URBAN SECTOR

Final Sector Review Report

Directorate of Government Support and Infrastructure Financing Management
Contents

2.1.1 Planning Overview.............................................................................................................................................. 2

2.1.2 Urban Infrastructure Sector Planning Considerations.......................................................................................... 3

2.3.1 Project Models & Case Studies .......................................................................................................................... 8

3.3.1 Regulatory Aspects on Public Housing ............................................................................................................. 27

3.3.2 Regulatory Aspects on General Market ............................................................................................................ 32

3.3.3 Regulatory Aspects on Industrial Estate ........................................................................................................... 34

3.3.4 Regulatory Aspects on Urban Regeneration (i.e. DKI Jakarta TOD) ................................................................. 36

5.1.1 Debt ................................................................................................................................................................. 49

5.1.2 Equity ............................................................................................................................................................... 49

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iii
List of Tables
Table 2-1 suggested risk allocations / risk sharing between project owner and the private operator .................... 19
Table 3-1 Urban Infrastructure Regulatory Framework ......................................................................................... 26
Table 3-2 Negative Investment List ....................................................................................................................... 30
Table 3-3 Division of Authority .............................................................................................................................. 32
Table 3-4 Potential KBLI ....................................................................................................................................... 35
Table 3-5 discrepancies of TOD Locations ........................................................................................................... 37
Table 3-6 Urban Infrastructure Policy Landscape ................................................................................................. 38
Table 4-1 Stakeholder Mapping for Urban Infrastructure PPP Projects ................................................................ 40
Table 4-2 Regulatory Framework of Urban Infrastructure ..................................................................................... 47

List of Boxes
Box 2-1 Urban Development Coverage .................................................................................................................. 4
Box 2-2 Case Study: Mandaluyong City Market, Philippines .................................................................................. 9
Box 2-3 Case Study: Shukhobrishti Housing Project, India ................................................................................... 14

List of Figures
Figure 1-1 : Share of Total Investment in Core Infrastructure ................................................................................. 1
Figure 2-1 Spectrum of Housing, per Canada Mortgage and Housing Corporation ................................................ 5
Figure 2-2 Typical functions of a PPP Unit based on global scan, per World Bank. ............................................... 7
Figure 2-3 Typical project structure for Government-land Based Subsidized Housing, per Government of India. 10
Figure 2-4 Typical project structure for Mixed Development Cross-subsidized Housing, per Government of India.
.............................................................................................................................................................................. 11
Figure 2-5 Typical project structure for Annuity Based Subsidized Housing, per Government of India. ................ 11
Figure 2-6 Typical project structure for Annuity cum Capital Grant based Subsidized Housing, per Government of
India. ..................................................................................................................................................................... 12
Figure 2-7 Typical project structure for Direct Relationship Ownership Housing, per Government of India. ......... 13
Figure 2-8 Typical project structure for Direct Relationship Rental Housing, per Government of India. ................ 13
Figure 2-9 Comparator of the six PPP models for affordable housing, per Government of India. ......................... 14
Figure 2-10 Public Sector Responsibilities ............................................................................................................ 15
Figure 2-11 Public Sector Responsibilities ............................................................................................................ 17
Figure 3-1 Division of Government Roles for Public Housing Development ......................................................... 27
Figure 3-2 PPP Project Structure for public housing PPP ..................................................................................... 29
Figure 3-3 PPP Project Structure .......................................................................................................................... 33
Figure 3-4 PPP Project Structure of Industrial Estate ........................................................................................... 35
Figure 4-1 Institutional Arrangements on Public Housing Sub-Sector................................................................... 42
Figure 4-2 Institutional Arrangements on General Market Sub-Sector .................................................................. 43
Figure 4-3 Institutional Arrangements on Industrial Estate Sub-Sector ................................................................. 43
Figure 4-4 Stakeholder Assessment ..................................................................................................................... 45
Figure 4-5 PPP Model Types ................................................................................................................................ 46
Figure 5-1 Financial and Contractual Structure of A PPP Transaction .................................................................. 49
Figure 5-2 Key Components That Affect Capital Costs in Urban Infrastructure Development .............................. 50
Figure 5-3 O&M Costs .......................................................................................................................................... 51
Figure 7-1 Prequalification (PQ) Process .............................................................................................................. 57
Figure 7-2 Process of the One-Stage Procurement .............................................................................................. 57
Figure 7-3 Process of Two-Stage Procurement .................................................................................................... 58
Figure 7-4 Opening and Evaluation of Bidding Documents ................................................................................... 58

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List of Terms, Acronyms and Abbreviations

ADB Asian Development Bank

APBD Regional Government Budget / Anggaran Pendapatan dan Belanja Daerah
ASEAN Association of Southeast Asian Nation
BLU Public Service Agency / Badan Layanan Umum
BPHTB Customs for Land and Building Rights / Bea Perolehan Hak Atas Tanah dan Bangunan
BRICS Brazil, Russia, India, China, South Africa
BUMN State Owned Enterprise / Badan Usaha Milik Negara
CAPM Capital Asset Pricing Model
CCM Certified Construction Manager
DEG Deutsche Investitions-fund Entwicklungsgesellschaft mbH
DGSIFM Director of Government Support and Infrastructure Financing Management / Direktorat Pengelolaan
Dukungan Pemerintah dan Pembiayaan Infrastruktur (PDPPI)
EMDE PT Megapolitan Developments Tbk
EPC Engineering, Procurement, and Construction
FTV Financing to Value
GCA Government Contracting Agency / Penanggung Jawab Proyek Kerjasama (PJPK)
IBE Implementing Business Entity
IFC International Finance Corporation
IMF International Monetary Fund
KPPIP Committee for Acceleration of Priority Infrastructure Delivery / Komite Percepatan Penyediaan
Infrastruktur Prioritas (KPPIP)
LKPP Government Goods and Services Policy Agency / Lembaga Kebijakan Pengadaan Barang Jasa
Pemerintah
LMAN State Asset Management Agency / Lembaga Manajemen Aset Negara
LTV Loan to Value
LVC Land Value Capture
MASP Ministry of Agrarian and Spatial Planning
MBR Masyarakat Berpenghasilan Rendah / Low Income Communities
MIGA Multilateral Investment Guarantee Association
MOEF Ministry of Environment & Forestry
MOF Ministry of Finance
MOI Ministry of Industry
MOT Ministry of Trade
MPWH Ministry of Public Works and Housing
NHB/HUDCO National Housing Bank / Housing and Urban Development Corporation Ltd.
OSS Online Single Submission
PDF Project Development Facility
PPAT Pejabat Pembuat Akta Tanah / Land Title Deed
PRGs Partial Risk Guarantees
RDTR Rencana Detail Tata Ruang / Detailed Spatial Planning
RFI Request for Information
RFP Request for Proposal
ROE Return of Equity
RPJMD Rencana Pembangunan Jangka Menengah Daerah / Regional Medium-Term Development Plan
RPJMN Rencana Pembangunan Jangka Menengah Nasional / National Medium-Term Development Plan
RTBL Rencana Tata Bangunan dan Lingkungan / Urban Design Guideline

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RTRW Rencana Tata Ruang Wilayah / General Spatial Plan
RZWP3K Rencana Zonasi Wilayah Pesisir dan Pulau-Pulau Kecil / Zoning Plan for Coastal Areas and Small
Islands
SBUM Subsidi Bantuan Uang Muka / Down Payment Subsidy
SEA Southeast Asia
SMBC Sumitomo Mitsui Banking Corporation
TOD Transit-oriented Development
VAT/PPN Value Added Tax / Pajak Pertambahan Nilai
VFM Value for Money
VGF Viability Gap Fund

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 Introduction and Objectives
This is the Final Sector Review Report on the Urban Infrastructure Sector. The report provides sector specific
analysis and recommendations using international best practice and project benchmark comparators and these
recommendations are outlined for the purposes of strategy and policy development by DGSIFM to enhance its role
as the central PPP Unit at the Ministry of Finance in delivery government support for PPP Infrastructure Projects.

At the same time, the report also annexes rule of thumb measures that can be used at the technical level to guide
the project identification, planning, and preparation of projects in the sector pipeline that is considering to be
developed as PPP projects. Furthermore, detailed iterative working papers are also annexed to guide technical
staff on sector specific considerations that were taken into account in formulating this report. The working papers
are the result of consultations and deliberations in May-June 2019 between MoF technical level practitioners and
PDF administrators, and a consolidation of advisory inputs from national sector advisors, legal regulatory advisors,
environmental and social, financial advisory, and international advisors from Canada. The rule of thumb measures
are annexed as Annexes I-III. The Working Papers for the Urban Infrastructure Sector can be found at the end of
the report.
Figure 1-1 : Share of Total Investment in Core Infrastructure
The need for infrastructure development in major
Indonesian cities is fast-growing. The quantity
and quality of existing infrastructure is far behind
many other middle-income countries in ASEAN
and BRICS (World Bank, 2017). The World Bank
reported that during the period 2005-2015, the
average growth of public capital stock per capita
in Indonesia was lower than in other Asian
countries. The private sector’s share of total
investment in infrastructure during the 2011-2015
was only 9 percent, compared to the period 2006-
2010 when it was 19 percent. In a 2017 report -
IMF Investment and Capital Stock Dataset,
Indonesia’s infrastructure deficit (or “Gap”) was
estimated to be USD 1.5 trillion due to years of Source: Bappenas, 2015
significant underinvestment.

On the other hand, the emerging digital economy has triggered new economic activity in cities. By ‘going digital’,
Indonesia can unleash the next level of economic growth, approximately USD 150 billion in annual economic impact
by 2025 (McKinsey, 2017). Fast-changing technology and communications have also shifted traditional business
and economics to new ones that utilize advanced digital technology, including urban property development. In
Using PPP to advance smart cities, this report depicts the potentiality of utilizing PPPs for smart city projects. From
initiatives aimed at expanding Wi-Fi access to promoting affordable housing, some municipalities abroad are
forging innovative partnerships to improve the quality of life of their residents and as a means of refurbishing and
modernizing aging infrastructure assets. Their experiences show how cities can overcome traditional barriers to
funding and financing smart city projects by demonstrating the potential of new technology to reduce costs, recycle
existing and legacy infrastructure assets, unlock value and bring a critical mass of players together to spur
economic development.

The fiscal gaps and the new digital economy in urban infrastructure creates an attractive opportunity for using PPPs
for urban infrastructure. This can vary from single-purpose facilities infrastructure to larger-scale settlements or
even new township development projects. The emergence of integrated urban infrastructure development and
value capturing development are potential areas for further developing PPPs. This preliminary review discusses
how government policies support urban infrastructure PPP, the current state of urban PPP projects, how to analyze
technical aspects and project cost structure, and includes recommendations for moving forward.

This preliminary review report aims to provide an overview of portions of the urban infrastructure sector which has
potential for development using a PPP methodology. The scope of this report covers urban infrastructure
development in affordable housing, urban renewal, general markets, and area development/industrial estates.
Whereas there is a broad theoretical framework used for urban development that includes all sub-sectors

1
mentioned above, a more in-depth analyses is provided for the affordable housing sector due to its higher level of
complexity.

Basic Theory and International

Best Practice
2.1 Planning
Planning Overview
A central goal of governments across the world is to effectively plan, deliver and manage major long-term
infrastructure projects which in turn deliver essential services for the economy and society to function. The
challenge faced in many jurisdictions, is that important decisions around infrastructure planning (i.e. which projects
to be delivered, which sectors to be prioritized, etc.) are typically made through an incremental, reactive process
that is often driven by political considerations, budget limitations and numerous other factors rather than being
based on a more holistic, long-term approach.
The guidance stated in this section - sourced from international good practices and guidance - is not sector-specific.
Upon a robust foundation of centralized, enabling frameworks and policies central governments should layer on an
appropriate division of functions and responsibilities between other levels of government. The sections that follow
respectively posit sector-specific factors, as well as institutional planning considerations for public sector decision-
makers.
An evolving challenge - as detailed in the proceeding section - is the effective division of roles and responsibilities
between different public sector actors. Generally, this report refers to the following levels of government:
1. Central government: situated at the national / federal level
2. Regional government: situated at the provincial / state level
3. Local government: situated at the municipal / township level

As noted by the World Bank, globally “the past 20 years have witnessed a shift towards decentralized infrastructure
planning and implementation … (with) subnational governments, regional entities and sector agencies delegated
responsibility for planning and project selection.”1 While numerous infrastructure projects are identified through
decentralized planning, governments often lack the financial and technical capacity to implement the full suite of
such projects, thereby contributing to a growing infrastructure gap. This capacity limitation drives a screening and
preparation process that forces government to prioritize the funding of projects - instead of planning in a way which
is holistic, rigorous and responsive to the needs of the country’s socioeconomic landscape.
Some approaches commonly used, despite their limitations, in infrastructure project prioritization include the
following:
1. Cost-Benefit Analysis: this approach focuses on comparing costs and benefits of a project over its lifetime
(future values adjusted to present value for comparative purposes), to select projects that maximize value to
society overall. This approach allows decision-makers to compare and rank all contemplated projects based
on a single indicator, and using one that maximizes value for society overall. However this approach can be
limited by the fact that it requires “extensive information about the projects and their projected impacts” 2. Since
such extensive information is often limited and the associated analysis costly, a rigorous cost-benefit approach
can be difficult to implement.
2. Multi-Criteria Decision Analysis: this approach is reflective of the time, information and capacity limitations
that governments typically face when undertaking project selection. This approach includes qualitative factors,
alongside quantitative factors, into a weighted (with weighting of categories and criteria determined and
calibrated by government decision-makers) decision analysis - and is beneficial “when information or analytical
resources are limited”.3 Weaknesses to this approach include subjectivity in the manipulation of weights and
criteria, in order to prioritize certain projects over others.

1
World Bank Group. “Prioritizing Infrastructure Investment: A Framework for Government Decision-Making.” May 2016.
2
World Bank Group. “Prioritizing Infrastructure Investment: A Framework for Government Decision-Making.” May 2016.
3
World Bank Group. “Prioritizing Infrastructure Investment: A Framework for Government Decision-Making.” May 2016.
2
In the context of developing countries supported by international donor organizations, further scrutiny on project
prioritization may be required, with the World Bank reporting “recent attention to infrastructure prioritization is
grounded on demonstrated government and multilateral organization demand for evidence, comprehensiveness,
value and legitimacy in infrastructure decision-making … (which is) also a proposed precursor to identifying
opportunities for private sector involvement.”4 Research undertaken by the World Bank also suggests that a lack
of holistic planning in infrastructure development creates a number of issues, noting that “the unstructured path to
project approval in many countries leaves room for corruption, inefficiency and particularist infrastructure policy
that is unlikely to effectively serve development needs.”5
As an alternative to the two common project prioritization approaches mentioned above, the World Bank has
proposed the Infrastructure Prioritization Framework for government consideration. This framework incorporates
policy goals, social and environmental sustainability considerations, and long-term development goals alongside
traditional financial factors (i.e. the monetary considerations as referenced in Cost-Benefit Analysis).
The implementation of the Infrastructure Prioritization Framework, or any other internationally recognized best
practice approach to infrastructure prioritization, is predicated on the following fundamental principles:

1. Account for key goals stated in infrastructure policy, as well as sector strategies and mid-term development
plans.
2. Consider the tenets of ‘value’ and ‘effectiveness’. The application of a defensible methodology implies due
consideration of said methodology’s effectiveness at delivering on goals (e.g. economic growth, human
development, etc.), as well as in the value (i.e. creating public value at the least cost).
3. Affirming legitimacy to decision-making. Legitimacy is founded on both inputs and outputs, and in order to fulfill
the former - the project prioritization methodology should include a process that is transparent, fair and
systematic.
4. Opportunity to innovate. As the infrastructure investment gap grows and governments explore different ways
to address it, more attention becomes focused on the enabling conditions that increase the potential for
institutional investment and private sector participation. Inherently, a defensible and recognized methodology
has the potential to contribute to a well-planned and legitimate project pipeline, which can in turn create the
aforementioned enabling conditions.
Best practice guidance from the World Bank also suggests that “while projects may be proposed from different line
agencies or subnational government units, prioritization should be managed at the same level ... by an
administrative unit with authority over investment decisions to ensure that analysis is effectively utilized.”6 In other
words, project planning and prioritization should be conducted at a level with administrative authority over
investment, and ideally performed in conjunction with budgeting cycles and activities. This aligns with the discourse
presented in the following section on institutional framework, regarding the allocation of decision-making
responsibility to central governments who commonly possess the appropriate perspective and purview.
An important takeaway from practices in jurisdictions such as the UK, Australia and Canada is that improved
coordination and planning should be initiated at a central or regional level of government. Central and regional
government possess the perspective to evaluate the needs of the population, establish funding frameworks based
on a view of the national budget, and can establish (central) or align (regional)priorities in public investment. Based
on this holistic view, central government agencies can develop and disseminate these national objectives - with
regional and local governments consequently aligning their respective infrastructure development priorities
(particularly if funding from central government budgets is offered).

Urban Infrastructure Sector Planning Considerations

Urban Development
Urban development is a broad-based category, and generally refers to a set of initiatives aimed at developing or
reorganizing municipal neighborhoods for the sake of socioeconomic development. Thematic objectives include

4
World Bank Group. “Prioritizing Infrastructure Investment: A Framework for Government Decision-Making.” May 2016.
5
World Bank Group. “Prioritizing Infrastructure Investment: A Framework for Government Decision-Making.” May 2016.
6
World Bank Group. “Prioritizing Infrastructure Investment: A Framework for Government Decision-Making.” May 2016.
3
increased community engagement and use of public spaces, and generally creating the conditions for an efficient
city.
Box 2-1 Urban Development Coverage

Urban development covers holistic planning which may include a range of projects and issues that
support the livelihood of urban agglomerations in a sustainable manner. This includes projects that
relate to supporting the productivity, livelihood, and sustainability of urbanized populations in existing
urban agglomerations which includes housing, regeneration of the urban built environment, and general
markets.

Urban development category may also cover more greenfield area planning such as the area
development of new or satellite cities and/or industrial estates or specialized economic zones.

From a planning perspective, these projects pose an important challenge of needing regional or national-level
coordination of efforts (i.e. to prevent duplication of effort). These kinds of projects are ostensibly of interest due to
their revenue generation potential - in contrast to the other infrastructure sectors which prioritizes providing
essential services. Urban markets are also characterized by the fact they require relatively low operating costs and
have good potential to generate revenue. From a planning perspective, governments need to ascertain the real
value behind contracting a private sector partner particularly when revenues from such projects will have to be
shared in a PPP arrangement.
Important considerations for public sector planners when considering private participation models in urban
development include the following7.
1. Diversity in contractual models. What in principle would enable private participation in this infrastructure class,
is some form of revenue and risk sharing mechanisms - which may not be common to traditional infrastructure
and thus must be tailored to the project.

2. Revenue streams. Developing a revenue model capable of attracting private participation is a challenge.
Innovation in designing alternative sources (i.e. advertising spaces) should be encouraged in this sector.
Governments should be cognizant that, at least in part, some form of public financial support mechanism may
be required to supplement.
o The provision of such financial mechanisms, in turn, raises implications for the institutional framework of
public sector responsibilities. Typically central governments will have greater financial resources and
credibility (i.e. credit rating) to provide such mechanisms, as opposed to a local government entity.

Affordable Public Housing

Affordable housing is a universal challenge in many jurisdictions, and is prevalent in developed countries as well
as developing countries. Adequate and affordable housing is a basic necessity that the public sector is
fundamentally responsible for. Provision of affordable housing is considered to be a complex undertaking and must
be planned properly and in consultation with its intended tenants. Mismanaged affordable housing projects have,
in many cases, created unsustainable urban communities which causes a range of social issues. Affordable public
housing needs to consider the housing continuum as shown in Figure 2-1 Spectrum of Housing, per Canada
Mortgage and Housing Corporation.

7
PPP Knowledge Lab. “Urban Revitalization.” 2019.
4
 Figure 2-1 Spectrum of Housing, per Canada Mortgage and Housing Corporation

The first step for policymakers is to understand the current landscape - including prevailing national and/or sub-
national efforts to invest in affordable housing programs. A scan of other government funding programs that support
vulnerable populations - including women and children fleeing family violence, seniors, indigenous peoples, people
with disabilities, those dealing with mental health and addiction issues, veterans and young adults - will help fill the
picture of all available public funds earmarked for this sector.
The next step is to determine the range of mechanisms applied to ameliorate this social issue - it will vary by
jurisdiction but typical programs include low-interest loans or grants provided to either build or preserve affordable
housing. International lessons learned suggest that funding is usually made on an ad-hoc basis, and commitments
made by various levels of government expire before the committed quantums of funding are applied. Project owners
at the municipal and project level struggle to attain the necessary financial capacity on their own, and must contend
with commercial parties for valuable plots of land. From a holistic planning perspective therefore, it is prudent to
seek out and implement a variety of programs and subsidy techniques to encourage local communities and
partnerships to support affordable housing. Some examples of enabling mechanisms include:
1. Housing block grant provided to state and local authorities

2. Effective interest rate subsidies provided through tax exempt bonds

3. Mortgage insurance and guarantee programs
4. Regulatory influences on mortgage capital
5. State and local financial support mechanisms such as housing trust funds, which dedicate a source of public
revenue for affordable housing projects
6. Low-Income Housing Tax Credit - providing tax credits to local non-profit housing authorities that can then
sell the credits to private investors for cash; the private sector in turn uses the credits to reduce their taxable
income
7. Urban planning frameworks that allow for mixed use development, which encourage or legally prescribe
affordable housing
The UK is another jurisdiction that has some history of supporting affordable housing through its Housing Private
Finance Initiative. Under this program, local housing authorities procure a private partner to deliver housing
services.
Good practices to take from these two jurisdictions from a planning perspective, are for different levels of
government to remain coordinated and engaged - to provide a fulsome suite of mechanisms to entice private sector
participation in the sector.
Another element of planning to take into account is to have an integrated approach to designing affordable housing
programs. The perception in many jurisdictions with failed affordable housing programs is that it creates ghettoes
that amplify areas of abject poverty and vulnerable populations. Planning agencies should strive to incorporate
whole-life planning and design, land assembly and construction, as well as management and maintenance to
alleviate such issues. PPPs - while not the only solution - is one model that has the ability to incorporate these
aforementioned elements and transfer the risk to a commercially-incentivized private sector partner.
Summary of Urban Infrastructure Sector Planning Consideration

A core part of upfront planning should revolve around leveraging land value capture when it comes to urban
development projects - including for affordable housing. The use of PPP projects structurally allows the public

5
sector to share in this benefit, with effective regulation, and thus should be considered. Segregated planning and
ad-hoc project procurement implies that such considerations will be lost in the shuffle - hence why early planning
for this potential structural benefit should be holistically integrated by the public sector.

In many ways the issues leading to members of the population struggling with affordable housing is a pervasive
issue that permeates society, until and unless interventions are made. While creating the infrastructure at below-
market rates for vulnerable populations is a fundamental step in the right direction, it must be recognized by
governments that more is needed. Other models - not PPP in classification - such as Development Impact Bonds
or Social Impact Bonds are innovative service models / financial mechanisms that can help pilot methods to perform
such interventions.

2.2 Institutional Framework

A number of overarching factors impact the institutional framework underpinning responsibility for delivering
infrastructure projects between different levels of government. The five main factors - when looking at jurisdictions
such as Australia, Canada, the UK, New Zealand and Singapore - can be summarized as follows8.
1. Sector Pipeline: evidence of a robust pipeline of infrastructure (including PPP) projects, tends to converge with
government decision to centralize responsibility for procurement in a given sector. In some instances, the
government enables the formation of purposely-formed statutory authorities to execute on the planning and
procurement of projects in sectors with a strong pipeline.

