Infrastructure action plan

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.