A turning point?

Indonesia's Development Planning Agency estimates the country needs 2,650km of roads, 1,000km of toll roads, 15 airports, 24 seaports, 3,258km of railway and a combined 35,000MW of new power capacity to achieve its growth plans.

It's no surprise that Indonesia, the fourth most populous country in the world, has such a great demand for infrastructure development, which collapsed during 1997's Asian financial crisis and has never really recovered.

The good news is this year may be a turning point for the country. While the growth of the Indonesian economy has slowed to a five-year low of 4.8 percent in 2015, the government has increased infrastructure funding and unveiled policy reforms to stimulate private investment.

In addition to taking steps to boost spending through a revised PPP programme, land acquisition law and the Indonesia Investment Co-ordinating Board's one stop service, designed to facilitate foreign investment, the government is expected to increase its direct infrastructure spending from $57 billion in 2014 to $90 billion in 2019 and $139 billion in 2025, according to a PwC report.

Higher public capital spending should provide additional opportunities for private investment, which, together with the implementation of structural reforms, will improve the investment climate, the Asian Development Bank (ADB) expects.

At present, many of Indonesia's big-ticket infrastructure projects are carried out in partnership with strategic investors from Japan, China and Korea, under bilateral contracts. These investors are competing for many of the new projects under way, particularly in the railways and ports sectors.

Japan is one of the major sources of foreign financing, announcing in December 2015 that it was providing some ¥140.05 billion ($1.28 billion; €1.12 billion) in funding to support various transport infrastructure and energy projects until 2019. Last month, China agreed to provide $4 billion in buyers' credit to fund nine infrastructure projects in Indonesia, including a $5.5 billion high-speed railway which connects Jakarta and Bandung.

Government-level contracts have been helping Indonesia to plug its infrastructure gap and build what it needs to boost economic growth. These partnerships also help educate local firms, familiarising them with the concept of developing projects together with foreign partners.

Indonesia has also received support from multilateral development banks like the ADB. Besides providing loans, the ADB formed two partnerships last year with state-owned PT Sarana Multi Infrastruktur, to provide independent advice to government on PPPs, and the government of Switzerland, to help strengthen Indonesia's tax administration, procedures and policies.

MANDATED DEVELOPMENTS

Governments and multilateral lenders are doing more than just building projects and providing financing, though; they are also issuing mandates to stimulate private sector participation across the region.

InfraCo Asia, for example, has a mandate from the Private Infrastructure Development Group (PIDG), which is funded by seven governments, and the International Finance Corporation to promote private infrastructure investments.

It funds early stage, high-risk infrastructure development activities by taking an equity stake in projects across emerging Asian markets. It originates, develops and structures the projects to bring them to financial close at its own cost and risk and then attracts private sector capital (equity and debt) to implement projects. InfraCo ultimately sells its stake in the project company to domestic and foreign equity investors.

Allard Nooy, chief executive of InfraCo Asia, highlights that Indonesia, as well as Southeast Asia in general, offers ample opportunities for renewables. Considering the vast archipelago is comprised of 17,508 islands, transmission services and smaller utility-scale power plants are desperately needed in the country.

Nooy points out that diesel generators are the main source of power on these islands, an expensive and inefficient energy source. He believes solar and wind power can alleviate those costs, though gas and coal will still have a role to play in the power mix.
Currently, around 30 percent of the population has no access to a reliable source of electricity, marking one of the lowest electricity supply rates in Southeast Asia. The Indonesian government is aiming to increase the share of renewable energy in the country's energy mix to 19 percent by 2019 and 23 percent by 2025. Renewable energy currently accounts for about 5 to 6 percent of the country's total energy use.

On the other hand, Indonesia's obsolete roads network has made logistics costs very expensive. Although spending on road infrastructure was increased to about $6 billion per year in 2013, this has been insufficient to keep pace with the double-digit growth in the country's vehicle fleet, leading to enormous congestion and rapidly rising transport costs. Road funding has primarily been used to repair and maintain national roads and little progress has been made on new expressway and toll road developments, the ADB said in a paper.

Plus, it is still a great challenge for developers to acquire land for these road projects, even with the revised land acquisition law, which Nooy describes as “not so successful”.

INADEQUATE PRIVATISATION

While mandated investors and developers with strategic interests are seizing the greenfield opportunities created by the country's massive infrastructure gap, are there any opportunities for brownfield investments in the country?

With an appetite to invest in emerging Asian markets, private investors like CapAsia favour operating assets with growth potential and de-risked greenfield projects through local partnerships. Devarshi Das, co-chief executive of CapAsia, says the Indonesian government has sent out positive signals and the firm has plans to re-engage with the Indonesian market this year.

Having invested in an Indonesian portfolio company with four operating toll roads, Das sees opportunities in conventional power, roads and ports, as well as telecoms. However, he observed that over 70 percent of the opportunities he came across are pure greenfield, making the lack of investable brownfield opportunities the main problem for an investor like CapAsia.

In Indonesia, it is rare for state-owned entities and local asset owners to divest their assets. On the contrary, they often compete with private investors in acquiring businesses and assets in a bid to expand their portfolios.

“There is no privatisation scheme in the country. When it comes to putting assets on sale, it could be because the shareholders may have problems on their balance sheets, or they need to raise money for other purposes like acquisitions. Even so, they rarely sell majority stakes in assets,” comments Das.

Foreign ownership can also be a problem, with Das explaining that Indonesian shareholders sometimes hesitate to sell assets to foreign investors, which they do not perceive as long-term investors. He argues foreign investors have to go the extra mile to explain to the local business community how they can help a company grow through their international expertise.

And then there is the wider question of how well local partnerships are expected to work. Niklas Amundsson, managing director of Monument Group Hong Kong, reckons the challenge for Indonesia is to provide an environment which attracts private investment into infrastructure, a market currently dominated by state-controlled companies as well as regional and local family conglomerates.

“Institutional investors are often less concerned about how much capital they potentially could make, but more concerned about how much capital they could potentially lose, should things go wrong”, says Amundsson.

Amundsson also points to the lack of diversity in the country's funding sources as another obstacle, starting with the lack of a sovereign wealth fund: “It has state-owned entities but not sovereign investment vehicles like Singapore's GIC and Temasek.”
As part of its efforts to bridge the gap between its infrastructure targets and budgetary limitation, the Indonesian government has used equity markets to channel capital into listed state-owned entities through rights issues, but the domestic debt market is too shallow to provide the private sector with widespread access to credit.

And that, in a nutshell, is where Indonesia is right now – an infrastructure market with good greenfield potential – particularly in the power sector – but in urgent need of regulatory simplification to alleviate high businesses costs, improved governance, better access to capital and a trust issue which may lead many foreign investors to treat it with caution. ?