Funding Instruments of Tariff and Availability Payment on PPP’s Scheme

The public-private partnership (PPP) scheme is an alternative scheme for infrastructure financing that emphasizes private sector participation. PPP is applied worldwide as a solution that brings together the growing demand for infrastructure service development with the government's fiscal capacity, especially in developing countries. A well-thought-out development plan is considered to influence the preference of the private sector to be involved in this cooperation scheme, especially from a business perspective. Project funding instruments are one of the considerations for the private sector to invest in infrastructure. Based on the Regulation of the Minister of National Development Planning/Bappenas (NDP) No. 7/2023, there are 3 forms of funding instruments for PPP projects, including User Charge, Availability Payment (AP), and Other Forms as long as they comply with applicable regulations. All three are determined by the Government Contracting Agency (GCA) which must pay attention to the principle of covering capital costs, operating costs, and providing reasonable benefits for the private sector.

User Charge (Tariff)

User Charge (Tariff) is a PPP project funding instrument sourced from the collection of fees for the use of certain infrastructure asset services. The basis for the imposition of tariffs is influenced by several factors including the financial model of the project business, the level of Ability to Pay (ATP), the level of Willingness to Pay (WTP), Capital Costs (CAPEX), Operating Costs (OPEX), reasonable margins, and other considerations that affect the tariff fee structure.

The private party (operator) will receive cash flow directly from the tariff charged to the public as the user of the asset. For example, the imposition of tariffs for the use of toll road access by the public. The public will directly pay the toll fees from the toll roads they have passed to the operator. However, not all applications of tariff schemes can return the capital costs that have been incurred by the private sector.

For infrastructure that requires high investment value, such as mass transportation with elevated or tunnel types, the estimated tariff scheme structure is often not enough for the private sector to reach the break-even point (BEP) or even reasonable profit. Therefore, for some infrastructures that require higher than normal investment costs, in order to keep the business financially viable, government support for the project can be applied.

Government Payment for Availability of Infrastructure Service (Availability Payment/AP)

Payment for the availability of infrastructure services or often known as Availability Payment (AP) is a periodic payment obligation made by the government (which is appointed as Government Contracting Agency/GCA) to the Private Party (in this case the Implementing Business Entity / BUP) as the operator for the fulfillment of services to the public from the infrastructure asset. This instrument is also known as the Government Payment concept, where the government takes part in funding a PPP project if there is no potential source of funding for the infrastructure. The source of AP funding comes from both the national (for ministry level) and regional budgets.

In this scheme, the availability of services will not necessarily be fulfilled when the asset has been built, but emphasizes the importance of service form and service quality. Therefore, it is necessary to first determine the criteria points and service quality to be achieved in the cooperation agreement during the operating period. The government will make payments only if the infrastructure and services have met the “availability” criteria as agreed by both parties in the agreement.

For example: in the PPP project for Public Street Lighting, the Private Party (operator) that provides services for Public Street Lighting in an area cannot directly collect fees for lighting services provided every time the PJU is turned on. So that the private party needs to provide PJU services in accordance with the PPP Agreement so that the AP can be paid in full.

Direct Liability or obligations in the form of long-term payments to the private sector must be fulfilled by the government throughout the agreed cooperation period. The government also needs to plan and manage AP payment obligations properly to maintain fiscal sustainability. As for the private sector, these payments are the project's main source of revenue needed to recoup its investment and for the achievement of the main objective of the business, which is to make a reasonable profit.

The amount of AP paid each year will be the same, taking into account several factors including the average inflation during the cooperation period, the components that make up capital costs (Capex) and operating costs (Opex), and so on. If there are conditions where the services provided do not meet the criteria, then in principle a penalty will be imposed in deduction from the payment fee. On the bright side, the public infrastructure services provided have a better level of service and are managed professionally.

Differences between Tariff and AP

The following summarizes the differences in the application of both PPP funding instruments through tariffs and AP payments for the provision of an infrastructure project through the PPP scheme.

Funding instruments are fundamental in the implementation of project investment in the business world. In government and business entity cooperation (PPP), the form of return of investment is one indicator of private's appetite in mutually beneficial cooperation.