Investment opportunities abound, risks remain high

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.