Addressing Infrastructure Financing Gap in Indonesia 1

ADDRESSING INFRASTRUCTURE FINANCING GAP IN INDONESIA: ROLE OF

FINANCIAL SECTOR

Fiscal Policy Agency, Ministry of Finance Indonesia

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Abstract

The Indonesia’s Medium-Term National Development Planning (RPJMN) formulated by the

Ministry of National Development Planning (Bappenas) stated that in order to achieve high

economic growth in the medium term, Indonesia is expected to increase investment, especially

from private sector. This paper aims to explore the challenges and issues in increasing private

investment via financial sector. This paper found that challenges and issues especially lies in the

availability of long term investment to mobilize to infrastructure project. Therefore it argues that

Indonesia needs to develop a comprehensive strategy to match the supply and demand of long

term funds, including what instrument will best mobilize the long term funds to infrastructure.

Institutional Investors and State-Owned Enterprises (SOE) will play a strategic role in

conducting this process. The paper also develops argument of why an innovation is needed on

the instrument development by introducing asset securitization scheme.

Keywords: Infrastructure Financing, Infrastructure Investment, Financial Market Development,

Asset Backed Securities

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Addressing Infrastructure Financing Gap in Indonesia: Role Of Financial Sector

Background

Despite the sizeable number of studies that reported less attractive results, over the last 25

years, most economic studies have found positive link between public infrastructure and

economy. Research has shown that a well-designed infrastructure will have long-term economic

benefit. It can raise economic growth, productivity, land values, as well as significant positive

spillovers.

Aschauer (1989), investigated whether all government expenditures are productive using

production function in which output depended on public capital, private capital and employment.

His result showed that the elasticity of output with respect to public capital was between 0.34

and 0.39.

A known example from infrastructure development and economic growth relationship is

China’s infrastructure investment case. Massive infrastructure investment in China began

especially after 1997 crisis where Chinese Government pushed out a stimulus plan to maintain

post-crisis economic growth. From 1997, infrastructure investment amount in China has grown

significantly, which is more than 6 folds. Infrastructure is seen to remain as key driver to China’s

economy as the growth in the beginning of 2016 still record positive number at 19.6 percent.

Under the new government administration starting 2014, Indonesia has shared similar

direction as China back in the days. To sustain the economic growth, Indonesia is shifting its

economic driver from consumption-led to investment-led especially on infrastructure investment

to increase productivity and reduce cost. In order to deliver this, Government has committed to

increase infrastructure investment. To finance this investment, Government has promoted better
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quality of state budget spending. However, aside of Government fiscal policy commitment, it has

been identified that support from the private sector is also important.

Literature Review

There is vast literature about infrastructure financing. In term of private infrastructure

financing, the literatures stated that there are two broad categories of it, which are project and

corporate finance (Inderst, 2013). Infrastructure carries a unique characteristics which makes it

suitable to project finance. Based on Irwin (1997), this is due to several factors. First,

infrastructure services are very essential for customers and it is often being provided by

monopolists. These has made infrastructure projects becomes very sensitive to regulatory risk

especially on price as customer demands to keep prices low. Indeed, the World Bank (1994)

estimated that user fees fell far short of costs in gas, electricity, and water.

Second, infrastructure projects need huge investment in the beginning with a possibility

of ten to ten years recoup. Under such circumstance, serious risks needs to be borne by parties

involved in the development. For investor, risks are typically in the form of whether Government

or SOE as project owners will honor the pre-agreed tariff regulation and payments to investors

(Klein and Roger, 1994). Once investors are willing to inject investment, it is maybe a moral

hazard for Government or project owner to lower the prices that has been agreed before.

Considering these risks, investors are typically being very conservative toward infrastructure

investment. Without adequate contractual protection and declaration of risk sharing mechanism

(Dasgupta and Sengupta 1993, Edlin and Reischelstein 1996) among others, it is going to be very

challenging for investor to participate in the infrastructure market.

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The common channel of funds to infrastructure via financial sector is through financial

instruments and investment vehicles. A typical financing mix in infrastructure project is 20 to 40

percent of equity, both in listed (private equity or indirect equity investment) and unlisted (direct

equity investment) equities, and 60 to 80 percent of debt. The debt could be a combination of

traditional grants such as commercial bank loans, corporate bonds issuance, bridge and backup

facilities, multilateral and export credit agency loans, or more innovative ones that appeared just

in recent years such as asset-backed securities, project bonds, infrastructure indices, Exchange-

Traded Funds (ETF), and options.

Inderst (2013) argued that categorization as reference for which instruments to use are

based on (i) project stages (greenfield, brownfield, primary, secondary), (ii) geographic (global,

regional, emerging markets, country), (iii) revenue source (or ultimate ‘funding’): user (e.g. toll

road) or availability-based (i.e. government and tax payers, e.g. PPP hospital), and (iv)

investment style (e.g. core or opportunistic; growth or income style).

As discussed above, financial sector plays a critical role in providing and mobilizing

financing for infrastructure investment. Some studies such as Mavrotas and Son (2006) showed

that the relationship between financial sector and economic growth is stronger in developing

countries. This indicated that financial sector development will be key for addressing Indonesia’s

infrastructure investment gap.

King and Levine (2003) constructed four indicators of financial development to measure

the services provided by financial intermediaries: (i) the ratio of liquid liabilities to gross

domestic product (GDP), which measures financial depth, which is defined as the overall size of

the formal financial intermediary system; (ii) the ratio of commercial bank domestic credit to the

sum of commercial bank domestic credit and the central bank domestic credit, which measures
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the relative importance of specific financial institutions; (iii) the ratio of credit issued to

nonfinancial private firms to total credit; and (iv) the ratio of credit issued to nonfinancial private

firms to GDP (the last two measure domestic asset distribution).

