Infrastructure needs fixed financing scheme

Infrastructure needs fixed financing scheme

Fajar Hidayat, Jakarta

In economics, the term infrastructure refers to fixed assets
required to provide public services. Two key infrastructure are
utilities, which comprise electricity, gas, water and
telecommunications, and transportation facilities, such as roads,
bridges, urban transit systems, seaports and airports.

Indonesia is lacking in infrastructure, and according to a
2002 survey by the World Economic Forum, Indonesia's
infrastructure is among the most inferior of the 12 Southeast
Asian countries.

Indonesia ranked eleventh in electrification with a rate of
only 53.4 percent, ninth in telecommunications at a rate of 3.6
fixed lines and 5.5 cellular lines per 100 people, seventh in
clean water access at only 16 percent and eighth in highways at
1.7 km per 100 people.

Indonesia's poor infrastructure has hindered economic
activities and lowered the quality of social welfare. In the
electricity sector, for example, World Bank estimates show that
total annual losses from power shortages in residential, public
services, commercial and industrial activities reaches from
US$200 million to $1.23 billion. Meanwhile, frequent blackouts in
Riau during the first half of 2004 have caused consumers about Rp
25.7 billion ($2.8 million) in losses ensuing from damaged
electronic appliances.

A series of focus group discussions held last October by the
World Bank with the private sector throughout East Java
highlighted infrastructure as one of the main business
constraints.

Large enterprises identified poor road maintenance, difficult
access to industrial estates, insufficient power supply and an
expensive yet insufficient water supply as key infrastructure
problems, while small businesses identified the negative impacts
of traffic congestion on distribution and the need to supply
their own captive power to compensate for the unreliable
electricity supply.

The National Development Planning Board, or Bappenas,
predicted that from 2005 to 2009, Indonesia needed at least $72
billion to invest in new infrastructure. Due to fiscal
constraints, however, the government would only be able to
provide $31 billion, and the remainder is expected to come from
private funding.

The sources of private funding are available in the financial
market. Hence, mobilization of funds in the financial market will
be required to meet infrastructure investment needs.

Indonesia's banks presently have excess liquidity -- the
amount of total deposits minus outstanding loans -- of about Rp
530 trillion. Assuming that 20 percent of this is allocated
toward infrastructure investment, available funds would reach Rp
105 trillion. Meanwhile, insurance and pension funds have
approximately Rp 75 trillion in excess liquidity; if 20 percent
of this is also allocated to infrastructure, additional funds of
Rp 15 trillion will be available.

Still, a total figure of Rp 120 trillion falls short of the
$41 billion in private funds necessary. However, if these funds
can be utilized optimally to accelerate infrastructure
investment, then it can be expected to lure foreign investors to
fill the financing gap.

Utilizing the financial market to finance infrastructure
development can be achieved through banks and the capital market.

As creditors, the banks can finance infrastructure by
providing long-term investment and working capital loans from the
construction phase until the infrastructure is commercially
operational. The loans can be channeled either by a single bank
or several banks through syndicated loans, risk participation or
assets sales.

Infrastructure-financing schemes available through the capital
market are equity and debt financing. In equity financing,
investors finance projects by buying infrastructure providers'
common stock with a view to receiving dividends or capital gains.
In debt financing, the providers issue corporate bonds to obtain
capital for their projects.

Some sophisticated debt-financing schemes are also available
for infrastructure financing, one of which is Assets-Backed
Securities (ABS). The ABS comprises securities/bonds in which a
company gains capital by setting aside a group of assets, and
future revenue from these assets is used to service the debt. The
assets are typically the company's receivables or other figures
that will generate future cash payment.

An ABS consists of three basic steps. In the initial step, the
originator company transfers asset ownership to a special purpose
vehicle (SPV), which becomes a "bankruptcy remote entity" that
protects the assets from any third-party claims in the case that
the originator goes bankrupt. The assets are secured as
collateral exclusively for ABS investors.

The SPV then issues the securities through an investment bank,
which conducts a comprehensive assessment of the project's
commercial and financial feasibility, then determines the project
capital structure. In the distribution step, the bank offers the
ABS mostly to institutional investors like commercial banks,
insurance firms or pension funds.

The ABS scheme is appropriate for infrastructure providers
with many receivables, such as telecommunications, water or
electricity providers.

A toll road provider, on the other hand, can set aside future
toll revenues as a transferable asset under an ABS scheme. Toll
road operator PT Jasa Marga, for instance, is planning to issue
Rp 10 trillion in ABSs to finance the construction of 330 km of
toll road in the initial phase of a 1,000 km toll road project in
Java. Jasa Marga will sell the ABSs through private placement,
instead of a public offering.

Of paramount importance in all of these infrastructure-
financing schemes is cash flow valuation, which provides some
basis for creditors and investors to estimate the
infrastructure's potential to generate revenue. It is this
revenue that will cover operational costs and fulfill all
financial obligations to creditors and investors.

Private creditors and investors are not interested in
financing infrastructure projects without an adequate guarantee
of the infrastructure's financial sustainability.

A sufficient tariff rate that matches the infrastructure's
estimated cash flow will ensure financial sustainability. In
this context, the government has an important role as a regulator
in drawing up proper tariff policies that cover cost and expected
returns.

However, the government must also consider the public's rights
as consumers by ensuring that the infrastructure provides quality
services, efficiently and adequately. The tariffs rates imposed
on consumers must reflect the actual costs and normal expected
returns. Any monkey business, such as mark-ups and taking
excessive or abnormal returns, must be prevented.

Full transparency and accountability are vital requisites for
infrastructure providers and their consumers to benefit mutually
and fairly.

Projects that provide quality services efficiently, but cannot
charge commercially feasible tariffs in the absence of positive
economic externalities or government subsidies should not be
built.

The writer, a financial market analyst, can be reached at
fajarhidayat@lycos.co.uk