In addition, the construction of toll roads has not been able to stimulate industrialization around construction projects; for example, in Sumatra, which is still dominated by primary processed commodity sectors, such as CPO and coal. If the toll roads are used for the transport of coal and CPO, it becomes too risky, as maintenance costs as compensation for road damage will be high. So why do we build so many toll roads, if they are not suitable for business?
Where’s the impact?
The massive development of toll roads is also inversely proportional to the decline in logistics costs: Indonesian logistics costs are still the highest in ASEAN, or 23.5% of GDP. Meanwhile, Vietnam logistics costs are more competitive, at just 18% of GDP. Indonesia’s Logistics Performance Index for 2023 fell 17 places, from 46th (2018) to 63rd (2023), with a drop in score from 3.15 to 3.0. Malaysia’s logistics ranking is 31st, followed by Thailand in 37th, Philippines 47th and Vietnam 50th. (TABLE)
Logistics costs and logistics performance that do not naturally improve with infrastructure development have an impact on competitiveness in various sectors. The Indonesian ICOR (Incremental Capital Output Ratio) value in 2019 was 6.8. Countries such as Vietnam and Malaysia have ICOR of 3.7 and 5.4, respectively. The higher the ICOR value indicates that there are efficiency problems in investment, meaning that Indonesia suffers from a high-cost economy.
The manufacturing industry sector, which should ideally flourish, with recent massive infrastructure development, has actually suffered premature deindustrialization, with its portion of GDP below 19%. The smaller the portion of the manufacturing sector, the lower the impact on tax revenues and labor absorption. Industrial relocation from Indonesia to Vietnam, Bangladesh and Pakistan for textile and footwear products occurred because the competitiveness of the domestic industry continued to decline.
Banking and credibility at risk
The other risk occurred from project mismanagement left SOEs in a very dangerous financial condition and signified a negative effect on financial sector stability. Most of the banks involved in direct financing, cash flow arrangements, and syndicated loans for state companies are state-owned banks. If financial distress is serious enough, it is undeniable that state-owned banks will have to write off a large volume of bad loans. Surprisingly, the liquidity and capital adequacy of SOE Banks is quite healthy. Even amid a risk of default on construction SOE debt, as of the first quarter of 2023, Bank Mandiri’s non-performing credit reserves (BMRI) reached 303 percent.
However, if we study this in more detail, Bank Mandiri’s LAR (Loans at Risk) Coverage has been observed to have surged by 770 bps YoY to 47.2 percent in March 2023, from 39.5 percent in March 2022. This indicates that the risk of SOEs defaulting on loans can endanger the health of state-owned banks.
Why are SOEs so dependent on domestic banks? Frankly in a contemporary financing scenario, the number of cases of fraud and corruption that have been reported in SOEs has undermined their attractiveness to the private financial sector. There shouldn’t be a Sovereign Wealth Fund INA/SWF if state companies were honestly able to bolster their credibility for foreign investors. One of the reasons for the formation of the SWF/INA was a lack of trust from potential investors, when working directly with SOEs.
Future challenges
The situation faced by SOE is clearly problematical. Over the next few years, a geopolitical shift will lead to supply chain changes, thus increasing production costs for SOEs. Fluctuations in commodity prices also endanger SOE profits in energy and plantation sectors. Traditional export destination countries, including China, the US, Europe and Japan, report a gloomy outlook in 2024. Thus, performance of export-oriented SOEs could stall, due to uncertain demand.
Another significant external factor is the changing business of companies in the energy sector to follow commitments to make an energy transition. For example, with the US$20 billion JETP (Just Energy Transition Partnership) commitment, PT PLN must be involved in early coal power plant retirement. A coal phaseout will also have an impact on the revenue of SOEs in the coal mining sector which supplies coal to power plants. Another issue is that green financing commitments are expected to put pressure on SOEs in both the financial and extractive sectors to reduce their portfolio in the fossil fuels sector.
In an election year, political decisions will definitely involve SOEs, so that professional objectives will be deterred. The 5-year election cycle often abuses SOEs when they are dragged into short-term electoral interests. Domestic demand during the election process also poses a challenge due to the tendency of the upper middle class to hold back on spending. The wait-and-see phenomenon is also evident with investors, including hesitancy about investing in Nusantara, the new capital city planned for East Kalimantan. Considerations of political stability and policy continuity means investors who want to cooperate with state companies tend to hold back until elections are over.