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Editorial

Public Private Partnerships Under the 2015 Presidential Regulation

The President‚Äôs Office has issued Presidential Regulation No. 38 of 2015 on the Cooperation Between the Government and Business Entities in the Provision of Infrastructure (‚ÄúPR No. 38/2015‚ÄĚ). PR No. 38/2015 replaces the previous Presidential Regulation on the same issue, Presidential Regulation No. 67 of 2005 as last amended by Presidential Regulation No. 66 of 2013.

Notable Provisions

Services as the Driving Principle of PPP

While PR No. 38/2015 defines infrastructure provision as the activity of constructing, upgrading, managing or maintaining infrastructure in the course of enhancing its utility, PR No. 38/2015 seems to lean towards service provision. Some relevant provisions include the ability of GCAs to budget and pay for availability payments (defined as payments for the availability of infrastructure-related services to business entities), which is payable only after the infrastructure in question is deemed ready to operate.

Consortium of GCAs

Reflecting the need for integration, PR No. 38/2015 enables one or more state institution to act as the GCA in cases where the infrastructure subject to the cooperation comprises of two or more infrastructure types, falling under different regulatory purviews. In such case, the Minister/Head of Institution/Head of Regional Government having the jurisdiction over the cooperated infrastructure will jointly act as the GCA. This provision recognises the need for a number of potential GCAs, each with its own purviews, to interface and enable the provision of integrated infrastructure services.

Project Company’s Return on Investment

One marked change from the previous PPP regime is that PR No. 38/2015 expressly allows for a GCA to pay for availability payments (see Articles 11 and 13). Under the previous regime, it was unclear whether a GCA could budget for and effectuate availability payments, particularly in cases where the GCA is a regional government. As a result, it resolves a number of payment-related issues in infrastructure projects that require availability payments to compensate for a project company’s capital investment (e.g. in offtake contracts such as drinking water systems.

Article 13(2) PR No. 38/2015 also provides that in budgeting the funds for availability payments, the GCA is to take into account the capital costs, operational costs and profits of the business entity.

Reflecting the service-based outlook that the Government adopts towards infrastructure-provision, availability payments are payable only when the infrastructure in question has been built and is operable and that the determined service indicators are met (see Art. 13 (3) and 13(4)).

Finally, PR No. 38/2015 also goes one step further to enable the Minister of Domestic Affairs, responsible for issuing guidance on the regional budget, to issue regulation to govern availability payments by regional government GCAs.

Land Acquisition

One notable aspect of land acquisition under PR No. 38/2015 is that land acquisition is now facilitated(diselenggarakan) as opposed to undertaken (dilaksanakan) by the Government and in accordance to the laws applicable in land procurement for public interest. The term facilitated implies that the government may adopt the role of an arranger with the business entity partner acting to implement the acquisition. This is consistent with Article 117A (1) of Presidential Regulation No. 71 of 2012 as last amended by Presidential Regulation No. 30 of 2015 (PR No. 71/2012 as Amended), which enables a private entity to acquire the land on behalf of the a state institution, after having obtained authorisation to do so.

The phrase in accordance with the law can be interpreted that PR No. 38/2015 references PR No. 71/2012 as Amended, which enables a business entity to initially fund the land acquisition (see Art. 117A) and receive the return for such initial funding through return of investment pursuant to an agreement. Please note, however, that should this funding method be chosen, the business entity is not entitled to receive the repayment of funding until after the land acquisition has been completed, thus placing the acquiring business entity at risk where the acquisition cannot be completed.

Government Support

Under PR No. 38/2015 the government may support a PPP project in the form of viability-gap funding, guarantees, and tax incentives. Viability gap funding is given only to projects that confer social benefits and where the tariff for services offered by the Business Entity cannot yet be set to provide for the business entity’s return on investment. Consistent with the previous regime, viability gap funding must be requested by the GCA to the Minister of Finance.

Provisions on government guarantees appear unchanged from the previous PPP Regulation, in that guarantees are to be issued on the principle of risk management.

Use of State Assets

PR No. 38/2015 appears to recognise the concept of the transfer of state asset management (Art. 33(1)). PR No. 38/2015 still prohibits state assets from being used as collateral for the benefit of third parties (e.g. the project lender/financier).

Financing

PR No. 38/2015 provides that a project company must have obtained financing for the PPP project within 12 months of signing the PPP agreement. In cases where the PPP is financed through a loan, the requirement to have obtained financing is met where the loan agreement is signed and that the loan has become disbursable to finance the commencement of construction work. In case the PPP is to be implemented in phases, the financing obligation is met where the loan agreement for one of the phases has been executed and the loan has become disbursable to commence construction work.

The 12 month deadline may be extended by up to 6 months in cases where the inability to secure financing is not attributable to a project company’s fault. In cases where financing is still not obtained after the 6 month extension, the PPP agreement expires and the GCA is entitled to draw on the implementation guarantee.

Additionally, PR No. 38/2015 allows for the GCA to provide financing to the project. This can be used as a tool to enhance the financial feasibility of the project, in addition to other tools of government support.

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