Case study: Building world class treasury at Indonesia Infrastructure Finance

The Asian Development Bank (ADB) has reported that improving the quality and quantity of infrastructure in the Association of Southeast Asian Nations (ASEAN) region over the period 2010-20 requires long-term investment of US$ 8.22 trillion – or $0.75 trillion a year. Electrical infrastructure accounts for US$4 trillion, followed by transportation at US$2.9 trillion, telecommunications at US$1 trillion and water and sanitation at US$280bn.

Over this 10-year period Indonesia is seen as accounting for the greatest infrastructure financing needs in the ASEAN region at US$450bn and the percentage of infrastructure financing as a share of gross domestic product (GDP) needs to more than doubled, from 3% in 2012 to 6.2%. The Indonesia government developed a long-term infrastructure development programme in response to the ADB projections.

PT Indonesia Infrastructure Finance (IIF) is a private non-bank financial institution, which provides funding for the country’s commercially-viable infrastructure projects. It is supported by international agencies such as the World Bank (WB) and the Asian Development Bank (ADB), both as shareholders and as lenders. The Indonesian government is a major shareholder through PT Sarana Multi Infrastruktur (Persero), a state-owned enterprise (SOE) set up in February 2009.

Recent activity includes IIF’s appointment as mandated lead arranger by PT LEN Telekomunikasi Indonesia to arrange and source a syndicated loan for developing Palapa Ring’s fiber optic network. Palapa Ring is a national project for building a telecommunications network across the Indonesian archipelago. IIF also issued a rupiah  (IDR) 300bn (US$228m) five-year mandatory convertible bond to electricity services provider PT  Sumberdaya Sewatama, to finance a power plant for clean and renewable energy.

Treasury challenges

IIF applies international-standard best practices in every aspect of the organisation, as required by its prestigious shareholders. This aspiration presents particular challenges in a country with a developing financial market infrastructure, since the institution’s core business requires complex and sophisticated treasury operations, which demand powerful support services. IIF has FX and interest rate exposure in both assets and liabilities, including derivative exposures. On the asset side, it holds time deposits, bonds and loans of various kinds, and on the other side it has both local and foreign debts. This summer, IIF went to the markets when it issued senior unsecured bonds of IDR1.5 trillion with maturities of up to seven years.

IIF’s business environment presents a number of challenges to treasury. The local market lacks the instruments that it needs, especially derivatives, and it can be difficult to get a quote to hedge long-dated exposures. There is also a lack of a credible pricing benchmark for some positions. Indonesia continues to experience interest rate and FX market volatility and the country also has a reputation for complex and detailed regulatory reporting requirements.

IIF needs to report monthly to Indonesia’s financial services authority, Otoritas Jasa Keuangan (OJK) and its challenges are to provide accurate, reliable and on-time reporting to the OJK and management. Each of these factors requires a best practice team and infrastructure for effective management to the high international standards required.

Treasury organisation

IIF has implemented a world-class operation, with clear segregation of duties applied to front, middle and back offices for the treasury processes. The middle office is managed by its risk division, which provides in-depth analysis of market risk, asset liability management (ALM) compliance and liquidity risk to the treasury division.  A team of 10 people supports our treasury operation and has a diverse set of backgrounds and experiences, including specialist fields such as accounting, tax and quantitative analysis, as well as broader business experience.

Spreadsheet inadequacies

The demands of the business are such that technology support based on disconnected spreadsheets and models was clearly inadequate for managing complex asset and liability portfolios to the required quality standard. The treasury team could not achieve its targeted performance if using a spreadsheet solution, which is seldom well controlled and does not provide sufficient audit trails. The team’s working time was not being well spent because of the intense manual processes needed; this also led to an increase in operational risk.  In addition, it is almost impossible achieve integration using spreadsheets.

IIF has a growing balance sheet and – on top of that – a growing set of regulatory and reporting requirements. Transaction volume is not big; however, deal size is significant because of the nature of the business in providing long-term loans for infrastructure projects in Indonesia. For treasury counterparties, IIF only deals with world-class institutions; currently working with around 15 approved treasury counterparties. Treasury needed to see all the flows from the investments and borrowings on one platform, including treasury dealing, fueling the need for a new solution.

Selecting an integrated solution

IIF determined that it would select and implement a single integrated treasury system to improve the effectiveness of its business process, to provide the highest level of risk management and regulatory compliance and reporting, including compliance with the latest standards such as Basel III and international financial reporting standards (IFRS).  As part of the enterprise-wide IT transformation, this single integrated treasury system needed to be delivered by a capable implementation team, with strong local support provision.

All internal functions – from procurement to IT and the business units – were involved in the selection project. This began with a request for proposal (RFP) process, and three vendors were shortlisted for proof-of-concept exercises. Visual Risk was ultimately selected as provider, as the company provides an integrated single platform system solution, which meets IIF’s business objectives for treasury management, ALM and hedge accounting. The team was also particularly impressed with the level of subject matter expertise and support demonstrated by the company and its local partner, PT Nexia Indonesia Advisory Services, throughout the assessment process. This gave us great confidence in their ability to deliver.

The selection processes started late 2014 and finished in mid-2015. In addition to the treasury solution, the team also selected its core finance and loan management system at the same time.

Key outcomes

The main outcomes of the complete IIF treasury automation project are:

  • IIF has achieved an enterprise-wide view of assets and liabilities across the company’s books; an essential step in achieving sound asset and liability management.
  • Many manual treasury functions have been modernised and automated, eliminating multiple entries into spreadsheets and other manual process in dealing, confirmation, settlements, and accounting. This has significantly enhanced operational quality and efficiency.
  • Treasury dealing and asset and liability management are improved, both on a transactional level and a portfolio basis, to meet greater control and internal and regulatory requirements for risk management analysis and reporting.

It turned out to be easy to prove the new solution’s results since IIF moved from spreadsheets to the integrated, single software platform solution. From a management perspective, treasury can now easily and accurately perform analysis of its transactions and positions, which leads to faster and better decision making.

One aspect of a new solution implementation that many will miss or overlook is the change enablement. PT Nexia Indonesia Advisory Services and IIF’s project management office (PMO) defined a sound change enablement approach so that Visual Risk is highly accepted within the organisation; demonstrating that the team has achieved successful results with the new solution.

Team members are now able to focus on more strategic and analytical treasury decisions, and on delivering true service to the organisation. Through its provider, IIF not only has deal execution, risk management, and hedge and treasury accounting in a single workflow, but has also gained a robust facility management solution.

On the analytical aspects, Visual Risk provides a comprehensive asset liability management solution; including sensitivity analysis, balance sheet forecasting, stress testing and next-level analytics that our treasury team couldn’t carry out in a spreadsheet.

Cost and time-saving is substantial; for example, the team took almost a day to prepare sensitivity analysis from data collection to modelling using spreadsheets, but this now only requires a few clicks to accomplish.

A recommendation

When selecting a treasury solution, a single software platform is very important for maximising benefits – and it must be supported by a capable implementation team.  Regardless of how robust and sophisticated the solution is, you will not achieve true value when members lack the capability and capacity to implement well.

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