Bankability Remains Big Obstacle in Trying to Lure Private Investors
If good infrastructure forms the gate to civilization, Indonesia still has a long way to go before it can call itself a developed country. Only Jakarta and a few other major cities have had a taste of this luxury, but even there, areas requiring urgent improvement abound.
Without intending to discredit the government’s serious effort to promote infrastructure in the past decade, the bitter reality is that from about a hundred projects in which the government had offered to participate in a public-private partnership scheme, only a handful are in the process of realization.
Why is a PPP so important? Isn’t it the state’s obligation to provide good infrastructure? Yes, but the state does not have enough funds to meet all the demands of a rapidly growing country, and this is why investors should be very much involved in the projects.
Since 2009, the State Ministry of National Development Planning (Bappenas) has annually issued a so-called PPP Book, listing all the projects that the government endorses for cooperation with the private sector. Projects are classified into three categories: “ready for offer,” “priority” and “potential.”
In the 2011 PPP Book (applicable through 2014), the total number of projects identified was 79. Thirteen were ready for offer projects, 21 were priority projects and 45 were potential projects. Have the 13 “ready to offer” projects come to fruition? The answer is no. One project, a 2,000-megawatt Central Java power plant, has been signed. Some are still in the process of being signed, and the rest are stuck for want of willing investors.
For an investor, the biggest challenge in Indonesian infrastructure investment is the bankability of the projects. Bankability is the balance between risks assumed by investors to build expensive infrastructure and the potential to maximize gains, minimize losses and sustain the project. One risk that is almost impossible to mitigate in many infrastructure projects is the credit risk: the issue of payment assurance. This is key to the bankability of infrastructure projects and possibly the biggest obstacle to infrastructure development in Indonesia.
There are two main reasons that make it difficult for investors to assume credit risk. First, the Indonesian market is historically driven by politics.
Instances like the fuel subsidy battle, the Bank Century scandal and regulatory changes in the energy and resources sector show how political influence guides government decision-making. For investors, such volatility is risky, unless the gain is ascertained from the outset.
In a PPP business model where investors’ returns come solely from charges paid by end users during their concession period (toll road projects for example), investors’ main concerns would be the economical stability of the people who use the infrastructure. For instance, a road’s use can be affected by a political decision to scrap a fuel subsidy. Thus, less use means less return for the investors.
Second, there is an issue with the creditworthiness of certain state-owned companies. This is especially clear in the case of the state utility PLN and the state-owned drinking water company PDAM. There is uncertainty about the ability of PLN and PDAM to meet their payment obligations in the long run.
Both were established to undertake a “public service obligation,” which means PLN and PDAM can only sell electricity and water to consumers at tariffs approved by the government. These are generally lower than the costs of purchasing the electricity and water from the producers. The difference between the costs of purchasing and the retail tariffs is compensated for by the government through subsidies.
The question is: just how reliable is the state’s commitment to the subsidy? If it is halted, PLN and PDAM will likely fall into a payment default.
For the investors, the paramount concern is who will pay if PLN or PDAM defaults. A government guarantee would satisfy them, but recent history is not very promising in this regard. Since 1998, the government has not issued any guarantees except on certain pilot projects and the government’s own power-acceleration projects.
The government’s guarantee to enhance the bankability of infrastructure projects often collides with its interest in cutting costs. There is also a political sentiment questioning the benefits of a PPP if a project indeed eats up the state budget. But this is a false argument.
A PPP has always been a way of facilitating the private sector’s provision to help meet increasing demand for public infrastructure, primarily hampered by state budget constraints. The state’s funding liability is spread over a long period (typically, 25 to 30 years). The private sector takes up the full funding liability up front. It is not too much to expect a return of investment with a profit margin.
A PPP is not designed to let infrastructure development slip into the hands of the private sector — it still maintains the state control. Accordingly, the state needs to absorb credit risks that the private sector is unable to assume.
Stabilizing political, economic and social environments is key to gaining investors’ trust, but the most critical task for policymakers is to find better means of credit risk allocation.
Improving the creditworthiness of state-owned companies will require a major institutional and budget transformation, and eliminating subsidies may trigger social turmoil. But Indonesia should be willing to pay a price if it is to enjoy the feel of good infrastructure.
Cindy Riswantyo is a lawyer at Allen & Overy, specializing in finance. She is currently on a study leave to pursue a masters degree in law at Columbia University. The opinions expressed here are her own.