The role of creative financing is a smart approach that encourages regional governments to think outside the traditional budget box. This scheme is not merely about finding alternative funding sources, but about designing collaborative and sustainable financing models that involve various parties. Through creative financing, the challenge of budget limitations can be overcome, paving the way for the acceleration of more equitable infrastructure development across the country.
Infrastructure is the essential foundation for a community's welfare and a nation's economic growth. Without adequate roads, guaranteed clean water, or stable energy, a region's competitiveness will decline, and the quality of life for its citizens will erode. However, the goal of providing equitable infrastructure faces a significant challenge in Indonesia, where disparities are still evident. Data from the Central Statistics Agency (BPS) in 2023, which shows that access to proper drinking water has only reached 77.36% of households, is proof that millions of people are still struggling to meet their basic needs, highlighting the urgency to find solutions immediately.
The main obstacle to accelerating this development lies in the traditional infrastructure financing model, which heavily relies on the Regional Budget (APBD). This fiscal limitation often places regional governments in a dilemma, unable to realize strategic projects needed by the public. This dependence on conventional budgets creates a stalemate that hinders progress and delays the benefits of infrastructure for the wider community.
To break this deadlock, a new, innovative paradigm is needed. This is the role of creative financing, a smart approach that encourages regional governments to think outside the traditional budget box. This scheme is not merely about finding alternative funding sources, but about designing collaborative and sustainable financing models that involve various parties. Through creative financing, the challenge of budget limitations can be overcome, paving the way for the acceleration of more equitable infrastructure development across the country.
Understanding the Concept of Creative Financing
Facing the wall of Regional Budget (APBD) limitations, regional governments can no longer rely solely on conventional funding sources. This is where the concept of creative financing comes in as a breath of fresh air. Simply put, creative financing is an approach to funding infrastructure projects by utilizing resources outside of the direct government budget through innovative and collaborative schemes, often involving private sector participation.
This is not just about seeking loans, but about designing a mutually beneficial financing ecosystem. Creative financing focuses on:
Asset Optimization: Utilizing existing regional assets (such as land or buildings) as capital in a partnership.
Risk Sharing: Transferring a portion of the development and operational risks to the private sector, which is better able to manage them.
Attracting Private Capital: Creating commercially attractive (bankable) projects that entice the private sector to invest.
Performance-Based Focus: Payments are based on the quality of the service produced, not just on the completion of physical construction.
With this approach, creative financing becomes a direct answer to classic constraints. It allows regional governments to "purchase" quality infrastructure services without having to bear the entire investment burden upfront. The limited APBD funds can be allocated to trigger much larger private investments, creating a significant leverage effect for accelerating development.
The enactment of Law No. 1 of 2022 on Financial Relations between the Central Government and Regional Administrations (the HKPD Law) marks a historic milestone that provides a strong legal foundation for implementing creative financing in the regions. This law explicitly encourages regions to not only depend on transfer funds from the central government but also to proactively seek alternative financing sources to fund their development.
Several key points in the HKPD Law that lay out the red carpet for creative financing are:
Strengthening Fiscal Autonomy: The HKPD Law provides greater room for regions to manage their own finances, including establishing partnerships with third parties.
Recognition of Alternative Financing Schemes: The law explicitly mentions and encourages the use of financing schemes like the Public-Private Partnership (PPP), which is the most concrete form of creative financing.
Funding Synergy: It promotes synergy between the Regional Budget (APBD), the State Budget (APBN), funds from state/regional-owned enterprises (BUMN/BUMD), and private investment to fund strategic regional projects.
Flexibility in Regional Borrowing: It provides ease and flexibility for regions to access financing from financial institutions under more accommodative terms, as long as it is used for productive projects.
With the legal umbrella of the HKPD Law, regional governments now have greater legitimacy and confidence to step out of the comfort zone of traditional financing and begin embracing innovative schemes to realize the infrastructure their citizens dream of.
Among the various creative financing schemes, the collaboration model between the government and the private sector is the most mature and proven to be effective. This is the tangible form of modern mutual cooperation to build the nation.
PPP (Public-Private Partnership) as a Creative Financing Scheme
The Public-Private Partnership (PPP) is the flagship instrument in the creative financing portfolio. This scheme is officially recognized and promoted by the HKPD Law as a solution to overcome the limitations of the Regional Budget (APBD) in infrastructure provision. Essentially, a PPP is a long-term contract where a Regional Government, as the Contracting Agency (PJPK), partners with a business entity (private sector) to build and manage an infrastructure asset.
In this scheme, the regional government no longer acts as the builder, but as a "procurer of services." For example, instead of spending billions of rupiah from the APBD to build a hospital from scratch, the regional government can implement a PPP project. The private party will fund, build, and operate the hospital according to the standards set by the government. In return, the government will make periodic "service payments" to the private party, the amount of which depends on the availability and quality of the hospital's services.
The main benefits of PPPs for regions are highly significant:
Budget Efficiency: Projects can proceed without draining the APBD upfront, allowing regional budgets to be focused on other priority programs.
Quality and Maintenance Certainty: Because payments are performance-based, the private sector has a strong incentive to maintain the quality of assets and services throughout the contract period. No more stories of neglected or damaged assets due to a lack of maintenance funds.
Risk and Technology Transfer: Risks of construction delays and cost overruns are transferred to the private sector. Additionally, the region benefits from the transfer of knowledge and modern project management technology.