Above indicators are good in determining how accessible and accommodative financial

sector is for the business sectors. However, these indicators is not enough. As mentioned earlier,

infrastructure sectors in particular is very unique due to its long-term feature. Therefore,

specification on what the financial sector has to provide is needed. On that matter, a study by

OECD (2013) can be highlighted. It argued that beside financial institutions, capital market and

institutional investors are also important source of long term finance such as infrastructure

finance.

For long time already, banks have been a dominant player in the financial system to

facilitate savings transformation into investment. However, there has been growing awareness

that institutional investors such as pension funds, insurance companies, mutual funds, and, most

recently, sovereign wealth funds, are also an important source of funds (OECD, 2013). Due to

mismatch in the banking sector between supply of funds available which is short term, and

demand of funds which is long term, the non-bank financial institutions (NBFI) are now cited as

alternative source of financing. As this is a new model, a challenge for the literatures therefore, is

to explore how to mobilize this long term investment particularly to finance infrastructure. This

includes portfolio allocation policy in the institutional investors.

Beside the source of funds, Chan, et al. (2009) argued that capital market discipline (as

infrastructure for the investment mobilization) should be introduced to better enable the

infrastructure investment environment. Capital markets should discipline lenders and borrowers

by providing ‘signals’ to motivate and reward the sustainable use of capital funds (Lane 1993).
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According to studies by Bishop, Damrau and Miller (1989) and Lane (1993), a number of

conditions are essential for capital markets to be fully effective to promote a growing

infrastructure market, namely that (i) free and open financial markets exist to enable flexibility in

interest rates for accommodating variable risk profiles of investments, (ii) market participants

have access to reliable information for evaluating the creditworthiness of borrowers and their

projects, (iii) governments minimize capital controls and do not support privileged access to

finance, (iv) governments avoid creating ‘moral hazard’ by bailing out financially delinquent

borrowers and troubled projects, even in event of an impending or actual default. Empirical

evidence on capital-market performance indicated that many of the above conditions for market-

based investment discipline have been fulfilled in advanced economies but a little problematic in

others (Balassone, Franco and Giordano 2004; Lane 1993; Pisauro 2001).

Next literature review is on Government support form to increase private infrastructure

investment. Literature has been so focal about how to increase investor’s participation in

infrastructure projects investment from the Government side. First, Irwin (1997) articulated that

there has been an array of support provided by Government to promote the private investment

such as preferential tax treatments, grants, equity or debt contributions (without expecting

commercial returns), and guarantees for a particular risk. These obligations are articulated in the

form of laws, decrees, statutes, licenses, contracts and other legally binding document1.

In regard with non-financial support, one may relate to the importance of policy reform

which is a second thing that Irwin (1997) proposed. To completely support the nation’s interest

with respect to infrastructure development, it is great if Government could complement the

1
There was a trend of formulating bilateral investment treaties that defines investor’s right (Irwin, 1997)
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financial support with comprehensive policy reform by establishing stable macroeconomic

management, adequate tariff regime, track record of honoring commitment, and accountable

policy making. This will gradually enable the environment for infrastructure financing.

Current Global Trend of Infrastructure Financing through Financial Sector

Corporate equity is a major source of private finance for infrastructure (Inderst, 2013).

Infrastructure stocks2 form a subset of global stock markets. RREEF (2011b) find 535

infrastructure stocks with a market capitalization of USD 3.25tn worldwide. This is roughly 6%

of the estimated global stock market capitalization in 2011, a percentage similar to the one found

by S&P (2007).

However, OECD (2013) assessment result showed that over the last decade, there has

been major shifts in investment strategies. In particular, there has been a marked decline in

allocation to listed equities, while investment in debt securities as well as alternative assets

classes has increased substantially. This highlighted that there is a room for infrastructure sector

to attract the institutional investors through designing a tailored investment vehicle. With the

emergence of the infrastructure investment theme in the mid-2000s, for example, many index

providers have started to offer specialist infrastructure indices.

From the supply side of the capital, institutional investment in infrastructure has become

a much discussed topic in recent years, also in terms of public policy. Governments and other

institutions call for a heavier engagement of pension funds, insurance companies etc. in

infrastructure projects, and ‘long term investing’ more generally (European Commission 2013a).

2
The dispute is on about how far the term ‘infrastructure’ can be stretched. The ‘core’ infrastructure includes
diversified and integrated companies while ‘broad’ goes as far as power generation, shipping and timber.
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Infrastructure investments potentially offer some useful characteristics for pension funds

and insurance companies that have to match long-term, annuity-type liabilities. They include

long-term, predictable income streams, low correlations to other asset classes, relatively

favourable default and recovery rates of project finance (compared to corporate debt). The main

preference of most institutional investors is for lower risk, operating infrastructure assets with

predictable, often inflation-linked, cash flows (‘coupon clipping’). Some pension funds,

especially very large and well-funded ones, are also able to take on construction risks, or should

consider so (Blanc-Brude and Ismail 2013).

In 2015, out of 20 selected big pension funds from all around the world including

Australia, Canada, and Chile, the portfolio allocation for infrastructure investment both in the

form of debt as well as listed or unlisted equities has a mean of 8% from total investment.

From the literature review and global trend analysis above, there are still gaps that is felt

so that Indonesia could not easily apply as presented by literatures and becomes our important

study questions, which is what kind of comprehensive strategy or reform should be implemented

by Government of Indonesia for infrastructure financing through financial market?

