Indonesia : Leveraging Private Infrastructure Investment Project

Finance / Infrastructure finance and investment funds

Indonesia's infrastructure and infrastructure services are inadequate to support a modern, competitive middle-income economy and provide basic services to its people. Poor infrastructure constrains connectivity in Indonesia's archipelagic geography. Indonesia's roads, ports, and airports are heavily congested. Logistics costs are high by middle-income country standards, affecting trade and investment. Inadequate infrastructure is a drag on Indonesia's competitiveness.

The government has undertaken important institutional and regulatory reforms to facilitate infrastructure development. In 2010, with the support of ADB and the World Bank, the government established IIF, SMI, and PT Penjaminan Infrastruktur Indonesia (Persero), who have emerged as major players in the infrastructure landscape of Indonesia by providing debt financing, equity, guarantee as well as advisory services. In 2014, the government established the Committee for Acceleration of Priority Infrastructure Delivery to address coordination problems leading to delays in rolling out infrastructure projects. In 2017, the government established the Non-Government Budget Investment Financing Initiative at the Ministry of National Development Planning (BAPPENAS) to promote private and other non-budget investment in selected projects. The government plans to spend $450 billion in infrastructure development under the medium-term development plan, 2020-2024.

While continued improvements in public revenue and expenditure management will help create fiscal space for infrastructure and other priority development spending, increasing private sector participation will be essential for delivering the infrastructure development plan while reducing the fiscal burden. In 2017, the annual infrastructure expenditure of about $30 billion was dwarfed by annual investment needs of more than $70 billion before adjusting for climate change. Moreover, private sector investments have the potential to enhance the quality of infrastructure through improved efficiency as well as knowledge and technology transfer.

IIF was established by the Government of Indonesia and development partners including ADB to provide financing solutions and instruments that are otherwise unavailable in the market. In April 2019, PT Pemeringkat Efek Indonesia (PEFINDO), a national credit rating agency, maintained its national long-term rating of IIF's bonds at AAA with a stable outlook based on IIF's strategic importance, public sector and supranational ownership structure, and tight monitoring by the Ministry of Finance (MOF). IIF bonds are mostly held by institutional investors (e.g., pension funds, mutual funds, and insurance), which help channel long-term funds to infrastructure projects. IIF has an expanding portfolio and plays a critical market development role for infrastructure financing by (i) providing longer tenors (8 years on average) than what is available in the market; (ii) extending nonrecourse and limited recourse financing that support the development of a new asset class for project finance instruments; and (iii) offering scarcely available products such as mezzanine and equity finance. IIF partners with other banks and financial institutions through a syndication approach as prescribed by its investment limits. As of 2018, IIF leveraged Rp137 trillion of infrastructure investment from the domestic market through loan syndication and bonds issuance. When IIF plays the role of lead bank in the lending syndicate given its project structuring expertise, its participation adds an element of comfort to cofinanciers. In cases where IIF is not the lead bank, it undertakes an independent due diligence of the underlying risk and lenders agree on a common term sheet. Where IIF provides mezzanine or equity investments, it takes the riskier leg of the financing equation, thereby catalyzing senior bank debt. The MOF has expanded IIF's investment mandate to include social infrastructure such as health and education. To support IIF's expansion in response to the growing infrastructure finance market, the government obtained $200 million in additional financing from the World Bank and requested a new $100 million financial intermediation loan from ADB.

Availability of quality infrastructure increased (RPJMN 2020-2024)

Private investment in infrastructure catalyzed

Availability of long-term financing and facilitation services for infrastructure projects increased