2. Model Complexity: evidence of a sector requiring more complex procurement models (including alternative
delivery models such as PPP), tends to involve centralization of procurement functions. Based on the need for
greater levels of technical capacity to be successful with such projects, oftentimes specialized teams are
formed within the ministry / central government. In instances where local entities and other would-be project
owners lack the experience (particularly with more complex transactions involving private sector investment,
such as PPPs) and capability to deliver the capital project(s), responsibility is centralized. Where less
experienced agencies are charged with complex procurements, best practice encourages them to engage
external advisors and/or seek to acquire expertise from other parts of government.
3. Project Volume & Value: in sectors where project volume is high but individual project value is low,
responsibility for procurements fall to the responsible ministry9. In cases where a sector has large-scale
procurements, particularly Greenfield developments, in the pipeline - responsibility is typically assigned to
central government or deferred to a purposely-formed statutory authority.
4. Processes: where there exists a strong network of standardized processes and guidance, central government
is often relied upon less for delivery of these major capital projects.
Beyond the general factors cited above, the roles and responsibilities between central, regional, and local
governments when it comes to infrastructure planning, procurement and delivery varies based on context and
sector.

The Role of PPP Units

As governments contemplate shifting from traditional to alternative models such as PPP to procure capital projects,
they require new and specialized types of capacity - namely “to design projects with a package of incentives and
risks that makes them attractive to the private sector.”10 Other aspects of technical expertise required from
governments for PPP delivery include:
1. Assess cost to taxpayers: this is distinct from and can be more challenging than traditional delivery, due to the
long-term nature of government commitments.

8
For the Ontario Ministry of Infrastructure, Deloitte performed a global jurisdictional of the infrastructure procurement
institutional frameworks. This was undertaken by primary data collection using interviews from the Deloitte global network of
experts as well as with representatives from agencies in said jurisdictions (i.e. Australia, Canada, the UK, New Zealand, and
Singapore.
9
It should be noted that in some cases - in particular to deliver healthcare and education projects - governments have ‘bundled’
multiple assets into a single procurement to increase competitive pressure and increase scale to attract private sector
financing. Given the multitude of assets (and possible dispersal of assets over multiple local or regional governments), central
governments tend to be responsible for these procurements.
10
World Bank Group. “Financial and Private Sector Development Vice Presidency: PPP Units.” 2006.
6
2. Oversee contracts over the stipulated duration: public sector needs to be deft and proactive contract
management is required, delivered in conjunction with government regulators, third-party inspectors, as well
as the dedicated team of the contracted private sector entity.

3. Consensus-building: project owners need to canvass stakeholders, and engage in advocacy and outreach to
build broad-based support on (i) the role of PPPs; and (ii) support for specific projects.
As discussed in the prior section, technical capacity for governments in this regard is essential for successful PPP
delivery. A global scan of PPP markets informs of an increasingly common avenue to produce this capacity - by
establishing dedicated PPP units. These units are either new central agencies, or dedicated units within a central
(e.g. situated within the national Ministry of Finance) ministry.

International practices suggest that the exact role of PPP units will vary widely, and that commonly these agencies
exist to ‘fill the gaps’ left by the existing institutional framework of public sector actors. The figure below illustrates
the tasks performed by PPP units from around the world, ranging from upstream capacity-building to government
approval of the eventual PPP contract.
In Canada’s PPP landscape, PPP units exist at both the central level (i.e. the national entity known as the Canadian
Infrastructure Bank11 as well as the regional level (i.e. provinces committed to building PPP programs and pipelines
had their own capital projects teams with PPP-specific capacity, such as Infrastructure Ontario). The central PPP
unit in its early days stayed upstream and focused on acting as a resource center to project owners, which included
the provision of funding to undertake rigorous project preparation activities as well undertaking nation-wide capacity
building with the aim of raising awareness and capacity across all levels of government with regards to PPP models.
By comparison, in Ontario, the province with the largest population and PPP program, the PPP unit from inception
played a more active role in providing hands-on support and approval of specific PPP proposals and projects.
Figure 2-2 Typical functions of a PPP Unit based on global scan, per World Bank.

An overview of the functions provided by PPP units is summarized below.

1. Information & Guidance: PPP units can provide information and guidance to governments, on the preparation
of PPPs - ranging from provision of international resources to standardized PPP contracts and clauses for
streamlined use in procuring PPPs.
2. Advisory Support & Funding: PPP units can provide hands-on technical support to public sector project
owners, to supplement the limited resources of a regional or local entity who lack PPP experience. International
best practice suggests that PPP units should play a hands-on role in starting up a regional or local entity’s

11
The Canadian Infrastructure Bank has succeeded PPP Canada, a crown corporation that through 8 years promoted and
supported the adoption of PPPs across Canada.
7
 PPP program in order to build capacity. On the other hand with departments who have experience and
capacity, the advisory support role of the PPP unit can be light-touch in nature. PPP units can also - on behalf
of a central entity such as the Ministry of Finance - provide funding to help project owners acquire the expertise
necessary to perform appropriate and rigorous project planning (e.g. provision of funding to hire independent
transaction advisors).
3. Approval: PPP units can play a role in assessing whether the proposed PPP aligns with the quality, affordability
and expected fiscal cost that is within the budgetary threshold of the central government.
To reiterate, international best practices recommend the establishment of PPP units in a prominent and influential
position (i.e. dedicated unit located in the national Ministry of Finance) - with the specific functions of each unit to
be customized depending on the relative technical capacity and experiences of existing government actors in the
landscape of capital projects procurement.

Urban Sector Considerations

Urban Development

The same - absence of title over lands and fragmented land ownership - holds true as a major risk for all urban
development projects including urban markets. In developing countries - and in particular the Middle East region -
generations of inheritance has fragmented land ownership to the point where attaining all approvals to proceed
with land acquisition is very challenging.

Affordable Housing

Jurisdictions grappling with affordable housing issues struggle with instances where responsibility is decentralized,
and the lower-level agencies lack the legislative authority as well as financial capacity to tackle this challenge. In
most international jurisdictions therefore, there is usually a central agency responsible for housing policy and
funding programs as a whole.

It is apparent that this is truly a cross-cutting issue that requires close coordination and engagement from public
sector actors at all levels. Federal policymakers should enable all mechanisms (e.g. the absence of title / ownership
over lands can be a huge challenge in developing economies) available for private sector participation in the sector,
and commit to funding housing projects alongside provincial or state governments. When developing other
infrastructure projects - such as urban transit - that capture or increase the value of said property, government
should consider diverting these benefits to affordable housing projects.

2.3 Project Benchmark

Project Models & Case Studies
The fundamental role of the public sector - regardless of the type of infrastructure - revolves around defining scope,
specifying objectives and outputs of the asset/service, and holistically establish tools for successful PPPs.
Urban Development

For other sub-sectors within the urban sector, there is typically flexibility to partner with the private sector through
a concession or revenue-risk type of arrangement. These types of projects - in contrast to affordable housing -
focus on revenue generation.
Take for instance, the development of public markets in the Philippines12. The public sector relied on the private
operator to raise the financing required to build the seven-story complex13 (keeping in mind that sufficient debt was
only raised via a concessional loan from the Asian Development Bank). The revenues were shared between public
(revenue from the public market and the store-front stalls, in addition to taxing the new commercial elements) and
private (the remainder of the market).

12
Global Infrastructure Hub & World Bank. “Compendium of Municipal PPP Case Studies”. 2019.
13
United Nations Economic Commission for Europe. “PPP Contract Models and Enabling Environment.” 2014.
8
Affordable Housing
There are a number of models for affordable housing projects 14, each with different implications in the ways and
extent to which they involve private sector participation.

 Government-land Based Subsidized Housing: public sector provides land to the private sector, in exchange
for the design, build and financing of affordable housing as well as associated services of predetermined
standards. Payments are milestones-based, and delivered upon verification of identified deliverables being
completed. Eligible residents (eligibility to be determined by the public sector) make predetermined periodic
payments, directly to the public authority. Maintenance of the units, at least the common areas and public
spaces, may be provided by community associations.
o In practice this model is commonly referred to as a Design-Build-Finance PPP scheme. While the public
sector is responsible for revenue collection, it may still be good practice to introduce mechanisms to help
facilitate payment by residents - including with a financial subsidy regime.

Box 2-2 Case Study: Mandaluyong City Market, Philippines

Case Study: Mandaluyong City Market, Philippines

The project involved the rebuild of a market using a PPP, which initially consisted of originally 500 stalls
(located along the sidewalk) which caused traffic congestion and sanitation issues. The impetus was
that the government lacked sufficient public capital to build a new market, or the fiscal space to assume
additional debt. The project was tendered as a 40-year contract to build, operate and manage the market.

Project Owner: Metro Manila government

Contract Structure / Design: Project Co was contracted to deliver a seven-story commercial center -
inclusive of a public market, street-front stores, a parking garage, commercial shops, department stores,
a bowling alley, and a movie theater.

While the build, operate, and management risks were transferred to the private sector - the financial
viability of the PPP would not have been possible without a ten-year concessional loan from the Asian
Development Bank. Overall financing for the project consisted of: 25% equity; 50% debt; and 25%
advances from shops.

The project owner assumed the risks of operating the public market and collecting fees from the street
front stores. Project Co assumed risks of maintenance and security, as well as operating and maintaining
the commercial complex.

As part of the contract, Project Co also built a box culvert (infrastructure developed to address urban
flooding).

14
Government of India, Ministry of Housing & Urban Affairs. “PPP Models for Affordable Housing.” 2017.
9
 Figure 2-3 Typical project structure for Government-land Based Subsidized Housing, per Government of India.

 Mixed-Development Cross-Subsidized Housing: land is provided by public sector via lease to the private
sector. In exchange, the private sector is responsible for designing, building and financing affordable housing
and associated services to predetermined standards. As a collateral activity, the private sector will develop
high-end housing and consequently collect said revenue. Eligible residents (eligibility to be determined by the
public sector) make predetermined periodic payments, directly to the public authority. Maintenance of the units,
at least the common areas and public spaces, may be provided by community associations.
o In practice this model is commonly referred to as a Design-Build-Finance PPP scheme. While the public
sector is responsible for revenue collection, it may still be good practice to introduce mechanisms to help
facilitate payment by residents - including with a financial subsidy regime.

10
Figure 2-4 Typical project structure for Mixed Development Cross-subsidized Housing, per Government of India.

 Annuity Based Subsidized Housing: land is provided by public sector via lease to the private sector. In
exchange, the private sector is responsible for designing, building and financing affordable housing and
associated services at a predetermined cost and within predetermined time, as well as for the maintenance of
the asset (with annuity payments made by public sector, contingent on maintenance standards being met).
Eligible residents (eligibility to be determined by the public sector) make predetermined periodic payments,
directly to the public authority - with the collected amount escrowed to the private sector.
o In practice this model is commonly referred to as a Design-Build-Finance-Maintain PPP scheme.

Figure 2-5 Typical project structure for Annuity Based Subsidized Housing, per Government of India.

11
 Annuity cum Capital Grant based Subsidized Housing: land is provided by public sector via lease to the
private sector. In exchange the private sector is responsible for the design, build, and finance of affordable
housing and associated services at predetermined standards, as well as for the maintenance of the asset (with
annuity payments made by public sector, contingent on maintenance standards being met). An upfront grant
may also be provided by the public sector to finance the construction. Eligible residents (eligibility to be
determined by the public sector) make predetermined periodic payments, directly to the public authority - with
the collected amount escrowed to the private sector. The housing will be transferred by the private sector to
the public sector.
o In practice this model is commonly referred to as a Design-Build-Finance-Maintain-Transfer PPP scheme.
While the public sector is responsible for revenue collection, it may still be good practice to introduce
mechanisms to help facilitate payment by residents - including with a financial subsidy regime.

Figure 2-6 Typical project structure for Annuity cum Capital Grant based Subsidized Housing, per Government of
India.

 Direct Relationship Ownership Housing: land is provided by public sector via lease to the private sector. In
exchange, private sector is responsible for designing, building and financing of affordable housing and
associated services at predetermined standards, as well as for maintenance of the asset. Revenue for the
private sector comes from direct revenue collection from residents - which can be lump sum or periodic in
nature. Eligibility of residents continue to be determined by public sector.
o In this scheme the private sector is responsible for revenue collection, and thus the public sector should
introduce mechanisms to help facilitate payment by residents - including with a financial subsidy regime -
so that this risk can credibly be transferred.

12
 Figure 2-7 Typical project structure for Direct Relationship Ownership Housing, per Government of India.

 Direct Relationship Rental Housing: land is provided by the public sector via lease to the private sector. In
exchange, the private sector is responsible for designing, building and financing affordable housing and
associated services at predetermined standards, as well as for maintenance of the asset. Revenue for the
private sector comes from direct revenue collection from residents - which can be lump sum or periodic in
nature. Eligibility of residents continue to be determined by public sector. The housing will be transferred by
private sector to the public sector.
o In this scheme the private sector is responsible for revenue collection, and thus the public sector should
introduce mechanisms to help facilitate payment by residents - including with a financial subsidy regime -
so that this risk can credibly be transferred.
Figure 2-8 Typical project structure for Direct Relationship Rental Housing, per Government of India.

A comparison of the six described PPP models for affordable housing is provided in the figure below.

13
 Figure 2-9 Comparator of the six PPP models for affordable housing, per Government of India.

An example of an implemented PPP model in the affordable housing sector is provided for in the figure below,
closely aligned to Mixed Development Cross Subsidized Housing (Model 2).

2.4 Procurement Management

The public sector has a crucial role to play in the procurement process, with the project owner and its central
agency stakeholders being responsible for selecting the private partner to enter into the PPP contract. A number
of critical success factors for the public sector to consider during the procurement phase of the PPP lifecycle are
provided in the figure below.

Box 2-3 Case Study: Shukhobrishti Housing Project, India

Case Study: Shukhobrishti Housing Project, India

The project involved the contracting of a private sector partner to develop 50 acres of land with
affordable housing for 20,000 households. The public land was leased, and the private was expected to
generate revenue by undertaking commercial activities on the land. The private sector was also
expected to deliver major community associated services - such as healthcare facilities, school facilities,
and other public institution including post offices.

Project Owner: Dedicated agency delegated authority by a central (state) government - West Bengal
Housing Infrastructure Development Company

Contract Structure / Design: The PPP contract was specific such that there was minimum design
requirements for the housing units, per affordable housing legislation. Housing units were allocated by
the government to both low-income as well as middle-income groups. As aforementioned, this model
therefore followed best practices - in the inclusion of multiple income groups as well as scope inclusion
of community services - to prevent any undesirable outcomes.

What was critical to attain commercial viability for the PPP, was the government allowing the private
sector to earn revenue from commercial developments (i.e. mixed development) built on the 50 acres of
land.

14
 Figure 2-10 Public Sector Responsibilities

Public sector responsibilities

Payment
Bidder
Risk Transfer Mechanism RFP and
RFQ and Market Selection Financial
and Value and Project
Sounding and Close
for Money Performance Agreement
Negotiations
Standards

Key considerations

• Understand private sector interest for project/transaction

• Institute a fair, transparent and competitive procurement process
• Respect bidders’ time requirements for due diligence
• Maximize opportunities for innovation
• Keep strong communications lines open with all stakeholders
• Ensure sufficient public sector resources (or support) for well-managed procurement process
• Ensure internal team continuity

Using the Canadian PPP market as reference, there are a number of foundational principles for government project
owners and policymakers to follow or consider in the design and implementation of a robust procurement process.
1. Transparency: project objectives should be explicit, with evaluation criteria well-defined. Bidders and other
stakeholders should understand the procurement process, and the basis for evaluations and project award.

2. Robust & Fair: the procurement process should be resilient to problems encountered during procurement, and
should allow for a level playing field with all bidders.
3. Cost-effective and timely: the cost and duration of the bid should be commensurate with the potential rewards
of winning. Best efforts should be made to follow the procurement schedule.
4. Efficient financial close process: bidders are generally required to provide RFP submissions (against a final
version of the Project Agreement) with committed financing. This in turn allows for an effective financial close
period, of ~ three months in duration.
There are a number of mechanisms available for project owners to follow these principles, as provided below.

Independent Oversight

A competitive and transparent PPP procurement can benefit from the presence of a fairness monitor. The fairness
monitor serves as an objective third party who observes, reports on, and where applicable advises in-situ on the
impartiality of the procurement process. The involvement of this entity grants bidders and taxpayer’s confidence
that the procurement is being conducted in a fair manner that serves public interest.
The fairness monitor remains active throughout the procurement process and focuses on ensuring project owner’s
communications are clear, unbiased and based on actual requirements; ensuring transparency and equal access
to information while not breaching bounds of confidentiality; and overall ensuring the procurement and evaluation
process is executed in a way that is consistent with the documented plan and generally adheres to best practices.
Information Sharing & Protection

A competitive and efficient PPP procurement process will involve the two-way conveyance of project and bidder-
specific information and data. Communications between different members of the project owner - including parties
such as the local government; funding and oversight agencies; legal, commercial and technical advisors -
particularly when it comes to sharing documents that require multiple and sometimes concurrent layers of review
and edits also require a confidential, centralized and expedient repository. The standard practice in Canada, is for
the project owner team to establish an electronic data room. This data room is hosted on a secure website, with
levels of access (i.e. there will be folders available to different stakeholders, be they on the public or private side)
to be designed and determined by the project owner. This data room therefore represents the sole place where
project documents can be accessed, and both (i) centralizes all formal communication throughout the process; and
(ii) ensures confidentiality in the information being provided by all parties.

15
Public-Private Interactions (RFIs & CCMs)

In supplement to the electronic data room, it is standard practice in Canada to provide confidential and transparent
avenues for bidders to interact with the project owner. These avenues inherently provide greater opportunity for
bidders to develop optimal solutions for the project, and be as responsive to the project owner’s requirements and
needs.
A continuous way this is governed and promoted throughout the procurement process - is through the Request for
Information (‘RFI’) channel. This allows bidders to ask clarification questions to the project owner. Canadian
practice typically promotes the use of the electronic data room to host both the questions, as well as the responses
- which are available for access by all bidders. The data room will stipulate a format within which bidders will pose
their questions - one of which will ask the bidder to specify whether they consider a particular question to be
confidential.
Competitive procurement processes also provide an opportunity for face-to-face, one-on-one interaction between
each bidder and the project owner. Canadian best practice governs and promotes the use of Commercially
Confidential Meetings (‘CCMs’) - during which the project owner can provide their position on the rationale behind
the project requirements; bidders can seek detailed answers to questions on bid compliance and better understand
requirements; and bidders can posit potential changes to the project requirements and rationale therein.
Typically the dates for Commercially Confidential Meetings (subject to updates) will be set out in the draft RFP.
The RFP may further define that within a certain number of business days prior to, each bidder must provide to the
project owner their desired and customized agenda and accompanying materials. Proponents typically will prepare
a presentation - to be submitted via the electronic data room - prioritized topics for discussion as well as specific
questions, and if applicable suggestions for changes to requirements. The project owner will likewise have prepared
a presentation - uniform across all bidders - covering its prioritized topics for discussion. Beyond these
presentations, no other information is allowed to be shared in this forum.
Evaluation of Bids

The culmination of the procurement process is the submission of bids in response to the final draft of the RFP and
Project Agreement. Upon receipt, the project owner will undertake an evaluation process to determine the preferred
proponent. The following elements support the rigour behind the evaluation process in a PPP procurement:
1. The project owner develops an evaluation plan - including methodology, approach, and processes - for the
receipt, evaluation and scoring of bidder submissions.
2. Evaluators and supporting evaluation personnel must declare conflicts of interest, and must not hold any
subordinate relationships to any entities or individuals belonging to any of the bidders.
3. Submissions from bidders are separated into discrete packages containing technical content and financial
content, with some jurisdictions practicing staggered evaluation (i.e. technical evaluations completed prior to
opening of financial packages).

Efficient Path to Financial Close

What distinguishes the Canadian PPP procurement process from other jurisdictions such as the UK, is that of a
short (typically three months in duration) financial close period.
From a procurement perspective project owners balance the requirement for bidders to return the RFP submission
with committed financing, with relatively light design requirements 15. It should be noted this is only possible with a
robust design development protocol, as well as experienced practitioners on both the public and private sides of
the agreement.

This shortened process in turn becomes more attractive to potential lenders, who consequently are potentially more
prepared to offer a strong level of commitment in support of the RFP submission.

15
The implication is that detailed design work takes place during the design and construction period, post-financial close.
16
Urban Sector Considerations
Urban Development

With respect to the urban sector outside of affordable housing, the procurement process may be heavily oriented
towards highest revenue potential as opposed to lowest-cost (with the latter being the primary financial criteria for
other PPP sectors). This is because of the revenue-generation component of urban markets and other related sub-
sectors. This typically requires a well-structured and robust evaluation framework and process to make best efforts
to ensure that the projected revenues can in reality be achieved. International lessons learned indicate examples
where PPPs of this ilk have fallen short of aggressive revenue projections.

Affordable Housing

In terms of international lessons learned and good practices for the affordable housing sector, governments should
take care to design the procurement such that desirable outcomes are being met. As already mentioned, the
technical design and PPP scope should be expansive enough to allow for private sector innovation, and to
fundamentally build a community that is attractive for multiple income classes to inhabit.

Another takeaway from international jurisdictions is that developing countries struggle with underutilized / illegally
encroached lands. Enabling legislation or other central government actions need to be enacted to pave the way -
which is important not only to ensure land acquisition for projects in the pipeline, but also to create more project
opportunities.
Finally, the issue of revenue risk should be seriously considered - in particular for this sector. The willingness-to-
pay (or frankly, ability to pay) of the common user base for affordable housing is extremely low. Therefore unless
there are credible mechanisms to help the user base make payments, then the private sector may be unwilling -
and on principle, should not be allotted as such - the risk of revenue collection.

2.5 Contract Management

Central to ensuring success of the PPP arrangement is for the public sector to maintain robust monitoring, reporting
and management during the contract management phase. A number of critical success factors for public sector to
consider during the contract management phase of the PPP lifecycle are provided in the figure below.

Figure 2-11 Public Sector Responsibilities

Public sector responsibilities

Concession Periodic
Facility Agreement
Transition to Audits and Asset
Construction Operation &
Constructor Monitoring & Market Handback
Maintenance Management Testing

Key considerations

• Facilitate knowledge transfer from procurement phase to operational phase

• Ensure appropriately resourced contract management function
• Develop contract manual
• Revise contract as necessary and needed (esp. in facilities management during O&M phase)
• Maintain open and regular communication between Project Co and government sponsor
• Retain independent third party to confirm completion and/or milestones achieved
• Ensure robust and fair dispute resolution procedures are in place

Urban Sector Considerations

Urban Development
For urban sub-sectors involving high potential for revenue potential (i.e. other than affordable housing), likely a
core part of selecting the bidder revolved around revenue projections. To ensure these are met during the contract

17
management phase, the public sector should strive to have a high degree of control and transparency into Project
Co’s cashflows (and in turn make sure that the appropriate revenue sharing regimes can be effective).
Affordable Housing

For the affordable housing sector, one downstream management risk to strongly consider is that filling the units
with inhabitants. This can occur for a variety of reasons stemming from the planning or construction phases of the
project - poor construction, poor location - but principally means either the public sector or the private sector
(depending on how risks are structured or shared) is having trouble collecting revenue based on low usage.
Involving the private sector - a more commercially-oriented party who in turn can invoke commercial solutions - in
this risk can be beneficial if they are incentivized properly (i.e. a performance bonus for usage). The public sector
also has a role to play in educating or directing eligible households to consider these units - consequently robust
project management would imply for the project owner’s team to actively engage with other levels of government.

2.6 International Best Practices on Risk Allocation

At the core of every PPP transaction is the identification, allocation and ongoing management of project risks. A
sound understanding of the risk allocation arrangements is essential to the drafting of a successful PPP contract16.
The robust application of risk allocation principles contributes to the PPP project fulfilling government objectives,
achieving Value for Money, and becoming financially viable for the private sector.
Principles of Risk Allocation in PPPs

The fundamental principle of PPP risk allocation, is that a given risk should be allocated to the party best-suited (or
best-incentivized) to bear said risk. This best-suited party is the party who is (i) best able to manage the likelihood
of the risk occurring; and (ii) best able to manage the impacts if the risk does occur.
PPP project risks vary between sectors and projects. The individual characteristics of each project implicate that
risk allocation should be a bespoke process (ideally building from a foundation of national, or international best
practice), as opposed to using a ‘one-size-fits-all’ framework. From the project owner’s perspective, timely inclusion
of stakeholders in the risk identification, allocation and management process is important.

