The Limited Concession Scheme Redefined: Key Takeaways from Reg 66

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The Government of Indonesia had previously enabled certain assets to be 'recycled' and monetized by introducing the Limited Concession Scheme ("LCS") through the issuance of Presidential Regulation No. 32 of 2020 on Infrastructure Financing through Limited Management Rights ("Reg 32"). The Government has now issued a revision to Reg 32 in an effort to optimize the reduction of the State's budget load from infrastructure spending.

Overview

LCS is used by the Government as a form of creative financing to fund future infrastructure projects by utilizing the existing (i) assets belonging to the State (Barang Milik Negara / "BMN"), or (ii) assets belonging to State-owned companies ("SOE Assets") as the objects of LCS ("LCS Assets"). Under the LCS model, the Government grants the private sector (through Badan Usaha Pengelola Aset – "LCS Entity") a concession to operate and/or improve certain LCS Assets, and in return, the Government receives an upfront fee that can be utilized to develop new infrastructure assets. There is no transfer of ownership over the LCS Assets as the private sector only has the right to operate the assets for a definitive period of time while the ownership remains with the Government.

On July 2, 2024, the Government enacted the amendment to Reg 32 by issuing Presidential Regulation No. 66 of 2024 ("Reg 66"). Key changes under Reg 66 include the following aspects:

  • scope and criteria of LCS Assets;
  • determination of upfront fee;
  • private sector initiative;
  • selection method of LCS Entity for BMN; and
  • government support.

Scope and Criteria of LCS Assets

Under Reg 32, the scope of assets that can be cooperated through the LCS model cover nine types of infrastructure which include: (i) transportation (e.g., ports, airports, railways and bus terminals), (ii) toll road, (iii) water resources, (iv) drinking water, (v) wastewater management system, (vi) solid waste management system, (vii) telecommunication and informatics, (viii) electricity/power, and (ix) oil, gas and renewable energy.

In order to broaden the application of the LCS model, Reg 66 has expanded the scope of LCS Assets by adding five other types of infrastructure that may benefit from LCS: (a) health, (b) special zone/area (kawasan), (c) tourism, (d) government office building, and (e) housing.

The above list is non-exhaustive as Reg 66 grants a right to the relevant minister/head of agency or SOE's board of directors ("BOD") to propose other types of infrastructure assets that can be managed through LCS to the Coordinating Minister for Economic Affairs ("CMEA").

Reg 66 also slightly modifies the LCS Assets criteria to create room for flexibility as follows:

  1. The assets have been declared suitable for operation, either partially or fully. Previously, the assets had to be fully operated for at least two years.
  2. The assets require partners for the improvement of commercial value and/or operational efficiency. 
  3. The life of the assets is at least 10 years;
  4. For BMN, the assets must be recorded in the audited financial statements of the ministry/agency in the previous year; and
  5. For SOE Assets, the assets must be recorded in audited financial statements for at least three consecutive years. Previously, the assets should have a track record of positive cash flow for at least two consecutive years. 

In addition, if the requirements as mentioned in items 3 and 5 above are not fulfilled, the LCS can still be implemented if the viability and value add of the assets can be evidenced based on the feasibility study prepared by the relevant minister/head of agency or SOE's BOD. The feasibility study must also be approved by the CMEA.

Determination of Upfront Fee

  1. Reg 66 further specified how the estimated value of the funds resulting from the LCS (i.e., nilai dana hasil pengelolaan asset or the upfront fee) will be determined, based on each type of LCS Assets.
    For BMN, the asset valuation is carried out according to BMN management regulations, either by: (i) government appraisers (penilai pemerintah) based on the request of the relevant minister/head of agency as the government contracting agency ("PJPK"), or (ii) public appraisers (penilai publik) appointed by the Minister of Finance.
  2. For SOE Assets, the asset valuation is carried out by the public appraisal services office (Kantor Jasa Penilai Publik) appointed by the SOE's BOD as PJPK.

The funds value constitutes the LCS upfront payment/fee and may be subject to further clawback in case there is any upside to the LCS. PJPK may also propose for a revision to the estimated funds value to the CMEA if PJPK does not obtain an offer with a value higher or equal to the estimated value that has been determined by the CMEA.

Private Sector Initiative

Reg 66 now introduces a method similar to the unsolicited Public-Private Partnership (PPP) project where the private sector or business entities1 may submit their initiative for an LCS project to the relevant BMN users or SOE Assets owners. The initiative must fulfill the following criteria:

  1. must have added value to the LCS Assets;
  2. must be technically integrated with the master plan of the relevant sector (if the LCS involves the development or construction of new assets);
  3. must be economically and financially viable; and
  4. the initiating business entities must have sufficient financial capacity to fund the LCS.

The initiating business entities must submit a feasibility study to the relevant minister/head of agency or SOE BOD for review and approval. In addition, the initiating business entities for BMN assets will be awarded a compensation in the form of right to match to the best bidder.

Selection Method of LCS Entity for BMN

Previously under Reg 32, PJPK conducts the selection of the LCS Entity for BMN through prequalification tender process. Now, under Reg 66, the selection method is conducted through either: (i) a 'beauty contest', or (ii) direct appointment.

Beauty contest is defined as a selection method to determine the LCS Entity for BMN with the best financial and/or technical offer based on the criteria that have been determined by PJPK. The beauty contest can be done electronically by the relevant ministry/agency.

The direct appointment method may be used under limited circumstances as follows:

  1. the LCS expansion for BMN which was previously managed by the same business entity;
  2. the LCS period extension by the same business entity; or
  3. a failed re-beauty contest.

Government Support

Reg 66 now creates an opportunity to obtain government support for an LCS project – this was not possible previously under Reg 32. Such government support can be included in the LCS Entity procurement document.

Government support under Reg 66 refers to the support provided by the relevant minister/head of agency/head of region and/or the Minister of Finance (as applicable) to improve the feasibility and effectiveness of the LCS project.

Unlike PPP regulations, fiscal contributions are not included in the definition of government support under Reg 66. Therefore, typical fiscal support mechanisms available for PPP projects, such as government guarantee, viability gap funding or availability payments, may not be applicable in the LCS model. Reg 66 does not provide further details on the form of government support that can be obtained, stating only that further provisions will refer to the relevant Minister of Finance regulations.

1 Business entities are SOEs, private business entities (in a form of PT), foreign legal entities, or co-operatives.

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This article is prepared for the general information of interested persons. It is not, and does not attempt to be, comprehensive in nature. Due to the general nature of its content, it should not be regarded as legal advice.

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