Infrastructure projects important, but selective<\/p>\n
Umar Juoro, Jakarta<\/p>\n
The government has unveiled ambitious programs for
\ninfrastructure development. President Susilo Bambang Yudhoyono
\nhas himself said on various occasions that Indonesia needs US$72
\nbillion for infrastructure development over the next five years.
\nThe government expects that around 70 percent of this funding
\nwill come from the private sector.<\/p>\n
Coordinating Minister for Economy Aburizal Bakrie disclosed a
\nplan to build 1,500 km of toll roads connecting Java-Bali that
\nwill require investment of around Rp 80 trillion ($8.6 billion)
\nover the next five years. This is certainly an ambitious project,
\nremembering that in the last 25 years, Indonesia has only been
\nable to develop around 600 kilometers of toll road.<\/p>\n
The government expects domestic private sector participation
\nin this toll road development. The domestic banking system is
\nexpected to contribute to financing a significant portion of the
\nfunds needed for the project. Foreign investors would only be
\ninterested in this project if tariffs were sufficiently
\nattractive, and if problems such as land acquisition were taken
\ncare of.<\/p>\n
The Indonesian Chambers of Commerce (Kadin) strongly supports
\nthe infrastructure development programs, as do multilateral
\nagencies and foreign countries like Japan. Bankers, especially in
\nthe state banks, pension funds, and state owned enterprises, are
\nalso very supportive of the program. Certainly infrastructure
\ndevelopment is urgently needed because the country's
\ninfrastructure is now in poor condition, with the possible
\nexception of the telecommunications sector.<\/p>\n
Infrastructure development is important in boosting economic
\ngrowth and creating employment. The question is, how realistic is
\nthe program, given Indonesia's weak legal frameworks and the
\ninadequacy of capital?<\/p>\n
Is the government really prepared for such ambitious projects
\nso as not to repeat the mistakes of the previous administrations?
\nGovernments in the past have often had to bear the burdens of
\nproblematic projects. The Karaha Bodas power plant is a case in
\npoint, with settlement with the government still not being
\nachieved.<\/p>\n
Meanwhile investors in the electricity sector are still
\nwaiting for tariff adjustment to the level of 7 cent per kwh.
\nInvestors in fixed line telecommunications are also still waiting
\nfor the realization of the government's promise to increase
\ntelephone tariffs. Meanwhile investors in toll roads complain not
\nonly about low tariffs, but also about prolonged land acquisition
\nproblems.<\/p>\n
Tariff increases are always problematic. Ideally tariffs
\nshould be adjusted in accordance with inflation and changes in
\ncosts. But politically this is often very sensitive and risky for
\nany government.<\/p>\n
Land clearance remains a headache for both investors and the
\ngovernment, because they often become involved in prolonged
\ndisputes with land owners. There is still no effective mechanism
\nto settle such disputes, and a new body perhaps needs to be
\nassigned to handle these matters.<\/p>\n
There is also a need to implement reliable dispute resolution
\nmechanisms. For new infrastructure projects, investors usually
\ninsist on letters of guarantee, or at the very least, letters of
\ncomfort from the government. The government should be very
\ncautious in issuing such letters, because there are financial
\nconsequences that can impact the public purse should the project
\nget into trouble.<\/p>\n
Another sensitive issue for investors concerns good
\ngovernance, especially due to the country's own poor track record
\nin corruption.<\/p>\n
Meanwhile, for domestic investors this is an attractive time
\nfor them to invest in infrastructure especially as domestic banks
\nhave about Rp 400 trillion in uncommitted funds. However,
\nalthough banks are keen to allocate credit for infrastructure
\ndevelopment, they have to carefully consider issues of fund
\nmatching as most third party funds in banks are mainly on short
\nterm deposit.<\/p>\n
Pension funds also need to be careful in putting
\ninfrastructure developments into their portfolios because of the
\nrisks involved. The domestic capital market is very limited in
\nits ability to finance infrastructure development. The government
\ncan issue bonds, but it must be careful in using such money in
\norder to maintain fiscal sustainability.<\/p>\n
Clearly then the government must be prudent in carrying out
\nits ambitious infrastructure developments. Toll road projects
\nshould be focused in those areas that desperately require them,
\nwhere the market is promising, where land acquisition can be
\nhandled effectively, and where the government can guarantee
\nattractive tariff structures.<\/p>\n
Similarly, for the power generation sector, the main concern
\nfor investors are fuel supplies, tariff adjustments, government
\nguarantees, and dispute resolution mechanisms.<\/p>\n
The telecommunications sector remains very promising, except
\nin the matter of tariff adjustments for fixed lines. For drinking
\nwater -- and learning from the experience in Jakarta -- this
\nbusiness is still not very attractive for investors. Local
\ngovernments must continue to play a major role.<\/p>\n
On the airport development sector, selectivity is also very
\nimportant to make the project as realistic as possible. The
\ngovernment should present details of project selection, so that
\ninvestors can better assess whether to participate.<\/p>\n
Infrastructure development often has a quite high elasticity-
\nto-growth of around 0.18 percent with rate of return above 20
\npercent. This means that the contribution to employment is also
\nsignificant. However, we should be careful in selecting
\ninfrastructure projects so that the government and banking sector
\ndo not fall into debt traps. What Indonesia really needs are
\nrealistic programs and reliable policies that can be supported by
\ninvestors, both domestic as well as foreign.<\/p>\n
The writer is the Chairman of Center for Information and
\nDevelopment Studies (CIDES); and Senior Fellow at the Habibie
\nCenter.<\/p>",
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"sponsor": "Okusi Associates",
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