A typical risk analysis process will estimate the likelihood and potential impact of each risk, allowing the project
owner to make an informed decision on whether the risk should be retained or transferred.
Risk allocation as an exercise, is also subject to the maturity of the PPP market in question. As a jurisdiction gains
more successful experience17 in procuring PPP projects, a greater number potential bidders will become involved
creating a more competitive environment. This may allow project owners to transfer more risk to the private sector.
Affordable Housing PPP Risk Allocation

In most jurisdictions, social infrastructure PPPs are funded (in whole, or primarily) by availability payments directly
from the government. Most jurisdictions do not see the service provided as being congruent with the transfer of
demand risk. In some cases the private operator is provided availability payment and assumes rental collection
risk.
Based on international best practice, this section will provide for a list of the main risks to be considered in an
affordable housing PPP project - inclusive of design, build, refurbishment, finance and maintain scope 18. It is
assumed that housing and tenancy management services are the responsibility of the project owner. A discussion
of the key risks for affordable housing PPPs is provided below 19.
1. Existing Asset. In projects where scope involves the private operator refurbishing existing infrastructure and/or
integrating existing infrastructure into new developments, the condition of the former is an important
consideration.

2. Revenue risk. There is a risk of revenue shortfall for the project owner or private operator, depending on who
bears the risk. It is likely that rental payments from tenants will not prove sufficient to secure full occupancy for
the affordable housing, or that revenue collection is challenging.

16
Global Infrastructure Hub. “PPP Risk Allocation Tool 2019 Edition - Social Infrastructure.” 2019.
17
It is worth noting that conditions to generating this success can include - a stable economic, legal and political environment.
18
Global Infrastructure Hub. “PPP Risk Allocation Tool 2019 Edition - Social Infrastructure.” 2019.
19
Global Infrastructure Hub. “PPP Risk Allocation Tool 2019 Edition - Social Infrastructure.” 2019.
18
3. Residual value. If the private operator is retaining the housing stock upon expiry or early termination and is
required to bear residual value risk, the housing market assessment will be a core part of its due diligence.
4. Interface. During the operations phase, damage and defects to the affordable housing properties may be
caused by tenants or third parties. Consent and cooperation from tenants will also be required to make repairs.
5. Staggered Operations. Particularly in cases where housing stock is located on separate sites, or is a
combination of Greenfield and brownfield housing stock, a phased operations commencement plan may be
common. Potential benefits include helping to increase cash flow during construction, thereby reducing
financing costs. Milestone payments to incentivize phasing of construction works can also help deliver critical
components on time.

A summary table containing the suggested risk allocations / risk sharing between project owner and the private
operator, in context of an affordable housing PPP, is provided below.20

Table 2-1 Suggested Risk Allocations / Risk Sharing Between Project Owner and The Private Operator
Risk Category Description Suggested Risk Allocation
Public Shared Private

1. Site risk Risks associated with project land, as well √ √ √

as site conditions.
2. Design, Risks associated with project design, √ √
construction and construction and commissioning.
commissioning
risk
3. Sponsor risk Risks associated with the private operator √
and/or its sub-contractors’ fulfilment of
contractual obligations.
4. Financial risk Risks associated with financial viability of √
the project.
5. Operating risk Risks associated with performance in the √ √
operations phase.
6. Revenue risk Risks associated with demand and √ √
consequent implications to revenue
available for the private operator.
7. Network Risks associated with government-
connectivity risk controlled elements interrupting private
operator’s ability to perform.
8. Interface risk Risks associated with delivery from either
partner frustrating the delivery the other’s
ability to perform.
9. Political risk Risks associated with government action √
that materially and adversely impacting the
project and the private operator.
10. Force Risks associated with events wholly √
majeure risk outside the control of either partner.
11. Asset Risks associated with the economic value √ √
ownership risk of the asset deteriorating during or at the
end of the contracted term.

20
Guidance from the Global Infrastructure Hub’s international best practices, has been adapted (i.e. in terms of risk
categorization) to align with the Indonesia Infrastructure Guarantee Fund’s categories - for purposes of comparative analysis.
19
1. Site risk.
1. Land availability, access, site. This sub-category refers to the selection and acquisition of the land,
obtaining necessary approvals, as well as site access and condition.

a) Public Risks: Prevalent practice is for the project owner to bear land / site acquisition risk, based
on the fact that government holds legal authority to acquire land from property owners (including
indigenous groups). For parts of the site where detailed geotechnical due diligence has not been
conducted prior to award, the risk is retained by the project owner.
b) Private Risks: The private operator may have to rely on the project owner’s provision of
information relating to site acquisition and condition (e.g. right-of-way, covenants affecting use
or disposal, encroachment issues) - to price in certain risks during the bidding (procurement)
process. The private operator assumes risk - by way of indicating the suitability and sufficiency
of the land / site in the design and construction plan. Site security during construction is a private
operator risk, but both parties should be mindful of interface issues if the project is part of an
existing site. To the extent the accurate data on the condition of existing assets are shared with
the private operator, they can usually bear the corresponding risk.
c) Shared Risks: Site security is an important consideration with respect to third party access.
Provision of site security may be shared - with project owner taking responsibility for third party
site access to housing during operations, or with private operator providing housing management
services. Responsibility for utility relocation / access is typically shared, mainly due to lack of
data which makes it difficult for the private operator to credibly assess and price in.

2. Social. This sub-category refers to the affected peoples, impact on adjacent properties, resettlement,
indigenous land rights, and industrial action.
a) Public Risks: The project owner - as well as the government introducing the enabling policy for
affordable housing - bears the risk of integrating any affordable housing within an existing
community. The project owner is responsible for carrying out social impact studies to mitigate
adverse effects, and is furthermore responsible for carrying out active stakeholder engagement
from project conception all the way through to construction and operations. Any resettlement
activities (i.e. removal of housing and/or businesses, paired with compensation as well as
relocation of the same) is typically a project owner responsibility.
b) Private Risks: The private operator is responsible for non-compliance with any contractual and
legal social risk obligations.

c) Shared Risks: Labour disputes and strike action may be a shared risk, depending on the political
stability of the jurisdiction.
3. Environmental. This sub-category refers to environmental conditions, approvals, events, and climate
change.
a) Public Risks: The project owner is responsible for pre-existing environmental conditions on the
site. If exogenous environmental events are caused by government, the project owner is
responsible.
b) Private Risks: In the execution of the project (i.e. construction and operations), the private
operator is responsible for complying with all applicable environmental laws, and any
environmental obligations set forth in the contract (likely via adoption of internationally
recognized standards). While the project owner will review the robustness of the environmental
plans, the private operator is ultimately responsible for environmental events caused by the
project.
c) Shared Risks: Given the long gestation of most approvals in this aspect, to the extent possible
the project owner should strive to obtain or initiate environmental authorizations. At a specified
point in time, the private operator can take over the risks related to obtaining more detailed
environmental permits and licenses. Both partners share the risk of exogenous (non-
government) environmental events. A growing challenge - and a shared risk - to integrate in
planning for major capital projects is climate change, and how the same might be mitigated
through resilience design, construction and rehabilitation.

20
2. Design, construction and commissioning risk.
1. Design. This sub-category refers to design suitability, approvals, and changes.
a) Public Risks: n/a.

b) Private Risks: Fundamentally the private operator should assume design suitability risk, but the
degree to which depends on the specifications as requested by the project owner. Ideally the
specifications are output driven, allowing the private operator room to innovate while meeting
minimum standards. Given the asset, project owners may rely on standardized output
specifications. Obtaining design approval is a private operator responsibility.
c) Shared Risks: The project owner should ideally steer project design using output specifications
and engaging in iterative dialogue, but should ensure risk is assumed by the private operator. In
instances where the project owner is wholly prescriptive in specifying design, this risk will be
retained. Changes to the design after the PPP contract is executed as a risk item, is dependent
on the origin of the change (e.g. a private operator risk if the design is deficient; and a project
owner risk if changes are requested by the same).

2. Construction. This sub-category refers to cost overruns, delays project management, defects, and
other items related to construction.
a) Public Risks: n/a.
b) Private Risks: The private operator is responsible for construction cost overruns, construction
defects, construction delays, vandalism, intellectual property, project management risks, health
and safety compliance, and interface with other works and facilities (with exception to works that
are the responsibility of the project owner). Following minimum insurance requirements set out
in the PPP contract, the private operator will be liable for death, injury and property damage.
c) Shared Risks: To the extent that regulatory standards on quality change after the PPP contract
comes into effect, the risk may have to shared. The project owner could increase compensation
to comply, or the private operator may be excused if the standard is not mandatory.

3. Variations. This sub-category refers to changes requested by either partner, impacting construction
or operations.
a) Public Risks: n/a.
b) Private Risks: n/a.
c) Shared Risks: The risk and cost of changes implemented following either partner’s request is
allocated according to the same. The project owner will need to consider how best to fund these
variations (i.e. requiring private operator to procure committed but undrawn funding as a reserve
account, at the expense of driving up the bid price).
3. Sponsor risk.
1. Sponsor risk. This category refers to private operator or subcontractor failure, change in private
operator ownership, change in project owner’s status, disputes, and permitted step-ins.
a) Public Risks: n/a.

b) Private Risks: Failure to possess requisite financial or technical capacity, on the part of the
operator as well as its subcontractors, to deliver the project is a private operator risk. The private
operator’s ownership composition / shareholding may be locked in for a period, and any change
in ownership control will be restricted as well (a balance should be struck by project owner to
retain involvement of key participants with private sector’s desire to recycle their investment into
other projects.
c) Shared Risks: Step-in (primary concern is to provide continuity of service, or emergencies, or
intervention to protect against social and environmental risks) is generally a shared risk, with
allocation determined based on grounds and whether it was the private partner’s fault or not.
4. Financial risk.
1. Financial risk. This category refers to changes in financial markets affecting private operator’s
performance.
21
 a) Public Risks: Inflation during operations is a project owner risk.
b) Private Risks: Inflation during construction is a private operator risk. Refinancing risk - in terms
of risk of failing to raise the required capital - is a private operator risk.

c) Shared Risks: Exchange rate fluctuations are a shared risk. Between bid and financial close the
private operator bears the risk. However in jurisdictions with a lot of volatility and the long-term
currency swap markets are illiquid, the private operator may be ill-equipped - and instead ask for
payments to be in a stable foreign currency such as USD. During project implementation the
private operator will mitigate exchange risk via hedging arrangements to the extent possible.
Interest rate fluctuations may be shared between the two partners if the jurisdiction has a long
gestation period between bid and financial close. Insurances are typically a private operator
responsibility, however there are instances where neither partner is better-suited to control risk
of insurance coverage becoming expensive or unavailable. When refinancing creates additional
project risks, both partners will be responsible. Potential refinancing gains should also be shared
between the project owner and private operator.

5. Operating risk.
1. Operating risk. This category refers to cost overruns, poor performance, and other events during the
operations period.
a) Public Risks: The project owner has a responsibility to enforce the performance mechanism and
ensure the indicators are attainable and tailored based on relevant market data. If the private
operator bears said risk, rent revenue collection is an important indicator for the project owner to
track.
b) Private Risks: The private operator broadly bears risk for events which inhibit performance and
cause cost overruns. Depending on the payment mechanism in the PPP contract, the private
operator’s poor performance and maintenance of the asset (e.g. availability of hot water systems;
as well as housing repair response times) may additionally lead to deductions in payments. The
private operator generally assumes risk for ensuring a consistent and cost-effective flow of
operational resources including utility provision. The private operator also assumes risk for
obtaining intellectual property, health and safety compliance, and liability for death, injury and
property damage.
c) Shared Risks: Certain contexts may require risks to be shared in relation to availability of utilities
and local source materials - such as labour disputes, embargoes or other political risks. Interface
risk - including in this case damage to properties caused by tenants and third parties - is a shared
responsibility. Given that security of housing is usually a shared risk, vandalism mitigation is also
typically a shared risk.
6. Revenue risk.
1. Revenue risk. This category refers to actual user levels deviating from projections, and the
consequences for revenue and costs.

a) Public Risks: In addition to standard market-based considerations, the project owner may need
to consider political reasons (i.e. homeless, low-income and other vulnerable populations) that
favour retaining revenue risk for affordable housing.
b) Private Risks: Private operators may be willing to assume revenue risk if they are provided
subsidies or a minimum revenue guarantee to meet its financial obligations.

c) Shared Risks: Revenue risk in affordable housing context is very reliant on the local housing
market among other factors. Most projects involve some level of government payment
underpinning risk transfer.
7. Network connectivity risk.
1. Network connectivity risk. This category is not referenced as a major category or subcategory in
global guidance.

a) Public Risks: n/a.

b) Private Risks: n/a.

22
 c) Shared Risks: n/a.
8. Interface risk.
1. Interface connectivity risk. This category is not referenced as a major category or subcategory in
global guidance.
a) Public Risks: n/a.
b) Private Risks: n/a.
c) Shared Risks: n/a.

9. Political risk.

1. Material adverse government action. This sub-category refers to actions within public sector purview
that create an adverse impact on the project or private operator.
a) Public Risks: The project owner bears the risk of government actions that impede private
operator’s ability to perform contractual obligations. These events include - deliberate acts such
as nationalization or expropriation of the PPP, a moratorium on international payments and
foreign exchange restrictions, not granting approvals or failing to ensure utility connections. The
underlying principle of relief is to place the private operator into the position it had been in, prior
to the adverse government action occurring. Typically in mature, politically stable markets
bidders do not expect these types of actions to arise.
b) Private Risks: n/a.
c) Shared Risks: n/a.

2. Change in law. This sub-category refers to the risk of compliance with applicable law, and changes
in law affecting performance of the project.
a) Public Risks: The project owner is bears the risk for failure to enforce compliance onto third
parties which cause adverse effect on the project. Generally the project owner bears the risk of
unexpected changes in law which cause the private operator’s performance to be restricted. In
the event change in law benefits the private operator, the project owner may want to benefit from
the positive financial consequences as well.
b) Private Risks: The private operator is responsible to comply with applicable laws and regulations.
With a track record of a successful PPP program and an established, stable legal environment,
in some cases private operators may be amenable to more risk transfer in this sub-category.
c) Shared Risks: There are ways in which the project owner can attempt to mitigate risk assumption
or to share the risk. The PPP contract can allow for a monetary threshold up to which the private
operator accepts change in law risk, and any amount above is borne by the project owner.
Another alternative is for the private operator to assume consequences for changes in law except
for laws which are discriminatory, specific (i.e. to the affordable housing sector or to investors in
affordable housing), require capital expenditure in operations.
10. Force majeure risk.

1. Force majeure. This category refers to unexpected events beyond the control of either partner.
a) Public Risks: The project owner should consider ways to limit risk by carefully defining events
that qualify for force majeure (e.g. only earthquakes above a certain magnitude). Provided the
private operator made reasonable efforts to mitigate and to the extent it was not responsible, the
project owner may have to provide relief to the private operator. PPP contracts may include a
clause allowing for private operator to opt for termination following prolonged force majeure. The
project owner may want to include an option to continue the PPP, provided the private operator
is sufficiently compensated (i.e. compensation and extensions of time to reach substantial
completion during construction; as well as compensation and relaxed performance standards
during operations).
b) Private Risks: n/a.

23
 c) Shared Risks: This is usually a shared risk given neither private operator nor project owner are
better-suited to bear full responsibility. Typical events include armed conflict, nuclear or biological
contamination, as well as discovery of species-at-risk or important artefacts. The fundamental
principle is that each partner bears its own losses.

11. Asset ownership risk.

1. Disruptive technology. This sub-category refers to new or emerging technologies that unexpectedly
displaces established technology, as well as the equipment and other materials used becoming
obsolescent.

a) Public Risks: The project owner risks being handed back a project with outdated technology and
materials, since it cannot require private operator in a PPP to replace technology simply because
more efficient solutions are available. The project owner may want to consider contractual
mechanisms to encourage the private operator to integrate new technologies or practices (i.e.
improved energy efficiency measures, or solar panel heating schemes).

b) Private Risks: If replacing outdated equipment or materials is not required to meet the
specifications, then the private operator is not incentivized to replace the technology.
c) Shared Risks: A contractual mechanism by which to share the risk of disruptive technology, is a
cost-sharing regime wherein the project owner or private operator can request technological
upgrades.
2. Early termination. This sub-category refers to the a project being terminated prior to its signed expiry.

a) Public Risks: The project owner will be concerned with a number of risks associated with early
termination, including reputation, continuity of service delivery, reaching substantial completion
and/or maintenance, as well as potentially retendering the project. In instances of project owner
default termination, the private operator should be compensated as if the PPP had gone as
planned. The project owner should ensure other mitigating mechanisms are applied to reduce
the termination amount - including insurance proceeds, bank accounts, hedge break entitlements
and surplus maintenance funds. Similarly in event of change in law, and other government
actions proving adverse to the function of the project, the project owner will be responsible for
compensating the private operator. PPP contracts typically also include an option for the project
owner to terminate for convenience, for which the same compensation principles apply.
b) Private Risks: The private operator bears risk of termination for severe failures to deliver on
performance - in either a technical or financial sense. Opportunities to rectify should be provided
to the extent possible (i.e. in a PPP with more than one housing development, in the event of a
default isolated to one development the termination can be limited and allow continuity of
operations at the other sites). The typical level of compensation expected for a private operator
may be an amount equal to scheduled outstanding debt, minus applicable deductions (which are
likely if default is related to performance failure).

c) Shared Risks: With the private operator losing its expected revenue stream and the project owner
losing the delivery of the public service, this is a shared risk to mitigate and bear. The
fundamental legal principle in many jurisdictions is that the project owner should not be “unjustly
enriched” by receiving an asset for which it has not paid the full contractual price. For instances
of force majeure, the private operator will be compensated on the principles of it being neither
party’s fault and that the financial consequences should be shared. If the PPP was financed in a
sharia-compliant manner, how ownership will be transferred following termination must also be
considered.
3. Condition at handback. This sub-category refers to the project assets / land not being provided in the
contractually stipulated condition at time of handback to the project owner.
a) Public Risks: n/a.

b) Private Risks: To the extent that the affordable housing project is supposed to be transferred
back, the private operator is contractually obligated to ensure the project asset and land are
handed back to the project owner in the stipulated conditions. Typical contract mechanisms
include an advanced survey of conditions and remediation as appropriate. Depending on the
24
 local housing market, the private operator may be willing to bear residual value risk and retain
the housing stock.

c) Shared Risks: n/a.

Regulatory Framework &

Institutional Arrangement
3.1 Review of National Development Plan
The 2015-2019 National Medium-Term Development Plan, legally established in Perpres No. 2/2015, represents
the presidential agenda (known as “Nawa Cita”) which aims to develop the outer islands, border areas and less-
developed areas to reduce regional disparities. According to the 2015-2019 RPJMN, infrastructure is at the core of
national development. Infrastructure development aims to strengthen national connectivity inter-island or intra
island, cities to cities or intra cities, and urban-rural; accelerate the provision of basic infrastructure (housing, clean
water, sanitation and electricity); ensure water, food, and energy security to support national resilience and develop
urban mass transportation systems. It is estimated that total infrastructure development cost is IDR 5,000 trillion or
USD 333 billion. This includes the maritime-oriented connectivity infrastructure in 45 locations such as seaports,
vessels, and the “sea toll road” for a total investment of IDR 109.3 trillion. Due to the substantial fiscal gap in the
government’s funding capacity, private sector investment is expected to fund at least 37 percent of infrastructure
budgeted in the RPJMN.

The RPJMN refers to alternative financing schemes such as PPP. Through support by Presidential Regulation No.
38/2015 regarding PPP, Bappenas Regulation No. 4/2015 regarding Procedures for Implementing PPP, MoHA
Regulation No. 96/2016 regarding Payment for Availability of Services in the Framework of Regional Government
Cooperation with Business Entities, the government is taking serious steps to encourage local governments to
engage with the private sector. The establishment of a state-owned enterprise, PT. Sarana Multi Infrastructure (PT.
SMI), in 2009 as an infrastructure financing company also aims to support infrastructure project preparation for
PPP.

Following that regulation, GoI has attempted to reform various supporting policies through 16 economic policy
packages. These policies packages aim to improve the Indonesian policies, which currently hinder economic
growth, reorganize the Indonesian bureaucracy, and provide incentives to simplify the investment climate and
economy in Indonesia to be more conducive. The inclusion of urban infrastructure projects in the RPJMN/D is
essential to ensure that those projects are financially secured by the government budget or other financial sources,
such as PPP. The mid-term planning document informs the priority of the development agenda for the next five
years. It thus implies that when considering an urban infrastructure project, we need to determine whether the
proposed project is consistent with Indonesian development plans. As part of the development planning process,
spatial planning and zoning regulations is considered.

3.2 Spatial Planning and Zoning Regulations

Spatial planning is the regulatory framework that provides future spatial structure and pattern for the next 20 years
so that public and private investment can take place and interact productively and sustainably. Law No. 26/2007
mandates that spatial planning covers the administrative boundary area from national, provincial, to Districts/City
(Kabupaten/Kota) level multi-scale for a general directive plan and the functional area based on the strategic value
that was detailed in the general spatial plan. Spatial planning that is carried out by local governments needs to
receive substantial approval from central government through Ministry of Agrarian and Spatial Planning (MASP).
As it relates to urban infrastructure development, there are two main functions of spatial planning: (i) basis for
location permit approval where the urban infrastructure would be developed, and (ii) inputs for private investment
in supporting the implementation of spatial planning that is indicated in the matrix 5-years programs. At city level,
the general spatial plan (RTRW) is sometimes not detailed enough to properly identify the location for investment.
It thus requires detailed spatial planning (RDTR) that is complemented by zoning regulation (PZ) in 1:5,000 scale.
For new 40-60 ha area developments, local government requires a sustainable urban design guideline (RTBL) to
recommend the detailed vision of the urban space, the land and building uses and the size of urban infrastructure
that are required for the development.

25
The spatial planning procedure also mentions that the planning process should involve private and public
participation. It is thus highly important for the proponents of urban infrastructure to engage with the local
government during the spatial planning process or the revision process. At the implementation phase, public
participation, including the private sector, is central since 60 – 80 percent of built up development is provided by
the private sector and local communities. For instance, the RTRW DKI Jakarta (Provincial Government of DKI
Jakarta Regulation Number 1/2012) informs that one of the funding sources for spatial utilization comes from the
private sector (both domestic and foreign) as well as cooperation between the government, local government,
BUMN, individual and community (Article 191-192).

In addition to the RTRW or RDTR, the Strategic Environmental Assessment (SEA) also addresses the importance
of environmental sustainability that is affected by infrastructure policies, planning and programs. The SEA
document is often attached to the spatial plan document. The SEA document contains information related to the
carrying capacity of the environment, the level of resilience and biodiversity potential, estimates of environmental
impacts and risks as well as the level of vulnerability and capacity for adaptation to climate change which need to
be managed if those spatial policies, planning, and programs are implemented. The aim of integrating the results
of the SEA into planning urban infrastructure development is to ensure the principles of sustainable development
have become the basis of implementation as well as to preserve the sustainability of environmental functions and
provide a safer place for society.

