The Structure and Policy Implications of Indonesian Public-Private Partnership


Daechang Kang and Yoomi Kim


This report discusses the structure and current situation of the Indonesian public-private partnership (PPP), to discover measures for cooperation between Korea and Indonesia regarding the development of Indonesian PPP. It also addresses ways for the Korean government to support Korean firms in entering the Indonesian PPP market.

Chapter 1 discusses the background and necessity of research on Indonesian PPP while introducing the contents of the report.

The Indonesian government issued the MP3EI whose main objective is to develop industries suited to each of Indonesia’s six economic regions. The primary stance of MP3EI is to expand infrastructure to closely connect the six economic regions.

Currently in Indonesia, infrastructure is both small quantitatively and low qualitatively. The level of investment into that infrastructure is insufficient. which has become one of the critical obstacles to development in Indonesia. Recognizing the challenge and task, the Indonesian government is trying to promote development by enlarging its infrastructure. In order to fulfill it, it emphasizes participation from the private sector, and, in particular, aims to apply PPP broadly to infrastructure projects.

Chapter 2 analyses the overall structure of Indonesian PPP and provides a brief description of the general features of PPP. In addition, it examines specific features of Indonesian PPP, focusing on the roles and relations of the private and public sectors. Chapter 2 also analyzes the process of Indonesian PPP, describing the interaction between Indonesian government agencies and private businesses and the responsibilities of each participant at each stage.

Public-private partnership is a system in which central government agencies or provinces/municipalities and private firms agree to a long term contract; private firms invest into infrastructure instead of or jointly with the government, operates the facilities, and provides service for the users. Under PPP, the government owns the infrastructure facilities and private firms assume responsibilities for their construction, financing, and operations. The private firm earns profits and retrieves its initial investment through long term operation in exchange for bearing some of the risks.

PPP has two core characteristics: sharing of risk between the government and private firms via long term contracts; and the task bundling of building, financing, and operations. Since the PPP contract terms are usually from 20 to 50 years, private firms bear significant risks under PPP. Therefore, identifying and sharing of risks between the public and private sector is an essential element of PPP. There is diversity regarding forms of PPP depending on different ways of bundling tasks and timing of transfer of the facilities back to the government.

In the Indonesian PPP projects, the private sector plays a primary role in undertaking the projects and financing them. The project sponsor and companies proceed with the projects while financial institutions provide funds and guarantees. The Indonesian public sector plays a broad role including establishment and coordination of policies, project development, provision of financial support and guarantees, supply of funds, appropriation of lands, promotion of projects, and so on.

The process of Indonesian PPP can be largely classified into two stages: project development and project performance before and after the bidding on the project. PPP requires many steps at the project development stage which means that project development takes a long time. A successful undertaking of the project is largely dependent on project development.

Generally the process of Indonesian PPP comprises of nine stages. In the project development stage, the following processes should be carried out: project screening, public consultation, feasibility study, risk assessment, determination of PPP forms, government support, and procurement. In the project performance stage, implementation and monitoring of the project should take place. The nine-stage process applies to both solicited and unsolicited projects. However, the responsibilities of the Indonesian government and potential private entities differ with solicited and unsolicited projects.

Chapter 3 reviews the current progress of Indonesian PPP projects. It investigates planned PPP projects in MP3EI by economic region and by the category of the infrastructure, respectively.

The number of PPP projects planned in MP3EI may be small but the portion of funds allocated is large. Many projects were allocated to Papua-Kepulauan Maluku, a relatively poor and underdeveloped region; and Java, the center of economic activities in Indonesia.

The Indonesian government held the Infrastructure Summit four times from 2005 - when Indonesia began to establish institutions for regulating PPP - to 2010. During this period, the Indonesian government created the PPP project list by adopting the results of the discussion of the Infrastructure Summit without 5-year PPP plans.

The Indonesian government planned for many PPP projects in 2006, and since then has reduced the number of projects significantly and enlarged the scale of each remaining project. In establishing MP3EI, it reevaluated and adjusted the overall PPP plan in order to ensure a more rational process.

Prior to 2005, Indonesia applied PPP mostly to toll road projects by concession. Since 2005, the Indonesian government transferred the operation rights of many toll roads to PT Jasa Marga, a public enterprise, and private entities.

Currently, PPP projects in Indonesia that have been created since 2005 are not proceeding smoothly. As of 2013, there are 13 PPP projects still in the pipeline, 17 at the bidding stage, and only 1 project past the bidding stage. progress for most projects in the bidding stage have been slow, due to the problem related to land appropriation. This is especially true with toll road projects. At present, the Central Java Power Project is the only project that moved beyond the contract process, meaning the project has made it past the process specified by PPP regulations since 2005 and secured a guarantee. However, this project reportedly almost came to a stop, because of the condition of the guarantee.