The current strategies are heavily relying on financial type of support. Using the

background of huge infrastructure needs and the role of state budget that is limited, such study

and analytical tool is needed by the Government of Indonesia. Furthermore, although there is

vast literature on infrastructure financing, there is still a room to improve the literature by adding

more country specific case like Indonesia because one case could not fit to all.

The strategies discussed should cover the area (i) how to better utilize financing

instruments option for infrastructure?, (ii) the use of these infrastructure financing instruments in

Indonesia given its current capital market development, and (iii) how to kick-start the
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infrastructure market development. The paper will have a specific session for exploring policy

implication for Government of Indonesia. This part will summarize how policies should respond

to the needed improvements.

Based on the research questions above, the paper will conduct both case studies and

contextual approach which is started with (I) Identification of Infrastructure Financing Gap in

Indonesia, (II) Analysis of Long Term Investment Market in Indonesia as Tool for Infrastructure

Financing: Current Condition and Challenges to Improve, (III) Strategy to Improve Infrastructure

Market, and (IV) Policy Implication for Government of Indonesia as follows.

Identifying Infrastructure Financing Gap in Indonesia

Financing is usually the last thing to be sorted out. However, in the current economic

development agenda in Indonesia, there lies a potential financing gap for infrastructure

development that can be detected early in the stage of infrastructure development planning.

Looking at the overall investment needs for the economy, the 2015-2019 National Medium Term

Development Plan (RPJMN) projected that Indonesia will need IDR26.558 trillion investment.

There is a gap between this target (see Table 2) with the historical data. For example, in order to

finance this investment, stock issuance is expected to grow from 12,0 percent average in 2010-

2014 to 24,6 percent in the next five years. The other increase is expected to come from bank

loan and bonds issuance. Bank loan and bond issuance is expected to grow from 12,0 percent and

23,3 percent each in 2010-2014 term to 24,6 percent for both in the next five years.

As the number is high, there is a question mark on whether we can achieve the

investment target given many external and internal challenges. For infrastructure investment,

challenges is more likely about how to attract private investment that accounts for 36,5 percent
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of the RPJMN infrastructure needs and therefore resulted in annual needs of IDR402,8 trillion

(or equal to USD31 billion). With the currently small share of infrastructure in Indonesia’s

financial sector, it is clear that the infrastructure financing from private sector gap is big. As of

August 2016, this infrastructure investment realization was only less than one percent. Hence it

is very urgent to boost the capacity of our financial market to finance larger economic

development needs.

Analysis of Long Term Investment Market in Indonesia as Tool for Infrastructure

Financing

After calculating potential gap, now we look closer on the potential availability of funds

for infrastructure funds and challenges to mobilize it. This is done by assessing current Indonesia

financial intermediation system.

a. Bank Domination: Maturity Mismatch

As can be seen in below Figure 2 below, Indonesia economic financing still heavily relies

on banking sector. If we take a closer look to the maturity profile of banking sector’s asset and

liabilities, it is clear that banks liabilities are mostly in 3-month time deposit therefore if we keep

using the current arrangement, Indonesia economy will still suffer from a maturity mismatch. On

the other hand, our corporate bond market is still dominated by short term bonds, whose maturity

is between 1 and 3 years.

There are reasons why we should change the current arrangement, the strongest one is the

consequence of Basel III implementation on banking’s lending portfolio. Under the new capital

requirement in Basel III, deleveraging was made necessary by the liquidity ratios introduced by

Basel III and by the difficulties of banks to raise long-term senior unsecured funding.
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Even without the change in global regulation, although banks remain the largest

contributors for the infrastructure debts market, the lending to infrastructure is actually small. No

Precise data are available, however, PT SMI’s assessment to 4 Indonesian biggest banks comes

up with the fact that their infrastructure lending represents 8 to 10 percent of total bank lending

portfolio. The shares focus primarily on the Electricity (power) and Toll Road sector.

b. Low Financial Market Penetration: Financial Inclusion

While the global trend encourage corporate to raise funds via capital market, our

domestic financial market in general is not ready. Ratio of broad money (M2) to GDP Indonesia

is only around 40 percent. This means there is a low usage of financial market to pool funds in

Indonesia. Another interesting indication from this fact is that it does not link with the quite high

savings ratio in Indonesia. Even though it has not achieved its potential, given the financial

inclusion rate is still relatively low in Indonesia, the latter fact actually means that our savings

pool is not for productive uses.

Based on survey done by Ministry of National Development Planning (Bappenas), most

forms of savings in Indonesia is cash, gold, and term deposits. The first two forms are very

unproductive as it does not go through the financial intermediation system at all, while the latter

is still contributing to the economic development. This reason lies behind why the high savings is

not reflected in M2 to GDP or the depth of our financial market. This is a significant impediment

for infrastructure financing though financial market, both through bonds or equity market.
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c. Limited Availability of Long-Term Financial Product

Financing instrument is an important vehicle to mobilize funds for infrastructure. As a

result, the only financial products that is potential to be used as infrastructure financing scheme,

only few are ready in term of liquidity. In corporate bond market, infrastructure exposure is also

about less than 20 percent (most of corporate bonds are in finance sector). Even more limited

exposure has been made to non-traditional instruments such as project bonds. In absence of

project bond and limited availability of supply of corporate bond issued by infrastructure

companies, it is challenging that exposure to the infrastructure sector shall increase dramatically.

Besides, the lack of financial products availability as options for investors is also due to

the natural sequence of the market development. Based on Karacadag, Sundararajan and Elliot

(2003), the financial market should be developed in such sequence so potential negative

externalities such as financial distress can be avoided.