Development of urban infrastructure in constructed in coastal areas, should also consider the decentralization law
(UU No. 23/2014) which provides only that the provincial government has authority to provide a recommendation
for marine and coastal resources management. In line with this direction, regulation No. 27 of 2007 concerning
coastal and marine management, which has been amended into Act No. 1 of 2014, has also emphasized that the
provincial government should have coastal management planning (RZWP3K) to provide direction for cities in
utilizing marine and coastal resources. On the other hand, Law No 26/2007 regarding spatial planning has also
defined that the area for spatial planning is delineated by the administrative region. The administrative boundary
covers the land and sea administrative boundary. It means including the 12 miles territorial waters from the
shoreline. It thus creates two ways of coordination, first horizontal coordination between RTRW and RZWP3K,
second horizontal between provincial and city government. In practice, both planning options have created
uncertainty for implementation.

It means that when analyzing potential urban infrastructure PPP, the review on spatial planning should cover RTRW
and RDTR-PZ, including the SEA document and the RZWP3K if the development area is located in a coastal area.
The analysis should produce an interpretation of the spatial feasibility of the project. It is imperative because it
would become a prerequisite for the next step in the PPP assessment. Therefore, in selecting urban infrastructure
projects, the second step is to analyze whether the location or area is suitable in terms of spatial planning and
zoning regulations.

3.3 Regulatory Framework for Urban Infrastructure Sector

The table below summarize the regulatory frameworks concerning urban infrastructure sector, ranging from public
housing sub-sector, general market sub-sector, and area development (industrial estate) sub-sector.
Table 3-1 Urban Infrastructure Regulatory Framework
No Regulation Subject
Public Housing
1. Law 20/2011 Vertical Housing
2. Law 4/2016 Public Housing Fund
3. GR 64/2016 Development of Low Income Community Housing
4. MPWH Regulation 21/2018 Implementation Procedures for The Cooperation
between Government and Business Entities in
Provision of Infrastructure within Ministry of Public
Works and Housing
5. MPWH Regulation 21/216 Facility and/or Aid of Housing Procuration for Low
Income Community

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 6. MOHA Regulation 55/2017 Implementation of Licensing and Non-Licensing on
Construction for Low Income Community Housing
7. MPWH Regulation 1/2018 Vertical Housing Construction and Management
Aid
General Market
8. Law 7/2014 Trade
9. PR 112/2007 Structuring and Developing Traditional Markets,
Shopping Centers, and Modern Shops
10. MOT Regulation 70/2013 (as amended by MOT Guidelines of Structuring and Fostering Traditional
Regulation 56/2014) Markets, Shopping Centers, and Modern Shops
11. MOT Regulation 37/2017 (as amended by MOT Trade Facilities Construction and Management
Regulation 37/2017) Guidelines
Industrial Estate
12. Law 3/2014 Industry
13. GR 142/2015 Industrial Estate
14. MOI Regulation 5/2014 Procedures for Granting Industrial Estate Business
Permits and Industrial Estate Expansion Permits
15. MOI Regulation 40/2016 Technical Guidelines for Industrial Estate
Development

Regulatory Aspects on Public Housing

Based on Decentralization Law UU No. 23/2014 regarding Local Government and Housing Law UU No. 1/2011,
the division of government’s role in reducing the housing backlog has been assigned to central, provincial and local
government as shown in the figure below. It shows the important role of local governments, especially in land
provision, public housing provision, government budget allocation, public utilities provision and other supporting
regulations. The government is obliged to provide housing for low-income group by themselves and/or with the
cooperation with public entities. It is also mandatory for public entities, including private developers, to ensure the
balanced proportion of luxurious, medium-income, and low-income units in their housing development projects.
One luxurious house should be followed by two middle-class units and three for low-income groups. In the
derivative regulation, PP 14/2016, low-cost housing can also be provided by public entities through corporate social
responsibility.
Figure 3-1 Division of Government Roles for Public Housing Development

Source: Law 23/2014 on Regional Government

27
The housing policies for low-income groups also imply that there is a significant role for private developers through
various incentives that are offered by the government, such as ease of issuing permits and access to public housing
development facilities, financing schemes, insurance, and long-term funding availability. For example, Subsidized
Mortgages by the Government through the MPWH Decree 463/2018 regarding the Proportion of Credit or Financing
of New Welfare Home Ownership has increased. Previously, from total KPR funds, the proportion of government
funding was 90%, and the channeling bank provided 10%, now it is 75% by the government and 25% from the
channeling bank. With the decline in the portion of funding, the target of subsidized housing distribution for KPR-
FLPP can be increased to accelerate achievement of targets. In addition, Bank Indonesia has also comfortable
Loan to Value (LTV) rules, the decrease of reference interest, and large mortgage housing subsidy for low-income
groups. Another example is housing permit regulation. The government has accelerated the permit process and
reduced stages from 33 into 11 steps and cut permit duration which was 769-981 days to 44 days. This is estimated
to have reduced permit costs by up to 70%. These economic policy packages are expected to provide an enabling
environment for the private sector to invest in and develop housing projects in Indonesia.
In 2018, the MPWH also attempted utilize PPP to accelerate low-cost housing development through three pilot
housing projects (i) on a 2-ha site owned by the Bandung City Council, (ii) on a 180 ha site in association with Real
Estate Indonesia (REI) in the Jonggol area, and (iii) on a 33 ha site owned by Ministry of Public Works in Bogor.
The project proposals attempt to mix low-cost housing development with non-subsidized houses or commercial
units in a 30:70 or 40:60 proportion (Prabowo, Kompas Daily News, 23 August 2018). The government has offered
the projects on a Build Operate Transfer (BOT) basis with the government retaining ownership in the land. For
land-owned by private interests, the government also tried to develop cooperation through public infrastructure
development to support area development that should followed by certain commitment in low-cost housing.
However, this scheme is still being discussed to ensure transparency and mutual benefits among parties. The
presence of guarantee bodies, such as PT. SMI and PT. PII is required to ensure the PPP scheme for public
housing is manageable.
Several constraints, such as slow receipt of income, limited funding from the lenders, uncertainty in land acquisition,
poor project preparation, changing regulations, unclear allocation of risks, weak coordination and different
perspectives between government and private developers need to be addressed with more conducive policies.
The World Bank’s InfraSAP report estimates that there are around 40 regulations that are related to public housing
development of 158 national laws (World Bank, 2017). The PPP scheme requires a conducive housing policy
landscape. To date, the drafting of regulations for PPP schemes for housing provision and financing is still being
finalized by MPWH and is expected to be implemented by 2019. It will also need derivative technical and
operational regulations as a basis for implementation.
1. GCA Determination

In each PPP Project, the determination of GCA plays important role for the continuity and the success of PPP
Project. The definition of GCA regulated under PR 38/2015 and Bappenas Regulation 4/2015. Public Housing PPP
project are regulated within MPWH Regulation 21/2018, therein it is defined that GCA is minister, head of institution,
head of region, or SOE/ROE board of directors as the provider or operator of infrastructure based on prevailing
regulations.
As described in Figure 2.1 above, the authority on public housing development are divided among Central
Government, Provincial Government, and City/District Government. In Law 23/2014, housing provision for Low
Income Communities (Masyarakat Berpenghasilan Rendah/MBR) are within the responsibility of Central
Government. While Provincial Government are responsible for facilitating the provision of housing for the people
affected by Provincial Government relocation programs. Same goes to City/District Government that are
responsible for facilitating the provision of housing for people affected by city/district government relocation
programs. Based on said division of authority, Minister of MPWH is the most suitable authority to act as GCA in
housing provision for MBR. However, further discussion is required among stakeholders, notably MPWH, relevant
regional government regarding the possibility of Regional Government to act as GCA for other housing provision
scheme.
2. Scope of Services

According to MPWH Regulation 21/2018, the infrastructure that can be cooperated using PPP Model on Public
Housing infrastructure are (1) Public Vertical Housing (Rumah Susun Umum), which are intended to fulfill the needs
of housing for low-income community, (2) Special Vertical Housing (Rumah Susun Khusus), which are intended to
fulfill special needs, and (3) State Vertical Housing (Rumah Susun Negara), which are utilized by way of rent.

28
MPWH Regulation 21/2018 does not specifically describe the scope of work that are going to be provided by IBE.
Nevertheless, Law 20/2011 mention certain activities that are able to be cooperated with Business Entity on public
vertical housing provision. Although Article 15 Law 20/2011 stipulates that construction of public vertical housing,
special vertical housing, and state vertical housing are the responsibility of government, it allows business entity to
conduct construction of public vertical housing and special vertical housing.
Business entities are also allowed to be involved in managing vertical housing after its being constructed. Article
17 (4) MPWH Regulation 21/2018 states that vertical housing management are conducted towards vertical housing
buildings that are categorized as state asset or regional asset. Further, it is stipulated that the vertical housing
management are conducted on vertical housing that are posessed by way of rent. The vertical housing
management are conducted by managing unit, which are formed by ministry/institution or regional government.
Management of vertical housing are covers the activity of operational, maintenance, and upkeep. Article 18
stipulates that operational activity includes, labor administration (i.e. recruitment and employee development),
administration, financial administration. Furthermore, Article 28 of MPWH Regulation 21/2018 elaborates that
maintenance and upkeep that are conducted by vertical housing management unit covers vertical housing building,
infrastructure, facilities and public utilities. MPWH Regulation 21/2018 further stipulates that vertical housing
maintenance and upkeep activities be conducted in accordance with laws and regulations.
Based on Law 20/2011, in implementing its obligation the managing unit of vertical housing are allowed to
cooperate with individuals and legal entities. Therefore it is understandable that based on prevailing regulations on
public vertical housing, the scope of works of IBE in PPP Public Housing Project may include construction and
several aspects of management of the vertical housing.

3. Typical PPP Project Structure

Figure 3-2 PPP Project Structure for public housing PPP

The above picture depicts the ideal project structure for public housing PPP Project. IBE will conduct construction
of vertical housing based on PPP Agreement made with GCA. After the construction period, it is understandable
that based on existing regulatory framework the relevant regional government and/or central government will
formed a unit that will be responsible in conducting the management aspect of public vertical housing. The unit
itself will have certain working relationship with IBE during post construction period of the public vertical housing.
The management unit will be responsible in collecting the rent from residents and tenants or in other way the
operational part of the management. While the IBE will cooperate with vertical housing management unit in
providing the maintenance and upkeep services of the vertical housing and its supporting facilities.
The division of activity between GCA and IBE during the post-construction period is because the operational aspect
of vertical housing mainly covers administrative activity such as selecting the potential residents that will occupy
the vertical housing. However, the stipulations that exist in the regulatory framework shall not limit the possibility of
variation on IBE involvement in post-construction period of vertical housing.

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3.3.1.1 Limitation on Foreign Investment
In Indonesia, the opening/ operation of any type of business must be registered and licensed. Registration of
business and licensing will depend on the classification of the business under the business classification registry
known as "KBLI". The restriction for foreign investments is also determined with reference to the applicable KBLI.
Uncertainties in the KBLI classification may cause delay in the business licensing process.
The list of potential KBLIs that may be considered to be applicable for public housing sector is listed in the table
below, together with the relevant investment negative list in Indonesia for public housing:
Table 3-2 Negative Investment List

No. Negative Investment List Applicable Negative List

68110 This group includes buying, selling, leasing and real 100% Foreign Investment Allowed
estate operations both privately owned and rented,
such as apartment buildings, residential buildings
and buildings are not places stay (such as
exhibitions, private storage facilities, malls, centers)
shopping and others) and the provision of houses
and flats or apartments with or without furniture to
be used permanently, both inside monthly or yearly.
Including land sales activities, development the
building to be operated alone (for leasing spaces in
the building), the division of real estate into land lots
without development land and operation of
residential areas for houses that can moved around.

41011 Construction of Residential Buildings  Construction service with simple

This group includes the construction of buildings
that are used for living quarters, such as residential
houses, apartments and condominiums. Including
building for residential buildings carried out by real
estate companies with the purpose of being sold
and activities for changing and renovating
residential buildings.
technologies, and/or with contract
value up to IDR 50,000,000,000
are reserved for SMEs, are not
allowed for foreign ownership.
 For construction service with
complicated technologies, high
risk, and/or with a contract value
more than IDR 50,000,000,000,
foreign ownership is limited to 67%
(70% for investors from ASEAN
countries).

3.3.1.2 Return on Investment

Aforementioned that it is government’s obligation to provide facility for public vertical housing, particularly for MBR.
There are certain provision on vertical housing rent tariffs to ensure the affordability of vertical housing. On MPWH
Regulation 1/2018, rent tariffs are defined as nominal amount or certain value of money that needs to be paid
regarding the rent of vertical housing unit in certain period. The tariff is determined and calculated by considering
basic tariff calculation, tariffs component calculation, and tariff structure calculation (MPWH Regulation 1/2018).
According to MPWH Regulation 1/2018 State asset user or regional asset manager determines the rent tariff. The
determination is based on calculation that has been conducted, which the amount of the calculation results must
not be more than one third (1/3) of provincial minimum wage. In instance where the tariff is not affordable for the
residents to pay, the Government or Regional Government, as the case may be, must subsidized the rent tariffs.

The provision that exist on MPWH Regulation 1/2018 relating to subsidy is in line with the provision in Law 20/2011.
Article 57 (3) Law 20/2011 that stipulates that the management fee of public vertical housing and government-
owned special vertical housing may receive subsidy from the government.

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Article 11 of PR 38/2015 stipulates that GCA shall determine the form of investment return of the IBE. This
investment return covers the capital expenditure, operational expenses, and profit of the IBE. Furthermore, this
investment return is sourced from:

1. user payment in the form of tariff;

2. availability payment; and/or
3. other forms in accordance with the prevailing laws.

Since the possibility of using payment in the form of tariff for public vertical housing is unlikely since the IBE’s
flexibility in determining the optimum tariff for their return of investment is limited. The most suitable return of
investment scheme for public housing PPP Project is Availability Payment.
Availability Payment or AP is a periodic payment by the GCA to the IBE, for providing infrastructure services that
conforms to the quality and/or criteria as set out in the PPP agreement. AP on PPP project aims to ensure quality
of availability to the public continuously and the optimizations of the GCA’s budget (value for money).
To date, AP is currently regulated under MOF Regulation 260/2016 on Procedures of Availability Payment on PPP
Projects (“MOF Regulation 260/2016”). AP is provided to PPP project(s), which fulfills the following criteria:
1. Infrastructure projects which provides great economic and social benefits to the public as service user;
2. The return of investment from the project does not come from the users (tariffs); or in the event the project
receives revenue from user tariffs, the GCA is not allowed to use such revenue to be included in the AP for
the IBE; and
3. The procurement of IBE for the project shall be conducted by way of fair, open and transparent tender process,
as well as by considering healthy business competition principles.
Other than Central AP deriving from APBN, AP Payment may also derives from Regional State Budget (APBD) as
we understand that the type of return on investment for IBE in the implementation of Regional PPP may be in the
form of Regional AP that is provided by respective local government.
Based on MoHA Regulation 96/2016, Regional Budget (APBD) is being allocated in each budgeting year by GCA
(during cooperation period) for AP Payment upon the completion of construction period and the start date of
operation period. Considering that Regional AP derives from APBD share equal nature in the agreement, Article 5
of MoHA Regulation 96/2016 states that the PPP agreement should consist at least:
1. Output Specifications and Performance Indicator;
2. Agreed formula of AP Payment; and
3. The monitoring system that is effective on performance indicator.

Regional AP shall be provided PPP projects based on the following criteria:

1. Infrastructure projects that provide great economic and social benefits to the public as service user.
2. The return on investment from the project does not come from the users (tariffs).
3. Under MoHA Regulation 96/2016, it is noteworthy to undertake DPRD approval as the AP Payment shall
burden regional budgeting. Pursuant to Art. 4 para. (3) MoHA Regulation 96/2016, DPRD shall be taken into
account its approval in order to implement AP allocated by GCA.
In order to proceed, GCA shall also obtain recommendation from MoHA by submitting OBC or
FBC as well as projected accounting for AP Payment.State Asset Utilization Scheme Based on Article 17 Law
20/2011 it is stipulated that vertical housing are constructed upon (i) right of ownership land (tanah hak milik), (ii)
right to build land or right of use over state land (tanah hak guna bangunan atau hak pakai atas tanah negara), and
(iii) right to build land or right of use over right to manage land (tanah hak guna bangunan atau hak diatas hak
pengelolaan).

Law 20/2011 also stipulates that for construction on public vertical housing may be constructed upon state/regional
asset utilization on state/regional asset in the form of land. However, the state/regional asset utilization scheme
that are allowed in Law 20/2011 are restricted to Sewa and Kerja Sama Pemanfaatan.

3.3.1.3 Government Support and Government Guarantee on Public Housing Sector

Article 15 of PR 28/2015 stipulates that GCA may provide government support towards PPP Project in accordance
with PPP Project scope. Article 16 (1) further describes that MoF may approve government support in the form of
viability gap fund and/or tax incentives in accordance with prevailing laws and regulations based on GCA proposal.

31
The stipulation in regards with government support also exist MPWH Regulation 21/2018, MPWH Regulation
21/2018 stipulates on the steps GCA may take in obtaining government support for relevant PPP Project. The
steps itself is similar with the one provided within Bappenas Regulation 4/2015.

Moreover, MPWH Regulation 21/2018 also regulates the provision on government guarantee on PPP within
Ministry of Public Works and Housing. Notwithstanding, the provision of government guarantee is similar with the
provision as stipulated under PPP laws and regulations. Government Guarantee is a guarantee from he
government on financial obligation of GCA to compensate the IBE in the event of infrastructure risk in accordance
with risk allocation that agreed upon which is the responsibility of GCA under PPP agreement. Extensively,
government guarantee may be granted to IBE for: the occurrence of condition caused by the action or absence of
action by GCA or the government other than GCA in matters which are according to the prevailing laws and
regulations in which PJPK or government other than GCA has the authority to carry out those kind of action; caused
by the policy of GCA or the government otherthan GCA; caused by unilateral decisions of GCA or government
other than GCA; caused by inability of GCA to carry out its specified obligation to IBE under cooperation agreement
(breach of contract).

Pursuant to PR 78/2010, PPP scheme allows mechanism of Government Guarantee provision by ensuring that
PPP project is well-monitored, specifically for the allocation of risks shared by PPP contractual parties.

Regulatory Aspects on General Market

1. Determination of GCA

Article 13 Law 7/2014 stipulates that Government and Regional Government to cooperate in developing,
empowering, and upgrading the quality of General Market in order to increase competitiveness. The clear
determination on who should act as GCA in General Market PPP Project may identified from the division of authority
among central government, provincial government, and city/district government.

Based on Law 23/2014 the division of authority among central government, provincial government, city/district
government in relation with development, empowerment, and upgrading quality of general market are as follows:
Table 3-3 Division of Authority

Central Government Provincial Government City/District Government

- Construction and the operation of a. Construction and operation of trade

regional distributions center and distribution facilities.
provincial distributions center b. Guidance to manager of trade
distribution facility within its working
region.

Since the responsibility to construct and operate trade distribution facilities are lies on the hand of city/district
government. The most suitable authority to act as GCA in General Market PPP Project is the relevant mayor/regent
of certain city or district.

2. Scope of Services

Aforementioned, Law 7/2014 gives mandate to government and regional government to cooperate in construction,
empowerment, and quality upgrades of general market in order to increase competitiveness. Law 7/2014 further
describes that construction, empowerment, and quality upgrades of general market by conducting general market
construction and revitalization, facilitating access to the supply of goods with good quality and competitive prices,
facilitating access to financing sources for traders in general market, and professional operatorship management
implementation.

Ministry of Trade further provides guidelines for regional government in conducting obligation by issuing MoT
Regulation 37/2017. The guidelines encourage regional government to cooperate with business entities in
providing general market. For instance, Art 22 MoT Regulation 37/2017 stipulates that government and/or regional
government may cooperate with private sector in construction and/or revitalization of general market. Moreover,

32
Art 31 MoT Regulation 37/2017 also state that the operatorship of trade facilities (including general market) can be
performed by business entities that are appointed by SKPD that governor/mayor determined.

3. Typical PPP Project Structure

Figure 3-3 PPP Project Structure

The above picture depicts the typical PPP Project structure. It shows the relationship between the GCA which in
this case are Mayor or Regent of relevant city/district government. Through a PPP agreement IBE will provides
service of general market infrastructure facility to tenant and customers alike. The scope of IBE services are
Design-Build-Finance-Maintenance.

3.3.2.1 Limitation on Foreign Investment

The table below describes the potential KBLI that may apply in General Market PPP Project:

KBLI Negative Investment List Applicable Negative List

Code
Supermarket with less than 1,200 m2 sales 100% domestic investments.
floor area
This group consist of retail business activities
in necessities such as groceries/foods,
47111
beverages, or tobacco with its fixed price and
self-service system.
Minimarket with less than 400m2 including
Convenience Store and Community Store
Department Store with Sales Floor Area of Maximum of 67% on Foreign Investment
400 m2 – 2,000 m2
This group consist of retail business activities
47191 in necessities besides groceries/foods,
beverages, or tobacco in a department store,
integrated under a management.

Non-Department Store Retail Business 100% domestic Investments

47192 This group consist of retail business activities
in necessities besides groceries/foods,

33
 KBLI Negative Investment List Applicable Negative List
Code
beverages, or tobacco in a non-department
store area.

Non-Supermarket/Minimarket Retail 100% domestic Investments

Business

47112 This group consist of retail business activities

in necessities such as groceries/foods,
beverages, or tobacco in a non-
supermarket/minimarket area (traditional)
Shopping Centers Construction 1. Construction service with simple
technologies, and/or with contract value up
Class includes the building construction to IDR 50,000,000,000 are reserved for
activity for shopping center, such as mall, SMEs, are not allowed for foreign
department store, store, shop house, and ownership.
stall.
41014 2. For construction service with complicated
technologies, high risk, and/or with a
contract value more than IDR
50,000,000,000, foreign ownership is limited
to 67% (70% for investors from ASEAN
countries).

3.3.2.2 Return on Investment

The management of trade facilities, according to Article 30 MOT 37/2017, may be conducted by individuals, legal
entities, or business entities that are appointed professionally and autonomously for certain period of time. Regional
unit determined by governor or regent/mayor conducts the appointment of manager of trade facilities. In managing
the trade facilities in the form of people market/general market the regional government determine the price or rate
of trade facilities utilization by considering regional social economic, the amount of vendors that will utilized the
market, and the markets location.

The return on investment for PPP project on general market is not certain based on the existing regulations. The
possibility of using either the user charge or the availability payment as the return of investment is remain open.
The determination of the most suitable return of investment scheme is dependent on the calculation of relevant
mayor/regent that act as GCA by considering the elements that exist on MOT 37/2017.

Regulatory Aspects on Industrial Estate

1. GCA Determination

Based on Law 23/2014, the division of authority among central government and regional government in regards
with industrial estate are as follows, central government are responsible in the case that the industrial estate are
located in cross-province and if the capital that are used are in the form of foreign investment. While provincial
government are responsible when the industrial estate are located on cross-district area.

However, after the issuance of GR 142/2015, the central government are given the authority to initiate industrial
estate development. This happened in instances where (i) business entity is not yet able to afford and/or interested
in developing the industrial estate, or (ii) to accelerate the growth of equal distribution of industrial development.

According to GR 142/2015 these so-called “government-initiated industrial estate” will be operated by Public
Service Agency that provide industrial infrastructure. This is different from common industrial estate where the
operation responsibility of the industrial estate will be borne by business entities who held IUKI (Industrial Estate
Business Permit/ Izin Usaha Kawasan Industri).

Based on the existing framework the most suitable to act as GCA are Central Government, which is being
represented by Ministry of Industry. However, it should be further discussed among the relevant stakeholders

34
whether regional government are able to become GCA of Industrial Estate PPP Project. Although on GR 142/2015
regional government are not given the authority to initiated industrial development, they have the authority to
conduct planning of industrial estate development.

2. Scope of Works

The determination of PPP Project scope is crucial in determining the criteria of potential IBE. In industrial estate,
PPP Project the scope of works that might be implemented through PPP Model is quite abroad. Article 10 of GR
142/2015 stipulates the types of infrastructure that needs to be procured within an industrial estate.

