The Urgency for Expansive Development & the Role of State-Owned Enterprises in Indonesia

By Ditya Maharani Harninda & Aulia Gislir —

The recently completed Merah Putih Bridge in Ambon, Maluku province, Indonesia. Indonesia’s tremendous need for expanded infrastructure has required state-owned enterprises to take part in funding key projects. Source: Wikimedia user Toddy, used under a creative commons license.

The origin of Indonesia’s urgency to spur national infrastructure development comes from a thorough evaluation of the country’s economic strengths and weaknesses. According to the Logistic Performance Index (LPI) and its indicators released by the World Bank, Indonesia ranked 46th out of 160 countries in 2018, lower than fellow Asian countries such as Thailand (ranked 32th) and Malaysia (ranked 41st). The World Bank describes the LPI as, “Tools that are used to generate a big picture indicating countries’ logistic performance, based on a worldwide survey of operators on the ground, providing feedback on the logistic friendliness of the countries in which they operate and those with which they trade.” Furthermore, according to the Global Competitiveness Index 2017-2018, Indonesia is ranked 36th out of 137 countries, and once again, it is ranked below Thailand and Malaysia. The reason why Indonesia is often ranked below its fellow Southeast Asian countries such as Thailand and Malaysia, is that its customs and infrastructure are still seen as less efficient and serve as a drag on trade growth compared to other developing Asian countries.

These logistical and competitiveness issues in Asia have led Indonesia’s leaders to focus on the importance of spurring its own infrastructure development. In response, Indonesia has formulated a strategy to spend heavily on the development of infrastructure in many sectors including power generation, ports, toll roads, transportation, telecommunication, energy, and information and communication technology.

From 2015 to 2018, the Indonesian government allocated almost $92 billion (Rp.1.32 trillion) from the government budget for infrastructure development projects. In 2019, the government is still eager to allocate nearly $29 Billion (Rp. 415 billion) for specific projects. Most of the 2019 budget spending is for 1,247 miles of new or reconstructed roads; 258 miles of railways; and four new airports. This strategy aims to create a more efficient domestic logistical network and eventually to increase economic growth as well as enhance Indonesian competitiveness in the eyes of the world.

The Indonesian government issued Presidential Decree Number 3 year of 2016, as amended by Presidential Decree No. 58 year of 2017 on Implementation of the Acceleration of National Strategic Projects (Pelaksanaan Percepatan Proyek Strategis Nasional). Through this process, Indonesia’s government decided to focus on 245 key projects and 3 programs. The challenge that has emerged is how to pay for them.

The role of state-owned Enterprises (SOEs) in boosting infrastructure development

Under President Joko “Jokowi” Widodo’s administration, state-owned enterprises’ (SOEs) status and role in Indonesia has been increasing significantly. SOEs have been assigned by Indonesia’s government to play more active roles as an agent of development; meaning they were encouraged to become the driver of the national infrastructure development plan. From the beginning of this assignment, the perspective and role of SOEs has shifted slightly, not only as business units and profit makers for the country, but also to be prominent contributors to national advancement. SOEs were encouraged to participate in infrastructure projects based on their business nature. For example, SOEs in construction sectors have to participate and take charge in many projects related to enhancing and building new transportation networks such as light rail transit in Java and Sumatra, the Jakarta‐Bandung high‐speed rail project, building a toll-road project connecting many areas in Indonesia, and development of some new ports and airports. In addition, SOEs that operate in the telecommunication industry as well as the electricity industry have participated in building BTS (based transmission receiver) systems in rural areas, to cover all Indonesian villagers who have not had access to either electricity or telecommunications and internet services.

There are two rationales behind why the government chose assigning SOEs as major actors of national development. First, the funds needed to complete these projects are massive and could not be fully provided by the government. Hence by delegating to SOEs to run particular projects, the central government will not be fully burdened with appropriating the large budgets required to finance those projects. Instead, SOEs themselves have to seek financing to fund the project assigned to them. Needed financing can be obtained by raising funds from the public through capital market mechanisms (that will involve domestic or foreign investors) or by involving banks (SOEs & private banks) to provide loans for funding the projects. Incorporating financing from the capital market could benefit the country because it will drive the public to participate more in the infrastructure’s development.

Second, assigning the projects to SOEs will enhance efficiency and time effectiveness as private companies operating in construction are less interested in doing projects that give lower internal rate of return. Moreover, evoking participation of state-owned banks to finance infrastructure projects is critical, as SOE banks, such as Bank Mandiri, Bank Negara Indonesia, and Bank Rakyat Indonesia, have huge capability and resources compared to other banks or financial institutions in the country. SOE banks have a bigger legal lending limit which will prove useful when financing key infrastructure projects.

However, historically, standalone sizable infrastructure projects in Indonesia were financed by many banks, not just SOEs but also private banks. Why? The participation of SOE banks in financing a large infrastructure project gave more confidence to other private lenders to also join as participants in syndicated financing scheme for those projects, thus increasing credibility and spreading the financial risk of the initial investment. By involving SOEs so heavily now, Jakarta is hoping to facilitate greater involvement from private investors and banks in the long-term – and they will be needed.

In 2018, SOE banks have already spent $22.7 billion for infrastructure project financing. The problem is that in the long run, SOE banks will not be able to continue financing these projects at the high level that they are today. In the future, Indonesia’s Legal Lending Limit may become an issue during review of prevailing banking regulations. Theoretically, this problem could be overcome if the government issues more guarantees to the infrastructure projects that are financed by banks, because somehow, financing an infrastructure project with a guarantee from government, is considered to be less risky, and could be excluded from the estimation of the Legal Lending Limit issue.

Moving forward, if Indonesia still needs to consistently finance large infrastructure projects, greater involvement of the public through capital markets could be a solution. By doing so, it will create less dependency on the government budget, thus lifting the government’s burden.

Ms. Ditya Maharhani Harninda is Assistant Vice President at Bank Negara Indonesia. Mr. Muhammad Aulia Gislir is Assistant Vice President, Legal in the Global Banking and Treasury Business at Bank Negara Indonesia. Both were previously Visiting Fellows with the Southeast Asia Program at CSIS.    


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