Paving the road ahead

Indonesia, Southeast Asia’s largest economy, is at an inflection point. Will political uncertainty derail its bid for growth?

Asia’s emerging markets are in for a bumpy year in 2019 as they face the full impact of the US-China trade war, global interest rate hikes and a strengthening US dollar. Indonesia, Southeast Asia’s largest economy, has the added challenge of maintaining its economic transition to cement its place as an Asian powerhouse next only to China and India.


9 Jan 2019


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ASIA’S emerging markets are in for a bumpy year in 2019 as they face the full impact of the US-China trade war, global interest rate hikes and a strengthening US dollar. Indonesia, Southeast Asia’s largest economy, has the added challenge of maintaining its economic transition to cement its place as an Asian powerhouse next only to China and India.

Much will depend on whether President Jokowi Widodo can achieve his ambitious goal of seeing the economy expand by 7% from the current 5% level. The World Bank, in its latest report, expects Indonesia to post a real GDP growth rate of 5.3% in 2018, up from 5.1% in 2017. The bank expects the country’s GDP to grow by 5.3% in 2019, before expanding to 5.4% in 2020.

Critical to achieving his GDP goal is Indonesia’s far-reaching infrastructure investment programme known as the National Medium Term Development Plan (RPJMN). Under the plan, the country needs to invest 4,796 trillion rupiahs (US$354 billion) this year to make up for the severe underinvestment that has undermined Indonesia’s competitiveness.

In 2018, the government has set aside 404 trillion rupiahs for infrastructure. It plans to build 856 kilometres of new roads and 781 kilometres of irrigation channels. Over 40% of the total budget is for road construction and for the maintenance of 46,000 existing roads. Another 37 trillion rupiahs is allocated for irrigation infrastructure. Plans include the construction of 11 new dams, 54,000 hectares of irrigation networks and the repair of 160,000 hectares of existing ones.   

Crucial to the success of the government’s infrastructure development programme will be the outcome of the general elections on April 17 2019, where Widodo will seek a second term.

Similar to those of other democratic nations, Indonesia’s infrastructure projects are subject to heightened risks of policy interventions. The elections present uncertainty to the continuation of the nation’s infrastructure programme.

Meanwhile, Indonesia needs to raise US$1.5 trillion to plug widening funding gap for infrastructure projects including power stations, toll roads and ports.

“(If he succeeds), the president will be remembered as the father of infrastructure in Indonesia. He understands the power of the archipelago with its 17,500 islands. It is also very long – 1.25 times the distance between New York and Los Angeles. He understands you need to connect all these islands. He understands logistics,” says Batara Sianturi, chief executive officer at Citi Indonesia.


Indonesia’s power sector accounts for a big share of the nation’s expenditure. State electricity company PT Perusahaan Listrik Negara (PLN) oversees the establishment of vital power infrastructure.

Recognizing that the country’s power requirements cannot be serviced by PLN alone, the government has invited independent power producers (IPPs) to build power plants and feed electricity into the public grid. The government plans to expand the country’s power capacity by 35GW (gigawatt) in 2019, according to the Ministry of Energy. The government plans to share the responsibility of building this much capacity with the private sector. 

So far, PLN has raised a total of US$5.1 billion – US$3.6 billion from the capital markets through US dollar-denominated bonds issues and US$1.5 billion through loans from international banks.

The state utility is banking on IPPs to contribute US$54 billion for power generators. PLN will invest US$37 billion in power plants. Some US$19 billion more are needed for transmission lines and substations, and another US$15 billion for distribution, according to the Global Indonesia Business Guide.

By 2026, PLN and the IPP would have constructed 77.9GW of generating capacity, according to PWC. Of the capacity, PLN is building 21GW and the IPPs, 42.1GW. PWC says some 14.8GW of capacity have yet to be allocated.

Toll roads

The second major component of the infrastructure programme is the construction of toll roads led mainly by PT Jasa Marga Persero (Jasa Marga), also known as the Indonesian Highway Corporation.

