RI capital markets: Waving or drowning? The Jakarta Post | Mon, 07/03/2006 4:36 PM | Opinion
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 [EMAIL PROTECTED] -- Limited offer: Avail 50 sqm office space in Surabaya. Just 3 km from CBD. Contact: 031-5013570, HP: 0852 3008 3510. mailto:[EMAIL PROTECTED] ------------------------------------ Kunjungi situs http://www.info-saham.com untuk informasi seputar saham. DILARANG KERAS MEMOSTING OPINI PRIBADI TENTANG POLITIK DI MILIS INI. Silahkan lakukan itu di milis [EMAIL PROTECTED] [EMAIL PROTECTED] untuk berhenti dari milis saham [EMAIL PROTECTED] untuk bergabung ke milis saham Yahoo! 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