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Infrastructure financing options unfit for insurers
Many insurance companies have shown interest in taking part in financing the country’s infrastructure projects, but challenges remain as the country’s capital market lacks the appropriate instruments that fit their investment requirements
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span>Many insurance companies have shown interest in taking part in financing the country’s infrastructure projects, but challenges remain as the country’s capital market lacks the appropriate instruments that fit their investment requirements.
The Indonesian Life Insurance Association (AAJI) chairman Budi Tampubolon said that of the industry’s total assets of about Rp 550 trillion (US$39.14 billion) last year, about Rp 460 trillion was allocated for investment. “We have a lot of funds that could be managed and invested in infrastructure projects,” he said in a business forum in Jakarta on Tuesday.
Many insurance companies are eager to put money into infrastructure because it usually provides long-term investment opportunities with lucrative returns and manageable risks, he said, but existing investment instruments mostly did not fit the insurance industry’s investment criteria.
The National Development Planning Agency (Bappenas) estimated that the country would need about Rp 6.45 quadrillion in the next five years to finance its many infrastructure projects.
The state budget would only cover 37 percent of the infrastructure financing needs, while 21 percent would come from state-owned enterprises (SOEs) and 42 percent is expected to come from the private sector.
“This means that we need to involve more of the private sector to participate in closing the infrastructure financing gap,” Luky Alfirman, the Finance Ministry’s director general for financing and risk management, said on Tuesday during a forum in Jakarta.
Despite that many investment instruments still do not meet the insurance companies’ criteria, the poor liquidity of such financial instruments also discouraged insurers from financing the infrastructure sector, Sustainable Development Investment Partnership (SDIP) ASEAN hub steering group cochair Donald Kanak said at the same event.
The liquidity aspect is one of the main considerations of the insurance companies in deciding where to invest, as they have to ensure they can redeem their investments any time they need them, he said.
To solve this issue, Kanak suggested project owners, contractors and the government issue more debt instruments like long-term project-based bonds and sukuk, as well as infrastructure funds, through collective infrastructure contracts.
“Indonesia needs to have more of these instruments in the stock market so that insurance companies, as well as pension funds, can have more favorable investment options for the country’s infrastructure,” he told The Jakarta Post, adding that these instruments could provide alternative funding sources for infrastructure projects, other than bank loans and the state budget.
At present, most of the bonds and other alternative investment instruments like infrastructure funds, asset-backed securities and limited participation funds, are issued by state-owned firms such as toll operator Jasa Marga and electricity firm PLN.
Kanak said the government needed to make a breakthrough so that private companies would also follow suit in the future.
However, Mandiri Manajer Investasi president director Alvin Pattisahusiwa acknowledged that investment managers still struggled to persuade infrastructure project owners to issue the alternative investment instruments.
“It’s hard to convince project owners to issue collective investment instruments as a way to pool funding for their projects,” he said.
Alvin said investors were reluctant to put their money into those instruments as they were still unfamiliar with them. Also, there was only a limited pool of funds owned by institutional investors such as insurance firms.
To increase the pool of funds, Budi said the AAJI was proposing that the government reduce taxes on income from bonds.
ASEAN Insurance Council secretary-general Evelina Piteruschka, however, said that stakeholders should also continue improving the country’s financial literacy rate as one of the main keys for promoting financial investment instruments in Indonesia.
According to the Financial Services Authority, Indonesia’s financial literacy rate was 38.03 percent in 2019, half of the country’s financial inclusion rate of 76.19 percent.
