A breakthrough in RI’s infrastructure financing

On Aug. 9, 2010 a new Indonesian financial institution was formally launched — PT Indonesia Infrastructure Finance (IIF). Its objective is to provide long-term rupiah financing and advisory services to private infrastructure projects in Indonesia.

The establishment of this new institution is an important milestone in the overall process that the government has initiated to funnel more investment into infrastructure.

Indonesia has among the lowest levels of access to infrastructure in East Asia. Following the 1997 financial crisis, infrastructure investment in Indonesia fell from over 7 percent of GDP to just over 2 percent in 2001. Since then, infrastructure investment has risen to over 3 percent of GDP, but this level is insufficient to meet the growing demand from existing infrastructure users, much less to address the needs of the large segments of the population who do not have access to basic infrastructure services.

China and Vietnam, by contrast, spend nearly 10 percent of their GDP on infrastructure. Inadequate infrastructure is now widely seen as a key constraint to sustained economic growth and poverty reduction in Indonesia.

 The government of Indonesia estimates that total infrastructure investments that will be required during the period 2010–2014 are a staggering US$145 billion.

Of this amount, the government expects to obtain nearly two-thirds — $93 billion — from the private sector.

This will require a concerted effort by the government to provide an overall institutional and regulatory framework that the private sector feels comfortable with.   

To achieve this target, innovative ways of raising infrastructure financing based on market-friendly policies and international best practice, customized to the Indonesian context, are necessary.

The government has taken a number of steps to attract private investment in infrastructure including establishing a supportive regulatory and institutional framework.

However, as in many other countries, “fast tracking” private investment has not been possible. There are several — and by now well known — reasons for the slow progress including weaknesses in: quality of project preparation prior to bidding, lack of clarity and consistency of risk-sharing and guarantee  arrangements, the private sector’s inability to deal with risks such as land acquisition, and lack of long-term domestic currency debt to finance projects.

These shortcomings have been well recognized by the government and a number of initiatives are being taken to address these.

Indonesia is now in the process of seeking country-specific solutions, and pieces of the jigsaw puzzle of policies, institutions, and financing that are necessary, are falling into place.

A major challenge to mobilizing private financing into infrastructure is the shortage of long-term rupiah resources.

Commercial banks are the dominant financial institutions with over 80 percent of financial sector assets, but almost all of their deposits are less than one month in maturity.

With such a short duration, banks are naturally constrained in the tenor of loans they can offer and unable to provide long-term financing needed for sustained private investment in infrastructure.

Rupiah financing is also an important risk mitigation mechanism in private infrastructure projects.

Electricity bills and road tolls are paid in rupiah; therefore, financing projects that earn rupiah revenues with rupiah debt reduces exchange-rate risks.

Local financial institutions also have limited experience in financing infrastructure assets.

IIF is designed to address these constraints and provide long-term rupiah financing to private infrastructure projects.

It is a non-bank financial institution with an initial equity capital of $160 million provided jointly by the government, the International Finance Corporation (IFC), the Asian Development Bank (ADB), and the German development cooperation agency DEG.

The World Bank and the ADB have provided loans of $100 million each, which will act as a layer of subordinated debt for IIF.

This initial capital will allow IIF to raise nearly Rp 25 trillion additionally from the markets that it could then use to finance private infrastructure.

IIF is also open to equity participation by more private investors. The government of Australia has provided IIF grant support.

IIF is commercially oriented with private sector governance, and mandated and equipped to mobilize local-currency financing with appropriate terms, tenor and price for the development of creditworthy infrastructure projects in three ways: by using its balance sheet structure and good credit rating to borrow from the private debt market to lend funds to projects on appropriate terms for infrastructure projects; by providing financial products to enhance the credit of individual infrastructure projects and thereby mobilize additional private financing for those projects; and  by using its staff of highly experienced infrastructure financiers to provide advisory services to help identify and arrange bankable infrastructure projects, and provide policy support.

The launch of IIF is the culmination of a five-year effort that began during Indonesia’s infrastructure summit of 2005.

The hope is that its contribution will mark the beginning of its new journey in attracting private investment into infrastructure — a journey that will see Indonesia having the kind of infrastructure that will enable it to advance to the next level of its development, sustain rapid economic growth, and further reduce poverty.   


The writer is lead financial economist, at the World Bank office, Jakarta, and led the Bank team that worked on IIF.