JP/Editorial
JP/Editorial
Incentives for infrastructure
President Susilo Bambang Yudhoyono, in Busan, South Korea, for
the APEC summit over the weekend, took the opportunity at the
international forum to invite investors to Indonesia's second
Infrastructure Summit -- scheduled for mid-February in Jakarta.
This time, however, the government seems better prepared to
make it a success. The first Infrastructure Summit last January,
which was attended by hundreds of would-be investors, but turned
out to be a dud as only six of the 91 projects, valued at US$22.5
billion, on offer at the gathering have thus far been tendered.
And, even more disheartening, only four -- all toll roads -- have
been taken by investors.
Learning from the big failure of the first summit, the
government moved last week in a firm manner to improve the
investment climate for infrastructure by establishing a better
framework for the management and sharing of risks, while offering
new incentives to investors.
The new package of initiatives, stipulated in Presidential
Regulation No. 67/2005 on government-private partnerships in
infrastructure provision, are designed to remove most of the
hurdles to infrastructure investment by ensuring the use of
commercial principles to secure the financial sustainability of
service provision, while at the same time still protecting
consumer interests.
Realizing that infrastructure investment has a long payback
period, the new regulation ensures that right from the outset the
prices for infrastructure provision are set at levels adequate to
cover the costs of investments and operations plus a reasonable
profit margin. If this is not possible and cannot be afforded by
domestic consumers, the government is required to make up the
shortfall in the form of compensation or subsidies in order to
ensure the financial sustainability of service provision.
Another significant improvement that investors will greatly
welcome is the better mechanism for managing the risks of
infrastructure investment and the sharing of risks between the
government and private investors in infrastructure development.
If the conditions require it, the government can put up equity
shares, provide guarantees or tax relief; all with the objective
of making infrastructure projects commercially viable.
The government also has set up a special committee at the
finance ministry in charge of assessing and managing risks
related to infrastructure development. It is this committee that
will decide the requirements for government-private partnerships
in infrastructure development and determine the commercial
viability of projects and oversee those projects, which use
government support and incentives.
The better framework for the management and sharing of risks
will go a long way in regaining investor confidence because of
the high risks encountered by businesses in Indonesia, not the
least, is in the infrastructure sector, which has a very long
payback period.
The regulation, however, stipulates tough requirements for
government-private partnerships in infrastructure development and
provisions to ensure transparency and fair competition. All
projects, for example, must be tendered through open and
competitive bids.
The new package of measures, if properly implemented, will
surely improve the prospects of investment in infrastructure,
which the country badly needs because infrastructure deficits
have become one of the biggest hurdles to investments in
Indonesia.
Poor infrastructure impairs the competitiveness of the economy
as production and distribution costs are made much higher than
those in 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 new initiatives are also quite timely in view of the
second Infrastructure Summit scheduled in Jakarta in mid-
February. This new package and the series of new directives and
rules issued over the last few months, including the ones on land
acquisition and bank lending to infrastructure projects,
certainly will make the projects -- for roads, seaports,
airports, rail networks, power stations, water supplies and
treatment, gas supplies and telecommunications, much more
attractive to investors.
The better, more sensible regulations for infrastructure
investment will also bolster more regional initiatives in
infrastructure development as was the case with the West Java
administration through an infrastructure summit in Bandung this
past August.
The experiences of other countries, which have succeeded in
wooing private investment in infrastructure, show that sensible,
effective regulations are the most critical enabling condition
for infrastructure development.
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