Widodo’s second term to bring infra opportunities in Indonesia

More deregulation and introduction of tax incentives are expected to attract private capital, but risks, including corruption, remain.

The re-election of Joko Widodo as president of Indonesia, announced last month, should bring more infrastructure opportunities to the market, analysts said.

Widodo, known as ‘Jokowi’, is a business-friendly reformist who has turned infrastructure development into one of the key issues for his administration.

The 13,000-island state is lagging some of its South-East Asian peers and has the highest logistics costs in the region, according to a 2016 study by the Asian Development Bank.

After being elected for the first time in 2014, Widodo launched a plan to invest over $400 billion in infrastructure between 2015 and 2019.

According to a 2017 World Bank report, state-owned enterprises were expected to contribute nearly a quarter of total infrastructure spending during the period, while private capital was expected to account for 37 percent of total spending. However, private capital accounted for only 9 percent of total infrastructure spending between 2011 and 2015, down from 19 percent in the previous five-year period.

“During the first term of Jokowi’s administration, the government was focused on constructing projects quickly, mainly using state-owned enterprises to build [the assets],” Julian Smith, global transport and logistics industry leader of PwC Indonesia, told Infrastructure Investor.

Despite some successes, like the opening of Jakarta’s first subway line, Smith said the government now wants private companies to play a bigger role in infrastructure development, as Indonesian SOEs have become considerably indebted.

“With the re-election of Jokowi, investors are expecting the government to further deregulate certain sectors and provide incentives to attract foreign investments into the country, including easing of foreign ownership restrictions and introducing tax incentives or holidays,” added Ricole Tan, senior managing director at business advisory firm FTI Consulting.

During his first mandate, Widodo launched a package of measures to make the Indonesian economy more business-friendly.

The government reduced the number of procedures required to establish a business; it created a one-stop integrated service centre to assist foreign investors; and further deregulated private ownership for some infrastructure sectors, such as toll roads, a PwC report said.

Indonesia jumped from number 120 in 2014 to number 73 in 2019 in the ‘Ease of Doing Business’ World Bank ranking.

Which sectors might benefit from these reforms and the push to attract private capital? “There should be opportunities coming in the water and sanitation space, and in major transport projects across major cities, including the expansion of the MRT [the subway system] in Jakarta,” Smith said.

The analyst also listed plans to develop 12 municipal waste-to-energy projects, including five to be tendered as PPPs, and the monetisation of operational assets from construction companies.

Corruption risk remains

But both experts agreed that investors still face several challenges when trying to enter the market.

“The current regulatory framework sometimes makes it difficult to structure PPPs, and the government agencies are often not experienced in running PPP tender processes,” Smith said.

The PwC analyst argued that PPPs backed by the Indonesian Infrastructure Guarantee Fund, a state-owned enterprise created to provide government guarantees to them, are generally bankable, as long as risk allocation between parties “is appropriate”.

Smith also pointed out that investors should be willing to take some local currency risk as debt for most assets, except for energy projects, is denominated in Indonesian rupiah.

On the other hand, Tan put the focus on the lack of transparency in the tender process, that lends itself “to risks of corruption”.

Since his arrival to power, Widodo has promised to battle corruption. Despite this, the country’s score in Transparency International’s Corruption Perceptions Index improved only slightly from 34 in 2014 to 38 in 2018.

“Notwithstanding the measures the government has put in place to eradicate corruption, investors are still concerned about it, and generally believe it will continue to be prevalent in the immediate future,” she said.