Two types of infrastructures that must have exist within an industrial estate. First industrial infrastructure, at the
very least includes energy and electricity network, telecommunication network, water resources and raw water
supply network, sanitation and transportation network. Second, supporting infrastructure that at the very least
includes housing, education and training, research and development, health, fire rescue, and waste disposal.

The provisions of infrastructure above are the responsibility of Government and Regional Government. However,
in providing such infrastructure the government are allowed to cooperate with business entities, particularly for
government initiated industrial estate. Therefore, for potential GCA’s it must be able to determine the scope of
works that are going to be cooperated with IBE through PPP Model. The more types of infrastructure that will be
procured through PPP, the more complexity of criteria that needs to be fulfilled by potential IBE’s.

3. Typical PPP Project Structure

The figure below depicts the ideal project structure of Industrial Estate PPP Project:

Figure 3-4 PPP Project Structure of Industrial Estate

Based on the above pictures the GCA will have PPP Agreement with IBE regarding the provision of industrial estate
infrastructure. Moreover, as mentioned above for government initiated industrial estates will be operated by BLU,
which means the industrial estate will pay any relevant fees or payment regarding industrial estate facility.
Furthermore, GCA will pay the availability payment to IBE through IBE.

3.3.3.1 Limitation on Foreign Investment

The table below describes the potential KBLI that may apply in Industrial Estate PPP Project:

Table 3-4 Potential KBLI

KBLI
Negative Investment List Applicable Negative List
Code

68130 Industrial Estate 100% Investment Allowed

This sub-classification includes:
Cultivation of land with an area of at least 50
hectares in one stretch which is used as an area

35
 KBLI
Negative Investment List Applicable Negative List
Code

of concentration of industrial activities equipped

with supporting facilities and infrastructure
developed and managed by Industrial Estate
Companies that have Industrial Estate Business
Permits
Concession of certain Industrial Estate land for
Micro, Small and Medium Enterprises is at least
5 (five) hectares in one stretch.
41013 Industrial Building Construction  Construction service with simple
This group includes the construction of buildings technologies, and/or with contract value
used for industry, such as factories and up to IDR 50,000,000,000 are reserved
workshops. Including changes and innovation for SMEs, are not allowed for foreign
activities in industrial buildings ownership.
 For construction service with
complicated technologies, high risk,
and/or with a contract value more than
4291 Construction of Other Civil Buildings IDR 50,000,000,000, foreign ownership
is limited to 67% (70% for investors
This subgroup includes:
from ASEAN countries).
- Construction of industrial facilities, except
buildings, such as oil refineries and chemical
industry plants
- Construction of waterways or canals, ports and
facilities for river, dock (base), sluice gates and
others, dams and dikes
- Dredging for the manufacture of water
transportation lines
- Construction other than buildings, such as
outdoor sports facilities
- Division of land with its development (eg
addition of public infrastructure roads and
others)

3.3.3.2 Return on Investment

Aforementioned, central government are given the authority to initiate industrial estate development. For industrial
estate that are initiated by the government, the management of industrial estate will be conducted by BLU industrial
estate business entities. The management of industrial estate, as mentioned on MoT Regulation 40/2016, covers
management system implementation, tenant services, marketing, business development, infrastructure and
supporting facilities maintenance etc.

Regarding the scope of management of industrial above it should be explore further whether the BLU and IBE can
have a joint management structure. Therefore, it will be possible to structure a revenue sharing scheme between
IBE and BLU as return of investment scheme instead of availability payment. Thus, decreasing state-budget
dependency.

Regulatory Aspects on Urban Regeneration (i.e. DKI Jakarta TOD)

1. GCA Determination

Transit-oriented Development (TOD) development is becoming trend of urban regeneration in major Indonesian
cities. TOD aims to develop an integrated area development in accordance with the principles of smart growth. It
is important to assess in case of TOD being cooperated by way of PPP which authority shall act as GCA.

MASP provides guidelines regarding the development of TOD Area that are poured in MASP Regulation 16/2017.
In said regulation, it is stipulated that TOD Management may be performed through cooperation between

36
Government/Regional Government with Business Entity. It is further stipulates Government/ Regional Government
may form a unit in accordance with its authority or assign SOE/ROE that are the main operator of transportation
system to manage the development of TOD Area.

In connection with the guidelines in MASP Regulation 16/2017, DKI Jakarta Government has issued GR 44/2017
on TOD area development. Main Operator that are assigned and/or determined as the administrator of TOD area
by the Governor executes the management of TOD area including its development according to GR 44/2014. Main
Operator are further defined as ROE and/or Unit Pengelola Dinas Perhubungan that built infrastructure and facilities
and/or implement mass public transportation system on certain corridor.

In applying the provision of GR 44/2017, Governor DKI Jakarta issued DKI Jakarta Governor Regulation 140/2015
that gives special assignment to PT MRT Jakarta. The assignment also includes the provision that stipulates MRT
Jakarta have the authority to cooperate with ROE and/or other business entities in ensuring the realization of TOD
area development.

In case of TOD area development are intended to be developed by way of PPP, it should be further discussed with
the relevant regional government whether or not if certain ROE are appointed as executor of TOD area
development, does such assignment also means the particular ROE has the authority to be GCA.

2. Different Location of TOD

Every PPP project is required to fulfill the compliance criteria. The most crucial criteria are compliance with the
spatial plan and/or zoning regulations. In the existing regulatory framework regarding TOD, in DKI Jakarta alone,
there are discrepancies of locations that are intended for the development of TOD. There uniformity issues between
all relevant regulations, it is advised that there should be definitive location determination to overcome the fulfillment
of compliance conditions with the spatial plan.

The following table illustrates the discrepancies of TOD Locations among spatial regulation and strategic master
plan regulation

Table 3-5 Discrepancies of TOD Locations

GR 1/2012 GR 1/2014 PR 55/2018
(DKI Jakarta Spatial Plan) (DKI Jakarta Specific Spatial (Jabodetabek Transportation
Plan) Masterplan)
1. Dukuh Atas 1. Dukuh Atas 1. Dukuh Atas
2. Manggarai 2. Manggarai 2. Manggarai
3. Blok M 3. Blok M 3. Blok M
4. Harmoni 4. Harmoni 4. Harmoni
5. Pasar Senen 5. Pasar Senen 5. Pasar Senen
6. Grogol 6. Grogol 6. Grogol
7. Jatinegara 7. Kampung Rambutan
8. Pulo Gebang 8. Lebak Bulus
9. Tanjung Priok
10. Rawa Buaya
11. Jakarta Kota
12. Cawang-Cikoko
13. Tanah Abang
14. Stasiun Tanjung Barat
15. Stasiun Juanda
16. Mangga Dua
17. Cibubur
18. Pancoran

3. Government Support on Urban Infrastructure

Aside from urban infrastructure that falls within the scope of Ministry of Public Works and Housing such as Public
Housing sub-sector, there are no specific regulations that differentiate the practice of government support on the
remaining sub sectors of urban infrastructure PPP Project. The fact that there is no specific regulations that
differentiate the applicability of government support or the diferention criteria that needs to be fulfilled to obtain

37
government support in urban infrastructure renderes the stipulation of PPP laws and regulations also applies for
urban infrastructure.

4. Other Policies and Sectoral Strategies

As one of the fastest urbanizing countries, it is thus not unexpected to experience changes in regulations and
policies. The dynamic policy landscape has led a lack of clarity and certainty in regards to the rules of the game for
the private sector. In developing the urban infrastructure PPP scheme, we should consider various cross-sectoral
regulations and policies (see table).

Table 3-6 Urban Infrastructure Policy Landscape

No Policy Area Description

1 Land Acquisition
Land acquisition is critical for infrastructure development. Various cases show that
many projects are delayed due to land problems. Law No. 2 /2012 concerning land
procurement for development that is related to the public interest tried to provide
assurance for infrastructure development. But resistance continues to be
encountered mainly from parties which are directly impacted by land acquisition
issues. The need for the acquisition of specific land areas for infrastructure
development in the national interest should be intensively socialized to the
community. Land holders should release their land for the public interest. On the
other hand, the government also needs to be proactive in providing land for public
infrastructure.
Currently, two draft regulations are being prepared: (1) Draft Government
Regulation on Land Banks, and (2) Draft Regulation of MoF on Progressive Taxes.
Both regulations hopefully can encourage people to be more active in supporting
the availability of land for development. For example, the provision of green open
spaces as mandated by Spatial Planning Law. This regulation for housing
complexes or new town developers is not easy to comply with. Limited land
availability and high land prices always become key issue. At the same time, city
government needs to provide a minimum 30% of its urban area.
The other regulation that needs to be considered is the presence of State Asset
Management Agency (LMAN) as derivative from the Presidential Regulation No.
102/2016 regarding Land Procurement Funding for Development in the Public
Interest. The role of LMAN to support implementation of National Strategic
Projects is expected to contribute positively, primarily related to PPP.
Most land acquisition costs for urban infrastructure development are still funded
from APBD funds. For instance, all land acquisition costs in construction of
603,516 houses for Low-Income houses as part of the ‘One Million Housing
Program’ used the DKI Jakarta Provincial Budget (APBD). The initial fund injection
in 2017 was close to IDR 16 trillion (USD 1.2 billion), of which toll roads received
the largest allocation for about IDR 13.3 trillion, followed by railway infrastructure
(IDR 3.8 trillion), dams (IDR 2.4 trillion), and port infrastructure (IDR 500 billion).

2 Environmental Environmental Law No.32/2009: Environmental Protection and Management

Sustainability
Minister of Environment Regulation 5/2015: AMDAL and Regulation Government
27/2012 concerning UKL / UPL or Environmental Permit.
Assessing environmental policies is important to define the role of both parties in
implementing urban infrastructure. Some of national strategic project planning
processes, such as the establishment of the Merauke SEZ and the Construction
of Patimban Port, were delayed due to environmental compliance issues.

3 Capital Investment
The Government announced the 16 Economic Policy Package contained in
Presidential Regulation No. 91/2017 regarding the Acceleration of Business
Implementation. BKPM now provides a centralized licensing point for specific
sectors, which should increase the efficiency of the investment approval process
PP 24/2018 regarding Online Single Submission (OSS) is also a positive step
towards accelerating urban infrastructure investment and construction.

38
 No Policy Area Description
Another regulation concerning Capital Investment that is related to housing sector
(Presidential Regulation No. 44/2016) and to waste management (Presidential
Regulation No. 39/2014) are also essential to be considered. Both regulations
regulate the List of Business Fields that are allowed, allowed with conditions, and
disallowed in the field of Investment. Both also regulate the percentage of capital
ownership

4 Infrastructure Presidential Regulation 82/2015: Central government guarantees for infrastructure

Finance financing through direct loans from national financial institutions to state-owned
enterprises (SOEs/BUMN).
MoF Regulation 223/PMK.011/2012: Provision of Viability Gap Fund, MoF
Regulation 143/PMK.011/2013: Guidance of Provision of Viability Gap Fund (VGF)
MOHA Regulation 96/2016: Payment Availability of Services in the Framework of
Regional Government Cooperation with Business Entities in the Provision of
Infrastructure in Regions.
MoF Regulation 190/2015: the use of availability payments for infrastructure
finance; MoHA Regulation 96/2016: Availability payments for local infrastructure
PPP.

5 Local Regulations Several local regulations support PPP programs to increase regional economic
growth. These policies are for example the use of development materials derived
from local resources and wisdom with minimum service standards from the
aspects of security in construction, health, and comfort. Including the necessity of
involving the local community during the infrastructure development process.
Source: Compilation form various sources. 2018

The presence of differences among sectoral policies and the possibility of overlapping or divergent regulations are
critical factors that should be identified in the third step, after RPJMN/D and RTRW/RDTR review process and
before assessing technical and financial aspects. Each type of urban infrastructure requires a different kind of
policy analysis, and it is thus essential to have a comprehensive understanding of the opportunities and constraints
that are caused by regulations or policies for urban infrastructure development. The government should identify
potential inconsistencies and duplications and resolve any issues once the regulatory check has been completed,
before offering potential projects or agreeing to review unsolicited PPP proposals from the private sector.

Institutional Framework
4.1 Institutional/Stakeholders Mapping
Mapping key stakeholders is needed to recognize different interests of various stakeholders that probably can
affect project risks and viability for urban infrastructure development. There are 3 (three) stages of doing
stakeholder mapping: (1) identifying stakeholders; (2) differentiating roles between and categorizing stakeholders;
and (3) investigating relationships between stakeholders. The table below shows the initial mapping of each
stakeholder that is involved in urban infrastructure development.

39
 Table 4-1 Stakeholder Mapping for Urban Infrastructure PPP Projects

No Subgroups Role

Public Urban Area General

Housing Renewal/ Developm Market,
Stakeholders Revitalizati ent e.g. e.g.
on/ Industrial Traditional
Regeneratio or Market
n Tourism
Developm
ent

A Public Sector (Government)

1 PPP Unit  Ministry of Finance (MoF) a) Regulator and
monitoring for the
process of
Infrastructure
Guarantee, VGF and
AP
b) Granting approval
and monitoring the
implementation of AP
c) Regulator and
granting approval for
the implementation
of PDF
d) Granting approval for
state assets
utilization
 Development Planning Agency (Bappenas) a) Planning,
programming, and
budgeting of APBN.
b) Regulator and
monitoring the
implementation of
PPP stages
 Committee for Acceleration of Priority Infrastructure a) Coordinator for
Delivery (KPPIP) acceleration of
priority and national
strategic
infrastructure
provision projects.
b) Debottlenecking of
priority and national
strategic
infrastructure
provision projects.
 National Public Procurement Agency (LKPP) Regulator and
monitoring the
implementation of IBE
procurement
Technical  Ministry of Agrarian Affairs & Spatial Planning/ National a) Making
Ministry/ Land Affairs Agency (MASP) compensation
Agency:  State Asset Management Agency (LMAN) payments for land
acquisition for
national strategic
infrastructure
provision projects
b) Regulator and
supervision for the
implementation of
land acquisition for
public interest

40
No Subgroups Role

Public Urban Area General

Housing Renewal/ Developm Market,
Stakeholders Revitalizati ent e.g. e.g.
on/ Industrial Traditional
Regeneratio or Market
n Tourism
Developm
ent
 Indonesia Investment Coordinating Board (BKPM)/ OSS  Conducting market
Authority (as applicable) sounding for PPP
projects.
 Providing relevant
licenses for specific
sector PPP projects.
 Ministry of Environment & Forestry (MOEF) Regulator and
supervision for SEA or
EIA (AMDAL) permits
Government  Ministry of  Ministry  Ministry  Ministry a) Responsible for the
Contracting Public of Public of of Trade preparation of PPP
Agency (GCA) Works and Works Industri (MoT) projects
Housing and al  Local b) Procurement of IBE
(MPWH) Housing  Ministry Govern and monitors PPP
 Perumnas (MPWH) of ments – project
(SOE)  Ministry Touris Departm implementation
 Local of m ent of c) Disburse AP to the
Governme Agrarian  Local cooperat IBE during validity
nts – Affairs & Govern ives & period of the PPP
Departmen Spatial ments small Agreement/concessi
t of Public Planning/ – medium on
Works & National Depart enterpris
Housing Land ment of es
Affairs Trade
Agency &
(MASP) Industr
 Local y or
Governm Touris
ents – m
Departme
nt of
Public
Works &
Housing
B Private Sector
2 Implementing  Developers Responsible for the
Business  Contractor (EPC) & Design Consultant financing, design,
Entity (IBE)  Operator Consultant (Operation & Maintenance) construction, operation
 Finance institution (Bank/ Koperasi and maintenance of all
infrastructure that are
included under the PPP
projects’ scope of work.
C Finance Institutions
3 Finance- PT. Sarana Multi Infrastruktur (PT. SMI) Infrastructure financial
related and project preparation
institutions Indonesia Infrastructure Guarantee Fund (IIGF) or PT. Providing Government
Penjamin Infrastruktur Indonesia (PII)  Improve the Guarantee to the
creditworthiness of PPP projects designated PPP
projects
Indonesia Infrastructure Facility (IIF) Infrastructure financing
and advisory services
provider
Multilateral World Bank, Asia Development Bank (ADB), Multilateral Alternative credit facility
Development Investment Guarantee Association (MIGA), International Partial Risk Guarantees
Bank Finance Corporation (IFC)) (PRGs)
41
 No Subgroups Role

Public Urban Area General

Housing Renewal/ Developm Market,
Stakeholders Revitalizati ent e.g. e.g.
on/ Industrial Traditional
Regeneratio or Market
n Tourism
Developm
ent
D Non-governmental Organization (NGOs)
1 NGO  NGOs/community-based organizations that represent Monitoring project
community interests that located in or impacted by the process (planning to
development implementation)
 NGOs that represent broader interests outside the
immediate scope of services in question (e.g.
environment)
E Society
1 Society Citizen groups Providing inputs for the
Individual Consumers development
Participating in the
market surveys

In order to give a better picture regarding the stakeholders and the coordination line between each stakeholders in
urban infrastructure PPP, the mapping of stakeholders of each subsector is illustrated below.
Figure 4-1 Institutional Arrangements on Public Housing Sub-Sector

42
 Figure 4-2 Institutional Arrangements on General Market Sub-Sector

Figure 4-3 Institutional Arrangements on Industrial Estate Sub-Sector

4.2 Public Sector

1. MoF PPP Unit

The role of Directorate of Government Support and Infrastructure Financing Management (DGSIFM) under the
Directorate General of Budget Finance and Risk Management, Ministry of Finance (MoF) as the PPP Unit is to
boost PPP development by giving government support and to promote awareness of PPP. The PPP Unit’s core
mandate is to:

a. Improve the quality of project selection under KPPIP

b. Support project preparation through PDF using high-quality transaction advisors, VGF and sovereign
guarantees
c. Act on behalf of the Minister of Finance to provide government support for projects in all stages of the bidding
process
d. Coordinate all public finance instruments, so plans have a single financing and guarantee support package.

43
e. Provide capacity building to GCAs and other relevant stakeholders to complete project preparation until
financial close

2. Bappenas qq Directorate for PPP

The PPP Directorate plays a key role in planning infrastructure development and supporting GCAs in project
selection through to the development of OBCs. It focuses its efforts on early stage project identification, receiving
submissions from GCAs for individual PPP project proposals. Bappenas influences budget planning. This position
should be used to encourage GCAs to conduct more due diligence during early identification and election stages,
to establish criteria and processes designed to help GCAs select projects, to improve the potential PPP projects’
pipeline.

3. KPPIP

Led by the Coordinating Minister for Economic Affairs as the Chairperson, the Committee consists of the Minister
of Finance, Head of Bappenas, and the Minister of Agrarian Affairs and Spatial Planning. KPPIP’s role in
coordination among national infrastructure agencies is to accelerate priority infrastructure and promote project
quality improvement for “priority” projects. KPPIP is also in charge of determining priority projects and at the same
time defining financing schemes.

4. State Asset Management Agency or Lembaga Manajemen Aset Negara (LMAN)

LMAN has a key role in managing state assets, include land acquisition. LMAN has a flexible budgeting system
which allows it to use its budget at any time, without any obligation to return the remaining budget to the MoF.
However, as it has just been established, it has not been provided with a sufficient budget to procure land. APBD
still funds the costs of land acquisition for urban infrastructure development.

5. Government-based Financing Institutions

Indonesia Infrastructure Guarantee Fund (IIGF / PT PII) is mandated to provide guarantees to the private sector to
cover the non-financial and certain financial obligations of central and local government counterparties for
financially viable PPP projects. The Government through MoF established the PT PII as an SOE, 100 percent
owned by the government. It may only guarantee PPP projects which comply with Presidential Regulation No.
38/2015.
PT. Sarana Multi Infrastruktur (PT. SMI) is an infrastructure financing company that provides competitive
infrastructure financing including debt and equity to infrastructure projects. It is also the PDF facilitator and is 100
percent owned by the MoF.
Indonesia Infrastructure Facility (IIF) is a private entity owned 30 percent by PT SMI and 70 percent by a
consortium, comprising Asian Development Bank (ADB), International Finance Corporation (IFC), Deutsche
Investitions-fund Entwicklungsgesellschaft mbH (DEG) and Sumitomo Mitsui Banking Corporation (SMBC). IIF
provides lending to viable infrastructure projects in domestic currency including delivering financial products for
PPP projects.

6. Government Contracting Agencies (GCA)

GCAs consist of Ministers / Heads of Institutions / Regional Heads, or State-owned Enterprises / Regional Owned
Enterprises as infrastructure providers or providers. The GCA in the PPP Structure of housing and sanitation
infrastructure is the Minister, Governor, Regent, or Mayor as their authority.

4.3 Private sector

Stakeholders from the private sector are generally divided into:
1. Implementing Business Entities (IBE)
Business Entities is a legal entity that carries out PPP contracts and is responsible for the infrastructure and
services provided following the output specifications are written in the contract.

44
2. Supporting aspects of construction and operation
Supporting providers of development and operations, consisting of design consultants, contractors, and
operators. The function of the design consultant and contractor can be combined by selecting Engineering,
Procurement and Construction (Engineering, Procurement and Construction - EPC) companies. They also
engage in contractual agreements with the IBE that aims to provide infrastructure and services available under
PPP contracts.
3. Supporting financing aspects
Supporting parties for financing aspects consist of Project Sponsors and Lenders. Project Sponsor is a single
individual/company/consortium of companies/cooperatives that provide capital in IBE under PPP contract
requirements.

4.4 Community
The purpose of PPP is to provide benefits to the community. Direct public participation - by service users or other
stakeholders - at various stages in the PPP process will improve project design and performance. Another factor
that is equally important is the transparency of the process in the public domain. In the Indonesian context, people,
who are sometimes represented by NGOs, play a crucial role in supporting or being a part of the PPP program.
The limited knowledge among the wider community contributes to the emergence of NGOs, so they are very much
needed for the procurement of self-help houses, especially access to land availability.
Mapping the relationships among stakeholders in urban development context would provide a better understanding
of the potential for urban PPP. The map can inform the interest or concern of stakeholders, the potential risks and
errors, effective mechanism to influence other stakeholders, key people would be well informed, and the existence
of negative stakeholders, if any. Mapping would make management easier. As suggested by Escobedo (2016), the
arrangement can be established if stakeholder identification or mapping is followed by differentiating and
investigating relationships. This would lead to communications strategy development, so that interaction between
stakeholders can be started.
The next step is to develop communications strategies that are in line with the project's needs to strengthen
stakeholder engagement. According to Zou et al. (2014), most practitioners look at relationship management as a
process of communication. It mainly about communicating with clients and stakeholders and maintaining a strong
relationship with clients.

Figure 4-4 Stakeholder Assessment

45
4.5 Government Relationships/Engagement in Project Structure
The government has a critical role in managing and directing stakeholders who are involved in PPP projects to
achieve development targets. Started from formulating an urban PPP policy framework, creating an enabling
environment, establishing an administrative mechanism, promoting good governance, addressing the social and
political concerns about urban PPP projects, to increasing the capacity of local government and community, the
government should act as a policy and decision maker. It thus requires a good strategy and expertise in managing
and directing stakeholders to implement PPP policy for urban infrastructure development.
According to Zhang (2016), the most critical approach to get stakeholder engagement in PPP project is: (i) obtain
a good understanding of government and private sector objectives, (ii) clear and timely information distribution to
general community, (iii) early communication with stakeholders on their concerns, and (iv) honest communication
with the general population. Government engagement is carried out through an active consultation process
between government and potential stakeholders involved in the PPP project. The forms of PPP model depend on
the investment factors, and risks, obligations, and duration factors as shown in the figure below. They can be
management contracts, turnkey, lease, concession, or private ownership (See figure 3.2). Therefore, the
government engagement would not be the same for each type of urban infrastructure.
Figure 4-5 PPP Model Types

Source: UNESCAP, 2008

In affordable housing, if the local government has land available, it can propose that the private sector investor
either just act as a developer or also be an operator if the building type is rental housing. In addition, local
government can also be as an incentive provider through spatial planning, building codes etc.. If the available land
is located in a per-urban area, the government should also act as enabler through basic infrastructure development
with central government support. Therefore, it is preferable to establish joint cooperation between local government
and the private sector.
In urban renewal/revitalization/regeneration, the institutional set up depends on the interests of land and building
owners. If the land is owned by government but has been developed on an ad-hoc basis by the community, the
government can invite the private sector to become involved by allowing additional vertical development space
without displacing the original community through spatial planning and zoning regulations. The key issue is about
building trust between the private sector, government and the general community. For old buildings or heritage
sites that are abandoned or inactive, the government with private sector assistance can invite the building owner
to co-develop new urban economic activities. In this case, the role of the government can be as enabler and
regulator for joint-cooperation.
In industrial or tourism area development, the institutional arrangement should involve inter-governmental
cooperation at the beginning because the presence of basic infrastructure is the key beside other technical policy
and administrative support. The strong commitment of government and financial institutions can attract private
companies to develop and operate some or all facilities within the development area.
In the traditional market revitalization, the government can either increase the capacity of existing traditional market
facilities with several improvements or develop new facilities on government land. Combining mixed-use
development with the traditional market as the anchor can be another alternative. This should attract more private
sector investors to become involved in the PPP framework.

