Financing infrastructure

Financing infrastructure

If the views and policy statements made by the Indonesian
ministers at the World Bank-sponsored international conference
are a reliable guide, political connections will no longer help
private investors to gain infrastructure contracts. The credible
legal and institutional framework which the ministers said is
being prepared will ensure that all infrastructure contracts for
private investors will be awarded through competitive bidding and
transparent evaluation processes. There was an unanimous
agreement among the conference's participants that a credible,
stable legal and institutional framework is crucial for
stimulating private-sector investments in infrastructure
development.

Vigorous competition, transparency, clear-cut rules and strong
commitment on the part of the government were cited by the
Indonesian ministers and the conference participants from other
Asian countries as the key elements of any credible framework to
govern private involvement in infrastructure development.

Indonesia and most Asian countries have yet to establish the
appropriate sectoral policies and the legal and institutional
framework to govern the actions of private investors in the
development of infrastructure, previously the monopoly of state
companies.

But the situation in Indonesia apparently has been worsened by
the powerful lobbies of politically-well connected businessmen.
The decision-making process for awarding contracts has often not
been transparent. In fact it is usually very complex, causing
allegations of political favoritism. Many contracts, notably the
potentially lucrative ones, have been awarded on an unsolicited
basis through direct negotiations.

Indonesia's macroeconomic policies, though hailed
internationally as very prudent and sound, are not sufficient by
themselves to induce private investments in infrastructure. They
must be supplemented by a transparent, stable and credible legal
and regulatory framework, mutually-acceptable pricing and by
risk-sharing mechanisms especially tailored to the specific
characteristics of private investments in infrastructure.

The development of infrastructure, such as power generation
stations, roads, telecommunications systems and water supply
networks, usually require large investments, but their pay-back
period is very long, often up to 25 years. Investors also face
foreign exchange risks during the long lifetime of their ventures
because projects require large imports of equipment while
revenues are in local currency.

Moreover, investors do not have much leeway regarding prices
because the pricing policy remains controlled by the government,
which naturally wants to ensure that the rates for infrastructure
services are affordable by the people. Credit requires a long,
complex process because in most cases, infrastructure development
is financed on a non-recourse basis, meaning that creditors do
not have any recourse to the assets of the investors in case of
default. The crux of the matter is that infrastructure
development requires not only very large amounts of money but
also very long-term funds. The risk of uncertainty and,
consequently, of losses, is made bigger for investors if the
country in question has not established clear-cut rules and
transparent policies.

Prudent macroeconomic policies together with the credible
framework mentioned above will enable Indonesia to compete in
attracting private investments to accelerate its infrastructure
development, which is badly needed to sustain the country's
robust economic growth. Prudent macroeconomic policies have been
effective for maintaining macroeconomic stability and conducive
for sustaining robust growth thus far. Economic growth increases
the demand for various infrastructure services, thereby making
large private investments in the provision of infrastructure
commercially viable.