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Indonesia Project Finance Roundtable: Part 1

Indonesia is one of the largest emerging economies in the world. It should be unsurprising that the country has a huge infrastructure spending plan to meet over the next five years. Asiamoney sits down with a panel of senior market participants to discuss the best source of infrastructure funding over the coming years, and how that funding should be split between the government and the private sector.

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Adam Gifari, president director, Sarana Menara Nusantara (Protelindo)

Armand Hermawan, CFO, Indonesia Infrastructure Guarantee Fund

Noburu Kato, head of investment banking, Asia, Sumitomo Mitsui Banking Corporation

Rainier, program director, KPPIP (Committee for Acceleration of Priority Infrastructure Delivery), Coordinating Ministry for Economic Affairs, Republic of Indonesia

Kiyoshi Nishimura, CEO, Credit Guarantee & Investment Facility

Emma Sri Martini, president director, PT Sarana Multi Infrastruktur (SMI)

Sukatmo Padmosukarso, president director, Indonesia Infrastructure Finance (IIF)

Atsi Sheth, senior vice president, sovereign risk group, Moody’s Investors Service

Moderator: Matthew Thomas, contributing editor, Asiamoney

Sep15 Indonesia roundtable 1

The participants (left to right): Armand Hermawan, CFO, Indonesia Infrastructure Guarantee Fund; Noburu Kato, head of investment banking, Asia, Sumitomo Mitsui Banking Corporation; Sukatmo Padmosukarso, president director, Indonesia Infrastructure Finance (IIF); Matthew Thomas, Asiamoney; Emma Sri Martini, president director, PT Sarana Multi Infrastruktur (SMI); Kiyoshi Nishimura, CEO, Credit Guarantee & Investment Facility; Adam Gifari, president director, Sarana Menara Nusantara (Protelindo); Atsi Sheth, senior vice president, sovereign risk group, Moody’s Investors Service; Rainier, program director, KPPIP (Committee for Acceleration of Priority Infrastructure Delivery), Coordinating Ministry for Economic Affairs, Republic of Indonesia.

Asiamoney (AM): Indonesia is projected to need more than $400bn of infrastructure funding over the next five years, an eye-watering amount that is going to require coordination from government and private sources. How does that compare to other countries in the region — and how is addressing that funding need going to impact the country over the next five years?

Atsi Sheth, Moody’s: It is a very large number but it is worth noting that Indonesia is a very large economy. This is an economy that now has nearly $1tr of output every year, so over a five year period we are talking about infrastructure funding of under 50% of annual GDP. That seems reasonable. It is about what other countries at similar income levels, such as India or the Philippines, require as a percentage of GDP.

There are several big challenges to raising this amount of infrastructure funding. This funding is very necessary, and if it succeeds it will give a real boost to the country's credit profile. But it is happening at a time when India, the Philippines and other countries are trying to do the same. What is going to distinguish Indonesia, and make it stand out from the competition in this landscape?

The first thing, I think, is going to be implementation capacity. Money will go to those countries that have demonstrated implementation capacity. There has certainly been a push in terms of intent in Indonesia. The budget this year allocated a lot of the budget to infrastructure. There was also a push by the government to improve private sector financing. But neither of these things have happened yet. We are half-way through the year, and we still haven't seen projects get off the ground.

The second factor that will help Indonesia attract funding is, quite simply, growth. Indonesia is facing a little bit of a challenge in this regard. It is seen as a bit of commodity play. Its growth level is just below 5%, which is slower than both India and the Philippines.

The best time to do infrastructure funding is when the global financial environment is conducive, when interest rates are falling, and when people are excited about emerging markets. That is not the environment we're in at the moment. Capital markets are very jittery about emerging markets, particularly those that are reliant on commodity revenues. The rupiah has depreciated rather more than peer currencies. It is a difficult time for Indonesia to try to hit its infrastructure target.

How can it overcome these challenges? There is one way in which Indonesia really does have an advantage. It is well recognised at the government level, at the regulatory level, at the state-owned enterprise level and at the private sector level what needs to be done to overcome the challenges I have talked about. The wheels are in motion already. The strategy part is understood; now we come to the operational part.

AM: When do you expect we will see the first projects start to make a dent in the large infrastructure funding need in this country?

Rainier, KPPIP: The impact has already started to happen, even though [the deals] are not too obvious and known in the public. There are a lot of background works being carried out in terms of preparing projects, which is an important part in making the impact. From past experiences and through these background works, the government is still learning how to prepare projects correctly, and as more knowledge is accrued in this area, it is going to become easier and faster to develop infrastructure projects including finding the funding for projects. The funding is clearly fundamental, but project preparation should not be overlooked either.

The government is aware of the problems and the bottlenecks in infrastructure funding in this country, and there is a lot of will to remove those bottlenecks. Once the government gets five or so projects off the ground, the lessons learnt through these projects will help the government to deliver the rest much more quickly.

Adam Gifari, Protelindo: It feels as if everything is starting anew in Indonesia. This is the first time we are going to have an MRT, for instance; that is a major step. There are some problems being created by this, but they are problems being addressed by the President, not just by ministers. This is what I recently told people on a trip in Germany: a lot of these things are still new for us, but there is the political will there. We will learn, and we will be able to achieve the goals that the government has set.

