Infrastructure development unlikely to spur growth

Infrastructure development unlikely to spur growth

Umar Juoro, Jakarta

The government's intention to stimulate the economy through
infrastructure development, which will be accelerated by Bank of
Indonesia's easing of legal lending limits related to the
financing of infrastructure and other programs in the supply of
basic needs of the people, may not be effective for increasing
economic growth to an annual average of 6.2 percent.

The reason is that this intention is not supported by
officials at the technical level or by expansive bank lending.
New credits will continue to go mostly to consumer and commercial
financing and not to such long-term, high-risk investment
projects as infrastructure.

The business community, especially those involved in large
investments such as oil and gas mining and infrastructure, does
not doubt the strong commitment of the President and his
ministers, but they are not sure about the support of officials
in charge of realizing the commitments.

Up to now, there have not been any changes within the
bureaucracy. Several important economic ministries, such as those
in charge of public works, industry and trade, do not have a
formal structure yet, not to mention the appointment of officials
to fill the positions.

It is worth recalling that the ministry of public works which
was diluted under the previous government is being refurbished,
and the trade and industry ministry was split into two separate
institutions.

The slow pace of work within the bureaucracy seems to have
frustrated many businesspeople who have placed high expectations
on the new government.

There is a tendency among some economic ministers to bypass
the bureaucracy by forming special committees and taking
immediate action without going through the normal, if arduous,
bureaucratic mechanisms.

This idea seems wonderful, but not so in practical terms.
For example, the minister of mines and energy has promised to
simplify and expedite the procedures of investment in the oil and
natural gas sector. However, the bureaucracy has not moved to
support the minister's commitment.

The Constitutional Court instead annulled the new electricity
law and amended the new oil and gas law. High-profile cases such
as those related to the extension of the MobilExxon contract for
the oil field in Cepu and the disputes with Karaha Bodas and
Cemex remain unresolved despite the government's pledge to settle
at least one of them during the first 100 days in office.

Are we going to continue listening to wonderful speeches and
sweet promises from the President and his ministers? That could
be the case if the government does not improve its capacity to
execute its policies.
The government should realize that a lot has to be done to
improve its capacity within a relatively short period of time. In
addition, the President and his ministers should start to shift
the focus of their attention from public relations to getting
things done.

The central bank has supported the government's plan to
stimulate the economy by easing its money policy. Bank Indonesia
has steadily lowered its interest rate and prodded banks to
expand lending. Consumer and commercial credits (for working and
capital and financing trade) have indeed increased significantly.

However, banks remain hesitant and extra careful about lending
to such long-term and high-risk sectors as infrastructure
development. Moreover, most large companies are still in the
process of consolidation and are not viable for large credits.

Despite the central bank's easing of legal lending limits with
regard to financing for infrastructure, it is quite likely that
only large state banks such as Mandiri and BNI will be able to
make use of the new facility. Other major private banks will
still focus on consumer and commercial lending, with relatively
low risks and high returns, while they take a very limited
participation in investment such as infrastructure projects with
manageable risks.

Private banks are still able to gain profits from their
consumer and commercial lending, so why should they go to high-
risk businesses with modest returns such as infrastructure
financing.

After 100 days in power, the new government should face
reality. It is not only the political mandate that matters, but
more importantly how it goes about effectively exercising the
mandate to deliver on its promises to the people.

Considering the existing condition of the bureaucracy and the
focus of banking sector, it is better for the government to
adjust its policies and programs to this reality and get
reasonable results. The government should focus on the problems
that can be solved in the short run, to gain confidence and
credibility, and synergize the available resources to achieve
realistic targets. This is the time to get real and get the job
done, while staying away from unfulfilled promises.

The writer is chairman of the Center for Information and
Development Studies (CIDES), and a senior fellow at the Habibie
Center.