Photo by Railway Technology

JAKARTA (TheInsiderStories) – President Joko Widodo has targeted 5.4 percent of economic growth for 2018, supported by infrastructure development and consumer activity.

Widodo’s infrastructure development plan will require some Rp 5,500 Trillion (US$450 billion) in investment between 2015 and 2019 – the term of his presidency – the funds to derive from the state as well as from other partners.

Rising needs for infrastructure financing has pushed government to create alternatives and seek creative financing instead of relying on conventional bank borrowing. It is estimated that the state budget can cover only about 30 percent of total needs. Clearly, the government cannot rely on banks’ third party funds, as they must manage them for business continuity.

Apparently, Widodo’s ambition has not received sufficient support from local financial institutions or investors. During 1H, third party funds in banks reached Rp5,045 trillion, mostly with 2-years maturity, on average.

This will become a constraint as infrastructure projects only mature after 10 years. Meanwhile, banks need to allocate impairment reserves to mitigate risk on long-term projects. This signifies there should be innovation in financing schemes.

“We have promoted several innovations, including project-based loans, project-based securitization, global bond issuance, Build, Operate and Transfer schemes as well as joint financing with other institutions. We simply cannot finance these projects alone,” said Kartika Wirjoatmodjo, CEO of state-owned lender PT Bank Mandiri Tbk (IDX: BMRI) in a recent talk.

To complete financing from bank, government began to established so-called Indonesia Infrastructure Financing Agency or known as infrastructure bank. The idea is to increase leveraging financial capability with low capital injection.

In the last 2015, government and parlement has agreed to merge state-owned investment unit PT Pusat Investasi Pemerintah (PIP)’s asset with state-owned infrastructure financing PT Sarana Multi Infrastruktur (SMI). This new agency won’t effective work unless government and house of representative sign act as legal basis for the merge of two agencies, that is targeted to be done by this year.

Currently government is transferring PIP’s asset of Rp18.3 trillion to SMI. As end of 1H, SMI’s asset reach Rp46.9 trillion. As infrastructure financing agency, SMI has disburse Rp50.2 trillion financing to projects worth Rp264.5 trillion. SMI also give projects consultation and technical assist services, bring some deadlock projects closer to financial close stage.

Government idea is to let new merged agency to  participate in the financing of large-scale projects, as well as to tap funds from global and domestic-multilateral sources. The agency will then channel the funds to wholly-owned state enterprises to cut the current costly and time-consuming procedures, which require multilateral financing schemes to be signed through a government to government (G to G) scheme before being channeled to SMI.

The new agency would be able to issue bonds with incentives, such as tax exemptions and interest-rate subsidies, while also looking at alternatives for funds, such as securitization and equity investment.

While there is no certain timeline for this new merged agency to operate, currently Indonesia has cooperate with foreign infrastructure bank incuding Japan Bank for International Cooperation with portfolio more than $8 billion and it allocate $2 billion loan per year in the last five years. Mean while, other foreign infrastructure banks China Development Bank is interesting to expand their presence in Indonesia.

Our government is out of mind if they miss this fortune.

The inability of Indonesia to form an infrastructure bank has inspired hope in multilateral financial institutions that do have large capital pools and specialization, to step in for financing infrastructure.

This golden chance has been targeted by the world’s largest infrastructure bank, China Development Bank. China’s growing prominence on the global political and economic stage has been mirrored in the transformation of one Chinese bank.

CDBis now the world’s largest overseas loan institution, overtaking both the World Bank and Asian Development Bank. The bank was founded in 1994 as a policy financial institution under the direct leadership of the State Council.

It was incorporated as CDB in December 2008, and officially defined by the State Council as a development finance institution in March 2015. CDB is also largest Chinese bank for foreign investment and financing cooperation, long-term lending and bond issuance. It ranked 87th on the Fortune Global 500 list in 2015.

CDB currently has 37 primary branches and 3 secondary branches on the Chinese mainland, one offshore branch in Hong Kong and five representative offices, in Cairo, Moscow, Rio de Janeiro, Caracas and London, with about 9,000 staff. Its subsidiaries include CDB Capital Co., Ltd., CDB Securities Co., Ltd., CDB Leasing Co., Ltd. and China-Africa Development Fund Co., Ltd.

CDB’s big step in Indonesia manifested when Indonesia picked China over Japan to build the country’s first fast-train rail link, connecting its capital Jakarta to the textile hub of Bandung in 2015.

CDB has promised to invest a huge quantity of funds in the project; a consortium of Indonesian and Chinese companies building Indonesia’s first high-speed railway have signed off on a $4.5 billion loan. CDB also loaned $3 billion cash to Bank Mandiri, PT Bank Negara Indonesia Tbk (IDX: BBNI), PT Bank Rakyat Indonesia Tbk (IDX: BBRI) and three domestic banks.

CDB has announced that it is going to open a Representative Office in Indonesia, likely in connection with its plan to facilitate loans for the mammoth Jakarta-Bandung high-speed train (HST) project.

