1. INDONESIA
INFRASTRUCTURE
INITIATIVE
Potential Role of Performance-Based
Availability Schemes for Financing
Indonesia’s Expressway Network
Bina Marga & IndII National Road Policy Team
(Ir. Herry T. Zuna & Steve Richards)
1st IRF Asia Regional Congress & Exhibition
November 17–19, 2014
Bali, Indonesia

2. 2
Discussion Topics
• Introduction: IndII advisory support for national road
modernisation
• Context: proposed scale of investment in national roads
• The role of PBAS in delivering road infrastructure
projects – the evidence
• Financing PBAS transactions – private financing sources
• Key market concerns for implementing PBAS in Indonesia
• Next steps – an implementation plan
• Closing observations
*note, some slides have been hidden for the speaking version of this presentation

3. 3
Initial Views about PBAS from GoI
Representatives Involved with IndII
“Delivering infrastructure across several sectors, including roads, is
essential so that Indonesia can continue its economic growth and
social well-being. PBAS can help mobilize the private sector
investment that will be needed to accelerate the GoI’s infrastructure
program, deliver better value for money, and improve the quality of
infrastructure. Implementing PBAS in Indonesia will be one of our
key priorities for the RPJMN III 2015-19.”
Dr. Ir. Dedy S Priatna Msc
Deputy Minister for Infrastructure
Bappenas
“Public-Private Partnerships and PBAS are more
than just ways to supplement the government’s
budget. They can help us take a whole-of-life
approach to planning and financing much needed
infrastructure.”
Ir. Harris H.Batubara,M.Eng.Sc
Director for Program Planning
Directorate General of Highways
Ministry of Public Works

4. 4
Introduction to IndII’s National Roads
advisory support for the expressway program
Objectives of IndII Program 2013-2014+
Supporting National Roads
POLICY
Facilitate acceleration of investment in expressway network
Realigning institutional responsibilities – DGH and BPJT
Financing and delivery models to increase both public funding
and private investment in expressways, including PBAS
PLANNING
Investing in development of connectivity – modern network
Generating medium and long-term pipelines of investment
projects
Upgrading planning systems and capacity
DELIVERY
Improve life and performance of road assets
Improve efficiency of delivery, reduce life-cycle costs
Realign management of asset preservation

5. 5
Context: proposed scale of investment in
national roads
• The ability of Indonesia and other
ASEAN nations to finance
additional infrastructure projects
is limited. Government’s
infrastructure spending is
constrained by fiscal limits on the
budget deficit (3% of GDP) and
outlays on fuel subsidies. Private
financing sources need to be
tapped.
• Indonesia’s funding of infrastructure has
fallen from above 7% to 3-4% of GDP since
the Asian financial crisis. On average,
infrastructure investment has reduced across
all levels of government in Indonesia.
• This level of infrastructure investment is low
compared with, say, China (10% of GDP).
While Indonesia invests a third of GDP in
fixed assets, only 3.2% goes on infrastructure
like roads, rail and power.

6. 6
Context: proposed scale of investment in
national roads
• One solution
financing/delivery model used
by other countries has been to
use Performance Based
Annuity Schemes
(PBAS)/Availability PPPs
“…Performance based
management…holds government agencies
accountable to road users and the public at
large for funding, constructing, maintaining,
and operating the highway network to an
increasingly higher standard. This ultimately
leads to a better transportation system for
today and tomorrow…”
US DOT/Federal Highway Administration (2011)
• GoI’s Planned Investment in Roads
- Expressways 7,300 km totalling
IDR 640 Trillion (i.e. over USD60
billion) built/opened within 15
years
- National roads of 6,000 km to be
improved/rebuilt costing IDR 700
Trillion (i.e. USD70 billion)

7. 7
Types of PPPs: Economic PPP and
PBAS/Availability Payment PPPs
• An “economic” PPP is where the private sector takes all
revenue risk (i.e. toll or demand risk) and
construction/delivery risk
• In a PBAS contract…
- revenue risk is removed, delivery risk is shared
- the private sector’s role is to design, construct,
finance, operate and maintain a project to specified
standards
- the Government makes performance-based
payments over a long term contract (i.e. 25 to 30 years)
• PBAS contracts are also known internationally as “Availability
PPPs”

