PPP Fi l Ri k M t PPP Fiscal Risk Management “the implementation”

Freddy R. SaragihHead of Center for Fiscal Risk Management

Fiscal Policy Office – Ministry of Finance of Indonesia

Fiscal RiskFiscal Risk Government fiscal risk matrix

Direct ContingentDirectObligation in any even

ContingentObligation if a particular event occurs

ExplicitGovernment liability created

Government Debt Government GuaranteesGovernment liability created by a law or contract

ImplicitA “political” obligation of government that reflects public

Longstanding and popular social spending that government could in theory

Obligation to bail out banks that are too big to fail

government that reflects public and interest-group pressures

government could, in theory, cut.

Source : Government at Risk: Contingent Liabilities and Fiscal Risks, 2002.

Government has to deal with fiscal risks under transparent and accountable management of fiscal to ensure the sustainability.ensure the sustainability.

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Infrastructure DevelopmentInfrastructure Development Financial crisis in the late 1990s caused the investment of

infrastructure fell down from more than 6 percent of GDP, or about USD15 billion/year to 2 percent of GDP and most of that is spent onUSD15 billion/year, to 2 percent of GDP and most of that is spent on maintenance.

To recover the economic situation, PPP scheme is the reasonable option in developing infrastructure for more efficient and effective government spending.

Projection of infrastructure investment needed in 2010-2014

USD214 Bio USD 140 Bio

USD74 Bio

PPP Scheme is expected to cover around 50% of total

private funding neededUSD74 Bio

Total Funding Needed

Gov’tBudget

Funding Gap

Private

*) Source: Bappenas, 2010Needed Budget

+ SOEGap

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PPP Scheme Raises Government Risks Since 2005, GOI has committed to support the infrastructure development by

the PPP scheme. To implement the PPP scheme pri ate in estors need go ernment g arantees To implement the PPP scheme, private investors need government guarantees

to ensure their investment in infrastructure projects. The provision of government guarantees create fiscal risks. Guarantee provided by government support letter (conventional guarantee) Guarantee, provided by government support letter (conventional guarantee),

negatively influences the fiscal sustainability.

Conventional Guarantee Ideal Guaranteeblanket Specific risks

immeasurable measurable

support letter guarantee agreement

Coverage Risk

Exposure

Form of Guaranteedirect

(probable cause a sudden shock)indirect - none

(ring fence mechanism)

no-regulation by regulation (transparent and accountable)

Impact to Gov. Budget

Legal basis

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How to Manage the Risks?How to Manage the Risks? The fiscal risks can be faced by the transparent and

accountable management such as:accountable management, such as:

The allocation of project risks between government and private party should be done properly;p p y p p y;

The risks which allocated to the government have to be managed and be measured to prevent fiscal shock in the future;future;

Government allocates reserve fund to maintain the fiscal sustainability;

The contingent liabilities are reported in fiscal risk statement.

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Guarantee Fund as a Fiscal Instrument The Indonesia Infrastructure Guarantee Fund (IIGF) has been established

as an instrument in managing fiscal risks.

Transparent and Accountable Risk Management

Appraising and structuring process (including risk allocation) of the PPP project are more professional, consistent, and independent;

Risk coverage is stated in the form of agreement between IIGF and project company (investor);

The project risks are measured accurately;

P idi i f t th G t b l h t b th IIGF Providing ring fence to the Government balance sheet because the guarantee claim will be paid by the IIGF first;

Public, especially private investor and lender, will be easier to access the information of guarantee mechanism and the exposure of the liabilities;

IIGF

IIGF could leverage their capacity and capability by cooperation and

Government does not have to reserve fund to ensure the fiscal sustainability.

partnership with multilateral agency and other institutions.

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Illustration on Ring Fence Mechanism

Without IIGF With IIGF

Gov. Budget

Contingent Liability

Gov. Budget

Capital Ri Liability

Guarantee

Capital injection

Ring Fencing

11

1

IIGFContingent

Liability

Guarantee

Guarantee

22

23

Project Company

Project Company

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Skema Penjaminan dalam Proyek CJPP

A sample of IIGF business model in power sectorf 2 1000 MW C t l J P Pl t (CJPP)

Minister of Finance

- for 2x1000 MW Central Java Power Plant (CJPP)

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Private Investors

Guarantee AgreementGuarantee Agreement

Private Investors

PPAPPARecourseRecourse

3 31

Recourse Agreement

Recourse Agreement

PLN

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Center for Fiscal Risk ManagementFiscal Policy Office

Ministry of Finance of IndonesiaRM N t h i dj B ildi fl 4thRM Notohamiprodjo Building, floor 4th

Jl. Dr. Wahidin No. 1, Jakarta 10710