Indonesia Needs an Overhaul in Infrastructure Financing

While this is excellent news for the country, many have highlighted the economic risks that the current financial structuring of these plans may pose for the economy.

Leading infrastructure expert Shadik Wahono claims that to minimize long term financial risk, the government should pay attention to the investment schemes for infrastructure. Presently, the government begins construction first, and then searches for an investor and makes regulation.

Shadiq, who has undertaken various toll projects himself, said the government must consider several points in future. The first is related to the return of investment or ROI. Currently, toll road development carried out by Indonesian state-owned enterprises must be in the context of ROI. "Otherwise, they will lose money later," he said.

He explained that before posting a loss, SOEs will usually look for additional loans or reimbursement from banks or bond issuance. If not, then the financial costs will continue to undermine the value of the project, and in the end, if it is sold, it is not necessarily the result of sales not able to pay back what has been spent. "Of course this method is not healthy," he explained.

In addition, many infrastructure projects have not yet shifted from traditional infrastructure financing from the era of the early 70s and 80s. During that time, several developed countries assisted donor agencies, often making development costs very expensive and slow due to the inclusion of foreign interests in return to the aid.

According to recent comments in the media by Bappenas, Indonesia's Development Planning Board, the country plans to spend US$412 billion on infrastructure during the next five years. Up to 65% will be funded directly by the government or through SOEs.

If the government's fiscal strength is very high, the government can build whatever infrastructure it wants. For Indonesia, however, this isn't the case. The country's external debts reached US$387 billion at the end of 1Q19. This makes it hard for the government and SOEs to shoulder such expenditure.

In limited fiscal capacity, the government still has to build infrastructure to support economic growth, namely by an overhaul on the financing structure. In this case, the government must again pay attention to investment discipline.

"The government must be able to provide adequate support so that infrastructure projects offered to the private sector can have an attractive risk-return profile with a level of ROI that is in line with the demands of the financial market," Shadik concluded.

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