Mammoth Infrastructure Projects Face Financial Reality

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JAKARTA (TheInsiderStories) – Indonesian government aims to establish the Indonesia Infrastructure Financing Agency, also known as the ‘infrastructure bank’ as soon as 2018, to act as a bridge over the gap between the needs of infrastructure project funding and available longer-term financing.

Isa Rachmatarwata, Director General of State Assets Management at the Ministry of Finance, told The Insider Stories that the government will propose the bill next year as a legal basis for the infrastructure bank establishment. In 2015 the government and House of Representatives agreed to establish the bank but however, limited funding from the state budget required for backup guarantee funding has hampered the plan.

President Joko Widodo’s infrastructure development plan will require some Rp5,500 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. It is estimated that the state budget can cover only about 30 percent of total needs.

The new bank  is expected to tap funds from global and domestic-multilateral sources, including the World Bank, Asia Development bank as well as the Asia Infrastructure Investment Bank . The agency will then channel the funds to wholly-owned state enterprises to cut through 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 state financier firm PT Sarana Multi Infrastruktur (SMI).

Currently, there are only two multilateral agencies that have been actively participating in Indonesia infrastructure projects, namely, Chinese Development Bank (CDB) and Japan Bank for International Cooperation (JBIC). CDB assets in Indonesia have reached US$27 billion (including debts and loans) while the JBIC portfolio only reached $8 billion in the last five years.

According to Rachmatarwata, to address the gap between available funding and infrastructure funding needs, the government is studying ways to combine the financing model of existing joint-venture firms in infrastructure financing between Asian Development Bank, International Finance Corporation, Deutsche Investitions und Entwicklungsgesellschaft mbH, PT Indonesia Infrastructure Finance and SMI.

“Currently we have SMI, that focuses on infrastructure project financing, and the IIF that focuses on industry development financing. If we have two different models of financing, we should blend them instead of competing with each other. A financing model in any country currently tends toward collaboration with one another, as they are challenged when the size of the pool of financing becomes too large. We are preparing a model that will yield optimum benefits,” he said.

Furthermore, He added, that limited capital stock opening was not the issue any longer, as this can be added gradually in accordance with infrastructure bank establishment. In 2015, the government reallocated Rp18.3 trillion of the assets of state-owned investment unit PT Pusat Investasi Pemerintah (PIP) to SMI, in accordance with the establishment of infrastructure bank. Thus, currently the government is transferring PIP assets  to SMI. As of the end of 1H, SMI’s assets reached Rp46.9 trillion.

However, the new agency will not work effectively unless the government and House of Representative signs an act as a legal basis for the merger of the two agencies, a move targeted for sometime next  year.

“Thanks to that, our House of Representative supports this initiative and will be included in the 2018 priority national legislation program,” he stated.

Rachmatarwata remarks, that the government is also preparing three classifications for infrastructure projects. First, basic infrastructure, including dams, bridges, irrigation and sanitation. Second, financing from loans, including foreign multilateral agency loans and government bond issuance. Third, Infrastructure projects with high commercial value that can be offered to state-owned enterprises and private sources. In addition, the government can collaborate with local authorities to allocate regional budgets.

“They have regional transfer budgets and mostly (more than 50 percent) of local budgets are still ineffectively disbursed, and regional budgets allocating funds for infrastructure spending are still below 15 percent. We can monitor special allocation funds (DAK) and general transfer funds in infrastructure spending,” he said.

Senior Deputy Governor of Bank Indonesia Mirza Adityaswara views more variety in infrastructure project financing instruments. Thus, the urgency of establishing an infrastructure bank is being questioned.

“Since The Financial Services Authority regulates infrastructure financing, in line with the government’s ongoing infrastructure development plan in Indonesia, including infrastructure bonds, asset-backed securities and currently they are studying perpetual bonds or bonds without any repayment period, and infrastructure funds, the function of infrastructure financing has been proceeding anyway. The important thing is that there is funding,” he opined.

In addition, state-owned banks, including PT Bank Mandiri Tbk (IDX: BMRI), PT Bank Negara Indonesia Tbk (IDX: BBNI), PT Bank Rakyat Indonesia Tbk (IDX: BBRI) as well as PT Bank Tabungan Negara Tbk (IDX: BBTN) also actively disburse loans into infrastructure projects, including toll roads, power plants and public housing.

Joint Financing Trend

IIF President Director Ari Soerono admitted, that joint financing schemes have become popular among infrastructure project lenders, joining other schemes including syndicate loans and credit lines, pointing out how their latest financing for the Trans-Java Toll Road project also made use of a joint financing scheme.

“We have geothermal power plant projects in East Java planned, in which we could only contribute up to 35 percent of needed funds, while the remaining financing should derive from other investors,” he said.

Acording to him, the company is also preparing new structures called “staple financing” and “take-out financing”. In a staple financing scheme, the public-private partnership project will be bundled with an IIF financial package; then the contractors do not have to find any financing. If they cannot come to an agreement they can then look for external financiers.

For take-out financing schemes, there is an agreement that IIF will take over financing in the future, said Ari. He gave an example: if the project tenor was 15 years, the bank would finance it for the first five years, after that they could sell it to IIF.

“Take-out financing is useful for a bank that has a medium financing horizon, for if they stay in a project too long, it could affect their asset quality,” Ari said.

During the 2015-2019 term of President Joko Widodo, the government has daringly set ambitious infrastructure spending of Rp5,500 Trillion (US$450 billion). Will this government also have the nerve to set up such an infrastructure bank or will they just continue creating alternatives and seeking creative financing? We’ll see.

Writing by Yosi Winosa, Email: yosi.winosa@theinsiderstories.com

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