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Public private partnerships in indonesia’s water sector

Public private partnerships in indonesia’s water sector



presented by Bambang Bintoro Sudjito in WATER FINANCING CONFERENCE

presented by Bambang Bintoro Sudjito in WATER FINANCING CONFERENCE
Government of Indonesia and Asian Development Bank
Bandung: 7-9 November 2007



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  • Some infrastructure projects may be undertaken fully by the private sector, such as mobile telephone operations in a country with the necessary legal and regulatory framework for telecommunications. Some other infrastructure projects may not be able to attract private sector participation, such as rural roads. But many infrastructure projects are likely to involve some form of public-private partnership (PPP). Such projects are characterized by high economic returns, but uncertain financial returns, due perhaps to non-commercial risks. They will require a structure that involves public-private risk-sharing. The key challenge in structuring PPP projects is to ensure optimal – not maximum -- risk transfer from the government to the private sector. The basic principle is to allocate risk to the party who is best able to manage it. In PPP, the private sector contributes not only capital, but also technology and management. The expected results from PPP are improvements in the availability, quality and efficiency of service. Efficiency of capital utilization is also expected. PPP is a relatively new technology that needs to be adapted for each sector and each country, and some experimentation is needed. In PPP as in any other modes of infrastructure development, there are only two (2) sources from which infrastructure investment needs can be ultimately funded: 1. consumers (via user changes) 2. taxpayers (via subsidies). Financiers – whether in the private sector or in the development community – can change the requisite time profile of taxes or user charges,but eventually their contributions have to be repaid or remunerated (and if they aren’t, the consequences will generally rebound on consumers or tax payers at some later point). The GMS has already had experience with innovative PPP structures that could attract private sector participation.

Public private partnerships in indonesia’s water sector Public private partnerships in indonesia’s water sector Presentation Transcript