Most of the financing for toll roads come from state banks and regional banks with local currency portfolios. Although Indonesian toll road development began 40 years ago with the opening of the Jagorawi toll road from Jakarta to Bogor, toll road construction continues to face issues of inefficiency, financing risk and unattractive investment environment.

Jasa Marga’s high debt ratio prevents it from raising additional financing to develop more toll roads. Its lack of borrowing capacity is pushing the company to explore alternative sources of funds such as Islamic finance.

“There are two types of (sukuk) structures that we can offer the market. One is a corporate sukuk while the other is sukuk issued at the project level,” says Donny Arsal, director of finance for Jasa Marga, which is looking at issuing sukuk bonds for the first time.

“As a corporate, Jasa Marga can issue normal sukuk. But at the project level we can issue sukuks with maturity that will match the requirements of project financing,” Arsal says.

Jasa Marga traditionally funds projects through bank loans that don’t usually match the maturity requirements of its project financing. Sukuks can address that issue, says Arsal.

Gioshia Ralie, managing director and head of corporate and investment banking at Citi Indonesia says securitization is another fundraising option Jasa Marga can explore. But that will entail taxes that can make the fundraising process onerous.

“You take this asset, put it into a vehicle, raise money on the back of this asset, and use this money to expand into a new toll road. But the challenge in Indonesia is when you take this asset and move it into a vehicle, an SPV (special purpose vehicle). There is a tax implication there. That’s why securitization in Indonesia may not work mainly because of the tax, although people are still working very hard to see whether that may be doable because Jasa Marga still needs a lot more money to build toll roads especially outside Java,” he adds.

For now, Jasa Marga continues to look for new ways of raising more money “on an off-balance-sheet basis because its debt is already high,” adds Ralie.          


In terms of funding, the development of Indonesia’s ports has had a greater degree of success. PT Pelabuhan Indonesia II, the country’s biggest port operator also known as Pelindo II, raised US$1.6 billion from the international capital markets through bond issuance in 2015.

PT Pelindo III, another state-owned port operator, also raised 4.5 trillion rupiahs (US$343 million) from a syndicate of local banks including Bank Negara Indonesia (BNI), Bank Rakyat Indonesia (BRI) and Bank Mandiri.

Pelindo II president director Elwyn Masassya says its national strategic projects include developing a new international port in Kijing, West Kalimantan and Kalibaru port as an extension of Tanjung Priok, the country’s main port located in its capital, Jakarta.

The new port will improve the capacity of Indonesia’s main ports to take in international and domestic cargo.

Pelindo II also plans to develop a network of internal waterways or canals from Tanjung Priok to Cikarang, West Java that will provide an alternative means of transporting cargo out of Jakarta while avoiding the metropolis’ notoriously congested road network.

Pelindo II is also enhancing connectivity within the country’s port system by developing a digital network that will integrate the port operator systems with those of the private sector and the government’s trade and customs bureaus.

“In line with our president’s vision to make this country into a maritime axis, we have to improve our connectivity network. We have to improve our infrastructure quality. We have to create an integrated port network. This means the ports have to be supported by an industrial area and the main ports must be connected into one system, one operational standard, one commercial tariff system and one infrastructure standard,” Masassya says.


Financing is a huge problem facing Indonesia’s infrastructure. However the sector faces a much bigger challenge: obtaining land permits.

Particularly for infrastructure projects that transcend local and regional boundaries, getting regional governments’ support can be tricky.

Political synergy or the lack thereof between the central and regional governments can define the fate of a number of the country’s vital infrastructure projects.

“If the partnership runs well, then the projects may be done faster. But if you have a regional government that is not aligned with the central government that may not happen,” adds Ralie.

“It may take longer to get the permits out – to get the regional government support on land acquisition or the environmental study. This is one area where project availability can be the delaying factor. The timeliness of the preparation of the project so that it will be available for financing may be affected because of the involvement of the regional government,” he adds.


9 Jan 2019


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