8. 8
Reasons for using PBAS/Availability PPPs
• Mobilising private sector
capital and commercial
discipline
• Facilitates greater public
funding share
• Secure partnership likely to attract market interest
• While PBAS/Availability PPPs use private finance, they
are also a performance contracting/delivery option that
uses financing …the private financing ensures a focus
on costs and quality, particularly as a PPP proponent is
subject to penalties for non-performance

9. 9
Performance Focus of PBAS/Availability
PPPs – Road Projects
• PBAS/Availability Schemes have a strong focus on
performance…covers both the construction, and operating and
maintenance phases
Construction Phase
Project Schedule & Cost
Design Quality
Pavement Standard to a
Minimum Life
Structures, including Drainage
and Shoulders
Road Safety Audit: D&C works
meet high safety standards
Operating/Maintain
Traffic Access & Lane
Availability
Incident Response
Safety Management
Road Maintenance
Environmental Management
Hand Back Condition

10. 10
Difference between Traditional Public Works
Contracts and PBAS/Availability PPP Contract
• Some of the key differences between Traditional and Availability
PPP contracts
Traditional Contracts PBAS/Availability Contract
Constructor receives payments during
construction
Payment only starts when project commissioned –
constructor and rest of PPP consortium bear
construction risk
Contractor and O&M partners work at
different phases
Contractor and O&M partners work at the same
time, allowing integration of whole of life efficiencies
Contractor and O&M partners do not
have equity at risk
Contractor and O&M partners have equity at risk for
term of concession – all parties incentivised to
perform and take a “long-term” view
Conventional procurement inputs-
focussed, mainly construction phase
focus, and subject to scrutiny only by
independent verifiers
The lenders to a PPP are an additional independent
verifier…lenders will focus on quality construction to
minimise any potential downstream loss to them due
to poor operating and performance of an asset
Contractor not responsible for residual life
of asset
PPP Consortium responsible for handing over the
asset in a fit-for-purpose condition

11. 11
Evidence of reported benefits and risks of
PBAS/Availability Payment PPPs
• Like most delivery options, there will always benefits and risks with using
PBAS/Availability PPP models
Benefits Risks
Transfer risks to private sector Not “free” funding
Greater price and schedule certainty Too many long term payment contracts
can limit budget flexibility
Better levels of maintenance New risks from complex procurement
process
Way to introduce innovation in design
and operation of assets
Need to develop capability in the market
Can be used for either tolled or non-
tolled roads
Require sufficient time to implement
No need for viability gap arrangements Requires a management focus on long
term contract management

12. 12
Evidence from PBAS implementation…Some
User Feedback

13. 13
Examples of PBAS/Availability Payment
PPPs to deliver road projects
• Canada, United States, Australia, New Zealand, Spain, Portugal, and the
United Kingdom use PBAS/Availability payment PPPs to deliver road projects
• Important to note that PBAS/Availability PPPs for road projects are not a
large part of the overall road infrastructure capital program
• The real benefit is the impact on the wider road program by emphasizing
whole-of-life approach to road delivery, maintenance and performance
• Case studies…a Canadian, Australian and New Zealand PBAS projects:
- The Canadian and one of the Australian PBAS road projects were both
procured after the Global Financial Crisis, during stressed financial
markets
- The New Zealand PBAS road project commenced in 2014
- East West Link in Australia is currently under procurement and includes
PBAS delivery and a separate tolling agreement.

