Increasing State Revenue
    Category: Column By : Raj Kannan Read : 541 Date : Thursday, January 04, 2018 - 14:51:49

    The Indonesian government missed its revenue target last year by around Rp 36 trillion, according to the Finance Ministry. Moody’s also raised concerns last year that Indonesia’s state revenues, at 14.3% of GDP, was low compared its other “Baa” rated peers, such as Thailand’s revenues at 22.4%, India at 21.3% and the Philippines at 19.1%. Moody’s said it needs to see evidence of higher state revenue to increase Indonesia’s rating from Baa3 to Baa2.

    But how to raise revenues? The Joko “Jokowi” Widodo’s program of building more infrastructure is helping as it comes online, supporting economic growth. However, so far SOEs are doing most of the building. Using SOEs for infrastructure growth is fine—they are technically capable, but their financial capacity uncertain, particularly without government cash injections. Thus, the government has been considering alternatives such as Limited Concession Schemes (LCS) to extract fresh capital from the private sector.

    To explain, LCS are not an asset sale, they are a concession agreement between the government and private investors for an operating asset for a specific period, usually 15 to 20 years. During this period, the investors will manage, expand and improve the asset. In return for the concession, the private group will pay the government an upfront concession fee and or an annual concession fee. For example, a LCS for Soekarno-Hatta airport could raise an estimated Rp 45 trillion upfront fee— comparing this against the Rp 36 trillion state revenue shortfall or Rp 41 trillion in estimated SOE 2017 dividends to the government, one can see the clear financial benefit to the country. In sum, an LCS of Soekarno-Hatta could profoundly increase state revenue.

    The danger of LCS is if the private sector consortium doesn’t substantially improve the asset during the concession period. The other danger is if the LCS’s upfront payment is co-mingled with other funds. The key measure to ensure the success of an LCS is keep the proceeds in a separate fund, a clear learning I gathered as a member of the World Economic Forum’s roundtable on asset recycling, from those who have successfully implemented LCS like schemes in their countries.

    This use of a distinct LCS fund means that its benefits can be easily tracked. Thus, the Indonesian government can show how concessioning a state asset led to improved services and development of much needed infrastructure in islands outside Java. One should bear in mind that the revenue of a SOE is not the same as state revenue, thus the SOE keeping the LCS proceeds will not help improve a country’s credit rating.

    In conclusion, LCS is an effective tool to increase state revenue as long as they are well designed and structured in the country’s best interest. I am hopeful that the Finance Ministry will look seriously at LCS since many governments worldwide are rolling out LCS schemes to increase state revenue.