JP\/Editorial<\/p>\n
Incentives for infrastructure<\/p>\n
President Susilo Bambang Yudhoyono, in Busan, South Korea, for
\nthe APEC summit over the weekend, took the opportunity at the
\ninternational forum to invite investors to Indonesia's second
\nInfrastructure Summit -- scheduled for mid-February in Jakarta.<\/p>\n
This time, however, the government seems better prepared to
\nmake it a success. The first Infrastructure Summit last January,
\nwhich was attended by hundreds of would-be investors, but turned
\nout to be a dud as only six of the 91 projects, valued at US$22.5
\nbillion, on offer at the gathering have thus far been tendered.
\nAnd, even more disheartening, only four -- all toll roads -- have
\nbeen taken by investors.<\/p>\n
Learning from the big failure of the first summit, the
\ngovernment moved last week in a firm manner to improve the
\ninvestment climate for infrastructure by establishing a better
\nframework for the management and sharing of risks, while offering
\nnew incentives to investors.<\/p>\n
The new package of initiatives, stipulated in Presidential
\nRegulation No. 67\/2005 on government-private partnerships in
\ninfrastructure provision, are designed to remove most of the
\nhurdles to infrastructure investment by ensuring the use of
\ncommercial principles to secure the financial sustainability of
\nservice provision, while at the same time still protecting
\nconsumer interests.<\/p>\n
Realizing that infrastructure investment has a long payback
\nperiod, the new regulation ensures that right from the outset the
\nprices for infrastructure provision are set at levels adequate to
\ncover the costs of investments and operations plus a reasonable
\nprofit margin. If this is not possible and cannot be afforded by
\ndomestic consumers, the government is required to make up the
\nshortfall in the form of compensation or subsidies in order to
\nensure the financial sustainability of service provision.<\/p>\n
Another significant improvement that investors will greatly
\nwelcome is the better mechanism for managing the risks of
\ninfrastructure investment and the sharing of risks between the
\ngovernment and private investors in infrastructure development.
\nIf the conditions require it, the government can put up equity
\nshares, provide guarantees or tax relief; all with the objective
\nof making infrastructure projects commercially viable.<\/p>\n
The government also has set up a special committee at the
\nfinance ministry in charge of assessing and managing risks
\nrelated to infrastructure development. It is this committee that
\nwill decide the requirements for government-private partnerships
\nin infrastructure development and determine the commercial
\nviability of projects and oversee those projects, which use
\ngovernment support and incentives.<\/p>\n
The better framework for the management and sharing of risks
\nwill go a long way in regaining investor confidence because of
\nthe high risks encountered by businesses in Indonesia, not the
\nleast, is in the infrastructure sector, which has a very long
\npayback period.<\/p>\n
The regulation, however, stipulates tough requirements for
\ngovernment-private partnerships in infrastructure development and
\nprovisions to ensure transparency and fair competition. All
\nprojects, for example, must be tendered through open and
\ncompetitive bids.<\/p>\n
The new package of measures, if properly implemented, will
\nsurely improve the prospects of investment in infrastructure,
\nwhich the country badly needs because infrastructure deficits
\nhave become one of the biggest hurdles to investments in
\nIndonesia.<\/p>\n
Poor infrastructure impairs the competitiveness of the economy
\nas production and distribution costs are made much higher than
\nthose in other countries. Inadequate infrastructure such as poor
\nroads also hinders access to public services such as health,
\neducation and market facilities, thereby hampering poverty
\nalleviation.<\/p>\n
The new initiatives are also quite timely in view of the
\nsecond Infrastructure Summit scheduled in Jakarta in mid-
\nFebruary. This new package and the series of new directives and
\nrules issued over the last few months, including the ones on land
\nacquisition and bank lending to infrastructure projects,
\ncertainly will make the projects -- for roads, seaports,
\nairports, rail networks, power stations, water supplies and
\ntreatment, gas supplies and telecommunications, much more
\nattractive to investors.<\/p>\n
The better, more sensible regulations for infrastructure
\ninvestment will also bolster more regional initiatives in
\ninfrastructure development as was the case with the West Java
\nadministration through an infrastructure summit in Bandung this
\npast August.<\/p>\n
The experiences of other countries, which have succeeded in
\nwooing private investment in infrastructure, show that sensible,
\neffective regulations are the most critical enabling condition
\nfor infrastructure development.<\/p>\n
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