  • Public Private Partnerships in Indonesia’s Water SectorBambang Bintoro SoedjitoSenior PPP Specialist – Bappenas/ADB SIDPlenary Session 4: Sample Programs/Projects that Demonstrate Options andSolutionsWATER FINANCING CONFERENCEGovernment of Indonesia and Asian Development BankBandung: 7-9 November 2007
  • The Role of Infrastructure A continued push for the development of infrastructure is crucial to support an average growth rate of 6.6% annually for the next five years, as expanding infrastructure is essential for sustaining future rapid growth. Moreover, quality infrastructure services are necessary to sustain growth and maintain or improve competitiveness in an increasingly integrated world. And inadequate infrastructure services mean a lower quality of life, despite rising incomes - especially in urban areas.
  • Infrastructure is key to sustainable growth Infrastructure improves productivity and competitiveness, the basis of sustainable economic growth. Good infrastructure means reduced transport time, fast communication, and reliable energy and water supply, Providing easy access to local and global markets and efficient support for private sector investment. Also providing the poor access to basic services. Productivity Competitiveness Good Poverty EconomicInfrastructure Reduction Growth
  • Why Indonesia Needs Private Sector Participation (PSP) in Infrastructure However, the huge investment needs in infrastructure for the next five years, clearly confront us with enormous challenge if we are to sustain development and improve the quality of life and enhance competitiveness. There is an estimated financing gap of 73 to 98.5 billion USD over the next 5 years; The need for increasing private sector participation in infrastructure is inevitable as to some extent the private sector has access to the resources, technologies, and skills that are necessary to deliver infrastructure services.
  • Funding Gap: Leveraging Needs Infrastructure Annual Needs (2005-2010): 22 Billion USD Funding Gap: Average Investment Average Funding needs Needs from donors and private(2005-2010) sector equivalent to:equivalent to 17.80 Billion USD22 Billion USD Average State Budget Allocation (2005-2010) equivalent to Leveraging Needs: 4.2 17.80 / 4.20 = 4.24 USD of Billion Donors & Private sector per USD USD of State Budget Allocation
  • Public Development Expenditures Substantial fiscal space not translating into development expenditures at all levels of government…10%9%8% Public7% Revenues6%5%4%3% Public2% Capital1% Expend.0% 1997 1998 1999 2000 2001 2002 2003 2004 2005 Central Province Kabupaten/Kota Note: all figures in % Central of GDP
  • The Nature of Private Sector Involvement in Infrastructure Involving the private sector infrastructure is much more complex than people originally thought and requires a level of sophistication on the part of government that takes time and experience to develop. In some way, the responsibility on the government to guide the process is even greater than when the system was almost exclusively public. This is because adding a private component to any infrastructure network opens up a whole new range of complicated management and design issues which the government has learned the hard way in the past. Private participation in infrastructure projects invariably involve government at the planning, construction and operating stages. If the particular project is part of a broader public system such as toll road, or a water treatment facility, or an individual electricity generator, then some public utility or authority will expect the new facility to fit comfortably within their existing systems and planning arrangements. There will be pressure to use similar equipment, compatible technology, existing contractors and to maximize value of the public network whether existing or planned. All along there will be a tension as to what exactly the nature of the private sector involvement.
  • Promoting PSP in Infrastructure Two key factors are important in promoting private sector participation in infrastructure : Government and private sector commitment : 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 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 time. Government must establish a well conceived operating framework for the private sector if they are to get good value out of private sector involvement. Such a clear policy framework for private sector involvement could simultaneously tackle the interrelated objectives of:  reducing the risk factors and pricing distortion;  ensuring private providers deliver high quality services efficiently and at reasonable cost;  ensuring projects are approved efficiently, fairly and in timely fashion; and  dealing with important societal concerns about the environment, resettlement, and provision of basic services to the poor.
  • Public Private Partnerships (PPP) can facilitate private participation Country or sector conditions give rise to risks that the private sector often find difficult to manage. Public-private partnership (PPP) provides a solution to managing risks. In PPP, the public and private sectors collaborate to combine in partnership their strengths and capabilities, and agree on a sensible allocation of risks between them. Risk is assigned to the partner best able to manage it.The private sector has the capacity to deal with commercial risks, but needs relief from noncommercial risks that are beyond its control. In PPP, the objective is to optimize, not maximize, the assignment of risk to the private partner in order to strike a viable risk-reward balance