14. 14
• Project a response to in response to the impact of growing
regional congestion, and to improve the movement of people,
goods and transit throughout Metro Vancouver by providing
efficient transportation choices and better connections
• 40 km of four lane highway with connections to existing routes
• Performance based, fixed price concession (availability)
agreement
• Availability agreement covers finance, construction and 20 year
operating, maintenance and rehabilitation
Canada: South Frazer
Perimeter Road
Selected PBAS Road Case Studies: Canada

15. 15
Selected PBAS Road Case Studies: Canada
• Reported CD$34 million (net
present terms) in better value
for money compared to
public sector delivery
• VfM efficiencies from
competitive construction
pricing, integrating the
design, build and finance
teams, and an efficient
allocation of risk
• Agreement transfers key design & construction risks (e.g. cost
and schedule, and long term maintenance and rehabilitation)
to the PPP proponent
• This drives optimised life cycle approach and promotes
innovation in design and maintenance strategies

16. 16
Selected PBAS Road Case Studies: Australia
Victoria: Peninsula
Link Road
• 27 kilometre freeway standard road
• Benefits include reducing travel times and improving travel
time reliability, improving freight and commercial vehicle
access, and reducing traffic congestion
• PBAS/availability model where the private sector will design,
construct and finance the Project and to operate and
maintain the Project over a 25 year period

17. 17
• Reported AUD$9 million (net
present terms) in better value
for money compared to
public sector delivery
• Project was signed in a post-
GFC environment where the
supply of private debt was in
short supply, and margins
were high
• Despite this situation, value
for money still achieved
• Key Performance Indicators (KPIs) cover a range of O&M activities
including those relating to emergency contact points, incident
response, compliance with operational plans, maintenance
inspections and works, reporting and environmental management
Selected PBAS Road Case Studies: Australia

18. 18
Selected PBAS Road Case Studies:
New Zealand
• Transmission Gully is a 27km, 4-lane expressway standard road scheduled to
open in 2020
• The Transmission Gully Road is one leg of the 110-km Wellington Northern
Corridor Road of National Significance, to enable economic growth, improve
road safety and reduce traffic congestion
• The PBAS consortium will be responsible for financing, designing, building,
maintaining and operating the highway for up to 25 years, Transmission Gully
will remain a public asset – it is never owned by the PPP consortium
• NZ Government is considering separately the issue of tolling
• Also, the Transmission Gully road is designed to withstand a maximum 7.5
Magnitude local earthquake with a maximum complete closure time (all
lanes) of 3 days for all classes of vehicles
Transmission
Gully

19. 19
Selected PBAS Road Case Studies:
New Zealand
• Reported NZD$13 million (net
present terms) in better value for
money compared to public sector
delivery
• Risks transferred to the private
sector included site and
contamination risk, design and
construction risk (including design
solution and scope creep),
operational costs, poor pavement
design, traffic/streams diversions
impacting on higher than
anticipated on-going maintenance
costs, and residual value
• Key Performance Indicators (KPIs) cover free flow travel time, lane
availability for both planned and unplanned events, safe travel outcomes,
junction performance, environmental compliance, customer satisfaction,
capital works and operational completion

20. 20
Selected PBAS Road Case Studies:
Australia
• The East West Link project is an 18km, freeway standard, cross city connection
north of the Melbourne – construction is scheduled to commence late 2014
• Consists of a package of works including new freeway standard road, road
widening, interchange, and public transport options. Expected total cost of the
project is AUD $6-8 billion, and the total project is scheduled over 5 years.
• One section of this project will be a PBAS/availability payment PPP with tolls
retained by the State - under this model, the State receives the toll revenue
stream, bearing the full cost (reduced toll revenues) or full benefit (increased
toll revenues) that may result from fluctuating traffic volumes.
• Asset delivery and ongoing operations are procured via a separate PBAS
contract for 25 years, under which the private sector is responsible for the
design, construction, finance, operation and maintenance of the Project over
the concession period.
East-West
Link

