New partnership for infrastructure in Indonesia

Jemal-ud-din Kassum, Jakarta

The terrible tragedy in Aceh has shown us the power of people uniting to work together to overcome and rebuild. We should use this lesson to address another, less obvious crisis that is affecting the lives of many poor people in Indonesia: The growing shortage of quality infrastructure services. Over 40 percent of Indonesians do not have access to electricity. Only 14 percent of the people are connected to a regional water utility and access to proper sanitation is shockingly low.

There is a large backlog of road investments, and congestion imposes a heavy burden. Fixed-line telephone access is the lowest in the region, affecting Indonesia's competitiveness for investments. These infrastructure constraints are holding back both economic growth and access to basic services, especially for the poor. Unless they're addressed, Indonesia will not be able to achieve its development goals for job creation and poverty reduction.

At today's Infrastructure Summit, we heard some remarkable statements of commitment from the new government for a new way of doing business in infrastructure in Indonesia. President Susilo Bambang Yudhoyono called on all of us to join in a new partnership to resolve Indonesia's infrastructure needs.

The Government has shown real determination to move ahead with urgently-needed reforms to improve investment and reduce corruption. It will take time and persistent effort to change the status quo. There are strong entrenched interests that will resist efforts to put in place a more transparent and cost effective framework for infrastructure development.

A shared commitment is needed to improve the quality and efficiency of infrastructure services to make a real difference to the lives of Indonesians. Imagine a high-grade highway that will connect the major economic centers in the country; increasing access to the nearly 90 million people that currently do not have electricity today largely with the help of small- scale producers of renewable energy; a gas pipeline that will connect abundant gas fields in Kalimantan to the power plants and industrial consumers in Java; or ramping up access to potable water throughout the country through local government initiatives. This can be the Indonesia of tomorrow -- if we start today.

We know this will be expensive. It is estimated that Indonesia will have to invest at least US$15 billion each year -- an extra investment of 2 percent of GDP on top what is currently being spent -- over the next five years on infrastructure to support an annual growth rate of 6 percent. Additional funding will also be needed to maintain and optimize existing assets. Experience also teaches us one important lesson: Whether infrastructure is owned, managed and financed by the public or private sector, a sound policy environment is the key to success.

In Indonesia a large share of the funding for infrastructure will continue to come from the public sector in the near future. But, given the constraints on budget resources, public funds must be used strategically to catalyze private investments in infrastructure and support projects that are important but cannot attract private finance. Public utilities must be made more efficient so that they make the most of existing assets.

More broadly, the central government has an important role to play in providing direction to Indonesia's infrastructure strategy, and to coordinate activities across sectors, space and time. This is especially important in a decentralized Indonesia. Local governments and communities have an increasing role in infrastructure decisions and sector governance.

The private sector will be expected to provide a growing share of the financing for infrastructure development. Despite a recovery in investment over the past year, and a recent upgrade in Indonesias foreign currency credit rating, the overall investment climate in the country still ranks very low in the region. Potential investors complain most loudly about policy uncertainty and corruption, holding back infrastructure development.

Yesterday the Government announced its willingness to guarantee Government performance and regulatory risk in certain defined areas and in cases where it is absolutely necessary, to attract private investment. This is a welcome step in the right direction. Government's plans to put in place a risk allocation and mitigation framework to comprehensively evaluate each project proposal will help ensure that public funds are used in the most efficient manner.

The private sector is needed for more than just funding. It may be the most efficient and effective way to deliver infrastructure services -- provided it is able to operate in an environment characterized by competition, adequate pricing arrangements, and adequate regulation.

The private sector also has a responsibility to behave as good corporate citizens and hold themselves to the standards of good governance, transparency, and accountability which they themselves would ask for from government, and also meeting world class standards of environmental and social sustainability.

We must agree that the infrastructure puzzle cannot be solved through a single entity. Instead, it takes all stakeholders -- central government, local authorities, private sector and communities -- focusing on their distinct roles, but working together in partnership to provide Indonesians with the quality of infrastructure services they deserve.

Indonesia has the opportunity now to build on the current momentum, and the clear commitment of the new government, to make a real push on infrastructure development, with concrete goals and measurable progress over the near term. We now need to move from vision to action -- here as President Susilo noted so well today, we all have a role to play.

The writer is the World Bank's Vice President for East Asia and the Pacific. This is an abridged version of his remarks at the Indonesia Infrastructure Summit in Jakarta on Jan. 17, 2005.