Incentives for infrastructure

President Susilo Bambang Yudhoyono, in Busan, South Korea, for the APEC summit over the weekend, took the opportunity at the international forum to invite investors to Indonesia's second Infrastructure Summit -- scheduled for mid-February in Jakarta.

This time, however, the government seems better prepared to make it a success. The first Infrastructure Summit last January, which was attended by hundreds of would-be investors, turned out to be a dud as only six of the 91 projects, valued at US$22.5 billion, on offer at the gathering have thus far been tendered. And, even more disheartening, only four -- all toll roads -- have been taken by investors.

Learning from the big failure of the first summit, the government moved last week in a firm manner to improve the investment climate for infrastructure by establishing a better framework for the management and sharing of risks, while offering new incentives to investors.

The new package of initiatives, stipulated in Presidential Regulation No. 67/2005 on government-private partnerships in infrastructure provision, are designed to remove most of the hurdles to infrastructure investment by ensuring the use of commercial principles to secure the financial sustainability of service provision, while at the same time still protecting consumer interests.

Realizing that infrastructure investment has a long payback period, the new regulation ensures that right from the outset the prices for infrastructure provision are set at levels adequate to cover the costs of investments and operations plus a reasonable profit margin. If this is not possible and cannot be afforded by domestic consumers, the government is required to make up the shortfall in the form of compensation or subsidies in order to ensure the financial sustainability of service provision.

Another significant improvement that investors will greatly welcome is the better mechanism for managing the risks of infrastructure investment and the sharing of risks between the government and private investors in infrastructure development. If the conditions require it, the government can put up equity shares, provide guarantees or tax relief; all with the objective of making infrastructure projects commercially viable.

The government also has set up a special committee at the finance ministry in charge of assessing and managing risks related to infrastructure development. It is this committee that will decide the requirements for government-private partnerships in infrastructure development and determine the commercial viability of projects and oversee those projects, which use government support and incentives.

The better framework for the management and sharing of risks will go a long way in regaining investor confidence because of the high risks encountered by businesses in Indonesia and, not the least, in the infrastructure sector, which has a very long payback period.

The regulation, however, stipulates tough requirements for government-private partnerships in infrastructure development and provisions to ensure transparency and fair competition. All projects, for example, must be tendered through open and competitive bids.

The new package of measures, if properly implemented, will surely improve the prospects of investment in infrastructure, which the country badly needs because infrastructure deficits have become one of the biggest hurdles to investments in Indonesia.

Poor infrastructure impairs the competitiveness of the economy as production and distribution costs are made much higher than those in other countries. Inadequate infrastructure such as poor roads also hinders access to public services such as health, education and market facilities, thereby hampering poverty alleviation.

The new initiatives are also quite timely in view of the second Infrastructure Summit scheduled in Jakarta in mid- February. This new package and the series of new directives and rules issued over the last few months, including the ones on land acquisition and bank lending to infrastructure projects, certainly will make the projects -- for roads, seaports, airports, rail networks, power stations, water supplies and treatment, gas supplies and telecommunications, much more attractive to investors.

The better, more sensible regulations for infrastructure investment will also bolster more regional initiatives in infrastructure development as was the case with the West Java administration through an infrastructure summit in Bandung this past August.

The experiences of other countries, which have succeeded in wooing private investment in infrastructure, show that sensible, effective regulations are the most critical enabling condition for infrastructure development.