The sequence starts from (1) money market; (2) treasury bill and foreign exchange

market (3) government bond market; (4) corporate bond and equity market; and (5) asset backed

securities and derivatives market. Right now, Indonesia only has government bond and equity

market that are ready for infrastructure financing.

The rest of the product should be built simultaneously starting from money market,

treasury and foreign exchange market, in order to be used as infrastructure financing scheme. By

immediately starting the development, some critically important products for infrastructure

financing such as local currency corporate bond (including infrastructure project bond), asset-

backed securities, Real Estate Investment Trust (REIT), with improvement of market

infrastructure and regulation, will be able to develop accordingly.

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d. Need Long Term Savings

Compared to other countries in the region, like Malaysia and Singapore, Indonesia’s

saving rate is relatively adequate. However, with the same level. Add the fact that the savings are

of mostly short-term nature like bank deposits, the solution needs to be aimed to address both the

volume and the depth on the long-term ones.

Figure 3 below shows the level of savings in Indonesia compared to other countries.

Figure 4, 5, and 6 shows that long-term savings like pension funds or insurance products are

much lower than short-term savings like bank deposits. As a result, long-term financing in the

market is not very well fulfilled which is reflected on the relatively low outstanding bonds to

GDP (Figure 7).

Figure 3: Gross National Savings (% of GDP) Figure 4: Banks Deposit (% of GDP)

60 200
Indonesia
Malaysia
40 Singapore
100
20 Malaysia
Indonesia
0 Singapore 0
1980 1985 1990 1995 2000 2005 2010 1981 1986 1991 1996 2001 2006 2011

Source: CEIC Source: [Link]

Figure 5: Pension Fund Assets (% of GDP) Figure 6: Insurance Assets (% of GDP)

80 50

60 Singapore
Malaysia
40 Indonesia Indonesia
Malaysia
20 Singapore
0 0
2002 2006 2010 2002 2005 2008 2011

Source: [Link] Source: FRED

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Figure 7: Outstanding Bonds (% of GDP)

150

100

Indones
50
ia

0
2000 2003 2006 2009 2012 2015

Source: AsianBondsOnline

As explained before, the economic needs currently is long term financing which

concentrate mainly on infrastructure financing. This fact shows that our economy is facing a big

challenge because having long term infrastructure project also means strong base for domestic

investment with long term maturity of debts is needed.

Using qualitative research method and learning from international experience, this paper

is therefore expected to discuss in more detail regarding designing an optimal scheme to fill the

infrastructure financing gap in Indonesia through private investment. More discussions will also

be made on instruments to be used to mobilize such investment so it could be turned into

productive sectors. It is also expected to take into account the potential capital offshore to be

repatriated in domestic assets.

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Strategy to Improve Infrastructure Market

a. Increasing Role of Institutional Investors

Investment Policy toward Infrastructure Investment

While savings rate is not much different with other countries, the utilization of this

savings is something that needs to be improved.

As of March 2016, domestic institutional investors have IDR915 trillion asset under

management or around 10 percent of GDP. However, their contribution to infrastructure

financing still needs to be improved. Based on PT SMI’s assessment, institutional Investors

focus primarily on publicly listed instruments such as Government bonds, corporate bonds and

listed equities. Credit risk knowledge within these institutional investors rely heavily to

credibility of rating agencies.

As a result, limited exposure has been made to the customized direct financing,

meanwhile infrastructure financing are typically done using this form. In absence of project bond

and limited availability of supply of corporate bond issued by infrastructure companies, and the

fact that infrastructure financing in Indonesia is still dominated by direct financing, it is

challenging to boost the development of the infrastructure financing using institutional investors.

It can be seen from Figure 8 below that the possible direct channeling of institutional

investor’s asset to infrastructure financing is through bonds and stock. Insurance sector for

example has allocated 35 percent of their asset to bonds, while BPJS and pension fund has

allocated each about 53 percent and 45 percent.

While bonds portfolio is already big, stock portfolio has ample room to increase. In the

rest of the world, the assets are mostly allocated in bonds and shares at the second place. In
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Japan, for example, institutional investors (pension funds, insurance companies) are the top

priority for long term investment development.

Figure 8: Assets Allocation of the Local Institutional Investors

Source: PT SMI

Despite the challenges, there is still room for adjustment to the more ideal concept of

approximately 10% of assets allocated in term deposit into infrastructure or corporate bonds

based on our estimated assets in 2020. The breakdown of challenge for each institutional

investors are analyzed in Table 5 below.

Beside the current arrangement, the policy direction is also in line with the purpose to

increase institutional investor participation on long term financing. As can be seen in Table 6

below, our three biggest institutional investors has been obliged to support long-term financing

of the country by holding a minimum percentage of capital market products such as bonds and

stocks in their portfolio.

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However, a further improvement need to be made, especially for increasing the

channeling to corporate bonds, because the current regulatory framework is still addressing lack

participation at the government securities. For example, BPJS, under the newly issued Financial

Services Authority (OJK) regulation, they are required to allocate 50 percent of their asset to

bonds, especially in the form of government and SOE bonds.

Taking into account all the factors, necessary initiatives needs to be established to secure

our financing needs for infrastructure financing, especially by establishing alternatives source of

financing. This should be firstly done by analyzing the cross country experience.