AM: As Atsi mentioned a moment ago, now is not the best time for an emerging market to be attempting a big boost in infrastructure spending. US rates are set to rise. China is proving an increasing source of volatility. Greece has dominated discussion, at the expense of stability. How difficult is this environment proving right now — and what do you see as being the biggest hurdle?

Emma Sri Martini, SMI: It is quite a challenge right now. We face the problem that our currency is deeply depreciated. But if we look at our portfolio, which is financed in US dollars, we have not seen any significant impact that could hurt the progress of projects. There is a lot of demand to finance projects in US dollars, and the central bank is regulating the use of US dollar financing, giving some guidance on what sectors and projects can be financed in dollars. But we still need to be conscious of mitigating the currency risk and avoiding double-exposure.

When we are forced to provide rupiah financing instead of US dollar financing to certain projects, despite the fact that these projects actually need US dollar financing, there is a currency mismatch that increases the risk. We are discussing this issue with the central bank to make sure we can still provide dollar financing when and where it is needed. Transportation, IPP and electricity projects tend to rely very much on dollar financing because that best matches their revenues. If we just benchmark to our current portfolio, infrastructure funding needs in this country are almost 50% dollars and 50% rupiah.

AM: The 'funding gap' is often the buzzword in discussions of infrastructure financing but that is particularly so in this country, given the reasonably tight budgetary situation and the sheer size of the overall target. How big is the funding gap right now – and how can regulators and market participants overcome that?

Noburu Kato, SMBC: It is a little difficult to quantify exactly how large the funding gap is in the country, but it is obvious that there is a huge gap between the funding requirement and the amount of financing available in the market. Domestic banks are getting very close to a 100% loan-to-deposit ratio. They also don't have any real capacity to raise long-term debt in the domestic market. Unlike in countries like India or the Philippines, where domestic banks can be the dominant source of infrastructure funding, Indonesian projects are going to have to rely on foreign lenders.

There are many things the government may be able to do to help alleviate the funding gap, however. For example, in India, the central bank announced the concept of an infrastructure bond through which institutional investors feed money into the banking industry. The proceeds can then be on-lent to infrastructure projects. This infrastructure investment by banks can then be exempted from so-called priority sector lending requirements, which is one of the big burdens for commercial banks in India. The Reserve Bank of India tried to incentivise commercial banks to raise long-term money and then use that to lend to the infrastructure sector.

We cannot copy this format exactly, because there is no priority sector lending in Indonesia. But it is possible there may be some exemptions in terms of loan-to-deposit ratios for banks that are lending to the infrastructure sector. It could provide a rough guide for what can be done here.

There is another constraint on debt capacity in this market: the lack of a derivative market here. We have been exploring the possibility of long-term cross-currency swaps for some time, but we don't have any clarity on netting exposures to single counterparties. That means that even if we introduced collateralised swap agreements with certain counterparties, we don't know whether that would help or not. The maximum tenor for cross-currency swaps right now is around 10 years, whereas the funding requirement for infrastructure projects tends to be 10 years or 15 years. This is a major hurdle right now, and it is something that should be considered.

Kiyoshi Nishimura, CGIF: The financial system is bank-dominated in this market, as it is in many other ASEAN markets. The points raised by Kato-san are very important. Project bonds sold directly to institutional investors may not be the only solution. There needs to be a way to bring banks into infrastructure funding in a greater way. It makes more sense to allow the banks to issue long-term bonds so they can help finance infrastructure development. This is something that used to happen in Japan with the long-term credit banks. It is something that could certainly be used here.

AM: Kato-san, you suggested that lending limits referencing loan-to-deposit ratios could be loosened in this country for banks that are lending to infrastructure projects. But is there actually enough appetite among banks here, and understanding of how to price infrastructure risk, that this would have much impact on infrastructure lending?

Kato, SMBC: In Indonesia, we can expect players like the IIF to lead the way in terms of structuring and understanding infrastructure financing. They will open the doors for banks in this country to engage more with the infrastructure segment of the market. Banks that want to do this kind of business have to reduce their lending elsewhere at the moment, but that does not have to be so.

Kiyoshi Nishimura, CGIF: The consensus in most ASEAN countries is that the problem is a lack of bankable projects, rather than a funding gap. The situation here in Indonesia is different, because although the lack of bankable projects is a bit of an issue, there is also a major financing hurdle. Other main countries in the region enjoy a current account surplus, and that makes it a lot easier to meet the infrastructure needs with domestic savings. In Indonesia, as the country still suffers from a current account deficit, foreign funds are going to be much more important than in other key ASEAN countries.

Gifari, Protelindo: Protelindo is lucky enough that we don't have that much leverage. In the earlier years, we tried to grow the company very quickly. We tripled the company in size. The shareholders put up money, the contracts were there, but the business was new in Indonesia. This was a good example of how to make banks take more risks. Foreign banks understood the tower business, but many local institutions did not. We tried to educate them as much as possible on our business, and after some time, it worked. We have no problem now when it comes to getting money from local institutions.

