Investment opportunities abound, risks remain high
Riyadi Suparno, The Jakarta Post, Tanjung Benoa, Bali
Australian and Indonesian businesspeople are of the view that investment opportunities in Indonesia are abundant -- especially in the infrastructure sector -- but that equally risks are still high, and to some extent this keeps them at bay -- unless the returns are attractive.
Ray Hodgson, president of PT Leighton Contractors Indonesia, noted on Tuesday that competition for private funds in the region was getting tighter and consequently private investors now demand better returns and a quantifiable risk environment.
"Risk is the key in determining a project's viability and the government tends to underestimate the multitude of risks involved," he said on Tuesday at the two-day Indonesia Australia Business Conference at the Conrad Bali Resort and Spa here.
Indonesia, he said, had quite a high investment risk. Therefore, investors demanded returns in the range of 20 percent to 30 percent per annum, depending on the sector.
Coordinating Minister for the Economy Aburizal Bakrie estimated on Monday that infrastructure projects in Indonesia would bring returns of around 15 percent.
Hodgson contended that the government might believe that private investors' expectations of returns were unreasonably high, but that was the reality, considering the fact that private or institutional money would rather seek lower risk environments.
On the other hand, the government could no longer fund the construction of infrastructure projects due to financial constraints.
Indonesia will need some $150 billion for infrastructure development projects over the next five years, of which the government is ready to finance only less than 20 percent, with local and global investors expected to cover the bulk of the investment.
In January, the government put up 91 projects worth $22 billion, and in November it will put up more projects worth about $57.5 billion.
The banking community, especially foreign banks in Indonesia, are ready to support financing of infrastructure projects, but they demand that their money be invested safely and with better legal protection.
Wayne Yang, the Citigroup Private Bank's managing director and global market manager for Indonesia, said foreign banks have plenty of funds to finance infrastructure, but they were holding it up due to a lack of legal certainty.
"As a foreign investor, we have a lot of capital. The problem is we don't know if we can get the money back when we invest it due to weak legal frameworks," he said.
He also urged the government to deregulate financial markets further to give an alternative for banks to raise capital domestically. He noted there had been a lot of innovations in financial services, however they could not be implemented here due to legal constraints.
Hilton R. King, a foreign legal consultant at Makarim and Tiara S. law firm, said the government should consider promoting rupiah financing for infrastructure projects as an alternative to foreign financing.
He suggested that the government reform the pension and insurance industries, which amass huge funds, however most of these funds -- between 60 and 70 percent -- are invested in short-term instruments.
He also noted that Indonesia could learn from Malaysia in raising local financing for infrastructure, which he said was successful.
Minister of Finance Yusuf Anwar and State Minister for Planning and Development Sri Mulyani Indrawati both promised to improve legal certainty.
Mulyani said her office, and other ministries, were working hard to complete regulations pertaining to infrastructure.
The government has promised to complete the issuance of 11 regulations, but so far has completed only three on energy, toll roads and water.
She also said the government was finalizing a new investment law to give better protection to foreign investments by treating them equally and abolishing the current requirement for divestment.
Mulyani and Yusuf said the government, with a Cabinet consisting of a number of former businessmen, was aware of problems faced by businesses, especially foreign investors, and was working hard to address these, including reducing the risks in doing business in Indonesia.
Apart from that, Yusuf said the government was trying to solve conflicts in regions such as Aceh and Papua, as well as fighting terrorism and pursuing better coordination between the military and police to protect investment in infrastructure.
The government is also working to reduce economic risks by pursuing prudent macroeconomic management; legal risks by reforming the judicial system; and project risks by sharing risks with the private sector such as facilitating financing instruments with regard to the use of land, facilities and incentives.