  • Perpres 67/2005: A Cross-sector PPP Regulatory Framework A cross-sector regulatory framework on PPP in Infrastructure Provision -- Perpres 67/2005 -- has been issued in November 2005; It emphasizes the ‘partnership’ aspect in a public-private partnerships (PPP) venture - the overriding principle is that the private investor is entitled to profit from the venture; It sets the ‘rules of the game’ for PSP according to best practice; and The Perpres has four main objectives, i.e.:  to provide a credible regulatory framework;  to ensure clarity and predictability of the rules of the game for infrastructure investment;  to promote sustainable infrastructure provision; and  to ensure accountable, competitive, fair and transparent PPP procurement.
  • Perpres 67/2005: A Cross-sector PPP Regulatory FrameworkPerpres 67/2005 has important features, namely:3) the general principles of partnership (mutual needs, mutual support and mutual profitability);4) the importance of government due diligence (in preparing the social cost-benefit analysis, capital cost scrutiny, environmental study, and choice of PPP modalities);5) commercial issues, including tariff setting and adjustment, risk management, and government support;6) fair, transparent, competitive and accountable procurement of the PPP concessionaire; and7) the provision on government financial support.
  • The Scope of Infrastructure transportation infrastructure , covering ports at sea, rivers or lakes, airports, railway networks and railway stations; road infrastructure , covering toll highways and toll bridges; water infrastructure , covering channels for the flow of fresh water; drinking water infrastructure which covers the development of fresh water extraction, transmission network, drinking water processing installation; waste water infrastructure which covers installation of waste water processing installation, gathering network and main network; and waste facilities which cover transportation and landfills for disposal; telecommunications infrastructure , covering telecommunications networks; electric power infrastructure , covering power plants, transmission or distribution of electric power; and natural oil and gas infrastructure covering processing, stocking, transportation, transmission or distribution of natural oil and gas.
  • The Prospect of PPP Projects in Water Sector in IndonesiaStatus & Performance in Water Supply and Sanitation (WSS) 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 unregulated small scale private providers account for the balance; Reluctant to increase tariffs and poor efficiency has constrained PDAM service coverage and quality.Problems – To ensure availability and sustainability of bulk water supply due to declining water reserves; – As the nature of water supply provision is local, the investment size tend to be small. Government encourages regionalization (inter-local governments cooperation) approach for the provision of water supply; – Tariff setting and its adjustments need to take into account the affordability and social aspect of the consumers.Potential Risks – Business sustainability depends primarily on the supply of bulk water; – Process of tariff setting and its long-term adjustment.
  • The Location of Prospective PPP Projects in Water Supply LIST OF OPPORTUNITIES OF INVESMENT IN INDONESIA INFRASTRUCTURE PROJECT 2. Dumai Water Supply 22. Banjarmasin Bulk Treated Water Supply 1. Duri Water Supply (Kab. Bengkalis) 23. Samarinda Bulk Treated Water Supply 3. Tanjung Pinang Water Supply 24. Menado Bulk Treated Water Supply4. Cileduk Water Supply (Tangerang City)5. Kecamatan Benda & Cengkareng Water Supply ( Tangerang City )6. Ciparen Tangerang Water Supply7. Sepatan Water Supply (Kab. Tangerang)8. Pondok Gede Water Supply (Kota Bekasi)9. Cikarang Water Supply (Kabupaten Bekasi) 17. Surakarta-Sukoharjo Bulk Treated Water Supply 20. Karang Pilang IV Bulk Treated Water Supply10. Jatinangor Water Supply (Kab. Sumedang) 21. Umbulan Bulk Water Supply 18. Greater Yogyakarta - Magelang Water Supply11. Cirebon Bulk & Water Supply 19. Menganti Water Supply (Kab. Gresik) 12. Uprating WTP. Kali Garang Semarang 13. Semarang Raw Water Supply 14. East Semarang New Water Supply 15. Bulk Treated Water Supply to Kabupaten & City of Semarang 16. Tegal Water Supply
  • Evaluation of PPP Projects in Water Supply Out of 35 PPP Projects in Water Supply offered at IIS 2005 (including 3 model projects announced at IICE 2006) : – 3 in operation (Samarinda, Yogyakarta, Banjarmasin); – 1 in the process of bid evaluation (Tangerang); – 31 under preparation (feasibility study, technical and financial review, etc.) Majority of local governments have yet to develop Master-plans for the water supply provision system and its integration with water resource development plans, including the business plan, to ensure clarity and predictability of its development policy. The proposed projects are in many cases not supported with a proper due diligence resulting in non-viable and non-bankable projects. Most PDAMs are unhealthy financially due to their huge debt burden and deficit financial account resulting in lower capacity and credibility to obtain new borrowings.
  • Evaluation of PPP Projects in Water Supply Scarcity and low quality of raw water require higher investment cost for water treatment, coupled with low consumer’s ability to pay are the reasons why most of water supply projects are not commercially viable. Relevant stakeholders (LGs, DPRDs and PDAMs) have very limited understanding on the PPP concept (risk allocation, government support, tariff adjustment, etc.) creating public resistance to private investment in delivering infrastructure services. Lack of policy, regulatory and institutional frameworks for developing and implementing PPP projects in water supply are key factors constraining local governments in promoting and realizing PPP projects.
  • The Way ForwardGovernment needs to provide funding or risk bearingsupport to make PPPs bankable;PPP demands strong planning and central coordination;PPP requires well-prepared projects;Transparent competitive bidding is best practice;Lenders require adequate protection;Pro-active public communication and stakeholderconsultation help ensure success.
  • Thank You!For more information:Contact Bambang Bintoro Soedjitobbintoros@yahoo.com