Modeling contingent liabilities arising from government guarantees in Indonesian BOT/PPP toll roads

By the end of 2010, the Government of Indonesia (GoI) issued a new regulation on government guarantee provision to protect project sponsors from government-related project risks in public-private partnered (PPP) infrastructure development. Whereas the provision of guarantees can help improve the creditworthiness of PPP projects, it also may expose the GoI to considerable fiscal risk as a result of contingent liabilities the GoI incurs when providing guarantees. This requires a systematic contingent liability analysis to understand the full extent of their exposures. The present paper discusses simple and operational methodologies of quantifying payments of guarantees given to PPP toll road projects to protect project sponsors from skyrocketing costs of acquiring land, delays in scheduled toll adjustment, and compensation payments in case of nationalization. The paper also includes extensive modeling of key project risks, i.e., land cost escalation, initial traffic volume, inflation rates, toll adjustment delays, and a nationalization event. The methodologies are tested on a case study of a PPP toll road project in Indonesia implemented under a build-operate-transfer (BOT) arrangement to demonstrate its application. A Monte Carlo-based simulation is performed to estimate two measures of exposures that are the expected and excess payment of each guarantee. Although the discussion is framed within the context of a specific sector and country, the methodologies offered herein can be adopted to other countries and sectors facing similar problems.