Government reformulates funding for Indonesia's infrastructure

As it moves to implement a major infrastructure development programme, the government has faced significant challenges in accessing the necessary financing for new projects. However, recent moves to partner with the World Bank for the formulation of a government debt and risk management programme (GDRMP) should support borrowing activities at state-owned enterprises (SOEs), with a new internal credit rating scorecard system expected to improve risk management. With SOE allocations declining in recent budgets, government-guaranteed bond financing offers a near-term solution to pressing infrastructure finance needs, and should help the government avoid excessive budgetary pressure while continuing to implement planned projects.

BOND ISSUANCE: Government guarantees for SOE lending will play an important role in supporting infrastructure development, which has faced notable financing challenges recently. Despite the government delivering on increased allocations to SOEs at the beginning of its five-year infrastructure development agenda in 2015, decreases since then can in large part be attributed to significant expansions in infrastructure budget allocations to regional spending, rising by 108.8% from Rp88trn ($6.6bn) in 2016 to Rp183.7trn ($13.8bn) in 2017.

Global bond markets have provided SEOs with an option for raising necessary capital in recent years in the wake of public spending constraints. The first SOE in the country to issue a global bond was Pelabuhan Indonesia II. The ports operator raised $1.6bn in two separate, unsecured tranches in mid-2015, which were used for upgrades at Jakarta’s Tanjung Priok port (see Transport chapter).

Airport management SOEs Angkasa Pura I and II have also turned to international bond markets, raising Rp3trn ($226.1m) and Rp2trn ($150.7m), respectively, in 2016 to finance airport upgrades. Supported by Standard & Poor’s (S&P) April 2017 decision to upgrade Indonesia’s sovereign credit rating to investment grade, SOE bond issuance is forecast to accelerate in the short to medium term. S&P was the last of the big three global credit ratings agencies to upgrade Indonesia’s sovereign credit rating (see Economy chapter).

GDRMP: In January 2017 the World Bank reported that borrowing costs for Indonesia’s 24 SOEs, many of which are involved in infrastructure development, had previously been identified as being costly due to the lack of a government guarantee for bond issuance and other borrowing activities.

Since 2014 the government has been working to address these challenges with the adoption of a risk-sharing model developed under the GDRMP, working with the World Bank to implement a new methodology for issuing government guarantees, in turn improving the overall current outlook for bond issuances and SOE borrowing. Using the internal credit rating system, the new framework enables SOEs to benefit from lower borrowing costs without exposing the national budget to financial shocks.

RATINGS SCORECARD: The internal credit rating is similar to scorecards used by international credit ratings agencies such as S&P, Fitch and Moody’s, and works by assessing each SOE in categories including management quality, financial performance, business environment and capital expenditure, with the entity’s final score determining the risk of default.

The World Bank has worked with the Debt Management Office to develop scorecards for the electricity and clean water segments, with the Ministry of Finance signing a regulation specifying the actions necessary in the event a guarantee claim is triggered, or a guarantee is requested by an SOE.

The GDRMP is now approaching its final stage of implementation, in which the internal credit rating scorecard is rolled out to infrastructure projects including toll roads, railways, bridges and ports.