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.