With United States reflation euphoria receding and investor sentiment on Indonesia at a new high, there is no better time than now to push through those badly needed structural infrastructure reforms.
Indonesia’s infrastructure deficit has been well-cited. To illustrate the magnitude of its underdevelopment, the country is probably the only few investment-grade countries, by Moody and Fitch standards, whose capital city is bereft of an adequate mass-rapid transportation. The lack of island connectivity had also contributed to the huge price differentials on commodities sold in the country’s capital and its Eastern provinces.
National Development Planning Agency (Bappenas) estimated that Indonesia requires Rp 932 trillion ($70 billion) annually to support infrastructure development and that the government has to fill the $50 billion infrastructure gap. However, with its limited fiscal flexibility, a sustainable and substantial alternative funding channel is required. The administration has called on the private sector, through public-private partnerships, to fill in this gap.
The partnership program is not a novel idea. In fact, the concept was heralded as a pivotal component of Susilo Bambang Yudhoyono administration’s Masterplan for Acceleration and Expansion of Indonesia’s Economic Development (MP3EI) to address the funding gap for the country’s infrastructure projects. However, execution has been a drag in the past, largely attributed to the difficulty of land acquisition, high degree of regulatory ambiguity and general lack of interest from private sector as the projects are costly and return on investments are relatively small.
The government has made considerable strides in tackling some of these bottlenecks since then. It revised regulations to speed up land acquisitions and improved the bureaucracy by closely monitoring the progress of the ministries and state-owned enterprises. Having said that, there are still some areas that the administration needs to address as land procurement issues remain a major obstacle, largely due to lack of land tenure data nationwide that hinders a fair valuation of the land for the owners and the investors.
The legal issues resolution may be a long-drawn out process but the government may likely be able to easily resolve the issue on depressed returns on investments if it views the infrastructure project planning holistically.
When a toll road is built, the major value added benefit to the economy should not come from the road administration itself but rather, these should come from the potential capital gains and revenue streams through the construction of housing properties, malls and other commercial activities within its periphery.
When planning is done this way, the return can be substantially larger as developers could then price the project based on the expected properties they can build along the infrastructure they helped to finance.
Developing the pipeline for key public-private partnership projects is also an area that the government can do to promote transparency and better planning. This would allow the government to further break down the projects so that they are more economically feasible as to appease the private sectors’ appetite in investing into the projects. That can also drive down the cost of compensation to the owners of the land per project, which may further assist a speedy land procurement process.
The government should also consider being more active in tapping into conglomerates and major property developers' balance sheets instead of largely relying on its state-owned enterprises. These large private developers would also likely have more flexible operating framework that is not limited by government mandate, be more efficiently run and have more firepower relative to the state-owned enterprises.
As the potential key players are broadened, the banking sector could also benefit. The banks are currently hesitant in participating in these infrastructure projects given the high risk of failure. Some would ascribe their borrowers hefty criteria and guarantee requirement which some corporates and state-owned enterprises may not necessarily always be able to meet.
Having solely large property players to participate may not necessarily eliminate these risks, but getting them to participate in the process could help mitigate them.
For example, as the scale of the infrastructure project is expanded to include the developments in its fringe, banks could ask for the land rights or planned commercial properties as collateral provided the government has given these major property developers such incentives. For those who want to completely offload the risk, banks could instead help these companies issue bonds to foreign investors who are desperate for yields while still making a hefty fee income in return.
These suggestions, of course, are contingent to how effective the government could resolve the underlying issues such as land procurement process. However, having a properly laid out operating frameworks for public-private partnership implementation could certainly accelerate the infrastructure deficit resolution once the structural issues are resolved. With the low interest environment and generally favorable business sentiment, Indonesia should take heed and be more aggressive in trying to take advantage of the market. Don’t let the opportunity pass us by once again. Now is the time.
Tamma Febrian is an associate director at Fitch Ratings Singapore. He previously worked at Credit Suisse as a credit analyst within its investment bank and private banking arms. His views are his own. He can be reached at tamma.febrian@fitchratings.