Ex ante required rates of return and related factors in Indonesian PPP infrastructure projects

Abstract

PurposeThis paper delves into the ex ante rates of return demanded by the private sector in Indonesian public–private partnership (PPP) infrastructure projects and the manifold factors emanating from project attributes that can influence these rates.Design/methodology/approachThis paper analyzes feasibility studies of 37 PPP projects across different sectors. The studies were carefully selected based on relevance, completeness and validity of data. The analysis uses statistical techniques, including Levene’s tests, t-tests, ANOVA tests, Cohen’s effect size and Pearson correlations, to explore differences in cost of capital and excess returns across various attributes.FindingsBased on the statistical analysis, no significant difference exists between the excess return of 200 basis points (bps) and the equity excess return of 0 bps. This suggests that the eligibility criteria for PPP projects require an internal rate of return (IRR) equal to the weighted average cost of capital plus 200 bps or an equity IRR equal to the cost of equity. The variations in the tested variables among diverse project attributes do not exhibit statistically significant disparities, even though specific attributes display moderate to high effect sizes.Originality/valueThis paper represents one of the first attempts to examine the rates of return demanded by the private sector in the context of Indonesian PPP projects. It comprehensively explores the factors that influence these rates, drawing on insights derived from feasibility studies.