Chapter 4 analyzes the institutional aspects of the factors that hinder the progress of PPP projects and discusses measures for advancing PPP in Indonesia. There is also discussion of ways in which the Korean government can cooperate with Indonesia with respect to PPP.

Most of all, the Indonesian government needs to clearly comprehend the objectives for pursuing PPP. In this regard, it must arrange ways to share the risks appropriately through a public sector comparator (PSC), the main tool for evaluating PPP. There is also a need to strengthen individual phases for project development, and by understanding and appraising the PPP projects more clearly, it can increase the potential for active investment into PPPs by private entities. This requires expansion of cooperation among the government agencies involved in PPP and reinforcement of KKPPI, the supreme decision making body for long-term management of PPPs. It should also resolve conflicts of interest by adjusting the roles of state owned enterprises (SOEs).

As for the Korean government, it seeks to support Korean firms indirectly by cooperating with Indonesia in the area of policy finance. In particular, it has sought the ways to promote the development of Indonesian PPP and cooperate with Indonesia through the Korea-Indonesia Economic Cooperation Committee. The discussion in the policy finance sub-committee has been focused on creating a system of cooperation among policy finance agencies of the two countries and measures to support Indonesian PPP by utilizing the Economic Development Cooperation Fund (EDCF) of Korea. The EDCF gives Korea and Indonesia a foundation for cooperation. Although the two countries share basic principles, operate a cooperation committee, and kept the discussion moving forward, they have not achieved concrete results yet.

Recently, many Korean firms have expressed interest in the Indonesian PPP market, and several of them have seen positive results. However, Korean firms should keep in mind that direct support from the Korean government will be quite limited. To ensure progress of the Indonesian PPP, the Korean government should bolster cooperation with Indonesia by sharing Korea’s experience with PPP. The Korean government thereby needs to obtain some means of indirect support for Korean firms thinking about pursuing Indonesian PPP projects by providing information on Indonesian PPP institutions and market, and strengthening the cooperation among state finance institutions of Korea and Indonesia.

Chapter 5 evaluates the current situation of the development of Indonesian PPP, suggesting that Korean firms and government approach the Indonesian PPP market with both the short term and the long term outlook in mind.

Although the long term outlook for the Indonesian PPP market seems positive because it is large and dynamic, it is not developing smoothly at the present. Though Indonesia made efforts to establish a basic institutional framework to operate PPP schemes, further and more consistent development of PPP institutions is required in terms of project development and risk sharing. Considering this, the Korean government needs to strengthen the cooperation with Indonesia on PPP.

But given the positive outlook in the long term, Korean firms and government need to approach the Indonesian PPP market actively, irrespective of difficulties in the short term. The Korean government should formulate measures for continued support of Korean firms to facilitate their unfettered entry into the Indonesian PPP market. They need to act from a long term perspective, considering that the operation period of PPP projects typically takes place over 20 years.

The Korean firms should have full understanding of the Indonesian government's primary policy stance on PPP when entering the Indonesian PPP market. As the Indonesian government generally restricts providing direct funding and guarantees for PPP projects, Korean firms need to pursue the Indonesian PPP projects by first establishing plans for cooperation with financial institutions dealing with long-term investments or loans.

Executive Summary 
  
I. Introduction 

II. The Data 

III. Empirical Methodology 
1. Total Factor Productivity (TFP) Estimation 
2. The Effects of AD Protection 

IV. Results 
1. Control Group 1 (10-digit HS code number): Importers Belonging to Affirmative AD cases 
2. Robustness Check 

V. Channels Behind the Results 
1. Changes in Firm-level Variables
2. Industry Competition 

VI. Conclusion 

References 

Appendix 

This paper examines the imposition of Anti-dumping (AD) duties on foreign imported products in Korea. We use panel data for Korean firms between 2002 and 2010 and estimate the changed firm-level productivity of domestic import-competing firms before and after the imposition of duties. In contrast to recent research analyzing the effects of AD measures on firm performance, we find evidence of a decrease in estimated productivity of protected domestic firms during the AD protection period. We then discuss the channels behind our results and find that the average productivity losses are not driven by the changes in company account variables that influence firm productivity during the protection period. Instead, we find that AD protection has heterogeneous treatment effects on firm productivity depending on the market structure.