Indonesian Minister for Coordination for Maritime Affairs Luhut Binsar Pandjaitan has revealed that he will soon meet with CDB officials in Bali to discuss financing plans for infrastructure projects in Indonesia in more detail.

Meanwhile Indonesian Financial Service Agency (FSA) has agreed to process entry permits for a CDB Representative Office in Indonesia under certain conditions, as long as it meets the rules for the domestic financial industry.

“If CDB has activities and customers here, and the scale is large, then certainly it would be a good reason to open a Representative Office,” said the Chairman of FSA Wimboh Santoso.

Separately, Governor of Indonesia Central Bank, Agus D.W. Martowardojo, expressed his support, observing how Indonesia still needs various sources of financing for development.

In 2015, CDB disbursed a total of US $3 billion to three state-owned lenders, Bank Mandiri Tbk, Bank Rakyat Indonesia, and Bank Negara Indonesia. China would be the largest investor in Indonesia in the following decade as reflected by the country’s increasing investment realization.

Based on data from the Investment Coordinating Board, China was the fourth largest investors in Indonesia after Singapore, Japan, and Hong Kong. China’s investment realization in the third quarter of 2016 stood at $549 million with 499 projects.

Meanwhile, Singapore was at the top of the list with a total investment value of $2 billion with 1,927 projects. Japan was at the second place with a total investment value of $1.3 billion, followed by Hong Kong with $597 million.

CDB was founded in 1994 as a policy financial institution under the direct leadership of the State Council. It was incorporated as China Development Bank Corporation in December 2008, and officially defined by the State Council as a development finance institution in March 2015. CDB has a registered capital of RMB421.248 billion.

Its shareholders include the Ministry of Finance of the People’s Republic of China (36.54 percent), Central Huijin Investment Ltd. (34.68 percent), Buttonwood Investment Holding Co., Ltd. (27.19 percent) and the National Council for Social Security Fund (1.59 percent).

By the end of 2015, its assets grew to RMB12.62 trillion, a balance of loans of RMB9.21 trillion, and a cumulative recovery rate of 98.78 percent that continued to lead the industry for the sixteenth consecutive year.

CDB currently has 37 primary branches and 3 secondary branches on the Chinese mainland, one offshore branch in Hong Kong and five representative offices in Cairo, Moscow, Rio de Janeiro, Caracas and London, with about 9,000 staff. Its subsidiaries include CDB Capital Co.,Ltd., CDB Securities Co.,Ltd., CDB Leasing Co.,Ltd. and China-Africa Development Fund Co.,Ltd.

Chinese dominance has slowly shifted to fill the role of Japan in investment in Indonesia. CDB assets in Indonesia have reached $27 billion (including debt and loans) while the Japan Bank for International Cooperation (JBIC) portfolio only reached US$8 billion in the last five years.

China is now targeting Southeast Asia, in its efforts to make use of its gigantic U.S dollar foreign reserves. Chinese companies are broadening their targets to invest in Southeast Asia, particularly in the infrastructure sector: developing countries require huge funding to build roads, railways, and ports. Poor infrastructure has historically stunted Southeast Asia’s economic potential.

The Asian Development Bank estimates that developing countries across Asia will have to invest US$ 26 trillion to build up sufficient infrastructure, from transport links to clean water systems, by 2030. The goal is to maintain growth momentum, reduce poverty, and ameliorate climate change. This is what China perceives as its opportunity to enter.

As of 2015, China’s share of investment to ASEAN countries was still relatively small, at 6.8 percent. Nevertheless, Chinese corporations are steadily moving to assume greater ownership of shares in major infrastructure projects in the Southeast Asian region.

There is also a political subtext to its foreign investment, as China has historically seen Southeast Asia as within its realm of influence; as American power weakens and the USA draws back China will move in to assume a greater role in regional affairs. Its expanding blue-water navy is also a factor in the projection of power, with foreign investment linked to political influence.

CDB has signed a $4.5 billion loan agreement with PT Kereta Cepat Indonesia China (KCIC) in support of Indonesia’s Jakarta-Bandung High-Speed Railway Project, witnessed by the heads of state of China and Indonesia. Officially signed during the Belt and Road Forum for International Cooperation, the agreement marks the start of fast implementation of the first international order won in China’s high-speed rail sector.

Following the signing of EPC on April 4, based on the mutually beneficial and win-win principle, CDB and PT KCIC, along with Chinese and Indonesian sponsors, have worked closely with China Railway Corporation and other Chinese partners towards the successful signing of the loan agreement, marking a milestone of the project.

The Jakarta-Bandung High-Speed Railway Project, as a flagship bilateral cooperation project high on the agenda of both governments, is the first global high speed rail project using Chinese technology and standards.

US$1 = Rp13,300

Writing by Elisa Valenta and Yosi Winosa, Email : elisa.valenta@theinsiderstories.com and yosi.winosa@theinsiderstories.com

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