Infrastructure projects important, but selective

Infrastructure projects important, but selective

Umar Juoro, Jakarta

The government has unveiled ambitious programs for
infrastructure development. President Susilo Bambang Yudhoyono
has himself said on various occasions that Indonesia needs US$72
billion for infrastructure development over the next five years.
The government expects that around 70 percent of this funding
will come from the private sector.

Coordinating Minister for Economy Aburizal Bakrie disclosed a
plan to build 1,500 km of toll roads connecting Java-Bali that
will require investment of around Rp 80 trillion ($8.6 billion)
over the next five years. This is certainly an ambitious project,
remembering that in the last 25 years, Indonesia has only been
able to develop around 600 kilometers of toll road.

The government expects domestic private sector participation
in this toll road development. The domestic banking system is
expected to contribute to financing a significant portion of the
funds needed for the project. Foreign investors would only be
interested in this project if tariffs were sufficiently
attractive, and if problems such as land acquisition were taken
care of.

The Indonesian Chambers of Commerce (Kadin) strongly supports
the infrastructure development programs, as do multilateral
agencies and foreign countries like Japan. Bankers, especially in
the state banks, pension funds, and state owned enterprises, are
also very supportive of the program. Certainly infrastructure
development is urgently needed because the country's
infrastructure is now in poor condition, with the possible
exception of the telecommunications sector.

Infrastructure development is important in boosting economic
growth and creating employment. The question is, how realistic is
the program, given Indonesia's weak legal frameworks and the
inadequacy of capital?

Is the government really prepared for such ambitious projects
so as not to repeat the mistakes of the previous administrations?
Governments in the past have often had to bear the burdens of
problematic projects. The Karaha Bodas power plant is a case in
point, with settlement with the government still not being
achieved.

Meanwhile investors in the electricity sector are still
waiting for tariff adjustment to the level of 7 cent per kwh.
Investors in fixed line telecommunications are also still waiting
for the realization of the government's promise to increase
telephone tariffs. Meanwhile investors in toll roads complain not
only about low tariffs, but also about prolonged land acquisition
problems.

Tariff increases are always problematic. Ideally tariffs
should be adjusted in accordance with inflation and changes in
costs. But politically this is often very sensitive and risky for
any government.

Land clearance remains a headache for both investors and the
government, because they often become involved in prolonged
disputes with land owners. There is still no effective mechanism
to settle such disputes, and a new body perhaps needs to be
assigned to handle these matters.

There is also a need to implement reliable dispute resolution
mechanisms. For new infrastructure projects, investors usually
insist on letters of guarantee, or at the very least, letters of
comfort from the government. The government should be very
cautious in issuing such letters, because there are financial
consequences that can impact the public purse should the project
get into trouble.

Another sensitive issue for investors concerns good
governance, especially due to the country's own poor track record
in corruption.

Meanwhile, for domestic investors this is an attractive time
for them to invest in infrastructure especially as domestic banks
have about Rp 400 trillion in uncommitted funds. However,
although banks are keen to allocate credit for infrastructure
development, they have to carefully consider issues of fund
matching as most third party funds in banks are mainly on short
term deposit.

Pension funds also need to be careful in putting
infrastructure developments into their portfolios because of the
risks involved. The domestic capital market is very limited in
its ability to finance infrastructure development. The government
can issue bonds, but it must be careful in using such money in
order to maintain fiscal sustainability.

Clearly then the government must be prudent in carrying out
its ambitious infrastructure developments. Toll road projects
should be focused in those areas that desperately require them,
where the market is promising, where land acquisition can be
handled effectively, and where the government can guarantee
attractive tariff structures.

Similarly, for the power generation sector, the main concern
for investors are fuel supplies, tariff adjustments, government
guarantees, and dispute resolution mechanisms.

The telecommunications sector remains very promising, except
in the matter of tariff adjustments for fixed lines. For drinking
water -- and learning from the experience in Jakarta -- this
business is still not very attractive for investors. Local
governments must continue to play a major role.

On the airport development sector, selectivity is also very
important to make the project as realistic as possible. The
government should present details of project selection, so that
investors can better assess whether to participate.

Infrastructure development often has a quite high elasticity-
to-growth of around 0.18 percent with rate of return above 20
percent. This means that the contribution to employment is also
significant. However, we should be careful in selecting
infrastructure projects so that the government and banking sector
do not fall into debt traps. What Indonesia really needs are
realistic programs and reliable policies that can be supported by
investors, both domestic as well as foreign.

The writer is the Chairman of Center for Information and
Development Studies (CIDES); and Senior Fellow at the Habibie
Center.