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What is Indonesia Infrastructure Guarantee Fund?

Indonesia Infrastructure Guarantee Fund, or IIGF, is a state owned enterprise that is established by the Ministry of Finance. As one of the fiscal tools of the Government, IIGF is under direct supervision of the Ministry of Finance and has mandate to provide guarantee for infrastructure projects under Public Private Partnership (PPP) scheme. IIGF is part of the government’s efforts to accelerate infrastructure development in Indonesia, by providing contingency support/guarantee for the risks caused by the government’s action or inaction, which hurts the economic feasibilities of the PPP project.

What is the Public Private Partnership (PPP) project?

A PPP project is an infrastructure project determined by the government and is developed and financed by the private sector through an agreement (contract) between the government entity (public sector) and a Business Entity (private sector). Following the award from the government, the private sector is in charge for design works, construction, financing and operation of the project. A PPP contract usually applies a relatively long-term tenor (more than 15 years) to enable private sector recoup their investment. The basis of a PPP contract is risk sharing/allocation between the government (through Contracting Agency) and private companies, where each risk is allocated to the party that is relatively more capable in controlling, managing, preventing or absorbing it. PPP projects can be in the form of agreement on operation and maintenance of infrastructure facility or financing, provision and operation of infrastructure facility.

Who is Contracting Agency?

Contracting Agency (CA) is the government’s representative or partner in the public private partnership (PPP). It can be ministry, government institution, local government, state-owned enterprise or local government-owned enterprise, which is responsible for providing infrastructure in accordance with the law.

What can be guaranteed by IIGF?

Basically, guarantee can be provided for the financial obligations of CA, triggered by the risk events allocated to CA in the PPP agreement, so long as the financial obligation can be quantified or there is a compensation formula stated in the PPP agreement. Some examples of the financial obligations that can be covered by Infrastructure Guarantee are the ones caused by the delay in obtaining permit/license, change in regulation, absence of tariff adjustment and failure in integrating the network/facilities.

What is the purpose of IIGF establishment?

In short, the purpose in establishing IIGF are as follow:

  • To provide guarantee for infrastructure projects under public-private partnership (PPP) scheme.
  • To improve creditworthiness, particularly the bankability of PPP based infrastructure projects.
  • To improve good governance, consistency and transparency in guarantee provision.
  • To minimize the possibility of sudden shock to the State Budget and to ring-fence the government’s contingent liability.

What are the relevant regulations for infrastructure guarantee provided by IIGF?

There are six relevant regulations:

  • Presidential Regulation No. 67/2005 and Its Amendment, Presidential Regulation No.13/2010 and Presidential Regulations No. 56/2011.
  • Presidential Regulation No. 78/2010 on Infrastructure Guarantee in Public Private Partnership Provided Through Infrastructure Guarantee Fund.
  • Finance Minister Regulation No. 260/2010 on the Implementing Guideline for Infrastructure Guarantees in Public Private Partnership.
  • Government Regulation No. 35/2009 on State Capital Injection for the Establishment of a State-Owned Enterprise Operating in Infrastructure Guarantee Provision.
  • Government Regulations No. 88/2010 on Additional State Capital Injection for IIGF.
  • Government Regulations No. 55/2011 on Additional State Capital Injections for IIGF.
  • Government Regulation No. 68/2012 on Additional State Capital Injection for IIGF.

What kind of infrastructure project that is guaranteed by IIGF?

Infrastructure projects that can be guaranteed by IIGF are those involving Public Private Partnership (PPP), based on the criteria stipulated in Presidential Regulation No. 13/2010. The regulation states 8 (eight) sectors that can be guaranteed: Transportation, Toll Road/Highway, Irrigation, Water, Waste, Telecommunication and Informatics, Electricity, and Transmission and/or Oil and Gas Distribution.

What are the criteria of PPP projects that can be guaranteed by IIGF?

In general, the PPP projects that can be guaranteed by IIGF are those whose private partner selection is conducted in compliance with Presidential Regulation No. 13/2010. The PPP projects must go through tender process; technically, economically and financially feasible and meet the environmental and social requirement. Other criteria include comply by sectoral regulations, have feasibility studies conducted by credible experts, and have a binding arbitration clause in the contract.

What is the mechanism to get a guarantee for a project? Can an interested private company apply directly to IIGF?

