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Indonesia expands horizons to US for infrastructure funding

Posted by on 04 Oktober 2019

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The government has set its sights on diversifying its funding sources for big ticket infrastructure projects to the United States after earlier this year proposing $91.1 billion infrastructure projects to be funded by China.
Coordinating Maritime Affairs Minister Luhut Pandjaitan said Indonesia would be one of the first in the queue to participate in the US government’s development program designated for developing countries. The program will be under the International Development Finance Corporation (IDFC), which was mandated to be created by the 2018 BUILD Act.
The IDFC will finance infrastructure projects in emerging economies, a direct competition to China’s Belt Road Imitative (BRI), to counter China’s growing influence as the world’s two largest economies jolted the global economy with a trade war.
“I recently met with Jared Kushner and talked about a lot of cooperation [opportunities] between Indonesia and the United States,” said Luhut in the State Palace in Jakarta on Thursday, referring to his recent meeting with the senior adviser to US President Donald Trump in Washington, D.C.
“They [the US government] want a better relation [with Indonesia] going forward,” added Luhut, whose coordinating ministry oversees energy, mining, tourism, transportation and fisheries affairs.
During his meeting with Kushner, who also leads the US government’s efforts in the Middle East peace process, Luhut said that the Indonesian government hoped to be involved in the peacebuilding efforts in the region, with outgoing Vice President Jusuf Kalla tapped as the government’s special envoy for peace missions.
“I asked him [Kushner] why Indonesia has not been included [in peace talks] as the nation with the world’s largest Muslim population? We eventually agreed to the inclusion of Indonesia at the table and President [Joko ‘Jokowi’ Widodo] appointed VP Jusuf Kalla to continue representing Indonesia in the peacebuilding process,” said Luhut.
Luhut said President Jokowi as well as Finance Minister Sri Mulyani Indrawati had already been briefed on the discussions over infrastructure projects being financed by the US IDFC. Indonesia will offer projects in four regional comprehensive economic corridors in the country, namely the projects in North Sumatra, North Kalimantan, North Sulawesi and Bali.
The four corridors in total have as many as 28 projects worth US$ 91.1 billion and were previously reported among the projects that the government offered to the Chinese government’s BRI.

 

Maritime Affairs Coordinating Minister Luhut Binsar Pandjaitan (tempo.co/File) 

Maritime Affairs Coordinating Minister Luhut Binsar Pandjaitan (tempo.co/File)

 

Both the US and Chinese initiatives joined the global trend of growing connectivity through infrastructure projects. China is taking the lead in construction works around the world from Asia to Africa and Europe, slated to integrate the continents, which is the main goal of the BRI.
The trend was reflected in Indonesia, with foreign direct investment (FDI) from Chinese companies to Indonesia growing rapidly. Four years ago, China did not even make it into the top five of FDI contributors for Indonesia, with a share of less than 3 percent of overall FDI in the country. Today, investments from Chinese companies account for 16.1 percent of overall FDI in Indonesia, versus 4.5 percent for the US.
China was Indonesia’s third-largest country of origin for FDI in the first half of this year, having poured in $2.29 billion in direct investment in the January-June period. The US, meanwhile, ranks seventh with investments worth $631.7 million over the same period.
Indonesia is banking on investment and consumer spending as engines of the country’s economic growth, which slowed to the lowest level in two years at 5.05 percent in the second quarter this year from the same period a year ago.
For infrastructure alone the country will need around Rp 6.44 quadrillion in funds until 2024, according to Finance Ministry estimates, which is expected to be funded through a combination of public and private sources.
“The first step should be identifying what to do – where will the money come from? It will not be enough to use regular schemes, we have to be creative,” said Luky Alfirman, the Finance Ministry’s director general for fund and risk management, during a seminar on infrastructure on Wednesday.
On financing schemes, Luhut unveiled a plan to set up a sovereign wealth fund for Indonesia so that the country can pool major funding from various sources, targeting a value of $5 billion to $10 billion for infrastructure projects and other development programs.
“[This is] a result of discussions with Abu Dhabi, the energy minister, the CEO of Mubadala and several other high-ranking officials in Abu Dhabi on a sovereign wealth fund. This input will be studied further and I hope that a decision will not take a long time,” Luhut said after a meeting with United Arab Emirates delegates on Sept. 17.
The UAE will discuss the matter further with state-owned infrastructure financing firm PT Sarana Multi Infrastruktur (SMI), which is tipped to take a lead in delving into details of the funding schemes for infrastructure for the formation of Indonesia’s first sovereign wealth fund.
Luhut went on to add that Jakarta and Abu Dhabi sought to strengthen their bilateral ties as a follow up to UAE Crown Prince Mohammed bin Zayed al-Nahyan’s visit to Indonesia last July – the first official visit by a UAE leader to the country in almost three decades.
The UAE government has also expressed its interest in helping Indonesia in its capital relocation process to East Kalimantan, Luhut said, through a capital injection to the soon-to-be formed Indonesian Sovereign Wealth Fund, which would pool development funds from other countries to be used as government investment funding.
Executive director of the Center of Reform on Economics (CORE) Indonesia Mohammad Faisal urged the government to be careful in taking loans or grants from other countries to finance the new capital, given that the project is of strategic value to the country.
“The government needs to be careful in handling the capital relocation [projects],” said Faisal, arguing that the government needed to look to finance the projects from funds at home as the new capital is constituted to be “an expression of [Indonesia’s] sovereignty”.