Indonesia's specialised state institutions aim to make large-scale infrastructure projects a reality

The zeal with which the current administration is tackling Indonesia’s infrastructure challenges may outclass previous efforts to bring the sector up to snuff, but the general underlying principals of the movement have underpinned national economic developmental plans for decades. Reducing production and operating costs and increasing efficiencies have long spearheaded strategic plans for industrial development. Past governments have deemed these goals so significant to the country’s long-term goals as to require further state participation rather than depending solely on the private sector to deliver results.

Over the years this impetus has given rise to a number of government entities tasked with the funding and oversight of infrastructure development. In some cases this has also meant taking responsibility and participating directly in the management of various projects. Equally and perhaps more importantly, the state has developed various bodies that hold the purse strings to develop these projects in the form of direct budgetary allocations, investment funds and other financial tools. “One of the main challenges to the success of the infrastructure plan is achieving the right private financing schemes and regulation. Herianto Pribadi, president director at Kopelindo Infrastruktur, told OBG. “The country would highly benefit from private and public companies working together for this goal.”

Financial Institutions 

Where this most recent infrastructure development differs from its predecessor, however, is in the restructuring of financial institutions to better channel the major surge in investment funds to their respective destinations. Much of this funding will be distributed through three relatively new or recently configured finance institutions set up specifically to support the sector: the Indonesia Infrastructure Guarantee Fund (IIGF), Indonesia Infrastructure Finance Company (SMI) and Indonesia Infrastructure Finance (IIF).

With nearly Rp6000trn ($438bn) slated to be spent on major infrastructure projects through to 2020, the ability of these organisations to efficiently and transparently distribute funds will likely prove to be just as important to their ultimate success as the enterprises tasked with contracting out the concrete and steel works on the ground. “Infrastructure is moving into the right direction steadily. The implementation has been a challenge, but we are seeing some improvements”, Takuya Yamakawa, president director of Hitachi Asia Indonesia, told OBG. “This will help improve the economy, to an extent, given the falling demand for construction machinery and others.”

SMI 

Established in 2009 as a state-owned enterprise (SOE) under the Ministry of Finance (MoF), SMI was created to support the state’s infrastructure development agenda through partnerships with private and multilateral financial institutions to facilitate cooperation in public-private partnerships (PPPs). Serving as a catalyst for large infrastructure projects, the SOE sources funds from state equity injections, loans and grants from domestic and foreign participants, capital markets through bonds, securities and securitisation. In addition to the financing aspects, SMI also has a hand in public and private sector advisory services along with project development for infrastructure works spanning the full spectrum of sectors.

More recently, SMI received a significant boost in 2015 when the government folded the assets of the largely ineffective Government Investment Centre (PIP) into SMI, which resulted in an infusion of Rp18.3trn ($1.3bn) worth of idle PIP assets. Along with this increased funding, SMI’s role was also expanded to include new responsibilities such as municipal financing for social infrastructure, the ability to tap into alternative sources of funding to reduce the cost of funds and expand the size of its financing pool, all of which were supported by new regulations and tax incentives.

As of April 2016, SMI was involved in financing 65 separate projects across the country to the tune of $8.7bn. In the institutions early days these efforts have leaned heavily towards the energy sector, with major electricity development projects involving the state power operator PLN making up 36% of the total, along with another 12% dedicated to private-electricity generation for independent power producers and 14% in the oil and gas sector. Road construction accounted for another 22% of financing followed by other transport projects (5%), telecommunications (3%), irrigation (2%) and water supply (2%).

Complementing the financing and investing duties, SMI has also taken on five project development ventures: the Umbulan Water Spring in East Java, a mass rapid transit project in Surbaya, local government infrastructure development assistance in Sulawesi, a port development project in Jayapura and the Palapa Ring Central telecommunications project, a 2700-km undersea fibre-optic cable connecting Kalimantan, Sulawesi and North Maluku. The entity is also providing advisory services on another 20 projects ranging from power plants and water supply to corporate business plans and financial advisement.

However, with trillions of rupiah of new investments pouring in, SMI is set to undergo another transformation in order to better absorb the scale of the new projects coming down the pipeline. Under a new draft proposal being drawn up by the government in 2016, SMI will be converted into the Indonesian Development Bank (IDB), which will be tasked with developing marginal projects that private developers would be reticent to undertake for a variety of reasons. The bank would be funded with an initial infusion of Rp30trn ($2.2bn), which the institution would then leverage up to four times through measures such as bond issuances and multilateral loans. “Through the transformation into the IDB, we hope that projects that are not financially attractive enough to attract private sector but will create multiplier economic impacts on their regions will be able to be carried out using these funds,” Fakhrul Aufa, a senior manager in SMI’s research and business development division, told OBG. “The IDB will not be competing with private banks, but filling in the funding gaps.”

In the long term, the IDB would also expand its scope of operations beyond infrastructure into industrial, maritime, agriculture and other sectors. As of mid-2016, the MoF was finalising this draft law, the final version of which is expected to be completed by the end of the year and then sent to Parliament for debate and approval in 2017.

Provisions being considered in the draft law include mechanisms to provide greater aid in leveraging the bank’s capital, such as guarantees of minimum capital. This would then increase the credit rating of the bank to AAA levels, thus enabling the bank to issue bonds at lower costs and subsequently fund projects with marginal rates on return. The new IDB would also differ from existing state-owned financial institutions, which are SOEs tasked with running a profit.

The IDB would not be mandated to turn a profit, but merely to operate at a sustainable level. Its chief focus would be the social and economic impacts of its prospective projects.

IIF 

While SMI acts as a conduit between financing and contracting, the IIF is the pool of funding which is tapped specifically for strategically important projects to be developed with the private sector. Set up shortly after SMI in January 2010, the fund was tasked with of providing lending to viable infrastructure projects in domestic currency by raising loans in the domestic market using its strong credit rating and by providing financial products for PPP and private projects. The largest shareholder in the financial institution is SMI, holding a 30% stake, followed by the Asian Development Bank and International Finance Corporation, each with a 19.99% share along with the German Investment Corporation (15.12%) and Sumitomo Mitsui Banking (14.9%). Starting with a balance sheet of some $600m, the IIF has since leveraged this to around $900m by the end of 2015. In addition to securing funds, the IIF also has a role as a strategic advisor to the government as well as a transaction manager and lead arranger for infrastructure projects. In this role, the IIF often finds itself bridging the gap between the public interests of the government and private sector concerns regarding the profitability of taking on specific works packages.

As a way of rectifying these opposing priorities, the IIF utilises its advisory role to liaise with both stakeholders in order to make projects more viable for private sector participation. “The expectation is to bring a private sector view into the government in terms of what is acceptable and what is needed to make the projects attractive,” Irman Boyle, executive vice-president and head of public sector advisory in the IIF, told OBG.

IIGF 

Established alongside the SMI in 2009, the IIFG is a 100% SOE charged with facilitating PPP projects by improving the credit worthiness of these projects. The commercial entity operates as a single window for appraisal-and-guarantee structuring for the government, which is intended to mitigate political risk, as both the central and local government function as contracting agencies, to provide certainty and stability for investors. These guarantees ultimately lower the cost of financing associated with PPP infrastructure builds by reducing perceived exposure to political risk in the eyes of private investors and creditors.

In 2015 the IIFG received a significant state capital injection of Rp1.5trn ($109.5m) from the 2015 state budget, bringing its total equity to Rp6trn ($438m). By the end of 2015, the IIFG had processed guarantees for 16 infrastructure development projects including four power generation plants, three drinking water supply systems, three broadband projects and six transport projects.