Table 6: Maximum Investment Allocation Policy in Several Institutional Investors

BPJS Ketenagakerjaan Insurance (Ministry of Pension Fund (OJK

Instrument (Government Finance Regulation No. Regulation
Regulation No. 15 2015) 53/PMK.010/2012) No.3/POJK.05/2015)
Deposit 15 15 20
Government Securities* 30 (minimum) 30 (minimum) 30 (minimum)

Bank Indonesia Not yet regulated Not yet regulated 20

Certificate of Deposit
Corporate Bonds 50 50 20 (Bonds), 10 (MTN)
Stocks/Equity 50 40 20
Mutual Fund 50 50 20 (Conventional), 10
(RDPT)
Asset Backed Securities 20 20 20

Real Estate Investment 20 20 20

Trust
Repurchase Agreement 5 Not yet regulated 20

Direct Equity 5 10 15 (Domestic), 5 (Foreign)

Investment
Land and Building 5 10 20
Municipal Bonds 50 Not yet regulated Not yet regulated
*under new OJK regulation No. 1/POJK.05/2016 regarding investment on Government Securities by Non-
Bank Financial Institutions
Source: presented by PT SMI

Governance Improvement
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For Indonesia’s institutional investors to move to that direction, there are challenges to be

faced, such as how to credibly conduct the investment. This may involve some key investment

process to follow certain good governance process, including the establishment of proper

functioning key investment considerations that leaves some necessary discretion for the

investment allocations as well as the establishment of independent investment panel.

Below is an example of how an infrastructure investment in Employee Provident Fund

(EPF) Malaysia is done. All the investment including infrastructure will have to comply key

investment considerations that is pre-determined. Besides, investment panel and investment

committee review is there to make sure due diligence and monitoring of investment performance.

Although BPJS Manpower for example already has these features, the functioning needs to be

improved.

Figure 9: Key Investment Process in EPF Malaysia

Source: EPF Malaysia

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Role of SOE

In Indonesia case, even though the institutional investor participation is already active in

the bond market, infrastructure sector itself is still underserved. This is reflected on Figure 10

below. The issuance of bonds is still dominated by the financial sector (61.9 percent). The

outstanding bonds of infrastructure sectors as of January 2016 amounting to IDR48.105 trillion

(19,4 percent). In term of Issuance, During 2015, the issuance of infrastructure sector bonds

amounting to IDR 12,5 trillion. While in term of capital market, the market capitalization of

Infrastructure sector traded in Indonesia Stock Exchange (IDX) is only 13.2 percent of the total

market capitalization. Many large infrastructure company has not listed in IDX, such as PT

Pertamina, PT PLN, and PT Angkasa Pura.

Figure 10: Infrastructure Weight in the Corporate Bond (as of Jan 2016)

Sector Outstanding (IDR bn) Percentage

Plantation 2.700 1,1
Mining 6.500 2,6
Basic Industry 3.599 1,4
Consumer 7.155 2,9
Property and Construction 18.537 7,5
Infrastructure 48.105 19,4
Finance 153.658 61,9
Trade and Services 7.987 3,2
Total 248.241
Source: PT SMI

The potential to issue, however, is very huge. SOEs balance sheet are still under leverage

with debt level representing less that 40 percent of total assets (See Table 7) While the ideal level

of leverage for SOE does not really come to a fixed number, a common rule of corporate optimal

level of leverage of their balance sheet, 50 percent, can be used as reference. In the past five

years to 2015, limited debt fund raising has been taking places in the SOEs engage in the
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Airport, Railway, Land Transport, Seaport, Waste treatment and Sewerage. Most of the capital

expenditures were: (1) internally sourced, and/ or (2) being element of public contribution.

Table 7: SOE’s Balance Sheet are still Under Leverage

Jasa Nindya Angkasa WIKA Telkom Hutama

Marga Karya Pura 2 Karya
(toll) (constructi
on)
(Currency, (IDR bn) (IDR bn) (IDR bn) (IDR bn) (IDR bn) (IDR bn)
unit)
Year 2015 2014 2015 2014 2015 2015
Total Debt 14,573 850 1,198 2,966 30,673 2,405
Total Asset 36,725 2,506 20,271 15,916 166,173 12,337
Debt/Asset 39.7% 33.9% 5.9% 18.6% 18.5% 19.5%
Source: PT SMI

However, issuing project or corporate bonds in Rupiah does not create immediate

positive effect for the corporates or SOEs in particular. First reason maybe because some

corporates lives in a “dollar world” (for example commodity-based corporates) where getting

funding through foreign loan or issuing global bonds is kind of a form of natural hedging. The

cost of fund of those two options are also very low compared to issuing Rupiah bonds. In the

longer term, as the liquidity starts to load the market, the cost of fund for Rupiah bonds will be

lower. For some SOEs whose revenues are in Rupiah for example Electricity, Roads, IDR bonds

make a lot of sense as long as there is demand from long-term investors.

IV.3 Attention to Green Field Infrastructure Projects

Financing of infrastructure is different than other type of corporate financing. It is divided

into several categories based on the stage of the project which determines risk borne by investors

(see Image 8 below). While commercial operation is easier to get funding, financing for green
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field (planning or construction) stage remains challenging thus needs higher attention from the

GOI.