46
The table below summarize the regulatory frameworks concerning urban infrastructure sector, ranging from public
housing sub-sector, general market sub-sector, and area development (industrial estate) sub-sector.

Table 4-2 Regulatory Framework of Urban Infrastructure

No Regulation Subject

Public Housing

1. Law 20/2011 Vertical Housing

2. Law 4/2016 Public Housing Fund

3. GR 64/2016 Development of Low Income Community Housing

4. MPWH Regulation 21/2018 Implementation Procedures for The Cooperation

between Government and Business Entities in
Provision of Infrastructure within Ministry of Public
Works and Housing

5. MPWH Regulation 21/216 Facility and/or Aid of Housing Procuration for Low
Income Community

6. MOHA Regulation 55/2017 Implementation of Licensing and Non-Licensing on

Construction for Low Income Community Housing

7. MPWH Regulation 1/2018 Vertical Housing Construction and Management

Aid

General Market

8. Law 7/2014 Trade

9. PR 112/2007 Structuring and Developing Traditional Markets,

Shopping Centers, and Modern Shops

10. MOT Regulation 70/2013 (as amended by MOT Guidelines of Structuring and Fostering Traditional
Regulation 56/2014) Markets, Shopping Centers, and Modern Shops

11. MOT Regulation 37/2017 (as amended by MOT Trade Facilities Construction and Management
Regulation 37/2017) Guidelines

Industrial Estate

12. Law 3/2014 Industry

13. GR 142/2015 Industrial Estate

14. MOI Regulation 5/2014 Procedures for Granting Industrial Estate Business
Permits and Industrial Estate Expansion Permits

15. MOI Regulation 40/2016 Technical Guidelines for Industrial Estate

Development

47
 Financial and Economic
Assessment
5.1 Introduction
Private financing is one of the key features of PPP transactions. Through it, the government is able to accelerate
the development of infrastructure and anchor transfer of contractual risks to the private sector. The former in
particular is one of the main drivers for governments in EMDE countries to pursue PPPs as private capital can
bridge the gap between the infrastructure needs and the comparatively limited public financial resources available.
The large-scale mobilization of private capital in EMDE countries remains a major challenge largely due to
investors’ risk appetite that is driven by a number of factors including political stability, economic volatility,
transparency concerns, etc.

Compared to the public sector cost of borrowing, private capital typically comes at a premium. In the context of
government having the financial resources to undertake an infrastructure project through traditional delivery
models, this warrants important consideration. Understanding the value that comes with such relatively expensive
private capital is a key consideration for the public sector during the decision-making process. This is where the
risk transfer feature of PPP projects becomes very important. While quantifying the fiscal cost of a project may
prove a PPP approach to be more expensive than traditional, government-funded procurement, quantifying the
risk-adjusted cost may reveal a different picture. This is the basic premise of a typical quantitative Value for Money
(VFM) assessment as is presented in the figure below.

Basic elements of a typical VFM analysis, as per Deloitte

In order to balance the trade-off in a PPP between achieving risk transfer and increasing project costs through
private capital premiums (i.e. to maintain project affordability), it may be beneficial in some cases for public sector
funding to partially cover some of the project’s capital costs. This may be referred to as Viability Gap Funding, in
others words it is the amount of public capital required for the project to financially viable from a private capital
perspective when faced with limitations around long-term revenues (either through an limited AP or due to
limitations in user revenue).

Private capital in a PPP project comes in the form of debt or equity with both being used on a typical project. Each
of those broad categories has its own financial instruments, come with different cost implications and have different
risk profiles. Key features of these forms of private capital are discussed below.

48
 Debt
In simple terms, debt refers to financing that is obtained through third-party financial institutions, typically banks or
bonds raised in the capital market. PPP projects are typically implemented under a project-finance structure
whereby a Special Purpose Vehicle (SPV) is set-up by the private sector as a standalone entity with the sole
purpose of delivering the project. Debt and equity are injected into the SPV to enable it to cover the capital costs
of the project. Once the project is in operations, the SPV receives revenues from the project and these revenues
are generally its only source of revenue which it uses to cover operating costs and repay the debt and equity
investments. This is the basic structure of a project finance model where lenders only have recourse to the project’s
revenues (and whatever guarantees are put in place with respect to the SPV’s obligations).

Out of the two forms of private capital, debt has a lower cost. However, the cost of debt (i.e. the interest rate) can
vary due a number of reasons with a key one being the lenders’ view of project risks. When it comes to lending
into projects where the public sector sponsor / off-taker has a sovereign credit rating that is low or when the sponsor
is a local government entity (e.g. municipality) with limited financial resources, the cost of debt increases.
Guarantee facilities, such as those provided by IIGF can play an important role in de-risking a project to enable it
to lower the cost of, or even attract, private debt. The figure below outlines the overall financial and contractual
structure of a PPP transaction that includes Viability Gap Funding, a Guarantee facility and private capital (debt
and equity) injected into the project.

Figure 5-1 Financial and Contractual Structure of A PPP Transaction

It should be noted that the availability of debt with sufficiently long-term tenors that matches the duration of a PPP
contract is a major issue facing many EMDE financial markets. In Indonesia this risk is present as most banks do
not offer debt with tenors of 20-30 years. This introduces refinancing risks to the project. An alternative for investors
would be to seek long-term debt externally, however that typically comes in hard currency and therefore introduces
currency exchange risk. Practice in Indonesia has also been to secure debt based on corporate lending rather than
limited-recourse project financing. Corporate lending is reliant on the strength of the borrower’s balance sheet and
the guarantees they can provide to secure the lending. This is not a sustainable approach due to standard debt
limitations on borrowers and therefore access to capital to finance PPP projects at a large-scale may be significantly
impacted.

Equity

Equity refers to the cash invested in a projected by investors making them shareholders of the SPV. In a non-
recourse, project finance structure, the liability exposure of shareholders is limited to their shareholding in the SPV.
Equity can be invested in a PPP project directly (e.g. cash injection from investors) or indirectly through funds or in
49
some cases through subordinated debt instruments. From a cashflow perspective, equity is subordinated to debt
meaning that in the event of shortfalls, debt lenders have higher rights to receive available funds. This additional
risk that equity investors assume comes with a pricing premium. It is standard for equity invested in a project to
target an Internal Rate of Return (IRR) that is higher than the interest rate payable to debt lenders.

The IRR on equity is typically estimated using the variant of Capital Asset Pricing Model (“CAPM”). CAPM computes
the required rate of return on equity as a function of the rate of return on a risk-free investment, plus an equity risk
premium (the return stockholders expect above the return on a risk-free investment), multiplied by the “beta” for
the investment. A standard proxy for the risk-free rate is the sovereign cost of borrowing. The yields of such bonds
(30-year Indonesian Sovereign Bond) as of 31 December 2018 for Indonesian Sovereign Bond yields in IDR was
9.09%, while Bond Yield in USD was 5.20% (data taken from Bloomberg Analysis 2019, refer to Annex I). Adding
the necessary layers for risk premiums (country risks, project risks, etc.) an indicative cost of equity in IDR can be
expected to be approx. 19.5%, meanwhile the corresponding cost of equity in USD can be assumed at 15.5%.

Alternatively, the estimated cost of debt in Indonesia, based on the Indonesian IDR and USD lending rates
published by Bank Indonesia as of 31 December 2018, are approx. 10.37% and 5.52%, respectively. While it may
appear more efficient to finance a project entirely based on debt (being the less costly form of private capital),
lenders typically dictate a minimum level of equity to be invested in the project. This equity acts as a “buffer” that
protects the project’s ability to service the debt in case of cash shortfalls. The ratio of debt-to-equity (also referred
to leverage) on a project is dependent on a number of factors, paramount among them being the lenders’ view of
the project’s overall risk profile.

5.2 Sector-specific Considerations

Introduction

The diverse nature of projects in the urban sector carries on to impact the financial nature of these projects.
While some are projects that carry a large element of social service attached to them (e.g. affordable housing),
many projects in the urban sector come with a significant commercial component that is attractive to the private
sector and may greatly lessen the burden on local government and, in some cases, even contribute financial
returns to the public sector.
Cost and Revenue Overview

According to Bappenas’ KPBU toolkit, the figure below shows some key components that affect capital costs in
urban infrastructure development. Under this model costs are categorized into four main components as follows:
Figure 1-2 Key Components That Affect Capital Costs in Urban Infrastructure Development

Source: Bappenas Toolkit and various source, 2017

In sectoral-based area development, capital cost is usually relatively large as these projects require landscape
management, main infrastructure, and basic utilities to prepare the land for the main economic activities. In addition

50
to developing a project in stages, the private sector investor often needs government support for some of these
basic or bulk infrastructure costs.
In affordable housing, the most significant investment cost is the provision of land and construction of buildings.
Land cost can be higher if purchased from individual landowners or was previously customary land (tanah adat),
which requires compensation to obtain permits.
From an operating cost perspective, O&M costs associated with projects in the urban sector generally fall into two
main categories as noted in the figure below:
Figure 1-3 O&M Costs

Source: Bappenas Toolkit and various source, 2017

Although dependent on the size of a project, O&M costs for sectoral-based area development is higher than for
other urban infrastructure. In this instance OPEX covers operational costs for the whole area, especially for basic
utilities services. Maintenance costs can also be higher if infrastructure quality is low.
As varied as they are in their capital cost structures, urban sector projects can attract different forms of revenue.
Taking an Industrial Estate development project as an example, a well-structured PPP in this space can benefit
from several potential sources of income such as those identified below.
a) Sales business
i. Parcel sales for industrial companies
ii. Building sales for storage-warehousing
b) Rental and retribution services
i. Rent of land for office buildings and/or industrial buildings
ii. Rent of warehouse buildings and lots for temporary goods storage
iii. Rent of land for (a) outdoor advertising board, and (b) telecommunications antenna
iv. Entrance fees according to vehicle type
v. Parking levies
vi. Retribution and/or electricity payment services
vii. Retribution and/or gas payment services
viii. Retribution and/or payment services for drinking water
ix. Retribution on cleanliness and maintenance of the environment
x. Retribution of security services
xi. Non-B3 Wastewater Treatment Services
xii. Non-B3 Waste Management Services
This diverse revenue structure however faces multiple risks that can include delays in market absorption compared
to the estimated market absorption of industrial business land as well as supporting activities such as
storage/warehousing. External factors, such as changing macroeconomic, location, and local political conditions
can increase the risks of revenue.

In the case of affordable housing projects, licensing costs can be a major uncertain cost parameter for developers.
Government has tried to simplify the permitting process for low-income housing by measures which were included
in its 13th Economic Policy Package issued in 2017. It is estimated these measures may cut permit costs by up to
70%. In addition, several policies that are expected to improve the commercial viability and reduce construction
costs for public housing development are as follows:

51
1. Financial incentives: relaxation of Loan to Value (LTV) and Financing to Value (FTV) regulations that should
stimulate property demand because the amount of down payments required will be smaller
2. Tax allowance: exemptions from VAT / PPN for subsidized houses and PPh 1%
3. Credit facilities from banks: such as housing loan financing, land purchase credit, construction credit, working
capital credit and investment credit.
4. PSU fund subsidies: estimated at around IDR 8 million/house unit
5. Down payment support: IDR 5 Million, including PPAT / Notary fees, bank fees, and others.
6. Consumer support mechanisms: low-interest rates of 5% for 20 years, down payment of 1%, and down
payment subsidy of IDR 4 million (SBUM), and deductions for BPHTB tax 25%

The private sector can also plan to build and operate retail, commercial, or shopping places that are combined with
extensive public housing, also providing advertising facilities for renting purposes. These models as noted earlier
in this report have been effectively used in a number of countries across the world.

For industrial estate projects, a PPP model could offer business opportunities in the development, operation and
management of the area. The industrial estate owner or operator can also provide supporting attractions, such as
marinas, golf courses, leisure, MICE and conference halls. Supporting services, such as hotels and restaurants,
will organically follow the increasing occupancy rate of the industrial estate. Revenue comes from leasing facilities
by the tenants and visitor ticket sales, in addition to other revenues such as advertising spots can be significant in
a well-designed and operated development. Additionally, several incentives or subsidies are also provided to
improve financial feasibility of these projects, such as:

1. Government support for infrastructure development, e.g. logistic transportation access for industrial estate,
water distribution, etc.
2. Permit incentives to build accommodation facilities around the development area, fiscal incentives or
disincentive for the industries that located in the outside of industrial estate

In sectoral based-area development, a PPP project offers business opportunities in the development, operation
and management of the area. For example, tourist destinations: the opportunities for the private sector include
tourism supported services; developing tourism infrastructure and facilities and managing the properties. Besides
promoting a tourist center’s natural attractions, the private company can also provide the man-made tourism
attractions, such as marinas, golf courses, theme parks, cultural centers, MICE and conference halls. The rising
number of domestic and international tourists is a strong indication of the tourism sector’s potential. Supporting
services, such as hotels and restaurants, will be required. Revenue comes from leasing facilities by the tenants
and visitor ticket sales, in addition to other revenues such as advertising spots.

For urban regeneration projects, the business case for private sector investment is related mainly to building
management and creating new economic activities. For example, the revitalization of an old downtown area. The
potential return on investment from such a project is usually earned from the leasing cost of old buildings and
operating commercial and shopping centers. Several incentives or subsidies are also provided to improve the
financial feasibility of these projects, such as:

1. Government support for infrastructure development, e.g. public transportation access, pedestrian pathway
improvement, etc.
2. Permit incentives to build accommodation facilities around the development area. Encourage tourist visits by
promoting cultural tourism destinations, for example Jakarta Old Town.
3. Exemptions from land and building tax (PBB) and building permit (IMB) fees for old building owners, such as
the case in Semarang Old Town.

One main challenge facing these projects however is to ensure that urban regeneration does not overlook cultural
and environmental preservation aspects at the core of the project. The urban design process for such projects is
the key to success in transforming an old city into an active and vibrant city space without having commercial or
financial interests impeded this main objective.

52
 Risk Analysis
The analysis and allocation of project risks in the PPP context is an important consideration for the Government of
Indonesia. A robust understanding of the risk allocation arrangements is essential to ensuring government
objectives are met and Value for Money is achieved. National guidelines containing suggested risk allocations
across different sectors, is provided by the Indonesia Infrastructure Guarantee Fund.
This section as follows, will provide for a summary allocation and discussion of key risks in the affordable housing
PPP sector21. A summary table containing the national suggested risk allocations / sharing between project owner
and private operator, in context of an affordable housing project, is provided below22.

Risk Category Description Suggested Risk Allocation

Public Shared Private
1. Site risk Risks associated with project land, as well √ √
as site conditions.
2. Design, Risks associated with project design, √
construction and construction and commissioning.
commissioning
risk
3. Sponsor risk Risks associated with the private operator √
and/or its sub-contractors’ fulfilment of
contractual obligations.
4. Financial risk Risks associated with financial viability of √ √
the project.
5. Operating risk Risks associated with performance in the √ √
operations phase.
6. Revenue risk Risks associated with demand and √ √
consequent implications to revenue
available for the private operator.
7. Network Risks associated with government- √
connectivity risk controlled elements interrupting private
operator’s ability to perform.
8. Interface risk Risks associated with delivery from either √ √
partner frustrating the delivery the other’s
ability to perform.
9. Political risk Risks associated with government action √ √
that materially and adversely impacting the
project and the private operator.
10. Force Risks associated with events wholly √
majeure risk outside the control of either partner.
11. Asset Risks associated with the economic value √
ownership risk of the asset deteriorating during or at the
end of the contracted term.

1. Site risk. This category of risk refers to land acquisition, resettlement, site conditions, land tenure,
contamination, and other social, environmental and health issues.
a) Public Risks: The project owner is responsible for land acquisition and right-of-access
activities, and as such bears the risk of setting the project location, securing technical and

21
Indonesia Infrastructure Guarantee Fund. ”Risk Allocation Guideline: PPP in Indonesia.” 2019.
22
Indonesia Infrastructure Guarantee Fund. ”Risk Allocation Guideline: PPP in Indonesia.” 2019.
53
 financial resources, resettlement, and securing legal compliance. The project owner holds
primary responsibility over socializing the project as early as possible, including developing
a project communication strategy, mapping of social issues, determining fair compensation,
and general stakeholder engagement. While affordable housing land requirements are not
onerous, the validation and completion of land tenure (i.e. multiple land ownership
certificates) should remain a project owner responsibility.
b) Private Risks: Once contracted as the partner, the private operator has a secondary
responsibility to socialize the project and prevent downstream issues with social disruption.
The private operator also possesses primary risk on good construction practices, to the
extent they were provided knowledge (by the project owner) of limitation including artifacts
and antiquates. From an environmental and social perspective, based on environmental
impact analysis and AMDAL studies, the private operator should be responsible for
complying with robust environmental protection practices.
c) Shared Risks: n/a.

2. Design, construction and commissioning risk. This category refers to design specifications, construction
performance, as well as operation and commission testing.
a) Public Risks: n/a.
b) Private Risks: The private operator is broadly responsible for the management of risks -
performance, cost, and timing - during the design, construction and commissioning period.
Good practices suggested include having active communication during the tender process
to clarify design specifications, selecting credible contractors and subcontractors who
possess the right experience.
c) Shared Risks: n/a.

3. Sponsor risk. This risk category refers to default by the private operator and its related stakeholders
including the lender.
a) Public Risks: n/a.
b) Private Risks: The private operator is responsible for all risks in this regard. Good practices
suggested include selecting credible sponsors and lenders during the procurement process.
c) Shared Risks: n/a.

4. Financial risk. This risk category refers to changes in financial markets / funds on which the project was
dependent on, which affect private operator’s performance.
a) Public Risks: The project owner, and the government by extension, is responsible for the
disbursement of government support (including VGF) and the refund of land bailouts. Good
practices suggested include robust budgeting processes that ensure availability of said
funds.
b) Private Risks: The private operator is responsible for failure to achieve financial close,
foreign exchange rate risk, inflation and interest rate risk, and insurance risk. Good practices
suggested include the consideration of appropriate mitigation mechanisms including
hedging instruments, and securing financing in Rupiah.

c) Shared Risks: The IIGF guide suggests that in instances of extreme fluctuations, foreign
exchange rate, inflation and interest rate risk can be shared between the project owner and
the private operator.

5. Operating risk. This category refers to cost overruns, poor performance, and other events during the
operations period.
a) Public Risks: The project owner has a responsibility to, using robust project control
measures, monitor and enforce the contractual mechanisms included in the PPP.

54
 b) Private Risks: The private operator broadly bears risk for events which inhibit performance
and cause cost overruns - including availability of facilities, poor performance against the
output specifications, industrial action (e.g. strikes), project management failures, cost
overruns including lifecycle expenditure, and delay in delivery of medical equipment.
c) Shared Risks: n/a.

6. Revenue risk. This category refers to actual user levels deviating from projections, and the consequences
for revenue and costs.
a) Public Risks: In the application of a user-pays model, the project owner is responsible for
sharing the risk in tariff collection failures. In the application of availability payment model,
the project owner is additionally responsible for the timely provision of AP funding to the
private operator. In the application of a mixed model (involving both user-pay and availability
payment elements), the project owner is responsible for tariff-setting.
b) Private Risks: In the application of a user-pays model, the private operator bears the risk of
demand changes, and shares the risk of revenue collection. In the application of an
availability payment model, the private operator is largely responsible for the same. In the
application of a mixed model (involving both user-pay and availability payment elements),
the private operator is responsible for shortfalls in the initial tariff calculation.
c) Shared Risks: n/a.

7. Network connectivity risk. This category refers to connectivity, smoothness and competitor facilities’ risk.
a) Public Risks: The project owner is responsible for breaches in government obligation to build
and maintain the required network, managing tariff around the site which impacts service
performance during operations, and to not build a competing facility / route.
b) Private Risks: n/a.

c) Shared Risks: n/a.

8. Interface risk. This category refers to disparity in the delivery (i.e. quality and time) of works, in service
standards, and in miscommunication of relations.
a) Public Risks: n/a.
b) Private Risks: The private operator should bear risk for differences in service standards,
given the PPP contract should be clear on the applied standards / methods on delivery.
c) Shared Risks: Both partners share the risk in miscommunicating causing delays, and for
disparities in time and quality of works.

9. Political risk. This category refers to risks such as change in law, government actions, and availability of
currency.

a) Public Risks: The project owner the risk of adverse government actions including currency
inconvertibility and non-transfer, expropriation of assets, discriminatory changes in law,
delays in approvals and consents, and parastatal risk.
b) Private Risks: The private operator is responsible for bearing the risk of any general changes
in law.

c) Shared Risks: n/a.

10. Force majeure risk. This category refers to unexpected events beyond the control of either partner.
a) Public Risks: n/a.
b) Private Risks: n/a.
c) Shared Risks: The occurrences of natural disasters, political force majeure and extreme
weather conditions, and prolonged force majeure, are all shared risks. Insurances procured
55
 by the private operator will be used to cover, and beyond this the financial consequences
are borne by the project owner.
11. Asset ownership risk. This sub-category refers to issues related to loss of the asset, or the asset transfer
after the PPP contract ends.
a) Public Risks: n/a.
b) Private Risks: In the event of asset loss due to catastrophic events, the private operator is
responsible and will likely have procured insurance per the PPP contract requirements. In
the event the asset transfer process is hampered, the private operator is held responsible
as well.

c) Shared Risks: n/a

Procurement, Transaction & Contract

Management
The transaction stage comprises of the following activities:

1. Market Interest Confirmation

According to LKPP Regulation 29/2018, market interest confirmation (commonly in the form of market sounding)
is intended to obtain input, response and market confirmation to a certain PPP project. The GCA conducts the
market interest confirmation through conducting a re-review of the market sounding results conducted by the GCA
in the preparation stage, or by way of conducting discussion in a forum with business entities. In practice, the
market interest confirmation is not limited to the aforementioned methods, as a recent PPP project which refers to
LKPP Regulation 29/2018, conduct the market interest confirmation by dispatching an official letter from the GCA
to the relevant private sector, inquiring and confirming about their interest in such project, and requesting the
submission of letter of intent to the GCA.

Although it has a similar objective to market sounding, the key difference between market interest confirmation and
market sounding (aside from the timing of the process (market sounding is conducted in the preparation stage,
while market interest confirmation is conducted in the transaction stage)), is that market interest confirmation
intends to re-review the results of market sounding and/or re-confirm the interests of the prospective participants,
who attended the market sounding process(es) conducted in the prior stage. Further to the above, Bappenas
Regulation 4/2015 specifically differentiates between the market sounding process conducted in the preparation
stage and the transaction stage, whereby the former is conducted to obtain input and feedback from the relevant
stakeholders, whereas the latter is conducted to obtain input, feedback, as well as to determine the interest on the
relevant PPP project.

