It is pleasing to report that only recently, as part of a national initiative to attract private funding to the critical infrastructure sector, the Indonesian government has embarked on a policy framework of risk allocation and sovereign support, promulgated via a Ministerial Decree. This decree covers political, performance and demand project risks. Although the framework has not been tested in practice, at least at the time of writing this paper, the government appears to be willing to share some specific project risks (e.g., those associated with land-procurement and tariff-setting) with the private sector. In principle, the government would provide some guarantees and compensations (if necessary) to private investors, if they were to be disadvantaged due to the eventuation of an identified project risk, and their inability to control the consequences of the risk if it materializes. To demonstrate, a ‘capped’ land cost arrangement is guaranteed by the government. If the actual cost exceeds the guaranteed cost (capped at 110% of the expected cost), then the government will pay the balance. Currently, the Ministry of Finance is believed to be in the process of estimating the funds required to implement such a scheme as it may expose the government to substantial contingent liabilities.
The government is also considering imposing a new tax regulation on the use of ground water in an attempt to minimize water demand risk for operators in the greater Jakarta area. To date, the prevailing tax rates are not conducive for users to use piped water due to its relatively high cost. This leads to excessive groundwater-pumping that is allegedly responsible for sinking groundwater level in the city. These tax rates may encourage consumers (i.e. households and industries) to rely more on piped water usage.
It is noteworthy that a project must meet pre-determined stringent criteria to be considered eligible for the above scheme. These criteria include: transparency, fiscal prudence, acceptable cost-benefit ratio, to name but a few. Nevertheless, it is a step in the right direction to boost the investor’s confidence. Finally, it is imperative to properly define project risk allocation in the contract, and for both parties to give a strong commitment to fulfilling the contractual agreement.