Indonesia’s quest for infrastructure financing-

Many of Asia’s fast growing economies have suffered a slowdown in their economic growth in recent times. Indonesia is also undergoing the same trend: GDP growth was 5.78 per cent in 2013, the lowest recorded since 2009. Due to macroeconomic factors such as the falling rupiah, a high government deficit, and rising interest rates, investors have shied away from infrastructure projects, hence depriving the sector of much-needed funds. Presidential elections due in April 2014 have further added to the uncertainty of the policy landscape that affects investment in infrastructure development.

Although the Indonesian government has taken several steps to improve infrastructure financing in recent years, their impact has yet to be felt. The focus on regaining the momentum of economic growth has once again placed the spotlight on the infrastructural deficits of the country, which will pose a serious threat to growth, if they are not addressed.

Lower-than-projected private sector investments

According to Indonesia’s Public Works Ministry, the government invested IDR 438.1 trillion in infrastructure development in 2013, which exceeded the 2012 figure of IDR 385.2 trillion by 13.2 per cent. The largest share of the investment in 2013 came from the state budget that accounted for 47 per cent, followed by the regional budget that constituted 22 per cent. State-owned enterprises (SOEs) and the private sector contributed 18 per cent and the remaining 14 per cent, respectively. These figures are in sharp contrast to the country’s economic plan for 2011–14, which had projected that more than two-thirds of infrastructure investment would come from the private sector.

Many factors have affected the investment decisions of private players. The rupiah, for instance, has fallen by more than 20 per cent over the past year, thus affecting the import of machinery and equipment for construction activities. To arrest the currency depreciation and contain the current account deficit (that also constrains government financing), the Indonesian central bank raised its benchmark rate five times (a total of 1.75 percentage points) in 2013. This action pushed up domestic finance costs, which resulted in the private sector’s postponement of investments, including those planned for infrastructure projects.

Key government measures

The Masterplan for Acceleration and Expansion of Indonesia’s Economic Development (2011–25) identifies 774 key infrastructure projects that require a total investment of $240 billion. More than half of the funding is expected to come from the private sector, primarily through public–private partnerships (PPPs). In order to attract private sector investments in the infrastructure sector, the government created a range of state-owned entities to assist with the financing and bankability of PPP projects.

The Ministry of Finance (MoF) established PT Sarana Multi Infrastructure (PT SMI) in February 2010 and PT Indonesia Infrastructure Finance (PT IIF) in August 2010 to provide funds (both debt and equity) for infrastructure projects. While PT SMI is fully owned by the government, PT IIF is a private non-bank financial company (NBFC) jointly funded by the government, the Asian Development Bank, the International Finance Corporation, and two private financing institutions. The MoF also established a Viability Gap Fund to provide additional capital to ensure the financial viability of projects.

To improve the creditworthiness of the public sector counterparts, another government-owned entity, PT Penjamin Infrastruktur Indonesia, or the Indonesia Infrastructure Guarantee Fund, was set up to provide project guarantees to the private sector.

The government has also attempted to address the problem of land availability for infrastructure development through a sovereign wealth fund, Pusat Investasi Pemerintah, which finances land acquisitions for PPP projects. By end-2013, it was announced that up to 30 new PPP projects, at a total cost of IDR 380 trillion, would be awarded in 2014. However, many potential infrastructure players have stated that the lengthy PPP procedure needs to be further streamlined and made more user friendly.

Entrenched obstacles

Indonesia’s structural issues are among the key reasons for inadequate infrastructure development. The banking industry is mired in an asset–liability mismatch due to its exposure to infrastructure projects, thus limiting its willingness to finance new projects. Equally underutilised are international bond markets that could be tapped by SOEs to raise funds (for on-lending to infrastructure projects). Investor diffidence towards such projects can also be attributed to the Parliament, and Corruption Eradication Commission’s intense scrutiny of companies’ expenditure patterns. This inspection also limits infrastructure companies’ willingness to borrow through other regional and multilateral agencies even if loans are readily available.

Moreover, sector-specific issues play an important role in investment decisions. Extremely low power and water tariffs, held down for political reasons, make investments in these subsectors economically unattractive. The lack of availability of land continues to affect all infrastructure sectors. It is a major bottleneck that undermines the timely and cost-effective implementation of projects. Although the Land Procurement Act for Development in the Public Interest, was introduced in January 2012, it cannot be enforced for existing projects that have been postponed until January 2015.

Promising developments

Indonesia has recently witnessed some major developments in the infrastructure sector. With regard to foreign lending, the ASEAN Infrastructure Fund Limited (AIF) commenced its lending operations in Indonesia by extending a $25 million loan to the country’s power sector in December 2013. The AIF loan will help to finance the expansion of transmission networks from Java to Bali in order to address system deficiencies in Bali that have resulted in widespread blackouts and power outages. In the same month, the Japan International Cooperation Agency, Japan’s overseas development agency, agreed to provide $1.46 billion in loans for Indonesia’s infrastructure projects under the Metropolitan Priority Area for Investment and Industry programme, which also cover project feasibility studies.

Furthermore, in September 2013, Germany approved EUR 458 million in technical and financial assistance to Indonesia’s renewable energy and low-carbon infrastructure programmes. Of this amount, EUR 400 million will go towards supporting geothermal energy development and sanitation management, with the remaining EUR 58 million allocated for technical assistance for education, governance, and forest preservation.

On the domestic front, PT IIF announced plans to provide $332 million worth of long-term financing to Indonesia’s infrastructure sector. The NBFC is expected to extend loans for various infrastructure projects such as hydroelectric power plants, gas-fired power plants, telecommunication projects, toll roads, and airports.

Turning back the clock

The country’s infrastructure sector has suffered from years of underinvestment. It has yet to regain infrastructure investment levels that prevailed before the Asian financial crisis of 1997–98. According to the World Bank, Indonesia now struggles to invest 3–4 per cent of its GDP in its infrastructure, well below the pre-1997–98 level of over 7 per cent. However, government efforts to elicit investor interest in infrastructure provide grounds for some optimism. With new studies revealing the easing of downside risks, stability in the rupiah, and the narrowing current account deficit, more investments can be expected in infrastructure financing. However, attempts to make projects more “bankable” will be a key long-term enabler to elicit the required amount of investments in the sector.