Indonesia & East Timor News Updates - August 18, 2017

* KPK gets new information on flow of funds in e-ID graft
* Indonesia's unorthodox toll road debt
* Government to spend Rp 404t on infrastructure projects in 2018
* Indonesia loan growth falls to 7.7 pct in June, lowest in 8 months
* Timor-Leste parties struggle to form government


KPK gets new information on flow of funds in e-ID graft

Jakarta Post - August 17, 2017

Jakarta -- The Corruption Eradication Commission (KPK) has received details provided by the Financial Transaction Reports and Analysis Center (PPATK) regarding the flow of Rp 2.3 trillion (US$172 million) that had been stolen from the electronic identity card (e-ID) procurement project.

KPK deputy chairman Alexander Marwata said that the information concerned financial transaction of four firms that are part of the State Printing Company (PNRI) Consortium, which was appointed to implement the project.

Alexander said the firms were PT Superintending Company of Indonesia (Sucofindo), PT LEN Industri, PT Quadra Solution and PT Sandipala Arthaputra.

"[The flow] was pretty simple. Money from the government went into a bank account controlled by the consortium, and we're looking into how the money from the consortium went to other [parties]," Alexander said as quoted by

He said that the PPATK data would help the investigation in gaining details on how Rp 2.3 trillion -- from the allocated budget of Rp 5.9 trillion -- was stolen and how it could have likely ended up in overseas bank accounts.

"We will find out who has enjoyed the money; an audit of the Rp 2.3 trillion would show us. We'll just follow the money," he said.

At least 37 House of Representatives members have been implicated in the e-ID graft case, including House Speaker and senior Golkar politician Setya Novanto.



Indonesia's unorthodox toll road debt

The Interpreter - August 18, 2017

John Cheong-Holdaway -- In 2016 Indonesia's Ministry of Public Works dramatically underestimated the funds it needed to acquire land for toll road development. To try to keep development on schedule, the government leaned on toll road developers to lend them the difference at well-below-commercial rates. Over a year later, most of this money still has not been repaid, and government is now seeking to borrow more.

President Joko Widodo has made infrastructure development a large part of his platform. Among other ambitious targets, his government aims to deliver 1000 kilometres of toll roads over the 2015-2019 term. More so than any other infrastructure sector, toll road development is highly dependent on the timely availability of land.

Indonesia is bound by law to keep its budget deficit below 3% of GDP. With low resource prices and slowing oil and gas production putting pressure on revenues, 2016 was projected to be tight so all ministries were instructed to find efficiencies in their budgets. Loath to undertake difficult bureaucratic reform, most ministries demonstrated the local variant of Washington Monument Syndrome and cut spending on the President's priorities, hoping to get topped up when the revised budget came out later in the year. In the case of the Ministry of Public Works and Housing (MPWH), this meant land acquisition for toll roads.

Indonesia's 2016 budget included an allocation of IDR 1.6 trillion ($152 million) for land acquisition. This amount was less than a third of what was spent in 2015, and a fraction of what most in the industry thought would be needed for that year. Predictably, the full calendar year's budget for land acquisition was exhausted by February, so MPWH went back to the Minister of Finance to ask for a top-up.

When the then Finance Minister Bambang Brodjonegoro refused this request, MPWH looked for alternatives and found an accommodation where future land acquisition funds would be disbursed via a new public service agency. While that was being arranged, MPWH borrowed the money from the investors.

The rights and obligations of the government and the toll road developers are governed by toll road concession agreements. In very general terms, the government provides the land, sets the tariffs in accordance with principles set out in the agreement, makes sure service standards are being adhered to, and allows the developer the rights to build the road (and associated infrastructure) and to charge people to use it. In recent years, land acquisition for toll roads has been solely the responsibility of the government.

Generally accepted principles of infrastructure regulation mean that when the government has an amount owing to the concessionaire arising as a result of a failure by government -- in this case, the failure to acquire the necessary land -- that debt will attract an interest rate at least equal to the weighted average cost of capital (WACC) of the concessionaire; currently around 13-15% for toll roads under development. The government, wanting to keep its budget under control, instead proposed to borrow at the Bank Indonesia seven-day (Reverse Repo Rate); currently 4.75%. Faced with the prospect of further delays in land acquisition, and wary of the wrath of MPWH (under whom the relevant regulator sits), the developers acquiesced, lending IDR 16 trillion ($1.5 billion) to the government at various points through the middle of 2016.

In April this year, some of the money was repaid but most is still outstanding. In June, the government borrowed another IDR 15 trillion ($1.4 billion) from concessionaires, putting the total amount outstanding well over IDR 20 trillion ($1.9 billion). The difference between the repo rate and their WACC and the total amount outstanding means the concessionaires have already lost over IDR 1 trillion, and are still losing over IDR 100 billion ($9.5 million) a month.

This is not the first time the Indonesian government has decided that toll road concessionaires should take a haircut. In 2015, President Joko Widodo announced that all toll roads nationwide would be cutting tariffs over the Idul Fitri holiday; a heavily trafficked period that operators rely on to make a lot of their revenue for the year. Toll road operators were not compensated for this tariff cut (I tried to estimate the costs and benefits of that decision here, with a brief follow-up here).

The government's propensity to undertake post-bid renegotiations is part of the reason that cost of capital for utilities developers in Indonesia is closer to the neighbourhood of its lower-income ASEAN neighbours Vietnam, and Cambodia, rather than its lower-middle-income peers of the Philippines and Thailand.

Investors and lenders see this and build expectations for it into their hurdle rates. So borrowing at a low interest rate might look attractive but, in the long term, the government -- and its citizens -- pay through higher cost of finance.

