CDPQ’s Cabanes: Reforms put Indonesia on road to success

The pension's APAC infra head hopes to clinch a bundle of roads in the country over the next six months, as he outlines plans for the broader region.

Cyril Cabanes

CDPQ Asia-Pacific infrastructure managing director Cyril Cabanes says Indonesia has been an attractive infrastructure investment destination for a long time. But recent reforms, such as the passing of the Omnibus Law – which included the creation of INA, a sovereign wealth fund – has added to the momentum, opening up opportunities at a much faster pace than investors would have thought possible a few years ago.

As a result, the Canadian pension announced in May that it had signed a memorandum of understanding with INA, Dutch pension administrator APG Asset Management and a subsidiary of the Abu Dhabi Investment Authority to form an Indonesian toll road-specific joint investment vehicle. With an estimated investment capacity of $3.75 billion, the vehicle is set to be the first infrastructure-focused investment platform in the country.

“The Indonesian macroeconomic picture is well-known and compelling, being the world’s fourth most populated country and also one of the largest democracies, and with general consensus on its long-term GDP growth rate of around five to six percent,” Cabanes tells Infrastructure Investor. “Indonesia is also underinvested in roads, which are considered to be a major facilitator to economic growth.

“In addition to the overall macroeconomic tailwinds, we have been very impressed with how the regulatory and political environment has come together in the last couple of years thanks to the broad and effective reform agenda of the Jokowi government. The passing of the Omnibus Law earlier this year was a particularly important milestone for foreign investors.”

Cabanes points out that in countries like Indonesia, where economic growth is anticipated, investing in roads can even accelerate that growth. He also expects the long-term performance of toll roads to recover well from the impact of the pandemic.

Roads to recovery

“Intra-urban roads, being partly commuter traffic-driven, have suffered disproportionally,” he says. “[The performance of] those roads has gone down very materially – in some places, including Indonesia, we’ve seen intra-urban roads traffic down by as much as 65 to 70 percent compared with 2019, and they haven’t fully recovered because people are still staying home.”

In contrast, inter-urban roads that connect major cities are more freight -driven, so heavy-vehicle traffic has been higher than passenger traffic, he explains. “These roads have performed well – in some cases recovered back to or even exceeding 2019 levels in a number of countries. The whole theme of consumer-driven society and economy has played out strongly in Indonesia, with a strong pick-up in logistics-driven traffic.

“The Asia-Pacific region is exceptionally large and diverse so it’s very hazardous to tar all markets with the same brush”

Cyril Cabanes, CDPQ

“We don’t think the long-term value of inter-urban roads has been affected. Even intra-urban roads we think will come back to a large extent, though you might not see the same level of growth you used to see in the intra-urban space because of changes in commuter habits and remote work practices.”

Cabanes declines to comment on the split of capital between partners but says the new vehicle is a co-investment platform, not just in terms of capital but for governance. INA’s involvement means the platform also has access to state-owned enterprise toll roads, which make up around three-quarters of toll road infrastructure in Indonesia.

“The co-investment platform has been structured as a true partnership, so you can expect all parties involved to be contributing in the same way,” Cabanes explains. “We’ve committed to each other exclusively for six months. By the end of the six months, our aim is to have made a first investment – hopefully more than one road, probably a bundle. And we will have established the platform formally from a legal and operational standpoint.

“We’re in the process of selecting the priority acquisition targets we’re going to focus on to get the platform off the ground. INA acts as a bridge between private capital and the SOEs – in addition to its great skill sets and unique local reach, INA also has the ability, by law, to acquire assets from SOEs bilaterally without a competitive process. Through INA we have access to and will look at the whole gamut of the SOE roads. The universe is large and diverse, so we’re going through the review process diligently and rigorously.”

Broader APAC ambitions

Looking at the wider region, Cabanes highlights Australia, New Zealand and India as continuing to be key markets across a range of sectors, with the renewables sector in Taiwan, Korea and Japan also a focus. Indonesia and the Philippines remain important markets as well, particularly in terms of the transport and energy sectors.

“Australia and New Zealand… represent the majority of our asset base in Asia-Pacific at the moment and we continue to see a lot of opportunities in both markets despite their high level of maturity,” Cabanes says. “We’ve committed about a billion and a half of capital to India in the last four years. It’s by far the deepest market in Asia-Pacific and is therefore an essential area of focus for whomever wants to deploy capital at a significant scale.

“For the rest of Asia, we really look at it in terms of North Asia and Southeast Asia. The primary focus in North Asia for us is Taiwan, Korea and Japan. In Southeast Asia, we are predominantly focused on Indonesia and the Philippines. We see other markets in the region as lacking the depth, size of deals or velocity and ease of dealmaking that we seek. In some markets, the regulatory and legal environment isn’t necessarily where we would like it to be either.”

Cabanes says the stability of regulatory and legal frameworks continues to be an important factor when considering which emerging markets to invest in. Although some countries in the region experience more oscillation than others in terms of the reliability and transparency of their regulatory systems, markets such as Indonesia and India appear to be making great strides. “That’s really the core focus. As a long-term investor, it is vital for us to ensure that these frameworks are going to remain stable for the long haul, irrespective of the investment thesis. Short-term regulation cycles are too big a hurdle to be able to value assets appropriately and raise debt financing on sustainable terms.”

Given the number of emerging markets in the region, dealflow pace can also be a potential concern when looking at investment opportunities.

“Apart from Australia, New Zealand and India, dealflow in the region has tended to remain comparatively slow,” he says. “Asia is not as mature a market as Europe or North America. When you compare the dealflow in Asia proportional to the population and GDP of those countries versus the dealflow in Europe, the contrast is particularly striking. However, we expect this to change over the coming years with an acceleration of inbound FDI, rapidly maturing markets and the continued growth of institutional investment in infrastructure – either directly, like what we do at CDPQ, or through commingled funds.

“The Asia-Pacific region is exceptionally large and diverse so it’s very hazardous to tar all markets with the same brush. A key question for us is probably how quickly can one deploy capital and how comfortable can one be that one will meet these goals? Despite a large influx of capital into the region over the past five years or so, dealmaking remains patchy. We’ve had the great fortune of doing quite a few investments in a relatively short amount of time in the markets that we had chosen to focus on, and we hope to continue to build upon that momentum in the coming years.”