Boosting Infrastructure Financing through Risk Mitigation Instruments

Financing Sources

for Public-Private Partnerships Forum

Kuala Lumpur, 25 November 2015

Dr Armand Hermawan CFO Indonesia Infrastructure Guarantee Fund

Printed: 20/11/2015

Indonesia infrastructure context

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Brazil1 UK Canada India USA Germany Spain China

0

20

40

60

80

100

Total infrastructure stock 2012, % of GDP

70 ~60-65

Water

87 80

76 73 71 64

58 58 57 54

Telecom Power

Airports

Ports

Rail

Roads

South Africa

Poland Indonesia2

1 For Brazil, road data contains all of transport. The estimate shown is based on data provided courtesy of Dr. Armando Castelar. 2 Indonesia transport stock is an expert estimate and ranges approx. 5-10% of GDP in 2012

Source: various national statistics; McKinsey Global Institute analysis

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Indonesia infrastructure context

E1.Estimate based on Global Insights GDP growth forecast in 2014-2025, ranging from 5,1% to 6%. All data are in real base 2013 2 An additional ~US$ 277 bn (1.5-2% GDP) would be needed to include capex depreciation

GDP value (USD billion, real 2013)

225

New investment needed

Investment required to meet the 70% “rule of thumb” for infrastructure stock

~ 1,160-1,1701

~370-3802

2025 2013

~ 560-570

2011-2014 MP3EI plan

Bn USD, real 2013 ESTIMATES Investment gap

869 16231

Source: Indonesia Coordinating Ministry For Economic Affairs, Global Insights, McKinsey analysis

Indonesia infrastructure context

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Indonesia infrastructure PPP context

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~ 1,160-1,1701

2025

145-180

New investment needed

~370-3802

~90-110

2011-2014 MP3EI plans

225

55-70

2013

~ 560-570

Bn USD, real 2013 ESTIMATES

1 Estimate based on Global Insights GDP growth forecast in 2014-2025, ranging from 5,1% to 6%. All data are in real base 2013 2 An additional ~US$ 277 bn (1.5-2% GDP) would be needed to include capex depreciation

GDP value (USD billion, real 2013) 869 16231

PPP potential

Source: Indonesia Coordinating Ministry For Economic Affairs, Global Insights, McKinsey analysis

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four fundamental benefits by closing the infrastructure investment gap

Increased efficiency

Appropriate Risk allocation

▪ Risk allocated to party best able to manage it ▪ Risk reduction by redefining relationship between parties ▪ Maintains quality of service through effective incentive system

Leverage Private sector Strengths

▪ Maximised use of private sector skill ▪ Execution and delivery expertise

New sources of financing

▪ Private sector has financial interest to deliver on time ▪ Optimise life-cycle cost (investment vs. ops cost) ▪ Meet budgets (known outputs for known cost) ▪ Competition between bidders drive price down

▪ Injection of private capital and ability to raise additional capital ▪ Makes projects affordable if borrowing is limited ▪ Project can be funded off-balance sheet1

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Land Fund Infrastructure Fund

Capital market and regulatory

reform Private Investors /

Lenders

Land Acquisition &

Clearance

Policy (Bankabaility)

Risks

Project Financing

Preparation Bidding Construction Operation

Cost of financing Refinancing

Government of Indonesia

fiscal initiatives and supporting institution

Viability Gap Fund

Viability Risk

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Established: December 30, 2009

Authorized Capital: IDR 9 Trillion

100% Government-owned

Core Mandate: Single Window for Infrastructure Guarantees

Indonesia Infrastructure Guarantee Fund

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benefits of the Guarantee to PPP projects

INVESTMENT Sustainability of investment Joint project supervision with

the Government

BANKABILITY Lenders confident to lend Competitive interest rate due to

guaranteed term

RISK Professional and efficient risk

management Workable and clear risk

mitigation plan

CREDIBILITY The project is more credible in the

eyes of the private sector Increasing competition more

competitive rates

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a case study: Central Java Power Plant PPP project

Gurarantee Agreement ofIDR 300 Bio

6 October 2011

Guarantee Agreement for

Central Java Power Project 2x1000 MW; ~US$ 4 bio

Location Batang Regency, Central Java Province, Indonesia

COD 2019

Build, Operate, Transfer (BOT)

Guarantee Structure

• Guarantee Agreement: Project Co. with IIGF & GOI • Coverage: political risks, force majeure affecting PLN &

PLN EOD • Guarantee Tenor:

• Equity : 16 years • Debt : 21 years

PPA Tenor 25 years

PPP Structure

Developer PT Bhimasena Power Indonesia, an SPV of consortium:

• ADARO: 34% (Indonesia) • J-POWER: 34% (Japan) • ITOCHU: 32% (Japan)

Project Ultra super critical coal fired power plant, 2x1000 MW

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Issue Description

▪ Varying awareness and capabilities on what it takes to do a PPP ▪ Stringent procurement process limits access to world-class

advisory firms for project preparation

Challenged Government 2 capacity in pre-FS and project prep

▪ Misaligned incentives among GCAs and PPP agencies ▪ No single unit accountable from origination to completion ▪ Lack of mandate from highest authority

No end-to-end ownership 1

▪ Opaque criteria for selection and prioritization of PPPs ▪ Limited consideration of financial viability during project selection

results in projects tendered without viable fiscal support

Opaque project selection criteria 3

▪ Over 30 laws and regulations govern PPPs ▪ Contradicting stipulations across sectors; and between

national and local governments

Conflicting 4 regulatory

framework

PPP-

spec

ific

Rel

evan

t however, there’s challenges that need to be addressed

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Recommendation Description

▪ Define robust criteria to determine when PPP is most suitable delivery mode

▪ Adopt value-for-money (VFM) principles

Mainstreaming PPPs as an infrastructure delivery mode 2

▪ Serve as control tower, ensuring that PPPs reach financial close ▪ PPP champion, driver of transformation, owner of reforms

Authoritative and credible PPP center 1

▪ Pool all resources to ensure allocation across projects are maximized ▪ Develop readily available roster of technical, financial and legal

advisors to support transactions

Project development fund for 3 accelerating procurement of

world-class advisory services

Capability-building program across the bureaucracy 4

▪ Conduct regulatory audit ▪ Propose specific amendments 5 Debottleneck regulations

▪ Develop programs to address three key areas:

– Awareness-raising – PPP Basics – Specialized transaction skills

…..resulting in 5 corresponding actions to unlock PPP potential

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Thank You