If Indonesia wants to achieve the lofty infrastructure investment numbers in its targets, and engage the private sector in doing so, it would do well to hew closer to generally accepted principles of infrastructure regulation and borrow from companies at their WACC, or not at all.



Government to spend Rp 404t on infrastructure projects in 2018

Jakarta Post - August 18, 2017

Jakarta -- Next year, the government plans to allocate Rp 404 trillion (US$30.23 billion) for infrastructure development, according to the draft state budget announced by President Joko "Jokowi" Widodo on Thursday. This year, the government projects to spend Rp 387.70 trillion.

The President explained that 856 kilometers of new roads and 781 kilometers of irrigation channels would be constructed.

"Infrastructure development is expected to boost economic growth and improve connectivity among the regions," Jokowi said when reading out a financial note during a House of Representatives plenary session.
Read also: Jokowi inspects progress of trans-Papua road project

The government will also develop sanitation infrastructure to manage waste water produced by 853,000 households, construct water treatment plants and develop 7,062 low-cost apartments for low-income families, Jokowi added.

Meanwhile, Public Works and Housing Minister Basuki Hadimuljono said 41.30 percent of the total budget would be spent on road construction and for the maintenance of 46,000 existing roads across the country.

The government has allocated Rp 37 trillion for constructing and repairing irrigation infrastructure -- including 11 new dams, 54,000 hectares of irrigation networks and repairing 160,000 hectares of existing irrigation networks.

For waste water treatment and clean water infrastructure, the government has allocated Rp 16 trillion, the minister added.

"Tenders for the government projects in 2018 will be opened in October this year," he said, adding that in addition to the projects funded by the state budget, the government would also invite the private sector to develop infrastructure through private-public partnerships (PPPs). (bbn)



Indonesia loan growth falls to 7.7 pct in June, lowest in 8 months

Reuters - August 18, 2017

Jakarta -- Loans extended by Indonesian banks grew 7.7 percent in June from a year earlier, the slowest pace for any month since October, the financial services authority said on Friday.

In May, annual loan growth was 8.7 percent. Bank Indonesia (BI) will hold a policy meeting on Tuesday.

A Reuters poll showed BI is expected to keep its benchmark interest rate unchanged at 4.75 percent, where it has been since October, despite sluggish private consumption.

In 2016, the central bank cut the benchmark rate six times, by a total of 1.5 percentage points, in a bid to spur faster loan growth. (Reporting by Nilufar Rizki; Editing by Richard Borsuk)



Timor-Leste parties struggle to form government

UCA News - August 16, 2017

Siktus Harson, Jakarta -- Three weeks after its parliamentary election, Asia's most Catholic nation Timor-Leste remains leaderless and could be heading for a minority government.

Fretilin, which won most seats in the July 22 poll, has so far failed to form a government with its former coalition partner  the National Congress for Timorese Reconstruction (CNRT).

Without the support of the CNRT, rocked by the resignation of its leader and the country's most powerful politician Xanana Gusmao on Aug. 5, Fretilin, with 23 seats is struggling to patch together an alliance to try to reach if not pass the 33-seat target to form a majority in the 65-seat assembly.

Of the four other parties that won parliamentary seats in the July election, CNRT won 22, the Popular Liberation Party grabbed eight, the Democratic Party has seven seats, and Khunto has five.

With the CNRT ruling itself out of an alliance Fretilin is pinning its hopes on the other three.

So far the Khunto party has agreed to join a coalition, the Democratic Party has opted to sit in opposition, while the Popular Liberation Party has offered mixed signals.

Popular Liberation Party chairman, Taur Matan Ruak, has announced that his party would sit in opposition.

Juliano Sapalo Ximenes, a political analyst from the University of Dili, said Fretilin has the chance of forming a minority coalition since the Popular Liberation Party would be "unofficially" in the coalition with Fretilin.

"It's true the Popular Liberation Party will sit in parliament as an opposition party, but it does not mean it will forever be an opponent. For major national interests, such as to pass bills on the state budget, Popular Liberation Party will support the government," Ximenes told

However, the government would be in a precarious situation if the PLP does not provide full backing, he said.

Fretilin leader, and another former premier, Mari Alkatiri, told reporters on Aug. 10 that the party had not lost hope of gaining further partners and would look to form a minority government if necessary.

"Fretilin is confident it can form a government," Alkatiri said, adding an agreement could still be achieved before Aug. 22 when the new parliament members are sworn in.

"I call on all Timorese people to stay calm so to give leaders the chance to discuss about the establishment of new government," Alkatiri told the Timor Post.

Negotiations are still ongoing. On Aug. 14, Fretilin, CNRT, and Popular Liberation Party were back in talks, but reports suggested the CNRT and Popular Liberation Party are still reluctant to strike a deal.

Efforts to form a new government were thrown into disarray after Gusmao announced he would step down as CNRT leader and called on party members to sit in opposition leaders.

Gusmao said he resigned because the party had lost the people's trust after it lost eight seats in the July poll.

Father Julio Crispim Ximenes Belo, head of Baucau Diocese's Justice and Peace Commission, said Gusmao's decision to quit and call for the party to sit in opposition must be respected.

He said it's a healthy democracy if there are parties that function as opposition, to ensure that the government works in accordance with the constitution and for the good of the people.

However, he said the Catholic Church hopes further negotiations before Aug. 22 would see the establishment of a more stable government.

The priest said the church would pressure the government on two fundamental issues: the needs of the people and clean government.

"One of the main things the church is fighting for is better education," he added, saying the church will also continue to push the government on providing clean water and helping farmers.



Asia Pacific Solidarity Network (APSN)