It is to be noted, however, that market interest confirmation, while being one of the several steps of the transaction
preparation, it is not mandatory. This is evident under Article 11 paragraph (2), and specifically Chapter II, Section
A2 of the Appendix of LKPP Regulation 29/2018, stating that market interest confirmation can be conducted by the
procurement team, as may be required. In conclusion, market interest confirmation is not mandatory for solicited
projects (which refers to LKPP Regulation 29/2018).

2. PPP Project Location Determination

According to Article 34 of Bappenas Regulation 4/2015, location determination shall be obtained prior to enter the
qualification stage, unless it is governed otherwise under the sectoral regulation.

3. Procurement of IBE
One of the phases of the transaction stage is the procurement of IBE. Previously, IBE procurement is regulated
under Head of LKPP Regulation 19 of 2015 on Mechanism of IBE Procurement for PPP Projects (“LKPP Regulation
19/2015”). However, with the enactment of LKPP Regulation No. 29 of 2018 on the Mechanism of Implementing
Business Entity Procurement for Infrastructure Provision through Public Private Partnership Initiated by The
Minister/ Head of Agency/ Head of Region (“LKPP Regulation 29/2018”), Article 1 to Article 35 of LKPP Regulation
19/2015, which contains provisions on the procurement of IBE for government solicited projects, has been revoked.

56
Procurement of IBE consists of two main process, which are the prequalification process (PQ) and the tender
process itself. The following diagram depicts the PQ process, prior to the RFP process:

Figure 7-1 Prequalification (PQ) Process

The PQ process commences upon the issuance of the RFQ documents, and ends with the announcement of the
PQ results (in which bidders are given the opportunity to object on such results). During the PQ process, there are
two clarification phases which allows potential bidder(s) and/or bidder(s) to inquire to the GCA in regards to the PQ
process. These clarification phases are given upon post explanation meeting (should the potential bidder(s) have
any additional question(s) and/or need further clarification on a certain matter in regards to the PQ process), and
post evaluation of the PQ documents (objection period).

Upon completion PQ process, the tender process will continue with the issuance of RFP document as well as
invitation and collection of confidentiality letter. The tender process differs, based on whether it is a one-stage or
two-stage process. The following diagrams depicts the overall process of the one-stage and two-stage process,
respectively.

Figure 1-2 Process of the One-Stage Procurement

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 Figure 1-3 Process of Two-Stage Procurement

Up until the submission of proposal/bidding documents, the process is similar (submission of confidentiality letter
and collection of RFP documents, clarification meeting, etc.) it is to be noted that, from submission of proposal
onwards, the two stages are different in regards to the process. The following diagram, summarizes the difference
in regards to the opening and evaluation of proposal, between the one-stage process and the two-stage process.

Figure 1-4 Opening and Evaluation of Bidding Documents

Under the LKPP Regulation 29/2018 and as shown in the diagrams above, in the one-stage process, the proposal
is divided into two different envelopes (sampul), in which envelope I shall contain administrative and technical
proposal, and envelope II shall contain financial proposal. The two envelopes will be evaluated separately, and will
each undergo the same process throughout the tender process, starting from opening of envelope, evaluation of
envelope, and announcement of evaluation on each envelope.

The one-stage process as briefly explained above, differs with the two-stage process, LKPP Regulation 29/2018
does not specifically state that the proposal shall be submitted in two separate envelopes (as shown in the one-
stage process) for the two-stage process. Thus, the administrative, technical and financial proposal are merged
into a single proposal. The major difference between the one-stage and two-stage process, is the possibility of
having an optimization dialogue or a one-on-one meeting with the procurement team/GCA, to produce a more
enhanced proposal, more-suited with the needs of the project and GCA. As per the diagram above, upon
completion of the objection of the evaluation result process, the bidders are then shortlisted and invited by the
procurement team/GCA to the optimization dialogue. Optimization dialogue, aims to enhance bidder’s proposal in
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order to obtain a better offer to the GCA, with regards to the value for money. Shortlisted bidders are referred to as
dialogue participants. The procurement team may inquire to the dialogue participants to provide them with input,
in regards to the dialogue topic discussion. Upon completion of such optimization dialogue, the dialogue
participants shall submit the enhanced proposal, and it will undergo the same evaluation process as the initial
proposal. Article 18 (6) of LKPP Regulation 29/2018 enables the procurement team (with prior approval of the
GCA) to conduct the dialogue (starting from the invitation to the optimization dialogue until the evaluation of the
optimized proposal) more than once, in the event the following condition(s) occurs:
1. the financial proposal (in the optimized proposal) of the highest-ranked bidder is not better than the initial
proposal; or
2. the optimized proposal submitted by the highest-ranked bidder is not in line with the Minutes of Optimization
Dialogue;
3. the optimized proposal of the highest-ranked bidder does not have the best value for money due to material
factors which may adversely affect the procurement result, and is not in line with the purpose of the
procurement as set forth in the RFP.

Upon completion of such optimization dialogue, the tender process will undergo similar steps with the one-stage
process.

Another method of procurement under LKPP Regulation 29/2018 is the direct appointment of IBE. Direct
appointment, under Article 20 of LKPP Regulation 29/2018, may be done in the event that there is a certain
condition in regards to the PPP Project (further elaborated in the next paragraph, such certain conditions are: (i)
the development of infrastructure which has been previously built and/or operated by the same IBE; (ii) only one
service provider/potential IBE can provide and/or implement the use of new technology which is required for the
project; or (iii) such IBE has acquired possession/control over the majority or all land which are going to be used
for the PPP project), or the PQ process results in one qualified bidder.

4. Signing of PPP Agreement

Prior to the signing of PPP agreement, the winning bidder shall establish an IBE, at the latest 6 (six) months after
the letter of award. The GCA and IBE shall sign the PPP agreement no later than 40 (forty) days after the IBE
establishment.

5. Financial Close
At the maximum of 12 (twelve) months after IBE signed PPP Agreement, IBE shall have to obtain financing over
PPP project. Based on GCA’s consideration (of which is stated in relevant provision regarding financial close under
the PPP agreement), this time can be extended with the maximum 6 (months) period. Financial close will be
declared accomplished if the loan agreement is signed and the loan is able to be partially draw down. In the event
that PPP is divided into several stages, the financial close shall be declared accomplished in the event of:
1. loan agreement to finance one of the PPP stages that has been signed; and
2. the loan is able to be partially drawndown for the PPP stage as referred to in point (i).
In the event that the time period cannot be met by IBE, the PPP Agreement shall be terminated and the GCA
reserves the rights to execute the performance bond.

Contract Management

In regards with urban infrastructure PPP Project, the provision that provide the guidelines in conducting contract
management is not limited to only Bappenas Regulation 4/2015. For public housing subsector the guidelines also
exist in MPWH Regulation 21/2018 provide certain guidelines for GCA and IBE in managing the PPP Agreement
implementation. Notwithstanding, the guidelines in both regulation are quite similar, the following description is
intended to highlight the key aspects of Contract Management in regards with PPP Project.

The management of PPP Agreement implementation is conducted in order to ensure the availability of service, and
the execution of each obligation of GCA and IBE is fulfilled in accordance with the PPP agreement. In conduction
the management of PPP Agreement implementation, GCA ensure the execution of guarantee agreement and
recourse agreement is not deviate from respective agreement. PPP Management unit also assist GCA in
overseeing and control the execution of PPP Agreement. The management itself is conducted throughout 4
phases, which are:

1. Pre-construction

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The management during the pre-construction phase is starting from the achievement of financial close by IBE until
the commencement of construction. PPP management unit is task in supervising the implementation of PPP
agreement in pre-construction to ensure the construction phase achieved.

2. Construction

The management during the construction phase is started from the commencement of construction phase until the
PPP Project reach commercial operation date. The PPP management unit is tasked in conducting several
implementation management such as the design of the new facility that have been made by IBE as the case may
be or the integration of the new facility and existing facilities. Moreover, the PPP management also conduct the
implementation management in regards with GCA’ right to submit issue or concerns in connection with the failure
or the inability of IBE to adhere to the PPP Areement.

During the construction phase, if there is a transfer of IBE’s share before the commencement of commercial
operation date, the PPP Node must coordinate with organization unit in carrying out the activities that includes the
determination of transfer of shares criteria by GCA, conducting the qualification towards the potential shareholders
of the IBE, requesting for GCA proposal if the potential shareholder has fulfilled all the criteria of IBE share transfer
and qualification conditions, and preparing the approval of IBE shares transfer that will be signed by GCA.

3. Operation

Implementation of PPP management during operations is started from the time the PPP operates commercially
until the expiration of the PPP agreement period. Besides supervising the implementation of PPP agreement, the
PPP management unit also supervise the service performance standards in accordance with the PPP Agreement.

4. End of PPP Agreement

Towards the end of PPP agreement period PPP Node shall consider on re-transfer of assets to GCA, PPP
agreement has to regulate specific conditions of the project that required on the period of PPP agreement is
terminated, and the PPP is transferred to GCA. PPP Node also has roles in conducting the asset assesment to
calculate the cost estimation that required operating and maintaining (routine and non-routine) during of the period,
evaluate the availability of human resources that owned by GCA evaluate the availability of spare parts for the
infrastructures and its syste and evaluate the management implementation efficiency during the period.

Moreover, if the asset is transferred back to GCA at the end of PPP agreement, the PPP management unit are
also conducting an evaluation towards the readiness of GCA in operating the infrastructure post PPP Agreement.
The evaluation itself is conducted at most 12 month before the end of PPP Agreement, and covers several aspects,
namely technology transfer readiness, human resources competence and availability, budget availability to operate
the infrastructure, IBE performance evaluation, and risk analysis if the operation of infrastructure is conducted by
the government.

Analysis and Recommendations for

Indonesia
8.1 Recommendations for Planning
In order to ensure successful implementation, front-loaded project preparation with emphasis on stakeholder
mapping on the intended users of the affordable housing is needed. The GCA needs to be proactive in engaging
various stakeholders so that the intended users are well prepared to inhabit the property. This may require strong
social services, access to economic activity, connectivity and other factors that serve as a strong pull factor for the
intended users. Change management may be needed so that the users unaccustomed with vertical housing or
shared public space is properly educated.

The Urban Infrastructure sector, particularly affordable housing involves multiple stakeholders (i.e. MPWH,
Regional Government (both provincial level and city/district level). Especially regarding the development of urban
60
infrastructure using Transit Oriented Development. Therefore, it is necessary for DGSIFM to become intermediary
between stakeholders in order to map out each stakeholders responsibility to ensure the development realization.

Similar social issues may also be encountered when developing industrial estates and a strong front-loaded project
planning with good quality environment and social assessment and meaningful public consultations need to be in
place. Addressing such social issues are needed before moving into financial and technical assessments.

The momentum to create better planning for urban infrastructure is facilitated by incentives from the government
to attract private developers. GCAs need to ensure that social issues can be mitigated to create a viable business
climate.

Aforementioned, the government has made several efforts to attract private developers’ interest to participate in
providing urban infrastructure particularly on public housing sub-sector. Subsidized Mortgages by the Government
through the MPWH Decree 463/2018 regarding the Proportion of Credit or Financing of New Welfare Home
Ownership has increased. Previously, from total KPR funds, the proportion of government funding was 90%, and
the channeling bank provided 10%, now it is 75% by the government and 25% from the channeling bank. With the
decline in the portion of funding, the target of subsidized housing distribution for KPR-FLPP can be increased to
accelerate achievement of targets. In addition, Bank Indonesia has also comfortable Loan to Value (LTV) rules,
the decrease of reference interest, and large mortgage housing subsidy for low-income groups. Another example
is housing permit regulation. The government has accelerated the permit process, reduced stages from 33 into 11
steps, and cut permit duration, which was 769-981 days to 44 days. This is estimated to have reduced permit costs
by up to 70%. These economic policy packages are expected to provide an enabling environment for the private
sector to invest in and develop housing projects in Indonesia.

Several obstacle, such as slow receipt of income, limited funding from the lenders, uncertainty in land acquisition,
poor project preparation, changing regulations, unclear allocation of risks, weak coordination and different
perspectives between government and private developers need to be addressed with policies that are more
conducive. The policy that are enacted to increase private participation is a step forward and in line wit the current
trend that exist in PPP practice on urban infrastructure. The policy is small step that might be a key factor in realizing
the firts urban infrastructure project in Indonesia. However, to overcome the obstacles that are exists; adopting
international best practices in planning perspective, which are for different levels of government to remain
coordinated and engaged - to provide a fulsome suite of mechanisms to entice private sector participation in the
sector.

Moreover, it is essential in the beginning of the process to have a disciplined planning for outlining a comprehensive
roadmap for implementation. By fully discovering objectives and core values of the purpose of the project, and how
it will benefit the public, it is hopeful that any missteps further in the process could be avoided.

8.2 Recommendations for Regulatory Framework

Based on practice of other countries issues that are faced in regards with institutional arrangement is struggle with
instances where responsibility is decentralized, and the lower-level agencies lack the legislative authority as well
as financial capacity to tackle this challenge. In most international jurisdictions therefore, there is usually a central
agency responsible for housing policy and funding programs as a whole.

In Indonesia itself, it is known that the authority on housing is divided between central government and regional
government. Public housing for low-income community is the responsibility of central government. However, it
should be noted that for special vertical housing and state vertical housing might fall under the authority of regional
government. In such instances, the central government and regional government must coordinate in overcoming
the issue of regional government lack of capacitiy in executing the PPP Project.

8.3 Recommendations for Project Benchmark

A large portion of projects in the urban sector have a unique aspect that can if implemented appropriately greatly
increase the financial viability of these projects from a public sector perspective. This is the ability to identify LVC
mechanisms as a funding tool to recover project costs. Combined with the revenue-generation potential of projects
in this sector (e.g. mixed-use development that combine affordable housing with commercial developments)
governments can greatly enhance the attractiveness of urban development projects to the private sector while
reducing, or avoiding altogether, the fiscal impact to government. This however requires the appropriate legislative

61
framework as well as strong enforcement mechanisms (some LVC tools such as development charges can be
implemented in theory however actual collection may significant lag). Accordingly, projects in the urban sector
warrant specific due diligence upfront and consideration of the broader impacts of the project from a financial
perspective. Additionally, contracts put in place for transactions where commercial revenue is present should
include appropriate gainshare mechanisms such that local government agencies can benefit from better-than-
expected results accruing from project revenues.

The absence of urban infrastructure sector PPP project transaction has made the private sector adopt a wait and
see approach. There are some urban infrastructure PPP projects initiated, but none has reached the transaction
phase. Project benchmarks are needed particularly on how GCAs can perform a proactive role in ensuring proper
project preparation and change management to pick up the momentum of the various incentives given by the
government in developing both affordable housing and industrial estates.

As per the project benchmark Shukhobrishti Housing Project in India, the GCA required the private sector to include
community-associated services and adopted an inclusion of multiple income groups as well as scope inclusion of
community services. The multiple-icome group housing design with integrated community services has the effect
of both reducing social issues and cross-subsidizing operational costs and making a more feasible revenue stream.

Based on the project benchmark that are applied based on international best practice, based on the assessment
of the prevailing law and regulations on public housing the various types of project structure that are elaborated on
international best practice section are possible to be applied in Indonesia. Nonetheless, it should be noted that for
public vertical housing MPWH mandates the relevant regional government and/or central government to formed a
unit that will be responsible in conducting the management aspect of public vertical housing. The unit itself will
have certain working relationship with IBE during post construction period of the public vertical housing. Moreover,
the unit will be responsible in collecting the rent from beneficiaries and tenants. While the IBE will provide the
maintenance services of the vertical housing and its supporting facilities.

8.4 Recommendations for Procurement & Transaction Management

To establish sound output specifications parameters, more rigorous due diligence during the technical and financial
assessment is needed. Noting from international best practice, GCAs need to ensure that there is an integrated
community services requirement and that the affordable housing complex can blend multiple income groups into a
cohesive settlement and not overly reliant on local government fiscal support.

Therefore, an optimum level of VfM can be identified by good quality feasibility studies by the GCAs and good
quality transactions advisory to help solicit the most innovative solutions given the output specifications.

For industrial estates, similar social issues are faced particularly on the inclusion of local community. The
community needs to benefit from the industrial estate development in their vicinity and their human development
needs to also be raised by integrating the migrant skilled workers to help improve the skills and welfare of the local
community.

8.5 Recommendations for Contract Management

Contract management is essential to deliver consistency in the provision of services especially in affordable
housing where the revenue scheme and management is key in ensuring proper maintenance and operations after
construction.

As affordable housing sector is heavily subsidized, it is important to ensure the GCA’s ability to pay. Notably, if the
local government fiscal resources is limited and that the sector is in competition with other sectors of higher priority
nationally such as public health and education, there needs to be a fail safe mechanism supported by a robust
contract management mechanism backed by a strong legal basis.

For the affordable housing sector, one downstream management risk to consider is filling the units with inhabitants.
The coordination between IBE, PPP node, GCA, PPP management unit, and relevant regional government is
paramount in selecting the beneficiaries that will inhabit the the units. Since in public housing provision for low-
income community must gone through a selection of low-income citizen that will become beneficiaries of the
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constructed units. The selection must be conducted Either the coordination occur for a variety of reasons stemming
from the planning or construction phases of the project - poor construction, poor location - but principally means
the public sector or the private sector (depending on how risks are structured or shared) is having trouble-collecting
revenue based on low usage. The public sector has a role to play in educating or directing eligible households to
consider these units - consequently robust project management would imply for the project owner’s team to actively
engage with other levels of government.

8.6 Recommendations on Risk Analysis & Allocation

In a comparative analysis of the guidance on risk allocation and sharing for PPPs in the affordable housing sector,
the following observations and recommendations can be made.

1. Site risk
a) Site security: responsibility over site security for affordable housing is under-developed in national risk
guidelines (and is an important issue given third-party access as well as the vulnerability of residents).
International guidance suggests that this should be a shared risk item (i.e. project owner provides security
for third-party access during operating hours, complemented by private operator providing housing
management services).

b) Labour disputes and strike action: discussion in national risk guidelines suggests this is purely a private
risk to bear, whereas international guidelines propose a more nuanced approach to the issue. The parsing
of the issue will depend on the political stability of the jurisdiction, but ultimately it is suggested the PPP
contract provide clear provisions for events of labour unrest.
c) Contamination and pollution of site: national risk guidelines suggest this is a private risk to bear. To the
extent that the project owner’s due diligence unearths the existence of known contamination; and it is
consequently disclosed and priced in by the private bidder - this is true. However international guidance
suggests that in cases of previously unknown contamination, there are contractual mechanisms that share
responsibility between the partners.
2. Design, construction and commissioning risk
Design specifications and changes therein: national risk guidelines appear to assume the project owner will
be output based in design specifications, which would inherently transfer design risk to the private operator.
However in practice this is not always the case based on regulation-based or project-specific needs.
International guidance provides a more nuanced perspective, suggesting that to the specifications are output-
driven the risk can be fulsomely transferred to the private sector. In instances where there are consequent
changes to the design and construction requirements - whether it be project owner-dictated or as required by
law - the risk may have to be shared.
3. Sponsor risk
Step-in: while both national and international guidance supports the premise that private operator non-
performance risk is borne by the private party, the latter supports a more nuanced approach to the trigger of
step-in rights. The project owner (and by extension the public sector) is primarily concerned with providing
continued public services, and in some instances will want to step-in despite it not being the fault of the private
operator (i.e. emergencies, intervention to protect against social and environmental risks).
4. Financial risk
Refinancing: while national guidance does not provide detailed suggestion in this regard, international
guidance suggests a proactive approach (i.e. by stipulating a mechanism in the PPP contract) from the project
owner to share refinancing risks. Precedent mechanisms include a sharing of refinancing losses and gains
between the two partners.
5. Operating risk
Interface: while both national and international guidance supports the premise that private operator bears
primary responsibility during the operations period, the latter notes some additional contexts for which sharing
risk may be considered. Specific to the affordable housing context, interface between private maintenance and
presence of tenants and third parties becomes a key issue that should be managed (involves considerations
such as site security, vandalism mitigation, attaining consent to make repairs, etc.).
6. Revenue risk

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 Demand: international guidance provides clarity for the implications governing availability payment model vs.
user-pays model in the affordable housing context. Generally international guidance supports the
consideration of political reasons (i.e. collection of rent from vulnerable populations) to favour retaining of
revenue collection risk. International guidance further points to the local housing market, as well as the
potential for government support (i.e. minimum revenue guarantees) - as important for the private operator’s
appetite to assume this risk.
7. Network connectivity risk
Connectivity: national guidance is not specific as to how the named risks would apply to a housing project.
International guidance is silent on this risk category.

8. Interface risk
Interface: national guidance is not specific as to how the named risks would apply to a housing project.
International guidance is silent on this risk category.
9. Political risk
Change in law: national guidance and international guidance largely converge in perspective on this risk
category. Importantly, both suggest the approach of having the private operator assume risk of changes in law
beyond those that are sector-specific or otherwise discriminatory towards the project.
10. Force majeure risk
Option to continue: national guidance and international guidance largely converge in perspective on this risk
category. International guidance does provide some suggestions for instances wherein the private operator
wishes to terminate the PPP following prolonged force majeure, but it is in the public sector interest to continue
(i.e. contractual mechanisms to ensure private operator is sufficiently compensated and incentivized to
continue the PPP).
11. Asset ownership risk
a) Disruptive technology: while national guidance pinpoints this as a private operator risk, international
guidance provides a more nuanced discussion on the topic. The project owner must carefully design
contractual mechanisms (i.e. cost-sharing regime where either partner can request technological
upgrades) to encourage the adoption of more efficient technologies or practices (i.e. solar panel
installation onto affordable housing projects).
b) Early termination: while national guidance appears to be silent, international guidance provides best
practices on determining cause and compensation for early termination.

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Annexes
Annex I: Rule of Thumb Investment Parameters for the Indonesian Urban Infrastructure Sector

This Annex I is provided to equip personnel that are involved in identifying, planning, and preparing for PPP
projects, in particular for the MoF PPP Unit to assist in executing its PDF role, with tools in the form of
parameters that are based on rule of thumb general principles. The rule of thumb-based indicators are based
on current data obtained and analyzed through the financial market data to obtain an understanding of market
perceptions on indicators that the market considers bankable on a particular sector in the emerging market
and Indonesian contexts

This Annex I is provided to equip personnel that are involved in identifying, planning, and preparing for PPP
projects, in particular for the MoF PPP Unit to assist in executing its PDF role, with tools in the form of
Useparameters
of a Rule that are basedas
of Thumbs onComparative
rule of thumb general
Tools principles. The rule of thumb-based indicators are based
on current data obtained and analyzed through the financial market data to obtain an understanding of market
The rule of thumb
perceptions onprinciple
indicatorsisthat
defined by Investopedia
the market (2019) asonaa ‘guideline
considers bankable that provides
particular sector simplifiedmarket
in the emerging advice
regarding a particular subject. It is a general principle that gives
and Indonesian contexts practical instructions for accomplishing or
approaching a certain task. Typically, rules of thumb develop as a result of practice and experience rather than
from scientific research or theory.’

Noting the variance of project proposals being identified and entering the sector PPP infrastructure project pipeline,
the rule of thumb approach may be useful to identify potential statistical outliers as they are based on very broad
general principles. Variance in projects entering the pipeline is due to the case-by-case basis as each project
proposal shall have a unique approach in its project design to deliver its unique value proposition and this will be
the main pillar of its business model that will in turn affect assumptions regarding the cost structure, the expected
revenue stream, and the value chain partnerships that need to be established.

The following are costs incurred during the period of cooperation, from the construction stage to operations and
maintenance.