Table 8: Stage of Projects and Capital Structure

Stage Risk Structure Capital Provider

Planning / High Senior Loan  Commercial Banks
Construction  Insurance Companies
 Multilateral Banks
Mezzanine Loan  Infrastructure Fund (Public/Private)
 Non-Bank Financial Companies
Equity  Operator (Contractor, IT, Supplier,
Offtaker)
 Government, Government Fund
 Infrastructure Fund (Greenfield)
Early Stage Moderate Senior Loan  Commercial Banks
of  Insurance Companies
Commercial  Multilateral Banks
Operation Mezzanine Loan  Infrastructure Fund (Public/Private)
 Non-Bank Financial Companies
Equity  Operator (Contractor, IT, Supplier,
Offtaker)
 Government, Government Fund
 Infrastructure Fund (Greenfield)
Stabilized Low Senior Loan  Commercial Banks – Partial Exit
Stage of  Insurance Companies – Partial Exit
Commercial  Multilateral Banks
Operation Equity  Operator (Contractor, IT, Supplier,
Offtaker)
 Infrastructure Fund (Pension) – Partial Exit
Project Bond  Institutional Investor (Non-Bank) – active at
steady operational stage
Source: JCRA

IV.4 Role of Product Development: Non-traditional Financing Instruments

In particular with infrastructure financing, it is important to note that there is a wide range

of instruments that can be used to accommodate the many types of infrastructure-related

investment. Instruments are expected to be more of non-traditional grants

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Asset Securitization

Karacadag, Sundararajan and Elliot (2003) argued that the financial market should be

developed in a sequence. The sequence starts from (1) money market; (2) treasury bill and

foreign exchange market (3) government bond market; (4) corporate bond and equity market;

and (5) Asset Backed Securities (ABS) and derivatives market. However, the paper argues that

corporate bond market is not pre-requisite for ABS to grow and help infrastructure financing.

Asset Securitization has been an important vehicle for corporates. It has been commonly

used for the purpose of housing finance. However for infrastructure financing, implementation

has not yet as plentiful. As explained earlier, investors in Indonesia do have appetite for

sophisticated and volatile instrument like equity, and therefore, the next possible instrument to be

assessed is asset securitization.

Basic concept of securitization is making a illiquid asset to become liquid. For the

context of infrastructure financing, securitization of asset can therefore be used by recycling the

monetary value of existing infrastructure to finance green field (new) infrastructure projects.

Such scheme has been implemented by other countries such as Australia and Mexico.

Asset securitization basically has similar form with equity and bonds. The main

difference between the two is that equity and bonds are issued by a company so the return of the

instrument depends on the company performance, while Asset Backed Securities (ABS) as a

product of asset securitization are issued by a Collective Investment Contract (CIC) as an issuer

so the return of the instrument depends on the underlying asset performance.

For this reason, SOE that wants to raise funds via asset securitization must first carefully

identify the potential asset (Schwarcz, 1994). These assets normally represents rights to payment

at future dates and are usually referred to as “receivable”. SOE that owns this receivable is called
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the “originator”. Risk that these payments may not be fulfilled is a very important factor in

valuing the receivable. After identifying the assets, originator SOE will transfer this receivable to

a legally separate entity. This transfer is made in order to separate receivables from risks

associated with the originator3. In term of infrastructure ABS, the asset can be in the form of

future cash flow from infrastructure asset.

Figure 11 below showed basic structure of ABS. Particular SOE that needs financing to

contact the originator / creditor to sell financial asset (for example future receivable) to CIC. The

CIC will deal with servicer (the one who collects cash on behalf of investors), custodian bank,

investment manager, investors or lenders both directly and through arranger/underwriter, rating

agency, and credit enhancement.

Based on the structure, there are some risks embedded in ABS instrument:

1. credit risk from interruption of financial asset repayments;

2. liquidity risk from the event when investor could not sell holdings in the abs secondary

market;

3. prepayment risk from the event when financial asset occurs faster than projected

(reinvestment risk);

4. operational risk from the implementation of investment manager, the custodian bank, and

the service provider;

and also several advantages that other financing vehicle does not have, such as (i)

transparency: claim on investment is directed toward the underlying asset, (ii) good credit rating,

(iii) tough selection criteria, (iv) secure transaction structure, (v) payment of amortization, (vi)

3
There are two specific features in consequence of this transfer, which is true sale and bankruptcy remoteness.
Both has accounting and legal treatment.
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low default rate because there is diversification of asset, (vii) bankruptcy remoteness (the

bankruptcy of the debtor would not affect the payment from asset), (viii) relatively higher

coupon at the moment, (ix) stable valuation, and (x) reputable performance.

ABS is divided into several categories based on (i) yield and seniority (fix and non-fix

cash ABS), (ii) offering method (general and limited offering), and (iii) payment of principal and

interest (amortizing ABS and non-amortizing ABS).

Figure 11: Flowchart of CIC-ABS Structure

Source: Danareksa Investment Management

In Indonesia, the securitization of assets has a huge potential that has not been fully

utilized so the market mechanism (price discovery), regulation, and infrastructure are considered

not yet developed. ABS has been issued since 2009 all of which is based on mortgage. The size

is only IDR 5 trillion.

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The lack of participation makes it challenging for other investors to join. As can be seen

in Table 14 for the mortgage case, the participation of NBFI investor is very small, therefore a

kick-start from SOEs and government prioritized economic infrastructure projects under tax

amnesty regime could be a significant catalyst for the development of ABS market in Indonesia.

Table 14: ABS-CIC Investors

Investment (IDR Trillion)

Size % of Total
Insurance 1.652 33
Corporates 1.990 40
Pension Fund 491 10
Banks 548 11
Individuals 1 0
Mutual Funds 50 1
Foundation 81 2
Others 205 4
Source: Danareksa Investment Management

There are regulations related to investment in ABS, for example requirement for ABS

credit rating and whether public offering can be obtained. The regulations are different for banks

and non-banks. For banks the regulation is Bank Indonesia regulation 7/4/PBI/2005, for

insurance is Ministry of Finance regulation 53/PMK.010/2012, for pension fund is Ministry of

Finance regulation 199/PMK.010/2008, and for mutual fund is Ministry of Finance regulation

No. IV.B.1, while other institutions such as PT Taspen (pension fund for civil servants) and

BPJS Manpower, has not had any regulation in place.

