. Sumedang)

11. Cirebon Bulk & Water Supply

12. Uprating WTP. Kali Garang Semarang

13. Semarang Raw Water Supply14. East Semarang New Water Supply

15. Bulk Treated Water Supply to Kabupaten& City of Semarang

16. Tegal Water Supply

17. Surakarta-Sukoharjo Bulk Treated Water Supply

18. Greater Yogyakarta - Magelang Water Supply

19. Menganti Water Supply (Kab. Gresik)

20. Karang Pilang IV Bulk Treated Water Supply

21. Umbulan Bulk Water Supply

22. Banjarmasin Bulk Treated Water Supply

23. Samarinda Bulk Treated Water Supply

24. Menado Bulk Treated Water Supply

1. Duri Water Supply (Kab. Bengkalis)

2. Dumai Water Supply

3. Tanjung Pinang Water Supply

IN INDONESIA INFRASTRUCTURE PROJECT

The Location of Prospective PPP The Location of Prospective PPP Projects in Water SupplyProjects in Water Supply

Evaluation of PPP Projects in Evaluation of PPP Projects in Water SupplyWater Supply

Out of 35 PPP Projects in Water Supply offered at IIS 2005 Out of 35 PPP Projects in Water Supply offered at IIS 2005 (including 3 model projects announced at IICE 2006) :(including 3 model projects announced at IICE 2006) :

– 3 in operation (Samarinda, Yogyakarta, Banjarmasin);3 in operation (Samarinda, Yogyakarta, Banjarmasin);– 1 in the process of bid evaluation (Tangerang);1 in the process of bid evaluation (Tangerang);– 31 under preparation (feasibility study, technical and financial review, 31 under preparation (feasibility study, technical and financial review,

etc.)etc.)

Majority of local governments have yet to develop Master-Majority of local governments have yet to develop Master-plans for the water supply provision system and its plans for the water supply provision system and its integration with water resource development plans, integration with water resource development plans, including the business planincluding the business plan, , to ensure clarity and to ensure clarity and predictability of its development policy.predictability of its development policy.The proposed projects are in many cases not supported with The proposed projects are in many cases not supported with a proper due diligence resulting in non-viable and non-a proper due diligence resulting in non-viable and non-bankable projects.bankable projects.Most PDAMs are unhealthy financially due to their huge debt Most PDAMs are unhealthy financially due to their huge debt burden and deficit financial account resulting in lower burden and deficit financial account resulting in lower capacity and credibility to obtain new borrowings.capacity and credibility to obtain new borrowings.

Evaluation of PPP Projects in Evaluation of PPP Projects in Water SupplyWater Supply

Scarcity and low quality of raw water require higher Scarcity and low quality of raw water require higher investment cost for water treatment, coupled with low investment cost for water treatment, coupled with low consumer’s ability to pay are the reasons why most of consumer’s ability to pay are the reasons why most of water supply projects are not commercially viable.water supply projects are not commercially viable.

Relevant stakeholders (LGs, DPRDs and PDAMs) have Relevant stakeholders (LGs, DPRDs and PDAMs) have very limited understanding on the PPP concept (risk very limited understanding on the PPP concept (risk allocation, government support, tariff adjustment, allocation, government support, tariff adjustment, etc.) creating public resistance to private investment etc.) creating public resistance to private investment in delivering infrastructure services.in delivering infrastructure services.

Lack of policy, regulatory and institutional frameworks Lack of policy, regulatory and institutional frameworks for developing and implementing PPP projects in water for developing and implementing PPP projects in water supply are key factors constraining local governments supply are key factors constraining local governments in promoting and realizing PPP projects. in promoting and realizing PPP projects.

The Way ForwardThe Way Forward

Government needs to provide funding or risk bearing Government needs to provide funding or risk bearing support to make PPPs bankable;support to make PPPs bankable;

PPP demands strong planning and central PPP demands strong planning and central coordination;coordination;

PPP requires well-prepared projects;PPP requires well-prepared projects;

Transparent competitive bidding is best practice;Transparent competitive bidding is best practice;

Lenders require adequate protection;Lenders require adequate protection;

Pro-active public communication and stakeholder Pro-active public communication and stakeholder consultation help ensure success.consultation help ensure success.

Thank You!Thank You!

For more information:For more information:

Contact Bambang Bintoro SoedjitoContact Bambang Bintoro Soedjitobbintoros@yahoo.com