Mobilising long-term private debt into sustainable infrastructure in Indonesia

Infrastructure development is a long-term national priority for Indonesia. It is a core pillar for supporting economic growth and improving socioeconomic equality across the population. The scale and need for infrastructure, as well as the financing requirement, for Indonesia is significant.

With the onset of global climate change, the drive towards making infrastructure more sustainable is increasingly important as ambitious climate goals need to be delivered. In 2021, the Indonesian Ministry of Finance committed USD 323 billion towards sustainable climate spending to meet emission targets by 2030, with energy and transportation accounting for 75% of this funding^[1].

The Government has since taken further decisive steps including elevating emission reduction targets and committing to net zero by 2060, which requires an estimated USD 150-200 billion annually from 2021 to 2030.

The infrastructure investment opportunity

Set against the backdrop of the scale of the need, investing in infrastructure projects in Indonesia is no easy task for private investors. It requires careful navigation of complex risk factors ranging from macro factors such as political and institutional aspects to project-specific factors such as technology and operational risks. Additionally, currency risks and tenor mismatch risks are also important financing considerations for investors.

A significant funding gap necessitates more innovative financing solutions. Infrastructure financing in Indonesia is significantly dependent on public funds, with 37% expected from the state budget and 21% from State-Owned Enterprises based on RJPMN 2020-2024 over the previous period. Private investment, covering the remaining 42% of total needs, is key to sustaining infrastructure development.

Expanding financing sources, increasing market-rate debt availability, and leveraging blended finance will be necessary to scale up investment. While Green, Social and Sustainability (GSS) and Islamic financing (Sukuks) are increasingly prominent formats being considered for infrastructure financing, there remains a lack of understanding in unlocking their full potential to support Indonesia’s infrastructure goals.

Credit guarantees to close the funding gap

Credit guarantees are one such innovative financing solution, which can more efficiently blend financing instruments to leverage larger amounts of private capital using public funding. They can play a vital role in unlocking new capital pools for infrastructure financing and offering an alternative approach for risk mitigation.

The strategic application of credit guarantees can enhance market confidence and investment flow for investing in infrastructure sectors. When appropriately deployed, credit guarantees can act as powerful catalysts for infrastructure development, offering benefits across the financial ecosystem and transaction participants.

This can help unlock investment into new sectors of sustainable infrastructure financing to overcome where access to finance is still limited due to higher perceived risks given the novelty of these areas. The report uses lesson learned from existing case studies to explore how credit guarantees can be employed in several specific sectors: power/energy; transportation; water and sanitation; digital communications; urban and social infrastructure; along with natural capital.

Infrastructure sectors are well-suited to benefit from credit guarantees due to their need for local currency and long-tenor debt, which can be enhanced and structured through innovative application of credit guarantees.

CALL TO ACTION

The Report provides four recommendations, inviting further engagement amongst stakeholders to more effectively utilise this innovative financing product.

Conduct knowledge sharing among policymakers and market participants to increase awareness and demystify misconceptions of the use of credit guarantees for infrastructure in Indonesia.
Explore the development of new guarantee products specific to Indonesia, based on a deep understanding of market needs as required.
Create partnerships with international and national guarantors to share guarantee capacity, knowledge and leverage each other’s unique strengths and knowledge.
Engage in policy dialogue on guarantees to foster open communication and shared understanding on a way forward for development of credit guarantee markets for infrastructure.

^[1] OECD, Responsible business conduct for sustainable infrastructure in Indonesia, (2024).