Sumatra: the second-largest GDP generator for Indonesia

Raj Kannan, President Director of Tusk Advisory talks about Sumatra developing into massive economic center.

From Tusk’s perspective, what kind of investments is the country looking for?

In fact, one of the things that we have been able to convince the government in terms of taking some parts of the risks is, whether we like it or not, majority of the infrastructure the government needs today are not bankable. Most of the toll roads with high traffic volume, they have been built.

The new toll roads that are being proposed for Sumatera are not bankable today, that’s the reality. Whether you like it or not, Sumatera is going to be a massive economic center, in 15 years’ time. Today, it is the second largest GDP generator for the country, at about 24%, and the current GDP of Indonesia is roughly around US$1 trillion. The estimates by series of institutions, including economist, by 2030, Indonesia will be the 9th largest economy in the world, at roughly between US$3 to US$4.5 trillion economy. During that time, Sumatera would be contributing close to around 30-33% of GDP, and 30-33% of GDP, when the economy is US$3 trillion, is US$1 trillion. Sumatera as an island does not have the basic infrastructure that it needs to be able to sustain that kind of economic activity. That is one of the things that we are saying to the government. Whether we like it or not, Trans Sumatera toll road has to be built. We know that it is not bankable. The government has taken it to the market 6 times and it failed, because it is not bankable, since the average IRR is about 9%. So what the government is saying, is ok, let me start the road with funding with the notion of PMN-a government capital injection institution. The government has injected up to 5 trillion rupiah, which were around US$500 million.

The government is now looking at how can it implement long term funding structure, like availability payment scheme, performance-based annuity scheme, or scheme that we developed for economic projects. In principal, it is a scenario of government saying to the private sector, “You build it first, and I will pay you over 25 to 30 years”, which is what the governments do in most countries. Almost every country that we looked at as benchmarks, the infrastructure that are being built currently have the same issue: it is not bankable purely on the basis of collecting revenue from the users. Therefore, the scheme like PBAS is becoming much more widely used. One of the things we are looking at here is to actually trying to use that.

The government has implemented the availability payment scheme for Palapa Ring project, where the government has hired private sector to install the broadband, on the basis that they get paid over time. There are complexities to that project because the funding was not necessarily from the government budget, but it came from a pool of money that the industry had contributed. But, in principle, they have the approved all of the laws that is needed. The process the government is going through now, we expect more and more the use of AP scheme or PBAS scheme, which are popular in countries like India.

I think to answer the question that is happening, the funding commitment is happening, and the government is actually saying, I have to lead with infrastructure funding. For example, you go to 450 billion as a program in the next 5 years. Out of that, only 36% are expecting to be funded by the private sector. The last 10 years, it would be the reverse. They also came out with US$400 billion program, but they would expect 70% to be funded by private sector.

So I think the mindset change is significant. This is where one of the things that we are encouraging the private sector investors, particularly investors who have experience in working in emerging markets, like India, Brazil, Chile, etc, to actually come in and work with the government to find the long term investment strategies.