T

he government has recently encouraged pension funds including the Workers Social Security Agency (BPJS Ketenagakerjaan) to take part in financing infrastructure projects carried out by state-owned enterprises (SOEs).

However, a workable scheme needs to be put in place. The Brazilian example of Standardized Infrastructure Bonds (SDIBs) could be one possible option.

In term of infrastructure investment, pension funds can invest in two ways — directly and indirectly. However, allocation for both investment types is relatively small.

For direct investment, BPJS Ketenagakerjaan for example, has not yet fully used the room it has to invest in infrastructure projects. Based on Presidential Decree No. 55/2015 on the asset management of BPJS Ketenagakerjaan, it can allocate up to 5 percent to direct investment from total assets. However, the current allocation is only 0.9 percent, with all of it going to property.

With respect to indirect investment, one potential investment option is the instrument of corporate bonds. However, the pension funds’ investment allocation for corporate bonds is lower than that for bank deposits.

In fact, however, this is just not happening with pension funds. Insurance companies and haj trust funds are also investing in short term instruments. It is quite different from the worldwide trend.

According to Global Pension Statistic, 90 percent of the pension funds in the world place their investment in bonds and stocks.

There are few explanation of why there is a lack of interest in corporate bonds.

First, the market is not liquid. Based on the current data, corporate bond size in Indonesia is only around 2 percent of gross domestic product (GDP). From this small amount, only 13 percent is used to finance infrastructure projects. With a small market and not very active secondary market, investors are still reluctant to utilize such a financial instrument.

Starting 2017, a regulatory push is going to be applied to change this condition.

Under Indonesia’s Financial Services Authority (OJK) regulation No. 1/POJK.05/2016 on government bond investment, pension funds are required to allocate minimum 30 percent of their assets to buy government bonds. However, there is still a gap as corporate bonds are not given the same treatment. OJK has recently planned a revision for this regulation to also include infrastructure-related SOE bonds on the requirement which is expected to help filling the regulatory gap.

From the supply-side, the high cost of funds, as well as limited understanding has been the impediment of the corporate bond market growing. The fact that most issuers are financial companies makes the corporate bond market unattractive.

Therefore, the issuance of infrastructure sector-related bonds are expected to be able to further expand the corporate bond market.

Another structural barrier to pension funds investing in infrastructure is because of the fact that Indonesian investors are more familiar with corporate bonds than project bonds.

Pension funds, for example, prefer bonds already listed on the stock market, which means it can only be issued by a company that meets certain profitability criteria. This is why it is difficult for green-field projects to attract buyers.

It is important to note that similar problems are also being faced by many pension funds around the world. However, Indonesia can learn the experiences of Brazil in mobilizing funds for infrastructure projects.

The investment instrument, which is specifically designed to mobilize pension funds to infrastructure projects is called Standardized Infrastructure Bonds (SDIBs).

Based on a study by Japan Credit Rating Agency, pension funds should only invest in a particular stage of an infrastructure project, namely in the operation stage. However, the Brazilian government has adopted a concept that makes pension funds more comfortable to invest in from the beginning of the construction stage by addressing two main concerns.

First, by involving the banking sector to pay interest to bond holders during the construction stage for approximately five years, as projects have yet to generate income.

In this way, the pension funds will still be able to justify their asset allocation because they will receive interest payments during the construction stage. It is also suitable for the current situation, where banks are not encouraged to provide long-term loan.

Second, utilization of the construction risk-sharing mechanism. Brazilian banks and insurers are also involved in providing a guarantee scheme so the high construction risk is not borne by the pension funds. This is possible by setting up a pool of Brazilian Treasury Bonds that they hold. So if there is anything wrong with the project, the pension funds are allowed to sell these government bonds.

The amount of the government bonds is equal to the amount of cash injected into a project. When a project has begun its operation and is earning cash flow, it will pay back the interest paid by the banks during the construction stage.

With the interest payment during the whole life of the bonds included in the construction stage and guarantee on the principal, such a project bond can attract long-term investors.

Such concept has received a positive response from long-term investors in Brazil. The project bond concept developed by Brazil is quite attractive and could be adopted by the Indonesian government in order to mobilize more long-term funds to finance infrastructure development.
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The writer works for the Center of Macroeconomic Policy in the Finance Ministry’s Fiscal Policy Agency. The views expressed are her own.