According to Bappenas’ KPBU toolkit, the figure below shows some key components that affect Capital
Expenditures (CAPEX) in urban infrastructure development. CAPEX is categorized into four main components as
follows:

Figure 1 Urban Infrastructure CAPEX Key Components

Source: Bappenas Toolkit and various source, 2017

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In sectoral-based area development, capex is usually relatively large because it requires landscape management,
main infrastructure, and basic utilities to prepare the land for the main economic activities. It requires long-term
fixed costs. In addition to developing a project in stages, the private sector investor often needs government support
for these basic infrastructure costs.
In affordable housing, the most significant investment cost is the provision of land and construction of buildings.
Land cost can be higher if purchased from individual land owners or was previously customary land (tanah adat),
which requires compensation to obtain permits.
Figure 2: Urban Infrastructure OPEX Key Components

Source: Bappenas Toolkit and various source, 2017

Although this depends on the size of a project, OPEX for sectoral-based area development is higher than for other
urban infrastructure. In this instance OPEX covers operational costs for the whole area, especially for basic utilities
services. Maintenance costs can also be higher if infrastructure quality is low. Therefore, CAPEX and OPEX have
a strong relationship. Higher quality assets may have lower maintenance and repair costs.

Rule of Thumb Project Cost Based on Typical Urban Infrastructure Sector Business Model Canvas

The Investment Parameters that are given in this sector relate to the ‘Other Cost’ component, particularly on the
financial costs related to project financing. It will answer questions such as: is the cost of debt and equity too large
for this project? If yes, then is it justifiable?

This Annex is provided to equip personnel that are involved in identifying, planning, and preparing for PPP projects,
in particular for the MoF PPP Unit to assist in executing its PDF role. Sector-wide investment parameter are
obtained based on data as of 31st December 2018 through Deloitte Konsultan Indonesia’s Financial Advisory
Services based on benchmarks obtained in the health sector from comparable data in emerging markets.

These data are obtained from the Damodaran NYU database, which aggregates and analyzes data from various
sources such as Bloomberg, Morningstar, and other sector-specific global financial markets databases.
Furthermore, the data is then unlevered to adjust to the Indonesian valuation context (non-diversifiable or systemic
financial risk coefficients) to produce an ‘unlevered beta coefficient.’

This section will define the: (i) summary of parameters for investment decision; (ii) weighted average cost of capital;
(iii) cost of equity; (iv) risk-free rate; (v) unlevered beta coefficient; (vi) market risk premium; (vii) country risk
premium; (viii) cost of debt; (ix) tax rate; and (x) other pull factors that attract investors.

The above parameters can be used as comparator when analyzing the project financing assumptions made during
the initial stages of project identification, planning and preparation as these are market-driven data that act as a
barometer for what the markets consider as potentially bankable projects. These parameters relate to market
perceptions on financial risk and the costs of debt and equity that should be used to test any project financing
assumptions. These parameters need to be updated and its ‘beta unlevered’ on an annual basis utilizing
professional financial advisory services with reach to global and local sector-specific financial markets data and
research.

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Parameter Investment Decision (regarding economic benefit)

DISCOUNT RATE DECEMBER 31ST 2018

Weighted Average Cost of Capital

IDR USD

Indonesian Government Bond Rate (30 years) 9.09% 5.20%

Country Default Spread (CDS) 2.15% 2.15%
Risk free rate 6.95% 3.05%
Contry Risk Premium:
Country Default Spread (CDS) 2.15% 2.15%
Relative Volatility 1.23 1.23
Contry Risk Premium: 2.64% 2.64%
Mature Market Equity Risk Premium 5.96% 5.96%
Indonesian Equity Risk Premium (ERP) 8.60% 8.60%
Beta Unlevered 0.64 0.64
Beta Levered 0.94 0.94
Beta x ERP 8.05% 8.05%
Cost of Equity (CAPM) 15.00% 11.10%
Cost of Debt 10.37% 5.52%
Tax 25.0% 25.0%
Weight of Equity 61.7% 61.7%
Weight of Debt 38.3% 38.3%
Weighted Average Cost of Captal (WACC) 12.23% 8.44%
WACC - Rounded 12.20% 8.40%

Average Interest on Investment Loans

(Data from Bank Indonesia)

IDR USD
Bank Persero 10.06% 5.48%
Bank Umum Swasta Nasional 10.67% 5.79%
Bank Umum 10.38% 5.28%
Average without BPD 10.37% 5.52%
BPD 11.21%
Average including BPD 10.58%

Indo Government Bond Rate Interest Rate

IDR USD Difference

10 years 8.03% 4.50% 3.53%

20 Years 8.41% 5.40% 3.01%

30 Years 9.09% 5.20% 3.89%

Weighted average cost of capital

WACC represents an investor’s expected return to fund the assets of an enterprise. WACC is computed by
summing the cost of each capital component multiplied by its proportional weight.

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Generally, an enterprise is funded by debt and equity. Hence, we can calculate WACC using the following
formula:

Cost of Equity

The required rate of return on equity is estimated using the variant of Capital Asset Pricing Model (“CAPM”). CAPM
computes the required rate of return on equity as a function of the rate of return on a risk-free investment, plus an
equity risk premium (the return stockholders expect above the return on a risk-free investment), multiplied by the
“beta” for the investment.

Beta measures the relationship between the price movements of ownership participants for individual companies
to price movement of a fully diversified stock portfolio.

The Cost of Equity formula is as follows:

Risk-Free Rate (Rf)

The CAPM implicitly assumes the presence of a single risk-less asset, that is, an asset perceived by all investors
as having no risk. Return on such assets is the risk-free rate of return. We have used the 30-year Indonesian
Sovereign Bond yields computed by Bloomberg as a proxy for the Indonesia risk-free rate. The yields of such
bonds as of 31 December 2018 for Indonesian Sovereign Bond yields in IDR was 9.09%, while Bond Yield in USD
was 5.20%.

Beta (ß)

Risk associated with the asset (non-diversifiable or systematic risk) is measured by the Beta coefficient. It can also
be defined as the sensitivity of the asset returns to market returns. It is estimated by regressing assets excess
return against the market portfolio’s excess return. Slope of the regression equation is beta. As a proxy we have
considered median unlevered beta of a listed peer group. Such beta is then adjusted to reflect the difference
between the effective tax rate and capital structure of the peer company. The result is called “unlevered beta”.

The “unlevered beta” is readjusted for the capital structure and applicable tax rate. The following formula is used
to adjust for the difference in the capital structure and the tax rate.

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Based on the Damodaran’s data extracted as of 31 December 2018, the estimated unlevered beta for Urban
Infrastructure sector is 0.73. The estimated re-levered beta is 0.84.

Market Risk Premium (“MRP”)

The equity market risk premium represents the additional return an investor expects to receive for investing in a
risky asset i.e. stock market as compared to investing in risk-free assets. According to Damodaran, the market risk
premium as of 31 December 2018 was 5.96%.

Country Equity Risk Premium

The equity market risk premium represents the additional return an investor expects to receive for investing in a
risky asset i.e. stock market as compared to investing in risk-free assets. Country equity risk premium (“CERP”)
represents risk premium attributable to the risks specific to the country. It is designed to account for macroeconomic
factors such as political instability, volatile exchange rates and economic turmoil which are possibly not reflected
elsewhere.

CERP is estimated by multiplying country default spread (“CDS”) with 1.23x being the global average of equity to
bond market volatility (which is the country equity risk multiple (“CERM”). Indonesia CDS is sourced from
Damodaran, which is 2.15%. By multiplying that number by 1.23x, we obtained Indonesia Risk Premium of 2.64%.

Cost of Equity

From the above analysis, we obtain a cost of equity in IDR of 14.20%, meanwhile for cost of equity in USD is
10.30%.

Target Capital Structure (Debt to Equity Ratio)

Theoretically, an “optimal” capital structure should be used to estimate a company’s WACC in the case of an
acquisition. Deciding on an “optimal” capital structure is a subjective exercise. Based on this premise, the estimated
capital structure range based on the capital structure of Health sector, is 16.5% debt and 83.5% equity.

Tax Rate

We have used the statutory corporate tax rate in Indonesia of 25.0%.

Cost of Debt

Cost of debt for Indonesia is estimated based on the Indonesian IDR and USD lending rate as of 31 December
2018, published by Bank Indonesia which is 10.37% and 5.52%, respectively. Hence, the cost of debt after tax is
7.78% for IDR and 4.14% for USD.

WACC

Based on information presented previously, using Capital Asset Pricing Model (CAPM) the estimated WACC for
Health sector in IDR is 13.14%, while WACC in USD will be 9.29%. Beside serving a greater good for the society
Assumptions Regarding Use of Damodaran-derived Investment Parameters

The ratios and or other investment parameters produced are based on international financial markets
estimations. Such estimations capture the apetite of international markets to a particular sector in emerging
markets for project financing specifically unlevered for the Indonesian context.
Thus, there are only parameters which may or may not reflect actual practice and most notably not indicative
of the national banking sector apetite as these are varied based on the project and the unique value proposition
and potential monetization it may bring. Furthermore, variances between local market perceptions and
international market perceptions may also occur. In some cases, it may even be a deliberate policy action to
stimulate local industries into having a portfolio in particular sector in an attempt to create a domestic market.

and fulfilling the government’s target of health facilities development, PPP in health care must also bring benefits
to the private investors. The GCA has to set a lucrative and viable deal while carefully considers the factors that
can attract the private sectors for a PPP. Those factors are involved around the economic, political, and legal
circumstances.

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Annex II: Preliminary Market Research on the Urban Infrastructure Sector PPP in
Indonesia

This Annex II is provided to equip personnel that are involved in identifying, planning, and preparing for PPP
projects, in particular for the MoF PPP Unit to have a sense of pull and push factors that may enhance the
project proposal’s attractiveness to the market.

In this annex, the push and pull strategy based on Lewin’s field theory (1943) is used as the basic theoretical
framework, as we utilize the consumer behavior characteristics that affect the investors in the Urban Infrastructure
This Annex II is provided to equip personnel that are involved in identifying, planning, and preparing for PPP
sector market. Both push and pull factors that reduce constraints against investor hesitation to invest in PPP for
projects, in particular for the MoF PPP Unit to have a sense of pull and push factors that may enhance the
the Urban Infrastructure sectors shall be elaborated
project proposal’sso that a changetointhe
attractiveness behavior
market.towards improving market interest
is initiated.

The factors that may attract private investments and who the potential investors are that maybe identified as
possible pioneering private sector actors to develop PPP in the Urban Infrastructure sector in Indonesia and
positioning them in their perspective as having first mover advantage in the Indonesian health sector market
through becoming pioneers in the PPP projects for the Urban Infrastructure.

Factors That May Attract Private Investments

In addition to the main parameters for investment decisions, such as Economic Internal Rate of Return (EIRR),
Economic Net Present Value (ENPV), and Economic Benefits Cost Ratio (BCR), another parameter is Value for
money (VfM). VfM is an indicator that can inform the combination of benefits and costs in delivering services that
users want. The analysis can be used to sense-check the rationale for using a PPP. It deals with the question
whether a proposed project is suitable for private financing. Another analytical tool which can be used is the public
sector comparator (PSC) which compares the fiscal cost of a PPP delivery option with that of a conventional public
delivery option for either single or multiple infrastructure projects.
How attractive the PPP on urban infrastructure can also be influenced by government incentives or privileges of
economic benefits, such as:

1. Incentives in the form of tax deductions

2. A relatively large interest offering
3. The minimum wage for labor
4. A guarantee from the government, e.g. PT. PII
5. The existence of competitive neutrality, which is a component that eliminates competitive gains and losses
owned by the public, such as certain taxes or insurance.
6. The prestige brand of the company in the infrastructure name

Since the cost center for urban infrastructure are in the land acquisition and construction process, the other factors
that can make this sector is still commercially benefit for private sector investors to participate are the government
supports on land acquisition and construction costs and guarantee for payment. The government has published
several facilities to improve economic and financial feasibility to engage the private sector in partnership for urban
infrastructure project, such as:
1. Land acquisition for national strategic projects, the cost will be entirely taken care of by the State Asset
Management Agency (BLU-LMAN), once all the process and document requirements have met the applicable
provisions.
2. Viability Gap Fund (VGF), which is assistance to increase the financial feasibility of an infrastructure
development project. VGF is capped at 49% of construction costs.
3. Guarantee Fund, which is financial compensation given by the MoF through the Indonesian Infrastructure
Guarantee Fund (PT. PII) to the Implementing Business Entity (IBE) through a risk sharing scheme
4. Availability Payment (AP), which is a payment scheme for service availability by the government during the
concession period to the Implementing Business Entity (IBE) after the private sector has complete constructed
the assets

Tax allowance, consist of:

1. Income tax on dividends to foreign taxpayers is 10%, lower according to P3B

2. Reduction of net income of 30% of total investment charged for six years, each of 5%
3. Reduction of tax holidays for projects that have a large economic impact and high externalities
4. Reduction of interest rates for the People's Business Credit (KUR) from 9% to 7% per year
5. Longer loss compensation, around 5-10 years

Potential investors and financiers (including contractors and operators)

For potential urban infrastructure sector PPP, identification of potential investors and financiers is related to
developments in the property market. However, to identify specific potential investors in urban PPP needs further
study because it depends on the typology of urban infrastructure, local regulations and the fact that there is still
only a limited number of urban PPP projects actually delivered.

The criteria for potential investors or financiers usually depends on in which area that their companies operate and
or are interested in. We need to examine their funding history and sources of funding. The financiers usually trust
the technology providers, which have good credibility or incorporated in their network. Analyzing the profile of
potential investors or financiers would also assist stakeholder mapping.

Table 1 Potential Players from Private Sector (include but not limited to the Entities in the table below)
Financial Institutions Delivery Partners Management Private Developers
No Agencies (Investors)
1 Public Housing
 Regional Banks  PT Waskita Karya  PERUMNAS Housing Developers (PT
 PT. SMI  PT Wijaya Karya  Property Lippo Karawaci,
 PT. Sarana Multigriya  PT Nindya Karya Consultants PT Bumi Serpong
Finansial (SMF)  Cooperatives Damai Tbk (BSDE), PT
 PT Adhi Karya
 BPJS Ketenagakerjaan  Local Ciputra, PT Agung
 PT Amarta Karya Podomoro Land, PT
 PT Taspen government
 PT Hutama Karya agencies Pakuwon Jati Tbk, etc.)
2 Area Development
Regional Banks  PT.  Ministry of  Jakarta International
PT. SMI Pengembangan Tourism Hotels & Development
Pariwisata  MPWH  Grahamas Citrawisata
Indonesia  Local  etc.
government
 PT. Hotel Indonesia
agencies
Natour
 etc.
3 Urban Regeneration/Renewal/Revitalization
Regional Banks  PT Wijaya Karya  MPWH PT KI Jababeka, PT
PT. SMI  PT Nindya Karya  Local Ciputra
government PT Best Engineering
 PT Adhi Karya
agencies Contractor & Agencies
 PT Amarta Karya Indonesia, PT Karunia
 etc. Jaya Sukses, PT Muara
Wisesa Samudra, PT
Taman Harapan Indah,
etc.
4 Traditional Market
Regional Bank  PD Pasar Jaya  Ministry of Salim Group
PT. SMI  PT Waskita Karya Trade
 PT Wijaya Karya  PD. Pasar
 Trading Company  Cooperative
 Local
government
agency
Source: Deloitte Analysis 2019

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Annex III: Suggested Approaches on Effective Stakeholder Engagement for Policymakers in
PPP
Based on a review of the literature, various PPP models have been utilized for urban infrastructure projects. The
leadership role of government and good coordination between government agencies play a significant role in
introducing private sector investment and community participation into a partnership to develop and/or manage
urban infrastructure. From the government’s perspective, a PPP arrangement can offer an off-budget mechanism
for infrastructure development, better project design, construction and operation, and better value for money
because private sector investors typically consider whole life cycle costing for projects. Therefore, improving the
coherence of urban programs at national and local level and having a clear transparent bureaucratic hierarchy in
decentralizing Indonesia is an initial requirement for creating PPP.
The role of government is critical particularly with respect to urban infrastructure projects that are probably not
financially viable, but can offer economic benefits. To date, the government has provided various incentives and
other support, such as land acquisition, capital grants, revenue guarantees, assumption of foreign exchange risk,
tax incentives, protection against tariff reductions, protection against reduction of the concession period and loan
guarantees. However, there are still no urban infrastructure PPP developments that have been successfully
prepared even though various successful urban PPP projects have been delivered in other countries. Therefore,
drawing on the existing guidelines, the government needs to define the parameters for potential urban infrastructure
PPP projects.
The key parameters should have clear and measurable definitions. For example, in the preparation stage, the
contents of the preliminary study or proposal documents should include supporting evidence, e.g. land title
certificates, commitment letters from participating parties, confirmation of spatial plan and zoning regulations, and
support letters from government agencies. The Pre-FS or FS should also contain the size of the project, the
approved design by local government, etc. Providing those parameters at every stage of PPP preparation would
make DGBFRM’s task easier and provide certainty for the PPP sponsors.
Since “decentralization”, the responsibility to develop urban infrastructure has become the responsibility of local
government. Most of them do not seem aware of the advantages of PPP. It is still perceived as a complex scheme
that involves public or private financing, higher transaction costs, and requires close monitoring and regulatory
oversight. It is essential to strengthen local government project development capacity. Continuous professional
development followed by technical assistance is needed to help local governments in structuring PPP projects,
designing PPP contracts, managing PPP transactions, handling PPP contracts and responding to unsolicited
proposals.

Detailed guidance for each step is necessary to accelerate capacity building both for local government and the
private sector for following PPP preparatory steps. In selecting an urban project, competence to review the business
case and project output specification is needed. For unsolicited projects, more time is required to assess
compatibility with the government’s program and the legal basis for the proposed project. It would also require
additional communications with Bappenas and the relevant technical ministry. In assessing the PPP model, the
competence is needed to assess technical and economic aspects of projects, including criteria of affordability, risks
allocation, bankability, value for money and available standards. In checking detailed preparation, competence is
required to review a project’s plan and team, timeline and organization structure. In assisting with the procurement
process, competence is required related to valuation of the technical components and financial aspects proposed
by the bidders.
Strengthening the urban infrastructure regulatory framework and policy landscape, especially in harmonizing and
synergizing inter-sectoral regulations and policies. Simpler procedures without losing the substance of sustainable
development is also a part of this components. Adopting various benchmarking as background studies for
regulation making would be useful, but still should be contextualized with the Indonesian urban governance
framework.
In supporting DGSIFM, developing an integrated toolkit for assessing potential urban infrastructure PPP projects
would be helpful. Criteria should covers technical aspects (physical, environmental and social dimensions) and
economic and financial aspects. It should be a user friendly toolkit that can assess urban infrastructure PPP
proposals based on clear steps. The toolkit will supplement the existing technical PPP regulations. The toolkit
should be loaded onto a digital platform to allow for a relatively simple screening process.
PPP for Public Housing has potential because the strong demand for housing. Property developers, design
consultants and property management companies are expected to be attracted to Public Housing PPP for several
reasons including the mandate of the housing law, the incentives included in government policies, the settled selling

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price and availability of bank funding. Several examples of collaboration between government and the private
sector are positive indicators in this regard.
There are a number of urban regeneration PPP success stories in developed countries. The opportunity to redesign
and add new commercial activities to reactivate an urban space, with the aim of making the space more vibrant
are key factors that can attract potential investors. For old town areas, the partnership of government and the
private sector would be more effective if the local community is involved. This should improve the sustainability of
the project, although it often takes considerable time to achieve consensus between government, private investors
and the local community.
PPP of sectoral-based area development would not be easy to attract private investors to join the partnership
unless they have strong commitments and vision to develop the area. The accessibility to manage the land is the
key attraction for this scheme, beside of the flexibility in developing business case in the area, infrastructure
supports from government side, and other fiscal incentives. Support from financial institutions is crucial to achieve
success with an urban regeneration PPP.
Traditional market revitalization PPPs have potential because often a market’s strategic location will enhance the
case for investing in improvement to the site. The opportunity to construct additional facilities to be used for other
commercial activities and improve the quality of existing facilities and environment should also expand the target
group of potential visitors to the market. Since traditional market revitalization is a government priority, the various
economic incentives which the government has at its disposal should benefit individual PPPs.
However, the business case for urban infrastructure projects is difficult to develop since this relies on the capacity
of the PPP designer to develop effective partnerships. Preparation is the key because the legal requirements, land
status clarity, and spatial planning suitability are usually the issues that cannot be solved in the short term. The
second important step, the institutional arrangement can only occur if the PPP business model demonstrates a
project’s commercial viability. Therefore, validating supporting data would help the development of urban
infrastructure PPP.
Table 2 Summary of Regulatory Gaps in Urban Infrastructure PPP
Challenges Recommendation
No
1. Coordination among stakeholders Urban Infrastructure involves multiple stakeholders (i.e.
MPWH, Regional Government (both provincial level and
city/district level). Especially regarding the development of
urban infrastructure using Transit Oriented Development.
Therefore, it is necessary for DGSIFM to become
intermediary between stakeholders in order to map out
each stakeholders responsibility to ensure the
development realization.

2. Choosing a payment scheme In order to provide clear guidelines on PPP

Implementation on PPP Implementation, there is a need
for technical regulation on the available payment
mechanism for return of investment as well as on how to
choose the most appropriate payment scheme.

3. Measuring fiscal capacity Technical regulation for measuring fiscal capacity,

especially when availability payment scheme is
considered as the favorable payment for return for
investment.

4. Obtaining approval or endorsement Technical regulation that contains detailed guidance and
from DPRD toolkit on how to obtain DPRD approval or endorsement
for local government that act as GCA. Further, one of
core’s successful milestone that PPP is well implement is
obtaining DPRD’s approval.

5. Assessing OBC and FBC Technical regulation discussing standards of OBC and
FBC for Urban Infrastructure PPP. This should contain, for
example, how OBC and FBC for Urban Infrastructure PPP

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 Challenges Recommendation
No
should be, what aspect (financial, regulatory, institutional,
and so on) and to what extent each aspect needs to be
covered in OBC and FBC, how to set output specifications
in FBC. Further, all stakeholders that are involved under
PPP project preparation stage shall comply with
Bappenas Regulation 4/2015.

6. Managing post-transaction period Technical instruction discussing how to manage post-

transaction activities and ensure the project achieve
consistent output after the transaction.

7. GCA Capacity & Political Commitment There should be clear screening to identify and
differentiate GCA that has the stakeholders’ political
commitment and fiscal capacity to procure PPP projects.

How to Move Forward

The following are the proposed activities to be taken by DGSIFM to support line ministries in achieving their
respective objectives through PPP implementation
Table 3 Proposed Activities to be Performed by DGSIFM
No. Categories

1. Implementing Urban Infrastructure Pilot Project Transaction

The absence of urban infrastructure sector PPP project transaction has made the private sector adopt a
wait and see approach. There are some urban infrastructure PPP projects initiated, but none have
reached the transaction phase.

Despite existence of various challenging issues on the Central Government as well as local governments
hospital PPP implementation, there is a strong recommendation for DGSIFM to take initiatives supporting
local governments implement hospital PPP transaction. This will provide accurate learning-by-doing
experience to both DGSIFM and line ministry/local governments on PPP transaction process, develop
transaction model for other local governments, as well as expedite urban sector infrastructure and service
delivery to the Indonesian citizen.

MPWH has proposed Paldam Vertical Housing as one of the pilot project for urban infrastructure.

2. Capacity Building for PPP Urban Sector stakeholders

The number and complexity of stakeholders involved in PPP projects highlights the necessity to provide
urban and training to increase stakeholders’ capacity. This is especially true for Local Governments, and
other parties in ministries related to the urban infrastructure sector.

Capacity building can be done through the PPP Joint Office, or by providing PPP related training and
Information disbursement through mass media and social media might attract people to learn about PPP.

3. PPP Implementation Guidelines and Toolkits Development

Potential GCA’s of Urban Infrastructure Project would greatly benefit from sectoral PPP Implementation
Guidelines and Toolkits Development that covers Financial Aspects, Technical Aspects, and Legal
Aspects of each sub-sector during Project Planning and Project Preparation Phase

4. Standard PPP Documents Development

Model Transaction Document, Guidelines and Toolkits (FS, RFQ, RFP including PPP Agreements).

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