Analysis of Government Cooperation Mechanism with Business Entities in Indonesia
From: A.M Oktarina Counsellors at Law
Contributors: Pramudya Yudhatama, S.H., Raysha Alfira, S.H., Khaifa Muna Noer Uh’Dina, S.H., Putri Shaquila, S.H.
Reviewer: Noverizky Tri Putra Pasaribu, S.H., L.L.M (Adv).
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The role of the Government is very important for infrastructure development in Indonesia. However, the limitations of the State Budget in financing infrastructure development cause a funding gap that must be met. Based on the 2020-2024 Medium-Term Development Plan (“RPJMN”), Indonesia’s infrastructure financing needs are identified as reaching Rp6,445 trillion, while the Government’s ability to finance infrastructure needs is predicted to be only 37% of the total funds needed, which is Rp2,385 trillion. A total of Rp1,253 trillion or 21% was allocated from State-Owned Enterprises (“SOEs”), while Rp2,706 trillion or 42% of the total funds needed were allocated from the private sector (as the attached link). To get around this, the government uses various sources of funding, one of which is a development cooperation scheme involving private parties. This scheme is known as Public-Private Partnership (“PPP”). This scheme is a form of cooperation between the public sector (government) and the private sector (private) in providing public services bound by agreements that regulate the form of cooperation and risk sharing that has been widely exemplified in Indonesia. So how do regulations in Indonesia regulate the PPP scheme?
B. Legal Basis
1. Law Number 5 of 1999 concerning the Prohibition of Monopoly Practices and Unfair Business Competition. (“Law 5/1999”)
2. Law Number 1 of 2022 concerning Financial Relations between the Central Government and Regional Governments. (“Law 1/2022”)
3. Presidential Regulation Number 38 of 2015 concerning Government Cooperation with Business Entities in Infrastructure Provision. (“PERPRES 38/2015”)
Before diving further into the PPP mechanism, by definition PPP itself refers to Article 1 number 6 of PERPRES 38/2015 which regulates as follows:
“Cooperation between Government and Business Entities, hereinafter referred to as PPP, is cooperation between the government and Business Entities in the Provision of Infrastructure for the public interest by referring to specifications that have been previously determined by the Minister/Head of Institution/Regional Head/State-Owned Enterprises/Regional-Owned Enterprises, which partially or fully use the resources of Business Entities by taking into account the risk sharing between the parties.”
The purpose of PPP itself is regulated in Article 3 of PERPRES 38/2015 which reads:
“PPP is carried out with the aim to:
1. Sufficient sustainable funding needs in Infrastructure Provision through the deployment of private funds;
2. Realizing the provision of quality, effective, efficient, targeted, and timely infrastructure;
3. Creating an investment climate that encourages the participation of Business Entities in Infrastructure Provision based on sound business principles;
4. Encourage the use of the principle of users paying for services received, or in certain cases considering the ability to pay users; and/or
5. Provide certainty of return on investment of Business Entities in Infrastructure Provision through periodic payment mechanism by the government to Business Entities.”
PPP has several principles, one of which is the Efficient principle, namely to cooperate with the private sector, which is regulated in Article 4 letter f of PERPRES 38/2015 which reads:
“Efficient, namely cooperation in Infrastructure Provision to meet funding needs in a sustainable manner in Infrastructure Provision through private funding support.”
Governments and private businesses can share risks and be accountable in purchasing power parity plans. Public infrastructure will be built by the government, while the role of private business entities is responsible for providing it and managing it within a predetermined period of time.
That in PPP, the Government has a role to be the Person in Charge of Cooperation Projects (“PJPK”). In the implementation of PPP, those who act as PJPK are Ministers/Heads of Institutions/Regional Heads in accordance with the provisions in Article 6 paragraph (1) of PERPRES 38/2015. Not only the government, Article 8 of PERPRES 38/2015 stipulates that SOEs and/or Regional-Owned Enterprises (“BUMDs”) can also become PJPK, as long as they are regulated in sector laws and regulations.
In infrastructure development, there are restrictions and what development projects can be done with the PPP scheme. The types of infrastructure and forms of cooperation that can be carried out with the PPP scheme are regulated in Article 5 of PERPRES 38/2015 which reads:
“(1) The infrastructure that can be cooperated under this Presidential Regulation is economic infrastructure and social infrastructure.