AM: There has been a major focus on the role of institutions to help overcome the infrastructure hurdles in Indonesia. On this panel, we have representatives from Indonesia Infrastructure Finance, Indonesia Infrastructure Guarantee Fund and Sarana Multi Infrastruktur. How confident are you that infrastructure funding in this country will take-off soon?

Sukatmo Padmosukarso, IIF: Around 70% of our shares are held by multilaterals and international investors. The intention of these shareholders when founding IIF was to provide the infrastructure market with a catalyst to invite more participation from investors, especially in the private sector. It is quite challenging, of course, in Indonesia right now. The funding gap has already been discussed. The requirement for the participation of the private sector is huge.

The starting point of all of this is convincing the sponsors to take up the infrastructure projects that are driven or initiated by the government. That is not easy because of the risks being considered by investors, including some restrictions in the currency law that have already been mentioned by Ibu Emma. The currency law effectively determines that any transactions in Indonesia have to be rupiah-dominated. That leads a lot of currency risk for foreign investors.

Private sector investors are going to be fundamental in the next five years. They will need to provide more than Rp500tr of equity into these projects. It is really important to improve the perceptions of international investors considering investing in Indonesian infrastructure. This is our role: we help the government to prepare projects so that they will be market-friendly and appealing to foreign investors. We also have a private client advisory function. The international market does not always understand what the regulatory risks are in this country. We can provide guidance to those foreign investors looking to come into this market.

We also, of course, provide financing, especially on the equity participation as well as on the mezzanine level. This country needs a catalyst from end-to-end to make projects more viable and more appealing to international investors. There is a major role for IIF and other institutions to play in developing this market.

Armand Hermawan, IIGF: If you compare the infrastructure needs [in the country] with the funding we have, there is still a gap. But if you look at the amount of budget spending allocated to infrastructure compared to previous years, things have improved dramatically.

I would echo what some people have said already. There may not be projects using PPP schemes at this moment as there are no dedicated institutions who assist the government in preparing projects to be well accepted by the market. But it is also worth noting that PPP is a new concept so that a regional government is not familiar with this scheme then has less incentives to use this. This is a challenge. For the Central Java Power Plant, the land acquisition issue is also a hindrance, slowing down project delivery.

IIGF is mandated by the government to provide guarantees for those investors that can come into the Indonesia market, and that is an important function for us to undertake. But the projects need to come first before the product can really be utilised more.

Sri Martini, SMI: We need to talk about who is responsible for preparing projects. If we simply refer to the existing regulatory framework and sectoral laws, the responsibility of preparing projects relies on the sector ministries. Port or transportation projects, for example, would be done by the Ministry of Transportation. But the mindset of sector ministries is much more driven by maintenance, rather than infrastructure development. There needs to be a push to force sector ministries to put master plans in place to deliver good infrastructure projects under their ministries.

AM: There has been a lot of discussion about the role of foreign investors in this market, and the importance they will play in meeting Indonesia's infrastructure funding needs. But that's obviously pretty broad. It may be that European and US investors bring a little more knowledge to the table, but perhaps not as much willingness as their Asian counterparts. Which foreign investors are the right fit for this market?               

Nishimura, CGIF: This is an interesting question that I have asked myself. The problem here is partly a lack of bankable projects, but there are a lot of differences in the notion of what a bankable project really is. People talking a lot about bringing foreign investors into this market, but that could mean European investors, US investors, Japanese investors, ASEAN investors or investors from elsewhere. The best approach is going to be finding those investors who are more comfortable with the risks in this market and, in that sense, Asian investors are probably going to be the best source of funding. They can best understand the local context, and the situation on the ground.

AUDIENCE MEMBER: Is the lack of bankable projects in this market down to less than bankable sponsors, poor preparation or something else? And how can we all put our brains together to overcome these deficiencies? Is it the sponsors or the projects themselves that we should focus on first?

Rainier, KPPIP: From my point of view, the key problem is not sitting with the project sponsors. There are a lot of sponsors out there that are willing to fund projects in this market. The key issue is the lacking in project preparation, such as the quality of feasibility study documents. It appears to me that a significant amount of project documents have been prepared very poorly, to the extent that when you flick to the section where they give you a guideline on the return on investment, it does not even show what the actual number is. It is important to have professional documents, because that is going to be something sponsors and other investors look back at a lot.

Good professional documents will provide investors with a clear understanding of the risks they are taking, and the kind of risks that the government is willing to take on board. The documents are going to help them value projects much better.

Sheth, Moody's: It occurs to me that bankability is really visibility about risk. Regulatory regimes make such a difference to that visibility, particularly in infrastructure. We talked about land acquisition a bit earlier. If you don't know what the ultimate cost and time-frame is going to be for acquiring land for your project, you simply cannot assess the risks of the project. It becomes unviable and unbankable. There are environmental risks, input costs, tariff costs: these all need to be somewhat clear to sponsors before risks can really be assessed. There is a big role to be played by non-financial regulations in this country that could really help increase the chances of infrastructure projects getting off the ground. 

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