Private Entity as operator of infrastructure assets
Indonesia government is continuing its innovation to attracts fresh fund by allowing private sector to participate as operator of existing State’s assets as well as State-Companies’ assets under Limited Operation Right. With Limited Operation Right, Private Entity can become an operator of various existing infrastructure assets such as: transportation ( seaports, airports, trains and bus terminal), toll roads, water resources, drinking water, waste management system, garbage management system, telecommunication and informatics, electricity, oil, natural gas and renewable energy.
The government determine that infrastructure assets to be operated under the Limited Operation Rights are assets that are performing well, which meet a certain criteria such as: (i) a positive cash flow for two consecutive years; and (ii) lifespan of at least 10 years.
In return for the Limited Operation Right, Private Entity shall provide government with a pre-determined Asset Operation Fund. The Asset Operation Fund is intended for the government to finance the construction of new infrastructure projects as well as expansion of existing infrastructure assets.
Addressing Investor’ interest
The President Regulation No 32 year 2020 (“PR32”) is meant to bridge the gap between the Investor’s interest and Government’s interest in relation to infrastructure and financing. With the Limited Operation Right scheme, Investor have a secured revenue from an already ongoing projects, while the Government secured a much needed fund to develop the infrastructure.
One of the main issue that has always been a problem in financing infrastructure projects in Indonesia is how to provide Investor’ with a guaranteed revenue stream while at the same time minimizing the project risk towards the government (timeline of completion, project specification, etc.). Investors needs the guarantee and commitment from government on the revenue of the project that is going to be constructed. Understandably, this is important to ensure a profitable return for the investors. On the other hand, the government is very cautious in making any early commitments to investor in new projects. Any commitment from government shall take a long time or even not granted at all.
The government is hoping that PR32 can address this issue. Under PR32, government shall grant Limited Operation Right to Private Entity to become operator for a certain period of time. In return, Private Entity shall provide government with a pre-determined Asset Operation Fund. The Asset Operation Fund is intended for the government to finance the construction of new infrastructure projects as well as expansion of existing infrastructure assets.
Issues to note:
- Initiatives. Government and/or State-Companies hold all the initiative. While the government may be keen to start the initiative, it will be interesting to see whether State-Companies will take the initiative and enthusiastically participate in handing over the operation of their assets to Investors.
- Inputs from Investors. It is important for the government to hear inputs from the investors on which assets that are attractive for investors to operate. An investor forum on Limited Operation Right should be held to hear what the investors have to say.
- Asset Operation Fund. No clear definition of Asset Operation Fund. This must be specifically addressed in the Asset Operation Agreement for the operation of asset.
- Grace Period. As operator of asset, investors has a grace period of 12 (twelve) months in total before having to pay the Asset Operation Fund.
The information contained herein is not intended to provide official and specific advice and merely highlight important issues in relation to limited operation right for existing infrastructure. Dynameis makes no warranties about the completeness, reliability and accuracy of the information contained herein. Further, Dynameis is not responsible for any errors or omissions or for the results obtained from the use of this information.
You should seek specific advice prior to take any actions in relation with the limited operation right for existing infrastructure. Should you have further questions with regard to matters as elaborated above or any other matters, please do not hesitate to contact your usual Dynameis’ representative