(2) Types of economic infrastructure and social infrastructure as referred to in paragraph (1) include:
a. transport infrastructure;
b. road infrastructure;
c. water resources and irrigation infrastructure;
d. drinking water infrastructure;
e. centralized wastewater management system infrastructure;
f. infrastructure of local wastewater management systems;
g. waste management system infrastructure;
h. telecommunications and informatics infrastructure;
i. electricity infrastructure;
j. oil and gas infrastructure and renewable energy;
k. energy conservation infrastructure;
l. infrastructure of urban facilities;
m. infrastructure of educational facilities;
n. infrastructure of sports facilities and infrastructure, as well as the arts;
o. regional infrastructure;
p. tourism infrastructure;
q. health infrastructure;
r. penitentiary infrastructure; and
s. public housing infrastructure.
(3) PPP can be a Provision of Infrastructure which is a combination of 2 (two) or more types of infrastructure as referred to in paragraph (2).
(4) In order to improve the feasibility of PPP and/or provide greater benefits to the community, PPP may include activities to provide commercial facilities.
(5) Further provisions regarding other types of economic and social infrastructure shall be determined by the minister administering government affairs in the field of national development planning.”
In implementing PPP, private business entities not only cooperate with the Central Government, but can also cooperate with Regional Governments. This provision is regulated in Article 167 paragraph (4) of Law 1/2022 which reads:
“(4) Funding other than the Regional Budget as referred to in paragraph (2) may be in the form of cooperation with private parties, state-owned enterprises, BUMDs, and/or other Regional Governments.”
Private business entities can also submit PPP Initiatives in advance to the government, in accordance with the provisions stipulated in Article 14 of PERPRES 28/2015 which reads:
“(1) The Minister/Head of Institution/Regional Head initiates the Provision of Infrastructure which will be collaborated with Business Entities through the PPP scheme.
(2) Exempted from the provisions in paragraph (1), a Business Entity may submit a PPP initiative to the Minister/Head of Institution/Regional Head.
(3) The provision of infrastructure that can be initiated by a business entity is one that meets the following criteria:
a. technically integrated with the master plan in the sector concerned;
b. economically and financially feasible; and
c. Business Entities that apply for initiatives have sufficient financial capacity to finance the implementation of Infrastructure Provision.
(4) The initiating business entity shall prepare a feasibility study on the proposed PPP.”
The PPP mechanism itself is implemented through three stages, namely the planning stage, the preparation stage, and the transaction stage. The budget plan, identification, decision making, and preparation of the PPP Plan List are all part of the planning stage carried out by the CA. The result of the planning phase is a list of project priorities and preliminary study documents sent to the Ministry of National Development Planning/National Development Planning Agency (Bappenas) for inclusion in the PPP Plan List, consisting of PPP that is ready to be offered and PPP that is in the process of preparation. The next stage is PPP preparation, PJPK assisted by the Preparation Agency and accompanied by public consultation, producing pre-feasibility studies, Government support plans and Government Guarantees, determining procedures for returning investment for implementing business entities, and land acquisition for PPP. The last is the transaction stage, which is carried out by the PJPK and consists of exploring market interest, determining the location, procuring the Implementing Business Entity and carrying out its procurement, signing the agreement, and fulfilling costs (as the link attaches).
Keep in mind, the implementation of PPP is also carried out with the principle of Competition which is regulated in Article 4 letter c of PERPRES 38/2015 which reads:
“Competition, namely the procurement of cooperation partners for Business Entities is carried out through fair, open, and transparent selection stages, and takes into account the principle of healthy business competition.”
If the government in choosing a business entity as a cooperation partner is carried out by tender, then the business entity is prohibited from conspiring to cause unfair business competition. This is in line with the tender intent described in the Explanation to Article 22 of Law 5/1999 , namely:
“A tender is an offer to bid a price to purchase a job, to procure goods, or to provide a service.”
The prohibition to commit conspiracy in the selection of tenders is contained in Article 22 of Law 5/1999 which regulates as follows:
“Business actors are prohibited from conspiring with other parties to regulate and or determine the winner of the tender so that it can result in unfair business competition.”
Thus, every selection of tender winners by the government to business entities must be carried out fairly, openly, transparently, and prohibited from colluding with other parties so as not to create unfair business competition.
Looking at the discussion previously explained, the government can cooperate with private business entities for the development and provision of infrastructure called PPP. The existence of PPP is caused by several factors, including the limitations of the state budget in financing infrastructure development, causing funding differences that must be met. The PPP mechanism is implemented through 3 stages, namely the planning stage, the preparation stage, and the transaction stage. Business entities as partners appointed by the government from the results of the tender must apply the principle of competition, which must be carried out fairly, openly, transparently, and pay attention to the principle of unfair business competition. In its implementation, PPP must get supervision from relevant stakeholders, so that development runs according to agreement and can benefit the community.
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