[Kabar-indonesia] RI capital markets: Waving or drowning?

[Joyo at aol.com]

The Jakarta Post 
Monday, July 3, 2006

Opinion

RI capital markets: Waving or drowning?

David O'Brien, Jakarta

A few recent articles in The Jakarta Post have left me wondering the above 
point. For those non Australians out there the above saying relates to the 
signal given to a lifesaver when in trouble in the treacherous Australian surf.

For one who does not know, it may just appear to be someone waving. In terms 
of financing, Indonesian capital needs to support sustainable growth. The 
market needs to operate to most efficiently channel funds from savers to value 
adding investments. Are advances being made to save the economy in this way or 
are those in charge just waving?

The business section of the Post of Tuesday June 10 led with the story of the 
latest attempt to keep the national airlines Garuda and Merpati afloat. State 
Minister for State Enterprises Sugiharto has come up with a third proposal to 
save the airlines. It was reported that his previous plans were met 
indifferently by the Vice President and bureaucrats at the Ministry of State 
Enterprises.

This third proposal is unlikely to see much more success given Vice President 
Jusuf Kalla's view that the airlines be sold to investors to reduce the drain 
on state funds. The proposal involves development of a fund which is seeded 
by the proceeds from securitization of minority interests held by the state in 
private sector and state firms.

Securitisation is a form of finance where a pool of assets with strong 
sustainable cash flows are pooled in a special purpose vehicle and on sold to new 
investors that are better suited to the risk profile than the original owner. It 
is common place with mortgages and lending for cars and motor cycles. Such 
loans are secured by assets and much safer than corporate or credit card lending.

This is high finance and I must have missed something. The concept of 
securitizing minority interests does not seem to make sense. The cash flows 
associated with a minority holding is the dividend stream. As a minority, the holder of 
the shares has no influence over the level of dividends the company may 
declare.

I would have thought any such stream of cash flows that are largely 
unpredictable would be difficult to securitise. At best they would be heavily 
discounted to allow for this uncertainty.

In countries with a strong rule of law and regulatory regime, income streams 
from monopoly utilities are also often securitized to fund network expansion. 
This brings me to a second story on the same page of that day's Post. This 
involves the need of PLN to secure $7.7 billion for network expansion.

To date the story of PLN has been focused upon the need for generation. 
Without expansion of the network these investments cannot reach the load centers 
that need the power. It could result in a scenario such as the present one. 
Generation was built in East Java but cannot be delivered to West Java due to the 
construction of a new transmission line being delayed by nearly a decade.

A restructured transparent PLN would have its Java, Madura and Bali 
transmission company as a separate entity with its own balance sheet. It currently does 
exist but merely as a quasi autonomous business unit. This entity could have 
its rates set by an independent regulator rather than less transparent 
internal transfer pricing.

Investors in the capital market that need such predictable cash flows in 
their portfolios would be very attracted to such an offering. It particularly 
matches the long term income stream needs of pension funds. As transmission 
networks require less foreign capital than generation it would also match the rupiah 
holdings of the local funds.

Innovation is in evidence such as the proposed development of the rolling 
fund for land acquisition being developed by the Ministry of Public Works and 
Ministry of Finance. This is reflective of the state shouldering risks that are 
hampering private investment.

This risk sharing does need to be appropriate though. The Post of June 23 
reported that the Ministry of Finance has given in principle agreement for the 
provision of a blanket loan for the monorail project in Jakarta. The Ministry of 
Finance developed a new risk management unit to assess the ability to apply 
guarantees to specific key projects.

This project has been bedeviled by this issue since its initial tender. The 
Malaysian company which won the tender could not secure finance in absence of a 
guarantee and thus defaulted on their commitment. It was a similar case with 
the new Singaporean majority owner that has since exited. It now seems the 
Indonesian consortium is to be granted such a guarantee.

The concept behind private sector involvement is that the private sector 
carries risk in relation to its investment. In formulating bids, all tenderers 
would have been given a schedule of tariffs. They would undertake their own 
demographic profile to determine passenger numbers over the life of the project and 
make a bid based on that assessment in conjunction with the capital cost.

If the government is merely providing a guarantee as to the tariff level 
proposed being met I believe that is a valid guarantee. However if they are now 
protecting investors from their estimates of passenger volume the developers 
seem to be carrying no risk at all.

It seems that at the macro level the ministries are moving in the right 
direction. The new incumbents post last years cabinet reshuffle are well respected 
by markets. The markets remain confused as to the confused signals from 
associated ministries such as State Enterprises and the lack of clarity in 
implementing the big picture coming from the top.

Evidence is required of a stable legal environment with a level playing field 
to allay investors fears. I was speaking to a manager from a major multi 
national a week ago. He made the point that he competes for internal capital and 
has to justify his Indonesian investment and earn rates commensurate with 
China, Vietnam and India. In the current environment this remains difficult and 
thus investment is hampered.

The wrier is a Technical Advisor at CSA Strategic Advisory which assists 
businesses address change by originating strategy and successfully executing. He 
may be contacted at dobrien at csadvisory.com. 

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Joyo Indonesia News Service
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