Publisher: Oxford Business Group
Publish Date: 21 November 2018
Indonesia has sought to increase private sector participation in major infrastructure projects, unveiling a series of new developments and announcing a shift in funding policy that could open the door to more international and domestic investors.
In early October officials unveiled 79 infrastructure projects worth some $42bn as part of the Indonesia Infrastructure Investment Forum – staged on the sidelines of the annual meeting between the IMF and World Bank, which was held this year in Bali.
The projects, which will be undertaken in partnership with state-owned enterprises (SOEs), cover a number of sectors, including transport, energy and industry.
In addition to unveiling the new developments, the government used the forum to encourage SOEs to make greater use of equity-based finance to fund infrastructure projects.
“Looking ahead, we will also encourage direct investment, strategic partnership and innovative long-term project financing,” Rini Soemarno, the minister of SOEs, told delegates.
The approach appears to have had an effect. During the forum SOEs signed $13bn in deals, mainly with overseas partners, to carry out 21 separate developments.
Besides equity-based finance, SOEs are increasingly looking towards diversified sources of debt financing to meet their needs.
“SOEs such as Perusahaan Listrik Negara, Pertamina or Garuda Indonesia have traditionally opted for conventional bank loans,” Aloysius Kiik Ro, deputy for business restructuring and development at the Ministry of SOEs, told OBG. “As infrastructure development is a long-term endeavour, asset-backed securities are therefore increasingly utilised.”
Moreover, with Indonesia further seeking to tap Islamic financial markets for funding to support infrastructure developments, the central bank announced on October 9 that the sharia hedging facilities would now be available as a provision of sharia loans, a first in the country.
Private sector targeted for infrastructure funding
The move towards alternative methods of financing comes amid efforts to fund the country’s significant medium-term infrastructure programme.
Indonesia has a pipeline of 223 separate projects with a combined budget of $307bn. Of this, the government is looking to the private sector to generate $180bn, approximately 60% of the total, with state enterprises to raise the balance.
While infrastructure development has been a driving force in the economy in recent years, supporting GDP expansion of around 5% per year since 2013, a new OECD report has shown that low state revenues, in part due to a narrow tax base, were preventing higher levels of infrastructure spending.
This has subsequently limited efforts to narrow Indonesia’s infrastructure gap and constrained development, the report said, necessitating the need to look for alternative forms of capital.
Diversification of funding to reduce public sector risk
Furthermore, the policy of deepening the investment pool to support infrastructure development, and the government’s attempt to scale back its own direct exposure to the scheme, should help reduce fiscal risks for SOEs.
Borrowing undertaken by SOEs to support infrastructure development could expose them to cash flow constraints, especially if interest rates increase or projects are delayed, the OECD said.
Therefore, by diversifying fund sourcing and increasing the participation of private sector partners in infrastructure projects, SOEs should be better placed to mitigate exposure to risks and reduce any calls for capital injections.
Domestic SOEs adopt alternative funding methods
One example of domestic firms broadening their range of fiscal product options to attract investment is Jasa Marga, an SOE with the charter to develop and operate toll roads.
In mid-October, the company launched an Infrastructure Investment Fund – Dana Investasi Infrastruktur (DINFRA) – that aims to raise up to Rp1.5trn ($98.6m) to strengthen capital structures for its toll road investment programme.
A capital market product in the form of collective investment contracts, the DINFRA raises funds from investors – either as equity or debt – for infrastructure assets investment.
The development builds on the company’s decision last year to deploy asset securitisation to attract funds, offering a share in future revenue, another first for Indonesian infrastructure.
Jasa Marga is also attracting investment from the country’s expanding insurance industry, with underwriter WanaArtha Life recently investing Rp100bn ($6.6m) in the company to fund infrastructure development.
Further improvement needed to attract foreign investment
While Indonesia’s expansive infrastructure programme and the push to increase private sector participation is providing significant investment opportunities, industry figures say the country needs to improve the execution of large-scale developments if it is to attract investors outside of Asia.
“A major problem is the ability for project sponsors to prepare an ‘investment-ready’ project, as investors still perceive Indonesia to be a high-risk country because of the legal system and internal politics, despite its credit upgrading,” Herianto Pribadi, president-director of Kopel Infrastructure, a unit of Koperasi Pegawai Bulog Seluruh Indonesia, told OBG.
As more of these projects break ground and are shown to have strong investor appeal, more capital should flow into infrastructure development, he added.