Indonesia's infrastructure drive will eventually stutter without greater private-sector participation, says Fitch Ratings. The government has bolstered the capacity of state-owned enterprises (SOEs) to finance projects, but SOEs alone will not be able to deliver on far-reaching plans to address the country's infrastructure problems.
The Joko Widodo administration is aiming to launch infrastructure projects worth around IDR5,500trn (USD420bn) during its first term, from 2014-2019.
The government does not have the funds to meet this target on its own, owing to its low revenue base. Moreover, the government has not yet been able to generate the interest in public-private partnerships (PPP) that it hopes will help make up the difference.
Potential private-sector participants have so far been put off by the uncertain regulatory environment and bureaucratic delays.
The government has responded by introducing a number of programmes to give SOEs the financial capacity to plug some of the gap. Most notably, it injected more than IDR17.5trn of new equity into infrastructure-related SOEs - such as contractors, airport and port operators, and power generators - in 2015, and has budgeted for another IDR35trn in 2016.
This capital is being given to SOEs assigned to build projects. For example, Angkasa Pura II will receive IDR2trn this year to acquire land to build a runway at Soekarno Hatta Jakarta airport. Fitch expects SOEs to be at the forefront of the government's infrastructure push.
However, public finances are already constraining on this strategy. No provision has been made in the 2017 budget draft for the injection of new equity capital into infrastructure-related SOEs.
The government has passed certain provisions that allow the state to guarantee borrowings by SOEs from international financial institutions for certain priority projects, but SOEs will otherwise be expected to improve their capacity for self-financing.
Strong market position
Indonesian infrastructure-related SOEs generally have a strong market position in their regions, relatively stable income and fairly sound credit metrics.
However, most will still generate negative free cash flow in the short- to medium-term, as they have large capital expenditure plans and must pre-fund most of their projects. They are in a weak position to lock up large amounts of extra capital in projects with long investment horizons. Fitch feels that a debt-fuelled increase in infrastructure investment by SOEs is therefore not sustainable beyond the short term.
This means that the government will still need to break the PPP gridlock if it is to fulfil its infrastructure-development agenda. As part of a broader, ambitious reform effort, the government has taken steps to tackle process inefficiencies and mitigate the economic risks faced by investors. It has revoked more than 3,000 regional regulations that contradict national rules or deter investment in 2016. Land acquisition has also been made easier.
These are positive reforms that have addressed some of the business environment weaknesses that hold back private-sector infrastructure investment.