Application to get IIGF guarantee must be submitted by the relevant CA of the project. Based on the CA’s inquiry, IIGF would conduct appraisal and guarantee structuring. If the PPP project is qualified for guarantee, IIGF would issue an In-Principal Approval, which will later be included by CA in the tender document. The detailed process for applying guarantee is stipulated in Presidential Regulation No. 78/2010 and the Ministry of Finance Regulation No. 260/2010.

Is there any cost regarding IIGF guarantee? If yes, how is the structure, how much is it and who pays for it?

The private companies that receive the benefit of infrastructure guarantee will pay the guarantee fee. The structure takes the form of a One-Time Fee (based on the project value) and Recurring Fee (based on maximum exposure guarantee). The amount of guarantee fee also depends on project risk profile, guarantee coverage and guarantee period. For indicative purpose, current One-Time Fee is to 100, while Recurring Fee is around 50 to 100 basis points.

What are the benefits of establishing IIGF for the Government?

The benefits of establishing IIGF for the Government are as follow:

  • To attract private investors and financial institutions to participate in PPP projects, hence increase the success rate of project execution in accordance with the plan and schedule.
  • To bring more competition into the tender process hence expectedly will get quality tender proposal and to achieve a more competitive price.

What are the benefits of establishing IIGF for the Private Sectors?

The benefits of establishing IIGF for the Private Sectors are as follow:

  • Mitigate risks that are difficult for private sector to cover through other means.
  • Improve transparency, clarity, and consistency of guarantee provision and processes.
  • Improve bankability of project.
  • Lengthen financing maturities, which may improve competitiveness of bidding price.
  • Provide incentive for CA to prepare good contracts in accordance with market/international standard.

How is the process of providing IIGF guarantee ?

The mechanism of IIGF in providing guarantee is as follow:

  • Consultation/Guidance: To provide detailed information on IIGF’s guarantee provision, such as the criteria for guarantee, the process in obtaining guarantee, such as concession agreement, etc.
  • Screening: To evaluate screening form submitted by CA to determine project qualification or eligibility in obtaining guarantee based on existing regulations. The general criteria include among others the sectors named in Presidential Regulation No. 13/2010, the project is in line with include among the government’s priority, and project documentation is prepared by credible expert.
  • Appraisal: To conduct detailed assessment on project feasibility based on legal, technical, economic and financial aspects, as well as the evaluation on CA’s ability to meet its financial obligation under in the concession agreement.
  • Structuring: To determine guarantee structure and terms and condition, such as the guarantee period, financial obligation and risk of the guaranteed project, which is adjusted for each PPP project.

The form and mechanism for guarantee provision, as well as the procedure to submit and settle claims, are specifically governed by Presidential Regulation No. 78/2010 and the Ministry of Finance Regulation No. 260/2010.

With limited capital, how can IIGF provide guarantee for infrastructure projects that have much higher value?

If the value of the project that has to be guaranteed exceeds its capital, IIGF can co-guarantee the project with multilateral development agency, such as the World Bank, other financial institutions or with the Minister of Finance. The co-guarantee mechanism will be stipulated in the Guarante Agreement between investors/lenders and the guarantors. IIGF signed a AAA-rated guarantee facility of $480 million with the World Bank. Despite the co-guarantee structure, the process of guarantee provision, including and appraisal, is conducted by IIGF under the Single Window Policy.

What is the Single Window Policy?

Single Window Policy is the policy of the Government which mandates IIGF as the Infrastructure Guarantee Entity (Badan Usaha Penjaminan Infrastruktur or BUPI) to conduct the guarantee provision process. The benefit of this policy is to uphold transparency and consistency in the guarantee provision and claim processing, in order to increase investor’s confidence participate in infrastructure projects in Indonesia.

How can IIGF sustain its financial position when a claim is made?

As stipulated in the regulation, IIGF has the right of recourse to CA for every claim it disburses to investors. The amount of recourse that can be claimed by IIGF to CA is the disbursed claim including the time value of money. The rights of IIGF and obligations of CA are stated in the Recourse Agreement between IIGF and CA, which is signed before IIGF signs the Guarantee Agreement with private companies. The recourse scheme will ensure IIGF’s financial sustainability.

Why is Recourse Agreement necessary?

Aside from ensuring IIGF’s financial sustainability, the Recourse Agreement is necessary to ensure CA is accountable for its financial and non-financial obligations agreed in the PPP Agreement.

How is the arrangement of Recourse Agreement, Guarantee Agreement and PPP Agreement?

Diagram below shows the arrangement of all agreements related to a PPP transaction.

CA   : Contracting Agency
IIGF : Indonesia Infrastructure Guarantee Fund
PPP  : Public Private Partnership