Raj Kannan, Managing Director, Tusk Advisory, on boosting infrastructure development in Indonesia

Raj Kannan1 (1).jpgWhat is the status of the implementation of the government’s infrastructure plan?

RAJ KANNAN: In the last couple of years the government’s efforts to deliver projects have been better than expected. In 2016 alone it managed to achieve financial closure on the $4bn Central Java Power Project that had been delayed for over four years. It also launched the construction of the much-needed Trans-Sumatra Highway and enabled a joint venture between a local state-owned enterprise (SOE) and the largest port operator in Europe for the development of the new Kuala Tanjung international seaport and industrial zones. Additionally, it reached financial closure on the long-delayed Umbulan spring water treatment project. This spirit of achievement, I believe, is beginning to infiltrate some of the line ministries. They are now enthusiastically exploring how to get some of the existing projects off the ground by taking a more innovative approach to funding structures, leveraging the private sector’s financial management and technological know-how.

How can the government attract further private investment in infrastructure projects?

KANNAN: For starters, I think the government needs to embrace the private sector as a key partner in infrastructure delivery to foster economic growth across the nation. The private sector’s aspirations for the country’s economic growth are often aligned with the government’s. Thus, the private sector should be treated as a partner when it comes to encouraging economic growth. That said, the government must structure the projects so they enable the private sector to make a reasonable return on their investments.

What I am suggesting is for the government to craft project delivery structures that are in line with ones used effectively all over the world; where the government remains the project’s owner, but the private sector is awarded a concession to develop and expand an existing asset long enough for it to recover its investments. To enable this, the government must provide certainty of investment, which is not about the government providing a guarantee against commercial losses, but rather honouring its contract and meeting its obligations, irrespective of political leadership in the country.

How can limited concession schemes (LCSs) help boost infrastructure development in Indonesia?

KANNAN: An LCS is effectively an infrastructure funding scheme that has been proven to be both government- and market-friendly. The Committee for Acceleration of Priority Infrastructure Delivery (KPPIP) has been at the forefront of promoting this scheme, effectively monetising some of the government’s existing assets that require capital expansion for new facilities and upgrading. Under LCSs, the private sector will compete on the amount of upfront cash it will pay the government to take over the running of these assets, such as seaports, airports or transmission lines, for an agreed concession period. During this concession period the private sector will be responsible for all capital expenditures required to upgrade the services of these assets. For example, in Turkey the government concessioned eight existing airports, starting with its flagship Ataturk Airport in Istanbul, and these schemes collectively raised over $5.8bn in upfront cash to the government. In India, the government concessioned five of its 125 commercial airports to private sector consortiums, and now 60% of the Airports Authority of India’s revenue comes from these airports.

What’s important to recognise in these LCS-type deals is that the government remains the owner of the assets, and at the end of the concession period the government will take back the facility that has been upgraded. In the case of Ataturk Airport, the concession was only for 17.5 years. We are hopeful that the government, particularly the Ministry of Transport, will see the benefits of LCSs and explore their implementation in Indonesia. It’s also important to remember that the upfront payments for an LCS are not debts, they are in fact private sector investment costs, thus the government doesn’t have to return these payments, unlike securitisation. Securitisation is a debt instrument where the current asset owner or operator pledges all future revenue in exchange for upfront cash to upgrade an existing asset. The project owner must repay these debts. When the project owner is an SOE, then this is effectively government borrowing.

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