Building a better future together after the tragedy

Shamshad Akhtar, Manila

Infrastructure development is key to sustained economic growth, poverty reduction and regional integration. The question is: What must be done to meet the demand for enhanced infrastructure? Most critical is the need to develop a conducive, stable, and predictable policy environment backed by a well- governed legal and regulatory framework that will attract the required resources required to finance new roads, power grids, irrigation networks and other costly but crucial infrastructure.

Indonesia's adoption of a 5-year infrastructure plan and strategy, announced by the government on Jan. 17, is impressive and timely. The leadership and economic managers of Indonesia have created a comprehensive and well-conceptualized vision and short- and long-term strategy for infrastructure sectors, reflecting a deep understanding of the issues at hand as the nation works to meet a vast need that has grown in the wake of the tragic tsunami disaster.

The infrastructure needs in the Asia and Pacific region are truly daunting. Over the coming decade the region will require at least US$250 billion per year in infrastructure investment to meet recognized needs.

Around the world, 2.4 billion people lack access to sanitation, 2.5 billion people are without access to modern energy supplies, 1.2 billion people lack access to safe drinking water, and 1 billion people lack roads to reach markets, jobs, and health facilities. The great majority of these people are in the Asia-Pacific region. Rapid economic growth and rising trade in East Asia also create a steadily increasing demand for infrastructure services.

Meeting these needs, especially in rural areas, is critical to reducing poverty. Asian Development Bank studies have demonstrated that rural infrastructure investments significantly contribute to the reduction of rural poverty. In just one example of the costs of inadequate infrastructure, limited rural transportation and communication networks result in higher costs and low returns for agricultural producers, greatly hindering their chances to grow.

Building roads, communications networks or irrigation systems is expensive. Fiscal constraints are now forcing Governments to cut back their capital spending over the medium term. The gap between needs and resources can only be filled by domestic and foreign private sector investment. This will only increase if proper incentive frameworks are created.

In Indonesia, the infrastructure demands are huge. In seeking funds to meet this demand, Indonesia must compete for a limited pool of financial resources. To attract investments in the infrastructure sectors, major policy reforms are needed in several areas.

First, while a government will always play a major role in infrastructure sectors, the private sector must be involved in the financing, construction, operation and maintenance of commercially viable projects and services.

Financing requirements can only be met through an effective and judicious combination of public and private sector resources. If this is to happen, the government needs to create a fair, trusted, and welcoming legal and policy environment for the private sector.

Second, Indonesia should strengthen strategic planning in infrastructure sectors to identify where and when private sector participation should be encouraged, to monitor whether such participation is adequate to meet needs, and to determine the level of complementary support to be provided through public- private partnerships.

Private sector investors need clarity and predictability. Stronger would also enhance the effectiveness of public sector infrastructure investments.

Third, recent technological advances obviate the need for vertical or horizontal integration of infrastructure sectors to reap economies of scale. If handled well, the creation of independent infrastructure providers, such as power producers and distributors, toll-way operators and port concessionaires, can improve efficiency, reduce costs and enhance the quality of service to consumers. To minimize opportunities for corruption, transparent competitive bidding should be adopted.

Fourth, we must remember that creating effective markets requires more than private sector participation. The importance of independent and technically competent regulators, transparent regulatory decisions, training and adequate compensation of regulators, and access to the legal system on appeal cannot be overemphasized.

Fifth, domestic currency sources of financing infrastructure development must be tapped. Given Indonesia's demographic characteristics, measures taken now to deepen the development of pension and life insurance sectors, if their funds are invested in the capital markets, would provide alternative sources of financing infrastructure development.

Finally, appropriate risk mitigation and sharing is essential. Each reform step in the right direction reduces the need for government guarantees. The shorter the transition period to credible judicial and regulatory systems, and commercialized and open infrastructure sectors, the lighter will be the guarantee burden. Government guarantees cannot be completely avoided during this transition period, but they should be used judiciously.

ADB is in a unique position to assist Indonesia with private sector mobilization. Since its establishment in 1966, ADB has lent $7.8 billion for 87 infrastructure projects in Indonesia, or 40 percent of its total lending to the country. The energy sector accounted for $3.4 billion, transport and communication for $2.6 billion, and urban development, water supply and sanitation for $1.8 billion.

In addition to providing emergency assistance for rehabilitation and reconstruction of infrastructure in the tsunami-affected areas, ADB in future will be supporting infrastructure sector policy reforms, renewable energy development (particularly in regions outside Java), power transmission and distribution, trans-ASEAN power interconnection, gas transportation, road rehabilitation and expansion, port and airport development, and water supply and sanitation.

Indonesia's infrastructure needs are enormous, and have increased greatly since the tragedy of Dec. 26. No group can answer the challenge alone. But the needs can be met by strong joint efforts of domestic and international investors, the government and its development partners.

The writer is the director general of the Asian Development Bank's Southeast Asia Department.