Author:
IBC Team
11 September 2024
Reliance on traditional funding for infrastructure, including bond issuance or short-term bank loans hurts project cash inflows.
Indonesia’s infrastructure projects rely on traditional funding models. With extensive plan spanning 1,700 kilometers of toll roads, reservoirs, ports, airports, and other infrastructure developments outside Java – this proves as challenging financially.
These projects are mainly funded with the state budget, with state-owned enterprises carrying out the infrastructure development. This model has put some SOEs on financial difficulties and potentially jeopardizing the country’s infrastructure ambitions.
Indonesia needs a framework that enables financing of project on long-term basis and beyond the capacity of the sponsors’ balance sheet, thereby reducing credit risk.
Project Finance is a financing structure used to fund large projects with the main collateral being the assets and cash flows generated from the project itself. Infrastructure investments suitable for project finance structure have typical characteristics such as: significantly long lifespans, provision of essential public services, and low demand elasticity. It involves multiple players, each with distinct role and with specific responsibilities.
Project Finance is essential to provide adequate financing for projects sponsored by state-owned enterprises.
This applies especially for projects in key sectors such as energy, transportation, and construction. This financing structure would enable the development of the project as it allows the project to finance itself. However, Indonesia today does not have the mechanism to issue project finance bonds. This type of debt is not yet recognized as a capital market instrument. Consequently, these instruments are not included on investments list nor considered as eligible assets.
”Indonesia today does not have the mechanism to issue project finance bonds. This type of debt is not yet recognized as a capital market instrument.
Certain regulatory changes are necessary for successful implementation of Project Finance Bonds and to allow institutional investors to participate.
There are four steps necessary to achieve this:
- Allow issuance of project finance debt as instruments and for institutional investors to be able to buy from the market.
- Project finance bonds to be rated and listed on the stock exchange.
- Allow public financing institutions for infrastructure such as PT
Sarana Multi Infrastruktur and PT Penjaminan Infrastruktur Indonesia to participate as partial guarantors of project finance debt. - Allow foreign multilateral institutions to partially guarantee project finance debt.
