Posted on 06 May 2015
Since the global financial crisis in
2008, the Asian region has been the most economically resilient in the world
and the motor of the global economy.
In the last six years, emerging Asia (especially China) has taken over the role
of developed countries in stimulating the flagging global economy.
Yet Asia’s enormous potential has not been supported by the infrastructure
necessary to long-term economic growth.
High-quality infrastructure attracts investment. Moreover, the potential for
high inflation can be reduced, particularly in archipelagic countries like
Indonesia, and sufficient infrastructure facilitates market access to better
information, ultimately driving efficiency in the economy.
The quality of infrastructure in Asia countries is still relatively low
compared with other regions in the world. According to the Global
Competitiveness Index (GCI) survey, the average index of competitiveness for
the quality of regional infrastructure in emerging and developing Asia is at
3.55, lower than the index of competitiveness for the quality of global
infrastructure at 4.23.
According to data from the Asian Development Bank (ADB), to be able to improve
the quality and quantity of infrastructure, the region will require massive
long-term investment (2010-2020) of US$ 8.22 trillion, or $0.75 trillion a
year.
The sector requiring the greatest investment is electrical infrastructure,
which needs $4 trillion, followed by transportation at $2.9 trillion,
telecommunications at $1 trillion and water and sanitation at $280 billion.
Indonesia is expected to account for the greatest infrastructure financing
needs in the ASEAN region (2010 to 2020), with $450 billion. The portion of
infrastructure financing as a share of gross domestic poduct (GDP) needs to be
increased from 3 percent (2012) to 6.2 percent.
In line with ADB calculations, the Indonesian government has designed a
long-term infrastructure development program.
The urgent need for adequate infrastructure has encouraged the new government
to focus on six strategic areas in the field of infrastructure and
connectivity: building maritime connectivity in the form of 24 new ports and
their means of support; building 5,500 kilometers of railways in Sumatra,
Kalimantan, Sulawesi and Papua; adding 35,000 megawatts of electricity supply;
building mass rapid transportation (MRT) systems in several large cities in
Indonesia; building 25 dams across Indonesia to increase food production; and
building 24 new airports to attract 24 million foreign tourists by 2019.
In the national medium-term development plan 2015–2019, infrastructure
financing needs in Indonesia reach Rp 5.52 quadrillion, equivalent to Rp 1.10
quadrillion per year, with a balanced source of funding from government and the
private sector (banks and non-banks).
By September 2014, banking finance to the infrastructure sector had increased
about fourfold to Rp 347.6 trillion from Rp 88.8 trillion in 2007. However,
banks are limited in their capacity to disburse loans because of tight
liquidity, as reflected in the high loans-to-deposit ratio (LDR), which has
reached 90 percent.
Such conditions require Indonesia to seek infrastructure funding alternatives
aside from banks. In two other countries in Asia, Malaysia and India, the role
of the private sector in infrastructure funding is relatively large. In
Malaysia, government spending on infrastructure funding is relatively low, as
the government encourages the private sector to play a larger role.
One successful effort made by the Malaysian private sector in infrastructure
financing is collecting funds through the debt capital market. An example more
similar to Indonesia is India, where infrastructure financing comes mostly from
the public sector. Aware of fiscal constraints in infrastructure funding, the Indian
government has enacted regulations to encourage public-private partnerships
(PPP), with the portion of bank loans to infrastructure financing increasing
from 2 percent in 2000 to 14 percent in 2012.
The need for infrastructure financing is growing in India, encouraging the
government to involve the private sector. One of the efforts involves widening
the availability of the infrastructure fund base by issuing bonds for sale to
long-term investors (insurance companies and pension funds).
Alternative financing for infrastructure seems indeed to be driven by the
non-bank financial sector, such as the capital market. At the Mandiri
Investment Forum 2015, the chairman of the Financial Services Authority (OJK)
said that the need for infrastructure financing was great and long-term, and
thus could not be met by the banking sector alone.
This is, therefore, a very good opportunity for capital markets to contribute
more to the national economy in terms of infrastructure financing. On the
supply side, the development of capital markets is related to the number of
listed companies on the stock exchange. Unfortunately, listed companies number
only around 500.
On the demand side, it is very important to increase the participation of
domestic retail investors. Indonesia’s huge population offers a tremendous
opportunity for capital market penetration. However, efforts to expand the role
of capital markets in financing infrastructure must also be accompanied by the
expansion of products and financial instruments that can be attractive to
investors.
Further discussion on which infrastructure financing model is the best suited
to the Asian region, including Indonesia, will take place at a Bank Mandiri
event, the 2015 IIF Asia Summit on May 6-7. There will be several panel
discussions on the global economic outlook, infrastructure financing, financial
inclusion, global regulatory structures, financial integration and investing in
Asia. Around 300 participants are expected to attend the event, which will
offer the latest information on Asian economies, as well as analysis of future
opportunities and challenges.
