Risk Allocation for Infrastructure Development Through Indonesia ...mddb.apec.org/Documents/2017/FMP/FDM2/17_fdm2_003.pdf · Risk Allocation for Infrastructure Development Through

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2017/FDM2/003 Session: 2

Risk Allocation for Infrastructure Development Through Indonesia Infrastructure Guarantee Fund

Guarantee

Purpose: Information Submitted by: Indonesia

Finance and Central Bank Deputies’ MeetingHoi An, Viet Nam20 October 2017

PT Penjaminan Infrastruktur Indonesia (Persero)

Risk AllocationFor Infrastructure Development

Through IIGF Guarantee

October 2017

Donny HamdaniDeputy Director of Finance

PT Penjaminan Infrastruktur Indonesia (Persero)Indonesia Infrastructure Guarantee Fund


Indonesia Context to the PPP


Emerging Opportunity - Substantial Infrastructure NeedIn line with Indonesia’s Medium Term Development Plan 2015-2019

3

2

Sector US$ Bio

Road 54.7

Railway 16.86

Air Transport 10.75

Sea Transport 44.12

Water Resources 33.65

Housing 24.44

Urban Transport 6.42

Land Transport (incl. Ferry) 3.5

Power 74.6

Energy 37.8

Waste Management 30.07

ICT 20.9

TOTAL 358

INFR

ASTR

UCT

URE

NEE

DS

(201

5 –

2019

)

FINANCING SOURCE PLAN

1

41,3%

Realized & Allocation:• 2015: $ 19.1 Bio• 2016: $ 23,7 Bio• 2017: $ 28.9 BioGap to 2019: $ 76 Bio

STATE BUDGET

$ 147.7 Bio

22,2%SOE

$ 79.6 Bio

Include Equity Injection to SOE from Government budget allocation

36,5%PRIVATE

$ 130.7 Bio

Promoting Public Private Partnership (PPP)

Page 1


Fiscal tools for PPP SchemeFiscal tools for PPP Scheme

US$ 358 Bn

41.3%

US$ 148 Bn 22.2%

36.5%

US$ 131 Bn

APBN/APBD

SOE

Closing the GAP

Private Sector

Inve

stm

ent t

arge

t20

15-2

019

• 225 National Strategic Project

• 30 National Priority Project

• Social Infrastructure Project

• Others

US$ 80 Bn

1. Project Development Fund2. Viability Gap Funding3. Availability Payment4. Guarantee5. Infrastructure Financing6. Land Acquisition Support

Emerging Opportunity - Substantial Infrastructure NeedVarious fiscal policy & support to close the Gap using private sectors

Page 2


US$ 358 Bn

41.3%

US$ 148 Bn 22.2%

36.5%

US$ 131 Bn

APBN/APBD

SOE

Private Sector

Inve

stm

ent t

arge

t20

15-2

019

• 225 National Strategic Project

• 30 National Priority Project

• Social Infrastructure Project

• Others

US$ 80 Bn

Emerging Opportunity - Substantial Infrastructure NeedPotential Source of Funding in PPP

In Indonesia alone there is USD $95 billion in assets under management

100

732Private pensions 556

Public pensionsInsurance

Investment companies19Foundations

Bank 81,9199,800

Indonesia AUM 2015, USD Mn

*) Based on McKinsey Study on IIGF Long-term Strategy Assignment

Banking Industry as the biggest pool still has its own limitation.

Page 3


Government Support For InfrastructureFacilities to support PPP Projects in Indonesia, provided as required

Project Preparation Bidding Process Project Construction

Facilities Project Development Fund

Viability Gap Funding FinancingAvailability

Payment Land AcquisitionGuarantee

Fund

Managing Entity

KPPIP/CAPID, PT SMI and PT IIF, Ministry of

Finance

Ministry of Finance (GCA

request)PT SMI, IIFMinistry of

Finance

Ministry of Agrarian and Land Spatial,

LMAN

Page 3


IIGF Context to the PPP Development Support in Indonesia


IIGF Profile

PT PII (Persero)“IIGF”

Established on 30 December 2009. As a “Single Window” in providing government guarantee provision for Infrastructure Projects. IIGF is also valued for its state budget’s ring fencing function.

