Author Topic: Indonesia poised to benefit as China's Belt and Road turns green  (Read 595 times)


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Indonesia poised to benefit as China's Belt and Road turns green
David Li and Fajar Ibnu Ramadhan
Beijing/Jakarta | Fri, June 22, 2018 | 03:50 pm

In September 2013, Chinese President Xi Jinping unveiled a grand vision to reawaken and extend the old Silk Road in the name of enhanced international trade, development and cooperation. The scope of this Belt & Road initiative is extensive, set to account for 30 percent of global GDP and require up to US$6 trillion of investment by 2030.

But the BRI will require up to US$6 trillion of investment by 2030. Funds are being strategically invested in transport, energy and infrastructure projects along several economic corridors, from China into Central Asia, the Middle East, Europe, Southeast Asia and Africa. While Chinese public capital is being used as an initial stimulus, investment on this scale cannot be driven by this source alone, private capital is needed to fund BRI projects as well.

Meanwhile, global demand for sustainable infrastructure is similarly booming, estimated to exceed $90 trillion between 2015 and 2030. It is now widely accepted throughout the region that there is a massive need for green infrastructure, transport, renewable power and water services along significant trade routes.

The green finance market — which comprises investments with an environmental benefit or which promote sustainability or fight against climate change — has previously struggled to meet investor demand, suffering from a lack of investment opportunities on the scale required by institutional investors. The scale of the BRI meets the demand for greater green finance opportunities.

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Indonesia has ambitious infrastructure improvement plans, particularly regarding energy, transport hubs and agricultural production. International Finance Corporation (IFC) estimates that there will be $274 billion of green investment opportunities in Indonesia in 2016 to 2030. This provides a breadth of opportunities, including large scale projects, which could generate investment under the green Belt and Road.

As private capital looks to the region for investment opportunities, Indonesia can offer a range of attractive green projects — including investments — to develop infrastructure and provide sustainable energy in a rising emerging market economy, with initial stimulus provided by Chinese public funds.

As an example, in May 2017 a consortium of Indonesian and Chinese companies building Indonesia’s first high-speed railway signed a $4.5 billion loan with China Development Bank. High speed railway projects are a well-established green use of proceeds, so green bonds or sukuk issued by Indonesian entities could be used to plug funding gaps in this project. The government of Indonesia signaled its support of green finance when it recently issued the world’s first sovereign green sukuk, which complies with the ASEAN Green Bond Standards.

Despite the interest in green investment opportunities, investors will generally only participate in projects they deem to be commercially viable. Whereas state-owned Chinese banks may be pressured to pour money into projects with questionable economic viability in the name of furthering the Belt and Road initiative, other investors may have a more limited risk appetite.

Risks include underdeveloped credit markets, inconsistent regulatory regimes and poor infrastructure, which make the initiation of local BRI projects problematic. Economic stability should — at least in theory — significantly increase once investment has been pumped in. With functioning transport links, infrastructure and affordable renewable energy supplies, local economies can grow, creating the ability to benefit from further investment opportunities.

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