21. 21
Selected PBAS Road Case Studies:
Australia
• A strong field of international and local companies were shortlisted for the East
West Link project
Shortlisted PBAS
Consortiums
Consortium Details
East West Connect The East West Connect Consortium comprises Capella Capital, Lend Lease,
Acciona and Bouygues. Members have experience in significant projects both
in Australian and overseas, including Legacy Way (Brisbane), Pajares Tunnel
(Spain), Peninsula Link (Melbourne) and Port of Miami Tunnel (Miami).
Inner Link Group The Inner Link Group Consortium comprises Cintra Infraestructuras S.A, Retail
Employees Superannuation, Samsung C&T Corporation, Ferrovial Agroman
(Australia), Ghella, Transfield Services (Australia), and Macquarie Capital
(Australia) Pty Ltd. The group has been involved in significant local and
international projects including 407ETR (Canada); EastLink (Melbourne);
Incheon Bridge (South Korea) and Legacy Way (Brisbane).
Momentum
Infrastructure
The Momentum Infrastructure Consortium is made up of John Holland,
Dragados Australia, Leighton Contractors, Iridium Concesiones de
Infraestructuras S.A and The Bank of Tokyo – Mitsubishi UFJ. Members have
worked on significant projects both in Australia and overseas, including
EastLink and CityLink (Melbourne), Airport Link (Brisbane), CLEM7
(Brisbane), Lane Cove Tunnel (Sydney), Alaskan Way (Seattle), Madrid M-30
(Spain) and Interstate595 (Florida).

22. 22
Reviews of PBAS/Availability Payment
PPPs Contracts
• There is empirical evidence from
Australia and the United Kingdom
showing time, cost and quality
benefits from PBAS-type contracts
compared to traditional D&C
procurement
• Importantly, there have been reviews that have highlighted the potential
problems with using PBAS/Availability PPPs
• The potential problems appear to centre on ensuring the right projects are
selected, insufficiently flexible contracts, and capability of the public
sector…solutions have been developed and implemented to solve these
problems
• Important to note that traditional contracting also has the same problems,
as well as being input and not performance focused, and have a short term
focus on the D&C phase rather than whole-of-life

23. 23
Evidence of Value for Money and
performance benefits from using PBAS
• Professor Colin Duffield (2008) from Melbourne University has reported
major cost benefits from PBAS vs traditional government delivery

24. 24
Evidence of Value for Money and
performance benefits from using PBAS
• Professor Colin Duffield (2008) also reported that once a PBAS contract is
signed, PBAS projects were subject to smaller variations in time…reducing
time variations helps to reduce project costs due to overruns

25. 25
Financing PBAS transactions – private
financing sources
• There are two main sources of private financing for PBAS
transactions:
- Debt providers
- Equity investors.
• PBAS transactions are usually highly geared – for example,
debt/equity ratios upwards of 70/30 percent
• Note, financing is not funding – financing sources are inputs used to
resource a project…funding sources used to pay for the project (i.e.
affordability)
Debt Providers Equity Investors
Private bank loans Investment banks
Bonds Infrastructure funds
Government
contributions
Pension funds, insurance companies,
Sovereign wealth funds

26. 26
Financing PBAS Transactions – Bank Debt
• Bank debt is the main source of financing for PBAS/availability PPPs
• Globally banks have undertaken the bulk of infrastructure financing
particularly in emerging markets where corporate bond and securitisation
markets are relatively undeveloped. From 1999 to 2009, commercial
banks provided an estimated 90% of all private debt.
• From an micro-economic perspective, the Indonesian banking sector has
gone through 3 policy phases

27. 27
Financing PBAS Transactions – Bank Debt
• For Indonesia, Rupiah PPP debt
has short tenors ( around 7
years) and high margins – bank
liquidity costs are a major factor
• This has several implications for
PBAS transactions, requiring
solutions to be developed
• Interestingly, these implications
are identical to the issues faced
by other PBAS countries
immediately after the start of the
GFC – PBAS transactions were
still able to be implemented
• Also, the current Basel III
prudential banking rules (e.g.
minimum capital requirements)
will have an impact on bank
funding to PBAS projects

28. 28
Financing PBAS Transactions – Bank Debt
• In other PBAS countries, living with high debt funding costs since the GFC is
now the norm…while debt funding have reduced since the GFC, it is
unlikely debt margins will return to pre GFC settings that saw very
competitive rates
Source: The International Bank for Reconstruction and Development/Ernst & Young, 2010
History of Senior Bank Debt Margins for UK PBAS (i.e. PFI) Projects
Margins for lending increased
substantially, rising from around
80 basis points pre-GFC to over
300 basis points in mid-2009 for
relatively straightforward
PBAS/PFI projects with similar
risks…

