Naoyuki Yoshino (Courtesy of ADB)

With infrastructure development having been prioritized by the administration of President Joko “Jokowi” Widodo, infrastructure financing is a crucial issue. The Jakarta Post’s Rachmadea Aisyah recently talked with Naoyuki Yoshino, the dean and CEO of the Asian Development Bank Institute (ADBI), about infrastructure and capital investment. The following are excerpts from the interview:

Question: What have you been doing here with ADBI?

Answer: Today we are talking about infrastructure financing. Indonesia requires a huge amount of money for infrastructure development. In order to complete so many projects, not only is government money important, but also private sector financing. However, public-private partnerships (PPPs) in many Asian countries are not doing very well.

One of the main reasons why private sectors do not want to put their money into infrastructure is the very low, low rate of return. Most infrastructure revenue comes from user charges [in tolls and power, water and sanitation fees].

So the government cannot raise those prices. And we have to think about if user charges cannot satisfy investors of infrastructure, then we have to bring some other revenues to infrastructure investment.

What are other investment sources?

[Railway] infrastructure will develop Indonesia. Suppose [projects] are completed right away, then many businesses [will] come and stations will be developed. More businesses [could] start their own shops around the stations. Then there’s a reason for development. And property prices [...] will increase.

Housing can be constructed alongside the railways. And with highways, many businesses can start their factories. Agriculture, etc., can develop products and bring them through the highway to the market.

There are a lot of spillover effects from infrastructure. Tax revenues will increase along those highways and railways because economic activities will become bigger and property prices [will] rise. And then, all the [tax] revenues go to the government. It is not returned to investors of the infrastructure. Investors only receive user charges. But the [...] tax revenues — all of them go to the government.

So I’m proposing that the increasing tax revenue — for example, 50 percent — be returned to the infrastructure investors. Then the rate of return will increase.

What is your view about the capital flows in Indonesia in the first half of this year?

First, I think in Indonesia, domestic savings are increasing, so when we are talking about capital flow, you need to first talk about the domestic savings and domestic investments.

Savings come from deposits. Pension funds are also a source of savings. And insurance is also another source of finance. Then stocks and bonds. So those are different asset categories.

But in Indonesia and many Asian countries, deposits are a major source of savings. But the aging populations of Indonesia and Asian countries have yet to have a developed pension system and insurance [system]. Insurance is private money to support your life after retirement.

The government is supporting elderly people so insurance and pension funds will increase domestic savings and if domestic savings are enough then you can support domestic investments. But if your domestic savings are small then you’d have to bring capital from the outside.

So the important thing is to be independent from the outside capital market. You have to develop a big domestic savings market. Germany, Japan and Korea succeeded because their savings rates have been increased. So domestic savings can finance domestic investment.

Then, you don’t have to worry about other country’s interest yields. Use domestic money. And if your domestic rate of return is higher than the United
States [rate], then domestic savings will remain within Indonesia, you don’t have to rely on foreign capital.

Is this the solution you are offering in this issue?

Yes. In order to do so you have to increase the rate of return in domestic investment. That is related to my first proposal. If the rate of interest being used in infrastructure is higher than the US rate, then many people would like to invest here.

Has Bank Indonesia been doing the right thing by increasing its seven-day reverse repo rate?

Yes, and also the savings rate. But infrastructure is more important than these rates’ revenues. It’s much better coming from tax revenues.

And the Indonesian central government has been using dollar-denominated bonds. It is good for foreign investors because it is in the dollar. There are no evident risks.

But they [the risks] have to be carried by the Indonesian government in their fluctuation of the exchange rate. So I prefer if the government bonds are issued. It should be in a rupiah bond
rather than a US dollar-denominated bond.

Indonesia has been issuing rupiah-denominated bonds though. Have those been enough?

Yes, the rupiah is better. Because exchange risks now are not covered by the Indonesian government and American investors do not get affected by the exchange rate.

Have countries in Southeast Asia been successful in being independent in terms of capital?

Savings rates are growing very rapidly [in Southeast Asia]. The Philippines’ savings rate [grew the least]. But even there, the domestic savings rate is growing because of remittances. The Philippines has a lot of overseas workers. They sent the money they earned overseas to the Philippines.

So in many Southeast Asian countries, savings are increasing, especially in Thailand. Its savings are going to the insurance market.

That is a long-term investment. And Vietnam has started its pension system, so they have established government pension funds.

Many Southeast Asian countries have accumulated savings. Not only deposits but also insurance and pension funds.

How will Indonesia’s attempts to attract capital outflows play out in 2018?

Again, coming back to the first point, if the rate of return on investment in Indonesia is attractive, then foreigners would want to come here. But if they think the US return rate is higher, they will go back. So that is a very mobile capital flow.

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