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Andrew Woodman AVCJ


There is substantial demand for infrastructure
investment in Indonesia and plenty of opportu-
nities to participate, yet progress is slow. Does
the does the sector still hold promise for private
equity?
With nine in 10 passenger journeys and 50%
of cargo traffic carried by road, stand-still
traffic jams have become a daily fact of life in
the Jakarta, Indonesia's capital, where the num-
ber of vehicles has tripled in the last decade.
This problem has been exacerbated by the
absence of long-term infrastructure projects
such as the Mass Rapid Transit (MRT) system
and the monorail. The latter is only just said to
be restarting after a five-year pause.
Delay and inaction has long been an issue with
Indonesian infrastructure. At least four of 11
infrastructure projects selected by President
Susilo Bambang Yudhoyono as a priority for his
second term in office are not expected to be
completed in time. The worst delay has been
with toll-roads; of 1,296 kilometers of high-
ways promised between 2009 and 2014, only
296 km has been completed. Meanwhile, of the
planned 954 km of railways, only 319 km is
operational.
Transport is expected to account for 71% of
infrastructure investment by 2014, but the coun-
try's needs go beyond that. Indonesia is one of
Asia's fastest growing economies and infrastruc-
ture investment is lagging behind GDP growth,
threatening to put the brakes on this rapid eco-
nomic development.
"The demand for infrastructure services in Indo-
nesia is huge," says Sarvesh Suri, Indonesia
country manager with the International Finance
Corporation, the World Bank's investment arm.
"The economy is growing at 5-6% per annum
and there is now a significant movement of
people from the rural to urban areas, so there
is pressure on land, pressure on water, pressure
on services like power."
Indonesia: Infrastructure gridlock
Fundamental need
According to the World Bank, Indonesia's
infrastructure needs are the third greatest in
Asia after China and India with $450 billion
in capital expenditure needed between 2010
and 2020. These figures broadly correlate
with the government's 2011-2025 develop-
ment plan, which identifies IDR4,012 trillion
($440 billion) of investment, of which
IDR1,786 trillion is assigned for basic infra-
structure.
Under the nation's shorter term 2011-2014
economic plan, the infrastructure investment
target is up to $191 billion for the economy
to grow at its full potential. One third of this
will come from the government, with the pri-
vate sector providing the remaining $140
billion.
There is clearly an investment opportunity, but
Suri warns the challenges are significant - to
the point that it might not be a good fit for
private equity. Getting traction in Indonesian
infrastructure requires patience.
According to AVCJ Research, PE has account-
ed for a small portion investment in the asset
class over the past decade, with just $2.2
billion deployed in utilities, transport and
telecom. However, the real number may be
less once investments in infrastructure-related
services are discounted.
Anecdotal evidence suggests that a large
proportion of infrastructure opportunities are
greenfield. It typically takes three or more
years to work through licensing and land
clearance, another two years to build the
asset, and a couple more to ramp up produc-
tion. this means most GPs are under pressure
to sell an asset before it reaches its full poten-
tial.
As i a n Ve n t u r e C a p i t a l J ou r n a l
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Interest, Trends, Tags
covered in this article:
Indonesia: Infra-
structure gridlock
1
Fundamental need 1
Openings in ener-
gy
2
Lacking clarity 3
2
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As i a n Ve n t u r e C a p i t a l J ou r n a l
Mature infrastructure assets on the other hand are rarely for sale, and if they are, the ask-
ing price is high.
"This is the really the main challenge when investing in infrastructure," says Easy Arisar-
windha, investment manager with Saratoga Capital. "The choice is either invest in mature
infra such as telecom towers or operating toll roads, but the return is limited; or invest in a
greenfield or brownfield project with the hope that a buyer will become available before
the end of the fund life, which is clearly a riskier strategy."
As such, the most active investors in the space have tended to the likes of large pension
funds, sovereign wealth funds and developmental finance institutions, which are able to
make long-term investments in return for a steady cash flow.
However, there are examples of GP participation, most notably in energy. One of the larg-
er infrastructure PE deals to take place in recent times saw Saratoga team up with IFC to
buy a 51% stake in Medco Power International for $112 million. The deal came about be-
cause the company's parent, oil and gas specialist Medco Energi, needed fresh capital to
develop small independent power producers (IPPs) to serve areas outside the main Java-
Bali grid.
