28 Jul 2020
Govt offers investors attractive new concession scheme for brownfield state assets
The President has issued a regulation that simultaneously holds out the prospect of attractive new opportunities for private-sector investment in existing public infrastructure and greater state funding for new infrastructure. This is the upshot of Presidential Regulation No. 32 of 2020 (“PR 32”, effective 18 February 2020), which introduces the limited-concession concept that allows the state to earn upfront fees by granting concessions over existing state or state-enterprise infrastructure assets to investors. The money so earned is then expected to be reinvested by the state in future infrastructure development and on the maintenance or upgrading of existing infrastructure.
What is a Limited Concession?
Under PR 32, a limited management concession over an existing state asset or an asset owned by a state enterprise (SOE) may be granted to an investor based on an asset management agreement (AMA) between the investor and the relevant public-service unit (badan layanan umum / BLU, that is, the unit responsible for operating the asset) or the president director (equivalent to CEO) of the SOE concerned based on (a) the outcome of a tender process in the case of a state asset, or (b) the relevant procurement regulations in the case of an SOE asset.
The AMA should stipulate the term of the concession and the concession fee, which must be paid within 6 months of the AMA’s signing.
It is important to note that there is no transfer of ownership over the asset, which continues to be vested in the state or SOE, as the case may be. Further, the concessionaire is prohibited from encumbering the asset and must surrender it to its owner upon expiry (or termination) of the AMA.
Assets Covered by PR 32
PR 32/2020 allows concessions to be granted over a wide range of assets, including (i) transportation assets (such as ports, airports, rail lines and bus terminals); (ii) tolled expressways; (iii) water-resources infrastructure; (iv) mains water infrastructure; (v) wastewater infrastructure; (vi) solid waste infrastructure ; (vii) telecommunications and informatics infrastructure; (viii) power infrastructure; and (ix) energy infrastructure (oil, natural gas and renewables).
However, not all state/SOE assets may be the subject of concessions. In order for a concession to be granted, the following requirements must be fulfilled:
PR 32 provides that assets that fulfill the above criteria should be inventoried by (i) the relevant ministers/ government agency chiefs; and (ii) the president directors of relevant SOEs for the purpose of preparing a list of those for which concessions may be awarded. The final list should then be reported to the Committee for the Acceleration of Priority Infrastructure Procurement (“KPPIP”), which is responsible for planning the development of strategic public infrastructure. The KPPIP is then required to prepare Asset Management Plans, which should be publicized widely by the KPPIP and the relevant ministries, state ministries and agencies and SOEs.
The beauty of the limited-concession model is its simplicity. Indeed, it is so simple, even elementary, that is difficult to understand why it has not been tried before in Indonesia. It not only allows the government to earn money on the state’s vast stock of infrastructure assets, it also allows existing assets (often dilapidated) to be upgraded while simultaneously providing financing for further infrastructure investment (provided of course that the fees earned are actually invested in infrastructure and not used to cover general government spending).
From the investor’s perspective, the scheme may be a more attractive alternative to a public-private partnership (PPP) arrangement, particularly if the investor is looking for a shorter-term commitment compared with that typically associated with developing a new PPP project.
However, not everything in the garden is rosy. While there appears to have been little opposition to PR 32 thus far (possibly due to the public’s attention being diverted by Covid-19), there is nevertheless a deep-seated antipathy in some circles in Indonesia to anything that smacks of privatization or foreign acquisition of Indonesian state assets (even if only on a temporary basis). The long-running water-privatization saga in Jakarta, which eventually culminated in a Supreme Court ruling striking down the entire scheme, is just one example of how things can go badly wrong. However, we believe that the manner in which the limited-concession model is framed in PR 32 fully takes into account previous judicial concerns and so it should be able to pass scrutiny. Assuaging vested interests in the state agencies or SOEs whose assets are to be farmed out might be a trickier proposition, however.
All in all, we view the introduction of the limited-concession model as a very welcome development that should provide significant opportunities for private-sector investment while at the same time helping to bring some of Indonesia’s more dilapidated public infrastructure assets up to par.
Should you have any queries or require legal advice on how you can best protect your interests during this time of uncertainty, please contact any of the persons below, call us on +6221-2505125, or email us at firstname.lastname@example.org.
Mr. Emir Nurmansyah (email@example.com)
Mr. Nafis Adwani (firstname.lastname@example.org)
Mr. Agus Ahadi Deradjat (email@example.com)
 Presidential Regulation No. 30 of 2020 on Financing of Infrastructure Through Limited Management Rights (Peraturan Presiden No. 32 Tahun 2020 Tentang Pembiayaan Infrastruktur Melalui Hak Pengelolaan Terbatas)
 Referred to in PR 32 as “limited management rights” (hak pengelolaan terbatas).
This edition of ABNR News and the contents hereof are intended solely to provide a general overview, for informational purposes, of selected recent developments in Indonesian law. They do not constitute legal advice and should not be relied upon as such. Accordingly, ABNR accepts no liability of any kind in respect of any statement, opinion, view, error, or omission that may be contained herein. In all circumstances, you are strongly advised to consult a licensed Indonesian legal practitioner before taking any action that could adversely affect your rights and obligations under Indonesian law.