Projects Guaranteed 13 projects in 4 Sectors: Electricity, ICT, Water & Toll Road~Project Value: Rp 119 Tr or ~ US$ 8.9 BillionGuarantee amount: Rp 29 Tr ~ US$ 2.1 Billion

Retained Earning

~US$ 149 M

Paid in Capital (CI)

~US$ 525 M

Revenue

~US$ 29 M

Gearing Ratio

3,1 x

Int’l Credit Rating

BBB-Sovereign rating

By Fitchratings

Key Financial Figures (30 June 2017)

Income Margin

63.11%Opex Ratio (OER)

22.23%

at max exposure

Page 4

Leveraging Ratio*

13,2 x

Guarantee Value/ Capital Ratio Project Size/ Capital Ratio

*Economic Impact


Government Guarantee through IIGF

IIGF Value Proposition

SAFEGUARDSupport the continuation of the project through a careful analysis of safeguard.

RISKFair risk allocation between

government and private investorClear risk mitigation

BANKABILITYProvide more comfort for financier to support the project.

Reducing the cost of fund

TRANSPARENCYIncreasing bidding competition

resulting the most optimal project investment

Guarantee provision that can be verified during the bidding process

VALUEPROPOSITION

(Mirroring World Bank Safeguard Policy) As written in IIGF Operation Manual

ACCOUNTABILITY

Page 7


Proven Business Model for PPP Guarantee

Cooperation AgreementInvestor/Sponsor

Multilateral Development

Agenvy

Ministry of Finance

Guarantee Agreement

Co guarantor/Liquidity facility

Regulatory &Capital Injection

Recourse AgreementRisk Mitigation Plan

GuaranteeApplication

Package

Counter Guarantee

PJPKGovernment Contracting

Agency

Page 11


Keywords for Projects to be eligible for IIGF (Sovereign) Guarantee

Page 8

321

Viable(financial and

technical)

Risks(cover government

triggered risks)

Tender(guarantee covers is attached in RfP)


• PPPs are complex relationships• With the legal framework provided by long term contracts • Operating in evolving policy and regulatory regimes• Affected by quality of contract management & partnership spirit

• Allocation and mitigation of risks ultimately are not as intended but as the contractual provisions read

• Over the long term, players change, unforeseen situations arise• Lending terms and cost of financing depends on risk allocation as given in the

contracts

• Risk allocation & mitigation is managed through a complex contractual structure

• Complexity of construction, financing, regulatory, commercial and operational risks is managed through a web of contracts

Risk Allocation in a PPP’s contract


means: Deciding which party to the PPP contract will bear the cost (or reap the benefit) of a change in project outcomes arising from each risk factor

Two main goals of Risk Allocation:1. To create incentives for the parties to manage risk well

improve project benefits or reduce costs2. To reduce the overall cost of project risk by “insuring”

parties against risks they are not happy to bear



Each risk should be allocated to the party:1. Best able to control the likelihood of the risk occurring2. Best able to control the impact of the risk project outcomes3. Able to absorp the risk at the lowest cost

Preferred risk allocation is often put in the form of Risk Allocation Matrix, example:1. Infrastructure Australia: “standard commercial principle”2. Hongkong Introductory Guide to PPPs: risk matrix for water treatment plant PPP3. The Government of Rio de Janeiro’s PPP Manual: risk matrix for PPPs4. South Africa’s PPP Manual: standardized PPP risk matrix5. India PPP Toolkit: guide on risk allocation under different PPP contract types

Risk Matrix may be generic and usually used as a starting point for allocating risk on a particular project



MOF Regulation No. 260/2010 mandates IIGF to develop and issue Risk Allocation Guideline

• Risk Allocation Guideline is intended to be a key reference for: Contracting Agencies in developing the PPP Contracts as well as the

Guarantee Application Package (GAP) to be submitted to IIGF for guarantee provision; and

Investors and financiers in assessing their potential investment and financing for PPP projects in Indonesia.

