It’s unfortunate timing. In the same week that Prime Minister Anthony Albanese announced a $2 billion facility to encourage investment in South-East Asia, a Canadian pension fund investor hit pause on a much-touted push into Indonesia.
In
recent years, South-East Asia’s largest economy has made some big
strides in welcoming institutional investors – including Australia’s
Macquarie Asset Management – by dealing with concerns about political,
economic and regulatory risks.
The three-year-old Indonesian
Investment Authority (INA), protected by its own legislation and a
reporting line straight to the president, has done much to smoothen the
way.
INA chief executive Ridha Wirakusumah
has briefed fund managers across the globe on its mission to bring
world-class investors to Indonesia. He has made several visits to
Australia and was back again this week as Albanese launched the $2
billion Southeast Asia Investment Financing Facility in the presence of
regional leaders and executives at the ASEAN Summit in Melbourne.
INA
has done a good job of insulating investors from Indonesia’s always
complex and often piecemeal regulatory framework. However, a recent
development shows the path is not straightforward, even for seasoned
investors who have done years of due diligence.
One of the INA’s early triumphs, a $US3.75 billion investment platform formed with three international partners, has taken an unexpected turn. Canada’s Caisse de dépôt et placement du Québec (CDPQ) was left off the list when the INA announced that the platform had become a shareholder in a major tollway project this year. This week, an INA spokeswoman confirmed that CDPQ was no longer involved in the platform “for the time being”. The target investment had consequently been reduced to $US2.75 billion.
A spokesman said CDPQ would not go into the details regarding its engagement with INA “but active discussions are ongoing”.
The diminished size of the investment platform demonstrates Indonesia’s continuing battle to diversify its financial backers. Although foreign direct investment has reached record levels recently, much of this has been concentrated in huge new industrial parks centred on nickel mining. The country’s ambitious goals for clean energy and its pressing need for more infrastructure require billions more.
In November, Indonesian President Joko Widodo inaugurated a floating solar farm in West Java province. It’s the third largest such structure in the world, but just one small step in what the president, commonly known as Jokowi, estimates is a $US1 trillion task to get South-East Asia’s largest economy to zero emissions.
The Albanese government views the green transition as a chance to both strengthen a crucial bilateral relationship and help turn the dream for Australia to become a renewables superpower into reality. Hence, the $2 billion promise to help tempt Australian investors into South-East Asia, which was announced at the ASEAN Summit.
The initiative will provide loans, guarantees, equity and insurance to help bolster what the government describes as the “underweight” and “stagnant” two-way trade and investment with ASEAN member countries. Renewable energy and infrastructure development are the priority areas.
The $2 billion could be “catalytic in Indonesia,” says Andrew Hudson who leads the Melbourne-based Centre for Policy Development, which also has a presence in Jakarta. “We’ve seen investment in South-East Asia drop off drastically over the last decade and the big question is how do we encourage the private sector. I think this new facility will help derisk and provide higher return rates – and it really should be focused on Indonesia, the giant of South-East Asia.”
It’s a good time to be looking around, he notes. The Indonesian government is increasingly frustrated by delays in the $US20 billion promised by G7 countries in 2022 to help shift its developing economy. The country is still powered almost entirely by coal-fired electricity that is heavily subsidised – as is the gasoline used by the vast majority of cars and motorbikes across the archipelago.
Indonesia is at the point of what the OECD refers to as the country’s “reform journey” where more institutional investors are becoming increasingly comfortable they won’t be caught out by political or economic crises. The INA’s two other partners in the investment platform launched in 2021 have stuck with the initiative under which the acquisition of a stake in a Trans-Java toll road was announced in January. However, CDPQ’s actions show the country remains complex for international investors – even those whose due diligence goes back years.
ugboats and barges transporting coal are moored on the Mahakam River in Samarinda, East Kalimantan, Indonesia. Bloomberg
Shrinking involvement
Although these considerations are not incompatible with the Albanese government’s strategy for the region, they will be top of mind for Export Finance Australia, which will run the $2 billion South-East Asia Investment Financing Facility. The goal is to reverse our shrinking involvement with a region that is tipped to be the fourth largest in the world by 2040, after the US, China and India.
Macquarie Asset Management is one of the few Australian institutions to have invested directly in Indonesia, where it has a minority stake in Bersama Digital Infrastructure. Singapore-based King & Wood Mallesons partner Nicola Yeomans advised MAM’s co-investor in that deal, Canada’s Public Sector Pension Investment Board. Yeomans was also in Melbourne this week. She praises the government for acting so quickly on the recommendations made in the South-East Asia strategy that was led by former Macquarie boss Nicholas Moore.
“The issue is there are not enough big, bankable projects. This will provide finance for ventures at an earlier stage than private capital,” Yeomans says.
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“My view is we need to normalise the risk. Yes, it’s a different legal system and yes, you need to understand your partner. The risks are real and people have been in trouble in the past. But there are many investors from elsewhere in the world that have done the work and who understand the nature of those risks.”
Shifting Indonesia to green energy is an immense task – sobering not only in terms of its size but also its social impact, with a lot of workers engaged in fossil fuel-related industries and many consumers being used to heavily subsidised purchases.
The 192-megawatt peak solar farm on the Cirata reservoir in West Java is expected to generate 245 gigawatt-hours of electricity a year. That’s enough to power 50,000 households, though this could increase with plans to expand the project to 500MWp and perhaps as high as 1000MWp.
Renewables account for just 12 per cent of Indonesia’s power generation and the country is likely to miss its target of increasing that to 23 per cent by next year. The government has estimated it needs $US600 billion to retire 15 gigawatts of coal power generation over the next three decades.
At the end of 2022, developed nations agreed to help fund the transition from coal to clean power. The $US20 billion Indonesia Just Energy Transition Partnership is led by the United States and Japan and supported by the UK, Germany, France, the EU, Canada, Italy, Norway and Denmark. The plan is for public sector agencies to pledge $US10 billion, and the same amount would be put up by the private sector.
The JETP for Indonesia – and others agreed with South Africa, Vietnam and Senegal – are an acknowledgement the world is moving too slowly on climate action, and too unevenly. More than 90 per cent of all increased spending on renewables is going into developed countries and China, according to the Rockefeller Foundation.
But so far, those good intentions have failed to translate into cash. A JETP Secretariat opened in Jakarta a year ago and 400 priority projects have been whittled down to just under 50. However, Jokowi expressed frustration when he told the Financial Times last year there was “tremendous” concern over the lack of action in funding. “Don’t question Indonesia’s commitment towards the energy transition. What I’m questioning is the commitment of the developed states.”
In a report on the overall JETP approach released last month, the Rockefeller Foundation concluded that “healthy scepticism and continued scrutiny are warranted given how long the process is taking and how slowly the money has flowed so far”.
When the Indonesian JETP was announced, some observers felt Australia should have been involved. One well-informed observer said the Indonesian government suggested informally that Canberra should jump in only if it were willing to commit a substantial sum.
The $2 billion facility directed squarely at the region shows serious intent. But it remains to be seen if institutional investors will turn into active players and team up with fund managers operating in the region, and also follow the lead of the newly appointed regional business champions by backing companies keen to do more with our northern neighbours.
T
Emma ConnorsSenior editor and writerEmma Connors was South-east Asia correspondent from October 2019 until mid-2023, based in Jakarta and Singapore. She has previously edited Perspective, Review and op-ed, and has written extensively across the AFR and related titles. Connect with Emma on Twitter. Email Emma at emma.connors@nine.com.au
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