Banking on infrastructure : A Lesson from China Malia Rochma ;   Group head of Market Intelligence and Business Portfolio Division at Bank Negara Indonesia (BNI)

JAKARTA POST,  17 Desember 2014

                                                                                                                       

It has been over a month since President Joko “Jokowi” Widodo’s inauguration and people are keeping tabs on the many promises he made during his election campaign. One of his key pledges was to establish an infrastructure bank to finance long-term projects, thereby enhancing national competitiveness and prosperity. An infrastructure bank seems like a sensible idea because Indonesia is trailing behind most countries in the region in terms of roads, water, electricity and telecommunications services. The previous government’s Masterplan for the Acceleration and Expansion of Indonesian Economic Development estimated that about US$164 billion will be needed to develop basic infrastructure by 2025. Greater infrastructure development through low-interest financing should increase productivity, spur economic growth and reduce poverty. It will also reduce food prices and freight costs. Yet commercial banks prefer to provide short-term funding, and are reluctant to offer long-term loans for major projects, which can take up to 15 years and may carry high risk. Establishing a special infrastructure bank would fill the void; however, concern over how to source adequate operating capital has made some people look abroad for a solution. Jokowi’s recent endorsement of the China-led Asian Infrastructure Investment Bank (AIIB) could be viewed as a possible solution to Indonesia’s infrastructure budgetary constraints. Indonesia is set to join 21 Asian countries as joint owners of the AIIB, which was founded in Beijing on Oct. 24 and may become an alternative to the International Monetary Fund (IMF) and the Asian Development Bank. Although the AIIB could potentially fund all Indonesian infrastructure projects, total reliance on foreign financing would be politically risky. Many observers view the AIIB as part of China’s efforts to build its influence in the Asia-Pacific region. In response to such concerns, Jokowi has requested that AIIB’s headquarters be located in Jakarta and that Indonesia play a prominent role in the bank. Rather than rely on China, Indonesia should instead learn from China’s strategy of financing its own infrastructure projects. Beijing has proved that strong commitment, professional management and correct policy are the keys to accelerating domestic development through infrastructure banking. Instead of seeking foreign financing, the Chinese government established two banks to support state infrastructure projects, namely the China Construction Bank (CCB) and China Development Bank (CDB). While the CCB is now a public commercial bank, the CDB continues as an investment bank responsible for infrastructure financing. The CDB issues bonds that are fully backed by the Chinese government. Under Chinese central bank regulations, CDB bonds purchased by local commercial banks are treated as risk-free assets. So why doesn’t Indonesia have a similar bank? We used to have an infrastructure bank. The state-owned Indonesian Development Bank (Bapindo) was formed in 1960 and focused on development of infrastructure, transportation and tourism. Back then, every state-owned bank had a specific mission in support of national development. Bank Bumi Daya (BBD) focused on agriculture and forestry, Bank Exim on trade finance, Bank Dagang Negara (BDN) on mining and manufacturing, Bank Rakyat Indonesia on micro-finance and Bank Negara Indonesia (BNI) on corporate finance. After the 1997/1998 economic crisis Bapindo was merged with BBD, Bank Exim and BDN to form Bank Mandiri, as mandated by the IMF. As the domestic finance industry continues to evolve, the government should consider whether existing financial institutions can play a role in the creation of an infrastructure bank. Lacking a specialist infrastructure bank, the previous government established two infrastructure financing companies: PT Sarana Multi Infrastruktur (SMI) in 2009 and PT Indonesia Infrastructure Finance (IIF) in 2010. While SMI is fully owned by the government through the Finance Ministry, IIF is a private joint venture, with shareholders comprising SMI (34 percent), Asian Development Bank (20 percent), International Finance Corporation (20 percent), German Investment Corporation (11 percent) and Japan’s SMBC Bank (15 percent). Both SMI and IIF, as non-bank financial institutions, face challenges in mitigating risk related to land acquisition for infrastructure projects. As of December 2013, SMI had managed Rp 5 trillion (US$400 million) in infrastructure loans while IIF managed loan commitments of Rp 2 trillion as of November 2013. Much more will be needed to develop necessary supporting facilities for economic development. There are some alternatives to building a new national infrastructure bank from scratch. First is transforming SMI into the embryo for such a bank. However, this would face certain challenges. The government would have to inject more capital so the new bank would be able to finance large-scale projects. In June 2014, SMI’s capital was about Rp 4.7 trillion or just 5 percent of Bank Mandiri’s consolidated capital. SMI also needs banking capabilities to manage an infrastructure bank. The second alternative is converting one of the existing state-owned banks into an infrastructure bank. Aside from Bank Tabungan Negara (BTN), the other three state-owned banks — Bank Mandiri, BRI and BNI — have sufficient capacity to manage infrastructure financing. In the third quarter of this year, Mandiri managed corporate loans of Rp 177 trillion, representing about 40 percent of its total loans. BRI managed Rp 125 trillion in corporate loans, about 30 percent of its total loans, while BNI managed some Rp 118 trillion in corporate loans, about 50 percent of its total loans. Around 10-20 percent of the corporate loans of each bank were infrastructure loans. A third alternative is a combination of the first two alternatives. Given its experience in issuing infrastructure bonds, SMI could become the investment banking wing of an existing state-owned bank. Both would then act as an infrastructure bank. However, the last two alternatives are not without concerns. There would be a profit issue because the financing margin for state infrastructure projects tends to be lower. Infrastructure projects are also susceptible to political risk. If a bank predominantly focuses on infrastructure, there will be concentration portfolio risk. Only serious commitment by the government will overcome the concerns over establishing an infrastructure bank. China’s success with specialty banks for infrastructure should be studied, so the profit and risk issues of having a national infrastructure bank could also be solved by thorough government policies and supporting legislation. ●