Taking Indonesia to market: Leveraging global experience

Taking Indonesia to market

With infrastructure investors starting to shift their eyes east, looking for better yields and new opportunities, Indonesia is rapidly coming into view.

Sharad Somani

Head of Infrastructure, KPMG Asia Pacific

KPMG in Singapore

Wooden bridge

With investors starting to shift their eyes east, looking for better yields and new opportunities, Indonesia is rapidly coming into view. The country boasts the world’s fourth largest population (around 260 million), placing it behind only China, India and the US in terms of size. And with a median age of just 29 years, all signs suggest that Indonesia may now be entering a period of sustained and accelerated growth.

Growth requires infrastructure. And Indonesia — like every other emerging market — has a long list of requirements. From power and ports through to hospitals and schools, significant investment is required to improve connectivity and productivity across Indonesia’s many populated islands. The government estimates that around US$500 billion in infrastructure investment may be needed over the next 5 years alone.

Clearly, public budgets are insufficient to finance the total investment requirement. Everyone now recognizes that private sector investment will be vital to closing the gap.

According to Sinthya Roesly, CEO of the Indonesia Infrastructure Guarantee Fund, Indonesia’s Government is keenly focused on driving private participation into infrastructure delivery. “It’s an established policy direction and the current government is pushing hard to develop a framework to attract private participation,” she noted in a recent interview “All stakeholders now recognize that private participation is an absolute ‘must’ if we want our country to develop.”

Creating clarity and comfort

Attracting private investment, however, is a challenge for most emerging markets and competition amongst markets is heating up. In response, Indonesia’s government is focused on improving the investment environment and options for international investors.

“The real challenge for emerging markets is to create an environment that provides clarity, certainty and consistency across the legal, regulatory and institutional framework,” Ms. Roesly noted. “At the same time, we want to help create a pipeline of projects that are financially, economically, technically, environmentally and socially feasible.”

That includes ensuring that risk assessments and allocations for projects are reasonable and that procurement processes are transparent and to global best practices. “The structure and framework we are developing should provide significant comfort to private sector investors interested in Indonesia’s infrastructure sector,” she added. “But it also provides comfort to the public sector by creating a framework and providing accountability for private sector involvement.”

Taking on the right risks

It is Ms. Roesly’s organization — the Indonesia Infrastructure Guarantee Fund (IIGF) — that is perhaps the most unique and effective tool in Indonesia’s efforts to attract private investors. Structured as a State-Owned Enterprise under the Ministry of Finance, the IIGF was established in late 2009 to provide a system of government guarantees for private public-partnership (PPP) infrastructure schemes.

Essentially, Indonesia’s government has recognized that — in order to attract international investors — the country needs to establish a strong track record for successful PPP delivery. In the initial period, that will mean providing government guarantees to help the first wave of investors enter the market with confidence.

The IIGF is more than a pure guarantee scheme. The organization is also focused on improving the quality of Indonesia’s projects and the success of the private-public relationships. “Our main mandate is to provide guarantees, but that starts with having a robust appraisal and evaluation system for projects,” she noted. “We need to ensure that we are providing guarantees only to well-structured and high-quality projects.”

While the IIGF is a central organization, Ms. Roesly’s team spends a significant amount of time working with local government leaders and municipalities to help them apply the new frameworks and structure their projects. “We’re trying to build awareness within the public sector of what can be done when you use the right framework,” she added.

Getting the right advice

When establishing the IIGF, Ms. Roesly and the Indonesian government were adamant that the organization would adhere to the highest international standards. “World class operational norms and best practices provide stability and build confidence with international investors and financiers,” she said. “This is important not only in the execution of the deal, but also in the way risk is allocated, projects are prepared and agreements are documented.”

The organization has also taken great efforts to ensure that their processes, procedures and operations are aligned with the key multilateral organizations operating in the country. Working in cooperation with the World Bank and other International Financial Institutions and Development Banks, the IIGF developed leading standards and process.

“We engaged with a wide range of advisors to help us develop the right framework and build the right guarantee structure for the IIGF. Not only technical advisors, but also commercial advisors, financial advisors, legal experts and — of course — the private sector itself,” she added. “We want to be able to deliver against the expectations of the international financial community.”

All signs suggest that Ms. Roesly’s efforts are paying off. In the first 6 full years of operation, the IIGF has signed nine guarantee agreements for nine separate projects across four sectors (power, water, roads and information and communications technology). In total, the projects represented more than US$7 billion in investment. Another US$13 billion worth of projects have been appraised and prepared for tender.

“We’ve been getting a lot of feedback from the market and we are seeing rising interest from investors who want to be involved in projects where the IIGF has had an involvement,” she noted. “I think the business model and discipline that we bring to the market is proving to be a success.”

A bright future ahead

Ms. Roesly recognizes that the global infrastructure market is rapidly evolving and that investor preferences are changing. Her team continuously engages with national, regional and global advisors to ensure that the IIGF’s models and frameworks remain relevant. “It’s critical to ensure that our capabilities and capacity remains aligned with global requirements,” she noted.

However, she also believes that Indonesia’s infrastructure market will also grow and evolve to meet investors requirements. So while the organization is currently focused on greenfield projects, Ms. Roesly expects that this focus will broaden to include brownfield deals in the near future.

“Once the construction stage has been completed, we expect some of these projects to be cycled to the private sector through secondary asset sales, thereby allowing capital to be reinvested into new projects and sectors,” she forecasted. “That being said, the ultimate responsibility for infrastructure delivery falls on the public sector, so it will be critical to ensure that government remains involved throughout the lifecycle.”
Ms. Roesly is quick to point out the robust pipeline of projects that her organization is helping bring to market. In fact, she expects the IIGF to extend guarantees to another 10 projects this year and to support another 20 to 30 new projects over the next 5 years.

“There is great optimism in Indonesia today and we believe that there are significant opportunities for both economic and social infrastructure as an investment in Indonesia,” she added. “Together, we can build infrastructure that creates benefits not only for the people of Indonesia, but also for investors and stakeholders.”

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