Attaining Value from Private Investment in Power Generation Projects in Indonesia: An Empirical Study

Abstract

Provision of electrical infrastructure in emerging economies, like Indonesia, is very challenging post the 2008 Global Financial Crisis (GFC). Constrained lending via international finance markets has led to a reduction in the number of investors and shorter lending periods for public private partnerships (PPPs) projects. While domestic Indonesian investors and banks have begun to be involved in such projects, the scale of budgetary requirements for the delivery of power plant projects generally exceeds the financial capacity of both the public sector and local financial markets. This paper presents the findings of a Delphi style survey and proposes implementation strategies that may overcome current investment constraints and still attain Value for Money (VfM) from the delivery of Indonesian PPP power projects post the 2008 GFC. Initially, qualitative data was acquired from two industry seminars to establish the context of Indonesian PPP power projects. This was followed by two rounds of the Delphi technique to develop consensus among a panel of industry experts about realizing VfM from Indonesian PPPs. The results show that (i) export credit agencies from regional Asian countries have increased their roles to support PPP power projects (ii) structural deficiencies of local power industry manufacturing has created barriers for greater roles of local finances in the projects (iii) enhanced contractual risk allocation between the public and private sector can potentially improve project outcomes; these involve greater transparency and accountability of project guarantee processes. This study adapted key implementation features for attaining VfM into short, medium, and long term development strategies that are suitable for Indonesia. It has been concluded that a sustainable energy system can be realized when there is alignment of interests between the government, project sponsors, fuel suppliers, and lenders.

Preface

“…In addition to this, Atmo, Duffield and Wilson (2015) suggest that whilst local investment from private entities may substantially contribute to some of the smaller projects, the larger infrastructure projects that are vital for national social and economic growth require a considerable amount of investment that may only be provided by foreign parties. Moreover, the current system for risk allocation and lack of transparency in the system have managed to deter foreign investors from Public Private Partnership (PPP) schemes in Indonesia (Atmo et al 2015;Ray and Ing 2016;Olken 2007;Abednego and Ogunlana 2006). Risks of extensive delays in the project's implementation timelines and the government's tendency to be "stronger on announcements than implementation" have led to the cautious response from foreign markets despite the various reforms in regulation that have been brought upon by the Jokowi government (Ray and Ing 2016, p. 2;Manning 2015).…”

“…Other notable regulatory reforms include the establishment of the Indonesian Infrastructure Guarantee Fund (IIGF), supported by the World Bank, that provides a government guarantee for political and legal risks pertaining to the project (Ministry of Finance 2012) and (Atmo et al 2015). Not only does this increase the investor's confidence in the system by increasing the government's accountability towards the project; the establishment of the IIGF also encourages transparency in the system, hence increasing the chances of the project's successful implementation (Atmo et al 2015). In addition to this, PPP institutions have also been set up and clear guidelines on the PPP implementation process have been established to maximise the benefits for potential future PPP partnerships (Indra 2011).…”

“…Private investment is necessary to overcome the financial obstacles in procurement of infrastructure projects in Indonesia (Duffield et al unpublished). Whilst PPP arrangements are a viable option for attracting private investment in infrastructure projects (Pangeran et al 2012;Atmo et al 2015), there are several risks associated with such schemes, especially when international parties are involved (Pangeran et al 2012). The large capital investment requirements and the lack of flexibility in contractual agreements increase the level of risk involved with the project, making effective risk management and a clear system of risk allocation critical factors for the overall project success (Dixon, Pottinger and Jordan 2005;Hardcastle, Edwards, Akintoye and Li 2005;Pangeran et al 2012;Abednego and Ogunlana 2006).…”

“…Additionally, it must be acknowledged that risk management must continue from the project planning, through to the execution and construction stages, as stated by Pangeran et al (2012). The exposure to risk for the private entity throughout the project's lifetime has been addressed by the Presidential Regulation 67/2005 that was later amended by Presidential Regulation 13/2010, Presidential Regulation 78/2010(Indra 2011Atmo et al 2015;Ministry of Finance 2012). These address the provision of government support and guarantees to the private entity engaged in a PPP agreement to effectively reduce the risks that the investors may be exposed to throughout the planning and implementation stages of the project (Ministry of Finance 2012).…”

The Choice Of Infrastructure Project Financing Strategies: A Case Of A Seaport In Indonesia

“…Nevertheless, there was no significant cost difference between the two procurement approaches. In order to resolve the problems with the budgetary constraints and still maximize value for money, G. Atmo and Duffield propose implementation strategies based on their study on the provision of Indonesian PPP power projects post the 2008 global financial crisis [3]. The study highlighted the importance of the regional export credit agencies to support Indonesian PPP power projects and the development of local manufacturing capabilities to reduce the projects' currency exchange risk.…”