29. 29
Bank Debt Implications
for PBAS projects
Key Issue(s) Possible Solution(s)
Short tenors mismatch
with long term nature
of infrastructure
projects
Banks are unwilling to commit to
lending terms for anything other than
a short period. This raises risk and
impacts on returns for equity
investors from the uncertainty of
having to secure replacement
funding or lower cost funding
sometimes as soon as 5 years after
financial close.
Accept that consortiums of banks may be
needed to implement PBAS transactions.
Other governments (e.g. United Kingdom)
have established a co-lending facility based
and managed within the government. These
co-lending units consider applications for
loans to PBAS projects, negotiate the terms
of any such loans on a commercial basis,
and monitor and manage the loan portfolio,
like a bank.
High debt cost margins
impact on funding costs
and value for money
High margins are driven mainly by
the available supply of bank debt and
wholesale funding costs. The high
leverage of debt to equity in PBAS
transactions means large debt
tranches increase overall financing
costs.
Other governments have used several
approaches to overcome this issue,
including government capital contribution,
co-lending debt, and guarantee models, and
relaxing the requirements for fully
underwritten bids (fully underwritten bids
incur a cost premium).
Refinancing Risk In tight capital markets, at the
maturity of the initial debt there is a
risk of: (i) finance not being available;
or (ii) finance costs increase from
those originally
projected. From a government
perspective, the private sector needs
to have some incentive
to manage its finances efficiently, so
needs to bear some of this
refinancing risk.
One option is for government and the
private sector to share the refinancing risk.
Many governments already bear this risk (or
manage it on a portfolio basis) for their own
borrowings and those of state-owned
enterprises.
Also, existing PBAS policies in other
countries allow for government to share the
gains from lower refinancing costs.
Financing PBAS Transactions – Bank Debt

30. 30
Financing PBAS Transactions – Local Currency
Bonds (LCY)
• Bond financing is the
alternative to bank financing
• Since the GFC and the
disappearance of mono-line
insurers there has not been a
deep project bond market, if
at all
• Indonesia’s bond market has
grown steadily in recent
years to offer a more
diversified array of debt
instruments and to cater to a
broader investor base.
• Foreign investors are allowed to invest in the bond market, subject to regulatory
approval. The country’s current legal framework for securitization encourages
opportunities for new instruments to be introduced.
• What will potentially improve this local market is further development of
regional bond market - since the Asian Financial Crisis in the late 1990’s, the LCY
bond market has increased but government bonds are the main share
Source: Asian Development Bank

31. 31
Financing PBAS Transactions – Equity
• Equity investment is needed to
attract private debt (which is why
PBAS transactions are leveraged
with debt and equity
• Equity investors assume the
highest risks
• Equity's rate of return is not fixed:
– Payment to equity investors
depends on operating
performance
– There is upside potential, if the
project operates well and above
projections
– They could also lose their entire
investment (e.g., in case of a
default on debt).
• Given the risks assumed by equity parties, some equity investors may
invest only after construction is complete and revenue has stabilized to
lower their risk exposure – using PBAS payments, however, helps to
encourage equity to participate in the construction phase
Source: US DoT: FHWA Office of Innovative Program Delivery

32. 32
Understanding Market Concerns
• As a PBAS contract is a
partnership/collaboration agreement
between government and the
private sector, it is helpful to
understand some of the market’s key
concerns with PBAS transaction
• These concerns include:
- Payment security
- Exchange rate risk
- Regulatory framework
- Government’s project development.

