Indonesia moves to equity-based financing to support infrastructure and transport

In early October 2018 officials unveiled 79 infrastructure projects worth $42bn as part of the Indonesia Infrastructure Investment Forum. 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. The approach appears to have had an effect. During the forum, SOEs signed $13bn in deals, mainly with overseas partners, to carry out 21 developments, though many have yet to publish detailed terms or reach finanicial close. 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 that the sharia hedging facilities would now be available as a provision of sharia loans, a first in the country.

Private Sector 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 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 growth of around 5% per year since 2013, low state revenue, in part due to a narrow tax base, has prevented higher levels of infrastructure spending. This has limited efforts to narrow Indonesia’s infrastructure gap and held back development, creating the need to look for alternative forms of capital.

Funding Methods

One example of domestic firms broadening their range of options to attract investment is Jasa Marga, an SOE with the mandate 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, DINFRA raises funds from investors, either as equity or debt, for investment in infrastructure assets.

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.

Attracting Investment

While Indonesia’s expansive infrastructure programme and the push to increase private sector participation are providing significant investment opportunities, industry figures say that the country needs to improve the execution of large-scale developments in order to attract investors outside of Asia. “A major problem is the ability of project sponsors to prepare an investment-ready project, as investors still perceive Indonesia to be a high-risk country because of the complications of the legal system and internal politics, despite the recent credit rating upgrade,” Herianto Pribadi, president director of Kopel Infrastructure, a unit of Koperasi Pegawai Bulog Seluruh Indonesia, told OBG.