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