Ministry of National Development Planning (Bappenas) is preparing a pre-feasibility study process regarding Public Private Partnership (KPBU) for the infrastructure construction of the new capital city. This is one of the schemes that the government relies on to fund the state capital (IKN) project. Currently, the PPP process which consists of four stages is ongoing. After the planning and pre-feasibility study are completed, the PPP stage will continue with transactions and operations.
To support the preparation and transaction processes, PPP projects in IKN will utilize the Project Development Facility. There are three types of PPP funding schemes, which are tariff PPPs, availability payment PPPs or service availability payments, and other PPPs. The tariff PPP scheme comes from the service users. Meanwhile, PPP availability payments are direct payments from the government to PPP Implementing Business Entity (IBE) for long-term cooperation contracts and are not tied to service revenues. While other forms of PPP funding comes from the results of commercial activities originating from the project.
Looking at other countries such as the United Kingdom and Netherlands, they have successfully used PPPs for delivering core government buildings such as offices, police stations and courts. Indonesia is already seeing benefits from PPPs, through the Palapa Ring Broadband project as well as power generation, water treatment and toll road projects. Therefore, the PPP scheme can also be applied to this new capital city project with some homework that needs to be done by the Government.
Based on the 2020-2024 medium-term development plan (RPJMN), the State Capital project requires a budget of Rp466.98 trillion. Since only 19% of the state budget allocated for funding this project, the government intends to rely heavily on PPPs, state-owned enterprise assets, and the pure private sector
This means that the private sector will be expected to absorb the remaining of the cost as well as project risks. Lets put a highlight on that private investments might be hindered by the fact that Indonesia’s bureaucratic environment remains complex, with a disconnect between the local and central governments.
However, there are some notable steps that the government has taken to relax infrastructure investment restrictions in 2021. For instance, the construction sector previously saw a maximum 67% of foreign ownership (70% for Association of Southeast Asian Nation investors), but this restriction has now been completely lifted, although companies still have to form local joint ventures. For Legal Risk, Indonesia scores 47.2 out of 100, ranking in 12th place in East and South East Asia, below markets such as Vietnam, Malaysia and Taiwan. Therefore, it is expected that the Indonesian government’s intention to rely on PPPs will be hampered by legal risks and potentially time-consuming anti-corruption and due diligence checks.
Source : Tempo
 Fitch Solutions Macro Research, 2018.