Sustainable Infrastructure Provision: This scheme ensures that public services are available optimally and sustainably for a long period (15-30 years).
Government Support for Infrastructure Financing Projects Through PPPs
Recognizing that the PPP scheme is quite complex, the central government does not let regional governments go it alone. Various support instruments have been prepared to ensure that PPP projects in the regions can run smoothly and be attractive to investors.
These forms of support include:
Government Guarantee: Through a Special Mission Vehicle like PT Penjaminan Infrastruktur Indonesia (PT PII/IIGF), the central government provides guarantees for risks that fall under the regional government's responsibility. This guarantee acts as a safety net that increases the confidence of investors and financial institutions to fund projects in the regions.
Project Development Facility (PDF): The central government, through the Ministry of Finance, provides facilities and technical assistance to regional governments for preparing high-quality and bankable feasibility studies and project documents. This is very helpful for regions with limited human resource capacity.
Viability Gap Funding (VGF): For projects that are highly needed by the community but are less financially attractive, the central government can provide support in the form of an initial fund injection to cover part of the investment cost, making the project commercially viable.
In terms of the procurement process, PPP projects do not follow conventional goods/services procurement rules. These projects are specifically regulated through Presidential Regulation No. 38 of 2015 and its derivative regulations. The bidding process is conducted openly, transparently, and competitively to ensure the regional government gets the best private partner in technical and financial terms, and to maintain accountability and prevent corrupt practices.
Although the path to implementing creative financing is not always smooth, its great potential, coupled with various incentives, makes it a direction worth pursuing. However, it is also important to recognize the existing challenges so they can be mitigated early on.
Potential for Regional Infrastructure Financing Through Creative Schemes
The potential of creative schemes, especially PPPs, is not just a theory. Several regions in Indonesia have already proven their success.
Short Case Study: Umbulan Water Supply System (SPAM) Project, East Java The Umbulan Water Supply System (SPAM) project is a brilliant example of how collaboration can meet the basic needs of a community. For decades, this project was stalled due to funding constraints. Through a PPP scheme, this massive project was finally realized. The East Java Provincial Government acted as the Contracting Agency (PJPK), collaborating with a business entity to build a 93 km clean water transmission pipeline. The project now serves more than 1.3 million people in 5 districts/cities in East Java, providing access to clean water that was previously difficult to obtain. This success was inseparable from the support of the Central Government, including a guarantee from PT PII, which made the project attractive to investors.
This example shows the extraordinary potential: a project that was impossible to fund with the Regional Budget alone could be realized to provide direct benefits to millions of citizens through creative financing.
Challenges in Implementing Creative Financing for Infrastructure
Behind the success stories, regional governments face a number of real challenges in implementing these innovative schemes:
Human Resource (HR) Capacity: This is the primary challenge. Many regional governments do not yet have civil servants with specific expertise in project preparation, feasibility analysis, contract law, and the management of complex long-term partnerships like PPPs.
Political and Institutional Commitment: PPP projects are long-term, often spanning more than one term of a regional head. Strong and sustained political commitment from both the executive and legislative branches of the regional government is required to ensure project continuity amidst leadership transitions.
Quality Project Preparation: Compiling bankable (acceptable to banks/investors) feasibility studies and tender documents requires time, money, and high-level expertise, which often becomes an obstacle for regional governments.
Public Perception and Communication: Misconceptions sometimes arise among the public that PPPs are a form of privatization or "selling off regional assets." Effective public communication is needed to transparently explain the benefits and mechanisms of this scheme.
Incentives to Encourage Creative-Based Infrastructure Financing
To overcome these challenges and encourage more regions to adopt this scheme, various incentives, both direct and indirect, can be major motivators:
Opportunity to Receive Central Government Support: Regional governments that are proactive and serious about preparing high-quality PPP project proposals have a greater chance of receiving support facilities from the central government, such as the PDF for project preparation and VGF for initial funding.
Improving the Region's Rating and Reputation: Successfully implementing a PPP project will enhance the region's image and investment rating, making it more attractive to other investors in various sectors.
Leaving a Development Legacy: For a regional leader, successfully realizing vital infrastructure without excessively burdening the APBD is a monumental achievement and legacy.
Increasing Locally-Generated Revenue (PAD): New, well-functioning infrastructure will trigger local economic growth, increase property values, and ultimately has the potential to raise PAD in the long term.
Awards and Recognition: The central government periodically gives awards (such as the PPP Award) to regional governments that successfully implement innovative infrastructure projects, which can be a source of pride and a motivator for other regions.
Accelerating development is key to unlocking a region's economic potential, but the main challenge always lies in infrastructure financing. Relying on traditional sources like the Regional Budget (APBD) is often not enough. Therefore, creative financing emerges as a strategic solution. Through concrete schemes like PPPs, fully supported by the HKPD Law, the paradigm of infrastructure financing is shifting from a budgetary burden to a performance-based investment, where regions can realize vital projects without bearing the full cost upfront.
The future of infrastructure financing in Indonesia now depends on the adoption of this innovative approach. Regional leaders are challenged to shift from a rigid budget mindset to a collaborative mindset driven by creative financing. By professionally embracing creative financing models, the door to a more connected, prosperous, and competitive Indonesia is wide open, transforming the challenge of infrastructure financing into an opportunity for progress that can be achieved together.