As of 2015, ABS total issuance has reached IDR 5,4 trillion only. In the middle of risks

faced by investor about assessing the risk of a new project (green field project), securitization of

asset is filling a gap by allowing more fund flows under the base of an existing project (brown

field project) or assets. Beside safer than other tailored-to-infrastructure instruments, ABS is also
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not affecting the balance sheet of the company that is related to the asset, for example PT PLN

(power) with electricity base tariff rate as the underlying asset. Using this scheme, leverage

capacity of SOEs could be increased without giving up prudent risk sharing mechanism between

investors and issuers.

ABS could help covering financing needs for green field projects. For that, there are two

main options. First is SOE monetizing cash flows on existing brown field infrastructure (toll-

road; power plant; airport slots) and use the income from the ABS to finance greenfield project

(See Figure 12 and Table 15).

Figure 12: Option 1

Source: author’s calculation

Practically, the SOE issues ABS on the future cash flow and sells the ABS to an

institutional investor (pension fund, insurance company), possibly with credit enhancement from

the government if the rating on the ABS is not adequate for the institutional investor. With the

income from the sale of ABS, the SOE can self-finance green field infrastructure investment
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without requiring a bank loan or issuing bonds. Eventually, after a few years as the projects is

starting to generate cash flow (become brown field), it will be able to use the cash flow from this

project to issue ABS and repeat the financing mechanism.

This option is the easiest one as it does not require banks. But it assumes that there is

already a sizeable quantity of brown field projects to be used for ABS. If there is not enough of

them, then option 2 is needed.

The second option for green field project financing is bank bridging loans. When SOEs

want to finance green field infrastructure, they borrow from the banks for the project for a

maturity of up to 5 years. A government guarantee may be needed for the bank loan given the

construction risk. After two or three years of operations, the project has a steady stream of cash

flow (becomes brown field). The SOE issues ABS on the cash flow of the infrastructure and sells

the ABS to institutional investors (pension fund or insurance company). A government guarantee

on the ABS may be needed if the rating is not enough for the institutional investor. With the

income from the sale of ABS, the SOE pays back the bank for the original 5 year borrowing.

This option needs the participation of the banking system to provide bridge loan during the green

field period of the project. But it does not require existing brown field project to be securitised.

On the second option, the securitisation process can also be initiated by the bank itself,

and not by the SOE. Once the construction part of the green field project is over, the bank may

want to move the loan off its balance-sheet by securitising it, and selling the securities to an

institutional investor such as a pension fund or an insurance company. Of course, the securities

will have to be rated by a rating agency.

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Option 2

Source: author’s calculation

Table 15: Parties Involved and Its Respective Roles

Option Asset Originator Investors Rating Government

(for ABS) role
1: Brown field SOE who Institutional If sufficient No
Securitising project has brown investors for investors government
the Brown field project (pension, guarantee
Field insurance)
If not Government
sufficient for guarantee
investors
2a: Bank Green field Bank A Government
loans project (bank guarantee for
bridging loan) high
construction
cost
2b: Paying Green field SOE with Institutional If sufficient No
back the project pipeline investors for investors government
bank loans becomes projects or (pension, guarantee
using asset brown field Bank A insurance) If not Government
securitization sufficient for guarantee
investors
Source: author’s calculation
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Table 16: Potential Assets to be Securitized

No Originator Sector Underlying Asset

1 PT Jasa Marga Toll Road Toll Revenue
2 PT Perusahaan Listrik Negara Power Electricity Bills, Electricity
(PLN) Offtake Contract to IPP
3 PT Angkasa Pura Airport Passenger Service Charge,
Landing Service, Navigation
Service
4 PT Pelindo Port Cargo Service Charge, Ticket
Service Charge
Source: Coordinating Ministry for Economic Affairs

From the list of potential ABS above (Table 16), PT PLN (Power) asset is the most

feasible one to be securitized in the near term. Besides, PT PLN has already exhausted its ability

to generate more debt securities out of their balance sheet. Therefore, issuing bonds will not

anymore becoming a main option in term of raising debt-type funds. While on the other hand, PT

PLN’s share is not offered for public (full state-owned).

Let alone the size of the asset itself that is big, this is due to the fact that PT PLN’s asset

has specific features that can be accommodated by the current law as well as regulation. These

features among others is predictability of the future cash flow as the amount of the asset is

always growing and not dependent to service usage and the fact that the bills are now managed

in a specific account separated from PT PLN’s account. Further support on the underwriting will

be needed as it will become the first infrastructure asset-originated CIC-ABS.

As for asset securitization of toll revenue and concession of PT Jasa Marga in the short

term cannot be implemented because of the issue of the clarity of legal and accounting treatment

for such transaction4. Basically because of its high predictability, OJK considered that enough

4
Asset Securitization process follows a feature called “true sale” which basically a sale (to the special purpose
vehicle or SPV) that is sufficient under bankruptcy law to remove the receivables from the originator’s bankruptcy
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toll revenue potential for securitized been recorded as intangible assets in the amount of

approximately IDR22 trillion in the balance sheets of PT Jasa Marga. Issues to be discussed is

how to structure concession right (asset) is such that the switch to the CIC-ABS will only be toll

revenue collection rights to the consumer. Meanwhile, toll road operations related rights remains

the responsibility of PT Jasa Marga.

