Infrastructure action plan

The government has made the right decision in going ahead with the Infrastructure Summit, which starts today, despite some strong suggestions that it be postponed because of the situation in Nanggroe Aceh Darussalam and North Sumatra.

The investment forum is even more relevant now after the earthquake and tsunami destroyed basic infrastructure across several coastal towns in northern Sumatra. Yet, more encouraging is the high enthusiasm of the more than 310 foreign investors in their intent to attend the two-day summit.

Even before the cataclysm in northern Sumatra, infrastructure such as roads and port facilities in most provinces had deteriorated due to a severe lack of maintenance funds, while the prospect of imminent power shortages faces many provinces on Java, Sumatra, Sulawesi and Kalimantan. In fact, several outer islands have already been suffering regular outages.

It is no wonder that infrastructure deficit is one of the greatest obstacles to investing in Indonesia. Poor infrastructure impairs the economy's competitiveness, as it causes production and distribution costs to rise higher than those of 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 Infrastructure Summit is also more timely now because the government's investment capacity has been curtailed by severe fiscal constraints after the 1997 economic crisis, and new infrastructure development has had to rely mainly on private investment. Before the crisis, the government was responsible for over 80 percent of investments in infrastructure development, but now it cannot even afford to meet the maintenance costs of existing infrastructure, let alone build new infrastructure.

Infrastructure development needs to be accelerated to generate an annual growth of at least 6 percent -- the minimum economic expansion needed to absorb the millions of unemployed and underemployed in the country.

Analysts agree that developing countries require a minimum of as much as 7 percent of gross domestic product (GDP) in maintenance funds and new investment for infrastructure development to generate a 6 percent economic growth. However, infrastructure investment in the country has been hovering at only around 2 percent GDP since 1998.

The Infrastructure Summit seems to have been designed to be a truly effective investors forum, with the government having prepared 91 key infrastructure projects worth US$22 billion to be offered at the forum. This is only part of the estimated $75 billion necessary for infrastructure development over the next five years.

Each of the projects on offer, such as toll roads, power plants, gas pipelines, ports, airports and telecommunications infrastructure, comes with a basic profile sheet to help potential investors identify those projects in which they are interested.

Meanwhile, the government has been addressing most of the major problems that have been hindering private infrastructure investment. It will soon enact 14 government regulations to strengthen legal certainty, solve taxation issues, improve the commercial viability of infrastructure investment, expedite land acquisition and set up a viable tariff/pricing system.

Given the complex land acquisition problems many investors encounter, the government should also require that provincial governors participate in the summit. These local leaders have an important role in facilitating the smooth implementation of infrastructure projects, most of which require a lot of land and often extend to remote areas.

The experiences of other countries that have succeeded in wooing private infrastructure investment show that effective regulations are key to creating a condition conducive to infrastructure development.

Regulatory framework must be credible in that they have been designed to protect the interests of both investors and customers, while regulatory processes must be open and transparent, and encourage competition. Furthermore, although regulations on pricing should provide incentives to investors, they should also provide well-designed subsidies and safety nets to ensure that the poor have access to vital services.

Given the enormous economic importance of infrastructure development, the huge infrastructure deficit and the huge need for private financing to cover the deficit, the Infrastructure Summit could turn out to be one of the most important measures in the First 100 Days Agenda of the Susilo administration.