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Friday, April 24, 2015, 10:14

Indonesia banking on AIIB

By Vincent Lingga, The Jakarta Post / ANN

Editor’s note: This is the first in a regular column contributed by writers of the Asia News Network (ANN). ANN is a regional network of 23 leading newspapers, including China Daily, organized to provide avenues for cooperation and to optimize coverage of major news events in the region.

Indonesia banking on AIIB
Indonesian President Joko Widodo has put infrastructure on top of his working programs and the newly formed Asian Infrastructure Investment Bank (AIIB) will be a tremendous help to his development plans. The AIIB is expected to focus on large projects, filling the gap left by other multilateral lending institutions. (Zhang Haizhou / CHINA DAILY ASIA WEEKLY)

Only about two months after the inauguration of President Joko “Jokowi” Widodo’s government last October, Indonesia decided to join the China-led Asian Infrastructure Investment Bank (AIIB) as a founding shareholder for obvious reasons.

As Southeast Asia’s largest economy, yet with acutely poor and inadequate infrastructure, Indonesia badly needs to speed up its infrastructure development to improve connectivity within the vast archipelago and to connect the country with global supply chains.

Jokowi rightly put infrastructure on top of his working programs because high quality infrastructure — from reliable power and water supplies to well built roads, seaports and airports — is central to a country’s development. It is also essential for everyday life, along with access to education, health services and jobs.

But the $80 billion financing needed for his ambitious infrastructure development for the next five years is simply not available domestically.

The government will be able to fund only about 20 percent of the needed investment and expects the remaining 80 percent to come from the private sector, but the national private sector, notably banks, is simply unable to put up the shortfall.

In 2011, the government established a non-bank infrastructure financing institution, Sarana Multi Infrastruktur, which later founded Indonesia Infrastructure Finance in a joint venture with the World Bank, the Asian Development Bank (ADB) and a German development bank.

This was followed by the Penjamin Infrastruktur Indonesia guarantee fund for improving the creditworthiness of projects, the Government Investment Center for financing land acquisition and a viability gap fund at the Finance Ministry to ensure the financial viability of projects.

But even these specialist infrastructure financing agencies will not be able to supply all the funds needed for the development of such huge infrastructure.

Indonesia’s domestic savings also are quite small. For example, third-party funds in the entire banking industry, mostly short term, are now estimated at only 4 quadrillion rupiah ($310 billion) and total bank loans outstanding merely 3.5 quadrillion rupiah.

Hence, foreign loan or equity financing is expected to finance the bulk of the investment.

The AIIB, which was launched in Beijing last October with an initial equity capital of $50 billion, is a great alternative source of funds. It will supplement the ASEAN Infrastructure Fund (AIF), which was set up in 2012 by members of the Association of Southeast Asian Nations, including Indonesia. The Manila-based ADB is the administrator of the AIF and provides technical support.

As Indonesia’s Finance Minister Bambang Brodjonegoro noted recently, the AIIB will focus on large projects, filling the gap left by other multilateral lending institutions such as the ADB and the World Bank.

A 2010 study by the ADB estimates that Asia needs about $800 billion a year in infrastructure investment until 2020. But the needs are perhaps most acutely felt in the less developed markets such as Indonesia, where local banks are least able to respond as they depend on short-term funds, while international commercial banks are hesitant.

Indonesia is confident that the AIIB, led by China that has the world’s biggest foreign exchange reserves, and with the support of almost 60 countries committed to join the bank, will be able to develop into a multilateral infrastructure bank with a high credit rating.

The market also believes that with the participation of so many developed countries, such as Britain, France and Germany as shareholders, the standards of governance and accountability within the AIIB will be high, thereby further boosting its credit rating.

The accession of so many financially strong shareholders to the AIIB will indeed make it more likely that the bank will adhere to the same standards that govern the World Bank and other international financial institutions.

A high credit rating in turn will create a virtuous circle as the AIIB will then be able to attract additional financing from institutional investors such as pension, insurance and sovereign wealth funds, currently estimated globally at $50 trillion.

That is because infrastructure projects offer reliable long-term, steady cash flow, a hedge against inflation, low volatility and returns.

A high credit rating is vital for the AIIB because as a non-commercial bank it must depend mainly on the capital market to strengthen its lending resources.

As the China-led bank steadily builds up its reputation, its involvement in a project or a transaction, whether through financing or guarantee support, will give such an undertaking greater credibility with host governments, private investors and lenders.

Good cooperation with the World Bank and ADB, which have long experiences in project financing, could also increase the likelihood that the AIIB will become an efficient supplement to those two multilateral development banks.

Recruiting former executives of the World Bank and the International Monetary Fund to help set up the structure of AIIB and build up an effective risk-management system and a body of expertise in designing project finance could, from the outset, enhance this new bank’s credibility with the developed country shareholders.

Then as the AIIB steadily replenishes its funding resources and develops a broader body of skills and expertise, it will eventually be able to assist public-private partnership centers in Asian countries in formulating enabling laws and regulations.

Hence, on a very positive note, the AIIB has a great chance of becoming an efficient and credible supplement to the World Bank and ADB, which are perceived to be dominated by the United States and Japan, respectively.

Indonesia’s participation in the AIIB as a shareholder should also be seen as another step forward in further deepening the economic cooperation between the world’s second-largest economic powerhouse and Southeast Asia’s largest and most vibrant economy.

China is already Indonesia’s largest trading partner, and Indonesian public and private sectors have increasingly become comfortable dealing with Chinese investors.

On an even more positive note, especially regarding infrastructure development, Chinese construction companies and financing institutions have played a major role in Indonesia’s first fast-track electricity development of 10,000 megawatts since 2006.

The $450 million 5.4-kilometer cable-stayed bridge — the longest in the country — that links Surabaya, the capital of East Java province, and Madura Island was built by a consortium of two Indonesian state-owned construction companies and two Chinese contractors.

The writer is a senior editor with The Jakarta Post.


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