In order to facilitate other kinds of asset, there are challenges in the medium term, such as

(i) illiquid secondary market (can be overcome as a majority of institutional investors’

investment strategy is buy and hold to maturity), (ii) relatively long tenure for retail investors,

(iii) complicated and hard to understand structure due to unfamiliarity compared to other

instruments that has been used by SOE such as bank credit and bonds, (iv) accounting treatment

for investor, (v) limited available information about ABS, (vi) limited number of ABS

outstanding, and (vii) the absence of proper regulation in the law level, there is no securitization

act that specifically regulate about asset securitization in Indonesia –such thing is important for

consumer protection especially. Therefore, in the beginning, set of fiscal support may be needed.

Policy Implication

Based on strategies above, this paper would like to summarize the implication to our

policies to accommodate the goals. This implication is this paper’s summary of main

recommendation for Government of Indonesia to kick start the acceleration of the infrastructure

financing using financial sector (see Table 17).

estate. Due to the absence of law addressing specifically the asset securitization for infrastructure and lack of
experience in conducting the transaction, it is a little uncomfortable for SOE to use such scheme.
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Policy implication is divided into three areas of strategy, which are (i) Increasing Role of

Institutional Investor, (ii) Increasing Role of SOE, and (iii) Kick-starting the Development of

Infrastructure Financing through Financial Sector: Asset Securitization.

In order to increase role of institutional investors, first we should aim to increase the size

of asset of the institutions. It can be done gradually through increasing rate of mandatory

contribution and limiting early withdrawal of old age savings. This may include the needs to

revise Government Regulation No. 60 2015 about Old Age Security.

Beside increasing the size, the allocation policy needs to be improved also so that

allocation to productive investment such as infrastructure could increase. This involves the needs

to have minimum allocation policy in the beginning. This is a form of “forcing” education for

institutional investors. Recently, OJK has accommodated this idea by revising OJK Regulation

No. 1 2016 about Government Bond Investment for Non-Banks Financial Institutions. The

revision mandated for example life insurance companies to allocate minimum of 20 percent of

their Government Bond investment to Infrastructure-Related SOE bonds.

This regulatory push needs to be further equipped with enforcement of investment

discipline. This can be done by utilizing the role of investment panel. The main direction for

shaping this critical panel’s role is for example to avoid too heavily bonding target.

Beside governance, fiscal support could also play role to increase investor’s appetite.

This idea has already been accommodated for pension fund industry through the exemption of

this fund for capital gain tax of debt securities transaction as explicated in Government

Regulation No. 100 2013 about Tax on Bond Interest Income.

Next is for SOE, especially infrastructure SOE to explore more diversified way of

financing, by issuing more marketable securities for example. As explained earlier in the paper,
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weight of infrastructure can be improved in the domestic bond market. A start on the fiscal

support actually has been placed through Government Regulation No. 77 2013 about the Income

Tax Cut for Publicly Listed Company Taxpayers.

Table 17: Policy Implication

Strategy Issues Addressed Policies

Increasing Role of Increasing Size of Asset Gradually increasing rate of
Institutional Investor in contribution
Infrastructure Limiting early withdrawal
Financing Increasing Allocation to Long Minimum allocation policy
Term Capital Market Instruments, until the market is maturing
Particularly Infrastructure-Related
Increasing Investment Good Strengthening the function of
Governance investment panel
Eliminate too bonding
investment target

Increasing Investor Appetite Fiscal support

Increasing SOE role Increasing Issuance of Marketable Fiscal support
Securities
Kickstarting the Developing New Product e.g. Credit enhancement,
development Securitization of PT PLN’s Cash Coordination, Ensuring legal
Flow and accounting aspect
Source: author

Lastly, as the infrastructure market is very tiny, Government could then catalyze the

market by promoting a real scheme so more transactions could happen in the future. One of the

scheme is PT PLN (power)’s future cash flow securitization to build new infrastructure. As

identified above, PT PLN’s electricity receivable in this case is the most workable one for

Infrastructure CIC-ABS. Therefore, it should be promoted. Government could help initiating the

idea through coordination in the national level between relevant ministries, SOEs, asset

management companies, and so on. Government could also provide credit enhancement
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(guarantee) just like the recent progress on Government guaranteeing toll project in Sumatra that

used project bond as way of financing.

Most importantly, it is the Government’s role to make sure that regulatory aspect is

accommodating such scheme. This is related with the regulation for ABS issued by OJK

(formerly Indonesia Capital Market Supervisory Agency/Bapepam LK) No. IX.K.I about

Guidance for CIC-ABS.

VI. Conclusion

From above, we learnt that infrastructure investment needs to be well designed to have

large economic benefit. A strategy has to be put to fulfill the needs to attract investment from the

private sector. Building good PPP system, infrastructure banks, debottlenecking, optimum risk

sharing, and incentives provision are very necessary to enable the environment for it.

About instrument, bond remains very important due to maturity mismatch in the current

financial sector which is dominated by banks whose liabilities is less than a year. With the

current low depth of both market and institutions, strategy to deepen the market through

sequencing the development, institution through increasing asset of NBFI, skills, as well as

sectors are essentials. With the shift on global regulation which makes it not a favorable position

for banks to deliver long term projects, urgency of bond market development should be top

priority. However, we also learnt that the size and liquidity of bond market should not be a

prerequisite for projects bond development such as in the case of Philippines.

We learnt also that beside the financial market depth, access of financing also needs

attention. With the high savings rate in Indonesia, financial market should be built in the same

speed. Therefore, getting the financing to the right uses and users is important.
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Things the Government can do to support the financial sector development is by enabling

environment, such as regulatory neutrality. Building up the asset of NBFI as the natural fund

supplier for a long term economic financing needs is very important. However, at some point,

Government needs to kick start.

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