Recognizing the benefit of asset recycling

Realizing the state budget’s capacity is still limited due to a high deficit ceiling, the private sector and state-owned enterprises (SOEs) should play a greater role in the development of the country’s infrastructure projects.

Based on data from the Committee for Acceleration of Priority Infrastructure Delivery (KPPIP), of the total Rp 3 quadrillion (US$224.4 billion) in investments needed for the development of infrastructure projects in the medium term, the government and SOEs can only provide about 40 percent.

Thus there is still a gap that needs to be financed externally, either indirectly through banks or the capital market, or directly by private infrastructure companies.

An innovative scheme such as recycling assets by state-owned enterprises (SOEs) should therefore be promoted as an alternative to finance such infrastructure projects. It is inarguable that SOEs have an important role. However, SOEs also have its limitations especially on the financing side.

Raising funds through privatization will be difficult for SOEs. Under the Law No. 19/2003 on SOEs, fund raising that will affect SOEs’ equity ownership structure should follow certain processes, which involve the need of legislative approval. As a result of this requirement, several SOEs have preferred to raise funds through debt instruments.

Achieving the latter is also challenging. The country’s infrastructure debt market is still small. Based on observation by Indonesia’s state-owned PT Sarana Multi Infrastruktur (infrastructure financing company), the proportion of infrastructure lending is only around 8 to 20 percent of the total lending portfolio of some big banks.

The debt securities market is also small because of demand scarcity. Institutional investors as targeted investors are in general still investing heavily on money market instruments.

This has scared away SOEs to raise funds by issuing bonds, for instance, as it is relatively expensive.

Besides, some big SOEs have certain balance sheet conditions that limit their ability to leverage or increase debt.

Although the government has increased its capital injection into SOEs in recent years to accelerate infrastructure development, the challenges from the financial side remain.

In regard to these impediments, the government recently called for innovative ways to attract private investment for infrastructure. In November 2016, a directive was made by the government for owners of infrastructure assets such as SOEs to recycle their assets in order to fund new infrastructure.

There are several ways of recycling, for example by leasing the assets and securitizing the assets’ future cash flow.

For assets through leasing, exemplary work has been done by the Australian government. In 2014, the Australian federal government introduced its Asset Recycling Initiative (ARI).

The ARI has provided incentive payments to states and territories that lease their assets to the private sector for 99-year terms and reinvest the longterm lease proceeds to fund infrastructure investments across Australia.

Under this scheme, the government provides incentives to the state and territories to invest and replace infrastructure assets within their domain.

State and territory will receive 15 percent of the proceeds of the assets sold if all the lease proceeds are allocated to new infrastructure investments.

Recently, the New South Wales state government also enables the possibility of virtuous asset recycling. This is done by making the incentives eligible only for new infrastructure projects that further facilitates the long-term lease of an asset once it has developed a sufficiently reliable revenue stream.

With such an opportunity, private investors accepted the demand risk associated with the usage of the infrastructure. This was reflected from enthusiastic participation from local pension funds and an inflow of foreign direct investment.

The scheme has successfully recycled a high-voltage electricity network and port with total amount of A$20 billion (Rp 204.77 trillion).

Considering the asset recycling will not affect the ownership of the assets, this scheme could be a much-needed complement to the Indonesian government’s infrastructure development strategy.

The next alternative, which is currently being pursued by the SOEs Ministry is securitization. The basic idea of infrastructure asset securitization is to form securities out of future cash flow from infrastructure that already has a steady and predictable stream. The securities are issued like debt instruments. The only One of the most important difference with other debt instruments is that this instrument is remote from the corporate’s bankruptcy risk.

Mexico is one developing country that conducts securitization using infrastructure assets. Sharing a border with a country that has a very developed financial sector like the United States, since 1990s, Mexico has conducted some advanced financial market transactions such as securitization of tollroad.

Despite the big obstacles faced at the implementation level, the transactions provided a fast track for infrastructure in emerging markets and gave the private sector the opportunity to invest.

While the concept of asset recycling is quite simple, its implementation is very meticulous. If the government and SOEs are interested in pursuing an asset recycling program, they should first plan a sound implementation strategy.

This will include an asset management strategy such as proper assessment of what assets to retain, enhance or divest, with a long-term perspective. The writer works for the Center of Macroeconomic Policy at the Finance Ministry’s Fiscal Policy Agency. The views expressed are her own.


Written by: Adelia Pratiwi
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