Government pours cash into state firms; investors are doubtful
Link: http://www.wsj.com/articles/indonesia-makes-play-for-infrastructure-investment-1425592554
Indonesia’s president wants to pour billions of dollars into state-owned firms to encourage the private sector to invest in infrastructure. Investors have their doubts.
Last month, as part of his administration’s first budget, Mr. Widodo announced that the government is investing a record $22 billion in infrastructure projects. He said the government will also inject $3 billion directly into state firms, most of it for companies under the ministry for state-owned enterprises that are involved in infrastructure development.
Mr. Widodo, who came into power with a mandate to reform the country late last year, is hoping to do what past leaders have struggled to achieve: build up the ports, power plants and roadways the archipelago nation needs to usher in a new age of manufacturing and competitiveness.
To succeed, the president will need private-sector help. Officials hope firms will either partner with companies like PT Waskita Karya , one of the country’s largest construction firms, and airport operator Angkasa Pura II, or invest in bonds and shares they plan to sell.
Like most Asian governments, Indonesia has always propped up state firms, but this is the first time it has laid out a specific plan of this scale to dress the companies up. Tom Lembong, who advises Mr. Widodo on economic policy, called the $3 billion capital-injection plan “revolutionary” but conceded the amount isn’t huge.
“It sends a strong signal: The government will inject money beside private investors,” Mr. Lembong said, adding that it will help turn the country’s state firms from “being a milking cow to being a proactive agent for development.”
Indonesia’s state firms have always been a big source of dividends for the government, but under Mr. Widodo, those companies will be able to keep the money, as long as funds go into infrastructure. Revenues at state-owned companies are equivalent to almost a fifth of the country’s nearly $900 billion gross domestic product.
Still, investors question the plans, citing fear about corruption and failures to complete previous projects in Southeast Asia’s biggest economy.
“We will wait to see what will happen, because execution [of infrastructure plans] has been quite poor in the past,” said Bharat Joshi, head of Indonesia investments at Aberdeen Asset Management , which manages about $4.5 billion in Indonesia and owns shares in some state-controlled companies.
He said the fund manager is currently investing in state firms that could benefit from infrastructure development through lower logistics costs, for example, but is avoiding companies directly exposed to the process, such as construction firms. “If the infrastructure investment accelerates, that would be a multiplier for more consumption spending,” he said. “But we are not really betting on infrastructure happening.”
Delays in areas such as the acquisition of land are common, and the overall track record for completing construction projects is poor.
The capital injection “has provided some confidence, but it is not a major factor yet” in creating confidence in investing in Indonesia, said Ivan Chamdani, head of research at Trimegah Asset Management in Jakarta.
The worry, say many investors, is that the less efficient of the state-owned beneficiaries of the government’s largess, some of whom have had problems with fraud or corruption, will squander the funds. Some firms face “audit problems,” Mr. Chamdani said.
“The missing piece in this strategy is how the capital injections will be used to incentivize [state-owned enterprises] to accelerate reforms and ensure no leakages,” Nomura Holdings Inc. said in a recent note.
More than half the $3 billion will go to six companies, including Jakarta-listed state construction firm PT Adhi Karya . The company, which was in the spotlight last year after a director was imprisoned for corruption, will be getting a 1.4 trillion rupiah ($108 million) injection from the government. Adhi Karya, which is building mass-transport projects around the capital, including the country’s first monorail, told The Wall Street Journal it is looking to raise up to 10 trillion rupiah. More than 80% will come from private investors via a rights issue and sources that may include bank loans and bonds.
Adhi Karya’s shares have fallen 4.2% since parliament approved the government injection, while the benchmark Jakarta Stock Exchange is up 1.4%.
Angkasa Pura II, which is getting two trillion rupiah from the government, plans to raise as much as six trillion rupiah from the sale of bonds in the next two years. It is working to triple passenger capacity at the third terminal of Jakarta’s main airport, according to Budi Karya Sumadi, the company’s president director.
PT Jasa Marga , a publicly traded toll-road operator that didn’t request government money this year, is also looking to tap the local market through a possible rights issue if it wins contracts to build and operate new toll roads, the state-owned company said in a statement to the Indonesia stock exchange.
To be sure, the government is planning to offer a host of multibillion-dollar projects to the private sector that could generate more interest, even if investors don’t want to be involved with state-owned firms.
And investor confidence in Indonesia has surged since Mr. Widodo took power.
The country’s benchmark stock index is at a record, and government-bond yields are near their lowest since June 2013, largely because foreign investors have piled in, sending their holdings of Indonesian assets to record levels and indicating confidence in the government’s ability to service its debt.
But although the $22 billion the government is putting into infrastructure is 53% more than was allocated last year, it falls short of the more than $80 billion the administration says the country needs each year to improve its infrastructure. The history of spending, as opposed to planned outlays, has also been weak.
“Past disbursement has always fallen short of allocations,” Chua Hak Bin, an economist at Bank of America Merrill Lynch, wrote in a research note.
Write to Ben Otto at ben.otto@wsj.com and Jake Maxwell Watts at jake.watts@wsj.com