This content is from: Local Insights

Government guarantees in PPP projects

Freddy KaryadiOene Marseille

On December 21 2010, the President of the Republic of Indonesia issued Regulation Number 78 of 2010, concerning the Infrastructure Guarantee for Partnership Projects Between Government and Business Entities Conducted through Infrastructure Guarantee (Regulation 78/2010).

The spirit of this regulation is to increase the creditworthiness of infrastructure projects and to support private sector participation in the development of infrastructure. The infrastructure projects mentioned thereto refers those projects provided based on a partnership between the government and a business entity in the infrastructure area.

Regulation 78/2010 describes the scope, the general requirements and the framework of partnership projects in infrastructure guarantee programmes. The regulation defines an infrastructure guarantee as a guarantee provided as to the financial obligation of the party in charge conducted based on a written agreement consisting of the rights and obligations of the party in charge and the business entity in order to develop the partnership project. The party in charge is defined as a minister/head of institution/head of region, or a state-/region-owned enterprise.

The infrastructure guarantee is provided in relation to the following categories of infrastructure risk:

(i) those better controlled, managed or prevent, or absorbed by the Party in Charge instead of the business entity;
(ii) those sourced from the party in charge; and/or
(iii) those sourced from a part of the government other than the Party in Charge.

An infrastructure guarantee shall be provided to the extent provided by the cooperation agreement for the implementation of the partnership project. Such cooperation agreement shall set out the following matters:

(i) infrastructure risk-sharing between the two parties in accordance with the risk allocation;
(ii) relevant mitigation efforts by both parties to prevent the occurrence of the risk and reduce its impact if it should occur;
(iii) the amount of the financial obligation of the party in charge which becomes the liability of the Party in Charge in the event of occurrence of infrastructure risk, or methods to determine the amount of the financial obligation of the party in charge if such amount has not been determined at the time of the signing of the cooperation agreement;
(iv) a sufficient time period to perform the financial obligations of the party in charge including its grace period;
(v) a reasonable procedure for determining the time at which the party in charge is in the state of not being able to perform its financial obligation;
(vi) procedures for settlement of any dispute which may arise between the party in charge and the business entity related to the implementation of the financial obligation of the party in charge which is prioritised through alternative settlement mechanisms and/or arbitration; and
(vii) that governing law is Indonesian Law.

There are some requirements imposed on the party in charge before an infrastructure guarantee can be given. Before the guarantee agreement is signed by the business entity concerned, the proposal of guarantee must be submitted by the party in charge to the business entity for its review. In addition, an infrastructure guarantee shall be provided in accordance with the capital adequacy of the business entity concerned.

Oene Marseille and Freddy Karyadi

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