International travellers are advised to leave plenty of time to get to the airport, but even the most conservative estimates should probably add two hours’ travel time. Jakarta’s traffic jams are notorious and panicked travellers dashing to catch their flight from Soekarno-Hatta International Airport will most likely face long queues and an airport that is almost at capacity.
The risk of missing flights and an inability to reliably plan a schedule are just some of the downsides of doing business in Indonesia, and seem a world away from the convenience of neighbouring Singapore. A 2011 Standard Chartered report estimated that the capacity of Soekarno-Hatta International Airport is less than a third of Singapore’s Changi Airport. Such a situation is symptomatic of an emerging market whose economic growth has outpaced the development of its infrastructure.
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Corruption, bureaucracy and problems with land acquisition have been some of the hurdles to developing Indonesia’s infrastructure, but the mood is now optimistic as a number of projects are under way and some of these barriers have been removed.
Plans in motion
In Jakarta, where there is no escaping the gridlocks, major projects to address the most chronic problems in the city have now been set in motion. Under the leadership of Jakarta’s governor, progress is being made to get stalled projects off the ground. Jakarta’s monorail project, which was shelved in 2007, was reinstated with the groundbreaking taking place in October 2013. The project has been implemented under a public-private partnership (PPP) with Jakarta Monorail – a joint venture between Singapore’s Ortus Holdings and Indonesia Transit Central – leading the project. In October, local media reported that Jakarta Monorail had signed an agreement with China Communications Construction Company, which agreed to invest $1.5bn in the project. It is expected that the first of two monorail lines will be completed in 2016.
Also in October, the governor reinstated the Mass Rapid Transit (MRT) project, which is expected to be completed in 2018. The MRT line is expected to reduce rush-hour traffic journeys of two hours to just 30 minutes. While the monorail is a private-sector project, the MRT is a project funded by the government mainly though foreign loans from the Japan International Co-operation Agency.
Jakarta’s governor, Joko Widodo, has been credited with getting these projects off the ground. He is touted as an effective leader, not afraid to root out corruption and vested interests, and has been identified as a potential candidate for the presidential elections in July 2014.
There are a number of other ongoing projects, including the expansion of Tanjung Priok, Indonesia’s main port for international trade. As an archipelago of about 17,000 islands, the development of Indonesia’s seaports is also critical to regional trade in Indonesia and reducing the logistics costs of trade.
Not enough
Despite the ongoing projects, Indonesia still has a serious infrastructure problem, says Ferry Wong, head of equity research at Citi Indonesia. “Although progressing, it is still not enough,” he says of the country’s infrastructure projects, adding that there are still problems that need to be addressed with the country’s airports, seaports and roads.
In the World Economic Forum’s Global Competitive Report for 2012 to 2013, Indonesia’s infrastructure scored poorly. On a scale of 1 to 7, with 7 being the most developed infrastructure, Indonesia scored 3.7. This was below the south-east Asian average of 4.6 and the G-7 average of 5.7.
Indonesia’s infrastructure has suffered from years of underinvestment and has not yet reached the levels of investment it was receiving prior to the Asian financial crisis. According to the World Bank’s Indonesia Economic Quarterly, published in October, Indonesia has struggled to invest 3% to 4% of gross domestic product (GDP) in its infrastructure, which is still well below the pre-1997/98 level of more than 7%. Its infrastructure investment also lags behind its Asian neighbours China, Thailand and Vietnam, where investment has exceeded 7% of GDP.
The government has been taking action to address these issues. In 2011, it launched the Masterplan for the Acceleration and Expansion of Indonesia’s Economic Development, which is often referred to as MP3EI. The plan aims to boost Indonesia’s connectivity, increase investment in infrastructure and put the country on a path to becoming a developed nation by 2025.
The time is now
The chronic infrastructure problem in Indonesia has dampened the country’s economic growth, but now the mood is more optimistic among observers. Erwin Maspolim, ING’s head of utilities and infrastructure finance for Asia, says: “Having been in the infra/power sector for nearly 20 years, I have never seen such tremendous efforts in the sector by the Indonesian government. They are sowing good seeds and we will see some of them bearing fruits soon. For instance, I expect to see [the deal for] one of the largest geothermal projects in the world closed in 2014 in Indonesia.”
Citi’s Mr Wong says the major setback to developing Indonesia’s infrastructure “is not the lack of financing. In my view, financing is not an issue.” He explains that the biggest challenges are the bureaucracy and difficulties in land acquisition.
The Land Procurement Act for Development in the Public Interest – or the land acquisition act – which came into effect in January 2012 has addressed this problem. It means that Indonesia now has the legal mechanisms in place to acquire the land necessary to build roads, and so on. However, the new rules cannot be enforced until January 2015 for existing projects that have been postponed. After this date Mr Wong expects a number of PPP projects to go ahead.
ING’s Mr Maspolim agrees that land acquisition is one of the major challenges in developing Indonesia’s infrastructure. The other challenges, he notes, are the risk allocation in project agreements; municipality risk and end-user affordability; liquidity of local currency funding; cost and interest-rate hedging; and a protracted decision-making process.