It is important to note that some risk allocations may have variations to what have been outlined in the current Guideline, as they are subject to actual project and/or sector specific conditions or agreed commercial position between the parties.

Regulation requires the Guideline to be reviewed periodically, minimum once for every 12 months, by way of gathering feedbacks from key stakeholders as has been conducted previously when developing the Guideline

Indonesia PPP Risk Allocation Guideline


IIGF Guarantee OfferingGovernment Guarantee through IIGF – Typical Risks Covered

Land acquisition

Project Budget approval

Discriminatory change in law (project specific)

Delays in necessary approval

(Early) termination by government

Pre-construction Construction Operation

Payment risk

Tariff adjustment risk

Page 10


Typical Risk Allocation Coverage

Public Allocation

PrivateAllocation

Political Risk

• Currency inconvertability

• Expropriation risk

• Change in law• Fail in

obtaining permits

• N/A

*) For complete set, IIGF published Risk Allocation Guidelines Book

Site Acquisition

• Land acquisition delay

• Complex resettlement

• Contamination/pollution to the site

• Disruption of the community convenience around the project

Design, Construction & Commisioning

• N/A

• Design faults• Failure to maintain

security & safety• Default of sub-

contractors• Increase in

construction cost

Sponsor Risk

• VGF disbursement• Refund of land

acquisition fund (DTT)

• Default of project company, sponsor, or lender

• Increase in construction cost

• Fail to achieve financial close

• Forex, inflation

Operating Risk

• N/A

• Failure project management

• O&M cost operation increase

• Incompetent of technology & information system

Revenue

• Failure in AP payment

• Delay in periodical tariff adjustment

• Failure in initial tarif determination

• Misscalculation of tariff estimates

Network connectivity

• Road & transportation connectivity

• Smoothness of transportation system

• Competing facilities

• N/A

Page 9


A Case for 1st PPP Guaranteed in Indonesia - CJPP

PPAPPA

Guarantee Agreement (GA)

Guarantee Agreement (GA)

Recourse Agreement

Recourse Agreement

First loss basisup to certain amount

Remaining balanceafter IIGF portion



Sponsors

EPC Contractor Fuel Supplier O&M Contractor

PPA

Equity Project-Finance Debt

Fuel Supply ContractEngineering, Procurement and Construction Contract

Operation and Maintenance Contract

Profit Distribution Debt Service

1

EPC, O&M, Fuel Supply Agreements

State-owned electric utility

Project Company LendersSponsor Agreement4 Loan Agreement5

6

Political Risks in Indonesia

- Regulatory risk- Expropriation risk- Breach of Contract by Govt- Default of Govt

Political Risks in Indonesia

- Regulatory risk- Expropriation risk- Breach of Contract by Govt- Default of Govt

PLN Credit Risk

- Financial Sustainability risk

- Breach of Contract by PLN

- Default of PLN

PLN Credit Risk

- Financial Sustainability risk

- Breach of Contract by PLN

- Default of PLN



Development

Design

Cost changes due to planning

PLN changes to design

Fail to reachfinancial close

Termination Risk

Construction

Mis-estimation of construction cost

Gov’t induced changes in design

Demolition

Schedule

Ground/Site Conditions

Performance

Interest rate escalation

Fire, explosion, etc.

PLN Delay Event

Project testing

NFM Affecting Seller

NFM Affecting PLN

Political Force Majeure

Indemnity

Termination Risk

Operation

Mis-estimation of maintenance cost

Regulatory changes

Change in variable costs

Performance risk

Demand risk

Mismatch of revenue from financial model

Interest rate & forex risks

Seller Event of Default

PLN Event of Default

NFM Affecting Seller

NFM Affecting PLN

Political Force Majeure

Indemnity

Termination Risk

Project CompanyPLNGOI + PII Guarantee


Disclaimer

All information presented were taken from multiple sources and considered as true by the time they were written to the knowledge of PT Penjaminan Infrastruktur Indonesia (Persero)/Indonesia Infrastructure Guarantee Fund.

Any questions can be submitted to:

CORPORATE SECRETARYTel : +62 21 5795 0550 Fax : +62 21 5795 0040Email : [email protected]