Standard Chartered IL&FS Infrastructure Growth Fund also made investment in this space in
2011, when it committed an undisclosed sum to Navigat Group, which develops independent
power systems for island locations off the grid.
"The disaggregated nature of Indonesia, a country of around 17,000 islands, means you
can't put wires from island to island so you need all these independent power systems and
portable power helps fill the gaps," says Andrew Yee, global head of infrastructure at
Standard Chartered Bank's principal finance division. "We found a novel way of providing
power in Navigat but with toll roads there is no solution. With tollroads, it is not so easy to
address this Indonesian geographic disaggregation."
Indeed, the transport sector has been slower to gain traction with foreign investors com-
pared to the power sector. One investment that closed this year saw toll road operator
Baskhara Utama Sedaya (BUS) receive a IDR1.13 trillion 18-year convertible debt facility
by OCBC Bank's mezzanine arm together with a consortium of investors, including Saratoga.
Openings in energy
BUS has a 45% stake in Lintas Marga Sedaya (LMS), which was awarded a concession to build and operate the Cikampek-
Palimanan Toll Road (CPTR), a section of the Trans-Java Toll Road that is scheduled for completion by September 2014.
However, the project which - kicked off in December 2011 - has suffered a number of delays. LMS only began work on the road in
January of this year after running into trouble on land acquisition issues.
The lack of clear regulations on land acquisition and the provision of land compensation are among the most commonly cited barriers
to investment in space. Much of this is rooted in Indonesia's history of informal land, which prompts any number of individuals to claim
the rights to the land during the acquisition process.
The other frequent complaint is land owners holding on to their land as long as possible to benefit from appreciation in value while a
project progresses, which has led to unexpected land cost escalation.
One way the government has tried to tackle this is through land reform legislation, allowing purchases for projects previousl y thwart-
ed by private land owners to be forced through. The most significant recent development came in February when the constitutional
court upheld the 2011 Land Acquisition Law, which was designed to speed up the settlement of legal problems resulting from land
acquisitions.
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3
Lacking clarity
As i a n Ve n t u r e C a p i t a l J ou r n a l
Another area which area investors are also
hoping for clarity is regarding public private
partnerships (PPPs). With the two thirds of in-
frastructure investment expected to come from
the private sector, the government will need to
rely on PPPs but so far only two projects of-
fered since 2006 have made it to the construc-
tion phase - coal-fired power plant Central
Java IPP and an expressway in Bali.
"I think there is a weak public sector capacity
to actually develop, transact, ward and monitor
these projects," says Jon Lindborg, Indonesia
country director with the Asian Development
Bank. "There is still much to be done to develop
the public sector capacity to implement PPPs."
The World Bank threw its weight behind the
issue in September of last year, approving a
project to support the newly established Indo-
nesian Infrastructure Guarantee Fund (IIGF), an
institution under the Ministry of Finance respon-
sible for providing guarantees for PPP infra-
structure projects. With the World Bank's sup-
port, the IIGF acts as a credible guarantee
provider, leveraging private investments in
infrastructure projects.
"The government realizing that it must regular-
ize PPPs, not look at them as one-off projects
that can cherry-picked," says Lindborg. "The
government needs to treat PPP as one of the
basic options for infrastructure services."
This also highlights the point that support for
infrastructure investment in Indonesia is not lim-
ited to putting capital into assets.
For example, the country's Ministry of Finance
teamed up with a consortium of development
finance institutions to form Indonesia Infrastruc-
ture Finance (IIF), which provides local-currency
financing for privately-funded projects. Mean-
while, the Ministry of National Development
Planning (BAPPENAS) has established a project
development facility with funding from the ADB
aimed at assisting in project preparation and
the selection of private partners in infrastruc-
ture services.
There may be a huge demand for infrastructure
investment in Indonesia, and more capital will-
ing to fulfill it, but the key is in bridging the
gap to ensure the proper resources reach the
right projects. Otherwise progress will remain
stuck in downtown Jakarta traffic.
25 September 2013, written by Andrew
Woodman.
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