Finance challenge
Sarvesh Suri, country manager for the International Finance Corporation (IFC) in Indonesia, believes that financing the projects is a potential hurdle. “One major challenge in developing Indonesia’s infrastructure is getting the financing. Other challenges for the government of Indonesia are to implement more bankable projects and to improve coordination among national ministries and provinces to help expedite implementation of PPP infrastructure projects,” he says.
The government has identified the need for infrastructure financing that amounts to Rp1,900,000bn ($213bn), or about 5% of Indonesia’s annual GDP. He notes that these figures were outlined in the government’s five-year development plan for 2010 to 2014 and it is estimated the central government can only cover 29.1% of the total investment needed.
“The IFC believes that it is important to bring private-sector investors to the table to fill in the gap and support infrastructure development,” says Mr Suri. He adds that the Indonesian government has recognised the vital role of the private sector in filling the gap and has put in place the foundation for private-sector participation through PPPs. Other reforms to improve the regulatory and PPP framework include appointing the Ministry of Finance as the single provider of government guarantees, resolving the backlog of ‘old’ PPP projects and strengthening PPP projects, mainly through bankable tender documents, says Mr Suri.
Regarding the current level of financing, ING’s Mr Maspolim says that it is difficult to make year-on-year comparisons because it takes years to close an infrastructure project. “Having said that, relatively speaking, the current stage of financing is actually promising. We see toll road projects being financed by local banks and a government-owned airport completed. This is encouraging,” says Mr Maspolim. The government-owned airport Mr Maspolim refers to is Kuala Namu International Airport on the island of North Sumatra, which began operating in July 2013.
Mr Maspolim explains that the government has come up with different support mechanisms to accelerate the country’s infrastructure projects. These include issuance of a Business Viability Guarantee Letter (BVGL), potential Viability Gap Funding, and the Indonesia Infrastructure Guarantee Fund (IIGF), which champions projects.
“While no major transactions were closed using these mechanisms – except a small hydro project employing a BVGL – it does offer alternative options for lenders and investors seeking to step up or maintain their activities in Indonesia,” he says. The IIGF was established by Indonesia’s finance ministry to encourage PPPs by guaranteeing infrastructure projects and guarantees against risks such as failure to gain approvals or acquire land, or breach of contract.
Indonesia Infrastructure Finance (IIF) is another example of an organisation that is also aiming to boost Indonesia’s infrastructure. IIF is a non-bank financial institution that focuses on providing long-term financing for projects and has a number of shareholders, which include the IFC, the Asian Development Bank and Japan’s Sumitomo Mitsui Banking Corporation.
Bond financing
The bond market is one area that could be developed, but in the short term Mr Maspolim does not expect to see bond financing take over project loan financing. “Bonds are always an option for projects with stable cash flow. It is more likely applicable for refinancing, although banks are now exploring a construction loan facility to be taken out by bonds. While we may see bond issuance from time to time – rupiah and US dollar – we do not expect bond financing to overtake project loan financing in the short term. It is more expensive than project loans and many sponsors prefer to deal with banks rather than institutional investors,” he says.
Mr Suri adds: “There are not many foreign investors participating in the rupiah bond market. Based on market feedback, this seems to be because these international investors are looking for large tickets – probably about $300m equivalent or more for a single issuance – and not many bonds meet that threshold.”
Mr Suri also notes that the median tenor for corporate bonds in Indonesia is currently three to four years and for this kind of tenor the bond market does not have a strong competitive advantage over banks. The long process of bond issues is also a hindrance: “For example, there is no streamlined or special issuance process targeting professional investors or for frequent issuers,” says Mr Suri.
Another reason the bond market has not developed for infrastructure projects, Mr Suri notes, is “there is a lack of innovative transactions by issuers who otherwise might not be able to come to market on their own standing, thus needing some kind of credit enhancements. Banks would also like to have a healthy securitisation market where they can share their risk-bearing assets. Partial credit guarantees and asset-backed securities are among these innovative structures missing in the current market.”
Despite the challenges in financing Indonesia’s infrastructure, Mr Suri says: “The appetite for investments is huge. Private sector participation in infrastructure can help people in developing world countries by extending their access to basic infrastructure and by improving its quality and reliability. Despite investors’ concerns about the unpredictable regulatory environment, high level of corruption and increase in labour fees, investors still believe in the good prospects of investing in Indonesia. What the investors would like to see is certainty and stability in the regulatory environment.”
Mr Maspolim says: “Appetite is high for the right projects. The recent material depreciation of the rupiah does not help, however. The challenges mentioned earlier if not addressed or mitigated, when combined with the perception of the currency volatility, may potentially reduce investors' interest to wholeheartedly bid and develop projects.
“The good news is while playing safe, the government seems to be making decisions and improving policies, albeit slowly. There seems to be a realisation that it cannot afford to delay further. Momentum is there for the country to develop and prosper.”
