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The emergence of equity financing for infrastructure development
SOEs may resort to an equity-financing scheme through the Indonesia Investment Authority (INA), a national sovereign-wealth fund.
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A Garuda Indonesia airplane is parked at Soekarno Hatta International Airport in Tangerang, Banten, on May 14. (AFP/Chaideer Mahyuddin)
T
he Organization for Economic Cooperation and Development (OECD) has predicted Indonesia will be a developed nation by 2045, becoming the fourth-largest economy with approximately US$9.1 trillion in GDP. To achieve this objective, the government needs to continue developing the country’s physical infrastructure to enhance interregional connectivity, thereby unleashing its economic potential and sustaining its annual growth.
However, similar to most nations during the post-COVID-19 era, the current government’s budget is under significant strain, curbing its ability to finance entire projects. Notwithstanding the government’s effort to boost the budgetary allocation for infrastructure in 2023 to Rp 392 trillion (US$25 billion), the need for infrastructure financing might not be fully covered. In fact, only 37 percent of infrastructure projects can be funded by the government between 2020-2024, while it is assumed that the remainder will be fulfilled by the private sector or state-owned enterprises (SOEs).
Nevertheless, given that some of the projects might not be appealing to the private sector for commercial reasons, the role of SOEs as a quasi-government entity becomes pivotal to ensuring infrastructure projects can continue to be rolled out.
According to the OECD, the primary purpose of SOEs in many countries is to support national economic and strategic interests. In Indonesia, there are many quintessential examples of how SOEs play a central role in development projects; for instance, the Trans-Sumatra Toll Road project by SOE Hutama Karya and the Trans-Java Toll Road project by SOE Waskita Karya.
In the pharmaceutical industry, SOE Biofarma has been able to produce a COVID-19 vaccine on its own, which is expected to help support a national vaccination program and hasten the economic recovery post-pandemic. Furthermore, as an archipelagic country where connectivity becomes a challenge, SOEs such as airport-operator Angkasa Pura and shipping-firm Pelni have attempted to connect isolated areas with the rest of the country by building airports and expanding ship-fleet operations.
However, as the nature of infrastructure projects requires long-term investment (above 30 years), where most of the financing mechanism in Indonesia is considered for short-term (20 years), SOEs’ capacity to exert leverage might have already reached a reasonable limit. Such conditions would prevent them from acquiring new financing and impede them from initiating new infrastructure projects.
To surmount this challenge, SOEs may resort to an equity financing scheme through the Indonesia Investment Authority (INA), a national sovereign wealth fund (SWF) launched in early 2021. The INA may invest in strategic assets owned by SOEs, especially those in operation (brownfield assets), as they might be lucrative from a business perspective.
