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Insurance Fund to Protect Indonesia Infrastructure Investments
Dion Bisara | January 06, 2010

A worker constructs the steel fence for a crossing bridge on the Jakarta Outer Ring Toll Road West 1 in Cengkareng, Jakarta, on Monday. (JG Photo/Safir Makki) A worker constructs the steel fence for a crossing bridge on the Jakarta Outer Ring Toll Road West 1 in Cengkareng, Jakarta, on Monday. (JG Photo/Safir Makki)
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The government has established a state-owned guarantee fund to protect investors in infrastructure projects from any “unfavorable” policies that could hurt their investments, the Finance Ministry said on Tuesday.

The fund — called PT Penjaminan Infrastruktur Indonesia (PII) — will act like an insurance company, compensating investors for losses if, for example, a promised tariff hike on a toll road did not materialize. Investors will have to pay premiums but not as high as those charged by traditional insurance firms.

“The objective in establishing PII is, firstly, to reduce the cost of financing public-private partnerships [PPPs] by improving the quality of the PPP projects and their creditworthiness,” Arif Baharudin, the Finance Ministry’s director of state assets, said. Firms who are backed by PII will also enjoy easier access to credit and lower interest rates, he said.

“PII is also expected to help the government manage its fiscal risk better by ring-fencing government obligations vis-a-vis guarantees,” Arif said.

PII was formally established last week and will report directly to the finance minister. The government has injected Rp 1 trillion ($107 million) as initial capital, the Finance Ministry said.

Fatchur Rochman, the chairman of the Indonesian Toll Road Association, said PII would need to gain the trust of the banks.

“I would say that it needs three years to build confidence in the banking sector. If they fail to to gain that confidence, they would not be effective in bringing down interest rates,” he said.

“Currently we have to pay high interest, ranging from 14 to 15 percent,” he added.

He said investors would be more than happy if the establishment of PII resulted in lending rates for infrastructure investment falling by two or three percentage points.

PII may get additional funds from a Rp 1.5 trillion loan from the World Bank to Indonesia.

PII commissioner Freddy Rikson Saragih said the fund was still calculating the premiums that investors would have to pay to obtain coverage.

No details on the premiums were available because PII had only been established recently, he said.

The government has estimated that the country needs nearly Rp 2,000 trillion a year in infrastructure investment over the next five years.

However, the government is only able to finance about 40 percent of that amount, prompting it to turn to the private sector to jointly finance projects via public-private partnerships.

But PPP projects often find it difficult to get financing. Banks are reluctant to provide loans due to the long durations and high-risk nature of the projects.