The BRI concept and infrastructure development in Indonesia

Kompas

An employee walks past monitors displaying stock prices at Indonesia Stock Exchange (IDX) in Jakarta on Friday (23/3). The Jakarta Composite Index closed down 0.69 percent, or 43.48 points, at the level of 6,210.7 points.

In its 2018 report titled Infrastructure Sector Assessment Program, the World Bank states that the participation of foreign investors in infrastructure projects in Indonesia through the capital market remains minimal. Currently, foreign investors’ capital flow to Indonesia remains centered on government obligations and equities.

Foreign investors owned almost 40 percent of government obligations as of 2015. This was double the amount in 2010. Meanwhile, foreign investors’ participation in the equity market was 43.2 percent in 2015, much higher than the 31.7 percent in 2010.

Foreign investors’ interest in infrastructure portfolio investments through capital markets in Indonesia has remained low. The World Bank cites at least two reasons why foreign investors are reluctant to get into infrastructure investment portfolio through the capital market. First is the segmented markets for foreign and domestic investors. Second is the poor risk mitigation system for investment products.

Foreign investors tend to actively participate in corporate obligations issued in foreign currencies, mainly US dollars. They choose to invest in funds in international markets due to the lack of an efficient mechanism to manage funds in Indonesia. Difficult risk mitigation in local instruments has led foreign investors to choose to invest through international markets. For investors, efficient mitigation efforts are important to tackle risks in the investment instruments.

Why does Indonesia need to rely on foreign investors for its infrastructure projects? Can the country rely exclusively on domestic investments, instead? The facts show that the role of domestic investors, especially institutions, remains low in Indonesia when compared to neighboring countries such as Malaysia and Singapore. On the other hand, Indonesia needs funding from domestic investors, the World Bank says.

In 2016, the total assets of domestic corporations in Indonesia only accounted for 1.8 percent of the country’s gross domestic product (GDP). Compare this to the total assets of Singaporean corporates in the country’s GDP, which is 79.4 percent. A more detailed assessment found that, in June 2017, total investment assets stood at Rp 254 trillion (US$17.93 billion) in pension funds, Rp 339 trillion in mutual funds, Rp 522 trillion in life and general insurances, Rp 290 trillion in social security and health insurance and Rp 199 trillion in the government pension fund.

The Belt and Road Initiative

The Belt and Road Initiative (BRI) is a massive infrastructure development program seeking to promote global trade and economic growth. The BRI is President Xi Jinping’s foreign policy to strengthen China’s relationship with Southeast Asia, Europe and Africa through networks of roads, seaports, railways, power plants and other infrastructure projects. However, some suspect that China seeks to expand its political presence and influence through the program.

Regardless of the criticisms, China’s BRI program is not controlled by foreign investors in its implementation. China has issued an annual “negative list” of industries where foreign investment is either limited or banned entirely.

China limits foreign investment, similar to how Trump protects his voter base, namely those in the US agriculture industry. However, foreign businesses based in China can participate in the BRI to explore available tax incentives, especially in developing western China, including several densely-populated remote regions and all provinces in the country’s western border, such as Guizhou, Guangxi and Yunnan in the south (that borders or is near to Vietnam, Laos and Cambodia), Sichuan, Gangsu, Ningxia and Xinjiang (all of whom have sizable Muslim populations), Inner Mongolia (that borders Russia and Mongolia), Tibet (that borders Nepal and India) and China’s largest city Chongqing.

China has signed numerous double tax agreements (DTA) to ensure that businesses are not imposed with double taxation for the same revenues or services in two countries. The country also often provides tax reductions and exemptions in certain areas. This may include value-added tax reductions for certain products marketed in two countries, customs and tariff waivers, benefit tax reduction in certain areas and individual income tax reduction.

Despite Indonesia’s differing view on foreign involvement in infrastructure development, there are several lessons we can take from China. The government can encourage foreign entities and governments that directly invest in regions with taxation facilities to participate in buying infrastructure shares.

Surely, as an incentive, the government must provide various tax facilities on share ownership, apart from the various tax facilities available at the investment destinations. Through such a concept, it is hoped that the incentives will not only reach the right targets but also reduce gaps in infrastructure funding needs and will make infrastructure development more effective. (Makmun Syadullah, Researcher, Fiscal Policy Agency, Finance Ministry)