State vs private companies

RIGHT from the outset of his administration, Indonesian President Joko “Jokowi” Widodo has focused his attention on the shortfalls of the country by accelerating infrastructure development and pushing for deregulation.

But his infrastructure programmes have of late been criticised for the alleged dominance of state-owned enterprises in financing and building facilities like toll roads, power plants, airports and seaports. Even the Indonesian Chamber of Commerce and Industry (Kadin) brought the issue of what it calls “SOEs omnipresence” in the economy.

The impression of SOE dominance especially in infrastructure development is inevitable, because this sector requires huge and long-term investment, and the biggest barriers to investors are the complexity of land clearance and acquisition and overlap- ping regulations.

Faced with the understandable reluctance of private investors in green-field infrastructure projects due to the myriad regulatory and financial risks, the president has pressured SOEs to take the lead role in a concerted bid to build up confidence after infrastructure was ignored over the past two decades. Inadequate infrastructure has become the biggest obstacle to economic development, including poverty alleviation.

Given the high risks and huge capital requirement of infrastructure development, SOEs, riding on the back of state budget financing and government guarantees, have the big advantage of circumventing the regulatory and bureaucratic inefficiencies in plunging head-on into this sector.

The problem is that there has been an acute lack of bankable projects. But the bankability of an infrastruc- ture project is determined in its early phase – at the project development stage, which is entirely under the jurisdiction of the government or ministries preparing projects. If the risks are not allocated to the right parties during a project’s conceptualisation, investors and lenders will not want in.

Since the assessment and design of the risk-sharing arrangement under the public-private partnership scheme are done by line ministries, SOEs have the advantage of implementing the projects either through competitive bidding or by direct appointment. But this has the effect of crowding out the private sector, which is supposed to put up almost 40 percent of the $350 billion of infrastructure investment needed for the 2015-2019 period.

A lack of competition or an oligopoly usually causes inefficiency. This is the biggest downside risk now encoun- tered in the SOE-dominated infrastructure development. In addition, there has been pressure on the balance sheets of SOEs involved in infrastructure development. Moreover, state budget funds derived from the savings generated by slashing fuel subsidies have sharply decreased.

Good to know, though, that after three years of pioneering efforts, the government is aware of these risks and has started improving the PPP scheme for state-private joint ventures and is encouraging SOEs to monetise the stable cash flows from their existing revenue-generating infrastructure assets for investment in green-field projects.

Investors will certainly conduct vigorous due diligence on the SOEs and their projects, especially their corporate governance standards and requirements for efficiency, transparency and accountability.