As “green growth” becomes more important, interests in the culture industry which is highly value-adding, eco-friendly, and job-creating have increased. China has paid much attention to the culture industry as a new engine of the sustainable growth. As China is expected to stand with U.S. and Japan as a big market for culture industry, Korean firms have stronger interests in entering China’s culture industry.
Specifically, Shanghai is one of the regions that have witnessed rapid growth in culture industry. The city’s development of culture industry has generated extensive economic and social spillover effects to nearby regions and the potential for further growth in Shanghai seems to continue in the future. Examining the experience of Shanghai, our study provides implications for Korean firms which have prepared for entry into China (including Shanghai) as well as for the Korean government which supports Korean firms.
This manuscript is organized as follows: In Chapter 1, we provide research background, motivation, summary of prior research, and research methodology. In Chapter 2, we introduce the current snapshot for culture industry in Shanghai and analyze what is ongoing between Korea and China (Shanghai). The dynamic growth for culture industry in China has been explained broadly by three reasons. First, Shanghai municipality has attempted to restructure the culture industry with varying approaches; second, specific types of ownership are dominant in each sub-industry and; third, Shanghai residents have been strongly interested in consuming the cultural goods. In Chapter 3, we analyze the policies to promote culture industry, which were designed by Shanghai municipality, and examine cases on cooperation between the local firms and foreign firms. Shanghai municipality has been active in development of culture industry through financial supports, construction of culture industry complex, and building of cultural infrastructure. In addition, the leading Chinese firms in Shanghai such as SMG, CMC, Shendi, Shanda, SFG, or SSCEG highly welcome global cooperation. Foreign firms have entered the culture industry in Shanghai by establishment of joint venture, although few joint ventures are found.
Finally in Chapter 4, we assess the current situation and the direction for culture policy in Shanghai and discuss implications for Korean firms and government. We also address limitations for this study.

Executive Summary

 

I. Introduction

II. Regional Borders and Trade

1. Definition of Regional Borders
2. Trends of Regional Trade and Regional Border Trade

III. Empirical Works

1. The Gravity Model of Asian Trade
2. Estimation Results

VI. Conclusion

References

Data Sources

Internet Sources

Appendix

This paper investigates the effect of regional borders on trade in Asia. The regional borders define the three regions of Asia: South, Southeast, and East Asia. Regional trade indicates the flows of trade within a region, whereas regional border trade means trade across regions. A gravity model is augmented with the region dummies to estimate the regional border effects that capture any and all time-invariant factors promoting or impeding regional trade. The main finding is that regional border effects are asymmetric on the three regions in Asia: There is a large and significant regional border effect on South Asia, small on Southeast Asia, and negligibly negative on East Asia. The significant and positive regional border effect in South Asia suggests that countries share intrinsic factors facilitating trade between countries in this region. Although the regional border effect of Southeast Asia is positive, its magnitude shows little difference between its regional trade and regional border trade. Finally, the estimate on East Asia presents a completely different picture from the actual data. It implies that there exist some factors leading to active regional border trade between East Asia and other Asian regions.

The purpose of this research is to analyze the pattern of export competitiveness for environmental goods between Korea, China, and Japan, examine the current status of the intra-regional trade including the tariff and non-tariff measures, and set policy recommendations based on the research findings. As for environmental goods, we use the APEC list of 54 environmental goods agreed in the 2012 APEC leaders’ meeting in Vladivostok, Russia.
To better assess the pattern of export competitiveness for the environmental goods between the three countries, we applied the concept of the unit value and discriminated between price and quality competition based on Aiginger (1997, 1998, 2000). As a complementary, we additionally applied the concept of product differentiation from Abd-El-Rahman (1991), Greenaway, Hine and Milner (1994), Fontagne and Freudenberg (1997).
The main findings of this research are as follows. First, trade in environmental goods has increased significantly over the past decade worldwide. In particular, the share of Korea, China, and Japan in the trade in environmental goods is substantial and the growth rate of the intra-regional trade among the three countries came out higher than the three countries’ trade with other countries. Second, the share of the top 10 major export environmental goods dominates the total trade in the environmental goods industry, and many major export products overlaps among the three countries. Third, Japanese products showed comparative advantage in quality competition while the Korean and Chinese products had more comparative advantage in price competition. The status of the comparative advantage for each item showed to be closely connected with the trade balance. Fourth, the tariff rate is relatively higher in Korea and China while most Japanese products were subject to zero. However, considering the non-tariff measures such as the technical barriers to trade, China and Japan seem to have more protective trade measures compared to Korea.
Based on the main findings, we suggest the following policy recommendations. First, Korea needs to develop a strategic approach per item when negotiating for further trade liberalization in environmental goods since the characteristics of intra-regional trade, pattern of export competitiveness, and tariff and non-tariff measures in the environmental goods industry are distinct from each other by items. Second, Korean government needs to focus more on the non-tariff measures. However, there are difficulties to discover the non-tariff measures due to asymmetric information problems and cultural difference among countries. Accordingly, the Korean government could initiate a separate trilateral joint research project and a committee to identify and deal with the issues of non-tariff measures. Third, concerning the characteristics of intra-regional trade and the patterns of comparative advantages in environmental goods, Korea needs to diversify its strategic export products and upgrade its quality competitiveness. Korean products, compared to that of Japan’s, are more price dependent with relatively high tariff rate. Examining patterns of trade between Korea and China, the comparative disadvantage in the price competition is widening. The intra-regional trade in environmental goods is concentrated in few specific items. Since APEC member countries agreed to cut tariffs to five percent or less by 2015 for on the 54 environmental goods, the Korean government should minimize the negative impact from further tariff cuts by making more efforts to increase the quality competitiveness of environmental goods and diversify the support towards the industry.

