Inspiring Investment in Indonesia: A Roundtable discussion

Like many fast-emerging markets, Indonesia has a long list of infrastructure needs. And investors are starting to listen.To  find out how Indonesia is winning in Asia’s competitive infrastructure market,

Sharad Somani, Head of KPMG’s Association of Southeast Asian Nations (ASEAN) Infrastructure Advisory practice, sat down with three of the country’s institutional leaders: Pradana Murti, Head of Development at PT Sarana Multi Infrastruktur (SMI), Rainier Haryanto, Program Director of the Committee for Acceleration of Priority Infrastructure Projects (KPPIP), and Harold Tjiptadjaja, Managing Director of Indonesia Infrastructure Finance (IIF).

Their insights provide valuable lessons for international investors seeking new opportunities and for emerging market leaders hoping to catalyze their own infrastructure markets.

Sharad Somani (SS):When infrastructure investors talk about the next big investment market, they are usually talking about Indonesia. And many investors recognize that the market is rapidly maturing. What has been attracting private investors to Indonesia’s infrastructure market?

Pradana Murti (PM): I think we are starting to demonstrate a good track record for public-private partnerships (PPPs). We started out slowly and it took almost 5 years to move the first PPP project into the market, but we’ve since been able to identify a lot of the challenges we faced and overcome them.

Harold Tjiptadjaja (HT): Right. And I believe that investors recognize that the Indonesian government is working hard to make regulations and permitting processes to be more investor-friendly for both private sector and foreign investors. At the same time, there is a massive backlog of projects at the national, regional and municipal level — investors have lots of choice in projects which fit in their risk appetite. 

Rainier Haryanto (RH): The government has also made great strides in making the institutions and processes more professional.To support such effort, Indonesia is producing a number of strong initiatives and institutions focused on attracting, facilitating and supporting private investment into infrastructure and I think there is a general acknowledgement in government that you need a mix of private and public sector professionals to run a world-class institution. 

SS: Tell us about the role that your organizations play in attracting private investment to Indonesia.

PM: PT SMI is a State Owned Enterprise (SOE) established by the Ministry of Finance in 2009 to act as an infrastructure financing company. But we were also given a mandate to provide advice and support to public and private entities developing infrastructure in the country. Our focus is now on helping governments, particularly at the municipal and local level, understand their options and how to tap into them.

HT: IIF is much more focused on mobilizing private sector funding and investment into the infrastructure sector. We were established in 2010, essentially to get the best leverage possible for government investments. And so far, we’ve been fairly successful. We now have funding commitments of around US$1 billion, leveraging the government’s initial commitment of just US$50 million. So we are continuously focusing on finding and unlocking new sources of investment. RH: Where SMI offers advice and  nancing, and IIF mobilizes funding, our mandate at KPPIP is focused on accelerating priority projects. There was a broad recognition that the government needed a centralizing body to help drive their projects including key PPP initiatives. So our job is to be involved at any phase of the project to achieve successful project delivery. This means our role stretches from the preparation phase through to the operations and maintenance phase — to remove bottlenecks and facilitate delivery, working across government entities and with private sector.

SS: According to Pak Rudiantara, Indonesia’s Communications and Information Minister, “Our ultimate goal is to make infrastructure development the foundation for our economy. We cannot afford to delay investment in infrastructure, which supports trade flows and investment in this country”. Indonesia clearly boasts very strong institutions and levers for driving infrastructure investment. What is currently holding investors back?

HT: I think many investors are worried about two classic challenges — permitting process and land acquisition processes. The good news is that the government has been working very hard to simplify the permit and licensing processes, acknowledging that such processes will take some time. On the land acquisition process the government also passed a new law in 2012 with full implementation guidelines in 2014 in order to streamline the land acquisition process for infrastructure projects and that has helped improve transparency significantly.

RH: I think investors also want to see a strong, prioritized pipeline of projects before they really start looking at investing in a market. But that requires a good source of reliable centralized data on the projects being prepared. So one of our objectives has been to set the pipeline of priority/ strategic projects, collect that data and make it available to private sector investors to help them get a better view of the opportunities available in the market.

PM: Like all markets, Indonesia struggles with financing. But I think the bigger challenge isn’t the financing itself, but rather the quality of the projects. At the state-level, there are a number of projects — many of which we support — that are very professional. But when you get down to the municipal level, governments still need a lot of assistance.

SS: There are now 516 municipalities in Indonesia, each with a list of projects to deliver. What are the key challenges for municipal investment?

PM: The municipalities have been facing a challenging environment. There have been three successive budget adjustments recently and that — combined with a recognition that low resource prices will likely lead to further  fiscal tightening — is forcing municipalities to start thinking about other options. I think the good municipalities are now embracing the challenge and seeing the opportunities.

RH: On the challenge, there is also a very different level of understanding about PPPs across the country. I think part of the solution will be in creating more standardized contracting and prequali cation criteria. But more work will need to be done to help municipal leaders — particularly those from regions without significant resources — unlock alternative sources of capital for infrastructure.

HT: I think it’s also important to ensure the right capital is flowing to the right projects. We want to attract large foreign investors to those projects where their expertise and capital can have the most impact, and not to small, isolated projects. So we are focused on helping to build capacity that helps accelerate bigger projects, not looking from the viewpoint of the state budget down, but rather from private participation coming up.

SS: What will it take to catalyze faster growth and development for Indonesia’s infrastructure market?

HT: I have been very vocal about Indonesia’s need for a centralized PPP unit that puts all of the government’s infrastructure tender processes under one roof. That would help drive transparency for domestic and foreign participants. And it would allow for a single, prioritized and coordinated pipeline of projects to be produced.

RH: I suspect that the SOEs will still continue to play a significant role in catalyzing the infrastructure markets. Not only because they are able to leverage government funding but also because foreign investors and operators would require local partners and the SOEs want to improve their capabilities.

PM: When you look at the markets that have moved quickly, they are often the ones that have seen a sudden change in competition or market realities. Open skies forced airports to step up their game. Heightened competition led SOEs to broaden their investment portfolios and start selling assets. We’ll certainly make steady progress without a sudden change in the market, but good things often come from change.

SS: In a recent conversation, Pak Rudiantara stated “We must continuously push for measures that will ultimately make infrastructure in Indonesia more efficient and beneficial to the public”. Given the country’s recent successes and current trajectory, what is your forecast for Indonesia’s market over the next 3 to 5 years?

HT: I think we picked up good momentum in 2016 with a number of major PPP projects achieving financial close — these projects include power and drinking water installation initiatives like Batang IPP and Umbulan East Java respectively, and broadband developments like the Palapa Ring program for Western and Central Indonesia. And I think we’ll see that number start to pick up significantly as investors starts to gain more comfort in the market. Ultimately, Indonesia is resource rich and I think investors recognize that there are many ways to finance their projects. I’m very optimistic about Indonesia’s future.

RH: I absolutely agree with Harold’s statement. I think in the next 3 years, we will continue to pick up momentum and will see both the size of the market and the diversity of the players grow signi cantly. At the same time, I believe that the domestic markets will also grow, improving local financing options and creating more opportunities for local businesses and retail investors.

PM: I also agree with my colleagues. I would, however, remind investors that it takes time to make the changes that are required. Over the next year, important changes will certainly be made and the market will become much more attractive. Now is the time to engage with the Indonesian market so that — when the opportunities do emerge — you are ready to take advantage of them.

Sumber: KPMG Insight, edisi No. 9 2017, Halaman 40-43