33. 33
Understanding Market Concerns - Payment
Security
• Payment security is a key
market concern
• This is because several
parties have debt and equity
at risk (which is part of the
performance/incentive
structure for the private
sector to perform)
• To secure this performance,
the government, the PBAS
payment by government is
essential to providing
payment security for the
private sector
• Note, PBAS payments made by government are not all paid first to debt and
equity providers – there is a “payment waterfall” which prioritises payments
• In fact, equity providers are usually the last party to receive payments –
operations & maintenance expenses and reserve funds have a high priority
Source: US DoT: FHWA Office of Innovative Program Delivery

34. 34
Understanding Market Concerns – Exchange
Rate Risk
• Exchange rate fluctuation is an issue for Indonesian infrastructure projects
- the international market is often hesitant to accept funding exchange
rate risk, where user charges are denominated in IDR but debt and equity
are in US dollars
• PBAS concessions, where the government assumes demand/user charger
risk and makes the annual PBAS payments to the PBAS operator, can
possibly alleviate the market’s concern

35. 35
Understanding Market Concerns – Regulatory
Framework
• Changes and more consistency in regulatory and frameworks and other
factors are needed to rebuild market confidence to do business in Indonesia
Possible Regulatory Changes to Improve Market Confidence
Improving coordination among government agencies, ministries, and sub-sovereign
governments
Faster progress in determining spatial planning
Improving institutional capacity to resolve contract disputes
Improving legal rights to safeguard the interests of the private sector
Remove or centralise overlapping licensing and permit issues at the central and sub-
sovereign government level
Legal conditions for domestic capital and securitisation markets need to be aligned
with ASEAN policies and stock markets to access wider pools of infrastructure
financing
Reduce unnecessary regulatory burdens on joint venture rules for foreign investors

36. 36
Understanding Market Concerns –
Government’s Project Development
• A key bottleneck to
infrastructure development is
a severe lack of bankable
projects which can attract
private capital, and improving
significantly the flow of
project transactions
• Construction risk (permits, timeliness and cost overruns), certainty of
land acquisition, demand risk, long gestation periods, low returns and
lumpiness of capital, are key concerns for private financiers
• Private sector confidence can be improved through better project
preparation and structuring projects to manage these risks
• Institutional capacity needs improving to carry out the level of detail
desired by the private sector during the pre-construction stage (e.g.
feasibility studies, documentation, and public consultation)
• There also needs to be a dedicated unit in Government to manage and
coordinate the PBAS transaction during both the procurement and the
operating phases of the project

37. 37
Understanding Market Concerns –
Government’s Project Development
• For PBAS implementation in Indonesia, there are existing PPP support
structures in place that will play a vital role
• The implementation focus needs to be on the coordinated roles that
these existing institutions will play, e.g. government funding support,
guarantees, project due diligence and facilitation

38. 38
Next Steps for
Implementation of PBAS?
• There are several implementation issues to keep in mind
Implementation Issues
Changes to the PPP regulations to include PBAS/availability PPPs (this is underway)
Capacity and capability in both government and the private sector
Developing a public sector comparator/benchmark of project delivery and operational
cost, and value for money analysis
Authority to enter into long term contracts for construction, operations and maintenance
Budget funding certainty for making any availability payments
Developing a contract management/performance management unit with government
Strong, transparent procurement guidelines and practices are essential to attracting world-
class PPP consortiums
Encourage competitive bidding by PPP consortiums to get the best possible pricing from
the market
Using market-accepted concession agreements and experienced, good quality transaction
advisors/consultants that reflect world best practice are critically important to building
market confidence

39. 39
Closing Observations – The PPP Maturity
Model
• The lessons learned
from other PPP
jurisdictions is the
market does judge
the “PPP Maturity”
of countries – that
is, toll PPP and PBAS
experience
• Indonesia will be
competing against
these other PPP
countries for finance
and equity Source: New Zealand Government Office of the Auditor General:
Managing the Implications of Public Private Partnerships (2011)
• Adopting PPP processes and governance used in these other
OECD countries will help improve market confidence and
certainty

40. 40
Closing Observations – The PPP Maturity
Model
• Using a “3 Step
Process” may assist
in implementing
PBAS, using the
transport sector as
the starting point
• A key point in this 3
Step Process is to get
PBAS transactions
right then move to
new innovative
models
Source: Deloitte Research – Closing America’s Infrastructure Gap

41. 41
Thank you