Amid deterioration of North Korea’s foreign relations due to its nuclear development, economic cooperation between North Korea and China is actually showing unmistakable signs of expansion. It is expected that economic relations between the two states will become even closer in the coming years as cooperation projects between the two are materializing along with the rapid promotion by China of its development plan for its Northeast provinces. This study seeks to gain an understanding of the characteristics and problems of the current North Korea-China economic cooperation, by investigating trade, price settlement methods and transaction practices in the border areas.
In transactions between North Korea and China, the methods of exchange are often unofficial, taking advantage of close relations between partners from both sides. Unlike regular international transactions using letters of credit or financial institutions, cash transactions and barter trade are prevalent in commercial transactions between the two communist states. Such practices include illegal elements such as smuggling of foreign currency into the country. In the face of economic sanctions by the international community along with industrial stagnation and foreign currency shortage due to economic difficulties, North Korea is actively taking advantage of these ‘unofficial’ methods in an attempt to circumvent official rules of financial transactions. Chinese trade companies located in the border areas are accustomed to cash or barter transactions, and some companies even prefer such transactions precluding involvement by financial institutions, for reasons of reducing extra expenses and avoiding taxes.
Among modes of trade, border trade is reflective of characteristics of border areas. Chinese companies in the border areas favor conducting transactions with North Korea through such “border trade.” It is because there is more room to utilize unofficial methods in foreign exchange control, price settlement, and tax rebate through border trade than through general trade. Taking various unofficial trade practices into account, the scale of trade between North Korea and China is very likely to far exceed the figures recorded officially by Chinese customs.
North Korea is receiving payments in cash for processing imported materials commissioned by Chinese companies. Such cash brought into the North is easy to hide and there is high possibility that North Korean authorities divert such cash for their own operations. State institutions, trade companies, and financial institutions in North Korea often do not abide by rules stipulated in transactions with China regarding trade settlement. Though there are no official statistics regarding bank remittance for trade settlement, it is estimated that about 20 to 30 percent of trade settlement are conducted through bank remittance and the rest are settled through cash.
This study points out that though unofficial transactions carried out between North Korea and China are attributable to expanding economic cooperation between the two countries, there are illegal elements in such transactions which can undermine economic sanctions imposed by the international community.

2013
Policy References(in Korean)
Working Papers
Journal of East Asian Economic Integration
World Economy Update

2012
Policy Analyses
Policy Analyses(in Korean)
Conference Proceedings
ODA Regional Studies(in Korean)
ODA Policy Analyses(in Korean)
Studies in Comprehensive Regional Strategies(in Korean)
Trade and Investment Study Series(in Korean)
Policy References(in Korean/in English)
Working Papers
APEC Study Series
Journal of East Asian Economic Integration
World Economy Update

2011
Policy Analyses
Policy Analyses(in Korean)
Conference Proceedings
ODA Policy Analyses(in Korean)
ODA Policy Report(in Korean)
Studies in Comprehensive Regional Strategies(in Korean)
Regional Study Series(in Korean)
Trade and Investment Study Series(in Korean)
Policy References(in Korean/in English)
Working Papers
APEC Study Series
Journal of East Asian Economic Integration
World Economy Update

The Korea Institute for International Economic Policy (KIEP) was founded in 1990 as a government-funded economic research institute. It is a leading institute concerning the international economy and its relationship with Korea. KIEP advises the government on all major international economic policy issues and serves as a warehouse of information on Korea’s international economic policies. Further, KIEP carries out research by request from outside institutions and organizations on all areas of the Korean and international economies by request.