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Economy

Soured IPO spells trouble for Indonesia's infrastructure drive

Weak investor appetite for state contractor casts doubt over $37bn funding gap

A screen at the Indonesia Stock Exchange in Jakarta shows the decline in PP Presisi's stock price during its trading debut on Nov. 24. (Photo by Wataru Suzuki)

JAKARTA -- After a round of energized speeches by PP Presisi executives, the crowd was in high spirits. They were gathered at the Indonesia Stock Exchange building's stylish hall on Friday morning to celebrate the stock trading debut of the state-owned contractor.

"We have the largest number of equipment in Indonesia," said Tumiyana, the President of PP Presisi's state-owned parent PP. "We've entered an industry that is extraordinarily dynamic."

But the opening bell at 9 a.m. was followed immediately by an uneasy silence. The giant screens around the hall, with everyone's eyes glued to them, turned red as PP Presisi's stock began tanking. Within seconds, it fell as much as 8% compared with its offering price of 430 rupiah (3 U.S. cents). The ceremony was quickly wrapped up.

The soured initial public offering raises fresh doubts over the capability of state-owned enterprises (SOE) to fund the massive amount of capital required to push the government's infrastructure program.

"We still have a funding gap of 500 trillion [rupiah]," or about $37 billion, said Aloysius Kiik Ro, deputy for Restructuring and Business Development at the Ministry for State Owned Enterprises. He said there are 12 SOEs planning to launch an IPO next year.

Executives of PP Presisi, among others, celebrate the trading debut of its shares on Nov. 24. (Photo by Wataru Suzuki)

Some warn that investor demand is not catching up to the flood of SOEs tapping the capital markets.

"The market for financing ... to collect money and build infrastructure is now rather crowding out," Rofikoh Rokhim, a commissioner at Bank Rakyat Indonesia, one of the country's largest state-owned banks, said at a business forum on Thursday. "There are many infrastructure companies, mainly SOEs [trying to raise funding]," she said. "Be careful."

The lack of investor appetitite for PP Presisi's shares was clear even before the listing, according to people involved in the deal who spoke on the condition of anonymity. One person said investors preferred other IPOs of state-owned enterprises, such as Wijaya Karya Gedung, a construction company that is slated for a listing at the end of this month. Port services company Jasa Armada Indonesia, another SOE, is also said to be seeking a listing in December. 

PP Presisi, the person said, was especially unpopular because it was difficult to measure the strength of its fundamentals. The company's net profit for the January-July period more than doubled from a year earlier to 37.65 billion rupiah, an achievement that its executives touted as proof of its bright prospects. In reality, much of its profits were pushed up thanks to its acquisition of Lancarjaya Mandiri Abadi, a private construction company, in June.

The offering price of PP Presisi was eventually set at the lower end of its target range. Initially aiming to pocket as much as 2.3 trillion rupiah from the listing, the company ended up settling for less than half that amount, 1.01 trillion rupiah, by selling 23% of its enlarged capital.

Indonesian President Joko Widodo speaks after inspecting the construction of a toll road in Cileunyi, West Java Province, in March 2016. (Reuters / Antara Foto)

Indonesian President Joko Widodo is pushing an ambitious 4,800 trillion rupiah infrastructure agenda to plug a massive shortage of roads, railways, ports and projects. After taking office in October 2014, he quickly slashed gasoline subsidies and freed up tens of billions of dollars in the budget to be allocated for land acquisition and the awarding of lucrative contracts. But recently, lower-than-expected tax revenue and obstacles in cutting red tape has left the SOE sector increasingly funding the projects that they are building.

IPOs and other means of equity funding, which do not have to be repaid like bank loans, are seen as particularly important in improving a company's financial health. The rising level of debt -- which has nearly tripled in three years for seven listed SOEs -- has made some analysts wary of the ability of the SOEs to complete the projects fast enough to repay them.

One person said that IPOs of some infrastructure-related SOEs remain attractive for investors, given the government's commitment to the program. Institutional investors have lined up for the listing of Wijaya Karya Gedung, a unit of state contractor Wijaya Karya, the person said.

Most economists agree that significant improvements in infrastructure, which has been neglected in the past, is necessary to reduce sky-high logistic costs and income inequality.

"The problem is that the previous government had so many, many, many problems with bureaucracy and regulations," Pramono Anung, Indonesia's cabinet secretary, told a business forum on Thursday. "This has been making the government and doing business inflexible," he said. "We are still concerned, and we will try to make the regulations more friendly for investment."

Nikkei staff writer Erwida Maulia in Jakarta contributed to this story.

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