The Jakarta Post
Mon, August 12 2019
/ 02:26 am
Infrastructure development will remain one of President Joko “Jokowi” Widodo’s priority programs in his second term. However, with government debt rising to a new all time high, it has become most imperative to source the bulk of investment financing for the next five years from private investors. The International Monetary Fund, World Bank and even Finance Minister Sri Mulyani Indrawati have all cautioned the government and state-owned enterprises (SOEs) against having too dominant a role in infrastructure development.
The question is, how should the government go about attracting more private financing for the estimated US$450 billion in infrastructure development needed for the next five years? The Jakarta Post’s Vincent Lingga raised this issue in a recent interview with Shadik Wahono, a corporate restructuring expert and toll-road investor in three Asian countries. The following are excerpts from the interview:
Question: With both the government and SOEs already heavily leveraged, what should the government do to woo more private investment in the infrastructure sector?
Answer: Our infrastructure development has yet to align with financial metrics that can minimize risk and optimize performance so as to attract more long-term investments. We need to pay more attention to cash-flow projection, the ability to achieve stable operating expenditure and overall financial viability.
These are the calculations that investors are looking for — they want to assess the ability to service an infrastructure loan. History suggests Indonesia’s track record has fallen short in this regard. After the 1998 economic crisis, many projects had to be bailed out by the government, either directly or via SOEs. The rest were deemed to be financially insolvent. There is also a need to support and incentivize experienced operators with proven track records.
There are two kinds of financiers in infrastructure: investors and lenders. Could you talk about debt-financing alternatives suitable for infrastructure in view of special characteristics of infrastructure?
The infrastructure financing model for Indonesia has not changed much since the 1990s. Essentially, a project is awarded with a fixed payment period, using discounted cash flow with a risk premium. The entire project is seen as a monolithic entity for which risk is calibrated and priced once and for all. There are two major problems. First, all the risks are thrown in and factored to the rating. Because we have bundled all the risks, investors take the lowest denominator — which means the highest possible interest rate — to justify the sum of the risks.
Second, it assumes lenders are themselves monolithic. In that sense, we have not caught up with major changes in international infrastructure financing. Globally, this space has become more sophisticated and there are new players — not just traditional project financiers but also private equity and insurance companies. We need to consider variations to the funding model to tailor to the specific expectations and parameters of different types of financial institutions.
Since project financing is different from corporate financing in that the former depends solely on the projected stream of revenues, how should the government manage the tariff regime for public infrastructure?
There is a need for the government to resist the pressure to lower, change or lift tariffs at will. The concession is a legal agreement with stakeholders who expect it to be honored. But Indonesia, as history suggests, has a habit of bowing to political pressure at various levels such that the tariffs are not fully honored.
As much as possible, maintain consistency. If there are situations in which tariffs are suspended or lowered, there should be ample mechanisms for tariff recovery. We must find ways to protect the interests of investors and maintain confidence. In short, we need to be disciplined in our contractual agreements with infrastructure investors. All parties need to build up a culture of trust.
Indonesia still performs poorly in attracting investors under the public-private partnership (PPP) scheme launched in 2005, while countries such as India, Brazil and Mexico have succeeded in developing almost 35 percent of their infrastructure under the scheme. What are the main barriers?
We need to clearly define the roles of the private sector and the public sector. In Indonesia, there is always a tendency to mix up the two. Keep politics out of the PPP. Indonesia tends to chop up and offer projects, or segments of a project, based on “connections” or to an SOE instead of decisions based on merit. This trend not only poses problems of coordination and lack of economies of scale, it sends a bad signal to investors. Even if projects look good, they may want to stay on the sidelines.
We should deliberately look out for operators who have completed projects on time and even at lower costs — seek out and incentivize them with new projects. This can be a deliberate effort to keep the overall costs of infrastructure down by sending a strong signal that Indonesia rewards success.
Back to financial instruments for infrastructure, how do you assess the prospects of issuing infrastructure bonds and other infrastructure-based securities backed with future revenues? What additional market and regulatory infrastructure is needed to facilitate these securities?
In fact, such infrastructure financing has already been started by several SOEs. One hurdle […] is red tape. Issuers face a host of challenges which include government policy, regulatory clearance and taxation issues. Overall, our financial and legal frameworks are often seen as not conducive to encouraging the issuance of such instruments. We need to review our financial legislation and capital market regulation to encourage more such instruments, especially when we consider the urgent need to ramp up infrastructure as outlined by the President.
