Indonesian toll roads draw interest of foreign pension funds

Pension funds in Canada and the Netherlands as well as the Abu Dhabi Investment Authority have announced they will co-invest up to $3.75bn in toll roads with Indonesia’s new sovereign wealth fund.

The agreement represents the first official commitment by global institutional investors to the fund as foreign groups seek the potentially higher returns offered by south-east Asia’s largest economy. 

The three institutions — Caisse de Dépôt et Placement du Québec (CDPQ), Canada’s second-largest public pension fund; APG Asset Management, the biggest pension fund in the Netherlands; and an ADIA subsidiary — will each put $1bn into a toll-road investment vehicle.

Under the memorandum of understanding, Jakarta’s sovereign wealth fund, known as the Indonesia Investment Authority (INA), will commit $750m to the vehicle, according to a person familiar with the matter.

The platform “would be the consortium members’ primary vehicle for toll road investments in Indonesia”, said the INA in a statement.

Unlike most sovereign wealth funds, which typically manage a country’s surplus reserves, the INA aims to raise $15bn from international investors in addition to $5bn injected by Indonesia’s government as initial capital. President Joko Widodo has said the fund, which has been set up with the assistance of ADIA, could grow to $100bn.

The toll-road investment vehicle was expected to earmark its first investments in the next six months, although this could be extended.

The fund is seen as a gauge of international appetite for sovereign wealth funds in the region after the multibillion-dollar 1Malaysia Development Berhad embezzlement scandal in neighbouring Malaysia.

The sovereign wealth fund also represents a high-profile test of Jakarta’s capacity for good governance after Indonesia was ranked 102 out of 180 nations last year in Transparency International’s corruption index. 

Ridha Wirakusumah, the INA’s chief executive, said the new vehicle showed global investors’ “confidence” in Indonesia’s economic potential.

Emmanuel Jaclot, head of infrastructure at CDPQ, said the memorandum of understanding was “an opportunity to jointly build a portfolio of critical road assets in one of the fastest-growing economies in the world”, leveraging INA’s local networks.

The sovereign wealth fund was also the first significant test of radical reforms passed by Indonesia in October that were designed to attract foreign investors to the world’s fourth-most populous nation, analysts said.

Indonesia’s economy shrank 2.1 per cent last year, the first full-year contraction in two decades, as it struggled to contain Covid-19 infections.

The toll-road investment vehicle has identified a list of assets mostly owned by state-owned enterprises with long-term concessions expiring between 2043 and 2067.

“If this platform is successful in delivering what it has promised, it could probably become the blueprint for other similar platforms targeting other sectors,” said Cyril Cabanes, managing director for infrastructure in the Asia-Pacific at CDPQ.

Hans-Martin Aerts, head of infrastructure at APG Asset Management Asia, said the collaboration would bring benefits “through the application of best practices in operational performance and corporate governance”.

The partial privatisation of Indonesia’s toll roads would help the government recycle capital to reinvest in other infrastructure — a model Cabanes said had worked “very effectively in Australia over the last 10 to 15 years”.

However, Olly Prayudi, director of corporates in the Asia-Pacific at Fitch Ratings, said the high leverage of state-owned enterprises involved in toll roads in Indonesia was typically a factor in their ability to reinvest. Projects were long term and often “require a lot of debt funding to complete”.